-----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, OoJyFlzqUYfDRXxWVJ6dXrgACwNcRyJfIobPGj/Ya/yr74ttg3u0pxeEh0HxTiz0 X4QcY/sMr/4eWxib4PzzBw== 0000950159-98-000059.txt : 19980311 0000950159-98-000059.hdr.sgml : 19980311 ACCESSION NUMBER: 0000950159-98-000059 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 19 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980309 SROS: NYSE SROS: PHLX 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-K405 SEC ACT: SEC FILE NUMBER: 001-01401 FILM NUMBER: 98560605 BUSINESS ADDRESS: STREET 1: 2301 MARKET ST STREET 2: P O BOX 8699 CITY: PHILADELPHIA STATE: PA ZIP: 19101 BUSINESS PHONE: 2158414000 FORMER COMPANY: FORMER CONFORMED NAME: PHILADELPHIA ELECTRIC CO DATE OF NAME CHANGE: 19920703 10-K405 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, 1997 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 Identification No.) incorporation or organization) P.O. Box 8699 2301 Market Street, Philadelphia, PA (215) 841-4000 19101 (Address of principal executive offices) (Registrant's telephone number, including area code) (Zip Code) ------------------------ Securities registered pursuant to Section 12(b) of the Act: First and Refunding Mortgage Bonds (Listed on the New York Stock Exchange): 5 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 3/8% Series due 2001 6 1/2% Series due 2003 7 1/8% Series due 2023 7 1/4% Series due 2024 Cumulative Preferred Stock -- without par value (Listed on the New York and Philadelphia Stock Exchanges): $4.68 Series $4.40 Series $4.30 Series $3.80 Series Common Stock -- without par value (Listed on the New York and Philadelphia Stock Exchanges) 9.00% Cumulative Monthly Income Preferred Securities, Series A, $25 stated value, issued by PECO Energy Capital, L.P. and unconditionally guaranteed by the Company (Listed on the New York Stock Exchange) Trust Receipts of PECO Energy Capital Trust I, each representing an 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 (Listed on the New York Stock Exchange) Trust Receipts of PECO Energy Capital Trust II, each representing an 8.00% Cumulative Monthly Income Preferred Security, Series C, $25 stated value, issued by PECO Energy Capital, L.P. and unconditionally guaranteed by the Company (Listed on the New York Stock Exchange) 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. [X] The aggregate market value of the registrant's common stock (only voting stock) held by non-affiliates of the registrant was $4,407,775,384 at February 28, 1998. 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: 222,546,562 shares outstanding at February 28, 1998. ------------------------ DOCUMENTS INCORPORATED BY REFERENCE (In Part) Annual Report of PECO Energy Company to Shareholders for the year 1997 is incorporated in part in Parts I, II and IV hereof, as specified herein. Proxy Statement of PECO Energy Company in connection with its 1998 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 Deregulation and Rate Matters.....................................1 Electric - Retail..............................................1 Electric -Wholesale............................................3 Gas............................................................4 Competition....................................................5 Electric Operations...............................................5 General........................................................5 Limerick Generating Station....................................8 Peach Bottom Atomic Power Station.............................10 Salem Generating Station......................................10 Fuel ............................................................12 Nuclear.......................................................12 Coal..........................................................14 Oil...........................................................14 Natural Gas...................................................14 Gas Operations...................................................14 Segment Information..............................................15 Construction.....................................................15 Capital Requirements and Financing Activities....................16 Employee Matters.................................................17 Environmental Regulations........................................17 Water.........................................................18 Air...........................................................18 Solid and Hazardous Waste.....................................18 Costs.........................................................21 Telecommunications and Other Ventures............................21 PECO Energy Capital Corp. and Related Entities...................22 Executive Officers of the Registrant.............................23 ITEM 2. PROPERTIES.......................................................25 ITEM 3. LEGAL PROCEEDINGS................................................27 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..............27 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS....................................27 ITEM 6. SELECTED FINANCIAL DATA..........................................28 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................28 ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.......28 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......................28 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.........................28 PART III ITEM 10.DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...............29 ITEM 11.EXECUTIVE COMPENSATION...........................................29 ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.....................................................29 ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................29 PART IV ITEM 14.EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.......................................................30 Financial Statements and Financial Statement Schedule............30 REPORT OF INDEPENDENT ACCOUNTANTS................................31 SCHEDULE II-- VALUATION AND QUALIFYING ACCOUNTS..................32 Exhibits.........................................................33 Reports on Form 8-K..............................................36 SIGNATURES i PART I ITEM 1. BUSINESS The Company Incorporated in Pennsylvania in 1929, PECO Energy Company (Company) provides retail electric and natural gas service in southeastern Pennsylvania and, through pilot programs, natural gas service to areas in Maryland and New Jersey. The Company also engages in the wholesale marketing of electricity on a national basis and participates in joint ventures which provide telecommunication services in the Philadelphia area. The Company's traditional retail service territory covers 2,107 square miles. Electric service is furnished to an area of 1,972 square miles with a population of approximately 3.6 million, including 1.6 million in the City of Philadelphia. Approximately 94% of the retail electric service area and 64% of retail kilowatthour (kWh) 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 in a 1,475-square-mile area of southeastern Pennsylvania adjacent to Philadelphia with a population of approximately 1.9 million. Through Horizon Energy, a wholly owned subsidiary of the Company, and PECO Energy/EnergyOne, a franchised energy products brand, the Company participates in Pennsylvania's pilot program for retail competition for generation. The electric and gas utility industries are both undergoing fundamental restructuring. In 1996, the Federal Energy Regulatory Commission (FERC) issued Order No. 888 providing for competition in wholesale generation by requiring that all public utilities file non-discriminatory, open-access transmission tariffs. In December 1996, Pennsylvania Governor Ridge signed into law the Electricity Generation Customer Choice and Competition Act (Competition Act) which provides for the restructuring of the electric utility industry in Pennsylvania, including retail competition for generation beginning in 1999. At December 31, 1997, the Company discontinued the use of regulatory accounting in its financial statements for its electric generation operations. For additional information, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report to Shareholders for the year 1997. 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 FERC as to transmission rates. Specific operations of the Company are also subject to the jurisdiction of various other federal, state, regional and local agencies, including the United States Nuclear Regulatory Commission (NRC), the United States Environmental Protection Agency (EPA), the United States Department of Energy (DOE), the Delaware River Basin Commission 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. Deregulation and Rate Matters Historically, all of the Company's retail electric and gas revenues have been derived pursuant to bundled rates regulated by the PUC and all of the Company's wholesale electric revenue has been derived pursuant to rates regulated by the FERC. As a result of the adoption of the Competition Act and deregulation initiatives by the FERC, electric services are being unbundled into separate generation, transmission and distribution services with open competition for both retail and wholesale generation services. Certain transmission and distribution services will remain subject to regulation. Electric - Retail The Competition Act was enacted in December 1996 providing for the restructuring of the electric utility industry in Pennsylvania, including retail competition for generation beginning in 1999. The Competition Act 1 required each electric utility in Pennsylvania to submit to the PUC a restructuring plan, including its retail electric generation-related stranded costs (the loss in value of electric generation-related assets which will result from competition). The Competition Act authorizes the recovery of stranded costs through charges to distribution customers beginning January 1, 1999 for a period up to seven years (or for an alternative period determined by the PUC for good cause shown). During that period, the utility is subject to a rate cap which provides that total charges to customers cannot exceed rates in place as of December 31, 1996, subject to certain exceptions. The Competition Act also caps transmission and distribution rates from December 31, 1996 through June 30, 2001, subject to certain exceptions. Pursuant to the Competition Act, in April 1997, the Company filed with the PUC a comprehensive restructuring plan detailing its proposal to implement full customer choice of electric generation supplier. The Company's restructuring plan identified $7.5 billion of retail electric generation-related stranded costs. In August 1997, the Company and various intervenors in the Company's restructuring proceeding filed with the PUC a Joint Petition for Partial Settlement (Pennsylvania Plan). In December 1997, the PUC rejected the Pennsylvania Plan and entered an Opinion and Order, revised in January 1998 (PUC Restructuring Order), which deregulates the Company's electric generation operations. The PUC Restructuring Order allows the Company to recover stranded costs of $4.9 billion on a discounted basis, or $5.3 billion on a book value basis, over 8-1/2 years beginning in 1999. Recovery of stranded costs will be through a separate charge to be levelized over the recovery period using a 7.47% cost of capital. The PUC Restructuring Order provides for the phasing in of customer choice of electric generation supplier for all customers: one-third of the peak load of each customer class on January 1, 1999; one-third on January 2, 1999 (one day later); and the remainder on January 2, 2000. All customers will continue to take bundled electric service under the Company's PUC-approved rates through December 31, 1998. From January 1, 1999 through June 30, 2007, the Company will be obligated to provide generation service to customers who do not choose an alternate energy supplier as well as all customers who seek a new energy supplier but are unable to reach a service agreement with another supplier. The Company's rates for these customers will remain bundled and are capped at 1996 levels through June 30, 2007, subject to certain exceptions. The PUC Restructuring Order caps all customer bills at the year-end 1996 system-wide average of 9.95 cents per kWh. Beginning January 1, 1999, electric rates for customers who choose an alternate energy supplier will be unbundled into a transmission and distribution component, the charge for recovery of stranded costs and a "shopping credit" for generation. On a system-wide average basis, the transmission and distribution component will be 2.93 cents per kWh, the charge for recovery of stranded costs will be 2.45 cents per kWh and the "shopping credit" for generation will be 4.58 cents per kWh. Bundled rates are capped through June 30, 2001, subject to certain provisions. To encourage competition, the PUC established the "shopping credit" for generation in excess of current market prices. The PUC estimates that customers who choose an alternate energy supplier will save up to 15% of their total electric bill beginning in 1999 through June 30, 2007 and will save 30 % of their total electric bill thereafter. The PUC Restructuring Order requires the Company to increase enrollment in its Customer Assistance Program for low-income customers, presently limited to 40,000 customers, to at least 80,000 customers with no limit on the number of enrollees. The Company has also been directed to spend $5.6 million on weatherization programs for low-income customers. The Company believes that the PUC Restructuring Order provides sufficient details regarding the deregulation of the Company's electric generation operations to require the Company to discontinue the use of regulatory accounting in its financial statements for those operations. The Company determined that at December 31, 1997, $5.8 billion of its $7.1 billion of electric generation assets were impaired and it had $2.6 billion of other electric generation-related regulatory assets. At December 31, 1997, the Company recorded an extraordinary charge against income of $3.1 billion ($1.8 billion net of income taxes) to reflect the amount of electric generation-related assets that will not be recovered from customers either prior to the commencement of 2 competition or under the PUC Restructuring Order. See note 4 of Notes to Consolidated Financial Statements included in the Company's Annual Report to Shareholders for the year 1997. On January 21, 1998, the Company filed a complaint in the U.S. District Court for the Eastern District of Pennsylvania (Eastern District Court) seeking injunctive and monetary relief on the grounds that the Competition Act and the PUC Restructuring Order: (1) are preempted by Section 201(b) of the Federal Power Act; (2) effect a taking of private property without just compensation in violation of the Fifth and Fourteenth Amendments to the U.S. Constitution; (3) violate the Due Process Clause, the Contract Clause and the First Amendment of the U.S. Constitution; and (4) deprive the Company of certain other federally protected rights. On January 22, 1998, the Company filed two Petitions for Review in the Commonwealth Court of Pennsylvania (Commonwealth Court) appealing the PUC Restructuring Order. The petitions state that the PUC Restructuring Order must be set aside because it is based upon errors of law, is not supported by substantial evidence, constitutes an arbitrary and capricious abuse of administrative discretion and deprives the Company of the due process of law, to which it is entitled under Article I of the Pennsylvania Constitution. In addition to the Company's appeals, numerous other parties, including various intervenors, have filed appeals and cross appeals of the PUC Restructuring Order. There are also two pending actions alleging that the manner in which the Competition Act was passed by the Pennsylvania legislature violates the Pennsylvania Constitution. The Competition Act authorizes the PUC to approve, by adopting a Qualified Rate Order (QRO), the issuance of Transition Bonds as a mechanism to mitigate stranded costs and reduce customer rates. The Transition Bonds may be issued by a utility, a finance subsidiary of a utility or a third-party assignee of a utility. Under the Competition Act, proceeds of Transition Bonds are required to be used principally to reduce qualified stranded costs and the related capitalization of the utility. The Transition Bonds are payable from irrevocable customer charges and may have a maximum maturity of the earlier of ten years or the recovery period of stranded costs. On January 22, 1997, the Company filed an Application with the PUC for a QRO authorizing the issuance of Transition Bonds to fund $3.6 billion of stranded costs and related transaction and use of proceeds costs. On May 22, 1997, the PUC adopted an order authorizing the Company to securitize up to $1.1 billion of stranded costs. Such authorization, which expires May 22, 1998 unless extended, does not preclude the Company from applying for an additional QRO to securitize additional stranded costs. Certain parties which intervened in the Company's Application for a QRO have appealed the PUC's order to the Commonwealth Court. The Company believes it is unlikely that it will securitize the recovery of its stranded costs until these appeals and the appeals of the PUC Restructuring Order are resolved. If the Company does securitize, it cannot predict the amount of stranded cost recovery that it would be permitted to securitize or the impact of such securitization on the Company's capitalization. The Competition Act requires each regulated electric utility to implement a Retail Access Pilot Program (Pilot Program) for customers representing 5% of the peak load of each customer class. On August 29, 1997, the PUC issued a final order outlining the guidelines for Pilot Programs. Among other things, the Pilot Programs guidelines provide for: residential and commercial customers to be given a 3 cent per kWh energy credit and a 13% reduction in the regulated portion of their bills; industrial customers to be given a 2.7 cent per kWh energy credit and a 10% reduction in the regulated portion of their bills. Approximately 400,000 of the Company's customers applied to participate in the Company's Pilot Program. In a lottery held by an independent third party, approximately 75,000 customers were chosen to participate in the Company's Pilot Program. The Pilot Programs began on November 1, 1997 and will last through December 31, 1998. Electric - Wholesale During 1996, the FERC issued Order No. 888 which requires all public utilities that own, control or operate interstate transmission facilities to file open-access transmission tariffs for wholesale transmission services in accordance with non-discriminatory terms and conditions established by the FERC. The FERC's stated goal in 3 promulgating Order No. 888 and related orders is to remove impediments to competition in the wholesale bulk power market place and to bring more efficient, lower cost power to electricity consumers. In response to Order No. 888, on July 3, 1996, the Company filed an individual compliance tariff with the FERC which became effective July 9, 1996. In December 1996, the Company and the other members of the PJM Interconnection (PJM) filed a joint compliance filing with the FERC. The PJM is a power pool which integrates through central dispatch the generation and transmission operations of its member companies across a 50,000 square-mile territory in the Mid-Atlantic region. That filing included a PJM regional transmission tariff. Under the PJM tariff, which became effective on March 1, 1997, transmission service is provided on a pool-wide, open-access basis using the transmission facilities of the PJM members at rates based on the costs of the transmission system at the point of delivery. On March 31, 1997, the members of the PJM converted that organization from an unincorporated association into a limited liability company and filed with the FERC a revised PJM Operating Agreement to reflect that change. In November 1997, the FERC issued an order authorizing the establishment of an independent system operator (ISO) for the PJM on January 1, 1998 and designated the PJM Interconnection, L.L.C.'s Office of the Interconnection as the ISO. The ISO is responsible for operation of the PJM control area and administration of the PJM open-access transmission tariff and the hourly energy market in the PJM. In that same order, the FERC directed the Company and the other transmission owners in the PJM to turn over control of their transmission facilities to the ISO and put in place a new PJM regional transmission tariff and energy market arrangement. Although the Company cannot predict the long-term economic effect of the restructured pooling arrangements approved by the FERC, the arrangements, together with the introduction of retail competition, could adversely affect the Company's ability to fully recover its transmission costs. Authority has been requested from the FERC to sell energy from PJM-dispatched generating units in the PJM markets, including the hourly energy market, at market based rates. The FERC has not yet acted on this request. The Company received approval from the FERC to remove the cost-based cap on prices charged for power in the wholesale market and certain changes regarding the terms of the buy-for-resale agreements. The new tariff provisions allow the Company to sell energy at market-based rates both within and outside the geographical boundaries of the PJM. Gas The Company's gas sales and gas transportation revenues are derived pursuant to rates regulated by the PUC. The PUC has established through regulatory proceedings the base rates the Company may charge for gas service in Pennsylvania. The Company's gas rates are subject to a purchased gas cost (PGC) adjustment clause and a State Tax Adjustment Surcharge (STAS). The PGC is designed to recover or refund the difference between the actual cost of purchased gas and the amount included in base rates. The PGC is adjusted quarterly. The STAS is designed to recover or refund increases or decreases in certain state taxes not recovered in base rates. On August 1, 1997, the Company reached a settlement on all outstanding issues regarding its PGC No. 14 rates for the period December 1, 1997 to November 30, 1998, which reflects a $0.0731 per thousand cubic feet (mcf) decrease in natural gas sales rates. PGC No. 14 became effective December 1, 1997. The gas industry is continuing to undergo structural changes in response to FERC policies designed to increase competition. FERC policies have required interstate gas pipelines to unbundle their gas sales service from other regulated tariff services, such as transportation and storage. In anticipation of these changes, the Company modified its gas purchasing arrangements to enable the purchase and transportation of gas at lower cost. The Company, through Horizon Energy Company, is participating in pilot programs outside the Company's gas service territory to market natural gas and other services. There is an initiative in the Pennsylvania legislature to deregulate the gas industry, which has the support of the Governor. The Company cannot predict whether the Pennsylvania legislature will enact legislation that 4 deregulates the gas industry or whether the Governor will ultimately sign into law any such legislation. The Company cannot predict the ultimate effect of gas industry deregulation on its future financial condition and results of operations. Competition The Company actively competes in the developing wholesale markets for electricity. The Company's wholesale marketing activities include the sale of energy from the Company's installed capacity, the purchase of energy to meet the Company's retail requirements, the resale of energy purchased from unaffiliated utilities and others and the marketing of energy of other generators. The Company competes in the wholesale market for electricity on the bases of price, dependability of service and execution of transactions. The Company, through Horizon Energy and PECO Energy/EnergyOne, expects to compete for retail customers within the Company's traditional retail electric service territory. The Company, through Horizon Energy Company, is participating in electric and gas retail access pilot programs outside the Company's traditional service territory. Over 30 companies, including investor-owned utilities located in Pennsylvania and elsewhere, unregulated energy companies and power marketers, are participating in the Company's Pilot Program. Competition for retail customers in the Company's Pilot Program has been extensive. Certain companies have targeted specific segments of the market for retail generation services and other companies are competing in all segments. The majority of participating companies have targeted customers in the large commercial and industrial segments of the market. The bases of competition in the Pilot Program are primarily price and reliability. The Company cannot predict whether the competitive factors in the Company's Pilot Program are indicative of future competition for retail generation services. The Company anticipates very active competition for retail generation services within the Company's traditional electric service territory. As a result of competitive pressures, the Company has continued to negotiate long-term contracts with many of its larger-volume customers. Although these agreements have generally resulted in reduced margins, they have permitted the Company to retain these customers. For additional information regarding competition, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report to Shareholders for the year 1997. Electric Operations General During 1997, 90% of the Company's operating revenues and 91% of its operating income were from electric operations. Annual and quarterly operating results can be significantly affected by weather. Traditionally, sales of electricity are higher in the first and third quarters due to colder weather and warmer weather, respectively. Electric sales and operating revenues for 1997 by class of customer are set forth below:
Operating Sales Revenues (millions of kWh) (millions of $) Residential................................................... 10,407 $1,357 Small commercial and industrial............................... 6,685 779 Large commercial and industrial............................... 15,034 1,077 Other......................................................... 841 148 Change in unbilled............................................ 70 19 ------- ------- Service territory......................................... 33,037 3,380 Interchange sales............................................. 1,927 59 Sales to other utilities...................................... 28,893 728 ------- ------- Total 63,857 $4,167 ======= =======
The Company is engaged in the wholesale marketing of electricity on a national basis. The Company's wholesale marketing activities include the sale of energy from the Company's installed capacity, the purchase of energy to meet the Company's retail requirements, the resale of energy purchased from unaffiliated utilities and 5 others and the marketing of energy of other generators. During 1997, the Company purchased 44.6% of its total requirements and estimates that for 1998 it will purchase 39.6% of its total requirements. At December 31, 1997, the Company had long-term commitments to purchase from unaffiliated utilities and others energy associated with 1,330 megawatts (MW) of capacity in 1998, energy associated with 2,540 MW of capacity during the period 1999 through 2002 and energy associated with 2,430 MW of capacity thereafter. Under some of these contracts, the Company may purchase, at its option, additional power as needed. These purchases will be utilized through a combination of sales to jurisdictional customers, long-term sales to other utilities and open-market sales. At December 31, 1997, the Company had entered into long-term agreements with unaffiliated utilities to sell energy associated with 540 MW of capacity in 1998, energy associated with 1,700 MW of capacity during the period 1999 through 2002 and energy associated with 2,040 MW of capacity thereafter. See note 5 of Notes to Consolidated Financial Statements included in the Company's Annual Report to Shareholders for the year 1997. The net installed electric generating capacity (summer rating) of the Company and its subsidiaries at December 31, 1997 was as follows:
Type of Capacity MW % of Total Nuclear........................................................... 4,090 44.4% Mine-mouth, coal-fired............................................ 709 7.7 Service-area, coal-fired.......................................... 725 7.9 Oil-fired......................................................... 1,176 12.8 Gas-fired......................................................... 267 2.9 Hydro (includes pumped storage)................................... 1,392 15.1 Internal combustion 845 9.2 ----- ----- Total 9,204(1) 100.0% ===== ===== - --------------- (1) See "Fuel" for sources of fuels used in electric generation.
The all-time maximum hourly demand on the Company's system was 7,390 MW which occurred on July 15, 1997. The Company's peak service territory load for 1998 is estimated to be 7,267 MW. The Company estimates its generating reserve margin for 1998 to be 33%. The all-time maximum PJM demand of 49,406 MW occurred on July 15, 1997. PJM's installed capacity (summer rating) is more than 56,000 MW. The Company's installed capacity is expected to be sufficient to meet its obligation to supply its PJM reserve margin share during the period 1998-2001. See "Deregulation and Rate Matters Electric - Retail." The Company's nuclear-generated electricity is supplied by Limerick Generating Station (Limerick) Units No. 1 and No. 2, Peach Bottom Atomic Power Station (Peach Bottom) Units No. 2 and No. 3, which are operated by the Company, and Salem Generating Station (Salem) Units No. 1 and No. 2, which are operated by Public Service Electric and Gas Company (PSE&G). The Company owns 100% of Limerick, 42.49% of Peach Bottom and 42.59% of Salem. Limerick Units No. 1 and No. 2 each has a capacity of 1,110 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. The Company's nuclear generating facilities represent approximately 44% of its installed generating capacity. In 1997, approximately 39% of the Company's electric output was generated from the Company's nuclear generating facilities. Changes in regulations by the NRC that require a substantial increase in capital expenditures for the Company's nuclear generating facilities or that result in increased operating costs of nuclear generating units could adversely affect the Company. 6 The Price-Anderson Act currently limits the liability of nuclear reactor owners to $8.9 billion for claims that could arise from a single incident. The limit is subject to change to account for the effects of inflation and changes in the number of licensed reactors. The Company carries the maximum available commercial insurance of $200 million and the remaining $8.7 billion is provided through mandatory participation in a financial protection pool. Under the Price-Anderson Act, all nuclear reactor licensees can be assessed up to $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 if the damages from an incident at a licensed nuclear facility exceed $8.9 billion. The Price-Anderson Act and the extensive regulation of nuclear safety by the NRC do not preclude claims under state law for personal, property or punitive damages related to radiation hazards. Property insurance in the amount of $2.75 billion is maintained for each nuclear power plant in which the Company has an ownership interest. The Company is responsible for its proportionate share of such insurance based on its ownership interest. The Company's insurance policies provide coverage for decontamination liability expense, premature decommissioning and loss or damage to its nuclear facilities. These policies require that insurance proceeds first be applied to assure that, following an accident, the facility is in a safe and stable condition and can be maintained in such condition. Within 30 days of stabilizing the reactor, the licensee must submit a report to the NRC which provides a clean-up plan, including the identification of all clean-up operations necessary to decontaminate the reactor to permit either the resumption of operations or decommissioning of the facility. Under the Company's insurance policies, proceeds not already expended to place the reactor in a stable condition must be used to decontaminate the facility. If, as a result of an accident, the decision is made to decommission the facility, a portion of the insurance proceeds will be allocated to a fund which the Company is required by the NRC to maintain to provide funds for decommissioning the facility. These proceeds would be paid to the fund to make up any difference between the amount of money in the fund at the time of the early decommissioning and the amount that would have been in the fund if contributions had been made over the normal life of the facility. The Company is unable to predict what effect these requirements may have on the timing of the availability of insurance proceeds to the Company for the Company's bondholders and the amount of such proceeds which would be available. Under the terms of the various insurance agreements, the Company could be assessed up to $26 million for losses incurred at any plant insured by the insurance companies. The Company is self-insured to the extent that any losses may exceed the amount of insurance maintained. Any such losses could have a material adverse effect on the Company's financial condition or results of operations. The Company is a member of an industry mutual insurance company which provides replacement power cost insurance in the event of a major accidental outage at a nuclear station. The policy contains a waiting period before recovery of costs can commence. The premium for this coverage is subject to assessment for adverse loss experience. The Company's maximum share of any assessment is $13 million per year. NRC regulations require that licensees of nuclear generating facilities demonstrate that funds will be available in certain minimum amounts at the end of the life of the facility to decommission the facility. Based on estimates of decommissioning costs for each of the nuclear facilities in which the Company has an ownership interest, the PUC permits the Company to collect from its customers and deposit in segregated accounts amounts which, together with earnings thereon, will be used to decommission such nuclear facilities. The Company's current estimate of the cost of decommissioning its nuclear facilities is $1.5 billion in 1997 dollars which is being collected through electric rates over the life of each generating unit. Beginning in 1999, decommissioning costs will be recoverable through transmission and distribution rates. At December 31, 1997, the Company held $320 million in trust accounts, representing amounts recovered from customers and net realized and unrealized investment earnings thereon, to fund future decommissioning costs. In an Exposure Draft issued in 1996, the Financial Accounting Standards Board (FASB) proposed changes in the accounting for closure and removal costs of production facilities, including the recognition, measurement and classification of decommissioning costs for nuclear generating stations. The FASB has expanded the scope of the Exposure Draft to include closure or removal liabilities that are incurred at any time during the operating 7 life of the related long-lived asset. The FASB has decided that it should proceed toward either a final Statement or a revised Exposure Draft. The timing of this project is still to be determined. If current electric utility industry accounting practices for decommissioning are changed, annual provisions for decommissioning costs could increase and the estimated cost for decommissioning could be recorded as a liability rather than as accumulated depreciation, and the increased cost would be recognized as a regulatory asset. For additional information concerning nuclear decommissioning, see note 5 of Notes to Consolidated Financial Statements included in the Company's Annual Report to Shareholders for the year 1997. On January 29, 1998, the NRC proposed to issue a generic letter which would require all nuclear plant operators to provide the agency with information concerning their programs, planned or implemented, to address Year 2000 computer and systems issues at their facilities. In particular, operators would be asked to provide confirmation of implementation of their programs and certification that their facilities are Year 2000 ready and in compliance with the terms and conditions of their licenses and NRC regulations. Licensees would be required to submit a written response indicating the status of their Year 2000 readiness program, including scope, assessment process and plans for corrective action. Upon completion of their Year 2000 readiness program and no later than July 1, 1999, licensees would be required to confirm to the NRC that their facilities are Year 2000 ready, together with a status report of work necessary to be Year 2000 compliant. Year 2000 ready means computer systems and applications are suitable for continued use into the year 2000. Year 2000 compliant means that such systems and applications accurately process date/time data beyond the year 2000. The Company cannot predict if this or any proposal will be adopted by the NRC. For additional information regarding Year 2000 issues, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report to Shareholders for the year 1997. In 1996, the NRC requested that all nuclear plant operators inform the NRC whether their nuclear units are operated and maintained within the design bases of the facilities and confirm that any deviations have been or will be reconciled in a timely manner. The Company responded to the NRC's request on February 4, 1997 with a detailed description of ongoing activities and new initiatives to ensure that Limerick and Peach Bottom are operated and maintained within their design bases. PSE&G provided a similar response to the NRC on February 11, 1997 concerning Salem. Since the information that was submitted will be used by the NRC to determine follow-up inspection activity or potential enforcement actions, the Company cannot predict what impact the NRC's request will have. Limerick Generating Station Limerick Unit No. 1 achieved a capacity factor of 85% in 1997 and 84% in 1996. Limerick Unit No. 2 achieved a capacity factor of 95% in 1997 and 91% in 1996. Limerick Units No. 1 and No. 2 are each on a 24-month refueling cycle. The last refueling outages for Units No. 1 and No. 2 were in the spring of 1996 and 1997, respectively. On May 9, 1997, the NRC issued its periodic Systematic Assessment of Licensee Performance (SALP) for Limerick for the period April 2, 1995 to March 29, 1997. Limerick achieved ratings of "1," the highest of three rating categories, in the areas of Operations, Maintenance and Plant Support. In the area of Engineering, Limerick achieved a rating of "2." The NRC stated that the overall performance of Limerick remained excellent. Strong management involvement and conservative decision making were exhibited in day-to-day activities. Self-assessment and quality assurance activities continued to be effective. The Performance Enhancement Process continued to be an effective program for identifying, evaluating and correcting issues with appropriate thresholds and priorities. Oversight and independent review committees contributed to the corrective actions program effectiveness. While noting strengths in design, analysis and modifications, the NRC stated that earlier engineering intervention could have prevented equipment problems that resulted in a number of plant trips and forced shutdowns. The NRC also noted that management has recognized this performance weakness and has initiated remedial actions. The Company is continuing to take actions in response to the NRC's comments. 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, 8 including a review of fabrication records and visual examinations of accessible areas of the core shroud seam welds. Each of the reactors at Limerick and Peach Bottom is a GE BWR. Initial examination of Limerick Unit No. 1 was completed during the February 1996 refueling outage. Although crack indications were identified at one location, the Company concluded that there is a substantial margin for each core shroud weld to allow for continued operation of Unit No. 1 for a minimum of the next two operating cycles. In accordance with industry experience and guidance, initial examination of Limerick Unit No. 2 has been scheduled for the refueling outage planned for April 1999. Peach Bottom Unit No. 3 was initially examined during its refueling outage in the fall of 1993. Although crack indications were identified at two locations, the Company presented its 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 refueling outage in the fall of 1995 and the extent of cracking identified was determined to be within industry-established guidelines. The Company has concluded, and the NRC has concurred, that there is a substantial margin for each core shroud weld to allow for continued operation of Unit No. 3 until its refueling outage scheduled for 1999, at which time it will be re-examined. Peach Bottom Unit No. 2 was initially examined during its October 1994 refueling outage and the examination revealed a minimal number of flaws. Unit No. 2 was re-examined during its last refueling outage in September 1996. Although the examination revealed additional minor flaw indications, the Company concluded, and the NRC concurred, that neither repair nor modification to the core shroud was necessary. The Company is also participating in a GE BWR Owners Group to develop long-term corrective actions. As a result of several BWRs experiencing clogging of some emergency core cooling system suction strainers, which are part of the water supply system for emergency cooling of the reactor core, the NRC issued a Bulletin in May 1996 to operators of BWRs requesting that measures be taken to minimize the potential for clogging. The NRC proposed three resolution options, including the installation of large capacity passive strainers, with a request that actions be completed by the end of the unit's first refueling outage after January 1997. Strainers were installed at Peach Bottom Unit No. 3 during the October 1997 refueling outage. Installation of strainers at Peach Bottom Unit No. 2 and Limerick Unit No. 1 is scheduled for their next refueling outages in October 1998 and April 1998, respectively. For Limerick Unit No. 2, the NRC granted the Company's request to defer the installation of strainers until the end of 1998. The Company has requested that the deferral period for installation of strainers at Limerick Unit No. 2 be extended until its scheduled refueling outage in April 1999. No assurance can be given that such additional deferral will be granted. The Company cannot predict what other actions, if any, the NRC may take in this matter. The NRC has raised concerns that the Thermo-Lag 330 fire barrier systems used to protect cables and equipment at certain nuclear facilities, including Limerick and Peach Bottom, may not provide the necessary level of fire protection and 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 Limerick and Peach Bottom. This re-analysis identified proposed modifications to be performed over the next several years at both plants in order to implement the long-term measures addressing the concern over Thermo-Lag use. The Company met with the NRC during 1997 regarding the Company's plans for the resolution of the Thermo-Lag issue. In August 1997, the NRC informed the Company that it was satisfied with the progress to date on this issue. The Company continues to work towards completion of activities to resolve this issue by the previously committed dates of April 1999 for Limerick and October 1999 for Peach Bottom. Water for the operation of Limerick is drawn from the Schuylkill River adjacent to Limerick and from the Perkiomen Creek, a tributary of the Schuylkill River. During certain periods of the year, generally the summer months but possibly for as much as six months or more in some years, the Company would not be able to operate Limerick without the use of supplemental cooling water due to existing regulatory water withdrawal constraints applicable to the Schuylkill River and the Perkiomen Creek. Supplemental cooling water for Limerick is provided by a supplemental cooling water system which draws water from the Delaware River at the 9 Point Pleasant Pumping Station, transports it to the Bradshaw Reservoir (Point Pleasant Project), then to the east and main branches of the Perkiomen Creek and finally to Limerick. The supplemental cooling water system also provides water for public use to two Montgomery County water authorities. Certain of the permits relating to the operation of the supplemental cooling water system must be renewed periodically. The Company has entered into an agreement with a municipality to secure a backup source of water for the operation of Limerick should the amount of water from the supplemental cooling water system not be sufficient. Should the supplemental cooling water system be completely unavailable, this backup source is capable of providing cooling water to operate both Limerick units simultaneously at 70% of rated capacity for short periods of time. Peach Bottom Atomic Power Station Peach Bottom Unit No. 2 achieved a capacity factor of 100% in 1997 and 79% in 1996. Peach Bottom Unit No. 3 achieved a capacity factor of 79% in 1997 and 99% in 1996. Peach Bottom Units No. 2 and No. 3 are each on a 24-month refueling cycle. The last refueling outages for Units No. 2 and No. 3 were in the fall of 1996 and 1997, respectively. On July 17, 1997, the NRC issued its periodic SALP report for Peach Bottom for the period October 15, 1995 to June 7, 1997. Peach Bottom achieved ratings of "1," in the areas of Plant Operations, Maintenance and Plant Support. In the area of Engineering, Peach Bottom achieved a rating of "2." Overall, the NRC observed excellent performance at Peach Bottom during the assessment period. The NRC stated that station management provided excellent oversight and control of engineering activities throughout the period. The NRC noted that, while overall engineering performance was good, there were several instances where operating procedures, surveillances, and tests were not consistent with the design and licensing bases. The Company is continuing to take actions in response to the NRC's comments. During the Unit No. 3 refueling outage in October 1997, cracks were identified in three of the ten recirculation system jet pump riser pipes within the reactor vessel. The Company developed a plan allowing for the continued operation of the unit for several months until permanent repairs can be made. The plan limits operation of the unit to 94% of its rated power level for most of this period. The Company plans to remove Unit No. 3 from service for approximately two weeks during March 1998 to perform permanent repairs. The Company expects that the permanent repairs will cost approximately $3.25 million. The Company, Delmarva Power & Light Company and PSE&G have agreed to an operating performance standard through December 31, 2007 for Peach Bottom and through December 31, 2011 for Salem. Under the standard, the operator of each respective station would be required to make payments to the non-operating owners if the three-year capacity factor, determined annually, of such station falls below 40 percent, subject to a maximum of $25 million per year. The initial three-year period began on January 1, 1998 for Peach Bottom and will begin on the date Salem Unit No. 1 returns to service for Salem. The parties have also agreed to forego litigation in the future, except for limited cases in which the operator would be responsible for damages of no more than $5 million per year. In addition to the matters discussed above, see "Limerick Generating Station" for a discussion of certain matters which affect both Peach Bottom and Limerick. Salem Generating Station Salem Units No. 1 and No. 2 were taken out of service by PSE&G in the second quarter of 1995. In June 1995, the NRC issued a Confirmatory Action Letter (CAL) which documented commitments of PSE&G to 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 until the NRC agrees that the unit is sufficiently prepared to restart. Salem Unit No. 2 returned to service on August 30, 1997. The NRC amended the CAL to require a final assessment of Salem Unit No. 2 after approximately two months of full operation. The Company has been informed by PSE&G that a meeting was held with the NRC on December 4, 1997 which satisfied this final CAL requirement for Salem Unit No. 2. 10 The Company has been informed by PSE&G that Salem Unit No. 1 is expected to return to service in the second quarter of 1998. Restart of Salem Unit No. 1 is also subject to completion of the requirements of the restart plan to the satisfaction of PSE&G and the NRC. The Company has been informed by PSE&G that the NRC's Readiness Assessment Team Inspection (RATI) of Salem Unit No. 1 (a requirement for restart) was completed on February 20, 1998. The inspection team concluded that Salem Unit No. 1 was ready to return to operation. The inability to successfully return the Salem Unit No. 1 to operation could have a material adverse effect on the Company's financial condition and results of operations. During 1997, the Company incurred and expensed $152 million for replacement power and maintenance costs related to the shutdown of Salem. See note 5 of Notes to Consolidated Financial Statements included in the Company's Annual Report to Shareholders for the year 1997. See also "Peach Bottom Atomic Power Station" for a discussion of operating performance standards. The Company has been informed by PSE&G that as a part of PSE&G's efforts to return the Salem units to service, an examination was performed on the steam generators, which are large heat exchangers used to produce steam to drive the turbines. Inspection of Salem Unit No. 1 indicated degradation in a significant number of tubes. Inspection and testing of Salem Unit No. 2 confirmed that the condition of the steam generators are well within current repair limits. The Salem co-owners purchased and installed in Salem Unit No. 1 unused steam generators from the unfinished Seabrook Nuclear Generating Station Unit No. 2 in New Hampshire. The cost of replacing the Salem Unit No. 1 steam generators, including installation of the new steam generators and disposal of the old steam generators, was approximately $178 million, of which the Company's share was approximately $76 million. At the January 1997 semi-annual NRC Senior Management Meeting, the Salem units were placed on the NRC Watch List (Watch List) and were designated as Category 2 facilities. In a letter to PSE&G advising of the action, the NRC noted that its decision to place the Salem units on the Watch List was not based on any recent performance problems or decline but was due to the NRC's determination that the Salem units should have been placed on the Watch List previously because of Salem's past safety performance. The NRC also indicated in its letter that it had increased its attention and resources at Salem commensurate with a Watch List plant. Finally, the NRC concluded that, notwithstanding the improvements at Salem (which were noted), had it been previously identified as a Watch List plant, Salem would not have been removed from the Watch List since Salem had yet to demonstrate a period of safe performance at power. The NRC has three classifications of facility monitoring. A Category 3 facility is one which is having or has had significant weaknesses that warrant maintaining the plant in a shutdown condition until the licensee can demonstrate to the NRC that adequate programs have both been established and implemented to ensure substantial improvement. Full NRC approval is required for restart of plants in this category which the NRC will monitor closely. A Category 2 facility is a plant that is authorized to operate but that the NRC will monitor closely. Although being operated in a manner that adequately protects public health and safety, plants in this category are having or have had weaknesses that warrant increased NRC attention. A plant will remain in this category until the licensee either demonstrates a period of improved performance, or until a further deterioration of performance results in the plant being placed in Category 3. A Category 1 facility is a plant that has been removed from the Watch List. On July 8, 1997, a predecisional enforcement conference was held with the NRC to discuss apparent violations at Salem. These apparent violations, identified in May and June 1997, concerned emergency core cooling system switch over and related residual heat removal system (RHR) flow issues and fire protection issues. In a letter dated October 8, 1997, the NRC informed PSE&G that a Level III violation was cited for the issues surrounding the RHR system and Level IV violations were cited for the two fire protection issues. There was no civil penalty issued by the NRC for any of these violations. The Company has been informed by PSE&G that predecisional enforcement conferences were held on December 9, 1997 to discuss two allegations concerning security program issues which occurred at Salem in 1996. PSE&G cannot predict what other actions, if any, the NRC may take in these matters. In addition to the matters discussed above, see "Environmental Regulations - -- Water." 11 Fuel The following table shows the Company's sources of electric output for 1997 and as estimated for 1998:
1997 1998 (Est.) Nuclear........................................................... 39.0% 43.6% Mine-mouth, coal-fired............................................ 8.0 7.2 Service-area, coal-fired.......................................... 5.7 6.8 Oil-fired......................................................... 0.9 1.0 Hydro (includes pumped storage)................................... 1.6 1.6 Internal combustion............................................... 0.2 0.2 Purchased, interchange and nonutility generated................... 44.6 39.6 ------ ------ 100.0% 100.0% ====== ======
Nuclear The cycle of production and utilization of nuclear fuel includes the mining and milling of uranium ore into uranium concentrate; the conversion of uranium concentrates to uranium hexafluoride; the enrichment of the uranium hexafluoride; the fabrication of fuel assemblies; and the utilization of the nuclear fuel in the generating station reactor. The Company does not anticipate difficulty in obtaining the necessary uranium concentrates or conversion, enrichment or fabrication services for Limerick or Peach Bottom. PSE&G has informed the Company that it presently has sufficient contracts for uranium and services related to the nuclear fuel cycle to fully meet its current projected requirements. The following table summarizes the years through which the Company has contracts for the segments of the nuclear fuel supply cycle:
Concentrates (1) Conversion (2) Enrichment Fabrication Limerick Unit No. 1 ................................ 2002 2001 2004 2003 Limerick Unit No. 2 ................................ 2002 2001 2004 2004 Peach Bottom Unit No. 2 ........................ 2002 2001 2004 2001 Peach Bottom Unit No. 3 ........................ 2002 2001 2004 2002 - --------------- (1) The Company's contracts for uranium concentrates are allocated to Limerick and Peach Bottom on an as-needed basis. (2) The Company also has commitments for at least 60% of the conversion services requirements for Limerick and Peach Bottom through 2002.
There are no commercial facilities for the reprocessing of spent nuclear fuel currently in operation in the United States, nor has the NRC licensed any such facilities. The Company currently stores all spent nuclear fuel from its nuclear generating facilities in on-site, spent-fuel storage pools. Limerick has on-site facilities with capacity to store spent fuel to 2007. Peach Bottom has on-site facilities with capacity to store spent fuel until 2000 for Unit No. 2 and 2001 for Unit No. 3. In 1998, the Company will begin construction of a dry spent-fuel storage facility at Peach Bottom to maintain full-core discharge capacity in the spent-fuel pools. Construction is expected to take approximately 27 months. The Company expects that such a facility will cost $16 million to construct and will provide spent-fuel storage capacity at Peach Bottom for the life of the plant. The Company expects to purchase storage canisters for the spent fuel at an estimated cost of $6 million per year. The Company has been informed by PSE&G that as a result of reracking the two spent-fuel pools at Salem, the spent-fuel storage capacity of Salem Units No. 1 and No. 2 is estimated to be 2012 and 2016, respectively. Under the Nuclear Waste Policy Act of 1982 (NWPA), the DOE is required to begin taking possession of all spent nuclear fuel generated by nuclear facilities, including the Company's, for long-term storage by no later than 1998. Based on recent public pronouncements, it is not likely that a permanent disposal site will be available for the industry before 2015, at the earliest. In reaction to statements from the DOE that it was not legally obligated to begin to accept spent fuel in 1998, a group of utilities and state government agencies filed a lawsuit against the DOE which resulted in a decision by the U.S. Court of Appeals for the District of Columbia (D.C. Court of Appeals) in July 1996 that the DOE had an unequivocal obligation to begin to 12 accept spent fuel in 1998. In accordance with the NWPA, the Company pays the DOE one mill ($.001) per kWh of net nuclear generation for the cost of nuclear fuel disposal. This fee may be adjusted prospectively in order to ensure full cost recovery. Because of inaction by the DOE following the D.C. Court of Appeals finding of the DOE's obligation to begin receiving spent fuel in 1998, a group of forty-two utility companies, including the Company, and forty-six state agencies, filed suit against the DOE seeking authorization to suspend further payments to the U.S. government under the NWPA and to deposit such payments into an escrow account until such time as the DOE takes effective action to meet its 1998 obligations. In November 1997, the D.C. Court of Appeals issued a decision in which it held that the DOE had not abided by its prior determination that the DOE has an unconditional obligation to begin disposal of spent nuclear fuel by January 31, 1998. The D.C. Court of Appeals also precluded the DOE from asserting that it was not required to begin receiving spent nuclear fuel because it had not yet prepared a permanent repository or an interim storage facility. The DOE and one of the utility companies have filed a Petition for Reconsideration of the decision. In February 1998, a group of utilities, including the Company, filed a petition with the D.C. Court of Appeals for further orders to enforce the court's previous decisions. The state agencies have filed a similar petition. The U.S. House of Representatives and the U.S. Senate passed separate bills in 1997 authorizing construction of a temporary storage facility which could accept spent nuclear fuel from utilities in 2003. In addition, the DOE is exploring other options to address delays in the waste acceptance schedule. The charge collected by the Company from its customers in 1997 for spent-fuel disposal was $24 million. As a by-product of their operations, nuclear generating units, including those in which the Company owns an interest, produce low level radioactive waste (LLRW). LLRW is accumulated at each facility and permanently disposed of at a federally licensed disposal facility. The Company is currently shipping LLRW generated at Peach Bottom and Limerick to the disposal site located in Barnwell, South Carolina for disposal. On-site storage facilities have been constructed at Peach Bottom and Limerick, each with a five-year storage capacity, which are currently being used for interim storage. The Company is also pursuing alternative disposal strategies for LLRW generated at Peach Bottom and Limerick, including a LLRW reduction program. Pennsylvania has agreed to be the host site for a LLRW disposal facility for 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. Salem has on-site LLRW storage facilities with a five-year storage capacity. The Company has been informed by PSE&G that PSE&G ships LLRW generated at Salem to Barnwell, South Carolina and currently uses the Salem facility for interim storage. PSE&G has also advised the Company that New Jersey plans to establish a LLRW disposal facility by 2000. Public meetings have been held in an effort to provide information to and obtain feedback from the public. To date, there have been no voluntary sites identified. Consequently, on February 10, 1998, the state agency responsible for this program recommended to the Governor of New Jersey that this effort be abandoned. 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 $46 million for such costs at December 31, 1997. The Company is currently recovering these costs through rates. The Company is currently recovering in rates the costs for nuclear decommissioning and decontamination and spent-fuel storage. The Company believes that the ultimate costs of decommissioning and decontamination, spent-fuel disposal and any assessment under the Energy Act will continue to be recoverable through rates. For additional information concerning decommissioning, see "Electric Operations - General." 13 Coal The Company has a 20.99% ownership interest in Keystone Station (Keystone) and a 20.72% ownership interest in Conemaugh Station (Conemaugh), coal-fired, mine-mouth generating stations in western Pennsylvania operated by GPU Generating Corp. A majority of Keystone's fuel requirements is supplied by one coal company under a contract which expires on December 31, 2004. The contract calls for varying amounts of coal purchases as follows: between 3.0 million and 3.5 million tons for each of the years through 1999; and a total of 6.5 million tons for the years 2000 through 2004. Approximately 80% of Conemaugh's 1998 fuel requirements are secured by a long-term contract and the remainder by several short-term contracts or spot purchases. The Company has entered into contracts for a significant portion of its coal requirements and makes spot purchases for the balance of coal required by its Philadelphia-area, coal-fired units at Eddystone Station (Eddystone) and Cromby Station (Cromby). At January 1, 1998, 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. Oil The Company purchases fuel oil through a combination of short-term contracts and spot market purchases. The contracts are normally not longer than one year in length. Fuel oil inventories are managed such that in the winter months sufficient volumes of fuel are available in the event of extreme weather conditions and during the remaining months inventory levels are managed to take advantage of favorable market pricing. Natural Gas The Company obtains natural gas for electric generation through a combination of short-term contracts and spot purchases made on the open market, as well as through the Company's own gas tariff. The Company obtains the limited quantities of natural gas used by the auxiliary boilers and pollution control equipment at Eddystone through the same means. The Company has the capability to use either oil or natural gas at Cromby Unit No. 2 and Eddystone Units No. 3 and No. 4. Gas Operations During 1997, 10% of the Company's operating revenues and 9% of its operating income were from gas operations. Gas sales and operating revenues for 1997 by class of customer are set forth below:
Operating Sales Revenues (mmcf) (millions of $) House heating................................................. 32,666 $265 Residential (other than house heating)........................ 1,614 17 Commercial and industrial..................................... 19,830 145 Other......................................................... 673 3 Change in unbilled............................................ 212 (1) ------ ------ Total gas sales........................................... 54,995 429 Gas transported for customers................................. 30,412 22 ------ ------ Total gas sales and gas transported....................... 85,407 $451 ====== ======
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 14 (Transcontinental). The Company's aggregate annual entitlement under these firm transportation contracts is 98.5 million dekatherms. Peak gas is provided by the Company's liquefied natural gas facility and propane-air plant. See "ITEM 2. PROPERTIES." 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 1997-98 heating season supplies. The gas industry is continuing to undergo structural changes in response to FERC policies designed to increase competition. In addition, there is an initiative in the Pennsylvania legislature to deregulate the gas industry, which has the support of Governor Ridge. See "Deregulation and Rate Matters." Horizon Energy Company, a wholly owned subsidiary of the Company, is an unregulated marketing enterprise. Horizon Energy is engaged in marketing gas to residential and commercial gas customers outside of the Company's service territory. Horizon Energy is also a member of a natural gas buying cooperative created to enhance reliability of service and to access less expensive gas supplies for its eight gas utility members. 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 1997. 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 does not include any new generating facilities. At December 31, 1997, construction work in progress, excluding nuclear fuel, aggregated $611 million. Due to the expected adverse impact of the PUC Restructuring Order and competition for electric generating services on its future capital resources, the Company is currently evaluating its capital commitments for 1999 and beyond. The following table shows the Company's most recent estimate of capital expenditures for plant additions and improvements for 1998:
(Millions of $) Electric: Production........................................................ $155 Nuclear fuel...................................................... 53 Transmission and distribution..................................... 126 Other electric.................................................... 3 ---- Total electric................................................ 337 Gas.................................................................... 40 Other.................................................................. 73 ---- Total............................................................. $450 ====
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 1997. 15 Capital Requirements and Financing Activities The following table shows the Company's most recent estimate of capital requirements for 1998:
(Millions of $) Construction.................................................. $450 New ventures (1).............................................. 150 Long-term debt maturities and sinking funds................... 247 ---- Total capital requirements........................... $847 ==== - --------------- (1) A portion of these expenditures will be expensed.
The following table shows the Company's financing activities for 1997:
(Millions of $) Pollution Control Variable Rate due 2027...................................... $23 Term-Loan Facility Variable Rate due 1998...................................... 88 Trust Preferred Securities 8% Series C................................................. 50 ---- Total................................................ $161 ====
During 1997, the Company entered into a $900 million unsecured revolving credit facility with a group of banks. The credit facility is composed of a $450 million 364-day credit agreement and a $450 million three-year credit agreement. The Company uses the credit facility principally to support the Company's commercial paper program. 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. As a result of the extraordinary charge in December 1997, the Company did not meet the earnings test under the Mortgage required for the issuance of additional bonds against property additions for the twelve months ended December 31, 1997. In addition, the Company does not expect to meet the earnings test under the Mortgage for any twelve-month period ending prior to December 31, 1998. Earnings coverages under the Mortgage for the calendar years 1996 and 1995 were 4.39 and 4.94 times, respectively. At December 31, 1997, the Company was entitled to issue approximately $3.7 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. As a result of the extraordinary charge in December 1997, the Company did not meet the earnings test of the Articles for the twelve months ended December 31, 1997. In addition, the Company does not expect to meet the earnings test under the Articles for any twelve-month period ending prior to December 31, 1998. Earnings coverage under the Articles for the calendar years 1996 and 1995 was 2.50 and 2.34 times, respectively. 16 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:
1993 1994 1995 1996 1997 Ratio of Earnings to Fixed Charges..................... 3.15 2.66 3.41 3.29 2.71 Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends......................... 2.67 2.32 3.12 3.04 2.50
For purposes of these ratios, (i) earnings consist of income from continuing operations before income taxes and fixed charges and (ii) fixed charges consist of all interest deductions and the financing costs associated with capital leases. For purposes of calculating these ratios, income from continuing operations for 1997 does not include the extraordinary charge against income of $3.1 billion ($1.8 billion net of income taxes). At December 31, 1997, the Company had a total of $87.5 million outstanding under an unsecured term-loan agreement with banks maturing in 1998. Most of the Company's unsecured debt agreements contain cross-default provisions to the Company's other debt obligations. The Company has a $600 million commercial paper program. At December 31, 1997, there was $314 million of commercial paper outstanding. At December 31, 1997, the Company and its subsidiaries had formal and informal lines of credit with banks aggregating $75 million against which there was no short-term debt outstanding. As of December 31, 1997, the Company had no compensating balance agreements with any bank. For additional information, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report to Shareholders for the year 1997. Employee Matters The Company and its subsidiaries had 7,359 employees at December 31, 1997. None of the employees of the Company or its subsidiaries are represented by a union. Over the past several years, a number of unions have filed petitions with the National Labor Relations Board to hold certification elections with regard to different segments of employees within the Company. In all cases, the Company employees have rejected union representation. The Company expects that such petitions will continue to be filed in the future. Environmental Regulations Environmental controls at the federal, state, regional and local levels have a substantial impact on the Company's operations due to the cost of installation and operation of equipment required for compliance with such controls. In addition to the matters discussed below, see "Electric Operations - -- General" and "Electric Operations -- Limerick Generating Station." An environmental issue with respect to construction and operation of electric transmission and distribution lines and other facilities is whether exposure to electro-magnetic fields (EMF) causes adverse human health effects. A large number of scientific studies have examined this question and certain studies have indicated an association between exposure to EMF and adverse health effects, including certain types of cancer. However, the scientific community still has not reached a consensus on the issue. Additional research intended to provide a better understanding of EMF is continuing. The Company also supports further research in this area and is funding and monitoring such studies. Public concerns about the possible health risks of exposure to EMF have adversely affected, and are expected in the future to adversely affect, the costs of, and time required to, site new distribution and transmission facilities and upgrade existing facilities. The Company cannot predict at this time what effect, if any, this issue will have on other future operations. 17 Water The Company has been informed by PSE&G that PSE&G is implementing the 1994 New Jersey Pollutant Discharge Elimination System permit issued for Salem which requires, among other things, water intake screen modifications and wetlands restoration. The estimated capital cost of compliance with the final permit is approximately $100 million, of which approximately $10 million remains to be spent. The Company's share of such costs is 42.59% and is included in the Company's capital requirements. In 1999, PSE&G must apply to the New Jersey Department of Environmental Protection and Energy (NJDEPE) and other agencies to renew such Salem permit. Failure to obtain renewal of this permit on a timely basis, which cannot be assured, could have a material adverse effect on the Company's financial condition and results of operations. Air Air quality regulations promulgated by the EPA, the PDEP and the City of Philadelphia in accordance with the federal Clean Air Act and the Clean Air Act Amendments of 1990 (Amendments) impose restrictions on emission of particulates, sulfur dioxide (SO2), nitrogen oxides (NOx) and other pollutants and require permits for operation of emission sources. Such permits have been obtained by the Company and must be renewed periodically. The Amendments establish a comprehensive and complex national program to substantially reduce air pollution. The Amendments include a two-phase program to reduce acid rain effects by significantly reducing emissions of SO2 and 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 Phase I requirements of the Amendments. Keystone Units No. 1 and No. 2 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. 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 expects that the cost of compliance with anticipated air-quality regulations may be substantial due to further limitations on permitted NOx emissions. The PDEP has adopted a NOx allowance program which could restrict the operation of the Company's fossil-fired units, require the purchase of NOx emission allowances from others or require the installation of additional control equipment to permit operation above certain limits. The Company has appealed a portion of the PDEP NOx allowance program. Many other provisions of the Amendments affect the Company's business. The Amendments establish stringent control measures for geographical regions which have been determined by the EPA to not meet National Ambient Air Quality Standards; establish limits on the purchase and operation of motor vehicles and require increased use of alternative fuels; establish stringent controls on emissions of toxic air pollutants and provide for possible future designation of some utility emissions as toxic; establish new permit and monitoring requirements for sources of air emissions; and provide for significantly increased enforcement power, and civil and criminal penalties. Solid and Hazardous Waste The Comprehensive Environmental Response, Compensation, and Liability Act of 1980 and the Superfund Amendments and Reauthorization Act of 1986 (collectively CERCLA) authorize the EPA to cause potentially responsible parties (PRPs) to conduct (or for the EPA to conduct at the PRPs' expense) remedial action at waste disposal sites that pose a hazard to human health or the environment. Parties contributing hazardous substances to a site or owning or operating a site typically are viewed as jointly and severally liable for conducting or paying for remediation and for reimbursing the government for related costs incurred. PRPs may agree to allocate liability among themselves, or a court may perform that allocation according to equitable factors deemed 18 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 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 April 18, 1996, a consent decree, which included the terms of the settlement, was entered by the United States District Court for the Eastern District of Kentucky. The PRPs have entered into a contract for the design and implementation of the remedial plan and preliminary work has commenced. By notice issued in December 1987, the EPA notified several entities, including the Company, that they may be PRPs under CERCLA with respect to wastes resulting from the treatment and disposal of transformers and miscellaneous electrical equipment at a site located in Philadelphia, Pennsylvania (the Metal Bank of America site). Several of the PRPs, including the Company, formed a steering committee to investigate the nature and extent of possible involvement in this matter. On May 29, 1991, a Consent Order was issued by the EPA pursuant to which the members of the steering committee 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. In December 1997, the EPA finalized its record of decision (ROD) for the site. The Company is evaluating the cost of implementing the remedy described in the ROD, which differs from the remedy previously proposed by the EPA. In January 1998, the EPA sent letters to approximately 20 PRPs, including the Company, giving them 60 days to negotiate with the EPA to perform the proposed remedy. By notice issued in September 1985, the EPA notified the Company that it has been identified as a PRP for the costs associated with the cleanup of a site (Berks Associates/Douglassville site) where waste oils generated from Company operations were transported, treated, stored and disposed. In August 1991, the EPA filed suit in the Eastern District Court against 36 named PRPs, not including the Company, seeking a declaration that these PRPs are jointly and severally liable for cleanup of the Berks Associates/Douglassville site and for costs already expended by the EPA on the site. Simultaneously, the EPA issued an Administrative Order against the same named defendants, not including the Company, which requires the PRPs named in the Administrative Order to commence cleanup of a portion of the site. On September 29, 1992, the Company and 169 other parties were served with a third-party complaint joining these parties as additional defendants. Subsequently, an additional 150 parties were joined as defendants. A group of approximately 100 PRPs with allocated shares of less than 1%, including the Company, have formed a negotiating committee to negotiate a settlement offer with the EPA. In December 1994, the EPA proposed a de minimis PRP settlement which would require the Company to pay $991,835 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 19 EPA that it wishes to participate with other eligible PRPs in the de minimis settlement, and is currently awaiting approval of the settlement. In October 1995, the Company, along with over 500 other companies, received a General Notice from the EPA advising that the Company had been identified as having sent hazardous substances to the Spectron/Galaxy Superfund Site and requesting the companies to conduct an RI/FS at the site. The Company had previously been identified as a de minimis PRP and paid $2,100 to settle an earlier phase. Additionally, the Company had participated in a PRP agreement and consent order related to further work at the Spectron site. In conjunction with the EPA's General Notice, the existing PRP group has proposed a settlement which, based on the volume of hazardous substances sent to the Spectron site by the Company, would allow the Company to settle the matter as a de minimis party for less than $10,000. On October 16, 1989, the EPA and the NJDEPE commenced a civil action in the United States District Court for the District of New Jersey (New Jersey District Court) against 26 defendants, not including the Company, alleging the right to collect past and future response costs for cleanup of the Helen Kramer landfill located in New Jersey. In October 1991, the direct defendants joined the Company and over 100 other parties as third-party defendants. The third-party complaint alleges that the Company generated materials containing hazardous substances that were transported to and disposed at the landfill by a third party. The Company, together with a number of other direct and third-party defendants, has agreed to participate in a proposed de minimis settlement which would allow the Company to settle its potential liability at the site for approximately $40,000. 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 has reached an agreement with the plaintiff resolving the Company's liabilities for the site for an amount that is not material to the Company's financial condition or results of operations. The Company has been named as a defendant in a Superfund matter involving the Greer Landfill in South Carolina. The plaintiff's motion to dismiss the complaint against the Company was granted, although the third-party defendant's cross-claims against the Company remain. The Company is currently involved in settlement discussions with the third-party defendants. On November 18, 1996, the Company received a notice from the EPA that the Company is a PRP at the Malvern TCE Superfund Site, located in Malvern, Pennsylvania. The Company is currently unable to estimate the amount of liability, if any, it may have with respect to this site. On February 3, 1997, the Company was served with a third-party complaint involving the Pennsauken Sanitary Landfill. The Company is currently unable to estimate the amount of liability it may have with respect to this site. In June 1989, a group of PRPs (Metro PRP Group) entered into an Administrative Order on Consent with the EPA pursuant to which they agreed to perform certain removal activities at the Metro Container Superfund Site located in Trainer, Pennsylvania. In January 1990, the Metro PRP Group notified the Company that the group considered the Company to be a PRP at the site. Since that time, the Company has reviewed, and continues to review its files and records and has been unable to locate any information which would indicate any connection to the site. The Company does not believe that it has any liability with respect to this site. In November 1987, the Company received correspondence from the EPA which indicated that the EPA was investigating the release of hazardous substances from the Blosenski Landfill located in West Caln Township, Chester County, Pennsylvania. The Company has been unable to locate any information which would indicate any connection to this site. The Company does not believe it has any liability with respect to this site. 20 The Company has identified 27 sites where former manufactured gas plant activities may have resulted in site contamination. Past activities at several sites have resulted in actual site contamination. The Company is presently engaged in performing various levels of activities at these sites, including initial evaluation to determine the existence and nature of the contamination, detailed evaluation to determine the extent of the contamination and the necessity and possible methods of remediation, and implementation of remediation. The PDEP has approved the Company's clean-up of two sites. Six other sites are currently under some degree of active study and/or remediation. At December 31, 1997, the Company had accrued approximately $35 million for investigation and remediation of these manufactured gas plant sites that currently can be reasonably estimated. 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. Costs At December 31, 1997, the Company had accrued $63 million for various investigation and remediation costs that can be reasonably estimated, including approximately $35 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 1998 for compliance with environmental requirements total approximately $14 million. In addition, the Company may be required to make significant additional expenditures not presently determinable. Telecommunications and Other Ventures In 1995, the Company and Hyperion Telecommunications, Inc., a subsidiary of Adelphia Cable Company, formed PECO Hyperion Telecommunications. The partnership is a Competitive Local Exchange Carrier (CLEC) and provides local phone service in the Philadelphia metropolitan region. PECO Hyperion utilizes a large-scale fiber optic, cable-based network that currently extends over 525 miles and is connected to major long-distance carriers and local businesses. The Company and Hyperion Telecommunications, Inc. each holds a 50% interest in the partnership. On behalf of its venture with AT&T Wireless Services, the Company has completed the initial build-out of a new digital wireless Personal Communications Services (PCS) network. Commercial launch of PCS in the Philadelphia area occurred in October 1997. The Company holds a 49% equity interest in the venture. In 1997, the Company and UtiliCorp United formed EnergyOne, L.L.C. (EnergyOne), a separate nationwide marketing company designed to integrate traditional energy commodities with a portfolio of competitively priced products and services. These products and services will be offered by participating distributors and suppliers under franchise arrangements with EnergyOne. The Company and UtiliCorp each holds a 50% equity interest in EnergyOne, with an aggregate investment totaling approximately $22 million. The Company is also an EnergyOne franchisee. In 1997, the Company and British Energy of Edinburgh, Scotland formed AmerGen Energy, LLC (AmerGen) to pursue opportunities to acquire and operate nuclear generating stations in the United States. The Company and British Energy each own a 50% equity interest in AmerGen. Due to their start-up nature, these joint ventures and investments are expected to negatively affect earnings in the near future. See note 19 of Notes to Consolidated Financial Statements included in the Company's Annual Report to Shareholders for the year 1997. 21 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 (Subordinated Debentures), which are the only assets of the Partnership. The only revenues of the Partnership are interest on the Subordinated Debentures. All of the operating expenses of the Partnership are paid by PECO Energy Capital Corp. As of December 31, 1997, the Partnership held $360,175,464 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. As of December 31, 1997, the Trust had outstanding 3,124,183 Trust Receipts. At December 31, 1997, 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 during 1997 in the aggregate amount of $6,810,719, or $2.18 per Trust Receipt. Expenses of the Trust for 1997 were approximately $50,000, all of which were paid by PECO Energy Capital Corp. There were 828 holders of record of the Trust Receipts as of December 31, 1997. PECO Energy Capital Trust II (Trust II) was created in June 1997 as a statutory business trust under the laws of the State of Delaware solely for the purpose of issuing trust receipts (Trust II Receipts) each representing an 8.00% Cumulative Monthly Income Preferred Security, Series C (Series C Preferred Securities) of the Partnership. The Partnership is the sponsor of the Trust II. As of December 31, 1997, the Trust II had outstanding 2,000,000 Trust II Receipts. At December 31, 1997, the assets of the Trust II consisted solely of 2,000,000 Series C Preferred Securities with an aggregate stated liquidation preference of $50,000,000. Distributions were made on the Trust II Receipts during 1997 in the aggregate amount of $2,666,667. Expenses of the Trust II for 1997 were approximately $50,000, all of which were paid by PECO Energy Capital Corp. The Trust II Receipts are issued in book-entry-only form. 22 Executive Officers of the Registrant at December 31, 1997
Age at Effective Date of Election Name Dec. 31, 1997 Position to Present Position C. A. McNeill, Jr.............. 58 Chairman of the Board, President and Chief Executive Officer........................ July 1, 1997 D. M. Smith.................... 64 President-- PECO Nuclear and Chief Nuclear Officer................................ February 1, 1996 G. A. Cucchi................... 48 Senior Vice President-- Ventures.................. June 1, 1997 J. W. Durham................... 60 Senior Vice President-- Legal and General Counsel................................ October 24, 1988 M. J. Egan..................... 44 Senior Vice President-- Finance and Chief Financial Officer........................ October 13, 1997 W. J. Kaschub.................. 55 Senior Vice President-- Human Resources........... June 10, 1991 G. S. King..................... 57 Senior Vice President-- Corporate and Public Affairs................................. October 1, 1992 K. G. Lawrence................. 50 Senior Vice President-- Local Distribution Company........................................ October 13, 1997 J. M. Madara, Jr............... 54 Senior Vice President-- Power Generation Group.......................................... March 1, 1994 W. H. Smith, III............... 49 Senior Vice President-- Business Services Group.......................................... November 7, 1997 A. J. Weigand.................. 59 Senior Vice President............................. June 1, 1997 G. R. Rainey................... 48 Senior Vice President-- Nuclear Operations........ April 1, 1996 N. J. Bessey................... 44 Vice President-- Power Transactions............... October 11, 1994 J. B. Cotton................... 53 Vice President-- Station Support.................. April 9, 1997 J. Doering, Jr................. 54 Vice President-- Operations-- Power Generation Group............................... October 28, 1996 G. N. Dudkin................... 40 Vice President-- Power Delivery................... June 1, 1997 D. B. Fetters.................. 46 Vice President-- Nuclear Planning and Development.................................... April 9, 1997 T. P. Hill, Jr................. 49 Vice President and Controller..................... January 1, 1991 W. G. MacFarland, IV........... 48 Vice President-- Limerick Generating Station........................................ March 1, 1995 C. A. Matthews................. 47 Vice President-- Information Systems and Chief Information Officer.................. July 28, 1997 J. P. McElwain................. 47 Vice President-- Nuclear Projects................. April 9, 1997 J. B. Mitchell................. 49 Vice President-- Finance and Treasurer............ December 1, 1994 T. N. Mitchell................. 42 Vice President-- Peach Bottom Atomic Power Station.................................. April 1, 1996 W. E. Powell, Jr............... 61 Vice President-- Support Services................. January 30, 1995 K. K. Combs.................... 47 Corporate Secretary............................... November 1, 1994
Each of the above executive officers holds such office at the discretion of the Company's Board of Directors until his or her replacement or earlier resignation, retirement or death. Prior to his election to his current position, Mr. McNeill was President and Chief Executive Officer, President and Chief Operating Officer and Executive Vice President - Nuclear. Prior to his election to his current position, Mr. D. M. Smith was Senior Vice President - Nuclear Generation Group and Senior Vice President - Nuclear. 23 Prior to his election to his current position, Mr. Cucchi was Vice President - Power Delivery, Vice President - Corporate Planning and Development, Director of System Planning and Performance, and Manager - System Planning. Prior to joining the Company, Mr. Egan was Senior Vice President and Chief Financial Officer of Aristech Chemical Company and Vice President of Planning and Control of ARCO Chemical Company, Americas. Prior to his election to his current position, Mr. Lawrence was Senior Vice President - Finance and Chief Financial Officer and Vice President - Gas Operations. Prior to his election to his current position, Mr. Madara was Vice President - Production. Prior to his election to his current position, Mr. W. H. Smith, III was Vice President and Group Executive - Telecommunications Group, Vice President - Station Support, Vice President - Planning and Performance, and Manager - Corporate Strategy and Performance. Prior to his election to his current position, Mr. Weigand was Senior Vice President and Group Executive Bulk Power Enterprises and Vice President - Transmission and Distribution Services. Prior to joining the Company in 1994, Ms. Bessey was Vice President of U.S. Generating Company, an independent power producer. Prior to her election to her current position, Ms. Matthews was Director of Consumer Energy Information Systems and Distributed Information Officer. Prior to joining the Company in 1996, Ms. Matthews was Vice President of Strategic Business Development for Europe Online S.A. Luxembourg. Prior to 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 their election to the positions shown above, the following executive officers held other positions with the Company since January 1, 1993: Mr. Cotton was Director - Nuclear Engineering, Director - Nuclear Quality Assurance and Superintendent - Operations; Mr. Doering was Plant Manager - Limerick, Director - Nuclear Strategies Support, and General Manager - Operations; Mr. Dudkin was Acting General Manager - Power Delivery, Regional Director - Power Delivery and Manager - Electric Operations; Mr. Fetters was Vice President - Nuclear Planning and Development, Director - Nuclear Engineering, Director - Limerick Maintenance and a project manager; Mr. MacFarland was Outage Management Director - Limerick, Manager - Nuclear Maintenance, and Manager - Peach Bottom Installation Division; Mr. McElwain was Director of Outage Management - Peach Bottom; Mr. J. B. 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; and Ms. Combs was an Assistant General Counsel. There are no family relationships among directors or executive officers of the Company. 24 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, 1997:
Net Generating Estimated Capacity (1) Retirement Station Location (Kilowatts) Year Nuclear Limerick............................. Limerick Twp., PA .................. 2,220,000 2024(2), 2029(2) Peach Bottom......................... Peach Bottom Twp., PA............... 928,000(3) 2013, 2014 Salem ............................. Hancock's Bridge, NJ................ 942,000(3) 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 (4) Eddystone............................ Eddystone, PA....................... 1,341,000 2009, 2010, 2011 Schuylkill........................... Philadelphia, PA.................... 166,000 (4) Conemaugh............................ New Florence, PA.................... 352,000(3) 2005, 2006 Keystone............................. Shelocta, PA ....................... 357,000(3) 2002, 2003 Fossil (Gas Turbines) Chester ............................. Chester, PA......................... 39,000 (4) Croydon ............................. Bristol Twp., PA ................... 373,000 (4) Delaware............................. Philadelphia, PA ................... 60,000 (4) Eddystone............................ Eddystone, PA....................... 64,000 (4) Fairless Hills....................... Falls Twp., PA...................... 60,000 (4) Falls................................ Falls Twp., PA...................... 50,000 (4) Moser................................ Lower Pottsgrove Twp., PA........... 48,000 (4) Pennsbury............................ Falls Twp., PA...................... 6,000 (4) Richmond............................. Philadelphia, PA ................... 96,000 (4) Schuylkill........................... Philadelphia, PA.................... 32,000 (4) Southwark............................ Philadelphia, PA.................... 54,000 (4) Salem................................ Hancock's Bridge, NJ................ 16,000(3) (4) Fossil (Internal Combustion) Cromby............................... Phoenixville, PA.................... 2,700 (4) Delaware............................. Philadelphia, PA ................... 2,700 (4) Schuylkill........................... Philadelphia, PA.................... 2,800 (4) Conemaugh............................ New Florence, PA.................... 2,300(3) 2006 Keystone............................. Shelocta, PA ....................... 2,300(3) 2003 --------- Total.................................................................... 9,203,800 ========= - --------------- (1) Summer rating. (2) For depreciation accrual purposes only, retirement dates have been reduced by 10 years. (3) Company portion. (4) Retirement dates are under on-going review by the Company. Current plans call for the continued operation of these units beyond 1998.
25 The following table sets forth the Company's major transmission and distribution lines in service at December 31, 1997:
Voltage in Kilovolts (Kv) Conductor Miles Transmission: 500 Kv........................................................ 891 220 Kv........................................................ 1,634 132 Kv........................................................ 15 66 Kv......................................................... 570 33 Kv and below............................................... 29 Distribution: 33 Kv and below............................................... 46,817
At December 31, 1997, the Company's principal electric distribution system included 21,009 pole-line miles of overhead lines and 21,002 cable miles of underground cables. The following table sets forth the Company's gas pipeline miles at December 31, 1997:
Pipeline Miles Transmission...................................................... 28 Distribution...................................................... 5,679 Service piping.................................................... 4,507 ------ Total......................................................... 10,214 ======
The Company has a liquefied natural gas facility located in West Conshohocken, Pennsylvania which has a storage capacity of 1,200,000 mcf and a sendout capacity of 157,000 mcf/day and a propane-air plant located in Chester, Pennsylvania, with a tank storage capacity of 1,980,000 gallons and a peaking capability of 25,000 mcf/day. In addition, the Company owns 24 natural gas city gate stations (including one temporary station) at various locations throughout its gas service territory. At December 31, 1997, the Company had 545 miles of fiber optic cable. The Company owns an office building in downtown Philadelphia, in which it maintains its headquarters, and also owns or leases elsewhere in its service area a number of properties which are used for office, service and other purposes. Information regarding rental and lease commitments is incorporated herein by reference to note 16 of Notes to Consolidated Financial Statements included in the Company's Annual Report to Shareholders for the year 1997. 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 $26 million for property losses incurred at any plant insured by the insurance companies (see "ITEM 1. BUSINESS -- Electric Operations -- General"). The Company is self-insured to the extent that any losses may exceed the amount of insurance maintained. Any such losses could have a material adverse effect on the Company's financial condition and results of operations. 26 ITEM 3. LEGAL PROCEEDINGS On July 26, 1993 and August 15, 1995, attorneys on behalf of shareholders filed separate derivative actions in the Court of Common Pleas in Philadelphia County (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. The basis of these suits, which were subsequently consolidated, was the findings and conclusions contained in a credit collection section of the May 1991 PUC management audit report prepared by Ernst & Young. In June 1993, the Board of Directors of the Company appointed a special committee of directors to consider whether legal action against the Company officers and directors would be in the best interest 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 related to the suit subsequently filed in 1995 and authorizing and directing officers of the Company to take all steps necessary to terminate the suit filed in 1993. On February 23, 1996, the Company and the defendants filed a petition to terminate the consolidated action on the basis of the March 14, 1994 Board of Directors resolution, which petition was denied by the Court of Common Pleas. On appeal, the Supreme Court of Pennsylvania held that the business judgment rule, which permits the Board of Directors of a Pennsylvania corporation to terminate derivative lawsuits brought by minority shareholders, is the law in Pennsylvania; established a procedure for determining whether the criteria for application of the business judgment rule had been met in a specific case; reversed the order of the Court of Common Pleas; and remanded the matter to the Court of Common Pleas for further proceedings consistent with its opinion. On February 26, 1998, the Court of Common Pleas granted the motion of the defendants and the Company to dismiss the derivative suits because the decision of the Company's Board of Directors to terminate the suits based on the recommendation of its special committee was proper. During the shutdown of Salem, examinations of the steam generator tubes at Salem Unit No. 1 revealed significant cracking. On February 27, 1996, the Company, PSE&G, Atlantic Electric Company and Delmarva, the co-owners of Salem, filed an action in the New Jersey District Court against Westinghouse Electric Corporation, the designer and manufacturer of the Salem steam generators. The suit alleges that the significant cracking of the steam generator tubes is the result of defects in the design and fabrication of the steam generators and that Westinghouse knew that the steam generators supplied to Salem were defective and that Westinghouse deliberately concealed this from PSE&G. The suit alleges violations of both the federal and New Jersey Racketeer Influenced and Corrupt Organizations Acts (RICO), fraud, negligent misrepresentation and breach of contract. Westinghouse has filed a motion for summary judgment on the grounds that the claim of the plaintiffs is barred by the statute of limitations. In addition, Westinghouse has filed a motion to dismiss the RICO claims. The Company cannot predict the outcome of this proceeding. 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, 1998, there were 163,049 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 1997 and 1996 is incorporated herein by reference to "Operating Statistics" in the Company's Annual Report to Shareholders for the year 1997. The book value of the Company's common stock at December 31, 1997 was $12.25 per share. 27 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, 1997, such capital ($2.73 billion) amounted to about 12 times the liquidating value of the outstanding preferred stock ($230.2 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 Subordinated Debentures which were issued to the Partnership; (2) the Company defaults on its guarantee of the payment of distributions on the Cumulative Monthly Income Preferred Securities of the Partnership; or (3) an event of default occurs under the Indenture under which the Subordinated Debentures are issued. ITEM 6. SELECTED FINANCIAL DATA Selected financial data for each of the last five years for the Company and its subsidiaries is incorporated herein by reference to "Financial Statistics" and "Operating Statistics" in the Company's Annual Report to Shareholders for the year 1997. 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 1997. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK None. 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 1997. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 28 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 1998 Annual Meeting of Shareholders to be held April 8, 1998, under the heading "Election of Directors" and is incorporated herein by reference. (b) Identification of Executive Officers. The information required for Executive Officers is set forth in "PART I. ITEM 1. BUSINESS - Executive Officers of the Registrant" of this Form 10-K. ITEM 11. EXECUTIVE COMPENSATION The information with respect to this caption is included in the Proxy Statement of the Company in connection with its 1998 Annual Meeting of Shareholders to be held April 8, 1998, under the heading "Executive Compensation Disclosure" and is incorporated herein by reference. 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 1998 Annual Meeting of Shareholders to be held April 8, 1998, under the heading "Election of Directors" and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information with respect to this caption is included in the Proxy Statement of the Company in connection with its 1998 Annual Meeting of Shareholders to be held April 8, 1998, under the heading "Election of Directors" and is incorporated herein by reference. 29 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 1997: Report of Independent Accountants............................................. -- 21 Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995............................................ -- 22 Consolidated Balance Sheets as of December 31, 1997 and 1996.................. -- 24 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995............................................ -- 23 Consolidated Statements of Changes in Common Shareholders' Equity and Preferred Stock for the years ended December 31, 1997, 1996 and 1995............................................ -- 26 Notes to Consolidated Financial Statements.................................... -- 27 Data submitted herewith: Report of Independent Accountants............................................. 31 -- Schedule II-- Valuation and Qualifying Accounts for the years ended December 31, 1997, 1996 and 1995....................... 32 --
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 1997 and incorporated by reference into this Form 10-K, the Annual Report to Shareholders for the year 1997 is not to be deemed filed as part of this Form 10-K. 30 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 21 of the 1997 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, 1998 31 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, 1997 ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS............................. $24,040 $58,367 $ -- $50,593 $31,814 ------- ------- ------- ------- ------- TOTAL.......................... $24,040 $58,367 $ -- $50,593 $31,814 ======= ======= ======= ======= ======= FOR THE YEAR ENDED DECEMBER 31, 1996 ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS............................. $20,860 $50,976 $ -- $47,796 $24,040 ------- ------- ------- ------- ------- TOTAL.......................... $20,860 $50,976 $ -- $47,796 $24,040 ======= ======= ======= ======= ======= 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 ======= ======= ======= ======= ======= - --------------- (1) Write-off of individual accounts receivable.
32 Exhibits Certain of the following exhibits have been filed with the Securities and Exchange Commission (Commission) pursuant to the requirements of the Acts administered by the Commission. Such exhibits are identified by the references following the listing of each such exhibit and are incorporated herein by reference under Rule 12b-32 of the Securities and Exchange Act of 1934, as amended. Certain other instruments which would otherwise 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 26, 1998. 4-1 First and Refunding Mortgage dated May 1, 1923 between The Counties Gas and Electric Company (predecessor to the Company) and Fidelity Trust Company, Trustee (First Union National Bank, successor), (Registration No. 2-2881, Exhibit B-1). 4-2 Supplemental Indentures to the Company's First and Refunding Mortgage:
Dated as of File Reference Exhibit No. ------------------------------------------------------------------------------------------ May 1, 1927 2-2881 B-1(c) March 1, 1937 2-2881 B-1(g) December 1, 1941 2-4863 B-1(h) November 1, 1944 2-5472 B-1(i) December 1, 1946 2-6821 7-1(j) September 1, 1957 2-13562 2(b)-17 May 1, 1958 2-14020 2(b)-18 March 1, 1968 2-34051 2(b)-24 March 1, 1981 2-72802 4-46 March 1, 1981 2-72802 4-47 December 1, 1984 1984 Form 10-K 4-2(b) July 15, 1987 Form 8-K dated July 21, 1987 4(c)-63 July 15, 1987 Form 8-K dated July 21, 1987 4(c)-64 October 15, 1987 Form 8-K dated October 7, 1987 4(c)-66 October 15, 1987 Form 8-K dated October 7, 1987 4(c)-67 April 15, 1988 Form 8-K dated April 11, 1988 4(e)-68 April 15, 1988 Form 8-K dated April 11, 1988 4(e)-69 October 1, 1989 Form 8-K dated October 6, 1989 4(e)-72 October 1, 1989 Form 8-K dated October 18, 1989 4(e)-73 April 1, 1991 1991 Form 10-K 4(e)-76 December 1, 1991 1991 Form 10-K 4(e)-77 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 33 Dated as of File Reference Exhibit No. ------------------------------------------------------------------------------------------ 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 Indenture, dated as of July 1, 1994, between the Company and First Union National Bank, as successor trustee (1994 Form 10-K, Exhibit 4-5). 4-4 First Supplemental Indenture, dated as of December 1, 1995, between the Company and First Union National Bank, as successor trustee, to Indenture dated as of July 1, 1994 (1995 Form 10-K, Exhibit 4-7). 4-5 Second Supplemental Indenture, dated as of June 1, 1997, between the Company and First Union National Bank, as successor trustee, to Indenture dated as of July 1, 1994. 4-6 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). 4-7 Payment and Guarantee Agreement, dated as of December 19, 1995, executed by the Company in favor of the holders of Cumulative Monthly Income Preferred Securities, Series B of PECO Energy Capital, L.P (1995 Form 10-K, Exhibit 4-10). 4-8 Payment and Guarantee Agreement, dated as of June 6, 1997, executed by the Company in favor of the holders of Cumulative Monthly Income Preferred Securities, Series C of PECO Energy Capital, L.P. 4-9 Revolving Credit Agreement, dated as of October 7, 1997, among the Company, as borrower, and certain banks named therein. 4-10 364-day Credit Agreement, dated as of October 7, 1997, among the Company, as borrower, and certain banks named therein. 4-11 PECO Energy Company Dividend Reinvestment and Stock Purchase Plan, as amended January 28, 1994 (Post-Effective Amendment No. 1 to Registration No. 33-42523, Exhibit 28). 10-1 Amended and Restated Operating Agreement of PJM Interconnection, L.L.C., dated June 2, 1997, (Revised December 31, 1997). 10-2 Agreement, dated November 24, 1971, between Atlantic City Electric Company, Delmarva Power & Light Company, Public Service Electric and Gas Company and the Company for ownership of Salem Nuclear Generating Station (1988 Form 10-K, Exhibit 10-3); supplemental agreement dated September 1, 1975; supplemental agreement dated January 26, 1977 (1991 Form 10-K, Exhibit 10-3); and supplemental agreement dated May 27, 1997. 34 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; supplemental agreement dated January 26, 1977 (1988 Form 10-K, Exhibit 10-4) and supplemental agreement dated May 27, 1997. 10-4 Deferred Compensation and Supplemental Pension Benefit Plan.* 10-5 Management Group Deferred Compensation and Supplemental Pension Benefit Plan.* 10-6 Unfunded Deferred Compensation Plan for Directors.* 10-7 Forms of Agreement between the Company and certain officers (1995 Form 10-K, Exhibit 10-5). 10-8 PECO Energy Company 1989 Long-Term Incentive Plan, amended April 9, 1997 (1997 Proxy Statement, Appendix B).* 10-9 PECO Energy Company Management Incentive Compensation Plan (1997 Proxy Statement, Appendix A).* 10-10 Amended and Restated Limited Partnership Agreement of PECO Energy Capital, L.P., dated July 25, 1994 (1994 Form 10-K, Exhibit 10-7). 10-11 Amendment No. 1 to the Amended and Restated Limited Partnership Agreement of PECO Energy Capital, L.P. (1995 Form 10-K, Exhibit 10-8). 10-12 Amendment No. 2 to the Amended and Restated Limited Partnership Agreement of PECO Energy Capital, L.P. (1995 Form 10-K, Exhibit 10-9). 10-13 Amended and Restated Trust Agreement of PECO Energy Capital Trust I, dated as of December 19, 1995. (1995 Form 10-K, Exhibit 10-10). 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 1997. 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. 35 Reports on Form 8-K During the quarter ended December 31, 1997, the Company filed Current Reports on Form 8-K, dated: November 7, 1997 reporting information under "ITEM 5. OTHER EVENTS" regarding the Company's filing of testimony with the Pennsylvania Public Utility Commission in connection with its restructuring proceeding. December 11, 1997 reporting information under "ITEM 5. OTHER EVENTS" regarding the Pennsylvania Public Utility Commission's approval of a restructuring plan in the Company's restructuring proceeding. December 12, 1997 reporting information under "ITEM 5. OTHER EVENTS" regarding the terms of the Pennsylvania Public Utility Commission's restructuring plan in the Company's restructuring proceeding. Subsequent to December 31, 1997, the Company filed Current Reports on Form 8-K, dated: January 9, 1998 reporting information under "ITEM 5. OTHER EVENTS" regarding the Company's filing of a Petition for Rehearing, Reconsideration, Clarification, and Amendment to the Pennsylvania Public Utility Commission's Opinion and Order in the Company's restructuring proceeding. January 15, 1998 reporting information under "ITEM 5. OTHER EVENTS" regarding the Pennsylvania Public Utility Commission's response to the Company's filing of a Petition for Rehearing, Reconsideration, Clarification, and Amendment to the Opinion and Order in the Company's Restructuring Proceeding. January 22, 1998 reporting information under "ITEM 5. OTHER EVENTS" regarding the Company's filing of complaints appealing the Pennsylvania Public Utility Commission's decision in its restructuring proceeding. January 23, 1998 reporting information under "ITEM 5. OTHER EVENTS" regarding the Company's filing of complaints appealing the Pennsylvania Public Utility Commission's decision in its restructuring proceeding. January 26, 1998 reporting information under "ITEM 5. OTHER EVENTS" regarding the Company's decision to reduce the Company's quarterly common stock dividend and reporting 1997 financial results. 36 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 9th day of March 1998. PECO ENERGY COMPANY By /s/ C.A. McNeill, Jr. ---------------------------------------- C.A. McNeill, Jr., Chairman of the Board, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this annual report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ C. A. McNeill, Jr. Chairman of the Board, President, March 9, 1998 _________________________ Chief Executive Officer and C. A. McNeill, Jr. Director (Principal Executive Officer) /s/ M. J. Egan Senior Vice President - Finance March 9, 1998 _________________________ and Chief Financial Officer M. J. Egan (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 JAMES A. HAGEN DANIEL L. COOPER KINNAIRD R. MCKEE M. WALTER D'ALESSIO JOSEPH J. MCLAUGHLIN G. FRED DIBONA, JR. JOHN M. PALMS R. KEITH ELLIOTT JOSEPH F. PAQUETTE, JR. RICHARD G. GILMORE RONALD RUBIN RICHARD H. GLANTON ROBERT SUBIN By /s/ C. A. McNeill, Jr. March 9, 1998 ______________________________________ C. A. McNeill, Jr., Attorney-in-Fact EX-3.2 2 PECO ENERGY COMPANY B Y L A W S ARTICLE I Offices and Fiscal Year Section 1.01. Registered Office.--The registered office of the corporation in the Commonwealth of Pennsylvania shall be at 2301 Market Street, Philadelphia, Pennsylvania 19101 until otherwise established by an amendment of the articles or by the board of directors and a record of such change is filed with the Department of State in the manner provided by law. Section 1.02. Other Offices.--The corporation may also have offices at such other places within or without the Commonwealth of Pennsylvania as the board of directors may from time to time appoint or the business of the corporation may require. Section 1.03. Fiscal Year.--The fiscal year of the corporation shall begin on the first day of January in each year. ARTICLE II Notice - Waivers - Meetings Generally Section 2.01. Manner of Giving Notice. (a) General Rule.--Whenever written notice is required to be given to any person under the provisions of the Business Corporation Law or by the articles or these bylaws, it may be given to the person either personally or by sending a copy thereof by first class or express mail, postage prepaid, or by telegram (with messenger services specified), telex or TWX (with answerback received) or courier service, charges prepaid, or by facsimile transmission, to the address (or to the telex, TWX or facsimile transmission telephone number) of the person appearing on the books of the corporation or, in the case of directors, supplied by the director to the corporation for the purpose of notice. If the notice is sent by mail, telegraph or courier service, it shall be deemed to have been given to the person entitled thereto when deposited in the United States mail or with a telegraph office or courier service for delivery to that person or, in the case of telex or TWX, when dispatched or, in the case of facsimile transmission, when received. A notice of meeting shall specify the place, day and hour of the meeting and any other information required by any other provision of the Business Corporation Law, the articles or these bylaws. (b) Adjourned Shareholder Meetings.--When a meeting of shareholders is adjourned, it shall not be necessary to give any notice of the adjourned meeting or of the business to be transacted at an adjourned meeting, other than by announcement at the meeting at which the adjournment is taken, unless the board fixes a new record date for the adjourned meeting. Section 2.02. Notice of Meetings of the Board of Directors.--Notice of a regular meeting of the board of directors need not be given. Notice of every special meeting of the board of directors shall be given to each director by telephone or in writing at least 24 hours (in the case of notice by telephone, telex, TWX or facsimile transmission) or 48 hours (in the case of notice by telegraph, courier service or express mail) or five days (in the case of notice by first class mail) before the time at which the meeting is to be held. Every such notice shall state the time and place of the meeting. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the board need be specified in a notice of the meeting. Section 2.03. Notice of Meetings of Shareholders. (a) General Rule.-- Written notice of every meeting of the shareholders shall be given by, or at the direction of, the secretary to each shareholder of record entitled to vote at the meeting at least ten days prior to the day named for a meeting called to consider amendment of the articles or adoption of a plan of merger, consolidation, exchange, asset, transfer, division or conversion or adoption of a proposal of dissolution, or five days prior to the day named for the meeting in any other case. If the secretary neglects or refuses to give notice of a meeting, the person or persons calling the meeting may do so. In the case of a special meeting of shareholders, the notice shall specify the general nature of the business to be transacted. (b) Notice of Action by Shareholders on Bylaws.--In the case of a meeting of shareholders that has as one of its purposes action on the bylaws, written notice shall be given to each shareholder that the purpose, or one of the purposes, of the meeting is to consider the adoption, amendment or repeal of the bylaws. There shall be included in, or enclosed with, the notice a copy of the proposed amendment or a summary of the changes to be effected thereby. Section 2.04. Waiver of Notice. (a) Written Waiver.--Whenever any written notice is required to be given under the provisions of the Business Corporation Law, the articles or these bylaws, a waiver thereof in writing, signed by the person or persons entitled to the notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of the notice. Except as otherwise required by this subsection, neither the business to be transacted at, nor the purpose of, a meeting need be specified in the waiver of notice of the meeting. In the case of a special meeting of shareholders, the waiver of notice shall specify the general nature of the business to be transacted. (b) Waiver by Attendance.--Attendance of a person at any meeting shall constitute a waiver of notice of the meeting except where a person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to 2 the transaction of any business because the meeting was not lawfully called or convened. Section 2.05. Modification of Proposal Contained in Notice.--Whenever the language of a proposed resolution is included in a written notice of a meeting required to be given under the provisions of the Business Corporation Law or the articles or these bylaws, the meeting considering the resolution may without further notice adopt it with such clarifying or other amendments as do not enlarge its original purpose. Section 2.06. Exception to Requirement of Notice. (a) General Rule.--Whenever any notice or communication is required to be given to any person under the provisions of the Business Corporation Law or by the articles or these bylaws or by the terms of any agreement or other instrument or as a condition precedent to taking any corporate action and communication with that person is then unlawful, the giving of the notice or communication to that person shall not be required. (b) Shareholders Without Forwarding Addresses.--Notice or other communications shall not be sent to any shareholder with whom the corporation has been unable to communicate for more than 24 consecutive months because communications to the shareholder are returned unclaimed or the shareholder has otherwise failed to provide the corporation with a current address. Whenever the shareholder provides the corporation with a current address, the corporation shall commence sending notices and other communications to the shareholder in the same manner as to other shareholders. Section 2.07. Use of Conference Telephone and Similar Equipment.--Any director may participate in any meeting of the board of directors, and the board of directors may provide by resolution with respect to a specific meeting or with respect to a class of meetings that one or more persons may participate in a meeting of the shareholders of the corporation, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. Participation in a meeting pursuant to this section shall constitute presence in person at the meeting. ARTICLE III Shareholders Section 3.01. Place of Meeting.--All meetings of the shareholders of the corporation shall be held at the registered office of the corporation unless another place is designated by the board of directors in the notice of a meeting. Section 3.02. Annual Meeting.--The board of directors may fix and designate the date and time of the annual meeting of the shareholders, but if no such date and time is fixed and designated by the board, the meeting for any 3 calendar year shall be held on the second Wednesday in April in such year, if not a legal holiday under the laws of Pennsylvania, and, if a legal holiday, then on the next succeeding business day, not a Saturday, at 10:30 o'clock a.m., and at said meeting the shareholders then entitled to vote shall elect directors and shall transact such other business as may properly be brought before the meeting. If the annual meeting shall not have been called and held within six months after the designated time, any shareholder may call the meeting at any time thereafter. Section 3.03. Special Meetings.--Special meetings of the shareholders may be called at any time by resolution of the board of directors, which may fix the date, time and place of the meeting, and shall be called as provided in the terms of the Preferred Stock. If the board does not fix the date, time or place of the meeting, it shall be the duty of the secretary to do so. A date fixed by the secretary shall not be more than 60 days after the date of the adoption of the resolution of the board calling the special meeting. Section 3.04. Quorum and Adjournment. (a) General Rule.--A meeting of the shareholders of the corporation duly called shall not be organized for the transaction of business unless a quorum is present. Except as otherwise provided in the terms of the Preferred Stock, the presence of shareholders entitled to cast at least a majority of the votes that all shareholders are entitled to cast on a particular matter to be acted upon at the meeting shall constitute a quorum for the purposes of consideration and action on the matter. Shares of the corporation owned, directly or indirectly, by it and controlled, directly or indirectly, by the board of directors of this corporation, as such, shall not be counted in determining the total number of outstanding shares for quorum purposes at any given time. (b) Withdrawal of a Quorum.--The shareholders present at a duly organized meeting can continue to do business until adjournment notwithstanding the withdrawal of enough shareholders to leave less than a quorum. (c) Adjournments Generally.--Any regular or special meeting of the shareholders, including one at which directors are to be elected and one which cannot be organized because a quorum has not attended, may be adjourned for such period and to such place as the shareholders present and entitled to vote shall direct. (d) Electing Directors at Adjourned Meeting.--Those shareholders entitled to vote who attend a meeting called for the election of directors that has been previously adjourned for lack of a quorum, although less than a quorum as fixed in this section, shall nevertheless constitute a quorum for the purpose of electing directors. (e) Other Action in Absence of Quorum.--Those shareholders entitled to vote who attend a meeting of shareholders that has been previously adjourned for one or more periods aggregating at least 15 days because of an absence of a quorum, although less than a quorum as fixed in this section, shall nevertheless 4 constitute a quorum for the purpose of acting upon any matter set forth in the notice of the meeting if the notice states that those shareholders who attend the adjourned meeting shall nevertheless constitute a quorum for the purpose of acting upon the matter. Section 3.05. Action by Shareholders.--Except as otherwise provided in the Business Corporation Law or the articles or these bylaws, whenever any corporate action is to be taken by vote of the shareholders of the corporation, it shall be authorized by a majority of the votes cast at a duly organized meeting of shareholders by the holders of shares entitled to vote thereon. Except as otherwise provided in the terms of the Preferred Stock or when acting by unanimous consent to remove a director or directors, the shareholders of the corporation may act only at a duly organized meeting. Only such business will be conducted at an annual or special meeting of shareholders as shall have been properly brought before the meeting: (i) by or at the direction of the Board of Directors, or (ii) by any shareholder who complies with the procedures set forth in this section. For business to be properly brought before an annual or special meeting by a shareholder, the shareholder must have given to the secretary of the corporation timely written notice of the shareholder's intention to make a proposal, in the manner and form prescribed herein. In addition, the proposal must otherwise be lawful and satisfy the requirements for inclusion in a proxy statement contained in Rule 14a-8 of the Securities and Exchange Commission (or any similar or successor rule or regulation), promulgated under the Securities Exchange Act of 1934, as amended. To be timely, a shareholder's notice with respect to an annual meeting of shareholders must be addressed to the secretary of the corporation at the principal executive offices of the corporation and received by the secretary not less than 120 days in advance of the date the corporation's proxy statement was released to shareholders in connection with the previous year's annual meeting of shareholders, and this notice requirement shall not be affected by any adjournment of the meeting; provided, however, that if no annual meeting was held the previous year or the date of the annual meeting has been changed by more than 30 calendar days from the date contemplated at the time of the previous year's proxy statement, to be timely, a shareholder's notice must be received at least 80 days prior to the date the corporation intends to distribute its proxy statement with respect to such meeting. To be timely, a shareholder's notice with respect to a special meeting of the shareholders must be addressed to the secretary of the corporation at the principal executive offices of the corporation and received by the secretary not less than 60 days nor more than 90 days prior to the meeting; provided, however, that in the event that less than 70 days' notice or prior public disclosure of the date of the meeting is given or made to shareholders, notice by the shareholder must be received not later than the close of business on the tenth day following the day on 5 which notice of the date of the special meeting was mailed or such public disclosure was made, whichever first occurs. The notice must include all the information required by Rule 14a-8 of the Securities and Exchange Commission (or any similar or successor rule or regulation), promulgated under the Securities Exchange Act of 1934, as amended, for inclusion of a shareholder proposal in a proxy statement. Notwithstanding anything in the bylaws to the contrary, no business shall be conducted at any annual or special meeting except in accordance with the procedures set forth in this section. The chairman of the annual meeting or special meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this section, and if he or she should so determine, such business shall not be transacted. Section 3.06. Organization. (a) Chairman and Secretary of Meeting.--At every meeting of the shareholders, the chairman of the board, if there be one, or, in the case of vacancy in office or absence of the chairman of the board, one of the following officers present in the order stated: the vice chairman of the board, if there be one, the president, the vice presidents in their order of rank and seniority, or a person chose by vote of the shareholders present, shall act as chairman of the meeting. The secretary or, in the absence of the secretary, an assistant secretary, or, in the absence of both the secretary and assistant secretaries, a person appointed by the chairman of the meeting, shall act as secretary of the meeting. (b) Rules of Conduct.-- The board of directors or the chairman shall be entitled to make such rules or regulations for the conduct of meetings of shareholders as are deemed necessary, appropriate or convenient for the proper conduct of the meeting, including, without limitation, establishing an agenda or order of business for the meeting, rules and procedures for maintaining order at the meeting and the safety of those present, limitations on participation in such meeting to shareholders of record of the corporation and their duly authorized and constituted proxies, and such other persons as the chairman shall permit, restrictions on entry to the meeting after the time fixed for the commencement thereof, limitations on the time allotted to questions or comment by participants and regulation of the opening and closing of the polls for balloting on matters which are to be voted on by ballot. Unless, and to the extent determined by the board of directors or the chairman of the meeting, meetings of shareholders need not be conducted in accordance with rules of parliamentary procedure. Section 3.07. Voting Rights of Shareholders.--Unless otherwise provided in the articles, every shareholder of the corporation shall be entitled to one vote for every share standing in the name of the shareholder on the books of the corporation. 6 Section 3.08. Voting and other Action by Proxy. (a) General Rule.-- (1) Every shareholder entitled to vote at a meeting of shareholders may authorize another person to act for the shareholder by proxy. (2) The presence of, or vote or other action at a meeting of shareholders by a proxy of a shareholder shall constitute the presence of, or vote or action by the shareholder. (3) Where two or more proxies of a shareholder are present, the corporation shall, unless otherwise expressly provided in the proxy, accept as the vote of all shares represented thereby the vote cast by a majority of them and, if a majority of the proxies cannot agree whether the shares represented shall be voted, or upon the manner of voting the shares, the voting of the shares shall be divided equally among those persons. (b) Minimum Requirements.--Every proxy shall be executed in writing by the shareholder or by the duly authorized attorney-in-fact of the shareholder and filed with the secretary of the corporation. A proxy, unless coupled with an interest, shall be revocable at will, notwithstanding any other agreement or any provision in the proxy to the contrary, but the revocation of a proxy shall not be effective until written notice thereof has been given to the secretary of the corporation. An unrevoked proxy shall not be valid after three years from the date of its execution unless a longer time is expressly provided therein. A proxy shall not be revoked by the death or incapacity of the maker unless, before the vote is counted or the authority is exercised, written notice of the death or incapacity is given to the secretary of the corporation. (c) Expenses.--The corporation shall pay the reasonable expenses of solicitation of votes or proxies of shareholders by or on behalf of the board of directors or its nominees for election to the board, including solicitation by professional proxy solicitors and otherwise. Section 3.09. Voting by Fiduciaries and Pledgees.--Shares of the corporation standing in the name of a trustee or other fiduciary and shares held by an assignee for the benefit of creditors or by a receiver may be voted by the trustee, fiduciary, assignee or receiver. A shareholder whose shares are pledged shall be entitled to vote the shares until the shares have been transferred into the name of the pledgee, or a nominee of the pledgee, but nothing in this section shall affect the validity of a proxy given to a pledgee or nominee. Section 3.10. Voting by Joint Holders of Shares. (a) General Rule.--Where shares of the corporation are held jointly or as tenants in common by two or more persons, as fiduciaries or otherwise: 7 (1) if only one or more of such persons is present in person or by proxy, all of the shares standing in the names of such persons shall be deemed to be represented for the purpose of determining a quorum and the corporation shall accept as the vote of all the shares the vote cast by a joint owner or a majority of them; and (2) if the persons are equally divided upon whether the shares held by them shall be voted or upon the manner of voting the shares, the voting of the shares shall be divided equally among the persons without prejudice to the rights of the joint owners or the beneficial owners thereof among themselves. (b) Exception.--If there has been filed with the secretary of the corporation a copy, certified by an attorney-at-law to be correct, of the relevant portions of the agreement under which the shares are held or the instrument by which the trust or estate was created or the order of court appointing them or of an order of court directing the voting of the shares, the persons specified as having such voting power in the document latest in date of operative effect so filed, and only those persons, shall be entitled to vote the shares but only in accordance therewith. Section 3.11. Voting by Corporations. (a) Voting by Corporate Shareholders.--Any corporation that is a shareholder of this corporation may vote at meetings of shareholders of this corporation by any of its officers or agents, or by proxy appointed by any officer or agent, unless some other person, by resolution of the board of directors of the other corporation or a provision of its articles or bylaws, a copy of which resolution or provision certified to be correct by one of its officers has been filed with the secretary of this corporation, is appointed its general or special proxy in which case that person shall be entitled to vote the shares. (b) Controlled Shares.--Shares of this corporation owned, directly or indirectly, by it and controlled, directly or indirectly, by the board of directors of this corporation, as such, shall not be voted at any meeting and shall not be counted in determining the total number of outstanding shares for voting purposes at any given time. 8 Section 3.12. Determination of Shareholders of Record. (a) Fixing Record Date.--The board of directors may fix a time prior to the date of any meeting of shareholders as a record date for the determination of the shareholders entitled to notice of, or to vote at, the meeting, which time, except as otherwise provided in the articles or in the case of an adjourned meeting, shall be not more than 90 days prior to the date of the meeting of shareholders. Only shareholders of record on the date fixed shall be so entitled notwithstanding any transfer of shares on the books of the corporation after any record date fixed as provided in this subsection. The board of directors may similarly fix a record date for the determination of shareholders of record for any other purpose, except that the record date fixed to determine the holders of Preferred Stock entitled to receive dividends thereon shall not precede the respective dividend payment date by more than 40 days. When a determination of shareholders of record has been made as provided in this section for purposes of a meeting, the determination shall apply to any adjournment thereof unless the board fixes a new record date for the adjourned meeting. (b) Determining When a Record Date is Not Fixed.--If a record date is not fixed: (1) The record date for determining shareholders entitled to notice of, or to vote at, a meeting of shareholders shall be at the close of business on the day next preceding the day on which notice is given. (2) The record date for determining shareholders for any other purpose shall be at the close of business on the day on which the board of directors adopts the resolution relating thereto. (c) Certification by Nominee.--The board of directors may adopt a procedure whereby a shareholder of the corporation may certify in writing to the corporation that all or a portion of the shares registered in the name of the shareholder are held for the account of a specified person or persons. Upon receipt by the corporation of a certification complying with the procedure, the persons specified in the certification shall be deemed, for the purposes set forth in the certification, to be the holders of record of the number of shares specified in place of the shareholder making the certification. Section 3.13. Voting Lists. (a) General Rule.--The officer or agent having charge of the transfer books for shares of the corporation shall make a complete list of the shareholders entitled to vote at any meeting of shareholders, arranged in alphabetical order, with the address of and the number of shares held by each. The list shall be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any shareholder during the whole time of the meeting for the purposes thereof except that, if the corporation has 5,000 or more shareholders, in lieu of the making of the list the corporation may make the information therein available at the meeting by any other means. 9 (b) Effect of List.--Failure to comply with the requirements of this section shall not affect the validity of any action taken at a meeting prior to a demand at the meeting by any shareholder entitled to vote thereat to examine the list. The original share register or transfer book, or a duplicate thereof kept in the Commonwealth of Pennsylvania, shall be prima facie evidence as to who are the shareholders entitled to examine the list or share register or transfer book or to vote at any meeting of shareholders. Section 3.14. Judges of Election. (a) Appointment.--In advance of any meeting of shareholders of the corporation, the board of directors may appoint judges of election, who need not be shareholders, to act at the meeting or any adjournment thereof. If judges of election are not so appointed, the presiding officer of the meeting may, and on the request of any shareholder shall, appoint judges of election at the meeting. The number of judges shall be one or three. A person who is a candidate for an office to be filled at the meeting shall not act as a judge. (b) Vacancies.--In case any person appointed as a judge fails to appear or fails or refuses to act, the vacancy may be filled by appointment made by the board of directors in advance of the convening of the meeting or at the meeting by the presiding officer thereof. (c) Duties.--The judges of election shall determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, and the authenticity, validity and effect of proxies, receive votes or ballots, hear and determine all challenges and questions in any way arising in connection with nominations by shareholders or the right to vote, count and tabulate all votes, determine the result and do such acts as may be proper to conduct the election or vote with fairness to all shareholders. The judges of election shall perform their duties impartially, in good faith, to the best of their ability and as expeditiously as is practical. If there are three judges of election, the decision, act or certificate of a majority shall be effective in all respects as the decision, act or certificate of all. (d) Report.--On request of the presiding officer of the meeting or of any shareholder, the judges shall make a report in writing of any challenge or question or matter determined by them, and execute a certificate of any fact found by them. Any report or certificate made by them shall be prima facie evidence of the facts stated therein. Section 3.15. Minors as Security Holders.--The corporation may treat a minor who holds shares or obligations of the corporation as having capacity to receive and to empower others to receive dividends, interest, principal and other payments or distributions, to vote or express consent or dissent and to make elections and exercise rights relating to such shares or obligations unless, in the case of payments or distributions on shares, the corporate officer responsible for maintaining the list of shareholders or the transfer agent of the corporation or, in 10 the case of payments or distributions on obligations, the treasurer or paying officer or agent has received written notice that the holder is a minor. ARTICLE IV Board of Directors Section 4.01. Powers. (a) General Rule.--Unless otherwise provided by statute, all powers vested by law in the corporation shall be exercised by or under the authority of, and the business and affairs of the corporation shall be managed under the direction of, the board of directors. (b) Personal Liability of Directors.-- (1) A director shall not be personally liable, as such, for monetary damages for any action taken, or any failure to take any action, unless: (i) the director has breached or failed to perform the duties of his or her office under 15 Pa.C.S. ss.ss. 511 and 1721 and 42 Pa.C.S. ss. 8363; and (ii) the breach or failure to perform constitutes self-dealing, willful misconduct or recklessness. (2) The provisions of paragraph (1) shall not apply to the responsibility or liability of a director pursuant to any criminal statute, or the liability of a director for the payment of taxes pursuant to local, State or Federal law. Section 4.02. Qualifications and Selection of Directors. (a) Qualifications.--Each director of the corporation shall be a natural person of full age who need not be a resident of the Commonwealth of Pennsylvania or a shareholder of the corporation. (b) Notice of Certain Nominations Required.--Nominations for election of directors may be made by any shareholder entitled to vote for the election of directors if written notice (the "Notice") of the shareholder's intent to nominate a director at the meeting is given by the shareholder and received by the secretary of the corporation in the manner and within the time specified in this section. The Notice shall be delivered to the secretary of the corporation not less than 14 days nor more than 50 days prior to any meeting of the shareholders called for the election of directors; except that if less than 21 days' notice of the meeting is given to shareholders, the Notice shall be delivered to the secretary of the corporation not later than the earlier of the seventh day following the day on which notice of the meeting was first mailed to shareholders or the fourth day 11 prior to the meeting. In lieu of delivery to the secretary, the Notice may be mailed to the secretary by certified mail, return receipt requested, but shall be deemed to have been given only upon actual receipt by the secretary. The requirements of this subsection shall not apply to a nomination for directors made to the shareholders by the board of directors. (c) Contents of Notice.--The Notice shall be in writing and shall contain or be accompanied by: (1) the name and residence address of the nominating shareholder; (2) a representation that the shareholder is a holder of record of voting stock of the corporation and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the Notice; (3) such information regarding each nominee as would have been required to be included in a proxy statement filed pursuant to Regulation 14A of the rules and regulations established by the Securities and Exchange Commission under the Securities Exchange Act of 1934 (or pursuant to any successor act or regulation) had proxies been solicited with respect to such nominee by the management or board of directors of the corporation; (4) a description of all arrangements or understandings among the shareholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the shareholder; and (5) the consent of each nominee to serve as a director of the corporation if so elected. (d) Determination of Compliance.--If a judge or judges of election shall not have been appointed pursuant to these bylaws, the chairman of the meeting may, if the facts warrant, determine and declare to the meeting that any nomination made at the meeting was not made in accordance with the procedures of this section and, in such event, the nomination shall be disregarded. Any decision by the chairman of the meeting made in good faith shall be conclusive and binding upon all shareholders of the corporation for any purpose. (e) Election of Directors.--Except as otherwise provided in these bylaws, directors of the corporation shall be elected by the shareholders. In elections for directors, voting need not be by ballot, except upon demand made by a shareholder entitled to vote at the election and before voting begins. The candidates receiving the highest number of votes from each class or group of classes, if any, entitled to elect directors separately up to the number of directors to be elected by the class or group of classes shall be elected. If at any meeting of shareholders, directors of more than one class are to be elected, each class of directors shall be elected in a separate election. 12 Section 4.03. Number and Term of Office. (a) Number.--The board of directors shall consist of such number of directors as may be determined from time to time by resolution of the board of directors. (b) Term of Office.--Each director shall hold office until the expiration of the term for which he or she was selected and until a successor has been selected and qualified or until his or her earlier death, resignation or removal. A decrease in the number of directors shall not have the effect of shortening the term of any incumbent director. (c) Resignation.--Any director may resign at any time upon written notice to the corporation. The resignation shall be effective upon receipt thereof by the corporation or at such subsequent time as shall be specified in the notice of resignation. (d) Classified Board of Directors.--The directors shall be classified in respect to the time for which they shall severally hold office as follows: (1) Each class shall be as nearly equal in number as possible. (2) The term of office of at least one class shall expire in each year. (3) Except as otherwise provided in the terms of the Preferred Stock or in the articles, the members of each class shall be elected for a period of three years. Section 4.04. Vacancies. (a) General Rule.--Except as otherwise provided in the terms of the Preferred Stock, vacancies in the board of directors, including vacancies resulting from an increase in the number of directors, may be filled by a majority vote of the remaining members of the board though less than a quorum, or by a sole remaining director, and each person so selected shall be a director to serve until the next selection of the class for which such director has been chosen, and until a successor has been selected and qualified or until his or her earlier death, resignation or removal. (b) Action by Resigned Directors.--When one or more directors resign from the board effective at a future date, the directors then in office, including those who have so resigned, shall have power by the applicable vote to fill the vacancies, the vote thereon to take effect when the resignations become effective. Section 4.05. Removal of Directors. (a) Removal by the Shareholders.--The entire board of directors, or any class of the board, or any individual director may be removed from office by vote 13 of the shareholders entitled to vote thereon only for cause. In case the board or a class of the board or any one or more directors are so removed, new directors may be elected at the same meeting. The repeal of a provision of the articles or bylaws prohibiting, or the addition of a provision to the articles or bylaws permitting, the removal by the shareholders of the board, a class of the board or a director without assigning any cause shall not apply to any incumbent director during the balance of the term for which the director was selected. (b) Removal by the Board.--The board of directors may declare vacant the office of a director who has been judicially declared of unsound mind or who has been convicted of an offense punishable by imprisonment for a term of more than one year or if, within 60 days after notice of his or her selection, the director does not accept the office either in writing or by attending a meeting of the board of directors. Section 4.06. Place of Meetings.--Meetings of the board of directors may be held at such place within or without the Commonwealth of Pennsylvania as the board of directors may from time to time appoint or as may be designated in the notice of the meeting. Section 4.07. Organization of Meetings.--At every meeting of the board of directors, the chairman of the board, if there be one, or, in the case of a vacancy in the office or absence of the chairman of the board, one of the following officers present in the order stated: the vice chairman of the board, if there be one, the president, the vice presidents in their order of rank and seniority, or a person chosen by a majority of the directors present, shall act as chairman of the meeting. The secretary or, in the absence of the secretary, an assistant secretary, or, in the absence of the secretary and the assistant secretaries, any person appointed by the chairman of the meeting, shall act as secretary of the meeting. Section 4.08. Regular Meetings.--Regular meetings of the board of directors shall be held at such time and place as shall be designated from time to time by resolution of the board of directors. Section 4.09. Special Meetings.--Special meetings of the board of directors shall be held whenever called by the chairman or by two or more of the directors. Section 4.10. Quorum of and Action by Directors. (a) General Rule.--A majority of the directors in office of the corporation shall be necessary to constitute a quorum for the transaction of business and the acts of a majority of the directors present and voting at a meeting at which a quorum is present shall be the acts of the board of directors. (b) Action by Written Consent.--Any action required or permitted to be taken at a meeting of the directors may be taken without a meeting if, prior or subsequent to the action, a consent or consents thereto by all of the directors in office is filed with the secretary of the corporation. 14 (c) Notation of Dissent.--A director who is present at a meeting of the board of directors, or of a committee of the board, at which action on any corporate matter is taken shall be presumed to have assented to the action taken unless his or her dissent is entered in the minutes of the meeting or unless the director files a written dissent to the action with the secretary of the meeting before the adjournment thereof or transmits the dissent in writing to the secretary of the corporation immediately after the adjournment of the meeting. The right to dissent shall not apply to a director who voted in favor of the action. Nothing in this section shall bar a director from asserting that minutes of the meeting incorrectly omitted his or her dissent if, promptly upon receipt of a copy of such minutes, the director notifies the secretary, in writing, of the asserted omission or inaccuracy. Section 4.11. Executive and Other Committees. (a) Establishment and Powers.--The board of directors may, by resolution adopted by a majority of the directors in office, establish one or more committees to consist of one or more directors of the corporation. Any committee, to the extent provided in the resolution of the board of directors, shall have and may exercise all of the powers and authority of the board of directors except that a committee shall not have any power or authority as to the following: (1) The submission to shareholders of any action requiring approval of shareholders under the Business Corporation Law. (2) The creation or filling of vacancies in the board of directors. (3) The adoption, amendment or repeal of these bylaws. (4) The amendment or repeal of any resolution of the board that by its terms is amendable or repealable only by the board. (5) Action on matters committed by a resolution of the board of directors to another committee of the board. (b) Alternate Committee Members.--The board may designate one or more directors as alternate members of any committee who may replace any absent or disqualified member at any meeting of the committee or for the purposes of any written action by the committee. In the absence or disqualification of a member and alternate member or members of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not constituting a quorum, may unanimously appoint another director to act at the meeting in the place of the absent or disqualified member. (c) Term.--Each committee of the board shall serve at the pleasure of the board. (d) Committee Procedures.--The term "board of directors" or "board," when used in any provision of these bylaws relating to the organization or procedures of 15 or the manner of taking action by the board of directors, shall be construed to include and refer to any executive or other committee of the board. Section 4.12. Compensation.--The board of directors shall have the authority to fix the compensation of directors for their services as directors and a director may be a salaried officer of the corporation. ARTICLE V Officers Section 5.01. Officers Generally. (a) Number, Qualifications and Designation.--The officers of the corporation shall be a president, one or more vice presidents, a secretary, a treasurer, and such other officers as may be elected in accordance with the provisions of Section 5.03. Officers may but need not be directors or shareholders of the corporation. The president and secretary shall be natural persons of full age. The treasurer may be a corporation, but if a natural person shall be of full age. The board of directors may elect from among the members of the board a chairman of the board and vice chairman of the board who shall be officers of the corporation. Any number of offices may be held by the same person. (b) Bonding.--The corporation may secure the fidelity of any or all of its officers by bond or otherwise. Section 5.02. Election, Term of Office and Resignations. (a) Election and Term of Office.--The officers of the corporation, except those elected by delegated authority pursuant to Section 5.03, shall be elected by the board of directors, and each such officer shall hold office at the discretion of the board until his or her death, resignation or removal with or without cause. (b) Resignations.--Any officer may resign at any time upon written notice to the corporation. The resignation shall be effective upon receipt thereof by the corporation or at such subsequent time as may be specified in the notice of resignation. Section 5.03. Subordinate Officers, Committees and Agents.--The board of directors may from time to time elect such other officers and appoint such committees, employees or other agents as the business of the corporation may require, including one or more assistant secretaries, and one or more assistant treasurers, each of whom shall hold office for such period, have such authority, and perform such duties as are provided in these bylaws, or as the board of directors may from time to time determine. The board of directors may delegate to any officer or committee the power to elect subordinate officers and to retain or appoint employees or other agents, or committees thereof, and to 16 prescribe the authority and duties of such subordinate officers, committees, employees or other agents. Section 5.04. Removal of Officers and Agents.--Any officer or agent of the corporation may be removed by the board of directors with or without cause. The removal shall be without prejudice to the contract rights, if any, of any person so removed. Election or appointment of an officer or agent shall not of itself create contract rights. Section 5.05. Vacancies.--A vacancy in any office because of death, resignation, removal, disqualification, or any other cause, may be filled by the board of directors or by the officer or committee to which the power to fill such office has been delegated pursuant to Section 5.03, as the case may be, and if the office is one for which these bylaws prescribe a term, shall be filled for the unexpired portion of the term. Section 5.06. Authority. (a) General Rule.--All officers of the corporation, as between themselves and the corporation, shall have such authority and perform such duties in the management of the corporation as may be provided by or pursuant to resolutions or orders of the board of directors or, in the absence of controlling provisions in the resolutions or orders of the board of directors, as may be determined by or pursuant to these bylaws. (b) Chief Executive Officer--The chairman of the board or the president, as designated from time to time by resolution of the board of directors, shall be the chief executive officer of the corporation. Section 5.07. The Chairman and Vice Chairman of the Board.--The chairman of the board, or in the absence of the chairman, the vice chairman of the board, shall preside at all meetings of the shareholders and of the board of directors, and shall perform such other duties as may from time to time be requested by the board of directors. Section 5.08. The President.--The president shall have general supervision over the business and operations of the corporation, subject however, to the control of the board of directors and, if the chairman of the board is the chief executive officer of the corporation, the chairman of the board. The president shall sign, execute, and acknowledge, in the name of the corporation, deeds, mortgages, bonds, contracts or other instruments, authorized by the board of directors, except in cases where the signing and execution thereof shall be expressly delegated by the board of directors, or by these bylaws, to some other officer or agent of the corporation; and, in general, shall perform all duties incident to the office of president and such other duties as from time to time may be assigned by the board of directors and, if the chairman of the board is the chief executive officer of the corporation, the chairman of the board. 17 Section 5.09. The Vice Presidents.--The vice presidents shall perform the duties of the president in the absence of the president and such other duties as may from time to time be assigned to them by the board of directors or the president. Section 5.10. The Secretary.--The secretary or an assistant secretary shall attend all meetings of the shareholders and of the board of directors and shall record all the votes of the shareholders and of the directors and the minutes of the meetings of the shareholders and of the board of directors and of committees of the board in a book or books to be kept for that purpose; shall see that notices are given and records and reports properly kept and filed by the corporation as required by law; shall be the custodian of the seal of the corporation and see that it is affixed to all documents to be executed on behalf of the corporation under its seal; and, in general, shall perform all duties incident to the office of secretary, and such other duties as may from time to time be assigned by the board of directors or the president. Section 5.11. The Treasurer.--The treasurer or an assistant treasurer shall have or provide for the custody of the funds or other property of the corporation; shall collect and receive or provide for the collection and receipt of moneys earned by or in any manner due to or received by the corporation; shall deposit all funds in his or her custody as treasurer in such banks or other places of deposit as the board of directors may from time to time designate; shall, whenever so required by the board of directors, render an account showing all transactions as treasurer, and the financial condition of the corporation; and, in general, shall discharge such other duties as may from time to time be assigned by the board of directors or the president. Section 5.12. Salaries.--The salaries of the officers elected by the board of directors shall be fixed from time to time by the board of directors or by such officer as may be designated by resolution of the board. The salaries or other compensation of any other officers, employees and other agents shall be fixed from time to time by the officer or committee to which the power to elect such officers or to retain or appoint such employees or other agents has been delegated pursuant to Section 5.03. No officer shall be prevented from receiving such salary or other compensation by reason of the fact that the officer is also a director of the corporation. 18 ARTICLE VI Certificates of Stock, Transfer, Etc. Section 6.01. Share Certificates. (a) Form of Certificates.--Certificates for shares of the corporation shall be in such form as approved by the board of directors, and shall state that the corporation is incorporated under the laws of the Commonwealth of Pennsylvania, the name of the person to whom issued, and the number and class of shares and the designation of the series (if any) that the certificate represents. Certificates for shares of the corporation shall set forth upon the face or back of the certificate (or shall state on the face or back of the certificate that the corporation will furnish to any shareholder upon request and without charge), a full or summary statement of the designations, voting rights, preferences, limitations and special rights of the shares of each class or series authorized to be issued so far as they have been fixed and determined and the authority of the board of directors to fix and determine the designations, voting rights, preferences, limitations and special rights of the classes and series of shares of the corporation. (b) Share Register.--The share register or transfer books and blank share certificates shall be kept by the treasurer or by any transfer agent or registrar designated by the board of directors for that purpose. Section 6.02. Issuance.--The share certificates of the corporation shall be numbered and registered in the share register or transfer books of the corporation as they are issued. They shall be executed in such manner as the board of directors shall determine. Section 6.03. Transfer.--Transfers of shares shall be made on the share register or transfer books of the corporation upon surrender of the certificate therefor, endorsed by the person named in the certificate or by an attorney lawfully constituted in writing. No transfer shall be made inconsistent with the provisions of the Uniform Commercial Code, 13 Pa.C.S. ss.ss. 8101 et seq., and its amendments and supplements. Section 6.04. Record Holder of Shares.--The corporation shall be entitled to treat the person in whose name any share or shares of the corporation stand on the books of the corporation as the absolute owner thereof, and shall not be bound to recognize any equitable or other claim to, or interest in, such share or shares on the part of any other person. Section 6.05. Lost, Destroyed or Mutilated Certificates.--The holder of any shares of the corporation shall immediately notify the corporation of any loss, destruction or mutilation of the certificate therefor, and the officers of the corporation may, in their discretion, cause a new certificate or certificates to be issued to such holder, in case of mutilation of the certificate, upon the surrender of the mutilated certificate or, in case of loss or destruction of the certificate, upon satisfactory proof of such loss or destruction and, if such officers shall so 19 determine, the deposit of a bond in such form and in such sum, and with such surety or sureties, as any of them may direct. ARTICLE VII Indemnification of Directors, Officers and Other Authorized Representatives Section 7.01. Scope of Indemnification. (a) General Rule.--The corporation shall indemnify an indemnified representative against any liability incurred in connection with any proceeding in which the indemnified representative may be involved as a party or otherwise by reason of the fact that such person is or was serving in an indemnified capacity, including, without limitation, liabilities resulting from any actual or alleged breach or neglect of duty, error, misstatement or misleading statement, negligence, gross negligence or act giving rise to strict or products liability, except: (1) where such indemnification is expressly prohibited by applicable law; (2) where the conduct of the indemnified representative has been finally determined pursuant to Section 7.06 or otherwise: (i) to constitute willful misconduct or recklessness within the meaning of 15 Pa.C.S. ss.ss. 513(b) and 1746(b) and 42 Pa.C.S. ss. 8365(b) or any superseding provision of law sufficient in the circumstances to bar indemnification against liabilities arising from the conduct; or (ii) to be based upon or attributable to the receipt by the indemnified representative from the corporation of a personal benefit to which the indemnified representative is not legally entitled; or (3) to the extent such indemnification has been finally determined in a final adjudication pursuant to Section 7.06 to be otherwise unlawful. (b) Partial Payment.--If an indemnified representative is entitled to indemnification in respect of a portion, but not all, of any liabilities to which such person may be subject, the corporation shall indemnify such indemnified representative to the maximum extent for such portion of the liabilities. (c) Presumption.--The termination of a proceeding by judgment, order, settlement or conviction or upon a plea of nolo contendere or its equivalent shall not of itself create a presumption that the indemnified representative is not entitled to indemnification. 20 (d) Definitions.--For purposes of this Article: (1) "indemnified capacity" means any and all past, present and future service by an indemnified representative in one or more capacities as a director, officer, employee or agent of the corporation, or, at the request of the corporation, as a director, officer, employee, agent fiduciary or trustee of another corporation, partnership, joint venture, trust, employee benefit plan or other entity or enterprise; (2) "indemnified representative" means any and all directors and officers of the corporation any other person designated as an indemnified representative by the board of directors of the corporation (which may, but need not, include any person serving at the request of the corporation, as a director, officer, employee, agent, fiduciary or trustee of another corporation, partnership, joint venture, trust, employee benefit plan or other entity or enterprise); (3) "liability" means any damage, judgment, amount paid in settlement, fine, penalty, punitive damages, excise tax assessed with respect to an employee benefit plan, or cost or expense, of any nature (including, without limitation, attorneys' fees and disbursements); and (4) "proceeding" means any threatened, pending or completed action, suit, appeal or other proceeding of any nature, whether civil, criminal, administrative or investigative, whether formal or informal, and whether brought by or in the right of the corporation, a class of its security holders or otherwise. Section 7.02. Proceedings Initiated by Indemnified Representatives.--Notwithstanding any other provision of this Article, the corporation shall not indemnify under this Article an indemnified representative for any liability incurred in a proceeding initiated (which shall not be deemed to include counter-claims or affirmative defenses) or participated in as an intervenor or amicus curiae by the person seeking indemnification unless such initiation of or participation in the proceeding is authorized, either before or after its commencement, by the affirmative vote of a majority of the directors in office. This section does not apply to reimbursement of expenses incurred in successfully prosecuting or defending an arbitration under Section 7.06 or otherwise successfully prosecuting or defending the rights of an indemnified representative granted by or pursuant to this Article. Section 7.03. Advancing Expenses.--The corporation shall pay the expenses (including attorneys' fees and disbursements) incurred in good faith by an indemnified representative in advance of the final disposition of a proceeding described in Section 7.01 or the initiation of or participation in which is authorized pursuant to Section 7.02 upon receipt of an undertaking by or on behalf of the indemnified representative to repay the amount if it is ultimately determined pursuant to Section 7.06 that such person is not entitled to be indemnified by the corporation pursuant to this Article. The financial ability of an indemnified 21 representative to repay an advance shall not be a prerequisite to the making of such advance. Section 7.04. Securing of Indemnification Obligations.--To further effect, satisfy or secure the indemnification obligations provided herein or otherwise, the corporation may maintain insurance, obtain a letter of credit, act as self-insurer, create a reserve, trust, escrow, cash collateral or other fund or account, enter into indemnification agreements, pledge or grant a security interest in any assets or properties of the corporation, or use any other mechanism or arrangement whatsoever in such amounts, at such costs, and upon such other terms and conditions as the board of directors shall deem appropriate. Absent fraud, the determination of the board of directors with respect to such amounts, costs, terms and conditions shall be conclusive against all security holders, officers and directors and shall not be subject to voidability. Section 7.05. Payment of Indemnification.--An indemnified representative shall be entitled to indemnification within 30 days after a written request for indemnification has been delivered to the secretary of the corporation. Section 7.06. Arbitration. (a) General Rule.--Any dispute related to the right to indemnification, contribution or advancement of expenses as provided under this Article, except with respect to indemnification for liabilities arising under the Securities Act of 1933 that the corporation has undertaken to submit to a court for adjudication, shall be decided only by arbitration in the metropolitan area in which the principal executive offices of the corporation are located at the time, 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 corporation, the second of whom shall be selected by the indemnified representative and the third of whom shall be selected by the other two arbitrators. In the absence of the American Arbitration Association, or if for any reason arbitration under the arbitration rules of the American Arbitration Association cannot be initiated, and if one of the parties fails or refuses to select an arbitrator or the arbitrators selected by the corporation and the indemnified representative cannot agree on the selection of the third arbitrator within 30 days after such time as the corporation and the indemnified representative have each been notified of the selection of the other's arbitrator, the necessary arbitrator or arbitrators shall be selected by the presiding judge of the court of general jurisdiction in such metropolitan area. (b) Qualifications of Arbitrators.--Each arbitrator selected as provided herein is required to be or have been a director or executive officer of a corporation whose shares of common stock were listed during at least one year of such service on the New York Stock Exchange or the American Stock Exchange or quoted on the National Association of Securities Dealers Automated Quotations System. 22 (c) Burden of Proof.--The party or parties challenging the right of an indemnified representative to the benefits of this Article shall have the burden of proof. (d) Expenses.--The corporation shall reimburse an indemnified representative for the expenses (including attorneys' fees and disbursements) incurred in successfully prosecuting or defending such arbitration. (e) Effect.--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, except that the corporation shall be entitled to interpose as a defense in any such judicial enforcement proceeding any prior final judicial determination adverse to the indemnified representative under Section 7.01(a)(2) in a proceeding not directly involving indemnification under this Article. This arbitration provision shall be specifically enforceable. Section 7.07. Contribution.--If the indemnification provided for in this Article or otherwise is unavailable for any reason in respect of any liability or portion thereof, the corporation shall contribute to the liabilities to which the indemnified representative may be subject in such proportion as is appropriate to reflect the intent of this Article or otherwise. Section 7.08. Mandatory Indemnification of Directors, Officers, Etc.--To the extent that an authorized representative of the corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Section 1741 or 1742 of the Business Corporation Law or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys' fees and disbursements) actually and reasonably incurred by such person in connection therewith. Section 7.09. Contract Rights; Amendment or Repeal.--All rights under this Article shall be deemed a contract between the corporation and the indemnified representative pursuant to which the corporation and each indemnified representative intend to be legally bound. Any repeal, amendment or modification hereof shall be prospective only and shall not affect any rights or obligations then existing. Section 7.10. Scope of Article.--The rights granted by this Article shall not be deemed exclusive of any other rights to which those seeking indemnification, contribution or advancement of expenses may be entitled under any statute, agreement, vote of shareholders or disinterested directors or otherwise, both as to action in an indemnified capacity and as to action in any other capacity. The indemnification, contribution and advancement of expenses provided by or granted pursuant to this Article shall continue as to a person who has ceased to be an indemnified representative in respect of matters arising prior to such time, and shall inure to the benefit of the heirs, executors, administrators and person representatives of such a person. 23 Section 7.11. Reliance on Provisions.--Each person who shall act as an indemnified representative of the corporation shall be deemed to be doing so in reliance upon the rights provided by this Article. Section 7.12. Interpretation.--The provisions of this Article are intended to constitute bylaws authorized by 15 Pa.C.S. ss.ss. 513 and 1746 and 42 Pa.C.S. ss. 8365. ARTICLE VIII Emergency Bylaws Section 8.01. Scope of Article.--This Article shall be applicable during any emergency resulting from a catastrophe as a result of which a quorum of the board of directors cannot readily be assembled. To the extent not in conflict with this Article, these bylaws shall remain in effect during the emergency. Section 8.02. Special Meetings of the Board.--A special meeting of the board of directors may be called by any director by means feasible at the time. Section 8.03. Emergency Committee of the Board. (a) Composition.--The emergency committee of the board shall consist of nine persons standing highest on the following list who are available and able to act: Members of the board of directors. President. The individual who, immediately prior to the emergency, was the senior officer in charge of nuclear operations. The individual who, immediately prior to the emergency, was the senior officer in charge of other operations. The individual who, immediately prior to the emergency, was the senior officer in charge of finance operations. Other officers. Where more than one person holds any of the listed ranks, the order of precedence shall be determined by length of time in rank. Each member of the emergency committee thus constituted shall continue to act until replaced by an individual standing higher on the list. The emergency committee shall continue to act until a quorum of the board of directors is available and able to act. If the corporation has no directors, the emergency committee shall cause a special meeting of shareholders for the election of directors to be called and held as soon as practicable. (b) Powers.--The emergency committee shall have and may exercise all of the powers and authority of the board of directors, including the power to fill a vacancy in any office of the corporation or to designate a temporary replacement 24 for any officer of the corporation who is unavailable, but shall not have the power to fill vacancies in the board of directors. (c) Quorum.--A majority of the members of the emergency committee in office shall constitute a quorum. (d) Status.--Each member of the emergency committee who is not a director shall during his or her service as such be entitled to the rights and immunities conferred by law, the articles and these bylaws upon directors of the corporation and upon persons acting in good faith as a representative of the corporation during an emergency. ARTICLE IX Miscellaneous Section 9.01. Corporate Seal.--The corporation shall have a corporate seal in the form of a circle containing the name of the corporation, the year of incorporation and such other details as may be approved by the board of directors. Section 9.02. Checks.--All checks, notes, bills of exchange or other orders in writing shall be signed by such person or persons as the board of directors or any person authorized by resolution of the board of directors may from time to time designate. Section 9.03. Contracts.--Except as otherwise provided in the Business Corporation Law in the case of transactions that require action by the shareholders, the board of directors may authorize any officer or agent to enter into any contract or to execute or deliver any instrument on behalf of the corporation, and such authority may be general or confined to specific instances. Section 9.04. Interested Directors or Officers; Quorum. (a) General Rule.--A contract or transaction between the corporation and one or more of its directors or officers or between the corporation and another corporation, partnership, joint venture, trust or other enterprise in which one or more of its directors or officers are directors or officers or have a financial or other interest, shall not be void or voidable solely for that reason, or solely because the director or officer is present at or participates in the meeting of the board of directors that authorizes the contract or transaction, or solely because his, her or their votes are counted for that purpose, if: (1) the material facts as to the relationship or interest and as to the contract or transaction are disclosed or are known to the board of directors and the board authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors even though the disinterested directors are less than a quorum; 25 (2) the material facts as to his or her relationship or interest and as to the contract or transaction are disclosed or are known to the shareholders entitled to vote thereon and the contract or transaction is specifically approved in good faith by vote of those shareholders; or (3) the contract or transaction is fair as to the corporation as of the time it is authorized, approved or ratified by the board of directors or the shareholders. (b) Quorum.--Common or interested directors may be counted in determining the presence of a quorum at a meeting of the board which authorizes a contract or transaction specified in subsection (a). Section 9.05. Deposits.--All funds of the corporation shall be deposited from time to time to the credit of the corporation in such banks, trust companies or other depositories as the board of directors may approve or designate, and all such funds shall be withdrawn only upon checks signed by such one or more officers or employees as the board of directors shall from time to time determine. Section 9.06. Corporate Records. (a) Required Records.--The corporation shall keep complete and accurate books and records of account, minutes of the proceedings of the incorporators, shareholders and directors and a share register giving the names and addresses of all shareholders and the number and class of shares held by each. The share register shall be kept at either the registered office of the corporation in the Commonwealth of Pennsylvania or at its principal place of business wherever situated or at the office of its registrar or transfer agent. Any books, minutes or other records may be in written form or any other form capable of being converted into written form within a reasonable time. (b) Right of Inspection.--Every shareholder shall, upon written verified demand stating the purpose thereof, have a right to examine, in person or by agent or attorney, during the usual hours for business for any proper purpose, the share register, books and records of account, and records of the proceedings of the incorporators, shareholders and directors and to make copies or extracts therefrom. A proper purpose shall mean a purpose reasonably related to the interest of the person as a shareholder. In every instance where an attorney or other agent is the person who seeks the right of inspection, the demand shall be accompanied by a verified power of attorney or other writing that authorizes the attorney or other agent to so act on behalf of the shareholder. The demand shall be directed to the corporation at its registered office in the Commonwealth of Pennsylvania or at its principal place of business wherever situated. Section 9.07. Amendment of Bylaws. (a) General Rule.--Except as otherwise provided in the express terms of any series of the shares of the corporation: 26 (1) The shareholders shall have the power to amend or repeal these bylaws, or to adopt new bylaws, only with the approval of the board of directors. A direction by the board that a shareholder proposal with respect to the bylaws shall be submitted to the shareholders for action thereon, or the sufferance by the board that such a proposal shall be so submitted, shall not constitute approval by the board of directors of the amendment, repeal or new bylaws. (2) These bylaws may be amended or repealed, or new bylaws may be adopted, by vote of a majority of the board of directors of the corporation in office at any regular special meeting of directors, including in circumstances otherwise reserved by statute exclusively to the shareholders, the board of directors of the corporation having under the articles of incorporation the full authority conferred by law upon the shareholders of the corporation to adopt, amend or repeal these bylaws. Any bylaw adopted by the board of directors under this paragraph shall be consistent with the articles of incorporation. (b) Effective Date.--Any change in these bylaws shall take effect when adopted unless otherwise provided in the resolution effecting the change. As adopted February 26, 1990 and amended January 26, 1998. 27 EX-4.5 3 PECO ENERGY COMPANY AND First Union National Bank, as Trustee SECOND SUPPLEMENTAL INDENTURE Dated as of June 1, 1997 to INDENTURE Dated as of July 1, 1994 Providing for the Issuance of 8% Deferrable Interest Subordinated Debentures, Series C TABLE OF CONTENTS Page ARTICLE 1 DEFINITIONS AND INCORPORATION BY REFERENCE................. 2 SECTION 1.01 Definitions.................................................... 2 ARTICLE 2 THE SERIES C DEBENTURES.......................... 2 SECTION 2.01 Form of the Series C Debentures; Denominations................. 2 ARTICLE 3 REDEMPTION................................. 3 SECTION 3.01 Redemption; Notice to Trustee.................................. 3 SECTION 3.02. Compliance with Terms of Indenture............................. 3 ARTICLE 4 EXTENSION PERIOD.............................. 4 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................................... 4 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............................. 5 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.............................................. 6 (i) SECOND SUPPLEMENTAL INDENTURE, dated as of June 1, 1997, by and between PECO Energy Company, a Pennsylvania corporation (the "Company"), and First Union National Bank, a national association, as successor trustee (the "Trustee"), to an Indenture, dated as of July 1, 1994 (the "Original Indenture"), by and between the Company and the Trustee, which was supplemented by a First Supplemental Indenture (the "First Supplemental Indenture") dated as of December 1, 1995 (the Original Indenture, as supplemented, the "Indenture"). WHEREAS, the Company has formed a wholly owned subsidiary, PECO Energy Capital Corp., which is the general partner of PECO Energy Capital, L.P., a Delaware limited partnership ("PECO Energy Capital"), to issue in series from time to time its limited partner interests ("Preferred Securities") and to loan the proceeds thereof, together with the investment by PECO Energy Capital Corp. in PECO Energy Capital, to the Company and to effect other similar arrangements. WHEREAS, the Company has duly executed and delivered to the Trustee the Original Indenture to provide for the 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. WHEREAS, the Company has duly executed and delivered to the Trustee the First Supplemental Indenture authorizing and providing for the issuance of the second series of Debentures which were designated the 8.72% Deferrable Interest Subordinated Debentures, Series B. WHEREAS, the Company desires to authorize and to effect the issuance of a third series of Debentures in an aggregate principal amount of $51,562,500 and to designate such series 8% Deferrable Interest Subordinated Debentures, Series C (the "Series C Debentures") under this Second Supplemental Indenture. WHEREAS, all things necessary to make the Series C Debentures when duly issued and executed by the Company and authenticated and delivered hereunder, the valid obligations of the Company, and to make this Second 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 C Debentures: ARTICLE 1 DEFINITIONS AND INCORPORATION BY REFERENCE SECTION 1.01 Definitions. "Additional Interest", with respect to the Series C 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 C Debentures. "Issue Date" means June 6, 1997. "Series C Debentures" means any of the Company's 8% Deferrable Interest Subordinated Debentures, Series C issued under this Second Supplemental Indenture. "Series C Debentureholder" or "Series C Holder" means a Person in whose name a Series C Debenture is registered on the Registrar's books. "Series C Preferred Securities" means the 8% Cumulative Monthly Income Preferred Securities, Series C, 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 C DEBENTURES SECTION 2.01 Form of the Series C Debentures; Denominations. The Series C Debentures and the Trustee's certificate of authentication shall be substantially in the form of Exhibit A attached hereto. The terms and provisions contained in the Series C Debentures, a form of which is annexed hereto as Exhibit A, shall constitute, and are hereby expressly made, a part of this Second Supplemental Indenture. The Company and the Trustee, by their execution and delivery of this Second 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 C Debentures for original issue in the aggregate principal amount of $51,562,500 to evidence the Company's obligation with respect to the loan from PECO Energy 2 Capital, upon receipt by the Trustee of a Board of Directors resolution and a written order of the Company signed by two Officers of the Company, but without any further action by the Company. Such order shall specify the amount of the Series C Debentures to be authenticated and the date on which the original issue of Series C Debentures is to be authenticated and delivered to evidence the Company's obligation with respect to the loan from PECO Energy Capital. The aggregate principal amount of Series C Debentures outstanding at any time may not exceed $51,546,392 except as provided in Section 2.09 of the Original Indenture. The Series C 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 C 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 C 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. 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 C 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. 3 ARTICLE 4 EXTENSION PERIOD SECTION 4.01 Limitation on Right of Company to Extend Interest Payment Period. The Company agrees that no extended interest payment period shall extend beyond the stated maturity date or redemption date of the Series C 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 the First Supplemental Indenture and this Second 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 Second 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 Second Supplemental Indenture under the Trust Indenture Act of 1939, as amended. ARTICLE 6 MISCELLANEOUS SECTION 6.01 Trust Indenture Act Controls. If any provision of this Second 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 Second Supplemental Indenture, except as, and to the extent, they are expressly 4 excluded from this Second Supplemental Indenture, as permitted by the TIA. SECTION 6.02 Severability Clause. If any provision in this Second Supplemental Indenture or in the Series C 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 Second Supplemental Indenture and the Series C 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 C Debentures or this Second Supplemental Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. By accepting a Series C Debenture, each Series C Debentureholder shall waive and release all such liability. The waiver and release shall be part of the consideration for the issue of the Series C Debentures. 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 Second Supplemental Indenture shall be held and construed to mean the trustee under the Indenture for the time being whether the original or a successor trustee. SECTION 6.06. Confirmation of Original Indenture. As supplemented by the First Supplemental Indenture and this Second Supplemental Indenture, the Original Indenture, is in all respects ratified and confirmed, and this Second Supplemental Indenture shall be read, taken and construed as a part of the Indenture so that all of the rights, remedies, terms, conditions, covenants and agreements of the Indenture shall apply and remain in full force and effect with respect to this Second Supplemental Indenture and to the Series C Debentures issued hereunder. 5 SECTION 6.07 Successors. All agreements of the Company in this Second Supplemental Indenture and the Series C Debentures shall bind its successors and assigns. All agreements of the Trustee in this Second 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 Second 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 Second 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 Second 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 Second Supplemental Indenture or in the Series C Debentures, express or implied, shall give to any Person, other than the parties hereto and their successors hereunder, the Series C Holders and the Special Representative, any benefit or any legal or equitable right, remedy or claim under this Second Supplemental Indenture. SECTION 6.11. Date of Indenture. This Second Supplemental Indenture is dated as of June 1, 1997, but was actually executed and delivered on June 6, 1997. 6 SIGNATURES IN WITNESS WHEREOF, the undersigned, being duly authorized, have executed this Second Supplemental Indenture on behalf of the respective parties hereto as of the date first above written. PECO ENERGY COMPANY By: Name: J. Barry Mitchell Title: Vice President - Finance FIRST UNION NATIONAL BANK, as Trustee By: Name: Title: PECO Energy Capital, L.P. By its General Partner, PECO Energy Capital Corp. By: Name: J. Barry Mitchell Title: President 7 Exhibit A 8% Deferrable Interest Subordinated Debentures, Series C due 2037 No. 1 PECO Energy Company, a Pennsylvania corporation (the "Company"), which term includes any successor corporation under the Indenture, as defined herein), for value received, hereby promises to pay to PECO Energy Capital, L.P. or registered assigns, the principal sum of Fifty One Million Five Hundred Sixty Two Thousand Five Hundred Dollars ($51,562,500) on June 6, 2037, and to pay interest on said principal sum from June 6, 1997 (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 June 30, 1997 at the rate of 8% per annum plus Additional Interest, if any, until the principal hereof shall have become due and payable, and on any overdue principal and premium, if any, and (to the extent that payment of such interest is enforceable under applicable law) on any overdue installment of interest at the same rate per annum. If at any time PECO Energy Capital, L.P. ("PECO Energy Capital") would be required to pay any taxes, duties, or other governmental charges (other than withholding taxes) imposed by the United States, or any other taxing authority, then, in any such case, the Company also will pay as Additional Interest such amounts as shall be required so that the net amounts received and retained by PECO Energy Capital after paying any such taxes, duties, or other governmental charges will not be less than the amounts PECO Energy Capital would have received had no such taxes, duties, assessments or other governmental charges been imposed. The amount of interest payable on any Interest Payment Date shall be computed on the basis of a 360-day year of twelve 30-day months. In the event that any date on which interest is payable on the Series C 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 A-1 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. 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 Additional Interest, if any) on 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. This Debenture is one of a duly authorized series of Debentures of the Company (herein sometimes referred to as the "Series C 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 and a Second Supplemental Indenture dated as of June 1, 1997 (as supplemented, the "Indenture") executed and delivered between the Company and First Union National Bank, as successor 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 A-2 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 C 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 C Preferred Securities, but if in part, in an aggregate principal amount equal to the aggregate stated liquidation preference of the Series C Preferred Securities redeemed. At the option of the Company, the Series C Debentures are subject to redemption prior to maturity (i) at any time on or after June 6, 2002, in whole or in part, and (ii) if a Tax Event shall occur and be continuing, in whole or 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 C 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 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 C 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. A-3 In case an Event of Default shall have occurred and be continuing, the principal of all of the Debentures may be declared, and upon such declaration shall become, due and payable, in the manner, with the effect and subject to the conditions provided in the Indenture. The Indenture contains provisions for defeasance at any time of the entire indebtedness of this 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 C Debentures may be amended with the written consent of the Holders of a majority in aggregate principal amount of the Series C 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 C 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. So long as an Event of Default has not occurred and is continuing, the Company shall have the right at any time during the term of the Series C 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 C 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 A-4 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 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 capitalized terms used in this Debenture which are defined in the Indenture shall have the meanings assigned to them in the Indenture. A-5 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: June 6, 1997 TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the Debentures referred to in the within-mentioned Indenture. FIRST UNION NATIONAL BANK, as Trustee By: ___________________________________ Name: Title: A-6 EX-4.8 4 PAYMENT AND GUARANTEE AGREEMENT THIS PAYMENT AND GUARANTEE AGREEMENT ("Guarantee Agreement"), dated as of June 6, 1997, 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 C 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 $50,000,000 aggregate stated liquidation preference of limited partner interests of a series designated the 8% Cumulative Monthly Income Preferred Securities, Series C (the "Series C 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 C 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 C 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 C 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 C Preferred Securities called for redemption by PECO Energy Capital out of moneys legally available therefor held by PECO Energy Capital, and (iii) upon liquidation of PECO Energy Capital, the lesser of (a) the Liquidation Distribution (as defined below) and (b) the amount of assets of PECO Energy Capital available for distribution to the Holders in liquidation of PECO Energy Capital. "Holders" shall mean the persons or entities in whose name any Series C 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 C Preferred Securities have given any request, notice, consent or waiver hereunder, "Holder" shall not include the Guarantor or any entity owned more than 50% by the Guarantor, either directly or indirectly. "Indenture" shall mean the Indenture, dated as of July 1, 1994 (the "Original Indenture"), as supplemented by the First Supplemental Indenture, dated as of December 1, 1995, between the Guarantor and First Union National Bank, as successor trustee, and the Second Supplemental Indenture, dated as of June 1, 1997, between the Guarantor and First Union National Bank, as trustee, pursuant to which the Guarantor has issued and will issue its Deferrable Interest Subordinated Debentures in series. "Liquidation Distribution" shall mean the aggregate of the stated liquidation preference of $25 per Series C 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 C Preferred Security. "Redemption Price" shall mean the aggregate of $25 per Series C 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 Second Supplemental Indenture, dated as of June 1, 1997, between the Guarantor and First Union National Bank, as trustee, pursuant to which the Guarantor has issued its 8% Deferrable Interest Subordinated Debentures, Series C (the "Series C Subordinated Debentures") in an amount equal to the aggregate stated 2 liquidation preference of the Series C Preferred Securities and the G.P. Capital Contribution. "Trust" shall mean PECO Energy Capital Trust II, a Delaware business trust. "Trust Agreement" shall mean the Amended and Restated Trust Agreement of PECO Energy Capital Trust II, as amended from time to time, among PECO Energy Capital, L.P., as Grantor, First Union National Bank, as trustee, and the General Partner, for the limited purpose stated therein, dated as of June 6, 1997. "Trustee" shall mean First Union National Bank or a successor trustee under the Trust Agreement. ARTICLE II SECTION 2.01. The Guarantor hereby irrevocably and unconditionally agrees to pay in full to the Holders the Guarantee Payments, as and when due (except to the extent paid by PECO Energy Capital), to the fullest extent permitted by law, regardless of any defense, right of set-off or counterclaim which the Guarantor may have or assert against PECO Energy Capital, the General Partner, the Trust or the Trustee. The Guarantor's obligation to make a Guarantee Payment may be satisfied by direct payment by the Guarantor to the Holders or by payment of such amounts by PECO Energy Capital to the Holders. Notwithstanding anything to the contrary herein, the Guarantor retains all of its rights under Section 4.01(b) of the Indenture to extend the interest payment period on the Series C Subordinated Debentures and the Guarantor shall not be obligated hereunder to pay during an Extension Period any monthly distributions on the Series C 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: (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 C Preferred Securities to be performed or observed by PECO Energy Capital; 3 (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 C Preferred Securities or the extension of time for the performance of any other obligation under, arising out of, or in connection with, the Series C 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 C 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 C 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 C Preferred Securities other than the Trust, representing not less than 10% in aggregate stated liquidation preference of the Series C Preferred Securities have the right to direct the time, method and place of conducting any proceeding for any remedy available in respect of this Guarantee Agreement including the giving of directions to the General Partner or the Special Representative as the case may be; and (v) if the General Partner or the Special Representative fails to enforce this Guarantee Agreement as above provided, any holder of Preferred Trust Receipts representing Series C Preferred Securities may institute a legal proceeding directly against the Guarantor to enforce its 4 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 C 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. ARTICLE III SECTION 3.01. So long as any Series C 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 5 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 C 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 C 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 C Preferred Securities or under this Guarantee Agreement for any reason whatsoever. 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 C 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 C Preferred Securities remain outstanding, any amendment that materially 6 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 C Preferred Securities other than the Trust, representing not less than 662/3% of the aggregate liquidation preference of all Series C Preferred Securities then outstanding. SECTION 5.03. All notices, requests or other communications required or permitted to be given hereunder to the Guarantor shall be deemed given if in writing and delivered personally or by recognized overnight courier or express mail service or by facsimile transmission (confirmed in writing) or by registered or certified mail (return receipt requested), addressed to the Guarantor at the following address (or at such other address as shall be specified by like notice to the Holders): PECO Energy Company 2301 Market Street P.O. Box 8699 Philadelphia, Pennsylvania 19101 Facsimile No.: (215) 557-9885 Attention: Treasurer All notices, requests or other communications required or permitted to be given hereunder to the Holders shall be deemed given if in writing and delivered by the Guarantor in the same manner as notices sent by PECO Energy Capital to the Holders. SECTION 5.04. This Guarantee Agreement is solely for the benefit of the Holders and is not separately transferable from the Series C Preferred Securities. 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: Name: J. Barry Mitchell Title: Vice President-Finance 7 EX-4.9 5 CONFORMED COPY $450,000,000 REVOLVING CREDIT AGREEMENT dated as of October 7, 1997 among PECO ENERGY COMPANY as Borrower THE BANKS NAMED HEREIN as Banks CERTAIN BANKS SPECIFIED HEREIN as Lead Managers CERTAIN BANKS SPECIFIED HEREIN as Co-Agents FIRST CHICAGO CAPITAL MARKETS, INC., MELLON BANK, N.A. and CITICORP SECURITIES, INC. as Syndication Agents FIRST CHICAGO CAPITAL MARKETS, INC. and MELLON BANK, N.A. as Arrangers THE FIRST NATIONAL BANK OF CHICAGO as Administrative Agent and MELLON BANK, N.A. as Documentation Agent TABLE OF CONTENTS Section Page ARTICLE I DEFINITIONS AND ACCOUNTING TERMS 1.01 Certain Defined Terms .................................. 1 1.02 Computation of Time Periods ............................ 11 1.03 Accounting Principles .................................. 11 ARTICLE II AMOUNTS AND TERMS OF THE ADVANCES 2.01 The Contract Advances .................................. 11 2.02 Making the Contract Advances ........................... 11 2.03 The Auction Advances ................................... 12 2.04 Fees ................................................... 15 2.05 Reduction of the Commitments ........................... 16 2.06 Repayment of Contract Advances ......................... 16 2.07 Interest on Contract Advances .......................... 16 2.08 Additional Interest on Contract Advances ............... 16 2.09 Interest Rate Determination ............................ 17 2.10 Conversion of Contract Advances ........................ 17 2.11 Prepayments ............................................ 18 2.12 Increased Costs ........................................ 18 2.13 Illegality ............................................. 19 2.14 Payments and Computations .............................. 19 2.15 Taxes .................................................. 20 2.16 Sharing of Payments, Etc ............................... 22 2.17 Extension of Termination Date .......................... 22 2.18 Additional Lenders ..................................... 23 ARTICLE III CONDITIONS OF LENDING 3.01 Conditions Precedent to Initial Advances ................ 25 3.02 Conditions Precedent to Certain Contract Borrowings ..... 26 3.03 Conditions Precedent to Each Auction Borrowing .......... 26 ARTICLE IV REPRESENTATIONS AND WARRANTIES 4.01 Representations and Warranties of the Borrower .......... 27 ARTICLE V COVENANTS OF THE BORROWER 5.01 Affirmative Covenants ................................... 28 5.02 Negative Covenants ...................................... 30 i Section Page ARTICLE VI EVENTS OF DEFAULT 6.01 Events of Default ......................................... 31 ARTICLE VII THE AGENTS 7.01 Authorization and Action .................................. 33 7.02 Agents' Reliance, Etc ..................................... 33 7.03 Agents and Affiliates ..................................... 34 7.04 Lender Credit Decision .................................... 34 7.05 Indemnification ........................................... 34 7.06 Successor Administrative Agent ............................ 35 7.07 Syndication Agents, Co-Agents, Lead Managers and Arrangers. 35 ARTICLE VIII MISCELLANEOUS 8.01 Amendments, Etc............................................. 35 8.02 Notices, Etc................................................ 35 8.03 No Waiver; Remedies......................................... 36 8.04 Costs and Expenses; Indemnification......................... 36 8.05 Right of Set-off............................................ 37 8.06 Binding Effect.............................................. 37 8.07 Assignments and Participations.............................. 37 8.08 Governing Law............................................... 39 8.09 Consent to Jurisdiction..................................... 40 8.10 Execution in Counterparts; Integration...................... 40 Schedule I List of Applicable Lending Offices Exhibit A-1 Form of Contract Note Exhibit A-2 Form of Auction Note Exhibit B-1 Notice of a Contract Borrowing Exhibit B-2 Notice of an Auction Borrowing Exhibit C Assignment and Acceptance Exhibit D Form of Opinion of Special Counsel for the Borrower Exhibit E Form of Opinion of Counsel to the Documentation Agent Exhibit F Form of Annual and Quarterly Compliance Certificate Exhibit G Form of Additional Lender Supplement ii REVOLVING CREDIT AGREEMENT dated as of October 7, 1997 PECO Energy Company, a Pennsylvania corporation (the "Borrower"), the banks listed on the signature pages hereof (the "Banks"), certain Banks specified herein, as lead managers hereunder (in such capacity, the "Lead Managers"), certain Banks specified herein, as co-agents hereunder (in such capacity, the "Co-Agents"), First Chicago Capital Markets, Inc. ("First Chicago Capital Markets"), Mellon Bank, N.A. ("Mellon") and CitiCorp Securities, Inc. ("CitiCorp"), as syndication agents hereunder (in such capacity, the "Syndication Agents"), First Chicago Capital Markets and Mellon, as arrangers hereunder (in such capacity, the "Arrangers"), The First National Bank of Chicago ("First Chicago"), as administrative agent for the Lenders hereunder (in such capacity, the "Administrative Agent"), and Mellon, as documentation agent for the Lenders hereunder (in such capacity, the "Documentation Agent"), hereby agree as follows: ARTICLE I DEFINITIONS AND ACCOUNTING TERMS SECTION 1.01. Certain Defined Terms. As used in this Agreement, each of the following terms shall have the meaning set forth next to such term below (each such meaning to be equally applicable to both the singular and plural forms of the term defined): "Additional Lender" has the meaning specified in Section 2.18. "Adjusted CD Rate" means, for any Interest Period for each Adjusted CD Rate Advance made as part of the same Contract Borrowing, an interest rate per annum equal to the sum of: (a) the rate per annum obtained by dividing (i) the rate of interest determined by the Administrative Agent to be the average (rounded upward to the nearest whole multiple of 1/100 of 1% per annum, if such average is not such a multiple) of the consensus bid rate determined by each of the Reference Banks for the bid rates per annum, at 10:00 A.M. (Chicago time) (or as soon thereafter as practicable) on the first day of such Interest Period, of New York certificate of deposit dealers of recognized standing selected by such Reference Bank for the purchase at face value of certificates of deposit of such Reference Bank in an amount substantially equal to such Reference Bank's Adjusted CD Rate Advance made as part of such Contract Borrowing and with a maturity equal to such Interest Period, by (ii) a percentage equal to 100% minus the Domestic Rate Reserve Percentage for such Interest Period, plus (b) the Assessment Rate for such Interest Period. The Adjusted CD Rate for the Interest Period for each Adjusted CD Rate Advance made as part of the same Contract Borrowing shall be determined by the Administrative Agent on the basis of applicable rates furnished to and received by the Administrative Agent from the Reference Banks on the first day of such Interest Period, subject, however, to the provisions of Section 2.09. "Adjusted CD Rate Advance" means a Contract Advance that bears interest as provided in Section 2.07(b). "Administrative Agent" means First Chicago in its capacity as administrative agent for the Lenders pursuant to Article VII, and not in its individual capacity as a Lender, and any successor Administrative Agent appointed pursuant to Article VII. "Advance" means a Contract Advance or an Auction Advance. "Affiliate" means, as to any Person, any other Person that, directly or indirectly, controls, is controlled by or is under common control with such Person or is a director or officer of such Person. "Agents" means the Administrative Agent, the Documentation Agent, the Syndication Agents, the Arrangers, the Co-Agents and Lead Managers, collectively. "Applicable Commitment Fee Rate" means (i) during any Level 1 Rating Period, 0.100% per annum, (ii) during any Level 2 Rating Period, 0.125% per annum, (iii) during any Level 3 Rating Period, 0.150% per annum, (iv) during any Level 4 Rating Period, 0.1875% per annum and (v) during any Level 5 Rating Period, 0.300% per annum. The Applicable Commitment Fee Rate shall change when and as the Rating Period changes. "Applicable Lending Office" means, with respect to each Lender, such Lender's Domestic Lending Office in the case of a Base Rate Advance, such Lender's CD Lending Office in the case of an Adjusted CD Rate Advance, and such Lender's Eurodollar Lending Office in the case of a Eurodollar Rate Advance and, in the case of an Auction Advance, the office of such Lender notified by such Lender to the Administrative Agent as its Applicable Lending Office with respect to such Auction Advance. "Applicable Margin" means, on any date, for a Base Rate Advance, an Adjusted CD Rate Advance or a Eurodollar Rate Advance, the interest rate per annum set forth below in the column entitled "Base Rate", "CD Rate" or "Eurodollar Rate", as appropriate, opposite the applicable Rating Period in effect on such date:
Rating Period Base Rate CD Rate Eurodollar Rate Level 1 0 .400% .275% Level 2 0 .450% .325% Level 3 0 .500% .400% Level 4 0 .625% .500% Level 5 0 .875% .750%
The Applicable Margin applicable to an outstanding Contract Advance shall change when and as the Rating Period changes. "Arranger" means either of First Chicago Capital Markets or Mellon, in its capacity as Arranger, and not in its individual capacity as a Lender. "Assessment Rate" for the Interest Period for each Adjusted CD Rate Advance made as part of the same Contract Borrowing means the assessment rate per annum (rounded upwards to the next higher multiple of 1/100 of 1% if the rate is not such a multiple) payable to the Federal Deposit Insurance Corporation (or any successor) by a member of the Bank Insurance Fund which is classified as adequately capitalized and within supervisory subgroup "A" (or a comparable successor assessment risk classification) within the meaning of 12 C.F.R. ss.327.4(a) (or any successor provision) for the insurance of time deposits at the offices of such institution in the United States, as estimated by the Administrative Agent on the first day of such Interest Period. 2 "Assignment and Acceptance" means an assignment and acceptance entered into by a Lender and an Eligible Assignee, and accepted by the Administrative Agent, in substantially the form of Exhibit C hereto. "Auction Advance" means an advance by a Lender to the Borrower as part of an Auction Borrowing resulting from the auction bidding procedure described in Section 2.03. "Auction Borrowing" means a borrowing consisting of simultaneous Auction Advances from each of the Lenders whose offer to make one or more Auction Advances as part of such borrowing has been accepted by the Borrower under the auction bidding procedure described in Section 2.03. "Auction Note" means a promissory note of the Borrower payable to the order of any Lender, in substantially the form of Exhibit A-2 hereto, evidencing the indebtedness of the Borrower to such Lender resulting from an Auction Advance made by such Lender. "Auction Reduction" has the meaning specified in Section 2.01. "Base Rate" means, for any period, a fluctuating interest rate per annum as shall be in effect from time to time which rate per annum shall at all times be equal to the higher of: (a) the rate of interest announced by First Chicago, from time to time, as its corporate base rate; and (b) the sum of 1/2 of 1% per annum plus the Federal Funds Rate in effect from time to time. "Base Rate Advance" means a Contract Advance that bears interest as provided in Section 2.07(a). "Benchmark Debt" means the Borrower's senior secured long-term debt or, in the event that the Borrower has no senior secured long-term debt rated by S&P (or by a generally recognized successor to S&P) or by Moody's (or by a generally recognized successor to Moody's), the Borrower's senior unsecured long-term debt. "Borrowing" means a Contract Borrowing or an Auction Borrowing. "Business Day" means a day of the year on which banks are not required or authorized to close in Philadelphia, Pennsylvania, Chicago, Illinois or New York, New York, and, if the applicable Business Day relates to any Eurodollar Rate Advances, on which dealings are carried on in the London interbank market. "CD Lending Office" means, with respect to any Lender, the office of such Lender specified as its "CD Lending Office" opposite its name on Schedule I hereto or in the Assignment and Acceptance pursuant to which it became a Lender (or, if no such office is specified, its Domestic Lending Office), or such other office of such Lender as such Lender may from time to time specify to the Borrower and the Administrative Agent. "Co-Agent" means a Bank identified as such on the signature pages to this Agreement, in its capacity as Co-Agent, and not in its individual capacity as a Lender. "Code" means the Internal Revenue Code of 1986, and the regulations promulgated thereunder, in each case as amended, reformed or otherwise modified from time to time. 3 "Commitment" has the meaning specified in Section 2.01. "Consolidated Adjusted Total Capitalization" on any date shall mean the sum, without duplication, of the following with respect to the Borrower and its consolidated Subsidiaries (exclusive, in each case, of Nonrecourse Transition Bond Debt, to the extent Nonrecourse Transition Bond Debt would otherwise be included in such item): (a) total capitalization as of such date, as determined in accordance with GAAP, (b) the current portion of liabilities which as of such date would be classified in whole or part as long-term debt in accordance with GAAP (it being understood that the noncurrent portion of such liabilities is included in the total capitalization referred to in clause (a)), (c) all obligations as lessee which, in accordance with GAAP, are capitalized as liabilities (including the current portion thereof), and (d) all other liabilities which would be classified as short-term debt in accordance with GAAP (including, without limitation, all liabilities of the types classified as "Notes Payable, Bank" on the Borrower's audited balance sheet for December 31, 1996). "Consolidated Adjusted Total Debt" on any date shall mean the sum, without duplication, of the following with respect to the Borrower and its consolidated Subsidiaries (exclusive, in each case, of Nonrecourse Transition Bond Debt, to the extent Nonrecourse Transition Bond Debt would otherwise be included in such item): (a) all liabilities which as of such date would be classified in whole or in part as long-term debt in accordance with GAAP (including the current portion thereof), (b) all obligations as lessee which, in accordance with GAAP, are capitalized as liabilities (including the current portion thereof), and (c) all other liabilities which would be classified as short-term debt in accordance with GAAP (including, without limitation, all liabilities of the types classified as "Notes Payable, Bank" on the Borrower's audited balance sheet for December 31, 1996). "Contract Advance" means an advance by a Lender to the Borrower as part of a Contract Borrowing and refers to an Adjusted CD Rate Advance, a Base Rate Advance or a Eurodollar Rate Advance, each of which shall be a "Type" of Contract Advance. "Contract Borrowing" means a borrowing consisting of simultaneous Contract Advances of the same Type and, if such Borrowing comprises Adjusted CD Rate Advances or Eurodollar Rate Advances, having Interest Periods of the same duration, made by each of the Lenders pursuant to Section 2.01 or Converted pursuant to Section 2.10. "Contract Note" means a promissory note of the Borrower payable to the order of any Lender, in substantially the form of Exhibit A-1 hereto, evidencing the aggregate indebtedness of the Borrower to such Lender resulting from the Contract Advances made by such Lender. "Controlled Group" means all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control that, together with the Borrower or any Subsidiary, are treated as a single employer under Section 414(b) or 414(c) of the Code. "Convert", "Conversion" and "Converted" each refers to a conversion of Advances of one Type into Advances of another Type or the selection of a new, or the renewal of the same, Interest Period for Eurodollar Rate Advances or CD Rate Advances, as the case may be, pursuant to Section 2.10. "Debt" means (i) indebtedness for borrowed money, (ii) obligations evidenced by bonds, debentures, notes or other similar instrument, (iii) obligations to pay the deferred purchase price of property or services (other than trade payables incurred in the ordinary course of business), (iv) obligations as lessee under leases that shall have been or are required to be, in accordance with GAAP, recorded as capital leases, (v) obligations (contingent or otherwise) under 4 reimbursement or similar agreements with respect to the issuance of letters of credit (other than obligations in respect of documentary letters of credit opened to provide for the payment of goods or services purchased in the ordinary course of business) and (vi) obligations under direct or indirect guaranties in respect of, and obligations (contingent or otherwise) to purchase or otherwise acquire, or otherwise to assure a creditor against loss in respect of, indebtedness or obligations of others of the kinds referred to in clauses (i) through (v) above. "Documentation Agent" means Mellon in its capacity as documentation agent pursuant to Article VII, and not in its individual capacity as a Lender. "Domestic Lending Office" means, with respect to any Lender, the office of such Lender specified as its "Domestic Lending Office" opposite its name on Schedule I hereto or in the Assignment and Acceptance pursuant to which it became a Lender, or such other office of such Lender as such Lender may from time to time specify to the Borrower and the Administrative Agent. "Domestic Rate Reserve Percentage" for the Interest Period for any Adjusted CD Rate Advance means the reserve percentage applicable on the first day of such Interest Period under regulations issued from time to time by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement (including, but not limited to, any emergency, supplemental or other marginal reserve requirement) with respect to liabilities consisting of or including (among other liabilities) U.S. dollar nonpersonal time deposits of $100,000 or more in the United States with a maturity equal to such Interest Period. "Eligible Assignee" means (i) a commercial bank organized under the laws of the United States, or any State thereof; (ii) a commercial bank organized under the laws of any other country that is a member of the OECD or has concluded special lending arrangements with the International Monetary Fund associated with its General Arrangements to Borrow, or a political subdivision of any such country, provided that such bank is acting through a branch or agency located in the United States; (iii) a finance company, insurance company or other financial institution or fund (whether a corporation, partnership or other entity) engaged generally in making, purchasing or otherwise investing in commercial loans in the ordinary course of its business; or (iv) the central bank of any country that is a member of the OECD; provided, however, that (A) any such Person described in clause (i), (ii) or (iii) above shall also (x) have outstanding unsecured long-term debt that is rated BBB- or better by S&P and Baa3 or better by Moody's (or an equivalent rating by another nationally recognized credit rating agency of similar standing if either such corporation is no longer in the business of rating unsecured indebtedness of entities engaged in such businesses) and (y) have combined capital and surplus (as established in its most recent report of condition to its primary regulator) of not less than $100,000,000 (or its equivalent in foreign currency), and (B) any Person described in clause (ii), (iii) or (iv) above shall, on the date on which it is to become a Lender hereunder, be entitled to receive payments hereunder without deduction or withholding of any United States Federal income taxes (as contemplated by Section 2.15(e)). "Eligible Successor" means a Person which (i) is a corporation duly incorporated, validly existing and in good standing under the laws of one of the states of the United States or the District of Columbia, (ii) is qualified to do business in Pennsylvania, (iii) as a result of the contemplated acquisition, consolidation or merger, will succeed to all or substantially all of the consolidated business and assets of the Borrower and its Subsidiaries, (iv) upon giving effect to the contemplated acquisition, consolidation or merger, will have all or substantially all of its consolidated business and assets conducted and located in the United States and (v) is acceptable to the Majority Lenders as a credit matter. 5 "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated and rulings issued thereunder, each as amended and modified from time to time. "Eurocurrency Liabilities" has the meaning assigned to that term in Regulation D of the Board of Governors of the Federal Reserve System, as in effect from time to time. "Eurodollar Lending Office" means, with respect to any Lender, the office of such Lender specified as its "Eurodollar Lending Office" opposite its name on Schedule I hereto or in the Assignment and Acceptance pursuant to which it became a Lender (or, if no such office is specified, its Domestic Lending Office), or such other office of such Lender as such Lender may from time to time specify to the Borrower and the Administrative Agent. "Eurodollar Rate" means, for the Interest Period for each Eurodollar Rate Advance made as part of the same Contract Borrowing, an interest rate per annum equal to the average (rounded upward to the nearest whole multiple of 1/16 of 1% per annum, if such average is not such a multiple) of the rate per annum at which deposits in U.S. dollars are offered by the principal office of each of the Reference Banks in London, England, to prime banks in the London interbank market at 11:00 A.M. (London time) two Business Days before the first day of such Interest Period in an amount substantially equal to such Reference Bank's Eurodollar Rate Advance made as part of such Contract Borrowing and for a period equal to such Interest Period. The Eurodollar Rate for the Interest Period for each Eurodollar Rate Advance made as part of the same Contract Borrowing shall be determined by the Administrative Agent on the basis of applicable rates furnished to and received by the Administrative Agent from the Reference Banks two Business Days before the first day of such Interest Period, subject, however, to the provisions of Section 2.09. "Eurodollar Rate Advance" means a Contract Advance that bears interest as provided in Section 2.07(c). "Eurodollar Rate Reserve Percentage" of any Lender for the Interest Period for any Eurodollar Rate Advance means the reserve percentage applicable during such Interest Period (or if more than one such percentage shall be so applicable, the daily average of such percentages for those days in such Interest Period during which any such percentage shall be so applicable) under regulations issued from time to time by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement (including, without limitation, any emergency, supplemental or other marginal reserve requirement) for such Lender with respect to liabilities or assets consisting of or including Eurocurrency Liabilities having a term equal to such Interest Period. "Events of Default" has the meaning specified in Section 6.01. "Exchange Act" means the Securities Exchange Act of 1934, as amended and modified from time to time. "Federal Funds Rate" means, for any period, a fluctuating interest rate per annum equal for each day during such period to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by it. 6 "GAAP" shall have the meaning given that term in Section 1.03. "Interest Period" means, for each Contract Advance, the period commencing on the date of such Contract Advance or the date of the Conversion of any Contract Advance into such a Contract Advance and ending on the last day of the period selected by the Borrower pursuant to the provisions below and, thereafter, each subsequent period commencing on the last day of the immediately preceding Interest Period and ending on the last day of the period selected by the Borrower pursuant to the provisions below. The duration of each such Interest Period shall be 30, 60, 90 or 180 days in the case of an Adjusted CD Rate Advance, and 1, 2, 3 or 6 months in the case of a Eurodollar Rate Advance, in each case as the Borrower may select in accordance with Section 2.02 or 2.10; provided, however, that: (i) the Borrower may not select any Interest Period that ends after the Termination Date then in effect; (ii) Interest Periods commencing on the same date for Contract Advances made as part of the same Contract Borrowing shall be of the same duration, and (iii) whenever the last day of any Interest Period would otherwise occur on a day other than a Business Day, the last day of such Interest Period shall be extended to occur on the next succeeding Business Day, provided, in the case of any Interest Period for a Eurodollar Rate Advance, that if such extension would cause the last day of such Interest Period to occur in the next following calendar month, the last day of such Interest Period shall occur on the next preceding Business Day. "Lead Manager" means a Bank identified as such on the signature pages to this Agreement, in its capacity as Lead Manager, and not in its individual capacity as a Lender. "Lenders" means the Banks listed on the signature pages hereof and each Eligible Assignee that shall become a party hereto pursuant to Section 2.18 or 8.07. "Level 1 Rating Period" means any period during which the Benchmark Debt is rated A- or higher by S&P (or a comparable rating from any generally recognized successor to S&P) or A3 or higher by Moody's (or a comparable rating from any generally recognized successor to Moody's) (it being understood that, for this purpose, such ratings shall be subject to the Split Rating Adjustment). "Level 2 Rating Period" means any period which does not qualify as a Level 1 Rating Period during which the Benchmark Debt is rated BBB+ or higher by S&P (or a comparable rating from any generally recognized successor to S&P) or Baa1 or higher by Moody's (or a comparable rating from any generally recognized successor to Moody's) (it being understood that, for this purpose, such ratings shall be subject to the Split Rating Adjustment). "Level 3 Rating Period" means any period which does not qualify as a Level 1 or Level 2 Rating Period during which the Benchmark Debt is rated BBB or higher by S&P (or a comparable rating from any generally recognized successor to S&P) or Baa2 or higher by Moody's (or a comparable rating from any generally recognized successor to Moody's) (it being understood that, for this purpose, such ratings shall be subject to the Split Rating Adjustment). "Level 4 Rating Period" means any period which does not qualify as a Level 1, Level 2 or Level 3 Rating Period during which the Benchmark Debt is rated BBB- or higher by S&P (or a comparable rating from any generally recognized successor to S&P) or Baa3 or higher by Moody's (or a comparable rating from any generally recognized successor to Moody's) (it being understood that, for this purpose, such ratings shall be subject to the Split Rating Adjustment). 7 "Level 5 Rating Period" means any period which does not qualify as a Level 1, Level 2, Level 3 or Level 4 Rating Period (it being understood that, for this purpose, such ratings shall be subject to the Split Rating Adjustment). "Lien" means any lien (statutory or other), mortgage, pledge, security interest or other charge or encumbrance, or any other type of preferential arrangement (including, without limitation, the interest of a vendor or lessor under any conditional sale, capitalized lease or other title retention agreement). "Material Adverse Change" and "Material Adverse Effect" each means, relative to any occurrence, fact or circumstances of whatsoever nature (including, without limitation, any determination in any litigation, arbitration or governmental investigation or proceeding), any materially adverse change in, or materially adverse effect on, the financial condition, operations, assets or business of the Borrower and its consolidated Subsidiaries, taken as a whole. "Majority Lenders" means, at any time prior to the Termination Date, Lenders having at least 66-2/3% of the Commitments, and, at any time on or after the Termination Date, Lenders having at least 66-2/3% of the Advances outstanding (provided that, for purposes hereof, neither the Borrower, nor any of its Affiliates, if a Lender, shall be included in (i) the Lenders having such amount of the Commitments or the Advances or (ii) determining the total amount of the Commitments or the Advances). "Moody's" means Moody's Investors Service, Inc. "Mortgage" means the First and Refunding Mortgage, dated as of May 1, 1923, between The Counties Gas & Electric Company (to which the Borrower is successor) and Fidelity Trust Company, Trustee (to which First Union National Bank is successor), as amended, supplemented or refinanced from time to time, provided, that no effect shall be given to any amendment, supplement or refinancing after the date of this Agreement that would broaden the definition of "excepted encumbrances" as defined in the Mortgage as constituted on the date of this Agreement. "Multiemployer Plan" means a Plan maintained pursuant to a collective bargaining agreement or any other arrangement to which the Borrower or any member of the Controlled Group is a party to which more than one employer is obligated to make contributions. "Non-Consenting Lender" has the meaning specified in Section 2.17(a). "Nonrecourse Transition Bond Debt" means obligations evidenced by "transition bonds" (as defined in 66 Pa. Cons. Stat. Ann. ss. 2812(g) (West Supp. 1997), or any successor provision of similar import), rated AA or higher by S&P (or a comparable rating from a generally recognized successor to S&P) or Aa2 or higher by Moody's (or a comparable rating from a generally recognized successor to Moody's), representing a securitization of "intangible transition property" (as defined in the foregoing statute), as to which obligations neither the Borrower nor any Subsidiary of the Borrower (other than a Special Purpose Subsidiary) has any direct or indirect liability (whether as primary obligor, guarantor, or surety, provider of collateral security, put option, asset repurchase agreement or capital maintenance agreement, debt subordination agreement, or through other right or arrangement of any nature providing direct or indirect assurance of payment or performance of any such obligations in whole or in part), except for liability to repurchase "intangible transition property" conveyed to the securitization vehicle, on terms and conditions customary in receivables securitizations, in the event such "intangible transition property" violates representations and warranties of scope customary in receivables securitizations. "Special Purpose Subsidiary" means a direct or indirect wholly-owned corporate Subsidiary of the Borrower, substantially all of the assets of which are 8 "intangible transition property" and proceeds thereof, formed solely for the purpose of holding such assets and issuing such "transition bonds," and which complies with the requirements customarily imposed on bankruptcy-remote corporations in receivables securitizations. "Note" means a Contract Note or an Auction Note. "Notice of a Contract Borrowing" has the meaning specified in Section 2.02(a). "Notice of an Auction Borrowing" has the meaning specified in Section 2.03(a). "OECD" means the Organization for Economic Cooperation and Development. "Order of Registration" has the meaning assigned to that term in Section 3.01(a)(iii). "PBGC" means the Pension Benefit Guaranty Corporation and any entity succeeding to any or all of its functions under ERISA. "Person" means an individual, partnership, corporation (including a business trust), joint stock company, trust, unincorporated association, joint venture, limited liability company or other entity, or a government or any political subdivision or agency thereof. "Plan" means an employee pension benefit plan that is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code as to which the Borrower or any member of the Controlled Group may have any liability. "PPUC" means the Pennsylvania Public Utility Commission. "Principal Subsidiary" means (i) each Utility Subsidiary and (ii) from and after the date on which the aggregate book value of the assets of the Subsidiaries of the Borrower that are not Utility Subsidiaries exceeds $250,000,000, each such Subsidiary the assets of which exceeded $75,000,000 in book value at any time during the preceding 24-month period. "Rating Period" means a Level 1 Rating Period, a Level 2 Rating Period, a Level 3 Rating Period, a Level 4 Rating Period or a Level 5 Rating Period, as the case may be. "Reference Banks" means First Chicago, Mellon and Citibank, N.A. "Register" has the meaning specified in Section 8.07(c). "Reportable Event" means a reportable event as defined in Section 4043 of ERISA and regulations issued under such section with respect to a Plan, excluding, however, such events as to which the PBGC by regulation waived the requirement of Section 4043(a) of ERISA that it be notified within 30 days of the occurrence of such event, provided that a failure to meet the minimum funding standard of Section 412 of the Code and Section 302 of ERISA shall be a Reportable Event regardless of the issuance of any such waivers in accordance with either Section 4043(a) of ERISA or Section 412(d) of the Code. "S&P" means Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc. "Securities Certificate" has the meaning assigned to that term in Section 3.01(a)(iii). "Single Employer Plan" means a Plan maintained by the Borrower or any member of the Controlled Group for employees of the Borrower or any member of the Controlled Group. 9 "Special Purpose Subsidiary" has the meaning assigned to that term in the definition of "Nonrecourse Transition Bond Debt." "Split Rating Adjustment": For the purpose of determining the appropriate Rating Period, the rating of the Benchmark Debt shall be subject to adjustment as follows. In the event that the Benchmark Debt is rated at equivalent rating levels or not more than one rating level apart by S&P (or any generally accepted successor to S&P) and Moody's (or any generally accepted successor to Moody's), then no adjustment shall apply. Otherwise, the higher of the two ratings shall be deemed to be reduced to the next lower rating level. For this purpose, (i) determination of the rating level shall take into account "+" and "-" modifiers to S&P ratings and numerical modifiers to Moody's ratings (so that, for example, an S&P rating of A- shall be deemed equivalent to a Moody's rating of A3, an S&P rating of BBB+ shall be deemed equivalent to a Moody's rating of Baa1, an S&P rating of BBB shall be deemed equivalent to a Moody's rating of Baa2, an S&P rating of BBB- shall be deemed equivalent to a Moody's rating of Baa3, and so on), and (ii) by way of clarification, in the event the Benchmark Debt is rated by only one of the two referenced rating agencies, such rating shall be deemed to be reduced to the next lower rating level. "Subsidiary" means, with respect to any Person, any corporation or unincorporated entity of which more than 50% of the outstanding capital stock (or comparable interest) having ordinary voting power (irrespective of whether or not at the time capital stock, or comparable interests, of any other class or classes of such corporation or entity shall or might have voting power upon the occurrence of any contingency) is at the time directly or indirectly owned by such Person (whether directly or through one or more other Subsidiaries). "Syndication Agent" means any of First Chicago Capital Markets, Mellon or CitiCorp, in its capacity as Syndication Agent, and not in its individual capacity as a Lender. "Termination Date" means the earlier of (i) October 7, 2000 (or, if such date is not a Business Day, the next preceding Business Day) or such later date that may be established pursuant to Section 2.17(a) or (ii) the date of termination in whole of the Commitments pursuant to Section 2.05 or Section 6.01. "364-Day Credit Agreement" means that certain 364-Day Credit Agreement, dated as of October 7, 1997, among the Borrower, the banks named therein, certain banks specified therein, as lead managers thereunder, certain banks specified therein, as co-agents thereunder, First Chicago Capital Markets, Mellon and CitiCorp, as syndication agents thereunder, First Chicago Capital Markets and Mellon, as arrangers thereunder, First Chicago, as administrative agent for the lenders thereunder, and Mellon, as documentation agent for the lenders thereunder, as the same may be amended, modified or supplemented from time to time. "Unfunded Liabilities" means, (i) in the case of any Single Employer Plan, the amount (if any) by which the present value of all vested nonforfeitable benefits under such Plan exceeds the fair market value of all Plan assets allocable to such benefits, all determined as of the then most recent evaluation date for such Plan, and (ii) in the case of any Multiemployer Plan, the withdrawal liability that would be incurred by the Controlled Group if all members of the Controlled Group completely withdrew from such Multiemployer Plan. "Utility Subsidiary" means each Subsidiary of the Borrower that is engaged principally in the generation, transmission, or distribution of electricity or gas and is subject to regulation as a public utility by federal or state regulatory authorities. "Yield" means, for any Auction Advance, the effective rate per annum at which interest on such Auction Advance is payable, computed on the basis of a year of 360 days for the actual 10 number of days (including the first day but excluding the last day) occurring in the period for which such interest is payable. SECTION 1.02. Computation of Time Periods. In this Agreement in the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including" and the words "to" and "until" each means "to but excluding". SECTION 1.03. Accounting Principles. As used in this Agreement, "GAAP" shall mean generally accepted accounting principles in the United States, applied on a basis consistent with the principles used in preparing the Borrower's audited consolidated financial statements as of December 31, 1996 and for the fiscal year then ended. In this Agreement, except to the extent, if any, otherwise provided herein, all accounting and financial terms shall have the meanings ascribed to such terms by GAAP, and all computations and determinations as to accounting and financial matters shall be made in accordance with GAAP. In the event that the financial statements generally prepared by the Borrower apply accounting principles other than GAAP, the compliance certificate delivered pursuant to Section 5.01(b)(iv) accompanying such financial statements shall include information in reasonable detail reconciling such financial statements to GAAP to the extent relevant to the calculations set forth in such compliance certificate. ARTICLE II AMOUNTS AND TERMS OF THE ADVANCES SECTION 2.01. The Contract Advances. Each Lender severally agrees, on the terms and conditions hereinafter set forth, to make Contract Advances to the Borrower from time to time on any Business Day during the period from the date hereof until (but excluding) the Termination Date in an aggregate amount not to exceed at any time outstanding the amount set forth opposite such Lender's name on the signature pages hereof or, if such Lender has entered into any Assignment and Acceptance or Additional Lender Supplement, set forth for such Lender in the Register maintained by the Administrative Agent pursuant to Section 8.07(c), as such amount may be reduced pursuant to Section 2.05 or 2.17 (such Lender's "Commitment"); provided, that the aggregate amount of the Commitments of the Lenders shall be deemed used from time to time to the extent of the aggregate amount of the Auction Advances then outstanding, and such deemed use of the aggregate amount of the Commitments shall be applied to the Lenders ratably according to their respective Commitments (such deemed use of the aggregate amount of the Commitments being an "Auction Reduction"). Each Contract Borrowing shall consist of Contract Advances of the same Type made or Converted on the same day by the Lenders ratably according to their respective Commitments. Each Contract Borrowing comprising Base Rate Advances shall be in an aggregate amount not less than $5,000,000, and each Contract Borrowing comprising Adjusted CD Rate Advances or Eurodollar Rate Advances shall be in an aggregate amount not less than $10,000,000. Within the limits of each Lender's Commitment, the Borrower may from time to time borrow, prepay pursuant to Section 2.11 and reborrow under this Section 2.01. SECTION 2.02. Making the Contract Advances. (a) Each Contract Borrowing (other than pursuant to a Conversion) shall be made on notice, given not later than 10:00 A.M. (Chicago time) on the third Business Day prior to the date of any proposed Contract Borrowing comprising Eurodollar Rate Advances, on the second Business Day prior to the date of any proposed Contract Borrowing comprising Adjusted CD Rate Advances and on the date of any proposed Contract Borrowing comprising Base Rate Advances, by the Borrower to the Administrative Agent, which shall give to each Lender prompt notice thereof. Each such notice of a Contract Borrowing (a "Notice of a Contract Borrowing") shall be sent by telecopier, telex or cable, confirmed immediately in writing, in substantially the form of Exhibit B-1 hereto, specifying therein the requested (i) date of such Contract Borrowing, (ii) Type of Contract Advances to be made in connection with such Contract Borrowing, (iii) 11 aggregate amount of such Contract Borrowing, and (iv) in the case of a Contract Borrowing comprising Adjusted CD Rate Advances or Eurodollar Rate Advances, initial Interest Period for the Contract Advances to be made in connection with such Contract Borrowing. Each Lender shall, before 11:00 A.M. (Chicago time) on the date of such Contract Borrowing, make available for the account of its Applicable Lending Office to the Administrative Agent at its address referred to in Section 8.02, in same day funds, such Lender's ratable portion of such Contract Borrowing. After the Administrative Agent's receipt of such funds and upon fulfillment of the applicable conditions set forth in Article III, the Administrative Agent will make such funds available to the Borrower at the Administrative Agent's aforesaid address. (b) Each Notice of a Contract Borrowing shall be irrevocable and binding on the Borrower. In the case of any Contract Borrowing that the related Notice of a Contract Borrowing specifies is to comprise Adjusted CD Rate Advances or Eurodollar Rate Advances, the Borrower shall indemnify each Lender against any loss, cost or expense incurred by such Lender as a result of any failure to fulfill on or before the date specified in such Notice of a Contract Borrowing for such Contract Borrowing the applicable conditions set forth in Article III, including, without limitation, any loss, cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such Lender to fund the Contract Advance to be made by such Lender as part of such Contract Borrowing when such Contract Advance, as a result of such failure, is not made on such date. (c) Unless the Administrative Agent shall have received notice from a Lender prior to the date of any Contract Borrowing that such Lender will not make available to the Administrative Agent such Lender's ratable portion of such Contract Borrowing, the Administrative Agent may assume that such Lender has made such portion available to the Administrative Agent on the date of such Contract Borrowing in accordance with subsection (a) of this Section 2.02 and the Administrative Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent that such Lender shall not have so made such ratable portion available to the Administrative Agent, such Lender and the Borrower severally agree to repay to the Administrative Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Administrative Agent, at (i) in the case of the Borrower, the interest rate applicable at the time to Contract Advances made in connection with such Contract Borrowing and (ii) in the case of such Lender, the Federal Funds Rate. If such Lender shall repay to the Administrative Agent such corresponding amount, such amount so repaid shall constitute such Lender's Contract Advance as part of such Contract Borrowing for purposes of this Agreement. (d) The failure of any Lender to make the Contract Advance to be made by it as part of any Contract Borrowing shall not relieve any other Lender of its obligation, if any, hereunder to make its Contract Advance on the date of such Contract Borrowing, but no Lender shall be responsible for the failure of any other Lender to make the Contract Advance to be made by such other Lender on the date of any Contract Borrowing. (e) Notwithstanding anything to the contrary contained herein, no more than sixteen (16) Contract Borrowings comprising Adjusted CD Rate Advances and Eurodollar Rate Advances may be outstanding at any time. SECTION 2.03. The Auction Advances. (a) Each Lender severally agrees that the Borrower may request Auction Borrowings under this Section 2.03 from time to time on any Business Day during the period from the date hereof until the date occurring seven days prior to the Termination Date, in the manner set forth below; provided that, following the making of each Auction Borrowing, the aggregate amount of the Advances then outstanding shall not exceed the aggregate amount of the Commitments of the Lenders. 12 (i) The Borrower may request an Auction Borrowing by delivering to the Administrative Agent by telecopier, telex or cable, confirmed immediately in writing, a notice of an Auction Borrowing (a "Notice of an Auction Borrowing"), in substantially the form of Exhibit B-2 hereto, specifying the date and aggregate amount of the proposed Auction Borrowing, the maturity date for repayment of each Auction Advance to be made as part of such Auction Borrowing (which maturity date may not be earlier than the date occurring seven days after the date of such Auction Borrowing or later than the earlier to occur of (A) 270 days after the date of such Auction Borrowing and (B) the Termination Date), the interest payment date or dates relating thereto (which shall occur at least every 90 days), and any other terms to be applicable to such Auction Borrowing, not later than 9:00 A.M. (Chicago time) at least one Business Day prior to the date of the proposed Auction Borrowing. The Administrative Agent shall in turn promptly notify each Lender of each request for an Auction Borrowing received by it from the Borrower by sending such Lender a copy of the related Notice of an Auction Borrowing. (ii) Each Lender may, in its sole discretion, elect to irrevocably offer to make one or more Auction Advances to the Borrower as part of such proposed Auction Borrowing at a rate or rates of interest specified by such Lender in its sole discretion, by notifying the Administrative Agent (which shall give prompt notice thereof to the Borrower), before 9:00 A.M. (Chicago time) on the date of such proposed Auction Borrowing of the minimum amount and maximum amount of each Auction Advance that such Lender would be willing to make as part of such proposed Auction Borrowing (which amounts may, subject to the proviso to the first sentence of this Section 2.03(a), exceed such Lender's Commitment), the rate or rates of interest therefor, the interest period relating thereto and such Lender's Applicable Lending Office with respect to such Auction Advance; provided that if the Administrative Agent in its capacity as a Lender shall, in its sole discretion, elect to make any such offer, it shall notify the Borrower of such offer before 8:00 A.M. (Chicago time) on the date on which notice of such election is to be given to the Administrative Agent by the other Lenders. (iii) The Borrower shall, in turn, before 10:00 A.M. (Chicago time) on the date of such proposed Auction Borrowing, either (A) cancel such Auction Borrowing by giving the Administrative Agent notice to that effect, or (B) irrevocably accept one or more of the offers made by any Lender or Lenders pursuant to paragraph (ii) above, in its sole discretion, in an aggregate amount not in excess of the aggregate amount of the proposed Auction Borrowing requested in the relevant Notice of an Auction Borrowing, subject only to the provisions of this paragraph (iii), by giving notice to the Administrative Agent of the amount of each Auction Advance (which amount shall be equal to or greater than the minimum amount, and equal to or less than the maximum amount, notified to the Borrower by the Administrative Agent on behalf of such Lender for such Auction Advance pursuant to paragraph (ii) above) to be made by each Lender as part of such Auction Borrowing, and reject any remaining offers made by Lenders pursuant to paragraph (ii) above by giving the Administrative Agent notice to that effect; provided, however, that (x) the Borrower shall not accept an offer made pursuant to paragraph (ii) above, at any Yield if the Borrower shall have, or shall be deemed to have, rejected any other offer made pursuant to paragraph (ii) above, at a lower Yield, (y) if the Borrower declines to accept, or is otherwise restricted by the provisions of this Agreement from accepting, the maximum aggregate principal amount of Auction Borrowings offered at the same Yield pursuant to paragraph (ii) above, 13 then the Borrower shall accept a pro rata portion of each offer made at such Yield, based as nearly as possible on the ratio of the aggregate principal amount of such offers to be accepted by the Borrower to the maximum aggregate principal amount of such offers made pursuant to paragraph (ii) above (rounding up or down to the next higher or lower multiple of $1,000,000), and (z) no offer made pursuant to paragraph (ii) above shall be accepted unless the Auction Borrowing in respect of such offer is in an integral multiple of $1,000,000 and the aggregate amount of such offers accepted by the Borrower is equal to at least $10,000,000. Any offer or offers made pursuant to paragraph (ii) above not expressly accepted or rejected by the Borrower in accordance with this paragraph (iii) shall be deemed to have been rejected by the Borrower. (iv) If the Borrower notifies the Administrative Agent that such Auction Borrowing is canceled pursuant to clause (A) of paragraph (iii) above, the Administrative Agent shall give prompt notice thereof to the Lenders and such Auction Borrowing shall not be made. (v) If the Borrower accepts one or more of the offers made by any Lender or Lenders pursuant to clause (B) of paragraph (iii) above, the Administrative Agent shall in turn promptly notify (A) each Lender that has made an offer as described in paragraph (ii) above, of the date and aggregate amount of such Auction Borrowing and whether or not any offer or offers made by such Lender pursuant to paragraph (ii) above have been accepted by the Borrower, (B) each Lender that is to make an Auction Advance as part of such Auction Borrowing of the amount of each Auction Advance to be made by such Lender as part of such Auction Borrowing, and (C) each Lender that is to make an Auction Advance as part of such Auction Borrowing, upon receipt, that the Administrative Agent has received forms of documents appearing to fulfill the applicable conditions set forth in Article III. Each Lender that is to make an Auction Advance as part of such Auction Borrowing shall, before 11:00 A.M. (Chicago time) on the date of such Auction Borrowing specified in the notice received from the Administrative Agent pursuant to clause (A) of the preceding sentence or any later time when such Lender shall have received notice from the Administrative Agent pursuant to clause (C) of the preceding sentence, make available for the account of its Applicable Lending Office to the Administrative Agent at its address referred to in Section 8.02 such Lender's portion of such Auction Borrowing, in same day funds. Upon fulfillment of the applicable conditions set forth in Article III and after receipt by the Administrative Agent of such funds, the Administrative Agent will make such funds available to the Borrower at the Administrative Agent's aforesaid address. Promptly after each Auction Borrowing, the Administrative Agent will notify each Lender of the amount of the Auction Borrowing, the consequent Auction Reduction and the dates upon which such Auction Reduction commenced and will terminate. (b) Each Auction Advance shall be in an amount not less than $1,000,000 or an integral multiple of $1,000,000 in excess thereof and, following the making of each Auction Borrowing, the Borrower shall be in compliance with the limitation set forth in the proviso to the first sentence of subsection (a) above. (c) Within the limits and on the conditions set forth in this Section 2.03, the Borrower may from time to time borrow under this Section 2.03, repay or prepay pursuant to subsection (d) below, and reborrow under this Section 2.03; provided, that an Auction Borrowing shall not be made within three Business Days of the date of any other Auction Borrowing. 14 (d) The Borrower shall repay to the Administrative Agent for the account of each Lender that has made an Auction Advance, or each other holder of an Auction Note, on the maturity date of each Auction Advance (such maturity date being that specified by the Borrower for repayment of such Auction Advance in the related Notice of an Auction Borrowing delivered pursuant to subsection (a)(i) above and provided in the Auction Note evidencing such Auction Advance), the then unpaid principal amount of such Auction Advance. The Borrower shall have no right to prepay any principal amount of any Auction Advance unless, and then only on the terms, specified by the Borrower for such Auction Advance in the related Notice of an Auction Borrowing delivered pursuant to subsection (a)(i) above and set forth in the Auction Note evidencing such Auction Advance. (e) The Borrower shall pay interest on the unpaid principal amount of each Auction Advance from the date of such Auction Advance to the date the principal amount of such Auction Advance is repaid in full, at the rate of interest for such Auction Advance specified by the Lender making such Auction Advance in its notice with respect thereto delivered pursuant to subsection (a)(ii) above, payable on the interest payment date or dates specified by the Borrower for such Auction Advance in the related Notice of an Auction Borrowing delivered pursuant to subsection (a)(i) above, as provided in the Auction Note evidencing such Auction Advance. (f) The indebtedness of the Borrower resulting from each Auction Advance made to the Borrower as part of an Auction Borrowing shall be evidenced by a separate Auction Note of the Borrower payable to the order of the Lender making such Auction Advance. (g) Upon payment in full of the principal amount of any Auction Note and interest accrued thereon, the holder of such Auction Note shall cancel and return such Auction Note to the Borrower. SECTION 2.04. Fees. (a) The Borrower agrees to pay to the Administrative Agent for the account of each Lender a commitment fee on the average daily unused portion of such Lender's Commitment (after giving effect to any Auction Reduction) from the date hereof in the case of each Bank, and from the effective date specified in the Assignment and Acceptance or the Additional Lender Supplement pursuant to which it became a Lender in the case of each other Lender, until the Termination Date, and, in the case of the termination in whole of a Lender's Commitment pursuant to Section 2.05 or 2.17, the date of such termination, payable on the last day of each March, June, September and December during such period, and on the Termination Date, and, in the case of the termination in whole of a Lender's Commitment pursuant to Section 2.05 or 2.17, the date of such termination, at a percentage rate per annum equal to the Applicable Commitment Fee Rate in effect from time to time, changing when and as the Applicable Commitment Fee Rate changes. (b) The Borrower agrees to pay to the Administrative Agent for the account of each Lender an auction facility fee on the average daily aggregate principal amount of such Lender's Auction Reduction during the period from the date hereof in the case of each Bank, and from the effective date specified in the Assignment and Acceptance pursuant to which it became a Lender in the case of each other Lender, until the Termination Date, and, in the case of the termination in whole of a Lender's Commitment pursuant to Section 2.05 or 2.17, the date of such termination, payable on the last day of each March, June, September and December during such period, and on the Termination Date, and, in the case of the termination in whole of a Lender's Commitment pursuant to Section 2.05 or 2.17, the date of such termination, at a percentage rate per annum equal to the Applicable Commitment Fee Rate in effect from time to time, changing when and as the Applicable Commitment Fee Rate changes. (c) The Borrower agrees to pay to the Documentation Agent for its own account a closing fee as agreed to in writing between the Borrower and the Documentation Agent, payable upon the execution and delivery of this Agreement. 15 (d) The Borrower agrees to pay to the Administrative Agent for its own account a closing fee, an auction administration fee and an Administrative Agent's administration fee, each payable in such amounts and on such dates as may be agreed to in writing from time to time between the Borrower and the Administrative Agent. SECTION 2.05. Reduction of the Commitments. The Borrower shall have the right, upon at least two Business Days' notice to the Administrative Agent, to terminate in whole or reduce ratably in part the unused portions of the respective Commitments of the Lenders; provided, that the aggregate amount of the Commitments of the Lenders shall not be reduced to an amount that is less than the aggregate principal amount of the Advances then outstanding; and provided, further, that each partial reduction shall be in the aggregate amount of $1,000,000 or an integral multiple thereof. SECTION 2.06. Repayment of Contract Advances. The Borrower shall repay the principal amount of each Contract Advance made by each Lender in accordance with the Contract Note to the order of such Lender. SECTION 2.07. Interest on Contract Advances. The Borrower shall pay interest on the unpaid principal amount of each Contract Advance made by each Lender from the date of such Contract Advance until such principal amount shall be paid in full, at the following rates per annum: (a) Base Rate Advances. If such Contract Advance is a Base Rate Advance, a rate per annum equal at all times to the Base Rate in effect from time to time, payable quarterly on the last day of each March, June, September and December during such periods and on the date such Base Rate Advance shall be Converted or paid in full. (b) Adjusted CD Rate Advances. If such Contract Advance is an Adjusted CD Rate Advance, a rate per annum equal at all times during the Interest Period for such Contract Advance to the sum of the Adjusted CD Rate for such Interest Period plus the Applicable Margin for such Adjusted CD Rate in effect from time to time, payable on the last day of the Interest Period for such Adjusted CD Rate Advance (or, if the Interest Period for such Advance is 180 days, accrued interest shall be payable on the 90th day and the 180th day of such Interest Period) or, if earlier, on the date such Adjusted CD Rate Advance shall be Converted or paid in full. (c) Eurodollar Rate Advances. Subject to Section 2.08, if such Contract Advance is a Eurodollar Rate Advance, a rate per annum equal at all times during the Interest Period for such Contract Advance to the sum of the Eurodollar Rate for such Interest Period plus the Applicable Margin for such Eurodollar Rate Advance in effect from time to time, payable on the last day of the Interest Period for such Eurodollar Rate Advance (or, if the Interest Period for such Advance is six months, accrued interest shall be payable on the day that is three months and on the day that is six months from the date such Advance was made) or, if earlier, on the date such Eurodollar Rate Advance shall be Converted or paid in full. SECTION 2.08. Additional Interest on Contract Advances. The Borrower shall pay to each Lender, so long as such Lender shall be required under regulations of the Board of Governors of the Federal Reserve System to maintain reserves with respect to liabilities or assets consisting of or including Eurocurrency Liabilities, additional interest on the unpaid principal amount of each Eurodollar Rate Advance of such Lender, from the date of such Contract Advance until such principal amount is paid in full or Converted, at an interest rate per annum equal at all times to the remainder obtained by subtracting (i) the Eurodollar Rate for the Interest Period for such Contract Advance from (ii) the rate obtained by dividing such Eurodollar Rate by a percentage equal to 100% minus the Eurodollar Rate Reserve Percentage of such Lender for such Interest Period, payable on each date on which interest is payable on such Contract Advance; provided, that no Lender shall be entitled to demand such additional interest more than 90 days following the last day of the Interest Period in respect of which such demand is made; provided further, however, that the foregoing proviso shall in no way limit the right of any 16 Lender to demand or receive such additional interest to the extent that such additional interest relates to the retroactive application of the reserve requirements described above if such demand is made within 90 days after the implementation of such retroactive reserve requirements. Such additional interest shall be determined by such Lender and notified to the Borrower through the Administrative Agent, and such determination shall be conclusive and binding for all purposes, absent manifest error. SECTION 2.09. Interest Rate Determination. (a) Each Reference Bank agrees to furnish to the Administrative Agent timely information for the purpose of determining each Adjusted CD Rate or Eurodollar Rate, as applicable. If any one of the Reference Banks shall not furnish such timely information to the Administrative Agent for the purpose of determining any such interest rate, the Administrative Agent shall determine such interest rate on the basis of timely information furnished by the remaining Reference Banks. (b) The Administrative Agent shall give prompt notice to the Borrower and the Lenders of the applicable interest rate determined by the Administrative Agent for purposes of Section 2.07(a), (b) or (c), and the applicable rate, if any, furnished by each Reference Bank for the purpose of determining the applicable interest rate under Section 2.07(b) or (c). (c) If fewer than two Reference Banks furnish timely information to the Administrative Agent for determining the Adjusted CD Rate for any Adjusted CD Rate Advances, or the Eurodollar Rate for any Eurodollar Rate Advances, (i) the Administrative Agent shall forthwith notify the Borrower and the Lenders that the interest rate cannot be determined for such Adjusted CD Rate Advances or Eurodollar Rate Advances, as the case may be, (ii) each such Advance will automatically, on the last day of the then existing Interest Period therefor, Convert into a Base Rate Advance (or if such Advance is then a Base Rate Advance, will continue as a Base Rate Advance), and (iii) the obligation of the Lenders to make, or to Convert Contract Advances into, Adjusted CD Rate Advances or Eurodollar Rate Advances, as the case may be, shall be suspended until the Administrative Agent shall notify the Borrower and the Lenders that the circumstances causing such suspension no longer exist. (d) If, with respect to any Eurodollar Rate Advances, the Majority Lenders notify the Administrative Agent that the Eurodollar Rate for any Interest Period for such Advances will not adequately reflect the cost to such Majority Lenders of making, funding or maintaining their respective Eurodollar Rate Advances for such Interest Period, the Administrative Agent shall forthwith so notify the Borrower and the Lenders, whereupon (i) each Eurodollar Rate Advance will automatically, on the last day of the then existing Interest Period therefor (unless prepaid or Converted to any Type of Advance other than a Eurodollar Rate Advance prior to such date), Convert into a Base Rate Advance, and (ii) the obligation of the Lenders to make, or to Convert Contract Advances into, Eurodollar Rate Advances shall be suspended until the Administrative Agent shall notify the Borrower and the Lenders that the circumstances causing such suspension no longer exist. SECTION 2.10. Conversion of Contract Advances. (a) Voluntary. The Borrower may on any Business Day, upon notice given to the Administrative Agent not later than 10:00 A.M. (Chicago time) on the third Business Day prior to the date of any proposed Conversion into Eurodollar Rate 17 Advances, the second Business Day prior to the date of any proposed Conversion into Adjusted CD Rate Advances and on the date of any proposed Conversion into Base Rate Advances, and subject to the provisions of Sections 2.09 and 2.13, Convert all Contract Advances of one Type made in connection with the same Contract Borrowing into Advances of another Type or Types or Advances of the same Type having the same or a new Interest Period; provided, however, that any Conversion of Adjusted CD Rate Advances or Eurodollar Rate Advances into Advances of another Type or Advances of the same Type having the same or new Interest Periods shall be made on, and only on, the last day of an Interest Period for such Adjusted CD Rate Advances or Eurodollar Rate Advances, unless the Borrower shall also reimburse the Lenders in respect thereof pursuant to Section 8.04(b) on the date of such Conversion. Each such notice of a Conversion shall, within the restrictions specified above, specify (i) the date of such Conversion, (ii) the Contract Advances to be Converted, and (iii) if such Conversion is into, or with respect to, Adjusted CD Rate Advances or Eurodollar Rate Advances, the duration of the Interest Period for each such Contract Advance. (b) Automatic. If the Borrower shall fail to select the Type of any Contract Advance or the duration of any Interest Period for any Contract Borrowing comprising Adjusted CD Rate Advances or Eurodollar Rate Advances in accordance with the provisions contained in the definition of "Interest Period" in Section 1.01 and Section 2.10(a), the Administrative Agent will forthwith so notify the Borrower and the Lenders and such Advances will automatically, on the last day of the then existing Interest Period therefor, Convert into Base Rate Advances. SECTION 2.11. Prepayments. The Borrower may, upon at least two Business Days' notice (or same day notice in the case of any prepayment of Base Rate Advances) to the Administrative Agent stating the proposed date and aggregate principal amount of the prepayment, and if such notice is given the Borrower shall, prepay the outstanding principal amounts of the Advances made as part of the same Contract Borrowing in whole or ratably in part, together with accrued interest to the date of such prepayment on the principal amount prepaid; provided, however, that (i) each partial prepayment shall be in an aggregate principal amount not less than $10,000,000 (or $5,000,000 in the case of any prepayment of Base Rate Advances) and (ii) in the case of any such prepayment of an Adjusted CD Advance or Eurodollar Rate Advance, the Borrower shall be obligated to reimburse the Lenders in respect thereof pursuant to Section 8.04(b) on the date of such prepayment. SECTION 2.12. Increased Costs. (a) If on or after (x) the date of this Agreement, in the case of any Contract Advance or any obligation to make a Contract Advance, or (y) the date a Lender offers to make such Auction Advance, in the case of any Auction Advance, any Lender determines that (i) the introduction of or any change (other than any change by way of imposition or increase of reserve requirements, in the case of Adjusted CD Rate Advances, included in the Domestic Rate Reserve Percentage or, in the case of Eurodollar Rate Advances, included in the Eurodollar Rate Reserve Percentage) in or in the interpretation of any law or regulation or (ii) the compliance with any guideline or request from any central bank or other governmental authority (whether or not having the force of law) shall increase the cost to such Lender of agreeing to make or making, funding or maintaining Adjusted CD Rate Advances or Eurodollar Rate Advances, then the Borrower shall from time to time, upon demand by such Lender (with a copy of such demand to the Administrative Agent), pay to the Administrative Agent for the account of such Lender additional amounts (without duplication of any amount payable pursuant to Section 2.15) sufficient to compensate such Lender for such increased cost; provided, that no Lender shall be entitled to demand such compensation more than 90 days following the last day of the Interest Period in respect of which such demand is made; provided further, however, that the foregoing proviso shall in no way limit the right of any Lender to demand or receive such compensation to the extent that such compensation relates to the retroactive application of any law, regulation, guideline or request described in clause (i) or (ii) above if such demand is made within 90 days after the implementation of such retroactive law, interpretation, guideline or request. A certificate as to the amount of such increased cost, submitted to the Borrower and the Administrative Agent by such Lender, shall be conclusive and binding for all purposes, absent manifest error. 18 (b) If any Lender determines that, after the date of this Agreement, compliance with any law or regulation or any guideline or request from any central bank or other governmental authority (whether or not having the force of law) affects or would affect the amount of capital required or expected to be maintained by such Lender or any corporation controlling such Lender and that the amount of such capital is increased by or based upon the existence of such Lender's commitment to lend hereunder and other commitments of this type or the Advances made by such Lender, then, upon demand by such Lender (with a copy of such demand to the Administrative Agent), the Borrower shall immediately pay to the Administrative Agent for the account of such Lender, from time to time as specified by such Lender, additional amounts sufficient to compensate such Lender or such corporation in the light of such circumstances, to the extent that such Lender determines such increase in capital to be allocable to the existence of such Lender's commitment to lend hereunder or the Advances made by such Lender; provided, that no Lender shall be entitled to demand such compensation more than one year following the payment to or for the account of such Lender of all other amounts payable hereunder and under any Note held by such Lender and the termination of such Lender's Commitment; provided further, however, that the foregoing proviso shall in no way limit the right of any Lender to demand or receive such compensation to the extent that such compensation relates to the retroactive application of any law, regulation, guideline or request described above if such demand is made within one year after the implementation of such retroactive law, interpretation, guideline or request. A certificate as to such amounts submitted to the Borrower and the Administrative Agent by such Lender shall be conclusive and binding, for all purposes, absent manifest error. (c) Any Lender claiming compensation pursuant to this Section 2.12 shall use its best efforts (consistent with its internal policy and legal and regulatory restrictions) to change the jurisdiction of its Applicable Lending Office if the making of such a change would avoid the need for, or reduce the amount of, any such compensation that may thereafter accrue and would not, in the reasonable judgment of such Lender, be otherwise disadvantageous to such Lender. SECTION 2.13. Illegality. Notwithstanding any other provision of this Agreement, if any Lender shall notify the Administrative Agent that the introduction of or any change in or in the interpretation of any law or regulation makes it unlawful, or any central bank or other governmental authority asserts that it is unlawful, for such Lender or its Eurodollar Lending Office to perform its obligations hereunder to make Eurodollar Rate Advances or to fund or maintain Eurodollar Rate Advances hereunder, (i) the obligation of such Lender to make, or to Convert Contract Advances into, Eurodollar Rate Advances shall be suspended (subject to the following paragraph of this Section 2.13) until the Administrative Agent shall notify the Borrower and the Lenders that the circumstances causing such suspension no longer exist and (ii) all Eurodollar Rate Advances of such Lender then outstanding shall, on the last day of then applicable Interest Period (or such earlier date as such Lender shall designate upon not less than five Business Days prior written notice to the Administrative Agent), be automatically Converted into Base Rate Advances. If the obligation of any Lender to make, fund or maintain Eurodollar Rate Advances has been suspended pursuant to the preceding paragraph, then, unless and until the Administrative Agent shall notify the Borrower and the Lenders that the circumstances causing such suspension no longer exist (i) all Contract Advances that would otherwise be made by such Lender as Eurodollar Rate Advances shall instead be made as Base Rate Advances and (ii) to the extent that Eurodollar Rate Advances of such Lender have been Converted into Base Rate Advances pursuant to the preceding paragraph or made instead as Base Rate Advances pursuant to the preceding clause (i), all payments and prepayments of principal that would have otherwise been applied to such Eurodollar Rate Advances of such Lender shall be applied instead to such Base Rate Advances of such Lender. SECTION 2.14. Payments and Computations. (a) The Borrower shall make each payment hereunder and under the Notes not later than 10:00 A.M. (Chicago time) on the day when due in U.S. dollars to the Administrative Agent at its address referred to in Section 8.02 in same day funds. The Administrative Agent will promptly thereafter cause to be distributed like funds relating to the payment of principal or interest or commitment and auction facility fees ratably (other than amounts payable pursuant to Section 2.02(c), 2.03, 2.08, 2.12, 2.15, 2.17(a) or 8.04(b)) to the Lenders for the account of their respective Applicable Lending Offices, and like funds relating to the payment 19 of any other amount payable to any Lender to such Lender for the account of its Applicable Lending Office, in each case to be applied in accordance with the terms of this Agreement. Upon its acceptance of an Assignment and Acceptance and recording of the information contained therein in the Register pursuant to Section 8.07(d), from and after the effective date specified in such Assignment and Acceptance, the Administrative Agent shall make all payments hereunder and under the Notes in respect of the interest assigned thereby to the Lender assignee thereunder, and the parties to such Assignment and Acceptance shall make all appropriate adjustments in such payments for periods prior to such effective date directly between themselves. (b) The Borrower hereby authorizes each Lender, if and to the extent payment owed to such Lender is not made when due hereunder or under any Note held by such Lender, to charge from time to time against any or all of the Borrower's accounts with such Lender any amount so due. (c) All computations of interest based on the Base Rate shall be made by the Administrative Agent on the basis of a year of 365 or 366 days, as the case may be, and all computations of interest based on the Adjusted CD Rate, the Eurodollar Rate or the Federal Funds Rate and of commitment fees, auction facility fees and interest payable on Auction Advances shall be made by the Administrative Agent, and all computations of interest pursuant to Section 2.08 shall be made by a Lender, on the basis of a year of 360 days, in each case for the actual number of days (including the first day but excluding the last day) occurring in the period for which such interest or commitment fees are payable. Each determination by the Administrative Agent (or, in the case of Section 2.08, by a Lender) of an interest rate hereunder shall be conclusive and binding for all purposes, absent manifest error. (d) Whenever any payment hereunder or under the Notes shall be stated to be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of payment of interest or commitment fee, as the case may be; provided, however, if such extension would cause payment of interest on or principal of Eurodollar Rate Advances to be made in the next following calendar month, such payment shall be made on the next preceding Business Day. (e) Unless the Administrative Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Lenders hereunder that the Borrower will not make such payment in full, the Administrative Agent may assume that the Borrower has made such payment in full to the Administrative Agent on such date and the Administrative Agent may, in reliance upon such assumption, cause to be distributed to each Lender on such due date an amount equal to the amount then due such Lender. If and to the extent that the Borrower shall not have so made such payment in full to the Administrative Agent, each Lender shall repay to the Administrative Agent forthwith on demand such amount distributed to such Lender together with interest thereon, for each day from the date such amount is distributed to such Lender until the date such Lender repays such amount to the Administrative Agent, at the Federal Funds Rate. (f) Notwithstanding anything to the contrary contained herein, any amount payable by the Borrower hereunder or under any Note that is not paid when due (whether at stated maturity, by acceleration or otherwise) shall (to the fullest extent permitted by law) bear interest from the date when due until paid in full at a rate per annum equal at all times to the Base Rate plus 2%, payable upon demand. SECTION 2.15. Taxes. (a) Any and all payments by the Borrower hereunder or under the Contract Notes shall be made, in accordance with Section 2.14, free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding, in the case of each Lender and the Administrative 20 Agent, taxes imposed on its income, and franchise taxes imposed on it, by the jurisdiction under the laws of which such Lender or the Administrative Agent (as the case may be) is organized or any political subdivision thereof and, in the case of each Lender, taxes imposed on its income, and franchise taxes imposed on it, by the jurisdiction of such Lender's Applicable Lending Office or any political subdivision thereof (all such non-excluded taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "Taxes"). If the Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder or under any Note to any Lender or the Administrative Agent, (i) the sum payable shall be increased as may be necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 2.15) such Lender or the Administrative Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions and (iii) the Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law. (b) In addition, the Borrower agrees to pay any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies to the extent arising from the execution, delivery or registration of this Agreement or the Contract Notes (hereinafter referred to as "Other Taxes"). (c) No Lender may claim or demand payment or reimbursement in respect of any Taxes or Other Taxes pursuant to this Section 2.15 if such Taxes or Other Taxes, as the case may be, were imposed solely as the result of a voluntary change in the location of the jurisdiction of such Lender's Applicable Lending Office. (d) The Borrower will indemnify each Lender and the Administrative Agent for the full amount of Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes imposed by any jurisdiction on amounts payable under this Section 2.15) paid by such Lender or the Administrative Agent (as the case may be) and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted. This indemnification shall be made within 30 days from the date such Lender or the Administrative Agent (as the case may be) makes written demand therefor. (e) Prior to the date of the initial Borrowing in the case of each Bank, and on the date of the Assignment and Acceptance or Additional Lender Supplement pursuant to which it became a Lender in the case of each other Lender, and from time to time thereafter within 30 days from the date of request if requested by the Borrower or the Administrative Agent, each Lender organized under the laws of a jurisdiction outside the United States shall provide the Administrative Agent and the Borrower with the forms prescribed by the Internal Revenue Service of the United States certifying that such Lender is exempt from United States withholding taxes with respect to all payments to be made to such Lender hereunder and under the Notes. If for any reason during the term of this Agreement, any Lender becomes unable to submit the forms referred to above or the information or representations contained therein are no longer accurate in any material respect, such Lender shall notify the Administrative Agent and the Borrower in writing to that effect. Unless the Borrower and the Administrative Agent have received forms or other documents satisfactory to them indicating that payments hereunder or under any Note are not subject to United States withholding tax, the Borrower or the Administrative Agent shall withhold taxes from such payments at the applicable statutory rate in the case of payments to or for any Lender organized under the laws of a jurisdiction outside the United States and no Lender may claim or demand payment or reimbursement for such withheld taxes pursuant to this Section 2.15. (f) Any Lender claiming any additional amounts payable pursuant to this Section 2.15 shall use its best efforts (consistent with its internal policy and legal and regulatory restrictions) to change the jurisdiction of its Applicable Lending Office if the making of such a change would avoid the need for, or reduce the amount of, any such additional amounts which may thereafter accrue and would not, in the reasonable judgment of such Lender, be otherwise disadvantageous to such Lender. 21 (g) If the Borrower makes any additional payment to any Lender pursuant to this Section 2.15 in respect of any Taxes or Other Taxes, and such Lender determines that it has received (i) a refund of such Taxes or Other Taxes or (ii) a credit against or relief or remission for, or a reduction in the amount of, any tax or other governmental charge attributable solely to any deduction or credit for any Taxes or Other Taxes with respect to which it has received payments under this Section 2.15, such Lender shall, to the extent that it can do so without prejudice to the retention of such refund, credit, relief, remission or reduction, pay to the Borrower such amount as such Lender shall have determined to be attributable to the deduction or withholding of such Taxes or Other Taxes. If, within one year after the payment of any such amount to the Borrower, such Lender determines that it was not entitled to such refund, credit, relief, remission or reduction to the full extent of any payment made pursuant to the first sentence of this Section 2.15(g), the Borrower shall upon notice and demand of such Lender promptly repay the amount of such overpayment. Any determination made by such Lender pursuant to this Section 2.15(g) shall in the absence of bad faith or manifest error be conclusive, and nothing in this Section 2.15(g) shall be construed as requiring any Lender to conduct its business or to arrange or alter in any respect its tax or financial affairs (except as required by Section 2.15(f)) so that it is entitled to receive such a refund, credit or reduction or as allowing any person to inspect any records, including tax returns, of any Lender. (h) Without prejudice to the survival of any other agreement of the Borrower or any Lender hereunder, the agreements and obligations of the Borrower and the Lenders contained in this Section 2.15 shall survive the payment in full of principal and interest hereunder and under the Notes; provided, that no Lender shall be entitled to demand any payment under this Section 2.15 more than one year following the payment to or for the account of such Lender of all other amounts payable hereunder and under any Note held by such Lender and the termination of such Lender's Commitment; provided further, however, that the foregoing proviso shall in no way limit the right of any Lender to demand or receive any payment under this Section 2.15 to the extent that such payment relates to the retroactive application of any Taxes or Other Taxes if such demand is made within one year after the implementation of such Taxes or Other Taxes. SECTION 2.16. Sharing of Payments, Etc. If any Lender shall obtain any payment (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise) on account of the Contract Advances made by it (other than pursuant to Section 2.02(c), 2.08, 2.12, 2.15, 2.17(a) or 8.04(b)) in excess of its ratable share of payments on account of the Contract Advances obtained by all the Lenders, such Lender shall forthwith purchase from the other Lenders such participations in the Contract Advances made by them as shall be necessary to cause such purchasing Lender to share the excess payment ratably with each of them, provided, however, that if all or any portion of such excess payment is thereafter recovered from such purchasing Lender, such purchase from each Lender shall be rescinded and such Lender shall repay to the purchasing Lender the purchase price to the extent of such recovery together with an amount equal to such Lender's ratable share (according to the proportion of (i) the amount of such Lender's required repayment to (ii) the total amount so recovered from the purchasing Lender) of any interest or other amount paid or payable by the purchasing Lender in respect of the total amount so recovered. The Borrower agrees that any Lender so purchasing a participation from another Lender pursuant to this Section 2.16 may, to the fullest extent permitted by law, exercise all its rights of payment (including the right of set-off) with respect to such participation as fully as if such Lender were the direct creditor of the Borrower in the amount of such participation. SECTION 2.17. Extension of Termination Date. (a) Unless the Termination Date shall have occurred, the Borrower may request the Lenders, by written notice to the Administrative Agent not more than 90 days and not less than 60 days prior to the then effective Termination Date, to consent to extension of the Termination Date to the date which is one year after the then effective Termination Date (or, if such date is not a Business Day, the next preceding Business Day). Each Lender shall, in its sole discretion, determine whether to consent to such request and shall notify the Administrative Agent of its determination not more than 45 days and not less than 30 days prior to the then-effective Termination Date. Any Lender which fails to give such notice to the Administrative Agent shall be deemed to have 22 not consented to such request. If any Lender shall not have consented to such request 30 days prior to the then effective Termination Date (such Lender being referred to herein as a "Non-Consenting Lender"), the Administrative Agent shall promptly so notify the Borrower and the other Lenders, whereupon each other Lender may, not more than 30 days and not less than 25 days prior to the then effective Termination Date, revoke any consent to such extension previously given by such Lender (in which case such Lender shall be deemed a Non-Consenting Lender). If such request shall have been consented to by the Majority Lenders (as determined after giving effect to the replacement of any Non-Consenting Lender pursuant to Section 8.07(h)), the Administrative Agent shall notify the Borrower and the Lenders in writing of such consent, and such extension shall become effective upon the delivery by the Borrower to the Administrative Agent and each Lender, on or prior to the then-effective Termination Date, of (i) a certificate of a duly authorized officer of the Borrower, dated such date, as to the accuracy, both before and after giving effect to such proposed extension, of the representations and warranties set forth in Section 4.01 and as to the absence, both before and after giving effect to such proposed extension, of any Event of Default or event that with the giving of notice or the passage of time or both would constitute an Event of Default, (ii) certified copies of all corporate and governmental approvals, if any, required to be obtained by the Borrower in connection with such proposed extension and (iii) an opinion of counsel to the Borrower (who shall be satisfactory to the Administrative Agent) as to the matters set forth in Exhibit D, upon giving effect to the extension of the Termination Date, and such other matters as any Lender, through the Administrative Agent, may reasonably request, all of the foregoing to be satisfactory in form and substance to the Administrative Agent. In the event of any such extension of the Termination Date, the Commitment of each Non-Consenting Lender that has not been replaced pursuant to Section 8.07(h) shall be terminated in whole as of such former Termination Date, the aggregate principal amount of all Advances made by such Non-Consenting Lender, together with accrued and unpaid interest, commitment fees and auction facility fees, and all other amounts payable hereunder to or for the account of such Non-Consenting Lender shall be due and payable on such former Termination Date, and upon such reduction and payment of such amounts such Non-Consenting Lender shall cease to be a party to this Agreement. (b) Upon the effectiveness of any extension of the Termination Date pursuant to subsection (a) above, each reference in Section 4.01(e) and Exhibit D to (i) the year-end financial statements of the Borrower, (ii) December 31 of any year, (iii) the quarter-end financial statements of the Borrower and (iv) the last day of any fiscal quarter (other than December 31) of any year, shall be deemed to be amended to be references to (A) the year-end financial statements of the Borrower included in the Borrower's Annual Report on Form 10-K most recently delivered to the Lenders pursuant to Section 5.01(b)(iii), (B) December 31 of the year of the financial statements described in clause (A) above, (C) the fiscal quarter-end financial statements of the Borrower included in the Borrower's Quarterly Report on Form 10-Q most recently delivered to the Lenders pursuant to Section 5.01(b)(ii) and (D) the last day of the fiscal quarter of the financial statements described in clause (C) above, respectively. SECTION 2.18. Additional Lenders. (a) For a period of 60 days after extension of a Termination Date pursuant to Section 2.17(a) that has resulted in a reduction of the aggregate Commitments of the Lenders, the Borrower may request that one or more additional banks or other Persons (each, an "Additional Lender") become party to this Agreement as Lenders and that the aggregate amount of the Commitments of the Lenders be increased to reflect the Commitments allocated to each such Additional Lender; provided, that the aggregate Commitments of the Lenders after giving effect so such increase shall not exceed the aggregate Commitments of the Lenders immediately prior to such former Termination Date. Addition of an Additional Lender shall be made only with the written consent of the Administrative Agent (which consent shall not be unreasonably withheld or delayed) and with the written consent of the Borrower (which consent may be granted or withheld in its absolute discretion). Each Additional Lender must be an Eligible Assignee and, without the consent of the Administrative Agent, the initial Commitment of each Additional Lender shall not be less than $5,000,000. 23 (b) Addition of an Additional Lender shall be effected by the Additional Lender executing and delivering to the Administrative Agent, for its acceptance and recording in the Register, a duly completed Additional Lender Supplement in substantially the form of Exhibit G attached hereto. The Borrower shall execute and deliver to the Administrative Agent for transmittal to such Additional Lender a Contract Note in substantially the form of Exhibit A-1 attached hereto in the amount of the Commitment of such Additional Lender. Acceptance by the Administrative Agent of an Additional Lender is subject to the conditions that the Administrative Agent shall have received, with a counterpart for each Lender, (i) a certificate of a duly authorized officer of the Borrower, dated the effective date of such Additional Lender Supplement, as to the accuracy, both before and after giving effect to such proposed addition, of the representations and warranties set forth in Section 4.01 and as to the absence, both before and after giving effect to such proposed extension, of any Event of Default or event that with the giving of notice or the passage of time or both would constitute an Event of Default, (ii) certified copies of all corporate and governmental approvals, if any, required to be obtained by the Borrower in connection with such proposed addition, (iii) an opinion of counsel to the Borrower (who shall be satisfactory to the Administrative Agent) as to the matters set forth in Exhibit D (appropriately modified to include, in addition to the other matters set forth therein, such Additional Lender Supplement and the new Contract Note), and such other matters as any Lender, through the Administrative Agent, may reasonably request, and (iv) such other certificates and documents as the Administrative Agent may reasonably request, all of the foregoing to be satisfactory in form and substance to the Administrative Agent. Upon execution and delivery of the Additional Lender Supplement, acceptance by the Administrative Agent and recording in the Register, from and after the effective date specified in such Additional Lender Supplement, such Additional Lender shall be a party hereto and shall, to the extent of the Commitment specified in such Additional Lender Supplement, have the rights and obligations of a Lender hereunder. (c) If, at the time an Additional Lender is to become party to this Agreement, the continuing Lenders have any outstanding Contract Advances, such Additional Lender shall offer to purchase from each continuing Lender, effective as of the date such Additional Lender becomes party to this Agreement, a portion of each continuing Lender's outstanding Contract Advances, in such amounts as will have the result that, immediately after giving effect to such Additional Lender becoming party to this Agreement and to such purchases, each Lender (including the Additional Lender) shall share in the outstanding Contract Advances in the same proportion as their respective Commitments. The Additional Lender shall offer in writing to purchase the requisite portion of each continuing Lender's outstanding Contract Advances, at a price equal to the outstanding principal amount thereof together with accrued and unpaid interest thereon to the date of purchase, and a continuing Lender shall not unreasonably decline to accept such offer. Each such purchase shall be made in accordance with Section 8.07 (with the related Assignment and Acceptance modified, mutatis mutandis, to reflect that such purchase is not a purchase of any portion of the Commitment of the continuing Lender). Such purchases shall not be subject to the provisions of clause (ii) of Section 8.07(a), and the Borrower shall be responsible for all amounts payable to the Administrative Agent pursuant to clause (iv) of Section 8.07(a). The Borrower shall pay to each continuing Lender on demand any amount that would be payable to such continuing Lender pursuant to Section 8.04(b) (which for this purpose shall be applied as if such assignment were a prepayment of the Contract Advances assigned by such continuing Lender), and shall reimburse each continuing Lender on demand for all reasonable fees and expenses (including reasonable fees and expenses of counsel) incurred by it in connection with such assignment. 24 ARTICLE III CONDITIONS OF LENDING SECTION 3.01. Conditions Precedent to Initial Advances. The obligation of each Lender to make its initial Advance is subject to the satisfaction, prior to or concurrently with, the making of such initial Advance, of each of the following conditions precedent: (a) Documents and Other Agreements. The Administrative Agent shall have received on or before the day of the initial Borrowing the following, each dated the same date, in form and substance satisfactory to the Administrative Agent and (except for the Notes) with one copy for each Lender: (i) The Contract Notes payable to the order of each of the Lenders, respectively; (ii) Certified copies of the resolutions of the Board of Directors of the Borrower approving the transactions contemplated by this Agreement and the Notes, and of all documents evidencing other necessary corporate action with respect to this Agreement and the Notes; (iii) A certificate of the Secretary or an Assistant Secretary of the Borrower certifying (A) the names and true signatures of the officers of the Borrower authorized to sign this Agreement and the Notes and the other documents to be delivered hereunder; (B) that attached thereto are true and correct copies of the Restated Articles of Incorporation and the By-laws of the Borrower, in each case in effect on such date; and (C) that attached thereto are true and correct copies of all governmental and regulatory authorizations and approvals required for the due execution, delivery and performance of this Agreement and the Notes, including, without limitation, the Securities Certificate filed with the PPUC by the Borrower (the "Securities Certificate") and the Order of Registration issued by the PPUC registering the Securities Certificate (the "Order of Registration"); (iv) Copies of the financial statements referred to in Section 4.01(e); (v) A certificate signed by either the chief financial officer, principal accounting officer or treasurer of the Borrower stating that (A) the representations and warranties contained in Section 4.01 are correct on and as of the date of such certificate as though made on and as of such date and (B) no event has occurred and is continuing on the date of such certificate that constitutes an Event of Default or would constitute an Event of Default but for the requirement that notice be given or time elapse or both; (vi) A favorable opinion of Ballard Spahr Andrews & Ingersoll, special counsel for the Borrower, substantially in the form of Exhibit D hereto; and (vii) A favorable opinion of Reed Smith Shaw & McClay LLP, counsel for the Documentation Agent, substantially in the form of Exhibit E hereto. (b) Termination of Prior Credit Facility. The Administrative Agent shall have received evidence of (i) the payment in full of all obligations of the Borrower under the $400,000,000 Credit Agreement, dated as of June 26, 1995, among the Borrower, the banks named therein, Citibank, N.A., as administrative agent, and The First National Bank of Chicago, as documentation agent, and (ii) the termination of the "Commitments" under such agreement. 25 SECTION 3.02. Conditions Precedent to Certain Contract Borrowings. The obligation of each Lender to make a Contract Advance on the occasion of each Contract Borrowing (including the initial Contract Borrowing) that would increase the aggregate amount of Contract Advances outstanding shall be subject to the further conditions precedent that on the date of such Contract Borrowing the following statements shall be true, and each of the giving of the applicable Notice of a Contract Borrowing and the acceptance by the Borrower of the proceeds of such Contract Borrowing shall constitute a representation and warranty by the Borrower that on the date of such Contract Borrowing such statements are true: (A) The representations and warranties contained in Section 4.01 are correct on and as of the date of such Borrowing, before and after giving effect to such Borrowing and to the application of the proceeds therefrom, as though made on and as of such date; and (B) No event has occurred and is continuing, or would result from such Borrowing or from the application of the proceeds therefrom, that constitutes an Event of Default or would constitute an Event of Default but for the requirement that notice be given or time elapse or both (it being understood for clarification that (i) without limiting the foregoing, it is a condition of this clause (B) that the Borrower shall be in compliance with Section 5.01(a)(iv), Section 5.02(a) and Section 5.02(c) upon giving effect to such Borrowing and (ii) the conditions of this clause (B) shall apply whether or not the respective Commitments of the Lenders have been terminated pursuant to Section 6.01). SECTION 3.03. Conditions Precedent to Each Auction Borrowing. The obligation of each Lender that is to make an Auction Advance on the occasion of an Auction Borrowing (including the initial Auction Borrowing) to make such Auction Advance as part of such Auction Borrowing is subject to the conditions precedent that (i) the Administrative Agent shall have received the written confirmatory Notice of an Auction Borrowing with respect thereto, (ii) on or before the date of such Auction Borrowing, but prior to such Auction Borrowing, the Administrative Agent shall have received an Auction Note payable to the order of such Lender for each of the Auction Advances to be made by such Lender as part of such Auction Borrowing, in a principal amount equal to the principal amount of the Auction Advance to be evidenced thereby and otherwise on such terms as were agreed to for such Auction Advance in accordance with Section 2.03, and (iii) except as otherwise waived in accordance with Section 8.01, on the date of such Auction Borrowing the following statements shall be true, and each of the giving of the applicable Notice of an Auction Borrowing and the acceptance by the Borrower of the proceeds of such Auction Borrowing shall constitute a representation and warranty by the Borrower that on the date of such Auction Borrowing such statements are true: (A) The representations and warranties contained in Section 4.01 are correct on and as of the date of such Borrowing, before and after giving effect to such Borrowing and to the application of the proceeds therefrom, as though made on and as of such date, and (B) No event has occurred and is continuing, or would result from such Borrowing or from the application of the proceeds therefrom, which constitutes an Event of Default or which would constitute an Event of Default but for the requirement that notice be given or time elapse or both (it being understood for clarification that (i) without limiting the foregoing, it is a condition of this clause (B) that the Borrower shall be in compliance with Section 5.01(a)(iv), Section 5.02(a) and Section 5.02(c) upon giving effect to such Borrowing and (ii) the conditions of this clause (B) shall apply whether or not the respective Commitments of the Lenders have been terminated pursuant to Section 6.01). 26 ARTICLE IV REPRESENTATIONS AND WARRANTIES SECTION 4.01. Representations and Warranties of the Borrower. The Borrower represents and warrants as follows: (a) The Borrower is a corporation duly organized. validly existing and in good standing under the laws of the Commonwealth of Pennsylvania. (b) The execution, delivery and performance by the Borrower of this Agreement and the Notes are within the Borrower's corporate powers, have been duly authorized by all necessary corporate action, and do not and will not contravene (i) the Borrower's Restated Articles of Incorporation or By-laws, (ii) applicable law or (iii) any contractual or legal restriction binding on or affecting the Borrower or its properties. (c) No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for the due execution, delivery and performance by the Borrower of this Agreement or the Notes except for the filing of the Securities Certificate with, and the final approval of, and the Order of Registration issued by, the PPUC, which filing has been duly made and which final approval and Order of Registration have been duly obtained; such Order of Registration is in full force and effect and is final; and on and after the date of the initial Borrowing hereunder, the action of the PPUC registering the Securities Certificate shall no longer be subject to appeal. (d) This Agreement is, and the Notes when delivered hereunder will be, legal, valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their respective terms, except as the enforceability thereof may be limited by equitable principles or bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally. (e) The consolidated balance sheet of the Borrower and its Subsidiaries as at December 31, 1996, and the related statements of income and retained earnings and of cash flows of the Borrower and its Subsidiaries for the fiscal year then ended, certified by Coopers & Lybrand, and the unaudited consolidated balance sheet of the Borrower and its Subsidiaries as at June 30, 1997 and the related unaudited statements of income for the six-month period then ended, copies of which have been furnished to each Lender, fairly present in all material respects (subject, in the case of such balance sheets and statements of income for the period ended June 30, 1997, to year-end adjustments) the consolidated financial condition of the Borrower and its Subsidiaries as at such dates and the consolidated results of the operations of the Borrower and its Subsidiaries for the periods ended on such dates, all in accordance with GAAP, and since December 31, 1996, there has been no Material Adverse Change. (f) Except as disclosed in the Borrower's Annual, Quarterly or Current Reports, each as filed with the Securities and Exchange Commission and delivered to the Lenders (including reports filed prior to the date of execution and delivery of this Agreement and reports delivered to the Lenders pursuant to Section 5.01(b)), there is no pending or threatened action, investigation or proceeding affecting the Borrower or any of its Subsidiaries before any court, governmental agency or arbitrator that may reasonably be anticipated to have a Material Adverse Effect. There is no pending or threatened action or proceeding against the Borrower or its Subsidiaries that purports to affect the legality, validity, binding effect or enforceability of this Agreement or any Note. (g) No proceeds of any Advance have been or will be used directly or indirectly in connection with the acquisition of in excess of 5% of any class of equity securities that is registered 27 pursuant to Section 12 of the Exchange Act or any transaction subject to the requirements of Section 13 or 14 of the Exchange Act. (h) The Borrower is not engaged in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation U issued by the Board of Governors of the Federal Reserve System), and no proceeds of any Advance will be used to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying any margin stock. Not more than 25% of the value of the assets of the Borrower and its Principal Subsidiaries is represented by margin stock. (i) The Borrower (i) is exempt from the provisions of the Public Utility Holding Company Act of 1935, as amended, other than Section 9(a)(2) thereof, pursuant to Section 3(a)(2) thereof, and (ii) is not an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (j) During the twelve consecutive month period prior to the date of the execution and delivery of this Agreement and prior to the date of any Borrowing under this Agreement, no steps have been taken to terminate any Plan, and no contribution failure by the Borrower or any member of the Controlled Group has occurred with respect to any Plan. No condition exists or event or transaction has occurred with respect to any Plan (including any Multiemployer Plan) which might result in the incurrence by the Borrower or any member of the Controlled Group of any material liability, fine or penalty. ARTICLE V COVENANTS OF THE BORROWER SECTION 5.01. Affirmative Covenants. So long as any Note or any amount payable by the Borrower hereunder shall remain unpaid or any Lender shall have any Commitment hereunder (except with respect to subsection (a)(iv), which shall be applicable only as of the date hereof and at any time that any Advance is outstanding hereunder), the Borrower will, and, in the case of Section 5.01(a), will cause its Principal Subsidiaries to, unless the Majority Lenders shall otherwise consent in writing: (a) Keep Books; Corporate Existence; Maintenance of Properties; Compliance with Laws; Insurance; Taxes. (i) keep proper books of record and account, all in accordance with generally accepted accounting principles; (ii) subject to Section 5.02(b), preserve and keep in full force and effect its existence; (iii) maintain and preserve all of its properties (except such properties the failure of which to maintain or preserve would not have, individually or in the aggregate, a Material Adverse Effect) which are used or useful in the conduct of its business in good working order and condition, ordinary wear and tear excepted; (iv) comply in all material respects with the requirements of all applicable laws, rules, regulations and orders (including those of any governmental authority and including with respect to environmental matters) to the extent the failure to so comply, individually or in the aggregate, would have either a Material Adverse Effect or a material adverse effect on the ability of the Borrower to perform its obligations under this Agreement and the Notes; 28 (v) maintain insurance with responsible and reputable insurance companies or associations, or self-insure, as the case may be, in each case in such amounts and covering such contingencies, casualties and risks as is customarily carried by or self-insured against by companies engaged in similar businesses and owning similar properties in the same general areas in which the Borrower and its Principal Subsidiaries operate; (vi) at any reasonable time and from time to time, pursuant to prior notice delivered to the Borrower, permit any Lender, or any agents or representatives of any thereof, to examine and, at such Lender's expense, make copies of, and abstracts from the records and books of account of, and visit the properties of, the Borrower and any of its Principal Subsidiaries and to discuss the affairs, finances and accounts of the Borrower and any of its Subsidiaries with any of their respective officers; provided, that any non-public information (which has been identified as such by the Borrower) obtained by any Lender, or any of their respective agents or representatives pursuant to this subsection (vi) shall be treated confidentially by such Person; provided, further, that such Person may disclose such information to any other party to this Agreement, its examiners, affiliates, outside auditors, counsel or other professional advisors in connection with the Agreement or if otherwise required to do so by law or regulatory process; and (vii) use the proceeds of the Advances for general corporate purposes (including, without limitation, the refinancing of its commercial paper, the repayment of outstanding Advances, and the making of acquisitions) but in no event for any purpose which would be contrary to clause (g) or clause (h) of Section 4.01. (b) Reporting Requirements. Furnish to the Lenders: (i) as soon as possible, and in any event within 5 Business Days after the occurrence of each Event of Default or each event which, with the giving of notice or lapse of time, or both, would constitute an Event of Default, continuing on the date of such statement, a statement of an authorized officer of the Borrower setting forth details of such Event of Default or event and the action which the Borrower proposes to take with respect thereto; (ii) as soon as available and in any event within 60 days after the end of each of the first three quarters of each fiscal year of the Borrower, a copy of the Borrower's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission with respect to such quarter, together with a certificate of an authorized officer of the Borrower stating that no Event of Default, or event which, with notice or lapse of time or both, would constitute an Event of Default, has occurred and is continuing or, if any Event of Default or such event has occurred and is continuing, a statement as to the nature thereof and the action which the Borrower proposes to take with respect thereto; (iii) as soon as available and in any event within 105 days after the end of each fiscal year of the Borrower, a copy of the Borrower's Annual Report on Form 10-K filed with the Securities and Exchange Commission with respect to such fiscal year, together with a certificate of an authorized officer of the Borrower stating that no Event of Default, or event which, with notice of lapse of time or both, would constitute an Event of Default, has occurred and is continuing or, if any Event of Default or such event has occurred and is continuing, a statement as to the nature thereof and the action which the Borrower proposes to take with respect thereto; 29 (iv) concurrently with the delivery of the annual and quarterly reports referred to in Sections 5.01(b)(ii) and 5.01(b)(iii), a compliance certificate in substantially the form set forth in Exhibit F, duly completed and signed by the Chief Financial Officer, Treasurer or an Assistant Treasurer of the Borrower; (v) except as otherwise provided in subsections (ii) and (iii) above, promptly after the sending or filing thereof, copies of all reports that the Borrower sends to any of its security holders, and copies of all Reports on Form 10-K, 10-Q or 8-K, and registration statements and prospectuses that the Borrower or any of its Subsidiaries files with the Securities and Exchange Commission or any national securities exchange (except to the extent that any such registration statement or prospectus relates solely to the issuance of securities pursuant to employee or dividend reinvestment plans of the Borrower or such Subsidiary); (vi) promptly upon becoming aware of the institution of any steps by the Borrower or any other Person to terminate any Plan, or the failure to make a required contribution to any Plan if such failure is sufficient to give rise to a lien under section 302(f) of ERISA, or the taking of any action with respect to a Plan which could result in the requirement that the Borrower furnish a bond or other security to the PBGC or such Plan, or the occurrence of any event with respect to any Plan, which could result in the incurrence by the Borrower or any member of the Controlled Group of any material liability, fine or penalty; and (vii) such other information respecting the condition, operations, business or prospects, financial or otherwise, of the Borrower or any of its Subsidiaries as any Lender, through the Administrative Agent, may from time to time reasonably request. SECTION 5.02. Negative Covenants. So long as any Note or any amount payable by the Borrower hereunder shall remain unpaid or any Lender shall have any Commitment hereunder (except with respect to subsection (a), which shall be applicable only as of the date hereof and at any time any Advance is outstanding hereunder), the Borrower will not, without the written consent of the Majority Lenders: (a) Limitation on Liens. Create, incur, assume or suffer to exist, or permit any of its Principal Subsidiaries to create, incur, assume or suffer to exist, any Lien on its respective property, revenues or assets, whether now owned or hereafter acquired except (i) Liens upon or in any property acquired by the Borrower or any of its Principal Subsidiaries in the ordinary course of business to secure the purchase price of such property or to secure any obligation incurred solely for the purpose of financing the acquisition of such property, (ii) Liens existing on such property at the time of its acquisition (other than any such Lien created in contemplation of such acquisition unless permitted by the preceding clause (i)), (iii) Liens granted under the Mortgage and "excepted encumbrances" as defined in the Mortgage, (iv) Liens granted in connection with any financing arrangement for the purchase of nuclear fuel or the financing of pollution control facilities, limited to the fuel or facilities so purchased or acquired, (v) Liens arising in connection with sales or transfers of, or financing secured by, accounts receivable or related contracts, (vi) Liens securing the Borrower's notes collateralized solely by mortgage bonds of the Borrower issued under the terms of the Mortgage, (vii) Liens arising in connection with sale and leaseback transactions, but only to the extent (x) the proceeds received by the Borrower or such Principal Subsidiary from such sale shall immediately be applied to retire mortgage bonds of the Borrower issued under the terms of the Mortgage, or (y) the aggregate purchase price of assets sold pursuant to such sale and leaseback transactions where such proceeds are not so applied shall not exceed $1,000,000,000, (viii) Liens granted by a Special Purpose Subsidiary to secure Nonrecourse Transition Bond Debt of such Special Purpose Subsidiary, and (ix) Liens, other than those described in clauses (i) through (viii) of this subsection granted by the Borrower or any of its Principal Subsidiaries in 30 the ordinary course of business securing Debt of the Borrower and its Principal Subsidiaries in an amount not to exceed $50,000,000 in the aggregate at any one time outstanding. (b) Mergers and Consolidations; Disposition of Assets. Merge with or into or consolidate with or into, or sell, assign, lease or otherwise dispose of (whether in one transaction or in a series of transactions) all or substantially all of its assets (whether now owned or hereafter acquired) to any Person or permit any Principal Subsidiary to do so, except that (i) the Borrower or any Principal Subsidiary may merge with or into or consolidate with or transfer assets to any other Principal Subsidiary, (ii) any Principal Subsidiary may merge with or into or consolidate with or transfer assets to the Borrower and (iii) the Borrower may merge with or into or consolidate with or transfer assets to any other Person; provided in each case, immediately thereafter in giving effect thereto, no Event of Default or event that would, with the giving of notice or the passage of time or both constitute an Event of Default shall have occurred and be continuing and (A) in the case of any such merger, consolidation or transfer of assets to which the Borrower is a party, either (x) the Borrower shall be the surviving corporation or (y) the surviving corporation shall be an Eligible Successor and shall have assumed all of the obligations of the Borrower under this Agreement and the Notes pursuant to a written instrument in form and substance satisfactory to the Administrative Agent and (B) subject to clause (A) above, in the case of any such merger to which a Principal Subsidiary is a party, a Principal Subsidiary shall be the surviving corporation. (c) Financial Covenant. Permit Consolidated Adjusted Total Debt to exceed 65% of Consolidated Adjusted Total Capitalization at any time. (d) Continuation of Businesses. (i) Generation Business. (A) Cease to own (through the Borrower or wholly-owned Subsidiaries) the business of generating electricity, or (B) reduce the net installed electric generating capacity (summer rating) of the electricity generation business owned by the Borrower and its wholly-owned Subsidiaries taken as a whole to less than 7821 Megawatts. (ii) Distribution, Transmission and Gas Businesses. Cease to own (directly by the Borrower, and not through Subsidiaries) the business of distributing electricity to end-users, the business of transmitting electricity, or the businesses of transmitting and distributing natural gas, each substantially as conducted by the Borrower as of the date of this Agreement (and the Borrower warrants that as of the date of this Agreement substantially all of such businesses conducted by the Borrower on a consolidated basis, and the assets relating thereto, are operated and owned by the Borrower directly and not through Subsidiaries). ARTICLE VI EVENTS OF DEFAULT SECTION 6.01. Events of Default. If any of the following events ("Events of Default") shall occur and be continuing: (a) The Borrower shall fail to pay any principal of any Advance when the same becomes due and payable, or interest thereon or any other amount payable under this Agreement or any of the Notes within three Business Days after the same becomes due and payable; or 31 (b) Any representation or warranty made by the Borrower herein or by the Borrower (or any of its officers) pursuant to the terms of this Agreement shall prove to have been incorrect or misleading in any material respect when made; or (c) The Borrower shall fail to perform or observe (i) any term, covenant or agreement contained in Section 5.02, Section 5.01(a)(vii) or Section 5.01(b)(i), or (ii) any other term, covenant or agreement contained in this Agreement on its part to be performed or observed if the failure to perform or observe such other term, covenant or agreement shall remain unremedied for 30 days after written notice thereof shall have been given to the Borrower by the Administrative Agent (which notice shall be given by the Administrative Agent at the written request of any Lender); or (d) The Borrower or any Principal Subsidiary shall fail to pay any principal of or premium or interest on any Debt that is outstanding in a principal amount in excess of $50,000,000 in the aggregate (but excluding Debt evidenced by the Notes and Nonrecourse Transition Bond Debt) of the Borrower or such Principal Subsidiary (as the case may be) when the same becomes due and payable (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise), and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such Debt; or any other event shall occur or condition shall exist under any agreement or instrument relating to any such Debt and shall continue after the applicable grace period, if any, specified in such agreement or instrument, if the effect of such event or condition is to accelerate, or to permit the acceleration of, the maturity of such Debt; or any such Debt shall be declared to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment), prior to the stated maturity thereof, other than any acceleration of any Debt secured by equipment leases or fuel leases of the Borrower or a Principal Subsidiary as a result of the occurrence of any event requiring a prepayment (whether or not characterized as such) thereunder, which prepayment will not result in a Material Adverse Change; or (e) The Borrower or any Principal Subsidiary (other than a Special Purpose Subsidiary) shall generally not pay its debts as such debts become due, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against the Borrower or any Principal Subsidiary (other than a Special Purpose Subsidiary) seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, custodian or other similar official for it or for any substantial part of its property and, in the case of any such proceeding instituted against it (but not instituted by it), either such proceeding shall remain undismissed or unstayed for a period of 60 days, or any of the actions sought in such proceeding (including, without limitation, the entry of an order for relief against, or the appointment of a receiver, trustee, custodian or other similar official for, it or for any substantial part of its property,) shall occur; or the Borrower or any Principal Subsidiary (other than a Special Purpose Subsidiary) shall take any corporate action to authorize or to consent to any of the actions set forth above in this subsection (e); or (f) One or more judgments or orders for the payment of money in an aggregate amount exceeding $50,000,000 (excluding any such judgments or orders which are fully covered by insurance, subject to any customary deductible, and under which the applicable insurance carrier has acknowledged such full coverage in writing) shall be rendered against the Borrower or any Principal Subsidiary and either (i) enforcement proceedings shall have been commenced by any creditor upon such judgment or order or (ii) there shall be any period of 30 consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; or (g) (i) any Reportable Event that the Majority Lenders determine in good faith might constitute grounds for the termination of any Plan or for the appointment by the appropriate United 32 States District Court of a trustee to administer a Plan shall have occurred and be continuing 30 days after written notice to such effect shall have been given to the Borrower by the Administrative Agent or (ii) any Plan shall be terminated, or (iii) a Trustee shall be appointed by an appropriate United States District Court to administer any Plan or (iv) the PBGC shall institute proceedings to terminate any Plan or to appoint a trustee to administer any Plan; provided, however that on the date of any event described in clauses (i) through (iv) above the Unfunded Liabilities of such Plan exceed $20,000,000; or (h) any "Event of Default" shall occur under the 364-Day Credit Agreement; then, and in any such event, the Administrative Agent (i) shall at the request, or may with the consent, of the Majority Lenders, by notice to the Borrower, declare the respective Commitments of the Lenders to be terminated, whereupon the same shall forthwith terminate, and (ii) shall at the request, or may with the consent, of the Majority Lenders, by notice to the Borrower, declare the principal amount outstanding under the Notes, all interest thereon and all other amounts payable under this Agreement to be forthwith due and payable, whereupon the principal amount outstanding under the Notes, all such interest and all such amounts shall become and be forthwith due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by the Borrower; provided, however, that in the event of an actual or deemed entry of an order for relief with respect to the Borrower or any Principal Subsidiary under the Federal Bankruptcy Code, (A) the obligation of each Lender to make Advances shall automatically be terminated and (B) the principal amount outstanding under the Notes, all such interest and all such amounts shall automatically become and be due and payable, without presentment, demand, protest or any notice of any kind, all of which are hereby expressly waived by the Borrower. ARTICLE VII THE AGENTS SECTION 7.01. Authorization and Action. Each Lender hereby appoints and authorizes the Administrative Agent to take such action as administrative agent on its behalf and to exercise such powers under this Agreement as are delegated to the Administrative Agent by the terms hereof, together with such powers as are reasonably incidental thereto. Each Lender hereby appoints and authorizes the Documentation Agent to prepare this Agreement and the Contract Notes on behalf of the Lenders, provided, that it is hereby understood and agreed that the Documentation Agent shall not have any responsibilities or obligations hereunder subsequent to the execution and delivery of this Agreement by and among the Borrower, the Banks, and the Agents. As to any matters not expressly provided for by this Agreement (including, without limitation, enforcement or collection of the Notes), the Administrative Agent shall not be required to exercise any discretion or take any action, but shall be required to act or to refrain from acting (and shall be fully protected in so acting or refraining from acting) upon the instructions of the Majority Lenders, and such instructions shall be binding upon all Lenders and all holders of Notes; provided, however, that the Administrative Agent shall not be required to take any action which exposes the Administrative Agent to personal liability or which is contrary to this Agreement or applicable law. The Administrative Agent agrees to give to each Lender prompt notice of each notice given to it by the Borrower pursuant to the terms of this Agreement. SECTION 7.02. Agents' Reliance, Etc. Neither the Administrative Agent nor the Documentation Agent nor any of their respective directors, officers, agents or employees shall be liable for any action taken or omitted to be taken by it or them under or in connection with this Agreement, except for its or their respective own gross negligence or willful misconduct. Without limitation of the generality of the foregoing: (i) the Administrative Agent may treat the payee of any Note as the holder thereof until the Administrative Agent receives and accepts an Assignment and Acceptance entered into by the Lender which is the payee of such Note, as assignor, and an Eligible Assignee, as assignee, as provided in Section 8.07; (ii) the Administrative Agent and the Documentation Agent each may consult 33 with legal counsel (including counsel for the Borrower), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts; (iii) neither the Administrative Agent nor the Documentation Agent makes any warranty or representation to any Lender and shall not be responsible to any Lender for any statements, warranties or representations (whether written or oral) made in or in connection with this Agreement; (iv) neither the Administrative Agent nor the Documentation Agent shall have any duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of this Agreement on the part of the Borrower or to inspect the property (including the books and records) of the Borrower; (v) neither the Administrative Agent nor the Documentation Agent shall be responsible to any Lender for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other instrument or document furnished pursuant hereto; and (vi) neither the Administrative Agent nor the Documentation Agent shall incur any liability under or in respect of this Agreement by acting upon any notice, consent, certificate or other instrument or writing (which may be by telecopier, telegram, cable or telex) believed by it to be genuine and signed or sent by the proper party or parties. SECTION 7.03. Agents and Affiliates. With respect to their respective Commitments, their respective Advances and their respective Notes, each of Mellon and First Chicago shall have the same rights and powers under this Agreement as any other Lender and may exercise the same as though it were not an Agent; and the term "Lender" or "Lenders" shall, unless otherwise expressly indicated, include Mellon and First Chicago in their respective individual capacities. Mellon, First Chicago and their respective affiliates may accept deposits from, lend money to, act as trustee under indentures of, and generally engage in any kind of business with, the Borrower, any of its subsidiaries and any Person who may do business with or own securities of the Borrower or any such subsidiary, all as if First Chicago was not the Administrative Agent and Mellon was not the Documentation Agent, as the case may be, and without any duty to account therefor to the Lenders. SECTION 7.04. Lender Credit Decision. Each Lender acknowledges that it has, independently and without reliance upon the Administrative Agent, the Documentation Agent or any other Lender and based on the financial statements referred to in Section 4.01(e) and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon the Administrative Agent or the Documentation Agent or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement. SECTION 7.05. Indemnification. The Lenders agree to indemnify the Administrative Agent, the Documentation Agent and the Syndication Agents (to the extent not reimbursed by the Borrower), ratably according to the respective principal amounts of the Contract Notes then held by each of the Lenders (or if no Contract Notes are at the time outstanding, ratably according to the respective amounts of their Commitments), from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by, or asserted against any such Agent in any way relating to or arising out of this Agreement or any action taken or omitted by any such Agent under this Agreement, provided that no Lender shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from such Agent's gross negligence or willful misconduct. Without limitation of the foregoing, each Lender agrees to reimburse each such Agent promptly upon demand for its ratable share of any out-of-pocket expenses (including reasonable counsel fees) incurred by such Agent in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement, to the extent that such expenses are reimbursable by the Borrower but for which such Agent is not reimbursed by the Borrower. 34 SECTION 7.06. Successor Administrative Agent. The Administrative Agent may resign at any time by giving written notice thereof to the Lenders and the Borrower and may be removed at any time with or without cause by the Majority Lenders. Upon any such resignation or removal, the Majority Lenders shall have the right to appoint a successor Administrative Agent. If no successor Administrative Agent shall have been so appointed by the Majority Lenders, and shall have accepted such appointment, within 30 days after the retiring Administrative Agent's giving of notice of resignation or the Majority Lenders' removal of the retiring Administrative Agent, then the retiring Administrative Agent may, on behalf of the Lenders, appoint a successor Administrative Agent, which shall be a commercial bank described in clause (i) or (ii) of the definition of "Eligible Assignee" and having a combined capital and surplus of at least $150,000,000. Upon the acceptance of any appointment as Administrative Agent hereunder by a successor Administrative Agent, such successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations under this Agreement. After any retiring Administrative Agent's resignation or removal hereunder as Administrative Agent, the provisions of this Article VII shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent under this Agreement. Notwithstanding the foregoing, if no Event of Default, and no event that with the giving of notice or the passage of time, or both, would constitute an Event of Default, shall have occurred and be continuing, then no successor Administrative Agent shall be appointed under this Section 7.06 without the prior written consent of the Borrower, which consent shall not be unreasonably withheld or delayed. SECTION 7.07. Syndication Agents, Co-Agents, Lead Managers and Arrangers. The titles "Syndication Agent," "Co-Agent," "Lead Manager" and "Arranger" are purely honorific, and the Syndication Agents, Co-Agents, Lead Managers and Arrangers shall have no duties or responsibilities in such capacities. ARTICLE VIII MISCELLANEOUS SECTION 8.01. Amendments, Etc. No amendment or waiver of any provision of this Agreement or the Contract Notes, nor consent to any departure by the Borrower therefrom, shall in any event be effective unless the same shall be in writing and signed by the Majority Lenders, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that no amendment, waiver or consent shall, unless in writing and signed by all the Lenders (other than any Lender that is the Borrower or an Affiliate of the Borrower), do any of the following: (a) waive any of the conditions specified in Section 3.01 or 3.02, (b) increase the Commitments of the Lenders or subject the Lenders to any additional obligations, (c) reduce the principal of, or interest on, the Contract Notes or any fees or other amounts payable hereunder, (d) postpone any date fixed for any payment of principal of, or interest on, the Contract Notes or any fees or other amounts payable hereunder, (e) change the percentage of the Commitments or of the aggregate unpaid principal amount of the Contract Notes, or the number of Lenders, that shall be required for the Lenders or any of them to take any action hereunder, or (f) amend this Section 8.01; provided, further, that in connection with any Auction Borrowing, any waiver of the conditions specified in clause (iii) of Section 3.03 relating to the representation set forth in paragraph (A) of Section 3.03 shall be effective if in writing and signed by each Lender that is to make an Auction Advance in connection with such Auction Borrowing; and provided, further, that no amendment, waiver or consent shall, unless in writing and signed by the Administrative Agent or the Documentation Agent (as the case may be), in addition to the Lenders required above to take such action, affect the rights or duties of the Administrative Agent or the Documentation Agent (as the case may be) under this Agreement or any Note. SECTION 8.02. Notices, Etc. All notices and other communications provided for hereunder shall be in writing (including telecopier, telegraphic, telex or cable communication) and 35 mailed, telecopied, telegraphed, telexed, cabled or delivered, if to the Borrower, at its address at 2301 Market Street, Philadelphia, Pennsylvania 19101, Attention: Vice President-Finance and Treasurer, S21-1, Telecopy: (215) 841-5743; if to any Bank, at its Domestic Lending Office specified opposite its name on Schedule I hereto; if to any other Lender, at its Domestic Lending Office specified in the Assignment and Acceptance or Additional Lender Supplement pursuant to which it became a Lender; and if to the Administrative Agent, at its address at One First National Plaza, Mail Suite 0634, 1FPN-10, Chicago, Illinois 60670, Attention: Ms. Gwendolyn Watson, Telecopy: (312) 732-4840 or, as to each party, at such other address as shall be designated by such party in a written notice to the other parties. All such notices and communications shall, when mailed, telecopied, telegraphed, telexed or cabled, be effective when deposited in the mails, telecopied, delivered to the telegraph company, confirmed by telex answerback or delivered to the cable company, respectively, except that notices and communications to the Administrative Agent pursuant to Article II or VII shall not be effective until received by the Administrative Agent. SECTION 8.03. No Waiver; Remedies. No failure on the part of any Lender or the Administrative Agent to exercise, and no delay in exercising, any right hereunder or under any Note shall operate as a waiver thereof; nor shall any single or partial exercise of any such right preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. SECTION 8.04. Costs and Expenses; Indemnification. (a) The Borrower agrees to pay on demand all costs and expenses incurred by the Administrative Agent, the Documentation Agent, the Syndication Agents and the Arrangers in connection with the preparation, execution, delivery, administration, syndication, modification and amendment of this Agreement, the Notes and the other documents to be delivered hereunder, including, without limitation, the reasonable fees, internal charges and out-of-pocket expenses of counsel (including, without limitation, in-house counsel) for such Agents with respect thereto and with respect to advising the such Agents as to their respective rights and responsibilities under this Agreement. The Borrower further agrees to pay on demand all costs and expenses, if any (including, without limitation, counsel fees and expenses of outside counsel and of internal counsel), incurred by the Administrative Agent, the Documentation Agent and any Lender in connection with the collection and enforcement (whether through negotiations, legal proceedings or otherwise) of this Agreement, the Notes and the other documents to be delivered hereunder, including, without limitation, reasonable counsel fees and expenses in connection with the enforcement of rights under this Section 8.04(a). (b) If any payment of principal of, or Conversion of, any Adjusted CD Rate Advance or Eurodollar Rate Advance is made other than on the last day of the Interest Period for such Contract Advance, as a result of a payment or Conversion pursuant to Section 2.10 or 2.13 or acceleration of the maturity of the Notes pursuant to Section 6.01 or for any other reason, the Borrower shall, upon demand by any Lender (with a copy of such demand to the Administrative Agent), pay to the Administrative Agent for the account of such Lender any amounts required to compensate such Lender for any additional losses, costs or expenses which it may reasonably incur as a result of such payment or Conversion, including, without limitation, any loss, cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by any Lender to fund or maintain such Contract Advance. (c) The Borrower hereby agrees to indemnify and hold each Lender, each Agent and each of their respective Affiliates, officers, directors and employees (each, an "Indemnified Person") harmless from and against any and all claims, damages, losses, liabilities, costs or expenses (including reasonable attorney's fees and expenses, whether or not such Indemnified Person is named as a party to any proceeding or is otherwise subjected to judicial or legal process arising from any such proceeding) that any of them may pay or incur arising out of or relating to this Agreement, the Notes or the transactions contemplated thereby, or the use by the Borrower or any of its subsidiaries of the proceeds of any Advance, provided that the Borrower shall not be liable for any portion of such claims, damages, 36 losses, liabilities, costs or expenses resulting from such Indemnified Person's gross negligence or willful misconduct. The Borrower's obligations under this Section 8.04(c) shall survive the repayment of all amounts owing to the Lenders and the Administrative Agent under this Agreement and the Notes and the termination of the Commitments. If and to the extent that the obligations of the Borrower under this Section 8.04(c) are unenforceable for any reason, the Borrower agrees to make the maximum contribution to the payment and satisfaction thereof which is permissible under applicable law. SECTION 8.05. Right of Set-off. Upon (i) the occurrence and during the continuance of any Event of Default and (ii) the making of the request or the granting of the consent specified by Section 6.01 to authorize the Administrative Agent to declare the Notes due and payable pursuant to the provisions of Section 6.01, each Lender is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Lender to or for the credit or the account of the Borrower against any and all of the obligations of the Borrower now or hereafter existing under this Agreement and any Note held by such Lender, whether or not such Lender shall have made any demand under this Agreement or such Note and although such obligations may be unmatured. Each Lender agrees promptly to notify the Borrower after any such set-off and application made by such Lender, provided that the failure to give such notice shall not affect the validity of such set-off and application. The rights of each Lender under this Section 8.05 are in addition to other rights and remedies (including, without limitation, other rights of set-off) that such Lender may have. SECTION 8.06. Binding Effect. This Agreement shall become effective when it shall have been executed by the Borrower and the Agents and when the Administrative Agent shall have been notified by each Bank that such Bank has executed it and thereafter shall be binding upon and inure to the benefit of the Borrower, the Agents and each Lender and their respective successors and assigns, except that the Borrower shall not have the right to assign its rights hereunder or any interest herein without the prior written consent of the Lenders. SECTION 8.07. Assignments and Participations. (a) Each Lender may, with the prior written consent of the Borrower and the Administrative Agent (neither of which consents shall be unreasonably withheld or delayed), and if demanded by the Borrower pursuant to subsection (h) hereof shall to the extent required by such subsection (h), assign to one or more banks or other entities all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Commitment, the Contract Advances owing to it and the Contract Note or Notes held by it); provided, however, that (i) each such assignment shall be of a constant, and not a varying, percentage of all of the assigning Lender's rights and obligations under this Agreement (other than any Auction Advances or Auction Notes), (ii) the amount of the Commitment of the assigning Lender being assigned pursuant to each such assignment (determined as of the date of the Assignment and Acceptance with respect to such assignment) shall in no event be less than $5,000,000 or, if less, the entire amount of such Lender's Commitment, and shall be an integral multiple of $1,000,000 or such Lender's entire Commitment, (iii) each such assignment shall be to an Eligible Assignee, and (iv) the parties to each such assignment shall execute and deliver to the Administrative Agent, for its acceptance and recording in the Register, an Assignment and Acceptance, together with any Contract Note or Notes subject to such assignment and a processing and recordation fee of $3,500 (which shall be payable by one or more of the parties to the Assignment and Acceptance, and not by the Borrower, and shall not be payable if the assignee is a Bank, any Affiliate of any Bank or the Federal Reserve Bank). Upon such execution, delivery, acceptance and recording, from and after the effective date specified in each Assignment and Acceptance, (x) the assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, have the rights and obligations of a Lender hereunder and (y) the Lender assignor thereunder shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights and be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto). 37 Notwithstanding anything contained in this Section 8.07(a) to the contrary, (A) the consent of the Borrower and the Administrative Agent shall not be required with respect to any assignment by any Lender to an Affiliate of such Lender or to another Lender and (B) any Lender may at any time, without the consent of the Borrower or the Administrative Agent, and without any requirement to have an Assignment and Acceptance executed, assign all or any part of its rights under this Agreement and its Notes to a Federal Reserve Bank, provided that such assignment does not release the transferor Lender from any of its obligations hereunder. (b) By executing and delivering an Assignment and Acceptance, the Lender assignor thereunder and the assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (i) other than as provided in such Assignment and Acceptance, such assigning Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other instrument or document furnished pursuant hereto; (ii) such assigning Lender makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrower or the performance or observance by the Borrower of any of its obligations under this Agreement or any other instrument or document furnished pursuant hereto; (iii) such assignee confirms that it has received a copy of this Agreement, together with copies of the financial statements referred to in Section 4.01(e) and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (iv) such assignee will, independently and without reliance upon the Administrative Agent or the Documentation Agent, such assigning Lender or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (v) such assignee confirms that it is an Eligible Assignee; (vi) such assignee appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to the Administrative Agent by the terms hereof, together with such powers as are reasonably incidental thereto; and (vii) such assignee agrees that it will perform in accordance with their terms all of the obligations which by the terms of this Agreement are required to be performed by it as a Lender. (c) The Administrative Agent shall maintain at its address referred to in Section 8.02 a copy of each Assignment and Acceptance and each Additional Lender Supplement delivered to and accepted by it and a register for the recordation of the names and addresses of the Lenders and the Commitment of, and principal amount of the Contract Advances owing to, each Lender from time to time (the "Register"). The entries in the Register shall be conclusive and binding for all purposes, absent manifest error, and the Borrower, the Administrative Agent and the Lenders may treat each Person whose name is recorded in the Register as a Lender hereunder for all purposes of this Agreement. The Register shall be available for inspection by the Borrower or any Lender at any reasonable time and from time to time upon reasonable prior notice. (d) Upon its receipt of an Assignment and Acceptance executed by an assigning Lender and an assignee representing that it is an Eligible Assignee, together with any Contract Note or Notes subject to such assignment, the Administrative Agent shall, if such Assignment and Acceptance has been completed and is in substantially the form of Exhibit C hereto, (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register and (iii) give prompt notice thereof to the Borrower. Within five Business Days after its receipt of such notice, the Borrower, at its own expense, shall execute and deliver to the Administrative Agent in exchange for the surrendered Contract Note or Notes a new Contract Note to the order of such Eligible Assignee in an amount equal to the Commitment assumed by it pursuant to such Assignment and Acceptance and, if the assigning Lender has retained a Commitment hereunder, a new Contract Note to the order of the assigning Lender in an amount equal to the Commitment retained by it hereunder. Such new Contract Note or Notes shall be in an aggregate principal amount equal to the aggregate principal amount of such surrendered Contract Note or Notes, shall be dated the effective date of such Assignment and Acceptance and shall otherwise be in substantially the form of Exhibit A-1 hereto. 38 (e) Each Lender may assign to one or more Eligible Assignees any Auction Note or Notes held by it. (f) Each Lender may sell participations to one or more banks or other entities (each, a "Participant") in or to all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Commitment, the Advances owing to it and the Note or Notes held by it); provided, however, that (i) such Lender's obligations under this Agreement (including, without limitation, its Commitment to the Borrower hereunder) shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) such Lender shall remain the holder of any such Note for all purposes of this Agreement, (iv) the Borrower, the Administrative Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement and (v) such Lender shall retain the sole right to approve, without the consent of any Participant, any amendment, modification or waiver of any provision of this Agreement or the Note or Notes held by such Lender, other than any such amendment, modification or waiver with respect to any Advance or Commitment in which such Participant has an interest that forgives principal, interest or fees or reduces the interest rate or fees payable with respect to any such Advance or Commitment, postpones any date fixed for any regularly scheduled payment of principal of, or interest or fees on, any such Advance or Commitment, releases any guarantor of any such Advance or releases any substantial portion of collateral, if any, securing any such Advance. (g) Any Lender may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 8.07, disclose to the assignee or participant or proposed assignee or participant, any information relating to the Borrower furnished to such Lender by or on behalf of the Borrower; provided that, prior to any such disclosure, the assignee or participant or proposed assignee or participant shall agree to preserve the confidentiality of any confidential information relating to the Borrower received by it from such Lender (subject to customary exceptions regarding regulatory requirements, compliance with legal process and other requirements of law). (h) If (i) any Lender shall make demand for payment under Section 2.12(a), 2.12(b) or 2.15, or (ii) shall deliver any notice to the Administrative Agent pursuant to Section 2.13 resulting in the suspension of certain obligations of the Lenders with respect to Eurodollar Rate Advances or (iii) shall fail to consent to, or shall revoke its consent to, the extension of any Termination Date pursuant to Section 2.17 or (iv) shall fail to consent to, or shall revoke its consent to, any extension of the "Termination Date" (as defined in the 364-Day Credit Agreement) requested by the Borrower pursuant to Section 2.17 of the 364-Day Credit Agreement as originally constituted (or any successor provision of similar import), then (in the case of clause (i)) within 60 days after such demand (if, but only if, such payment demanded under Section 2.12(a), 2.12(b) or 2.15 has been made by the Borrower), or (in the case of clause (ii)) within 60 days after such notice (if such suspension is still in effect), or (in the case of clauses (iii) and (iv)) no later than 10 days prior to the then effective Termination Date, as the case may be, the Borrower may demand that such Lender assign in accordance with this Section 8.07 to one or more Eligible Assignees designated by the Borrower and reasonably acceptable to the Administrative Agent all (but not less than all) of such Lender's Commitment and the Advances owing to it within the next succeeding 30 days (in the case of clause (i) or clause (ii)), or within the next succeeding 5 days (in the case of clauses (iii) and (iv)) . If any such Eligible Assignee designated by the Borrower shall fail to consummate such assignment on terms acceptable to such Lender, or if the Borrower shall fail to designate any such Eligible Assignee for all of such Lender's Commitment or Advances, then such Lender may (but shall not be required to) assign such Commitment and Advances to any other Eligible Assignee in accordance with this Section 8.07 during such period. SECTION 8.08. Governing Law. THIS AGREEMENT AND THE NOTES SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA. 39 SECTION 8.09. Consent to Jurisdiction. THE BORROWER HEREBY IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF THE COURTS OF THE COMMONWEALTH OF PENNSYLVANIA AND ANY UNITED STATES DISTRICT COURT SITTING IN THE COMMONWEALTH OF PENNSYLVANIA IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE NOTES AND THE BORROWER HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT AND IRREVOCABLY WAIVES ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT OR THAT SUCH COURT IS AN INCONVENIENT FORUM. NOTHING HEREIN SHALL LIMIT THE RIGHT OF THE ADMINISTRATIVE AGENT OR ANY LENDER TO BRING PROCEEDINGS AGAINST THE BORROWER IN THE COURTS OF ANY OTHER JURISDICTION. SECTION 8.10. Execution in Counterparts; Integration. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. This Agreement constitutes the entire agreement and understanding among the parties hereto and supersedes all prior and contemporaneous agreements and understandings, oral or written, relating to the subject matter hereof. [Remainder of the page intentionally left blank] 40 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. [SEAL] PECO ENERGY COMPANY /s/Todd D. Cutler By /s/J. B. Mitchell Todd D. Cutler Name: J. B. Mitchell Assistant Secretary Title: Vice President - Finance and Treasurer MELLON BANK, N.A., as Documentation Agent, Arranger and Syndication Agent By /s/Mary Ellen Usher Name: Mary Ellen Usher Title: Vice President THE FIRST NATIONAL BANK OF CHICAGO, as Administrative Agent By /s/Kenneth J. Bauer Name: Kenneth J. Bauer Title: Authorized Agent FIRST CHICAGO CAPITAL MARKETS, INC., as Arranger and Syndication Agent By /s/Kenneth J. Bauer Name: Kenneth J. Bauer Title: Vice President/Senior Banker CITICORP SECURITIES, INC., as Syndication Agent By /s/Anita J. Brickell Name: Anita J. Brickell Title: Vice President This is a signature page to the Revolving Credit Agreement, dated as of October 7, 1997, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Lead Managers, certain Banks specified therein, as Co-Agents, First Chicago Capital Markets, Inc., Mellon Bank, N.A. and CitiCorp Securities, Inc., as Syndication Agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as Arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent. 41 THE BANKS Commitment $37,500,000 THE FIRST NATIONAL BANK OF CHICAGO, as Administrative Agent and as Bank By /s/Kenneth J. Bauer Name: Kenneth J. Bauer Title: Authorized Agent This is a signature page to the Revolving Credit Agreement, dated as of October 7, 1997, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Lead Managers, certain Banks specified therein, as Co-Agents, First Chicago Capital Markets, Inc., Mellon Bank, N.A. and CitiCorp Securities, Inc., as Syndication Agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as Arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent. 42 Commitment $37,500,000 CITIBANK, N.A., as Bank By /s/Anita J. Brickell Name: Anita J. Brickell Title: Attorney-in-Fact This is a signature page to the Revolving Credit Agreement, dated as of October 7, 1997, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Lead Managers, certain Banks specified therein, as Co-Agents, First Chicago Capital Markets, Inc., Mellon Bank, N.A. and CitiCorp Securities, Inc., as Syndication Agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as Arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent. 43 Commitment $37,500,000 MELLON BANK, N.A., as Documentation Agent, as Syndication Agent, as Arranger and as Bank By /s/Mary Ellen Usher Name: Mary Ellen Usher Title: Vice President This is a signature page to the Revolving Credit Agreement, dated as of October 7, 1997, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Lead Managers, certain Banks specified therein, as Co-Agents, First Chicago Capital Markets, Inc., Mellon Bank, N.A. and CitiCorp Securities, Inc., as Syndication Agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as Arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent. 44 Commitment $25,000,000 THE BANK OF NEW YORK, as Co-Agent and as Bank By /s/John N. Watt Name: John N. Watt Title: Vice President This is a signature page to the Revolving Credit Agreement, dated as of October 7, 1997, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Lead Managers, certain Banks specified therein, as Co-Agents, First Chicago Capital Markets, Inc., Mellon Bank, N.A. and CitiCorp Securities, Inc., as Syndication Agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as Arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent. 45 Commitment $25,000,000 THE CHASE MANHATTAN BANK, as Co-Agent and as Bank By /s/Paul V. Farrell Name: Paul V. Farrell Title: Vice President This is a signature page to the Revolving Credit Agreement, dated as of October 7, 1997, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Lead Managers, certain Banks specified therein, as Co-Agents, First Chicago Capital Markets, Inc., Mellon Bank, N.A. and CitiCorp Securities, Inc., as Syndication Agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as Arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent. 46 Commitment $25,000,000 CORESTATES BANK, N.A., as Co-Agent and as Bank By /s/Anthony D. Braxton Name: Anthony D. Braxton Title: Vice President This is a signature page to the Revolving Credit Agreement, dated as of October 7, 1997, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Lead Managers, certain Banks specified therein, as Co-Agents, First Chicago Capital Markets, Inc., Mellon Bank, N.A. and CitiCorp Securities, Inc., as Syndication Agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as Arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent. 47 Commitment $25,000,000 FIRST UNION NATIONAL BANK, as Co-Agent and as Bank By /s/Michael J. Kolosowsky Name: Michael J. Kolosowsky Title: Vice President This is a signature page to the Revolving Credit Agreement, dated as of October 7, 1997, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Lead Managers, certain Banks specified therein, as Co-Agents, First Chicago Capital Markets, Inc., Mellon Bank, N.A. and CitiCorp Securities, Inc., as Syndication Agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as Arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent. 48 Commitment $25,000,000 THE TOKAI BANK, LIMITED, NEW YORK BRANCH, as Co-Agent and as Bank By /s/Kaoru Oda Name: Kaoru Oda Title: Assistant General Manager This is a signature page to the Revolving Credit Agreement, dated as of October 7, 1997, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Lead Managers, certain Banks specified therein, as Co-Agents, First Chicago Capital Markets, Inc., Mellon Bank, N.A. and CitiCorp Securities, Inc., as Syndication Agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as Arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent. 49 Commitment $25,000,000 TORONTO DOMINION (NEW YORK), INC., as Co-Agent and as Bank By /s/Jorge A. Garcia Name: Jorge A. Garcia Title: Vice President This is a signature page to the Revolving Credit Agreement, dated as of October 7, 1997, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Lead Managers, certain Banks specified therein, as Co-Agents, First Chicago Capital Markets, Inc., Mellon Bank, N.A. and CitiCorp Securities, Inc., as Syndication Agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as Arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent. 50 Commitment $25,000,000 UNION BANK OF CALIFORNIA, N.A., as Co-Agent and as Bank By /s/Karyssa M. Britton Name: Karyssa M. Britton Title: Vice President This is a signature page to the Revolving Credit Agreement, dated as of October 7, 1997, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Lead Managers, certain Banks specified therein, as Co-Agents, First Chicago Capital Markets, Inc., Mellon Bank, N.A. and CitiCorp Securities, Inc., as Syndication Agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as Arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent. 51 Commitment $17,500,000 THE FUJI BANK, LIMITED, as Lead Manager and as Bank By /s/Raymond Ventura Name: Raymond Ventura Title: Vice President & Manager This is a signature page to the Revolving Credit Agreement, dated as of October 7, 1997, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Lead Managers, certain Banks specified therein, as Co-Agents, First Chicago Capital Markets, Inc., Mellon Bank, N.A. and CitiCorp Securities, Inc., as Syndication Agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as Arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent. 52 Commitment $17,500,000 THE INDUSTRIAL BANK OF JAPAN TRUST COMPANY, as Lead Manager and as Bank By /s/John V. Veltri Name: John V. Veltri Title: Deputy General Manager This is a signature page to the Revolving Credit Agreement, dated as of October 7, 1997, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Lead Managers, certain Banks specified therein, as Co-Agents, First Chicago Capital Markets, Inc., Mellon Bank, N.A. and CitiCorp Securities, Inc., as Syndication Agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as Arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent. 53 Commitment $17,500,000 MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Lead Manager and as Bank By /s/Philip S. Detjens Name: Philip S. Detjens Title: Vice President This is a signature page to the Revolving Credit Agreement, dated as of October 7, 1997, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Lead Managers, certain Banks specified therein, as Co-Agents, First Chicago Capital Markets, Inc., Mellon Bank, N.A. and CitiCorp Securities, Inc., as Syndication Agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as Arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent. 54 Commitment $17,500,000 SUMMIT BANK, as Lead Manager and as Bank By /s/Bruce A. Gray Name: Bruce A. Gray Title: Vice President, Large Corporate Bank, Summit Bank This is a signature page to the Revolving Credit Agreement, dated as of October 7, 1997, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Lead Managers, certain Banks specified therein, as Co-Agents, First Chicago Capital Markets, Inc., Mellon Bank, N.A. and CitiCorp Securities, Inc., as Syndication Agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as Arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent. 55 Commitment $12,500,000 BANK OF MONTREAL, as Bank By /s/John L. Smith Name: John L. Smith Title: Director This is a signature page to the Revolving Credit Agreement, dated as of October 7, 1997, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Lead Managers, certain Banks specified therein, as Co-Agents, First Chicago Capital Markets, Inc., Mellon Bank, N.A. and CitiCorp Securities, Inc., as Syndication Agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as Arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent. 56 Commitment $12,500,000 BANKERS TRUST COMPANY, as Bank By /s/Marcus M. Tarkington Name: Marcus M. Tarkington Title: Vice President This is a signature page to the Revolving Credit Agreement, dated as of October 7, 1997, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Lead Managers, certain Banks specified therein, as Co-Agents, First Chicago Capital Markets, Inc., Mellon Bank, N.A. and CitiCorp Securities, Inc., as Syndication Agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as Arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent. 57 Commitment $12,500,000 DEUTSCHE BANK AG, NEW YORK BRANCH, as Bank By /s/Gabrielle C. Upton Name: Gabrielle C. Upton Title: Assistant Vice President DEUTSCHE BANK AG, CAYMAN ISLAND BRANCH, as Bank By /s/Joel D. Makowsky Name: Joel D. Makowsky Title: Assistant Vice President This is a signature page to the Revolving Credit Agreement, dated as of October 7, 1997, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Lead Managers, certain Banks specified therein, as Co-Agents, First Chicago Capital Markets, Inc., Mellon Bank, N.A. and CitiCorp Securities, Inc., as Syndication Agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as Arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent. 58 Commitment $12,500,000 THE LONG-TERM CREDIT BANK OF JAPAN, as Bank By /s/Hiroshi Kitada Name: Hiroshi Kitada Title: Deputy General Manager This is a signature page to the Revolving Credit Agreement, dated as of October 7, 1997, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Lead Managers, certain Banks specified therein, as Co-Agents, First Chicago Capital Markets, Inc., Mellon Bank, N.A. and CitiCorp Securities, Inc., as Syndication Agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as Arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent. 59 Commitment $12,500,000 THE TOYO TRUST & BANKING CO., LTD., as Bank By /s/Takashi Mikumo Name: Takashi Mikumo Title: Vice President This is a signature page to the Revolving Credit Agreement, dated as of October 7, 1997, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Lead Managers, certain Banks specified therein, as Co-Agents, First Chicago Capital Markets, Inc., Mellon Bank, N.A. and CitiCorp Securities, Inc., as Syndication Agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as Arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent. 60 Commitment $12,500,000 UNION BANK OF SWITZERLAND, NEW YORK BRANCH, as Bank By /s/Paul R. Morrison Name: Paul R. Morrison Title: Director UNION BANK OF SWITZERLAND, NEW YORK BRANCH, as Bank By /s/Andrew N. Taylor Name: Andrew N. Taylor Title: Assistant Vice President This is a signature page to the Revolving Credit Agreement, dated as of October 7, 1997, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Lead Managers, certain Banks specified therein, as Co-Agents, First Chicago Capital Markets, Inc., Mellon Bank, N.A. and CitiCorp Securities, Inc., as Syndication Agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as Arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent. 61 Commitment $10,000,000 BANK HAPOALIM B.M., as Bank By /s/Carl Kopfinger Name: Carl Kopfinger Title: Vice President By /s/Jonathan Kulka Name: Jonathan Kulka Title: First Vice President & Branch Manager This is a signature page to the Revolving Credit Agreement, dated as of October 7, 1997, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Lead Managers, certain Banks specified therein, as Co-Agents, First Chicago Capital Markets, Inc., Mellon Bank, N.A. and CitiCorp Securities, Inc., as Syndication Agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as Arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent. 62 Commitment $7,500,000 ABU DHABI INTERNATIONAL BANK INC., as Bank By /s/David J. Young Name: David J. Young Title: Assistant Vice President By /s/Nagy S. Kolta Name: Nagy S. Kolta Title: Senior Vice President This is a signature page to the Revolving Credit Agreement, dated as of October 7, 1997, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Lead Managers, certain Banks specified therein, as Co-Agents, First Chicago Capital Markets, Inc., Mellon Bank, N.A. and CitiCorp Securities, Inc., as Syndication Agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as Arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent. 63 SCHEDULE I Revolving Credit Agreement, dated as of October 7, 1997, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Lead Managers, certain Banks specified therein, as Co-Agents, First Chicago Capital Markets, Inc. , Mellon Bank, N.A. and CitiCorp Securities, Inc., as Syndication Agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as Arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent.
Domestic CD Lending Eurodollar Name of Bank Lending Office Office Lending Office Union Bank of Energy Capital Services same same California, N.A. 445 S. Figueroa Street 20th Floor Los Angeles, CA 90071 Attn: Yolande C. Hollis Phone: (213) 236-6199 Fax: (213) 236-4096 Abu Dhabi International Bank Inc. 1020 19th Street, N.W. same same Suite 500 Washington, DC 20036 Attn: Robert Ford Phone: (202) 842-7903 Fax: (202) 842-7955 CoreStates Bank, N.A. 1339 Chestnut Street same same FC 1-8-11-28 Philadelphia, PA 19107 Attn: Mary Lockhart Phone: (215) 786-4313 Fax: (215) 786-7721 Deutsche Bank A.G., New York 31 West 52nd Street same same Branch and/or Cayman Islands New York, NY 10019 Branch Attn: Jo Curcio Phone: (212) 469-4103 Fax: (212) 469-4139 First Union National Bank One First Union Center same same 301 South College Street Charlotte, NC 28288-0735 Attn: Dana Maloney Phone: (704) 383-0296 Fax: (704) 383-6670 The Chase Manhattan Bank One Chase Manhattan Plaza same same New York, NY 10081 Attn: Lynette Lang Phone: (212) 552-7692 Fax: (212) 552-5777 Domestic CD Lending Eurodollar Name of Bank Lending Office Office Lending Office Mellon Bank, N.A. Three Mellon Bank Center Room 2303 same same (Loan Administration) Pittsburgh, PA 15259-0003 Attn: Cathy Capp Phone: (412) 234-1870 Fax: (412) 236-2027, 2028 The Industrial Bank of Japan 1251 Avenue of the Americas same same Trust Company New York, NY 10020-1104 Attn: Atsushi Kawai Credit Administration Phone: (212) 282-4060 Fax: (212) 282-4480 The Toronto-Dominion Bank 909 Fannin, Suite 1700 TDSI (USA), Inc. same Houston, TX 77010 31 West 52nd Street Attn: Jorge A. Garcia 21st Floor Manager-Credit Administration New York, NY 10019-6101 Phone: (713) 653-8242 Attn: Senior Dealer Fax: (713) 951-9921 Phone: (212) 468-0400 Fax: (212) 974-5283 Bank Hapoalim B.M. Commercial Loan & Documentation same same 1515 Market Street, Suite 200 Philadelphia, PA 19102 Attn: Sheila D. Joe Phone: (215) 665-2228 Fax: (215) 665-2217 The Tokai Bank, Limited, New 55 East 52nd Street, 11th Floor same same York Branch New York, NY 10055 Attn: Eva Cordova Phone: (212) 339-1145 Fax: (212) 754-2171 Union Bank of Switzerland New York Branch same same 299 Park Avenue New York, NY 10171 Attn: Mike Peterson Loan Servicing Group Phone: (212) 821-3230 Fax: (212) 821-3259 The Long-Term Credit Bank of One Liberty Plaza same same Japan New York, NY 10006 Attn: Robert Pacitici Phone: (212) 335-4801 Fax: (212) 608-3452 2 Domestic CD Lending Eurodollar Name of Bank Lending Office Office Lending Office The Toyo Trust & Banking Co., 666 Fifth Avenue, 33rd Floor same same Ltd. New York, NY 10103 Attn: Debra Wylie Phone: (212) 307-3400, ext.287 Fax: (212) 977-5611 The Fuji Bank, Limited Two World Trade Center same same New York, NY 10048 Attn: Gemma Dizon Phone: (212) 898-2069 Fax: (212) 488-8216 Bank of Montreal 115 South LaSalle Street same same Chicago, IL 60603 Attn: John Paseka Phone: (312) 750-3771 Fax: (312) 750-4345 Summit Bank 750 Walnut Avenue, 3rd Floor same same Cranford, NJ 07016 Attn: Carolyn Swiss Phone: (201) 229-5288 Fax: (201) 641-4462 The Bank of New York One Wall Street, 19th Floor same same Energy Industries Division New York, NY 10286 Attn: Theresa A. Foran Phone: (212) 635-7921 Fax: (212) 635-7923 First National Bank of Chicago One First National Plaza same same Mail Suite 0634, 1FNP-10 Chicago, IL 60670 Attn: Gwendolyn Watson Phone: (312) 732-4509 Fax: (312) 732-4840 Bankers Trust Company 130 Liberty Street same same New York, NY 10006 Attn: Joe Regan Phone: (212) 250-4169 Fax: (212) 250-7351 3 Domestic CD Lending Eurodollar Name of Bank Lending Office Office Lending Office Morgan Guaranty and Trust 60 Wall Street same Nassau Bahamas Office Company of New York New York, NY 10260-0060 c/o J.P. Morgan Services, Attn: Sandra Doherty Inc. Credit Administrator Loan Operations, 3rd Floor Phone: (302) 634-8122 500 Stanton Christiana Rd. Fax: (302) 634-1092 Newark, DE 19713 Attn: Allison Hollis Loan Department Phone: (302) 634-4671 Fax: (302) 634-1094 Citibank, N.A. 399 Park Avenue same same 4th Floor, Zone 22 New York, New York 10021 Attn: Kate Bohen Phone: (302) 894-6120 Fax: (302) 894-6077
4 EXHIBIT A-1 FORM OF CONTRACT NOTE $____________________ Dated: October 7, 1997 FOR VALUE RECEIVED, the undersigned, PECO Energy Company, a Pennsylvania corporation (the "Borrower"), HEREBY PROMISES TO PAY to the order of (the "Lender") for the account of its Applicable Lending Office (such term and other capitalized terms herein being used as defined in the Credit Agreement referred to below) on the Termination Date the principal sum of U.S.$[amount of the Lender's Commitment in figures] or, if less, the aggregate principal amount of the Contract Advances made by the Lender to the Borrower pursuant to the Credit Agreement outstanding on the Termination Date. The Borrower promises to pay interest on the unpaid principal amount of each Contract Advance from the date of such Contract Advance until such principal amount is paid in full, at such interest rates, and payable at such times, as are specified in the Credit Agreement. Both principal and interest are payable in lawful money of the United States of America to The First National Bank of Chicago, as Administrative Agent, at One First National Plaza, Chicago, Illinois 60670, in same day funds. Each Contract Advance made by the Lender to the Borrower pursuant to the Credit Agreement, and all payments made on account of principal thereof, shall be recorded by the Lender and, prior to any transfer hereof, endorsed on the grid attached hereto which is part of this Promissory Note. This Promissory Note is one of the Contract Notes referred to in, and is entitled to the benefits of, the Revolving Credit Agreement, dated as of October 7, 1997, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Lead Managers, certain Banks specified therein, as Co-Agents, First Chicago Capital Markets, Inc., Mellon Bank, N.A. and CitiCorp Securities, Inc., as Syndication Agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as Arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent (as amended, modified or supplemented from time to time, the "Credit Agreement"). The Credit Agreement, among other things, (i) provides for the making of Contract Advances by the Lender to the Borrower from time to time in an aggregate amount not to exceed at any time outstanding the U.S. dollar amount first above mentioned, the indebtedness of the Borrower resulting from each such Contract Advance being evidenced by this Promissory Note, and (ii) contains provisions for acceleration of the maturity hereof upon the happening of certain stated events and also for prepayments on account of principal hereof prior to the maturity hereof upon the terms and conditions therein specified. The Borrower hereby waives presentment, demand, protest and notice of any kind. No failure to exercise, and no delay in exercising, any rights hereunder on the part of the holder hereof shall operate as a waiver of such rights. THIS PROMISSORY NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA. PECO ENERGY COMPANY By Name: Title: ADVANCES, MATURITIES, AND PAYMENTS OF PRINCIPAL
Amount of Maturity Principal Unpaid Amount of of Paid or Principal Notation Date Advance Advance Prepaid Balance Made By
EXHIBIT A-2 FORM OF AUCTION NOTE $_________________________ Dated: _________, 19___ FOR VALUE RECEIVED, the undersigned, PECO Energy Company, a Pennsylvania corporation (the "Borrower"), HEREBY PROMISES TO PAY to the order of (the "Lender") for the account of its Applicable Lending Office (as defined in the Credit Agreement referred to below), on , 19 , the principal amount of Dollars ($ ). The Borrower promises to pay interest on the unpaid principal amount hereof from the date hereof until such principal amount is paid in full, at the interest rate and payable on the interest payment date or dates provided below: Interest Rate: % per annum (calculated on the basis of a year of days for the actual number of days elapsed). Interest Payment Date or Dates: Both principal and interest are payable in lawful money of the United States of America to or the account of the Lender at the office of The First National Bank of Chicago, as Administrative Agent, at One First National Plaza, Chicago, Illinois 60670, in same day funds, free and clear of and without any deduction, with respect to the payee named above, for any and all present and future taxes, deductions, charges or withholdings (other than United States withholding taxes, if applicable), and all liabilities with respect thereto. This Promissory Note is one of the Auction Notes referred to in, and is entitled to the benefits of, the Revolving Credit Agreement, dated as of October 7, 1997, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Lead Managers, certain Banks specified therein, as Co-Agents, First Chicago Capital Markets, Inc., Mellon Bank, N.A. and CitiCorp Securities, Inc., as Syndication Agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as Arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent (as amended, modified or supplemented from time to time, the "Credit Agreement"). The Credit Agreement, among other things, contains provisions for acceleration of the maturity hereof upon the happening of certain stated events. The Borrower hereby waives presentment, demand, protest and notice of any kind. No failure to exercise, and no delay in exercising, any rights hereunder on the part of the holder hereof shall operate as a waiver of such rights. THIS PROMISSORY NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA. PECO ENERGY COMPANY By Name: Title: 2 EXHIBIT B-1 NOTICE OF A CONTRACT BORROWING The First National Bank of Chicago, as Administrative Agent for the Lenders parties to the Credit Agreement referred to below One First National Plaza Chicago, Illinois 60670 [Date] Attention: Utilities Department North American Finance Group Ladies and Gentlemen: The undersigned, PECO Energy Company, refers to the Revolving Credit Agreement, dated as of October 7, 1997, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Lead Managers, certain Banks specified therein, as Co-Agents, First Chicago Capital Markets, Inc., Mellon Bank, N.A. and CitiCorp Securities, Inc., as Syndication Agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as Arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent (as amended, modified or supplemented from time to time, the "Credit Agreement"), and hereby gives you notice, irrevocably, pursuant to Section 2.02 of the Credit Agreement that the undersigned hereby requests a Contract Borrowing under the Credit Agreement, and in that connection sets forth below the information relating to such Contract Borrowing (the "Proposed Contract Borrowing") as required by Section 2.02(a) of the Credit Agreement: (i) The Business Day of the Proposed Contract Borrowing is , 19 . (ii) The Type of Contract Advances to be made in connection with the Proposed Contract Borrowing is [Adjusted CD Rate Advances] [Base Rate Advances] [Eurodollar Rate Advances]. (iii) The aggregate amount of the Proposed Contract Borrowing is $________________. (iv) The Interest Period for each Contract Advance made as part of the Proposed Contract Borrowing is [ days] [ month[s]]. The undersigned hereby certifies that the following statements are true on the date hereof, and will be true on the date of the Proposed Contract Borrowing: (A) the representations and warranties contained in Section 4.01 are correct, before and after giving effect to the Proposed Contract Borrowing and to the application of the proceeds therefrom, as though made on and as of such date; and (B) no event has occurred and is continuing, or would result from such Proposed Contract Borrowing or from the application of the proceeds therefrom, that constitutes an Event of Default or would constitute an Event of Default but for the requirement that notice be given or time elapse or both. Very truly yours, PECO ENERGY COMPANY By Name: Title: 2 EXHIBIT B-2 NOTICE OF AN AUCTION BORROWING The First National Bank of Chicago, as Administrative Agent, for the Lenders parties to the Credit Agreement referred to below One First National Plaza Chicago, Illinois 60670 [Date] Attention: Utilities Department North American Finance Group Ladies and Gentlemen: The undersigned, PECO Energy Company, refers to the Revolving Credit Agreement, dated as of October 7, 1997, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Lead Managers, certain Banks specified therein, as Co-Agents, First Chicago Capital Markets, Inc., Mellon Bank, N.A. and CitiCorp Securities, Inc., as Syndication Agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as Arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent (as amended, modified or supplemented from time to time, the "Credit Agreement"), and hereby gives you notice pursuant to Section 2.03 of the Credit Agreement that the undersigned hereby requests an Auction Borrowing under the Credit Agreement, and in that connection sets forth the terms on which such Auction Borrowing (the "Proposed Auction Borrowing") is requested to be made: (A) Date of Auction Borrowing ______ (B) Amount of Auction Borrowing ______ (C) Maturity Date ______ (D) Interest Payment Date(s) ______ (E) ______ ______ (F) ______ ______ The undersigned hereby certifies that the following statements are true on the date hereof, and will be true on the date of the Proposed Auction Borrowing: (a) the representations and warranties contained in Section 4.01 are correct, before and after giving effect to the Proposed Auction Borrowing and to the application of the proceeds therefrom, as though made on and as of such date: (b) no event has occurred and is continuing, or would result from the Proposed Auction Borrowing or from the application of the proceeds therefrom, which constitutes an Event of Default or would constitute an Event of Default but for the requirement that notice be given or time elapse or both; and (c) the aggregate amount of the Proposed Auction Borrowing and all other Borrowings to be made on the same day under the Credit Agreement is within the aggregate amount of the unused Commitments of the Lenders. The undersigned hereby confirms that the Proposed Auction Borrowing is to be made available to it in accordance with Section 2.03(a)(v) of the Credit Agreement. Very truly yours, PECO ENERGY COMPANY By Name: Title: 2 EXHIBIT C ASSIGNMENT AND ACCEPTANCE Dated ___________, 19___ Reference is made to the Revolving Credit Agreement, dated as of October 7, 1997, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Lead Managers, certain Banks specified therein, as Co-Agents, First Chicago Capital Markets, Inc., Mellon Bank, N.A. and CitiCorp Securities, Inc., as Syndication Agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as Arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent (as amended, modified or supplemented from time to time, the "Credit Agreement"). Terms defined in the Credit Agreement are used herein with the same meaning. _________________ (the "Assignor") and _______________ (the "Assignee") agree as follows: 1. The Assignor hereby sells and assigns to the Assignee, and the Assignee hereby purchases and assumes from the Assignor, that interest in and to all of the Assignor's rights and obligations under the Credit Agreement as of the date hereof (other than in respect of Auction Advances and Auction Notes) which represents the percentage interest specified on Schedule 1 of all outstanding rights and obligations under the Credit Agreement (other than in aspect of Auction Advances and Auction Notes), including, without limitation, such interest in the Assignor's Commitment, the Contract Advances owing to the Assignor, and the Contract Note[s] held by the Assignor. After giving effect to such sale and assignment, the Assignee's Commitment and the amount of the Contract Advances owing to the Assignee will be as set forth in Section 2 of Schedule 1. 2. The Assignor (i) represents and warrants that it is the legal and beneficial owner of the interest being assigned by it hereunder and that such interest is free and clear of any adverse claim; (ii) makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Credit Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Credit Agreement or any other instrument or document furnished pursuant thereto; (iii) makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrower or the performance or observance by the Borrower of any of its obligations under the Credit Agreement or any other instrument or document furnished pursuant thereto; and (iv) attaches the Contract Note[s] referred to in paragraph 1 above and requests that the Administrative Agent exchange such Contract Note[s] for a new Contract Note payable to the order of the Assignee in an amount equal to the Commitment assumed by the Assignee pursuant hereto or new Contract Notes payable to the order of the Assignee in an amount equal to the Commitment assumed by the Assignee pursuant hereto and the Assignor in an amount equal to the Commitment retained by the Assignor under the Credit Agreement, respectively as specified on Schedule 1 hereto. 3. The Assignee (i) confirms that it has received a copy of the Credit Agreement, together with copies of the financial statements referred to in Section 4.01 thereof and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Acceptance; (ii) agrees that it will, independently and without reliance upon the Administrative Agent, the Documentation Agent, the Assignor or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Agreement; (iii) confirms that it is an Eligible Assignee; (iv) appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under the Credit Agreement as are delegated to the Administrative Agent by the terms thereof, together with such powers as are reasonably incidental thereto; (v) agrees that it will perform in accordance with their terms all of the obligations which by the terms of the Credit Agreement are required to be performed by it as a Lender; (vi) none of the consideration used to make the purchase being made by the Assignee hereunder are "plan assets" as defined under ERISA and the rights and interests of the Assignee in and under the Credit Agreement will not be "plan assets" under ERISA [and] (vii) specifies as its CD Lending Office, Domestic Lending Office (and address for notices) and Eurodollar Lending Office the offices set forth beneath its name on the signature pages hereof [and (viii) attaches the forms prescribed by the Internal Revenue Service of the United States certifying that it is exempt from United States withholding taxes with respect to all payments to be made to the Assignee under the Credit Agreement and the Notes].(1) 4. Following the execution of this Assignment and Acceptance by the Assignor and the Assignee, it will be delivered to the Administrative Agent for acceptance and recording by the Administrative Agent. The effective date of this Assignment and Acceptance shall be the date of acceptance thereof by the Administrative Agent, unless otherwise specified on Schedule 1 hereto (the "Effective Date"). 5. Upon such acceptance and recording by the Administrative Agent, as of the Effective Date, (i) the Assignee shall be a party to the Credit Agreement and, to the extent provided in this Assignment and Acceptance, have the rights and obligations of a Lender thereunder and (ii) the Assignor shall, to the extent provided in this Assignment and Acceptance, relinquish its rights and be released from its obligations under the Credit Agreement. 6. Upon such acceptance and recording by the Administrative Agent, from and after the Effective Date, the Administrative Agent shall make all payments under the Credit Agreement and the Contract Notes in respect of the interest assigned hereby (including, without limitation, all payments of principal, interest and commitment fees with respect thereto) to the Assignee. The Assignor and Assignee shall make all appropriate adjustments in payments under the Credit Agreement and the Contract Notes for periods prior to the Effective Date directly between themselves. 7. THIS ASSIGNMENT AND ACCEPTANCE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA. ______________ (1) If the Assignee is organized under the laws of a jurisdiction outside the United States. IN WITNESS WHEREOF, the parties hereto have caused this Assignment and Acceptance to be executed by their respective officers thereunto duly authorized, as of the date first above written, such execution being made on Schedule 1 hereto. [NAME OF ASSIGNOR] By Name: Title: [NAME OF ASSIGNEE] By Name: Title: CD Lending Office: [Address] Domestic Lending Office (and address for notices): [Address] Eurodollar Lending Office: [Address] Consented to this ____________ day of __________________, 19___ PECO ENERGY COMPANY By Name: Title: Consented to and Accepted this ______________ day of ___________________, 19___ [NAME OF ADMINISTRATIVE AGENT] By Name: Title: 3 Schedule 1 to Assignment and Acceptance Dated ______________, 19___ Section 1. Percentage Interest: ___% Section 2. Assignee's Commitment: $_____ Aggregate Outstanding Principal Amount of Contract Advances owing to the Assignee: $_____ A Contract Note payable to the order of the Assignee Dated: _________, 19___ Principal amount: $______ A Contract Note payable to the order of the Assignor Dated: __________, 19___ Principal amount: $______ Section 3. Effective Date(2): _____________, 19___ ________________ (2) This date should be no earlier than the date of acceptance by the Administrative Agent. EXHIBIT D FORM OF OPINION OF BALLARD SPAHR ANDREWS & INGERSOLL ________________, 19___ To each of the Banks, the Administrative Agent, the Documentation Agent, the Syndication Agents, the Arrangers, the Co-Agents and the Lead Managers party to the Revolving Credit Agreement, dated as of October 7, 1997, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Lead Managers, certain Banks specified therein, as Co-Agents, First Chicago Capital Markets, Inc., Mellon Bank, N.A. and CitiCorp Securities, Inc., as Syndication Agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as Arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent Re: PECO Energy Company Ladies and Gentlemen: This opinion is furnished to you pursuant to Section 3.01(a)(vi) of the Revolving Credit Agreement, dated as of October 7, 1997, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Lead Managers, certain Banks specified therein, as Co-Agents, First Chicago Capital Markets, Inc., Mellon Bank, N.A. and CitiCorp Securities, Inc., as Syndication Agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as Arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent (as amended, modified or supplemented from time to time, the "Credit Agreement"). Unless otherwise specified, terms defined in the Credit Agreement are used herein as therein defined. We have acted as special counsel for the Borrower in connection with the preparation, execution and delivery of the Credit Agreement. In that capacity we have examined the following: (i) The Credit Agreement, the Contract Notes and the form of the Auction Notes to be delivered in connection with Auction Borrowings; (ii) The documents furnished by the Borrower pursuant to Section 3.01 of the Credit Agreement; (iii) The Amended and Restated Articles of Incorporation of the Borrower and all amendments thereto (the "Charter"); (iv) The by-laws of the Borrower and all amendments thereto (the "By-laws"); and (v) A certificate of the Secretary of State of the Commonwealth of Pennsylvania, dated , 19 , attesting to the continued subsistence of the Borrower in Pennsylvania. We have also examined the originals, or copies certified to our satisfaction, of such other corporate records of the Borrower, certificates of public officials and of officers of the Borrower, and agreements, instruments and documents, as we have deemed necessary as a basis for the opinions hereinafter expressed. We have assumed the legal capacity and competence of natural persons, the genuineness of all signatures, the authenticity of all documents submitted to us as originals and the conformity to original documents of documents submitted to us as certified, conformed or photostatic copies. We have assumed that the Agents and the Banks have duly executed and delivered, with all necessary power and authority (corporate and otherwise), the Credit Agreement. We have further assumed that the Auction Notes, when delivered under the Credit Agreement, will be duly executed by the Borrower. When an opinion or confirmation is given to our knowledge or with reference to matters of which we are aware or which are known to us, or with another similar qualification, the relevant knowledge or awareness is limited to the actual knowledge or awareness of the lawyer who is the current primary contact for the Borrower and the individual lawyers in this firm who have participated in the specific transaction to which this opinion relates and without any special or additional investigation undertaken for the purposes of this opinion, except as otherwise noted herein. Based upon the foregoing and subject to the exceptions, limitations and qualifications set forth herein, we are of the following opinion: 1. The Borrower is a corporation duly incorporated and validly subsisting under the laws of the Commonwealth of Pennsylvania. 2. The execution, delivery and performance by the Borrower of the Credit Agreement and the Notes are within the Borrower's corporate powers, have been duly authorized by all necessary corporate action, do not contravene (i) the Charter or the By-laws or (ii) any law of the United States or the Commonwealth of Pennsylvania (including, without limitation, any order, rule or regulation of the PPUC or (iii) to the best of our knowledge, any agreement or instrument to which the Borrower is a party or by which it is bound, and do not result in or require the creation of any lien, security interest or other charge or encumbrance upon or with respect to any of its properties. 3. No authorization, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body of the United States or the Commonwealth of Pennsylvania is required for the due execution, delivery and performance by the Borrower of the Credit Agreement or the Notes except for the filing of the Securities Certificate with, and the final approval of, and the Order of Registration issued by, the PPUC, which filing has been duly made and which final approval and Order of Registration have been duly obtained; such Order of Registration is in full force and effect and is final; and the action of the PPUC registering the Securities Certificate is no longer subject to appeal. 4. The Credit Agreement and the Contract Notes have been duly executed and delivered by the Borrower, and the Credit Agreement and the Contract Notes are, and the Auction Notes, when executed and delivered hereunder will be, the legal, valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their respective terms. 5. The Borrower (i) is exempt from the provisions of the Public Utility Holding Company Act of 1935, as amended, other than Section 9(a)(2) thereof, pursuant 2 to Section 3(a)(2) thereof, and (ii) is not an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. 6. We confirm to you that to our knowledge, after inquiry of each lawyer who is the current primary contact for the Borrower or who has devoted substantive attention to matters on behalf of the Borrower during the preceding twelve months and who is still currently employed by or a member of this firm, except as disclosed in the Borrower's Annual Report on Form 10-K for the year ended December 31, 1996 and the Borrower's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, no litigation or governmental proceeding is pending or threatened in writing against the Borrower (i) with respect to the Credit Agreement or the Notes, or (ii) which is likely to have a material adverse effect upon the financial condition, business, properties or prospects of the Borrower and its subsidiaries taken as a whole. We draw to your attention the existence of the following two Pennsylvania statutes in connection with the fact that the Contract Advances bear floating rates of interest: (i) Section 911 of the Pennsylvania "Crime Code," 18 Pa. C.S.A. ss.911, enacted by the Act of December 6, 1972, P.L. 1482. Section 911 of the Crime Code bears a close resemblance to certain of the provisions of the Federal Racketeer Influenced and Corrupt Organizations Act of 1970, 18 U.S.C. ss.ss.1961-1968, commonly known as RICO, and is referred to hereinafter as the "Pennsylvania RICO Act." The Pennsylvania RICO Act provides, among other things, that it is a criminal offense, punishable as a felony, to "use or invest, directly or indirectly ... in the acquisition of any interest in, or the establishment or operation of, any enterprise" any income collected in full or partial satisfaction of a loan made "at a rate of interest exceeding 25% per annum... ." (ii) The Act of December 29, 1982, P.L. 1671, 18 Pa. C.S.A. ss.4806.1 et seq. (superseded volume) (the "Criminal Usury Statute"). The Criminal Usury Statute provides, among other things, that it is a criminal offense, punishable as a felony, to engage in, "charging, taking or receiving any money ... on the loan ... of any money ... at a rate exceeding thirty-six percent per annum... ." The Criminal Usury Statute may have been repealed, but the manner in which the repeal was enacted leaves the matter subject to uncertainty. Both the Pennsylvania RICO Act and the Criminal Usury Statute appear to be intended by the legislature to apply only to racketeering and loan sharking type activities, and not to the type of commercial loan transaction evidenced by the Loan Document. Nevertheless, in view of the plain language of the Pennsylvania courts, we cannot say that the ultimate resolution of this issue is free from doubt. The foregoing opinions are subject to the following exceptions, limitations and qualifications: (a) Our opinion is subject to the effect of applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, fraudulent transfer or similar laws affecting creditors' rights and remedies generally, general principles of equity, including without limitation, concepts of materiality, reasonableness, good faith and fair dealing (regardless of whether such enforceability is considered in a proceeding in equity or at law); and limitations on enforceability of rights to indemnification by federal or state securities laws or regulations or by public policy. 3 (b) We express no opinion as to the application or requirements of the Pennsylvania Securities Act or federal or state securities, patent, trademark, copyright, antitrust and unfair competition, pension or employee benefit, labor, environmental health and safety or tax laws in respect of the transactions contemplated by or referred to in the Credit Agreement. (c) We express no opinion as to the validity or enforceability of any provision of the Credit Agreement or the Notes which (i) permits the Lenders to increase the rate of interest in the event of delinquency or default if such increase would be deemed a penalty under applicable law; (ii) purports to be a waiver by Borrower of any right or benefit except to the extent permitted by applicable law; (iii) purports to require that waivers must be in writing to the extent that an oral agreement or implied agreement by trade practice or course of conduct modifying provisions of the Credit Agreement or the Notes has been made; or (iv) purports to exculpate any party from its own negligent acts. We express no opinion as to the law of any jurisdiction other than the law of the Commonwealth of Pennsylvania and the federal law of the United States. The foregoing opinion is solely for your benefit in connection with the consummation of the transaction described herein and may not be used or relied upon by you or any other Person without our express written consent for any other purpose other than (i) any Eligible Assignee that may become a Lender under the Credit Agreement after the date hereof and (ii) Reed Smith Shaw & McClay LLP, which may rely upon this opinion in rendering their opinion furnished pursuant to Article III of the Credit Agreement. The opinions given herein are as of the date hereof, and we assume no obligation to update or supplement this opinion to reflect facts or circumstances which may hereafter come to our attention or any changes in laws which may hereafter occur. Very truly yours, BALLARD SPAHR ANDREWS & INGERSOLL 4 EXHIBIT E FORM OF OPINION OF REED SMITH SHAW & McCLAY LLP _______________, 19___ To each of the Banks, the Administrative Agent, the Documentation Agent, the Syndication Agents, the Arrangers, the Co-Agents and the Lead Managers party to the Revolving Credit Agreement, dated as of October 7, 1997, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Lead Managers, certain Banks specified therein, as Co-Agents, First Chicago Capital Markets, Inc., Mellon Bank, N.A. and CitiCorp Securities, Inc., as Syndication Agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as Arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent Re: PECO Energy Company Ladies and Gentlemen: We have acted as counsel to Mellon Bank, N.A., individually and as Documentation Agent, in connection with the preparation, execution and delivery of the Revolving Credit Agreement, dated as of October 7, 1997, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Lead Managers, certain Banks specified therein, as Co-Agents, First Chicago Capital Markets, Inc., Mellon Bank, N.A. and CitiCorp Securities, Inc., as Syndication Agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as Arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent (as amended, modified or supplemented from time to time, the "Credit Agreement"). We are delivering this opinion pursuant to Section 3.01(a)(vii) of the Credit Agreement. Unless otherwise defined herein, terms defined in the Credit Agreement are used herein as therein defined. In that connection, we have examined (i) counterparts of the Credit Agreement, executed by the Borrower, the Banks, the Administrative Agent, the Documentation Agent, the Syndication Agents, the Arrangers, the Co-Agents and the Lead Managers, (ii) the Contract Notes, executed by the Borrower, (iii) the form of the Auction Notes to be delivered by the Borrower in connection with Auction Borrowings and (iv) the other documents listed on Exhibit A hereto, including the opinion of Ballard Spahr Andrews & Ingersoll, counsel to the Borrower (the "Opinion"), furnished to the Administrative Agent pursuant to Section 3.01(a) of the Credit Agreement. In our examination of the documents referred to above, we have assumed the authenticity of all such documents submitted to us as originals, the genuineness of all signatures, the due authority of the parties executing such documents and the conformity to the originals of all such documents submitted to us as copies. We have also assumed that the Banks, the Administrative Agent, the Documentation Agent, the Syndication Agents, the Arrangers, the Co-Agents and the Lead Managers have duly executed and delivered, with all necessary power and authority (corporate and otherwise), the Credit Agreement. As to matters of fact, we have relied solely upon the documents we have examined. Based upon the foregoing, we are of the opinion that, while we have not independently considered the matters covered by the Opinion to the extent necessary to enable us to express the conclusions stated therein, each of the Opinion and the other documents listed in Exhibit A hereto are substantially responsive to the corresponding requirements set forth in Section 3.01 of the Credit Agreement pursuant to which the same have been delivered. Please note that Richard H. Glanton, Esquire, a partner in this firm, is a director of PECO Energy Company. We have rendered and continue to render legal services to PECO Energy Company. The foregoing opinion is solely for your benefit and may not be relied upon by any other Person other than any Person that may become a lender under the Credit Agreement after the date hereof. Very truly yours, KCK:TEW:ARN 2 EXHIBIT F FORM OF ANNUAL AND QUARTERLY COMPLIANCE CERTIFICATE ______________________, 19__ Pursuant to the Revolving Credit Agreement, dated as of October 7, 1997, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Lead Managers, certain Banks specified therein, as Co-Agents, First Chicago Capital Markets, Inc., Mellon Bank, N.A. and CitiCorp Securities, Inc., as Syndication Agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as Arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent (as amended, modified or supplemented from time to time, the "Credit Agreement"), the undersigned, being ______________________ of the Borrower, hereby certifies on behalf of the Borrower as follows: 1. Delivered herewith are the financial statements prepared pursuant to Section 5.01(b)(ii) and Section 5.01(b)(iii) of the Credit Agreement, for the fiscal ________ ended ___________, 19__. All such financial statements comply with the applicable requirements of the Credit Agreement. 2. Schedule I hereto sets forth in reasonable detail the information and calculations necessary to establish compliance with the provisions of Section 5.02(c) of the Credit Agreement as of the end of the fiscal period referred to in paragraph 1 above. 3. (Check one and only one:) No Event of Default, or event which with notice or lapse of time or both would constitute an Event of Default, has occurred and is continuing or exists. An Event of Default, or event which with notice or lapse of time or both would constitute an Event of Default, has occurred and is continuing or exists, and the document(s) attached hereto as Schedule II specify in detail the nature and period of existence of such Event of Default or such other event as well as any and all actions with respect thereto taken or contemplated to be taken by the Borrower. 4. The undersigned has personally reviewed the Credit Agreement, and this certificate was based on an examination made by or under the supervision of the undersigned sufficient to assure that this certificate is accurate. 5. Capitalized terms used in this certificate and not otherwise defined shall have the meanings given in the Credit Agreement. PECO ENERGY COMPANY By Name: Title: Date: EXHIBIT G FORM OF ADDITIONAL LENDER SUPPLEMENT THIS SUPPLEMENT, dated as of ____________, 19_____, by the undersigned. Recitals: A. This Supplement is being executed and delivered in accordance with Section 2.18 of the Revolving Credit Agreement, dated as of October 7, 1997, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Lead Managers, certain Banks specified therein, as Co-Agents, First Chicago Capital Markets, Inc., Mellon Bank, N.A. and CitiCorp Securities, Inc., as Syndication Agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as Arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent (as amended, modified or supplemented from time to time, the "Credit Agreement"). Capitalized terms used herein without definition have the meanings specified in the Credit Agreement. B. The undersigned wishes to become a Lender party to the Credit Agreement, as an Additional Lender. NOW, THEREFORE, the undersigned, intending to be legally bound, hereby agrees as follows: 1. The undersigned hereby becomes party to the Credit Agreement as Lender thereunder, and shall be subject to and bound by all of the provisions thereof. 2. The Commitment of the undersigned shall be $_____________. 3. The undersigned (i) confirms that it has received a copy of the Credit Agreement, together with copies of the financial statements referred to in Section 4.01 thereof and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Additional Lender Supplement; (ii) agrees that it will, independently and without reliance upon the Administrative Agent, the Documentation Agent or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Agreement; (iii) confirms that it is an Eligible Assignee; (iv) appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under the Credit Agreement as are delegated to the Administrative Agent by the terms thereof, together with such powers as are reasonably incidental thereto; (v) agrees that it will perform in accordance with their terms all of the obligations which by the terms of the Credit Agreement are required to be performed by it as a Lender; (vi) none of the consideration used to make the purchase being made by the undersigned hereunder are "plan assets" as defined under ERISA and the rights and interests of the undersigned in and under the Credit Agreement will not be "plan assets" under ERISA [and] (vii) specifies as its CD Lending Office, Domestic Lending Office (and address for notices) and Eurodollar Lending Office the offices set forth beneath its name on the signature pages hereof [and (viii) attaches the forms prescribed by the Internal Revenue Service of the United States certifying that it is exempt from United States withholding taxes with respect to all payments to be made to the undersigned under the Credit Agreement and the Notes].(3) 4. This Supplement shall be effective upon the date of acceptance thereof by the Administrative Agent, unless otherwise specified under the undersigned's name signature below. 5. THIS SUPPLEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA. IN WITNESS WHEREOF, the undersigned has caused this Supplement to be executed and delivered by a duly authorized officer on the date first above written. [NAME OF ADDITIONAL LENDER] By:________________________ Name:______________________ Title:_______________________ CD Lending Office: [Address] Domestic Lending Office (and address for notices): [Address] Eurodollar Lending Office: [Address] Effective Date(4): ______________, 19___ CONSENTED TO: [NAME OF ADMINISTRATIVE AGENT] By: Name: Title: CONSENTED TO: PECO ENERGY COMPANY By: Name: Title: _________________ (3) If the undersigned is organized under the laws of a jurisdiction outside the United States. (4) This date should be no earlier than the date of acceptance by the Administrative Agent. EX-4.10 6 October 7, 1997 4:29 PM CONFORMED COPY $450,000,000 364-DAY CREDIT AGREEMENT dated as of October 7, 1997 among PECO ENERGY COMPANY as Borrower THE BANKS NAMED HEREIN as Banks CERTAIN BANKS SPECIFIED HEREIN as Lead Managers CERTAIN BANKS SPECIFIED HEREIN as Co-Agents FIRST CHICAGO CAPITAL MARKETS, INC., MELLON BANK, N.A. and CITICORP SECURITIES, INC. as Syndication Agents FIRST CHICAGO CAPITAL MARKETS, INC. and MELLON BANK, N.A. as Arrangers THE FIRST NATIONAL BANK OF CHICAGO as Administrative Agent and MELLON BANK, N.A. as Documentation Agent TABLE OF CONTENTS Section Page ARTICLE I DEFINITIONS AND ACCOUNTING TERMS 1.01 Certain Defined Terms .............................................. 1 1.02 Computation of Time Periods ........................................ 11 1.03 Accounting Principles .............................................. 11 ARTICLE II AMOUNTS AND TERMS OF THE ADVANCES 2.01 The Contract Advances .............................................. 11 2.02 Making the Contract Advances ....................................... 11 2.03 The Auction Advances ............................................... 12 2.04 Fees ............................................................... 15 2.05 Reduction of the Commitments ....................................... 16 2.06 Repayment of Contract Advances ..................................... 16 2.07 Interest on Contract Advances ...................................... 16 2.08 Additional Interest on Contract Advances ........................... 16 2.09 Interest Rate Determination ........................................ 17 2.10 Conversion of Contract Advances .................................... 17 2.11 Prepayments ........................................................ 18 2.12 Increased Costs .................................................... 18 2.13 Illegality ......................................................... 19 2.14 Payments and Computations .......................................... 20 2.15 Taxes .............................................................. 21 2.16 Sharing of Payments, Etc ........................................... 22 2.17 Extension of Termination Date ...................................... 22 2.18 Additional Lenders ................................................. 23 ARTICLE III CONDITIONS OF LENDING 3.01 Conditions Precedent to Initial Advances ........................... 25 3.02 Conditions Precedent to Certain Contract Borrowings ................ 26 3.03 Conditions Precedent to Each Auction Borrowing ..................... 26 ARTICLE IV REPRESENTATIONS AND WARRANTIES 4.01 Representations and Warranties of the Borrower ..................... 27 ARTICLE V COVENANTS OF THE BORROWER 5.01 Affirmative Covenants .............................................. 28 5.02 Negative Covenants ................................................. 30 i ARTICLE VI EVENTS OF DEFAULT 6.01 Events of Default .................................................. 31 ARTICLE VII THE AGENTS 7.01 Authorization and Action ........................................... 33 7.02 Agents' Reliance, Etc .............................................. 33 7.03 Agents and Affiliates .............................................. 34 7.04 Lender Credit Decision ............................................. 34 7.05 Indemnification .................................................... 34 7.06 Successor Administrative Agent ..................................... 35 7.07 Syndication Agents, Co-Agents, Lead Managers and Arrangers ......... 35 ARTICLE VIII MISCELLANEOUS 8.01 Amendments, Etc .................................................... 35 8.02 Notices, Etc ....................................................... 35 8.03 No Waiver; Remedies ................................................ 36 8.04 Costs and Expenses; Indemnification ................................ 36 8.05 Right of Set-off ................................................... 37 8.06 Binding Effect ..................................................... 37 8.07 Assignments and Participations ..................................... 37 8.08 Governing Law ...................................................... 39 8.09 Consent to Jurisdiction ............................................ 40 8.10 Execution in Counterparts; Integration ............................. 40 Schedule I List of Applicable Lending Offices Exhibit A-1 Form of Contract Note Exhibit A-2 Form of Auction Note Exhibit B-1 Notice of a Contract Borrowing Exhibit B-2 Notice of an Auction Borrowing Exhibit C Assignment and Acceptance Exhibit D Form of Opinion of Special Counsel for the Borrower Exhibit E Form of Opinion of Counsel to the Documentation Agent Exhibit F Form of Annual and Quarterly Compliance Certificate Exhibit G Form of Additional Lender Supplement ii 364-DAY CREDIT AGREEMENT dated as of October 7, 1997 PECO Energy Company, a Pennsylvania corporation (the "Borrower"), the banks listed on the signature pages hereof (the "Banks"), certain Banks specified herein, as lead managers hereunder, (in such capacity, the "Lead Managers"), certain Banks specified herein, as co-agents hereunder (in such capacity, the "Co-Agents"), First Chicago Capital Markets, Inc. ("First Chicago Capital Markets"), Mellon Bank, N.A. ("Mellon") and CitiCorp Securities, Inc. ("CitiCorp"), as syndication agents hereunder (in such capacity, the "Syndication Agents"), First Chicago Capital Markets and Mellon, as arrangers hereunder (in such capacity, the "Arrangers"), The First National Bank of Chicago ("First Chicago"), as administrative agent for the Lenders hereunder (in such capacity, the "Administrative Agent"), and Mellon, as documentation agent for the Lenders hereunder (in such capacity, the "Documentation Agent"), hereby agree as follows: ARTICLE I DEFINITIONS AND ACCOUNTING TERMS SECTION 1.01. Certain Defined Terms. As used in this Agreement, each of the following terms shall have the meaning set forth next to such term below (each such meaning to be equally applicable to both the singular and plural forms of the term defined): "Additional Lender" has the meaning specified in Section 2.18. "Adjusted CD Rate" means, for any Interest Period for each Adjusted CD Rate Advance made as part of the same Contract Borrowing, an interest rate per annum equal to the sum of: (a) the rate per annum obtained by dividing (i) the rate of interest determined by the Administrative Agent to be the average (rounded upward to the nearest whole multiple of 1/100 of 1% per annum, if such average is not such a multiple) of the consensus bid rate determined by each of the Reference Banks for the bid rates per annum, at 10:00 A.M. (Chicago time) (or as soon thereafter as practicable) on the first day of such Interest Period, of New York certificate of deposit dealers of recognized standing selected by such Reference Bank for the purchase at face value of certificates of deposit of such Reference Bank in an amount substantially equal to such Reference Bank's Adjusted CD Rate Advance made as part of such Contract Borrowing and with a maturity equal to such Interest Period, by (ii) a percentage equal to 100% minus the Domestic Rate Reserve Percentage for such Interest Period, plus (b) the Assessment Rate for such Interest Period. The Adjusted CD Rate for the Interest Period for each Adjusted CD Rate Advance made as part of the same Contract Borrowing shall be determined by the Administrative Agent on the basis of applicable rates furnished to and received by the Administrative Agent from the Reference Banks on the first day of such Interest Period, subject, however, to the provisions of Section 2.09. "Adjusted CD Rate Advance" means a Contract Advance that bears interest as provided in Section 2.07(b). "Administrative Agent" means First Chicago in its capacity as administrative agent for the Lenders pursuant to Article VII, and not in its individual capacity as a Lender, and any successor Administrative Agent appointed pursuant to Article VII. "Advance" means a Contract Advance or an Auction Advance. "Affiliate" means, as to any Person, any other Person that, directly or indirectly, controls, is controlled by or is under common control with such Person or is a director or officer of such Person. "Agents" means the Administrative Agent, the Documentation Agent, the Syndication Agents, the Arrangers, the Co-Agents and Lead Managers, collectively. "Applicable Commitment Fee Rate" means (i) during any Level 1 Rating Period, 0.075% per annum, (ii) during any Level 2 Rating Period, 0.100% per annum, (iii) during any Level 3 Rating Period, 0.125% per annum, (iv) during any Level 4 Rating Period, 0.1625% per annum and (v) during any Level 5 Rating Period, 0.275% per annum. The Applicable Commitment Fee Rate shall change when and as the Rating Period changes. "Applicable Lending Office" means, with respect to each Lender, such Lender's Domestic Lending Office in the case of a Base Rate Advance, such Lender's CD Lending Office in the case of an Adjusted CD Rate Advance, and such Lender's Eurodollar Lending Office in the case of a Eurodollar Rate Advance and, in the case of an Auction Advance, the office of such Lender notified by such Lender to the Administrative Agent as its Applicable Lending Office with respect to such Auction Advance. "Applicable Margin" means, on any date, for a Base Rate Advance, an Adjusted CD Rate Advance or a Eurodollar Rate Advance, the interest rate per annum set forth below in the column entitled "Base Rate", "CD Rate" or "Eurodollar Rate", as appropriate, opposite the applicable Rating Period in effect on such date:
Rating Period Base Rate CD Rate Eurodollar Rate Level 1 0 .400% .275% Level 2 0 .450% .325% Level 3 0 .500% .400% Level 4 0 .625% .500% Level 5 0 .875% .750%
The Applicable Margin applicable to an outstanding Contract Advance shall change when and as the Rating Period changes. "Arranger" means either of First Chicago Capital Markets or Mellon, in its capacity as Arranger, and not in its individual capacity as a Lender. "Assessment Rate" for the Interest Period for each Adjusted CD Rate Advance made as part of the same Contract Borrowing means the assessment rate per annum (rounded upwards to the next higher multiple of 1/100 of 1% if the rate is not such a multiple) payable to the Federal Deposit Insurance Corporation (or any successor) by a member of the Bank Insurance Fund which is classified as adequately capitalized and within supervisory subgroup "A" (or a comparable successor assessment risk classification) within the meaning of 12 C.F.R. ss.327.4(a) (or any successor provision) for the insurance of time deposits at the offices of such institution in the United States, as estimated by the Administrative Agent on the first day of such Interest Period. 2 "Assignment and Acceptance" means an assignment and acceptance entered into by a Lender and an Eligible Assignee, and accepted by the Administrative Agent, in substantially the form of Exhibit C hereto. "Auction Advance" means an advance by a Lender to the Borrower as part of an Auction Borrowing resulting from the auction bidding procedure described in Section 2.03. "Auction Borrowing" means a borrowing consisting of simultaneous Auction Advances from each of the Lenders whose offer to make one or more Auction Advances as part of such borrowing has been accepted by the Borrower under the auction bidding procedure described in Section 2.03. "Auction Note" means a promissory note of the Borrower payable to the order of any Lender, in substantially the form of Exhibit A-2 hereto, evidencing the indebtedness of the Borrower to such Lender resulting from an Auction Advance made by such Lender. "Auction Reduction" has the meaning specified in Section 2.01. "Base Rate" means, for any period, a fluctuating interest rate per annum as shall be in effect from time to time which rate per annum shall at all times be equal to the higher of: (a) the rate of interest announced by First Chicago, from time to time, as its corporate base rate; and (b) the sum of 1/2 of 1% per annum plus the Federal Funds Rate in effect from time to time. "Base Rate Advance" means a Contract Advance that bears interest as provided in Section 2.07(a). "Benchmark Debt" means the Borrower's senior secured long-term debt or, in the event that the Borrower has no senior secured long-term debt rated by S&P (or by a generally recognized successor to S&P) or by Moody's (or by a generally recognized successor to Moody's), the Borrower's senior unsecured long-term debt. "Borrowing" means a Contract Borrowing or an Auction Borrowing. "Business Day" means a day of the year on which banks are not required or authorized to close in Philadelphia, Pennsylvania, Chicago, Illinois or New York, New York, and, if the applicable Business Day relates to any Eurodollar Rate Advances, on which dealings are carried on in the London interbank market. "CD Lending Office" means, with respect to any Lender, the office of such Lender specified as its "CD Lending Office" opposite its name on Schedule I hereto or in the Assignment and Acceptance pursuant to which it became a Lender (or, if no such office is specified, its Domestic Lending Office), or such other office of such Lender as such Lender may from time to time specify to the Borrower and the Administrative Agent. "Co-Agent" means a Bank identified as such on the signature pages to this Agreement, in its capacity as Co-Agent, and not in its individual capacity as a Lender. "Code" means the Internal Revenue Code of 1986, and the regulations promulgated thereunder, in each case as amended, reformed or otherwise modified from time to time. 3 "Commitment" has the meaning specified in Section 2.01. "Consolidated Adjusted Total Capitalization" on any date shall mean the sum, without duplication, of the following with respect to the Borrower and its consolidated Subsidiaries (exclusive, in each case, of Nonrecourse Transition Bond Debt, to the extent Nonrecourse Transition Bond Debt would otherwise be included in such item): (a) total capitalization as of such date, as determined in accordance with GAAP, (b) the current portion of liabilities which as of such date would be classified in whole or part as long-term debt in accordance with GAAP (it being understood that the noncurrent portion of such liabilities is included in the total capitalization referred to in clause (a)), (c) all obligations as lessee which, in accordance with GAAP, are capitalized as liabilities (including the current portion thereof), and (d) all other liabilities which would be classified as short-term debt in accordance with GAAP (including, without limitation, all liabilities of the types classified as "Notes Payable, Bank" on the Borrower's audited balance sheet for December 31, 1996). "Consolidated Adjusted Total Debt" on any date shall mean the sum, without duplication, of the following with respect to the Borrower and its consolidated Subsidiaries (exclusive, in each case, of Nonrecourse Transition Bond Debt, to the extent Nonrecourse Transition Bond Debt would otherwise be included in such item): (a) all liabilities which as of such date would be classified in whole or in part as long-term debt in accordance with GAAP (including the current portion thereof), (b) all obligations as lessee which, in accordance with GAAP, are capitalized as liabilities (including the current portion thereof), and (c) all other liabilities which would be classified as short-term debt in accordance with GAAP (including, without limitation, all liabilities of the types classified as "Notes Payable, Bank" on the Borrower's audited balance sheet for December 31, 1996). "Contract Advance" means an advance by a Lender to the Borrower as part of a Contract Borrowing and refers to an Adjusted CD Rate Advance, a Base Rate Advance or a Eurodollar Rate Advance, each of which shall be a "Type" of Contract Advance. "Contract Borrowing" means a borrowing consisting of simultaneous Contract Advances of the same Type and, if such Borrowing comprises Adjusted CD Rate Advances or Eurodollar Rate Advances, having Interest Periods of the same duration, made by each of the Lenders pursuant to Section 2.01 or Converted pursuant to Section 2.10. "Contract Note" means a promissory note of the Borrower payable to the order of any Lender, in substantially the form of Exhibit A-1 hereto, evidencing the aggregate indebtedness of the Borrower to such Lender resulting from the Contract Advances made by such Lender. "Controlled Group" means all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control that, together with the Borrower or any Subsidiary, are treated as a single employer under Section 414(b) or 414(c) of the Code. "Convert", "Conversion" and "Converted" each refers to a conversion of Advances of one Type into Advances of another Type or the selection of a new, or the renewal of the same, Interest Period for Eurodollar Rate Advances or CD Rate Advances, as the case may be, pursuant to Section 2.10. "Debt" means (i) indebtedness for borrowed money, (ii) obligations evidenced by bonds, debentures, notes or other similar instrument, (iii) obligations to pay the deferred purchase price of property or services (other than trade payables incurred in the ordinary course of business), (iv) obligations as lessee under leases that shall have been or are required to be, in accordance with GAAP, recorded as capital leases, (v) obligations (contingent or otherwise) under 4 reimbursement or similar agreements with respect to the issuance of letters of credit (other than obligations in respect of documentary letters of credit opened to provide for the payment of goods or services purchased in the ordinary course of business) and (vi) obligations under direct or indirect guaranties in respect of, and obligations (contingent or otherwise) to purchase or otherwise acquire, or otherwise to assure a creditor against loss in respect of, indebtedness or obligations of others of the kinds referred to in clauses (i) through (v) above. "Documentation Agent" means Mellon in its capacity as documentation agent pursuant to Article VII, and not in its individual capacity as a Lender. "Domestic Lending Office" means, with respect to any Lender, the office of such Lender specified as its "Domestic Lending Office" opposite its name on Schedule I hereto or in the Assignment and Acceptance pursuant to which it became a Lender, or such other office of such Lender as such Lender may from time to time specify to the Borrower and the Administrative Agent. "Domestic Rate Reserve Percentage" for the Interest Period for any Adjusted CD Rate Advance means the reserve percentage applicable on the first day of such Interest Period under regulations issued from time to time by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement (including, but not limited to, any emergency, supplemental or other marginal reserve requirement) with respect to liabilities consisting of or including (among other liabilities) U.S. dollar nonpersonal time deposits of $100,000 or more in the United States with a maturity equal to such Interest Period. "Eligible Assignee" means (i) a commercial bank organized under the laws of the United States, or any State thereof; (ii) a commercial bank organized under the laws of any other country that is a member of the OECD or has concluded special lending arrangements with the International Monetary Fund associated with its General Arrangements to Borrow, or a political subdivision of any such country, provided that such bank is acting through a branch or agency located in the United States; (iii) a finance company, insurance company or other financial institution or fund (whether a corporation, partnership or other entity) engaged generally in making, purchasing or otherwise investing in commercial loans in the ordinary course of its business; or (iv) the central bank of any country that is a member of the OECD; provided, however, that (A) any such Person described in clause (i), (ii) or (iii) above shall also (x) have outstanding unsecured long-term debt that is rated BBB- or better by S&P and Baa3 or better by Moody's (or an equivalent rating by another nationally recognized credit rating agency of similar standing if either such corporation is no longer in the business of rating unsecured indebtedness of entities engaged in such businesses) and (y) have combined capital and surplus (as established in its most recent report of condition to its primary regulator) of not less than $100,000,000 (or its equivalent in foreign currency), and (B) any Person described in clause (ii), (iii) or (iv) above shall, on the date on which it is to become a Lender hereunder, be entitled to receive payments hereunder without deduction or withholding of any United States Federal income taxes (as contemplated by Section 2.15(e)). "Eligible Successor" means a Person which (i) is a corporation duly incorporated, validly existing and in good standing under the laws of one of the states of the United States or the District of Columbia, (ii) is qualified to do business in Pennsylvania, (iii) as a result of the contemplated acquisition, consolidation or merger, will succeed to all or substantially all of the consolidated business and assets of the Borrower and its Subsidiaries, (iv) upon giving effect to the contemplated acquisition, consolidation or merger, will have all or substantially all of its consolidated business and assets conducted and located in the United States and (v) is acceptable to the Majority Lenders as a credit matter. 5 "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated and rulings issued thereunder, each as amended and modified from time to time. "Eurocurrency Liabilities" has the meaning assigned to that term in Regulation D of the Board of Governors of the Federal Reserve System, as in effect from time to time. "Eurodollar Lending Office" means, with respect to any Lender, the office of such Lender specified as its "Eurodollar Lending Office" opposite its name on Schedule I hereto or in the Assignment and Acceptance pursuant to which it became a Lender (or, if no such office is specified, its Domestic Lending Office), or such other office of such Lender as such Lender may from time to time specify to the Borrower and the Administrative Agent. "Eurodollar Rate" means, for the Interest Period for each Eurodollar Rate Advance made as part of the same Contract Borrowing, an interest rate per annum equal to the average (rounded upward to the nearest whole multiple of 1/16 of 1% per annum, if such average is not such a multiple) of the rate per annum at which deposits in U.S. dollars are offered by the principal office of each of the Reference Banks in London, England, to prime banks in the London interbank market at 11:00 A.M. (London time) two Business Days before the first day of such Interest Period in an amount substantially equal to such Reference Bank's Eurodollar Rate Advance made as part of such Contract Borrowing and for a period equal to such Interest Period. The Eurodollar Rate for the Interest Period for each Eurodollar Rate Advance made as part of the same Contract Borrowing shall be determined by the Administrative Agent on the basis of applicable rates furnished to and received by the Administrative Agent from the Reference Banks two Business Days before the first day of such Interest Period, subject, however, to the provisions of Section 2.09. "Eurodollar Rate Advance" means a Contract Advance that bears interest as provided in Section 2.07(c). "Eurodollar Rate Reserve Percentage" of any Lender for the Interest Period for any Eurodollar Rate Advance means the reserve percentage applicable during such Interest Period (or if more than one such percentage shall be so applicable, the daily average of such percentages for those days in such Interest Period during which any such percentage shall be so applicable) under regulations issued from time to time by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement (including, without limitation, any emergency, supplemental or other marginal reserve requirement) for such Lender with respect to liabilities or assets consisting of or including Eurocurrency Liabilities having a term equal to such Interest Period. "Events of Default" has the meaning specified in Section 6.01. "Exchange Act" means the Securities Exchange Act of 1934, as amended and modified from time to time. "Federal Funds Rate" means, for any period, a fluctuating interest rate per annum equal for each day during such period to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by it. 6 "GAAP" shall have the meaning given that term in Section 1.03. "Interest Period" means, for each Contract Advance, the period commencing on the date of such Contract Advance or the date of the Conversion of any Contract Advance into such a Contract Advance and ending on the last day of the period selected by the Borrower pursuant to the provisions below and, thereafter, each subsequent period commencing on the last day of the immediately preceding Interest Period and ending on the last day of the period selected by the Borrower pursuant to the provisions below. The duration of each such Interest Period shall be 30, 60, 90 or 180 days in the case of an Adjusted CD Rate Advance, and 1, 2, 3 or 6 months in the case of a Eurodollar Rate Advance, in each case as the Borrower may select in accordance with Section 2.02 or 2.10; provided, however, that: (i) the Borrower may not select any Interest Period that ends after the Termination Date then in effect; (ii) Interest Periods commencing on the same date for Contract Advances made as part of the same Contract Borrowing shall be of the same duration, and (iii) whenever the last day of any Interest Period would otherwise occur on a day other than a Business Day, the last day of such Interest Period shall be extended to occur on the next succeeding Business Day, provided, in the case of any Interest Period for a Eurodollar Rate Advance, that if such extension would cause the last day of such Interest Period to occur in the next following calendar month, the last day of such Interest Period shall occur on the next preceding Business Day. "Lead Manager" means a Bank identified as such on the signature pages to this Agreement, in its capacity as Lead Manager, and not in its individual capacity as a Lender "Lenders" means the Banks listed on the signature pages hereof and each Eligible Assignee that shall become a party hereto pursuant to Section 2.18 or 8.07. "Level 1 Rating Period" means any period during which the Benchmark Debt is rated A- or higher by S&P (or a comparable rating from any generally recognized successor to S&P) or A3 or higher by Moody's (or a comparable rating from any generally recognized successor to Moody's) (it being understood that, for this purpose, such ratings shall be subject to the Split Rating Adjustment). "Level 2 Rating Period" means any period which does not qualify as a Level 1 Rating Period during which the Benchmark Debt is rated BBB+ or higher by S&P (or a comparable rating from any generally recognized successor to S&P) or Baa1 or higher by Moody's (or a comparable rating from any generally recognized successor to Moody's) (it being understood that, for this purpose, such ratings shall be subject to the Split Rating Adjustment). "Level 3 Rating Period" means any period which does not qualify as a Level 1 or Level 2 Rating Period during which the Benchmark Debt is rated BBB or higher by S&P (or a comparable rating from any generally recognized successor to S&P) or Baa2 or higher by Moody's (or a comparable rating from any generally recognized successor to Moody's) (it being understood that, for this purpose, such ratings shall be subject to the Split Rating Adjustment). "Level 4 Rating Period" means any period which does not qualify as a Level 1, Level 2 or Level 3 Rating Period during which the Benchmark Debt is rated BBB- or higher by S&P (or a comparable rating from any generally recognized successor to S&P) or Baa3 or higher by Moody's (or a comparable rating from any generally recognized successor to Moody's) (it being understood that, for this purpose, such ratings shall be subject to the Split Rating Adjustment). 7 "Level 5 Rating Period" means any period which does not qualify as a Level 1, Level 2, Level 3 or Level 4 Rating Period (it being understood that, for this purpose, such ratings shall be subject to the Split Rating Adjustment). "Lien" means any lien (statutory or other), mortgage, pledge, security interest or other charge or encumbrance, or any other type of preferential arrangement (including, without limitation, the interest of a vendor or lessor under any conditional sale, capitalized lease or other title retention agreement). "Material Adverse Change" and "Material Adverse Effect" each means, relative to any occurrence, fact or circumstances of whatsoever nature (including, without limitation, any determination in any litigation, arbitration or governmental investigation or proceeding), any materially adverse change in, or materially adverse effect on, the financial condition, operations, assets or business of the Borrower and its consolidated Subsidiaries, taken as a whole. "Majority Lenders" means, at any time prior to the Termination Date, Lenders having at least 66-2/3% of the Commitments, and, at any time on or after the Termination Date, Lenders having at least 66-2/3% of the Advances outstanding (provided that, for purposes hereof, neither the Borrower, nor any of its Affiliates, if a Lender, shall be included in (i) the Lenders having such amount of the Commitments or the Advances or (ii) determining the total amount of the Commitments or the Advances). "Moody's" means Moody's Investors Service, Inc. "Mortgage" means the First and Refunding Mortgage, dated as of May 1, 1923, between The Counties Gas & Electric Company (to which the Borrower is successor) and Fidelity Trust Company, Trustee (to which First Union National Bank is successor), as amended, supplemented or refinanced from time to time, provided, that no effect shall be given to any amendment, supplement or refinancing after the date of this Agreement that would broaden the definition of "excepted encumbrances" as defined in the Mortgage as constituted on the date of this Agreement. "Multiemployer Plan" means a Plan maintained pursuant to a collective bargaining agreement or any other arrangement to which the Borrower or any member of the Controlled Group is a party to which more than one employer is obligated to make contributions. "Non-Consenting Lender" has the meaning specified in Section 2.17(a). "Nonrecourse Transition Bond Debt" means obligations evidenced by "transition bonds" (as defined in 66 Pa. Cons. Stat. Ann. ss. 2812(g) (West Supp. 1997), or any successor provision of similar import), rated AA or higher by S&P (or a comparable rating from a generally recognized successor to S&P) or Aa2 or higher by Moody's (or a comparable rating from a generally recognized successor to Moody's), representing a securitization of "intangible transition property" (as defined in the foregoing statute), as to which obligations neither the Borrower nor any Subsidiary of the Borrower (other than a Special Purpose Subsidiary) has any direct or indirect liability (whether as primary obligor, guarantor, or surety, provider of collateral security, put option, asset repurchase agreement or capital maintenance agreement, debt subordination agreement, or through other right or arrangement of any nature providing direct or indirect assurance of payment or performance of any such obligations in whole or in part), except for liability to repurchase "intangible transition property" conveyed to the securitization vehicle, on terms and conditions customary in receivables securitizations, in the event such "intangible transition property" violates representations and warranties of scope customary in receivables securitizations. "Special Purpose Subsidiary" means a direct or indirect wholly-owned corporate Subsidiary of the Borrower, substantially all of the assets of which are 8 "intangible transition property" and proceeds thereof, formed solely for the purpose of holding such assets and issuing such "transition bonds," and which complies with the requirements customarily imposed on bankruptcy-remote corporations in receivables securitizations. "Note" means a Contract Note or an Auction Note. "Notice of a Contract Borrowing" has the meaning specified in Section 2.02(a). "Notice of an Auction Borrowing" has the meaning specified in Section 2.03(a). "OECD" means the Organization for Economic Cooperation and Development. "Order of Registration" has the meaning assigned to that term in Section 3.01(a)(iii). "PBGC" means the Pension Benefit Guaranty Corporation and any entity succeeding to any or all of its functions under ERISA. "Person" means an individual, partnership, corporation (including a business trust), joint stock company, trust, unincorporated association, joint venture, limited liability company or other entity, or a government or any political subdivision or agency thereof. "Plan" means an employee pension benefit plan that is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code as to which the Borrower or any member of the Controlled Group may have any liability. "PPUC" means the Pennsylvania Public Utility Commission. "Principal Subsidiary" means (i) each Utility Subsidiary and (ii) from and after the date on which the aggregate book value of the assets of the Subsidiaries of the Borrower that are not Utility Subsidiaries exceeds $250,000,000, each such Subsidiary the assets of which exceeded $75,000,000 in book value at any time during the preceding 24-month period. "Rating Period" means a Level 1 Rating Period, a Level 2 Rating Period, a Level 3 Rating Period, a Level 4 Rating Period or a Level 5 Rating Period, as the case may be. "Reference Banks" means First Chicago, Mellon and Citibank, N.A. "Register" has the meaning specified in Section 8.07(c). "Reportable Event" means a reportable event as defined in Section 4043 of ERISA and regulations issued under such section with respect to a Plan, excluding, however, such events as to which the PBGC by regulation waived the requirement of Section 4043(a) of ERISA that it be notified within 30 days of the occurrence of such event, provided that a failure to meet the minimum funding standard of Section 412 of the Code and Section 302 of ERISA shall be a Reportable Event regardless of the issuance of any such waivers in accordance with either Section 4043(a) of ERISA or Section 412(d) of the Code. "Revolving Credit Agreement" means that certain Revolving Credit Agreement, dated as of October 7, 1997, among the Borrower, the banks named therein, certain banks specified therein, as lead managers thereunder, certain banks specified therein, as co-agents thereunder, First Chicago Capital Markets, Mellon and CitiCorp, as syndication agents thereunder, First Chicago Capital Markets and Mellon, as arrangers thereunder, First Chicago, as administrative agent for the lenders thereunder, and Mellon, as documentation agent for the lenders thereunder, as the same may be amended, modified or supplemented from time to time. 9 "S&P" means Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc. "Securities Certificate" has the meaning assigned to that term in Section 3.01(a)(iii). "Single Employer Plan" means a Plan maintained by the Borrower or any member of the Controlled Group for employees of the Borrower or any member of the Controlled Group. "Special Purpose Subsidiary" has the meaning assigned to that term in the definition of "Nonrecourse Transition Bond Debt." "Split Rating Adjustment": For the purpose of determining the appropriate Rating Period, the rating of the Benchmark Debt shall be subject to adjustment as follows. In the event that the Benchmark Debt is rated at equivalent rating levels or not more than one rating level apart by S&P (or any generally accepted successor to S&P) and Moody's (or any generally accepted successor to Moody's), then no adjustment shall apply. Otherwise, the higher of the two ratings shall be deemed to be reduced to the next lower rating level. For this purpose, (i) determination of the rating level shall take into account "+" and "-" modifiers to S&P ratings and numerical modifiers to Moody's ratings (so that, for example, an S&P rating of A- shall be deemed equivalent to a Moody's rating of A3, an S&P rating of BBB+ shall be deemed equivalent to a Moody's rating of Baa1, an S&P rating of BBB shall be deemed equivalent to a Moody's rating of Baa2, an S&P rating of BBB- shall be deemed equivalent to a Moody's rating of Baa3, and so on), and (ii) by way of clarification, in the event the Benchmark Debt is rated by only one of the two referenced rating agencies, such rating shall be deemed to be reduced to the next lower rating level. "Subsidiary" means, with respect to any Person, any corporation or unincorporated entity of which more than 50% of the outstanding capital stock (or comparable interest) having ordinary voting power (irrespective of whether or not at the time capital stock, or comparable interests, of any other class or classes of such corporation or entity shall or might have voting power upon the occurrence of any contingency) is at the time directly or indirectly owned by such Person (whether directly or through one or more other Subsidiaries). "Syndication Agent" means any of First Chicago Capital Markets, Mellon or CitiCorp, in its capacity as Syndication Agent, and not in its individual capacity as a Lender. "Termination Date" means the earlier of (i) October 6, 1998 (or, if such date is not a Business Day, the next preceding Business Day) or such later date that may be established pursuant to Section 2.17(a) or (ii) the date of termination in whole of the Commitments pursuant to Section 2.05 or Section 6.01. "Unfunded Liabilities" means, (i) in the case of any Single Employer Plan, the amount (if any) by which the present value of all vested nonforfeitable benefits under such Plan exceeds the fair market value of all Plan assets allocable to such benefits, all determined as of the then most recent evaluation date for such Plan, and (ii) in the case of any Multiemployer Plan, the withdrawal liability that would be incurred by the Controlled Group if all members of the Controlled Group completely withdrew from such Multiemployer Plan. "Utility Subsidiary" means each Subsidiary of the Borrower that is engaged principally in the generation, transmission, or distribution of electricity or gas and is subject to regulation as a public utility by federal or state regulatory authorities. "Yield" means, for any Auction Advance, the effective rate per annum at which interest on such Auction Advance is payable, computed on the basis of a year of 360 days for the actual 10 number of days (including the first day but excluding the last day) occurring in the period for which such interest is payable. SECTION 1.02. Computation of Time Periods. In this Agreement in the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including" and the words "to" and "until" each means "to but excluding". SECTION 1.03. Accounting Principles. As used in this Agreement, "GAAP" shall mean generally accepted accounting principles in the United States, applied on a basis consistent with the principles used in preparing the Borrower's audited consolidated financial statements as of December 31, 1996 and for the fiscal year then ended. In this Agreement, except to the extent, if any, otherwise provided herein, all accounting and financial terms shall have the meanings ascribed to such terms by GAAP, and all computations and determinations as to accounting and financial matters shall be made in accordance with GAAP. In the event that the financial statements generally prepared by the Borrower apply accounting principles other than GAAP, the compliance certificate delivered pursuant to Section 5.01(b)(iv) accompanying such financial statements shall include information in reasonable detail reconciling such financial statements to GAAP to the extent relevant to the calculations set forth in such compliance certificate. ARTICLE II AMOUNTS AND TERMS OF THE ADVANCES SECTION 2.01. The Contract Advances. Each Lender severally agrees, on the terms and conditions hereinafter set forth, to make Contract Advances to the Borrower from time to time on any Business Day during the period from the date hereof until (but excluding) the Termination Date in an aggregate amount not to exceed at any time outstanding the amount set forth opposite such Lender's name on the signature pages hereof or, if such Lender has entered into any Assignment and Acceptance or Additional Lender Supplement, set forth for such Lender in the Register maintained by the Administrative Agent pursuant to Section 8.07(c), as such amount may be reduced pursuant to Section 2.05 or 2.17 (such Lender's "Commitment"); provided, that the aggregate amount of the Commitments of the Lenders shall be deemed used from time to time to the extent of the aggregate amount of the Auction Advances then outstanding, and such deemed use of the aggregate amount of the Commitments shall be applied to the Lenders ratably according to their respective Commitments (such deemed use of the aggregate amount of the Commitments being an "Auction Reduction"). Each Contract Borrowing shall consist of Contract Advances of the same Type made or Converted on the same day by the Lenders ratably according to their respective Commitments. Each Contract Borrowing comprising Base Rate Advances shall be in an aggregate amount not less than $5,000,000, and each Contract Borrowing comprising Adjusted CD Rate Advances or Eurodollar Rate Advances shall be in an aggregate amount not less than $10,000,000. Within the limits of each Lender's Commitment, the Borrower may from time to time borrow, prepay pursuant to Section 2.11 and reborrow under this Section 2.01. SECTION 2.02. Making the Contract Advances. (a) Each Contract Borrowing (other than pursuant to a Conversion) shall be made on notice, given not later than 10:00 A.M. (Chicago time) on the third Business Day prior to the date of any proposed Contract Borrowing comprising Eurodollar Rate Advances, on the second Business Day prior to the date of any proposed Contract Borrowing comprising Adjusted CD Rate Advances and on the date of any proposed Contract Borrowing comprising Base Rate Advances, by the Borrower to the Administrative Agent, which shall give to each Lender prompt notice thereof. Each such notice of a Contract Borrowing (a "Notice of a Contract Borrowing") shall be sent by telecopier, telex or cable, confirmed immediately in writing, in substantially the form of Exhibit B-1 hereto, specifying therein the requested (i) date of such Contract Borrowing, (ii) Type of Contract Advances to be made in connection with such Contract Borrowing, (iii) 11 aggregate amount of such Contract Borrowing, and (iv) in the case of a Contract Borrowing comprising Adjusted CD Rate Advances or Eurodollar Rate Advances, initial Interest Period for the Contract Advances to be made in connection with such Contract Borrowing. Each Lender shall, before 11:00 A.M. (Chicago time) on the date of such Contract Borrowing, make available for the account of its Applicable Lending Office to the Administrative Agent at its address referred to in Section 8.02, in same day funds, such Lender's ratable portion of such Contract Borrowing. After the Administrative Agent's receipt of such funds and upon fulfillment of the applicable conditions set forth in Article III, the Administrative Agent will make such funds available to the Borrower at the Administrative Agent's aforesaid address. (b) Each Notice of a Contract Borrowing shall be irrevocable and binding on the Borrower. In the case of any Contract Borrowing that the related Notice of a Contract Borrowing specifies is to comprise Adjusted CD Rate Advances or Eurodollar Rate Advances, the Borrower shall indemnify each Lender against any loss, cost or expense incurred by such Lender as a result of any failure to fulfill on or before the date specified in such Notice of a Contract Borrowing for such Contract Borrowing the applicable conditions set forth in Article III, including, without limitation, any loss, cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such Lender to fund the Contract Advance to be made by such Lender as part of such Contract Borrowing when such Contract Advance, as a result of such failure, is not made on such date. (c) Unless the Administrative Agent shall have received notice from a Lender prior to the date of any Contract Borrowing that such Lender will not make available to the Administrative Agent such Lender's ratable portion of such Contract Borrowing, the Administrative Agent may assume that such Lender has made such portion available to the Administrative Agent on the date of such Contract Borrowing in accordance with subsection (a) of this Section 2.02 and the Administrative Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent that such Lender shall not have so made such ratable portion available to the Administrative Agent, such Lender and the Borrower severally agree to repay to the Administrative Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Administrative Agent, at (i) in the case of the Borrower, the interest rate applicable at the time to Contract Advances made in connection with such Contract Borrowing and (ii) in the case of such Lender, the Federal Funds Rate. If such Lender shall repay to the Administrative Agent such corresponding amount, such amount so repaid shall constitute such Lender's Contract Advance as part of such Contract Borrowing for purposes of this Agreement. (d) The failure of any Lender to make the Contract Advance to be made by it as part of any Contract Borrowing shall not relieve any other Lender of its obligation, if any, hereunder to make its Contract Advance on the date of such Contract Borrowing, but no Lender shall be responsible for the failure of any other Lender to make the Contract Advance to be made by such other Lender on the date of any Contract Borrowing. (e) Notwithstanding anything to the contrary contained herein, no more than sixteen (16) Contract Borrowings comprising Adjusted CD Rate Advances and Eurodollar Rate Advances may be outstanding at any time. SECTION 2.03. The Auction Advances. (a) Each Lender severally agrees that the Borrower may request Auction Borrowings under this Section 2.03 from time to time on any Business Day during the period from the date hereof until the date occurring seven days prior to the Termination Date, in the manner set forth below; provided that, following the making of each Auction Borrowing, the aggregate amount of the Advances then outstanding shall not exceed the aggregate amount of the Commitments of the Lenders. 12 (i) The Borrower may request an Auction Borrowing by delivering to the Administrative Agent by telecopier, telex or cable, confirmed immediately in writing, a notice of an Auction Borrowing (a "Notice of an Auction Borrowing"), in substantially the form of Exhibit B-2 hereto, specifying the date and aggregate amount of the proposed Auction Borrowing, the maturity date for repayment of each Auction Advance to be made as part of such Auction Borrowing (which maturity date may not be earlier than the date occurring seven days after the date of such Auction Borrowing or later than the earlier to occur of (A) 270 days after the date of such Auction Borrowing and (B) the Termination Date), the interest payment date or dates relating thereto (which shall occur at least every 90 days), and any other terms to be applicable to such Auction Borrowing, not later than 9:00 A.M. (Chicago time) at least one Business Day prior to the date of the proposed Auction Borrowing. The Administrative Agent shall in turn promptly notify each Lender of each request for an Auction Borrowing received by it from the Borrower by sending such Lender a copy of the related Notice of an Auction Borrowing. (ii) Each Lender may, in its sole discretion, elect to irrevocably offer to make one or more Auction Advances to the Borrower as part of such proposed Auction Borrowing at a rate or rates of interest specified by such Lender in its sole discretion, by notifying the Administrative Agent (which shall give prompt notice thereof to the Borrower), before 9:00 A.M. (Chicago time) on the date of such proposed Auction Borrowing of the minimum amount and maximum amount of each Auction Advance that such Lender would be willing to make as part of such proposed Auction Borrowing (which amounts may, subject to the proviso to the first sentence of this Section 2.03(a), exceed such Lender's Commitment), the rate or rates of interest therefor, the interest period relating thereto and such Lender's Applicable Lending Office with respect to such Auction Advance; provided that if the Administrative Agent in its capacity as a Lender shall, in its sole discretion, elect to make any such offer, it shall notify the Borrower of such offer before 8:00 A.M. (Chicago time) on the date on which notice of such election is to be given to the Administrative Agent by the other Lenders. (iii) The Borrower shall, in turn, before 10:00 A.M. (Chicago time) on the date of such proposed Auction Borrowing, either (A) cancel such Auction Borrowing by giving the Administrative Agent notice to that effect, or (B) irrevocably accept one or more of the offers made by any Lender or Lenders pursuant to paragraph (ii) above, in its sole discretion, in an aggregate amount not in excess of the aggregate amount of the proposed Auction Borrowing requested in the relevant Notice of an Auction Borrowing, subject only to the provisions of this paragraph (iii), by giving notice to the Administrative Agent of the amount of each Auction Advance (which amount shall be equal to or greater than the minimum amount, and equal to or less than the maximum amount, notified to the Borrower by the Administrative Agent on behalf of such Lender for such Auction Advance pursuant to paragraph (ii) above) to be made by each Lender as part of such Auction Borrowing, and reject any remaining offers made by Lenders pursuant to paragraph (ii) above by giving the Administrative Agent notice to that effect; provided, however, that (x) the Borrower shall not accept an offer made pursuant to paragraph (ii) above, at any Yield if the Borrower shall have, or shall be deemed to have, rejected any other offer made pursuant to paragraph (ii) above, at a lower Yield, (y) if the Borrower declines to accept, or is otherwise restricted by the provisions of this Agreement from accepting, the maximum aggregate principal amount of Auction Borrowings offered at the same Yield pursuant to paragraph (ii) above, 13 then the Borrower shall accept a pro rata portion of each offer made at such Yield, based as nearly as possible on the ratio of the aggregate principal amount of such offers to be accepted by the Borrower to the maximum aggregate principal amount of such offers made pursuant to paragraph (ii) above (rounding up or down to the next higher or lower multiple of $1,000,000), and (z) no offer made pursuant to paragraph (ii) above shall be accepted unless the Auction Borrowing in respect of such offer is in an integral multiple of $1,000,000 and the aggregate amount of such offers accepted by the Borrower is equal to at least $10,000,000. Any offer or offers made pursuant to paragraph (ii) above not expressly accepted or rejected by the Borrower in accordance with this paragraph (iii) shall be deemed to have been rejected by the Borrower. (iv) If the Borrower notifies the Administrative Agent that such Auction Borrowing is canceled pursuant to clause (A) of paragraph (iii) above, the Administrative Agent shall give prompt notice thereof to the Lenders and such Auction Borrowing shall not be made. (v) If the Borrower accepts one or more of the offers made by any Lender or Lenders pursuant to clause (B) of paragraph (iii) above, the Administrative Agent shall in turn promptly notify (A) each Lender that has made an offer as described in paragraph (ii) above, of the date and aggregate amount of such Auction Borrowing and whether or not any offer or offers made by such Lender pursuant to paragraph (ii) above have been accepted by the Borrower, (B) each Lender that is to make an Auction Advance as part of such Auction Borrowing of the amount of each Auction Advance to be made by such Lender as part of such Auction Borrowing, and (C) each Lender that is to make an Auction Advance as part of such Auction Borrowing, upon receipt, that the Administrative Agent has received forms of documents appearing to fulfill the applicable conditions set forth in Article III. Each Lender that is to make an Auction Advance as part of such Auction Borrowing shall, before 11:00 A.M. (Chicago time) on the date of such Auction Borrowing specified in the notice received from the Administrative Agent pursuant to clause (A) of the preceding sentence or any later time when such Lender shall have received notice from the Administrative Agent pursuant to clause (C) of the preceding sentence, make available for the account of its Applicable Lending Office to the Administrative Agent at its address referred to in Section 8.02 such Lender's portion of such Auction Borrowing, in same day funds. Upon fulfillment of the applicable conditions set forth in Article III and after receipt by the Administrative Agent of such funds, the Administrative Agent will make such funds available to the Borrower at the Administrative Agent's aforesaid address. Promptly after each Auction Borrowing, the Administrative Agent will notify each Lender of the amount of the Auction Borrowing, the consequent Auction Reduction and the dates upon which such Auction Reduction commenced and will terminate. (b) Each Auction Advance shall be in an amount not less than $1,000,000 or an integral multiple of $1,000,000 in excess thereof and, following the making of each Auction Borrowing, the Borrower shall be in compliance with the limitation set forth in the proviso to the first sentence of subsection (a) above. (c) Within the limits and on the conditions set forth in this Section 2.03, the Borrower may from time to time borrow under this Section 2.03, repay or prepay pursuant to subsection (d) below, and reborrow under this Section 2.03; provided, that an Auction Borrowing shall not be made within three Business Days of the date of any other Auction Borrowing. 14 (d) The Borrower shall repay to the Administrative Agent for the account of each Lender that has made an Auction Advance, or each other holder of an Auction Note, on the maturity date of each Auction Advance (such maturity date being that specified by the Borrower for repayment of such Auction Advance in the related Notice of an Auction Borrowing delivered pursuant to subsection (a)(i) above and provided in the Auction Note evidencing such Auction Advance), the then unpaid principal amount of such Auction Advance. The Borrower shall have no right to prepay any principal amount of any Auction Advance unless, and then only on the terms, specified by the Borrower for such Auction Advance in the related Notice of an Auction Borrowing delivered pursuant to subsection (a)(i) above and set forth in the Auction Note evidencing such Auction Advance. (e) The Borrower shall pay interest on the unpaid principal amount of each Auction Advance from the date of such Auction Advance to the date the principal amount of such Auction Advance is repaid in full, at the rate of interest for such Auction Advance specified by the Lender making such Auction Advance in its notice with respect thereto delivered pursuant to subsection (a)(ii) above, payable on the interest payment date or dates specified by the Borrower for such Auction Advance in the related Notice of an Auction Borrowing delivered pursuant to subsection (a)(i) above, as provided in the Auction Note evidencing such Auction Advance. (f) The indebtedness of the Borrower resulting from each Auction Advance made to the Borrower as part of an Auction Borrowing shall be evidenced by a separate Auction Note of the Borrower payable to the order of the Lender making such Auction Advance. (g) Upon payment in full of the principal amount of any Auction Note and interest accrued thereon, the holder of such Auction Note shall cancel and return such Auction Note to the Borrower. SECTION 2.04. Fees. (a) The Borrower agrees to pay to the Administrative Agent for the account of each Lender a commitment fee on the average daily unused portion of such Lender's Commitment (after giving effect to any Auction Reduction) from the date hereof in the case of each Bank, and from the effective date specified in the Assignment and Acceptance or the Additional Lender Supplement pursuant to which it became a Lender in the case of each other Lender, until the Termination Date, and, in the case of the termination in whole of a Lender's Commitment pursuant to Section 2.05 or 2.17, the date of such termination, payable on the last day of each March, June, September and December during such period, and on the Termination Date, and, in the case of the termination in whole of a Lender's Commitment pursuant to Section 2.05 or 2.17, the date of such termination, at a percentage rate per annum equal to the Applicable Commitment Fee Rate in effect from time to time, changing when and as the Applicable Commitment Fee Rate changes. (b) The Borrower agrees to pay to the Administrative Agent for the account of each Lender an auction facility fee on the average daily aggregate principal amount of such Lender's Auction Reduction during the period from the date hereof in the case of each Bank, and from the effective date specified in the Assignment and Acceptance pursuant to which it became a Lender in the case of each other Lender, until the Termination Date, and, in the case of the termination in whole of a Lender's Commitment pursuant to Section 2.05 or 2.17, the date of such termination, payable on the last day of each March, June, September and December during such period, and on the Termination Date, and, in the case of the termination in whole of a Lender's Commitment pursuant to Section 2.05 or 2.17, the date of such termination, at a percentage rate per annum equal to the Applicable Commitment Fee Rate in effect from time to time, changing when and as the Applicable Commitment Fee Rate changes. (c) The Borrower agrees to pay to the Documentation Agent for its own account a closing fee as agreed to in writing between the Borrower and the Documentation Agent, payable upon the execution and delivery of this Agreement. 15 (d) The Borrower agrees to pay to the Administrative Agent for its own account a closing fee, an auction administration fee and an Administrative Agent's administration fee, each payable in such amounts and on such dates as may be agreed to in writing from time to time between the Borrower and the Administrative Agent. SECTION 2.05. Reduction of the Commitments. The Borrower shall have the right, upon at least two Business Days' notice to the Administrative Agent, to terminate in whole or reduce ratably in part the unused portions of the respective Commitments of the Lenders; provided, that the aggregate amount of the Commitments of the Lenders shall not be reduced to an amount that is less than the aggregate principal amount of the Advances then outstanding; and provided, further, that each partial reduction shall be in the aggregate amount of $1,000,000 or an integral multiple thereof. SECTION 2.06. Repayment of Contract Advances. The Borrower shall repay the principal amount of each Contract Advance made by each Lender in accordance with the Contract Note to the order of such Lender. SECTION 2.07. Interest on Contract Advances. The Borrower shall pay interest on the unpaid principal amount of each Contract Advance made by each Lender from the date of such Contract Advance until such principal amount shall be paid in full, at the following rates per annum: (a) Base Rate Advances. If such Contract Advance is a Base Rate Advance, a rate per annum equal at all times to the Base Rate in effect from time to time, payable quarterly on the last day of each March, June, September and December during such periods and on the date such Base Rate Advance shall be Converted or paid in full. (b) Adjusted CD Rate Advances. If such Contract Advance is an Adjusted CD Rate Advance, a rate per annum equal at all times during the Interest Period for such Contract Advance to the sum of the Adjusted CD Rate for such Interest Period plus the Applicable Margin for such Adjusted CD Rate in effect from time to time, payable on the last day of the Interest Period for such Adjusted CD Rate Advance (or, if the Interest Period for such Advance is 180 days, accrued interest shall be payable on the 90th day and the 180th day of such Interest Period) or, if earlier, on the date such Adjusted CD Rate Advance shall be Converted or paid in full. (c) Eurodollar Rate Advances. Subject to Section 2.08, if such Contract Advance is a Eurodollar Rate Advance, a rate per annum equal at all times during the Interest Period for such Contract Advance to the sum of the Eurodollar Rate for such Interest Period plus the Applicable Margin for such Eurodollar Rate Advance in effect from time to time, payable on the last day of the Interest Period for such Eurodollar Rate Advance (or, if the Interest Period for such Advance is six months, accrued interest shall be payable on the day that is three months and on the day that is six months from the date such Advance was made) or, if earlier, on the date such Eurodollar Rate Advance shall be Converted or paid in full. SECTION 2.08. Additional Interest on Contract Advances. The Borrower shall pay to each Lender, so long as such Lender shall be required under regulations of the Board of Governors of the Federal Reserve System to maintain reserves with respect to liabilities or assets consisting of or including Eurocurrency Liabilities, additional interest on the unpaid principal amount of each Eurodollar Rate Advance of such Lender, from the date of such Contract Advance until such principal amount is paid in full or Converted, at an interest rate per annum equal at all times to the remainder obtained by subtracting (i) the Eurodollar Rate for the Interest Period for such Contract Advance from (ii) the rate obtained by dividing such Eurodollar Rate by a percentage equal to 100% minus the Eurodollar Rate Reserve Percentage of such Lender for such Interest Period, payable on each date on which interest is payable on such Contract Advance; provided, that no Lender shall be entitled to demand such additional interest more than 90 days following the last day of the Interest Period in respect of which such demand is made; provided further, however, that the foregoing proviso shall in no way limit the right of any 16 Lender to demand or receive such additional interest to the extent that such additional interest relates to the retroactive application of the reserve requirements described above if such demand is made within 90 days after the implementation of such retroactive reserve requirements. Such additional interest shall be determined by such Lender and notified to the Borrower through the Administrative Agent, and such determination shall be conclusive and binding for all purposes, absent manifest error. SECTION 2.09. Interest Rate Determination. (a) Each Reference Bank agrees to furnish to the Administrative Agent timely information for the purpose of determining each Adjusted CD Rate or Eurodollar Rate, as applicable. If any one of the Reference Banks shall not furnish such timely information to the Administrative Agent for the purpose of determining any such interest rate, the Administrative Agent shall determine such interest rate on the basis of timely information furnished by the remaining Reference Banks. (b) The Administrative Agent shall give prompt notice to the Borrower and the Lenders of the applicable interest rate determined by the Administrative Agent for purposes of Section 2.07(a), (b) or (c), and the applicable rate, if any, furnished by each Reference Bank for the purpose of determining the applicable interest rate under Section 2.07(b) or (c). (c) If fewer than two Reference Banks furnish timely information to the Administrative Agent for determining the Adjusted CD Rate for any Adjusted CD Rate Advances, or the Eurodollar Rate for any Eurodollar Rate Advances, (i) the Administrative Agent shall forthwith notify the Borrower and the Lenders that the interest rate cannot be determined for such Adjusted CD Rate Advances or Eurodollar Rate Advances, as the case may be, (ii) each such Advance will automatically, on the last day of the then existing Interest Period therefor, Convert into a Base Rate Advance (or if such Advance is then a Base Rate Advance, will continue as a Base Rate Advance), and (iii) the obligation of the Lenders to make, or to Convert Contract Advances into, Adjusted CD Rate Advances or Eurodollar Rate Advances, as the case may be, shall be suspended until the Administrative Agent shall notify the Borrower and the Lenders that the circumstances causing such suspension no longer exist. (d) If, with respect to any Eurodollar Rate Advances, the Majority Lenders notify the Administrative Agent that the Eurodollar Rate for any Interest Period for such Advances will not adequately reflect the cost to such Majority Lenders of making, funding or maintaining their respective Eurodollar Rate Advances for such Interest Period, the Administrative Agent shall forthwith so notify the Borrower and the Lenders, whereupon (i) each Eurodollar Rate Advance will automatically, on the last day of the then existing Interest Period therefor (unless prepaid or Converted to any Type of Advance other than a Eurodollar Rate Advance prior to such date), Convert into a Base Rate Advance, and (ii) the obligation of the Lenders to make, or to Convert Contract Advances into, Eurodollar Rate Advances shall be suspended until the Administrative Agent shall notify the Borrower and the Lenders that the circumstances causing such suspension no longer exist. SECTION 2.10. Conversion of Contract Advances. (a) Voluntary. The Borrower may on any Business Day, upon notice given to the Administrative Agent not later than 10:00 A.M. (Chicago time) on the third Business Day prior to the date of any proposed Conversion into Eurodollar Rate 17 Advances, the second Business Day prior to the date of any proposed Conversion into Adjusted CD Rate Advances and on the date of any proposed Conversion into Base Rate Advances, and subject to the provisions of Sections 2.09 and 2.13, Convert all Contract Advances of one Type made in connection with the same Contract Borrowing into Advances of another Type or Types or Advances of the same Type having the same or a new Interest Period; provided, however, that any Conversion of Adjusted CD Rate Advances or Eurodollar Rate Advances into Advances of another Type or Advances of the same Type having the same or new Interest Periods shall be made on, and only on, the last day of an Interest Period for such Adjusted CD Rate Advances or Eurodollar Rate Advances, unless the Borrower shall also reimburse the Lenders in respect thereof pursuant to Section 8.04(b) on the date of such Conversion. Each such notice of a Conversion shall, within the restrictions specified above, specify (i) the date of such Conversion, (ii) the Contract Advances to be Converted, and (iii) if such Conversion is into, or with respect to, Adjusted CD Rate Advances or Eurodollar Rate Advances, the duration of the Interest Period for each such Contract Advance. (b) Automatic. If the Borrower shall fail to select the Type of any Contract Advance or the duration of any Interest Period for any Contract Borrowing comprising Adjusted CD Rate Advances or Eurodollar Rate Advances in accordance with the provisions contained in the definition of "Interest Period" in Section 1.01 and Section 2.10(a), the Administrative Agent will forthwith so notify the Borrower and the Lenders and such Advances will automatically, on the last day of the then existing Interest Period therefor, Convert into Base Rate Advances. SECTION 2.11. Prepayments. The Borrower may, upon at least two Business Days' notice (or same day notice in the case of any prepayment of Base Rate Advances) to the Administrative Agent stating the proposed date and aggregate principal amount of the prepayment, and if such notice is given the Borrower shall, prepay the outstanding principal amounts of the Advances made as part of the same Contract Borrowing in whole or ratably in part, together with accrued interest to the date of such prepayment on the principal amount prepaid; provided, however, that (i) each partial prepayment shall be in an aggregate principal amount not less than $10,000,000 (or $5,000,000 in the case of any prepayment of Base Rate Advances) and (ii) in the case of any such prepayment of an Adjusted CD Advance or Eurodollar Rate Advance, the Borrower shall be obligated to reimburse the Lenders in respect thereof pursuant to Section 8.04(b) on the date of such prepayment. SECTION 2.12. Increased Costs. (a) If on or after (x) the date of this Agreement, in the case of any Contract Advance or any obligation to make a Contract Advance, or (y) the date a Lender offers to make such Auction Advance, in the case of any Auction Advance, any Lender determines that (i) the introduction of or any change (other than any change by way of imposition or increase of reserve requirements, in the case of Adjusted CD Rate Advances, included in the Domestic Rate Reserve Percentage or, in the case of Eurodollar Rate Advances, included in the Eurodollar Rate Reserve Percentage) in or in the interpretation of any law or regulation or (ii) the compliance with any guideline or request from any central bank or other governmental authority (whether or not having the force of law) shall increase the cost to such Lender of agreeing to make or making, funding or maintaining Adjusted CD Rate Advances or Eurodollar Rate Advances, then the Borrower shall from time to time, upon demand by such Lender (with a copy of such demand to the Administrative Agent), pay to the Administrative Agent for the account of such Lender additional amounts (without duplication of any amount payable pursuant to Section 2.15) sufficient to compensate such Lender for such increased cost; provided, that no Lender shall be entitled to demand such compensation more than 90 days following the last day of the Interest Period in respect of which such demand is made; provided further, however, that the foregoing proviso shall in no way limit the right of any Lender to demand or receive such compensation to the extent that such compensation relates to the retroactive application of any law, regulation, guideline or request described in clause (i) or (ii) above if such demand is made within 90 days after the implementation of such retroactive law, interpretation, guideline or request. A certificate as to the amount of such increased cost, submitted to the Borrower and the Administrative Agent by such Lender, shall be conclusive and binding for all purposes, absent manifest error. 18 (b) If any Lender determines that, after the date of this Agreement, compliance with any law or regulation or any guideline or request from any central bank or other governmental authority (whether or not having the force of law) regarding capital adequacy requirements affects or would affect the amount of capital required or expected to be maintained by such Lender or any corporation controlling such Lender (including, in any event, any determination after the date of this Agreement by any such governmental authority or central bank that, for purposes of capital adequacy requirements, any Lender's Commitment hereunder does not constitute a commitment with an original maturity of one year or less) and that the amount of such capital is increased by or based upon the existence of such Lender's commitment to lend hereunder and other commitments of this type or the Advances made by such Lender, then, upon demand by such Lender (with a copy of such demand to the Administrative Agent), the Borrower shall immediately pay to the Administrative Agent for the account of such Lender, from time to time as specified by such Lender, additional amounts sufficient to compensate such Lender or such corporation in the light of such circumstances, to the extent that such Lender determines such increase in capital to be allocable to the existence of such Lender's commitment to lend hereunder or the Advances made by such Lender; provided, that no Lender shall be entitled to demand such compensation more than one year following the payment to or for the account of such Lender of all other amounts payable hereunder and under any Note held by such Lender and the termination of such Lender's Commitment; provided further, however, that the foregoing proviso shall in no way limit the right of any Lender to demand or receive such compensation to the extent that such compensation relates to the retroactive application of any law, regulation, guideline or request described above if such demand is made within one year after the implementation of such retroactive law, interpretation, guideline or request. A certificate as to such amounts submitted to the Borrower and the Administrative Agent by such Lender shall be conclusive and binding, for all purposes, absent manifest error. (c) Any Lender claiming compensation pursuant to this Section 2.12 shall use its best efforts (consistent with its internal policy and legal and regulatory restrictions) to change the jurisdiction of its Applicable Lending Office if the making of such a change would avoid the need for, or reduce the amount of, any such compensation that may thereafter accrue and would not, in the reasonable judgment of such Lender, be otherwise disadvantageous to such Lender. SECTION 2.13. Illegality. Notwithstanding any other provision of this Agreement, if any Lender shall notify the Administrative Agent that the introduction of or any change in or in the interpretation of any law or regulation makes it unlawful, or any central bank or other governmental authority asserts that it is unlawful, for such Lender or its Eurodollar Lending Office to perform its obligations hereunder to make Eurodollar Rate Advances or to fund or maintain Eurodollar Rate Advances hereunder, (i) the obligation of such Lender to make, or to Convert Contract Advances into, Eurodollar Rate Advances shall be suspended (subject to the following paragraph of this Section 2.13) until the Administrative Agent shall notify the Borrower and the Lenders that the circumstances causing such suspension no longer exist and (ii) all Eurodollar Rate Advances of such Lender then outstanding shall, on the last day of then applicable Interest Period (or such earlier date as such Lender shall designate upon not less than five Business Days prior written notice to the Administrative Agent), be automatically Converted into Base Rate Advances. If the obligation of any Lender to make, fund or maintain Eurodollar Rate Advances has been suspended pursuant to the preceding paragraph, then, unless and until the Administrative Agent shall notify the Borrower and the Lenders that the circumstances causing such suspension no longer exist (i) all Contract Advances that would otherwise be made by such Lender as Eurodollar Rate Advances shall instead be made as Base Rate Advances and (ii) to the extent that Eurodollar Rate Advances of such Lender have been Converted into Base Rate Advances pursuant to the preceding paragraph or made instead as Base Rate Advances pursuant to the preceding clause (i), all payments and prepayments of principal that would have otherwise been applied to such Eurodollar Rate Advances of such Lender shall be applied instead to such Base Rate Advances of such Lender. 19 SECTION 2.14. Payments and Computations. (a) The Borrower shall make each payment hereunder and under the Notes not later than 10:00 A.M. (Chicago time) on the day when due in U.S. dollars to the Administrative Agent at its address referred to in Section 8.02 in same day funds. The Administrative Agent will promptly thereafter cause to be distributed like funds relating to the payment of principal or interest or commitment and auction facility fees ratably (other than amounts payable pursuant to Section 2.02(c), 2.03, 2.08, 2.12, 2.15, 2.17(a) or 8.04(b)) to the Lenders for the account of their respective Applicable Lending Offices, and like funds relating to the payment of any other amount payable to any Lender to such Lender for the account of its Applicable Lending Office, in each case to be applied in accordance with the terms of this Agreement. Upon its acceptance of an Assignment and Acceptance and recording of the information contained therein in the Register pursuant to Section 8.07(d), from and after the effective date specified in such Assignment and Acceptance, the Administrative Agent shall make all payments hereunder and under the Notes in respect of the interest assigned thereby to the Lender assignee thereunder, and the parties to such Assignment and Acceptance shall make all appropriate adjustments in such payments for periods prior to such effective date directly between themselves. (b) The Borrower hereby authorizes each Lender, if and to the extent payment owed to such Lender is not made when due hereunder or under any Note held by such Lender, to charge from time to time against any or all of the Borrower's accounts with such Lender any amount so due. (c) All computations of interest based on the Base Rate shall be made by the Administrative Agent on the basis of a year of 365 or 366 days, as the case may be, and all computations of interest based on the Adjusted CD Rate, the Eurodollar Rate or the Federal Funds Rate and of commitment fees, auction facility fees and interest payable on Auction Advances shall be made by the Administrative Agent, and all computations of interest pursuant to Section 2.08 shall be made by a Lender, on the basis of a year of 360 days, in each case for the actual number of days (including the first day but excluding the last day) occurring in the period for which such interest or commitment fees are payable. Each determination by the Administrative Agent (or, in the case of Section 2.08, by a Lender) of an interest rate hereunder shall be conclusive and binding for all purposes, absent manifest error. (d) Whenever any payment hereunder or under the Notes shall be stated to be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of payment of interest or commitment fee, as the case may be; provided, however, if such extension would cause payment of interest on or principal of Eurodollar Rate Advances to be made in the next following calendar month, such payment shall be made on the next preceding Business Day. (e) Unless the Administrative Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Lenders hereunder that the Borrower will not make such payment in full, the Administrative Agent may assume that the Borrower has made such payment in full to the Administrative Agent on such date and the Administrative Agent may, in reliance upon such assumption, cause to be distributed to each Lender on such due date an amount equal to the amount then due such Lender. If and to the extent that the Borrower shall not have so made such payment in full to the Administrative Agent, each Lender shall repay to the Administrative Agent forthwith on demand such amount distributed to such Lender together with interest thereon, for each day from the date such amount is distributed to such Lender until the date such Lender repays such amount to the Administrative Agent, at the Federal Funds Rate. (f) Notwithstanding anything to the contrary contained herein, any amount payable by the Borrower hereunder or under any Note that is not paid when due (whether at stated maturity, by acceleration or otherwise) shall (to the fullest extent permitted by law) bear interest from the date when due until paid in full at a rate per annum equal at all times to the Base Rate plus 2%, payable upon demand. 20 SECTION 2.15. Taxes. (a) Any and all payments by the Borrower hereunder or under the Contract Notes shall be made, in accordance with Section 2.14, free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding, in the case of each Lender and the Administrative Agent, taxes imposed on its income, and franchise taxes imposed on it, by the jurisdiction under the laws of which such Lender or the Administrative Agent (as the case may be) is organized or any political subdivision thereof and, in the case of each Lender, taxes imposed on its income, and franchise taxes imposed on it, by the jurisdiction of such Lender's Applicable Lending Office or any political subdivision thereof (all such non-excluded taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "Taxes"). If the Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder or under any Note to any Lender or the Administrative Agent, (i) the sum payable shall be increased as may be necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 2.15) such Lender or the Administrative Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions and (iii) the Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law. (b) In addition, the Borrower agrees to pay any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies to the extent arising from the execution, delivery or registration of this Agreement or the Contract Notes (hereinafter referred to as "Other Taxes"). (c) No Lender may claim or demand payment or reimbursement in respect of any Taxes or Other Taxes pursuant to this Section 2.15 if such Taxes or Other Taxes, as the case may be, were imposed solely as the result of a voluntary change in the location of the jurisdiction of such Lender's Applicable Lending Office. (d) The Borrower will indemnify each Lender and the Administrative Agent for the full amount of Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes imposed by any jurisdiction on amounts payable under this Section 2.15) paid by such Lender or the Administrative Agent (as the case may be) and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted. This indemnification shall be made within 30 days from the date such Lender or the Administrative Agent (as the case may be) makes written demand therefor. (e) Prior to the date of the initial Borrowing in the case of each Bank, and on the date of the Assignment and Acceptance or Additional Lender Supplement pursuant to which it became a Lender in the case of each other Lender, and from time to time thereafter within 30 days from the date of request if requested by the Borrower or the Administrative Agent, each Lender organized under the laws of a jurisdiction outside the United States shall provide the Administrative Agent and the Borrower with the forms prescribed by the Internal Revenue Service of the United States certifying that such Lender is exempt from United States withholding taxes with respect to all payments to be made to such Lender hereunder and under the Notes. If for any reason during the term of this Agreement, any Lender becomes unable to submit the forms referred to above or the information or representations contained therein are no longer accurate in any material respect, such Lender shall notify the Administrative Agent and the Borrower in writing to that effect. Unless the Borrower and the Administrative Agent have received forms or other documents satisfactory to them indicating that payments hereunder or under any Note are not subject to United States withholding tax, the Borrower or the Administrative Agent shall withhold taxes from such payments at the applicable statutory rate in the case of payments to or for any Lender organized under the laws of a jurisdiction outside the United States and no Lender may claim or demand payment or reimbursement for such withheld taxes pursuant to this Section 2.15. 21 (f) Any Lender claiming any additional amounts payable pursuant to this Section 2.15 shall use its best efforts (consistent with its internal policy and legal and regulatory restrictions) to change the jurisdiction of its Applicable Lending Office if the making of such a change would avoid the need for, or reduce the amount of, any such additional amounts which may thereafter accrue and would not, in the reasonable judgment of such Lender, be otherwise disadvantageous to such Lender. (g) If the Borrower makes any additional payment to any Lender pursuant to this Section 2.15 in respect of any Taxes or Other Taxes, and such Lender determines that it has received (i) a refund of such Taxes or Other Taxes or (ii) a credit against or relief or remission for, or a reduction in the amount of, any tax or other governmental charge attributable solely to any deduction or credit for any Taxes or Other Taxes with respect to which it has received payments under this Section 2.15, such Lender shall, to the extent that it can do so without prejudice to the retention of such refund, credit, relief, remission or reduction, pay to the Borrower such amount as such Lender shall have determined to be attributable to the deduction or withholding of such Taxes or Other Taxes. If, within one year after the payment of any such amount to the Borrower, such Lender determines that it was not entitled to such refund, credit, relief, remission or reduction to the full extent of any payment made pursuant to the first sentence of this Section 2.15(g), the Borrower shall upon notice and demand of such Lender promptly repay the amount of such overpayment. Any determination made by such Lender pursuant to this Section 2.15(g) shall in the absence of bad faith or manifest error be conclusive, and nothing in this Section 2.15(g) shall be construed as requiring any Lender to conduct its business or to arrange or alter in any respect its tax or financial affairs (except as required by Section 2.15(f)) so that it is entitled to receive such a refund, credit or reduction or as allowing any person to inspect any records, including tax returns, of any Lender. (h) Without prejudice to the survival of any other agreement of the Borrower or any Lender hereunder, the agreements and obligations of the Borrower and the Lenders contained in this Section 2.15 shall survive the payment in full of principal and interest hereunder and under the Notes; provided, that no Lender shall be entitled to demand any payment under this Section 2.15 more than one year following the payment to or for the account of such Lender of all other amounts payable hereunder and under any Note held by such Lender and the termination of such Lender's Commitment; provided further, however, that the foregoing proviso shall in no way limit the right of any Lender to demand or receive any payment under this Section 2.15 to the extent that such payment relates to the retroactive application of any Taxes or Other Taxes if such demand is made within one year after the implementation of such Taxes or Other Taxes. SECTION 2.16. Sharing of Payments, Etc. If any Lender shall obtain any payment (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise) on account of the Contract Advances made by it (other than pursuant to Section 2.02(c), 2.08, 2.12, 2.15, 2.17(a) or 8.04(b)) in excess of its ratable share of payments on account of the Contract Advances obtained by all the Lenders, such Lender shall forthwith purchase from the other Lenders such participations in the Contract Advances made by them as shall be necessary to cause such purchasing Lender to share the excess payment ratably with each of them, provided, however, that if all or any portion of such excess payment is thereafter recovered from such purchasing Lender, such purchase from each Lender shall be rescinded and such Lender shall repay to the purchasing Lender the purchase price to the extent of such recovery together with an amount equal to such Lender's ratable share (according to the proportion of (i) the amount of such Lender's required repayment to (ii) the total amount so recovered from the purchasing Lender) of any interest or other amount paid or payable by the purchasing Lender in respect of the total amount so recovered. The Borrower agrees that any Lender so purchasing a participation from another Lender pursuant to this Section 2.16 may, to the fullest extent permitted by law, exercise all its rights of payment (including the right of set-off) with respect to such participation as fully as if such Lender were the direct creditor of the Borrower in the amount of such participation. SECTION 2.17. Extension of Termination Date. (a) Unless the Termination Date shall have occurred, the Borrower may request the Lenders, by written notice to the Administrative Agent not 22 more than 90 days and not less than 60 days prior to the then effective Termination Date, to consent to extension of the Termination Date to the date which is 364 days after the then effective Termination Date (or, if such date is not a Business Day, the next preceding Business Day). Each Lender shall, in its sole discretion, determine whether to consent to such request and shall notify the Administrative Agent of its determination not more than 45 days and not less than 30 days prior to the then-effective Termination Date. Any Lender which fails to give such notice to the Administrative Agent shall be deemed to have not consented to such request. If any Lender shall not have consented to such request 30 days prior to the then effective Termination Date (such Lender being referred to herein as a "Non-Consenting Lender"), the Administrative Agent shall promptly so notify the Borrower and the other Lenders, whereupon each other Lender may, not more than 30 days and not less than 25 days prior to the then effective Termination Date, revoke any consent to such extension previously given by such Lender (in which case such Lender shall be deemed a Non-Consenting Lender). If such request shall have been consented to by the Majority Lenders (as determined after giving effect to the replacement of any Non-Consenting Lender pursuant to Section 8.07(h)), the Administrative Agent shall notify the Borrower and the Lenders in writing of such consent, and such extension shall become effective upon the delivery by the Borrower to the Administrative Agent and each Lender, on or prior to the then-effective Termination Date, of (i) a certificate of a duly authorized officer of the Borrower, dated such date, as to the accuracy, both before and after giving effect to such proposed extension, of the representations and warranties set forth in Section 4.01 and as to the absence, both before and after giving effect to such proposed extension, of any Event of Default or event that with the giving of notice or the passage of time or both would constitute an Event of Default, (ii) certified copies of all corporate and governmental approvals, if any, required to be obtained by the Borrower in connection with such proposed extension and (iii) an opinion of counsel to the Borrower (who shall be satisfactory to the Administrative Agent) as to the matters set forth in Exhibit D, upon giving effect to the extension of the Termination Date, and such other matters as any Lender, through the Administrative Agent, may reasonably request, all of the foregoing to be satisfactory in form and substance to the Administrative Agent. In the event of any such extension of the Termination Date, the Commitment of each Non-Consenting Lender that has not been replaced pursuant to Section 8.07(h) shall be terminated in whole as of such former Termination Date, the aggregate principal amount of all Advances made by such Non-Consenting Lender, together with accrued and unpaid interest, commitment fees and auction facility fees, and all other amounts payable hereunder to or for the account of such Non-Consenting Lender shall be due and payable on such former Termination Date, and upon such reduction and payment of such amounts such Non-Consenting Lender shall cease to be a party to this Agreement. (b) Upon the effectiveness of any extension of the Termination Date pursuant to subsection (a) above, each reference in Section 4.01(e) and Exhibit D to (i) the year-end financial statements of the Borrower, (ii) December 31 of any year, (iii) the quarter-end financial statements of the Borrower and (iv) the last day of any fiscal quarter (other than December 31) of any year, shall be deemed to be amended to be references to (A) the year-end financial statements of the Borrower included in the Borrower's Annual Report on Form 10-K most recently delivered to the Lenders pursuant to Section 5.01(b)(iii), (B) December 31 of the year of the financial statements described in clause (A) above, (C) the fiscal quarter-end financial statements of the Borrower included in the Borrower's Quarterly Report on Form 10-Q most recently delivered to the Lenders pursuant to Section 5.01(b)(ii) and (D) the last day of the fiscal quarter of the financial statements described in clause (C) above, respectively. SECTION 2.18. Additional Lenders. (a) For a period of 60 days after extension of a Termination Date pursuant to Section 2.17(a) that has resulted in a reduction of the aggregate Commitments of the Lenders, the Borrower may request that one or more additional banks or other Persons (each, an "Additional Lender") become party to this Agreement as Lenders and that the aggregate amount of the Commitments of the Lenders be increased to reflect the Commitments allocated to each such Additional Lender; provided, that the aggregate Commitments of the Lenders after giving effect so such increase shall not exceed the aggregate Commitments of the Lenders immediately prior to such former Termination Date. Addition of an Additional Lender shall be made only with the written 23 consent of the Administrative Agent (which consent shall not be unreasonably withheld or delayed) and with the written consent of the Borrower (which consent may be granted or withheld in its absolute discretion). Each Additional Lender must be an Eligible Assignee and, without the consent of the Administrative Agent, the initial Commitment of each Additional Lender shall not be less than $5,000,000. (b) Addition of an Additional Lender shall be effected by the Additional Lender executing and delivering to the Administrative Agent, for its acceptance and recording in the Register, a duly completed Additional Lender Supplement in substantially the form of Exhibit G attached hereto. The Borrower shall execute and deliver to the Administrative Agent for transmittal to such Additional Lender a Contract Note in substantially the form of Exhibit A-1 attached hereto in the amount of the Commitment of such Additional Lender. Acceptance by the Administrative Agent of an Additional Lender is subject to the conditions that the Administrative Agent shall have received, with a counterpart for each Lender, (i) a certificate of a duly authorized officer of the Borrower, dated the effective date of such Additional Lender Supplement, as to the accuracy, both before and after giving effect to such proposed addition, of the representations and warranties set forth in Section 4.01 and as to the absence, both before and after giving effect to such proposed extension, of any Event of Default or event that with the giving of notice or the passage of time or both would constitute an Event of Default, (ii) certified copies of all corporate and governmental approvals, if any, required to be obtained by the Borrower in connection with such proposed addition, (iii) an opinion of counsel to the Borrower (who shall be satisfactory to the Administrative Agent) as to the matters set forth in Exhibit D (appropriately modified to include, in addition to the other matters set forth therein, such Additional Lender Supplement and the new Contract Note), and such other matters as any Lender, through the Administrative Agent, may reasonably request, and (iv) such other certificates and documents as the Administrative Agent may reasonably request, all of the foregoing to be satisfactory in form and substance to the Administrative Agent. Upon execution and delivery of the Additional Lender Supplement, acceptance by the Administrative Agent and recording in the Register, from and after the effective date specified in such Additional Lender Supplement, such Additional Lender shall be a party hereto and shall, to the extent of the Commitment specified in such Additional Lender Supplement, have the rights and obligations of a Lender hereunder. (c) If, at the time an Additional Lender is to become party to this Agreement, the continuing Lenders have any outstanding Contract Advances, such Additional Lender shall offer to purchase from each continuing Lender, effective as of the date such Additional Lender becomes party to this Agreement, a portion of each continuing Lender's outstanding Contract Advances, in such amounts as will have the result that, immediately after giving effect to such Additional Lender becoming party to this Agreement and to such purchases, each Lender (including the Additional Lender) shall share in the outstanding Contract Advances in the same proportion as their respective Commitments. The Additional Lender shall offer in writing to purchase the requisite portion of each continuing Lender's outstanding Contract Advances, at a price equal to the outstanding principal amount thereof together with accrued and unpaid interest thereon to the date of purchase, and a continuing Lender shall not unreasonably decline to accept such offer. Each such purchase shall be made in accordance with Section 8.07 (with the related Assignment and Acceptance modified, mutatis mutandis, to reflect that such purchase is not a purchase of any portion of the Commitment of the continuing Lender). Such purchases shall not be subject to the provisions of clause (ii) of Section 8.07(a), and the Borrower shall be responsible for all amounts payable to the Administrative Agent pursuant to clause (iv) of Section 8.07(a). The Borrower shall pay to each continuing Lender on demand any amount that would be payable to such continuing Lender pursuant to Section 8.04(b) (which for this purpose shall be applied as if such assignment were a prepayment of the Contract Advances assigned by such continuing Lender), and shall reimburse each continuing Lender on demand for all reasonable fees and expenses (including reasonable fees and expenses of counsel) incurred by it in connection with such assignment. 24 ARTICLE III CONDITIONS OF LENDING SECTION 3.01. Conditions Precedent to Initial Advances. The obligation of each Lender to make its initial Advance is subject to the satisfaction, prior to or concurrently with, the making of such initial Advance, of each of the following conditions precedent: (a) Documents and Other Agreements. The Administrative Agent shall have received on or before the day of the initial Borrowing the following, each dated the same date, in form and substance satisfactory to the Administrative Agent and (except for the Notes) with one copy for each Lender: (i) The Contract Notes payable to the order of each of the Lenders, respectively; (ii) Certified copies of the resolutions of the Board of Directors of the Borrower approving the transactions contemplated by this Agreement and the Notes, and of all documents evidencing other necessary corporate action with respect to this Agreement and the Notes; (iii) A certificate of the Secretary or an Assistant Secretary of the Borrower certifying (A) the names and true signatures of the officers of the Borrower authorized to sign this Agreement and the Notes and the other documents to be delivered hereunder; (B) that attached thereto are true and correct copies of the Restated Articles of Incorporation and the By-laws of the Borrower, in each case in effect on such date; and (C) that attached thereto are true and correct copies of all governmental and regulatory authorizations and approvals required for the due execution, delivery and performance of this Agreement and the Notes, including, without limitation, the Securities Certificate filed with the PPUC by the Borrower (the "Securities Certificate") and the Order of Registration issued by the PPUC registering the Securities Certificate (the "Order of Registration"); (iv) Copies of the financial statements referred to in Section 4.01(e); (v) A certificate signed by either the chief financial officer, principal accounting officer or treasurer of the Borrower stating that (A) the representations and warranties contained in Section 4.01 are correct on and as of the date of such certificate as though made on and as of such date and (B) no event has occurred and is continuing on the date of such certificate that constitutes an Event of Default or would constitute an Event of Default but for the requirement that notice be given or time elapse or both; (vi) A favorable opinion of Ballard Spahr Andrews & Ingersoll, special counsel for the Borrower, substantially in the form of Exhibit D hereto; and (vii) A favorable opinion of Reed Smith Shaw & McClay LLP, counsel for the Documentation Agent, substantially in the form of Exhibit E hereto. (b) Termination of Prior Credit Facility. The Administrative Agent shall have received evidence of (i) the payment in full of all obligations of the Borrower under the $400,000,000 Credit Agreement, dated as of June 26, 1995, among the Borrower, the banks named therein, Citibank, N.A., as administrative agent, and The First National Bank of Chicago, as documentation agent, and (ii) the termination of the "Commitments" under such agreement. 25 SECTION 3.02. Conditions Precedent to Certain Contract Borrowings. The obligation of each Lender to make a Contract Advance on the occasion of each Contract Borrowing (including the initial Contract Borrowing) that would increase the aggregate amount of Contract Advances outstanding shall be subject to the further conditions precedent that on the date of such Contract Borrowing the following statements shall be true, and each of the giving of the applicable Notice of a Contract Borrowing and the acceptance by the Borrower of the proceeds of such Contract Borrowing shall constitute a representation and warranty by the Borrower that on the date of such Contract Borrowing such statements are true: (A) The representations and warranties contained in Section 4.01 are correct on and as of the date of such Borrowing, before and after giving effect to such Borrowing and to the application of the proceeds therefrom, as though made on and as of such date; and (B) No event has occurred and is continuing, or would result from such Borrowing or from the application of the proceeds therefrom, that constitutes an Event of Default or would constitute an Event of Default but for the requirement that notice be given or time elapse or both (it being understood for clarification that (i) without limiting the foregoing, it is a condition of this clause (B) that the Borrower shall be in compliance with Section 5.01(a)(iv), Section 5.02(a) and Section 5.02(c) upon giving effect to such Borrowing and (ii) the conditions of this clause (B) shall apply whether or not the respective Commitments of the Lenders have been terminated pursuant to Section 6.01). SECTION 3.03. Conditions Precedent to Each Auction Borrowing. The obligation of each Lender that is to make an Auction Advance on the occasion of an Auction Borrowing (including the initial Auction Borrowing) to make such Auction Advance as part of such Auction Borrowing is subject to the conditions precedent that (i) the Administrative Agent shall have received the written confirmatory Notice of an Auction Borrowing with respect thereto, (ii) on or before the date of such Auction Borrowing, but prior to such Auction Borrowing, the Administrative Agent shall have received an Auction Note payable to the order of such Lender for each of the Auction Advances to be made by such Lender as part of such Auction Borrowing, in a principal amount equal to the principal amount of the Auction Advance to be evidenced thereby and otherwise on such terms as were agreed to for such Auction Advance in accordance with Section 2.03, and (iii) except as otherwise waived in accordance with Section 8.01, on the date of such Auction Borrowing the following statements shall be true, and each of the giving of the applicable Notice of an Auction Borrowing and the acceptance by the Borrower of the proceeds of such Auction Borrowing shall constitute a representation and warranty by the Borrower that on the date of such Auction Borrowing such statements are true: (A) The representations and warranties contained in Section 4.01 are correct on and as of the date of such Borrowing, before and after giving effect to such Borrowing and to the application of the proceeds therefrom, as though made on and as of such date, and (B) No event has occurred and is continuing, or would result from such Borrowing or from the application of the proceeds therefrom, which constitutes an Event of Default or which would constitute an Event of Default but for the requirement that notice be given or time elapse or both (it being understood for clarification that (i) without limiting the foregoing, it is a condition of this clause (B) that the Borrower shall be in compliance with Section 5.01(a)(iv), Section 5.02(a) and Section 5.02(c) upon giving effect to such Borrowing and (ii) the conditions of this clause (B) shall apply whether or not the respective Commitments of the Lenders have been terminated pursuant to Section 6.01). 26 ARTICLE IV REPRESENTATIONS AND WARRANTIES SECTION 4.01. Representations and Warranties of the Borrower. The Borrower represents and warrants as follows: (a) The Borrower is a corporation duly organized. validly existing and in good standing under the laws of the Commonwealth of Pennsylvania. (b) The execution, delivery and performance by the Borrower of this Agreement and the Notes are within the Borrower's corporate powers, have been duly authorized by all necessary corporate action, and do not and will not contravene (i) the Borrower's Restated Articles of Incorporation or By-laws, (ii) applicable law or (iii) any contractual or legal restriction binding on or affecting the Borrower or its properties. (c) No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for the due execution, delivery and performance by the Borrower of this Agreement or the Notes except for the filing of the Securities Certificate with, and the final approval of, and the Order of Registration issued by, the PPUC, which filing has been duly made and which final approval and Order of Registration have been duly obtained; such Order of Registration is in full force and effect and is final; and on and after the date of the initial Borrowing hereunder, the action of the PPUC registering the Securities Certificate shall no longer be subject to appeal. (d) This Agreement is, and the Notes when delivered hereunder will be, legal, valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their respective terms, except as the enforceability thereof may be limited by equitable principles or bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally. (e) The consolidated balance sheet of the Borrower and its Subsidiaries as at December 31, 1996, and the related statements of income and retained earnings and of cash flows of the Borrower and its Subsidiaries for the fiscal year then ended, certified by Coopers & Lybrand, and the unaudited consolidated balance sheet of the Borrower and its Subsidiaries as at June 30, 1997 and the related unaudited statements of income for the six-month period then ended, copies of which have been furnished to each Lender, fairly present in all material respects (subject, in the case of such balance sheets and statements of income for the period ended June 30, 1997, to year-end adjustments) the consolidated financial condition of the Borrower and its Subsidiaries as at such dates and the consolidated results of the operations of the Borrower and its Subsidiaries for the periods ended on such dates, all in accordance with GAAP, and since December 31, 1996, there has been no Material Adverse Change. (f) Except as disclosed in the Borrower's Annual, Quarterly or Current Reports, each as filed with the Securities and Exchange Commission and delivered to the Lenders (including reports filed prior to the date of execution and delivery of this Agreement and reports delivered to the Lenders pursuant to Section 5.01(b)), there is no pending or threatened action, investigation or proceeding affecting the Borrower or any of its Subsidiaries before any court, governmental agency or arbitrator that may reasonably be anticipated to have a Material Adverse Effect. There is no pending or threatened action or proceeding against the Borrower or its Subsidiaries that purports to affect the legality, validity, binding effect or enforceability of this Agreement or any Note. (g) No proceeds of any Advance have been or will be used directly or indirectly in connection with the acquisition of in excess of 5% of any class of equity securities that is registered 27 pursuant to Section 12 of the Exchange Act or any transaction subject to the requirements of Section 13 or 14 of the Exchange Act. (h) The Borrower is not engaged in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation U issued by the Board of Governors of the Federal Reserve System), and no proceeds of any Advance will be used to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying any margin stock. Not more than 25% of the value of the assets of the Borrower and its Principal Subsidiaries is represented by margin stock. (i) The Borrower (i) is exempt from the provisions of the Public Utility Holding Company Act of 1935, as amended, other than Section 9(a)(2) thereof, pursuant to Section 3(a)(2) thereof, and (ii) is not an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (j) During the twelve consecutive month period prior to the date of the execution and delivery of this Agreement and prior to the date of any Borrowing under this Agreement, no steps have been taken to terminate any Plan, and no contribution failure by the Borrower or any member of the Controlled Group has occurred with respect to any Plan. No condition exists or event or transaction has occurred with respect to any Plan (including any Multiemployer Plan) which might result in the incurrence by the Borrower or any member of the Controlled Group of any material liability, fine or penalty. ARTICLE V COVENANTS OF THE BORROWER SECTION 5.01. Affirmative Covenants. So long as any Note or any amount payable by the Borrower hereunder shall remain unpaid or any Lender shall have any Commitment hereunder (except with respect to subsection (a)(iv), which shall be applicable only as of the date hereof and at any time that any Advance is outstanding hereunder), the Borrower will, and, in the case of Section 5.01(a), will cause its Principal Subsidiaries to, unless the Majority Lenders shall otherwise consent in writing: (a) Keep Books; Corporate Existence; Maintenance of Properties; Compliance with Laws; Insurance; Taxes. (i) keep proper books of record and account, all in accordance with generally accepted accounting principles; (ii) subject to Section 5.02(b), preserve and keep in full force and effect its existence; (iii) maintain and preserve all of its properties (except such properties the failure of which to maintain or preserve would not have, individually or in the aggregate, a Material Adverse Effect) which are used or useful in the conduct of its business in good working order and condition, ordinary wear and tear excepted; (iv) comply in all material respects with the requirements of all applicable laws, rules, regulations and orders (including those of any governmental authority and including with respect to environmental matters) to the extent the failure to so comply, individually or in the aggregate, would have either a Material Adverse Effect or a material adverse effect on the ability of the Borrower to perform its obligations under this Agreement and the Notes; 28 (v) maintain insurance with responsible and reputable insurance companies or associations, or self-insure, as the case may be, in each case in such amounts and covering such contingencies, casualties and risks as is customarily carried by or self-insured against by companies engaged in similar businesses and owning similar properties in the same general areas in which the Borrower and its Principal Subsidiaries operate; (vi) at any reasonable time and from time to time, pursuant to prior notice delivered to the Borrower, permit any Lender, or any agents or representatives of any thereof, to examine and, at such Lender's expense, make copies of, and abstracts from the records and books of account of, and visit the properties of, the Borrower and any of its Principal Subsidiaries and to discuss the affairs, finances and accounts of the Borrower and any of its Subsidiaries with any of their respective officers; provided, that any non-public information (which has been identified as such by the Borrower) obtained by any Lender, or any of their respective agents or representatives pursuant to this subsection (vi) shall be treated confidentially by such Person; provided, further, that such Person may disclose such information to any other party to this Agreement, its examiners, affiliates, outside auditors, counsel or other professional advisors in connection with the Agreement or if otherwise required to do so by law or regulatory process; and (vii) use the proceeds of the Advances for general corporate purposes (including, without limitation, the refinancing of its commercial paper, the repayment of outstanding Advances, and the making of acquisitions) but in no event for any purpose which would be contrary to clause (g) or clause (h) of Section 4.01. (b) Reporting Requirements. Furnish to the Lenders: (i) as soon as possible, and in any event within 5 Business Days after the occurrence of each Event of Default or each event which, with the giving of notice or lapse of time, or both, would constitute an Event of Default, continuing on the date of such statement, a statement of an authorized officer of the Borrower setting forth details of such Event of Default or event and the action which the Borrower proposes to take with respect thereto; (ii) as soon as available and in any event within 60 days after the end of each of the first three quarters of each fiscal year of the Borrower, a copy of the Borrower's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission with respect to such quarter, together with a certificate of an authorized officer of the Borrower stating that no Event of Default, or event which, with notice or lapse of time or both, would constitute an Event of Default, has occurred and is continuing or, if any Event of Default or such event has occurred and is continuing, a statement as to the nature thereof and the action which the Borrower proposes to take with respect thereto; (iii) as soon as available and in any event within 105 days after the end of each fiscal year of the Borrower, a copy of the Borrower's Annual Report on Form 10-K filed with the Securities and Exchange Commission with respect to such fiscal year, together with a certificate of an authorized officer of the Borrower stating that no Event of Default, or event which, with notice of lapse of time or both, would constitute an Event of Default, has occurred and is continuing or, if any Event of Default or such event has occurred and is continuing, a statement as to the nature thereof and the action which the Borrower proposes to take with respect thereto; 29 (iv) concurrently with the delivery of the annual and quarterly reports referred to in Sections 5.01(b)(ii) and 5.01(b)(iii), a compliance certificate in substantially the form set forth in Exhibit F, duly completed and signed by the Chief Financial Officer, Treasurer or an Assistant Treasurer of the Borrower; (v) except as otherwise provided in subsections (ii) and (iii) above, promptly after the sending or filing thereof, copies of all reports that the Borrower sends to any of its security holders, and copies of all Reports on Form 10-K, 10-Q or 8-K, and registration statements and prospectuses that the Borrower or any of its Subsidiaries files with the Securities and Exchange Commission or any national securities exchange (except to the extent that any such registration statement or prospectus relates solely to the issuance of securities pursuant to employee or dividend reinvestment plans of the Borrower or such Subsidiary); (vi) promptly upon becoming aware of the institution of any steps by the Borrower or any other Person to terminate any Plan, or the failure to make a required contribution to any Plan if such failure is sufficient to give rise to a lien under section 302(f) of ERISA, or the taking of any action with respect to a Plan which could result in the requirement that the Borrower furnish a bond or other security to the PBGC or such Plan, or the occurrence of any event with respect to any Plan, which could result in the incurrence by the Borrower or any member of the Controlled Group of any material liability, fine or penalty; and (vii) such other information respecting the condition, operations, business or prospects, financial or otherwise, of the Borrower or any of its Subsidiaries as any Lender, through the Administrative Agent, may from time to time reasonably request. SECTION 5.02. Negative Covenants. So long as any Note or any amount payable by the Borrower hereunder shall remain unpaid or any Lender shall have any Commitment hereunder (except with respect to subsection (a), which shall be applicable only as of the date hereof and at any time any Advance is outstanding hereunder), the Borrower will not, without the written consent of the Majority Lenders: (a) Limitation on Liens. Create, incur, assume or suffer to exist, or permit any of its Principal Subsidiaries to create, incur, assume or suffer to exist, any Lien on its respective property, revenues or assets, whether now owned or hereafter acquired except (i) Liens upon or in any property acquired by the Borrower or any of its Principal Subsidiaries in the ordinary course of business to secure the purchase price of such property or to secure any obligation incurred solely for the purpose of financing the acquisition of such property, (ii) Liens existing on such property at the time of its acquisition (other than any such Lien created in contemplation of such acquisition unless permitted by the preceding clause (i)), (iii) Liens granted under the Mortgage and "excepted encumbrances" as defined in the Mortgage, (iv) Liens granted in connection with any financing arrangement for the purchase of nuclear fuel or the financing of pollution control facilities, limited to the fuel or facilities so purchased or acquired, (v) Liens arising in connection with sales or transfers of, or financing secured by, accounts receivable or related contracts, (vi) Liens securing the Borrower's notes collateralized solely by mortgage bonds of the Borrower issued under the terms of the Mortgage, (vii) Liens arising in connection with sale and leaseback transactions, but only to the extent (x) the proceeds received by the Borrower or such Principal Subsidiary from such sale shall immediately be applied to retire mortgage bonds of the Borrower issued under the terms of the Mortgage, or (y) the aggregate purchase price of assets sold pursuant to such sale and leaseback transactions where such proceeds are not so applied shall not exceed $1,000,000,000, (viii) Liens granted by a Special Purpose Subsidiary to secure Nonrecourse Transition Bond Debt of such Special Purpose Subsidiary, and (ix) Liens, other than those described in clauses (i) through (viii) of this subsection granted by the Borrower or any of its Principal Subsidiaries in 30 the ordinary course of business securing Debt of the Borrower and its Principal Subsidiaries in an amount not to exceed $50,000,000 in the aggregate at any one time outstanding. (b) Mergers and Consolidations; Disposition of Assets. Merge with or into or consolidate with or into, or sell, assign, lease or otherwise dispose of (whether in one transaction or in a series of transactions) all or substantially all of its assets (whether now owned or hereafter acquired) to any Person or permit any Principal Subsidiary to do so, except that (i) the Borrower or any Principal Subsidiary may merge with or into or consolidate with or transfer assets to any other Principal Subsidiary, (ii) any Principal Subsidiary may merge with or into or consolidate with or transfer assets to the Borrower and (iii) the Borrower may merge with or into or consolidate with or transfer assets to any other Person; provided in each case, immediately thereafter in giving effect thereto, no Event of Default or event that would, with the giving of notice or the passage of time or both constitute an Event of Default shall have occurred and be continuing and (A) in the case of any such merger, consolidation or transfer of assets to which the Borrower is a party, either (x) the Borrower shall be the surviving corporation or (y) the surviving corporation shall be an Eligible Successor and shall have assumed all of the obligations of the Borrower under this Agreement and the Notes pursuant to a written instrument in form and substance satisfactory to the Administrative Agent and (B) subject to clause (A) above, in the case of any such merger to which a Principal Subsidiary is a party, a Principal Subsidiary shall be the surviving corporation. (c) Financial Covenant. Permit Consolidated Adjusted Total Debt to exceed 65% of Consolidated Adjusted Total Capitalization at any time. (d) Continuation of Businesses. (i) Generation Business. (A) Cease to own (through the Borrower or wholly-owned Subsidiaries) the business of generating electricity, or (B) reduce the net installed electric generating capacity (summer rating) of the electricity generation business owned by the Borrower and its wholly-owned Subsidiaries taken as a whole to less than 7821 Megawatts. (ii) Distribution, Transmission and Gas Businesses. Cease to own (directly by the Borrower, and not through Subsidiaries) the business of distributing electricity to end-users, the business of transmitting electricity, or the businesses of transmitting and distributing natural gas, each substantially as conducted by the Borrower as of the date of this Agreement (and the Borrower warrants that as of the date of this Agreement substantially all of such businesses conducted by the Borrower on a consolidated basis, and the assets relating thereto, are operated and owned by the Borrower directly and not through Subsidiaries). ARTICLE VI EVENTS OF DEFAULT SECTION 6.01. Events of Default. If any of the following events ("Events of Default") shall occur and be continuing: (a) The Borrower shall fail to pay any principal of any Advance when the same becomes due and payable, or interest thereon or any other amount payable under this Agreement or any of the Notes within three Business Days after the same becomes due and payable; or 31 (b) Any representation or warranty made by the Borrower herein or by the Borrower (or any of its officers) pursuant to the terms of this Agreement shall prove to have been incorrect or misleading in any material respect when made; or (c) The Borrower shall fail to perform or observe (i) any term, covenant or agreement contained in Section 5.02, Section 5.01(a)(vii) or Section 5.01(b)(i), or (ii) any other term, covenant or agreement contained in this Agreement on its part to be performed or observed if the failure to perform or observe such other term, covenant or agreement shall remain unremedied for 30 days after written notice thereof shall have been given to the Borrower by the Administrative Agent (which notice shall be given by the Administrative Agent at the written request of any Lender); or (d) The Borrower or any Principal Subsidiary shall fail to pay any principal of or premium or interest on any Debt that is outstanding in a principal amount in excess of $50,000,000 in the aggregate (but excluding Debt evidenced by the Notes and Nonrecourse Transition Bond Debt) of the Borrower or such Principal Subsidiary (as the case may be) when the same becomes due and payable (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise), and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such Debt; or any other event shall occur or condition shall exist under any agreement or instrument relating to any such Debt and shall continue after the applicable grace period, if any, specified in such agreement or instrument, if the effect of such event or condition is to accelerate, or to permit the acceleration of, the maturity of such Debt; or any such Debt shall be declared to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment), prior to the stated maturity thereof, other than any acceleration of any Debt secured by equipment leases or fuel leases of the Borrower or a Principal Subsidiary as a result of the occurrence of any event requiring a prepayment (whether or not characterized as such) thereunder, which prepayment will not result in a Material Adverse Change; or (e) The Borrower or any Principal Subsidiary (other than a Special Purpose Subsidiary) shall generally not pay its debts as such debts become due, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against the Borrower or any Principal Subsidiary (other than a Special Purpose Subsidiary) seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, custodian or other similar official for it or for any substantial part of its property and, in the case of any such proceeding instituted against it (but not instituted by it), either such proceeding shall remain undismissed or unstayed for a period of 60 days, or any of the actions sought in such proceeding (including, without limitation, the entry of an order for relief against, or the appointment of a receiver, trustee, custodian or other similar official for, it or for any substantial part of its property,) shall occur; or the Borrower or any Principal Subsidiary (other than a Special Purpose Subsidiary) shall take any corporate action to authorize or to consent to any of the actions set forth above in this subsection (e); or (f) One or more judgments or orders for the payment of money in an aggregate amount exceeding $50,000,000 (excluding any such judgments or orders which are fully covered by insurance, subject to any customary deductible, and under which the applicable insurance carrier has acknowledged such full coverage in writing) shall be rendered against the Borrower or any Principal Subsidiary and either (i) enforcement proceedings shall have been commenced by any creditor upon such judgment or order or (ii) there shall be any period of 30 consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; or (g) (i) any Reportable Event that the Majority Lenders determine in good faith might constitute grounds for the termination of any Plan or for the appointment by the appropriate United 32 States District Court of a trustee to administer a Plan shall have occurred and be continuing 30 days after written notice to such effect shall have been given to the Borrower by the Administrative Agent or (ii) any Plan shall be terminated, or (iii) a Trustee shall be appointed by an appropriate United States District Court to administer any Plan or (iv) the PBGC shall institute proceedings to terminate any Plan or to appoint a trustee to administer any Plan; provided, however that on the date of any event described in clauses (i) through (iv) above the Unfunded Liabilities of such Plan exceed $20,000,000; or (h) any "Event of Default" shall occur under the Revolving Credit Agreement; then, and in any such event, the Administrative Agent (i) shall at the request, or may with the consent, of the Majority Lenders, by notice to the Borrower, declare the respective Commitments of the Lenders to be terminated, whereupon the same shall forthwith terminate, and (ii) shall at the request, or may with the consent, of the Majority Lenders, by notice to the Borrower, declare the principal amount outstanding under the Notes, all interest thereon and all other amounts payable under this Agreement to be forthwith due and payable, whereupon the principal amount outstanding under the Notes, all such interest and all such amounts shall become and be forthwith due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by the Borrower; provided, however, that in the event of an actual or deemed entry of an order for relief with respect to the Borrower or any Principal Subsidiary under the Federal Bankruptcy Code, (A) the obligation of each Lender to make Advances shall automatically be terminated and (B) the principal amount outstanding under the Notes, all such interest and all such amounts shall automatically become and be due and payable, without presentment, demand, protest or any notice of any kind, all of which are hereby expressly waived by the Borrower. ARTICLE VII THE AGENTS SECTION 7.01. Authorization and Action. Each Lender hereby appoints and authorizes the Administrative Agent to take such action as administrative agent on its behalf and to exercise such powers under this Agreement as are delegated to the Administrative Agent by the terms hereof, together with such powers as are reasonably incidental thereto. Each Lender hereby appoints and authorizes the Documentation Agent to prepare this Agreement and the Contract Notes on behalf of the Lenders, provided, that it is hereby understood and agreed that the Documentation Agent shall not have any responsibilities or obligations hereunder subsequent to the execution and delivery of this Agreement by and among the Borrower, the Banks, and the Agents. As to any matters not expressly provided for by this Agreement (including, without limitation, enforcement or collection of the Notes), the Administrative Agent shall not be required to exercise any discretion or take any action, but shall be required to act or to refrain from acting (and shall be fully protected in so acting or refraining from acting) upon the instructions of the Majority Lenders, and such instructions shall be binding upon all Lenders and all holders of Notes; provided, however, that the Administrative Agent shall not be required to take any action which exposes the Administrative Agent to personal liability or which is contrary to this Agreement or applicable law. The Administrative Agent agrees to give to each Lender prompt notice of each notice given to it by the Borrower pursuant to the terms of this Agreement. SECTION 7.02. Agents' Reliance, Etc. Neither the Administrative Agent nor the Documentation Agent nor any of their respective directors, officers, agents or employees shall be liable for any action taken or omitted to be taken by it or them under or in connection with this Agreement, except for its or their respective own gross negligence or willful misconduct. Without limitation of the generality of the foregoing: (i) the Administrative Agent may treat the payee of any Note as the holder thereof until the Administrative Agent receives and accepts an Assignment and Acceptance entered into by the Lender which is the payee of such Note, as assignor, and an Eligible Assignee, as assignee, as provided in Section 8.07; (ii) the Administrative Agent and the Documentation Agent each may consult 33 with legal counsel (including counsel for the Borrower), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts; (iii) neither the Administrative Agent nor the Documentation Agent makes any warranty or representation to any Lender and shall not be responsible to any Lender for any statements, warranties or representations (whether written or oral) made in or in connection with this Agreement; (iv) neither the Administrative Agent nor the Documentation Agent shall have any duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of this Agreement on the part of the Borrower or to inspect the property (including the books and records) of the Borrower; (v) neither the Administrative Agent nor the Documentation Agent shall be responsible to any Lender for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other instrument or document furnished pursuant hereto; and (vi) neither the Administrative Agent nor the Documentation Agent shall incur any liability under or in respect of this Agreement by acting upon any notice, consent, certificate or other instrument or writing (which may be by telecopier, telegram, cable or telex) believed by it to be genuine and signed or sent by the proper party or parties. SECTION 7.03. Agents and Affiliates. With respect to their respective Commitments, their respective Advances and their respective Notes, each of Mellon and First Chicago shall have the same rights and powers under this Agreement as any other Lender and may exercise the same as though it were not an Agent; and the term "Lender" or "Lenders" shall, unless otherwise expressly indicated, include Mellon and First Chicago in their respective individual capacities. Mellon, First Chicago and their respective affiliates may accept deposits from, lend money to, act as trustee under indentures of, and generally engage in any kind of business with, the Borrower, any of its subsidiaries and any Person who may do business with or own securities of the Borrower or any such subsidiary, all as if First Chicago was not the Administrative Agent and Mellon was not the Documentation Agent, as the case may be, and without any duty to account therefor to the Lenders. SECTION 7.04. Lender Credit Decision. Each Lender acknowledges that it has, independently and without reliance upon the Administrative Agent, the Documentation Agent or any other Lender and based on the financial statements referred to in Section 4.01(e) and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon the Administrative Agent or the Documentation Agent or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement. SECTION 7.05. Indemnification. The Lenders agree to indemnify the Administrative Agent, the Documentation Agent and the Syndication Agents (to the extent not reimbursed by the Borrower), ratably according to the respective principal amounts of the Contract Notes then held by each of the Lenders (or if no Contract Notes are at the time outstanding, ratably according to the respective amounts of their Commitments), from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by, or asserted against any such Agent in any way relating to or arising out of this Agreement or any action taken or omitted by any such Agent under this Agreement, provided that no Lender shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from such Agent's gross negligence or willful misconduct. Without limitation of the foregoing, each Lender agrees to reimburse each such Agent promptly upon demand for its ratable share of any out-of-pocket expenses (including reasonable counsel fees) incurred by such Agent in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement, to the extent that such expenses are reimbursable by the Borrower but for which such Agent is not reimbursed by the Borrower. 34 SECTION 7.06. Successor Administrative Agent. The Administrative Agent may resign at any time by giving written notice thereof to the Lenders and the Borrower and may be removed at any time with or without cause by the Majority Lenders. Upon any such resignation or removal, the Majority Lenders shall have the right to appoint a successor Administrative Agent. If no successor Administrative Agent shall have been so appointed by the Majority Lenders, and shall have accepted such appointment, within 30 days after the retiring Administrative Agent's giving of notice of resignation or the Majority Lenders' removal of the retiring Administrative Agent, then the retiring Administrative Agent may, on behalf of the Lenders, appoint a successor Administrative Agent, which shall be a commercial bank described in clause (i) or (ii) of the definition of "Eligible Assignee" and having a combined capital and surplus of at least $150,000,000. Upon the acceptance of any appointment as Administrative Agent hereunder by a successor Administrative Agent, such successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations under this Agreement. After any retiring Administrative Agent's resignation or removal hereunder as Administrative Agent, the provisions of this Article VII shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent under this Agreement. Notwithstanding the foregoing, if no Event of Default, and no event that with the giving of notice or the passage of time, or both, would constitute an Event of Default, shall have occurred and be continuing, then no successor Administrative Agent shall be appointed under this Section 7.06 without the prior written consent of the Borrower, which consent shall not be unreasonably withheld or delayed. SECTION 7.07. Syndication Agents, Co-Agents, Lead Managers and Arrangers. The titles "Syndication Agent," "Co-Agent," "Lead Manager" and "Arranger" are purely honorific, and the Syndication Agents, Co-Agents, Lead Managers and Arrangers shall have no duties or responsibilities in such capacities. ARTICLE VIII MISCELLANEOUS SECTION 8.01. Amendments, Etc. No amendment or waiver of any provision of this Agreement or the Contract Notes, nor consent to any departure by the Borrower therefrom, shall in any event be effective unless the same shall be in writing and signed by the Majority Lenders, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that no amendment, waiver or consent shall, unless in writing and signed by all the Lenders (other than any Lender that is the Borrower or an Affiliate of the Borrower), do any of the following: (a) waive any of the conditions specified in Section 3.01 or 3.02, (b) increase the Commitments of the Lenders or subject the Lenders to any additional obligations, (c) reduce the principal of, or interest on, the Contract Notes or any fees or other amounts payable hereunder, (d) postpone any date fixed for any payment of principal of, or interest on, the Contract Notes or any fees or other amounts payable hereunder, (e) change the percentage of the Commitments or of the aggregate unpaid principal amount of the Contract Notes, or the number of Lenders, that shall be required for the Lenders or any of them to take any action hereunder, or (f) amend this Section 8.01; provided, further, that in connection with any Auction Borrowing, any waiver of the conditions specified in clause (iii) of Section 3.03 relating to the representation set forth in paragraph (A) of Section 3.03 shall be effective if in writing and signed by each Lender that is to make an Auction Advance in connection with such Auction Borrowing; and provided, further, that no amendment, waiver or consent shall, unless in writing and signed by the Administrative Agent or the Documentation Agent (as the case may be), in addition to the Lenders required above to take such action, affect the rights or duties of the Administrative Agent or the Documentation Agent (as the case may be) under this Agreement or any Note. SECTION 8.02. Notices, Etc. All notices and other communications provided for hereunder shall be in writing (including telecopier, telegraphic, telex or cable communication) and 35 mailed, telecopied, telegraphed, telexed, cabled or delivered, if to the Borrower, at its address at 2301 Market Street, Philadelphia, Pennsylvania 19101, Attention: Vice President-Finance and Treasurer, S21-1, Telecopy: (215) 841-5743; if to any Bank, at its Domestic Lending Office specified opposite its name on Schedule I hereto; if to any other Lender, at its Domestic Lending Office specified in the Assignment and Acceptance or Additional Lender Supplement pursuant to which it became a Lender; and if to the Administrative Agent, at its address at One First National Plaza, Mail Suite 0634, 1FPN-10, Chicago, Illinois 60670, Attention: Ms. Gwendolyn Watson, Telecopy: (312) 732-4840 or, as to each party, at such other address as shall be designated by such party in a written notice to the other parties. All such notices and communications shall, when mailed, telecopied, telegraphed, telexed or cabled, be effective when deposited in the mails, telecopied, delivered to the telegraph company, confirmed by telex answerback or delivered to the cable company, respectively, except that notices and communications to the Administrative Agent pursuant to Article II or VII shall not be effective until received by the Administrative Agent. SECTION 8.03. No Waiver; Remedies. No failure on the part of any Lender or the Administrative Agent to exercise, and no delay in exercising, any right hereunder or under any Note shall operate as a waiver thereof; nor shall any single or partial exercise of any such right preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. SECTION 8.04. Costs and Expenses; Indemnification. (a) The Borrower agrees to pay on demand all costs and expenses incurred by the Administrative Agent, the Documentation Agent, the Syndication Agents and the Arrangers in connection with the preparation, execution, delivery, administration, syndication, modification and amendment of this Agreement, the Notes and the other documents to be delivered hereunder, including, without limitation, the reasonable fees, internal charges and out-of-pocket expenses of counsel (including, without limitation, in-house counsel) for such Agents with respect thereto and with respect to advising the such Agents as to their respective rights and responsibilities under this Agreement. The Borrower further agrees to pay on demand all costs and expenses, if any (including, without limitation, counsel fees and expenses of outside counsel and of internal counsel), incurred by the Administrative Agent, the Documentation Agent and any Lender in connection with the collection and enforcement (whether through negotiations, legal proceedings or otherwise) of this Agreement, the Notes and the other documents to be delivered hereunder, including, without limitation, reasonable counsel fees and expenses in connection with the enforcement of rights under this Section 8.04(a). (b) If any payment of principal of, or Conversion of, any Adjusted CD Rate Advance or Eurodollar Rate Advance is made other than on the last day of the Interest Period for such Contract Advance, as a result of a payment or Conversion pursuant to Section 2.10 or 2.13 or acceleration of the maturity of the Notes pursuant to Section 6.01 or for any other reason, the Borrower shall, upon demand by any Lender (with a copy of such demand to the Administrative Agent), pay to the Administrative Agent for the account of such Lender any amounts required to compensate such Lender for any additional losses, costs or expenses which it may reasonably incur as a result of such payment or Conversion, including, without limitation, any loss, cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by any Lender to fund or maintain such Contract Advance. (c) The Borrower hereby agrees to indemnify and hold each Lender, each Agent and each of their respective Affiliates, officers, directors and employees (each, an "Indemnified Person") harmless from and against any and all claims, damages, losses, liabilities, costs or expenses (including reasonable attorney's fees and expenses, whether or not such Indemnified Person is named as a party to any proceeding or is otherwise subjected to judicial or legal process arising from any such proceeding) that any of them may pay or incur arising out of or relating to this Agreement, the Notes or the transactions contemplated thereby, or the use by the Borrower or any of its subsidiaries of the proceeds of any Advance, provided that the Borrower shall not be liable for any portion of such claims, damages, 36 losses, liabilities, costs or expenses resulting from such Indemnified Person's gross negligence or willful misconduct. The Borrower's obligations under this Section 8.04(c) shall survive the repayment of all amounts owing to the Lenders and the Administrative Agent under this Agreement and the Notes and the termination of the Commitments. If and to the extent that the obligations of the Borrower under this Section 8.04(c) are unenforceable for any reason, the Borrower agrees to make the maximum contribution to the payment and satisfaction thereof which is permissible under applicable law. SECTION 8.05. Right of Set-off. Upon (i) the occurrence and during the continuance of any Event of Default and (ii) the making of the request or the granting of the consent specified by Section 6.01 to authorize the Administrative Agent to declare the Notes due and payable pursuant to the provisions of Section 6.01, each Lender is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Lender to or for the credit or the account of the Borrower against any and all of the obligations of the Borrower now or hereafter existing under this Agreement and any Note held by such Lender, whether or not such Lender shall have made any demand under this Agreement or such Note and although such obligations may be unmatured. Each Lender agrees promptly to notify the Borrower after any such set-off and application made by such Lender, provided that the failure to give such notice shall not affect the validity of such set-off and application. The rights of each Lender under this Section 8.05 are in addition to other rights and remedies (including, without limitation, other rights of set-off) that such Lender may have. SECTION 8.06. Binding Effect. This Agreement shall become effective when it shall have been executed by the Borrower and the Agents and when the Administrative Agent shall have been notified by each Bank that such Bank has executed it and thereafter shall be binding upon and inure to the benefit of the Borrower, the Agents and each Lender and their respective successors and assigns, except that the Borrower shall not have the right to assign its rights hereunder or any interest herein without the prior written consent of the Lenders. SECTION 8.07. Assignments and Participations. (a) Each Lender may, with the prior written consent of the Borrower and the Administrative Agent (neither of which consents shall be unreasonably withheld or delayed), and if demanded by the Borrower pursuant to subsection (h) hereof shall to the extent required by such subsection (h), assign to one or more banks or other entities all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Commitment, the Contract Advances owing to it and the Contract Note or Notes held by it); provided, however, that (i) each such assignment shall be of a constant, and not a varying, percentage of all of the assigning Lender's rights and obligations under this Agreement (other than any Auction Advances or Auction Notes), (ii) the amount of the Commitment of the assigning Lender being assigned pursuant to each such assignment (determined as of the date of the Assignment and Acceptance with respect to such assignment) shall in no event be less than $5,000,000 or, if less, the entire amount of such Lender's Commitment, and shall be an integral multiple of $1,000,000 or such Lender's entire Commitment, (iii) each such assignment shall be to an Eligible Assignee, and (iv) the parties to each such assignment shall execute and deliver to the Administrative Agent, for its acceptance and recording in the Register, an Assignment and Acceptance, together with any Contract Note or Notes subject to such assignment and a processing and recordation fee of $3,500 (which shall be payable by one or more of the parties to the Assignment and Acceptance, and not by the Borrower, and shall not be payable if the assignee is a Bank, any Affiliate of any Bank or the Federal Reserve Bank). Upon such execution, delivery, acceptance and recording, from and after the effective date specified in each Assignment and Acceptance, (x) the assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, have the rights and obligations of a Lender hereunder and (y) the Lender assignor thereunder shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights and be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto). 37 Notwithstanding anything contained in this Section 8.07(a) to the contrary, (A) the consent of the Borrower and the Administrative Agent shall not be required with respect to any assignment by any Lender to an Affiliate of such Lender or to another Lender and (B) any Lender may at any time, without the consent of the Borrower or the Administrative Agent, and without any requirement to have an Assignment and Acceptance executed, assign all or any part of its rights under this Agreement and its Notes to a Federal Reserve Bank, provided that such assignment does not release the transferor Lender from any of its obligations hereunder. (b) By executing and delivering an Assignment and Acceptance, the Lender assignor thereunder and the assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (i) other than as provided in such Assignment and Acceptance, such assigning Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other instrument or document furnished pursuant hereto; (ii) such assigning Lender makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrower or the performance or observance by the Borrower of any of its obligations under this Agreement or any other instrument or document furnished pursuant hereto; (iii) such assignee confirms that it has received a copy of this Agreement, together with copies of the financial statements referred to in Section 4.01(e) and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (iv) such assignee will, independently and without reliance upon the Administrative Agent or the Documentation Agent, such assigning Lender or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (v) such assignee confirms that it is an Eligible Assignee; (vi) such assignee appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to the Administrative Agent by the terms hereof, together with such powers as are reasonably incidental thereto; and (vii) such assignee agrees that it will perform in accordance with their terms all of the obligations which by the terms of this Agreement are required to be performed by it as a Lender. (c) The Administrative Agent shall maintain at its address referred to in Section 8.02 a copy of each Assignment and Acceptance and each Additional Lender Supplement delivered to and accepted by it and a register for the recordation of the names and addresses of the Lenders and the Commitment of, and principal amount of the Contract Advances owing to, each Lender from time to time (the "Register"). The entries in the Register shall be conclusive and binding for all purposes, absent manifest error, and the Borrower, the Administrative Agent and the Lenders may treat each Person whose name is recorded in the Register as a Lender hereunder for all purposes of this Agreement. The Register shall be available for inspection by the Borrower or any Lender at any reasonable time and from time to time upon reasonable prior notice. (d) Upon its receipt of an Assignment and Acceptance executed by an assigning Lender and an assignee representing that it is an Eligible Assignee, together with any Contract Note or Notes subject to such assignment, the Administrative Agent shall, if such Assignment and Acceptance has been completed and is in substantially the form of Exhibit C hereto, (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register and (iii) give prompt notice thereof to the Borrower. Within five Business Days after its receipt of such notice, the Borrower, at its own expense, shall execute and deliver to the Administrative Agent in exchange for the surrendered Contract Note or Notes a new Contract Note to the order of such Eligible Assignee in an amount equal to the Commitment assumed by it pursuant to such Assignment and Acceptance and, if the assigning Lender has retained a Commitment hereunder, a new Contract Note to the order of the assigning Lender in an amount equal to the Commitment retained by it hereunder. Such new Contract Note or Notes shall be in an aggregate principal amount equal to the aggregate principal amount of such surrendered Contract Note or Notes, shall be dated the effective date of such Assignment and Acceptance and shall otherwise be in substantially the form of Exhibit A-1 hereto. 38 (e) Each Lender may assign to one or more Eligible Assignees any Auction Note or Notes held by it. (f) Each Lender may sell participations to one or more banks or other entities (each, a "Participant") in or to all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Commitment, the Advances owing to it and the Note or Notes held by it); provided, however, that (i) such Lender's obligations under this Agreement (including, without limitation, its Commitment to the Borrower hereunder) shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) such Lender shall remain the holder of any such Note for all purposes of this Agreement, (iv) the Borrower, the Administrative Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement and (v) such Lender shall retain the sole right to approve, without the consent of any Participant, any amendment, modification or waiver of any provision of this Agreement or the Note or Notes held by such Lender, other than any such amendment, modification or waiver with respect to any Advance or Commitment in which such Participant has an interest that forgives principal, interest or fees or reduces the interest rate or fees payable with respect to any such Advance or Commitment, postpones any date fixed for any regularly scheduled payment of principal of, or interest or fees on, any such Advance or Commitment, releases any guarantor of any such Advance or releases any substantial portion of collateral, if any, securing any such Advance. (g) Any Lender may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 8.07, disclose to the assignee or participant or proposed assignee or participant, any information relating to the Borrower furnished to such Lender by or on behalf of the Borrower; provided that, prior to any such disclosure, the assignee or participant or proposed assignee or participant shall agree to preserve the confidentiality of any confidential information relating to the Borrower received by it from such Lender (subject to customary exceptions regarding regulatory requirements, compliance with legal process and other requirements of law). (h) If (i) any Lender shall make demand for payment under Section 2.12(a), 2.12(b) or 2.15, or (ii) shall deliver any notice to the Administrative Agent pursuant to Section 2.13 resulting in the suspension of certain obligations of the Lenders with respect to Eurodollar Rate Advances or (iii) shall fail to consent to, or shall revoke its consent to, the extension of any Termination Date pursuant to Section 2.17 or (iv) shall fail to consent to, or shall revoke its consent to, any extension of the "Termination Date" (as defined in the Revolving Credit Agreement) requested by the Borrower pursuant to Section 2.17 of the Revolving Credit Agreement as originally constituted (or any successor provision of similar import), then (in the case of clause (i)) within 60 days after such demand (if, but only if, such payment demanded under Section 2.12(a), 2.12(b) or 2.15 has been made by the Borrower), or (in the case of clause (ii)) within 60 days after such notice (if such suspension is still in effect), or (in the case of clauses (iii) and (iv)) no later than 10 days prior to the then effective Termination Date, as the case may be, the Borrower may demand that such Lender assign in accordance with this Section 8.07 to one or more Eligible Assignees designated by the Borrower and reasonably acceptable to the Administrative Agent all (but not less than all) of such Lender's Commitment and the Advances owing to it within the next succeeding 30 days (in the case of clause (i) or clause (ii)), or within the next succeeding 5 days (in the case of clauses (iii) and (iv)) . If any such Eligible Assignee designated by the Borrower shall fail to consummate such assignment on terms acceptable to such Lender, or if the Borrower shall fail to designate any such Eligible Assignee for all of such Lender's Commitment or Advances, then such Lender may (but shall not be required to) assign such Commitment and Advances to any other Eligible Assignee in accordance with this Section 8.07 during such period. SECTION 8.08. Governing Law. THIS AGREEMENT AND THE NOTES SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA. 39 SECTION 8.09. Consent to Jurisdiction. THE BORROWER HEREBY IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF THE COURTS OF THE COMMONWEALTH OF PENNSYLVANIA AND ANY UNITED STATES DISTRICT COURT SITTING IN THE COMMONWEALTH OF PENNSYLVANIA IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE NOTES AND THE BORROWER HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT AND IRREVOCABLY WAIVES ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT OR THAT SUCH COURT IS AN INCONVENIENT FORUM. NOTHING HEREIN SHALL LIMIT THE RIGHT OF THE ADMINISTRATIVE AGENT OR ANY LENDER TO BRING PROCEEDINGS AGAINST THE BORROWER IN THE COURTS OF ANY OTHER JURISDICTION. SECTION 8.10. Execution in Counterparts; Integration. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. This Agreement constitutes the entire agreement and understanding among the parties hereto and supersedes all prior and contemporaneous agreements and understandings, oral or written, relating to the subject matter hereof. [Remainder of the page intentionally left blank] 40 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. [SEAL] PECO ENERGY COMPANY PECO ENERGY COMPANY By /s/J. B. Mitchell Name: J. B. Mitchell Title: Vice President - Finance and Treasurer /s/Todd D. Cutler Todd D. Cutler Assistant Secretary MELLON BANK, N.A., as Documentation Agent, Arranger and Syndication Agent By /s/Mary Ellen Usher Name: Mary Ellen Usher Title: Vice President THE FIRST NATIONAL BANK OF CHICAGO, as Administrative Agent By /s/Kenneth J. Bauer Name: Kenneth J. Bauer Title: Authorized Agent FIRST CHICAGO CAPITAL MARKETS, INC., as Arranger and Syndication Agent By /s/Kenneth J. Bauer Name: Kenneth J. Bauer Title: Vice President/Senior Banker CITICORP SECURITIES, INC., as Syndication Agent By /s/Anita J. Brickell Name: Anita J. Brickell Title: Vice President This is a signature page to the 364-Day Credit Agreement, dated as of October 7, 1997, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Lead Managers, certain Banks specified therein, as Co-Agents, First Chicago Capital Markets, Inc., Mellon Bank, N.A. and CitiCorp Securities, Inc., as Syndication Agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as Arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent. 41 THE BANKS Commitment $37,500,000 THE FIRST NATIONAL BANK OF CHICAGO, as Administrative Agent and as Bank By /s/Kenneth J. Bauer Name: Kenneth J. Bauer Title: Authorized Agent This is a signature page to the 364-Day Credit Agreement, dated as of October 7, 1997, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Lead Managers, certain Banks specified therein, as Co-Agents, First Chicago Capital Markets, Inc., Mellon Bank, N.A. and CitiCorp Securities, Inc., as Syndication Agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as Arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent. 42 Commitment $37,500,000 CITIBANK, N.A., as Bank By /s/Anita J. Brickell Name: Anita J. Brickell Title: Attorney-in-Fact This is a signature page to the 364-Day Credit Agreement, dated as of October 7, 1997, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Lead Managers, certain Banks specified therein, as Co-Agents, First Chicago Capital Markets, Inc., Mellon Bank, N.A. and CitiCorp Securities, Inc., as Syndication Agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as Arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent. 43 Commitment $37,500,000 MELLON BANK, N.A., as Documentation Agent, as Syndication Agent, as Arranger and as Bank By /s/Mary Ellen Usher Name: Mary Ellen Usher Title: Vice President This is a signature page to the 364-Day Credit Agreement, dated as of October 7, 1997, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Lead Managers, certain Banks specified therein, as Co-Agents, First Chicago Capital Markets, Inc., Mellon Bank, N.A. and CitiCorp Securities, Inc., as Syndication Agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as Arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent. 44 Commitment $25,000,000 THE BANK OF NEW YORK, as Co-Agent and as Bank By /s/John N. Watt Name: John N. Watt Title: Vice President This is a signature page to the 364-Day Credit Agreement, dated as of October 7, 1997, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Lead Managers, certain Banks specified therein, as Co-Agents, First Chicago Capital Markets, Inc., Mellon Bank, N.A. and CitiCorp Securities, Inc., as Syndication Agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as Arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent. 45 Commitment $25,000,000 THE CHASE MANHATTAN BANK, as Co-Agent and as Bank By /s/Paul V. Farrell Name: Paul V. Farrell Title: Vice President This is a signature page to the 364-Day Credit Agreement, dated as of October 7, 1997, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Lead Managers, certain Banks specified therein, as Co-Agents, First Chicago Capital Markets, Inc., Mellon Bank, N.A. and CitiCorp Securities, Inc., as Syndication Agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as Arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent. 46 Commitment $25,000,000 CORESTATES BANK, N.A., as Co-Agent and as Bank By /s/Anthony D. Braxton Name: Anthony D. Braxton Title: Vice President This is a signature page to the 364-Day Credit Agreement, dated as of October 7, 1997, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Lead Managers, certain Banks specified therein, as Co-Agents, First Chicago Capital Markets, Inc., Mellon Bank, N.A. and CitiCorp Securities, Inc., as Syndication Agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as Arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent. 47 Commitment $25,000,000 FIRST UNION NATIONAL BANK, as Co-Agent and as Bank By /s/Michael J. Kolosowsky Name: Michael J. Kolosowsky Title: Vice President This is a signature page to the 364-Day Credit Agreement, dated as of October 7, 1997, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Lead Managers, certain Banks specified therein, as Co-Agents, First Chicago Capital Markets, Inc., Mellon Bank, N.A. and CitiCorp Securities, Inc., as Syndication Agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as Arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent. 48 Commitment $25,000,000 THE TOKAI BANK, LIMITED, NEW YORK BRANCH, as Co-Agent and as Bank By /s/Kaoru Oda Name: Kaoru Oda Title: Assistant General Manager This is a signature page to the 364-Day Credit Agreement, dated as of October 7, 1997, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Lead Managers, certain Banks specified therein, as Co-Agents, First Chicago Capital Markets, Inc., Mellon Bank, N.A. and CitiCorp Securities, Inc., as Syndication Agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as Arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent. 49 Commitment $25,000,000 TORONTO DOMINION (NEW YORK), INC., as Co-Agent and as Bank By /s/Jorge A. Garcia Name: Jorge A. Garcia Title: Vice President This is a signature page to the 364-Day Credit Agreement, dated as of October 7, 1997, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Lead Managers, certain Banks specified therein, as Co-Agents, First Chicago Capital Markets, Inc., Mellon Bank, N.A. and CitiCorp Securities, Inc., as Syndication Agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as Arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent. 50 Commitment $25,000,000 UNION BANK OF CALIFORNIA, N.A., as Co-Agent and as Bank By /s/Karyssa M. Britton Name: Karyssa M. Britton Title: Vice President This is a signature page to the 364-Day Credit Agreement, dated as of October 7, 1997, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Lead Managers, certain Banks specified therein, as Co-Agents, First Chicago Capital Markets, Inc., Mellon Bank, N.A. and CitiCorp Securities, Inc., as Syndication Agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as Arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent. 51 Commitment $17,500,000 THE FUJI BANK, LIMITED, as Lead Manager and as Bank By /s/Raymond Ventura Name: Raymond Ventura Title: Vice President & Manager This is a signature page to the 364-Day Credit Agreement, dated as of October 7, 1997, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Lead Managers, certain Banks specified therein, as Co-Agents, First Chicago Capital Markets, Inc., Mellon Bank, N.A. and CitiCorp Securities, Inc., as Syndication Agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as Arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent. 52 Commitment $17,500,000 THE INDUSTRIAL BANK OF JAPAN TRUST COMPANY, as Lead Manager and as Bank By /s/John V.Veltri Name: John V. Veltri Title: Deputy General Manager This is a signature page to the 364-Day Credit Agreement, dated as of October 7, 1997, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Lead Managers, certain Banks specified therein, as Co-Agents, First Chicago Capital Markets, Inc., Mellon Bank, N.A. and CitiCorp Securities, Inc., as Syndication Agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as Arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent. 53 Commitment $17,500,000 MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Lead Manager and as Bank By /s/Philip S. Detjens Name: Philip S. Detjens Title: Vice President This is a signature page to the 364-Day Credit Agreement, dated as of October 7, 1997, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Lead Managers, certain Banks specified therein, as Co-Agents, First Chicago Capital Markets, Inc., Mellon Bank, N.A. and CitiCorp Securities, Inc., as Syndication Agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as Arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent. 54 Commitment $17,500,000 SUMMIT BANK, as Lead Manager and as Bank By /s/Bruce A.Gray Name: Bruce A.Gray Title: Vice President, Large Corporate Bank, Summit Bank This is a signature page to the 364-Day Credit Agreement, dated as of October 7, 1997, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Lead Managers, certain Banks specified therein, as Co-Agents, First Chicago Capital Markets, Inc., Mellon Bank, N.A. and CitiCorp Securities, Inc., as Syndication Agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as Arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent. 55 Commitment $12,500,000 BANK OF MONTREAL, as Bank By /s/John L. Smith Name: John L. Smith Title: Director This is a signature page to the 364-Day Credit Agreement, dated as of October 7, 1997, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Lead Managers, certain Banks specified therein, as Co-Agents, First Chicago Capital Markets, Inc., Mellon Bank, N.A. and CitiCorp Securities, Inc., as Syndication Agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as Arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent. 56 Commitment $12,500,000 BANKERS TRUST COMPANY, as Bank By /s/Marcus M. Tarkington Name: Marcus M. Tarkington Title: Vice President This is a signature page to the 364-Day Credit Agreement, dated as of October 7, 1997, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Lead Managers, certain Banks specified therein, as Co-Agents, First Chicago Capital Markets, Inc., Mellon Bank, N.A. and CitiCorp Securities, Inc., as Syndication Agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as Arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent. 57 Commitment $12,500,000 DEUTSCHE BANK AG, NEW YORK BRANCH, as Bank By /s/Gabrielle C. Upton Name: Gabrielle C. Upton Title: Assistant Vice President DEUTSCHE BANK AG, CAYMAN ISLAND BRANCH, as Bank By /s/Joel D. Makowsky Name: Joel D. Makowsky Title: Assistant Vice President This is a signature page to the 364-Day Credit Agreement, dated as of October 7, 1997, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Lead Managers, certain Banks specified therein, as Co-Agents, First Chicago Capital Markets, Inc., Mellon Bank, N.A. and CitiCorp Securities, Inc., as Syndication Agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as Arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent. 58 Commitment $12,500,000 THE LONG-TERM CREDIT BANK OF JAPAN, as Bank By /s/Hiroshi Kitada Name: Hiroshi Kitada Title: Deputy General Manager This is a signature page to the 364-Day Credit Agreement, dated as of October 7, 1997, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Lead Managers, certain Banks specified therein, as Co-Agents, First Chicago Capital Markets, Inc., Mellon Bank, N.A. and CitiCorp Securities, Inc., as Syndication Agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as Arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent. 59 Commitment $12,500,000 THE TOYO TRUST & BANKING CO., LTD., as Bank By /s/Takashi Mikumo Name: Takashi Mikumo Title: Vice President This is a signature page to the 364-Day Credit Agreement, dated as of October 7, 1997, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Lead Managers, certain Banks specified therein, as Co-Agents, First Chicago Capital Markets, Inc., Mellon Bank, N.A. and CitiCorp Securities, Inc., as Syndication Agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as Arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent. 60 Commitment $12,500,000 UNION BANK OF SWITZERLAND, NEW YORK BRANCH, as Bank By /s/Paul R. Morrison Name: Paul R. Morrison Title: Director UNION BANK OF SWITZERLAND, NEW YORK BRANCH, as Bank By /s/Andrew N. Taylor Name: Andrew N. Taylor Title: Assistant Vice President This is a signature page to the 364-Day Credit Agreement, dated as of October 7, 1997, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Lead Managers, certain Banks specified therein, as Co-Agents, First Chicago Capital Markets, Inc., Mellon Bank, N.A. and CitiCorp Securities, Inc., as Syndication Agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as Arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent. 61 Commitment $10,000,000 BANK HAPOALIM B.M., as Bank By /s/Carl Kopfinger Name: Carl Kopfinger Title: Vice President By /s/Jonathan Kulka Name: Jonathan Kulka Title: First Vice President & Branch Manager This is a signature page to the 364-Day Credit Agreement, dated as of October 7, 1997, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Lead Managers, certain Banks specified therein, as Co-Agents, First Chicago Capital Markets, Inc., Mellon Bank, N.A. and CitiCorp Securities, Inc., as Syndication Agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as Arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent. 62 Commitment $7,500,000 ABU DHABI INTERNATIONAL BANK INC., as Bank By /s/David J. Young Name: David J. Young Title: Assistant Vice President By /s/Nagy S. Kolta Name: Nagy S. Kolta Title: Senior Vice President This is a signature page to the 364-Day Credit Agreement, dated as of October 7, 1997, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Lead Managers, certain Banks specified therein, as Co-Agents, First Chicago Capital Markets, Inc., Mellon Bank, N.A. and CitiCorp Securities, Inc., as Syndication Agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as Arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent. 63 SCHEDULE I 364-Day Credit Agreement, dated as of October 7, 1997, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Lead Managers, certain Banks specified therein, as Co-Agents, First Chicago Capital Markets, Inc. , Mellon Bank, N.A. and CitiCorp Securities, Inc., as Syndication Agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as Arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent.
Domestic CD Lending Eurodollar Name of Bank Lending Office Office Lending Office Union Bank of Energy Capital Services same same California, N.A. 445 S. Figueroa Street 20th Floor Los Angeles, CA 90071 Attn: Yolande C. Hollis Phone: (213) 236-6199 Fax: (213) 236-4096 Abu Dhabi International Bank Inc. 1020 19th Street, N.W. same same Suite 500 Washington, DC 20036 Attn: Robert Ford Phone: (202) 842-7903 Fax: (202) 842-7955 CoreStates Bank, N.A. 1339 Chestnut Street same same FC 1-8-11-28 Philadelphia, PA 19107 Attn: Mary Lockhart Phone: (215) 786-4313 Fax: (215) 786-7721 Deutsche Bank A.G., New York 31 West 52nd Street same same Branch and/or Cayman Islands New York, NY 10019 Branch Attn: Jo Curcio Phone: (212) 469-4103 Fax: (212) 469-4139 First Union National Bank One First Union Center same same 301 South College Street Charlotte, NC 28288-0735 Attn: Dana Maloney Phone: (704) 383-0296 Fax: (704) 383-6670 The Chase Manhattan Bank One Chase Manhattan Plaza same same New York, NY 10081 Attn: Lynette Lang Phone: (212) 552-7692 Fax: (212) 552-5777 Domestic CD Lending Eurodollar Name of Bank Lending Office Office Lending Office Mellon Bank, N.A. Three Mellon Bank Center Room 2303 same same (Loan Administration) Pittsburgh, PA 15259-0003 Attn: Cathy Capp Phone: (412) 234-1870 Fax: (412) 236-2027, 2028 The Industrial Bank of Japan 1251 Avenue of the Americas same same Trust Company New York, NY 10020-1104 Attn: Atsushi Kawai Credit Administration Phone: (212) 282-4060 Fax: (212) 282-4480 The Toronto-Dominion Bank 909 Fannin, Suite 1700 TDSI (USA), Inc. same Houston, TX 77010 31 West 52nd Street Attn: Jorge A. Garcia 21st Floor Manager-Credit Administration New York, NY 10019-6101 Phone: (713) 653-8242 Attn: Senior Dealer Fax: (713) 951-9921 Phone: (212) 468-0400 Fax: (212) 974-5283 Bank Hapoalim B.M. Commercial Loan & Documentation same same 1515 Market Street, Suite 200 Philadelphia, PA 19102 Attn: Sheila D. Joe Phone: (215) 665-2228 Fax: (215) 665-2217 The Tokai Bank, Limited, New 55 East 52nd Street, 11th Floor same same York Branch New York, NY 10055 Attn: Eva Cordova Phone: (212) 339-1145 Fax: (212) 754-2171 Union Bank of Switzerland New York Branch same same 299 Park Avenue New York, NY 10171 Attn: Mike Peterson Loan Servicing Group Phone: (212) 821-3230 Fax: (212) 821-3259 The Long-Term Credit Bank of One Liberty Plaza same same Japan New York, NY 10006 Attn: Robert Pacitici Phone: (212) 335-4801 Fax: (212) 608-3452 2 Domestic CD Lending Eurodollar Name of Bank Lending Office Office Lending Office The Toyo Trust & Banking Co., 666 Fifth Avenue, 33rd Floor same same Ltd. New York, NY 10103 Attn: Debra Wylie Phone: (212) 307-3400, ext.287 Fax: (212) 977-5611 The Fuji Bank, Limited Two World Trade Center same same New York, NY 10048 Attn: Gemma Dizon Phone: (212) 898-2069 Fax: (212) 488-8216 Bank of Montreal 115 South LaSalle Street same same Chicago, IL 60603 Attn: John Paseka Phone: (312) 750-3771 Fax: (312) 750-4345 Summit Bank 750 Walnut Avenue, 3rd Floor same same Cranford, NJ 07016 Attn: Carolyn Swiss Phone: (201) 229-5288 Fax: (201) 641-4462 The Bank of New York One Wall Street, 19th Floor same same Energy Industries Division New York, NY 10286 Attn: Theresa A. Foran Phone: (212) 635-7921 Fax: (212) 635-7923 First National Bank of Chicago One First National Plaza same same Mail Suite 0634, 1FNP-10 Chicago, IL 60670 Attn: Gwendolyn Watson Phone: (312) 732-4509 Fax: (312) 732-4840 Bankers Trust Company 130 Liberty Street same same New York, NY 10006 Attn: Joe Regan Phone: (212) 250-4169 Fax: (212) 250-7351 3 Domestic CD Lending Eurodollar Name of Bank Lending Office Office Lending Office Morgan Guaranty and Trust 60 Wall Street same Nassau Bahamas Office Company of New York New York, NY 10260-0060 c/o J.P. Morgan Services, Attn: Sandra Doherty Inc. Credit Administrator Loan Operations, 3rd Floor Phone: (302) 634-8122 500 Stanton Christiana Rd. Fax: (302) 634-1092 Newark, DE 19713 Attn: Allison Hollis Loan Department Phone: (302) 634-4671 Fax: (302) 634-1094 Citibank, N.A. 399 Park Avenue 4th Floor, Zone 22 New York, New York 10021 Attn: Kate Bohen Phone: (302) 894-6120 Fax: (302) 894-6077
4 EXHIBIT A-1 FORM OF CONTRACT NOTE $____________________ Dated: October 7, 1997 FOR VALUE RECEIVED, the undersigned, PECO Energy Company, a Pennsylvania corporation (the "Borrower"), HEREBY PROMISES TO PAY to the order of (the "Lender") for the account of its Applicable Lending Office (such term and other capitalized terms herein being used as defined in the Credit Agreement referred to below) on the Termination Date the principal sum of U.S.$[amount of the Lender's Commitment in figures] or, if less, the aggregate principal amount of the Contract Advances made by the Lender to the Borrower pursuant to the Credit Agreement outstanding on the Termination Date. The Borrower promises to pay interest on the unpaid principal amount of each Contract Advance from the date of such Contract Advance until such principal amount is paid in full, at such interest rates, and payable at such times, as are specified in the Credit Agreement. Both principal and interest are payable in lawful money of the United States of America to The First National Bank of Chicago, as Administrative Agent, at One First National Plaza, Chicago, Illinois 60670, in same day funds. Each Contract Advance made by the Lender to the Borrower pursuant to the Credit Agreement, and all payments made on account of principal thereof, shall be recorded by the Lender and, prior to any transfer hereof, endorsed on the grid attached hereto which is part of this Promissory Note. This Promissory Note is one of the Contract Notes referred to in, and is entitled to the benefits of, the 364-Day Credit Agreement, dated as of October 7, 1997, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Lead Managers, certain Banks specified therein, as Co-Agents, First Chicago Capital Markets, Inc., Mellon Bank, N.A. and CitiCorp Securities, Inc., as Syndication Agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as Arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent (as amended, modified or supplemented from time to time, the "Credit Agreement"). The Credit Agreement, among other things, (i) provides for the making of Contract Advances by the Lender to the Borrower from time to time in an aggregate amount not to exceed at any time outstanding the U.S. dollar amount first above mentioned, the indebtedness of the Borrower resulting from each such Contract Advance being evidenced by this Promissory Note, and (ii) contains provisions for acceleration of the maturity hereof upon the happening of certain stated events and also for prepayments on account of principal hereof prior to the maturity hereof upon the terms and conditions therein specified. The Borrower hereby waives presentment, demand, protest and notice of any kind. No failure to exercise, and no delay in exercising, any rights hereunder on the part of the holder hereof shall operate as a waiver of such rights. THIS PROMISSORY NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA. PECO ENERGY COMPANY By Name: Title: 2 ADVANCES, MATURITIES, AND PAYMENTS OF PRINCIPAL
Amount of Maturity Principal Unpaid Amount of of Paid or Principal Notation Date Advance Advance Prepaid Balance Made By
EXHIBIT A-2 FORM OF AUCTION NOTE $_________________________ Dated: _________, 19___ FOR VALUE RECEIVED, the undersigned, PECO Energy Company, a Pennsylvania corporation (the "Borrower"), HEREBY PROMISES TO PAY to the order of (the "Lender") for the account of its Applicable Lending Office (as defined in the Credit Agreement referred to below), on , 19 , the principal amount of Dollars ($ ). The Borrower promises to pay interest on the unpaid principal amount hereof from the date hereof until such principal amount is paid in full, at the interest rate and payable on the interest payment date or dates provided below: Interest Rate: % per annum (calculated on the basis of a year of days for the actual number of days elapsed). Interest Payment Date or Dates: Both principal and interest are payable in lawful money of the United States of America to or the account of the Lender at the office of The First National Bank of Chicago, as Administrative Agent, at One First National Plaza, Chicago, Illinois 60670, in same day funds, free and clear of and without any deduction, with respect to the payee named above, for any and all present and future taxes, deductions, charges or withholdings (other than United States withholding taxes, if applicable), and all liabilities with respect thereto. This Promissory Note is one of the Auction Notes referred to in, and is entitled to the benefits of, the 364-Day Credit Agreement, dated as of October 7, 1997, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Lead Managers, certain Banks specified therein, as Co-Agents, First Chicago Capital Markets, Inc., Mellon Bank, N.A. and CitiCorp Securities, Inc., as Syndication Agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as Arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent (as amended, modified or supplemented from time to time, the "Credit Agreement"). The Credit Agreement, among other things, contains provisions for acceleration of the maturity hereof upon the happening of certain stated events. The Borrower hereby waives presentment, demand, protest and notice of any kind. No failure to exercise, and no delay in exercising, any rights hereunder on the part of the holder hereof shall operate as a waiver of such rights. THIS PROMISSORY NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA. PECO ENERGY COMPANY By Name: Title: 2 EXHIBIT B-1 NOTICE OF A CONTRACT BORROWING The First National Bank of Chicago, as Administrative Agent for the Lenders parties to the Credit Agreement referred to below One First National Plaza Chicago, Illinois 60670 [Date] Attention: Utilities Department North American Finance Group Ladies and Gentlemen: The undersigned, PECO Energy Company, refers to the 364-Day Credit Agreement, dated as of October 7, 1997, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Lead Managers, certain Banks specified therein, as Co-Agents, First Chicago Capital Markets, Inc., Mellon Bank, N.A. and CitiCorp Securities, Inc., as Syndication Agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as Arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent (as amended, modified or supplemented from time to time, the "Credit Agreement"), and hereby gives you notice, irrevocably, pursuant to Section 2.02 of the Credit Agreement that the undersigned hereby requests a Contract Borrowing under the Credit Agreement, and in that connection sets forth below the information relating to such Contract Borrowing (the "Proposed Contract Borrowing") as required by Section 2.02(a) of the Credit Agreement: (i) The Business Day of the Proposed Contract Borrowing is , 19 . (ii) The Type of Contract Advances to be made in connection with the Proposed Contract Borrowing is [Adjusted CD Rate Advances] [Base Rate Advances] [Eurodollar Rate Advances]. (iii) The aggregate amount of the Proposed Contract Borrowing is $_________________. (iv) The Interest Period for each Contract Advance made as part of the Proposed Contract Borrowing is [ days] [ month[s]]. The undersigned hereby certifies that the following statements are true on the date hereof, and will be true on the date of the Proposed Contract Borrowing: (A) the representations and warranties contained in Section 4.01 are correct, before and after giving effect to the Proposed Contract Borrowing and to the application of the proceeds therefrom, as though made on and as of such date; and (B) no event has occurred and is continuing, or would result from such Proposed Contract Borrowing or from the application of the proceeds therefrom, that constitutes an Event of Default or would constitute an Event of Default but for the requirement that notice be given or time elapse or both. Very truly yours, PECO ENERGY COMPANY By Name: Title: 2 EXHIBIT B-2 NOTICE OF AN AUCTION BORROWING The First National Bank of Chicago, as Administrative Agent, for the Lenders parties to the Credit Agreement referred to below One First National Plaza Chicago, Illinois 60670 [Date] Attention: Utilities Department North American Finance Group Ladies and Gentlemen: The undersigned, PECO Energy Company, refers to the 364-Day Credit Agreement, dated as of October 7, 1997, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Lead Managers, certain Banks specified therein, as Co-Agents, First Chicago Capital Markets, Inc., Mellon Bank, N.A. and CitiCorp Securities, Inc., as Syndication Agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as Arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent (as amended, modified or supplemented from time to time, the "Credit Agreement"), and hereby gives you notice pursuant to Section 2.03 of the Credit Agreement that the undersigned hereby requests an Auction Borrowing under the Credit Agreement, and in that connection sets forth the terms on which such Auction Borrowing (the "Proposed Auction Borrowing") is requested to be made: (A) Date of Auction Borrowing ______ (B) Amount of Auction Borrowing ______ (C) Maturity Date ______ (D) Interest Payment Date(s) ______ (E) _________ ______ (F) _________ ______ The undersigned hereby certifies that the following statements are true on the date hereof, and will be true on the date of the Proposed Auction Borrowing: (a) the representations and warranties contained in Section 4.01 are correct, before and after giving effect to the Proposed Auction Borrowing and to the application of the proceeds therefrom, as though made on and as of such date: (b) no event has occurred and is continuing, or would result from the Proposed Auction Borrowing or from the application of the proceeds therefrom, which constitutes an Event of Default or would constitute an Event of Default but for the requirement that notice be given or time elapse or both; and (c) the aggregate amount of the Proposed Auction Borrowing and all other Borrowings to be made on the same day under the Credit Agreement is within the aggregate amount of the unused Commitments of the Lenders. The undersigned hereby confirms that the Proposed Auction Borrowing is to be made available to it in accordance with Section 2.03(a)(v) of the Credit Agreement. Very truly yours, PECO ENERGY COMPANY By Name: Title: EXHIBIT C ASSIGNMENT AND ACCEPTANCE Dated ______________, 19___ Reference is made to the 364-Day Credit Agreement, dated as of October 7, 1997, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Lead Managers, certain Banks specified therein, as Co-Agents, First Chicago Capital Markets, Inc., Mellon Bank, N.A. and CitiCorp Securities, Inc., as Syndication Agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as Arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent (as amended, modified or supplemented from time to time, the "Credit Agreement"). Terms defined in the Credit Agreement are used herein with the same meaning. ______________ (the "Assignor") and ________________ (the "Assignee") agree as follows: 1. The Assignor hereby sells and assigns to the Assignee, and the Assignee hereby purchases and assumes from the Assignor, that interest in and to all of the Assignor's rights and obligations under the Credit Agreement as of the date hereof (other than in respect of Auction Advances and Auction Notes) which represents the percentage interest specified on Schedule 1 of all outstanding rights and obligations under the Credit Agreement (other than in aspect of Auction Advances and Auction Notes), including, without limitation, such interest in the Assignor's Commitment, the Contract Advances owing to the Assignor, and the Contract Note[s] held by the Assignor. After giving effect to such sale and assignment, the Assignee's Commitment and the amount of the Contract Advances owing to the Assignee will be as set forth in Section 2 of Schedule 1. 2. The Assignor (i) represents and warrants that it is the legal and beneficial owner of the interest being assigned by it hereunder and that such interest is free and clear of any adverse claim; (ii) makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Credit Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Credit Agreement or any other instrument or document furnished pursuant thereto; (iii) makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrower or the performance or observance by the Borrower of any of its obligations under the Credit Agreement or any other instrument or document furnished pursuant thereto; and (iv) attaches the Contract Note[s] referred to in paragraph 1 above and requests that the Administrative Agent exchange such Contract Note[s] for a new Contract Note payable to the order of the Assignee in an amount equal to the Commitment assumed by the Assignee pursuant hereto or new Contract Notes payable to the order of the Assignee in an amount equal to the Commitment assumed by the Assignee pursuant hereto and the Assignor in an amount equal to the Commitment retained by the Assignor under the Credit Agreement, respectively as specified on Schedule 1 hereto. 3. The Assignee (i) confirms that it has received a copy of the Credit Agreement, together with copies of the financial statements referred to in Section 4.01 thereof and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Acceptance; (ii) agrees that it will, independently and without reliance upon the Administrative Agent, the Documentation Agent, the Assignor or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Agreement; (iii) confirms that it is an Eligible Assignee; (iv) appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under the Credit Agreement as are delegated to the Administrative Agent by the terms thereof, together with such powers as are reasonably incidental thereto; (v) agrees that it will perform in accordance with their terms all of the obligations which by the terms of the Credit Agreement are required to be performed by it as a Lender; (vi) none of the consideration used to make the purchase being made by the Assignee hereunder are "plan assets" as defined under ERISA and the rights and interests of the Assignee in and under the Credit Agreement will not be "plan assets" under ERISA [and] (vii) specifies as its CD Lending Office, Domestic Lending Office (and address for notices) and Eurodollar Lending Office the offices set forth beneath its name on the signature pages hereof [and (viii) attaches the forms prescribed by the Internal Revenue Service of the United States certifying that it is exempt from United States withholding taxes with respect to all payments to be made to the Assignee under the Credit Agreement and the Notes].1 4. Following the execution of this Assignment and Acceptance by the Assignor and the Assignee, it will be delivered to the Administrative Agent for acceptance and recording by the Administrative Agent. The effective date of this Assignment and Acceptance shall be the date of acceptance thereof by the Administrative Agent, unless otherwise specified on Schedule 1 hereto (the "Effective Date"). 5. Upon such acceptance and recording by the Administrative Agent, as of the Effective Date, (i) the Assignee shall be a party to the Credit Agreement and, to the extent provided in this Assignment and Acceptance, have the rights and obligations of a Lender thereunder and (ii) the Assignor shall, to the extent provided in this Assignment and Acceptance, relinquish its rights and be released from its obligations under the Credit Agreement. 6. Upon such acceptance and recording by the Administrative Agent, from and after the Effective Date, the Administrative Agent shall make all payments under the Credit Agreement and the Contract Notes in respect of the interest assigned hereby (including, without limitation, all payments of principal, interest and commitment fees with respect thereto) to the Assignee. The Assignor and Assignee shall make all appropriate adjustments in payments under the Credit Agreement and the Contract Notes for periods prior to the Effective Date directly between themselves. 7. THIS ASSIGNMENT AND ACCEPTANCE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA. 1 If the Assignee is organized under the laws of a jurisdiction outside the United States. IN WITNESS WHEREOF, the parties hereto have caused this Assignment and Acceptance to be executed by their respective officers thereunto duly authorized, as of the date first above written, such execution being made on Schedule 1 hereto. [NAME OF ASSIGNOR] By Name: Title: [NAME OF ASSIGNOR] By Name: Title: CD Lending Office: [Address] Domestic Lending Office (and address for notices): [Address] Eurodollar Lending Office: [Address] Consented to this ________ day of __________________, 19___ PECO ENERGY COMPANY By Name: Title: Consented to and Accepted this ____________ day of __________________, 19___ [NAME OF ADMINISTRATIVE AGENT] By Name: Title: 3 Schedule 1 to Assignment and Acceptance Dated ____________, 19___ Section 1. Percentage Interest: ___% Section 2. Assignee's Commitment: $____ Aggregate Outstanding Principal Amount of Contract Advances owing to the Assignee: $____ A Contract Note payable to the order of the Assignee Dated:_____, 19___ Principal amount: $____ A Contract Note payable to the order of the Assignor Dated:_____, 19___ Principal amount: $____ Section 3. Effective Date(2): __________, 19___ __________________ (2) This date should be no earlier than the date of acceptance by the Administrative Agent. EXHIBIT D FORM OF OPINION OF BALLARD SPAHR ANDREWS & INGERSOLL _____________, 19_______ To each of the Banks, the Administrative Agent, the Documentation Agent, the Syndication Agents, the Arrangers, the Co-Agents and the Lead Managers party to the 364-Day Credit Agreement, dated as of October 7, 1997, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Lead Managers, certain Banks specified therein, as Co-Agents, First Chicago Capital Markets, Inc., Mellon Bank, N.A. and CitiCorp Securities, Inc., as Syndication Agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as Arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent Re: PECO Energy Company Ladies and Gentlemen: This opinion is furnished to you pursuant to Section 3.01(a)(vi) of the 364-Day Credit Agreement, dated as of October 7, 1997, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Lead Managers, certain Banks specified therein, as Co-Agents, First Chicago Capital Markets, Inc., Mellon Bank, N.A. and CitiCorp Securities, Inc., as Syndication Agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as Arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent (as amended, modified or supplemented from time to time, the "Credit Agreement"). Unless otherwise specified, terms defined in the Credit Agreement are used herein as therein defined. We have acted as special counsel for the Borrower in connection with the preparation, execution and delivery of the Credit Agreement. In that capacity we have examined the following: (i) The Credit Agreement, the Contract Notes and the form of the Auction Notes to be delivered in connection with Auction Borrowings; (ii) The documents furnished by the Borrower pursuant to Section 3.01 of the Credit Agreement; (iii) The Amended and Restated Articles of Incorporation of the Borrower and all amendments thereto (the "Charter"); (iv) The by-laws of the Borrower and all amendments thereto (the "By-laws"); and (v) A certificate of the Secretary of State of the Commonwealth of Pennsylvania, dated , 19 , attesting to the continued subsistence of the Borrower in Pennsylvania. We have also examined the originals, or copies certified to our satisfaction, of such other corporate records of the Borrower, certificates of public officials and of officers of the Borrower, and agreements, instruments and documents, as we have deemed necessary as a basis for the opinions hereinafter expressed. We have assumed the legal capacity and competence of natural persons, the genuineness of all signatures, the authenticity of all documents submitted to us as originals and the conformity to original documents of documents submitted to us as certified, conformed or photostatic copies. We have assumed that the Agents and the Banks have duly executed and delivered, with all necessary power and authority (corporate and otherwise), the Credit Agreement. We have further assumed that the Auction Notes, when delivered under the Credit Agreement, will be duly executed by the Borrower. When an opinion or confirmation is given to our knowledge or with reference to matters of which we are aware or which are known to us, or with another similar qualification, the relevant knowledge or awareness is limited to the actual knowledge or awareness of the lawyer who is the current primary contact for the Borrower and the individual lawyers in this firm who have participated in the specific transaction to which this opinion relates and without any special or additional investigation undertaken for the purposes of this opinion, except as otherwise noted herein. Based upon the foregoing and subject to the exceptions, limitations and qualifications set forth herein, we are of the following opinion: 1. The Borrower is a corporation duly incorporated and validly subsisting under the laws of the Commonwealth of Pennsylvania. 2. The execution, delivery and performance by the Borrower of the Credit Agreement and the Notes are within the Borrower's corporate powers, have been duly authorized by all necessary corporate action, do not contravene (i) the Charter or the By-laws or (ii) any law of the United States or the Commonwealth of Pennsylvania (including, without limitation, any order, rule or regulation of the PPUC or (iii) to the best of our knowledge, any agreement or instrument to which the Borrower is a party or by which it is bound, and do not result in or require the creation of any lien, security interest or other charge or encumbrance upon or with respect to any of its properties. 3. No authorization, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body of the United States or the Commonwealth of Pennsylvania is required for the due execution, delivery and performance by the Borrower of the Credit Agreement or the Notes except for the filing of the Securities Certificate with, and the final approval of, and the Order of Registration issued by, the PPUC, which filing has been duly made and which final approval and Order of Registration have been duly obtained; such Order of Registration is in full force and effect and is final; and the action of the PPUC registering the Securities Certificate is no longer subject to appeal. 4. The Credit Agreement and the Contract Notes have been duly executed and delivered by the Borrower, and the Credit Agreement and the Contract Notes are, and the Auction Notes, when executed and delivered hereunder will be, the legal, valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their respective terms. 5. The Borrower (i) is exempt from the provisions of the Public Utility Holding Company Act of 1935, as amended, other than Section 9(a)(2) thereof, pursuant to Section 3(a)(2) thereof, and (ii) is not an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. 2 6. We confirm to you that to our knowledge, after inquiry of each lawyer who is the current primary contact for the Borrower or who has devoted substantive attention to matters on behalf of the Borrower during the preceding twelve months and who is still currently employed by or a member of this firm, except as disclosed in the Borrower's Annual Report on Form 10-K for the year ended December 31, 1996 and the Borrower's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, no litigation or governmental proceeding is pending or threatened in writing against the Borrower (i) with respect to the Credit Agreement or the Notes, or (ii) which is likely to have a material adverse effect upon the financial condition, business, properties or prospects of the Borrower and its subsidiaries taken as a whole. We draw to your attention the existence of the following two Pennsylvania statutes in connection with the fact that the Contract Advances bear floating rates of interest: (i) Section 911 of the Pennsylvania "Crime Code," 18 Pa. C.S.A. ss.911, enacted by the Act of December 6, 1972, P.L. 1482. Section 911 of the Crime Code bears a close resemblance to certain of the provisions of the Federal Racketeer Influenced and Corrupt Organizations Act of 1970, 18 U.S.C. ss.ss.1961-1968, commonly known as RICO, and is referred to hereinafter as the "Pennsylvania RICO Act." The Pennsylvania RICO Act provides, among other things, that it is a criminal offense, punishable as a felony, to "use or invest, directly or indirectly ... in the acquisition of any interest in, or the establishment or operation of, any enterprise" any income collected in full or partial satisfaction of a loan made "at a rate of interest exceeding 25% per annum... ." (ii) The Act of December 29, 1982, P.L. 1671, 18 Pa. C.S.A. ss.4806.1 et seq. (superseded volume) (the "Criminal Usury Statute"). The Criminal Usury Statute provides, among other things, that it is a criminal offense, punishable as a felony, to engage in, "charging, taking or receiving any money ... on the loan ... of any money ... at a rate exceeding thirty-six percent per annum... ." The Criminal Usury Statute may have been repealed, but the manner in which the repeal was enacted leaves the matter subject to uncertainty. Both the Pennsylvania RICO Act and the Criminal Usury Statute appear to be intended by the legislature to apply only to racketeering and loan sharking type activities, and not to the type of commercial loan transaction evidenced by the Loan Document. Nevertheless, in view of the plain language of the Pennsylvania courts, we cannot say that the ultimate resolution of this issue is free from doubt. The foregoing opinions are subject to the following exceptions, limitations and qualifications: (a) Our opinion is subject to the effect of applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, fraudulent transfer or similar laws affecting creditors' rights and remedies generally, general principles of equity, including without limitation, concepts of materiality, reasonableness, good faith and fair dealing (regardless of whether such enforceability is considered in a proceeding in equity or at law); and limitations on enforceability of rights to indemnification by federal or state securities laws or regulations or by public policy. (b) We express no opinion as to the application or requirements of the Pennsylvania Securities Act or federal or state securities, patent, trademark, copyright, antitrust and unfair competition, pension or employee benefit, labor, environmental 3 health and safety or tax laws in respect of the transactions contemplated by or referred to in the Credit Agreement. (c) We express no opinion as to the validity or enforceability of any provision of the Credit Agreement or the Notes which (i) permits the Lenders to increase the rate of interest in the event of delinquency or default if such increase would be deemed a penalty under applicable law; (ii) purports to be a waiver by Borrower of any right or benefit except to the extent permitted by applicable law; (iii) purports to require that waivers must be in writing to the extent that an oral agreement or implied agreement by trade practice or course of conduct modifying provisions of the Credit Agreement or the Notes has been made; or (iv) purports to exculpate any party from its own negligent acts. We express no opinion as to the law of any jurisdiction other than the law of the Commonwealth of Pennsylvania and the federal law of the United States. The foregoing opinion is solely for your benefit in connection with the consummation of the transaction described herein and may not be used or relied upon by you or any other Person without our express written consent for any other purpose other than (i) any Eligible Assignee that may become a Lender under the Credit Agreement after the date hereof and (ii) Reed Smith Shaw & McClay LLP, which may rely upon this opinion in rendering their opinion furnished pursuant to Article III of the Credit Agreement. The opinions given herein are as of the date hereof, and we assume no obligation to update or supplement this opinion to reflect facts or circumstances which may hereafter come to our attention or any changes in laws which may hereafter occur. Very truly yours, BALLARD SPAHR ANDREWS & INGERSOLL 4 EXHIBIT E FORM OF OPINION OF REED SMITH SHAW & McCLAY LLP _______________, 19___ To each of the Banks, the Administrative Agent, the Documentation Agent, the Syndication Agents, the Arrangers, the Co-Agents and the Lead Managers party to the 364-Day Credit Agreement, dated as of October 7, 1997, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Lead Managers, certain Banks specified therein, as Co-Agents, First Chicago Capital Markets, Inc., Mellon Bank, N.A. and CitiCorp Securities, Inc., as Syndication Agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as Arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent Re: PECO Energy Company Ladies and Gentlemen: We have acted as counsel to Mellon Bank, N.A., individually and as Documentation Agent, in connection with the preparation, execution and delivery of the 364-Day Credit Agreement, dated as of October 7, 1997, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Lead Managers, certain Banks specified therein, as Co-Agents, First Chicago Capital Markets, Inc., Mellon Bank, N.A. and CitiCorp Securities, Inc., as Syndication Agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as Arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent (as amended, modified or supplemented from time to time, the "Credit Agreement"). We are delivering this opinion pursuant to Section 3.01(a)(vii) of the Credit Agreement. Unless otherwise defined herein, terms defined in the Credit Agreement are used herein as therein defined. In that connection, we have examined (i) counterparts of the Credit Agreement, executed by the Borrower, the Banks, the Administrative Agent, the Documentation Agent, the Syndication Agents, the Arrangers, the Co-Agents and the Lead Managers, (ii) the Contract Notes, executed by the Borrower, (iii) the form of the Auction Notes to be delivered by the Borrower in connection with Auction Borrowings and (iv) the other documents listed on Exhibit A hereto, including the opinion of Ballard Spahr Andrews & Ingersoll, counsel to the Borrower (the "Opinion"), furnished to the Administrative Agent pursuant to Section 3.01(a) of the Credit Agreement. In our examination of the documents referred to above, we have assumed the authenticity of all such documents submitted to us as originals, the genuineness of all signatures, the due authority of the parties executing such documents and the conformity to the originals of all such documents submitted to us as copies. We have also assumed that the Banks, the Administrative Agent, the Documentation Agent, the Syndication Agents, the Arrangers, the Co-Agents and the Lead Managers have duly executed and delivered, with all necessary power and authority (corporate and otherwise), the Credit Agreement. As to matters of fact, we have relied solely upon the documents we have examined. Based upon the foregoing, we are of the opinion that, while we have not independently considered the matters covered by the Opinion to the extent necessary to enable us to express the conclusions stated therein, each of the Opinion and the other documents listed in Exhibit A hereto are substantially responsive to the corresponding requirements set forth in Section 3.01 of the Credit Agreement pursuant to which the same have been delivered. Please note that Richard H. Glanton, Esquire, a partner in this firm, is a director of PECO Energy Company. We have rendered and continue to render legal services to PECO Energy Company. The foregoing opinion is solely for your benefit and may not be relied upon by any other Person other than any Person that may become a lender under the Credit Agreement after the date hereof. Very truly yours, KCK:TEW:ARN 2 EXHIBIT F FORM OF ANNUAL AND QUARTERLY COMPLIANCE CERTIFICATE ______________________, 19__ Pursuant to the 364-Day Credit Agreement, dated as of October 7, 1997, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Lead Managers, certain Banks specified therein, as Co-Agents, First Chicago Capital Markets, Inc., Mellon Bank, N.A. and CitiCorp Securities, Inc., as Syndication Agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as Arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent (as amended, modified or supplemented from time to time, the "Credit Agreement"), the undersigned, being ______________________ of the Borrower, hereby certifies on behalf of the Borrower as follows: 1. Delivered herewith are the financial statements prepared pursuant to Section 5.01(b)(ii) and Section 5.01(b)(iii) of the Credit Agreement, for the fiscal ________ ended ___________, 19__. All such financial statements comply with the applicable requirements of the Credit Agreement. 2. Schedule I hereto sets forth in reasonable detail the information and calculations necessary to establish compliance with the provisions of Section 5.02(c) of the Credit Agreement as of the end of the fiscal period referred to in paragraph 1 above. 3. (Check one and only one:) No Event of Default, or event which with notice or lapse of time or both would constitute an Event of Default, has occurred and is continuing or exists. An Event of Default, or event which with notice or lapse of time or both would constitute an Event of Default, has occurred and is continuing or exists, and the document(s) attached hereto as Schedule II specify in detail the nature and period of existence of such Event of Default or such other event as well as any and all actions with respect thereto taken or contemplated to be taken by the Borrower. 4. The undersigned has personally reviewed the Credit Agreement, and this certificate was based on an examination made by or under the supervision of the undersigned sufficient to assure that this certificate is accurate. 5. Capitalized terms used in this certificate and not otherwise defined shall have the meanings given in the Credit Agreement. PECO ENERGY COMPANY By _______________________________________ Name: Title: Date: EXHIBIT G FORM OF ADDITIONAL LENDER SUPPLEMENT THIS SUPPLEMENT, dated as of ____________, 19_____, by the undersigned. Recitals: A. This Supplement is being executed and delivered in accordance with Section 2.18 of the 364-Day Credit Agreement, dated as of October 7, 1997, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Lead Managers, certain Banks specified therein, as Co-Agents, First Chicago Capital Markets, Inc., Mellon Bank, N.A. and CitiCorp Securities, Inc., as Syndication Agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as Arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent (as amended, modified or supplemented from time to time, the "Credit Agreement"). Capitalized terms used herein without definition have the meanings specified in the Credit Agreement. B. The undersigned wishes to become a Lender party to the Credit Agreement, as an Additional Lender. NOW, THEREFORE, the undersigned, intending to be legally bound, hereby agrees as follows: 1. The undersigned hereby becomes party to the Credit Agreement as Lender thereunder, and shall be subject to and bound by all of the provisions thereof. 2. The Commitment of the undersigned shall be $_____________. 3. The undersigned (i) confirms that it has received a copy of the Credit Agreement, together with copies of the financial statements referred to in Section 4.01 thereof and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Additional Lender Supplement; (ii) agrees that it will, independently and without reliance upon the Administrative Agent, the Documentation Agent or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Agreement; (iii) confirms that it is an Eligible Assignee; (iv) appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under the Credit Agreement as are delegated to the Administrative Agent by the terms thereof, together with such powers as are reasonably incidental thereto; (v) agrees that it will perform in accordance with their terms all of the obligations which by the terms of the Credit Agreement are required to be performed by it as a Lender; (vi) none of the consideration used to make the purchase being made by the undersigned hereunder are "plan assets" as defined under ERISA and the rights and interests of the undersigned in and under the Credit Agreement will not be "plan assets" under ERISA [and] (vii) specifies as its CD Lending Office, Domestic Lending Office (and address for notices) and Eurodollar Lending Office the offices set forth beneath its name on the signature pages hereof [and (viii) attaches the forms prescribed by the Internal Revenue Service of the United States certifying that it is exempt from United States withholding taxes with respect to all payments to be made to the undersigned under the Credit Agreement and the Notes].(3) 4. This Supplement shall be effective upon the date of acceptance thereof by the Administrative Agent, unless otherwise specified under the undersigned's name signature below. 5. THIS SUPPLEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA. IN WITNESS WHEREOF, the undersigned has caused this Supplement to be executed and delivered by a duly authorized officer on the date first above written. [NAME OF ADDITIONAL LENDER] By: Name: Title: CD Lending Office: [Address] Domestic Lending Office (and address for notices): [Address] Eurodollar Lending Office: [Address] Effective Date(4):________, 19__ CONSENTED TO: [NAME OF ADMINISTRATIVE AGENT] By: Name: Title: CONSENTED TO: PECO ENERGY COMPANY By: Name: Title: ________________ (3) If the undersigned is organized under the laws of a jurisdiction outside the United States. (4) This date should be no earlier than the date of acceptance by the Administrative Agent. 3 EX-10.1 7 AMENDED AND RESTATED OPERATING AGREEMENT OF PJM INTERCONNECTION, L.L.C. Dated June 2, 1997 (Revised December 31, 1997) OPERATING AGREEMENT TABLE OF CONTENTS 1. DEFINITIONS ........................................................... 2 1.1 Act ............................................................. 2 1.2 Affiliate ....................................................... 2 1.3 Agreement ....................................................... 2 1.4 Annual Meeting of the Members ................................... 2 1.5 Board Member .................................................... 2 1.6 Capacity Resource ............................................... 2 1.7 Control Area .................................................... 3 1.8 Electric Distributor ............................................ 3 1.9 Effective Date .................................................. 3 1.10 Emergency ...................................................... 3 1.11 End-Use Customer ............................................... 3 1.12 FERC ........................................................... 3 1.13 Finance Committee .............................................. 4 1.14 Generation Owner ............................................... 4 1.15 Good Utility Practice .......................................... 4 1.16 Interconnection ................................................ 4 1.17 LLC ............................................................ 4 1.18 Load Serving Entity ............................................ 4 1.19 Locational Marginal Price ...................................... 4 1.20 MAAC ........................................................... 4 1.21 Market Buyer ................................................... 5 1.22 Market Participant ............................................. 5 1.23 Market Seller .................................................. 5 1.24 Member ......................................................... 5 1.25 Members Committee .............................................. 5 1.26 NERC ........................................................... 5 1.27 Office of the Interconnection .................................. 5 1.28 Operating Reserve .............................................. 5 1.29 Original PJM Agreement ......................................... 5 1.30 Other Supplier ................................................. 6 1.31 PJM Board ...................................................... 6 1.32 PJM Control Area ............................................... 6 1.33 PJM Dispute Resolution Procedures .............................. 6 1.34 PJM Interchange Energy Market .................................. 6 1.35 PJM Manuals .................................................... 6 1.36 PJM Tariff ..................................................... 6 1.37 Planning Period ................................................ 6 1.38 President ...................................................... 6 i 1.39 Related Parties ............................................... 7 1.40 Reliability Assurance Agreement ............................... 7 1.41 Sector Votes .................................................. 7 1.42 State ......................................................... 7 1.43 System ........................................................ 7 1.44 Transmission Facilities ....................................... 7 1.45 Transmission Owner ............................................ 7 1.46 Transmission Owners Agreement ................................. 8 1.47 User Group .................................................... 8 1.48 Voting Member ................................................. 8 1.49 Weighted Interest ............................................. 8 2. FORMATION, NAME; PLACE OF BUSINESS ................................... 8 2.1 Formation of LLC; Certificate of Formation ..................... 8 2.2 Name of LLC .................................................... 9 2.3 Place of Business .............................................. 9 2.4 Registered Office and Registered Agent ......................... 9 3. PURPOSES AND POWERS OF LLC ........................................... 9 3.1 Purposes ....................................................... 9 3.2 Powers ......................................................... 10 4. EFFECTIVE DATE AND TERMINATION ....................................... 10 4.1 Effective Date and Termination ................................. 10 4.2 Governing Law .................................................. 10 5. WORKING CAPITAL AND CAPITAL CONTRIBUTIONS ............................ 11 5.1 Funding of Working Capital and Capital Contributions ........... 11 5.2 Contributions to Association ................................... 11 6. TAX STATUS AND DISTRIBUTIONS ......................................... 11 6.1 Tax Status ..................................................... 11 6.2 Return of Capital Contributions ................................ 12 6.3 Liquidating Distribution ....................................... 12 7. PJM BOARD ............................................................ 12 7.1 Composition .................................................... 12 7.2 Qualifications ................................................. 13 7.3 Term of Office ................................................. 13 7.4 Quorum ......................................................... 13 7.5 Operating and Capital Budgets .................................. 14 7.5.1 Finance Committee ....................................... 14 7.5.2 Adoption of Budgets ..................................... 14 7.6 By-laws ........................................................ 14 7.7 Duties and Responsibilities of the PJM Board ................... 14 8. MEMBERS COMMITTEE .................................................... 16 8.1 Sectors ........................................................ 16 8.1.1 Designation ............................................. 16 8.1.2 Related Parties ......................................... 17 8.2 Representatives ................................................ 17 ii 8.2.1 Appointment ............................................. 17 8.2.2 Regulatory Authorities .................................. 17 8.2.3 Initial Representatives ................................. 17 8.2.4 Change of or Substitution for a Representative .......... 17 8.3 Meetings ....................................................... 18 8.3.1 Regular and Special Meetings ............................ 18 8.3.2 Attendance .............................................. 18 8.3.3 Quorum .................................................. 18 8.4 Manner of Acting ............................................... 18 8.5 Chair and Vice Chair of the Members Committee .................. 19 8.5.1 Selection and Term ...................................... 19 8.5.2 Duties .................................................. 19 8.6 Other Committees ............................................... 19 8.7 User Groups .................................................... 20 8.8 Powers of the Members Committee ................................ 20 9. OFFICERS ............................................................. 21 9.1 Election and Term .............................................. 21 9.2 President ...................................................... 21 9.3 Secretary ...................................................... 21 9.4 Treasurer ...................................................... 22 9.5 Renewal of Officers; Vacancies ................................. 22 9.6 Compensation ................................................... 22 10. OFFICE OF THE INTERCONNECTION ....................................... 22 10.1 Establishment ................................................. 22 10.2 Processes and Organization .................................... 23 10.3 Confidential Information ...................................... 23 10.4 Duties and Responsibilities ................................... 25 11. MEMBERS ............................................................. 25 11.1 Management Rights ............................................. 25 11.2 Other Activities .............................................. 25 11.3 Member Responsibilities ....................................... 25 11.3.1 General ................................................ 25 11.3.2 Facilities Planning and Operation ...................... 26 11.3.3 Electric Distributors .................................. 27 11.3.4 Reports to the Office of the Interconnection ........... 28 11.4 Regional Transmission Expansion Planning Protocol ............. 28 11.5 Member Right to Petition ...................................... 28 11.6 Membership Requirements ....................................... 29 12. TRANSFERS OF MEMBERSHIP INTEREST .................................... 30 13. INTERCHANGE ......................................................... 30 13.1 Interchange Arrangements with Non-Members ..................... 30 13.2 Energy Market ................................................. 30 14. METERING ............................................................ 30 14.1 Installation, Maintenance and Reading of Meters ............... 30 iii 14.2 Metering Procedures ........................................... 30 14.3 Integrated Megawatt-Hours ..................................... 31 14.4 Meter Locations ............................................... 31 15. ENFORCEMENT OF OBLIGATIONS .......................................... 31 15.1 Failure to Meet Obligations ................................... 31 15.1.1 Termination of Market Buyer Rights ..................... 31 15.1.2 Termination of Market Seller Rights .................... 31 15.1.3 Payment of Bills ............................................ 32 15.2 Enforcement of Obligations .................................... 33 15.3 Obligations to a Member in Default ............................ 33 15.4 Obligations of a Member in Default ............................ 33 15.5 No Implied Waiver ............................................. 33 16. LIABILITY AND INDEMNITY ............................................. 34 16.1 Members ....................................................... 34 16.2 LLC Indemnified Parties ....................................... 35 16.3 Worker' Compensation Claims ................................... 36 16.4 Limitation of Liability ....................................... 36 16.5 Resolution of Disputes ........................................ 36 16.6 Gross Negligence or Willful Misconduct ........................ 36 16.7 Insurance ..................................................... 37 17. MEMBER REPRESENTATIONS, WARRANTIES AND COVENANTS .................... 37 17.1 Representations and Warranties ................................ 37 17.1.1 Organization and Existence ............................. 37 17.1.2 Power and Authority .................................... 37 17.1.3 Authorization and Enforceability ....................... 37 17.1.4 No Government Consents ................................. 37 17.1.5 No Conflict or Breach .................................. 37 17.1.6 No Proceedings ......................................... 38 17.2 Municipal Electric Systems .................................... 38 17.3 Survival ...................................................... 38 18. MISCELLANEOUS PROVISIONS ............................................ 38 18.1 Transmission Owners Rights .................................... 38 18.2 Fiscal and Taxable Year ....................................... 38 18.3 Reports ....................................................... 38 18.4 Bank Accounts; Checks, Notes and Drafts ....................... 39 18.5 Books and Records ............................................. 39 18.6 Amendment ..................................................... 40 18.7 Interpretation ................................................ 40 18.8 Severability .................................................. 40 18.9 Force Majeure ................................................. 41 18.10 Further Assurances ........................................... 41 18.11 Seal ......................................................... 41 18.12 Counterparts ................................................. 41 18.13 Costs of Meetings ............................................ 41 iv 18.14 Notice ....................................................... 42 18.15 Headings ..................................................... 42 18.16 No Third-Party Beneficiaries ................................. 42 18.17 Confidentiality .............................................. 42 18.17.1 Party Access .......................................... 42 18.17.2 Required Disclosure ................................... 43 18.18 Termination and Withdrawal ................................... 43 18.18.1 Termination ........................................... 43 18.18.2 Withdrawal ............................................ 43 18.18.3 Winding Up ............................................ 44 SCHEDULE 1 - PJM INTERCHANGE ENERGY MARKET .............................. 1 1. MARKET OPERATIONS .................................................... 1 1.1 Introduction ................................................... 1 1.2 Cost-based Offers .............................................. 1 1.3 Definitions .................................................... 1 1.3.1 Dispatch Rate ........................................... 1 1.3.2 Equivalent Load ......................................... 1 1.3.3 External Market Buyer ................................... 1 1.3.4 External Resource ....................................... 2 1.3.5 Fixed Transmission Right ................................ 2 1.3.6 Generating Market Buyer ................................. 2 1.3.7 Generator Forced Outage ................................. 2 1.3.8 Generator Maintenance Outage ............................ 2 1.3.9 Generator Planned Outage ................................ 2 1.3.10 Internal Market Buyer .................................. 2 1.3.11 Inadvertent Interchange ................................ 2 1.3.12 Market Operations Center ............................... 3 1.3.13 Maximum Generation Emergency ........................... 3 1.3.14 Minimum Generation Emergency ........................... 3 1.3.15 Network Resource ....................................... 3 1.3.16 Network Service User ................................... 3 1.3.17 Network Transmission Service ........................... 3 1.3.18 Normal Maximum Generation .............................. 3 1.3.19 Normal Minimum Generation .............................. 3 1.3.20 Offer Data ............................................. 3 1.3.21 Office of the Interconnection Control Center ........... 4 1.3.22 Operating Day .......................................... 4 1.3.23 Operating Margin ....................................... 4 1.3.24 Operating Margin Customer .............................. 4 1.3.25 PJM Interchange ........................................ 4 1.3.26 PJM Interchange Export ................................. 4 1.3.27 PJM Interchange Import ................................. 5 1.3.28 PJM Open Access Same-time Information System ........... 5 1.3.29 Point-to-Point Transmission Service .................... 5 v 1.3.30 Ramping Capability .......................................... 5 1.3.31 Regulation .................................................. 5 1.3.32 Regulation Class ............................................ 5 1.3.33 Spot Market Energy .......................................... 5 1.3.34 Transmission Congestion Charge .............................. 5 1.3.35 Transmission Congestion Credit .............................. 6 1.3.36 Transmission Customer ....................................... 6 1.3.37 Transmission Forced Outage .................................. 6 1.3.38 Transmission Planned Outage ................................. 6 1.4 Market Buyers ....................................................... 6 1.4.1 Qualification ................................................ 6 1.4.2 Submission of Information .................................... 7 1.4.3 Fees and Costs ............................................... 7 1.4.4 Office of the Interconnection Determination .................. 8 1.4.5 Existing Participants ........................................ 8 1.4.6 Withdrawal ................................................... 8 1.5 Market Sellers ...................................................... 9 1.5.1 Qualification ................................................ 9 1.5.2 Withdrawal ................................................... 9 1.6 Office of the Interconnection ....................................... 9 1.6.1 Operation of the PJM Interchange Energy Market ............... 9 1.6.2 Scope of Services ............................................ 9 1.6.3 Records and Reports .......................................... 10 1.6.4 PJM Manuals .................................................. 11 1.7 General ............................................................. 11 1.7.1 Market Sellers ............................................... 11 1.7.2 Market Buyers ................................................ 11 1.7.3 Agents ....................................................... 11 1.7.4 General Obligations of the Market Participants ............... 11 1.7.5 Market Operations Center ..................................... 13 1.7.6 Scheduling and Dispatching ................................... 13 1.7.7 Pricing ...................................................... 13 1.7.8 Generating Market Buyer Resources ............................ 13 1.7.9 Delivery to an External Market Buyer ......................... 13 1.7.10 Other Transactions .......................................... 14 1.7.11 Emergencies ................................................. 14 1.7.12 Fees and Charges ............................................ 14 1.7.13 Relationship to PJM Control Area ............................ 14 1.7.14 PJM Manuals ................................................. 15 1.7.15 Corrective Action ........................................... 15 1.7.16 Recording ................................................... 15 1.7.17 Operating Reserves .......................................... 15 1.7.18 Regulation .................................................. 15 1.7.19 Ramping ..................................................... 16 vi 1.7.20 Communication and Operating Requirements ............... 16 1.7.21 Multi-settlement System ................................ 17 1.8 Selection, Scheduling and Dispatch Procedure Adjustment Process ........................................................ 17 1.8.1 PJM Dispute Resolution Agreement ........................ 17 1.8.2 Market or Control Area Hourly Operational Disputes ...... 17 1.9 Prescheduling .................................................. 18 1.9.1 Outage Scheduling ....................................... 18 1.9.2 Planned Outages ......................................... 18 1.9.3 Generator Maintenance Outages ........................... 19 1.9.4 Forced Outages .......................................... 19 1.9.5 Market Participant Responsibilities ..................... 20 1.9.6 Internal Market Buyer Responsibilities .................. 20 1.9.7 Market Seller Responsibilities .......................... 20 1.9.8 Office of the Interconnection Responsibilities .......... 20 1.10 Scheduling .................................................... 21 1.10.1 Day-Ahead Scheduling ................................... 21 1.10.2 Pool-Scheduled Resources ............................... 23 1.10.3 Self-scheduled Resources ............................... 24 1.10.4 Capacity Resources ..................................... 24 1.10.5 External Resources ..................................... 25 1.10.6 External Market Buyers ................................. 26 1.10.7 Bilateral Transactions ................................. 26 1.10.8 Office of the Interconnection Responsibilities ......... 27 1.10.9 Hourly Scheduling ...................................... 27 1.11 Dispatch ...................................................... 28 1.11.1 Resource Output ........................................ 28 1.11.2 Operating Basis ........................................ 28 1.11.3 Pool-dispatched Resources .............................. 29 1.11.4 Regulation ............................................. 29 1.11.5 PJM Open Access Same-time Information System ........... 29 2. CALCULATION OF LOCATIONAL MARGINAL PRICES ............................ 30 2.1 Introduction ................................................... 30 2.2 General ........................................................ 30 2.3 Determination of System Conditions Using the State Estimator ...................................................... 31 2.4 Determination of Energy Offers Used in Calculating Locational Marginal Prices ..................................... 31 2.5 Calculation of Locational Marginal Prices ...................... 32 2.6 Performance Evaluation ......................................... 32 3. ACCOUNTING AND BILLING ............................................... 33 3.1 Introduction ................................................... 33 3.2 Market Buyers .................................................. 33 3.2.1 Spot Market Energy ...................................... 33 3.2.2 Regulation .............................................. 34 3.2.3 Operating Reserves ...................................... 35 3.2.4 Transmission Congestion ................................. 35 vii 3.2.5 Transmission Losses ..................................... 35 3.2.6 Emergency Energy ........................................ 36 3.2.7 Billing ................................................. 36 3.3 Market Sellers ................................................. 36 3.3.1 Spot Market Energy ...................................... 37 3.3.2 Regulation .............................................. 37 3.3.3 Operating Reserves ...................................... 37 3.3.4 Emergency Energy ........................................ 37 3.3.5 Billing ................................................. 38 3.4 Transmission Customers ......................................... 38 3.4.1 Transmission Congestion ................................. 38 3.4.2 Transmission Losses ..................................... 38 3.4.3 Billing ................................................. 38 3.5 Other Control Areas ............................................ 39 3.5.1 Energy Sales ............................................ 39 3.5.2 Operating Margin Sales .................................. 39 3.5.3 Transmission Congestion ................................. 39 3.5.4 Billing ................................................. 39 3.6 Metering Reconciliation ........................................ 39 3.6.1 Meter Correction Billing ................................ 39 3.6.2 Meter Corrections Between Market Participants ........... 40 3.6.3 500 kV Meter Errors ..................................... 40 3.6.4 Meter Corrections Between Control Areas ................. 40 3.6.5 Meter Correction Data ................................... 40 3.6.6 Correction Limits ............................................ 40 4. RATE TABLE ........................................................... 41 4.1 Offered Price Rates ............................................ 41 4.2 Transmission Losses ............................................ 41 4.3 Emergency Energy Purchases ..................................... 41 5. CALCULATION OF TRANSMISSION CONGESTION CHARGES AND CREDITS ........... 42 5.1 Transmission Congestion Charge Calculation ..................... 42 5.1.1 Calculation by Office of the Interconnection ............ 42 5.1.2 General ................................................. 42 5.1.3 Network Service User Calculation ........................ 42 5.1.4 Transmission Customer Calculation ....................... 42 5.1.5 Operating Margin Customer Calculation ................... 42 5.1.6 Total Transmission Congestion Charges ................... 43 5.2 Transmission Congestion Credit Calculation ..................... 43 5.2.1 Eligibility ............................................. 43 5.2.2 Fixed Transmission Rights ............................... 43 5.2.3 Target Allocation for Network Service Users ............. 44 5.2.4 Target Allocation for other Holders ..................... 44 5.2.5 Calculation of Transmission Congestion Credits .......... 44 5.2.6 Distribution of Excess Congestion Charges ............... 44 viii SCHEDULE 2 - COMPONENTS OF COST .......................................... 1 SCHEDULE 3 - ALLOCATION OF OI COSTS ...................................... 1 SCHEDULE 4 - STANDARD MEMBERSHIP AGREEMENT ............................... 1 SCHEDULE 5 - DISPUTE RESOLUTION PROCEDURE ................................ 1 1. DEFINITIONS ........................................................... 1 1.1 Alternate Dispute Resolution Committee .......................... 1 1.2 MAAC Dispute Resolution Committee ............................... 1 1.3 Related PJM Agreements .......................................... 1 2. PURPOSES AND OBJECTIVES ............................................... 1 2.1 Common and Uniform Procedures ................................... 1 2.2 Interpretation .................................................. 1 3. NEGOTIATION AND MEDIATION ............................................. 2 3.1 When Required ................................................... 2 3.2 Procedures ...................................................... 2 3.2.1 Initiation ............................................... 2 3.2.2 Selection of Mediator .................................... 2 3.2.3 Advisory Mediator ........................................ 2 3.2.4 Mediation Process ........................................ 3 3.2.5 Mediator's Assessment .................................... 3 3.3 Costs ........................................................... 4 4. ARBITRATION ........................................................... 4 4.1 When Required ................................................... 4 4.2 Binding Decision ................................................ 4 4.3 Initiation ...................................................... 4 4.4 Selection of Arbitrator(s) ...................................... 4 4.5 Procedures ...................................................... 5 4.6 Summary Disposition and Interim Measures ........................ 5 4.6.1 Lack of Good Faith Basis ................................. 5 4.6.2 Discovery Limits ......................................... 5 4.6.3 Interim Decision ......................................... 5 4.7 Discovery of Facts .............................................. 6 4.7.1 Discovery Procedures ..................................... 6 4.7.2 Procedures Arbitrator .................................... 6 4.8 Evidentiary Hearing ............................................. 6 4.9 Confidentiality ................................................. 7 4.9.1 Designation .............................................. 7 4.9.2 Compulsory Disclosure .................................... 7 4.9.3 Public Information ....................................... 7 4.10 Timetable ...................................................... 8 4.11 Advisory Interpretations ....................................... 8 4.12 Decisions ...................................................... 8 4.13 Costs .......................................................... 8 4.14 Enforcement .................................................... 9 5. ALTERNATE DISPUTE RESOLUTION COMMITTEE ................................ 9 ix 5.1 Membership ..................................................... 9 5.1.1 Representatives ......................................... 9 5.1.2 Term .................................................... 9 5.2 Voting Requirements ............................................ 9 5.3 Officers ....................................................... 9 5.4 Meetings ....................................................... 10 5.5 Responsibilities ............................................... 10 SCHEDULE 6 - REGIONAL TRANSMISSION EXPANSION PLANNING PROTOCOL .......... 1 1. REGIONAL TRANSMISSION EXPANSION PLANNING PROTOCOL .................... 1 1.1 Purpose and Objectives ......................................... 1 1.2 Conformity with NERC and MAAC Criteria ......................... 1 1.3 Establishment of Committees .................................... 1 1.4 Contents of the Regional Transmission Expansion Plan ........... 2 1.5 Procedure for Development of the Regional Transmission Expansion Plan ................................................. 2 1.5.1 Commencement of the Process ............................. 2 1.5.2 Development of Scope, Assumptions and Procedures ........ 3 1.5.3 Scope of Studies ........................................ 3 1.5.4 Supply of Data .......................................... 3 1.5.5 Coordination of the Regional Transmission Expansion Plan 3 1.5.6 Development of the Recommended Regional Transmission Expansion Plan .. 3 1.6 Approval of the Final Regional Transmission Expansion Plan ..... 4 1.7 Obligation to Build ............................................ 5 1.8 Relationship to the PJM Control Area Open Access Transmission PJM Tariff ........................................ 5 SCHEDULE 7 - UNDERFREQUENCY RELAY OBLICATIONS AND CHARGES ............... 1 1. UNDERFREQUENCY RELAY OBLIGATION ...................................... 1 1.1 Application .................................................... 1 1.2 Obligations .................................................... 1 2. UNDERFREQUENCY RELAY CHARGES ......................................... 1 3. DISTRIBUTION OF UNDERFREQUENCY RELAY CHARGES ......................... 2 3.1 Share of Charges ............................................... 2 3.2 Allocation by the Office of the Interconnection ................ 2 SCHEDULE 8 -DELEGATION OF RELIABILITY RESPONSIBILITIES .................. 1 1. DELEGATION ........................................................... 1 2. NEW PARTIES .......................................................... 1 3. IMPLEMENTATION OF RELIABILITY ASSURANCE AGREEMENT .................... 1 SCHEDULE 9 - EMERGENCY PROCEDURE CHARGES ................................ 1 1. EMERGENCY PROCEDURE CHARGE ........................................... 1 2. DISTRIBUTION OF EMERGENCY PROCEDURE CHARGES .......................... 1 2.1 Complying Parties .............................................. 1 2.2 All Parties .................................................... 1 x AMENDED AND RESTATED OPERATING AGREEMENT of PJM INTERCONNECTION, L.L.C. This Amended and Restated Operating Agreement of PJM Interconnection, L.L.C., dated as of this 2ndday of June, 1997, amends and restates as of the Effective Date the Operating Agreement of PJM Interconnection, L.L.C. filed with the FERC on April 2, 1997, as amended.of PJM Interconnection, L.L.C. filed with the FERC on April 2, 1997, as amended. WHEREAS, certain of the Members have previously entered into an agreement, originally dated September 26, 1956, as amended and supplemented up to and including December 31, 1996, stating "their respective rights and obligations with respect to the coordinated operation of their electric supply systems and the interchange of electric capacity and energy among their systems" (such agreement as amended and supplemented being referred to as the "Original PJM Agreement"), and which coordinated operations and interchange came to be known as the PJM Interconnection (the "Interconnection"); and WHEREAS, pursuant to a resolution of June 16, 1993, an unincorporated association comprised of the parties to the Original PJM Agreement was formed for the purpose of implementation of the Original PJM Agreement as it then existed and as it subsequently has been amended and supplemented, such association being known as the "PJM Interconnection Association"; and WHEREAS, because of changes in federal law and policy, the Original PJM Agreement, together with other documents and agreements, was amended, restated and submitted to FERC on December 31, 1996 to restructure fundamental aspects of the operation of the Interconnection; and WHEREAS, so that the provisions of the Original PJM Agreement could be placed into effect consistent with a February 28, 1997 order of FERC, including those provisions related to the governance of the Interconnection, the parties to the Original PJM Agreement, along with the other interested parties, approved the conversion of the PJM Interconnection Association into the LLC pursuant to the provisions of the Delaware Limited Liability Company Act, as amended (the "Delaware LLC Act"), pursuant to a Certificate of Formation (the "Certificate of Formation") and a Certificate of Conversion (the "Certificate of Conversion"), each filed with the Delaware Secretary of State (the "Recording Office") on March 31, 1997; and WHEREAS, the Members wish to amend and restate the Operating Agreement of PJM Interconnection, L.L.C. adopted in connection with the formation of the LLC and as in effect immediately prior to the Effective Date in the form set forth below; and WHEREAS, the Members intend to form an Independent System Operator in accordance with the regulations of the Federal Energy Regulatory Commission; and Now, therefore, in consideration of the foregoing, and of the covenants and agreements hereinafter set forth, the Members hereby agree as follows: 1 DEFINITIONS Unless the context otherwise specifies or requires, capitalized terms used in this Agreement shall have the respective meanings assigned herein or in the Schedules hereto for all purposes of this Agreement (such definitions to be equally applicable to both the singular and the plural forms of the terms defined). Unless otherwise specified, all references herein to Sections, Schedules, Exhibits or Appendices are to Sections, Schedules, Exhibits or Appendices of this Agreement. As used in this Agreement: 1.1 Act. "Act" shall mean the Delaware Limited Liability Company Act, Title 6, ss.ss. 18-101 to 18- 1109 of the Delaware Code. 1.2 Affiliate. "Affiliate" shall mean any two or more entities, one of which controls the other or that are under common control. "Control" shall mean the possession, directly or indirectly, of the power to direct the management or policies of an entity. Ownership of publicly-traded equity securities of another entity shall not result in control or affiliation for purposes of this Agreement if the securities are held as an investment, the holder owns (in its name or via intermediaries) less than 10 percent of the outstanding securities of the entity, the holder does not have representation on the entity's board of directors (or equivalent managing entity) or vice versa, and the holder does not in fact exercise influence over day-to-day management decisions. Unless the contrary is demonstrated to the satisfaction of the Members Committee, control shall be presumed to arise from the ownership of or the power to vote, directly or indirectly, ten percent or more of the voting securities of such entity. 1.3 Agreement. "Agreement" shall mean this Amended and Restated Operating Agreement of PJM Interconnection, L.L.C., including all Schedules, Exhibits, Appendices, addenda or supplements hereto, as amended from time to time. 1.4 Annual Meeting of the Members. "Annual Meeting of the Members" shall mean the meeting specified in Section 8.3.1 of this Agreement. 1.5 Board Member. "Board Member" shall mean a member of the PJM Board. 1.6 Capacity Resource. "Capacity Resource" shall mean the net capacity from owned or contracted for generating facilities all of which (i) are accredited to a Load Serving Entity pursuant to the procedures set forth in the Reliability Assurance Agreement and (ii) are committed to satisfy that Load Serving Entity's obligations under the Reliability Assurance Agreement and this Agreement. 2 1.7 Control Area. "Control Area" shall mean an electric power system or combination of electric power systems bounded by interconnection metering and telemetry to which a common automatic generation control scheme is applied in order to: (a) match the power output of the generators within the electric power system(s) and energy purchased from entities outside the electric power system(s), with the load within the electric power system(s); (b) maintain scheduled interchange with other Control Areas, within the limits of Good Utility Practice; (c) maintain the frequency of the electric power system(s) within reasonable limits in accordance with Good Utility Practice and the criteria of NERC and the applicable regional reliability council of NERC; (d) maintain power flows on transmission facilities within appropriate limits to preserve reliability; and (e) provide sufficient generating capacity to maintain operating reserves in accordance with Good Utility Practice. 1.8 Electric Distributor. "Electric Distributor" shall mean a Member that owns or leases with rights equivalent to ownership electric distribution facilities that are used to provide electric distribution service to electric load within the PJM Control Area. 1.9 Effective Date. "Effective Date" shall mean August 1, 1997, or such later date that FERC permits this Agreement to go into effect. 1.10 Emergency. "Emergency" shall mean: (i) an abnormal system condition requiring manual or automatic action to maintain system frequency, or to prevent loss of firm load, equipment damage, or tripping of system elements that could adversely affect the reliability of an electric system or the safety of persons or property; or (ii) a fuel shortage requiring departure from normal operating procedures in order to minimize the use of such scarce fuel; or (iii) a condition that requires implementation of emergency procedures as defined in the PJM Manuals. 1.11 End-Use Customer. "End-Use Customer" shall mean a Member that is a retail end-user of electricity within the PJM Control Area. 1.12 FERC. "FERC" shall mean the Federal Energy Regulatory Commission or any successor federal agency, commission or department exercising jurisdiction over this Agreement. 3 1.13 Finance Committee. "Finance Committee" shall mean the body formed pursuant to Section 0 of this Agreement. 1.14 Generation Owner. "Generation Owner" shall mean a Member that owns or leases with rights equivalent to ownership facilities for the generation of electric energy that are located within the PJM Control Area. Purchasing all or a portion of the output of a generation facility shall not be sufficient to qualify a Member as a Generation Owner. 1.15 Good Utility Practice. "Good Utility Practice" shall mean any of the practices, methods and acts engaged in or approved by a significant portion of the electric utility industry during the relevant time period, or any of the practices, methods and acts which, in the exercise of reasonable judgment in light of the facts known at the time the decision was made, could have been expected to accomplish the desired result at a reasonable cost consistent with good business practices, reliability, safety and expedition. Good Utility Practice is not intended to be limited to the optimum practice, method, or act to the exclusion of all others, but rather is intended to include acceptable practices, methods, or acts generally accepted in the region. 1.16 Interconnection. "Interconnection" shall mean the coordinated operations and interchange resulting from the Original PJM Agreement as continued in this Agreement. 1.17 LLC. "LLC" shall mean PJM Interconnection, L.L.C., a Delaware limited liability company. 1.18 Load Serving Entity. "Load Serving Entity" shall mean an entity, including a load aggregator or power marketer, (1) serving end-users within the PJM Control Area, and (2) that has been granted the authority or has an obligation pursuant to state or local law, regulation or franchise to sell electric energy to end- users located within the PJM Control Area, or the duly designated agent of such an entity. 1.19 Locational Marginal Price. "Locational Marginal Price" shall mean the hourly integrated market clearing marginal price for energy at the location the energy is delivered or received, calculated as specified in Section 0 of Schedule 1 of this Agreement. 1.20 MAAC. "MAAC" shall mean the Mid-Atlantic Area Council, a reliability council under ss. 202 of the Federal Power Act established pursuant to the MAAC Agreement dated August 1, 1994, or any successor thereto. 4 1.21 Market Buyer. "Market Buyer" shall mean a Member that has met reasonable creditworthiness standards established by the Office of the Interconnection and that is otherwise able to make purchases in the PJM Interchange Energy Market. 1.22 Market Participant. "Market Participant" shall mean a Market Buyer or a Market Seller, or both. 1.23 Market Seller. "Market Seller" shall mean a Member that has met reasonable creditworthiness standards established by the Office of the Interconnection and that is otherwise able to make sales in the PJM Interchange Energy Market. 1.24 Member. "Member" shall mean an entity that satisfies the requirements of Section 11.6 of this Agreement and that (i) is a member of the LLC immediately prior to the Effective Date, or (ii) has executed an Additional Member Agreement in the form set forth in Schedule 4 hereof. 1.25 Members Committee. "Members Committee" shall mean the committee specified in Section 8 of this Agreement composed of representatives of all the Members. 1.26 NERC. "NERC" shall mean the North American Electric Reliability Council, or any successor thereto. 1.27 Office of the Interconnection. "Office of the Interconnection" shall mean the employees and agents of the LLC engaged in implementation of this Agreement and administration of the PJM Tariff, subject to the supervision and oversight of the PJM Board acting pursuant to this Agreement. 1.28 Operating Reserve. "Operating Reserve" shall mean the amount of generating capacity scheduled to be available for a specified period of an Operating Day to ensure the reliable operation of the PJM Control Area, as specified in the PJM Manuals. 1.29 Original PJM Agreement. "Original PJM Agreement" shall mean that certain agreement between certain of the Members, originally dated September 26, 1956, and as amended and supplemented up to and including December 31, 1996, relating to the coordinated operation of their electric supply systems and the interchange of electric capacity and energy among their systems. 5 1.30 Other Supplier. "Other Supplier" shall mean a Member that is (i) a seller, buyer or transmitter of electric capacity or energy in, from or through the PJM Control Area, and (ii) is not a Generation Owner, Electric Distributor, Transmission Owner or End-Use Customer. 1.31 PJM Board. "PJM Board" shall mean the Board of Managers of the LLC, acting pursuant to this Agreement. 1.32 PJM Control Area. "PJM Control Area" shall mean the Control Area recognized by NERC as the PJM Control Area. 1.33 PJM Dispute Resolution Procedures "PJM Dispute Resolution Procedures" shall mean the procedures for the resolution of disputes set forth in Schedule 5 of this Agreement. 1.34 PJM Interchange Energy Market. "PJM Interchange Energy Market" shall mean the regional competitive market administered by the Office of the Interconnection for the purchase and sale of spot electric energy at wholesale in interstate commerce and related services established pursuant to Schedule 1 to this Agreement. 1.35 PJM Manuals. "PJM Manuals" shall mean the instructions, rules, procedures and guidelines established by the Office of the Interconnection for the operation, planning, and accounting requirements of the PJM Control Area and the PJM Interchange Energy Market. 1.36 PJM Tariff. "PJM Tariff" shall mean the PJM Open Access Transmission Tariff providing transmission service within the PJM Control Area, including any schedules, appendices, or exhibits attached thereto, as in effect from time to time. 1.37 Planning Period. "Planning Period" shall initially mean the 12 months be ginning June 1 through May 31 of the following year, or such other period established by the Reliability Committee established under the Reliability Assurance Agreement. 1.38 President. "President" shall have the meaning specified in Section 9.2. 6 1.39 Related Parties. "Related Parties" shall mean, solely for purposes of the governance provisions of this Agreement: (i) any generation and transmission cooperative and one of its distribution cooperative members; and (ii) any joint municipal agency and one of its members. For purposes of this Agreement, representatives of state or federal government agencies shall not be deemed Related Parties with respect to each other, and a public body's regulatory authority, if any, over a Member shall not be deemed to make it a Related Party with respect to that Member. 1.40 Reliability Assurance Agreement. "Reliability Assurance Agreement" shall mean that certain agreement, dated June 2, 1997 and as amended from time to time, establishing obligations, standards and procedures for maintaining the reliable operation of the PJM Control Area. 1.41 Sector Votes. "Sector Votes" shall mean the affirmative and negative votes of each sector on the Members Committee, as specified in Section 8.4. 1.42 State. "State" shall mean the District of Columbia and any State or Commonwealth of the United States. 1.43 System. "System" shall mean the interconnected electric supply system of a Member and its interconnected subsidiaries exclusive of facilities which it may own or control outside of the PJM Control Area. Each Member may include in its system the electric supply systems of any party or parties other than Members which are within the PJM Control Area, provided its interconnection agreements with such other party or parties do not conflict with such inclusion. 1.44 Transmission Facilities. "Transmission Facilities" shall mean facilities that: (i) are within the PJM Control Area; (ii) meet the definition of transmission facilities pursuant to FERC's Uniform System of Accounts or have been classified as transmission facilities in a ruling by FERC addressing such facilities; and (iii) have been demonstrated to the satisfaction of the Office of the Interconnection to be integrated with the PJM Control Area transmission system and integrated into the planning and operation of the PJM Control Area to serve all of the power and transmission customers within the PJM Control Area. 1.45 Transmission Owner. "Transmission Owner" shall mean a Member that owns or leases with rights equivalent to ownership Transmission Facilities. Taking transmission service shall not be sufficient to qualify a Member as a Transmission Owner. 7 1.46 Transmission Owners Agreement. "Transmission Owners Agreement" shall mean that certain agreement, dated June 2, 1997 and as amended from time to time, by and among Transmission Owners in the PJM Control Area providing for an open-access transmission tariff in the PJM Control Area, and for other purposes. 1.47 User Group. "User Group" shall mean a group formed pursuant to Section 0 of this Agreement. 1.48 Voting Member "Voting Member" shall mean (i) a Member as to which no other Member is an Affiliate or Related Party, or (ii) a Member together with any other Members as to which it is an Affiliate or Related Party. 1.49 Weighted Interest. "Weighted Interest" shall be equal to (0.1(1/N) + 0.5(B/C) + 0.2(D/E) + 0.2(F/G)), where: N = the total number of Members B = the Member's internal peak demand for the previous calendar year C = the sum of factor B for all Members D = the Member's net installed generating capacity located in the PJM Control Area as of January 1 of the current calendar year E = the sum of factor D for all Members F = the sum of the Member's circuit miles of transmission facilities multiplied by the respective operating voltage for facilities 100 kV and above as of January 1 of the current calendar year G = the sum of factor F for all Members 2. FORMATION, NAME; PLACE OF BUSINESS 2.1 Formation of LLC; Certificate of Formation. The Members of the LLC hereby: (a) acknowledge the conversion of the PJM Interconnection Association into the LLC, a limited liability company pursuant to the Act, by virtue of the filing of both the Certificate of Formation and the Certificate of Conversion with the Recording Office, effective as of March 31, 1997; (b) confirm and agree to their status as Members of the LLC; (c) enter into this Agreement for the purpose of amending and restating the rights, duties, and relationship of the Members; and (d) agree that if the laws of any jurisdiction in which the LLC transacts business so require, the PJM Board also shall file, with the appropriate office in that jurisdiction, any documents necessary for the LLC to qualify to transact business under such laws; and (ii) agree and obligate themselves to execute, acknowledge, and cause to be filed for record, in the place or places and manner prescribed by law, any amendments to the Certificate of Formation as may be required, 8 either by the Act, by the laws of any jurisdiction in which the LLC transacts business, or by this Agreement, to reflect changes in the information contained therein or otherwise to comply with the requirements of law for the continuation, preservation, and operation of the LLC as a limited liability company under the Act. 2.2 Name of LLC. The name under which the LLC shall conduct its business is "PJM Interconnection, L.L.C." 2.3 Place of Business. The location of the principal place of business of the LLC shall be 955 Jefferson Avenue, Valley Forge Corporate Center, Norristown, Pennsylvania 19403-2497. The LLC may also have offices at such other places both within and without the State of Delaware as the PJM Board may from time to time determine or the business of the LLC may require. 2.4 Registered Office and Registered Agent. The street address of the initial registered office of the LLC shall be 1209 Orange Street, Wilmington, Delaware 19801, and the LLC's registered agent at such address shall be The Corporation Trust Company. The registered office and registered agent may be changed by resolution of the PJM Board. 3. PURPOSES AND POWERS OF LLC 3.1 Purposes. The purposes of the LLC shall be: (a) to operate in accordance with FERC requirements as an Independent System Operator, comprised of the PJM Board, the Office of the Interconnection, and the Members Committee, with the authorities and responsibilities set forth in this Agreement; (b) as necessary for the operation of the Interconnection as specified above: (i) to acquire and obtain licenses, permits and approvals, (ii) to own or lease property, equipment and facilities, and (iii) to contract with third parties to obtain goods and services, provided that, the L.L.C. may procure goods and services from a Member only after open and competitive bidding; and (c) to engage in any lawful business permitted by the Act or the laws of any jurisdiction in which the LLC may do business and to enter into any lawful transaction and engage in any lawful activities in furtherance of the foregoing purposes and as may be necessary, incidental or convenient to carry out the business of the LLC as contemplated by this Agreement. 9 3.2 Powers. The LLC shall have the power to do any and all acts and things necessary, appropriate, advisable, or convenient for the furtherance and accomplishment of the purposes of the LLC, including, without limitation, to engage in any kind of activity and to enter into and perform obligations of any kind necessary to or in connection with, or incidental to, the accomplishment of the purposes of the LLC, so long as said activities and obligations may be lawfully engaged in or performed by a limited liability company under the Act. 4. EFFECTIVE DATE AND TERMINATION 4.1 Effective Date and Termination. (a) The existence of the LLC commenced on March 31, 1997, as provided in the Certificate of Formation and Certificate of Conversion which were filed with the Recording Office on March 31, 1997. This Agreement shall amend and restate the Operating Agreement of PJM Interconnection, L.L.C. as of the Effective Date. (b) The LLC shall continue in existence until terminated in accordance with the terms of this Agreement. The withdrawal or termination of any Member is subject to the provisions of Section 0 of this Agreement. (c) Any termination of this Agreement or withdrawal of any Member from the Agreement shall be filed with the FERC and shall become effective only upon the FERC 's approval. Governing Law. This Agreement and all questions with respect to the rights and obligations of the Members, the construction, enforcement and interpretation hereof, and the formation, administration and termination of the LLC shall be governed by the provisions of the Act and other applicable laws of the State of Delaware, and the Federal Power Act. 10 5. WORKING CAPITAL AND CAPITAL CONTRIBUTIONS 5.1 Funding of Working Capital and Capital Contributions. (a) The Office of the Interconnection shall attempt to obtain financing of up to five million two hundred thousand dollars ($5,200,000) to meet the working capital needs of the LLC, which shall be limited to such working capital needs that arise from timing in cash flows from interchange accounting, tariff administration and payment of the operating costs of the Office of the Interconnection. Such financing, which shall be non-recourse to the Members of the LLC and which shall be for a stated term without penalty for prepayment, may be obtained by borrowing the amount required at market-based interest rates, negotiated on an arm's length basis, (i) from a Member or Members or (ii) from a commercial lender, supported, if necessary, by credit enhancements provided by a Member or Members; provided, however, no Member shall be obligated to provide such financing or credit enhancements. The LLC shall make such filings and seek such approvals as necessary in order for the principal, interest and fees related to any such borrowing to be repaid through charges under the PJM Tariff as appropriate under Schedule 3 of this Agreement. (b) In the event financing of the working capital needs of the Office of the Interconnection is unavailable on commercially reasonable terms, the PJM Board may require the Members to contribute capital in the aggregate up to five million two hundred thousand dollars ($5,200,000) for the working capital needs that could not be financed; provided that in such event each Member's obligation to contribute additional capital shall be in proportion to its Weighted Interest, multiplied by the amount so requested by the PJM Board. Each Member that contributes such capital shall be entitled to earn a return on the contribution to the extent such contribution has not been repaid, which return shall be at a fair market rate as determined by the PJM Board but in no event less than the current interest rate established pursuant to 18 C.F.R. ss. 35.19a(a)(2)(iii); provided further, that any Member not wanting to contribute the requested capital contribution may withdraw from the LLC upon 90 days written notice as provided in Section 18.18.2 of this Agreement. 5.2 Contributions to Association. All contributions prior to the Effective Date of the original Operating Agreement of PJM Interconnection, L.L.C. of cash or other assets to the PJM Interconnection Association by persons who are now or in the future may become Members of the LLC shall be deemed contributions by such Members to the LLC. 6. TAX STATUS AND DISTRIBUTIONS 6.1 Tax Status. The LLC shall make all necessary filings under the applicable Treasury Regulations to have the LLC taxed as a corporation. 11 6.2 Return of Capital Contributions. (a) In the event Members are required to contribute capital to the LLC in accordance with Section 5.1 herein, the LLC shall request the Transmission Owners to recover such working capital through charges under the PJM Tariff as provided in Schedule 3 of this Ag reement. In the event all or a portion of the working capital is recovered pursuant to the PJM Tariff, such amount(s) shall be returned to the Members in accordance with their actual contributions. (b) Except for return of capital contributions and liquidating distributions as provided in the foregoing section and Section 6.3 herein, respectively, the LLC does not intend to make any distributions of cash or other assets to its Members. 6.3 Liquidating Distribution. Upon termination or liquidation of the LLC, the cash or other assets of the LLC shall be distributed as follows: (a) first, in the event the LLC has any liabilities at the time of its termination or dissolution, the LLC shall liquidate such of its assets as is necessary to satisfy such liabilities; (b) second, any capital contribution in cash or in kind by any Member of the PJM Interconnection Association prior to the Effective Date shall be distributed by the LLC back to such Member in the form received by the PJM Interconnection Association; and (c) third, any remaining assets of the LLC shall be distributed to the Members in proportion to their Weighted Interests. 7. PJM BOARD 7.1 Composition. There shall be an LLC Board of Man agers, referred to herein as the "PJM Board," composed of seven voting members, with the President as a non-voting member. The seven voting Board Members shall be elected by the Members Committee from a slate of candidates for the then- existing vacancies or expiring terms on the PJM Board. An independent consultant, retained by the Office of the Interconnection upon consideration of the advice and recommendations of the Members Committee, shall be directed to prepare a list of persons qualified and willing to serve on the PJM Board. Not later than 30 days prior to each Annual Meeting of the Members, the Office of the Interconnection shall distribute to the representatives on the Members Committee a slate from among the list proposed by the independent consultant, along with information on the background and experience of the persons on the slate appropriate to evaluating their fitness for service on the PJM Board. Elections for the PJM Board shall be held at each Annual Meeting of the Members, for the purpose of selecting the initial PJM Board in accordance with the provisions of Section 7.3(a), or selecting a person to fill the seat of a Board Member whose term is expiring. Should the Members Committee fail to elect a full PJM Board from the slate proposed by the independent consultant, the Office of the Interconnection shall direct the independent consultant, or a replacement consultant selected by the Office of the Interconnection, to propose a list for a slate of nominees for any vacancies on the PJM Board for consideration by the Members at the next regular meeting of the Members Committee. 12 7.2 Qualifications. A Board Member shall not be, and shall not have been at any time within five years of election to the PJM Board, a director, officer or employee of a Member or of an Affiliate or Related Party of a Member. Except as provided in the LLC's Standards of Conduct filed with the FERC, at any time while serving on the PJM Board, a Board Member shall have no direct business relationship or other affiliation with any Member or its Affiliates or Related Parties. Of the seven Board Members, four shall have expertise and experience in the areas of corporate leadership at the senior management or board of directors level, or in the professional disciplines of finance or accounting, engineering, or utility laws and regulation. Of the other three Board Members, one shall have expertise and experience in the operation or concerns of transmission dependent utilities, one shall have expertise and experience in the operation or planning of transmission systems, and one shall have expertise and experience in the area of commercial markets and trading and associated risk management. 7.3 Term of Office. (a) The persons serving as the Board of Managers of the LLC immediately prior to the Effective Date shall continue in office until the first Annual Meeting of the Members. At the first Annual Meeting of the Members, the then current members of the PJM Board who desire to continue in office shall be elected by the Members to serve until the second Annual Meeting of the Members or until their successors are elected, along with such additional persons as necessary to meet the composition requirements of Section 7.1 and the qualification requirements of Section 7.2. (b) A Board Member shall serve for a term of three years commencing with the Annual Meeting of the Members at which the Board Member was elected; provided, however, that two of the Board Members elected at the first Annual Meeting of the Members following the Effective Date shall be chosen by lot to serve a term of one year, three of such Board Members shall be chosen by lot to serve a term of two years and the final two such Board Members shall serve a term of three years. (c) Vacancies on the PJM Board occurring between Annual Meetings of the Members shall be filled by vote of the then remaining Board Members; a Board Member so selected shall serve until the next Annual Meeting at which time a person shall be elected to serve the balance of the term of the vacant Board Seat. Removal of a Board Member shall require the approval of the Members Committee. 7.4 Quorum. The presence in person or by telephone or other authorized electronic means of a majority of the voting Board Members shall constitute a quorum at all meetings of the PJM Board for the transaction of business except as otherwise provided by statute. If a quorum shall not be present, the Board Members then present shall have the power to adjourn the meeting from time to time, until a quorum shall be present. Provided a quorum is present at a meeting, the PJM Board shall act by majority vote of the Board Members present. 13 7.5 Operating and Capital Budgets. 7.5.1 Finance Committee. Not later than February 1 of each year, the entities specified below shall select the members of a Finance Committee. The Finance Committee shall be composed of one representative of the parties to the Reliability Assurance Agreement chosen by the parties to that agreement, one representative of the parties to the Transmission Owners Agreement chosen by the parties to that agreement, two representatives of the Members Committee chosen by the Members Committee and that are not representatives of an entity that is a party to the Transmission Owners Agreement or an Affiliate or Related Party of such an entity, one representative of the Office of the Interconnection selected by the President, and two Board Members selected by the PJM Board. The Members Committee shall endeavor to elect members of the Finance Committee that are broadly representative of the diversity of interests among the Members. The Office of the Interconnection shall prepare annual budgets in accordance with processes and procedures established by the PJM Board, and shall timely submit its budgets to the Finance Committee for review. The Finance Committee shall submit its analysis of and recommendations on the budgets to the PJM Board, with copies to the Members Committee. The Finance Committee shall also review and comment upon any additional or amended budgets prepared by the Office of the Interconnection at the request of the PJM Board or the Members Committee. 7.5.2 Adoption of Budgets. The PJM Board shall adopt, upon consideration of the advice and recommendations of the Finance Committee, operating and capital budgets for the LLC, and shall distribute to the Members for their information final annual budgets for the following fiscal year not later than 60 days prior to the beginning of each fiscal year of the LLC. 7.6 By-laws. To the extent not inconsistent with any provision of this Agreement, the PJM Board shall adopt such by-laws establishing procedures for the implementation of this Agreement as it may deem appropriate, including but not limited to by-laws governing the scheduling, noticing and conduct of meetings of the PJM Board, selection of a Chair and Vice Chair of the PJM Board, action by the PJM Board without a meeting, and the organization and responsibilities of standing and special committees of the PJM Board. Such by-laws shall not modify or be inconsistent with any of the rights or obligations established by this Agreement. 7.7 Duties and Responsibilities of the PJM Board. In accordance with this Agreement, the PJM Board shall supervise and oversee all matters pertaining to the Interconnection and the LLC, and carry out such other duties as are herein specified, including but not limited to the following duties and responsibilities: i) As its primary responsibility, ensure that the President, the other officers of the LLC, and Office of the Interconnection perform the duties and responsibilities set forth in this Agreement, including but not limited to those set forth in Sections 9.2 through 9.4 and Section 10.4 in a manner consistent with (A) the safe and reliable operation of the Interconnection, (B) 14 the creation and operation of a robust, competitive, and non-discriminatory electric power market in the PJM Control Area, and (C) the principle that a Member or group of Members shall not have undue influence over the operation of the Interconnection; ii) Select the Officers of the LLC; iii) Adopt budgets for the LLC; iv) Approve the Regional Transmission Expansion Plan in accordance with the provisions of the Regional Transmission Expansion Planning Protocol set forth in Schedule 6 of this Agreement. v) On its own initiative or at the request of a User Group as specified herein, submit to the Members Committee such proposed amendments to this Agreement or any Schedule hereto, or a proposed new Schedule, as it may deem appropriate; vi) Petition FERC to modify any provision of this Agreement or any Schedule or practice hereunder that the PJM Board believes to be unjust, unreasonable, or unduly discriminatory under Section 206 of the Federal Power Act, subject to the right of any Member or the Members to intervene in any resulting proceedings; vii) Review for consistency with the creation and operation of a robust, competitive and non-discriminatory electric power market in the PJM Control Area any change to rate design or to non-rate terms and conditions proposed by Transmission Owners for filing under Section 205 of the Federal Power Act. viii) If and to the extent it shall deem appropriate, intervene in any proceeding at FERC initiated by the Members in accordance with Section 11.5(b), and participate in other state and federal regulatory proceedings relating to the interests of the LLC; ix) Review, in accordance with Section 15.1.3, determinations of the Office of the Interconnection with respect to events of default; x) Assess against the other Members in proportion to their Weighted Interest an amount equal to any payment to the Office of the Interconnection, including interest thereon, as to which a Member is in default; xi) Esablish reasonable sanctions for failure of a Member to comply with its obligations under this Agreement; xii) Direct the Office of the Interconnection on behalf of the LLC to take appropriate legal or regulatory action against a Member (A) to recover any unpaid amounts due from the Member to the Office of the Interconnection under this Agreement and to make whole any Members subject to an assessment as a result of such unpaid amount, or (B) as may otherwise be necessary to enforce the obligations of this Agreement; 15 xiii) Resolve claims by a Member that the Reliability Committee established by the Reliability Assurance Agreement has exercised its responsibilities in a manner inconsistent with the creation and operation of a robust, competitive and non-discriminatory electric power market in the PJM Control Area, upon due consideration of the views of the Member and of the Reliability Committee, and of the need to preserve the reliability of electric service in the PJM Control Area. xiv) Solicit the views of Members on, and commission from time to time as it shall deem appropriate independent reviews of, (A) the performance of the PJM Interchange Energy Market, (B) compliance by Market Participants with the rules and requirements of the PJM Interchange Energy Market, and (C) the performance of the Office of the Interconnection under performance criteria proposed by the Members Committee and approved by the PJM Board; and xv) Terminate a Member as may be appropriate under the terms of this Agreement. 8. MEMBERS COMMITTEE 8.1 Sectors. 18.1.1 Designation. Voting on the Members Committee shall be by sectors. The Members Committee shall be composed of five sectors, one for Generation Owners, one for Other Suppliers, one for Transmission Owners, one for Electric Distributors, and one for End-Use Customers, provided that there are at least five Members in each Sector. Except as specified in Section 8.1.2, each Voting Member shall have one vote. Each Voting Member shall, within thirty (30) days after the Effective Date or, if later, thirty (30) days after becoming a Member, and thereafter not later than 10 days prior to the Annual Meeting of the Members for each annual period beginning with the Annual Meeting of the Members, submit to the President a sealed notice of the sector in which it is qualified to vote or, if qualified to participate in more than one sector, its rank order preference of the sectors in which it wishes to vote, and shall be assigned to its highest-ranked sector that has the minimum number of Members specified above. If a Member is assigned to a sector other than its highest-ranked sector in accordance with the preceding sentence, its higher sector preference or preferences shall be honored as soon as a higher-ranked sector has five or more Members. A Voting Member may designate as its voting sector any sector for which it or its Affiliate or Related Party Members is qualified. The sector designations of the Voting Members shall be announced by the President at the Annual Meeting. 8.1.2 Related Parties. The Members in a group of Related Parties shall each be entitled to a vote, provided that all the Members in a group of Related Parties that chooses to exercise such rights shall be assigned to the Electric Distributor sector. 16 8.2 Representatives. 8.2.1 Appointment. Each Member may appoint a representative to serve on the Members Committee, with authority to act for that Member with respect to actions or decisions by the Members Committee. Each Member may appoint an alternate representative to act for that Member at meetings of the Members Committee in the absence of the representative. A Member participating in the PJM Interchange Energy Market through an agent may be represented on the Members Committee by that agent. A Member shall appoint its representative by giving written notice identifying its representative and alternate representative to the Office of the Interconnection. Members that are Affiliates or Related Parties may each appoint a representative and alternate representative to the Members Committee, but shall vote as specified in Section 8.1. 8.2.2 Regulatory Authorities. FERC and any other federal agency with regulatory authority over a Member, each State electric utility regulatory commission with regulatory jurisdiction within the PJM Control Area, and each office of consumer advocate from each State all or any part of the territory of which is within the PJM Control Area, may nominate one representative to serve as an ex officio non-voting member of the Members Committee. 8.2.3 Initial Representatives. Initial representatives to the Members Committee shall be appointed no later than 30 days after the Effective Date; provided, however, that each representative to the Management Committee under the Operating Agreement of PJM Interconnection, L.L.C. as in effect immediately prior to the Effective Date shall automatically become a representative to the Members Committee on the Effective Date unless replaced as specified in Section 8.2.4. An entity becoming a Member shall appoint a representative to the Members Committee no later than 30 days after becoming a Member. 8.2.4 Change of or Substitution for a Representative. Any Member may change its representative or alternate on the Members Committee at any time by providing written notice to the Office of the Interconnection identifying its replacement representative or alternate. Any representative to the Members Committee may, by written notice to the Chair, designate a substitute representative from that Member to act for him or her with respect to any matter specified in such notice. 17 8.3 Meetings. 8.3.1 Regular and Special Meetings. The Members Committee shall hold regular meetings, no less frequently than once each calendar quarter at such time and at such place as shall be fixed by the Chair. The Members Committee shall hold an Annual Meeting of the Members each calendar year at such time and place as shall be specified by the Chair. At the Annual Meeting of the Members, Board Members as necessary, officers of the Members Committee, and representatives to the Finance Committee shall be elected. The Members Committee may hold special meetings for one or more designated purposes within the scope of the authority of the Members Committee when called by the Chair on the Chair's own initiative, or at the request of five or more representatives on the Members Committee. The notice of a regular or special meeting shall be distributed to the representatives as specified in Section 18.13 of this Agreement not later than seven days prior to the meeting, shall state the time and place of the meeting, and shall include an agenda sufficient to notify the representatives of the substance of matters to be considered at the meeting; provided, however, that meetings may be called on shorter notice at the discretion of the Chair as the Chair shall deem necessary to deal with an emergency or to meet a deadline for action. 8.3.2 Attendance. Regular and special meetings may be conducted in person or by telephone, or other electronic means as authorized by the Members Committee. The attendance in person or by telephone or other electronic means of a representative or a duly designated substitute shall be required in order to vote. 8.3.3 Quorum. The attendance as specified in Section 8.3.2 of a majority of the Voting Members from each of at least three sectors that each have at least five Members shall constitute a quorum. No action may be taken by the Members Committee at a meeting unless a quorum is present; provided, however, that if a quorum is not present, the Voting Members then present shall have the power to adjourn the meeting from time to time until a quorum shall be present. 8.4 Manner of Acting. (a) All matters brought up for a vote or approval by the Members Committee shall be stated in the form of a motion, which must be seconded. Only one motion may be pending at one time. (b) Each Sector shall be entitled to cast one and zero one-hundredths (1.00) Sector Votes. Each Voting Member shall be entitled to cast one (1) non-divisible vote in its sector. In the case of a Voting Member comprised of Affiliates or Related Parties, any representative, alternate or substitute of any of the Affiliated or Related Parties may cast the vote of the Voting Member. The Sector Vote of each sector shall be split into an affirmative component based on votes for the pending motion, and a negative component based on votes against the pending motion, in direct proportion to the votes cast within the sector for and against the pending motion, rounded to two decimal places. (c) The sum of affirmative Sector Votes necessary to pass the pending motion shall be 18 greater than (but not merely equal to) the product of .667 multiplied by the number of sectors that have at least five Members and that participated in the vote. (d) Voting Members not in attendance at the meeting as specified in Section 8.3.2 of this Agreement or abstaining shall not be counted as affirmative or negative votes. 8.5 Chair and Vice Chair of the Members Committee. 8.5.1 Selection and Term. The representatives or their alternates or substitutes on the Members Committee shall elect from among the representatives a Chair and a Vice Chair. The offices of Chair and Vice Chair shall be held for a term of one year and until succession to the office occurs as specified herein. Except as specified below, at each Annual Meeting of the Members the Vice Chair shall succeed to the office of Chair, and a new Vice Chair shall be elected. If the office of Chair becomes vacant, or the Chair leaves the employment of the Member for whom the Chair is the representative, or the Chair is no longer the representative of such Member, the Vice Chair shall succeed to the office of Chair, and a new Vice Chair shall be elected at the next regular or special meeting of the Members Committee, both such officers to serve until the second Annual Meeting of the Members following such succession or election to a vacant office. If the office of Vice Chair becomes vacant, or the Vice Chair leaves the employment of the Member for whom the Vice Chair is the representative, or the Vice Chair is no longer the representative of such Member, a new Vice Chair shall be elected at the next regular or special meeting of the Members Committee. 8.5.2 Duties. The Chair shall call and preside at meetings of the Members Committee, and shall carry out such other responsibilities as the Members Committee shall assign. The Chair shall cause minutes of each meeting of the Members Committee to be taken and maintained, and shall cause notices of meetings of the Members Committee to be distributed. The Vice Chair shall preside at meetings of the Members Committee in the absence of the Chair, and shall otherwise act for the Chair at the Chair's request. 8.6 Other Committees. (a) The Members Committee may form, select the membership, and oversee the activities, of an Operating Committee, a Planning Committee, and an Energy Market Committee as standing committees, and such other committees, subcommittees, task forces, working groups or other bodies as it shall deem appropriate, to provide advice and recommendations to the Members Committee or to the Office of the Interconnection as directed by the Members Committee. (b) The Members Committee shall elect representatives to the Alternate Dispute Resolution Committee as specified in the PJM Dispute Resolution Procedures. 8.7 User Groups. (a) Any five or more Members sharing a common interest may form a User Group, and may invite such other Members to join the User Group as the User Group shall deem appropriate. Notification of the formation of a User Group shall be provided to all members of the Members Committee. 19 (b) The Members Committee shall create a User Group composed of representatives of bona fide public interest and environmental organizations that are interested in the activities of the LLC and are willing and able to participate in such a User Group. Meetings of User Groups shall be open to all Members and the Office of the Interconnection. Notices and agendas of meetings of a User Group shall be provided to all Members that ask to receive them. (d) Any recommendation or proposal for action adopted by affirmative vote of three-fourths or more of the members of a User Group shall be circulated by the Office of the Interconnection to the representatives on the Members Committee and shall be considered by the Members Committee at its next regular meeting occurring not earlier than 30 days after the circulation of such notice. (e) If the Members Committee does not adopt a recommendation or proposal submitted to it by a User Group, upon vote of nine-tenths or more of the members of the User Group the recommendation or proposal may be submitted to the PJM Board for its consideration in accordance with Section 7.7(v). 8.8 Powers of the Members Committee. The Members Committee, acting by adoption of a motion as specified in Section 8.4, shall have the power to take the actions specified in this Agreement, including: i) Elect the members of the PJM Board; ii) In accordance with the provisions of Section 18.6 of this Agreement, amend any portion of this Agreement, including the Schedules hereto, or create new Schedules, and file any such amendments or new Schedules with FERC or other regulatory body of competent jurisdiction; iii) Terminate thisAgreement; and iv) Provide advice and recommendations to the PJM Board and the Office of the Interconnection. 9. OFFICERS 9.1 Election and Term. The officers of the LLC shall consist of a President, a Secretary and a Treasurer. The PJM Board may elect such other officers as it deems necessary to carry out the business of the LLC. All officers shall be elected by the PJM Board and shall hold office until the next annual meeting of the PJM Board and until their successors are elected. Any number of offices may be held by the same person, except that the offices of the President and Treasurer may not be held by the same person. 20 9.2 President. The PJM Board shall appoint a President and Chief Executive Officer of the LLC (the "President"). The President shall direct and supervise the day-to-day operation of the LLC, and shall report to the PJM Board. The President shall be responsible for directing and supervising the Office of the Interconnection in the performance of the duties and responsibilities specified in Section 10.4. The President shall execute bonds, mortgages and other contracts requiring a seal, under the seal of the LLC, except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the board to some other officer or agent of the LLC. In the absence of the President or in the event of his or her inability or refusal to act, and if a vice president has been appointed by the PJM Board, the Vice President (or in the event there be more than one Vice President, the Vice Presidents in the order designated by the PJM Board in its Minutes) shall perform the duties of the President, and when so acting, shall have all the powers of and be subject to all the restrictions upon the President. The Vice President shall perform such other duties and have such other powers as the PJM Board may from time to time prescribe. 9.3 Secretary. The Secretary shall attend all meetings of the PJM Board and record all the proceedings of the meetings of the PJM Board in a minute book to be kept for that purpose and shall perform like duties for the standing committees or special committees when required. He or she shall give, or cause to be given, notice of all special meetings of the PJM Board, and shall perform such other duties as may be prescribed by the PJM Board or President, under whose supervision he or she shall be. He or she shall have custody of the corporate seal of the LLC, and he or she, or an assistant secretary, shall have authority to affix the same to any instrument requiring it and, when so affixed, it may be attested by his or her signature or by the signature of such assistant secretary. The PJM Board may give general authority to any other officer to affix the seal of the LLC and to attest the affixing by his or her signature. 9.4 Treasurer. The Treasurer shall have or arrange for the custody of the LLC's funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belongings to the LLC and shall deposit all moneys and other valuable effects in the name and to the credit of the LLC in such depositories as may be designated by the PJM Board. The Treasurer shall disburse the funds of the LLC as may be ordered by the PJM Board, taking proper vouchers for such disbursements, and shall render to the President and PJM Board at its regular meetings, or when the PJM Board so requires, an account of his or her transactions as Treasurer and of the financial condition of the LLC. If required by the Board, the Treasurer shall give the LLC a bond (which shall be renewed periodically) in such sum and with such surety or sureties as shall be satisfactory to the PJM Board for the faithful performance of the duties of his office and of the restoration to the LLC, in case of his or her death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his or her possession or under his or her control belonging to the LLC. 21 9.5 Renewal of Officers; Vacancies. Any officer elected or appointed by the PJM Board may be removed at any time by the affirmative vote of a majority of the PJM Board eligible to vote. Any vacancy occurring in any office of the LLC shall be filled by the PJM Board. 9.6 Compensation. The salaries of all officers and agents of the LLC, and the reasonable compensation of the PJM Board, shall be fixed by the PJM Board. 10. OFFICE OF THE INTERCONNECTION. 10.1 Establishment. The Office of the Interconnection shall implement this Agreement, administer the PJM Tariff, and undertake such other responsibilities as set forth herein. All personnel of the Office of the Interconnection shall be employees of the LLC or under contract thereto. The cost of the Office of the Interconnection and expenses associated therewith, including salaries and expenses of said personnel, space and any necessary facilities or other capital expenditures, shall be recovered in accordance with Schedule 3. The Office of the Interconnection shall adopt, publish and comply with standards of conduct that satisfy the regulations of FERC. 10.2 Processes and Organization. In order to carry out the responsibilities of the Office of the Interconnection for the safe and reliable operation of the Interconnection, the President may establish processes and organization for operating personnel and facilities as the President shall deem appropriate, and shall request such Members as the President shall deem appropriate to participate in such processes and organization. All such processes and organization shall be carried out in accordance with all applicable code of conduct or other functional separation requirements of FERC. 10.3 Confidential Information. The Office of the Interconnection shall comply with the requirements of Section 18.17 with respect to any proprietary or confidential information received from or about any Member. 10.4 Duties and Responsibilities. The Office of the Interconnection, under the direction of the President as supervised and overseen by the PJM Board, shall carry out the following duties and responsibilities, in accordance with the provisions of this Agreement: i) Administer and implement this Agreement; ii) Perform such functions in furtherance of this Agreement as the PJM Board, acting within the scope of its duties and responsibilities under this Agreement, may direct; iii) Prepare, maintain, update and disseminate the PJM Manuals; iv) Comply with MAAC and NERC operation and planning standards, 22 principles and guidelines; v) Maintain an appropriately trained workforce, and such equipment and facilities, including computer hardware and software and backup power supplies, as necessary or appropriate to implement or administer this Agreement; vi) Direct the operation and coordinate the maintenance of the facilities of the Interconnection used for both load and reactive supply, so as to maintain reliability of service and obtain the benefits of pooling and interchange consistent with this Agreement and the Reliability Assurance Agreement; vii) Direct the operation and coordinate the maintenance of the bulk power supply facilities of the Interconnection with such facilities and systems of others not party to this Agreement in accordance with agreements between the LLC and such other systems to secure reliability and continuity of service and other advantages of pooling on a regional basis; viii) Perform interchange accounting and maintain records pertaining to the operation of the PJM Interchange Energy Market and the Interconnection; ix) Notify the Members of the receipt of any application to become a Member, and of the action of the Office of the Interconnection on such application, including but not limited to the completion of integration of a new Member's system into the PJM Control Area as specified in Section 11.6(f); x) Calculate the Weighted Interest of each Member; xi) Maintain accurate records of the sectors in which each Voting Member is entitled to vote, and calculate the results of any vote taken in the Members Committee; xii) Furnish appropriate information and reports as are required to keep the Members regularly informed of the outlook for, the functioning of, and results achieved by the Interconnection; xiii) File with FERC on behalf of the Members any amendments to this Agreement or the Schedules hereto, any new Schedules hereto, and make any other regulatory filings on behalf of the Members or the LLC necessary to implement this Agreement; xiv) At the direction of the PJM Board, submit comments to regulatory authorities on matters pertinent to the Interconnection; xv) Consult with the standing or other committees established pursuant to Section 8.6(a) on matters within the responsibility of the committee; xvi) Perform operating studies of the bulk power supply facilities of the Interconnection and make such recommendations and initiate such actions as may be necessary to maintain reliable operation of the Interconnection; xvii) Accept, on behalf of the Members, notices served under this Agreement; 23 xviii) Perform those functions and undertake those responsibilities transferred to it under the Transmission Owners Agreement, including (A) direct the operation of the transmission facilities of the parties to the Transmission Owners Agreement, (B) administer the PJM Tariff, and (C) administer the Regional Transmission Expansion Planning Protocol set forth as Schedule 6 to this Agreement. xix) Perform those functions and undertake those responsibilities transferred to it under the Reliability Assurance Agreement, as specified in Schedule 8 of this Agreement. xx) Monitor the operation of the PJM Control Area, ensure that appropriate Emergency plans are in place and appropriate Emergency drills are conducted, declare the existence of an Emergency, and direct the operations of the Members as necessary to manage, alleviate or end an Emergency; xxi) Incorporate the grid reliability requirements applicable to nuclear generating units in the PJM Control Area planning and operating principles and practices; and xxii) Initiate such legal or regulatory proceedings as directed by the PJM Board to enforce the obligations of this Agreement. 11. MEMBERS 11.1 Management Rights. The Members or any of them shall not take part in the management of the business of, and shall not transact any business for, the LLC in their capacity as Members, nor shall they have power to sign for or to bind the LLC. 11.2 Other Activities. Except as otherwise expressly provided herein, any Member may engage in or possess any interest in another business or venture of any nature and description, independently or with others, even if such activities compete directly with the business of the LLC, and neither the LLC nor any Member hereof shall have any rights in or to any such independent ventures or the income or profits derived therefrom. 11.3 Member Responsibilities. 11.3.1 General. To facilitate and provide for the work of the Office of the Interconnection and of the several committees appointed by the Members Committee, each Member shall, to the extent applicable; (a) Maintain adequate records and, subject to the provisions of this Agreement for the protection of the confidentiality of proprietary or commercially sensitive information, provide data required for (i) coordination of operations, (ii) accounting for all interchange 24 transactions, (iii) preparation of required reports, (iv) coordination of planning, including those data required for capacity accounting, (v) preparation of maintenance schedules, (vi) analysis of system disturbances, and (vii) such other purposes, including those set forth in Schedule 2, as will contribute to the reliable and economic operation of the Interconnection; (b) Provide such recording, telemetering, communication and control facilities as are required for the coordination of its operations with the Office of the Interconnection and those of the other Members and to enable the Office of the Interconnection to operate the PJM Control Area and otherwise implement and administer this Agreement, including equipment required in normal and Emergency operations and for the recording and analysis of system disturbances; (c) Provide adequate and properly trained personnel to (i) permit participation in the coordinated operation of the Interconnection, (ii) meet its obligation on a timely basis for supply of records and data, (iii) serve on committees and participate in their investigations, and (iv) share in the representation of the Interconnection in inter-regional and national reliability activities; (d) Share in the costs of committee activities and investigations (including costs of consultants, computer time and other appropriate items), communication facilities used by all the Members (in addition to those provided in the Office of the Interconnection), and such other expenses as are approved for payment by the PJM Board, such costs to be recovered as provided in Schedule 3; (e) Comply with the requirements of the PJM Manuals and all directives of the Office of the Interconnection to take any action for the purpose of managing, alleviating or ending an Emergency, and authorize the Office of the Interconnection to direct the transfer or interruption of the delivery of energy on their behalf to meet an Emergency and to implement agreements with other Control Areas interconnected with the PJM Control Area for the mutual provision of service to meet an Emergency, and be subject to the emergency procedure charges specified in Schedule 9 of this Agreement for any failure to follow the Emergency instructions of the Office of the Interconnection. 11.3.2 Facilities Planning and Operation. Consistent with and subject to the requirements of this Agreement, the PJM Tariff, the MAAC Agreement, the Reliability Assurance Agreement, the Transmission Owners Agreement, and the PJM Manuals, each Member shall cooperate with the other Members in the coordinated planning and operation of the facilities of its System within the PJM Control Area so as to obtain the greatest practicable degree of reliability, compatible economy and other advantages from such coordinated planning and operation. In furtherance of such cooperation each Member shall, as applicable: (a) Consult with the other Members and the Office of the Interconnection, and coordinate the installation of its electric generation and Transmission Facilities with those of such other Members so as to maintain reliable service in the PJM Control Area; (b) Coordinate with the other Members, the Office of the Interconnection and with others in the planning and operation of the regional facilities to secure a high level of reliability and continuity of service and other advantages; 25 (c) Cooperate with the other Members and the Office of the Interconnection in the implementation of all policies and procedures established pursuant to this Agreement for dealing with Emergencies, including but not limited to policies and procedures for maintaining or arranging for a portion of a Member's Capacity Resources at least equal to the level established pursuant to the Reliability Assurance Agreement to have the ability to go from a shutdown condition to an operating condition and start delivering power without assistance from the power system; (d) Cooperate with the members of MAAC to augment the reliability of the bulk power supply facilities of the region and comply with MAAC and NERC operating and planning standards, principles and guidelines and the PJM Manuals; (e) Obtain or arrange for transmission service as appropriate to carry out this Agreement; (f) Cooperate with the Office of the Interconnection's coordination of the operating and maintenance schedules of the Member's generating and Transmission Facilities with the facilities of other Members to maintain reliable service to its own customers and those of the other Members and to obtain economic efficiencies consistent therewith; (g) Cooperate with the other Members and the Office of the Interconnection in the analysis, formulation and implementation of plans to prevent or eliminate conditions that impair the reliability of the Interconnection; and (h) Adopt and apply standards adopted pursuant to this Agreement and conforming to MAAC and NERC standards, principles and guidelines and the PJM Manuals, for system design, equipment ratings, operating practices and maintenance practices. 11.3.3 Electric Distributors. In addition to any of the foregoing responsibilities that may be applicable, each Member that is an Electric Distributor, whether or not that Member votes in the Members Committee in the Electric Distributor sector or meets the eligibility requirements for any other sector of the Members Committee, shall: (a) Accept, comply with or be compatible with all standards applicable within the PJM Control Area with respect to system design, equipment ratings, operating practices and maintenance practices as set forth in the PJM Manuals, or be subject to an interconnected Member's requirements relating to the foregoing, so that sufficient electrical equipment, control capability, information and communication are available to the Office of the Interconnection for planning and operation of the PJM Control Area; (b) Assure the continued compatibility of its local system energy management system monitoring and telecommunications systems to satisfy the technical requirements of interacting automatically or manually with the Office of the Interconnection as it directs the operation of the PJM Control Area; (c) Maintain or arrange for a portion of its connected load to be subject to control by automatic underfrequency, under-voltage, or other load-shedding devices at least equal to the levels established pursuant to the Reliability Assurance Agreement, or be subject to another 26 Member's control for these purposes; (d) Provide or arrange for sufficient reactive capability and voltage control facilities to conform to Good Utility Practice and (i) to meet the reactive requirements of its system and customers and (ii) to maintain adequate voltage levels and the stability required by the bulk power supply facilities of the Interconnection; (e) Shed connected load, share Capacity Resources, initiate active load management programs, and take such other coordination actions as may be necessary in accordance with the directions of the Office of the Interconnection in Emergencies; (f) Maintain or arrange for a portion of its Capacity Resources at least equal to the level established pursuant to the Reliability Assurance Agreement to have the ability to go from a shutdown condition to an operating condition and start delivering power without assistance from the power system; (g)Provide or arrange through another Member for the services of a 24-hour local control center to coordinate with the Office of the Interconnection, each such control center to be furnished with appropriate telemetry equipment as specified in the PJM Manuals, and to be staffed by system operators trained and delegated sufficient authority to take any action necessary to assure that the system for which the operator is responsible is operated in a stable and reliable manner; (h) Provide to the Office of the Interconnection all System, accounting, customer tracking, load forecasting and other data necessary or appropriate to implement or administer this Agreement or the Reliability Assurance Agreement; and (i) Comply with the underfrequency relay obligations and charges specified in Schedule 7 of this Agreement. 11.3.4 Reports to the Office of the Interconnection. Each Member shall report as promptly as possible to the Office of the Interconnection any changes in its operating practices and procedures relating to the reliability of the bulk power supply facilities of the Interconnection. The Office of the Interconnection shall review such reports, and if any change in an operating practice or procedure of the Member is not in accord with the established operating principles, practices and procedures for the Interconnection and such change adversely affects the Interconnection and regional reliability, it shall so inform such Member, and the other Members through their representative on the Operating Committee, and shall direct that such change be modified to conform to the established operating principles, practices and procedures. 11.4 Regional Transmission Expansion Planning Protocol. The Members shall participate in regional transmission expansion planning in accordance with the Regional Transmission Expansion Planning Protocol set forth in Schedule 6 to this Agreement. 27 11.5 Member Right to Petition. (a) Nothing herein shall deprive any Member of the right to petition FERC to modify any provision of this Agreement or any Schedule or practice hereunder that the petitioning Member believes to be unjust, unreasonable, or unduly discriminatory under Section 206 of the Federal Power Act, subject to the right of any other Member (a) to oppose said proposal, or (b) to withdraw from the LLC pursuant to Section 4.1. (b) Nothing herein shall be construed as affecting in any way the right of the Members, acting pursuant to a vote of the Members Committee as specified in Section 8.4, unilaterally to make an application to FERC for a change in any rate, charge, classification, tariff or service, or any rule or regulation related thereto, under section 205 of the Federal Power Act and pursuant to the rules and regulations promulgated by FERC thereunder, subject to the right of any Member that voted against such change in any rate, charge, classification, tariff or service, or any rule or regulation related thereto, in intervene in opposition to any such application. (c) Nothing in this Agreement shall preclude those Members joining in the proposal to utilize Locational Marginal Prices to deal with transmission congestion from (i) filing amendments to the Agreement necessary to implement the use of Locational Marginal Prices in the PJM Control Area in accordance with such orders or other directives as may be issued by FERC relating thereto, or (ii) implementing the provisions of Sections 1.7.21 and 5.2.2(d) of Schedule 1 to this Agreement, without further authorization or approval by the Members Committee. 11.6 Membership Requirements. (a) To qualify as a Member, an entity shall: i) Be a Transmission Owner within the PJM Control Area or an Eligible Customer under the PJM Tariff; ii) If not a Transmission Owner, be a Generation Owner, an Other Supplier, an Electric Distributor, or an End-Use Consumer; iii) Be engaged in buying, selling or transmitting electric energy in or through the Interconnection or have a good faith intent to do so; and iv) Accept the obligations set forth in this Agreement. (b) Certain Members that are Load Serving Entities are parties to the Reliability Assurance Agreement. Upon becoming a Member, any entity that is a Load Serving Entity and that wishes to become a Market Buyer shall also simultaneously execute the Reliability Assurance Agreement. (c) An entity that wishes to become a party to this Agreement shall apply, in writing, to the President setting forth its request, its qualifications for membership, its agreement to supply data as specified in this Agreement, its agreement to pay all costs and expenses in accordance with Schedule 3, and providing all information specified pursuant to the Schedules to this Agreement for entities that wish to become Market Participants. Any such application that meets all applicable requirements shall be approved by the President within sixty (60) days. 28 (d)Nothing in this Section 11 is intended to remove, in any respect, the choice of participation by other utility companies or organizations in the operation of the Interconnection through inclusion in the System of a Member. (e) An entity whose application is accepted by the President pursuant to Section 11.6(c) shall execute a supplement to this Agreement in substantially the form prescribed in Schedule 4, which supplement shall be countersigned by the President and tendered for filing with FERC by the President. The entity shall become a Member effective on the date specified by FERC when accepting the supplement for filing. (f) Entities whose applications contemplate expansion or rearrangement of the PJM Control Area may become Members promptly as described in Sections 11.6(c) and 11.6(e) above, but the integration of the applicant's system into all of the operation and accounting provisions of this Agreement and the Reliability Assurance Agreement shall occur only after completion of all required installations and modifications of metering, communications, computer programming, and other necessary and appropriate facilities and procedures, as determined by the Office of the Interconnection. The Office of the Interconnection shall notify the other Members when such integration has occurred. 12. TRANSFERS OF MEMBERSHIP INTEREST The rights and obligations created by this Agreement shall inure to and bind the successors and assigns of such Member; provided, however, that the rights and obligations of any Member hereunder shall not be assigned without the approval of the Members Committee except as to a successor in operation of a Member's electric operating properties by reason of a merger, consolidation, reorganization, sale, spinoff, or foreclosure, as a result of which substantially all such electric operating properties are acquired by such a successor, and such successor becomes a Member. 13. INTERCHANGE 13.1 Interchange Arrangements with Non-Members. Any Member may enter into interchange arrangements with others who are not Members with respect to the delivery or receipt of capacity and energy to fulfill its obligations hereunder or for any other purpose, subject to the standards and requirements established in or pursuant to this Agreement. 29 13.2 Energy Market. The Office of the Interconnection shall administer an efficient energy market within the Interconnection, to be known as the PJM Interchange Energy Market, in which Members may buy and sell energy. The Office of the Interconnection will schedule in advance and dispatch generation on the basis of least-cost, security-constrained dispatch and the prices and operating characteristics offered by sellers within and into the Interconnection, continuing until sufficient generation is dispatched to serve the energy purchase requirements of the Interconnection and buyers out of the Interconnection, as well as the requirements of the Interconnection for ancillary services provided by such generation. Scheduling and dispatch shall be conducted in accordance with applicable schedules to the PJM Tariff and the Schedules to this Agreement. 14. METERING 14.1 Installation, Maintenance and Reading of Meters. The quantities of electric energy involved in determination of the amounts of the billing rendered hereunder shall be ascertained by means of meters installed, maintained and read either at the expense of the party on whose premises the meters are located or as otherwise provided for by agreement between the parties concerned. 14.2 Metering Procedures. Procedures with respect to maintenance, testing, calibrating, correction and registration records, and precision tolerance of all metering equipment shall be in accordance with Good Utility Practice. The expense of testing any meter shall be borne by the party owning such meter, except that when a meter tested upon request of another party is found to register within the established tolerance the party making the request shall bear the expense of such test. 14.3 Integrated Megawatt-Hours All metering of energy required herein shall be the integration of megawatt hours in the clock hour, and the quantities thus obtained shall constitute the megawatt load for such clock hour; provided, however, that adjustment shall be made for other contractual obligations of any Member as may be required to determine the quantity to be accounted for hereunder, and for transmission losses. 14.4 Meter Locations. The meter locations to be used by the Members in determining their energy transactions on the Interconnection shall be as reasonably determined from time to time by the Member or the Office of the Interconnection. 30 15. ENFORCEMENT OF OBLIGATIONS 15.1 Failure to Meet Obligations. 15.1.1 Termination of Market Buyer Rights. The Office of the Interconnection shall terminate a Market Buyer's right to make purchases from the PJM Interchange Energy Market if it determines that the Market Buyer does not continue to meet the obligations set forth in this Agreement, provided that the Office of the Interconnection has notified the Market Buyer of any such deficiency and afforded the Market Buyer a reasonable opportunity to cure it. The Office of the Interconnection shall reinstate a Market Buyer's right to make purchases from the PJM Interchange Energy Market upon demonstration by the Market Buyer that it has come into compliance with the obligations set forth in this Agreement. 15.1.2 Termination of Market Seller Rights. The Office of the Interconnection shall not accept offers from a Market Seller that has not complied with the prices, terms, or operating characteristics of any of its prior scheduled transactions in the PJM Interchange Energy Market, unless such Market Seller has taken appropriate measures to the satisfaction of the Office of the Interconnection to ensure future compliance. 15.1.3 Payment of Bills. (a) A Member shall make full and timely payment, in accordance with the terms specified by the Office of the Interconnection, of all bills rendered in connection with transactions in the PJM Interchange Energy Market or other services performed by the Office of the Interconnection, notwithstanding any disputed amount, but any such payment shall not be deemed a waiver of any right with respect to such dispute. Any Member that fails to make such payment, or otherwise fails to meet its financial or other obligations to a Member, the Office of the Interconnection or the LLC under this Agreement, shall upon expiration of the 30 day period specified below be in default. If the Office of the Interconnection concludes, upon its own initiative or the recommendation of or complaint by the Members Committee or any Member, that a Member is in breach of any obligation under this Agreement, the Office of the Interconnection shall so notify such Member and inform all other Members. The notified Member may remedy such asserted breach by: (i) paying all amounts assertedly due, along with interest on such amounts calculated in accordance with the methodology specified for interest on refunds in FERC's regulations at 18 C.F.R. ss. 35.19a(a)(2)(iii); and (ii) demonstration to the satisfaction of the Office of the Interconnection that the Member has taken appropriate measures to meet any other obligation of which it was deemed to be in breach; provided, however, that any such payment or demonstration may be subject to a reservation of rights, if any, to subject such matter to the PJM Dispute Resolution Procedures; and provided, further, that any such determination by the Office of the Interconnection may be subject to review by the PJM Board upon request of the Member involved or the Office of the Interconnection. If a Member has not remedied a breach by the 30th day following receipt of the Office of the Interconnection's notice, or receipt of the PJM Board's decision on review, if applicable, then the Member shall be in default and, in addition to such other remedies as may be available to the LLC: i) A defaulting Market Participant shall be precluded from buying or selling 31 energy in the PJM Interchange Energy Market until the default is remedied as set forth above. ii) A defaulting Member shall not be entitled to participate in the activities of any committee or other body established by the Members Committee or the Office of the Interconnection. iii) A defaulting Member shall not be entitled to vote on the Members Committee or any other committee or other body established pursuant to this Agreement. 15.2 Enforcement of Obligations. If the Office of the Interconnection sends a notice to the PJM Board that a Member has failed to perform an obligation under this Agreement, the PJM Board shall initiate such action against such Member to enforce such obligation as the PJM Board shall deem appropriate. Subject to the procedures specified in Section 15.1, a Member's failure to perform such obligation shall be deemed to be a default under this Agreement. In order to remedy a default, but without limiting any rights the LLC may have against the defaulting Member, the PJM Board may assess against, and collect from, the Members not in default, in proportion to their Weighted Interest, an amount equal to the amount that the defaulting Member has failed to pay to the Office of the Interconnection, along with appropriate interest, but such assessment shall in no way relieve the defaulting Member of its obligations, and shall confer upon the Members Committee the right to recover the assessed amounts from the defaulting Member. In addition to any amounts in default, the defaulting Member shall be liable to the LCC for reasonable costs incurred in enforcing the defaulting Member's obligations. 15.3 Obligations to a Member in Default. The Members have no continuing obligation to provide the benefits of interconnected operations to a Member in default. 15.4 Obligations of a Member in Default. A Member found to be in default shall take all possible measures to mitigate the continued impact of the default on the Members not in default, including, but not limited to, loading its own generation to supply its own load to the maximum extent possible. 15.5 No Implied Waiver. A failure of a Member, the PJM Board, or the LLC to insist upon or enforce strict performance of any of the provisions of this Agreement shall not be construed as a waiver or relinquishment to any extent of such entity's right to assert or rely upon any such provisions, rights and remedies in that or any other instance; rather, the same shall be and remain in full force and effect. 32 16. LIABILITY AND INDEMNITY 16.1 Members. (a) As between the Members, except as may be otherwise agreed upon between individual Members with respect to specified interconnections, each Member will indemnify and hold harmless each of the other Members, and its directors, officers, employees, agents, or representatives, of and from any and all damages, losses, claims, demands, suits, recoveries, costs and expenses (including all court costs and reasonable attorneys' fees), caused by reason of bodily injury, death or damage to property of any third party, resulting from or attributable to the fault, negligence or willful misconduct of such Member, its directors, officers, employees, agents, or representatives, or resulting from, arising out of, or in any way connected with the performance of its obligations under this Agreement, excepting only, and to the extent, such cost, expense, damage, liability or loss may be caused by the fault, negligence or willful misconduct of any other Member. The duty to indemnify under this Agreement will continue in full force and effect notwithstanding the expiration or termination of this Agreement or the withdrawal of a Member from this Agreement, with respect to any loss, liability, damage or other expense based on facts or conditions which occurred prior to such termination or withdrawal. (b) The amount of any indemnity payment arising hereunder shall be reduced (including, without limitation, retroactively) by any insurance proceeds or other amounts actually recovered by the Member seeking indemnification in respect of the indemnified action, claim, demand, costs, damage or liability. If any Member shall have received an indemnity payment for an action, claim, demand, cost, damage or liability and shall subsequently actually receive insurance proceeds or other amounts for such action, claim, demand, cost, damage or liability, then such Member shall pay to the Member that made such indemnity payment the lesser of the amount of such insurance proceeds or other amounts actually received and retained or the net amount of the indemnity payments actually received previously. 33 16.2 LLC Indemnified Parties. (a) The LLC will indemnify and hold harmless the PJM Board, the LLC's officers, employees and agents, and any representatives of the Members serving on the Members Committee and any other committee created under Section 8 of this Agreement (all such Board Members, officers, employees, agents and representatives for purposes of this Section 160 being referred to as "LLC Indemnified Parties"), of and from any and all actions, claims, demands, costs (including consequential or indirect damages, economic losses and all court costs and reasonable attorneys' fees) and liabilities to any third parties, arising from, or in any way connected with, the performance of the LLC under this Agreement, or the fact that such LLC Indemnified Party was serving in such capacity, except to the extent that such action, claim, demand, cost or liability results from the willful misconduct of any LLC Indemnified Party with respect to participation in the misconduct. To the extent any dispute arises between any Member and the LLC arising from, or in any way connected with, the performance of the LLC under this Agreement, the Member and the LLC shall follow the PJM Dispute Resolution Procedures. To the extent that any such action, claim, demand, cost or liability arises from a Member's contractual or other obligation to provide electric service directly or indirectly to said third party, which obligation to provide service is limited by the terms of any tariff, service agreement, franchise, statute, regulatory requirement, court decision or other limiting provision, the Member designates the LLC and each LLC Indemnified Party a beneficiary of said limitation. (b) An LLC Indemnified Party shall not be personally liable for monetary damages for any breach of fiduciary duty by such LLC Indemnified Party, except that an LLC Indemnified Party shall be liable to the extent provided by applicable law (i) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, or (ii) for any transaction from which the LLC Indemnified Party derived an improper personal benefit. Notwithstanding (i) and (ii), indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the LLC if and to the extent that the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which such court shall deem proper. If applicable law is hereafter construed or amended to authorize the further elimination or limitation of the liability of LLC Indemnified Parties, then the liability of the LLC Indemnified Parties, in addition to the limitation on personal liability provided herein, shall be limited to the fullest extent permitted by law. No amendment to or repeal of this section shall apply to or have any effect on the liability or alleged liability of any LLC Indemnified Party or with respect to any acts or omissions occurring prior to such amendment or repeal. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which such person reasonably believed to be in or not opposed to the best interests of the LLC, and with respect to any criminal action or proceeding, had reasonable cause to believe that his or her conduct was unlawful. (c) The LLC may pay expenses incurred by an LLC Indemnified Party in defending a civil, criminal, administrative or investigative action, suit or proceeding in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such LLC Indemnified Party to repay such amount if it shall ultimately be determined that such LLC 34 Indemnified Party is not entitled to be indemnified by the LLC as authorized in this Section. (d) In the event the LLC incurs liability under this Section 16.2 that is not adequately covered by insurance, such amounts shall be recovered pursuant to the PJM Tariff as provided in Schedule 3 of this Agreement. 16.3 Worker' Compensation Claims. Each Member shall be solely responsible for all claims of its own employees, agents and servants growing out of any Worker's Compensation Law. 16.4 Limitation of Liability. No Member or its directors, officers, employees, agents, or representatives shall be liable to any other Member or its directors, officers, employees, agents, or representatives, whether liability arises out of contract, tort (including negligence), strict liability, or any other cause of or form of action whatsoever, for any indirect, incidental, consequential, special or punitive cost, expense, damage or loss, including but not limited to loss of profits or revenues, cost of capital of financing, loss of goodwill or cost of replacement power, arising from such Member's performance or failure to perform any of its obligations under this Agreement or the ownership, maintenance or operation of its System; provided, however, that nothing herein shall be deemed to reduce or limit the obligations of any Member with respect to the claims of persons or entities that are not parties to this Agreement. 16.5 Resolution of Disputes. To the extent any dispute arises between one or more Members regarding any issue covered by this Agreement, the Members shall follow the dispute resolution procedures set forth in the PJM Dispute Resolution Procedures. 16.6 Gross Negligence or Willful Misconduct. Neither the LLC nor the LLC Indemnified Parties shall be liable to the Members or any of them for any claims, demands or costs arising from, or in any way connected with, the performance of the LLC under this Agreement other than actions, claims or demands based on gross negligence or willful misconduct; provided, however, that nothing herein shall limit or reduce the obligations of the LLC to the Members or any of them under the express terms of this Agreement or the PJM Tariff, including, but not limited to, those set forth in Sections 6.2 and 6.3 of this Agreement. 16.7 Insurance. The PJM Board shall be authorized to procure insurance against the risks borne by the LLC and the LLC Indemnified Parties, the cost of which shall be treated as a cost and expense of the LLC. 35 17. MEMBER REPRESENTATIONS, WARRANTIES AND COVENANTS 17.1 Representations and Warranties. Each Member makes the following representations and warranties to the LLC and each other Member, as of the Effective Date or such later date as such Member shall become admitted as a Member of the LLC. 17.1.1 Organization and Existence. Such Member is an entity duly organized, validly existing and in good standing under the laws of the state of its organization. 17.1.2 Power and Authority. Such Member has the full power and authority to execute, deliver and perform this Agreement and to carry out the transactions contemplated hereby. 17.1.3 Authorization and Enforceability. The execution and delivery of this Agreement by such Member and the performance of its obligations hereunder have been duly authorized by all requisite action on the part of the Member, and do not conflict with any applicable law or with any other agreement binding upon the Member. The Agreement has been duly executed and delivered by such Member and constitutes the legal, valid and binding obligation of such Member, enforceable against it in accordance with the terms thereof, except insofar as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or other similar laws affecting the enforcement of creditors' rights generally, and to general principles of equity whether such principles are considered in proceedings in law or in equity. 17.1.4 No Government Consents. No authorization, consent, approval or order of, notice to or registration, qualification, declaration or filing with, any governmental authority is required for the execution, delivery and performance by such Member of this Agreement or the carrying out by such Member of the transactions contemplated hereby other than such authorization, consent, approval or order of, notice to or registration, qualification, declaration or filing that is pending before such governmental authority. 17.1.5 No Conflict or Breach. None of the execution, delivery and performance by such Member of this Agreement, the compliance with the terms and provisions hereof and the carrying out of the transactions contemplated hereby, conflicts or will conflict with or will result in a breach or violation of any of the terms, conditions or provisions of any law, governmental rule or regulation or the charter documents or bylaws of such Member or any applicable order, writ, injunction, judgment or decree of any court or governmental authority against such Member or by which it or any of its properties, is bound, or any loan agreement, indenture, mortgage, bond, note, resolution, contract or other agreement or instrument to which such Member is a party or by which it or any of its properties is bound, or constitutes or will constitute a default thereunder or will result in the imposition of any lien upon any of its properties. 36 17.1.6 No Proceedings. There are no actions at law, suits in equity, proceedings or claims pending or, to the knowledge of the Member, threatened against the Member before any federal, state, foreign or local court, tribunal or government agency or authority that might materially delay, prevent or hinder the performance by the Member of its obligations hereunder. 17.2 Municipal Electric Systems. Any provisions of Section 17.1 notwithstanding, if any Member that is a municipal electric system believes in good faith that the provisions of Sections 5.1(b) and 16.1 of this Agreement may not lawfully be applied to that Member under applicable state law governing municipal activities, the Member may request a waiver of the pertinent provisions of the Agreement. Any such request for waiver shall be supported by an opinion of counsel for the Member to the effect that the provision of the Agreement as to which waiver is sought may not lawfully be applied to the Member under applicable state law. The PJM Board shall have the right to have the opinion of the Member's counsel reviewed by counsel to the LLC. If the PJM Board concludes that either or both of Sections 5.1(b) and 16.1 of this Agreement may not lawfully be applied to a municipal electric system Member, it shall waive the application of the affected provision or provisions to such municipal Member. Any Member not permitted by law to indemnify the other Members shall not be indemnified by the other Members. 17.3 Survival. All representations and warranties contained in this Section 17 shall survive the execution and delivery of this Agreement. 18. MISCELLANEOUS PROVISIONS 18.1 [Reserved.] 18.2 Fiscal and Taxable Year. The fiscal year and taxable year of the LLC shall be the calendar year. 18.3 Reports. Each year prior to the Annual Meeting of the Members, the PJM Board shall cause to be prepared and distributed to the Members a report of the LLC's activities since the prior report. 37 18.4 Bank Accounts; Checks, Notes and Drafts. (a) Funds of the LLC shall be deposited in an account or accounts of a type, in form and name and in a bank(s) or other financial institution(s) which are participants in federal insurance programs as selected by the PJM Board. The PJM Board shall arrange for the appropriate conduct of such accounts. Funds may be withdrawn from such accounts only for bona fide and legitimate LLC purposes and may from time to time be invested in such short-term securities, money market funds, certificates of deposit or other liquid assets as the PJM Board deems appropriate. All checks or demands for money and notes of the LLC shall be signed by any officer or by any other person designated by the PJM Board. (b) The Members acknowledge that the PJM Board may maintain LLC funds in accounts, money market funds, certificates of deposit, other liquid assets in excess of the insurance provided by the Federal Deposit Insurance Corporation, or other depository insurance institutions and that the PJM Board shall not be accountable or liable for any loss of such funds resulting from failure or insolvency of the depository institution. (c) Checks, notes, drafts and other orders for the payment of money shall be signed by such persons as the PJM Board from time to time may authorize. When the PJM Board so authorizes, the signature of any such person may be a facsimile. 18.5 Books and Records. (a) At all times during the term of the LLC, the PJM Board shall keep, or cause to be kept, full and accurate books of account, records and supporting documents, which shall reflect, completely, accurately and in reasonable detail, each transaction of the LLC. The books of account shall be maintained and tax returns prepared and filed on the method of accounting determined by the PJM Board. The books of account, records and all documents and other writings of the LLC shall be kept and maintained at the principal office of the Interconnection. (b) The PJM Board shall cause the Office of the Interconnection to keep at its principal office the following: i) A current list in alphabetical order of the full name and last known business address of each Member, the Weighted Interest of each Member, and the Members Committee sector of each Voting Member; ii) A copy of the Certificate of Formation and the Certificate of Conversion, and all Certificates of Amendment thereto; iii) Copies of the LLC's federal, state, and local income tax returns and reports, if any, for the three most recent years; and iv) Copies of the Operating Agreement, as amended, and of any financial statements of the LLC for the three most recent years. 38 18.6 Amendment. (a) Except as provided by law or otherwise set forth herein, this Agreement, including any Schedule hereto, may be amended, or a new Schedule may be created, only upon: (i) submission of the proposed amendment to the PJM Board for its review and comments; (ii) approval of the amendment or new Schedule by the Members Committee, after consideration of the comments of the PJM Board, in accordance with Section 8.4, or written agreement to an amendment of all Members not in default at the time the amendment is agreed upon; and (iii) approval and/or acceptance for filing of the amendment by FERC and any other regulatory body with jurisdiction thereof as may be required by law. If and as necessary, the Members Committee may file with FERC or other regulatory body of competent jurisdiction any amendment to this Agreement or to its Schedules or a new Schedule not filed by the Office of the Interconnection. (b) Notwithstanding the foregoing, an applicant eligible to become a Member in accordance with the procedures specified in this Agreement shall become a Member by executing a counterpart of this Agreement without the need for amendment of this Agreement or execution of such counterpart by any other Member. (c) Each of the following fundamental changes to the LLC shall require or be deemed to require an amendment to this Agreement and shall require the prior approval of FERC: i) Adoption of any plan of merger or consolidation; ii) Adoption of any plan of sale, lease or exchange of assets relating to all, or substantially all, of the property and assets of the LLC; iii) Adoption of any plan of division relating to the division of the LLC into two or more corporations or other legal entities; iv) Adoption of any plan relating to the conversion of the LLC into a stock corporation; v) Adoption of any proposal of voluntary dissolution; or vi) Taking any action which has the purpose or effect of the adoption of any plan or proposal described in items (i), (ii), (iii), (iv) or (v) above. 18.7 Interpretation. Wherever the context may require, any noun or pronoun used herein shall include the corresponding masculine, feminine or neuter forms. The singular form of nouns, pronouns and verbs shall include the plural and vice versa. 18.8 Severability. Each provision of this Agreement shall be considered severable and if for any reason any provision is determined by a court or regulatory authority of competent jurisdiction to be invalid, void or unenforceable, the remaining provisions of this Agreement shall continue in full force and effect and shall in no way be affected, impaired or invalidated, and such invalid, void or unenforceable provision shall be replaced with valid and enforceable provision or provisions which otherwise give effect to the original intent of the invalid, void or unenforceable provision. 39 18.9 Force Majeure. No Member shall be liable to any other Member for damages or otherwise be in breach of this Agreement to the extent and during the period such Member's performance is prevented by any cause or causes beyond such Member's control and without such Member's fault or negligence, including but not limited to any act, omission, or circumstance occasioned by or in consequence of any act of God, labor disturbance, act of the public enemy, war, insurrection, riot, fire, storm or flood, explosion, breakage or accident to machinery or equipment, or curtailment, order, regulation or restriction imposed by governmental, military or lawfully established civilian authorities; provided, however, that any such foregoing event shall not excuse any payment obligation. Upon the occurrence of an event considered by a Member to constitute a force majeure event, such Member shall use due diligence to endeavor to continue to perform its obligations as far as reasonably practicable and to remedy the event, provided that no Member shall be required by this provision to settle any strike or labor dispute. 18.10 Further Assurances. Each Member hereby agrees that it shall hereafter execute and deliver such further instruments, provide all information and take or forbear such further acts and things as may be reasonably required or useful to carry out the intent and purpose of this Agreement and as are not inconsistent with the terms hereof. 18.11 Seal. The seal of the LLC shall have inscribed thereon the name of the LLC, the year of its organization and the words "Corporate Seal, Delaware." The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. 18.12 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original but all of which together will constitute one instrument, binding upon all parties hereto, notwithstanding that all of such parties may not have executed the same counterpart. 18.13 Costs of Meetings. Each Member shall be responsible for all costs of its representative, alternate or substitute in attending any meeting. The Office of the Interconnection shall pay the other reasonable costs of meetings of the PJM Board and the Members Committee, and such other committees, subcommittees, task forces, working groups, User Groups or other bodies as determined to be appropriate by the Office of the Interconnection, which costs otherwise shall be paid by the Members attending. The Office of the Interconnection shall reimburse all Board Members for their reasonable costs of attending meetings. 40 18.14 Notice. (a) Except as otherwise expressly provided herein, notices required under this Agreement shall be in writing and shall be sent to a Member by overnight courier, hand delivery, telecopier or other reliable electronic means to the representative on the Members Committee of such Member at the address for such Member previously provided by such Member to the other Members or as otherwise directed by the Members Committee. Any such notice so sent shall be deemed to have been given (i) upon delivery if given by overnight couriers or hand delivery, or (ii) upon confirmation if given by telecopier or other reliable electronic means. (b) Notices, as well as copies of the agenda and minutes of all meetings of committees, subcommittees, task forces, working groups, User Groups, or other bodies formed under this Agreement, shall be posted in a timely fashion on and made available for downloading from the PJM website. 18.15 Headings. The section headings used in this Agreement are for convenience only and shall not affect the construction or interpretation of any of the provisions of this Agreement. 18.16 No Third-Party Beneficiaries. This Agreement is intended to be solely for the benefit of the Members and their respective successors and permitted assigns and, unless expressly stated herein, is not intended to and shall not confer any rights or benefits on any third party (other than successors and permitted assigns) not a signatory hereto. 18.17 Confidentiality. 18.17.1 Party Access. No Member shall have a right hereunder to receive or review any documents, data or other information of another Member, including documents, data or other information provided to the Office of the Interconnection, to the extent such documents, data or information have been designated as confidential pursuant to the procedures adopted by the Office of the Interconnection or to the extent that they have been designated as confidential by such other Member; provided, however, a Member may receive and review any composite documents, data and other information that may be developed based on such confidential documents, data or information if the composite does not disclose any individual Member's confidential data or information. 41 18.17.2 Required Disclosure. (a) Notwithstanding anything in the foregoing Section to the contrary, if a Member or the Office of the Interconnection is required by applicable law, or in the course of administrative or judicial proceedings, to disclose information that is otherwise required to be maintained in confidence pursuant to this Agreement, that Member or the Office of the Interconnection may make disclosure of such information; provided, however, that as soon as the Member or the Office of the Interconnection learns of the disclosure requirement and prior to making disclosure, that Member or the Office of the Interconnection shall notify the affected Member or Members of the requirement and the terms thereof and the affected Member or Members may direct, at their sole discretion and cost, any challenge to or defense against the disclosure requirement. The disclosing Member and the Office of the Interconnection shall cooperate with such affected Members to the maximum extent practicable to minimize the disclosure of the information consistent with applicable law. Each Member and the Office of the Interconnection shall cooperate with the affected Members to obtain proprietary or confidential treatment of such information by the person to whom such information is disclosed prior to any such disclosure. (b)The Office of the Interconnection shall endeavor to impose on any contractors retained to provide technical support or otherwise to assist with the implementation or administration of this Agreement a contractual duty of confidentiality consistent with this Agreement. A Member shall not be obligated to provide confidential or proprietary information to any contractor that does not assume such a duty of confidentiality, and the Office of the Interconnection shall not provide any such information to any such contractor without the express written permission of the Member providing the information. 18.18 Termination and Withdrawal. 18.18.1 Termination. Upon termination of this Agreement, final settlement for obligations under this Agreement shall include the accounting for the period ending with the last day of the last month for which the Agreement was effective. 18.18.2 Withdrawal. Subject to the requirements of Section 4.1(c) of this Agreement and Section 1.4.6 of the Schedule 1 to this Agreement, any Member may withdraw from this Agreement upon 90 days notice to the Office of the Interconnection. 42 18.18.3 Winding Up. Any provision of this Agreement that expressly or by implication comes into or remains in force following the termination or expiration of this Agreement shall survive such termination or expiration. The surviving provisions shall include, but shall not be limited to: (i) those provisions necessary to permit the orderly conclusion, or continuation pursuant to another agreement, of transactions entered into prior to the decision to terminate this Agreement, (ii) those provisions necessary to conduct final billing, collection, and accounting with respect to all matters arising hereunder, and (iii) the indemnification provisions as applicable to periods prior to such termination or expiration. IN WITNESS whereof, the Members have caused this Agreement to be executed by their duly authorized representatives. 43 SCHEDULE 1 PJM INTERCHANGE ENERGY MARKET (Revises and replaces former Schedules 7.01 and 7.03) Issued: June 2, 1997 Effective: August 1, 1997 1. MARKET OPERATIONS 1.1 Introduction. This Schedule sets forth the scheduling, other procedures, and certain general provisions applicable to the operation of the PJM Interchange Energy Market within the PJM Control Area. This Schedule addresses each of the three time-frames pertinent to the daily operation of the PJM Interchange Energy Market: Prescheduling, Scheduling, and Dispatch. 1.2 Cost-based Offers. Unless and until the FERC shall authorize the use of market-based prices in the PJM Interchange Energy Market, all offers for energy or other services to be sold on the PJM Interchange Energy Market from generating resources located within the PJM Control Area shall not exceed the variable cost of producing such energy or other service, as determined in accordance with Schedule 2 to this Agreement and applicable regulatory standards, requirements and determinations; provided that, a Market Seller may offer to the PJM Interchange Energy Market the right to call on energy from a resource the output of which has been sold on a bilateral basis, with the rate for such energy if called equal to the curtailment rate specified in the bilateral contract. 1.3 Definitions. 1.3.1 Dispatch Rate. "Dispatch Rate" shall mean the control signal, expressed in dollars per megawatt-hour, calculated and transmitted continuously and dynamically to direct the output level of all generation resources dispatched by the Office of the Interconnection in accordance with the Offer Data. 1.3.2 Equivalent Load. "Equivalent Load" shall mean the sum of an Internal Market Buyer's net system requirements to serve its customer load in the PJM Control Area, plus its net bilateral transactions. 1.3.3 External Market Buyer. "External Market Buyer" shall mean a Market Buyer making purchases of energy from the PJM Interchange Energy Market for consumption by end-users outside the PJM Control Area, or for load in the Control Area that is not served by Network Transmission Service. 1.3.4 External Resource. "External Resource" shall mean a generation resource located outside the metered boundaries of the PJM Control Area. 1.3.5 Fixed Transmission Right. "Fixed Transmission Right" shall mean a number determined as specified in Section 0 of this Schedule. 1.3.6 Generating Market Buyer. "Generating Market Buyer" shall mean an Internal Market Buyer that owns or has contractual rights to the output of generation resources capable of serving the Market Buyer's load in the PJM Control Area, or of selling energy or related services in the PJM Interchange Energy Market or elsewhere. 1.3.7 Generator Forced Outage. "Generator Forced Outage" shall mean an immediate reduction in output or capacity or removal from service, in whole or in part, of a generating unit by reason of an Emergency or threatened Emergency, unanticipated failure, or other cause beyond the control of the owner or operator of the facility, as specified in the relevant portions of the PJM Manuals. A reduction in output or removal from service of a generating unit in response to changes in market conditions shall not constitute a Generator Forced Outage. 1.3.8 Generator Maintenance Outage. "Generator Maintenance Outage" shall mean the scheduled removal from service, in whole or in part, of a generating unit in order to perform necessary repairs on specific components of the facility, if removal of the facility meets the guidelines specified in the PJM Manuals. 1.3.9 Generator Planned Outage. "Generator Planned Outage" shall mean the scheduled removal from service, in whole or in part, of a generating unit for inspection, maintenance or repair with the approval of the Office of the Interconnection in accordance with the PJM Manuals. 1.3.10 Internal Market Buyer. "Internal Market Buyer" shall mean a Market Buyer making purchases of energy from the PJM Interchange Energy Market for consumption by end-users inside the PJM Control Area. 1.3.11 Inadvertent Interchange. "Inadvertent Interchange" shall mean the difference between net actual energy flow and net scheduled energy flow into or out of the PJM Control Area, as determined and allocated each hour by the Office of the Interconnection in accordance with the procedures set forth in the PJM Manuals. 2 1.3.12 Market Operations Center. "Market Operations Center" shall mean the equipment, facilities and personnel used by or on behalf of a Market Participant to communicate and coordinate with the Office of the Interconnection in connection with transactions in the PJM Interchange Energy Market or the operation of the PJM Control Area. 1.3.13 Maximum Generation Emergency. "Maximum Generation Emergency" shall mean an Emergency declared by the Office of the Interconnection in which the Office of the Interconnection anticipates requesting one or more Capacity Resources to operate at its maximum net or gross electrical power output, subject to the equipment stress limits for such Capacity Resource, in order to manage, alleviate, or end the Emergency. 1.3.14 Minimum Generation Emergency. "Minimum Generation Emergency" shall mean an Emergency declared by the Office of the Interconnection in which the Office of the Interconnection anticipates requesting one or more generating resources to operate at or below Normal Minimum Generation, in order to manage, alleviate, or end the Emergency. 1.3.15 Network Resource. "Network Resource" shall have the meaning specified in the PJM Tariff. 1.3.16 Network Service User. "Network Service User" shall mean an entity using Network Transmission Service. 1.3.17 Network Transmission Service. "Network Transmission Service" shall mean transmission service provided pursuant to the rates, terms and conditions set forth in Part III of the PJM Tariff, or transmission service comparable to such service that is provided to a Load Serving Entity that is also a Regional Transmission Owner as that term is defined in the PJM Tariff. 1.3.18 Normal Maximum Generation. "Normal Maximum Generation" shall mean the highest output level of a generating resource under normal operating conditions. 1.3.19 Normal Minimum Generation. "Normal Minimum Generation" shall mean the lowest output level of a generating resource under normal operating conditions. 1.3.20 Offer Data. "Offer Data" shall mean the scheduling, operations planning, dispatch, new resource, and other data and information necessary to schedule and dispatch generation resources for the provision of energy and other services and the maintenance of the reliability and security of the transmission system in the PJM Control Area, and specified for submission to the PJM Interchange Energy Market for such purposes by the Office of the Interconnection. 3 1.3.21 Office of the Interconnection Control Center. "Office of the Interconnection Control Center" shall mean the equipment, facilities and personnel used by the Office of the Interconnection to coordinate and direct the operation of the PJM Control Area and to administer the PJM Interchange Energy Market, including facilities and equipment used to communicate and coordinate with the Market Participants in connection with transactions in the PJM Interchange Energy Market or the operation of the PJM Control Area. 1.3.22 Operating Day. "Operating Day" shall mean the daily 24 hour period beginning at midnight for which transactions on the PJM Interchange Energy Market are scheduled. 1.3.23 Operating Margin. "Operating Margin" shall mean the incremental adjustments, measured in megawatts, required in PJM Control Area operations in order to accommodate, on a first contingency basis, an operating contingency in the PJM Control Area resulting from operations in an interconnected Control Area. Such adjustments may result in constraints causing Transmission Congestion Charges, or may result in Ancillary Services charges pursuant to the PJM Tariff. 1.3.24 Operating Margin Customer. "Operating Margin Customer" shall mean a Control Area purchasing Operating Margin pursuant to an agreement between such other Control Area and the LLC. 1.3.25 PJM Interchange. "PJM Interchange" shall mean the following, as determined in accordance with the Schedules to this Agreement: (a) the amount by which an Internal Market Buyer's hourly Equivalent Load exceeds, or is exceeded by, the sum of the hourly outputs of the Internal Market Buyer's operating generating resources; or (b) the hourly scheduled deliveries of Spot Market Energy by an External Market Seller; or (c) the hourly net metered output of any other Market Seller; or (d) the hourly scheduled deliveries of Spot Market Energy to an External Market Buyer. 1.3.26 PJM Interchange Export. "PJM Interchange Export" shall mean the following, as determined in accordance with Schedules to this Agreement: (a) the amount by which an Internal Market Buyer's hourly Equivalent Load is exceeded by the sum of the hourly outputs of the Internal Market Buyer's operating generating resources; or (b) the hourly scheduled deliveries of Spot Market Energy by a Market Seller from an External Resource; or (c) the hourly net metered output of any other Market Seller. 1.3.27 PJM Interchange Import. "PJM Interchange Import" shall mean the following, as determined in accordance with the Schedules to this Agreement: (a) the amount by which an Internal Market Buyer's hourly Equivalent Load exceeds the sum of the hourly outputs of the Internal Market Buyer's operating generating resources; or (b) the hourly scheduled deliveries of Spot Market Energy to an External Market Buyer. 4 1.3.28 PJM Open Access Same-time Information System. "PJM Open Access Same-time Information System" shall mean the electronic communication system for the collection and dissemination of information about transmission services in the PJM Control Area, established and operated by the Office of the Interconnection in accordance with FERC standards and requirements. 1.3.29 Point-to-Point Transmission Service. "Point-to-Point Transmission Service" shall mean transmission service provided pursuant to the rates, terms and conditions set forth in Part II of the PJM Tariff. 1.3.30 Ramping Capability. "Ramping Capability" shall mean the sustained rate of change of generator output, in megawatts per minute. 1.3.31 Regulation. "Regulation" shall mean the capability of a specific generating unit with appropriate telecommunications, control and response capability to increase or decrease its output in response to a regulating control signal, in accordance with the specifications in the PJM Manuals. 1.3.32 Regulation Class. "Regulation Class" shall mean a subset of the generation units capable of providing Regulation to the PJM Control Area determined by a range of costs for providing Regulation as specified by the Office of the Interconnection using procedures specified in the PJM Manuals. 1.3.33 Spot Market Energy. "Spot Market Energy" shall mean energy bought or sold by Market Participants through the PJM Interchange Energy Market at Locational Marginal Prices determined as specified in Section 2 of this Schedule. 1.3.34 Transmission Congestion Charge. "Transmission Congestion Charge" shall mean a charge attributable to the increased cost of energy delivered at a given load bus when the transmission system serving that load bus is operating under constrained conditions, which shall be calculated and allocated as specified in Section 5.1 of this Schedule. 1.3.35 Transmission Congestion Credit. "Transmission Congestion Credit" shall mean the allocated share of total Transmission Congestion Charges credited to each holder of Fixed Transmission Rights, calculated and allocated as specified in Section 5.2 of this Schedule. 1.3.36 Transmission Customer. "Transmission Customer" shall mean an entity using Point-to-Point Transmission Service. 5 1.3.37 Transmission Forced Outage. "Transmission Forced Outage" shall mean an immediate removal from service of a transmission facility by reason of an Emergency or threatened Emergency, unanticipated failure, or other cause beyond the control of the owner or operator of the transmission facility, as specified in the relevant portions of the PJM Manuals. A removal from service of a transmission facility at the request of the Office of the Interconnection to improve transmission capability shall not constitute a Forced Transmission Outage. 1.3.38 Transmission Planned Outage. "Transmission Planned Outage" shall mean any transmission outage scheduled in advance for a pre-determined duration and which meets the notification requirements for such outages specified in the PJM Manuals. 1.4 Market Buyers. 1.4.1 Qualification. (a) To become a Market Buyer, an entity shall submit an application to the Office of the Interconnection, in such form as shall be established by the Office of the Interconnection. (b) An applicant that is a Load Serving Entity or that will purchase on behalf of a Load Serving Entity shall establish to the satisfaction of the Office of the Interconnection that the end-users as to which it or its principal is the Load Serving Entity, and which will be served through energy and related services purchased in the PJM Interchange Energy Market, are located electrically within the PJM Control Area, or will be brought within the PJM Control Area prior to any purchases from the PJM Interchange Energy Market by the Load Serving Entity or its agent. Such applicant shall further demonstrate that: i) The foregoing Load Serving Entity (the applicant or its principal) is obligated to meet the requirements of the Reliability Assurance Agreement; and ii) The foregoing Load Serving Entity has arrangements in place for Network Transmission Service or Point-To-Point Transmission Service for all PJM Interchange Energy Market purchases. (c) An applicant that is not a Load Serving Entity or purchasing on behalf of a Load Serving Entity shall demonstrate that: i) The applicant has obtained or will obtain Network Transmission Service or Point-to-Point Transmission Service for all PJM Interchange Energy Market purchases; and ii) The applicant's PJM Interchange Energy Market purchases will ultimately be delivered to a load in another Control Area that is recognized by NERC and that complies with NERC's standards for operating and planning reliable bulk electric systems. (d) All applicants shall demonstrate that: 6 i) The applicant is capable of complying with all applicable metering, data storage and transmission, and other reliability, operation, planning and accounting standards and requirements for the operation of the PJM Control Area and the PJM Interchange Energy Market; ii) The applicant meets the creditworthiness standards established by the Office of the Interconnection, or has provided a letter of credit or other form of security acceptable to the Office of the Interconnection; and iii) The applicant has paid all applicable fees and reimbursed the Office of the Interconnection for all unusual or extraordinary costs of processing and evaluating its application to become a Market Buyer, and has agreed in its application to subject any disputes arising from its application to the PJM Dispute Resolution Procedures. (e) The applicant shall become a Market Buyer upon a final favorable determination on its application by the Office of the Interconnection as specified below, and execution by the applicant of counterparts of this Agreement. 1.4.2 Submission of Information. The applicant shall furnish all information reasonably requested by the Office of the Interconnection in order to determine the applicant's qualification to be a Market Buyer. The Office of the Interconnection may waive the submission of information relating to any of the foregoing criteria, to the extent the information in the Office of the Interconnection's possession is sufficient to evaluate the application against such criteria. 1.4.3 Fees and Costs. The Office of the Interconnection shall require all applicants to become a Market Buyer to pay a uniform application fee, initially in the amount of $1,500, to defray the ordinary costs of processing such applications. The application fee shall be revised from time to time as the Office of the Interconnection shall determine to be necessary to recover its ordinary costs of processing applications. Any unusual or extraordinary costs incurred by the Office of the Interconnection in processing an application shall be reimbursed by the applicant. 1.4.4 Office of the Interconnection Determination. Upon submission of the information specified above, and such other information as shall reasonably be requested by the Office of the Interconnection, the Office of the Interconnection shall undertake an evaluation and investigation to determine whether the applicant meets the criteria specified above. As soon as practicable, but in any event not later than 60 days after submission of the foregoing information, or such later date as may be necessary to satisfy the requirements of the Reliability Assurance Agreement, the Office of the Interconnection shall notify the applicant and the members of the Members Committee of its determination, along with a written summary of the basis for the determination. The Office of the Interconnection shall respond promptly to any reasonable and timely request by a Member for additional information regarding the basis for the Office of the Interconnection's determination, and shall take such action as it shall deem appropriate in response to any request for reconsideration or other action submitted to the Office of the Interconnection not later than 30 days from the initial notification to the Members Committee. 7 1.4.5 Existing Participants. Any entity that was qualified to participate as a Market Buyer in the PJM Interchange Energy Market under the Operating Agreement of PJM Interconnection L.L.C. in effect immediately prior to the Effective Date shall continue to be qualified to participate as a Market Buyer in the PJM Interchange Energy Market under this Agreement. 1.4.6 Withdrawal. (a) An Internal Market Buyer may withdraw from this Agreement by giving written notice to the Office of the Interconnection specifying an effective date of withdrawal not earlier than the effective date of (i) its withdrawal from the Reliability Assurance Agreement, or (ii) the assumption of its obligations under the Reliability Assurance Agreement by an agent that is a Market Buyer. (b)An External Market Buyer may withdraw from this Agreement by giving written notice to the Office of the Interconnection specifying an effective date of withdrawal at least one day after the date of the notice. (c) Withdrawal from this Agreement shall not relieve a Market Buyer of any obligation to pay for electric energy or related services purchased from the PJM Interchange Energy Market prior to such withdrawal, to pay its share of any fees and charges incurred or assessed by the Office of the Interconnection prior to the date of such withdrawal, or to fulfill any obligation to provide indemnification for the consequences of acts, omissions or events occurring prior to such withdrawal; and provided, further, that withdrawal from this Agreement shall not relieve any Market Buyer of any obligations it may have under, or constitute withdrawal from, any other Related PJM Agreement. (d) A Market Buyer that has withdrawn from this Agreement may reapply to become a Market Buyer in accordance with the provisions of this Section 0, provided it is not in default of any obligation incurred under this Agreement. 1.5 Market Sellers. 1.5.1 Qualification. A Member that demonstrates to the Office of the Interconnection that the Member meets the standards for the issuance of an order mandating the provision of transmission service under section 211 of the Federal Power Act, as amended by the Energy Policy Act of 1992, may become a Market Seller upon execution of this Agreement and submission to the Office of the Interconnection of the applicable Offer Data in accordance with the provisions of this Schedule. All Members that are Market Buyers shall become Market Sellers upon execution of the PJM Dispute Resolution Agreement and submission to the Office of the Interconnection of the applicable Offer Data in accordance with the provisions of this Schedule. 8 1.5.2 Withdrawal. (a) A Market Seller may withdraw from this Agreement by giving written notice to the Office of the Interconnection specifying an effective date of withdrawal at least one day after the date of the notice; provided, however, that withdrawal shall not relieve a Market Seller of any obligation to deliver electric energy or related services to the PJM Interchange Energy Market pursuant to an offer made prior to such withdrawal, to pay its share of any fees and charges incurred or assessed by the Office of the Interconnection prior to the date of such withdrawal, or to fulfill any obligation to provide indemnification for the consequences of acts, omissions, or events occurring prior to such withdrawal; and provided, further, that withdrawal shall not relieve any entity that is a Market Seller and is also a Market Buyer of any obligations it may have as a Market Buyer under, or constitute withdrawal as a Market Buyer from, this Agreement or any other Related PJM Agreement. (b) A Market Seller that has withdrawn from this Agreement may reapply to become a Market Seller at any time, provided it is not in default with respect to any obligation incurred under this Agreement. 1.6 Office of the Interconnection. 1.6.1 Operation of the PJM Interchange Energy Market The Office of the Interconnection shall operate the PJM Interchange Energy Market in accordance with this Agreement. 1.6.2 Scope of Services. The Office of the Interconnection shall, on behalf of the Market Participants, perform the services pertaining to the PJM Interchange Energy Market specified in this Agreement, including but not limited to the following: i) Administer the PJM Interchange Energy Market as part of the PJM Control Area, including scheduling and dispatching of generation resources, accounting for transactions, rendering bills to the Market Participants, receiving payments from and disbursing payments to the Market Participants, maintaining appropriate records, and monitoring the compliance of Market Participants with the provisions of this Agreement, all in accordance with applicable provisions of the Office of the Interconnection Agreement, and the Schedules to this Agreement; ii) Review and evaluate the qualification of entities to be Market Buyers or Market Sellers under applicable provisions of this Agreement; iii) Coordinate, in accordance with applicable provisions of this Agreement, the Reliability Assurance Agreement, and the Transmission Owners Agreement, maintenance schedules for generation and transmission resources operated as part of the PJM Control Area; iv) Provide or coordinate the provision of ancillary services necessary for the operation of PJM Control Area or the PJM Interchange Energy Market; v) Determine and declare that an Emergency is expected to exist, exists, or has 9 ceased to exist, in all or any part of the PJM Control Area, or in another Control Area interconnected directly or indirectly with the PJM Control Area, and serve as a primary point of contact for interested state or federal agencies; vi) Enter into agreements for the transfer of energy in conditions constituting an Emergency in the PJM Control Area or in a Control Area interconnected with it, and the mutual provision of other support in such Emergency conditions with other Control Areas interconnected with the PJM Control Area, in accordance with the Schedules to this Agreement; vii) Coordinate the curtailment or shedding of load, or other measures appropriate to alleviate an Emergency, in order to preserve reliability in accordance with NERC and MAAC principles, guidelines and standards, and to ensure the operation of the PJM Control Area in accordance with Good Utility Practice and the this Agreement; viii) Protect confidential information as specified in this Agreement; and ix) Send a representative to meetings of the Members Committee or other Committees, subcommittees, or working groups specified in this Agreement or formed by the Members Committee when requested to do so by the chair or other head of such committee or other group. 1.6.3 Records and Reports. The Office of the Interconnection shall prepare and maintain such records and prepare such reports, including, but not limited to quarterly budget reports, as are required to document the performance of its obligations to the Market Participants hereunder in a form adopted by the Office of the Interconnection upon consideration of the advice and recommendations of the Members Committee. The Office of the Interconnection shall also produce special reports reasonably requested by the Members Committee and consistent with FERC's standards of conduct; provided, however, the Market Participants shall reimburse the Office of the Interconnection for the costs of producing any such report. Notwithstanding the foregoing, the Office of the Interconnection shall not be required to disclose confidential or commercially sensitive information in any such report. 1.6.4 PJM Manuals. The Office of the Interconnection shall prepare, maintain and update the PJM Manuals consistent with this Agreement. The PJM Manuals shall be available for inspection by the Market Participants, regulatory authorities with jurisdiction over the LLC or any Member, and the public. 1.7 General. 1.7.1 Market Sellers. Only Market Sellers shall be eligible to submit offers to the Office of the Interconnection for the sale of electric energy or related services in the PJM Interchange Energy Market. Market Sellers shall comply with the prices, terms, and operating characteristics of all Offer Data submitted to and accepted by the PJM Interchange Energy Market. 10 1.7.2 Market Buyers. Only Market Buyers shall be eligible to purchase energy or related services in the PJM Interchange Energy Market. Market Buyers shall comply with all requirements for making purchases from the PJM Interchange Energy Market. 1.7.3 Agents. A Market Participant may participate in the PJM Interchange Energy Market through an agent, provided that the Market Participant informs the Office of the Interconnection in advance in writing of the appointment of such agent. A Market Participant participating in the PJM Interchange Energy Market through an agent shall be bound by all of the acts or representations of such agent with respect to transactions in the PJM Interchange Energy Market, and shall ensure that any such agent complies with the requirements of this Agreement. 1.7.4 General Obligations of the Market Participants. (a) In performing its obligations to the Office of the Interconnection hereunder, each Market Participant shall at all times (i) follow Good Utility Practice, (ii) comply with all applicable laws and regulations, (iii) comply with the applicable principles, guidelines, standards and requirements of FERC, NERC and MAAC, (iv) comply with the procedures established for operation of the PJM Interchange Energy Market and PJM Control Area and (v) cooperate with the Office of the Interconnection as necessary for the operation of the PJM Control Area in a safe, reliable manner consistent with Good Utility Practice. (b) Market Participants shall undertake all operations in or affecting the PJM Interchange Energy Market and the PJM Control Area, including but not limited to compliance with all Emergency procedures, in accordance with the power and authority of the Office of the Interconnection with respect to the operation of the PJM Interchange Energy Market and the PJM Control Area as established in this Agreement, and as specified in the Schedules to this Agreement and the PJM Manuals. Failure to comply with the foregoing operational requirements shall subject a Market Participant to such reasonable charges or other remedies or sanctions for non-compliance as may be established by the PJM Board, including legal or regulatory proceedings as authorized by the PJM Board to enforce the obligations of this Agreement. (c) The Office of the Interconnection may establish such committees with a representative of each Market Participant, and the Market Participants agree to provide appropriately qualified personnel for such committees, as may be necessary for the Office of the Interconnection to perform its obligations hereunder. (d) All Market Participants shall provide to the Office of the Interconnection the scheduling and other information specified in the Schedules to this Agreement, and such other information as the Office of the Interconnection may reasonably require for the reliable and efficient operation of the PJM Control Area and the PJM Interchange Energy Market, and for compliance with applicable regulatory requirements for posting market and related information. Such information shall be provided as much in advance as possible, but in no event later than the deadlines established by the Schedules to this Agreement, or by the Office of the Interconnection in conformance with such Schedules. Such information shall include, but not be limited to, maintenance and other anticipated outages of generation or transmission facilities, scheduling and related information on bilateral transactions and self-scheduled resources, and implementation of 11 active load management, interruption of load, and other load reduction measures. The Office of the Interconnection shall abide by appropriate requirements for the non-disclosure and protection of any confidential or proprietary information given to the Office of the Interconnection by a Market Participant. Each Market Participant shall maintain or cause to be maintained compatible information and communications systems, as specified by the Office of the Interconnection, required to transmit scheduling, dispatch, or other time-sensitive information to the Office of the Interconnection in a timely manner. (e) Each Market Participant shall install and operate, or shall otherwise arrange for, metering and related equipment capable of recording and transmitting all voice and data communications reasonably necessary for the Office of the Interconnection to perform the services specified in this Agreement. A Market Participant that elects to be separately billed for its PJM Interchange shall be individually metered in accordance with Section 0 of this Agreement, or shall agree upon an allocation of PJM Interchange between it and the Market Participant through whose meters the unmetered Market Participant's PJM Interchange is delivered. The Office of the Interconnection shall be notified of the allocation by the foregoing Market Participants. (f) Each Market Participant shall operate, or shall cause to be operated, any generating resources owned or controlled by such Market Participant that are within the PJM Control Area or otherwise supplying energy to or through the PJM Control Area in a manner that is consistent with the standards, requirements or directions of the Office of the Interconnection and that will permit the Office of the Interconnection to perform its obligations under this Agreement; provided, however, no Market Participant shall be required to take any action that is inconsistent with Good Utility Practice or applicable law. (g) Each Market Participant shall follow the directions of the Office of the Interconnection to take actions to prevent, manage, alleviate or end an Emergency in a manner consistent with this Agreement and the procedures of the PJM Control Area as specified in the PJM Manuals. (h) Each Market Participant shall obtain and maintain all permits, licenses or approvals required for the Market Participant to participate in the PJM Interchange Energy Market in the manner contemplated by this Agreement. 1.7.5 Market Operations Center. Each Market Participant shall maintain a Market Operations Center, or shall make appropriate arrangements for the performance of such services on its behalf. A Market Operations Center shall meet the performance, equipment, communications, staffing and training standards and requirements specified in this Agreement for the scheduling and completion of transactions in the PJM Interchange Energy Market and the maintenance of the reliable operation of the PJM Control Area, and shall be sufficient to enable (i) a Market Seller to perform all terms and conditions of its offers to the PJM Interchange Energy Market, and (ii) a Market Buyer to conform to the requirements for purchasing from the PJM Interchange Energy Market. 12 1.7.6 Scheduling and Dispatching. (a) The Office of the Interconnection shall schedule and dispatch generation economically on the basis of least-cost, security-constrained dispatch and the prices and operating characteristics offered by Market Sellers, continuing until sufficient generation is dispatched to serve the PJM Interchange Energy Market energy purchase requirements under normal system conditions of the Market Buyers, as well as the requirements of the PJM Control Area for ancillary services provided by such generation, in accordance with this Agreement. Scheduling and dispatch shall be conducted in accordance with this Agreement. (b) The Office of the Interconnection shall undertake to identify any conflict or incompatibility between the scheduling or other deadlines or specifications applicable to the PJM Interchange Energy Market, and any relevant procedures of another Control Area, or any tariff (including the PJM Tariff). Upon determining that any such conflict or incompatibility exists, the Office of the Interconnection shall propose tariff or procedural changes, and undertake such other efforts as may be appropriate, to resolve any such conflict or incompatibility. 1.7.7 Pricing. The price paid for energy bought and sold in the PJM Interchange Energy Market will reflect the hourly Locational Marginal Price at each load and generation bus, determined by the Office of the Interconnection in accordance with this Agreement. Transmission Congestion Charges, which shall be determined by differences in Locational Marginal Prices in an hour caused by transmission constraints, shall be calculated and collected, and the revenues therefrom shall be disbursed, by the Office of the Interconnection in accordance with this Schedule. 1.7.8 Generating Market Buyer Resources. A Generating Market Buyer may elect to self-schedule its generation resources up to that Generating Market Buyer's Equivalent Load, in accordance with and subject to the procedures specified in this Schedule, and the accounting and billing requirements specified in Section 0 to this Agreement. 1.7.9 Delivery to an External Market Buyer. A purchase of Spot Market Energy by an External Market Buyer shall be delivered to a bus or busses at the border of the PJM Control Area specified by the Office of the Interconnection, or to load in the Control Area that is not served by Network Transmission Service, using Point-to-Point Transmission Service paid for by the External Market Buyer. Further delivery of such energy shall be the responsibility of the External Market Buyer. 13 1.7.10 Other Transactions. Market Participants may enter into bilateral contracts for the purchase or sale of electric energy to or from each other or any other entity, subject to the obligations of Internal Market Buyers to make Capacity Resources available for dispatch by the Office of the Interconnection. Bilateral arrangements that contemplate the physical transfer of energy to or from a Market Participant shall be reported to and coordinated with the Office of the Interconnection in accordance with this Schedule. To the extent the Office of the Interconnection dispatches a Generating Market Buyer's generation resources, such Generating Market Buyer may elect to net the output of such resources against its hourly Equivalent Load. Such a Generating Market Buyer shall be deemed a buyer from the PJM Interchange Energy Market to the extent of its PJM Interchange Imports, and shall be deemed a seller to the PJM Interchange Energy Market to the extent of its PJM Interchange Exports. 1.7.11 Emergencies. The Office of the Interconnection, with the assistance of the Member's dispatchers as it may request, shall be responsible for monitoring the operation of the PJM Control Area, for declaring the existence of an Emergency, and for directing the operations of Market Participants as necessary to manage, alleviate or end an Emergency. The standards, policies and procedures of the Office of the Interconnection for declaring the existence of an Emergency, including but not limited to a Minimum Generation Emergency, and for managing, alleviating or ending an Emergency, shall apply to all Members on a non-discriminatory basis. Actions by the Office of the Interconnection and the Market Participants shall be carried out in accordance with this Agreement, the NERC Operating Policies, MAAC reliability principles and standards, Good Utility Practice, and the PJM Manuals. A declaration that an Emergency exists or is likely to exist by the Office of the Interconnection shall be binding on all Market Participants until the Office of the Interconnection announces that the actual or threatened Emergency no longer exists. Consistent with existing contracts, all Market Participants shall comply with all directions from the Office of the Interconnection for the purpose of managing, alleviating or ending an Emergency. The Market Participants shall authorize the Office of the Interconnection to purchase or sell energy on their behalf to meet an Emergency, and otherwise to implement agreements with other Control Areas interconnected with the PJM Control Area for the mutual provision of service to meet an Emergency, in accordance with this Agreement. 1.7.12 Fees and Charges. Each Market Participant shall pay all fees and charges of the Office of the Interconnection for operation of the PJM Interchange Energy Market as determined by and allocated to the Market Participant by the Office of the Interconnection in accordance with Schedule 3. 1.7.13 Relationship to PJM Control Area. The PJM Interchange Energy Market operates within and subject to the requirements for the operation of the PJM Control Area. 14 1.7.14 PJM Manuals. The Office of the Interconnection shall be responsible for maintaining, updating, and promulgating the PJM Manuals as they relate to the operation of the PJM Interchange Energy Market. The PJM Manuals, as they relate to the operation of the PJM Interchange Energy Market, shall conform and comply with this Agreement, NERC operating policies, and MAAC reliability principles, guidelines and standards, and shall be designed to facilitate administration of an efficient energy market within industry reliability standards and the physical capabilities of the PJM Control Area. 1.7.15 Corrective Action. Consistent with Good Utility Practice, the Office of the Interconnection shall be authorized to direct or coordinate corrective action, whether or not specified in the PJM Manuals, as necessary to alleviate unusual conditions that threaten the integrity or reliability of the PJM Control Area or the regional power system. 1.7.16 Recording. Subject to the requirements of applicable State or federal law, all voice communications with the Office of the Interconnection Control Center may be recorded by the Office of the Interconnection and any Market Participant communicating with the Office of the Interconnection Control Center, and each Market Participant hereby consents to such recording. 1.7.17 Operating Reserves. The Office of the Interconnection shall schedule to the Operating Reserve and load- following objectives of the PJM Control Area in scheduling resources pursuant to this Schedule. A table of Operating Reserve objectives is calculated seasonally for various peak load levels and eight weekly periods and is published in the PJM Manuals. Reserve levels are probabilistically determined based on the season's historical load forecasting error and expected generation mix (including typical Planned and Forced/Unplanned Outages). 1.7.18 Regulation. (a) Regulation shall be supplied from generators located within the metered electrical boundaries of the PJM Control Area. Generating Market Buyers, and Market Sellers offering Regulation, shall comply with applicable standards and requirements for Regulation capability and dispatch specified in the PJM Manuals. (b) The Office of the Interconnection shall obtain and maintain an amount of Regulation equal to the PJM Control Area Regulation objective as specified in the PJM Manuals. (c) The Regulation range of a unit shall be at least twice the amount of Regulation assigned. (d) A unit capable of automatic energy dispatch that is also providing Regulation shall have its energy dispatch range reduced by twice the amount of the Regulation provided. The amount of Regulation provided by a unit shall serve to redefine the Normal Minimum Generation and Normal Maximum Generation energy limits of that unit, in that the amount of Regulation shall be added to the unit's Normal Minimum Generation energy limit, and subtracted from its Normal Maximum Generation energy limit. 15 (e) Qualified Regulation must satisfy the verification tests described in the PJM Manuals. 1.7.19 Ramping. A generator dispatched by the Office of the Interconnection pursuant to a control signal appropriate to increase or decrease the generator's megawatt output level shall be able to change output at the ramping rate specified in the Offer Data submitted to the Office of the Interconnection for that generator. 1.7.20 Communication and Operating Requirements. (a) Market Participants. Each Market Participant shall have, or shall arrange to have, its transactions in the PJM Interchange Energy Market subject to control by a Market Operations Center, with staffing and communications systems capable of real-time communication with the Office of the Interconnection during normal and Emergency conditions and of control of the Market Participant's relevant load or facilities sufficient to meet the requirements of the Market Participant's transactions with the PJM Interchange Energy Market, including but not limited to the following requirements as applicable. (b) Market Sellers selling from resources within the PJM Control Area shall: report to the Office of the Interconnection sources of energy available for operation; supply to the Office of the Interconnection all applicable Offer Data; report to the Office of the Interconnection units that are self-scheduled; report to the Office of the Interconnection bilateral sales transactions to buyers not within the PJM Control Area; confirm to the Office of the Interconnection bilateral sales to Market Buyers within the PJM Control Area; respond to the Office of the Interconnection's directives to start, shutdown or change output levels of generation units, or change scheduled voltages or reactive output levels; continuously maintain all Offer Data concurrent with on-line operating information; and ensure that, where so equipped, generating equipment is operated with control equipment functioning as specified in the PJM Manuals. (c) Market Sellers selling from resources outside the PJM Control Area shall: provide to the Office of the Interconnection all applicable Offer Data, including offers specifying amounts of energy available, hours of availability and prices of energy and other services; respond to Office of the Interconnection directives to schedule delivery or change delivery schedules; and communicate delivery schedules to the Market Seller's Control Area. (d) Internal Market Buyers shall: provide to the Office of the Interconnection forecasts of load to be served as required by the Office of the Interconnection; respond to Office of the Interconnection directives for load management steps; report to the Office of the Interconnection Capacity Resources to satisfy capacity obligations that are available for pool operation; report to the Office of the Interconnection all bilateral purchase transactions; respond to other Office of the Interconnection directives such as those required during Emergency operation. (e) External Market Buyers shall: provide to the Office of the Interconnection requests to purchase specified amounts of energy for each hour of the Operating Day during which it intends to purchase from the PJM Interchange Energy Market, along with Dispatch Rate levels above which it does not desire to purchase; respond to other Office of the Interconnection directives such as those required during Emergency operation. 16 1.7.21 Multi-settlement System. The PJM Interchange Energy Market shall be enhanced by an amendment to this Schedule, to be filed with FERC not later than December 31, 1997, that will provide for the implementation of a multi-settlement system as soon thereafter as shall be determined by the Office of the Interconnection to be reasonably practical. Such a system will provide an opportunity for Market Participants to commit and obtain commitments to energy prices and transmission congestion charges at certain specified deadlines in advance of the Office of the Interconnection's real-time dispatch. The Members specified in Section 11.5(c) of the Agreement, working with the Office of the Interconnection, shall develop the details of the implementation of such a multi- settlement system. 1.8 Selection, Scheduling and Dispatch Procedure Adjustment Process. 1.8.1 PJM Dispute Resolution Agreement. Subject to the condition specified below, any Member adversely affected by a decision of the Office of the Interconnection with respect to the operation of the PJM Interchange Energy Market, including the qualification of an entity to participate in that market as a buyer or seller, make seek such relief as may be appropriate under the PJM Dispute Resolution Procedures on the grounds that such decision does not have an adequate basis in fact or does not conform to the requirements of this Agreement. 1.8.2 Market or Control Area Hourly Operational Disputes. (a) Market Participants shall comply with all determinations of the Office of the Interconnection on the selection, scheduling or dispatch of resources in the PJM Interchange Energy Market, or to meet the operational requirements of the PJM Control Area. Complaints arising from or relating to such determinations shall be brought to the attention of the Office of the Interconnection not later than the end of the fifth business day after the end of the Operating Day to which the selection or scheduling relates, or in which the scheduling or dispatch took place, and shall include, if practicable, a proposed resolution of the complaint. Upon receiving notification of the dispute, the Office of the Interconnection and the Market Participant raising the dispute shall exert their best efforts to obtain and retain all data and other information relating to the matter in dispute, and to notify other Market Participants that are likely to be affected by the proposed resolution. Subject to confidentiality or other non-disclosure requirements, representatives of the Office of the Interconnection, the Market Participant raising the dispute, and other interested Market Participants, shall meet within three business days of the foregoing notification, or at such other or further times as the Office of the Interconnection and the Market Participants may agree, to review the relevant facts, and to seek agreement on a resolution of the dispute. (b) If the Office of the Interconnection determines that the matter in dispute discloses a defect in operating policies, practices or procedures subject to the discretion of the Office of the Interconnection, the Office of the Interconnection shall implement such changes as it deems appropriate and shall so notify the Members Committee. Alternatively, the Office of the Interconnection may notify the Members Committee of a proposed change and solicit the comments or other input of the Members. (c) If either the Office of the Interconnection, the Market Participant raising the dispute, or another affected Market Participant believes that the matter in dispute has not been 17 adequately resolved, or discloses a need for changes in standards or policies established in or pursuant to the Operating Agreement, any of the foregoing parties may make a written request for review of the matter by the Members Committee, and shall include with the request the forwarding party's recommendation and such data or information (subject to confidentiality or other non-disclosure requirements) as would enable the Members Committee to assess the matter and the recommendation. The Members Committee shall take such action on the recommendation as it shall deem appropriate. (d) Subject to the right of a Market Participant to obtain correction of accounting or billing errors, the LLC or a Market Participant shall not be entitled to actual, compensatory, consequential or punitive damages, opportunity costs, or other form of reimbursement from the LLC or any other Market Participant for any loss, liability or claim, including any claim for lost profits, incurred as a result of a mistake, error or other fault by the Office of the Interconnection in the selection, scheduling or dispatch of resources. 1.9 Prescheduling. The following procedures and principles shall govern the prescheduling activities necessary to plan for the reliable operation of the PJM Control Area and for the efficient operation of the PJM Interchange Energy Market. 1.9.1 Outage Scheduling. The Office of the Interconnection shall be responsible for coordinating and approving requests for outages of generation and transmission facilities as necessary for the reliable operation of the PJM Control Area, in accordance with the PJM Manuals. The Office of the Interconnection shall maintain records of outages and outage requests of these facilities. 1.9.2 Planned Outages. (a) A Generator Planned Outage shall be included in Generator Planned Outage schedules established prior to the scheduled start date for the outage, in accordance with standards and procedures specified in the PJM Manuals. (b) The Office of the Interconnection shall conduct Generator Planned Outage scheduling for Capacity Resources in accordance with the Reliability Assurance Agreement and the PJM Manuals and in consultation with the Members owning or controlling the output of Capacity Resources. A Market Participant shall not be expected to submit offers for the sale of energy or other services, or to satisfy delivery obligations, from all or part of a generation resource undergoing an approved Generator Planned Outage. If the Office of the Interconnection determines that approval of a Generator Planned Outage would significantly affect the reliable operation of the PJM Control Area, the Office of the Interconnection may withhold approval or withdraw a prior approval. Approval for a Generator Planned Outage of a Capacity Resource shall be withheld or withdrawn only as necessary to ensure the adequacy of reserves or the reliability of the PJM Control Area in connection with anticipated implementation or avoidance of Emergency procedures. If the Office of the Interconnection withholds or withdraws approval, it shall coordinate with the Market Participant owning or controlling the resource to reschedule the Generator Planned Outage of the Capacity Resource at the earliest practical time. The Office of the Interconnection shall if possible propose alternative schedules with the intent of minimizing the economic impact on the Market Participant of a Generator Planned Outage. 18 (c) The Office of the Interconnection shall conduct Planned Transmission Outage scheduling in accordance with procedures specified in the Transmission Owners Agreement and the PJM Manuals. If the Office of the Interconnection determines that transmission maintenance schedules proposed by one or more Members would significantly affect the efficient and reliable operation of the PJM Control Area, the Office of the Interconnection may propose alternative schedules, but such alternative shall minimize the economic impact on the Member or Members whose maintenance schedules the Office of the Interconnection proposes to modify. The Office of the Interconnection shall coordinate resolution of outage or other planning conflicts that may give rise to unreliable system conditions. The Members shall comply with all maintenance schedules established by the Office of the Interconnection. 1.9.3 Generator Maintenance Outages A Market Participant may request approval for a Generator Maintenance Outage of any Capacity Resource from the Office of the Interconnection in accordance with the timetable and other procedures specified in the PJM Manuals. The Office of the Interconnection shall approve requests for Generator Maintenance Outages for a Capacity Resource unless the outage would threaten the adequacy of reserves in, or the reliability of, the PJM Control Area. A Market Participant shall not be expected to submit offers for the sale of energy or other services, or to satisfy delivery obligations, from a generation resource undergoing an approved full or partial Generator Maintenance Outage. 1.9.4 Forced Outages (a) Each Market Seller that owns or controls a pool-scheduled resource, or Capacity Resource whether or not pool-scheduled, shall: (i) advise the Office of the Interconnection of a Generator Forced Outage suffered or anticipated to be suffered by any such resource as promptly as possible; (ii) provide the Office of the Interconnection with the expected date and time that the resource will be made available; and (iii) make a record of the events and circumstances giving rise to the Generator Forced Outage. A Market Seller shall not be expected to submit offers for the sale of energy or other services, or satisfy delivery obligations, from a generation resource undergoing a Generator Forced Outage. A Capacity Resource that does not deliver all or part of its scheduled energy shall be deemed to have experienced a Generator Forced Outage with respect to such undelivered energy, in accordance with standards and procedures for full and partial Generator Forced Outages specified in the Reliability Assurance Agreement and the PJM Manuals. (b)The Office of the Interconnection shall receive notification of Forced Transmission Outages, and information on the return to service, of Transmission Facilities in the PJM Control Area in accordance with standards and procedures specified in the Transmission Owners Agreement and the PJM Manuals. 1.9.5 Market Participant Responsibilities. Each Market Participant making a bilateral sale covering a period greater than the following Operating Day from a generating resource located within the PJM Control Area for delivery outside the PJM Control Area shall furnish to the Office of the Interconnection, in the form and manner specified in the PJM Manuals, information regarding the source of the energy, the load sink, the energy schedule, and the amount of energy being delivered. 19 1.9.6 Internal Market Buyer Responsibilities. Each Internal Market Buyer making a bilateral purchase covering a period greater than the following Operating Day shall furnish to the Office of the Interconnection, in the form an manner specified in the PJM Manuals, information regarding the source of the energy, the load sink, the energy schedule, and the amount of energy being delivered. Each Internal Market Buyer shall provide the Office of the Interconnection with details of any load management agreements with customers that allow the Office of the Interconnection to reduce load under specified circumstances. 1.9.7 Market Seller Responsibilities (a) Not less than 30 days before a Market Seller's initial offer to sell energy from a given generation resource on the PJM Interchange Energy Market, the Market Seller shall furnish to the Office of the Interconnection the information specified in the Offer Data for new generation resources. (b) Market Sellers authorized and intending to request market-based start-up and no-load fees in their Offer Data shall submit a specification of such fees to the Office of the Interconnection for each generating unit as to which the Market Seller intends to request such fees. Any such specification shall be submitted on or before March 31 for the period April 1 through September 30, and on or before September 30 for the period October 1 through March 31, and shall remain in effect without change throughout each such period for which a specification was submitted. The Office of the Interconnection shall reject any request for start-up and no-load fees in a Market Seller's Offer Data that does not conform to the Market Seller's specification on file with the Office of the Interconnection. 1.9.8 Office of the Interconnection Responsibilities (a) The Office of the Interconnection shall perform seasonal operating studies to assess the forecasted adequacy of generating reserves and of the transmission system, in accordance with the procedures specified in the PJM Manuals. (b) The Office of the Interconnection shall maintain and update tables setting forth Operating Reserve and other reserve objectives as specified in the PJM Manuals. (c) The Office of the Interconnection shall receive and process requests for firm and non-firm transmission service in accordance with procedures specified in the PJM Tariff. (d) The Office of the Interconnection shall maintain such data and information relating to generation and transmission facilities in the PJM Control Area as may be necessary or appropriate to conduct the scheduling and dispatch of the PJM Interchange Energy Market and PJM Control Area. (e)The Office of the Interconnection shall coordinate with other interconnected Control Area as necessary to manage, alleviate or end an Emergency. 20 1.10 Scheduling. The following scheduling procedures and principles shall govern the commitment of resources to the PJM Interchange Energy Market over a period extending from one week to one day prior to the Operating Day that transactions are to take place. Scheduling encompasses the day- ahead and hourly scheduling process, through which the Office of the Interconnection determines, based on changing forecasts of conditions and actions by Market Participants and system constraints, a plan to serve the hourly energy and reserve requirements of the Internal Market Buyers and the purchase requests of the External Market Buyers in the least costly manner, subject to maintaining the reliability of the PJM Control Area. Scheduling shall be conducted as specified below, subject to the following condition. If the Office of the Interconnection's forecast for the next seven days projects a likelihood of Emergency conditions, the Office of the Interconnection may commit, for all or part of such seven day period, to the use of generation resources with notification or start-up times greater than one day as necessary in order to alleviate or mitigate such Emergency, in accordance with the Market Sellers' offers for such units for such periods and the specifications in the PJM Manuals. 1.10.1 Day-Ahead Scheduling. The following actions shall occur not later than 12:00 noon on the day before the Operating Day for which transactions are being scheduled. (a) Each Internal Market Buyer shall submit to the Office of the Interconnection forecasts of its customer loads for the next Operating Day as required by the PJM Manuals. If an Internal Market Buyer expects to curtail load at a specific Dispatch Rate, it should specify the Dispatch Rate and estimated load curtailment. (b) An External Market Buyer shall submit to the Office of the Interconnection requests to purchase specified amounts of energy for each hour of the Operating Day during which it intends to purchase from the PJM Interchange Energy Market, along with Dispatch Rate levels above which it does not desire to purchase, in accordance with the specifications set forth in the PJM Manuals. (c) Each Generating Market Buyer shall submit to the Office of the Interconnection: (i) hourly schedules for resource increments, including hydropower units, self-scheduled by the Market Buyer to meet its Equivalent Load; and (ii) the Dispatch Rate at which each such self-scheduled resource will disconnect or reduce output, or confirmation of the Market Buyer's intent not to reduce output. (d) All Market Participants shall submit to the Office of the Interconnection schedules for any bilateral transactions involving use of generation or Transmission Facilities as specified below, and shall inform the Office of the Interconnection if the parties to the transaction are not willing to incur Transmission Congestion Charges in order to complete any such scheduled bilateral transaction. Scheduling of bilateral transactions shall be conducted in accordance with the specifications in the PJM Manuals and the following requirements: i) Internal Market Buyers shall submit schedules for all bilateral purchases for delivery within the PJM Control Area, whether from generation resources inside or outside the PJM Control Area; ii) Market Sellers shall submit schedules for bilateral sales to entities outside 21 the PJM Control Area from generation within the PJM Control Area; and iii) In addition to the foregoing schedules for bilateral transactions, Market Participants shall submit confirmations of each scheduled bilateral transaction from each other party to the transaction in addition to the party submitting the schedule, or the adjacent Control Area. (e) Market Sellers wishing to sell on the PJM Interchange Energy Market shall submit offers for the supply of energy (including energy from hydropower units), Regulation, Operating Reserves or other services for the following Operating Day. Offers shall be submitted to the Office of the Interconnection in the form specified by the Office of the Interconnection and shall contain the information specified in the Office of the Interconnection's Offer Data specification, as applicable. Market Sellers owning or controlling the output of a Capacity Resource that has not been rendered unavailable by a Generation Planned Outage, a Generator Maintenance Outage, or a Generation Forced Outage shall submit offers for the available capacity of such Capacity Resource, including any portion that is self-scheduled by the Generating Market Buyer claiming the resource as a Capacity Resource. The submission of offers for resource increments that are not Capacity Resources shall be optional, but any such offers must contain the information specified in the Office of the Interconnection's Offer Data specification, as applicable. Energy offered from generation resources that are not Capacity Resources shall not be supplied from resources that are included in or otherwise committed to supply the Operating Reserves of another Control Area. The foregoing offers: i) Shall specify the generation resource and energy for each hour in the offer period; ii) Shall specify the amounts and prices for the entire Operating Day for each resource component offered by the Market Seller to the Office of the Interconnection; iii) If based on energy from a specific generating unit, may specify start-up and no-load fees equal to the specification of such fees for such unit on file with the Office of the Interconnection; iv) Shall set forth any special conditions upon which the Market Seller proposes to supply a resource increment, including any curtailment rate specified in a bilateral contract for the output of the resource, or any cancellation fees; v) May include a schedule of offers for prices and operating data contingent on acceptance by the deadline specified in this Schedule, with a second schedule applicable if accepted after the foregoing deadline; vi) Shall constitute an offer to submit the resource increment to the Office of the Interconnection for scheduling and dispatch in accordance with the terms of the offer, which offer shall remain open through the Operating Day for which the offer is submitted; vii) Shall be final as to the price or prices at which the Market Seller proposes to supply energy or other services to the PJM Interchange Energy Market, such price or prices being guaranteed by the Market Seller for the period extending through the end of the following Operating Day; and 22 viii) Shall not exceed an energy offer price of $1,000/megawatt-hour. (f) A Market Seller that wishes to sell Regulation service shall submit an offer for Regulation that shall specify the MW of Regulation being offered and the Regulation Class from which such Regulation is being offered. The range of costs defining Regulation Classes, and the average cost for each Regulation Class, shall be determined periodically by the Office of the Interconnection on the basis of prior energy bid prices and appropriate fuel indices, in accordance with procedures specified in the PJM Manuals. Qualified Regulation capability must satisfy the verification tests specified in the PJM Manuals. Each Market Seller owning or controlling the output of a Capacity Resource shall submit a forecast of the availability of each such Capacity Resource for the next seven days. A Market Seller (i) may submit a non-binding forecast of the price at which it expects to offer a generation resource increment to the Office of the Interconnection over the next seven days, and (ii) shall submit a binding offer for energy, along with start-up and no-load fees, if any, for the next seven days or part thereof, for any generation resource with minimum notification or start-up requirement greater than 24 hours. (h) Each offer by a Market Seller of a Capacity Resource shall remain in effect for subsequent Operating Days until superseded or canceled. (i) The Office of the Interconnection shall post on the PJM Open Access Same-time Information System its estimate of the combined hourly load of the Market Buyers for the next four days, and peak load forecasts for an additional three days. 1.10.2 Pool-Scheduled Resources. Pool-scheduled resources shall be governed by the following principles and procedures. (a) Pool-scheduled resources shall be selected by the Office of the Interconnection on the basis of the prices offered for energy and related services, start-up, no-load and cancellation fees, and the specified operating characteristics, offered by Market Sellers to the Office of the Interconnection by the 12:00 noon offer deadline. (b) A resource that is scheduled by a Market Participant to support a bilateral sale, or that is self-scheduled by a Generating Market Buyer, shall not be selected by the Office of the Interconnection as a pool-scheduled resource except in an Emergency. (c) Market Sellers offering energy from hydropower or other facilities with fuel or environmental limitations may submit data to the Office of the Interconnection that is sufficient to enable the Office of the Interconnection to determine the available operating hours of such facilities. (d) The Market Seller of a resource selected as a pool-scheduled resource shall receive payments or credits for energy or related services, or for start-up and no-load fees, from the Office of the Interconnection on behalf of the Market Buyers in accordance with Schedule 3 to this Agreement. Alternatively, the Market Seller shall receive any cancellation fee reflected in the Market Seller's offer in lieu of start-up and no-load fees, if any, if the Office of the Interconnection cancels its selection of the resource as a pool-scheduled resource and so notifies the Market Seller before the resource is synchronized. 23 (e) Market Participants shall make available their pool-scheduled resources to the Office of the Interconnection for coordinated operation to supply the needs of the PJM Control Area for Operating Reserves. 1.10.3 Self-scheduled Resources. Self-scheduled resources shall be governed by the following principles and procedures. Each Generating Market Buyer shall use all reasonable efforts, consistent with Good Utility Practice, not to self-schedule resources in excess of its Equivalent Load. (b) The offered prices of resources that are self-scheduled, or otherwise not following the dispatch orders of the Office of the Interconnection, shall not be considered by the Office of the Interconnection in determining Locational Marginal Prices. (c) Market Participants shall make available their self-scheduled resources to the Office of the Interconnection for coordinated operation to supply the needs of the PJM Control Area for Operating Reserves. 1.10.4 Capacity Resources. (a) A Capacity Resource selected as a pool-scheduled resource shall be made available for scheduling and dispatch at the direction of the Office of the Interconnection. A Capacity Resource that does not deliver energy as scheduled shall be deemed to have experienced a Generator Forced Outage to the extent of such energy not delivered. (b) Energy from a Capacity Resource that has not been selected as a pool-scheduled resource may be sold on a bilateral basis by the Market Seller, or may be self-scheduled. A Capacity Resource that has not been selected as a pool-scheduled resource and that has been sold on a bilateral basis must be made available upon request to the Office of the Interconnection for scheduling and dispatch if the Office of the Interconnection declares a Maximum Generation Emergency. Any such resource so scheduled and dispatched shall receive the applicable Locational Marginal Price for energy delivered. (c) A Capacity Resource that has been self-scheduled shall not receive payments or credits for start-up or no-load fees. 1.10.5 External Resources. (a) External Resources may submit offers to the PJM Interchange Energy Market, in accordance with the day-ahead scheduling process specified above. An External Resource selected as a pool-scheduled resource shall be made available for scheduling and dispatch at the direction of the Office of the Interconnection, and except as specified below shall be compensated on the same basis as other pool-scheduled resources. External Resources that are not capable of dynamic dispatch shall, if selected by the Office of the Interconnection on the basis of the Market Seller's Offer Data, be block loaded on an hourly scheduled basis. Market Sellers shall offer External Resources to the PJM Interchange Energy Market on either a resource-specific or an aggregated resource basis. (b) Offers for External Resources from an aggregation of two or more generating units shall so indicate, and shall specify, in accordance with the Offer Data requirements 24 specified by the Office of the Interconnection: (i) energy prices; (ii) hours of energy availability; (iii) a minimum dispatch level; (iv) a maximum dispatch level; and (v) unless such information has previously been made available to the Office of the Interconnection, sufficient information, as specified in the PJM Manuals, to enable the Office of the Interconnection to model the flow into the PJM Control Area of any energy from the External Resources scheduled in accordance with the Offer Data. If a Market Seller submits more than one offer on an aggregated resource basis, the withdrawal of any such offer shall be deemed a withdrawal of all higher priced offers for the same period. A Market Seller offering energy from External Resources on an aggregated basis and that does not deliver energy as scheduled by the Office of the Interconnection shall be assessed a non-delivery charge as specified below. (c) Offers for External Resources on a resource-specific basis shall specify the resource being offered, along with the information specified in the Offer Data as applicable. A Market Seller offering an External Resource on a resource-specific basis that does not deliver energy as scheduled by the Office of the Interconnection shall be assessed a non-delivery charge as specified below, unless the resource being offered has suffered a Generator Forced Outage. The burden shall be on the Market Seller to demonstrate to the reasonable satisfaction of the Office of the Interconnection that the resource being offered has experienced a Generator Forced Outage. (d) Subject to the conditions specified in this paragraph, the non-delivery charge for External Resources that do not deliver energy as scheduled shall be calculated hourly as follows: Pro-rated start-up plus hourly no-load fees specified in the Offer Data + [offered minimum dispatch level x (Locational Marginal Price - offered energy price) x 110%] . For purposes of the foregoing calculation: (i) the Locational Marginal Price shall be the Locational Marginal Price at the buses at which the energy from the External Resource should have been delivered to the PJM Control Area; (ii) if the Locational Marginal Price less the offered energy price is less than zero, this difference shall be set to zero; and (iii) start-up and no-load fees shall be subject to the requirements of this Schedule. Payments or credits for non-delivery charges shall be used by the Office of the Interconnection to reduce or offset PJM Control Area costs for Operating Reserves. 1.10.6 External Market Buyers. (a) Deliveries to an External Market Buyer not subject to dynamic dispatch by the Office of the Interconnection shall be delivered on a block loaded basis to the load bus or busses at the border of the PJM Control Area, or in the PJM Control Area with respect to an External Market Buyer's load within the PJM Control Area not served by Network Service, at which the energy is delivered to or for the External Market Buyer. External Market Buyers shall be charged the Locational Marginal Price for energy at the foregoing load bus or busses. (b) An External Market Buyer's hourly schedules for energy purchased from the PJM Interchange Energy Market shall conform to the ramping and other applicable requirements of the interconnection agreement between the PJM Control Area and the Control Area to which, whether as an intermediate or final point of delivery, the purchased energy will initially be delivered. (c) The Office of the Interconnection shall curtail deliveries to an External Market Buyer if necessary to maintain appropriate reserve levels for the PJM Control Area as defined in the PJM Manuals, or to avoid shedding load in the PJM Control Area. 25 (d) An External Market Buyer that does not take delivery of the amounts of energy specified in its request to purchase shall be assessed a non-delivery charge, or if using Point- to-Point service within the PJM Control Area shall pay for imbalance service as specified in the Tariff. The non-delivery charge shall be calculated as the summation for all applicable busses of the product of (i) the Locational Marginal Price at each load bus at which delivery was not taken, times (ii) the amount of energy not taken each hour at such bus. The non-delivery charge shall not apply to deliveries curtailed by the Office of the Interconnection in accordance with this Schedule, or for periods when the Dispatch Rate exceeds the maximum value specified by the External Market Buyer in accordance with this Schedule. Payments or credits for non-delivery charges shall be used by the Office of the Interconnection to reduce or offset PJM Control Area costs for Operating Reserves. 1.10.7 Bilateral Transactions. Bilateral transactions as to which the parties have notified the Office of the Interconnection by 12:00 p.m. of the day before the Operating Day that they are not willing to incur Transmission Congestion Charges shall be curtailed by the Office of the Interconnection as necessary to reduce or alleviate transmission congestion. Bilateral transactions willing to incur congestion charges shall continue to be implemented during periods of congestion, except as may be necessary to respond to Emergencies. 1.10.8 Office of the Interconnection Responsibilities. (a) The Office of the Interconnection shall use its best efforts to determine the least-cost means of satisfying the projected hourly requirements for energy, Operating Reserves, and other ancillary services of the Market Buyers, including the reliability requirements of the PJM Control Area. In making this determination, the Office of the Interconnection shall take into account: (i) the Office of the Interconnection's forecasts of PJM Interchange Energy Market and PJM Control Area energy requirements, giving due consideration to the energy requirement forecasts and purchase requests submitted by Market Buyers; (ii) the offers submitted by Market Sellers; (iii) the availability of limited energy resources; (iv) the capacity, location, and other relevant characteristics of self-scheduled resources; (v) the objectives of the PJM Control Area for Operating Reserves, as specified in the PJM Manuals; (vi) the requirements of the PJM Control Area for Regulation and other ancillary services, as specified in the PJM Manuals; (vii) the benefits of avoiding or minimizing transmission constraint control operations, as specified in the PJM Manuals; and (viii) such other factors as the Office of the Interconnection reasonably concludes are relevant to the foregoing determination. The Office of the Interconnection shall develop a schedule of generation resources based on the foregoing determination. The Office of the Interconnection shall report the planned schedule for a hydropower resource to the operator of that resource as necessary for plant safety and security, and legal limitations on pond elevations. (b) Not later than 4:00 p.m. of the day before each Operating Day, or such earlier deadline as may be specified by the Office of the Interconnection in the PJM Manuals, the Office of the Interconnection shall: (i) post on the PJM Open Access Same-time Information System its forecast of the location and duration of any expected transmission congestion, and of the range of differences in Locational Marginal Prices between major subareas of the PJM Control Area expected to result from such transmission congestion; and (ii) inform each Market Seller whether its offer or offers have been accepted. 26 (c) The Office of the Interconnection shall revise its schedule of generation resources to reflect updated projections of load, conditions affecting electric system operations in the PJM Control Area, the availability of and constraints on limited energy and other resources, transmission constraints, and other relevant factors. The Office of the Interconnection shall post on the PJM Open Access Same-time Information System at times specified in the PJM Manuals a revised forecast of the location and duration of any expected transmission congestion, and of the range of differences in Locational Marginal Prices between major subareas of the PJM Control Area expected to result from such transmission congestion. 1.10.9 Hourly Scheduling (a) Following the initial posting of the Office of the Interconnection's transmission congestion forecast, and subject to the right of the Office of the Interconnection to schedule and dispatch pool-scheduled resources and to direct that schedules be changed in an Emergency, a Market Participant may adjust the schedule of a resource under its dispatch control on an hour-to-hour basis beginning at 10:00 p.m. of the day before each Operating Day, provided that the Office of the Interconnection is notified not later than 60 minutes prior to the hour in which the adjustment is to take effect, as follows: i) A Generating Market Buyer may self-schedule any of its resource increments, including hydropower resources, not previously designated as self-scheduled and not selected as a pool-scheduled resource; ii) A Market Participant may request the scheduling of a non-firm bilateral transaction; or iii) A Generating Market Buyer may remove from service a resource increment, including a hydropower resource, that it had previously designated as self-scheduled, provided that the Office of the Interconnection shall have the option to schedule energy from any such resource increment that is a Capacity Resource at the price offered in the scheduling process, with no obligation to pay any start-up fee. (b) An External Market Buyer may refuse delivery of some or all of the energy it requested to purchase by notifying the Office of the Interconnection of the adjustment in deliveries not later than 60 minutes prior to the hour in which the adjustment is to take effect. Any such refusal of delivery shall be subject to non-delivery charges in accordance with this Schedule. 1.11 Dispatch. The following procedures and principles shall govern the dispatch of the resources available to the Office of the Interconnection. 27 1.11.1 Resource Output. The Office of the Interconnection shall have the authority to direct any Market Seller to adjust the output of any pool-scheduled resource increment within the operating characteristics specified in the Market Seller's offer. The Office of the Interconnection may cancel its selection of, or otherwise release, pool-scheduled resources, subject to an obligation to pay any applicable start-up, no-load or cancellation fees. The Office of the Interconnection shall adjust the output of pool-scheduled resource increments as necessary: (a) to maintain reliability, and subject to that constraint, to minimize the cost of supplying the energy, reserves, and other services required by the Market Buyers and the operation of the PJM Control Area; (b) to balance load and generation, maintain scheduled tie flows, and provide frequency support within the PJM Control Area; and (c) to minimize unscheduled interchange not frequency related between the PJM Control Area and other Control Areas. 1.11.2 Operating Basis. In carrying out the foregoing objectives, the Office of the Interconnection shall conduct the operation of the PJM Control Area in accordance with the PJM Manuals, and shall: (i) utilize available generating reserves and obtain required replacements; and (ii) monitor the availability of adequate reserves. 1.11.3 Pool-dispatched Resources (a) The Office of the Interconnection shall implement the dispatch of energy from pool-scheduled resources with limited energy by direct request. In implementing mandatory or economic use of limited energy resources, the Office of the Interconnection shall use its best efforts to select the most economic hours of operation for limited energy resources, in order to make optimal use of such resources consistent with the dynamic load-following requirements of the PJM Control Area and the availability of other resources to the Office of the Interconnection. (b) The Office of the Interconnection shall implement the dispatch of energy from other pool-dispatched resource increments, including generation increments from Capacity Resources the remaining increments of which are self-scheduled, by sending appropriate signals and instructions to the entity controlling such resources, in accordance with the PJM Manuals. Each Market Seller shall ensure that the entity controlling a pool-dispatched resource offered or made available by that Market Seller complies with the energy dispatch signals and instructions transmitted by the Office of the Interconnection. 1.11.4 Regulation (a) A Market Buyer may satisfy its Regulation obligation from its own resources capable of performing Regulation service, by contractual arrangements with other Market Participants able to provide Regulation service, or by purchases from the PJM Interchange Energy Market. (b) The Office of the Interconnection shall obtain Regulation service from the least-cost alternatives available from either pool-scheduled or self-scheduled resources as needed to meet PJM Control Area requirements not otherwise satisfied by the Market Buyers. (c) The Office of the Interconnection shall dispatch resources for Regulation by sending Regulation signals and instructions to resources from which Regulation service has been 28 offered by Market Sellers, in accordance with the PJM Manuals. Market Sellers shall comply with Regulation dispatch signals and instructions transmitted by the Office of the Interconnection and, in the event of conflict, Regulation dispatch signals and instructions shall take precedence over energy dispatch signals and instructions. Market Sellers shall exert all reasonable efforts to operate, or ensure the operation of, their resources supplying load in the PJM Control Area as close to desired output levels as practical, consistent with Good Utility Practice. 1.11.5 PJM Open Access Same-time Information System. The Office of the Interconnection shall update the information posted on the PJM Open Access Same-time Information System to reflect its dispatch of generation resources. 29 2. CALCULATION OF LOCATIONAL MARGINAL PRICES 2.1 Introduction. The Office of the Interconnection shall calculate the price of energy at the load busses and generation busses in the PJM Control Area and at the interface busses between the PJM Control Area and adjacent Control Areas on the basis of Locational Marginal Prices. Locational Marginal Prices determined in accordance with this Section shall be calculated every five minutes and integrated hourly values of such calculations shall be the basis of sales and purchases of energy in the PJM Interchange Energy Market and of Transmission Congestion Charges under the PJM Tariff. 2.2 General. The Office of the Interconnection shall determine the least cost security-constrained dispatch, which is the least costly means of serving load at different locations in the PJM Control Area based on actual operating conditions existing on the power grid and on the prices at which Market Sellers have offered to supply energy in the PJM Interchange Energy Market. Locational Marginal Prices for the generation and load busses in the PJM Control Area, including interconnections with other Control Areas, will be calculated based on the actual economic dispatch and the prices of energy offers. The process for the determination of Locational Marginal Prices shall be as follows: (a) To determine actual operating conditions on the power grid in the PJM Control Area, the Office of the Interconnection shall use a computer model of the interconnected grid that uses available metered inputs regarding generator output, loads, and power flows to model remaining flows and conditions, producing a consistent representation of power flows on the network. The computer model employed for this purpose, referred to as the State Estimator program, is a standard industry tool and is described in Section 2.3 below. It will be used to obtain information regarding the output of generation supplying energy to the PJM Control Area, loads at buses in the PJM Control Area, transmission losses, and power flows on binding transmission constraints for use in the calculation of Locational Marginal Prices. Additional information used in the calculation, including Dispatch Rates and real time schedules for external transactions between PJM and other Control Areas, will be obtained from the Office of the Interconnection's dispatchers. (b) Using the prices at which energy is offered by Market Sellers to the PJM Interchange Energy Market, the Office of the Interconnection shall determine the offers of energy that will be considered in the calculation of Locational Marginal Prices. As described in Section 2.4 below, every offer of energy by a Market Seller from a resource that is following economic dispatch instructions of the Office of the Interconnection will be utilized in the calculation of Locational Marginal Prices. (c) Based on the system conditions on the PJM power grid, determined as described in (a), and the eligible energy offers, determined as described in (b), the Office of the Interconnection shall determine the least costly means of obtaining energy to serve the next increment of load at each bus in the PJM Control Area, in the manner described in Section 2.5 below. The result of that calculation shall be a set of Locational Marginal Prices based on the system conditions at the time. 30 2.3 Determination of System Conditions Using the State Estimator. Power system operations, including, but not limited to, the determination of the least costly means of serving load, depend upon the availability of a complete and consistent representation of generator outputs, loads, and power flows on the network. In calculating Locational Marginal Prices, the Office of the Interconnection shall obtain a complete and consistent description of conditions on the electric network in the PJM Control Area by using the most recent power flow solution produced by the State Estimator, which is also used by the Office of the Interconnection for other functions within power system operations. The State Estimator is a standard industry tool that produces a power flow model based on available real-time metering information, information regarding the current status of lines, generators, transformers, and other equipment, bus load distribution factors, and a representation of the electric network, to provide a complete description of system conditions, including conditions at busses for which real-time information is unavailable. The current version of the State Estimator includes over 1600 busses in the PJM Control Area, as well as interface busses with adjacent Control Areas. The Office of the Interconnection shall obtain a State Estimator solution every five minutes, which shall provide the megawatt output of generators and the loads at busses in the PJM Control Area, transmission line losses, and actual flows or loadings on constrained transmission facilities. External transactions between PJM and other Control Areas shall be included in the Locational Marginal Price calculation on the basis of the real time transaction schedules implemented by the Office of the Interconnection's dispatcher. 2.4 Determination of Energy Offers Used in Calculating Locational Marginal Prices. (a) To determine the energy offers submitted to the PJM Interchange Energy Market that shall be used to calculate the Locational Marginal Prices, the Office of the Interconnection shall determine which resources are following its economic dispatch instructions. A resource will be considered to be following economic dispatch instructions and shall be included in the calculation of Locational Marginal Prices if: i) the price bid by a Market Seller for energy from the resource is less than or equal to the Dispatch Rate for the area of the PJM Control Area in which the resource is located; or ii) the resource is specifically requested to operate by the Office of the Interconnection's dispatcher. (b) In determining whether a resource satisfies the condition described in (a), the Office of the Interconnection will determine the bid price associated with an energy offer by comparing the actual megawatt output of the resource with the Market Seller's offer price curve. Because of practical generator response limitations, a resource whose megawatt output is not ten percent more than the megawatt level specified on the offer price curve for the applicable Dispatch Rate shall be deemed to be following economic dispatch instructions, but the energy price offer used in the calculation of Locational Marginal Prices shall not exceed the applicable Dispatch Rate. Units that must be run for local area protection shall not be considered in the calculation of Locational Marginal Prices. 31 2.5 Calculation of Locational Marginal Prices. (a) The Office of the Interconnection shall determine the least costly means of obtaining energy to serve the next increment of load at each bus in the PJM Control Area represented in the State Estimator and each interface bus between the PJM Control Area and an adjacent Control Area, based on the system conditions described by the most recent power flow solution produced by the State Estimator program and the energy offers determined to be eligible for consideration under Section 2.4. This calculation shall be made by applying an incremental linear optimization method to minimize energy costs, given actual system conditions, a set of energy offers, and any binding transmission constraints that may exist. In performing this calculation, the Office of the Interconnection shall calculate the cost of serving an increment of load at each bus from each resource associated with an eligible energy offer as the sum of: (1) the price at which the Market Seller has offered to supply an additional increment of energy from the resource, and (2) the effect on transmission congestion costs (whether positive or negative) associated with increasing the output of the resource, based on the effect of increased generation from that resource on transmission line loadings. The energy offer or offers that can serve an increment of load at a bus at the lowest cost, calculated in this manner, shall determine the Locational Marginal Price at that bus. (b) The calculation set forth in (a) shall be performed every five minutes, using the Office of the Interconnection's Locational Marginal Price program, producing a set of Locational Marginal Prices based on system conditions during the preceding interval. The prices produced at five-minute intervals during an hour will be integrated to determine the Locational Marginal Prices for that hour, which will determine prices in the PJM Interchange Energy Market and Transmission Congestion Costs under the PJM Tariff. 2.6 Performance Evaluation. The Office of the Interconnection shall undertake an evaluation of the foregoing procedures for the determination of Locational Marginal Prices, as well as the procedures for determining and allocating Fixed Transmission Rights and associated Transmission Congestion Charges and Credits, not less often than every two years, in accordance with the PJM Manuals. To the extent practical, the Office of the Interconnection shall retain all data needed to perform comparisons and other analyses of locational marginal pricing. The Office of the Interconnection shall report the results of its evaluation to the Market Participants, along with its recommendations, if any, for changes in the procedures. 32 3. ACCOUNTING AND BILLING 3.1 Introduction. This schedule sets forth the accounting and billing principles and procedures for the purchase and sale of services on the PJM Interchange Energy Market and for the operation of the PJM Control Area. 3.2 Market Buyers. 3.2.1 Spot Market Energy. (a) At the end of each hour during an Operating Day, the Office of the Interconnection shall calculate the load payment for each Market Buyer's load bus. The load payment at each bus shall be the product of the Market Buyer's megawatts of load at such load bus in the hour times the Locational Marginal Price at the bus. The megawatts of load at each load bus shall be the sum of the megawatts of load for that bus of that Market Buyer as determined by the State Estimator, plus an allocated share of transmission losses, plus any megawatts of that Market Buyer's bilateral sales to purchasers outside the PJM Control Area attributable to that bus. The total load payment for each Market Buyer shall be the sum of the load payments for each of a Market Buyer's load busses. (b) At the end of each hour during an Operating Day, the Office of the Interconnection shall calculate the generation revenue for each Generating Market Buyer's generation bus. The generation revenue at each generation bus shall be the product of the Generating Market Buyer's megawatts of generation at such generation bus in the hour times the Locational Marginal Price at the bus. The megawatts of generation at each generation bus shall be the sum of the megawatts of generation for that bus of that Generating Market Buyer as determined by the State Estimator, plus any megawatts of bilateral purchases of that Generating Market Buyer from sellers outside the PJM Control Area attributable to that bus. The total generation revenue for each Generating Market Buyer shall be the sum of the generation revenues for each of the Generating Market Buyer's generation busses. (c) At the end of each hour during an Operating Day, the Office of the Interconnection shall calculate a net bill for each Market Buyer, determined as the difference between its total load payment and its total generation revenue. The portions of the net bill attributable to net hourly PJM Interchange and to Transmission Congestion Charges shall be determined as set forth below. (d) At the end of each hour during an Operating Day, the Office of the Interconnection shall calculate the total amount of net hourly PJM Interchange for each Market Buyer, including Generating Market Buyers, in accordance with the PJM Manuals. For Internal Market Buyers, this calculation shall include determination of the net energy flows from: (i) tie lines; (ii) any generation resource the output of which is controlled by the Market Buyer but delivered to it over another entity's Transmission Facilities; (iii) any generation resource the output of which is controlled by another entity but which is directly interconnected with the Market Buyer's transmission system; (iv) 500 kV transmission losses; (v) deliveries pursuant to bilateral energy sales; (vi) receipts pursuant to bilateral energy purchases; (vii) Inadvertent Interchange allocated to the Market Buyer; and (viii) the Market Buyer's allocated share of energy purchased from another Control Area in connection with a Minimum Generation Emergency in such other 33 Control Area as specified in Section 0(0). For External Market Buyers, this calculation shall determine the energy delivered pursuant to the External Market Buyer's purchase request. (e) The Office of the Interconnection shall calculate Locational Marginal Prices for each load and generation bus in the PJM Control Area, in accordance with Section 0 of this Schedule. (f) An Internal Market Buyer shall be charged for Spot Market Energy purchases to the extent of its hourly net PJM Interchange Imports, determined as specified above. An External Market Buyer shall be charged for its Spot Market Energy purchases based on the energy delivered to it, determined as specified above. The Office of the Interconnection shall calculate an hourly weighted average Locational Marginal Price for each such Market Buyer, based on the Locational Marginal Price at each load bus and the Market Buyer's load at that bus. The total charge shall be the Market Buyer's total net PJM Interchange Imports times the weighted average Locational Marginal Price. (g) A Generating Market Buyer shall be credited as a Market Seller for sales of Spot Market Energy to the extent of its hourly net PJM Interchange Exports, determined as specified above. The total credit shall be the sum of the credits determined by the product of (i) the hourly net amount of energy of PJM Interchange Exports at the applicable generation bus from each of the Generating Market Buyer's generation resources determined to be making such deliveries, times (ii) the hourly Locational Marginal Price at that generation bus. If the Office of the Interconnection dispatches energy to serve load in the PJM Control Area, the pool-dispatched generation resources determined to be making deliveries into PJM Interchange of such Generating Market Buyer shall be those that have the highest Locational Marginal Prices of the Market Seller's generation resources. (h) If energy in excess of a Generating Market Buyer's Equivalent Load flows to the PJM Control Area from a self-scheduled resource, the Generating Market Buyer shall receive a payment or credit for such excess energy at a rate equal to the lesser of (i) 95% of the Locational Marginal Price at the delivery bus for such energy, or (ii) the Locational Marginal Price at the delivery bus for such energy if the Locational Marginal Price is negative. For purposes of the foregoing calculation, such excess energy shall be deemed to have been delivered from the Generating Market Buyer's self-scheduled resource or resources with the lowest Locational Marginal Price or Prices at the time of delivery. Revenues attributable to the difference between the market clearing price in the PJM Interchange Energy Market and payments or credits for excess energy from self-scheduled resources shall be used by the Office of the Interconnection to reduce or offset PJM Control Area costs for Operating Reserves. 3.2.2 Regulation. (a) Each Internal Market Buyer shall have an hourly Regulation objective equal to its pro rata share of the PJM Control Area Regulation requirements for the hour, based on the Market Buyer's total load in the PJM Control Area for the hour. A Generating Market Buyer supplying Regulation at the direction of the Office of the Interconnection in excess of its hourly Regulation obligation shall be credited for each increment of such Regulation at the price in that hour for the Regulation Class from which the Regulation was supplied, as determined by the Office of the Interconnection in accordance with 34 procedures specified in the PJM Manuals. An Internal Market Buyer that does not meet its hourly Regulation obligation shall be charged for Regulation dispatched by the Office of the Interconnection to meet such obligation at the average price paid by the Office of the Interconnection for Regulation. 3.2.3 Operating Reserves. (a) A Market Seller's pool-scheduled resources capable of providing operating reserves shall be credited as specified below based on the prices offered for the operation of such resource, provided that the resource was available for the entire time specified in the Offer Data for such resource. (b) At the end of each Operating Day, the following determination shall be made for each synchronized pool-scheduled resource of each Market Seller: the total offered price for start-up and no-load fees and Spot Market Energy, determined on the basis of the resource's actual output or available and requested time and type of operation, shall be compared to the total value of that resource's Spot Market Energy. If the total offered price exceeds the total value, the difference shall be credited to the Market Seller. Market Sellers shall also be credited on the basis of their offered prices for synchronized condensing for any hydropower or combustion turbine units operated as synchronous condensers at the request of Office of the Interconnection but producing no energy. (c) The sum of the foregoing credits, plus any cancellation fees paid in accordance with Section 1.10.2(d), less any amounts received in accordance with Sections 1.10.5(d), 1.10.6(d) and 3.2.1(h) of this Schedule and payments received from another Control Area for Operating Reserves or from users of Point-to-Point Transmission Service within the PJM Control Area for imbalance service, shall be the cost of Operating Reserves for the PJM Control Area for each Operating Day. (d) The cost of Operating Reserves for each Operating Day shall be allocated and charged to each Market Buyer in proportion to its total load during that Operating Day in the PJM Control Area. 3.2.4 Transmission Congestion. Each Market Buyer shall be charged or credited for Transmission Congestion Charges as specified in Section 5 of this Schedule. 3.2.5 Transmission Losses. (a) Whenever the Office of the Interconnection has in place appropriate computer hardware, software, and other necessary resources to account for marginal losses in the dispatch of energy and the calculation of Locational Marginal Prices, loss accounting shall be determined on that basis, and the provisions of this Section shall be revised accordingly. Until such time, the following accounting provisions for losses shall apply. (b) Each Internal Market Buyer shall be credited in an amount equal to its pro rata share of the hourly total amounts collected from Transmission Customers either as charges for transmission losses in the PJM Control Area as specified in Section 3.4.2 or for transmission losses supplied in kind in accordance with Section 3.4.2(c) based on the Locational Marginal Price at the interface where such losses were delivered. This credit shall be determined by the ratio of the 35 Internal Market Buyer's total hourly load, divided by the total hourly load in the PJM Control Area. (c)PJM Control Area 500 kV losses shall be allocated to each Internal Market Buyer in proportion to its hourly load in the PJM Control Area. 3.2.6 Emergency Energy. (a) Internal Market Buyers shall be allocated a proportionate share of the net cost of Emergency energy purchased by the Office of the Interconnection. Such allocated share shall be determined in proportion to the amount of net PJM Interchange Imports by each Internal Market Buyer during the hour of each such energy purchase. (b) Net revenues in excess of Locational Marginal Prices attributable to sales of energy in connection with Emergencies to other Control Areas shall be credited to Internal Market Buyers in proportion to the amount of net PJM Interchange Imports by each Internal Market Buyer during each hour of such energy sales. (c) The costs, revenues, and energy associated with hourly energy purchased from another Control Area in connection with a Minimum Generation Emergency in such other Control Area, shall be allocated to each Internal Market Buyer in proportion to its load in the PJM Control Area during the hour of such purchases. 3.2.7 Billing. (a) The Office of the Interconnection shall prepare a billing statement each billing cycle for each Market Buyer in accordance with the charges and credits specified in Sections 3.2.1 through 3.2.6 of this Schedule, and showing the net amount to be paid or received by the Market Buyer. Billing statements shall provide sufficient detail, as specified in the PJM Manuals, to allow verification of the billing amounts and completion of the Market Buyer's internal accounting. (b) If deliveries to a Market Buyer that has PJM Interchange meters in accordance with Section 14 of the Operating Agreement include amounts delivered for a Market Participant that does not have PJM Interchange meters separate from those of the metered Market Buyer, the Office of the Interconnection shall prepare a separate billing statement for the unmetered Market Participant based on the allocation of deliveries agreed upon between the Market Buyer and the unmetered Market Participant specified by them to the Office of the Interconnection. 3.3 Market Sellers. Except as provided in the following sentence, the accounting and billing principles and procedures applicable to Generating Market Buyers functioning as Market Sellers shall be as set forth in Section 3.2. This Section sets forth the accounting and billing principles and procedures applicable to all other Market Sellers, and to Generating Market Buyers functioning as Market Sellers with respect to any matters not specified in Section 3.2. 3.3.1 Spot Market Energy. (a) At the end of each hour during an Operating Day, the Office of the Interconnection shall determine the total net amount of hourly energy delivered to the PJM Control Area by each pool-scheduled or pool-dispatched resource of each Market Seller, in accordance with the PJM Manuals and the calculation described in Section 3.2.1(d). 36 (b) The Office of the Interconnection shall calculate Locational Marginal Prices for each generation and load bus in the PJM Control Area, including the bus at each point of interconnection between the PJM Control Area and each adjacent Control Area, in accordance with Section 0 of this Schedule. (c) A Market Seller shall be credited for sales of Spot Market Energy to the extent of its hourly net deliveries of energy to the PJM Control Area from the Market Seller's pool-scheduled or pool-dispatched resources. For pool-scheduled resources that are External Resources, the Office of the Interconnection shall model, based on an appropriate flow analysis, the hourly amounts delivered from each such resource to the corresponding interface point between the PJM Control Area and adjacent Control Areas. The total credit for each Market Seller shall be the sum of its credits determined by the product of (i) the hourly net amount of energy delivered to the PJM Control Area at the applicable generation or interface bus from each of the Market Seller's pool-scheduled or pool-dispatched resources, times (ii) the hourly Locational Marginal Price at that bus. (d) Market Sellers, including Generating Market Buyers, shall be charged for non-delivery of Spot Market Energy from resources that are not Capacity Resources, as specified in Section 1.10.5(d) of this Schedule. 3.3.2 Regulation. Each Market Seller that is also an Internal Market Buyer shall have an hourly Regulation objective as specified in Section 3.2.2(a), and shall be credited or charged in connection therewith as specified in Section 3.2.2(b). All other Market Sellers supplying Regulation at the direction of the Office of the Interconnection shall be credited for each increment of such Regulation at the price in that hour for the Regulation Class from which the Regulation was supplied, as determined by the Office of the Interconnection in accordance with procedures specified in the PJM Manuals. 3.3.3 Operating Reserves. A Market Seller shall be credited for its pool-scheduled resources based on the prices offered for the operation of such resource, provided that the resource was available for the entire time specified in the Offer Data for such resource, in accordance with the procedures set forth in Section 3.2.3(b). 3.3.4 Emergency Energy. The costs and net revenues associated with hourly energy sales to other Control Areas in connection with a Minimum Generation Emergency in the PJM Control Area shall be allocated to Market Sellers in proportion to their sales to the PJM Interchange Energy Market from generation resources within the metered boundaries of the PJM Control Area in each hour in which such energy was sold to other Control Areas. 37 3.3.5 Billing. The Office of the Interconnection shall prepare a billing statement each billing cycle for each Market Seller in accordance with the charges and credits specified in Sections 3.3.1 through 3.3.4 of this Schedule, and showing the net amount to be paid or received by the Market Seller. Billing statements shall provide sufficient detail, as specified in the PJM Manuals, to allow verification of the billing amounts and completion of the Market Seller's internal accounting. 3.4 Transmission Customers. 3.4.1 Transmission Congestion. Each Transmission Customer shall be charged and credited for Transmission Congestion Charges as specified in Section 5 of this Schedule. 3.4.2 Transmission Losses (a) Whenever the Office of the Interconnection has in place appropriate computer hardware, software, and other necessary resources to account for marginal losses in the dispatch of energy and the calculation of Locational Marginal Prices, loss accounting shall be determined on that basis, and the provisions of this Section shall be revised accordingly. Until such time, the following accounting provisions for losses shall apply. (b) Transmission Customers other than entities that are also Internal Market Buyers shall be charged for transmission losses in an amount equal to the product of (i) the Transmission Customer's megawatt-hours of deliveries using Point-to-Point Transmission Service, times (ii) the appropriate loss factor for deliveries using Point-to-Point Transmission Service, times (iii) the weighted average Locational Marginal Price for all load busses in the PJM Control Area. The foregoing average hourly loss factor shall be: (i) determined by the Office of the Interconnection from time to time as conditions affecting losses shall warrant; and (ii) calculated separately for on-peak and off-peak hours on the basis of the average ratio of losses to load served in each such period. (c) A Transmission Customer may elect to pay for losses in kind, rounded off to the nearest whole megawatt, rather than as specified above if its total deliveries in an hour using Point-to-Point Transmission Service are greater than 200 megawatts. If it so elects, the Transmission Customer's specified source for the energy to be delivered using Point-to-Point Transmission Service may be scheduled to supply to the PJM Control Area boundary an amount of energy equal to the delivery schedule plus the amount of losses determined by applying the appropriate hourly loss factor as specified above to the delivered amount. 3.4.3 Billing. The Office of the Interconnection shall prepare a billing statement each billing cycle for each Transmission Customer in accordance with the charges and credits specified in Sections 0 through 0 of this Schedule, and showing the net amount to be paid or received by the Transmission Customer. Billing statements shall provide sufficient detail, as specified in the PJM Manuals, to allow verification of the billing amounts and completion of the Transmission Customer's internal accounting. 38 3.5 Other Control Areas. 3.5.1 Energy Sales. To the extent appropriate in accordance with Good Utility Practice, the Office of the Interconnection may sell energy to an interconnected Control Area as necessary to alleviate or end an Emergency in that Control Area. Such sales shall be made (i) only to Control Areas that have undertaken a commitment pursuant to a written agreement with the LLC to sell energy on a comparable basis to the PJM Control Area, and (ii) only to the extent consistent with the maintenance of reliability in the PJM Control Area. The Office of the Interconnection may decline to make such sales to a Control Area that the Office of the Interconnection determines does not have in place and implement Emergency procedures that are comparable to those followed in the PJM Control Area. If the Office of the Interconnection sells energy to an interconnected Control Area as necessary to alleviate or end an Emergency in that Control Area, such energy shall be sold at 150% of the Locational Marginal Price at the bus or busses at the border of the PJM Control Area at which such energy is delivered. 3.5.2 Operating Margin Sales. The extent appropriate in accordance with Good Utility Practice, the Office of the Interconnection may sell Operating Margin to an interconnected Control Area as requested to alleviate an operating contingency resulting from the affect of the purchasing Control Area's operations on the dispatch of resources in the PJM Control Area. Such sales shall be made only to Control Areas that have undertaken a commitment pursuant to a written agreement with the Office of the Interconnection (i) to purchase Operating Margin whenever the purchasing Control Area's operations will affect the dispatch of resources in the PJM Control Area, and (ii) to sell Operating Margin on a comparable basis to the LLC. 3.5.3 Transmission Congestion. Each Control Area purchasing Operating Margin shall be assessed Transmission Congestion Charges as specified in Section 5.1.5 of this Schedule. 3.5.4 Billing. The Office of the Interconnection shall prepare a billing statement each billing cycle for each Control Area to which Emergency energy or Operating Margin was sold, and showing the net amount to be paid by such Control Area. Billing statements shall provide sufficient detail, as specified in the PJM Manuals, to allow verification of the billing amounts. 3.6 Metering Reconciliation. 3.6.1 Meter Correction Billing. Metering errors and corrections will be reconciled at the end of each month by a meter correction charge or credit. The monthly meter correction charge or credit shall be determined by the product of the positive or negative deviation in energy amounts, times the weighted average Locational Marginal Price for the affected Market Buyer. 39 3.6.2 Meter Corrections Between Market Participants. If a Market Participant or the Office of the Interconnection discovers a meter error affecting an interchange of energy with another Market Participant and makes the error known to such other Market Participant prior to the completion by the Office of the Interconnection of the accounting for the interchange, and if both Market Participants are willing to adjust hourly load records to compensate for the error and such adjustment does not affect other parties, an adjustment in load records may be made by the Market Participants in order to correct for the meter error, provided corrected information is furnished to the Office of the Interconnection in accordance with the Office of the Interconnection's accounting deadlines. No such adjustment may be made if the accounting for the Operating Day in which the interchange occurred has been completed by the Office of the Interconnection. 3.6.3 500 kV Meter Errors. Billing cycle accounting for 500 kV transmission losses shall be adjusted to account for errors in meters on 500 kV Transmission Facilities. 3.6.4 Meter Corrections Between Control Areas. An error between accounted for and metered interchange between a Party in the PJM Control Area and an entity in another Control Area shall be corrected by adjusting the hourly meter readings. If this is not practical, the error shall be accounted for by a correction at the end of the billing cycle. The Market Participant with ties to such other Control Area experiencing the error shall account for the full amount of the discrepancy and an appropriate debit or credit shall be applied equally among all Market Buyers. The Office of the Interconnection will adjust the actual interchange between the PJM Control Area and the other Control Area to maintain a proper record of inadvertent energy flow. Meter corrections on the 500 kV system between the PJM Control Area and other Control Areas shall be accounted for through the internal 500 kV system meter error allocation at the end of the billing cycle. 3.6.5 Meter Correction Data. Meter error data shall be submitted to the Office of the Interconnection not later than noon on the second working day of the Office of the Interconnection after the end of the billing cycle applicable to the meter correction. 3.6.6 Correction Limits. A Market Participant may not assert a claim for an adjustment in billing as a result of a meter error for any error discovered more than two years after the date on which the metering occurred. Any claim for an adjustment in billing as a result of a meter error shall be limited to bills for transactions occurring in the most recent annual accounting period of the billing Market Participant in which the meter error occurred, and the prior annual accounting period. 40 4. RATE TABLE 4.1 Offered Price Rates. Spot Market Energy, Regulation, Operating Reserve, and Transmission Congestion are based on offers to the Office of the Interconnection specified in this Agreement. 4.2 Transmission Losses. Average loss factors shall be as specified in the PJM Tariff. 4.3 Emergency Energy Purchases. The pricing for Emergency energy purchases will be determined by the Office of the Interconnection and the adjacent Control Area, in accordance with an agreement between the Office of the Interconnection and such adjacent Control Area that complies with this Agreement. 41 5. CALCULATION OF TRANSMISSION CONGESTION CHARGES AND CREDITS 5.1 Transmission Congestion Charge Calculation 5.1.1 Calculation by Office of the Interconnection. When the transmission system is operating under constrained conditions, the Office of the Interconnection shall calculate Transmission Congestion Charges for each Network Service User, the PJM Interchange Energy Market, and each Transmission Customer. 5.1.2 General. The basis for the Transmission Congestion Charges shall be the Locational Marginal Prices determined in accordance with Section 2 of this Schedule. 5.1.3 Network Service User Calculation. Each Network Service User shall be charged for the increased cost of energy incurred by it during each constrained hour to deliver the output of its firm Capacity Resources or other owned or contracted for resources, its firm bilateral purchases, and its non-firm bilateral purchases as to which it has elected to pay Transmission Congestion Charges. The Transmission Congestion Charge for deliveries from each such source shall be the Network Service User's hourly net bill less its hourly net PJM Interchange payments or sales as determined in accordance with Section 3.2.1 or Sections 3.3 and 3.3.1 of this Schedule. 5.1.4 Transmission Customer Calculation. Each Transmission Customer using Firm Point-to-Point Transmission Service (as defined in the PJM Tariff), and each Transmission Customer using Non-Firm Point-to-Point Transmission Service (as defined in the PJM Tariff) that has elected to pay Transmission Congestion Charges, shall be charged for the increased cost of energy during constrained hours for the delivery of energy using Point-to-Point Transmission Service. The Transmission Congestion Charge for each such delivery shall be the delivery amount multiplied by the difference between the Locational Marginal Price at the delivery interface and the Locational Marginal Price at the source interface, or for Market Sellers using point-to-point transmission service for deliveries out of the PJM Control Area from generating resources within the PJM Control Area shall be the amount of its net bill less its net hourly PJM Interchange payments or sales as determined in accordance with Section 3.3 of this Schedule. 5.1.5 Operating Margin Customer Calculation. Each Control Area purchasing Operating Margin shall be assessed Transmission Congestion Charges for any the increase in the cost of energy resulting from the provision of Operating Margin. The Transmission Congestion Charge shall be the amount of Operating Margin purchased in an hour multiplied by the difference in the Locational Marginal Price at what would be the delivery interface and the Locational Marginal Price at what would be the source interface, if the operating contingency that was the basis for the purchase of Operating Margin had occurred in that hour. Operating Margin may be allocated among multiple source and delivery interfaces in accordance with an applicable load flow study. 42 5.1.6 Total Transmission Congestion Charges. The total Transmission Congestion Charges collected by the Office of the Interconnection each hour will be the sum of the amounts determined as specified in this Schedule. The Office of the Interconnection shall collect Transmission Congestion Charges for each hour the transmission system operates under constrained conditions. 5.2 Transmission Congestion Credit Calculation. 5.2.1 Eligibility. Each Transmission Customer using firm Point-to-Point Transmission Service and each Network Service User shall receive as a Transmission Congestion Credit a proportional share of the total Transmission Congestion Charges collected for each constrained hour. 5.2.2 Fixed Transmission Rights (a) Transmission Congestion Credits will be calculated based upon the Fixed Transmission Rights of each Network Service User and Transmission Customer, determined as specified below. (b)Each Network Service User shall designate a subset of its Network Resources for which Fixed Transmission Rights will be assigned. The Fixed Transmission Right for each Network Resource shall be a number of megawatts equal to or less than the installed capacity summer megawatt rating of each designated Network Resource, determined at the PJM Control Area transmission bus at which the designated Network Resource is connected to the aggregate load busses of the Network Service User. The sum of each Network Service User's Fixed Transmission Rights must be equal to or less than the Network Service User's projected annual peak load. (c)Each Transmission Customer receiving firm Point-to-Point Transmission Service shall be assigned Fixed Transmission Rights. The Fixed Transmission Right for each instance of Point-to-Point Transmission Service shall be a number of megawatts equal to the megawatts of firm service being provided between the receipt and delivery points as to which the Transmission Customer has firm Point-to-Point Transmission Service. (d) The foregoing assignment of Fixed Transmission Rights shall be enhanced by an amendment to this Schedule, to be filed with FERC not later than December 31, 1997, that will provide for an auction of Fixed Transmission Rights over and above those FTRs obtained and retained by Network Service Users and Transmission Customers then receiving firm Point-to-Point Transmission Service (including firm Point-to-Point transmission service for existing bilateral contracts), such auction to be implemented as soon after December 31, 1997 as shall be determined by the Office of the Interconnection to be reasonably practical. For so long as Fixed Transmission Rights are assigned on the basis of Network Transmission Service and firm Point-to-Point Transmission Service, any Fixed Transmission Rights awarded pursuant to an auction shall be simultaneously feasible with all Network Transmission Service and firm Point-to-Point Transmission Service obligations. The Members specified in Section 11.5(c) of the Agreement, working with the Office of the Interconnection, shall develop the details of the implementation of such an auction, including but not limited to the nature of the bidding process, the frequency of auctions, and the duration of the Fixed Transmission Rights purchased at auction. 43 5.2.4 Target Allocation for Network Service Users. A target allocation of Transmission Congestion Credits for each Network Service User shall be determined for each of its Fixed Transmission Rights. Each Fixed Transmission Right shall be multiplied by the percent of the Network Service User's annual peak load assigned to each load bus multiplied by the difference calculated as the Network Service User's load bus Locational Marginal Price minus the generation bus Locational Marginal Price of the Network Resource associated with the Fixed Transmission Right. The total target allocation for each Fixed Transmission Right is the sum of the target allocations for each load bus. The total target allocation for each Network Service User for each hour is the sum of the total target allocations for each of the Network Service User's Fixed Transmission Rights. 5.2.4 Target Allocation for other Holders. A target allocation of Transmission Congestion Credits for each Transmission Customer or entity holding an FTR acquired by other means shall be determined for each Fixed Transmission Right. Each Fixed Transmission Right shall be multiplied by the hourly Locational Marginal Price differences for the receipt and delivery points associated with the Fixed Transmission Right, calculated as the Locational Marginal Price at the delivery point(s) minus the Locational Marginal Price at the receipt point(s). The total target allocation for the Transmission Customer for each hour shall be the sum of the target allocations associated with all of the Transmission Customer's Fixed Transmission Rights. 5.2.5 Calculation of Transmission Congestion Credits (a) The total of all the target allocations determined as specified above shall be compared to the total Transmission Congestion Charges in each hour. If the total of the target allocations is less than the total of the Transmission Congestion Charges, the Transmission Congestion Credit for each Network Service User and Transmission Customer shall be equal to its target allocation. All remaining Transmission Congestion Charges shall be distributed as described below in Section 5.2.6 "Distribution of Excess Congestion Charges." (b) If the total of the target allocations is greater than the total Transmission Congestion Charges for the hour, each holder of Fixed Transmission Rights shall receive a share of the total Transmission Congestion Charges in proportion to its target allocations. 5.2.6 Distribution of Excess Congestion Charges (a) Excess Transmission Congestion Charges accumulated in a month shall be distributed to each holder of Fixed Transmission Rights in proportion to, but not more than, any deficiency in the share of Transmission Congestion Charges received by the holder during that month as compared to its total target allocations for the month. (b) Any excess Transmission Congestion Charges remaining at the end of a month shall be distributed to Network Service Users and Transmission Customers purchasing Firm Point-to-Point Transmission Service in proportion to their Demand Charges for Network Service and their charges for Reserved Capacity for Firm Point-to-Point Transmission Service. 44 SCHEDULE 2 Revision No. 2 COMPONENTS OF COST Issued: June 2, 1997 Effective: August 1, 1997 (a) Each Market Participant obligated to sell operating capacity on the PJM Interchange Energy Market at cost-based rates shall include the following components or their equivalent in the determination of costs for operating capacity supplied to or from the Interconnection: (1) Boilers Firing-up cost; No-load cost during period of operation; Peak-prepared-for maintenance cost; Incremental labor cost; and Other incremental operating costs. (2) Machines Starting cost from cold to synchronized operation; No-load cost during period of operation; Incremental labor cost; and Other incremental operating costs. (b) Each Member obligated to sell energy on the PJM Interchange Energy Market at cost-based rates shall include the following components or their equivalent in the determination of costs for energy supplied to the Interconnection: Incremental fuel cost; Incremental maintenance cost; Incremental labor cost; and Other incremental operating costs. (c) All fuel costs shall employ the marginal fuel price experienced by the Member. (d) The PJM Board, upon consideration of the advice and recommendations of the Members Committee, shall from time to time define in detail the method of determining the costs entering into the said components, and the Members shall adhere to such definitions in the preparation of incremental costs used on the Interconnection. 1 SCHEDULE 2 -- EXHIBIT A EXPLANATION OF THE TREATMENT OF THE COSTS OF EMISSION ALLOWANCES Issued: June 2, 1997 Effective: August 1, 1997 The cost of emission allowances is included in "Other Incremental Operating Costs" pursuant to Schedule 2. The replacement cost of emission allowances will be used to recover the cost of emission allowances consumed as a result of producing energy for the Interconnection. Index Consistent with definitions promulgated by the PJM Board upon consideration of the advice and recommendations of the Members Committee under Schedule 2, each Member Schedule 2 will determine and provide to the Interconnection its replacement cost of emission allowances, such cost to be an amount not exceeding the market price index published by Cantor- Fitzgerald Environmental Brokerage Services ("EBS"), or a PJM Board approved index in the event that EBS should cease publication of such index. As with all other components of cost required for accounting under this Agreement, each Member subject to Schedule 2 will use the same replacement cost of emissions allowances, so determined, as it uses for coordinating operation of its generating facilities hereunder. For each Member subject to Schedule 2, the cost of emissions allowances is included in the cost of energy supplied to or received from the Interconnection. Payment The Members subject to Schedule 2 waive the right of payment-in-kind for emission allowances for transactions wholly between the parties. Cash payments for emission allowances consumed in providing energy for the Interconnection shall be incorporated into and conducted pursuant to the billing procedures for energy prescribed by this Agreement. Calculation of Emission Allowance Amount and Cost Pursuant to the letter from the PJM Interconnection to FERC dated June 26, 1995, the calculation of an annual average for the cost of emission allowances, described below, is required due to the profile of the PJM physical system and PJM Energy Management software system. Approximately five hundred and forty generating units comprise the PJM system, of which 9 units are Phase I units. Current real-time operational software and hardware tools used in the transaction of energy do not identify individual units, and therefore do not identify Phase I units. (The pool has contracted with a vendor to supply a new Energy Management System to be installed over the next several years.) It is currently not possible for system operators to provide actual individual unit emission allowance costs in real time transaction quotations. An average emission allowance cost based on a standard production cost study case will be used to calculate the average cost of emission allowances for each pool megawatt produced. This cost for the current year is less than 0.2 dollars per megawatt-hour. In summary, for the above-mentioned reasons, it is not practical nor cost effective to provide actual individual emission allowance costs in real-time transaction quotations. Therefore, 1 the annual average method is proposed. The Emission Allowances (Tons of SO2)associated with a transaction will be calculated by multiplying the magnitude of a transaction (MWhr) by an Emissions per MWHr Factor (Tons of SO2 per MWhr): Emission Transaction Emissions Allowances = Magnitude x per MWhr Used Factor (Tons of S02) (MWhr) (Tons of S02 per MWhr) The Emissions per MWHr Factor will be calculated by dividing the forecast annual emissions from all Phase I units (Tons of S02) by the Forecast Annual Total PJM Energy Production (MWhr): Emissions per MWhr= Forecast Annual Phase I Unit Emissions (Tons of SO2) Factor Forecast Annual Total PJM Energy Production (MWhr) (Tons of S02 per MWhr) Likewise, the cost (Dollars) of the Emission Allowances for a transaction will be calculated by multiplying the transaction magnitude (MWhr) by a Charge per MWhr Factor (Dollars per MWHr). Cost of Emission Transaction Charge Allowances Used = Magnitude x per MWhr Factor (Dollars) (MWhr) (Dollars per MWhr) The Charge per MWhr Factor will be calculated by multiplying, for each Member subject to Schedule 2, its Forecast Annual Emissions (Tons of S02) by its respective Emissions Allowance Replacement Cost (Dollars per Ton of S02) to yield each the forecasted annual costs of emissions (Dollars). Then, the total of forecasted annual cost of emissions for each Member subject to Schedule 2 is divided by the Forecast Annual Total PJM Energy Production (MWhr) to determine the Charge per MWHr Factor (Dollars per MWHr). Charge per MWhr Factor = Summation(A x B), where: C A = Member's Forecasted Annual Emissions, (Tons of S20) B = Emission Allowance Replacement Cost, (Dollars per Ton of SO2, per company) C = Forecast Annual PJM Energy Production, (MWhr) 2 SCHEDULE 3 Revision No. 6 ALLOCATION OF THE COST AND EXPENSES OF THE OFFICE OF THE INTERCONNECTION Issued: June 2, 1997 Effective: August 1, 1997 (a) Each group of Affiliates, each group of Related Parties, and each Member that is not in such a group shall pay an annual membership fee, the proceeds of which shall be used to defray the costs and expenses of the LLC, including the Office of the Interconnection. The amount of the annual fee as of the Effective Date shall be $5,000. The amount of the annual membership fee shall be adjusted from time to time by the PJM Board to keep pace with inflation. (b) All remaining costs of the operation of the LLC and the Office of the Interconnection and the expenses, including, without limitation, the costs of any insurance and any claims not covered by insurance, associated therewith as provided in this Agreement shall be costs of Scheduling, System Control and Dispatching Service under the PJM Tariff and shall be recovered pursuant to the PJM Tariff. (c) An entity accepted for membership in the LLC shall pay all costs and expenses associated with additions and modifications to its own metering, communication, computer, and other appropriate facilities and procedures needed to effect the inclusion of the entity in the operation of the Interconnection. 1 SCHEDULE 4 Revision No. 1 STANDARD FORM OF AGREEMENT TO BECOME A MEMBER OF THE LLC Issued: June 2, 1997 Effective: August 1, 1997 Any entity which wishes to become a Member of the LLC shall, pursuant to Section 0 of this Agreement, tender to the President an application, upon the acceptance of which it shall execute a supplement to this Agreement in the following form: Additional Member Agreement 1. This Additional Member Agreement (the "Supplemental Agreement"), dated as of __________________, is entered into among _____________ and the President of the LLC acting on behalf of its Members. 2. _____________ has demonstrated that it meets all of the qualifications required of a Member to the Operating Agreement. If expansion of the PJM Control Area is required to integrate ____________________'s facilities, a copy of Attachment J from the PJM Tariff marked to show changes in Control Area boundaries is attached hereto. ____________________ agrees to pay for all required metering, telemetering and hardware and software appropriate for it to become a member. 3. ______________________ agrees to be bound by and accepts all the terms of the Operating Agreement as of the above date. 4. _________________________ hereby gives notice that the name and address of its initial representative to the Members Committee under the Operating Agreement shall be: - -------------------------------------------------------------------------------- 5. The President of the LLC is authorized under the Operating Agreement to execute this Supplemental Agreement on behalf of the Members and to file it with regulatory authorities having jurisdiction. 6. The Operating Agreement is hereby amended to include ___________ as a Member of the LLC thereto, effective as of ___________________, _____. IN WITNESS WHEREOF, _______________________ and the Members of the LLC have caused this Supplemental Agreement to be executed by their duly authorized representatives. Members of the LLC 1 By: Name: Title: President By: Name: Title: 2 SCHEDULE 5 Revision No. 1 PJM DISPUTE RESOLUTION PROCEDURES Issued: June 2, 1997 Effective: August 1, 1997 1. DEFINITIONS 1.1 Alternate Dispute Resolution Committee. "Alternate Dispute Resolution Committee" shall mean the Committee established pursuant to Section 0 of this Schedule. 1.2 MAAC Dispute Resolution Committee. "MAAC Dispute Resolution Committee" shall mean the committee established by the Mid- Atlantic Area Council to administer its industry-specific mechanism for resolving certain types of wholesale electricity disputes. 1.3 Related PJM Agreements. "Related PJM Agreements" shall mean this Agreement, the Transmission Owners Agreement, and the Reliability Assurance Agreement. 2. PURPOSES AND OBJECTIVES 2.1 Common and Uniform Procedures. The PJM Dispute Resolution Procedures are intended to establish common and uniform procedures for resolving disputes arising under the Related PJM Agreements. To the extent any of the foregoing agreements or the PJM Tariff contain dispute resolution provisions expressly applicable to disputes arising thereunder, however, this Agreement shall not supplant such provisions, which shall apply according to their terms. 2.2 Interpretation. To the extent permitted by applicable law, the PJM Dispute Resolution Procedures are to be interpreted to effectuate the objectives set forth in Section 2.1. To the extent permitted by these PJM Dispute Resolution Procedures, the Alternate Dispute Resolution Committee shall coordinate with the MAAC Dispute Resolution Committee, where appropriate, in order to conserve administrative resources and to avoid duplication of dispute resolution staffing. NEGOTIATION AND MEDIATION 3.1 When Required. The parties to a dispute shall undertake good-faith negotiations to resolve any dispute as to a matter governed by one of the Related PJM Agreements. Each party to a dispute shall designate an executive with authority to resolve the matter in dispute to participate in such negotiations. Any dispute as to a matter governed by one of the Related PJM Agreements that has not been resolved through good-faith negotiation shall be subject to non-binding mediation prior to the initiation of arbitral, regulatory, judicial, or other dispute resolution proceedings as may be appropriate as provided by these PJM Dispute Resolution Procedures. 3.2 Procedures. 3.2.1 Initiation. If a dispute that is subject to the mediation procedures specified herein has not been resolved through good-faith negotiation, a party to the dispute shall notify the Alternate Dispute Resolution Committee in writing of the existence and nature of the dispute prior to commencing any other form of proceeding for resolution of the dispute. The Alternate Dispute Resolution Committee shall have ten calendar days from the date it first receives notification of the existence of a dispute from any of the parties to the dispute in which to distribute to the parties a list of mediators. 3.2.2 Selection of Mediator. The Chair of the Alternate Dispute Resolution Committee shall distribute to the parties by facsimile or other electronic means a list containing the names of seven mediators with mediation experience, or with technical or business experience in the electric power industry, or both, as it shall deem appropriate to the dispute. The Chair of the Alternate Dispute Resolution Committee may draw from the lists of mediators maintained by the MAAC Dispute Resolution Committee, as the Chair shall deem appropriate. The persons on the proposed list of mediators shall have no official, financial, or personal conflict of interest with respect to the issues in controversy, unless the interest is fully disclosed in writing to all participants in the mediation process and all such participants waive in writing any objection to the interest. The parties shall alternate in striking names from the list with the last name on the list becoming the mediator. The determination of which party shall have the first strike off the list shall be determined by lot. The parties shall have ten calendar days to complete the mediator selection process, unless the time is extended by mutual agreement. 3.2.3 Advisory Mediator. If the Alternate Dispute Resolution Committee deems it appropriate, it shall distribute two lists, one containing the names of seven mediators with mediation experience, and one containing the names of seven mediators with technical or business experience in the electric power industry. In connection with circulating the foregoing lists, the Alternate Dispute Resolution Committee shall specify one of the lists as containing the proposed mediators, and the other as a list of proposed advisors to assist the mediator in resolving the dispute. The parties shall then utilize the alternative strike procedure set forth above until one name remains on each list, with the last named persons serving as the mediator and advisor. 2 3.2.4 Mediation Process. The disputing parties shall attempt in good faith to resolve their dispute in accordance with procedures and a timetable established by the mediator. In furtherance of the mediation efforts, the mediator may: (a) Require the parties to meet for face-to-face discussions, with or without the mediator; (b) Act as an intermediary between the disputing parties; (c) Require the disputing parties to submit written statements of issues and positions; (d) If requested by the disputing parties at any time in the mediation process, provide a written recommendation on resolution of the dispute including, if requested, the assessment by the mediator of the merits of the principal positions being advanced by each of the disputing parties; and (e) Adopt, when appropriate, the Center for Public Resources Model ADR Procedures for the Meditation of Business Disputes (as revised from time to time) to the extent such Procedures are not inconsistent with any rule, standard, or procedure adopted by the Alternate Dispute Resolution Committee or with any provision of this Agreement. 3.2.5 Mediator's Assessment. (a) If a resolution of the dispute is not reached by the thirtieth day after the appointment of the mediator or such later date as may be agreed to by the parties, if not previously requested to do so the mediator shall promptly provide the disputing parties with a written, confidential, non-binding recommendation on resolution of the dispute, including the assessment by the mediator of the merits of the principal positions being advanced by each of the disputing parties. The recommendation may incorporate or append, if and as the mediator may deem appropriate, any recommendations or any assessment of the positions of the parties by the advisor, if any. Upon request, the mediator shall provide any additional recommendations or assessments the mediator shall deem appropriate. (b) At a time and place specified by the mediator after delivery of the foregoing recommendation, the disputing parties shall meet in a good faith attempt to resolve the dispute in light of the recommendation of the mediator. Each disputing party shall be represented at the meeting by a person with authority to settle the dispute, along with such other persons as each disputing party shall deem appropriate. If the disputing parties are unable to resolve the dispute at or in connection with this meeting, then: (i) any disputing party may commence such arbitral, judicial, regulatory or other proceedings as may be appropriate as provided in the PJM Dispute Resolution Procedures; and (ii) the recommendation of the mediator, and any statements made by any party in the mediation process, shall have no further force or effect, and shall not be admissible for any purpose, in any subsequent arbitral, administrative, judicial, or other proceeding. 3 3.3 Costs. Except as specified in Section 0, the costs of the time, expenses, and other charges of the mediator and any advisor, and of the mediation process, shall be borne by the parties to the dispute, with each side in a mediated matter bearing one-half of such costs, and each party bearing its own costs and attorney's fees incurred in connection with the mediation. 4. ARBITRATION 4.1 When Required. Any dispute as to a matter: (i) governed by one of the Related PJM Agreements that has not been resolved through the mediation procedures specified herein, (ii) involving a claim that one or more of the parties owes or is owed a sum of money, and (iii) the amount in controversy is less than $1,000,000.00, shall be subject to binding arbitration in accordance with the procedures specified herein. If the parties so agree, any other disputes as to a matter governed by a Related PJM Agreement may be submitted to binding arbitration in accordance with the procedures specified herein. 4.2 Binding Decision. Except as specified in Section 0, the resolution by arbitration of any dispute under this Agreement shall not be binding. 4.3 Initiation. A party or parties to a dispute which is subject to the arbitration procedures specified herein shall send a written demand for arbitration to the Chair of the Alternate Dispute Resolution Committee with a copy to the other party or parties to the dispute. The demand for arbitration shall state each claim for which arbitration is being demanded, the relief being sought, a brief summary of the grounds for such relief and the basis for the claim, and shall identify all other parties to the dispute. 4.4 Selection of Arbitrator(s). The parties to a dispute for which arbitration has been demanded may agree on any person to serve as a single arbitrator, or shall endeavor in good faith to agree on a single arbitrator from a list of arbitrators prepared for the dispute by the Alternate Dispute Resolution Committee and delivered to the parties by facsimile or other electronic means promptly after receipt by the Alternate Dispute Resolution Committee of a demand for arbitration. The Alternate Dispute Resolution Committee may draw from the lists of arbitrators maintained by the MAAC Dispute Resolution Committee, as the Alternate Dispute Resolution Committee deems appropriate. If the parties are unable to agree on a single arbitrator by the fourteenth day following delivery of the foregoing list of arbitrators or such other date as agreed to by the parties, then not later than the end of the seventh business day thereafter the party or parties demanding arbitration on the one hand, and the party or parties responding to the demand for arbitration on the other, shall each designate an arbitrator from a list for the dispute prepared by the Alternate Dispute Resolution Committee. The arbitrators so chosen shall then choose a third arbitrator. 4 4.5 Procedures. The Alternate Dispute Resolution Committee shall compile and make available to the arbitrator(s) and the parties standard procedures for the arbitration of disputes, which procedures (i) shall include provision, upon good cause shown, for intervention or other participation in the proceeding by any party whose interests may be affected by its outcome, (ii) shall conform to the requirements specified in these PJM Dispute Resolution Procedures, and (iii) may be modified or adopted for use in a particular proceeding as the arbitrator(s) deem appropriate. To the extent deemed appropriate by the Alternate Dispute Resolution Committee, the procedures adopted by the Alternate Dispute Resolution Committee shall be based on the American Arbitration Association Rules, to the extent such Rules are not inconsistent with any rule, standard or procedure adopted by the Alternate Dispute Resolution Committee, or with any provision of these PJM Dispute Resolution Procedures. Upon selection of the arbitrator(s), arbitration shall go forward in accordance with applicable procedures. 4.6 Summary Disposition and Interim Measures. 4.6.1 Lack of Good Faith Basis. The procedures for arbitration of a dispute shall provide a means for summary disposition of a demand for arbitration, or a response to a demand for arbitration, that in the reasoned opinion of the arbitrator(s) does not have a good faith basis in either law or fact. If the arbitrator(s) determine(s) that a demand for arbitration or response to a demand for arbitration does not have a good faith basis in either law or fact, the arbitrator(s) shall have discretion to award the costs of the time, expenses, and other charges of the arbitrator(s) to the prevailing party. 4.6.2 Discovery Limits. The procedures for the arbitration of a dispute shall provide a means for summary disposition without discovery of facts if there is no dispute as to any material fact, or with such limited discovery as the arbitrator(s) shall determine is reasonably likely to lead to the prompt resolution of any disputed issue of material fact. 4.6.3 Interim Decision. The procedures for the arbitration of a dispute shall permit any party to a dispute to request the arbitrator(s) to render a written interim decision requiring that any action or decision that is the subject of a dispute not be put into effect, or imposing such other interim measures as the arbitrator(s) deem necessary or appropriate, to preserve the rights and obligations secured by any of the Related PJM Agreements during the pendency of the arbitration proceeding. The parties shall be bound by such written decision pending the outcome of the arbitration proceeding. 5 4.7 Discovery of Facts. 4.7.1 Discovery Procedures. The procedures for the arbitration of a dispute shall include adequate provision for the discovery of relevant facts, including the taking of testimony under oath, production of documents and other things, and inspection of land and tangible items. The nature and extent of such discovery shall be determined as provided herein and shall take into account (i) the complexity of the dispute, (ii) the extent to which facts are disputed, and (iii) the amount in controversy. The forms and methods for taking such discovery shall be as described in the Federal Rules of Civil Procedure, except as modified by the procedures established by the Alternate Dispute Resolution Committee, the arbitrator(s) or agreement of the parties. 4.7.2 Procedures Arbitrator. The sole arbitrator, or the arbitrator selected by the arbitrators chosen by the parties, as the case may be (such arbitrator being hereafter referred to as the "Procedures Arbitrator"), shall be responsible for establishing the timing, amount, and means of discovery, and for resolving discovery and other pre-hearing disagreement. If a dispute involves contested issues of fact, promptly after the selection of the arbitrator(s) the Procedures Arbitrator shall convene a meeting of the parties for the purpose of establishing a schedule and plan of discovery and other pre-hearing actions. 4.8 Evidentiary Hearing. The procedures for the arbitration of a dispute shall provide for an evidentiary hearing, with provision for the cross-examination of witnesses, unless all parties consent to the resolution of the matter on the basis of a written record. The forms and methods for taking evidence shall be as described in the Federal Rules of Evidence, except as modified by the procedures established by the Alternate Dispute Resolution Committee, the arbitrator(s) or agreement of the parties. The arbitrator(s) may require such written or other submissions from the parties as shall be deemed appropriate, including submission of the direct testimony of witnesses in written form. The arbitrator(s) may exclude any evidence that is irrelevant, immaterial, unduly repetitious or prejudicial, or privileged. Any party or parties may arrange for the preparation of a record of the hearing, and shall pay the costs thereof. Such party or parties shall have no obligation to provide or agree to the provision of a copy of the record of the hearing to any party that does not pay an equal share of the cost of the record. At the request of any party, the arbitrator(s) shall determine a fair and equitable allocation of the costs of the preparation of a record between or among the parties to the proceeding willing to share such costs. 6 4.9 Confidentiality. 4.9.1 Designation. Any document or other information obtained in the course of an arbitral proceeding and not otherwise available to the receiving party, including any such information contained in documents or other means of recording information created during the course of the proceeding, may be designated "Confidential" by the producing party. The party producing documents or other information marked "Confidential" shall have twenty days from the production of such material to submit a request to the Procedures Arbitrator to establish such requirements for the protection of such documents or other information designated as "Confidential" as may be reasonable and necessary to protect the confidentiality and commercial value of such information and the rights of the parties, which requirements shall be binding on all parties to the dispute. Prior to the decision of the Procedures Arbitrator on a request for confidential treatment, documents or other information designated as "Confidential" shall not be used by the receiving party or parties, or the arbitrator(s), or anyone working for or on behalf of any of the foregoing, for any purpose other than the arbitration proceeding, and shall not be disclosed in any form to any person not involved in the arbitration proceeding without the prior written consent of the party producing the information or as permitted by the Procedures Arbitrator. 4.9.2 Compulsory Disclosure. Any party receiving a request or demand for disclosure, whether by compulsory process, discovery request, or otherwise, of documents or information obtained in the course of an arbitration proceeding that have been designated "Confidential" and that are subject to a non-disclosure requirement under these PJM Dispute Resolution Procedures or a decision of the Procedures Arbitrator, shall immediately inform the party from which the information was obtained, and shall take all reasonable steps, short of incurring sanctions or other penalties, to afford the person or entity from which the information was obtained an opportunity to protect the information from disclosure. Any party disclosing information in violation of these PJM Dispute Resolution Procedures or requirements established by the Procedures Arbitrator shall thereby waive any right to introduce or otherwise use such information in any judicial, regulatory, or other legal or dispute resolution proceeding, including the proceeding in which the information was obtained. 4.9.3 Public Information. Nothing in the Related PJM Agreements shall preclude the use of documents or information properly obtained outside of an arbitral proceeding, or otherwise public, for any legitimate purpose, notwithstanding that the information was also obtained in the course of the arbitral proceeding. 7 4.10 Timetable. Promptly after the selection of the arbitrator(s), the arbitrator(s) shall set a date for the issuance of the arbitral decision, which shall be not later than eight months (or such earlier date as may be agreed to by the parties to the dispute) from the date of the selection of the arbitrator(s), with other dates, including the dates for an evidentiary hearing or other final submissions of evidence, set in light of this date. The date for the evidentiary hearing or other final submission of evidence shall not be changed absent extraordinary circumstances. The arbitrator(s) shall have the power to impose sanctions, including dismissal of the proceeding for dilatory tactics or undue delay in completing the arbitral proceedings. 4.11 Advisory Interpretations. Except as to matters subject to decision in the arbitration proceeding, the arbitrator(s) may request as may be appropriate from any committee or subcommittee established under a Related PJM Agreement or by the Office of the Interconnection, an interpretation of any Related PJM Agreements, or of any standard, requirement, procedure, tariff, Schedule, principle, plan or other criterion or policy established by any committee or subcommittee. Except to the extent that the Office of the Interconnection is itself a party to a dispute, the arbitrator(s) may request the advice of the Office of the Interconnection with respect to any matter relating to a responsibility of the Office of the Interconnection under the Agreement or with respect to any of the Related PJM Agreements, or to the PJM Manuals. Any such interpretation or advice shall not relieve the arbitrator(s) of responsibility for resolving the dispute or deciding the arbitration proceeding in accordance with the standards specified herein. 4.12 Decisions. The arbitrator(s) shall issue a written decision, including findings of fact and the legal basis for the decision. The arbitral decision shall be based on (i) the evidence in the record, (ii) the terms of the Related PJM Agreements, as applicable, (iii) applicable United States federal and state law, including the Federal Power Act and any applicable FERC regulations and decisions, and international treaties or agreements as applicable, and (iv) relevant decisions in previous arbitration proceedings. The arbitrator(s) shall have no authority to revise or alter any provision of the Related PJM Agreements. Any arbitral decision issued pursuant to these PJM Dispute Resolution Procedures that affects matters subject to the jurisdiction of FERC under Section 205 of the Federal Power Act shall be filed with FERC. 4.13 Costs. Unless the arbitrator(s) shall decide otherwise, the costs of the time, expenses, and other charges of the arbitrator(s) shall be borne by the parties to the dispute, with each side on an arbitrated issue bearing its pro-rata share of such costs, and each party to an arbitral proceeding shall bear its own costs and fees. The arbitrator(s) may award all or a portion of the costs of the time, expenses, and other charges of the arbitrator(s), the costs of arbitration, attorney's fees, and the costs of mediation, if any, to any party that substantially prevails on an issue determined by the arbitrator(s) to have been raised without a substantial basis. 8 4.14 Enforcement. If the decision of the arbitrator(s) is binding, the judgment may be entered on such arbitral award by any court having jurisdiction thereof; provided, however, that within one year of the issuance of the arbitral decision any party affected thereby may request FERC or any other federal, state, regulatory or judicial authority having jurisdiction to vacate, modify, or take such other action as may be appropriate with respect to any arbitral decision that is based upon an error of law, or is contrary to the statutes, rules, or regulations administered or applied by such authority. Any party making or responding to, or intervening in proceedings resulting from, any such request, shall request the authority to adopt the resolution, if not clearly erroneous, of any issue of fact expressly or necessarily decided in the arbitral proceeding, whether or not the party participated in the arbitral proceeding. 5. ALTERNATE DISPUTE RESOLUTION COMMITTEE 5.1 Membership. 5.1.1 Representatives. The Alternate Dispute Resolution Committee shall be composed of two representatives selected by each of the following: (i) the Office of the Interconnection; (ii) the Members Committee; (iii) the parties to the Reliability Assurance Agreement; and (iv) the parties to the Transmission Owners Agreement. 5.1.2 Term. Representatives on the Alternate Dispute Resolution Committee shall serve for terms of three years and may serve additional terms. 5.2 Voting Requirements. Approval or adoption of measures by the Alternate Dispute Resolution Committee shall require two-thirds of the votes of the representatives present and voting. Two-thirds of the representatives on the Alternate Dispute Resolution Committee shall constitute a quorum for the conduct of business. 5.3 Officers. At the first meeting of the Alternate Dispute Resolution Committee, the representatives to the Alternate Dispute Resolution Committee shall choose a Chair and Vice Chair from among the representatives on the Committee. The Chair of the Alternate Dispute Resolution Committee shall preside at meetings of the Committee, and shall have the power to call meetings of the Committee and to exercise such other powers as are specified in this Agreement or are authorized by the Alternate Dispute Resolution Committee. The Vice Chair shall preside at meetings of the Alternate Dispute Resolution Committee in the absence of the Chair, and shall exercise such other powers as are delegated by the Chair. 9 5.4 Meetings. The Alternate Dispute Resolution Committee shall meet at such times and places as determined by the Committee, or at the call of the Chair. The Chair shall call a meeting of the Alternate Dispute Resolution Committee upon the request of two or more representatives on the Alternate Dispute Resolution Committee. 5.5 Responsibilities. The duties of the Alternate Dispute Resolution Committee include but are not limited to the following: i) Maintain a list of persons qualified by temperament and experience, and with technical or legal expertise in matters likely to be the subject of disputes, to serve as mediators or arbitrators under these PJM Dispute Resolution Procedures; ii) Determine the rates and other costs and charges that shall be paid to mediators, advisors and arbitrators for or in connection with their services; iii) Determine whether mediation is not warranted in a particular dispute; iv) Provide to disputing parties lists of mediators, advisors or arbitrators to resolve particular disputes; v) Compile and make available to parties to disputes, arbitrators, and other interested persons suggested procedures for the arbitration of disputes in accordance with Section 4.5; vi) Maintain and make available to parties to disputes, mediators, advisors, arbitrators, and other interested persons the written decisions required by Section 4.12; vii) Establish such procedures and schedules, in addition to those specified herein, as it shall deem appropriate to further the prompt, efficient, fair and equitable resolution of disputes; and viii) Provide such oversight and supervision of the dispute resolution processes and procedures instituted pursuant to the Related PJM Agreements as may be appropriate to facilitate the prompt, efficient, fair and equitable resolution of disputes. 10 SCHEDULE 6 Revision No. 1 REGIONAL TRANSMISSION EXPANSION PLANNING PROTOCOL Issued: June 2, 1997 Effective: August 1, 1997 1. REGIONAL TRANSMISSION EXPANSION PLANNING PROTOCOL Purpose and Objectives This Regional Transmission Expansion Planning Protocol shall govern the process by which the Members shall rely upon the Office of the Interconnection to prepare a plan for the enhancement and expansion of the Transmission Facilities in order to meet the demands for firm transmission service in the PJM Control Area. The Regional Transmission Expansion Plan to be developed shall enable the transmission needs in the PJM Control Area to be met on a reliable, economic and environmentally acceptable basis. 1.2 Conformity with NERC and MAAC Criteria (a) NERC establishes Planning Principles and Guides to promote the reliability and adequacy of the North American bulk power supply as related to the operation and planning of electric systems. (b) MAAC is responsible for ensuring the adequacy, reliability and security of the bulk electric supply systems in the MAAC region through coordinated operations and planning of generation and transmission facilities. Toward that end, it has adopted the NERC Planning Principles and Guides and has established detailed Reliability Principles and Standards for Planning the Bulk Electric Supply System of the MAAC Group. (c) The Regional Transmission Expansion Plan shall conform with the applicable reliability principles, guidelines and standards of NERC and MAAC in accordance with the procedures detailed in the PJM Manuals. 1.3 Establishment of Committees (a) The Regional Transmission Owners shall supply representatives to the Planning Committee to provide the data, information, and analysis support necessary to perform studies as required. As used herein, "Regional Transmission Owner" shall be defined as it is in the PJM Open Access Transmission PJM Tariff ("PJM Tariff"). (b) The Transmission Expansion Advisory Committee established by the Office of the Interconnection will provide input to the development of the Regional Transmission Expansion Plan. The Transmission Expansion Advisory Committee will invite participation by: (i) all Transmission Customers, as that term is defined in the PJM Tariff, and applicants for transmission service; (ii) any other entity proposing to provide Transmission Facilities to be integrated into the PJM Control Area; (iii) all Members; (iv) the agencies and offices of consumer advocates of the States in the PJM Control Area exercising regulatory authority over the rates, terms or conditions of electric service or the planning, siting, construction or operation of electric facilities and (v) any other interested entities or persons. 1.4 Contents of the Regional Transmission Expansion Plan (a) The Office of the Interconnection shall prepare the Regional Transmission Expansion Plan, which shall consolidate the transmission needs of the region into a single plan which is assessed on the basis of maintaining the PJM Control Area's reliability in an economic and environmentally acceptable manner. (b) The Regional Transmission Expansion Plan shall reflect transmission enhancements and expansions, load and capacity forecasts and generation additions and retirements for the ensuing ten years. (c) The Regional Transmission Expansion Plan shall, as a minimum, include a designation of the Regional Transmission Owner or Owners or other entity that will own a transmission facility and how all reasonably incurred costs are to be recovered. (d) The Regional Transmission Expansion Plan shall (i) avoid unnecessary duplication of facilities; (ii) avoid the imposition of unreasonable costs on any Regional Transmission Owner or any user of Transmission Facilities; (iii) take into account the legal and contractual rights and obligations of the Regional Transmission Owners; (iv) provide, if appropriate, alternative means for meeting transmission needs in the PJM Control Area; and (v) provide for coordination with existing transmission systems and with appropriate interregional and local expansion plans. 1.5 Procedure for Development of the Regional Transmission Expansion Plan 1.5.1 Commencement of the Process (a) The Office of the Interconnection shall initiate the enhancement and expansion study process if (i) required as a result of a need for transfer capability identified by the Office of the Interconnection in its evaluation of requests for firm transmission service with a term of one year or more or as a result of the Office of the Interconnection's on-going evaluation of transmission system adequacy and performance; (ii) identified as a result of the MAAC reliability assessment or more stringent local reliability criteria, if any; (iii) constraints or available transfer capability shortage are identified by the Office of the Interconnection as a result of generation additions or retirements, evaluation of load forecasts or proposals for the addition of Transmission Facilities in the PJM Control Area; or (iv) expansion of the transmission system is proposed by the Regional Transmission Owners or others. (b) The Office of the Interconnection shall notify the Transmission Expansion Advisory Committee of the commencement of an enhancement and expansion study. The Transmission Expansion Advisory Committee shall notify the Office of the Interconnection in writing of any additional transmission considerations to be included. 1.5.2 Development of Scope, Assumptions and Procedures Once the need for an enhancement and expansion study has been established, the Office of the Interconnection shall consult with the Transmission Expansion Advisory Committee to prepare the study's scope, assumptions and procedures. 2 1.5.3 Scope of Studies In general, enhancement and expansion studies shall include: (a) An identification of existing and projected electric system limitations, with accompanying simulations to identify the costs of controlling those limitations. Potential enhancements and expansions will be proposed to mitigate limitations controlled by non-economic means. (b) Evaluation and analysis of potential enhancements and expansions, including alternatives thereto, needed to mitigate such limitations. (c) Engineering studies needed to determine the effectiveness and compliance (with reliability criteria) of recommended enhancements and expansions. 1.5.4 Supply of Data The Regional Transmission Owners, those entities requesting transmission service and any other entities proposing to provide Transmission Facilities to be integrated into the PJM Control Area shall supply such information and data reasonably required by the Office of the Interconnection to perform the enhancement and expansion study. 1.5.5 Coordination of the Regional Transmission Expansion Plan (a) The Regional Transmission Expansion Plan shall be developed in coordination with the transmission systems of the surrounding regional reliability councils and with the local transmission providers. (b) The Regional Transmission Expansion Plan shall be developed by the Office of the Interconnection in consultation with the Transmission Expansion Advisory Committee during the enhancement and expansion study process. 1.5.6 Development of the Recommended Regional Transmission Expansion Plan (a) Upon completion of its studies and analysis, the Office of the Interconnection shall prepare a recommended enhancement and expansion plan for review by the Transmission Expansion Advisory Committee. The recommended plan shall include recommendations for cost responsibility, except for directly assigned costs, for any enhancement or expansion, based on the planning analysis and other input from participants, including any indications of a willingness to bear cost responsibility for an enhancement or expansion. (b)For the purposes of Section 1.5.6(a), any allocation of costs to all of the Regional Transmission Owners shall be proportional to the load within the Zones. Load shall be measured consistent with the loads utilized to develop the rates included in Attachment H to the PJM Tariff. (c) Any Regional Transmission Owner and other participants on the Transmission Expansion Advisory Committee may offer an alternative. (d) If the Office of the Interconnection adopts the alternative, based upon its review of the relative costs and benefits, the ability of the alternative to supply the required level of transmission service, and its impact on the reliability of the Transmission Facilities, the Office of 3 the Interconnection shall make any necessary changes to the recommended plan. (e) If, based upon its review of the relative costs and benefits, the ability of the alternative to supply the required level of transmission service, and the alternative's impact on the reliability of the Transmission Facilities, the Office of the Interconnection does not adopt such alternative, the Regional Transmission Owner or Owners whose alternative or alternatives have not been accepted or to whom cost responsibility has been assigned and other participants on the Transmission Expansion Advisory Committee may require that its or their alternative(s) be submitted to Alternative Dispute Resolution. 1.6 Approval of the Final Regional Transmission Expansion Plan (a) The PJM Board shall approve the final Regional Transmission Expansion Plan, including any alternatives therein, in accordance with the requirements of this Section 1.6. (b) If the facilities to be provided in the Regional Transmission Expansion Plan are acceptable, but the Regional Transmission Owners and other entities who have indicated a willingness to bear some or all of the cost responsibility cannot unanimously agree on the allocation of the costs of enhancements or expansions, the cost responsibility shall be allocated (a) to those entities who have indicated a willingness to bear some or all of the cost of responsibility, and (b) among the Regional Transmission Owners in accordance with the following guidelines: i) All of the costs of Transmission Facilities (other than transformers) with a nominal operating voltage of 500 kV or higher shall be allocated to all of the Regional Transmission Owners; ii) One-half of the costs of Transmission Facilities (other than transformers) with a nominal operating voltage of 230 kV or 345 kV shall be allocated to all Regional Transmission Owners and one-half of the costs of such facilities shall be allocated to the Regional Transmission Owners in whose Zone, as that term is defined in the PJM Tariff, the enhancement or expansion is to be located; iii) All of the costs of Transmission Facilities (other than transformers) with a nominal operating voltage below 230 kV shall be allocated to the Regional Transmission Owner or Owners in whose Zone the enhancement or expansion is located; iv) One-half of the costs of transformers shall be allocated in accordance with the methodology specified in (a), (b), or (c) above, based upon the voltage at the high side of the transformer and one-half of the costs shall be allocated in accordance with the methodology specified in (a), (b), and (c) above based upon the voltage at the low side of the transformer, unless the low side of the transformer is less than 100 kV, in which case all of the costs of the transformer shall be allocated to the Regional Transmission Owner or Owners in whose Zone the transformer is located. If a Regional Transmission Expansion Plan is not approved, or if the transmission service requested by any entity is not included in an approved Regional Transmission Expansion Plan, nothing herein shall limit in any way the right of any entity to seek relief pursuant to the provisions 4 of Section 211 of the Federal Power Act. (d) Following PJM Board approval, the final Regional Transmission Expansion Plan shall be submitted to MAAC for verification that all enhancements or expansions conform to all MAAC Reliability Principles and Standards. 1.7 Obligation to Build (a) Subject to the requirements of applicable law, government regulations and approvals, including, without limitation, requirements to obtain any necessary state or local siting, construction and operating permits, to the availability of required financing, to the ability to acquire necessary right-of-way, and to the right to recover, pursuant to appropriate financial arrangements and tariffs or contracts, all reasonably incurred costs, plus a reasonable return on investment, Regional Transmission Owners designated as the appropriate entities to construct and own or finance enhancements or expansions specified in the Regional Transmission Expansion Plan shall construct and own or finance such facilities or enter into appropriate contracts to fulfill such obligations. (b) Nothing herein shall prohibit any Regional Transmission Owner from seeking to recover the cost of enhancements or expansions on an incremental cost basis or from seeking approval of such rate treatment from any regulatory agency with jurisdiction over such rates. 1.8 Relationship to the PJM Control Area Open Access Transmission PJM Tariff Nothing herein shall modify the rights and obligations of an Eligible Customer or a Transmission Customer, as those terms are defined in the PJM Tariff, with respect to required studies and completion of necessary enhancements or expansions. An Eligible Customer or Transmission Customer electing to follow the procedures in the PJM Tariff instead of the procedures provided herein, shall also be responsible for the related costs. The enhancement and expansion study process under this Protocol shall be funded as a part of the operating budget of the Office of the Interconnection. 5 SCHEDULE 7 Revision No. 1 UNDERFREQUENCY RELAY OBLICATIONS AND CHARGES Issued: June 2, 1997 Effective: August 1, 1997 1. UNDERFREQUENCY RELAY OBLIGATION 1.1 Application. The obligations of this Schedule apply to each Member that is an Electric Distributor, whether or not that Member participates in the Electric Distributor sector on the Members Committee or meets the eligibility requirements for any other sector of the Members Committee. 1.2 Obligations. Each Electric Distributor shall install or contractually arrange for underfrequency relays to interrupt at least 30 percent of its peak load with 10 percent of the load interrupted at each of three frequency levels: 59.3 Hz, 58.9 Hz and 58.5 Hz. Upon the request of the Reliability Committee, each Electric Distributor shall document that it has complied with the requirement for underfrequency load shedding relays. 2. UNDERFREQUENCY RELAY CHARGES If an Electric Distributor is determined to not have the required underfrequency relays, it shall pay an underfrequency relay charge of: Charge = D x R x 365 where D = the amount, in megawatts, the Electric Distributor is deficient; and R = the daily rate per megawatt, which shall be based on the annual carrying charges for a new combustion turbine generator, installed and connected to the transmission system, which daily deficiency rate as of the Effective Date shall be $58.400/per kilowatt-year or $160 per megawatt-day. 1 3. DISTRIBUTION OF UNDERFREQUENCY RELAY CHARGES 3.1 Share of Charges. Each Electric Distributor that has complied with the requirements for underfrequency relays imposed by this Agreement during a Planning Period, without incurring an underfrequency relay charge, shall share in any underfrequency relay charges paid by any other Electric Distributor that has failed to satisfy said obligation during such Planning Period. Such shares shall be in proportion to the number of megawatts of a Electric Distributor's load in the most recently completed month at the time of the peak for the PJM Control Area during that month rounded to the next higher whole megawatt, as established initially on the Effective Date and as updated at the beginning of each month thereafter. 3.2 Allocation by the Office of the Interconnection. In the event all of the Electric Distributors have incurred underfrequency relay charges during a Planning Period, the underfrequency relay charges shall be distributed among the Electric Distributors on an equitable basis as determined by the Office of the Interconnection. 2 SCHEDULE 8 Revision No. 1 DELEGATION OF RELIABILITY RESPONSIBILTIES Issued: June 2, 1997 Effective: August 1, 1997 1. DELEGATION The following responsibilities shall be delegated to the Office of the Interconnection by the parties to the Reliability Assurance Agreement. 2. NEW PARTIES With regard to the addition, withdrawal or removal of a party to the Reliability Assurance Agreement, the Office of the Interconnection shall: (a) Receive and evaluate the information submitted by entities that plan to serve loads within the PJM Control Area, including entities whose participation in the Agreement will expand the boundaries of the PJM Control Area, such evaluation to be conducted in accordance with the requirements of the Reliability Assurance Agreement; and (b) Evaluate the effects of the withdrawal or removal of a party from the Reliability Assurance Agreement. 3. IMPLEMENTATION OF RELIABILITY ASSURANCE AGREEMENT. With regard to the implementation of the provisions of the Reliability Assurance Agreement, the Office of the Interconnection shall: (a) Receive all required data and forecasts from the parties to the Reliability Assurance Agreement; (b) Perform all calculations and analyses necessary to determine the Forecast Pool Requirement, the Forecast Zone Requirement and the Forecast LSE Obligation, including periodic reviews of the capacity benefit margin for consistency with the Reliability Principles and Standards, as the foregoing terms are defined in the Reliability Assurance Agreement; (c) Monitor the compliance of each party to the Reliability Assurance Agreement with its obligations under the Reliability Assurance Agreement; (d) Keep cost records, and bill and collect any costs or charges due from the parties to the Reliability Assurance Agreement and distribute those charges in accordance with the terms of the Reliability Assurance Agreement; (e) Assist with the development of rules and procedures for determining and 1 demonstrating the capability of Capacity Resources; (f) Establish the capability and deliverability of Capacity Resources consistent with the requirements of the Reliability Assurance Agreement; (g) Collect and maintain generator availability data; (h) Perform any other studies or analyses required to administer the Reliability Assurance Agreement; (i) Coordinate maintenance schedules for generation resources operated as part of the PJM Control Area; (j) Determine and declare that an Emergency exists or has ceased to exist in all or any part of the PJM Control Area or in a Control Area interconnected with the PJM Control Area; (k) Enter into agreements for (i) the transfer of energy in Emergencies in the PJM Control Area or in a Control Area interconnected with the PJM Control Area and (ii) mutual support in such Emergencies with other Control Areas interconnected with the PJM Control Area; and (l) Coordinate the curtailment or shedding of load, or other measures appropriate to alleviate an Emergency, to preserve reliability in accordance with FERC, NERC or MAAC principles, guidelines, standards and requirements and the PJM Manuals, and to ensure the operation of the PJM Control Area in accordance with Good Utility Practice. 2 SCHEDULE 9 Revision No. 1 EMERGENCY PROCEDURE CHARGES Issued: June 2, 1997 Effective: August 1, 1997 EMERGENCY PROCEDURE CHARGE Following an Emergency, the compliance of each Member with the instructions of the Office of the Interconnection shall be evaluated by the Office of the Interconnection. If, based on such evaluation, it is determined that a Member failed to comply with the instructions of the Office of the Interconnection to implement voltage reductions or to drop load, that Member shall demonstrate that it employed its best efforts to comply with such instructions. In the event a Member failed to employ its best efforts to comply with the instructions of the Office of the Interconnection, that Member shall pay an emergency procedure charge as follows: (a) For each megawatt of voltage reduction that was not implemented as directed, the Member shall pay 365 times the daily deficiency rate per megawatt based on the annual carrying charges for a new combustion turbine generator, installed and connected to the transmission system, which daily deficiency rate as of the Effective Date shall be $58.400/per kilowatt-year or $160 per megawatt-day; and (b) For each megawatt of load that was not dropped as directed, the Member shall pay 730 times the daily deficiency rate per megawatt based on the annual carrying charges for a new combustion turbine generator, installed and connected to the transmission system, which daily deficiency rate as of the Effective Date shall be $58.400/per kilowatt-year or $160 per megawatt- day. 2. DISTRIBUTION OF EMERGENCY PROCEDURE CHARGES 2.1 Complying Parties. Each Member that has complied with the emergency procedures imposed by this Agreement during an Emergency, without incurring an emergency procedure charge, shall share in any emergency procedure charges paid by any other Member that has failed to satisfy said obligation during such Emergency in an equitable manner to be determined by the PJM Board. 2.2 All Parties. In the event all of the Members have incurred emergency procedure charges with respect to an Emergency, the emergency procedure charges related to that Emergency shall be distributed in an equitable manner as directed by the PJM Board. EX-10.2 8 AGREEMENT AMONG DELMARVA POWER & LIGHT COMPANY, PECO ENERGY COMPANY AND PUBLIC SERVICE ELECTRIC AND GAS COMPANY REGARDING LIABILITY AND PERFORMANCE OBLIGATIONS OF THE PLANT OPERATOR This Agreement dated May 27, 1997 is by and among Delmarva Power & Light Company (hereinafter referred to as "DP&L"), PECO Energy Company (formerly the Philadelphia Electric Company) hereinafter referred to as "PECO") and Public Service electric and Gas Company (and Public Services Enterprise Group Incorporated) (hereinafter referred to as "PSE&G"). DP&L, PECO Energy Company and PSE&G are hereinafter collectively referred to as the "Parties." RECITALS: WHEREAS, DP&L and PECO Energy Company filed a lawsuit against PSE&G and Public Services Enterprise Group Incorporated in the United States District Court for the Eastern District of Pennsylvania styled Delmarva Power & Light Company, et al. V. Public Service Enterprise Group, Inc., et al., C.A. No. 96-CV-1705 (E.D. Pa.) (hereinafter referred to as the "Litigation"); WHEREAS, DP&L, PECO and PSE&G are parties to the Salem Owners Agreement, as amended, and are co-owners of the Salem Nuclear Generating Station Units 1, 2 and 3 ("Salem Station"); WHEREAS, DP&L, PECO and PSE&G are parties to the Peach Bottom Owners Agreement, as amended, and are co-owners of the Peach Bottom Atomic Power Station Units 2 and 3 ("Peach Bottom Station"); WHEREAS, in an order dated March 28, 1997, Judge Clarence C. Newcomer encouraged the Parties to enter into settlement negotiations, and supported the use of an alternative dispute resolution process; WHEREAS, the Parties engaged in an alternative dispute resolution process with the assistance of the Honorable Harold R. Tyler, Jr., of New York, New York, former United States District Judge for the Southern District of New York; and WHEREAS, in consideration for the settlement of the litigation and for the additional consideration provided in this Agreement, the Parties desire to minimize the possibility of future litigation among the Owners of the Salem and Peach Bottom Stations and to establish for the remainder of the operating lives of the Salem and Peach Bottom Stations the extent of responsibility of the Owner-operator to the Non-operating Owner Parties of each Station for all management or operating errors and omissions or the failure to generate power and energy at either Station as economically and reliably as is practicable. NOW, THEREFORE, as part of the settlement of the Litigation, in consideration of the mutual covenants made by and between the Parties in settling the Litigation and for other valuable consideration, the Parties, intending to be legally bound, hereby agree as follows: DEFINITIONS Unless otherwise defined herein, the following terms used in this Agreement shall have the meanings ascribed to them as set forth below: (a) "Agreement" shall mean this Agreement Among DP&L, PECO and PSE&G Regarding Liability and Performance Obligations of the Plant Operator. (b) "Court" shall mean the United States District Court for the Eastern District of Pennsylvania. 2 (c) "Litigation" shall mean the lawsuit described in the recitals to this Agreement and all contentions and claims made therein. (d) "Salem Station" shall mean the Salem Nuclear Generating Station. (e) "Peach Bottom Station" shall mean the Peach Bottom Atomic Power Station. (f) "Salem Owners Agreement" shall mean the owners Agreement for Salem Nuclear Generating Station Units No. 1, 2 and 3, dated November 24, 1971, as amended. (g) "Peach Bottom owners Agreement" shall mean the Owners Agreement for the Peach Bottom Atomic Power Station Units No. 2 and 3, dated November 24, 1971, as amended. (h) "Owners Agreements" shall mean the Salem Owners Agreement and the Peach Bottom Owners Agreement referred to collectively. (i) "Owner-operator" refers to the owner which operates the Station(s) under each Owners Agreement. PSE&G is the Owner-operator of the Salem Station. PECO is the Owner-operator of the Peach Bottom Station. (j) "Non-operating owner Parties" refers to the owners which do not operate the Station(s) under each owners Agreement. For Salem, PECO and DP&L are Non-operating owner Parties; for Peach Bottom, PSE&G and DP&L are Non-operating Owner Parties. (k) "Current Outage": Salem Station Unit 1 has been off line (i.e., not producing electricity) since may 17, 1995, and Unit 2 since June '/, 1995. The Current Outage for each unit shall mean from June 1, 1995 to the first day of the month that is closest to the date of Synchronization of that unit with the grid as described herein. In the event the date of Synchronization of a unit with the grid falls on or between days 1 through 16 of a month, the Current Outage for that unit shall mean from June 1, 1995 to the first day of the month that the Synchronization with the grid takes place. In the event the date of Synchronization of a unit with the grid falls on or between days 17 through 31 of a month, the Current Outage for that unit shall mean from June 1, 1995 to 3 the first day of the next month following the date on which Synchronization with the grid takes place. (l) "Synchronization" shall have the special meaning accorded to it in the electric power industry. In general (and without intending to modify or alter its special meaning), the term refers to the point during restart at which the turbine generator of the nuclear plant is synchronously interconnected with the transmission grid and the first megawatt of sustained, continuous flow of electricity begins to flow from the plant to the grid. (m) "Replacement Power Costs" mean the costs incurred to obtain electricity, whether it is generated or purchased, to replace the output of a particular generation unit that is wholly or partially out of service. For purposes of this Agreement, Replacement Power Costs also shall include any alternative measure of the cost burden of maintaining a unit that is nonproductive. (n) "MDC" shall mean the maximum dependable capacity net. This shall be defined, for each Station, as the gross electrical output measured at the output terminals of the turbine generators during the most restrictive seasonal conditions, less the station service load. 4 TERMS AND CONDITIONS 1. This Agreement shall govern the relationship among the Parties with respect to liability and performance obligations of the undersigned Owner-operators of the Salem and Peach Bottom Stations. 2. The arrangements provided herein shall be effective for the Peach Bottom Station beginning on January 1, 1998 and for the Salem Station beginning on the later of the end of the Current Outage of Salem Unit 1 or Salem Unit 2. As to Salem, if the above occurs prior to January 1, 1998, then the beginning date for the Salem Station shall be January 1, 1998. The arrangements provided herein shall continue for each Station until the date of retirement of both units at that Station. 3. For the Salem Station, the following performance standards shall apply: a. The Owner-operator shall compensate the Non-operatinq Owner Parties a total of $10 million (PECO: $8,518,000; DP&L: $1,482,000) for each year that the three year historical average MDC capacity factor (excluding therefrom any period of time to which the Force Maleure Clause of this Agreement applies) for the Salem Station as calculated as of December 31 of that year is less than 40% but equal to or above 20%.(1) In the event that the three year historical average MDC capacity factor (excluding therefrom any period of time to which the Force Majeure Clause of this Agreement applies) for the Salem Station calculated as of December 31 of that year falls below 20%, the total - ----------------- (1) In the event that the beginning date for the Salem Station occurs after January 1, 1998, the calculation for the Salem Station shall be made initially as of December 31 of the first calendar year that is at least 24 months after the end of the Current Outage of the later of Unit 1 or Unit 2 of the Salem Station. In such event, the capacity factor calculation shall be made for the period beginning on the later of the end of the Current Outage of Salem Unit 1 or Salem Unit 2. 5 payment to the Non-operating Owner Parties shall be $25 million per year (PECO: $21,295,000; DP&L: $3,705,000).(2) b. The performance standards provided in paragraph 3(a) shall be applied beginning with the month these arrangements take effect for the Salem Station as set forth in paragraph 2 above. Any payments to Non-operating Owner Parties shall be in proportion to their ownership interests under the respective Owners Agreement. In no event will a payment be owing prior to two years from the effective date of the performance standard as it applies to the Salem Station. c. The calculation of amounts owed under paragraph 3(a) shall be done annually with any amounts owed for the preceding year becoming due and payable by the end of the first month following that year. Where one unit of the Salem Station has been retired, 1/2 of the payments provided in paragraph 3(a) will apply. 4. For the Peach Bottom Station, the following performance standards shall apply: a. The Owner-operator shall compensate the Non-operating Owner Parties a total of $10 million (PSE&G: $8,498,000; DP&L: $1,502,000) for each year that the three year historical average MDC capacity factor (excluding therefrom any period of time to which the Force Majeure Clause of this Agreement applies) for the Peach Bottom Station as calculated as of December 31 of that year is less than 40% but equal to or above 20%.(3) In the event that the three year historical average MDC capacity factor (excluding therefrom any period of time to which the Force - ----------------- (2) See Footnote 1. (3) The first "calculation" date shall be December 31, 2000. 6 Majeure Clause of this agreement applies) for the Peach Bottom Station calculated as of December 31 of that year falls below 20%, the total payment to the Non-operating Owner Parties shall be S25 million per year (PSE&G: $21,245,000; DP&L: $3,755,000). b. The performance standards provided in paragraph 4(a) shall be applied beginning with the month these arrangements take effect for the Peach Bottom Station as set forth in paragraph 2 above. Any payments to Non-operatinq Owner Parties shall be in proportion to their ownership interests under the respective Owners Agreement. In no event will a payment be owing prior to three years from the effective date of the performance standard as it applies to the Peach Bottom Station. c. The calculation of amounts owed under paragraph 4(a) shall be done annually with any amounts owed for the preceding year becoming due and payable by the end of the first month following that year. Where one unit of the Peach Bottom Station has been retired, 1/2 of the payments provided in paragraph 4(a) will apply- 5. The performance standards set forth in paragraph 3 shall be effective until December 31, 2011 at the dollar amounts set forth in paragraph 3(a). After that date, the performance standards and other provisions of this Agreement will remain effective, but the dollar amounts in paragraph 3(a) will be $1. The performance standards in paragraph 4 shall be effective until December 31, 2007 at the dollar amounts set forth in paragraph 4(a). After that date, the performance standards and other provisions of this Agreement shall remain effective, but the dollar amounts in paragraph 4(a) shall be $1. 6. The Parties agree that paragraphs 2-5 of this Agreement shall be the Non-operating Owner Parties, sole and exclusive remedy for all management or operating errors or omissions or the failure to generate power and energy at either 7 Station as economically and reliably as is practicable. The Owner-operator of the Salem Station or the Peach Bottom Station shall not be liable to the Non-operating Owner Parties in contract, or in tort (including, but not limited to negligence or gross negligence), or otherwise based upon facts, matters, or occurrences relating to or arising out of the construction, management, operation or maintenance of the Salem or Peach Bottom Stations or for any failures of the Owner-operator to perform any of its responsibilities except for Willful Action and then only up to a combined total of $5 million to the Non-operating Owner Parties for all such facts, matters or occurrences or failures to perform based upon Willful Action(s) during any one annual period, which amount shall be reduced to $2.5 million where one unit of a Station has been retired. Each Party shall bear the entire amount of its own Replacement Power Costs. "Willful Action" is defined as: action knowingly or intentionally taken or not taken by the chief nuclear officer and approved by his superior, which action or non-action and approval is taken with intent that injury or damage would result or would probably result therefrom or with intent to defraud another Party. 7. Each Party waives and covenants not to assert against any other Party all rights under the Owners Agreements to the extent that they are inconsistent with this Agreement. This Agreement does not alter or change the duties of all Parties to share the costs of the Salem and Peach Bottom Stations as specified in Article 3 of the Owners Agreements (and related budget and accounting articles of the Owners Agreements). The Parties to this Agreement do not intend, and this Agreement shall not be construed to affect the currently existing rights and interests of Atlantic Energy, Inc. or Atlantic City Electric Company (hereinafter referred to collectively as "Atlantic") that arise from Atlantic's ownership interests in the Salem and Peach Bottom Stations. 8. Times during which the operation of a Station is adversely affected by Force Majeure Conditions shall not form any part of the basis for a payment for low 8 capacity factors as set forth in paragraphs 3 and 4 of this Agreement. "Force Majeure Conditions" as used herein means the following: acts of God, floods, earthquakes, tornadoes, hurricanes; terrorism, or acts of public enemies; war, insurrections, riots or other civil disturbances; failure of or the necessity to replace equipment for reasons of obsolescence or defect in design or manufacture where the condition is generic to the equipment involved and for such time as is reasonably required therefor; plant shutdown, modification, derating, or decommissioning requirement which is necessary to comply with any Nuclear Regulatory Commission or other governmental action that is applicable to any generic category of plants or is based on considerations external to the Station itself (including, but not limited to, seismological, meteorological, hydrological, demographic or soil conditions). Any outage required to repair or replace steam generators shall conclusively be deemed to constitute a Force Majeure condition. 9. Any dispute over the application of the performance standards or any other disputes under the Owners Agreements for Salem and Peach Bottom shall be the subject of non-binding mediation prior to resort to any legal process. All Parties waive the right to trial by jury in any court proceeding involving any such dispute. MISCELLANEOUS PROVISIONS 10. Intent to Be Legally Bound The Parties intend that this Agreement create legally binding and enforceable obligations, and that each of the covenants and obligations contained herein may be legally enforced. 9 11. Warranty of Enforceabilitv Each Party represents, agrees, and warrants, that this Agreement, and each instrument required hereby to be executed and delivered by it, constitute legally valid, binding obligations, and shall be enforceable against each Party. 12. Assignment This Agreement may not be assigned by any Party hereto without the express written consent of each other Party hereto. The representations, warranties, covenants, and agreements contained in this Agreement are for the sole benefit of the Parties hereto and their successors and permitted assigns, and shall not be construed to confer any right or to avail any remedy to any other person. 13. Governing Law This Agreement shall be governed by, construed, and interpreted, and the rights of the Parties determined in accordance with, the laws of New Jersey as it applies to the Salem Station and the laws of Pennsylvania as it applies to the Peach Bottom Station. 14 Entire Agreement This Agreement contains the entire understanding of the Parties hereto in respect of the subject matter contained herein. There are no restrictions, promises, representations, warranties, covenants and undertakings governing the subject matter of this Agreement other than those expressly set forth or referred to herein. To the extent the terms and conditions of this Agreement can be construed to be inconsistent with the terms and conditions of either of the Owners Agreements, this Agreement supersedes the Owners Agreements and any other prior agreements and understandings among the Parties hereto with respect to the rights and obligations of the Parties under the Owners Agreements and the obligations of the Owner-operators of the Salem and Peach Bottom Stations. 10 15. Waiver of Compliance Any failure of any Party hereto to comply with any obligation, covenant, agreement or condition herein may be expressly waived in writing, to the extent permitted under applicable law, by the Party or Parties hereto entitled to the benefit of such obligation, covenant, agreement or condition. A waiver or failure to insist upon strict compliance with any representation, warranty, covenant, agreement or condition shall not operate a waiver of, or estoppel with respect to, any subsequent or other failure. 16. Counterparts This Agreement may be executed in any number of counterparts and any Party hereto may execute any such counterpart, each of which when executed and delivered shall be deemed to be an original and all of which counterparts taken together shall constitute but one and the same instrument. 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. 17. Severance The Parties agree that if any provision of this Agreement is declared invalid in whole or in part, it will have no effect on the validity of the other provisions of the Agreement. 18. Joint Drafting This Agreement is the product of the joint drafting of the parties. The parties agree that no provision of this Agreement shail be construed against any party as the drafter. 11 19. Recitals The Recitals to this Agreement are incorporated into and are part of this Agreement. PUBLIC SERVICE ELECTRIC AND GAS COMPANY Attest: By: /s/ R. Edwin Selover -------------------------------------- Its: Senior Vice President and General Counsel /s/ E.J. BIGGINS, Jr. Corporate Secretary PUBLIC SERVICE ELECTRIC AND GAS COMPANY Attest: By: /s/ R. Edwin Selover -------------------------------------- Its: Vice President and General Counsel /s/ E.J. BIGGINS, Jr. Corporate Secretary PECO ENERGY COMPANY Attest: By: /s/ Dikinson M. Smith -------------------------------------- Its: President, PECO Nuclear, PECO Energy Company /s/ Katherine K. Combs Corporate Secretary DELMARVA POWER & LIGHT COMPANY Attest: By: /s/ H. E. Cosgrove -------------------------------------- Its: Chairman, President and C.E.O. /s/ D. P. Connelly SECRETARY 12 EX-10.3 9 AGREEMENT AMONG DELMARVA POWER & LIGHT COMPANY, PECO ENERGY COMPANY AND PUBLIC SERVICE ELECTRIC AND GAS COMPANY REGARDING LIABILITY AND PERFORMANCE OBLIGATIONS OF THE PLANT OPERATOR This Agreement dated May 27, 1997 is by and among Delmarva Power & Light Company (hereinafter referred to as "DP&L"), PECO Energy Company (formerly the Philadelphia Electric Company) hereinafter referred to as "PECO") and Public Service electric and Gas Company (and Public Services Enterprise Group Incorporated) (hereinafter referred to as "PSE&G"). DP&L, PECO Energy Company and PSE&G are hereinafter collectively referred to as the "Parties." RECITALS: WHEREAS, DP&L and PECO Energy Company filed a lawsuit against PSE&G and Public Services Enterprise Group Incorporated in the United States District Court for the Eastern District of Pennsylvania styled Delmarva Power & Light Company, et al. V. Public Service Enterprise Group, Inc., et al., C.A. No. 96-CV-1705 (E.D. Pa.) (hereinafter referred to as the "Litigation"); WHEREAS, DP&L, PECO and PSE&G are parties to the Salem Owners Agreement, as amended, and are co-owners of the Salem Nuclear Generating Station Units 1, 2 and 3 ("Salem Station"); WHEREAS, DP&L, PECO and PSE&G are parties to the Peach Bottom Owners Agreement, as amended, and are co-owners of the Peach Bottom Atomic Power Station Units 2 and 3 ("Peach Bottom Station"); WHEREAS, in an order dated March 28, 1997, Judge Clarence C. Newcomer encouraged the Parties to enter into settlement negotiations, and supported the use of an alternative dispute resolution process; WHEREAS, the Parties engaged in an alternative dispute resolution process with the assistance of the Honorable Harold R. Tyler, Jr., of New York, New York, former United States District Judge for the Southern District of New York; and WHEREAS, in consideration for the settlement of the litigation and for the additional consideration provided in this Agreement, the Parties desire to minimize the possibility of future litigation among the Owners of the Salem and Peach Bottom Stations and to establish for the remainder of the operating lives of the Salem and Peach Bottom Stations the extent of responsibility of the Owner-operator to the Non-operating Owner Parties of each Station for all management or operating errors and omissions or the failure to generate power and energy at either Station as economically and reliably as is practicable. NOW, THEREFORE, as part of the settlement of the Litigation, in consideration of the mutual covenants made by and between the Parties in settling the Litigation and for other valuable consideration, the Parties, intending to be legally bound, hereby agree as follows: DEFINITIONS Unless otherwise defined herein, the following terms used in this Agreement shall have the meanings ascribed to them as set forth below: (a) "Agreement" shall mean this Agreement Among DP&L, PECO and PSE&G Regarding Liability and Performance Obligations of the Plant Operator. (b) "Court" shall mean the United States District Court for the Eastern District of Pennsylvania. 2 (c) "Litigation" shall mean the lawsuit described in the recitals to this Agreement and all contentions and claims made therein. (d) "Salem Station" shall mean the Salem Nuclear Generating Station. (e) "Peach Bottom Station" shall mean the Peach Bottom Atomic Power Station. (f) "Salem Owners Agreement" shall mean the owners Agreement for Salem Nuclear Generating Station Units No. 1, 2 and 3, dated November 24, 1971, as amended. (g) "Peach Bottom owners Agreement" shall mean the Owners Agreement for the Peach Bottom Atomic Power Station Units No. 2 and 3, dated November 24, 1971, as amended. (h) "Owners Agreements" shall mean the Salem Owners Agreement and the Peach Bottom Owners Agreement referred to collectively. (i) "Owner-operator" refers to the owner which operates the Station(s) under each Owners Agreement. PSE&G is the Owner-operator of the Salem Station. PECO is the Owner-operator of the Peach Bottom Station. (j) "Non-operating owner Parties" refers to the owners which do not operate the Station(s) under each owners Agreement. For Salem, PECO and DP&L are Non-operating owner Parties; for Peach Bottom, PSE&G and DP&L are Non-operating Owner Parties. (k) "Current Outage": Salem Station Unit 1 has been off line (i.e., not producing electricity) since may 17, 1995, and Unit 2 since June '/, 1995. The Current Outage for each unit shall mean from June 1, 1995 to the first day of the month that is closest to the date of Synchronization of that unit with the grid as described herein. In the event the date of Synchronization of a unit with the grid falls on or between days 1 through 16 of a month, the Current Outage for that unit shall mean from June 1, 1995 to the first day of the month that the Synchronization with the grid takes place. In the event the date of Synchronization of a unit with the grid falls on or between days 17 through 31 of a month, the Current Outage for that unit shall mean from June 1, 1995 to 3 the first day of the next month following the date on which Synchronization with the grid takes place. (l) "Synchronization" shall have the special meaning accorded to it in the electric power industry. In general (and without intending to modify or alter its special meaning), the term refers to the point during restart at which the turbine generator of the nuclear plant is synchronously interconnected with the transmission grid and the first megawatt of sustained, continuous flow of electricity begins to flow from the plant to the grid. (m) "Replacement Power Costs" mean the costs incurred to obtain electricity, whether it is generated or purchased, to replace the output of a particular generation unit that is wholly or partially out of service. For purposes of this Agreement, Replacement Power Costs also shall include any alternative measure of the cost burden of maintaining a unit that is nonproductive. (n) "MDC" shall mean the maximum dependable capacity net. This shall be defined, for each Station, as the gross electrical output measured at the output terminals of the turbine generators during the most restrictive seasonal conditions, less the station service load. 4 TERMS AND CONDITIONS 1. This Agreement shall govern the relationship among the Parties with respect to liability and performance obligations of the undersigned Owner-operators of the Salem and Peach Bottom Stations. 2. The arrangements provided herein shall be effective for the Peach Bottom Station beginning on January 1, 1998 and for the Salem Station beginning on the later of the end of the Current Outage of Salem Unit 1 or Salem Unit 2. As to Salem, if the above occurs prior to January 1, 1998, then the beginning date for the Salem Station shall be January 1, 1998. The arrangements provided herein shall continue for each Station until the date of retirement of both units at that Station. 3. For the Salem Station, the following performance standards shall apply: a. The Owner-operator shall compensate the Non-operatinq Owner Parties a total of $10 million (PECO: $8,518,000; DP&L: $1,482,000) for each year that the three year historical average MDC capacity factor (excluding therefrom any period of time to which the Force Maleure Clause of this Agreement applies) for the Salem Station as calculated as of December 31 of that year is less than 40% but equal to or above 20%.(1) In the event that the three year historical average MDC capacity factor (excluding therefrom any period of time to which the Force Majeure Clause of this Agreement applies) for the Salem Station calculated as of December 31 of that year falls below 20%, the total - ----------------- (1) In the event that the beginning date for the Salem Station occurs after January 1, 1998, the calculation for the Salem Station shall be made initially as of December 31 of the first calendar year that is at least 24 months after the end of the Current Outage of the later of Unit 1 or Unit 2 of the Salem Station. In such event, the capacity factor calculation shall be made for the period beginning on the later of the end of the Current Outage of Salem Unit 1 or Salem Unit 2. 5 payment to the Non-operating Owner Parties shall be $25 million per year (PECO: $21,295,000; DP&L: $3,705,000).(2) b. The performance standards provided in paragraph 3(a) shall be applied beginning with the month these arrangements take effect for the Salem Station as set forth in paragraph 2 above. Any payments to Non-operating Owner Parties shall be in proportion to their ownership interests under the respective Owners Agreement. In no event will a payment be owing prior to two years from the effective date of the performance standard as it applies to the Salem Station. c. The calculation of amounts owed under paragraph 3(a) shall be done annually with any amounts owed for the preceding year becoming due and payable by the end of the first month following that year. Where one unit of the Salem Station has been retired, 1/2 of the payments provided in paragraph 3(a) will apply. 4. For the Peach Bottom Station, the following performance standards shall apply: a. The Owner-operator shall compensate the Non-operating Owner Parties a total of $10 million (PSE&G: $8,498,000; DP&L: $1,502,000) for each year that the three year historical average MDC capacity factor (excluding therefrom any period of time to which the Force Majeure Clause of this Agreement applies) for the Peach Bottom Station as calculated as of December 31 of that year is less than 40% but equal to or above 20%.(3) In the event that the three year historical average MDC capacity factor (excluding therefrom any period of time to which the Force - ----------------- (2) See Footnote 1. (3) The first "calculation" date shall be December 31, 2000. 6 Majeure Clause of this agreement applies) for the Peach Bottom Station calculated as of December 31 of that year falls below 20%, the total payment to the Non-operating Owner Parties shall be S25 million per year (PSE&G: $21,245,000; DP&L: $3,755,000). b. The performance standards provided in paragraph 4(a) shall be applied beginning with the month these arrangements take effect for the Peach Bottom Station as set forth in paragraph 2 above. Any payments to Non-operatinq Owner Parties shall be in proportion to their ownership interests under the respective Owners Agreement. In no event will a payment be owing prior to three years from the effective date of the performance standard as it applies to the Peach Bottom Station. c. The calculation of amounts owed under paragraph 4(a) shall be done annually with any amounts owed for the preceding year becoming due and payable by the end of the first month following that year. Where one unit of the Peach Bottom Station has been retired, 1/2 of the payments provided in paragraph 4(a) will apply- 5. The performance standards set forth in paragraph 3 shall be effective until December 31, 2011 at the dollar amounts set forth in paragraph 3(a). After that date, the performance standards and other provisions of this Agreement will remain effective, but the dollar amounts in paragraph 3(a) will be $1. The performance standards in paragraph 4 shall be effective until December 31, 2007 at the dollar amounts set forth in paragraph 4(a). After that date, the performance standards and other provisions of this Agreement shall remain effective, but the dollar amounts in paragraph 4(a) shall be $1. 6. The Parties agree that paragraphs 2-5 of this Agreement shall be the Non-operating Owner Parties, sole and exclusive remedy for all management or operating errors or omissions or the failure to generate power and energy at either 7 Station as economically and reliably as is practicable. The Owner-operator of the Salem Station or the Peach Bottom Station shall not be liable to the Non-operating Owner Parties in contract, or in tort (including, but not limited to negligence or gross negligence), or otherwise based upon facts, matters, or occurrences relating to or arising out of the construction, management, operation or maintenance of the Salem or Peach Bottom Stations or for any failures of the Owner-operator to perform any of its responsibilities except for Willful Action and then only up to a combined total of $5 million to the Non-operating Owner Parties for all such facts, matters or occurrences or failures to perform based upon Willful Action(s) during any one annual period, which amount shall be reduced to $2.5 million where one unit of a Station has been retired. Each Party shall bear the entire amount of its own Replacement Power Costs. "Willful Action" is defined as: action knowingly or intentionally taken or not taken by the chief nuclear officer and approved by his superior, which action or non-action and approval is taken with intent that injury or damage would result or would probably result therefrom or with intent to defraud another Party. 7. Each Party waives and covenants not to assert against any other Party all rights under the Owners Agreements to the extent that they are inconsistent with this Agreement. This Agreement does not alter or change the duties of all Parties to share the costs of the Salem and Peach Bottom Stations as specified in Article 3 of the Owners Agreements (and related budget and accounting articles of the Owners Agreements). The Parties to this Agreement do not intend, and this Agreement shall not be construed to affect the currently existing rights and interests of Atlantic Energy, Inc. or Atlantic City Electric Company (hereinafter referred to collectively as "Atlantic") that arise from Atlantic's ownership interests in the Salem and Peach Bottom Stations. 8. Times during which the operation of a Station is adversely affected by Force Majeure Conditions shall not form any part of the basis for a payment for low 8 capacity factors as set forth in paragraphs 3 and 4 of this Agreement. "Force Majeure Conditions" as used herein means the following: acts of God, floods, earthquakes, tornadoes, hurricanes; terrorism, or acts of public enemies; war, insurrections, riots or other civil disturbances; failure of or the necessity to replace equipment for reasons of obsolescence or defect in design or manufacture where the condition is generic to the equipment involved and for such time as is reasonably required therefor; plant shutdown, modification, derating, or decommissioning requirement which is necessary to comply with any Nuclear Regulatory Commission or other governmental action that is applicable to any generic category of plants or is based on considerations external to the Station itself (including, but not limited to, seismological, meteorological, hydrological, demographic or soil conditions). Any outage required to repair or replace steam generators shall conclusively be deemed to constitute a Force Majeure condition. 9. Any dispute over the application of the performance standards or any other disputes under the Owners Agreements for Salem and Peach Bottom shall be the subject of non-binding mediation prior to resort to any legal process. All Parties waive the right to trial by jury in any court proceeding involving any such dispute. MISCELLANEOUS PROVISIONS 10. Intent to Be Legally Bound The Parties intend that this Agreement create legally binding and enforceable obligations, and that each of the covenants and obligations contained herein may be legally enforced. 9 11. Warranty of Enforceabilitv Each Party represents, agrees, and warrants, that this Agreement, and each instrument required hereby to be executed and delivered by it, constitute legally valid, binding obligations, and shall be enforceable against each Party. 12. Assignment This Agreement may not be assigned by any Party hereto without the express written consent of each other Party hereto. The representations, warranties, covenants, and agreements contained in this Agreement are for the sole benefit of the Parties hereto and their successors and permitted assigns, and shall not be construed to confer any right or to avail any remedy to any other person. 13. Governing Law This Agreement shall be governed by, construed, and interpreted, and the rights of the Parties determined in accordance with, the laws of New Jersey as it applies to the Salem Station and the laws of Pennsylvania as it applies to the Peach Bottom Station. 14 Entire Agreement This Agreement contains the entire understanding of the Parties hereto in respect of the subject matter contained herein. There are no restrictions, promises, representations, warranties, covenants and undertakings governing the subject matter of this Agreement other than those expressly set forth or referred to herein. To the extent the terms and conditions of this Agreement can be construed to be inconsistent with the terms and conditions of either of the Owners Agreements, this Agreement supersedes the Owners Agreements and any other prior agreements and understandings among the Parties hereto with respect to the rights and obligations of the Parties under the Owners Agreements and the obligations of the Owner-operators of the Salem and Peach Bottom Stations. 10 15. Waiver of Compliance Any failure of any Party hereto to comply with any obligation, covenant, agreement or condition herein may be expressly waived in writing, to the extent permitted under applicable law, by the Party or Parties hereto entitled to the benefit of such obligation, covenant, agreement or condition. A waiver or failure to insist upon strict compliance with any representation, warranty, covenant, agreement or condition shall not operate a waiver of, or estoppel with respect to, any subsequent or other failure. 16. Counterparts This Agreement may be executed in any number of counterparts and any Party hereto may execute any such counterpart, each of which when executed and delivered shall be deemed to be an original and all of which counterparts taken together shall constitute but one and the same instrument. 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. 17. Severance The Parties agree that if any provision of this Agreement is declared invalid in whole or in part, it will have no effect on the validity of the other provisions of the Agreement. 18. Joint Drafting This Agreement is the product of the joint drafting of the parties. The parties agree that no provision of this Agreement shail be construed against any party as the drafter. 11 19. Recitals The Recitals to this Agreement are incorporated into and are part of this Agreement. PUBLIC SERVICE ELECTRIC AND GAS COMPANY Attest: By: /s/ R. Edwin Selover -------------------------------------- Its: Senior Vice President and General Counsel /s/ E.J. BIGGINS, Jr. Corporate Secretary PUBLIC SERVICE ELECTRIC AND GAS COMPANY Attest: By: /s/ R. Edwin Selover -------------------------------------- Its: Vice President and General Counsel /s/ E.J. BIGGINS, Jr. Corporate Secretary PECO ENERGY COMPANY Attest: By: /s/ Dikinson M. Smith -------------------------------------- Its: President, PECO Nuclear, PECO Energy Company /s/ Katherine K. Combs Corporate Secretary DELMARVA POWER & LIGHT COMPANY Attest: By: /s/ H. E. Cosgrove -------------------------------------- Its: Chairman, President and C.E.O. /s/ D. P. Connelly SECRETARY 12 EX-10.4 10 Exhibit 10-4 PECO Energy Company Deferred Compensation and Supplemental Pension Benefit Plan (Effective Date: November 1, 1981) (As Amended Through February 23, 1998) The purposes of this plan are to permit the total pension of executive employees of PECO Energy Company ("PECO") to be determined on a basis that is no less favorable than for all other employees of PECO, to consolidate prior deferred compensation agreements with certain of PECO's executive employees into one document, to offset the impact of deferrals under the PECO Management Incentive Compensation Plan on the pensions of participating employees, and to provide uniform rules and regulations of plan administration. PECO therefore adopts the following plan of Deferred Compensation and Supplemental Pension Benefit Plan (the "Deferred Compensation Plan" or the "Plan"): 1. Administration. This Deferred Compensation Plan shall be administered by the Compensation Committee (the "Committee") of the Board of Directors of PECO (the "Board"). The Committee shall interpret the Deferred Compensation Plan; make factual determinations; establish such rules and regulations of plan administration that it deems appropriate; and appoint an administrator to assist the Committee in its responsibilities. The Committee's decisions with respect to the construction, administration and interpretation of the Plan shall be conclusive and binding, unless otherwise determined by the Board. The cost of the plan administration shall be paid by PECO, and shall not be charged against the deferred accounts of Plan participants. 2. Eligibility. Eligibility under the Deferred Compensation Plan is restricted to key management employees whose eligibility is determined by the Committee. Notwithstanding the foregoing, any employee who contributes an amount to the Deferred Compensation Plan through PECO's Management Incentive Compensation Plan shall be automatically eligible to participate in the Deferred Compensation Plan to the extent of such contribution. 3. Deferrals. (a) Subject to such rules and procedures as the Committee deems appropriate, each eligible employee may elect in writing (i) effective November 1, 1981 (the "Effective Date"), to receive a portion of his or her future cash compensation as deferred compensation, provided each such election is made prior to the period with respect to which the compensation is earned or otherwise payable, (ii) effective June 1, 1988 to receive all or a portion of his or her future awards under the PECO Management Incentive Compensation Plan as deferred compensation, provided each such election is made prior to the end of the calendar year with respect to which the award is calculated, and (iii) effective November 25, 1996 to receive all or a portion (in increments of 1%) of the lump sum payment pursuant to Paragraph 9(b)(1), below, as deferred compensation, provided such election is made prior to the calendar year in which such lump sum is scheduled to be paid and at least ninety (90) days prior to the date such lump sum is scheduled to be paid. Deferred amounts shall be credited to a deferral account in the participant's name ("Deferral Account") for later distribution. Each participant's Deferral Account shall be a bookkeeping entry only, and PECO shall not be required to fund the Deferral Account. Any -2- assets that may be held by PECO to fund a Deferral Account shall at all times remain unrestricted assets of PECO in its corporate capacity and not as fiduciary, and shall be subject to the claims of PECO's general creditors. Pending distribution, after the Effective Date each participant's Deferral Account shall be credited with earnings or interest as provide in Paragraph 3(b). (b) (1) For purposes of measuring the earnings or losses credited to his Deferral Account, the participant may select, from among the investment vehicles available from time to time under the PECO Energy Company Employee Savings Plan (the "Savings Plan"), the investment media in which all or part of his Deferral Account shall be deemed to be invested. (2) The participant shall make an investment designation in the form and manner prescribed by the Committee or its designee, which shall remain effective until another valid designation has been made by the participant as herein provided. The participant may amend his investment designation at such times and in such manner as prescribed by the Committee or its designee. A timely change to the participant's investment designation shall become effective as soon as administratively practicable. (3) The investment media deemed to be made available to the participant, and any limitation on the maximum or minimum percentages of the participant's Deferral Account that may be deemed to be invested in any particular medium, shall be the same as available or in effect from time-to-time under the Savings Plan. -3- (4) Except as provided below, the participant's Deferral Account shall be deemed to be invested in accordance with his investment designations, and the Deferral Account shall be credited with earnings (or losses) as if invested as directed by the participant. If -- (i) the participant does not furnish complete investment instructions, or (ii) the investment instructions from the participant are unclear, then the Deferral Account shall be credited with interest compounded and adjusted monthly, at a rate equal to the prime commercial lending rate of The Chase Manhattan Bank, N.A. in effect at the opening of business on the 15th day of each month (or if such day is a non-business day, on the first business day thereafter) plus 1/2 of 1%. The Deferral Accounts maintained pursuant to this Plan are for bookkeeping purposes only and PECO is under no obligation to invest such amounts. PECO shall provide a statement to the participant not less frequently than annually showing such information as is appropriate, including the aggregate amount in his Deferral Account, as of a reasonably current date. 4. Prior Deferrals. The status of prior deferrals under individual contracts of deferred compensation shall be determined under the respective individual contracts until the Effective Date. After the Effective Date, in consideration of the supplemental pension benefit under Paragraph 9 below, the participant shall surrender any and all rights in amounts previously credited for additional pension benefits under individual contracts and the accumulated interest -4- thereon (excluding amounts allocable for preretirement contingent annuitant option coverage). The balance of the employee's deferred compensation (including amounts allocable for preretirement contingent annuitant option coverage with interest thereon) shall be credited to his or her Deferral Account. Those employees with prior deferrals who have retired or otherwise separated from service prior to the Effective Date shall not participate in the Deferred Compensation Plan, and their rights shall be determined under the respective individual contracts. 5. Distributions. If the participant's employment with PECO is terminated for retirement, the amount standing to a participant's Deferral Account shall be distributed to the participant commencing after the participant's separation from service when the participant's accrued benefit begins to be paid under PECO's Service Annuity Plan. Distributions shall be paid monthly over 15 consecutive twelve-month periods. Each payment shall be determined by multiplying the balance remaining to the credit of the Deferral Account at the beginning of such twelve-month period (including earnings or interest credited under Paragraph 3(b)) by a fraction, the numerator of which is "1" and the denominator of which is the number of twelve-month periods (including the current period) for which payments are yet to be made. If application of the foregoing would result in a payment for any twelve-month period of less than $12,000 the amount payable for such period shall be at the rate of $12,000 per twelve-month period, until the Deferral Account is exhausted. Any unpaid balance in the Deferral Account shall be credited with earnings or interest as provided in Paragraph 3(b). If the participant is ineligible to receive benefits under the Service Annuity Plan, -5- benefits will begin to be paid on or about the first business day of the month following the later of the month the participant reaches age 65 or actually retires. In any calendar year prior to the calendar year in which payments are scheduled to begin and at least ninety (90) days prior to the date such payments are scheduled to begin, a participant may elect to receive the amounts payable hereunder in such other manner as is acceptable to the Committee, provided that no such election shall accelerate the commencement of benefits, and provided further that any such election to receive periodic installments determined by application of a formula based, in part, on investment return assumptions may subsequently be amended irrevocably to provide for installments thereafter in an amount equal to the lesser of (i) the initial periodic installment received by the participant or (ii) the most recent periodic installment received by the participant. Notwithstanding the foregoing, however, a participant who retires from employment with PECO under any early retirement incentive arrangement or non-recurring reduction in force (including, but not limited to, the 1990 Special Retirement and Service Completion Plan, the 1993 Nuclear Voluntary Retirement Plan, the 1993 Nuclear Voluntary Separation Plan, the 1993 Nuclear Involuntary Separation Plan, the 1994 Voluntary Retirement Incentive Plan ("1994 VRIP") and the 1994 Voluntary Separation Incentive Plan ("1994 VSIP")) may, prior to separation from service with PECO, make a one-time irrevocable election to receive a lump sum distribution of his or her account (or, in the case of a retirement under the 1994 VRIP or VSIP, a distribution paid over a period of three (3) years or in such other manner as may be acceptable to the Committee) in accordance with the terms of such arrangement or reduction in force and, if such election is approved by PECO, receive such a distribution upon his or her retirement. If at any time a -6- participant's employment with PECO is terminated (other than for retirement), unless otherwise directed by the Committee, he or she shall receive his or her account balance (with accrued earnings or interest) in a lump sum upon termination of employment with PECO, determined as of the date of separation from service. Notwithstanding the foregoing, a participant whose employment with PECO was terminated for retirement and who is receiving installment payments of his or her Deferral Account ("a retired participant"), or the beneficiary of a deceased retired participant, may elect to receive 90% of the balance of his or her Deferral Account in a lump sum. The remaining 10% of the balance of his or her Deferral Account shall be forfeited. 6. Death Benefits. Each participant shall designate a beneficiary or beneficiaries to receive any payments provided under Paragraphs 3 or 4 after the participant's death. The beneficiaries, and any priority or allocation between them, shall be designated in the manner specified by the Committee. If a participant dies before the entire balance in his or her Deferral Account has been paid out, the remaining balance shall be paid in the same form and number of installments as would have been the case had the participant lived (and terminated his or her employment on the date of his or her death, if he or she died while in the employment of PECO). If the participant is not survived by a designated beneficiary, the participant's beneficiary shall be the participant's spouse, if living, or otherwise, the participant's estate. If a beneficiary survives the participant but dies before the entire balance payable to him or her has been distributed, any remaining balance shall be paid to the beneficiary's estate. In the absence of contrary proof, the participant shall be deemed to have survived any designated beneficiary. A participant may change his or her beneficiary designation under this Paragraph at any time until -7- his or her death by filing a written beneficiary designation with the Company, in the manner specified by the Committee. 7. Financial Hardship. The Committee may, in its discretion, direct that a participant be paid an amount in cash (not in excess of the balance of his or her Deferral Account) sufficient to meet a financial hardship. Financial hardship shall mean (a) medical care for the participant, a member of his or her family, or any other person for whom the participant wishes or is legally required to provide such care; (b) education costs for a participant, spouse or child; (c) acquiring, constructing or renovating the participant's principal residence; or (d) other similar substantial and nonrecurring expenses for the welfare of the participant and his or her dependents, as the Committee shall determine in its sole discretion. To preserve the tax benefits of the deferral program, the Committee may require evidence of financial hardship. 8. No Assignment or Alienation of Benefits. Except as hereinafter provided with respect to marital disputes, a participant's Deferral Account may not be voluntarily or involuntarily assigned or alienated. In cases of marital dispute, PECO will observe the terms of the Plan unless and until ordered to do otherwise by a state or Federal court. As a condition of participation, a participant agrees to hold PECO harmless from any claim that arises out of PECO's obeying the final order of any state or Federal court, whether such order effects a judgment of such court or is issued to enforce a judgment or order of another court. 9. Supplemental Pension Benefit. (a) PECO will supplement a participant's monthly pension or preretirement death benefit payable under the Service Annuity Plan by the amount which is the difference, if any, between such pension or preretirement death benefit and the monthly pension -8- or preretirement death benefit which would have been payable under the Service Annuity Plan as if: (i) the provisions of that Plan were administered without regard to the maximum benefit limitations or the maximum compensation limitations imposed under the Internal Revenue Code of 1986, as amended; (ii) for purposes of calculating the participant's benefit under Section 3.1(a) (the "2% accrued" formula), the participant's salary includes in the year payable (whether or not deferred) the amount of any award under PECO's Management Incentive Compensation Plan or the prior Incentive Compensation Plan; (iii) for purposes of calculating the participant's benefit under Section 3.1(b) (the "minimum" formula), the participant's annual base salary includes the amount of any award under PECO's Management Incentive Compensation Plan, whether paid currently or deferred, and in either case imputed ratably over the months worked by the participant in the year earned; and (iv) for purposes of both benefit formulas under the Service Annuity Plan, the participant's salary had not been reduced (whether before or after the Effective Date) in connection with a deferral of cash compensation. In addition, for any participant whose compensation is established by the Board, such supplemental benefit will also reflect the following adjustment: for purposes of calculating the participant's benefit under Section 3.1(b) (the "minimum" formula), the participant's annual base salary shall include the amount of any award under PECO's prior Incentive Compensation Plan, whether paid currently or deferred, and in either case imputed ratably over the months worked by the participant in the year earned. Except as otherwise determined by the Committee, or as otherwise elected by the participant under this Paragraph, supplemental pension and death benefits will be in the same form and paid to the employee (or on his or her behalf, to his or her beneficiaries) in the same manner as payment of retirement and death benefits under the Service Annuity Plan. This supplement shall -9- also reflect to the appropriate extent any post-retirement benefit increases with respect to benefits under the Service Annuity Plan. (b) (1) In any calendar year before the year of retirement but in no event less than ninety days prior to retirement, a participant, while employed by PECO, may elect to receive the present value of all or a portion (in increments of 25%) of the supplemental retirement benefit payable to the participant under Paragraph 9(a) in a lump sum at retirement; provided, however, that no such election shall accelerate the commencement of benefits. Notwithstanding the foregoing, however, a participant who retires from employment with PECO under any early retirement incentive arrangement or non-recurring reduction in force (including, but not limited to, the 1990 Special Retirement and Service Completion Plan, the 1993 Nuclear Voluntary Retirement Incentive Plan, the 1993 Nuclear Voluntary Separation Plan, the 1993 Nuclear Involuntary Separation Plan, the 1994 Voluntary Retirement Incentive Plan and the 1994 Voluntary Separation Incentive Plan) may, prior to separation from service with PECO, make a one-time irrevocable election to receive a lump sum distribution of the present value of all or a portion of the supplemental retirement benefit payable to the participant under Paragraph 9(a) in accordance with the terms of such arrangement or reduction in force and, if such election is approved by PECO, receive such a distribution upon his or her retirement. (2) The present value of amounts payable in a lump sum pursuant to this Paragraph 9(b) will be actuarially determined by discounting the expected stream of annuity payments (based upon the life expectancy of the participant and, if -10- applicable, the life expectancy of the participant's beneficiary as provided under the Contingent Annuity Option of the PECO Service Annuity Plan, determined as of the date of payment under the mortality table used in the most recent actuarial analysis of the PECO Service Annuity Plan) at a rate equivalent to the Pension Benefit Guaranty Corporation (PBGC) Immediate Annuity Rate in effect on January 1 of the year of retirement; provided, however, that a lump sum payable pursuant to a lump sum election made prior to June 1, 1993 (even if such election was later modified to apply to a lesser portion of the amount payable) shall be valued using the PBGC Immediate Annuity Rate in effect during the month in which the election is made, if the use of such rate would result in a larger lump sum payment. Such calculation shall reflect the Contingent Annuity Option benefit under the PECO Service Annuity Plan if the participant otherwise satisfies the conditions for that benefit, but shall not reflect any possible post-retirement benefit increases; provided, however, that, if the participant's Contingent Annuity Option election under the PECO Service Annuity Plan is not irrevocable at the time the lump sum payment is made hereunder, the participant will receive an initial lump sum payment reflecting the Contingent Annuity Option resulting in the smallest lump sum payment from the Deferred Compensation Plan and, at age 65 (or at the participant's death, if earlier), a payment will be made to the participant (or his or her beneficiary) equal to the balance due the participant (which shall be the present value of the difference between the value of the total pension payable to the participant or beneficiary at such time over the sum of the value of benefits payable to the participant or beneficiary under the Service Annuity Plan and the lump sum previously paid, taking into account the Contingent -11- Annuity Option then in effect, the Contingent Annuity Option in effect between retirement and age 65, and increases in benefit payable under the Service Annuity Plan due to adjustment of Internal Revenue Code limitations, and reflecting the interest rate used to calculate the prior lump sum). The specific calculation methodology and manner of payment, which will be made in a manner acceptable to the Committee, will be applied in a uniform, non-discriminatory fashion. An election made pursuant to Paragraph 9(b)(1), once made, shall be irrevocable; provided, however, that a participant who made an election prior to June 1, 1993 to receive the entire supplemental retirement benefit payable to the participant hereunder in a lump sum may, while employed by PECO, make one subsequent election on or after June 1, 1993 to receive less than the full benefit in a lump sum, subject to the timing limitations described in Paragraph 9(b)(1). (c) (1) A participant may elect to have supplemental death benefits under Paragraph 9(a) paid to such beneficiary or beneficiaries as the participant may designate in writing, in the manner specified by the Committee. A change in beneficiary designation may be made at any time until the participant's death, notwithstanding that the form and amount of the benefit may be fixed upon the participant's termination of employment with PECO. In the absence of a written beneficiary designation, death benefits will be paid to the beneficiary or beneficiaries entitled to the participant's survivor and death benefits under the Service Annuity Plan. (2) Should a participant who has made a lump sum election as described in Paragraph 9(b)(1) prior to June 1, 1993 die between the time such election is made and the date payments are scheduled to begin, the present value of supplemental -12- death benefits payable to the participant's beneficiary under Paragraph 9(a) shall be paid in a lump sum to the participant's beneficiary as soon as administratively practicable following the participant's death; provided, however, that the participant has not made a contrary election pursuant to the following sentence. In accordance with procedures prescribed by the Committee, a participant (including a participant described in the preceding sentence), while employed by PECO, may elect, or revoke or change a prior election, to have the present value of all or a portion of the supplemental death benefits payable to the participant's beneficiary under Paragraph 9(a) paid to the beneficiary in a lump sum as soon as administratively practicable following the participant's death; provided, however, that such election, or revocation or change, will not be effective unless made in any calendar year prior to the year in which the participant dies and at least ninety (90) days prior to the date of such participant's death. (3) The present value of amounts payable in a lump sum pursuant to Paragraph 9(c)(2) will be actuarially determined by discounting the expected stream of annuity payments (based upon the beneficiary's life expectancy determined as of the date of payment under the mortality table used in the most recent actuarial analysis of the PECO Service Annuity Plan) at a rate equivalent to the Pension Benefit Guaranty Corporation (PBGC) Immediate Annuity Rate in effect on January 1 of the year of the participant's death; provided, however, that a lump sum payable to the beneficiary of a participant who made a lump sum election under this Paragraph 9 prior to June 1, 1993 (even if such election was later modified, or revoked and reinstated, with respect to the participant's beneficiary) shall be valued using the PBGC Immediate Annuity Rate in -13- effect during the month such election was made, if the use of such rate would result in a larger lump sum payment 10. Participation in Management Group Deferred Compensation Plan. A participant in the Company's Management Group Deferred Compensation Plan who becomes eligible to participate in the Deferred Compensation Plan shall cease to participate in the Management Group Deferred Compensation Plan, and all benefits payable to the participant with respect to either plan shall be provided under the Deferred Compensation Plan. The participant shall be credited with a Deferral Account under the Deferred Compensation Plan equal to the value of his or her Deferral Account under the Management Group Deferred Compensation Plan, and the participant's supplemental pension benefit (if any) shall be determined as though the employee had participated in the Deferred Compensation Plan during the period he or she was a participant in the Management Group Deferred Compensation Plan. The Committee shall establish such rules and regulations with respect to transferred participants as it deems appropriate to assure that any participant is not disadvantaged by the transfer. 11. Amendment or Discontinuance. The Deferred Compensation Plan may be altered, amended, suspended, or terminated at any time by the Board, provided that no such action shall result in the distribution of amounts credited to the Deferral Accounts of all participants in any manner than is otherwise provided in this Plan, nor shall such action reduce the availability of amounts previously deferred. The rules relating to distribution may be generally altered or specifically waived by the Committee in its sole discretion, but no such action shall reduce the availability of amounts previously deferred unless it is necessary to do so to preserve the tax deferral on amounts deferred. -14- 12. No Right to Continued Employment. The Deferred Compensation Plan shall not confer upon any person any right to be continued in the employment of PECO. 13. Governing Law. The Deferred Compensation Plan shall be governed by the law of the Commonwealth of Pennsylvania. APPENDIX A WHEREAS, Edward G. Bauer, Jr. (Bauer) and William F. Thompson (Thompson) were each awarded supplemental pension credits by Board resolution to reflect prior service; WHEREAS, the Company has been advised that such supplemental pension benefits cannot be paid under the Service Annuity Plan, but may be paid under the Company's Deferred Compensation and Supplemental Pension Benefit Plan. NOW, THEREFORE, be it resolved that the Company shall supplement the monthly pension or preretirement death benefit payable under the Service Annuity Plan to Bauer and Thompson or their beneficiaries as follows. The amount of the supplement payable to each shall be the difference, if any, between such pension or preretirement death benefit and the monthly pension or preretirement death benefit which would have been payable to him under the Service Annuity Plan if, in the case of Bauer seven additional years, and in the case of Thompson, six additional years, of past service credits had been credited thereunder and were used to calculate his benefits. This supplement shall be paid under the Company's Deferred Compensation and Supplemental Pension Benefit Plan (the "Deferred Compensation Plan"), and shall also reflect to the appropriate extent any post-retirement benefit increases granted with A-1 respect to benefits under the Service Annuity Plan. Supplemental pension and death benefits will be paid in the same form to Bauer and Thompson (or on their behalf, to their beneficiaries) in the same manner as payment of retirement and death benefits under the Service Annuity Plan, except the Committee which administers the Deferred Compensation Plan may, in its sole discretion, accelerate the payment of benefits to a beneficiary. A-2 APPENDIX C WHEREAS, the Company has committed to grant Corbin A. McNeill, Jr. supplemental service credit for purposes of determining his pension amount as part of the consideration for his accepting employment with the Company, and WHEREAS, the Company desires that the benefit resulting from such service credit be paid under the Company's Deferred Compensation and Supplemental Pension Benefit Plan (the "Deferred Compensation Plan"). NOW, THEREFORE, be it resolved, that the Deferred Compensation Plan is hereby amended with respect to Mr. McNeill to provide the following: 1. If Mr. McNeill's employment with the Company terminates after he has nonforfeitable rights to a pension payable under the Service Annuity Plan, the Company will supplement Mr. McNeill's pension or, in the case of a pre-retirement death benefit, Mr. McNeill's beneficiary's pension, by the additional amount which would be payable under the Service Annuity Plan if Mr. McNeill's service for purposes of calculating benefits is increased by twenty additional years. 2. Payments authorized under this Resolution shall be in the form and manner provided under Paragraph 9 of the Deferred Compensation Plan, including any post-retirement benefit increases and settlement options otherwise applicable to payments thereunder. 3. In all other respects, the Deferred Compensation Plan shall remain in full force and effect as to Mr. McNeill. C-1 APPENDIX D WHEREAS, the Company is committed to grant Joseph A. Carter and James W. Durham supplemental service credit for purposes of determining each of their pension amount as part of the consideration for each of their accepting employment with the Company, and WHEREAS, the Company desires that the benefits resulting from such service credit be paid under the Company's Deferred Compensation and Supplemental Pension Benefit Plan (the "Deferred Compensation Plan"). NOW, THEREFORE, be it resolved, that the Deferred Compensation Plan is hereby amended with respect to Mr. Carter and Mr. Durham to provide the following: 1. If the employment of Mr. Carter or Mr. Durham with the Company terminates after he has nonforfeitable rights to a pension payable under the Service Annuity Plan, the Company will supplement the individual's pension or, in the case of the pre-retirement death benefit, the individual's beneficiary pension, by the additional amount which would be payable under the Service Annuity Plan if the individual's service for purposes of calculating benefits were supplemented by an additional year of service for each completed year of service, to a maximum of 10 additional years of service. 2. Payments authorized under this resolution shall be in the form and manner provided under Paragraph 9 of the Deferred Compensation Plan, including any post-retirement benefit increases and settlement options otherwise applicable to payments thereunder. 3. In all other respects, the Deferred Compensation Plan shall remain in full force and effect as to Mr. Carter and Mr. Durham. D-1 APPENDIX E WHEREAS, the Company is committed to grant William J. Kaschub and Gwendolyn S. King supplemental service credit for purposes of determining each of their pension amounts as part of the consideration for each of their accepting employment with the Company, and WHEREAS, the Company desires that the benefits resulting from such service credit be paid under the Company's Deferred Compensation and Supplemental Pension Benefit Plan (the "Deferred Compensation Plan"). NOW, THEREFORE, be it resolved, that the Deferred Compensation Plan is hereby amended with respect to Mr. Kaschub and Ms. King to provide the following: 1. If the employment of Mr. Kaschub or Ms. King with the Company terminates after the individual has nonforfeitable rights to a pension payable under the Service Annuity Plan, the Company will supplement the individual's pension or, in the case of the pre-retirement death benefit, the pension of the individual's beneficiary, by the additional amount which would be payable under the Service Annuity Plan if the individual's service for purposes of calculating benefits were supplemented by an additional year of service for each completed year of service, to a maximum of 10 additional years of service. 2. Payments authorized under this resolution shall be in the form and manner provided under Paragraph 9 of the Deferred Compensation Plan, including any post-retirement benefit increases and settlement options otherwise applicable to payments thereunder. 3. In all other respects, the Deferred Compensation Plan shall remain in full force and effect as to Mr. Kaschub and Ms. King. E-1 APPENDIX F WHEREAS, the Company has committed to grant William L. Bardeen supplemental service credit for purposes of determining his pension amount as part of the consideration for his accepting employment with the Company, and WHEREAS, the Company desires that the benefit resulting from such service credit be paid under the Company's Deferred Compensation and Supplemental Pension Benefit Plan (the "Deferred Compensation Plan"). NOW, THEREFORE, be it resolved, that the Deferred Compensation Plan is hereby amended with respect to Mr. Bardeen to provide the following: 1. If Mr. Bardeen's employment with the Company terminates after he has nonforfeitable rights to a pension payable under the Service Annuity Plan, the Company will supplement Mr. Bardeen's pension or, in the case of a pre-retirement death benefit, the pension of Mr. Bardeen's beneficiary, by the additional amount which would be payable under the Service Annuity Plan if Mr. Bardeen's service for purposes of calculating benefits is increased by twenty additional years. 2. Payments authorized under this Resolution shall be in the form and manner provided under Paragraph 9 of the Deferred Compensation Plan, including any post-retirement benefit increases and settlement options otherwise applicable to payments thereunder. 3. In all other respects, the Deferred Compensation Plan shall remain in full force and effect as to Mr. Bardeen. F-1 EX-10.5 11 Exhibit 10-5 PECO Energy Company Management Group Deferred Compensation and Supplemental Pension Benefit Plan (Effective Date: June 1, 1988) (As Amended Through February 23, 1998) The purposes of this plan are to permit the total pension of certain management employees of PECO Energy Company ("PECO") and to offset the impact of deferrals under the PECO Management Incentive Compensation Plan on the pensions of participating employees, and to provide uniform rules and regulations of plan administration. PECO therefore adopts the following Management Group Deferred Compensation and Supplemental Pension Benefit Plan (the "Management Group Deferred Compensation Plan" or the "Plan"): 1. Administration. This Management Group Deferred Compensation Plan shall be administered by the Vice President - Finance and Accounting of PECO (the "Administrator") or such other individual or individuals as may be designated by the Board of Directors of PECO (the "Board"). The Administrator shall interpret the Management Group Deferred Compensation Plan, make factual determinations, and establish such rules and regulations of plan administration that he deems appropriate. The Administrator's decisions with respect to the construction, administration and interpretation of the Plan shall be conclusive and binding, unless otherwise determined by the Board. The cost of the plan administration shall be paid by PECO, and shall not be charged against the deferred accounts of Plan participants. 2. Eligibility. Eligibility under the Management Group Deferred Compensation Plan is restricted to key management employees who are eligible to participate in the PECO Management Incentive Compensation Plan, but who are not eligible to participate in the Company's previously adopted Deferred Compensation Plan. 3. Deferrals. (a) Each eligible employee may elect in writing to receive all or a portion of his or her future awards under the PECO Management Incentive Compensation Plan as deferred compensation, subject to such rules and procedures as the Administrator deems appropriate. Each such election shall be made prior to the end of the calendar year with respect to which the award is calculated. Effective November 25, 1996, each eligible employee may elect in writing to receive all or a portion (in increments of 1%) of the lump sum payment pursuant to Paragraph 8(b)(1) below, as deferred compensation, provided each such election is made prior to the calendar year in which payments are scheduled to begin and at least ninety (90) days prior to the date such payments are scheduled to begin. Deferred amounts shall be credited to a deferral account in the participant's name ("Deferral Account") for later distribution. Each participant's Deferral Account shall be a bookkeeping entry only, and PECO shall not be required to fund the Deferral Account. Any assets that may be held by PECO to fund a Deferral Account shall at all times remain unrestricted assets of PECO in its corporate capacity and not as fiduciary, and shall be subject to the claims of PECO's general creditors. Pending distribution, each participant's Deferral Account shall be credited with earnings or interest as provide in Paragraph 3(b). -2- (b) (1) For purposes of measuring the earnings or losses credited to his Deferral Account, the participant may select, from among the investment vehicles available from time to time under the PECO Energy Company Employee Savings Plan (the "Savings Plan"), the investment media in which all or part of his Deferral Account shall be deemed to be invested. (2) The participant shall make an investment designation in the form and manner prescribed by the Committee or its designee, which shall remain effective until another valid designation has been made by the participant as herein provided. The participant may amend his investment designation at such times and in such manner as prescribed by the Committee or its designee. A timely change to the participant's investment designation shall become effective as soon as administratively practicable. (3) The investment media deemed to be made available to the participant, and any limitation on the maximum or minimum percentages of the participant's Deferral Account that may be deemed to be invested in any particular medium, shall be the same as available or in effect from time-to-time under the Savings Plan. (4) Except as provided below, the participant's Deferral Account shall be deemed to be invested in accordance with his investment designations, and the Deferral Account shall be credited with earnings (or losses) as if invested as directed by the participant. If -- -3- (i) the participant does not furnish complete investment instructions, or (ii) the investment instructions from the participant are unclear, then the Deferral Account shall be credited with interest compounded and adjusted monthly, at a rate equal to the prime commercial lending rate of The Chase Manhattan Bank, N.A. in effect at the opening of business on the 15th day of each month (or if such day is a non-business day, on the first business day thereafter) plus 1/2 of 1%. The Deferral Accounts maintained pursuant to this Plan are for bookkeeping purposes only and PECO is under no obligation to invest such amounts. PECO shall provide a statement to the participant not less frequently than annually showing such information as is appropriate, including the aggregate amount in his Deferral Account, as of a reasonably current date. 4. Distributions. If the participant's employment with PECO is terminated for retirement, the amount standing to a participant's Deferral Account shall be distributed to the participant commencing after the participant's separation from service when the participant's accrued benefit begins to be paid under PECO's Service Annuity Plan. Distributions shall be paid monthly over 15 consecutive twelve-month periods. Each payment shall be determined by multiplying the balance remaining to the credit of the Deferral Account at the beginning of such twelve-month period (including earnings or interest credited under Paragraph 3(b)) by a fraction, the numerator of which is "1" and the denominator of which is the number of twelve-month periods (including the current period) for -4- which payments are yet to be made. If application of the foregoing would result in a payment for any twelve-month period of less than $12,000 the amount payable for such period shall be at the rate of $12,000 per twelve-month period, until the Deferral Account is exhausted. Any unpaid balance in the Deferral Account shall be credited with earnings or interest as provided in Paragraph 3(b). In any calendar year prior to the calendar year in which payments are scheduled to begin and at least ninety (90) days prior to the date such payments are scheduled to begin, a participant may elect to receive the amounts payable hereunder in such other manner as is acceptable to the Administrator, provided that no such election shall accelerate the commencement of benefits, and provided further that any such election to receive periodic installments determined by application of a formula based, in part, on investment return assumptions may subsequently be amended irrevocably to provide for installments thereafter in an amount equal to the lesser of (i) the initial periodic installment received by the participant or (ii) the most recent periodic installment received by the participant. Notwithstanding the foregoing, however, a participant who retires from employment with PECO under any early retirement incentive arrangement or non-recurring reduction in force (including, but not limited to, the 1990 Special Retirement and Service Completion Plan, the 1993 Nuclear Voluntary Retirement Incentive Plan, the 1993 Nuclear Voluntary Separation Plan, the 1993 Nuclear Involuntary Separation Plan, the 1994 Voluntary Retirement Incentive Plan ("1994 VRIP"), and the 1994 Voluntary Separation Incentive Plan ("1994 VSIP")) may, prior to separation from service with PECO, make a one-time irrevocable election to receive a lump-sum distribution of his or her account (or, in the case of a retirement -5- under the 1994 VRIP or VSIP, a distribution paid over a period of three (3) years or in such other manner as may be acceptable to the Administrator) in accordance with the terms of such arrangement or reduction in force and, if such election is approved by PECO, receive such a distribution upon his or her retirement. If at any time a participant's employment with PECO is terminated other than for retirement, unless otherwise directed by the Administrator, he or she shall receive his or her account balance (with accrued earnings or interest) in a lump sum upon termination of employment with PECO, determined as of the date of separation from service. Notwithstanding the foregoing, a participant whose employment with PECO was terminated for retirement and who is receiving installment payments of his or her Deferral Account ("a retired participant"), or the beneficiary of a deceased retired participant, may elect to receive 90% of the balance of his or her Deferral Account in a lump sum. The remaining 10% of the balance of his or her Deferral Account shall be forfeited. 5. Death Benefits. Each participant shall designate a beneficiary or beneficiaries to receive any payments under Paragraph 4 after the participant's death. The beneficiaries, and any priority or allocation between them, shall be designated in the manner specified by the Administrator. If a participant dies before the entire balance in his or her Deferral Account has been paid out, the remaining balance shall be paid in the same form and number of installments as would have been the case had the participant lived (and terminated his or her employment on the date of his or her death, if he or she died while in the employment of PECO). If the participant is not survived by a designated beneficiary, the participant's -6- beneficiary shall be the participant's spouse, if living, or otherwise, the participant's estate. If a beneficiary survives the participant but dies before the entire balance payable to him or her has been distributed, any remaining balance shall be paid to the beneficiary's estate. In the absence of contrary proof, the participant shall be deemed to have survived any designated beneficiary. A participant may change his or her beneficiary designation under this Paragraph at any time until his or her death by filing a written beneficiary designation with the Company, in the manner specified by the Administrator. 6. Financial Hardship. The Administrator may, in his discretion, direct that a participant be paid an amount in cash (not in excess of the balance of his or her Deferral Account) sufficient to meet a financial hardship. Financial hardship shall mean (a) medical care for the participant, a member of his or her family, or any other person for whom the participant wishes or is legally required to provide such care; (b) education costs for a participant, spouse or child; (c) acquiring, constructing or renovating the participant's principal residence; or (d) other similar substantial and nonrecurring expenses for the welfare of the participant and his or her dependents, as the Administrator shall determine in his sole discretion. To preserve the tax benefits of the deferral program, the Administrator may require evidence of financial hardship. 7. No Assignment or Alienation of Benefits. Except as hereinafter provided with respect to marital disputes, a participant's Deferral Account may not be voluntarily or involuntarily assigned or alienated. In cases of marital dispute, PECO will observe the terms of the Plan unless and until ordered to do otherwise by a state or Federal court. As a condition of participation, a participant agrees to hold PECO harmless from any claim that arises out of -7- PECO's obeying the final order of any state or Federal court, whether such order effects a judgment of such court or is issued to enforce a judgment or order of another court. 8. Supplemental Pension Benefit. (a) PECO will supplement a participant's monthly pension or preretirement death benefit payable under the Service Annuity Plan by the amount which is the difference, if any, between such pension or preretirement death benefit and the monthly pension or preretirement death benefit which would have been payable under the Service Annuity Plan as if: (i) the provisions of that Plan were administered without regard to the maximum benefit limitations or the maximum compensation limitations imposed under the Internal Revenue Code of 1986, as amended; (ii) for purposes of calculating the participant's benefit under Section 3.1(a) (the "2% accrued" formula), the participant's salary includes in the year payable (whether or not deferred) the amount of any award under PECO's Management Incentive Compensation Plan; and (iii) for purposes of calculating the participant's benefit under Section 3.1(b) (the "minimum" formula), the participant's annual base salary includes the amount of any award under PECO's Management Incentive Compensation Plan, whether paid currently or deferred, and in either case imputed ratably over the months worked by the participant in the year earned. Except as otherwise determined by the Administrator, or as otherwise elected by the participant under this Paragraph, supplemental pension and death benefits will be in the same form and paid to the employee (or on his or her behalf, to his or her beneficiaries) in the same manner as payment of retirement and death benefits under the Service Annuity Plan. This supplement shall also reflect to the appropriate extent any post-retirement benefit increases with respect to benefits under the Service Annuity Plan. -8- (b) (1) In any calendar year before the year of retirement but in no event less than ninety days prior to retirement, a participant, while employed by PECO, may elect to receive the present value of all or a portion (in increments of 25%) of the supplemental retirement benefit payable to the participant under Paragraph 8(a) in a lump sum at retirement; provided, however, that no such election shall accelerate the commencement of benefits. Notwithstanding the foregoing, however, a participant who retires from employment with PECO under any early retirement incentive arrangement or non-recurring reduction in force (including, but not limited to, the 1990 Special Retirement and Service Completion Plan, the 1993 Nuclear Voluntary Retirement Incentive Plan, the 1993 Nuclear Voluntary Separation Plan, the 1993 Nuclear Involuntary Separation Plan, the 1994 Voluntary Retirement Incentive Plan and the 1994 Voluntary Separation Incentive Plan) may, prior to separation from service with PECO, make a one-time irrevocable election to receive a lump-sum distribution of the present value of all or a portion of the supplemental retirement benefit payable to the participant under Paragraph 8(a) in accordance with the terms of such arrangement or reduction in force and, if such election is approved by PECO, receive such a distribution upon his or her retirement. (2) The present value of amounts payable in a lump sum pursuant to this Paragraph 8(b) will be actuarially determined by discounting the expected stream of annuity payments (based upon the life expectancy of the participant and, if applicable, the life expectancy of the participant's beneficiary as provided under the Contingent Annuity Option of the PECO Service Annuity Plan, determined as of the date -9- of payment under the mortality table used in the most recent actuarial analysis of the PECO Service Annuity Plan) at a rate equivalent to the Pension Benefit Guaranty Corporation (PBGC) Immediate Annuity Rate in effect on January 1 of the year of retirement; provided, however, that a lump sum payable pursuant to a lump sum election made prior to June 1, 1993 (even if such election was later modified to apply to a lesser portion of the amount payable) shall be valued using the PBGC Immediate Annuity Rate in effect during the month in which the election was made, if the use of such rate would result in a larger lump sum payment. Such calculation shall reflect the Contingent Annuity Option benefit under the PECO Service Annuity Plan if the participant otherwise satisfies the conditions for that benefit, but shall not reflect any possible post-retirement benefit increases; provided, however, that, if the participant's Contingent Annuity Option election under the PECO Service Annuity Plan is not irrevocable at the time the lump sum payment is made hereunder, the participant will receive an initial lump sum payment reflecting the Contingent Annuity Option resulting in the smallest lump sum payment from the Management Group Deferred Compensation Plan and, at age 65 (or at the participant's death, if earlier), a payment will be made to the participant (or his or her beneficiary) equal to the balance due the participant (which shall be the present value of the difference between the value of the total pension payable to the participant or beneficiary at such time over the sum of the value of benefits payable to the participant or beneficiary under the Service Annuity Plan and the lump sum previously paid, taking into account the Contingent Annuity Option then in effect, the Contingent Annuity Option in effect between retirement and age 65, and increases in benefits payable under the Service -10- Annuity Plan due to adjustment of Internal Revenue Code limitations, and reflecting the interest rate used to calculate the prior lump sum). The specific calculation methodology and manner of payment, which will be made in a manner acceptable to the Administrator, will be applied in a uniform, non-discriminatory fashion. An election made pursuant to Paragraph 8(b)(1), once made, shall be irrevocable; provided, however, that a participant who made an election prior to June 1, 1993 to receive the entire supplemental retirement benefit payable to the participant hereunder in a lump sum may, while employed by PECO, make one subsequent election on or after June 1, 1993 to receive less than the full benefit in a lump sum, subject to the timing limitations described in Paragraph 8(b)(1). (c) (1) A participant may elect to have supplemental death benefits under Paragraph 8(a) paid to such beneficiary or beneficiaries as the participant may designate in writing, in the manner specified by the Administrator. A change in beneficiary designation may be made at any time until the participant's death, notwithstanding that the form and amount of the benefit may be fixed upon the participant's termination of employment with PECO. In the absence of a written beneficiary designation, death benefits will be paid to the beneficiary or beneficiaries entitled to the participant's survivor and death benefits under the Service Annuity Plan. (2) Should a participant who has made a lump sum election as described in Paragraph 8(b)(1) prior to June 1, 1993 die between the time such election is made and the date payments are scheduled to begin, the present value of supplemental death benefits payable to the participant's beneficiary under Paragraph 8(a) shall be paid in a lump sum to the participant's beneficiary as soon as administratively practicable -11- following the participant's death; provided, however, that the participant has not made a contrary election pursuant to the following sentence. In accordance with procedures prescribed by the Administrator, a participant (including a participant described in the preceding sentence), while employed by PECO, may elect, or revoke or change a prior election, to have the present value of all or a portion of the supplemental death benefits payable to the participant's beneficiary under Paragraph 8(a) paid to the beneficiary in a lump sum as soon as administratively practicable following the participant's death; provided, however, that such election, or revocation or change, will not be effective unless made in the calendar year prior to the calendar year in which payments are scheduled to begin and at least ninety (90) days prior to the date such payments are scheduled to begin. (3) The present value of amounts payable in a lump sum pursuant to Paragraph 8(c)(2) will be actuarially determined by discounting the expected stream of annuity payments (based upon the beneficiary's life expectancy determined as of the date of payment under the mortality table used in the most recent actuarial analysis of the PECO Service Annuity Plan) at a rate equivalent to the Pension Benefit Guaranty Corporation (PBGC) Immediate Annuity Rate in effect on January 1 of the year of the participant's death; provided, however, that a lump sum payable to the beneficiary of a participant who made a lump sum election under this Paragraph 8 prior to June 1, 1993 (even if such election was later modified, or revoked and reinstated, with respect to the participant's beneficiary) shall be valued using the PBGC Immediate Annuity Rate in -12- effect during the month such election was made, if the use of such rate would result in a larger lump sum payment. 9. Participation in Deferred Compensation Plan. A participant in the Management Group Deferred Compensation Plan who becomes eligible to participate in the Company's Deferred Compensation Plan shall cease to participate in the Management Group Deferred Compensation Plan, and all benefits payable to the participant with respect to either plan shall be provided under the Deferred Compensation Plan. The participant shall be credited with a Deferral Account under the Deferred Compensation Plan equal to the value of his or her Deferral Account under the Management Group Deferred Compensation Plan, and the participant's supplemental pension benefit (if any) shall be determined as though the employee had participated in the Deferred Compensation Plan during the period he or she was a participant in the Management Group Deferred Compensation Plan. 10. Amendment or Discontinuance. The Management Group Deferred Compensation Plan may be altered, amended, suspended, or terminated at any time by the Board, provided that no such action shall result in the distribution of amounts credited to the Deferral Accounts of all participants in any manner than is otherwise provided in this Plan, nor shall such action reduce the availability of amounts previously deferred. The rules relating to distribution may be generally altered or specifically waived by the Administrator in his sole discretion, but no such action shall reduce the availability of amounts previously deferred unless it is necessary to do so to preserve the tax deferral on amounts deferred. -13- 11. No Right to Continued Employment. The Management Group Deferred Compensation Plan shall not confer upon any person any right to be continued in the employment of PECO. 12. Governing Law. The Management Group Deferred Compensation Plan shall be governed by the law of the Commonwealth of Pennsylvania. -14- EX-10.6 12 Exhibit 10-6 PECO Energy Company Unfunded Deferred Compensation Plan for Directors (Effective Date: April 1, 1983) (As Amended through February 23, 1998) The purpose of this plan is to permit Directors of PECO Energy Company ("PECO") to elect to defer receipt of directors' fees. To carry out this purpose PECO therefore adopts the following plan of Deferred Compensation for Directors (the "Deferred Compensation Plan for Directors" or the "Plan"): 1. Administration. The Deferred Compensation Plan for Directors shall be administered by the Treasurer of PECO (the "Treasurer"), or such other individual or individuals as designated by the Board of Directors of PECO (the "Board"). The Treasurer shall interpret the Deferred Compensation Plan and establish such rules and regulations of plan administration that he deems appropriate. The cost of plan administration shall be paid by PECO, and shall not be charged against the deferred accounts of Plan participants. 2. Eligibility. All Directors of PECO (other than full-time employees of PECO) shall be eligible to participate in the Deferred Compensation Plan for Directors. 3. Deferrals. (a) Effective April 1, 1983 (the "Effective Date"), each eligible Director may elect in writing to receive a portion of his or her future directors' fees as deferred compensation, by filing a written Director's Deferral Agreement form with the Treasurer. In all events, each such election shall be made prior to the period with respect to which the fees are earned or otherwise payable. Deferred amounts shall be credited to a deferral account in the participant's name ("Deferral Account") for later distribution. Each participant's Deferral Account shall be a bookkeeping entry only, and PECO shall not be required to fund the Deferral Account. Any assets that may be held by PECO to fund a Deferral Account shall at all times remain unrestricted assets of PECO in its corporate capacity and not as fiduciary, and shall be subject to the claims of PECO's general creditors. Pending distribution, after the Effective Date each participant's Deferral Account shall be credited with earnings or interest as provided in Paragraph 3(b). (b) (1) For purposes of measuring the earnings or losses credited to his Deferral Account, the participant may select, from among the investment vehicles available from time to time under the PECO Energy Company Employee Savings Plan (the "Savings Plan"), the investment media in which all or part of his Deferral Account shall be deemed to be invested. (2) The participant shall make an investment designation in the form and manner prescribed by the Committee or its designee, which shall remain effective until another valid designation has been made by the participant as herein provided. The participant may amend his investment designation at such times and in such manner as prescribed by the Committee or its designee. A timely change to the participant's investment designation shall become effective as soon as administratively practicable. (3) The investment media deemed to be made available to the participant, and any limitation on the maximum or minimum percentages of the participant's Deferral Account that may be deemed to be invested in any particular medium, shall be the same as available or in effect from time-to-time under the Savings Plan. (4) Except as provided below, the participant's Deferral Account shall be deemed to be invested in accordance with his investment designations, and the Deferral Account shall be credited with earnings (or losses) as if invested as directed by the participant. If -- 2 (i) the participant does not furnish complete investment instructions, or (ii) the investment instructions from the participant are unclear, then the Deferral Account shall be credited with interest compounded and adjusted monthly, at a rate equal to the prime commercial lending rate of The Chase Manhattan Bank, N.A. in effect at the opening of business on the 15th day of each month (or if such day is a non-business day, on the first business day thereafter) plus 1/2 of 1%. The Deferral Accounts maintained pursuant to this Plan are for bookkeeping purposes only and PECO is under no obligation to invest such amounts. PECO shall provide a statement to the participant not less frequently than annually showing such information as is appropriate, including the aggregate amount in his Deferral Account, as of a reasonably current date. 4. Distributions. The amount standing to a participant's Deferral Account shall be distributed to the participant as the participant shall direct in his or her Benefit Distribution Election Form beginning with the first day of the month following the participant's termination of service as Director of PECO, the termination of the participant's full-time employment, or the participant's 65th birthday. Distributions shall be paid monthly over not more than 15 consecutive twelve-month periods. Each payment shall be determined by multiplying the balance remaining to the credit of the Deferral Account at the beginning of such twelve-month period (including earnings or interest credited under Paragraph 3) by a fraction, the numerator of which is "1" and the denominator of which is the number of twelve month periods (including the current period) for which payments are yet to be made. If application of the foregoing would result in a payment for any twelve-month 3 period of less than $10,000, the amount payable for such period shall be at the rate of $10,000 per twelve-month period, until the Deferral Account is exhausted. Any unpaid balance in the Deferral Account shall be credited with earnings or interest as provided in Paragraph 3. In any calendar year before payments are scheduled to begin and at least ninety (90) days prior to the date such payments are scheduled to begin, a participant may elect to receive the amounts payable hereunder in such other manner as is acceptable to the Treasurer, provided that no such election shall accelerate the commencement of benefits, and provided further that any such election to receive periodic installments determined by application of a formula based, in part, on investment return assumptions may subsequently be amended irrevocably to provide for installments thereafter in an amount equal to the lesser of (i) the initial periodic installment received by the participant or (ii) the most recent periodic installment received by the participant. Notwithstanding the foregoing, a participant whose service as a Director of PECO was terminated for retirement and who is receiving installment payments of his or her Deferral Account ("a retired participant"), or the beneficiary of a deceased retired participant, may elect to receive 90% of the balance of his or her Deferral Account in a lump sum. The remaining 10% of the balance of his or her Deferral Account shall be forfeited. 5. Death Benefits. Each participant shall designate a beneficiary or beneficiaries to receive any payments hereunder after the participant's death. The beneficiaries, and any priority or allocation between them, shall be designated in the manner specified by the Treasurer. If a participant dies before the entire balance in his or her Deferral Account has been paid out, the remaining balance shall be paid at the discretion of the Treasurer either in installments as they would have been due to be paid to the participant or in a lump sum to the beneficiary. If the participant is not survived by a designated beneficiary, the participant's beneficiary shall be the 4 participant's spouse, if living, or otherwise, the participant's estate. If a beneficiary survives the participant but dies before the entire balance payable to him or her has been distributed, any remaining balance shall be paid to the beneficiary's estate. In the absence of contrary proof, the participant shall be deemed to have survived any designated beneficiary. A participant may change his beneficiary designation under this Paragraph at any time until his death by filing a written beneficiary designation with the Treasurer, in the manner specified by the Treasurer. 6. Financial Hardship. The Treasurer may, in his discretion, direct that a participant be paid an amount in cash (not in excess of the balance of his or her Deferral Account) sufficient to meet a financial hardship. Financial hardship shall mean (a) medical care for the participant, a member of his or her family, or any other person for whom the participant wishes or is legally required to provide such care; (b) education costs for a participant, spouse or child; (c) acquiring, constructing or renovating the participant's principal residence; or (d) other similar substantial and non-recurring expenses for the welfare of the participant and his dependents, as the Treasurer shall determine in his sole discretion. To preserve the tax benefits of the deferral program, the Treasurer may require evidence of financial hardship. 7. No Assignment or Alienation of Benefits. Except as hereinafter provided with respect to marital disputes, a participant's Deferral Account may not be voluntarily or involuntarily assigned or alienated. In cases of marital dispute, PECO will observe the terms of the Plan unless and until ordered to do otherwise by a state or Federal court. As a condition of participation, a participant agrees to hold PECO harmless from any claim that arises out of PECO's obeying the final order of any state or Federal court, whether such order effects a judgment of such court or is issued to enforce a judgment or order of another court. 5 8. Amendment or Discontinuance. The Deferred Compensation Plan for Directors may be altered, amended, suspended, or terminated at any time by the Board, provided that no such action shall result in the distribution of amounts credited to the Deferral Accounts of all participants in any manner than is otherwise provided in this Plan, nor shall such action reduce the availability of amounts previously deferred. The rules relating to distribution may be generally altered or specifi cally waived by the Treasurer in his sole discretion, but no such action shall reduce the availability of amounts previously deferred unless it is necessary to do so to preserve the tax deferral on amounts deferred. 9. Governing Law. The Deferred Compensation Plan for Directors shall be governed by the law of the Commonwealth of Pennsylvania. 6 EX-12.1 13 PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES SEC METHOD ($000) 12 Months Ended 12/31/97 - -------------------------------------------------------------------------------- NET INCOME $336,558 ADD BACK: - - INCOME TAXES: OPERATING INCOME 285,343 NON-OPERATING INCOME 7,426 - -------------------------------------------------------------------------------- NET TAXES $292,769 ================================================================================ - - FIXED CHARGES: INTEREST APPLICABLE TO DEBT $359,363 ANNUAL RENTALS ESTIMATE $ 8,723 - -------------------------------------------------------------------------------- TOTAL FIXED CHARGES $368,086 ================================================================================ - -------------------------------------------------------------------------------- ADJUSTED EARNINGS INCLUDING AFUDC $997,413 ================================================================================ - -------------------------------------------------------------------------------- RATIO OF EARNINGS TO FIXED CHARGES 2.71 ================================================================================ EX-12.2 14 PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDEND REQUIREMENTS SEC METHOD ($000) 12 Months Ended 12/31/97 - -------------------------------------------------------------------------------- NET INCOME $336,558 ADD BACK: - - INCOME TAXES: OPERATING INCOME 285,343 NON-OPERATING INCOME 7,426 - -------------------------------------------------------------------------------- NET TAXES $292,769 ================================================================================ - - FIXED CHARGES: TOTAL INTEREST $359,363 ANNUAL RENTALS ESTIMATE 8,723 - -------------------------------------------------------------------------------- TOTAL FIXED CHARGES $368,086 ================================================================================ EARNINGS REQUIRED FOR PREFERRED DIVIDENDS: DIVIDENDS ON PREFERRED STOCK $ 16,804 ADJUSTMENT TO PREFERRED DIVIDENDS* $ 14,618 -------- $ 31,422 ================================================================================ FIXED CHARGES AND PREFERRED DIVIDENDS $399,508 ================================================================================ EARNINGS BEFORE INCOME TAXES AND FIXED CHARGES $997,413 ================================================================================ RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND EARNINGS REQUIRED FOR PREFERRED DIVIDENDS 2.50 ================================================================================ * ADDITIONAL CHARGE EQUIVALENT TO EARNINGS REQUIRED TO ADJUST DIVIDENDS ON PREFERRED STOCK TO A PRE-TAX BASIS EX-13 15 13 Management's Discussion and Analysis of Financial Condition and Results of Operations General In December 1996, Pennsylvania Governor Ridge signed into law the Electricity Generation Customer Choice and Competition Act (Competition Act) which provides for the restructuring of the electric utility industry in Pennsylvania, including retail competition for generation beginning in 1999. Pursuant to the Competition Act, in April 1997, the Company filed with the Pennsylvania Public Utility Commission (PUC) a comprehensive restructuring plan detailing its proposal to implement full customer choice of electric generation supplier. The Company's restructuring plan identified $7.5 billion of stranded costs (the loss in value of the Company's electric generation-related assets, which will result from competition). In August 1997, the Company and various intervenors in the Company's restructuring proceeding filed with the PUC a Joint Petition for Partial Settlement (Pennsylvania Plan). In December 1997, the PUC rejected the Pennsylvania Plan and entered an Opinion and Order, revised in January 1998 (PUC Restructuring Order), that deregulates the Company's electric generation operations. The PUC Restructuring Order authorizes the Company to recover stranded costs of $4.9 billion on a discounted basis, or $5.3 billion on a book-value basis, over 8-1/2 years beginning in 1999. In January 1998, the Company filed appeals of the PUC Restructuring Order with the U.S. District Court for the Eastern District of Pennsylvania (Eastern District Court) and the Commonwealth Court of Pennsylvania (Commonwealth Court). The Company believes that the PUC Restructuring Order provides sufficient details regarding the deregulation of the Company's electric generation operations to require the Company to discontinue the use of regulatory accounting in its financial statements for those operations. The Company determined that at December 31, 1997, $5.8 billion of its $7.1 billion of electric generation assets were impaired and it had $2.6 billion of other electric generation-related regulatory assets. Effective December 31, 1997, the Company recorded an extraordinary charge against income of $3.1 billion ($1.8 billion net of income taxes) to reflect the amount of such electric generation-related assets which will not be recovered from customers either prior to the commencement of competition or under the PUC Restructuring Order. For additional information regarding the extraordinary charge, see note 4 of Notes to Consolidated Financial Statements. On January 26, 1998, the Company's Board of Directors reduced the quarterly common stock dividend from $0.45 per share to $0.25 per share, effective with the dividend payable on March 31, 1998. The Board of Directors concluded that, given the impact of the PUC Restructuring Order, the dividend reduction was necessary to provide the Company with the financial flexibility needed to meet the demands of competition. Although the Company cannot predict the ultimate effect of the PUC Restructuring Order and competition for electric generation services, the Company believes that its future financial condition and results of operations will be adversely affected. See "Outlook-PUC Restructuring Order." Discussion of Operating Results Earnings The Company recorded a loss per common share of $6.80 in 1997 as compared with earnings per share of $2.24 and $2.64 in 1996 and 1995, respectively. The loss in 1997 was primarily due to an extraordinary charge of $8.24 per share reflecting the effects of the PUC Restructuring Order and deregulation of the Company's electric generation operations. 1997 earnings were also reduced by several one-time charges totaling $0.56 per share for changes in employee benefits, write-offs of information systems development charges reflecting clarification of accounting guidelines and additional reserves, including for environmental site remediation; by $0.30 per share for higher depreciation expense resulting from a full year's increase in depreciation and amortization of assets associated with Limerick Generating Station (Limerick) and other assets; by $0.12 per share for income tax adjustments; by $0.09 per share for losses from new non-utility ventures; and by $0.05 per share for increased depreciation expense due to plant additions. These decreases were partially offset by a one-time $0.18 per share recognition of income resulting from the settlement of litigation arising from the current outage of Salem Generating Station (Salem); by $0.08 per share for operational efficiencies; and by higher revenues net of fuel of $0.06 per share primarily due to increased sales to other utilities. The $0.40 per share decrease in 1996 earnings was primarily due to higher Salem outage-related replacement power and maintenance costs which reduced earnings by $0.27 per share. Earnings also decreased by $0.18 per share in 1996 due to lower electric revenues resulting from milder weather conditions compared to 1995; by $0.12 per share due to the gain recognized in 1995 on the sale of Conowingo Power Company (COPCO); by $0.11 per share due to higher customer expenses; and by $0.10 per share due to the increased depreciation of assets associated with Limerick. These decreases were partially offset by $0.18 per share due to the Company's continuing cost control initiatives; by $0.09 per share due to savings resulting from the Company's ongoing debt and preferred stock refunding and refinancing program; and by $0.08 per share due to higher revenues resulting from increased sales to other utilities. 14 Significant Operating Items
Revenue and Expense Items as a Percentage of Total Operating Revenues Percentage Dollar Changes 1995 1996 1997 1997-1996 1996-1995 90% 90% 90% Electric 8% 2% 10% 10% 10% Gas 5% 4% ---- ---- ---- ---- ----- 100% 100% 100% Total Operating Revenues 8% 2% ==== ==== ==== ==== ==== 18% 23% 28% Fuel and Energy Interchange 33% 27% 30% 30% 31% Operating and Maintenance 12% 2% 11% 11% 12% Depreciation 19% 7% 8% 7% 7% Taxes Other Than Income 4% (5%) ---- ---- ---- ---- ----- 67% 71% 78% Total Operating Expenses 19% 9% ==== ==== ==== ==== ==== 33% 29% 22% Operating Income (19%) (11%) ==== ==== ==== ==== ==== (11%) (10%) (9%) Interest Expense (2%) (8%) ---- ---- ---- ---- ----- (9%) (9%) (8%) Total Other Income and Deductions 4% (9%) ---- ---- ---- ---- ----- 24% 20% 14% Income Before Taxes and Extraordinary Item (27%) (18%) ---- ---- ---- ---- ----- 10% 8% 6% Income Taxes (14%) (21%) ---- ---- ---- ---- ----- 14% 12% 8% Income Before Extraordinary Item (35%) (15%) ==== ==== ==== ==== ====
Operating Revenues Total operating revenues increased in 1997 by $334 million to $4,618 million. This represented a $312 million increase in electric revenues and a $22 million increase in gas revenues over 1996. The increase in electric revenues was primarily due to increased sales to other utilities. The increase in gas revenues was primarily due to higher revenues from sales to commercial, house heating and residential customers resulting from higher purchased gas-clause revenues charged in 1997 compared to 1996, partially offset by lower sales volume resulting from milder weather conditions in 1997. This increase was partially offset by reduced sales to interruptible customers switching to transportation service. Total operating revenues increased in 1996 by $98 million to $4,284 million. This represented an $80 million increase in electric revenues and an $18 million increase in gas revenues over 1995. The increase in electric revenues was primarily due to increased sales to other utilities, partially offset by decreased retail sales due to milder weather conditions. The increase in gas revenues was primarily due to increased sales to retail customers from colder weather conditions in the first half of 1996 and higher levels of firm sales resulting from customers switching from transportation service to firm service. These increases were partially offset by decreased sales and transportation revenues resulting from unusually mild weather in December 1996. Increases/(decreases) in electric sales and operating revenues by class of customer for 1997 compared to 1996 and 1996 compared to 1995 are set forth as follows:
1997 - 1996 1996 - 1995 Electric Electric Electric Electric Sales Revenues Sales Revenues (Millions of kWh) (Millions of $) (Millions of kWh) (Millions of $) Residential (48) $ (1) (86) $ (14) House Heating (217) (12) 121 5 Small Commercial and Industrial 194 30 291 19 Large Commercial and Industrial (174) (21) (555) (37) Other (61) 8 42 3 Unbilled 397 45 (862) (69) Service Territory 91 49 (1,049) (93) Interchange Sales 992 33 439 9 Sales to Other Utilities 8,650 230 6,202 164 Total 9,733 $ 312 5,592 $ 80
Fuel and Energy Interchange Expense Fuel and energy interchange expense increased in 1997 by $318 million to $1,290 million. The increase was primarily due to purchases needed for increased sales to other utilities and a one-time billing credit in 1996 from a non-utility generator. Fuel and energy interchange expense as a percentage of operating revenues increased from 23% to 28% principally due to purchases needed for increased sales to other utilities. Fuel and energy interchange expense increased in 1996 by $210 million to $973 million. The increase was primarily due to purchases needed for increased sales to other utilities, increased replacement power costs resulting from the shutdown of Salem and a net credit to expense in 1995 from certain energy sales to other utilities. Fuel and energy interchange expense as a percentage of operating revenues increased from 18% to 23% principally due to increased replacement power costs resulting from the shutdown of Salem. 15 Operating and Maintenance Expense Operating and maintenance expense increased in 1997 by $157 million to $1,431 million primarily due to several one-time charges totaling $187 million, including charges for changes in employee benefits, write-offs of information systems development charges reflecting clarification of accounting guidelines and additional reserves, including for environmental site remediation. These increases were partially offset by lower operating costs at Company-operated nuclear generating stations and lower administrative and general expenses resulting from the Company's ongoing cost-control efforts. Operating and maintenance expense increased in 1996 by $23 million to $1,274 million due to higher customer expenses, higher contractor costs and higher nuclear generating station charges resulting from the shutdown of Salem. These increases were partially offset by lower operating costs at Company-operated nuclear generating stations and lower administrative and general expenses resulting from the Company's ongoing cost-control efforts. Depreciation Expense Effective October 1, 1996, the Company increased depreciation and amortization on assets associated with Limerick by $100 million per year and decreased depreciation and amortization on other Company assets by $10 million per year. Depreciation expense increased in 1997 by $92 million to $581 million. The increase was primarily due to increased depreciation of assets associated with Limerick. Depreciation expense also increased due to additions to plant in service. Depreciation expense increased in 1996 by $32 million to $489 million. The increase was primarily due to increased depreciation of assets associated with Limerick. Depreciation expense also increased due to additions to plant in service. Interest Charges Interest charges decreased in 1997 by $7 million to $402 million. The decrease was primarily due to the Company's ongoing program to reduce and/or refinance higher-cost, long-term debt. This decrease was partially offset by the replacement of $62 million of preferred stock with Monthly Income Preferred Securities (MIPS) in the third quarter of 1997. MIPS are recorded in the financial statements as Company Obligated Mandatorily Redeemable Preferred Securities of a Partnership. Interest charges decreased in 1996 by $36 million to $409 million. The decrease was primarily due to the Company's ongoing program to reduce and/or refinance higher-cost, long-term debt. This decrease was partially offset by the replacement of $78 million of preferred stock with MIPS in the fourth quarter of 1995. Other Income and Deductions Other income and deductions excluding interest charges increased in 1997 by $6 million to $4 million. The increase was primarily due to the settlement of litigation arising from the shutdown of Salem. The increase was partially offset by losses from the Company's new non-utility ventures. Also offsetting the increase was the write-off of one of the Company's telecommunications investments as a result of the circumstances involved in the Federal Communication Commission's auctioning of the personal communications systems "C-block" licenses. Other income and deductions excluding interest charges decreased in 1996 by $60 million to a net deduction of $2 million. The decrease was primarily due to the gain recognized in 1995 on the sale of COPCO. Income Taxes Income taxes on operating and non-operating income decreased in 1997 by $47 million to $293 million. The decrease was primarily due to lower operating income. The decrease was partially offset by reduced tax depreciation benefits from plant and regulatory assets which are not fully normalized for ratemaking purposes. Income taxes decreased in 1996 by $92 million to $340 million. The decrease was primarily due to lower operating income and the gain recognized in 1995 on the sale of COPCO. Preferred Stock Dividends Preferred stock dividends decreased in 1997 by $1 million to $17 million. The decrease was primarily due to the replacement of $62 million of preferred stock with MIPS in the third quarter of 1997. Preferred stock dividends decreased in 1996 by $5 million to $18 million. The decrease was primarily due to the replacement of $78 million of preferred stock with MIPS in the fourth quarter of 1995. Discussion of Liquidity and Capital Resources The Company's capital resources are primarily provided by internally generated cash flows from utility operations and, to the extent necessary, external financing. Such capital resources are generally used to fund the Company's capital requirements, including investments in new and existing ventures, to repay maturing debt and to make preferred and common stock dividend payments. In 1997, 1996 and 1995, internally generated cash exceeded the Company's capital requirements and dividend payments. The Company anticipates that it will be able to meet its capital requirements with internally generated cash from utility operations in 1998. Beginning in 1999, the Company expects that internally generated cash will be reduced due to price pressures resulting from competition for electric generation services and the effects of the PUC Restructuring Order. In anticipation of this expected reduction of internally generated cash, in January 1998, the Board of Directors voted to reduce the Company's common stock dividend, effective with the first quarter 1998 dividend. Based upon the 222.5 million shares of common stock currently out- 16 standing, the common stock dividend reduction will reduce the Company's cash requirements by $178 million per year. Absent increases in the market price of electric generation services, the Company expects that internally generated cash will be further reduced in 2007, when the Company completes the recovery of its allowed stranded costs from customers. The magnitude of the reduction of internally generated cash will be affected by a number of factors, including how quickly electric generation competition develops, the Company's ability to compete, the impact of additional cost-cutting initiatives, future market prices of electric generation and the outcome of the Company's appeals of the PUC Restructuring Order. The Competition Act authorizes the securitization of the recovery of allowed stranded costs. Under the Competition Act, securitization proceeds must be used principally to reduce qualified stranded costs and related capitalization. Unless extended by the PUC, the Company has authorization until May 22, 1998 to securitize $1.1 billion of stranded costs. It is unlikely that the Company will securitize the recovery of its stranded costs until appeals of the PUC Restructuring Order are resolved. If the Company does securitize, it cannot predict the level of stranded cost recovery that it would be permitted to securitize or the impact of such securitization on the Company's capitalization. At December 31, 1997, the Company's capital structure consisted of 36.8% common equity; 7.9% preferred stock and Company obligated mandatorily redeemable preferred securities (which comprised 4.8% of the Company's total capitalization structure); and 55.3% long-term debt. The Company expects its level of net capital investment to decrease in future years. Total capital expenditures, primarily for utility plant, were $573 million in 1997 and are estimated to be $600 million in 1998. Due to the expected adverse impact of the PUC Restructuring Order and competition for electric generating services on its future capital resources, the Company is currently evaluating its capital commitments for 1999 and beyond. 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. The Company has undertaken a number of new ventures, principally through its Telecommunications Group, some of which require significant cash commitments. For 1998, the Company's expected capital expenditures include approximately $150 million in such ventures. Cash flows from operations were $1,038 million in 1997 as compared to $1,172 million in 1996 and $1,240 million in 1995. Cash flows consist of earnings, non-cash charges of depreciation and deferred income taxes Cash flows used in investing activities were $573 million in 1997 as compared to $663 million in 1996 and $465 million in 1995. Expenditures under the Company's construction program decreased in 1997. The Company has also made significant investments in diversified activities and other obligations. Net funds used in these activities in 1997 were $83 million, consisting of $26 million for telecommunications ventures, $54 million for nuclear plant decommissioning trust funds and $3 million for other deposits and ventures. In 1996 and 1995, funds used in similar activities were $114 million and $82 million, respectively. 1995 cash flows benefited from the sale of COPCO. Cash flows used in financing activities were $461 million in 1997 as compared to $501 million in 1996 and $802 million in 1995. The decreases in 1997 and 1996 were primarily due to less available cash permitting fewer retirements of higher-cost debt. The Company meets its short-term liquidity requirements primarily through the issuance of commercial paper and borrowings under an unsecured credit facility with a group of banks. The Company had $402 million of short-term debt, including $314 million of commercial paper, outstanding at December 31, 1997. At December 31, 1997, the Company's embedded cost of debt was 6.9% with 12.0% of the Company's long-term debt having floating rates. As a result of the extraordinary charge in December 1997, the Company does not expect to meet the earnings test under the Company's mortgage required for the issuance of additional bonds against property additions for the twelve months ended December 31, 1998. As of December 31, 1997, the Company was entitled to issue approximately $3.6 billion of mortgage bonds without regard to the earnings test against previously retired mortgage bonds. As a result of the extraordinary charge, the Company also does not expect to meet the coverage test under Company's Articles of Incorporation required for the issuance of additional preferred stock for the twelve months ended December 31, 1998. The Company cannot predict whether the Competition Act or the PUC Restructuring Order will ultimately affect the Company's credit ratings. Outlook The Company is entering a period of financial uncertainty with the deregulation of its electric generation operations in which revenues from regulated rates will be replaced by revenues from the competitive sale of electric generation at market prices. The Company believes that the deregulation of its electric generation operations and other regulatory initiatives designed to encourage competition will increase the Company's risk profile by changing and increasing the number of factors upon which the Company's financial results are dependent. This may result in more volatility in the Company's future results of operations. The Company believes that it has significant advantages that will assist it in the increasingly competitive electric generation environment. These advantages include the ability to produce electricity at a low marginal cost, a high reserve margin and the demonstrated ability to efficiently operate its electric generation facilities. The Company's future financial condition and its results of operations are substantially dependent upon the effects of the Competition Act and the PUC Restructuring Order. Additional factors that affect the Company's financial condition and results of operations include operation of nuclear generating facilities, sales to other utilities, accounting issues, inflation, weather and compliance with environmental regulations. Another factor affecting the Company's future financial condition is its ability to develop its investments in new ventures into profitable enterprises. 17 PUC Restructuring Order The Competition Act was enacted in December 1996, providing for the restructuring of the electric utility industry in Pennsylvania, including retail competition for generation beginning in 1999. The Competition Act requires the unbundling of electric services into separate generation, transmission and distribution services with open retail competition for generation. Electric distribution and transmission services will remain regulated by the PUC. The Competition Act requires utilities to submit to the PUC restructuring plans, including their quantification of stranded costs which will result from competition. The Competition Act authorizes the recovery of stranded costs through charges to distribution customers for up to nine years (or for an alternative period determined by the PUC for good cause shown). During that period, the utility is subject to a rate cap which provides that total charges to customers cannot exceed rates in place as of December 31, 1996, subject to certain exceptions. The Competition Act also caps transmission and distribution rates from December 31, 1996 through June 30, 2001, subject to certain exceptions. Pursuant to the Competition Act, in April 1997, the Company filed with the PUC a comprehensive restructuring plan. In December 1997, the PUC adopted its own restructuring plan which deregulates the Company's electric generation operations and allows the Company to recover stranded costs of $4.9 billion on a discounted basis, or $5.3 billion on a book value basis, over 8-1/2 years beginning in 1999. Recovery of allowed stranded costs will be through a separate charge to be levelized over the recovery period using a 7.47% cost of capital. Other major provisions of the PUC Restructuring Order include capping customer bills at the year-end 1996 system-wide average of 9.95 cents per kWh; beginning January 1, 1999, unbundling rates into a transmission and distribution component, the charge for recovery of stranded costs and a "shopping credit" for generation; and phasing in customer choice of electric generation supplier for all customers in three steps, one-third of the peak load of each customer class on January 1, 1999, one-third on January 2, 1999 (one day later) and the remainder on January 2, 2000. To encourage competition, the PUC established the "shopping credit" for generation in excess of current market prices. On January 21, 1998, the Company filed a complaint in the Eastern District Court seeking injunctive and monetary relief on the grounds that the Competition Act and the PUC Restructuring Order: (1) are preempted by Section 201(b) of the Federal Power Act; (2) effect a taking of private property without just compensation in violation of the Fifth and Fourteenth Amendments to the U.S. Constitution; (3) violate the Due Process Clause, the Contract Clause and the First Amendment of the U.S. Constitution; and (4) deprive the Company of certain other federally protected rights . On January 22, 1998, the Company filed two Petitions for Review in the Commonwealth Court appealing the PUC Restructuring Order. The petitions state that the PUC Restructuring Order must be set aside because it is based upon errors of law, is not supported by substantial evidence, constitutes an arbitrary and capricious abuse of administrative discretion and deprives the Company of the due process of law, to which it is entitled under Article I of the Pennsylvania Constitution. Uncertainties of Electric Generation Restructuring Competition in wholesale and retail electric generation is expected to create new uncertainties in the utility industry. These uncertainties include future prices of electricity in both the retail and wholesale markets, potential changes in the Company's sales portfolio and supply and demand volatility. The Company expects that deregulation of the Company's electric generating operations will result in price pressures that will reduce the Company's future revenues. While the Company cannot predict the ultimate impact of the PUC Restructuring Order on customer bills, the PUC estimates that customers will save up to 15% of their total electric bill beginning in 1999 through June 30, 2007 and will save 30% of their total electric bill thereafter. Competition is also expected to affect the ultimate composition of the Company's electricity sales. The "shopping credit" established by the PUC encourages electric retail customers to choose a supplier. The Company cannot predict how successful its affiliated generation marketers will be in competing for these customers and customers elsewhere in Pennsylvania. To the extent that the Company loses retail customers, it will be compelled to sell generation previously used to serve retail customers in the wholesale market. Since margins in the wholesale market are currently lower than in the retail market, this could adversely affect the Company's profit margins. The Company is a low marginal-cost electricity producer, which puts it in a favorable position to take advantage of opportunities in the electric retail and wholesale generation markets. The Company's competitive position and its future financial condition and results of operations are dependent on the Company's ability to successfully operate its low marginal-cost power plants. The Company enters into commitments to buy and sell power. Currently, these commitments make the Company a net power purchaser. Since the price and supply volatility of electricity generation cannot be predicted at this time, the Company's position as a net purchaser exposes it to risk to the extent that it has entered into contracts that may require the Company to pay prices for purchased power in excess of market prices. The Company, as the local distribution provider, is obligated under the PUC Restructuring Order to serve as the electric generation supplier of last resort in its service territory. This obligation will include all customers who do not elect to choose an electricity supplier as well as all customers who seek a new energy supplier but are unable to reach a service agreement with another supplier. The Company's rates are capped at 1996 levels. If energy prices rise above that level, the Company would still be obligated to serve these customers at the capped rate. Other Competitive Initiatives During 1996, the Federal Energy Regulatory Commission (FERC) issued Order No. 888 which requires public utilities to file open-access transmission tariffs for wholesale transmission services in accordance with non-discriminatory terms and conditions established by the FERC. In response to Order No. 888, in December 1996, the Company and the other members of PJM Interconnection, L.L.C. (PJM) filed a joint compliance filing with the FERC 18 proposing to restructure PJM. In November 1997, the FERC issued an order which allows for the establishment of an Independent System Operator (ISO) to operate the day-to-day operations of PJM. Transmission service is on a pool-wide, open-access basis using the transmission facilities of the eight historical PJM companies with a flat rate based on the costs of the transmission system where the point of delivery is located (thus there are eight rates). By January 1, 2003, PJM is required to have in place a uniform system-wide transmission rate. The Company received approval from the FERC to remove the existing cost-based cap on prices charged for power purchased by the Company in anticipation of later resale in the wholesale market and certain changes regarding the terms of the buy-for-resale agreements. The new tariff provisions allow the Company to purchase and re-sell energy at market-based rates both within PJM and outside PJM. The gas industry is continuing to undergo structural changes in response to FERC policies designed to increase competition. FERC policies have required interstate gas pipelines to unbundle their gas sales service from other regulated tariff services, such as transportation and storage. In anticipation of these changes, the Company has modified its gas purchasing arrangements to enable the purchase of gas and transportation at lower cost. The Company, through Horizon Energy Company, a wholly owned subsidiary, has successfully participated in pilot programs outside the Company's gas service territory to market natural gas and other services. There is an initiative in the Pennsylvania legislature to deregulate the gas industry, which has the support of Governor Ridge. The Company cannot predict whether the Pennsylvania legislature will enact legislation that deregulates the gas industry or whether Governor Ridge will ultimately sign into law any such legislation. The Company cannot predict the ultimate effect of gas industry deregulation on its future financial condition or results of operations. As a result of competitive pressures, the Company has continued to negotiate long-term contracts with many of its larger-volume industrial customers. Although these agreements have generally resulted in reduced margins, they have permitted the Company to retain these customers. 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 44% of its installed generating capacity. Because of the Company's reliance on its nuclear generating units, any changes in regulations by the Nuclear Regulatory Commission (NRC) requiring additional investments or resulting in increased operating costs of nuclear generating units could adversely affect the Company. During 1997, Company-operated nuclear plants operated at an 90% weighted-average capacity factor and Company-owned nuclear plants operated at a 73% weighted-average capacity factor. Company-owned nuclear plants produced 39% of the Company's electricity, despite the shutdown of the Salem units. Nuclear generation is the most cost-effective way for the Company to meet customer needs and commitments for sales to other utilities. 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 in the second quarter of 1995. 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. Unit No. 2 returned to service on August 30, 1997 and Unit No. 1 is expected to return to service late in the first quarter of 1998. The Company expects to incur and expense at least $20 million in 1998 for increased costs related to the shutdown. As of December 31, 1997, 1996 and 1995, the Company had incurred and expensed $152, $149 and $50 million, respectively, for replacement power and maintenance costs related to the shutdown of Salem. See note 5 of Notes to Consolidated Financial Statements. Sales to Other Utilities The Company's electric utility operations include the wholesale marketing of electricity. At December 31, 1997, the Company had long-term commitments relating to the purchase from unaffiliated utilities and others, energy associated with 1,330 megawatts (MW) of capacity in 1998, with 2,540 MW of capacity during the period 1999 through 2002 and with 2,430 MW of capacity thereafter. These purchases will be utilized through a combination of sales to jurisdictional customers, long-term sales to other utilities and open-market sales. Under some of these contracts, the Company may purchase, at its option, additional power as needed. The Company's future results of operations are dependent in part on its ability to successfully market the rest of this generation. See note 5 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 profit margins on these sales. At December 31, 1997, the Company had entered into long-term agreements with unaffiliated utilities to sell energy associated with 4,280 MW of capacity, of which 540 MW of these agreements are for 1998, 1,700 MW are for 1999 through 2002 and the remaining 2,040 MW extend through 2022. Accounting Issues Effective December 31, 1997, the Company discontinued accounting for its electric generation operations in accordance with Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation." For further information, see note 4 of Notes to Consolidated Financial Statements. The Company believes that its electric transmission and distribution system and gas operations continue to meet the provisions of SFAS No. 71. The Company believes that it is probable that regulatory assets associated with these operations will be recovered. In 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 130, "Reporting Comprehensive Income," to establish standards for reporting and display of comprehensive income and its components in financial statements. The new standard requires an entity to classify items of other comprehensive income by their nature in a financial statement and to display the accumulated balance of other comprehensive income separately from retained earnings and 19 additional paid in capital in the equity section of a statement of financial position. The new standard is effective for fiscal years beginning after December 15, 1997. The Company will adopt SFAS No. 130 in 1998. Adoption of SFAS No. 130 will not affect the Company's financial condition or results of operations. The Company is evaluating the impact on its disclosures, but does not expect SFAS No. 130 to materially change its disclosures. In 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," to establish standards for reporting information about operating segments in annual financial statements and to require reporting of selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographical areas and major customers. The new standard is effective for fiscal years beginning after December 31, 1997. Adoption of SFAS No. 131 will not affect the Company's financial condition or results of operations. The Company is evaluating the impact on its operating segment disclosures. During 1996, the FASB issued the Exposure Draft "Accounting for Certain Liabilities Related to Closure or Removal of Long-Lived Assets." The FASB has expanded the scope of the project to include closure or removal liabilities that are incurred at any time in the operating life of the related long-lived asset. The FASB has decided that it should proceed toward either a final Statement or a revised Exposure Draft. The timing of this project is still to be determined. Until such time that the final Statement is issued, the Company will be unable to determine what, if any, effect this issue might have on its financial condition or results of operations. See note 5 of Notes to Consolidated Financial Statements. Other Factors Annual and quarterly operating results can be significantly affected by weather. Since the Company's peak demand is in the summer months, temperature variations in summer months are generally more significant than variations during winter months. Inflation affects the Company through increased operating costs and increased capital costs for utility plant. As a result of the rate caps imposed by the Competition Act, the elimination of the Energy Cost Adjustment and expected price pressures due to competition, the Company may have limited opportunity to pass the costs of inflation through to customers. The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year and other programming techniques which constrain date calculations or assign special meanings to certain dates. Any of the Company's computer systems that have date-sensitive software or microprocessors may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send bills or operate electric generation stations. The Company has determined that it will be required to modify or replace significant portions of its software so that its computer systems will properly utilize dates beyond December 31, 1999. The Company presently believes that with modifications to existing software and conversions to new software, the Year 2000 Issue can be mitigated. However, if such modifications and conversions are not made, or are not completed timely, the Year 2000 Issue could have a material adverse impact on the operations and financial condition of the Company. The costs associated with this potential impact are speculative and not presently quantifiable. The Company initiated formal communications with all of its significant suppliers in March 1997 to determine the extent to which the Company is vulnerable to the suppliers' failure to remediate their own Year 2000 issue. The Company's estimated total Year 2000 project costs include the estimated costs and time associated with the impact of Year 2000 issues of third parties and are based on presently available information. There can be no guarantee that the systems of other companies on which the Company's systems rely will timely be converted, or that a failure to convert by another company, or a conversion that is incompatible with the Company's systems, would not have material adverse impact on the Company. The Company will utilize both internal and external resources to reprogram, or replace, and test software and computer systems for Year 2000 modifications. Management believes that adequate resources are being devoted to the Year 2000 Issue. The Company plans to complete the Year 2000 project not later than June 1, 1999. To date, the Company has funded the Year 2000 project from current operating cash flows as a base level of activity for the preliminary efforts in connection with its Year 2000 assessment and remediation plan. The Company expects the remaining costs of the Year 2000 project to be approximately $25 million. The costs of the project and the date on which the Company plans to complete the Year 2000 modifications are based on Management's best estimates, which were derived utilizing numerous assumptions of future events including the continued availability of certain resources, third-party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved; actual results could differ materially from those plans. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer programs and microprocessors, and similar uncertainties. 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 20 substances have been deposited and may be subject to additional proceedings in the future. The Company has identified 27 sites where former manufactured gas plant (MGP) activities have or may have resulted in site contamination. The Company is presently engaged in performing various levels of activities at these sites, including initial evaluation to determine the existence and nature of the contamination, detailed evaluation to determine the extent of the contamination and the necessity and possible methods of remediation, and implementation of remediation. The Pennsylvania Department of Environmental Protection has approved the Company's clean-up of two sites. Six other sites are currently under some degree of active study and/or remediation. As of December 31, 1997 and 1996, the Company had accrued $63 and $28 million, respectively, for environmental investigation and remediation costs, including $35 and $16 million, respectively, for MGP investigation and remediation that currently can be reasonably estimated. The Company expects to expend $5 million for environmental remediation activities in 1998. 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 such costs will be recoverable from third parties. For a discussion of other contingencies, see notes 3, 4 and 5 of Notes to Consolidated Financial Statements. Forward-Looking Statements Except for the historical information contained herein, certain of the matters discussed in this Report are forward-looking statements which are subject to risks and uncertainties. The factors that could cause actual results to differ materially include those discussed herein as well as those listed in notes 3, 4 and 5 of Notes to Consolidated Financial Statements and other factors discussed in the Company's filings with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Report. The Company undertakes no obligation to publicly release any revision to these forward-looking statements to reflect events or circumstances after the date of this Report. 21 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, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Coopers & Lybrand LLP 2400 Eleven Penn Center Philadelphia, Pennsylvania February 2, 1998 Consolidated Statements of Income
For the Years Ended December 31, 1997 1996 1995 Thousands of Dollars Operating Revenues Electric $ 4,166,669 $ 3,854,836 $ 3,775,326 Gas 451,232 428,814 410,830 ----------- ----------- ----------- Total Operating Revenues 4,617,901 4,283,650 4,186,156 ----------- ----------- ----------- Operating Expenses Fuel and Energy Interchange 1,290,164 972,380 762,762 Operating and Maintenance 1,431,420 1,274,222 1,251,273 Depreciation 580,595 489,001 457,254 Taxes Other Than Income 310,091 299,546 314,071 ----------- ----------- ----------- Total Operating Expenses 3,612,270 3,035,149 2,785,360 ----------- ----------- ----------- Operating Income 1,005,631 1,248,501 1,400,796 ----------- ----------- ----------- Other Income and Deductions Interest Expense (372,857) (382,443) (423,711) Company Obligated Mandatorily Redeemable Preferred Securities of a Partnership, which holds Solely Subordinated Debentures of the Company (28,990) (26,723) (20,987) Allowance for Funds Used During Construction 21,771 19,947 27,050 Settlement of Salem Litigation 69,800 -- -- Gain on Sale of Subsidiary -- -- 58,745 Other, net (66,028) (1,976) (444) ----------- ----------- ----------- Total Other Income and Deductions (376,304) (391,195) (359,347) ----------- ----------- ----------- Income Before Income Taxes and Extraordinary Item 629,327 857,306 1,041,449 Income Taxes 292,769 340,101 431,717 ----------- ----------- ----------- Income Before Extraordinary Item 336,558 517,205 609,732 Extraordinary Item (net of $1,290,961 income taxes) (1,833,664) -- -- ----------- ----------- ----------- Net (Loss) Income (1,497,106) 517,205 609,732 Preferred Stock Dividends 16,804 18,036 23,217 ----------- ----------- ----------- Earnings Applicable to Common Stock $(1,513,910) $ 499,169 $ 586,515 =========== =========== =========== Average Shares of Common Stock Outstanding (Thousands) 222,543 222,490 221,859 =========== =========== =========== Basic and Dilutive Earnings per Average Common Share Before Extraordinary Item (Dollars) $ 1.44 $ 2.24 $ 2.64 Extraordinary Item (Dollars) $ (8.24) -- -- ----------- ----------- ----------- Basic and Dilutive Earnings per Average Common Share (Dollars) $ (6.80) $ 2.24 $ 2.64 =========== =========== =========== Dividends per Common Share (Dollars) $ 1.80 $ 1.755 $ 1.65 =========== =========== ===========
See Notes to Consolidated Financial Statements. 23 Consolidated Statements of Cash Flows
For the Years Ended December 31, 1997 1996 1995 Thousands of Dollars Cash Flows from Operating Activities Net Income $(1,497,106) $ 517,205 $ 609,732 Extraordinary Item (net of $1,290,961 income taxes) (1,833,664) -- -- ----------- ----------- ----------- Income Before Extraordinary Item 336,558 517,205 609,732 Adjustments to reconcile Net Income to Net Cash provided by Operating Activities: Depreciation and Amortization 664,294 566,412 531,299 Deferred Income Taxes (17,228) 166,771 183,514 Salem Litigation Settlement 69,800 -- -- Gain on Sale of Subsidiary -- -- (58,745) Deferred Energy Costs (5,652) (66,151) (71,104) Amortization of Leased Property 39,100 31,400 42,900 Changes in Working Capital: Accounts Receivable (289,610) 53,681 (8,198) Inventories 28,628 (2,729) (10,872) Accounts Payable 93,881 (86,765) (4,686) Other Current Assets and Liabilities 58,539 (25,040) 9,641 Deferred Credits - Other 78,846 (4,609) 5,172 Other Items affecting Operations (19,005) 22,070 11,683 ----------- ----------- ----------- Net Cash Flows from Operating Activities 1,038,151 1,172,245 1,240,336 ----------- ----------- ----------- Cash Flows from Investing Activities Investment in Plant (490,200) (548,854) (532,614) Proceeds from Sale of Subsidiary -- -- 150,000 Increase in Other Investments (83,261) (114,126) (82,041) ----------- ----------- ----------- Net Cash Flows from Investing Activities (573,461) (662,980) (464,655) ----------- ----------- ----------- Cash Flows from Financing Activities Change in Short-Term Debt 114,000 287,500 (11,499) Issuance of Common Stock 117 11,301 15,585 Retirement of Preferred Stock (61,895) -- (78,105) Issuance of Company Obligated Mandatorily Redeemable Preferred Securities of a Partnership 50,000 -- 81,032 Issuance of Long-Term Debt 161,813 43,700 182,540 Retirement of Long-Term Debt (283,303) (427,463) (575,713) Loss on Reacquired Debt 22,752 24,724 12,302 Dividends on Preferred and Common Stock (417,383) (411,569) (390,340) Change in Dividends Payable (5,438) 1,685 5,626 Expenses of Issuing Long-Term Debt and Capital Stock (2,084) 890 (577) Capital Lease Payments (39,100) (31,400) (42,900) ----------- ----------- ----------- Net Cash Flows from Financing Activities (460,521) (500,632) (802,049) ----------- ----------- ----------- Increase (Decrease) in Cash and Cash Equivalents 4,169 8,633 (26,368) Cash and Cash Equivalents at beginning of period 29,235 20,602 46,970 ----------- ----------- ----------- Cash and Cash Equivalents at end of period $ 33,404 $ 29,235 $ 20,602 =========== =========== ===========
See Notes to Consolidated Financial Statements. 24 Consolidated Balance Sheets
At December 31, 1997 1996 Thousands of Dollars Assets Utility Plant Electric - Transmission & Distribution $ 3,617,666 $ 3,494,778 Electric - Generation 1,434,895 10,127,602 Gas 1,071,819 1,005,507 Common 302,672 317,065 ----------- ----------- 6,427,052 14,944,952 Less Accumulated Provision for Depreciation 2,690,824 5,046,950 ----------- ----------- 3,736,228 9,898,002 Nuclear Fuel, net 147,359 199,579 Construction Work in Progress 611,204 661,871 Leased Property, net 175,933 182,088 ----------- ----------- Net Utility Plant 4,670,724 10,941,540 ----------- ----------- Current Assets Cash and Temporary Cash Investments 33,404 29,235 Accounts Receivable, net Customers 173,350 19,159 Other 139,996 74,377 Inventories, at average cost Fossil Fuel 84,858 84,633 Materials and Supplies 90,890 119,743 Deferred Generation Costs Recoverable in Current Rates 424,497 -- Deferred Energy Costs-Gas 35,665 30,013 Other 20,115 63,234 ----------- ----------- Total Current Assets 1,002,775 420,394 ----------- ----------- Deferred Debits and Other Assets Competitive Transition Charge 5,274,624 -- Recoverable Deferred Income Taxes 590,267 2,325,721 Deferred Limerick Costs -- 361,762 Deferred Non-Pension Postretirement Benefits Costs 97,409 233,492 Deferred Energy Costs-Electric -- 92,021 Investments 515,835 432,574 Loss on Reacquired Debt 83,918 283,853 Other 121,016 169,262 ----------- ----------- Total Deferred Debits and Other Assets 6,683,069 3,898,685 ----------- ----------- Total Assets $12,356,568 $15,260,619 =========== ===========
See Notes to Consolidated Financial Statements. 25 Consolidated Balance Sheets (Continued)
At December 31, 1997 1996 Thousands of Dollars Capitalization and Liabilities Capitalization Common Shareholders' Equity Common Stock $ 3,517,731 $ 3,517,614 Other Paid-In Capital 1,239 1,326 Retained (Deficit) Earnings (792,239) 1,127,041 ------------ ------------ 2,726,731 4,645,981 Preferred and Preference Stock Without Mandatory Redemption 137,472 199,367 With Mandatory Redemption 92,700 92,700 Company Obligated Mandatorily Redeemable Preferred Securities of a Partnership, which holds Solely Subordinated Debentures of the Company 352,085 302,182 Long-Term Debt 3,853,141 3,935,514 ------------ ------------ Total Capitalization 7,162,129 9,175,744 ------------ ------------ Current Liabilities Notes Payable, Bank 401,500 287,500 Long-Term Debt Due Within One Year 247,087 283,303 Capital Lease Obligations Due Within One Year 55,808 49,347 Accounts Payable 306,847 212,966 Taxes Accrued 66,397 71,482 Interest Accrued 77,911 82,006 Dividends Payable 16,969 22,407 Deferred Income Taxes 185,696 2,745 Other 260,457 91,608 ------------ ------------ Total Current Liabilities 1,618,672 1,103,364 ------------ ------------ Deferred Credits and Other Liabilities Capital Lease Obligations 120,125 132,741 Deferred Income Taxes 2,297,042 3,745,242 Unamortized Investment Tax Credits 318,065 336,132 Pension Obligation 211,596 224,454 Non-Pension Postretirement Benefits Obligation 324,850 315,058 Other 304,089 227,884 ------------ ------------ Total Deferred Credits and Other Liabilities 3,575,767 4,981,511 ------------ ------------ Commitments and Contingencies (Notes 3, 4 and 5) Total Capitalization and Liabilities $ 12,356,568 $ 15,260,619 ============ ============
See Notes to Consolidated Financial Statements. 26 Consolidated Statements of Changes in Common Shareholders' Equity and Preferred Stock
Other Retained Common Stock Paid-In Earnings Preferred Stock All Amounts in Thousands Shares Amount Capital (Deficit) Shares Amount Balance at January 1, 1995 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 Net Income 517,205 Cash Dividends Declared Preferred Stock (at specified annual rates) (21,042) Common Stock ($1.755 per share) (390,527) Expenses of Capital Stock Activity (275) Capital Stock Activity Long-Term Incentive Plan Issuances 370 11,301 (2,028) ------- ---------- ------ ---------- ----- -------- Balance at December 31, 1996 222,542 3,517,614 1,326 1,127,041 2,921 292,067 Net Loss (1,497,106) Cash Dividends Declared Preferred Stock (at specified annual rates) (16,805) Common Stock ($1.80 per share) (400,578) Expenses of Capital Stock Activity 98 Interest on Stock Repurchase Forward Contract (4,889) Capital Stock Activity Long-Term Incentive Plan Issuances 5 117 Preferred Stock Redemptions (87) (619) (61,895) ------- ---------- ------ ---------- ----- -------- Balance at December 31, 1997 222,547 $3,517,731 $1,239 $(792,239) 2,302 $230,172 ======= ========== ====== ========= ===== ========
See Notes to Consolidated Financial Statements. 27 Notes to Consolidated Financial Statements 1. Significant Accounting Policies General The consolidated financial statements of PECO Energy 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 non-utility subsidiaries which are not material. The unconsolidated subsidiaries are accounted for under the equity method. Use of Estimates The preparation of financial statements in conformity with 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. Estimates are used in the Company's accounting for unbilled revenue, the allowance for uncollectible accounts, fuel adjustment clause, depreciation and amortization, taxes, reserves for contingencies, employee benefits, certain fair value and recoverability determinations, and nuclear outage costs, among others. Accounting for the Effects of Regulation The Company accounts for all of its regulated operations in accordance with Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation," requiring the Company to record the financial statement effects of the rate regulation to which the Company is currently subject. If a separable portion of the Company's business no longer meets the provisions of SFAS No. 71, the Company is required to eliminate the financial statement effects of regulation for that portion. Effective December 31, 1997, the Company determined that the electric generation portion of its business no longer met the criteria of SFAS No. 71 and, accordingly, implemented SFAS No. 101, "Regulated Enterprises - Accounting for the Discontinuation of FASB Statement No. 71," for that portion of its business (see note 4). Revenues Electric and gas revenues are recorded as service is rendered or energy is delivered to customers. At the end of each month, the Company accrues an estimate for the unbilled amount of energy delivered or services provided to customers (see note 8). Energy and Purchased Gas Cost Adjustment Clause The Company's gas rates are subject to a fuel adjustment clause designed to recover or refund the difference between the actual cost of purchased gas and the amount included in base rates. Differences between the amounts billed to customers and the actual costs recoverable are deferred and recovered or refunded in future periods by means of prospective adjustments to rates. Such rates are adjusted quarterly. Prior to December 31, 1996, the Company's retail electric rates were subject to an Energy Cost Adjustment (ECA) clause designed to recover or refund the difference between the actual cost of fuel, energy interchange or purchased power and the amount of such costs included in base rates. Effective December 31, 1996, the PUC approved the roll-in of electric energy costs into the base rates charged to the Company's retail electric customers and such rates are no longer subject to the ECA. Utility Plant Effective December 31, 1997, electric generation plant is valued at the lower of original cost or market pursuant to SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." All other utility plant continues to be valued at original cost (see note 4). Nuclear Fuel The cost of nuclear fuel is capitalized and charged to fuel expense on the unit of production method. Estimated costs of nuclear fuel disposal are charged to fuel expense as the related fuel is consumed. The Company's 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 Depreciation is provided over the estimated service lives of plant on the straight-line method. The Company is currently reviewing the useful lives of its electric generation assets. Annual depreciation provisions for financial reporting purposes, expressed as a percentage of average depreciable utility plant in service, were approximately 3.3% in 1997, 2.9% in 1996 and 2.8% in 1995. See note 3 for information concerning the change in 1996 to depreciation and amortization. The Company's current estimate of the costs for decommissioning its ownership share of its nuclear generating stations is currently included in electric base rates and is charged to operations over the expected service life of the related plant. The amounts recovered from customers are deposited in trust accounts and invested for funding of future costs. These amounts, and realized investment earnings thereon, are credited to accumulated depreciation. The Company believes that the amounts being recovered from customers through electric rates will be sufficient to fully fund the unrecorded portion of its decommissioning obligation (see note 5). 28 Income Taxes The Company uses an asset and liability approach for financial accounting and reporting of income taxes. Investment tax credits are deferred and amortized to income over the estimated useful life of the related property (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 as a credit to Other Income and Deductions. The rates used for capitalizing AFUDC, which averaged 8.88% in 1997, 9.38% in 1996 and 9.88% in 1995, 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. Effective January 1, 1998, the Company ceased accruing AFUDC for electric generation-related construction projects and will use SFAS No. 34, "Capitalizing Interest Costs," to calculate the costs during the period of construction of debt funds used to finance its electric generation-related construction projects. 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, 1997 and 1996, capitalized software costs totaled $86 and $78 million (net of $29 million accumulated amortization in each year), 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 Prior to December 31, 1997, gains and losses on reacquired debt were deferred and amortized to interest expense over the period approved for ratemaking purposes. Effective January 1, 1998, gains and losses on reacquired debt associated with the electric generation portion of the Company's operations will be expensed as incurred. Gains and losses on reacquired debt associated with the Company's regulated operations will continue to be deferred and amortized to interest expense over the period approved for ratemaking purposes. Reclassifications Certain prior-year amounts have been reclassified for comparative purposes. These reclassifications had no effect on net income or common shareholders' equity. 2. Nature of Operations and Segment Information The Company provides retail electric and natural gas service to the public in southeastern Pennsylvania and, in pilot programs, natural gas service to areas in Maryland and New Jersey. The Company also engages in the wholesale marketing of electricity on a national basis. The Company participates in joint ventures which provide telecommunications services in the Philadelphia area. The Company's traditional retail service territory covers 2,107 square miles. Electric service is furnished to an area of 1,972 square miles with a population of 3.6 million, including 1.6 million in the City of Philadelphia. Approximately 94% of the retail electric service area and 64% of retail kilowatthour (kWh) 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 in 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, 1997 1996 1995 Thousands of Dollars Electric Operations Operating revenues: Residential $ 1,357,449 $ 1,370,158 $ 1,379,046 Small commercial and industrial 778,743 748,561 730,220 Large commercial and industrial 1,077,374 1,098,307 1,135,550 Other 147,523 140,133 136,988 Unbilled 19,130 (25,950) 42,580 ----------- ----------- ----------- Service territory 3,380,219 3,331,209 3,424,384 Interchange sales 58,614 25,991 17,488 Sales to other utilities 727,836 497,636 333,454 ----------- ----------- ----------- Total operating revenues 4,166,669 3,854,836 3,775,326 ----------- ----------- ----------- Operating expenses, excluding depreciation 2,697,877 2,243,094 2,026,112 Depreciation 552,667 462,315 430,993 ----------- ----------- ----------- Operating income $ 916,125 $ 1,149,427 $ 1,318,221 =========== =========== =========== Utility plant additions $ 382,157 $ 447,105 $ 435,400 =========== =========== ===========
29
For the Years Ended December 31, 1997 1996 1995 Thousands of Dollars Gas Operations Operating revenues: Residential $ 16,852 $ 15,716 $ 15,482 House heating 265,299 249,507 235,456 Commercial and industrial 144,801 132,822 125,631 Other 3,228 11,462 5,382 Unbilled (969) (4,250) 6,540 ------------ ------------ ------------ Subtotal 429,211 405,257 388,491 ------------ ------------ ------------ Other revenues (including transported for customers) 22,021 23,557 22,339 ------------ ------------ ------------ Total operating revenues 451,232 428,814 410,830 ------------ ------------ ------------ Operating expenses, excluding depreciation 333,798 303,054 301,994 Depreciation 27,928 26,686 26,261 ------------ ------------ ------------ Operating income $ 89,506 $ 99,074 $ 82,575 ============ ============ ============ Utility plant additions $ 85,212 $ 68,394 $ 63,192 ============ ============ ============ Identifiable Assets* at December 31, Electric $ 9,610,984 $ 10,287,444 $ 10,408,105 Gas 966,685 858,471 785,881 Nonallocable assets 1,778,899 4,114,704 4,114,519 ------------ ------------ ------------ Total assets $ 12,356,568 $ 15,260,619 $ 15,308,505 ============ ============ ============
* Includes utility plant less accumulated depreciation, inventories, segment-specific regulatory assets and allocated common utility property. 3. Rate Matters Competition Act The Electricity Generation Customer Choice and Competition Act (Competition Act) was enacted in December 1996, providing for the restructuring of the electric utility industry in Pennsylvania, including retail competition for generation beginning in 1999. The Competition Act requires the unbundling of electric services into separate generation, transmission and distribution services with open retail competition for generation. Electric distribution and transmission services will remain regulated by the PUC. The Competition Act requires utilities to submit to the PUC restructuring plans, including quantification of their stranded costs (the loss in value of the Company's electric generation-related assets, which will result from competition). The Competition Act authorizes the recovery of stranded costs through charges to distribution customers for up to nine years (or for an alternative period determined by the PUC for good cause shown). During that period, the utility is subject to a rate cap which provides that total charges to customers cannot exceed rates in place as of December 31, 1996, subject to certain exceptions. The Competition Act also caps transmission and distribution rates from December 31, 1996 through June 30, 2001, subject to certain exceptions. Pursuant to the Competition Act, in April 1997, the Company filed with the PUC a comprehensive restructuring plan detailing its proposal to implement full customer choice of electric generation supplier. The Company's restructuring plan identified $7.5 billion of stranded costs. In August 1997, the Company and various intervenors in the Company's restructuring proceeding filed with the PUC a Joint Petition for Partial Settlement (Pennsylvania Plan). In December 1997, the PUC rejected the Pennsylvania Plan and entered an Opinion and Order, revised in January 1998 (PUC Restructuring Order), that deregulates the Company's electric generation operations. The PUC Restructuring Order allows the Company to recover $4.9 billion on a discounted basis, or $5.3 billion on a book value basis, over 8-1/2 years beginning in 1999. Recovery of allowed stranded costs will be through a separate charge to be levelized over the recovery period using a 7.47% cost of capital. Other major provisions of the PUC Restructuring Order include capping customer bills at the year-end 1996 system-wide average of 9.95 cents per kWh; beginning January 1, 1999, unbundling rates into a transmission and distribution component, the charge for recovery of stranded costs and a "shopping credit" for generation; and phasing-in customer choice of electric generation supplier for all customers in three steps: one-third of the peak load of each customer class on January 1, 1999, one-third on January 2, 1999 (one day later) and the remainder on January 2, 2000. To encourage competition, the PUC established the "shopping credit" for generation in excess of current market prices. On January 21, 1998, the Company filed a complaint in the U.S. District Court for the Eastern District of Pennsylvania seeking injunctive and monetary relief on the grounds that the Competition Act and the PUC Restructuring Order: (1) are preempted by Section 201(b) of the Federal Power Act; (2) effect a taking of private property without just compensation in violation of the Fifth and Fourteenth Amendments to the U.S. Constitution; (3) violate the Due Process Clause, the Contract Clause and the First Amendment of the U.S. Constitution; and (4) deprive the Company of certain other federally protected rights. 30 On January 22, 1998, the Company filed two Petitions for Review in the Commonwealth Court of Pennsylvania, appealing the PUC Restructuring Order. The petitions state that the PUC Restructuring Order must be set aside because it is based upon errors of law, is not supported by substantial evidence, constitutes an arbitrary and capricious abuse of administrative discretion and deprives the Company of the due process of law, to which it is entitled under Article I of the Pennsylvania Constitution. Limerick Under its electric tariffs through December 31, 1997, the Company was recovering $285 million of deferred Limerick costs representing carrying charges and depreciation associated with 50% of Limerick common facilities. The Company also 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. These costs were included in base rates and were being recovered over a nine-year period beginning October 1, 1996. The Company was also recovering $137 million of Limerick Unit No. 1 costs over a ten-year period without a return on investment. At December 31, 1997, the unamortized portion of these regulatory assets were included as part of electric generation-related regulatory assets (see note 4). Under its electric tariffs and ECA, the Company was allowed to retain for shareholders any proceeds above the average energy cost for sales of 399 megawatts (MW) of near-term excess capacity and/or associated energy and to share in the benefits which resulted from the operation of both Limerick Units No. 1 and No. 2. The Company's ECA was discontinued at December 31, 1996. During 1996 and 1995, the Company recorded as revenue net of fuel costs $82 and $79 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. Declaratory Accounting Order Pursuant to a PUC Declaratory Order, effective October 1, 1996, the Company increased depreciation and amortization on assets associated with Limerick by $100 million per year and decreased depreciation and amortization on other Company assets by $10 million per year, for a net increase in depreciation and amortization of $90 million per year. Effective December 31, 1997, the Company ceased this increased depreciation since this Declaratory Order has been superseded by the PUC Restructuring Order. At December 31, 1997, the $90 million of depreciation and amortization that would have been recognized in 1998 was deferred as a regulatory asset, since the Company's rates will continue to be cost-based until January 1, 1999, and will be amortized and recovered in 1998. Recovery of Non-Pension Postretirement Benefits Costs Effective January 1995, 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 SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," (see note 7). During 1997 and 1996, the Company deposited $26 and $47 million, respectively, in trust accounts to fund its retail electric non-pension postretirement benefits costs. These costs include amounts charged to operating expense or capitalized during 1997 and 1996. At December 31, 1997, $121 million of the previously recorded transition obligation was included as part of electric generation-related regulatory assets (see note 4). The Company recognizes $2.8 million in non-pension postretirement benefits costs annually associated with gas utility operations. During 1997 and 1996, the Company deposited $2.8 and $2.9 million, respectively, in trust accounts to fund its gas non-pension postretirement benefits costs. Energy Cost Adjustment Through December 31, 1996, the Company was subject to a PUC-established electric ECA which, in addition to reconciling fuel costs and revenues, incorporated a nuclear performance standard which allowed for financial bonuses or penalties depending on whether the Company's system nuclear capacity factor exceeded or fell below a specified range. For the years ended December 31, 1996 and 1995, the Company recorded bonuses of $22 and $13 million, respectively. 4. Accounting Changes The Company accounts for all of its regulated operations in accordance with SFAS No. 71 which allows the Company to record the financial statement effects of the rate regulation to which the Company is subject. Use of SFAS No. 71 is applicable to the utility operations of the Company which meet the following criteria: (1) third-party regulation of rates; (2) cost-based rates; and (3) a reasonable assumption that all costs will be recoverable from customers through rates. In 1997, the Financial Accounting Standards Board (FASB) through its Emerging Issues Task Force (EITF) issued EITF No. 97-4, "Deregulation of the Pricing of Electricity - Issues Related to the Application of FASB Statements No. 71, Accounting for the Effects of Certain Types of Regulation, and No. 101, Regulated Enterprises - Accounting for the Discontinuation of Application of FASB Statement No. 71." The EITF agreed that: a) an entity should cease to apply SFAS No. 71 no later than the date the specific deregulation plan is enacted and the details of that plan are known, and b) both stranded costs and regulated assets and liabilities should continue to be recognized to the extent that the transition plan provides for their recovery through the regulated transmission and distribution portion of the business. The Company believes that the PUC Restructuring Order provides sufficient details regarding the deregulation of the Company's electric generation operations to require the Company to discontinue the application of SFAS No. 71 for those operations. Effective December 31, 1997, the Company adopted the provisions of SFAS No. 101 for its electric generation operations. SFAS No. 101 requires a determination of impairment of plant assets under SFAS No. 121, and the elimination of all effects of rate regulation that have been recognized as assets and liabilities pursuant to SFAS No. 71. 31 At December 31, 1997, the Company performed an impairment test of its electric generation assets pursuant to SFAS No. 121 on a plant specific basis and determined that $6.1 billion of its $7.1 billion of electric generation assets would be impaired as of December 31, 1998. The Company estimated the fair value for each of its electric generating units by determining its estimated future operating cash inflows and outflows. The net future cash flows for each electric generating plant were then compared to its net book value. For any electric generating plant with future undiscounted cash flows less than its book value, net cash flows were discounted using a discount rate commensurate with the risk of each electric generating plant. Since the Company's retail electric rates will continue to be cost-based until January 1, 1999, $0.3 billion representing depreciation expense on electric generation-related assets in 1998 has been reclassified to a regulatory asset and will be amortized and recovered in 1998. At December 31, 1997, the Company had $2.7 billion of electric generation-related regulatory assets, of which $0.1 billion will be amortized and recovered through cost-based rates in 1998. At December 31, 1997, the Company had total electric generation-related stranded costs of $8.4 billion, representing $5.8 billion of net stranded electric generation plant and $2.6 billion of electric generation-related regulatory assets. The PUC Restructuring Order allows the Company to recover $4.9 billion on a discounted basis, or $5.3 billion on a book-value basis, of its generation-related stranded costs from customers. This results in a net unrecoverable amount of $3.1 billion. Although the Company is appealing the PUC Restructuring Order, Management believes that EITF No. 97-4 required it to write off all electric generation-related stranded costs for which recovery through rates has not been provided. Accordingly, the Company recorded an extraordinary charge at December 31, 1997 of $3.1 billion ($1.8 billion net of taxes) of electric generation-related stranded costs that will not be recovered from customers. A summary, as of December 31, 1997, of the electric generation-related stranded costs and the amount of such stranded costs written-off by the Company is shown in the following table: (Thousands of Dollars) Electric generation-related asset impairment determined pursuant to SFAS No. 121 Net book value of electric generation-related assets before write-down $7,115,155 December 31, 1998 market value of electric generation-related assets pursuant to SFAS No. 121 (990,376) Expected 1998 change in net plant recognized for recovery until cost-based rates cease at December 31, 1998 (303,800) ---------- Electric generation-related asset impairment 5,820,979 Electric generation-related regulatory assets Recoverable Deferred Income Taxes 1,762,946 Deferred Limerick Costs 321,420 Deferred Non-Pension Postretirement Benefits Other Than Pensions 120,899 Deferred Energy Costs - Electric 92,021 Loss on Reacquired Debt 177,183 Additional assets written-off pursuant to discontinuance of SFAS No. 71 104,818 Other 90,480 Regulatory asset recognized for recovery until cost-based rates cease at December 31, 1998 (91,497) ---------- Total electric generation-related regulatory assets 2,578,270 ---------- Total electric generation-related stranded costs 8,399,249 Amounts approved for collection from customers (regulatory asset pursuant to EITF No. 97-4) (5,274,624) ---------- Total Extraordinary Item $ 3,124,625 ========== Due to the market-based pricing of electric generation provisions of the PJM Interconnection, L.L.C. restructuring order approved by the FERC in November 1997, the Company believes that its wholesale energy sales operations are no longer subject to the provisions of SFAS No. 71. Based on projections of the Company's retail load growth, the Company believes all of its owned generation capacity is necessary to meet its electric retail load. As a result, the discontinuance of SFAS No. 71 for its wholesale energy sales operations has not resulted in an additional charge against income. The Company believes that its electric transmission and distribution system and gas operations continue to meet the provisions of SFAS No. 71. The Company believes that it is probable that regulatory assets associated with these operations will be recovered. 32 The Company has adopted SFAS No. 128, "Earnings Per Share," which is designed to simplify the existing computational guidelines for the earnings per share (EPS) information provided in financial statements, to revise the disclosure requirements and to increase the comparability of EPS data on an international basis. Pursuant to SFAS No. 128, the Company reflected on its Consolidated Statements of Income basic EPS and dilutive EPS for the years ended December 31, 1997, 1996 and 1995. Adoption of SFAS No. 128 did not impact the amount of EPS reported and there is no difference in the amounts calculated as basic EPS and dilutive EPS. 5. Commitments and Contingencies Capital Commitments Total capital expenditures, primarily for utility plant, are estimated to be $600 million in 1998. Due to the expected adverse impact of the PUC Restructuring Order and competition for electric generating services on its future capital resources, the Company is currently evaluating its capital commitments for 1999 and beyond. Certain facilities under construction and to be constructed may require permits and licenses which the Company has no assurance will be granted. The Company has undertaken a number of new ventures, principally through its Telecommunications Group, some of which require significant cash commitments. For 1998, the Company's expected capital expenditures include approximately $150 million in such ventures. 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 currently limits the liability of nuclear reactor owners to $8.9 billion for claims that could arise from a single incident. The limit is subject to change to account for the effects of inflation and changes in the number of licensed reactors. The Company carries the maximum available commercial insurance of $200 million and the remaining $8.7 billion is provided through mandatory participation in a financial protection pool. Under the Price-Anderson Act, all nuclear reactor licensees can be assessed up to $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. The Company carries property damage, decontamination and premature decommissioning insurance in the amount of its $2.75 billion proportionate share for each station loss resulting from damage to its nuclear plants. In the event of an accident, insurance proceeds must first be used for reactor stabilization and site decontamination. If the decision is made to decommission the facility, a portion of the insurance proceeds will be allocated to a fund which the Company is required by the Nuclear Regulatory Commission (NRC) to maintain, to provide for decommissioning the facility. The Company is unable to predict the timing of the availability of insurance proceeds to the Company for the Company's bondholders, and the amount of such proceeds which would be available. Under the terms of the various insurance agreements, the Company could be assessed up to $26 million for losses incurred at any plant insured by the insurance companies. The Company is self-insured to the extent that any losses may exceed the amount of insurance maintained. Such losses could have a material adverse effect on the Company's financial condition and results of operations. The Company is a member of an industry mutual insurance company which provides replacement power cost insurance in the event of a major accidental outage at a nuclear station. The premium for this coverage is subject to assessment for adverse loss experience. The Company's maximum share of any assessment is $13 million per year. Nuclear Decommissioning and Spent Fuel Storage The Company's current estimate of its nuclear facilities' decommissioning cost of $1.5 billion in 1997 dollars is being collected through electric rates over the life of each generating unit. Beginning in 1999, these amounts will be recoverable through transmission and distribution rates. Under current rates, the Company collects and expenses approximately $20 million annually from customers. The expense is accounted for as a component of depreciation expense and accumulated depreciation. At December 31, 1997 and 1996, $294 and $256 million, respectively, was included in accumulated depreciation. In order to fund future decommissioning costs, at December 31, 1997 and 1996, the Company held $320 and $266 million, respectively, in trust accounts which are included as an Investment in the Company's Consolidated Balance Sheet and include both net unrealized and realized gains. Net unrealized gains of $43 and $26 million were recognized as a Deferred Credit in the Company's Consolidated Balance Sheet at December 31, 1997 and 1996, respectively. The Company recognized net realized gains of $11, $10 and $9 million as Other Income in the Company's Consolidated Statement of Income for the years ended December 31, 1997, 1996 and 1995, respectively. The Company believes that the amounts being recovered from customers through electric rates will be sufficient to fully fund the unrecorded portion of its decommissioning obligation. In an Exposure Draft issued in 1996, the FASB proposed changes in the accounting for closure and removal costs of production facilities, including the recognition, measurement and classification of decommissioning costs for nuclear generating stations. The FASB has expanded the scope of the Exposure Draft to include closure or removal liabilities that are incurred at any time during the operating life of the related long-lived asset. The FASB has decided that it should proceed toward either a final Statement or a revised Exposure Draft. The timing of this project is still to be determined. If current electric utility industry accounting practices for decommissioning are changed, annual provisions for decommissioning could increase and the estimated cost for decommissioning could be recorded as a liability rather than as accumulated depreciation with recognition of an increase in the cost of a related regulatory asset. Under the Nuclear Waste Policy Act of 1982 (NWPA), the U.S. Department of Energy (DOE) is required to begin taking possession of all spent nuclear fuel generated by the Company's nuclear units for long-term storage by no later than 1998. Based on recent public pronouncements, it is not 33 likely that a permanent disposal site will be available for the industry before 2015, at the earliest. In reaction to statements from the DOE that it was not legally obligated to begin to accept spent fuel in 1998, a group of utilities and state government agencies filed a lawsuit against the DOE which resulted in a decision by the U.S. Court of Appeals for the District of Columbia (D.C. Court of Appeals) in July 1996 that the DOE had an unequivocal obligation to begin to accept spent fuel in 1998. In accordance with the NWPA, the Company pays the DOE one mill ($.001) per kilowatthour of net nuclear generation for the cost of nuclear fuel disposal. This fee may be adjusted prospectively in order to ensure full cost recovery. Because of inaction by the DOE following the D.C. Court of Appeals finding of the DOE's obligation to begin receiving spent fuel in 1998, a group of forty-two utility companies, including the Company, and forty-six state agencies, filed suit against the DOE seeking authorization to suspend further payments to the U.S. government under the NWPA and to deposit such payments into an escrow account until such time as the DOE takes effective action to meet its 1998 obligations. In November 1997, the D.C. Court of Appeals issued a decision in which it held that the DOE had not abided by its prior determination that the DOE has an unconditional obligation to begin disposal of spent nuclear fuel by January 31, 1998. The D.C. Court of Appeals also precluded the DOE from asserting that it was not required to begin receiving spent nuclear fuel because it had not yet prepared a permanent repository or an interim storage facility. The DOE and one of the utility companies have filed a Petition for Reconsideration of the decision. The U.S. House of Representatives and the U.S. Senate passed separate bills in 1997 authorizing construction of a temporary storage facility which could accept spent nuclear fuel from utilities in 2003. In addition, the DOE is exploring other options to address delays in the waste acceptance schedule. Peach Bottom has on-site facilities with capacity to store spent nuclear fuel discharged from the units through 2000 for Unit No. 2 and 2001 for Unit No. 3. Life-of-plant storage capacity will be provided by on-site dry cask storage facilities, the construction of which will begin in 1998. Limerick has on-site facilities with capacity to store spent nuclear fuel to 2007. Salem has on-site facilities with spent fuel storage capacity through 2008 for Unit No. 1 and 2012 for Unit No. 2. Public Service Electric and Gas Company (PSE&G) is the operator of Salem, which is 42.59% owned by the Company. Energy Commitments The Company's electric utility operations include the wholesale marketing of electricity. At December 31,1997, the Company had long-term commitments relating to the purchase from unaffiliated utilities and others energy associated with 1,330 MW of capacity in 1998, with 2,540 MW of capacity during the period 1999 through 2002 and with 2,430 MW of capacity thereafter. During 1997, purchases under long-term commitments resulted in expenditures of $311 million. As of December 31, 1997, these purchases result in commitments of approximately $240 million for 1998, $620 million for 1999 through 2002 and $830 million thereafter. These purchases will be utilized through a combination of sales to jurisdictional customers, long-term sales to other utilities and open market sales. Under some of these contracts, the Company may purchase, at its option, additional power as needed. In the wholesale market, the Company has increased its sales to other utilities, but increased competition has reduced the Company's profit margins on these sales. At December 31, 1997, the Company had entered into long-term agreements with unaffiliated utilities to sell energy associated with 4,280 MW of capacity, of which 540 MW of these agreements are for 1998, 1,700 MW are for 1999 through 2002 and the remaining 2,040 MW extend through 2022. 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 27 sites where former manufactured gas plant (MGP) activities have or may have resulted in actual site contamination. The Company is presently engaged in performing various levels of activities at these sites, including initial evaluation to determine the existence and nature of the contamination, detailed evaluation to determine the extent of the contamination and the necessity and possible methods of remediation, and implementation of remediation. The Pennsylvania Department of Environmental Protection has approved the Company's clean-up of two sites. Six other sites are currently under some degree of active study and/or remediation. As of December 31, 1997 and 1996, the Company had accrued $63 and $28 million, respectively, for environmental investigation and remediation costs, including $35 and $16 million, respectively, for MGP investigation and remediation, that currently can be reasonably estimated. The Company cannot predict whether it will incur other significant liabilities for additional investigation and remediation costs at these or additional sites identified by the Company, environmental agencies or others, or whether such costs will be recoverable from third parties. Shutdown of Salem Generating Station PSE&G removed Salem Units No. 1 and No. 2 from service in the second quarter of 1995 and 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. Unit No. 2 returned to service on August 30, 1997, and PSE&G estimates the restart of Unit No. 1 to occur late in the first quarter of 1998. For the years ended December 31, 1997, 1996 and 1995, the Company incurred and expensed approximately $152, $149 and $50 million of shutdown-related replacement power and maintenance costs, respectively (see note 21). 34 Telecommunications The Company periodically reviews its investments to determine that they are properly valued in its financial statements. Due to circumstances involved in the Federal Communication Commission's auctioning of the personal communications systems "C-block" licenses, the Company has determined that $20 million of its telecommunications investments were impaired at December 31, 1997. Accordingly, at December 31, 1997, the Company incurred a $20 million charge against Other Income and Deductions to write off this telecommunications investment. Litigation The Company is involved in various other litigation matters. The ultimate outcome of such matters, while uncertain, is not expected to have a material adverse effect on the Company's financial condition or results of operations. 6. Retirement Benefits The Company and its subsidiaries have a 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 89%, 80% and 74% of pension costs were charged to operations in 1997, 1996 and 1995, respectively, and the remainder, associated with construction labor, to the cost of new utility plant. Pension costs for 1997, 1996 and 1995 included the following components:
1997 1996 1995 Thousands of Dollars Service cost benefits earned during the period $ 25,368 $ 27,627 $ 19,710 Interest cost on projected benefit obligation 150,057 145,570 147,261 Actual return on plan assets (377,803) (320,247) (456,057) Amortization of transition asset (4,538) (4,538) (4,538) Amortization and deferral 197,480 154,402 300,214 --------- --------- --------- Net pension cost $ (9,436) $ 2,814 $ 6,590 ========= ========= =========
The changes in net periodic pension costs in 1997, 1996 and 1995 were as follows:
1997 1996 1995 Thousands of Dollars Change in number, characteristics and salary levels of participants and net actuarial gain $ (7,839) $(12,893) $ 1,486 Change in plan provisions 3,118 -- (8,305) Change in actuarial assumptions (7,529) 9,117 (3,136) -------- -------- -------- Net change $(12,250) $ (3,776) $ (9,955) ======== ======== ========
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 1997, 1996 and 1995. The weighted-average discount rate used in determining the actuarial present value of the projected benefit obligation was 7.25% at December 31, 1997, 7.75% at December 31, 1996 and 7.25% at December 31, 1995. The average rate of increase in future compensation levels ranged from 4% to 6% at December 31, 1997, 1996 and 1995. 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. 35 The funded status of the plan at December 31, 1997 and 1996 is summarized as follows:
1997 1996 Thousands of Dollars Actuarial present value of accumulated plan benefit obligations: Vested benefit obligation $ 1,794,222 $ 1,657,098 Accumulated benefit obligation 1,890,848 1,742,116 Projected benefit obligation for services rendered to date $ 2,141,040 $ 1,982,915 Plan assets at fair value (2,538,039) (2,302,935) ----------- ----------- Funded status (396,999) (320,020) Unrecognized transition asset 35,713 40,251 Unrecognized prior service costs (83,188) (92,682) Unrecognized net gain 649,903 588,013 ----------- ----------- Pension obligation recognized on the balance sheet $ 205,429 $ 215,562 =========== ===========
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, which represents the previously unrecognized accumulated non-pension postretirement benefit obligation, is being amortized on a straight-line basis over an allowed 20-year period. At December 31, 1997, the Company accelerated recognition of $121 million of its non-pension postretirement benefits obligation related to its electric generation operations and included this regulatory asset as part of electric generation-related regulatory assets (see note 4). 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 7% in 1998 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 $85 million and the annual service and interest costs by $10 million. Total costs for all plans were $73 million in 1997 and $71 million in 1996 and 1995. The net periodic benefits costs for 1997, 1996 and 1995 included the following components:
1997 1996 1995 Thousands of Dollars Service cost benefits earned during the period $ 14,401 $ 11,855 $ 8,681 Interest cost on projected benefit obligation 54,149 48,524 48,641 Amortization of transition asset 14,882 14,882 14,882 Actual return on plan assets (22,691) (13,257) (2,075) Deferred asset gain 12,707 9,320 1,359 -------- -------- -------- Net postretirement benefits costs $ 73,448 $ 71,324 $ 71,488 ======== ======== ========
Plan assets consist principally of common stock, U.S. government obligations and other fixed income instruments. In determining non-pension postretirement benefits costs, the assumed long-term rate of return on assets was 8% for 1997, 1996 and 1995. The weighted-average discount rate used in determining the actuarial present value of the projected benefit obligation was 7.75% as of January 1, 1997, 7.50% as of January 1, 1996 and 8.50% at January 1, 1995. The average rate of increase in future compensation levels ranged from 4% to 6% at December 31, 1997, 1996 and 1995. 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, 1997 and 1996 is summarized as follows:
1997 1996 Thousands of Dollars Accumulated postretirement benefit obligation: Retirees $ 697,084 $ 609,206 Fully eligible active plan participants 8,875 4,509 Other active plan participants 73,272 48,986 --------- --------- Total 779,231 662,701 Plan assets at fair value (178,045) (126,661) --------- --------- Accumulated postretirement benefit obligation in excess of plan assets 601,186 536,040 Unrecognized transition obligation (223,226) (238,108) Unrecognized net gain (53,110) 17,126 --------- --------- Accrued postretirement benefits obligation recognized on the balance sheet $ 324,850 $ 315,058 ========= =========
Measurement of the accumulated postretirement benefits obligation was based on a 7.25% and 7.75% assumed discount rate as of December 31, 1997 and 1996, respectively. 8. Accounts Receivable Accounts receivable at December 31, 1997 and 1996 included unbilled operating revenues of $135 and $117 million, respectively. Accounts receivable at December 31, 1997 and 1996 were net of an allowance for uncollectible accounts of $32 and $24 million, respectively. The Company has adopted SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which provides a standard for distinguishing between transfers of financial assets that are accounted for as sales from those that are accounted for as secured borrowings. The Company is party to an agreement with a financial institution under which it can sell or finance with limited recourse an undivided interest, adjusted daily, in up to $425 million of designated accounts receivable until November 2000. At December 31, 1997, the Company had sold a $425 million interest in accounts receivable, consisting of a $296 million interest in accounts receivable which the Company accounts for as a sale under SFAS No. 125 and a $129 million interest in special agreement accounts receivable which were accounted for as a long-term note payable (see note 12). The Company retains the servicing responsibility for these receivables. 9. Common Stock At December 31, 1997 and 1996, common stock without par value consisted of 500,000,000 shares authorized and 222,546,562 and 222,542,087 shares outstanding, respectively. At December 31, 1997, there were 5,800,841 shares reserved for issuance under the Company's Dividend Reinvestment and Stock Purchase Plan. Stock Repurchase During 1997, the Company's Board of Directors authorized the repurchase of up to 25 million shares of its common stock from time to time through open-market, privately negotiated and/or other types of transactions in conformity with the rules of the Securities and Exchange Commission. Pursuant to these authorizations, the Company has entered into forward purchase agreements to be settled from time to time, at the Company's election, on either a physical, net share or net cash basis. The amount at which these agreements can be settled is dependent principally upon the market price of the Company's common stock as compared to the forward purchase price per share and the number of shares to be settled. If these agreements had been settled on a net share basis at December 31, 1997, based on the closing price of the Company's common stock on that date, the Company would have received approximately 1,160,000 shares of Company common stock. Long-Term Incentive Plan (LTIP) The Company maintains an LTIP for certain full-time salaried employees of the Company. The types of long-term incentive awards which have been granted under the LTIP are non-qualified options to purchase shares of the Company's common stock, dividend equivalents and shares of restricted common stock. The Company uses the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." 37 If the Company elected to account for the LTIP based on SFAS No. 123, earnings applicable to common stock and earnings per average common share would have been changed to the pro forma amounts as follows:
1997 1996 Thousands of Dollars Earnings applicable to common stock As reported $(1,513,910) $499,169 Pro forma $(1,515,895) $497,887 Earnings per average common share (Dollars) As reported $ (6.80) $ 2.24 Pro forma $ (6.81) $ 2.24
Options granted under the LTIP become exercisable one year after the date of grant and all options expire 10 years from the date of the grant. Information with respect to the LTIP at December 31, 1997 and changes for the three years then ended, is as follows:
Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Price Price Price Shares (per share) Shares (per share) Shares (per share) 1997 1997 1996 1996 1995 1995 Balance at January 1 2,961,194 $ 26.68 2,591,765 $ 26.16 2,651,397 $ 26.73 Options granted 1,139,000 22.49 786,500 28.12 850,700 26.46 Options exercised -- -- (369,871) 25.07 (561,232) 23.91 Options cancelled (283,400) 24.96 (47,200) 29.36 (349,100) 35.57 --------- --------- --------- Balance at December 31 3,816,794 26.14 2,961,194 26.68 2,591,765 26.16 --------- --------- --------- Exercisable at December 31 2,800,794 26.65 2,192,694 26.17 1,813,565 25.91 Weighted average fair value of options granted during year $ 2.97 $ 2.78 $ 2.91
The fair value of each option is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 1997, 1996 and 1995, respectively: 1997 1996 1995 Dividend yield 6.2% 6.2% 6.2% Expected volatility 19.5% 16.6% 15.3% Risk-free interest rate 6.4% 5.5% 6.9% Expected life (years) 5 5 5 At December 31, 1997, the option groups outstanding based on ranges of exercise prices is as follows:
Options Outstanding Options Exercisable Weighted- Average Weighted Weighted- Remaining Average Average Number Contractual Life Exercise Number Exercise Range of Exercise Prices Outstanding (Years) Price Exercisable Price $15.75 - $20.00 156,094 4.47 $ 18.65 117,594 $ 18.43 $20.01 - $25.00 863,500 8.23 22.35 153,000 22.66 $25.01 - $30.00 2,607,000 6.72 27.32 2,518,000 27.22 $30.01 - $50.00 190,200 9.58 33.27 12,200 37.18 --------- --------- Total 3,816,794 2,800,794 ========= =========
38 10. Preferred and Preference Stock At December 31, 1997 and 1996, Series Preference Stock consisted of 100,000,000 shares authorized, of which no shares were outstanding. At December 31, 1997 and 1996, cumulative Preferred Stock, no par value, consisted of 15,000,000 shares authorized.
Current Shares Amount Redemption Outstanding Thousands of Dollars Price(a) 1997 1996 1997 1996 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 -- -- 618,954 -- 61,895 $7.48 (b) 500,000 500,000 50,000 50,000 ----------- --------- ---------- ---------- 1,374,720 1,993,674 137,472 199,367 Series (with mandatory redemption) $6.12 (c) 927,000 927,000 92,700 92,700 ----------- --------- ---------- ---------- Total preferred stock $ 2,301,720 2,920,674 $ 230,172 $ 292,067 =========== ========= ========== ========== (a) Redeemable, at the option of the Company, at the indicated dollar amounts per share, plus accrued dividends. (b) None of the shares of this series are subject to redemption prior to April 1, 2003. (c) There are no annual sinking fund requirements in 1998. Annual sinking fund requirements in 1999 - 2003 are $18,540,000. None of the shares of this series are subject to redemption prior to August 1, 1999.
11. Company Obligated Mandatorily Redeemable Preferred Securities of a Partnership (COMRPS) At December 31, 1997 and 1996, 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 three and two series, respectively, 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 Other Income and Deductions in the Consolidated Statements of Income and is deductible for income tax purposes.
Mandatory Trust Receipts Amount Redemption Distribution Outstanding Thousands of Dollars At December 31, Date Rate 1997 1996 1997 1996 Series A 2043 9.00% 8,850,000 8,850,000 $ 221,250 $ 221,250 B (a) 2025 8.72% 3,124,183 3,124,183 80,835 80,932 C (b) 2037 8.00% 2,000,000 -- 50,000 -- ---------- ---------- --------- --------- Total 13,974,183 11,974,183 $ 352,085 $ 302,182 ========== ========== ========= ========= (a) Ownership of this series is evidenced by Trust Receipts, each representing an 8.72% COMRPS, Series B, representing limited partnership interests. 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. (b) Ownership of this series is evidenced by Trust Receipts, each representing an 8.00% COMRPS, Series C, representing limited partnership interests. The Trust Receipts were issued by PECO Energy Capital Trust II, the sole assets of which are 8.00% COMRPS, Series C. Each holder of Trust Receipts is entitled to withdraw the corresponding number of 8.00% COMRPS, Series C from the Trust in exchange for the Trust Receipts so held.
39
12. Long-Term Debt At December 31, Series Due 1997 1996 Thousands of Dollars First and refunding mortgage bonds (a) 6 1/8% 1997 $ -- $ 75,000 5 3/8% 1998 225,000 225,000 7 1/2%-9 1/4% 1999 325,000 325,000 5 5/8%-7 3/8% 2001 330,000 330,000 7 1/8%-8% 2002 500,000 500,000 6 3/8%-10 1/4% 2003-2007 565,625 569,688 (b) 2008-2012 154,200 154,200 6 5/8%-8 3/4% 2018-2022 832,130 832,130 7 1/8%-7 3/4% 2023-2024 775,000 775,000 ----------- ----------- Total first and refunding mortgage bonds 3,706,955 3,786,018 Notes payable 15,574 -- Term loan agreements (c) 1997 -- 175,000 Pollution control notes (d) 2016-2034 212,705 212,705 Medium-term notes (e) 1998-2005 62,400 74,400 Note Payable - accounts receivable agreement (f) 2000 128,999 -- Unamortized debt discount and premium, net (26,405) (29,306) ----------- ----------- Total long-term debt 4,100,228 4,218,817 Due within one year (g) 247,087 283,303 ----------- ----------- Long-term debt included in capitalization (h) $ 3,853,141 $ 3,935,514 =========== =========== (a) Utility plant is subject to the lien of the Company's mortgage. (b) Floating rates, which were an average annual interest rate of 3.725% at December 31, 1997. (c) The Company has a $900 million unsecured revolving credit facility with a group of banks. The credit facility is composed of a $450 million 364-day credit agreement and a $450 million three-year credit agreement. The Company uses the credit facility principally to support the Company's commercial paper program, which was expanded from $300 million to $600 million in 1997. There was no debt outstanding under this credit facility at December 31, 1997. (d) Floating rates, which were an average annual interest rate of 3.75% at December 31, 1997. (e) Medium-term notes collateralized by mortgage bonds. The average annual interest rate was 8.75% at December 31, 1997. (f) See note 8. (g) Long-term debt maturities, including mandatory sinking fund requirements, in the period 1998-2002 are as follows: 1998 - $247,087,409; 1999 - $361,945,982; 2000 - $137,129,159; 2001 - $338,433,453; 2002 - $508,759,067. (h) The annualized interest on long-term debt at December 31, 1997, was $286 million, of which $269 million was associated with mortgage bonds and $17 million was associated with other long-term debt.
13. Short-Term Debt
1997 1996 1995 Thousands of Dollars Average borrowings $ 248,111 $ 198,090 $ 17,560 Average interest rates, computed on daily basis 5.83% 5.64% 6.25% Maximum borrowings outstanding $ 464,500 $369,500 $ 182,000 Average interest rates, at December 31 6.74% 6.90% --
The Company has a $600 million commercial paper program which is supported by the $900 million revolving credit facility (see note 12). At December 31, 1997, $314 million of commercial paper was outstanding. At December 31, 1997, the Company had formal and informal lines of credit with banks aggregating $75 million. At December 31, 1997, no short-term debt was outstanding under these lines. 40 14. Income Taxes Income tax expense (benefit) is comprised of the following components:
For the Years Ended December 31, 1997 1996 1995 Thousands of Dollars Included in operations: Federal Current $ 251,509 $ 126,471 $ 190,796 Deferred (11,378) 154,564 167,526 Investment tax credit, net (18,201) (15,979) (21,679) State Current 76,689 62,839 79,086 Deferred (5,850) 12,206 15,988 ---------- --------- --------- 292,769 340,101 431,717 ========== ========= ========= Included in extraordinary item: Federal Current (123) - - Deferred (987,234) - - State Current (29) - - Deferred (303,575) - - ---------- --------- --------- (1,290,961) - - ---------- --------- --------- Total $ (998,192) $ 340,101 $ 431,717 ========== ========= =========
The total income tax provisions, excluding the extraordinary item, differed from amounts computed by applying the federal statutory tax rate to income as follows:
1997 1996 1995 Thousands of Dollars Net Income $ 336,558 $ 517,205 $ 609,732 Total income tax provisions 292,769 340,101 431,717 ---------- ---------- ---------- Income before income taxes $ 629,327 $ 857,306 $1,041,449 ========== ========== ========== Income taxes on above at federal statutory rate of 35% $ 220,264 $ 300,057 $ 364,507 Increase (decrease) due to: Property basis differences 40,828 9,903 11,196 State income taxes, net of federal income tax benefit 46,046 48,779 61,799 Amortization of investment tax credit (18,201) (15,979) (13,604) Prior period income taxes (2,985) (1,707) 1,791 Other, net 6,817 (952) 6,028 ---------- ---------- ---------- Total income tax provisions $ 292,769 $ 340,101 $ 431,717 ========== ========== ========== Effective income tax rate 46.5% 39.7% 41.5%
41 Provisions for deferred income taxes consist of the tax effects of the following temporary differences:
1997 1996 1995 Thousands of Dollars Depreciation and amortization $ 57,530 $ 42,385 $ 32,287 Deferred energy costs 2,256 27,374 30,073 Retirement and separation programs (12,734) 19,746 15,733 Incremental nuclear outage costs (981) 2,440 8,079 Uncollectible accounts (1,710) (2,805) (1,991) Reacquired debt (8,607) (9,578) (3,266) Unbilled revenue (5,110) 3,910 (5) Environmental clean-up costs (15,121) (714) 2,433 Obsolete inventory (7,074) 5,829 6,362 Limerick plant disallowances and phase-in plan (747) (747) 2,507 AMT credits - 83,010 91,399 Other nuclear operating costs (9,892) - - Other (15,038) (4,080) (97) ----------- -------- -------- Subtotal (17,228) 166,770 183,514 Extraordinary item (1,290,809) - - ----------- -------- -------- Total $(1,308,037) $166,770 $183,514 =========== ======== ========
The tax effect of temporary differences giving rise to the Company's net deferred tax liability as of December 31, 1997 and 1996 is as follows:
Liability or (Asset) 1997 1996 Thousands of Dollars Nature of temporary difference: Plant basis difference $ 2,620,254 $ 3,795,786 Deferred investment tax credit 318,065 336,132 Deferred debt refinancing costs 111,651 120,031 Other, net (249,167) (167,830) ----------- ----------- Deferred income taxes (net) on the balance sheet $ 2,800,803 $ 4,084,119 =========== ===========
The net deferred tax liability shown above as of December 31, 1997 and 1996 is comprised of $3,153 and $4,347 million of deferred tax liabilities, and $352 and $263 million of deferred tax assets, respectively. In accordance with SFAS No. 71, the Company recorded a recoverable deferred income tax asset of $586 and $2,322 million at December 31,1997 and 1996, respectively. The December 31, 1997 balance was applicable only to non-electric generation assets, due to the discontinuance of SFAS No. 71 for the Company's electric generation operations. These recoverable deferred income taxes include the deferred tax effects associated principally with liberalized depreciation accounted for in accordance with the ratemaking policies of the PUC, as well as the revenue impacts thereon, and assume recovery of these costs in future rates. At December 31, 1997, $1,763 million of electric generation-related recoverable deferred income taxes were included as part of electric generation-related regulatory assets (see note 4). 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 Company and the IRS have reached a tentative settlement which would not result in an adverse impact on the Company. The years 1991 through 1993 are currently being examined by the IRS. The AMT credit was fully utilized for tax purposes at December 31, 1997, and reduced federal income taxes currently payable by $6 million in 1997. 42 15. Taxes, Other Than Income - Operating
For the Years Ended December 31, 1997 1996 1995 Thousands of Dollars Gross receipts $163,552 $160,246 $165,172 Capital stock 48,085 41,972 42,444 Real estate 69,597 69,185 71,600 Payroll 25,976 27,585 30,109 Other 2,881 558 4,746 -------- -------- -------- Total $310,091 $299,546 $314,071 ======== ======== ========
16. Leases Leased property included in utility plant was as follows:
At December 31, 1997 1996 Thousands of Dollars Nuclear fuel $ 521,921 $ 527,116 Electric plant 2,321 2,069 --------- --------- Gross leased property 524,242 529,185 Accumulated amortization (348,309) (347,097) --------- --------- Net leased property $ 175,933 $ 182,088 ========= =========
Nuclear fuel is amortized as the fuel is consumed. Amortization of leased property totaled $39, $31 and $43 million for the years ended December 31, 1997, 1996 and 1995, respectively. Other operating expenses included interest on capital lease obligations of $9 million in 1997 and 1996, and $10 million in 1995. Minimum future lease payments as of December 31, 1997 were:
For the Years Ending December 31, Capital Leases Operating Leases Total Thousands of Dollars 1998 $ 69,820 $ 50,584 $ 120,404 1999 68,530 49,370 117,900 2000 43,827 45,923 89,750 2001 10,892 43,219 54,111 2002 92 42,327 42,419 Remaining years 806 537,645 538,451 ---------- ----------- ---------- Total minimum future lease payments $ 193,967 $ 769,068 $ 963,035 =========== ========== Imputed interest (rates ranging from 6.5% to 17.0%) (18,034) ---------- Present value of net minimum future lease payments $ 175,933 ==========
Rental expense under operating leases totaled $74 million in 1997 and 1996, and $115 million in 1995. 43 17. Jointly Owned Electric Utility Plant The Company's ownership interests in jointly owned electric utility plant at December 31, 1997 were as follows:
Transmission Production Plants and Other Plant Peach Bottom Salem Keystone Conemaugh Public Service GPU GPU PECO Energy Electric and Generating Generating Various Operator Company Gas Company Corp. Corp. Companies Participating interest 42.49% 42.59% 20.99% 20.72% 21% to 43% Company's share (Thousands of Dollars) Utility plant $ 307,029 $ 18,331 $ 110,661 $ 184,037 $ 81,072 Accumulated depreciation 175,304 11,134 66,487 78,605 31,273 Construction work in progress 50,028 713 10,067 9,100 1,943
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:
1997 1996 1995 Thousands of Dollars Cash paid during the year: Interest (net of amount capitalized) $405,838 $415,063 $449,664 Income taxes (net of refunds) 345,232 251,554 257,677 Noncash investing and financing: Capital lease obligations incurred 32,909 33,063 48,760
19. Investments
At December 31, 1997 1996 Thousands of Dollars Trust accounts for decommissioning nuclear plants $320,442 $266,270 Telecommunications ventures 85,601 79,833 Energy services and other ventures 65,578 44,023 Nonutility property 24,697 26,349 Other 19,517 16,099 -------- -------- Total $515,835 $432,574 ======== ========
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, 1997 and 1996 were as follows:
Thousands of Dollars 1997 1996 Carrying Fair Carrying Fair Amount Value Amount Value Cash and temporary cash investments $33,404 $33,404 $29,235 $29,235 Long-term debt (including amounts due within one year) 4,100,228 4,210,885 4,218,817 4,239,357 Trust accounts for decommissioning nuclear plants 320,442 320,442 266,270 266,270
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. 44 21. Other Income Settlement of Salem Litigation On December 31, 1997, the Company received $70 million pursuant to the May 1997 settlement agreement with PSE&G resolving a suit filed by the Company concerning the shutdown of Salem. The agreement also provides that if the outage exceeds 64 reactor unit months, PSE&G will pay the Company $1 million per reactor unit month. As of December 31, 1997, the shutdown of Salem totaled 58 reactor unit months. During the second quarter of 1997, the Company recorded $70 million ($41 million net of income taxes) as Other Income. Sale of Subsidiary In June 1995, the Company completed the sale of Conowingo Power Company 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 of $59 million ($27 million net of taxes) on the sale was recorded in the second quarter of 1995. 22. Regulatory Assets and Liabilities At December 31, 1997 and 1996, the Company had deferred the following regulatory assets on the Consolidated Balance Sheet:
1997 1996 Thousands of Dollars Competitive transition charge (see note 4) $5,274,624 $ - Recoverable deferred income taxes (see note 14) 585,661 2,321,692 Deferred generation costs recoverable in current rates (see note 4) 424,497 - Deferred Limerick costs (see note 3) - 361,762 Loss on reacquired debt 83,918 283,853 Compensated absences 3,881 37,727 Deferred energy costs (see note 3) 35,665 122,034 Non-pension postretirement benefits (see note 3) 97,409 233,492 ---------- ---------- Total $6,505,655 $3,360,560 ========== ==========
23. Quarterly Data (Unaudited) The data shown below include all adjustments which the Company considers necessary for a fair presentation of such amounts:
Operating Revenues Operating Income Net Income (Loss) Millions of Dollars 1997 1996 1997 1996 1997 1996 Quarter ended March 31 $1,163 $1,171 $ 302 $ 357 $ 113 $ 150 June 30 1,032 989 250 267 123 99 September 30 1,278 1,110 388 347 158 150 December 31 1,144 1,014 66 278 (1,891) 118
Earnings Applicable Average Shares Earnings to Common Stock Outstanding Per Average Share Millions of Dollars 1997 1996 1997 1996 1997 1996 Quarter ended March 31 $109 $146 222.5 222.4 $ 0.49 $ 0.65 June 30 118 94 222.5 222.5 0.53 0.43 September 30 154 145 222.5 222.5 0.69 0.65 December 31 (1,895) 114 222.5 222.5 (8.51) 0.51
The decrease in 1997 first quarter results was primarily due to increased fuel and energy interchange expense resulting primarily from additional purchases needed for increased sales to other utilities and higher replacement power costs due to the Salem outage, milder weather and increased depreciation of assets associated with Limerick. The increase in 1997 second quarter results was primarily due to the recognition of the settlement of litigation arising from the Salem outage. Offsetting this increase was higher depreciation of assets associated with Limerick. The decrease in 1997 fourth quarter results was primarily due to the extraordinary charge of $8.24 per share resulting from the effects of the PUC Restructuring Order and deregulation of the Company's electric generation operations; several one-time adjustments for changes in employee benefits, write-offs of information systems development charges reflecting clarification of accounting guidelines and additional reserves to revise estimates for accruals; higher income tax adjustments; and higher losses from the Company's non-utility ventures. 45 Financial Statistics Summary of Earnings and Financial Condition
For the Years Ended December 31, 1997 1996 1995 1994 1993 1992 Millions of Dollars Income Data Operating Revenues $4,618 $ 4,284 $ 4,186 $ 4,041 $ 3,988 $ 3,963 Operating Income 1,006 1,249 1,401 1,064 1,390 1,298 Income before Extraordinary Item 337 517 610 427 591 479 Extraordinary Item (net of income taxes) (1,834) - - - - - Net Income (1,497) 517 610 427 591 479 Earnings Applicable to Common Stock Before Extraordinary Item (1,514) 499 587 389 542 418 Earnings per Average Common Share Before Extraordinary Item (Dollars) 1.44 2.24 2.64 1.76 2.45 1.90 Extraordinary Item (Per Share) (8.24) - - - - - Earnings per Average Common Share (6.80) 2.24 2.64 1.76 2.45 1.90 Dividends per Common Share (Dollars) 1.80 1.755 1.65 1.545 1.43 1.325 Common Stock Equity (Per Share) 12.25 20.88 20.40 19.41 19.25 18.24 Average Shares of Common Stock Outstanding (Millions) 222.5 222.5 221.9 221.6 221.1 220.2 At December 31, Balance Sheet Data Net Utility Plant $4,495 $10,760 $10,758 $10,829 $10,763 $10,691 Leased Property, net 176 182 181 174 194 210 Total Current Assets 1,003 420 426 427 515 550 Total Deferred Debits and Other Assets 6,683 3,899 3,944 3,992 3,905 1,127 ------- ------- ------- ------- ------- ------- Total Assets $12,357 $15,261 $15,309 $15,422 $15,377 $12,578 ======= ======= ======= ======= ======= ======= Common Shareholders' Equity $ 2,727 $ 4,646 $ 4,531 $ 4,303 $ 4,263 $ 4,022 Preferred and Preference Stock Without Mandatory Redemption 137 199 199 277 423 423 With Mandatory Redemption 93 93 93 93 187 231 Company Obligated Mandatorily Redeemable Preferred Securities of a Partnership 352 302 302 221 -- -- Long-term Debt 3,853 3,936 4,199 4,786 4,884 5,204 ------- ------- ------- ------- ------- ------- Total Capitalization 7,162 9,176 9,324 9,680 9,757 9,880 Total Current Liabilities 1,619 1,103 1,052 850 954 830 Total Deferred Credits and Other Liabilities 3,576 4,982 4,933 4,892 4,666 1,868 ------- ------- ------- ------- ------- ------- Total Capitalization and Liabilities $12,357 $15,261 $15,309 $15,422 $15,377 $12,578 ======= ======= ======= ======= ======= =======
46 Operating Statistics
For the Years Ended December 31, 1997 1996 1995 1994 1993 1992 Electric Operations Output (Millions of Kilowatthours) Fossil 9,659 10,856 10,792 11,239 10,352 8,082 Nuclear 25,853 24,373 25,499 28,195 27,026 24,428 Hydro 1,558 2,404 1,425 1,970 1,699 1,803 Pumped storage output 1,403 1,540 1,741 1,596 1,478 1,597 Pumped storage input (1,924) (2,230) (2,507) (2,256) (2,192) (2,217) Purchase and interchange 29,615 19,539 13,945 6,164 6,447 8,675 Internal combustion 144 179 175 106 56 29 --------- --------- --------- --------- --------- --------- Total electric output 66,308 56,661 51,070 47,014 44,866 42,397 ========= ========= ========= ========= ========= ========= Sales (Millions of Kilowatthours) Residential 10,407 10,671 10,636 10,859 10,609 9,965 Small commercial and industrial 6,685 6,491 6,200 6,150 5,769 5,396 Large commercial and industrial 15,034 15,208 15,763 15,968 15,956 15,829 Other 841 902 860 791 771 962 Unbilled 70 (327) 535 (205) 31 (159) --------- --------- --------- --------- --------- --------- Service territory 33,037 32,945 33,994 33,563 33,136 31,993 Interchange sales 1,927 935 496 768 457 1,231 Sales to other utilities 28,893 20,243 14,041 10,039 8,670 6,699 --------- --------- --------- --------- --------- --------- Total electric sales 63,857 54,123 48,531 44,370 42,263 39,923 ========= ========= ========= ========= ========= ========= Number of Customers, December 31, Residential 1,333,861 1,324,448 1,321,379 1,350,210 1,341,873 1,333,926 Small commercial and industrial 144,142 142,431 141,653 143,605 142,363 141,253 Large commercial and industrial 3,308 3,299 3,394 3,603 3,742 3,972 Other 1,094 1,051 959 944 888 857 --------- --------- --------- --------- --------- --------- Total electric customers 1,482,405 1,471,229 1,467,385 1,498,362 1,488,866 1,480,008 ========= ========= ========= ========= ========= ========= Operating Revenues (Millions of Dollars) Residential $ 1,357 $ 1,370 $ 1,379 $ 1,371 $ 1,351 $ 1,308 Small commercial and industrial 779 749 730 710 679 672 Large commercial and industrial 1,077 1,098 1,135 1,149 1,168 1,225 Other 148 140 137 136 161 168 Unbilled 19 (26) 43 (11) (1) (7) --------- --------- --------- --------- --------- --------- Service territory 3,380 3,331 3,424 3,355 3,358 3,366 Interchange sales 59 26 17 23 14 32 Sales to other utilities 728 498 334 247 233 199 --------- --------- --------- --------- --------- --------- Total electric revenues 4,167 3,855 3,775 3,625 3,605 3,597 --------- --------- --------- --------- --------- --------- Operating Expenses Operating expenses, excluding depreciation 2,698 2,244 2,026 2,209 1,894 1,990 Depreciation 553 462 431 416 401 391 --------- --------- --------- --------- --------- --------- Total operating expenses 3,251 2,706 2,457 2,625 2,295 2,381 --------- --------- --------- --------- --------- --------- Electric Operating Income $ 916 $ 1,149 $ 1,318 $ 1,000 $ 1,310 $ 1,216 ========= ========= ========= ========= ========= ========= Average Use per Residential Customer (Kilowatthours) Without electric heating 6,695 6,771 6,908 6,736 6,727 6,259 With electric heating 16,400 17,946 17,189 17,527 17,096 16,298 Total 7,830 8,074 8,130 8,041 7,970 7,443 Electric Peak Load, Demand (Thousands of Kilowatts) 7,390 6,509 7,244 7,227 7,100 6,617 Net Electric Generating Capacity- Year-end Summer Rating (Thousands of Kilowatts) 9,204 9,201 9,078 8,956 8,877 8,836 Cost of Fuel per Million BTU $ 0.84 $ 0.93 $ 0.87 $ 0.89 $ 0.90 $ 0.82 BTU per Net Kilowatthour Generated 10,737 10,682 10,705 11,617 10,675 10,657
47 Operating Statistics (continued)
For the Years Ended December 31, 1997 1996 1995 1994 1993 1992 Gas Operations Sales (Millions of Cubic Feet) Residential 1,614 1,681 1,516 1,636 1,637 1,819 House heating 32,666 35,471 30,698 32,246 30,242 30,218 Commercial and industrial 19,830 20,999 18,464 19,762 18,635 19,026 Other 673 2,571 1,582 7,039 9,733 4,885 Unbilled 212 (1,306) 1,710 (474) 676 (736) ------- ------- ------- ------- ------- ------- Total gas sales 54,995 59,416 53,970 60,209 60,923 55,212 Gas transported for customers 30,412 27,891 48,531 29,801 22,946 22,060 ------- ------- ------- ------- ------- ------- Total gas sales and gas transported 85,407 87,307 102,501 90,010 83,869 77,272 ======= ======= ======= ======= ======= ======= Number of Customers Residential 55,592 56,003 56,533 57,122 59,573 59,859 House heating 314,335 303,996 295,481 287,481 277,500 269,577 Commercial and industrial 35,215 34,182 33,308 32,292 31,573 30,956 ------- ------- ------- ------- ------- ------- Total gas customers 405,142 394,181 385,322 376,895 368,646 360,392 ======= ======= ======= ======= ======= ======= Operating Revenues (Millions of Dollars) Residential $ 17 $ 16 $ 15 $ 16 $ 15 $ 16 House heating 265 249 236 238 202 203 Commercial and industrial 145 133 126 128 110 113 Other 3 11 5 20 28 12 Unbilled (1) (4) 7 (3) 5 (1) ------- ------- ------- ------- ------- ------- Subtotal 429 405 389 399 360 343 Other revenues (including transported for customers) 22 24 22 17 23 23 ------- ------- ------- ------- ------- ------- Total gas revenues 451 429 411 416 383 366 ------- ------- ------- ------- ------- ------- Operating Expenses Operating expenses, excluding depreciation 333 302 302 326 279 261 Depreciation 28 27 26 26 24 23 ------- ------- ------- ------- ------- ------- Total operating expenses 361 329 328 352 303 284 ------- ------- ------- ------- ------- ------- Gas Operating Income $ 90 $ 100 $ 83 $ 64 $ 80 $ 82 ======= ======= ======= ======= ======= =======
Securities Statistics Ratings on PECO Energy Company's securities
Mortgage Bonds Preferred Stock Date Date Agency Rating Established Rating Established Duff and Phelps, Inc. BBB+ 4/92 BBB- 8/91 Fitch Investors Service, Inc. A- 9/92 BBB+ 9/92 Moody's Investors Service Baa1 4/92 baa2 4/92 Standard & Poor's Corporation BBB+ 4/92 BBB 4/92
NYSE-Composite Common Stock Prices, Earnings and Dividends by Quarter (Per Share)
1997 1996 Fourth Third Second First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter High price $25-1/8 $24-5/16 $21-1/8 $26-3/8 $27-3/8 $26-1/4 $26-7/8 $32-1/2 Low price $21-7/16 $20-3/4 $18-3/4 $20 $23-7/8 $23 $22-1/2 $26-1/4 Close $24-1/4 $23-7/16 $21 $20-3/8 $25-1/4 $23-3/4 $26 $26-5/8 Earnings ($8.51) 69(cent) 53(cent) 49(cent) 51(cent) 65(cent) 43(cent) 65(cent) Dividends 45(cent) 45(cent) 45(cent) 45(cent) 45(cent) 43.5(cent) 43.5(cent) 43.5(cent)
48 Board of Directors Susan W. Catherwood (54) Chairman, Trustee Board, The University of Pennsylvania Medical Center and Health System Daniel L. Cooper (62)(2) Former Vice President and General Manager, Nuclear Services Division Gilbert/Commonwealth, Inc. M. Walter D'Alessio (64) President and Chief Executive Officer, Legg Mason Real Estate Services (Commercial mortgage banking and pension fund advisors) G. Fred DiBona, Jr. (46) President and Chief Executive Officer, Independence Blue Cross R. Keith Elliott (55) Chairman, President and Chief Executive Officer, Hercules, Inc. Richard G. Gilmore (70)(1) Former Senior Vice President, Finance and Chief Financial Officer of the Company Richard H. Glanton, Esquire (51)(1) Partner of the law firm Reed Smith Shaw and McClay James A. Hagen (65) Former Chairman, Conrail, Inc. Admiral Kinnaird R. McKee (68) Director Emeritus, U.S. Navy Nuclear Propulsion Joseph J. McLaughlin (69)(1) Former President and Chief Executive Officer, Beneficial Mutual Savings Bank Corbin A. McNeill, Jr. (58)(1) Chairman of the Board President and Chief Executive Officer of the Company John M. Palms, PhD. (62) President, University of South Carolina Joseph F. Paquette, Jr. (63)(1) Former Chairman of the Board of Directors of the Company Ronald Rubin (66)(1) Chief Executive Officer, The Rubin Organization, Inc. (Real estate development and management) Robert Subin (59) Senior Vice President, Campbell Soup Company Officers Corbin A. McNeill, Jr. (58) Chairman of the Board of Directors President and Chief Executive Officer Dickinson M. Smith (64) President, PECO Nuclear and Chief Nuclear Officer Gregory A. Cucchi (48)(3) Senior Vice President Ventures James W. Durham (60) Senior Vice President, Legal and General Counsel Michael J. Egan (43)(4) Senior Vice President, Finance and Chief Financial Officer William J. Kaschub (55) Senior Vice President, Human Resources Kenneth G. Lawrence (50)(4) Senior Vice President, Local Distribution Company John M. Madara, Jr. (54) Senior Vice President, Power Generation Group William H. Smith, III (49)(5) Senior Vice President, Business Services Group Alvin J. Weigand (59) Senior Vice President Gerald R. Rainey (48) Senior Vice President, Nuclear Operations Nancy J. Bessey (44) Vice President, Power Transactions John B. Cotton (53)(6) Vice President, Station Support John Doering, Jr. (54) Vice President, Operations Power Generation Group Gregory P. Dudkin (40)(3) Vice President, Power Delivery Drew B. Fetters (46) Vice President, Nuclear Planning and Development Thomas P. Hill, Jr. (49) Vice President and Controller Cassandra A. Matthews (47)(7) Vice President, Information Systems John P. McElwain (47)(6) Vice President, Nuclear Projects, PECO Nuclear J. Barry Mitchell (50) Vice President, Finance and Treasurer Thomas N. Mitchell (42) Vice President, Peach Bottom Atomic Power Station William E. Powell, Jr. (61) Vice President, Support Services James D. von Suskil (51)(8) Vice President, Limerick Generating Station Katherine K. Combs (47) Corporate Secretary Edward J. Cullen, Jr. (50) Assistant Corporate Secretary Todd D. Cutler (37) Assistant Corporate Secretary Diana Moy Kelly (43) Assistant Treasurer George R. Shicora (51) Assistant Treasurer (1) Member of the Executive Committee of the Board of Directors (2) Elected June 23, 1997 (3) Effective June 1, 1997 (4) Effective October 13, 1997 (5) Effective November 7, 1997 (6) Effective April 9, 1997 (7) Effective July 28, 1997 (8) Effective January 26, 1998 EX-21 16 PECO Energy Company Subsidiaries PECO Energy Power Company Susquehanna Power Company The Proprietors of the Susquehanna Canal (inactive) Susquehanna Electric Company Eastern Pennsylvania Development Company Adwin Equipment Company Adwin (Schuylkill) Cogeneration, Inc. Adwin Realty Company Eastern Pennsylvania Exploration Company Energy Performance Services, Inc. PECO Energy Capital LP PECO Energy Capital Corp Horizon Energy Company (formerly known as PECO Gas Supply Company) PECO Wireless, LLC Exelon Corporation Energy Trading Company EX-23 17 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, 33-54935, 333-27721), Form S-4 (File Nos. 33-53785, 33-53785-01, 33-60859, and 33-60859-01), and Form S-8 (File No. 33-30317) of our report dated February 2, 1998, on our audits of the consolidated financial statements and financial statement schedules of PECO Energy Company and Subsidiary Companies as of December 31, 1997 and 1996 and for each of the three years in the period ended December 31, 1997, which report is included (or incorporated by reference) in this Annual Report on Form 10-K. /s/ Coopers & Lybrand L.L.P. 2400 Eleven Penn Center Philadelphia, Pennsylvania March 9, 1997 EX-24 18 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS that I, Susan W. Catherwood of Bryn Mawr, PA, do hereby appoint C. A. MC NEILL, JR. attorney for me and in my name and on my behalf to sign the annual Securities and Exchange Commission report on Form 10-K for 1997 of PECO Energy Company, to be filed with the Securities and Exchange Commission, and generally to do and perform all things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present. /S/ Susan W. Catherwood ---------------------------------------- DATE: 1/26/98 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS that I, M. Walter D'Alessio of Philadelphia, PA, do hereby appoint C. A. MC NEILL, JR. attorney for me and in my name and on my behalf to sign the annual Securities and Exchange Commission report on Form 10-K for 1997 of PECO Energy Company, to be filed with the Securities and Exchange Commission, and generally to do and perform all things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present. /S/ M. Walter D'Alessio ---------------------------------------- DATE: 1/26/98 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS that I, Richard G. Gilmore of Bradenton, FL, do hereby appoint C. A. MC NEILL, JR. attorney for me and in my name and on my behalf to sign the annual Securities and Exchange Commission report on Form 10-K for 1997 of PECO Energy Company, to be filed with the Securities and Exchange Commission, and generally to do and perform all things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present. /S/ Richard G. Gilmore ---------------------------------------- DATE: 1/26/98 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS that I, Richard H. Glanton of Philadelphia, PA, do hereby appoint C. A. MC NEILL, JR. attorney for me and in my name and on my behalf to sign the annual Securities and Exchange Commission report on Form 10-K for 1997 of PECO Energy Company, to be filed with the Securities and Exchange Commission, and generally to do and perform all things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present. /S/ Richard H. Glanton ---------------------------------------- DATE: 1/26/98 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS that I, James A. Hagen of Wilmington, North Carolina, do hereby appoint C. A. MC NEILL, JR. attorney for me and in my name and on my behalf to sign the annual Securities and Exchange Commission report on Form 10-K for 1997 of PECO Energy, to be filed with the Securities and Exchange Commission, and generally to do and perform all things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present. /S/ James A. Hagen ---------------------------------------- DATE: 1/26/98 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS that I, Kinnaird R. McKee of Oxford, MD, do hereby appoint C. A. MC NEILL, JR. attorney for me and in my name and on my behalf to sign the annual Securities and Exchange Commission report on Form 10-K for 1997 of PECO Energy Company, to be filed with the Securities and Exchange Commission, and generally to do and perform all things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present. /S/ Kinnaird R. McKee ---------------------------------------- DATE: 2/3/98 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS that I, Joseph J. McLaughlin of Rosemont, PA, do hereby appoint C. A. MC NEILL, JR. attorney for me and in my name and on my behalf to sign the annual Securities and Exchange Commission report on Form 10-K for 1997 of PECO Energy Company, to be filed with the Securities and Exchange Commission, and generally to do and perform all things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present. /S/ Joseph J. McLaughlin ---------------------------------------- DATE: 1/26/98 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS that I, Dr. John M. Palms of Columbia, SC, do hereby appoint C. A. MC NEILL, JR. attorney for me and in my name and on my behalf to sign the annual Securities and Exchange Commission report on Form 10-K for 1997 of PECO Energy Company, to be filed with the Securities and Exchange Commission, and generally to do and perform all things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present. /S/ Dr. John M. Palms ---------------------------------------- DATE: 1/26/98 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS that I, Joseph F. Paquette, Jr. of Gladwyne, PA, do hereby appoint C. A. MC NEILL, JR. attorney for me and in my name and on my behalf to sign the annual Securities and Exchange Commission report on Form 10-K for 1997 of PECO Energy Company, to be filed with the Securities and Exchange Commission, and generally to do and perform all things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present. /S/ Joseph F. Paquette, Jr. ---------------------------------------- DATE: 1/26/98 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS that I, Ronald Rubin of Narberth, PA, do hereby appoint C. A. MC NEILL, JR. attorney for me and in my name and on my behalf to sign the annual Securities and Exchange Commission report on Form 10-K for 1997 of PECO Energy Company, to be filed with the Securities and Exchange Commission, and generally to do and perform all things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present. /S/ Ronald Rubin ---------------------------------------- DATE: 1/30/98 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS that I, Robert Subin of Blue Bell, PA, do hereby appoint C. A. MC NEILL, JR. attorney for me and in my name and on my behalf to sign the annual Securities and Exchange Commission report on Form 10-K for 1997 of PECO Energy Company, to be filed with the Securities and Exchange Commission, and generally to do and perform all things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present. /S/ Robert Subin ---------------------------------------- DATE: 1/26/98 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS that I, R. Keith Elliott of Mendenhall, PA, do hereby appoint C. A. MC NEILL, JR. attorney for me and in my name and on my behalf to sign the annual Securities and Exchange Commission report on Form 10-K for 1997 of PECO Energy Company, to be filed with the Securities and Exchange Commission, and generally to do and perform all things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present. /S/ R. Keith Elliott ---------------------------------------- DATE: 1/26/98 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS that I, G. Fred DiBona, Jr. of Bryn Mawr, PA, do hereby appoint C. A. MC NEILL, JR. attorney for me and in my name and on my behalf to sign the annual Securities and Exchange Commission report on Form 10-K for 1997 of PECO Energy Company, to be filed with the Securities and Exchange Commission, and generally to do and perform all things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present. /S/ G. Fred DiBona, Jr. ---------------------------------------- DATE: 2/3/98 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS that I, Daniel L. Cooper of Wyomissing, PA, do hereby appoint C. A. MC NEILL, JR. attorney for me and in my name and on my behalf to sign the annual Securities and Exchange Commission report on Form 10-K for 1997 of PECO Energy Company, to be filed with the Securities and Exchange Commission, and generally to do and perform all things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present. /S/ Daniel L. Cooper ---------------------------------------- DATE: 1/26/98 EX-27 19
UT 1,000,000 12-MOS DEC-31-1997 DEC-31-1997 PER-BOOK 4671 516 1003 5962 205 12357 3518 1 (792) 2727 93 138 3853 402 0 314 247 0 120 56 4722 12357 4618 293 3612 3905 713 25 738 402 (1497) 17 (1514) 401 373 1038 (6.80) (6.80) Net income includes an extraordinary item of $3,125 million ($1,834 million net of $1,291 million of income taxes) reflecting the effects of a Pennsylvania Public Utility Commission Restructuring Order and deregulation of the Company's electric generation operations.
-----END PRIVACY-ENHANCED MESSAGE-----