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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________ to ___________________
Commission File Number 1-1401
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PECO ENERGY COMPANY
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Pennsylvania 23-0970240
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
P.O. Box 8699
2301 Market Street, Philadelphia, PA (215) 841-4000 19101
(Address of principal executive offices) (Registrant's telephone number, including area code) (Zip Code)
</TABLE>
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Securities registered pursuant to Section 12(b) of the Act:
First and Refunding Mortgage Bonds (Listed on the New York Stock Exchange):
<TABLE>
<CAPTION>
<S> <C> <C> <C>
5 5/8% Series due 2001 6 1/2% Series due 2003 7 1/8% Series due 2023 7 1/4% Series due 2024
7 3/8% Series due 2001 6 3/8% Series due 2005 7 3/4% Series 2 due 2023
Cumulative Preferred Stock -- without par value (Listed on the New York and Philadelphia Stock Exchanges):
$4.68 Series $4.40 Series $4.30 Series $3.80 Series
</TABLE>
Common Stock -- without par value (Listed on the New York and Philadelphia
Stock Exchanges)
9.00% Cumulative Monthly Income Preferred Securities, Series A, $25 stated
value, issued by PECO Energy Capital, L.P. and unconditionally guaranteed by
the Company (Listed on the New York Stock Exchange)
Trust Receipts of PECO Energy Capital Trust II, each representing an 8.00%
Cumulative Monthly Income Preferred Security, Series C, $25 stated value,
issued by PECO Energy Capital, L.P. and unconditionally guaranteed by the
Company (Listed on the New York Stock Exchange)
Trust Receipts of PECO Energy Capital Trust III, each representing an 7.38%
Cumulative Monthly Income Preferred Security, Series D, $1,000 stated value,
issued by PECO Energy Capital, L.P. and unconditionally guaranteed by the
Company (Listed on the New York Stock Exchange)
Securities registered pursuant to Section 12(g) of the Act:
Cumulative Preferred Stock -- without par value:
$7.48 Series $6.12 Series
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the registrant's common stock (only voting
stock) held by non-affiliates of the registrant was $9,305,227,737 at March
26, 1999.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of the latest practicable date.
Common Stock -- without par value: 203,392,956 shares
outstanding at March 26, 1999.
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DOCUMENTS INCORPORATED BY REFERENCE (In Part)
Annual Report of PECO Energy Company to Shareholders for the year 1998
is incorporated in part in Parts I, II and IV hereof, as specified herein.
Proxy Statement of PECO Energy Company in connection with its 1999 Annual
Meeting of Shareholders is incorporated in part in Part III hereof,
as specified herein.
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Page No.
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PART I
ITEM 1. BUSINESS ......................................................... 1
The Company ...................................................... 1
Deregulation and Rate Matters .................................... 1
Electric -- Retail .............................................. 2
Electric -- Wholesale ........................................... 5
Gas ............................................................. 6
Competition. .................................................... 6
Electric Operations .............................................. 7
General ......................................................... 7
Limerick Generating Station .....................................10
Peach Bottom Atomic Power Station ...............................12
Salem Generating Station ........................................12
Fuel .............................................................13
Nuclear .........................................................13
Coal. ...........................................................15
Oil .............................................................15
Natural Gas .....................................................15
Gas Operations ...................................................16
Year 2000 Readiness Disclosure ...................................16
Segment Information ..............................................17
Capital Requirements and Financing Activities. ...................17
Construction .....................................................19
Employee Matters .................................................20
Environmental Regulations ........................................20
Water ...........................................................20
Air .............................................................21
Solid and Hazardous Waste .......................................21
Costs ...........................................................24
AmerGen Energy Company, LLC ......................................24
Telecommunications Ventures ......................................24
PECO Energy Capital Corp. and Related Entities ...................25
Executive Officers of the Registrant. ............................26
ITEM 2. PROPERTIES .......................................................28
ITEM 3. LEGAL PROCEEDINGS ................................................29
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. .............30
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS .............................................30
ITEM 6. SELECTED FINANCIAL DATA ..........................................31
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. ..........................................31
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. ......31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ......................31
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE ........................................31
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ...............31
ITEM 11. EXECUTIVE COMPENSATION. ..........................................31
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT. ................................................. ...32
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ...................32
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K ................................................. ...33
Financial Statements and Financial Statement Schedule ............33
REPORT OF INDEPENDENT ACCOUNTANTS. ...............................34
SCHEDULE II-- VALUATION AND QUALIFYING ACCOUNTS. .................35
Exhibits .........................................................36
Reports on Form 8-K ..............................................39
SIGNATURES
i
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PART I
ITEM 1. BUSINESS
The Company
Incorporated in Pennsylvania in 1929, PECO Energy Company (Company) is
primarily a vertically integrated utility that historically has provided
regulated retail electric and natural gas service to customers in its
franchised service territory in southeastern Pennsylvania. Beginning in 1999,
the Electricity Generation Customer Choice and Competition Act (Competition
Act) requires the unbundling of retail electric services in Pennsylvania into
separate generation, transmission and distribution services with open retail
competition for generation services. With the advent of deregulation, the
Company serves as the local distribution company providing electric
distribution services in southeastern Pennsylvania and bundled electric service
to customers who cannot or do not choose an alternate electric generation
supplier (EGS). Through its Exelon division, the Company is a competitive
generation supplier offering a variety of unregulated energy and utility
infrastructure services, including electric supply, to businesses and
residential customers across Pennsylvania. The Company also engages in the
wholesale marketing of electricity on a national basis. The Company also
participates in joint ventures which provide telecommunication services in the
Philadelphia metropolitan region.
At December 31, 1997, the Company discontinued the use of regulatory
accounting in its financial statements for its electric generation operations.
In connection with the discontinuance of Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain Types of Regulation,"
the Company performed a market value analysis of its generation assets and
wrote-off $1.8 billion (net of income taxes) of unrecoverable electric plant
costs and regulatory assets. For additional information, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
the Company's Annual Report to Shareholders for the year 1998.
The Company is a public utility under the Pennsylvania Public Utility Code
and a transmitting utility and electric utility under the Federal Power Act. As
a result, the Company is subject to regulation by the Pennsylvania Public
Utility Commission (PUC) as to electric distribution, certain retail electric
rates, retail gas rates, issuances of securities and certain other aspects of
the Company's operations and by the Federal Energy Regulatory Commission (FERC)
as to transmission rates. Specific operations of the Company are also subject
to the jurisdiction of various other federal, state, regional and local
agencies, including the United States Nuclear Regulatory Commission (NRC), the
United States Environmental Protection Agency (EPA), the United States
Department of Energy (DOE), the Delaware River Basin Commission (DRBC) and the
Pennsylvania Department of Environmental Protection (PDEP). The Company's Muddy
Run Pumped Storage Project and the Conowingo Hydroelectric Project are subject
to the licensing jurisdiction of the FERC. Due to its ownership of subsidiary-
company stock, the Company is a holding company as defined by the Public
Utility Holding Company Act of 1935 (1935 Act); however, it is predominantly an
operating company and, by filing an exemption statement annually, is exempt
from all provisions of the 1935 Act, except Section 9(a)(2) relating to the
acquisition of securities of a public utility company.
The Company established specific goals to increase its generation capacity
from 9 gigawatts to 25 gigawatts by 2003. The Company is targeting a balanced
portfolio of nuclear, hydro and clean burning fossil capacity through the
acquisition of plants and long-term supply agreements. In order to meet this
strategic objective the Company may require significant capital resources.
Deregulation and Rate Matters
Historically, all of the Company's retail electric and gas revenues have
been derived pursuant to bundled rates regulated by the PUC and all of the
Company's wholesale electric revenue has been derived pursuant to
1
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rates regulated by the FERC. As a result of the adoption of the Competition Act
and deregulation initiatives by the FERC, electric services are being unbundled
into separate generation, transmission and distribution services with open
competition for both retail and wholesale generation services. Certain
transmission and distribution services will remain subject to regulation.
Electric -- Retail
The Competition Act was enacted in December 1996 and provides for the
restructuring of the electric utility industry in Pennsylvania. The Competition
Act requires the unbundling of electric services into separate generation,
transmission and distribution services with open retail competition for
generation services. Generation services may be provided by EGSs licensed by
the PUC. Under the Competition Act, EGSs are subject to certain limited
financial and disclosure requirements but are otherwise unregulated by the PUC.
The Competition Act required utilities to submit restructuring plans,
including their stranded costs which will result from retail competition for
generation services. Stranded costs include regulatory assets, nuclear
decommissioning costs and long-term purchase power commitments for which full
recovery is allowed and other costs, including investment in generating plants,
spent fuel disposal, retirement costs and reorganization costs, for which an
opportunity for recovery is allowed in an amount determined by the PUC as just
and reasonable.
As a mechanism for utilities to recover their allowed stranded costs, the
Competition Act provides for the imposition and collection of non-bypassable
charges on customers' bills called competitive transition charges (CTCs). CTCs
are assessed to and collected from all retail customers who have been assigned
stranded cost responsibility and access the utilities' transmission and
distribution systems and may be collected over a maximum period of nine years,
except as such period may be extended by the PUC for good cause shown. As the
CTCs are based on access to the utility's transmission and distribution system,
they will be assessed regardless of whether such customer purchases electricity
from the utility or an EGS. The Competition Act provides, however, that the
utility's right to collect CTCs is contingent on the continued operation at
reasonable availability levels of the assets for which the stranded costs were
awarded, except where continued operation is no longer cost efficient because
of the transition to a competitive market.
The Competition Act also authorizes the PUC to issue qualified rate orders
approving the issuance of transition bonds to facilitate the recovery or
financing of qualified transition expenses of an electric utility or its
assignee. Under the Competition Act, proceeds of transition bonds are required
to be used principally to reduce qualified transition expenses, including
stranded costs, and the related capitalization costs of the utility. The
transition bonds are payable from intangible transition charges (ITCs) which
are collected in lieu of CTCs.
In accordance with the provisions of the Competition Act, in April 1997,
the Company filed with the PUC a comprehensive restructuring plan detailing its
proposal to implement full customer choice of electric generation suppliers.
The Company's restructuring plan identified $7.5 billion of retail electric
generation-related stranded costs. In August 1997, the Company and various
intervenors in the Company's restructuring proceeding filed with the PUC a
Joint Petition for Partial Settlement (Joint Petition). In December 1997, the
PUC rejected the Joint Petition and entered an Opinion and Order, revised in
January and February 1998 (PUC Restructuring Order), which deregulated the
Company's electric generation operations. The PUC Restructuring Order
authorized the Company to recover stranded costs of $4.9 billion on a
discounted basis, or $5.3 billion on a book value basis, over 8 1/2 years
beginning in 1999.
In January 1998, the Company and numerous other parties filed petitions
for review of the PUC Restructuring Order in the Commonwealth Court of
Pennsylvania and the Company filed a complaint in the U.S. District Court for
the Eastern District of Pennsylvania seeking injunctive relief. On April 29,
1998, the Company and all but one of the 25 parties who had challenged the
Company's restructuring plan filed a joint petition and settlement (Settlement)
with the PUC. In May 1998, the PUC entered an Opinion and Order (Final
Restructuring Order) approving the Settlement. The intervenor who had not
joined the Settlement appealed the Final Restructuring Order to the
Commonwealth Court. After full briefing and oral argument, the Commonwealth
Court dismissed the appeal thus affirming the Final Restructuring Order. The
intervenor filed a petition for allowance of appeal with the Pennsylvania
Supreme Court which was denied. The intervenor subsequently filed a petition
for writ of certiorari with the United States Supreme Court, which was also
denied. Once this petition
2
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for writ of certiorari was denied, the Company and all other parties withdrew
their pending appeals at the Commonwealth Court and the Eastern District of
Pennsylvania. All appeals of the Final Restructuring Order have
either been finally resolved by a court or withdrawn by the parties.
The Settlement authorizes the Company to recover $5.26 billion of stranded
costs, together with a return of 10.75% thereon. For good cause shown, the PUC
authorized the recovery of stranded costs over a 12 year transition period
beginning January 1, 1999 and ending December 31, 2010. Stranded costs and the
allowed return thereon are recovered through CTCs and, at the Company's election
to issue or cause the issuance of transition bonds, ITCs, designed to recover
the $5.26 billion of stranded costs. The CTCs have been established assuming
annual growth in sales of 0.8% and will be reconciled annually to actual sales.
The following table shows the estimated average levels of CTCs and/or ITCs
for the years 1999 through 2010, based on estimated 0.8% annual sales growth
assumed in the Settlement.
TABLE 1
Annual Stranded Cost
Amortization And Return
<TABLE>
<CAPTION>
Revenue Excluding
Annual CTC Gross Receipts Tax
Year Sales and/or ITC(2) Total Return @ 10.75% Amortization
- - ------- ------------ --------------- ----------- ----------------- -------------
MWh(1) $/kWh ($000) ($000) ($000)
<S> <C> <C> <C> <C> <C>
1999 33,569,358 $ 0.0172 $551,988 $566,134 $ (14,146)
2000 33,837,913 0.0192 621,102 564,222 56,879
2001 34,108,616 0.0251 818,457 547,777 270,680
2002 34,381,485 0.0251 825,004 516,869 308,135
2003 34,656,537 0.0247 818,352 482,401 335,951
2004 34,933,789 0.0243 811,540 444,798 366,742
2005 35,213,260 0.0240 807,933 403,555 404,378
2006 35,494,966 0.0266 902,623 353,070 549,553
2007 35,778,925 0.0266 909,844 290,627 619,217
2008 36,065,157 0.0266 917,123 220,312 696,811
2009 36,353,678 0.0266 924,459 141,229 783,231
2010 36,644,507 0.0266 931,855 52,381 879,474
</TABLE>
- - ------------
(1) Subject to reconciliation of actual sales and collections.
(2) Both the CTCs and the ITCs are subject to adjustment.
The Settlement required the Company to unbundle its retail electric rates
on January 1, 1999 into the following components: (i) distribution and
transmission charges, (ii) CTCs and, if applicable, ITCs and (iii) a capacity
and energy charge for generation, which is the maximum amount the Company, as
the provider of last resort (PLR), can charge customers who do not or cannot
choose to purchase electricity from alternate EGS.
The Settlement requires the Company to reduce rates during 1999 and 2000
by 8% and 6%, respectively, from rates in existence on December 31, 1996. The
Settlement also extends the rate caps on generation rates at higher levels than
required by the Competition Act, until December 1, 2010 and extends rate caps
on transmission and distribution rates until June 30, 2005. The Company's
unbundled rates, rate reductions and rate caps are reflected in the schedule of
system-wide average rates included in the Settlement and shown in Table 2
below.
3
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TABLE 2
Schedule of System-Wide Average Rates (dollars per kilowatthour (kWh))(1)
<TABLE>
<CAPTION>
T&D CTC Shopping Generation
Effective Date Transmission(2) Distribution Rate Cap and/or ITC(3) Credit Rate Cap
- - ----------------- ----------------- ----------------- ----------------- --------------- ------------ --------------
(1) (2) (3)=(1) + (2) (4) (5) (6)=(4) + (5)
<S> <C> <C> <C> <C> <C> <C>
January 1, 1999 $ 0.0045 $ 0.0253 $ 0.0298 $ 0.0172 $ 0.0446 $ 0.0618
January 1, 2000 0.0045 0.0253 0.0298 0.0192 0.0446 0.0638
January 1, 2001 0.0045 0.0253 0.0298 0.0251 0.0447 0.0698
January 1, 2002 0.0045 0.0253 0.0298 0.0251 0.0447 0.0698
January 1, 2003 0.0045 0.0253 0.0298 0.0247 0.0451 0.0698
January 1, 2004 0.0045 0.0253 0.0298 0.0243 0.0455 0.0698
January 1, 2005 0.0045 (4) 0.0253 (4) 0.0298 (4) 0.0240 0.0458 0.0698
January 1, 2006 N/A N/A N/A 0.0266 0.0485 0.0751
January 1, 2007 N/A N/A N/A 0.0266 0.0535 0.0801
January 1, 2008 N/A N/A N/A 0.0266 0.0535 0.0801
January 1, 2009 N/A N/A N/A 0.0266 0.0535 0.0801
January 1, 2010 N/A N/A N/A 0.0266 0.0535 0.0801
</TABLE>
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(1) All charges reflect average retail billing for all rate classes (including
gross receipts tax).
(2) The transmission charge listed is for unbundled rates only. The PUC does
not regulate the rates for transmission service.
(3) Both the CTCs and the ITCs are subject to adjustment.
(4) Effective until June 30, 2005.
Under the Settlement, customer choice of EGSs is being phased in between
January 1, 1999 and January 2, 2000 with one-third of each rate class entitled
to choose their EGS by January 1, 1999, an additional one-third by January 2,
1999 and the remaining one-third by January 1, 2000. If on January 1, 2001 and
January 1, 2003 less than 35% and 50%, respectively, of all of the Company's
residential and commercial customers by rate class are obtaining generation
service from alternate EGSs, non-shopping customers will be randomly assigned to
EGSs, including those affiliated with the Company, to meet those thresholds.
Assignment of non-shopping customers will be through a PUC-approved process.
Customers assigned to a PLR, other than the Company will be counted as customers
receiving service from an alternate EGS.
Under the Settlement, the Company may securitize up to $4 billion of its
$5.26 billion of stranded cost recovery through the issuance of transition
bonds. The ITCs associated with the issuance of transition bonds must terminate
no later than December 31, 2010. The rate reductions and rate caps described in
Table 2 included as part of the Settlement anticipate the benefits of the
securitization, and no adjustment in the Company base rates will be made upon
issuance of any transition bonds. After January 1, 1999, CTCs (or the Company's
distribution rates) will be reduced by the amount of ITCs. For additional
information see "Capital Requirements and Financing Activities."
On January 1, 1999, the Company unbundled its retail electric rates for
metering, meter reading, and billing and collection services to provide credits
for those customers that have elected to have alternate suppliers perform these
services. Effective January 1, 1999, PUC-licensed entities, including EGSs, may
act as agents to provide a single bill and provide associated billing and
collection services to retail customers located in the Company's retail electric
service territory. In such event, the EGS or other third party would replace the
customer as the obligor with respect to the customer's bill and the Company will
generally have no right to collect such receivable from the customer. To the
extent that customers choose consolidated billing by an EGS or other third
party, the Company will be relying on a small number of EGSs and other third
parties rather than a large number of customers for the collection of billings,
including ITCs. The PUC-licensed entities, including EGSs, may also finance,
install, own, maintain, calibrate and remotely read advanced meters for service
to retail customers located in the Company's retail electric service territory.
An EGS or other third party that bills on behalf of the Company must comply with
all applicable billing and disclosure requirements absent waiver by the PUC,
including the unbundling of transmission and distribution rates. Only the
Company can physically disconnect or reconnect a customer's distribution
service. Physical termination of the service may only be permitted for failure
to pay transmission and distribution service or PLR service.
4
<PAGE>
Under the Restructuring Plan, the Company will act as a PLR for all retail
electric customers in its retail electric service territory who do not choose or
cannot choose to purchase power from an alternative EGS through December 31,
2010, subject to certain terms, conditions and qualifications. In February 1999,
certain utilities, customer advocates and EGSs convened to develop proposed
regulations on Competitive Default Service. On February 26, 1999, the chairman
of the group forwarded a suggested procedure for choosing a Competitive Default
Supplier to the PUC. Under those suggested procedures, entities that desire to
act as a Competitive Default Supplier have until April 1, 2000 to submit both
their qualifications to act as a Competitive Default Supplier and their bid for
providing such service. Competitive Default Service will begin on January 1,
2001 for 20% of the Company's residential customers. The suggested procedures
would require an EGS to provide, among other things, proof that it has received
the requisite licenses from the state and federal governments, proof that it
meets certain creditworthiness standards and assurances that it can acquire
additional bonding as necessary. The supplier of Competitive Default Service
will be required to provide billing, including its payment of ITCs and other
revenues, to the Company on the terms and conditions set forth in the Company
tariff for those entities who currently provide competitive billing services to
customers.
The suggested procedures will not become final until the PUC adopts them.
The PUC may choose to reject or modify the suggested procedures. The PUC has no
time deadline for rendering its decision on this issue. The PUC may allow a
public comment period before reaching a final resolution of these issues.
The Settlement also provides for flexible generation service pricing for
customers served by Competitive Default Service, authorization of the Company to
transfer its generation assets to a separate subsidiary, inclusion of a
sustainable energy and economic development fund (funded at a rate of .01 cents
per kilowatthour on all power sold, to be included in the capped transmision
and distribution rates) and expansion and modification of the Company's program
for low-income customers.
Electric -- Wholesale
During 1996, the FERC issued Order No. 888 which requires all public
utilities that own, control or operate interstate transmission facilities to
file open-access transmission tariffs for wholesale transmission services in
accordance with non-discriminatory terms and conditions established by the
FERC. The FERC's stated goal in promulgating Order No. 888 and related orders
is to remove impediments to competition in the wholesale bulk power market
place and to bring more efficient, lower cost power to electricity consumers.
In response to Order No. 888, on July 3, 1996, the Company filed an
individual compliance tariff with the FERC which became effective July 9, 1996.
In December 1996, the Company and the other members of the PJM Interconnection
LLC (PJM) filed a joint compliance filing with the FERC. The PJM is a power pool
which integrates, through central dispatch, the generation and transmission
operations of its member companies across a 50,000 square-mile territory in the
Mid-Atlantic region. That filing included a PJM regional transmission tariff.
Under the PJM tariff, which became effective on March 1, 1997, transmission
service is provided on a pool-wide, open-access basis using the transmission
facilities of the PJM members at rates based on the costs of the transmission
system at the point of delivery.
On March 31, 1997, the members of the PJM converted that organization from
an unincorporated association into a limited liability company and filed with
the FERC a revised PJM operating agreement to reflect that change.
In November 1997, the FERC issued an order authorizing the establishment of
an independent system operator (ISO) for the PJM on January 1, 1998 and
designated the PJM's Office of the Interconnection as the ISO. The ISO is
responsible for operation of the PJM control area and administration of the PJM
open-access transmission tariff and the hourly energy market in the PJM known as
the PJM Power Exchange (PJM PX). In that same order, the FERC directed the
Company and the other transmission owners in the PJM to turn over control of
their transmission facilities to the ISO and put in place a new PJM regional
transmission tariff and energy market arrangement. Although the Company cannot
predict the long-term economic effect of the restructured pooling arrangements
approved by the FERC, the arrangements could adversely affect the Company's
ability to fully recover its transmission costs.
5
<PAGE>
On March 10, 1999, the FERC issued an order granting a pending application
by other PJM utilities for market-based rate authority for sales of energy and
certain ancillary services into the PJM PX. Although the Company has not been a
party to that application, the FERC expressly granted the Company market-based
rate authority for sales of energy and ancillary services into the PJM PX.
Previously, the FERC restricted generators located within PJM, including the
Company, to cost-based bids. The recent order expands the Company's existing
ability to engage in wholesale trading of power and certain associated
ancillary services at market-based rates to include trading with the PJM PX.
The FERC also granted anyone else with market-based rate authority the same
right.
On March 10, 1999, the FERC also entered an order establishing a Market
Monitoring Plan (MMP) for the PJM control area. The MMP will be administered by
a newly created Market Monitoring Unit (MMU) under the PJM and authorizes the
MMU to monitor and report on market activity and alleged exercises of market
power by market participants. The FERC order directs additional modifications to
the proposed MMP that will increase the level of coordination of the MMU with
various governmental authorities. It is unclear what impact either the MMP or
the MMU ultimately will have on power trading within the PJM PX in particular
and on wholesale bilateral transactions generally.
On September 21, 1998, the PUC entered an Order directing holders of
installed capacity resources in PJM (including the Company) to immediately
release or offer capacity for sale in the wholesale markets during 1999 at a
presumptive price of $19.72 per kilowattyear, a price below the current
competitive wholesale market prices at that time. On October 21, 1998, the
Company filed a Petition for Review of the PUC Order in Commonwealth Court
seeking a declaration that the PUC's Order is preempted because it attempts to
regulate matters within the exclusive federal jurisdiction of the FERC. On
October 28, 1998, the Company entered into a settlement with the PUC under
which the Company agreed to make certain of its wholesale capacity available to
new market entrants serving retail load within the Company's service territory
at specified prices during 1999. On October 30, 1998, the PUC approved the
settlement.
Gas
The Company's gas sales and gas transportation revenues are derived
pursuant to rates regulated by the PUC. The PUC has established through
regulatory proceedings the base rates that the Company may charge for gas
service in Pennsylvania. The Company's gas rates are subject to a purchased gas
cost (PGC) adjustment clause and a State Tax Adjustment Surcharge (STAS). The
PGC is designed to recover or refund the difference between the actual cost of
purchased gas and the amount included in base rates. The PGC is adjusted
quarterly. The STAS is designed to recover or refund increases or decreases in
certain state taxes not recovered in base rates.
On November 4, 1998, the PUC issued an order approving the Company's PGC
No. 15 rates for the period December 1, 1998 to November 30, 1999, which
reflects a $0.0068 per thousand cubic feet (mcf) increase in natural gas sales
rates. PGC No. 15 became effective December 1, 1998.
The gas industry is continuing to undergo structural changes in response
to FERC policies designed to increase competition. FERC policies have required
interstate gas pipelines to unbundle their gas sales service from other
regulated tariff services, such as transportation and storage. In anticipation
of these changes, the Company modified its gas purchasing arrangements to
enable the purchase and transportation of gas at lower costs. The Company,
through Exelon Energy, is participating in pilot programs outside the Company's
gas service territory to market natural gas and other services to retail
customers.
Legislation has been introduced in the Pennsylvania legislature to
deregulate the gas industry. The effort to deregulate the gas industry has the
support of the Governor of Pennsylvania. The Company cannot predict whether the
Pennsylvania legislature will enact legislation that deregulates the gas
industry or whether the Governor of Pennsylvania will ultimately sign into law
any such legislation. The Company cannot predict the ultimate effect of gas
industry deregulation on its future financial condition and results of
operations.
Competition
The Company competes in both the retail electric generation market in
Pennsylvania and other states and the wholesale electric generation market
nationally.
6
<PAGE>
Retail competition for electric generation supply in Pennsylvania commenced
in January 1999, with two-thirds of the Company's electric utility consumers
having the right to choose their supplier. The Company is actively competing for
a share of the generation supply market in its traditional service territory
through PECO Energy Distribution (PED) and throughout Pennsylvania through
Exelon Energy, the Company's new competitive supplier. Generation services
provided by PED are at the energy and capacity charge mandated by the Final
Restructuring Order. Generation services offered by Exelon Energy are at
competitive market prices. Customers who choose to take generation service from
PED may choose an alternate generation supplier at any time. As of January 12,
1999, approximately 12% of the Company's residential and small commercial
customers and approximately 50% of its large commercial and industrial customers
had selected an alternate EGS. As of that date, Exelon Energy was providing
generation service to approximately 135,000 commercial, industrial and
residential customers throughout Pennsylvania.
The Company actively competes in the developing wholesale markets for
electricity. The Company's wholesale marketing activities include the sale of
energy from the Company's installed capacity, the purchase of energy to meet
the Company's retail requirements, the resale of energy purchased from
unaffiliated utilities and others and the marketing of energy of other
generators. The Company enters into both long-term and short-term commitments
to buy and sell power. Currently, the Company's long-term commitments, together
with the energy the Company expects to market from the Company's installed
capacity, make the Company a net power seller. The Company competes in the
wholesale market for electricity on the bases of price, dependability of
service and execution of transactions.
For additional information regarding competition, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
the Company's Annual Report to Shareholders for the year 1998.
Electric Operations
General
During 1998, 92% of the Company's operating revenues and 94% of its
operating income were from electric operations. Annual and quarterly operating
results can be significantly affected by weather. Traditionally, sales of
electricity are higher in the first and third quarters due to colder weather
and warmer weather, respectively. Electric sales and operating revenues for
1998 by class of customer are set forth below:
Operating
Sales Revenues
(millions of kWh) (millions of $)
------------------- ----------------
Residential ............................. 10,623 $1,377
Small commercial and industrial ......... 6,888 784
Large commercial and industrial ......... 15,678 1,067
Other ................................... 803 150
Change in unbilled ...................... 131 1
------ ------
Service territory .................... 34,123 3,379
Interchange sales ....................... 3,483 211
Sales to other utilities ................ 37,258 1,221
------ ------
Total ................................ 74,864 $4,811
====== ======
The Company is engaged in the wholesale marketing of electricity on a
national basis. The Company's wholesale marketing activities include the sale
of energy from the Company's installed capacity, the purchase of energy to meet
the Company's retail requirements, the resale of energy purchased from
unaffiliated utilities and others and the marketing of energy of other
generators. During 1998, the Company purchased 45.1% of its total kilowatthours
sold and estimates that for 1999 it will purchase 46.9% of its total
kilowatthours sold.
At December 31, 1998, the Company had long-term commitments to purchase
from unaffiliated utilities and others energy associated with 632 MW of
capacity in 1999, energy associated with 2,054 MW of capacity during the period
2000 through 2002 and energy associated with 2,431 MW of capacity thereafter.
Under some of
7
<PAGE>
these contracts, the Company may purchase, at its option, additional power as
needed. These purchases will be utilized through a combination of retail sales
to customers, sales to other utilities and EGSs and open-market sales. At
December 31, 1998, the Company had entered into long-term agreements with
unaffiliated utilities to sell energy associated with 5,094 MW of capacity, of
which 1,030 MW of these agreements are for 1999, 2,202 MW are for 2000 through
2002 and the remaining 1,862 MW extend through 2009. See Note 5 of Notes to
Consolidated Financial Statements included in the Company's Annual Report to
Shareholders for the year 1998.
The net installed electric generating capacity (summer rating) of the
Company and its subsidiaries at December 31, 1998 was as follows:
Type of Capacity MW % of Total
---------------- ----- ----------
Nuclear .................................. 4,119 44.4%
Mine-mouth, coal-fired ................... 709 7.7
Service-area, coal-fired ................. 725 7.8
Oil-fired ................................ 1,176 12.7
Gas-fired ................................ 267 2.9
Hydro (includes pumped storage) .......... 1,422 15.4
Internal combustion ...................... 844 9.1
----- -----
Total .................................... 9,262(1) 100.0%
===== =====
- - ------------
(1) See "Fuel" for sources of fuels used in electric generation.
The all-time maximum hourly demand on the Company's system was 7,390 MW
which occurred on July 15, 1997. The all-time maximum PJM demand of 49,406 MW
occurred on July 15, 1997. PJM's installed capacity (summer rating) is more
than 56,000 MW. The Company's installed capacity is expected to be sufficient
to meet its obligation to supply its PJM reserve margin share during the period
1998-2001. See "Deregulation and Rate Matters."
The Company's nuclear-generated electricity is supplied by Limerick
Generating Station (Limerick) Units No. 1 and No. 2, Peach Bottom Atomic Power
Station (Peach Bottom) Units No. 2 and No. 3, which are operated by the
Company, and Salem Generating Station (Salem) Units No. 1 and No. 2, which are
operated by Public Service Electric and Gas Company (PSE&G). The Company owns
100% of Limerick, 42.49% of Peach Bottom and 42.59% of Salem. Limerick Units
No. 1 and No. 2 have a capacity of 1,134 MW and 1,115 MW respectively; Peach
Bottom Units No. 2 and No. 3 each has a capacity of 1,093 MW, of which the
Company is entitled to 464 MW of each unit; and Salem Units No. 1 and No. 2
each has a capacity of 1,106 MW, of which the Company is entitled to 471 MW of
each unit.
The Company's nuclear generating facilities represent approximately 44.4%
of its installed generating capacity. In 1998, approximately 39.4% of the
Company's electric output was generated from the Company's nuclear generating
facilities. Changes in regulations by the NRC that require a substantial
increase in capital expenditures for the Company's nuclear generating
facilities or that result in increased operating costs of nuclear generating
units could adversely affect the Company.
The Price-Anderson Act currently limits the liability of nuclear reactor
owners to $9.7 billion for claims that could arise from a single incident. The
limit is subject to change to account for the effects of inflation and changes
in the number of licensed reactors. The Company carries the maximum available
commercial insurance of $200 million and the remaining $9.5 billion is provided
through mandatory participation in a financial protection pool. Under the
Price-Anderson Act, all nuclear reactor licensees can be assessed up to $88
million per reactor per incident, payable at no more than $10 million per
reactor per incident per year. This assessment is subject to inflation and
state premium taxes. In addition, the U.S. Congress could impose revenue
raising measures on the nuclear industry to pay claims if the damages from an
incident at a licensed nuclear facility exceed $9.7 billion. The Price-Anderson
Act and the extensive regulation of nuclear safety by the NRC do not preclude
claims under state law for personal, property or punitive damages related to
radiation hazards.
Property insurance in the amount of $2.75 billion is maintained for each
nuclear power plant in which the Company has an ownership interest. The Company
is responsible for its proportionate share of such insurance
8
<PAGE>
based on its ownership interest. The Company's insurance policies provide
coverage for decontamination liability expense, premature decommissioning and
loss or damage to its nuclear facilities. These policies require that insurance
proceeds first be applied to assure that, following an accident, the facility
is in a safe and stable condition and can be maintained in such condition.
Within 30 days of stabilizing the reactor, the licensee must submit a report to
the NRC which provides a clean-up plan, including the identification of all
clean-up operations necessary to decontaminate the reactor to permit either the
resumption of operations or decommissioning of the facility. Under the
Company's insurance policies, proceeds not already expended to place the
reactor in a stable condition must be used to decontaminate the facility. If,
as a result of an accident, the decision is made to decommission the facility,
a portion of the insurance proceeds will be allocated to a fund which the
Company is required by the NRC to maintain to provide funds for decommissioning
the facility. These proceeds would be paid to the fund to make up any
difference between the amount of money in the fund at the time of the early
decommissioning and the amount that would have been in the fund if
contributions had been made over the normal life of the facility. The Company
is unable to predict what effect these requirements may have on the timing of
the availability of insurance proceeds to the Company for the Company's
bondholders and the amount of such proceeds which would be available. Under the
terms of the various insurance agreements, the Company could be assessed up to
$30 million for losses incurred at any plant insured by the insurance
companies. The Company is self-insured to the extent that any losses may exceed
the amount of insurance maintained. Any such losses could have a material
adverse effect on the Company's financial condition or results of operations.
The Company is a member of an industry mutual insurance company which
provides replacement power cost insurance in the event of a major accidental
outage at a nuclear station. The policy contains a waiting period before
recovery of costs can commence. The premium for this coverage is subject to
assessment for adverse loss experience. The Company's maximum share of any
assessment is $10 million per year.
NRC regulations require that licensees of nuclear generating facilities
demonstrate that funds will be available in certain minimum amounts at the end
of the life of the facility to decommission the facility. Based on estimates of
decommissioning costs for each of the nuclear facilities in which the Company
has an ownership interest, the PUC permits the Company to collect from its
customers and deposit in segregated accounts amounts which, together with
earnings thereon, will be used to decommission such nuclear facilities. Through
1998, the Company's current estimate of its nuclear facilities' decommissioning
cost is $1.5 billion in 1997 dollars which was being collected through electric
rates over the life of each generating unit. Beginning in 1999, decommissioning
costs are recoverable through regulated rates. At December 31, 1998, the
Company held $378 million in trust accounts, representing amounts recovered
from customers and net realized and unrealized investment earnings thereon, to
fund future decommissioning costs.
In an Exposure Draft issued in 1996, the Financial Accounting Standards
Board (FASB) proposed changes in the accounting for closure and removal costs
of production facilities, including the recognition, measurement and
classification of decommissioning costs for nuclear generating stations. The
FASB has expanded the scope of the Exposure Draft to include closure or removal
liabilities that are incurred at any time during the operating life of the
related long-lived asset. The FASB is proceeding towards a revised Exposure
Draft, currently expected in the second quarter of 1999. If current electric
utility industry accounting practices for decommissioning are changed, annual
provisions for decommissioning costs could increase and the estimated cost for
decommissioning could be recorded as a liability rather than as accumulated
depreciation, and the increased cost would be recognized as a regulatory asset
to the extent recoverable through regulated rates. For additional information
concerning nuclear decommissioning, see Note 5 of Notes to Consolidated
Financial Statements included in the Company's Annual Report to Shareholders
for the year 1998.
In 1996, the NRC requested that all nuclear plant operators inform the NRC
whether their nuclear units are operated and maintained within the design bases
of the facilities and confirm that any deviations have been or will be
reconciled in a timely manner. The Company responded to the NRC's request on
February 4, 1997 with a detailed description of ongoing activities and new
initiatives to ensure that Limerick and Peach Bottom are operated and
maintained within their design bases. PSE&G provided a similar response to the
NRC on February 11, 1997 concerning Salem. Since the information that was
submitted will be used by the NRC to determine follow-up inspection activity or
potential enforcement actions, the Company cannot predict what impact the NRC's
request will have.
9
<PAGE>
On September 16, 1998, the NRC suspended its Systematic Assessment of
License Performance (SALP) program for an interim period until the NRC staff
completes a review of its nuclear power plant performance assessment process.
During the interim period while the SALP program is suspended, the NRC will
utilize the results of its plant performance reviews to provide nuclear power
plant performance information to licensees, state and local officials and the
public. These reviews are intended to identify performance trends since the
previous assessment and make any appropriate changes to the NRC's inspection
plans. At the end of the process, the NRC will decide whether to resume the
SALP program or substitute an alternative program.
Limerick Generating Station
Limerick Unit No. 1 achieved a capacity factor of 77% in 1998 and 85% in
1997. Limerick Unit No. 2 achieved a capacity factor of 95% in 1998 and 85% in
1997. Limerick Units No. 1 and No. 2 are each on a 24-month refueling cycle.
The last refueling outages for Units No. 1 and No. 2 were in the spring of 1998
and 1997, respectively.
On May 9, 1997, the NRC issued its periodic SALP report for Limerick for
the period April 2, 1995 to March 29, 1997. Limerick achieved ratings of "1,"
the highest of three rating categories, in the areas of Operations, Maintenance
and Plant Support. In the area of Engineering, Limerick achieved a rating of
"2." The NRC stated that the overall performance of Limerick remained
excellent. Strong management involvement and conservative decision making were
exhibited in day-to-day activities. Self-assessment and quality assurance
activities continued to be effective. The performance enhancement process
continued to be an effective program for identifying, evaluating and correcting
issues with appropriate thresholds and priorities. Oversight and independent
review committees contributed to the corrective actions program effectiveness.
While noting strengths in design, analysis and modifications, the NRC stated
that earlier engineering intervention could have prevented equipment problems
that resulted in a number of plant trips and forced shutdowns. The NRC also
noted that management has recognized this performance weakness and has
initiated remedial actions.
In October 1990, General Electric Company (GE) reported that crack
indications were discovered near the seam welds of the core shroud assembly in
a GE Boiling Water Reactor (BWR) located outside the United States. As a
result, GE issued a letter requesting that the owners of GE BWRs take interim
corrective actions, including a review of fabrication records and visual
examinations of accessible areas of the core shroud seam welds. Each of the
reactors at Limerick and Peach Bottom is a GE BWR. Initial examination of
Limerick Unit No. 1 was completed during the February 1996 refueling outage.
Although crack indications were identified at one location, the Company
concluded that there is a substantial margin for each core shroud weld to allow
for continued operation of Unit No. 1 for a minimum of the next two operating
cycles. In accordance with industry experience and guidance, initial
examination of Limerick Unit No. 2 has been scheduled for the refueling outage
planned for April 1999. Peach Bottom Unit No. 3 was initially examined during
its refueling outage in the fall of 1993. Although crack indications were
identified at two locations, the Company presented its findings to the NRC and
recommended continued operation of Unit No. 3 for a two-year cycle. Unit No. 3
was re-examined during its refueling outage in the fall of 1995 and the extent
of cracking identified was determined to be within industry-established
guidelines. The Company has concluded, and the NRC has concurred, that there is
a substantial margin for each core shroud weld to allow for continued operation
of Unit No. 3. Peach Bottom Unit No. 2 was initially examined during its
October 1994 refueling outage and the examination revealed a minimal number of
flaws. Unit No. 2 was re-examined during its refueling outage in September
1996. Although the examination revealed additional minor flaw indications, the
Company concluded, and the NRC concurred, that neither repair nor modification
to the core shroud was necessary. The Company is also participating in a GE BWR
Owners Group to develop long-term corrective actions.
As a result of several BWRs experiencing clogging of some emergency core
cooling system suction strainers, which are part of the water supply system for
emergency cooling of the reactor core, the NRC issued a bulletin in May 1996 to
operators of BWRs requesting that measures be taken to minimize the potential
for clogging. The NRC proposed three resolution options, including the
installation of large capacity passive strainers, with a request that actions
be completed by the end of the unit's first refueling outage after January
1997. Strainers were installed at Peach Bottom Unit No. 3 during the October
1997 refueling outage. Strainers were
10
<PAGE>
installed at Peach Bottom Unit No. 2 and Limerick Unit No. 1 during their
refueling outages in October 1998 and April 1998, respectively. For Limerick
Unit No. 2, the NRC granted the Company's request to defer the installation of
strainers until its scheduled refueling outage in April 1999. The Company
cannot predict what other actions, if any, the NRC may take in this matter.
The NRC has raised concerns that the Thermo-Lag 330 fire barrier systems
used to protect cables and equipment at certain nuclear facilities, including
Limerick and Peach Bottom, may not provide the necessary level of fire
protection and has requested licensees to describe short-term and long-term
measures being taken to address this concern. The Company has informed the NRC
that it has taken short-term corrective actions to address the inadequacies of
the Thermo-Lag barriers installed at Limerick and Peach Bottom and is
participating in an industry-coordinated program to provide long-term
corrective solutions. By letter dated December 21, 1992, the NRC stated that
the Company's interim actions were acceptable. The Company has been in contact
with the NRC regarding the Company's long-term measures to address Thermo-Lag
fire barrier issues. In 1995, the Company completed its engineering re-analysis
for both Limerick and Peach Bottom. This re-analysis identified proposed
modifications to be performed over the next several years at both plants in
order to implement the long-term measures addressing the concern over
Thermo-Lag use. The Company met with the NRC during 1997 regarding the
Company's plans for the resolution of the Thermo-Lag issue. In August 1997, the
NRC informed the Company that it was satisfied with the progress to date on
this issue. On May 19, 1998, the NRC issued a confirmatory order modifying the
license for Peach Bottom Units No. 2 and No. 3 requiring that the Company
complete final implementation of corrective actions on the Thermo-Lag 330 issue
by completion of the October 1999 refueling outage of Peach Bottom Unit No. 3.
In addition, the NRC issued a confirmatory order modifying the license for
Limerick Units No. 1 and No. 2 requiring that the Company complete final
implementation of corrective actions on the Thermo-Lag 330 issue by completion
of the April 1999 refueling outage of Limerick Unit No. 2. The Company
continues to work towards completion of activities to resolve this issue by the
previously committed dates of April 1999 for Limerick and October 1999 for
Peach Bottom.
Water for the operation of Limerick is drawn from the Schuylkill River
adjacent to Limerick and from the Perkiomen Creek, a tributary of the
Schuylkill River. During certain periods of the year, generally the summer
months but possibly for as much as six months or more in some years, the
Company would not be able to operate Limerick without the use of supplemental
cooling water due to existing regulatory water withdrawal constraints
applicable to the Schuylkill River and the Perkiomen Creek. Supplemental
cooling water for Limerick is provided by a supplemental cooling water system
which draws water from the Delaware River at the Point Pleasant Pumping
Station, transports it to the Bradshaw Reservoir (Point Pleasant Project), then
to the east and main branches of the Perkiomen Creek and finally to Limerick.
The supplemental cooling water system also provides water for public use to two
Montgomery County water authorities. Certain of the permits relating to the
operation of the supplemental cooling water system must be renewed
periodically.
The Company has entered into an agreement with a municipality to secure a
backup source of water for the operation of Limerick should the amount of water
from the supplemental cooling water system not be sufficient. Should the
supplemental cooling water system be completely unavailable, this backup source
is capable of providing cooling water to operate both Limerick units
simultaneously at 70% of rated capacity for short periods of time.
11
<PAGE>
Peach Bottom Atomic Power Station
Peach Bottom Unit No. 2 achieved a capacity factor of 80% in 1998 and 100%
in 1997. Peach Bottom Unit No. 3 achieved a capacity factor of 92% in 1998 and
79% in 1997. Peach Bottom Units No. 2 and No. 3 are each on a 24-month
refueling cycle. The last refueling outages for Units No. 2 and No. 3 were in
the fall of 1998 and 1997, respectively.
On July 17, 1997, the NRC issued its periodic SALP report for Peach Bottom
for the period October 15, 1995 to June 7, 1997. Peach Bottom achieved a rating
of "1," in the areas of Plant Operations, Maintenance and Plant Support. In the
area of Engineering, Peach Bottom achieved a rating of "2." Overall, the NRC
observed excellent performance at Peach Bottom during the assessment period.
The NRC stated that station management provided excellent oversight and control
of engineering activities throughout the period. The NRC noted that, while
overall engineering performance was good, there were several instances where
operating procedures, surveillances, and tests were not consistent with the
design and licensing bases.
The Company, Delmarva Power & Light Company (Delmarva) and PSE&G have
agreed to an operating performance standard through December 31, 2007 for Peach
Bottom and through December 31, 2011 for Salem. Under the standard, the operator
of each respective station would be required to make payments to the
non-operating owners if the three-year capacity factor, determined annually, of
such station falls below 40 percent, subject to a maximum of $25 million per
year. The initial three-year period began on January 1, 1998 and April 17, 1998
for Peach Bottom and Salem, respectively. The parties have also agreed to forego
litigation in the future, except for limited cases in which the operator would
be responsible for damages of no more than $5 million per year.
In addition to the matters discussed above, see "Limerick Generating
Station" for a discussion of certain matters which affect both Peach Bottom and
Limerick.
Salem Generating Station
As previously reported, Salem Units No. 1 and No. 2 were taken out of
service by PSE&G in the second quarter of 1995. Salem Unit No. 2 returned to
service on August 30, 1997. Salem Unit No. 1 returned to service on April 17,
1998. In July 1998, the NRC removed Salem Units No. 1 and No. 2 from the NRC
Watch List. The Company has been informed by PSE&G that the NRC noted that plant
material condition, safety culture and management oversight and effectiveness
had substantially improved. The NRC also observed that, while the maintenance
backlog resulting from discovery efforts during the outage remains high, PSE&G
is effectively managing the prioritization and resolution of those items.
Additionally, the NRC noted that PSE&G's management team has instituted robust
safety oversight and self-assessment at the site and that Salem has demonstrated
sustained successful plant performance.
The Company has been informed by PSE&G that on September 15, 1998, the NRC
issued its latest SALP for Salem for the period March 1, 1997 to August 1, 1998.
In the areas of Maintenance and Engineering, Salem achieved a rating of "2". In
the areas of Operations and Plant Support, Salem achieved a rating of "1". The
NRC noted improved performance overall during the period, as demonstrated by the
nearly event-free return of both units to operation following the extended
outage. The NRC identified strong management oversight, safe and conservative
operations, good engineering support and effective programs for independent
oversight and self-assessment. The NRC also noted that although human
performance has improved significantly due to extensive training interventions,
continued close management attention is warranted in the Operations and
Maintenance areas.
The Company has been informed by PSE&G that predecisional enforcement
conferences were held on December 9, 1997 to discuss two allegations concerning
security program issues which occurred at Salem in 1996. On April 24, 1998, the
NRC issued a severity Level III violation for one of these matters and informed
PSE&G that it would await issuance of the Secretary of Labor's Administrative
Review Board decision before making an enforcement decision in the other
matter. There was no civil penalty issued by the NRC for this violation. PSE&G
did not contest this violation. The Company cannot predict what other actions,
if any, the NRC may take in regard to the second matter.
12
<PAGE>
The Company has been informed by PSE&G that, in April 1997, as part of an
NRC inspection of fire barrier systems to protect equipment necessary for the
safe shutdown of the plant in the event of a fire, the NRC noted certain
weaknesses in Salem's fire barrier systems. PSE&G sent a letter to the NRC in
June 1997 addressing these issues concerning the qualifications of fire wrap
barriers used to protect electrical cabling at Salem. The letter outlined a
resolution plan and schedule to address the fire wrap issues. PSE&G has
committed to alternative measures in the form of fire watches until this plan
is implemented. A review of the installed fire barrier materials and safe
shutdown analysis is currently in progress. If certain modifications are
necessary to comply with NRC requirements, it is expected that the costs will
not be material. However, failure to resolve these fire barrier issues could
result in potential NRC violations, fines and/or plant shutdown which could
have a material adverse impact to the Company's financial condition and results
of operations.
In addition to the matters discussed above, see "Environmental Regulations
- - -- Water." See also "Peach Bottom Atomic Power Station"
Fuel
The following table shows the Company's sources of electric output for
1998 and as estimated for 1999:
1998 1999 (Est.)
------ -----------
Nuclear ................................................ 39.4% 39.1%
Mine-mouth, coal-fired ................................. 7.3 6.1
Service-area, coal-fired ............................... 4.5 4.5
Oil-fired .............................................. 1.8 1.9
Hydro (includes pumped storage) ........................ 1.7 1.3
Internal combustion .................................... 0.2 0.2
Purchased, interchange and nonutility generated ........ 45.1 46.9
----- -----
100.0% 100.0%
===== =====
Nuclear
The cycle of production and utilization of nuclear fuel includes the
mining and milling of uranium ore into uranium concentrates; the conversion of
uranium concentrates to uranium hexafluoride; the enrichment of the uranium
hexafluoride; the fabrication of fuel assemblies; and the utilization of the
nuclear fuel in the generating station reactor. The Company does not anticipate
difficulty in obtaining the necessary uranium concentrates or conversion,
enrichment or fabrication services for Limerick or Peach Bottom. PSE&G has
informed the Company that it presently has sufficient contracts for uranium and
services related to the nuclear fuel cycle to fully meet its current projected
requirements. The following table summarizes the years through which the
Company has contracts for the segments of the nuclear fuel supply cycle:
<TABLE>
<CAPTION>
Concentrates (1) Conversion (2) Enrichment Fabrication
------------------ ---------------- ------------ ------------
<S> <C> <C> <C> <C>
Limerick Unit No. 1 .............. 2002 2001 2004 2003
Limerick Unit No. 2 .............. 2002 2001 2004 2004
Peach Bottom Unit No. 2 .......... 2002 2001 2004 2002
Peach Bottom Unit No. 3 .......... 2002 2001 2004 2003
</TABLE>
- - ------------
(1) The Company's contracts for uranium concentrates are allocated to Limerick
and Peach Bottom on an as-needed basis.
(2) The Company also has commitments for at least 60% of the conversion
services requirements for Limerick and Peach Bottom through 2002.
There are no commercial facilities for the reprocessing of spent nuclear
fuel currently in operation in the United States, nor has the NRC licensed any
such facilities. The Company currently stores all spent nuclear fuel from its
nuclear generating facilities in on-site, spent fuel storage pools. Limerick
has on-site facilities with capacity to store spent fuel with full core
discharge until 2007. Peach Bottom has on-site facilities with capacity to
store spent fuel until 2000 for Unit No. 2 and 2001 for Unit No. 3. The Company
has begun construction
13
<PAGE>
of a dry spent-fuel storage facility at Peach Bottom to maintain full core
discharge capacity in the spent fuel pools. Construction will continue through
early 2000. The facility, including the first nine storage casks, is expected
to cost approximately $33.5 million. The independent spent fuel storage
facility is expected to provide life of plant storage capacity. The Company
expects to purchase storage casks to maintain spent fuel storage capacity at an
estimated cost of $6 million per year. The Company has been informed by PSE&G
that as a result of reracking the two spent fuel pools at Salem, spent fuel
storage capacity of Salem Units No. 1 and No. 2 is estimated to be 2012 and
2016, respectively. PSE&G is also currently assessing available options which
could satisfy the potential need for additional storage capacity, including the
option of constructing an on-site storage facility that would satisfy the
spent-fuel storage needs of Salem.
Under the Nuclear Waste Policy Act of 1982 (NWPA), the DOE is required to
begin taking possession of all spent nuclear fuel generated by the Company's
nuclear units for long-term storage by no later than 1998. Based on recent
public pronouncements, it is not likely that a permanent disposal site will be
available for the industry before 2015, at the earliest. In reaction to
statements from the DOE that it was not legally obligated to begin to accept
spent fuel in 1998, a group of utilities and state government agencies filed a
lawsuit against the DOE which resulted in a decision by the U.S. Court of
Appeals for the District of Columbia (D.C. Court of Appeals) in July 1996 that
the DOE had an unequivocal obligation to begin to accept spent fuel in 1998. In
accordance with the NWPA, the Company pays the DOE one mill ($.001) per
kilowatthour of net nuclear generation for the cost of nuclear fuel long-term
storage and disposal. This fee may be adjusted prospectively in order to ensure
full cost recovery. Because of inaction by the DOE following the D.C. Court of
Appeals finding of the DOE's obligation to begin receiving spent fuel in 1998,
a group of forty-two utility companies, including the Company, and forty-six
state agencies, filed suit against the DOE seeking authorization to suspend
further payments to the U.S. government under the NWPA and to deposit such
payments into an escrow account until such time as the DOE takes effective
action to meet is 1998 obligations. In November 1997, the D.C. Court of Appeals
issued a decision in which it held that the DOE had not abided by its prior
determination that the DOE has an unconditional obligation to begin disposal of
spent nuclear fuel by January 31, 1998. The D.C. Court of Appeals also
precluded the DOE from asserting that it was not required to begin receiving
spent nuclear fuel because it had not yet prepared a permanent repository or an
interim storage facility. The DOE and one of the utility companies filed
Petitions for Reconsideration of the decision which were denied, as were
petitions seeking U.S. Supreme Court review of the decision. In addition, the
DOE is exploring other options to address delays in the waste acceptance
schedule. In January 1999, legislation was introduced in the U.S. House of
Representatives authorizing the construction of a temporary storage facility
which could accept spent nuclear fuel from utilities prior to operation of a
permanent repository.
As a by-product of their operations, nuclear generating units, including
those in which the Company owns an interest, produce low level radioactive waste
(LLRW). LLRW is accumulated at each facility and permanently disposed of at a
federally licensed disposal facility. The Company is currently shipping LLRW
generated at Peach Bottom and Limerick to the disposal site located in Barnwell,
South Carolina and Clive, Utah for disposal. On-site storage facilities have
been constructed at Peach Bottom and Limerick, with twenty-five year and
five-year storage capacities, respectively.
The Company is also pursuing alternative disposal strategies for LLRW
generated at Peach Bottom and Limerick, including a LLRW reduction program.
Pennsylvania which had agreed to be the host site for a LLRW disposal facility
for generators located in Pennsylvania, Delaware, Maryland and West Virginia
suspended the search for a permanent disposal site. The Company contributed $12
million towards the total cost of a permanent Pennsylvania disposal site prior
to its suspension.
Salem has on-site LLRW storage facilities with a five-year storage
capacity. The Company has been informed by PSE&G that PSE&G ships LLRW
generated at Salem to Barnwell, South Carolina and currently uses the Salem
facility for interim storage. In 1991, New Jersey enacted legislation providing
for funding of the estimated $70 million cost to establish a LLRW disposal
facility. New Jersey would recover the costs through fees paid by LLRW
generators. The Company as a Salem co-owner, has paid $857,000 as its share of
the New Jersey siting costs. New Jersey established a volunteer siting process
to establish a LLRW disposal facility by 2000. Public meetings were held across
the State in an effort to provide information to and obtain feedback from the
public; however, no voluntary sites were identified. Consequently, on February
10, 1998, the New Jersey
14
<PAGE>
agency responsible for this program recommended to the Governor of New Jersey
that this volunteer plan be abandoned. The Governor of New Jersey has accepted
the agency's plan to reduce the scope of siting activities since the
development of a disposal facility in New Jersey may not be economically
feasible in light of current out-of-state disposal options. As a result, the
refund of the unspent funds paid by waste generators in New Jersey to finance
the siting process needs to be addressed. The Company expects to partially
recover the funds paid in connection with this effort.
The National Energy Policy Act of 1992 (Energy Act) requires, among other
things, that utilities with nuclear reactors pay for the decommissioning and
decontamination of the DOE nuclear fuel enrichment facilities. The total costs
to domestic utilities are estimated to be $150 million per year for 15 years,
of which the Company's share is $5 million per year. The Energy Act provides
that these costs are to be recoverable in the same manner as other fuel costs.
The Company has recorded the liability and a related regulatory asset of $47
million for such costs at December 31, 1998. The Company is currently
recovering these costs through regulated rates.
The Company is currently recovering in rates the costs for nuclear
decommissioning and decontamination and spent-fuel storage. The Company
believes that the ultimate costs of decommissioning and decontamination,
spent-fuel disposal and any assessment under the Energy Act will continue to be
recoverable through rates. For additional information concerning
decommissioning, see "Electric Operations -- General."
Coal
The Company has a 20.99% ownership interest in Keystone Station (Keystone)
and a 20.72% ownership interest in Conemaugh Station (Conemaugh), coal-fired,
mine-mouth generating stations in western Pennsylvania operated by GPU
Generating Corp. A majority of Keystone's fuel requirements is supplied by one
coal company under a contract which expires on December 31, 2004. The contract
calls for between 3.0 and 3.5 million tons for 1999 and a total of 6.5 million
tons of coal purchases for the years 2000 through 2004. Approximately 80% of
Conemaugh's 1999 fuel requirements are secured by a long-term contract and the
remainder by several short-term contracts or spot purchases.
The Company has entered into contracts for a significant portion of its
coal requirements and makes spot purchases for the balance of coal required by
its Philadelphia-area, coal-fired units at Eddystone Station (Eddystone) and
Cromby Station (Cromby). At January 1, 1999, the Company had contracts with two
suppliers for 1.5 million tons per year or approximately 80% of expected annual
requirements. Both contracts expire on December 31, 2000. Purchases pursuant to
these contacts represented approximately 3% of the Company's Fuel and Energy
Interchange Expense in 1998.
Oil
The Company purchases fuel oil through a combination of short-term
contracts and spot market purchases. The contracts are normally not longer than
one year in length. Fuel oil inventories are managed such that in the winter
months sufficient volumes of fuel are available in the event of extreme weather
conditions and during the remaining months inventory levels are managed to take
advantage of favorable market pricing.
Natural Gas
The Company obtains natural gas for electric generation through a
combination of short-term contracts and spot purchases as well as through the
Company's own gas tariff. The Company obtains the limited quantities of natural
gas used by the auxiliary boilers and pollution control equipment at Eddystone
through the same means. The Company has the capability to use either oil or
natural gas at Cromby Unit No. 2 and Eddystone Units No. 3 and No. 4.
15
<PAGE>
Gas Operations
During 1998, 8% of the Company's operating revenues and 6% of its
operating income were from gas operations. Gas sales and operating revenues for
1998 by class of customer are set forth below:
Operating
Sales Revenues
(mmcf) (millions of $)
---------- ----------------
House heating .................................. 28,402 $236
Residential (other than house heating) ......... 1,496 16
Commercial and industrial ...................... 16,757 125
Other .......................................... 554 2
Change in unbilled ............................. (440) (3)
------ ----
Total gas sales ............................... 46,769 376
Gas transported for customers .................. 28,204 24
------ ----
Total gas sales and gas transported ........... 74,973 $400
====== ====
Annual and quarterly operating results can be significantly affected by
weather. Traditionally, sales of gas are higher in the first and fourth
quarters due to colder weather.
The Company's natural gas supply is provided by purchases from a number of
suppliers for terms of up to five years. These purchases are delivered under
several long-term firm transportation contracts with Texas Eastern Transmission
Corporation (Texas Eastern) and Transcontinental Gas Pipe Line Corporation
(Transcontinental). The Company's aggregate annual entitlement under these firm
transportation contracts is 87.5 million dekatherms. Peak gas is provided by
the Company's liquefied natural gas facility and propane-air plant. See "ITEM
2. PROPERTIES."
The Company has under contract 21.5 million dekatherms of underground
storage through service agreements with Texas Eastern, Transcontinental,
Equitrans, Inc. and CNG Transmission Corporation. Natural gas from underground
storage represents approximately 40% of the Company's 1998-99 heating season
supplies.
The gas industry is continuing to undergo structural changes in response
to FERC policies designed to increase competition. In addition, there is a
renewed initiative in the Pennsylvania legislature to deregulate the gas
industry, which has the support of the Governor of Pennsylvania. See
"Deregulation and Rate Matters."
Year 2000 Readiness Disclosure
Due to the severity of the potential impact of the Year 2000 (Y2K) issue
on the electric utility industry, the Company has adopted a comprehensive
schedule to achieve Y2K readiness. The Company has dedicated extensive
resources to its Y2K Project (Project).
The Project is addressing the issue resulting from computer programs using
two digits rather than four to define the applicable year and other programming
techniques that constrain date calculations or assign special meanings to
certain dates. Any of the Company's computer systems that have date-sensitive
software or microprocessors may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including a temporary
inability to process transactions, send bills, operate generating stations, or
engage in similar normal business activities.
The Company is utilizing both internal and external resources to
reprogram, or replace and test software and computer systems for the Project.
The Project is scheduled for completion by July 1, 1999, except for a small
number of modifications, conversions or replacements that are impacted by
vendor dates and/or are being incorporated into scheduled plant outages between
July and October 1999.
On July 17, 1998, an order was entered by the PUC instituting a formal
investigation by the Office of Administrative Law on Year 2000 compliance by
jurisdictional fixed utilities and mission-critical service providers such as
the PJM. The order requires, (1) a written response to a list of compliance
program questions by
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<PAGE>
August 6, 1998 and, (2) all jurisdictional fixed utilities be Year 2000
compliant by March 31, 1999 or, if a utility determines that mission-critical
systems cannot be Year 2000 compliant on or before March 31, 1999, the utility
is required to file a detailed contingency plan. The PUC adopted the federal
government's definition for Year 2000 compliance and further defined Year 2000
compliance as a jurisdictional utility having all mission-critical Year 2000
hardware and software updates and/or replacements installed and tested on or
before March 31, 1999. On August 6, 1998, the Company filed its written
response, in which the Company stated that with a few carefully-assessed and
closely-managed exceptions, the Company will have all mission-critical systems
Year 2000 ready by June 1999. Pursuant to the formal investigation on Year 2000
compliance, the Company presented testimony before the PUC on November 20, 1998
On February 19, 1999, the PUC issued a Secretarial Letter notifying the
Company that it had hired a consultant to perform an assessment of the Company
and thirteen other utilities to evaluate the accuracy of their responses to the
compliance program questions and testimony provided before the PUC. The Company
complied with the PUC's directive in the Secretarial Letter to file updated
written responses to compliance questions by March 8, 1999, and to meet with
the consultant during a one-day on-site review session on March 8, 1999.
On May 11, 1998, the NRC issued a generic letter requiring all nuclear
plant operators to provide the NRC with information concerning the operators'
programs, planned or implemented, to address Year 2000 computer and system
issues at its facilities, (1) submission of a written response within 90 days,
indicating whether the operator has pursued and continues to pursue
implementation of Year 2000 programs and addressing the program's scope,
assessment process, plans for corrective actions, quality assurance measures,
contingency plans and regulatory compliance, and (2) submission of a written
response, no later than July 1, 1999, confirming that such facilities are Year
2000 ready, or will be Year 2000 ready, by the year 2000 with regard to
compliance with the terms and conditions of the license(s) and NRC regulations.
On July 30, 1998, the Company filed its 90-day required written response
indicating that the Company has pursued and is continuing to pursue a Year 2000
program which is similar to that outlined in Nuclear Utility Year 2000
Readiness, NEI/NUSMG 97.07.
From November 3 to November 5, 1998, members of the NRC staff conducted an
audit of the Company's Year 2000 Program for the Limerick Generating Station,
Units No. 1 and No. 2. Some of the observations of the audit team included in
their written report issued on December 18, 1998, were that (1) the Company's
readiness program is comprehensive and based on the guidance contained in
NEI/NUSMG 97.07, (2) the program is receiving proper management support and
oversight, and (3) project schedules are being aggressively pursued.
For additional information regarding the Year 2000 Readiness Disclosure
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Company's Annual Report to Shareholders for the year 1998.
Segment Information
Segment information is incorporated herein by reference to Note 2 of Notes
to Consolidated Financial Statements included in the Company's Annual Report to
Shareholders for the year 1998.
Capital Requirements and Financing Activities
The following table shows the Company's most recent estimate of capital
requirements for 1999:
(Millions of $)
----------------
Construction .......................................... $440
New ventures (1) ...................................... 129
Long-term debt maturities and sinking funds. .......... 362
----
Total capital requirements. ....................... $931
====
- - ------------
(1) A portion of these expenditures will be expensed.
Under the Company's mortgage (Mortgage), additional mortgage bonds may not
be issued on the basis of property additions or cash deposits unless earnings
before income taxes and interest during 12 consecutive calendar months of the
preceding 15 calendar months from the month in which the additional mortgage
bonds are
17
<PAGE>
issued are at least two times the pro forma annual interest on all mortgage
bonds outstanding and then applied for. For the purpose of this test, the
Company has not included Allowance for Funds Used During Construction which is
included in net income in the Company's consolidated financial statements. The
coverage under the earnings test of the Mortgage for the twelve months ended
December 31, 1998 was 5.47 times. As a result of the extraordinary charge in
December 1997, the Company did not meet the earnings test under the Mortgage
required for the issuance of additional bonds against property additions for
the twelve months ended December 31, 1997. Earnings coverage under the Mortgage
for the twelve months ended December 31, 1996 was 4.39 times. At December 31,
1998, the Company had at least $2.26 billion of available property additions
against which $1.36 billion of mortgage bonds could have been issued. In
addition at December 31, 1998, the Company was entitled to issue approximately
$4.4 billion of mortgage bonds without regard to the earnings and property
additions tests against previously retired mortgage bonds.
Under the Company's Amended and Restated Articles of Incorporation
(Articles), the issuance of additional preferred stock requires an affirmative
vote of the holders of two-thirds of all preferred shares outstanding unless
certain tests are met. Under the most restrictive of these tests, additional
preferred stock may not be issued without such a vote unless earnings after
income taxes but before interest on debt during 12 consecutive calendar months
of the preceding 15 calendar months from the month in which the additional
shares of stock are issued are at least 1.5 times the aggregate of the pro
forma annual interest and preferred stock dividend requirements on all
indebtedness and preferred stock. Coverage under this earnings test of the
Articles for the twelve months ended December 31, 1998 was 2.81 times. As a
result of the extraordinary charge in December 1997, the Company did not meet
the earnings test of the Articles for the twelve months ended December 31,
1997. Earnings coverage under the Articles for the twelve months ended December
31, 1996 was 2.50 times.
The following table sets forth the Company's ratios of earnings to fixed
charges and the ratios of earnings to combined fixed charges and preferred
stock dividends for the periods indicated:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges .......... 3.61 2.71 3.29 3.41 2.66
Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends .............. 3.45 2.50 3.04 3.12 2.32
</TABLE>
For purposes of these ratios, (i) earnings consist of income from
continuing operations before income taxes and fixed charges and (ii) fixed
charges consist of all interest deductions and the financing costs associated
with capital leases. For purposes of calculating these ratios, income from
continuing operations for 1998 does not include the extraordinary charge
against income of $33 million ($20 million net of income taxes) and for 1997
does not include the extraordinary charge against income of $3.1 billion ($1.8
billion net of income taxes).
The Company has a $900 million unsecured revolving credit facility with a
group of banks. The credit facility is composed of a $450 million 364-day
credit agreement and a $450 million three-year credit agreement. The Company
uses the credit facility principally to support the Company's commercial paper
program.
At December 31, 1998, the Company had a total of $400 million outstanding
under an unsecured term-loan agreement with banks maturing in 1999. Most of the
Company's unsecured debt agreements contain cross-default provisions to the
Company's other debt obligations.
The Company has a $600 million commercial paper program. At December 31,
1998, there was $125 million of commercial paper outstanding. At December 31,
1998, the Company and its subsidiaries had available formal and informal lines
of credit with banks aggregating $100 million. As of December 31, 1998, the
Company had no compensating balance agreements with any bank.
On March 25, 1999, PECO Energy Transition Trust (PETT), an independent
statutory business trust organized under the laws of Delaware and a wholly owned
subsidiary of the Company, issued $4 billion aggregate principal amount of PECO
Energy Transition Trust Transition Bonds to securitize a portion of the
Company's authorized stranded costs recovery. The Transition Bonds are solely
obligations of PETT, secured by Intangible Transition Property (ITP),
representing the right to collect ITC, sold by the Company to PETT concurrently
with the issuance of the Transition Bonds. The ITC will be allocated from CTC
and variable distribution charges (both of which are usage-based charges). ITCs
will be allocated first from CTCs, then, to the extent ITCs exceed such amounts,
from variable distribution charges. The ITCs collected by PETT, which will be
used to pay debt service on the Transition Bonds and related expenses, will
reduce the Company's collection of CTCs on a dollar-for-dollar basis.
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<PAGE>
The Transition Bonds were sold by PETT in seven separate classes with
average maturities ranging from 1.3 to 8.9 years. Two of the classes bear
interest at floating rates; the remaining five classes bear interest at fixed
rates with coupons ranging from 5.4% to 6.13%. The Company had entered into
treasury forwards and forward starting interest rate swaps to manage interest
rate exposure associated with the anticipated issuance of Transition Bonds. On
March 18, 1999, these instruments were settled with net proceeds to the Company
of approximately $80 million which will be deferred and amortized over the life
of the Transition Bonds, consistent with the Company's hedge accounting policy.
The net proceeds to the Company from the securitization of a portion of
its allowed stranded cost recovery, after payment of fees and expenses and the
capitalization of PETT, was approximately $3.9 billion. In accordance with the
provisions of the Competition Act, the Company is utilizing these proceeds
principally to reduce its stranded costs and related capitalization. The
Company plans to apply the proceeds to reduce capitalization as follows: $1.2
billion to retire fixed-rate debt, $.7 billion to reduce floating-rate debt and
commercial paper, $.3 billion to redeem preferred securities and $1.7 billion
to repurchase common stock. On March 26, 1999, the Company called for
redemption three series of its First Mortgage Bonds, 7.75% Series due 2023,
7.25% Series due 2024 and 7.125% Series due on 2023. On March 26, 1999, the
Company repaid $400 million of borrowings under a term credit facility. The
Company plans to call for redemption in May 1999 First Mortgage Bonds, 7.75%
Series 2 due 2023. The Company also plans to call for redemption in August 1999
the Company's Obligated Mandatorily Redeemable Preferred Securities, 9% Series
due 2043.
On March 26, 1999, the Company physically settled forward purchase
agreements relating to the Company's Common Stock resulting in the purchase by
the Company of 21.5 million shares of Common Stock for an aggregate purchase
price of $696 million. The Company currently anticipates that it will complete
its repurchase of Common Stock equity through open market purchases from time
to time in compliance with the Securities and Exchange Commission rules. The
number of shares to be purchased and the timing and manner of purchases are,
however, dependent upon market and other conditions.
Although the Transition Bonds are solely obligations of PETT, the
Transition Bonds will be included in the consolidated capitalization of the
Company and PETT's revenue from the ITC, as well as all interest expense
associated with the Transition Bonds and amortization expense associated with
the ITP will be reflected on the Company's consolidated financial statements.
The Company currently estimates that the impact of additional interest expense
resulting from the issuance of the Transition Bonds combined with the
anticipated reduction of common equity will result in earnings per share
benefits of approximately $0.15 in 1999 and $0.50 in 2000. These estimated
earnings per share benefits could change and are largely dependent upon the
timing and price of the Company's repurchase of Common Stock.
For additional information, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the Company's Annual Report
to Shareholders for the year 1998.
Construction
The following table shows the Company's most recent estimate of capital
expenditures for plant additions and improvements for 1999:
(Millions of $)
----------------
Electric:
Production ............................... $165
Nuclear fuel ............................. 60
Transmission and distribution. ........... 155
----
Total electric ...................... 380
Gas ........................................ 40
Other ...................................... 20
----
Total. ................................... $440
====
19
<PAGE>
The Company's current construction program does not include any new
generating facilities. At December 31, 1998, construction work in progress,
excluding nuclear fuel, aggregated $273 million. Nuclear fuel requirements
exclude the Company's share of the requirements for Peach Bottom and Salem
which are provided by an independent fuel company under a capital lease. See
Note 16 of Notes to Consolidated Financial Statements included in the Company's
Annual Report to Shareholders for the year 1998.
Employee Matters
The Company and its subsidiaries had 6,815 employees at December 31, 1998.
None of the employees of the Company or its subsidiaries are represented by a
union. Over the past several years, a number of unions have filed petitions
with the National Labor Relations Board to hold certification elections with
regard to different segments of employees within the Company. In all cases, the
Company employees have rejected union representation. The Company expects that
such petitions will continue to be filed in the future.
As part of the Cost Competitiveness Review (CCR), in April 1998, the Board
of Directors authorized the implementation of a retirement incentive program
and an enhanced severance benefit program to achieve targeted workforce
reductions. See Note 21 of Notes to Consolidated Financial Statements included
in the Company's Annual Report to Shareholders for the Year 1998.
Environmental Regulations
Environmental controls at the federal, state, regional and local levels
have a substantial impact on the Company's operations due to the cost of
installation and operation of equipment required for compliance with such
controls. In addition to the matters discussed below, see "Electric Operations
- - -- General" and "Electric Operations -- Limerick Generating Station."
An environmental issue with respect to construction and operation of
electric transmission and distribution lines and other facilities is whether
exposure to electro-magnetic fields (EMF) causes adverse human health effects.
A large number of scientific studies have examined this question and certain
studies have indicated an association between exposure to EMF and adverse
health effects, including certain types of cancer. However, the scientific
community still has not reached a consensus on the issue. Additional research
intended to provide a better understanding of EMF is continuing. The Company
supports further research in this area and is funding and monitoring such
studies.
Public concerns about the possible health risks of exposure to EMF have
adversely affected, and are expected in the future to adversely affect, the
costs of, and time required to, site new distribution and transmission
facilities and upgrade existing facilities. The Company cannot predict at this
time what effect, if any, this issue will have on other future operations.
Water
The Company has been informed by PSE&G that PSE&G is implementing the 1994
New Jersey Pollutant Discharge Elimination System permit issued for Salem which
requires, among other things, water intake screen modifications and wetlands
restoration. The estimated capital cost of compliance with the final permit,
the preparation of a renewal submittal and the activities required to obtain a
renewed permit is approximately $140 million. The project is approximately 90%
complete. Under the 1994 permit, which remains in effect until such time as a
renewal permit is issued, PSE&G is continuing to restore wetlands and to
conduct the requisite management and monitoring associated with the
implementation of the special conditions of that permit. The existing permit
remains in full force and effect indefinitely upon submission of a timely
renewal filing. The Company's share of such costs is 42.59% and is included in
the Company's capital requirements. PSE&G must apply to the New Jersey
Department of Environmental Protection (NJDEP) to renew the Salem permit in
1999. On March 4, 1999, PSE&G filed a comprehensive application for the
renewal of Salem's NJDEP permit. The Company cannot currently predict the
outcome of the review of this application. An unfavorable determination could
have a material adverse effect on the Company's financial condition and results
of operations.
The DRBC issued a revised Docket for Salem in 1995 (Revised Docket)
approving a modification to the 1970 Salem Docket that approved the
construction and operation of the station's cooling water system. The
20
<PAGE>
Revised Docket authorized, among other things, the continued operation of
Salem's cooling water system for an additional five years. The Revised Docket
provides that the authorization expires September 27, 2000 absent review of the
Docket on or before August 31, 1999 and renewal by the DRBC. DRBC review of the
matter is planned to commence in the second quarter of 1999.
Air
Air quality regulations promulgated by the EPA, the PDEP and the City of
Philadelphia in accordance with the Federal Clean Air Act and the Clean Air Act
Amendments of 1990 (Amendments) impose restrictions on emission of
particulates, sulfur dioxide (SO(2)), nitrogen oxides (NO(x)) and other
pollutants and require permits for operation of emission sources. Such permits
have been obtained by the Company and must be renewed periodically.
The Amendments establish a comprehensive and complex national program to
substantially reduce air pollution. The Amendments include a two-phase program
to reduce acid rain effects by significantly reducing emissions of SO(2) and
NO(x) from electric power plants. Flue-gas desulfurization systems (scrubbers)
have been installed at Conemaugh Units No. 1 and No. 2 to reduce SO(2) emissions
to meet the Phase I requirements of the Amendments. Keystone Units No. 1 and No.
2 are subject to the Phase II SO(2) and NO(x) limits of the Amendments which
must be met by January 1, 2000. The Company and the other Keystone co-owners are
evaluating the Phase II compliance options for Keystone, including the purchase
of SO2 emission allowances.
The Company's service-area, coal-fired generating units at Eddystone and
Cromby are equipped with scrubbers and their SO(2) emissions meet the SO(2)
emission rate limits of both Phase I and Phase II of the Amendments. The
Company has completed the implementation of measures, including the
installation of NO(x) emissions controls and the imposition of certain
operational constraints, to comply with the Reasonably Available Control
Technology limitations of the Amendments. The Company expects that the cost of
compliance with anticipated air-quality regulations may be substantial due to
further limitations on permitted NO(x) emissions.
On September 24, 1998, the EPA announced the issuance of a final regulation
which will require 22 states and the District of Columbia to reduce emissions of
NO(x) by more than 1 million tons annually beginning in 2003. The main goal of
the regulation is to limit the transport of ozone pollution into the
northeastern states, including Pennsylvania, by reducing NO(x) emissions in
southern and midwestern states. Pennsylvania utilities, including the Company,
are already subject to strict NO(x) emission limits. A group of southern and
midwestern states and utilities have appealed the issuance of the EPA
regulation to the Federal Court of Appeals.
The PDEP has adopted a NO(x) allowance program which could restrict the
operation of the Company's fossil-fired units, require the purchase of NO(x)
emission allowances from others or require the installation of additional
control equipment.
Many other provisions of the Amendments affect the Company's business. The
Amendments establish stringent control measures for geographical regions which
have been determined by the EPA to not meet National Ambient Air Quality
Standards; establish limits on the purchase and operation of motor vehicles and
require increased use of alternative fuels; establish stringent controls on
emissions of toxic air pollutants and provide for possible future designation
of some utility emissions as toxic; establish new permit and monitoring
requirements for sources of air emissions; and provide for significantly
increased enforcement power, and civil and criminal penalties.
Solid and Hazardous Waste
The Comprehensive Environmental Response, Compensation, and Liability Act
of 1980 and the Superfund Amendments and Reauthorization Act of 1986
(collectively CERCLA) authorize the EPA to cause potentially responsible
parties (PRPs) to conduct (or for the EPA to conduct at the PRPs' expense)
remedial action at waste disposal sites that pose a hazard to human health or
the environment. Parties contributing hazardous substances to a site or owning
or operating a site typically are viewed as jointly and severally liable for
conducting or paying for remediation and for reimbursing the government for
related costs incurred. PRPs may agree to allocate liability among themselves,
or a court may perform that allocation according to equitable factors deemed
appropriate. In addition, the Company is subject to the Resource Conservation
and Recovery Act (RCRA) which governs treatment, storage and disposal of solid
and hazardous wastes.
21
<PAGE>
By notice issued in November 1986, the EPA notified over 800 entities,
including the Company, that they may be PRPs under CERCLA with respect to
releases of radioactive and/or toxic substances from the Maxey Flats disposal
site, a low-level radioactive waste disposal site near Moorehead, Kentucky,
where Company wastes were deposited. Approximately 90 PRPs, including the
Company, formed a steering committee and entered into an administrative consent
order with the EPA to conduct a remedial investigation and feasibility study
(RI/FS), which was substantially revised based on the EPA comments. In
September 1991, following public review and comments, the EPA issued a Record
of Decision in which it selected a natural stabilization remedy for the Maxey
Flats disposal site. The steering committee has preliminarily estimated that
implementing the EPA proposed remedy at the Maxey Flats site would cost $60-$70
million in 1993 dollars. A settlement has been reached among the federal and
private PRPs, the Commonwealth of Kentucky and the EPA concerning their
respective roles and responsibilities in conducting remedial activities at the
site. Under the settlement, the private PRPs will perform the initial remedial
work at the site and the Commonwealth of Kentucky will assume responsibility
for long-range maintenance and final remediation of the site. The Company
estimates that it will be responsible for $600,000 of the remediation costs to
be incurred by the private PRPs. On April 18, 1996, a consent decree, which
included the terms of the settlement, was entered by the United States District
Court for the Eastern District of Kentucky. The PRPs have entered into a
contract for the design and implementation of the remedial plan and preliminary
work has commenced.
By notice issued in December 1987, the EPA notified several entities,
including the Company, that they may be PRPs under CERCLA with respect to
wastes resulting from the treatment and disposal of transformers and
miscellaneous electrical equipment at a site located in Philadelphia,
Pennsylvania (the Metal Bank of America site). Several of the PRPs, including
the Company, formed a steering committee to investigate the nature and extent
of possible involvement in this matter. On May 29, 1991, a Consent Order was
issued by the EPA pursuant to which the members of the steering committee
agreed to perform the RI/FS as described in the work plan issued with the
Consent Order. The Company's share of the cost of the RI/FS was approximately
30%. On October 14, 1994, the PRPs submitted to the EPA the RI/FS which
identified a range of possible remedial alternatives for the site from taking
no action to removal of essentially all contaminated material with an estimated
cost range of $2 million to $90 million. On July 19, 1995, the EPA issued a
proposed plan for remediation of the site which involves removal of
contaminated soil, sediment and groundwater and which the EPA estimates would
cost approximately $17 million to implement. On October 18, 1995, the PRPs
submitted comments to the EPA on the proposed plan which identified several
inadequacies with the plan, including substantial underestimates of the costs
associated with remediation. In December 1997, the EPA finalized its record of
decision (ROD) for the site. In January 1998, the EPA sent letters to
approximately 20 PRPs, including the Company, giving them 60 days to negotiate
with the EPA to perform the proposed remedy. The Company, along with the nine
other PRPs in the utility PRP group, responded to the EPA's letter by offering
to conduct the Remedial Design (RD) but not the Remedial Action (RA) outlined
in the ROD. The EPA rejected the PRP group's offer and, on June 26, 1998,
issued an Order to the non-de minimis PRP Group members, and others, including
the owner, to implement the RD and RA. The PRP Group is proceeding as required
by the Order. It has selected a contractor which has been approved by the EPA
and, on November 5, 1998, submitted the draft RD work plan. Implementation of
the RD will continue through 1999. The Company's share of the cost of the RD
will be approximately 25%.
By notice issued in September 1985, the EPA notified the Company that it
has been identified as a PRP for the costs associated with the cleanup of a
site (Berks Associates/Douglassville site) where waste oils generated from
Company operations were transported, treated, stored and disposed. In August
1991, the EPA filed suit in the Eastern District Court against 36 named PRPs,
not including the Company, seeking a declaration that these PRPs are jointly
and severally liable for cleanup of the Berks Associates/Douglassville site and
for costs already expended by the EPA on the site. Simultaneously, the EPA
issued an Administrative Order against the same named defendants, not including
the Company, which requires the PRPs named in the Administrative Order to
commence cleanup of a portion of the site. On September 29, 1992, the Company
and 169 other parties were served with a third-party complaint joining these
parties as additional defendants. Subsequently, an additional 150 parties were
joined as defendants. A group of approximately 100 PRPs with allocated shares
of less than 1%, including the Company, have formed a negotiating committee to
negotiate a settlement offer with the EPA. In December 1994, the EPA proposed a
de minimis PRP settlement which would have required the Company to pay
approximately $992,000 in exchange for the EPA agreeing not to sue.
Subsequently, the non-de minimis
22
<PAGE>
parties successfully challenged the Record of Decision (ROD) remedy. A ROD
amendment was finalized and, on October 27, 1998, the EPA settled with the de
minimis parties. Under the provisions of the settlement, the Company would be
required to pay approximately $520,000 for liabilities resulting from the
government's past and potential future costs. The Department of Justice must
approve the settlement.
In October 1995, the Company, along with over 500 other companies,
received a General Notice from the EPA advising that the Company had been
identified as having sent hazardous substances to the Spectron/Galaxy Superfund
Site and requesting the companies to conduct an RI/FS at the site. The Company
had previously been identified as a de minimis PRP and paid $2,100 to settle an
earlier phase. Additionally, the Company had participated in a PRP agreement
and consent order related to further work at the Spectron site. In conjunction
with the EPA's General Notice, the existing PRP group has proposed a settlement
which, based on the volume of hazardous substances sent to the Spectron site by
the Company, would allow the Company to settle the matter as a de minimis party
for less than $10,000.
On October 16, 1989, the EPA and the NJDEP commenced a civil action in the
United States District Court for the District of New Jersey (New Jersey
District Court) against 26 defendants, not including the Company, alleging the
right to collect past and future response costs for cleanup of the Helen Kramer
landfill located in New Jersey. In October 1991, the direct defendants joined
the Company and over 100 other parties as third-party defendants. The
third-party complaint alleges that the Company generated materials containing
hazardous substances that were transported to and disposed at the landfill by a
third party. The Company, together with a number of other direct and
third-party defendants, has agreed to participate in a proposed de minimis
settlement which would allow the Company to settle its potential liability at
the site for approximately $40,000.
The Company has been named as a defendant in a Superfund matter involving
the Greer Landfill in South Carolina. The plaintiff's motion to dismiss the
complaint against the Company was granted, although the third-party defendant's
cross-claims against the Company remain. The Company is currently involved in
settlement discussions with the third-party defendants.
On November 18, 1996, the Company received a notice from the EPA that the
Company is a PRP at the Malvern TCE Superfund Site, located in Malvern,
Pennsylvania. In April 1998, the Company was notified of a de minimus
settlement under which the Company is allocated a total cost of $16,000 for EPA
past and future costs. The settlement is still pending.
On February 3, 1997, the Company was served with a third-party complaint
involving the Pennsauken Sanitary Landfill. The Company is currently unable to
estimate the amount of liability it may have with respect to this site.
In June 1989, a group of PRPs (Metro PRP Group) entered into an
Administrative Order of Consent with the EPA pursuant to which they agreed to
perform certain removal activities at the Metro Container Superfund Site
located in Trainer, Pennsylvania. In January 1990, the Metro PRP Group notified
the Company that the group considered the Company to be a PRP at the site.
Since that time, the Company has reviewed, and continues to review its files
and records and has been unable to locate any information which would indicate
any connection to the site. The Company does not believe that it has any
liability with respect to this site.
In November 1987, the Company received correspondence from the EPA which
indicated that the EPA was investigating the release of hazardous substances
from the Blosenski Landfill located in West Caln Township, Chester County,
Pennsylvania. The Company has been unable to locate any information which would
indicate any connection to this site. The Company does not believe it has any
liability with respect to this site.
The Company has identified 28 sites where former manufactured gas plant
activities may have resulted in site contamination. Past activities at several
sites have resulted in actual site contamination. The Company is presently
engaged in performing various levels of activities at these sites, including
initial evaluation to determine the existence and nature of the contamination,
detailed evaluation to determine the extent of the contamination and the
necessity and possible methods of remediation, and implementation of
remediation. The PDEP has approved the Company's clean-up of three sites. Eight
other sites are currently under some degree of active study and/or remediation.
At December 31, 1998, the Company had accrued $33 million for investigation and
remediation of these manufactured gas plant sites that currently can be
reasonably estimated.
23
<PAGE>
The Company has also responded to various governmental requests,
principally those of the EPA pursuant to CERCLA, for information with respect
to the possible deposit of Company waste materials at various disposal,
processing and other sites.
On June 4, 1993, the Company entered into a Corrective Action Consent Order
(CACO) from the EPA under the Resource Conservation and Recovery Act (RCRA). The
CACO order requires the Company to investigate the extent of alleged releases of
hazardous wastes and to evaluate corrective measures, if necessary, for a site
located along the Delaware River in Chester, Pennsylvania, which had previously
been leased to Chem Clear, Inc. Chem Clear operated an industrial waste water
pretreatment facility on the site. In October 1994, the Company entered into an
agreement with Clean Harbors, the successor to Chem Clear, pursuant to which the
Company will be responsible for approximately 25% of the costs incurred under
the CACO and Clean Harbors will be responsible for 75% of the costs. The
required investigation was completed in the summer of 1998 and a comprehensive
RCRA Facility Investigation Report (RFI) is being prepared for submission to the
EPA. The Company performed interim measures at the site. In January 1998, the
Chester Waterfront Redevelopment Project was developed as an alternative to an
expanded RCRA Corrective Action Project. The Company together with the EPA and
the PDEP have agreed that potential remediation of the Chem Clear property and
the investigation and potential remediation of all contiguous properties be
moved from the EPA's RCRA Program to the PDEP Act 2 program. Act 2 is a land
recycling program allowing remediation of properties more efficiently through
redevelopment. At December 31, 1998, the Company had spent approximately $3.6
million to comply with the CACO and $700,000 on the Chester Waterfront Project.
At the completion of the required RCRA investigation, the Company will combine
the projects and will be able to predict the nature and cost of any potential
corrective action.
Costs
At December 31, 1998, the Company had accrued $60 million for various
investigation and remediation costs that can be reasonably estimated, including
approximately $33 million for investigation and remediation of former
manufactured gas plant sites as described above. The Company cannot currently
predict whether it will incur other significant liabilities for additional
investigation and remediation costs at sites presently identified or additional
sites which may be identified by the Company, environmental agencies or others
or whether all such costs will be recoverable through rates or from third
parties.
The Company's budget for capital requirements for 1999 for compliance with
environmental requirements total approximately $14 million. In addition, the
Company may be required to make significant additional expenditures not
presently determinable.
AmerGen Energy Company, LLC
In 1997, the Company and British Energy, plc of Edinburgh, Scotland formed
AmerGen Energy Company, LLC (AmerGen) to pursue opportunities to acquire and
operate nuclear generating stations in the United States. The Company and
British Energy, Inc., a wholly owned subsidiary of British Energy, plc, each own
a 50% equity interest in AmerGen. In October 1998, AmerGen entered into a
definitive asset purchase agreement with GPU, Inc. and certain of its
subsidiaries (GPU) to acquire GPU's 786 MW Three Mile Island Unit No. 1 Nuclear
Generating Facility for approximately $23 million in cash, $77 million for
nuclear fuel payable over five years and certain contingent payments based upon
future wholesale market prices.
Telecommunications Ventures
In 1995, the Company and Hyperion Telecommunications, Inc., a subsidiary
of Adelphia Cable Company, formed PECO Hyperion Telecommunications. The
partnership is a Competitive Local Exchange Carrier (CLEC) and provides local
phone service in the Philadelphia metropolitan region. PECO Hyperion utilizes a
large-scale fiber optic cable-based network that currently extends over 700
miles and is connected to major long-distance carriers and local businesses.
The Company and Hyperion Telecommunications, Inc. each holds a 50% interest in
the partnership.
24
<PAGE>
In 1996, the Company and AT&T Corp. formed AT&T Wireless PCS of
Philadelphia, LLC to provide a new digital wireless Personal Communications
Services (PCS) network in the Philadelphia metropolitan trading area. The
Company has completed the initial build-out of the new digital wireless PCS
network. Commercial launch of PCS in the Philadelphia area occurred in October
1997. The Company holds a 49% equity interest in the venture.
Due to their start-up nature, these joint ventures and investments are
expected to negatively affect earnings in the near future. See Note 19 of Notes
to Consolidated Financial Statements included in the Company's Annual Report to
Shareholders for the year 1998.
PECO Energy Capital Corp. and Related Entities
PECO Energy Capital Corp., a wholly owned subsidiary, is the sole general
partner of PECO Energy Capital, L.P., a Delaware limited partnership
(Partnership). The Partnership was created solely for the purpose of issuing
preferred securities, representing limited partnership interests and lending
the proceeds thereof to the Company and entering into similar financing
arrangements. The loans to the Company are evidenced by the Company's
subordinated debentures (Subordinated Debentures), which are the only assets of
the Partnership. The only revenues of the Partnership are interest on the
Subordinated Debentures. All of the operating expenses of the Partnership are
paid by PECO Energy Capital Corp. As of December 31, 1998, the Partnership held
$349.4 million aggregate principal amount of the Subordinated Debentures.
PECO Energy Capital Trust I (Trust I) was created in October 1995 as a
statutory business trust under the laws of the State of Delaware solely for the
purpose of issuing trust receipts (Trust I Receipts), each representing an
8.72% Cumulative Monthly Income Preferred Security, Series B (Series B
Preferred Securities) of the Partnership. The Partnership is the sponsor of the
Trust. On May 15, 1998, Trust I fully redeemed all outstanding Trust Receipts.
Distributions were made on the Trust I Receipts during 1998 in the aggregate
amount of $2.4 million. Expenses of the Trust for 1998 were approximately
$50,000, all of which were paid by PECO Energy Capital Corp.
PECO Energy Capital Trust II (Trust II) was created in June 1997 as a
statutory business trust under the laws of the State of Delaware solely for the
purpose of issuing trust receipts (Trust II Receipts) each representing an
8.00% Cumulative Monthly Income Preferred Security, Series C (Series C
Preferred Securities) of the Partnership. The Partnership is the sponsor of the
Trust II. As of December 31, 1998, the Trust II had outstanding 2,000,000 Trust
II Receipts. At December 31, 1998, the assets of the Trust II consisted solely
of 2,000,000 Series C Preferred Securities with an aggregate stated liquidation
preference of $50 million. Distributions were made on the Trust II Receipts
during 1998 in the aggregate amount of $4 million. Expenses of the Trust II for
1998 were approximately $50,000, all of which were paid by PECO Energy Capital
Corp. The Trust II Receipts are issued in book-entry only form.
PECO Energy Capital Trust III (Trust III) was created in April 1998 as a
statutory business trust under the laws of the State of Delaware solely for the
purpose of issuing trust receipts (Trust III Receipts) each representing an
7.38% Cumulative Monthly Income Preferred Security, Series D (Series D
Preferred Securities) of the Partnership. The Partnership is the sponsor of the
Trust III. As of December 31, 1998, the Trust III had outstanding 78,105 Trust
III Receipts. At December 31, 1998, the assets of the Trust III consisted
solely of 78,105 Series D Preferred Securities with an aggregate stated
liquidation preference of $78.1 million. Distributions were made on the Trust
III Receipts during 1998 in the aggregate amount of $4.1 million. Expenses of
the Trust III for 1998 were approximately $50,000, all of which were paid by
PECO Energy Capital Corp. The Trust III Receipts are issued in book-entry only
form.
25
<PAGE>
Executive Officers of the Registrant at December 31, 1998
<TABLE>
<CAPTION>
Age at Effective Date of Election
Name Dec. 31, 1998 Position to Present Position
- - ---- --------------- -------- -------------------
<S> <C> <C> <C>
C. A. McNeill, Jr ..... 59 Chairman of the Board, President and Chief
Executive Officer ................................ July 1, 1997
N. J. Bessey .......... 45 President, Power Team ............................. April 8, 1998
G. R. Rainey .......... 49 President and Chief Nuclear Officer, PECO
Nuclear .......................................... June 1, 1998
G. A. Cucchi .......... 49 Senior Vice President, Corporate and President,
PECO Energy Ventures. ............................ June 22, 1998
J. W. Durham .......... 61 Senior Vice President and General Counsel ......... October 24, 1988
M. J. Egan. ........... 45 Senior Vice President, Finance and Chief
Financial Officer ................................ October 13, 1997
K. G. Lawrence ........ 51 Senior Vice President, Corporate and President,
PECO Energy Distribution ......................... June 22, 1998
J. M. Madara, Jr ...... 55 Senior Vice President, Power Generation
Group ............................................ March 1, 1994
W. H. Smith, III ...... 50 Senior Vice President, Business Services
Group ............................................ November 7, 1997
D. W. Woods ........... 41 Senior Vice President, Corporate and Public
Affairs .......................................... December 1, 1998
J. B. Cotton .......... 53 Vice President, Special Projects, PECO
Nuclear .......................................... August 14, 1998
J. Doering, Jr ........ 55 Vice President, Peach Bottom Atomic Power
Station, PECO Nuclear. ........................... March 2, 1998
G. N. Dudkin .......... 41 Vice President, Operations, PECO Energy
Distribution ..................................... April 8, 1998
D. B. Fetters ......... 47 Vice President, Nuclear Development, PECO
Nuclear .......................................... June 22, 1998
J. H. Gibson .......... 42 Vice President and Controller. .................... May 31, 1998
P. E. Haviland ........ 44 Vice President, Corporate Development ............. March 4, 1998
T. P. Hill, Jr ........ 50 Vice President, Regulatory and External
Affairs, PECO Energy Distribution ................ April 9, 1998
C. A. Jacobs .......... 46 Vice President, Support Services .................. November 9, 1998
S. L. Keenan .......... 34 Vice President, Customer and Marketing
Services, PECO Energy Distribution ............... April 8, 1998
C. A. Matthews ........ 48 Vice President, Information Technology and
Chief Information Officer ........................ July 28, 1997
J. P. McElwain ........ 48 Vice President, Nuclear Projects, PECO
Nuclear .......................................... April 9, 1997
J. B. Mitchell ........ 51 Vice President, Treasury and Evaluation, and
Treasurer ........................................ December 1, 1994
J. D. von Suskil ...... 52 Vice President, Limerick Generating Station,
PECO Nuclear ..................................... January 26, 1998
R. G. White ........... 40 Vice President, Corporate Planning. ............... September 28, 1998
K. K. Combs ........... 48 Corporate Secretary. .............................. November 1, 1994
</TABLE>
Each of the above executive officers holds such office at the discretion
of the Company's Board of Directors until his or her replacement or earlier
resignation, retirement or death.
Prior to his election to his current position, Mr. McNeill was President
and Chief Executive Officer, President and Chief Operating Officer and
Executive Vice President -- Nuclear.
Prior to her election to her current position, Ms. Bessey was Vice
President-Power Transactions. Prior to joining the Company in 1994, Ms. Bessey
was Vice President of U.S. Generating Company, an independent power producer.
26
<PAGE>
Prior to his election to his current position, Mr. Rainey was Vice
President -- Peach Bottom Atomic Power Station, Vice President -- Nuclear
Services and Plant Manager -- Eddystone Generating Station;
Prior to his election to his current position, Mr. Cucchi was Vice
President -- Power Delivery, Vice President -- Corporate Planning and
Development, Director of System Planning and Performance, and Manager -- System
Planning.
James W. Durham has held the position of Senior Vice President and General
Counsel for over five years.
Prior to joining the Company, Mr. Egan was Senior Vice President and Chief
Financial Officer of Aristech Chemical Company and Vice President of Planning
and Control of ARCO Chemical Company, Americas.
Prior to his election to his current position, Mr. Lawrence was Senior
Vice President --Local Distribution Company, Senior Vice President -- Finance
and Chief Financial Officer, and Vice President -- Gas Operations.
Prior to his election to his current position, Mr. Madara was Vice
President -- Production.
Prior to his election to his current position, Mr. W. H. Smith, III was
Vice President and Group Executive -- Telecommunications Group, Vice President
- - -- Station Support, Vice President -- Planning and Performance, and Manager --
Corporate Strategy and Performance.
Prior to joining the Company in 1998, Mr. Woods was the Chief of Staff for
the Pennsylvania Senate Majority Leader.
Prior to her election to her current position, Ms. Gibson was Director of
Audit Services and Director of the Tax Division.
Prior to joining the Company in 1998, Mr. Haviland was Senior Vice
President -- Planning and Administration with Bovis Construction Group.
Prior to his election to his current position, Mr. Hill was Vice President
and Controller.
Prior to joining the Company in 1998, Ms. Jacobs was Vice President
of Industrial Operations, Americas and Vice President Professional Deveolpment
and Senior Director of Materials Management with Rhone-Polenc Rorer Corporation.
Prior to her election to her current position, Ms. Keenan was acting
General Manager -- Customer Services, Director -- Field Services, Director --
Reengineering and Performance and Manager -- Regulatory Performance.
Prior to her election to her current position, Ms. Matthews was Director
of Consumer Energy Information Systems and Distributed Information Officer.
Prior to joining the Company in 1996, Ms. Matthews was Vice President of
Strategic Business Development for Europe Online S.A. Luxembourg.
Prior to his election to his current position, Mr. von Suskil was Director
- - -- Engineering, Manager -- Planning and Assistant Manager -- Outages. Prior to
joining the Company in 1995, Mr. von Suskil was a Captain in the United States
Navy.
Prior to joining the Company, Mr. White was Corporate Finance Manager and
Corporate Operations Consultant for ARCO Chemical Company.
Prior to their election to the positions shown above, the following
executive officers held other positions with the Company since January 1, 1994:
Mr. Cotton was Director -- Nuclear Engineering, Director -- Nuclear
Quality Assurance and Superintendent -- Operations; Mr. Doering was Plant
Manager -- Limerick, Director -- Nuclear Strategies Support, and General
Manager Operations; Mr. Dudkin was Acting General Manager -- Power Delivery,
Regional Director Power Delivery and Manager -- Electric Operations; Mr.
Fetters was Vice President -- Nuclear Planning and Development, Director --
Nuclear Engineering, Director -- Limerick Maintenance and a Project Manager;
Mr. McElwain was Director of Outage Management -- Peach Bottom; Mr. Mitchell
was Director of Financial Operations and Assistant Treasurer; and Ms. Combs was
an Assistant General Counsel.
There are no family relationships among directors or executive officers of
the Company.
27
<PAGE>
ITEM 2. PROPERTIES
The principal plants and properties of the Company are subject to the lien
of the Mortgage under which the Company's First and Refunding Mortgage Bonds
are issued.
The following table sets forth the Company's net electric generating
capacity by station at December 31, 1998:
<TABLE>
<CAPTION>
Net Generating Estimated
Capacity (1) Retirement
Station Location (Kilowatts) Year
------- -------- ----------- ----
<S> <C> <C> <C>
Nuclear
Limerick ............................ Limerick Twp., PA ................... 2,249,000 2024, 2029
Peach Bottom ........................ Peach Bottom Twp., PA ............... 928,000(2) 2013, 2014
Salem ............................... Hancock's Bridge, NJ. ............... 942,000(2) 2016, 2020
Hydro
Conowingo ........................... Harford Co., MD. .................... 512,000 2014
Pumped Storage
Muddy Run ........................... Lancaster Co., PA ................... 910,000 2014
Fossil (Steam Turbines) ..............
Cromby .............................. Phoenixville, PA .................... 345,000 (3)
Delaware ............................ Philadelphia, PA .................... 250,000 (3)
Eddystone ........................... Eddystone, PA ....................... 1,341,000 2009, 2010, 2011
Schuylkill .......................... Philadelphia, PA .................... 166,000 (3)
Conemaugh ........................... New Florence, PA .................... 352,000(2) 2005, 2006
Keystone ............................ Shelocta, PA ........................ 357,000(2) 2002, 2003
Fossil (Gas Turbines) ................
Chester ............................. Chester, PA ......................... 39,000 (3)
Croydon ............................. Bristol Twp., PA .................... 380,000 (3)
Delaware ............................ Philadelphia, PA .................... 56,000 (3)
Eddystone ........................... Eddystone, PA ....................... 60,000 (3)
Fairless Hills ...................... Falls Twp., PA ...................... 60,000 (3)
Falls ............................... Falls Twp., PA ...................... 51,000 (3)
Moser ............................... Lower Pottsgrove Twp., PA. .......... 51,000 (3)
Pennsbury ........................... Falls Twp., PA ...................... 6,000 (3)
Richmond ............................ Philadelphia, PA .................... 96,000 (3)
Schuylkill .......................... Philadelphia, PA .................... 30,000 (3)
Southwark ........................... Philadelphia, PA .................... 52,000 (3)
Salem ............................... Hancock's Bridge, NJ. ............... 16,000(2) (3)
Fossil (Internal Combustion) .........
Cromby. ............................. Phoenixville, PA .................... 2,700 (3)
Delaware ............................ Philadelphia, PA .................... 2,700 (3)
Schuylkill .......................... Philadelphia, PA .................... 2,800 (3)
Conemaugh ........................... New Florence, PA .................... 2,300(2) 2006
Keystone ............................ Shelocta, PA ........................ 2,300(2) 2003
-----------
Total .................................................................. 9,261,800
===========
</TABLE>
- - ------------
(1) Summer rating.
(2) Company portion.
(3) Retirement dates are under on-going review by the Company. Current plans
call for the continued operation of these units beyond 1999.
28
<PAGE>
The following table sets forth the Company's major transmission and
distribution lines in service at December 31, 1998:
Voltage in Kilovolts (Kv) Conductor Miles
------------------------- ----------------
Transmission:
500 Kv......................... 891
220 Kv......................... 1,634
132 Kv......................... 15
66 Kv ......................... 570
33 Kv and below ............... 29
Distribution:
33 Kv and below ............... 48,222
At December 31, 1998, the Company's principal electric distribution system
included 21,009 pole-line miles of overhead lines and 21,002 cable miles of
underground cables.
The following table sets forth the Company's gas pipeline miles at
December 31, 1998:
Pipeline Miles
---------------
Transmission .................... 28
Distribution .................... 5,788
Service piping .................. 4,621
-----
Total ........................ 10,437
======
The Company has a liquefied natural gas facility located in West
Conshohocken, Pennsylvania which has a storage capacity of 1,200,000 mcf and a
sendout capacity of 157,000 mcf/day and a propane-air plant located in Chester,
Pennsylvania, with a tank storage capacity of 1,980,000 gallons and a peaking
capability of 28,800 mcf/day. In addition, the Company owns 24 natural gas city
gate stations at various locations throughout its gas service territory.
At December 31, 1998, the Company had 577 miles of fiber optic cable.
The Company owns an office building in downtown Philadelphia, in which it
maintains its headquarters, and also owns or leases elsewhere in its service
area a number of properties which are used for office, service and other
purposes. Information regarding rental and lease commitments is incorporated
herein by reference to Note 16 of Notes to Consolidated Financial Statements
included in the Company's Annual Report to Shareholders for the year 1998.
The Company maintains property insurance against loss or damage to its
principal plants and properties by fire or other perils, subject to certain
exceptions. Although it is impossible to determine the total amount of the loss
that may result from an occurrence at a nuclear generating station, the Company
maintains its $2.75 billion proportionate share for each station. Under the
terms of the various insurance agreements, the Company could be assessed up to
$30 million for property losses incurred at any plant insured by the insurance
companies (see "ITEM 1. BUSINESS -- Electric Operations -- General"). The
Company is self-insured to the extent that any losses may exceed the amount of
insurance maintained. Any such losses could have a material adverse effect on
the Company's financial condition and results of operations.
ITEM 3. LEGAL PROCEEDINGS
On April 9, 1998, Grays Ferry Cogneration Partnership (Grays Ferry), two of
three partners of Grays Ferry and Trigen-Philadelphia Energy Corporation, filed
a complaint in Philadelphia County Court of Common Pleas against the Company
arising out of the Company's termination of two power purchase agreements (PPAs)
that the Company had entered into with Grays Ferry. The complaint alleged among
other things, breach of contract, the fraud and breach of implied covenant of
good faith and fair dealing. The plaintiff seeks specific performance, damages
in excess of $200 million and punitive damages. A preliminary injunction was
entered against the Company on May 5, 1998, enjoining the Company from
terminating the PPAs. On September 4, 1998, the Chase Manhattan Bank, as agent
for a syndicate of banks that are lenders to Grays Ferry, filed a complaint
against the Company alleging tortious interference by the Company in the credit
agreements between Grays Ferry and the banks and breach of the letter agreement
between the Company and the banks. These matters have been
29
<PAGE>
consolidated. On March 9, 1999, the Court entered a partial judgment in
favor of Grays Ferry declaring, as a matter of law, that the Company's
termination of the PPAs was in breach of those agreements. Trial in the
remaining issues was scheduled for March 29, 1999. On May 29, 1998, Westinghouse
Power Generation filed a complaint in the Philadelphia Court of Common Pleas
against the Company for tortious interference with two contracts that
Westinghouse has with Grays Ferry. That case is scheduled for trial on April 19,
1999. The Company cannot predict the outcome of these matters.
On May 27, 1998, the United States Department of Justice, on behalf of the
Rural Utilities Service and the Chapter 11 Trustee for the Cajun Electric Power
Cooperative Inc. (Cajun), filed an action claiming breach of contract against
the Company in the United States District Court for the Middle District of
Louisiana arising out of the Company's termination of the contract to purchase
Cajun's interest in the River Bend nuclear power plant. This action seeks $67
million in damages. The Company cannot predict the outcome of this matter.
During the shutdown of Salem, examinations of the steam generator tubes at
Salem Unit No. 1 revealed significant cracking. On February 27, 1996, the
Company, PSE&G, Atlantic Electric Company and Delmarva, the co-owners of Salem,
filed an action in the New Jersey District Court against Westinghouse Electric
Corporation, the designer and manufacturer of the Salem steam generators. The
suit alleges that the significant cracking of the steam generator tubes is the
result of defects in the design and fabrication of the steam generators and that
Westinghouse knew that the steam generators supplied to Salem were defective and
that Westinghouse deliberately concealed this from PSE&G. The suit alleges
violations of both the federal and New Jersey Racketeer Influenced and Corrupt
Organizations Acts (RICO), fraud, negligent misrepresentation and breach of
contract. Westinghouse has filed a motion for summary judgment on the grounds
that the claim of the plaintiffs is barred by the statute of limitations. On
November 6, 1998, the New Jersey District Court granted summary judgment in
favor of Westinghouse. The plaintiff co-owners, including the Company, have
filed an appeal of the federal claims with the United States Circuit Court for
the Third Circuit Court of Appeals. The plaintiff co-owners are also pursuing an
action on the state law claims in the New Jersey state courts. The Company
cannot predict the outcome of these proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's common stock is listed on the New York and Philadelphia
Stock Exchanges. At January 31, 1999, there were 142,794 owners of record of
the Company's common stock. The information with respect to the prices of and
dividends on the Company's common stock for each quarterly period during 1998
and 1997 is incorporated herein by reference to "Operating Statistics" in the
Company's Annual Report to Shareholders for the year 1998.
The book value of the Company's common stock at December 31, 1998 was
$13.61 per share.
Dividends may be declared on common stock out of funds legally available
for dividends whenever full dividends on all series of preferred stock
outstanding at the time have been paid or declared and set apart for payment
for all past quarter-yearly dividend periods. No dividends may be declared on
common stock, however, at any time when the Company has failed to satisfy the
sinking fund obligations with respect to certain series of the Company's
preferred stock. Future dividends on common stock will depend upon earnings,
the Company's financial condition and other factors, including the availability
of cash.
The Company's Articles prohibit payment of any dividend on, or other
distribution to the holders of, common stock if, after giving effect thereto,
the capital of the Company represented by its common stock together with its
Other Paid-In Capital and Retained Earnings is, in the aggregate, less than the
involuntary liquidating value of its then outstanding preferred stock. At
December 31, 1998, such capital ($3.1 billion) amounted to about 13 times the
liquidating value of the outstanding preferred stock ($230.2 million).
30
<PAGE>
The Company may not declare dividends on any shares of its capital stock
in the event that: (1) the Company exercises its right to extend the interest
payment periods on the Subordinated Debentures which were issued to the
Partnership; (2) the Company defaults on its guarantee of the payment of
distributions on the Cumulative Monthly Income Preferred Securities of the
Partnership; or (3) an event of default occurs under the Indenture under which
the Subordinated Debentures are issued.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data for each of the last five years for the Company
and its subsidiaries is incorporated herein by reference to "Financial
Statistics" and "Operating Statistics" in the Company's Annual Report to
Shareholders for the year 1998.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information with respect to this caption is incorporated herein by
reference to "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in the Company's Annual Report to Shareholders for the
year 1998.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information with respect to this caption is incorporated herein by
reference to "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in the Company's Annual Report to Shareholders for the
year 1998.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information with respect to this caption is incorporated herein by
reference to "Consolidated Financial Statements" and "Financial Statistics" in
the Company's Annual Report to Shareholders for the year 1998.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Identification of Directors.
The information required for Directors is included in the Proxy Statement
of the Company in connection with its 1999 Annual Meeting of Shareholders to be
held April 27, 1999, under the heading "Election of Directors" and is
incorporated herein by reference.
(b) Identification of Executive Officers.
The information required for Executive Officers is set forth in "PART
I. ITEM 1. BUSINESS - Executive Officers of the Registrant" of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information with respect to this caption is included in the Proxy
Statement of the Company in connection with its 1999 Annual Meeting of
Shareholders to be held April 27, 1999, under the heading "Executive
Compensation Disclosure" and is incorporated herein by reference.
31
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information with respect to this caption is included in the Proxy
Statement of the Company in connection with its 1999 Annual Meeting of
Shareholders to be held April 27, 1999, under the heading "Election of
Directors" and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information with respect to this caption is included in the Proxy
Statement of the Company in connection with its 1999 Annual Meeting of
Shareholders to be held April 27, 1999, under the heading "Election of
Directors" and is incorporated herein by reference.
32
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Financial Statements and Financial Statement Schedule
<TABLE>
<CAPTION>
Reference (Page)
----------------------------------
Form 10-K Annual Report
Index Annual Report to Shareholders
- - ----- --------------- ----------------
<S> <C> <C>
Data incorporated by reference from the Annual Report to
Shareholders for the year 1998:
Report of Independent Accountants ..................... -- 23
Consolidated Statements of Income for the years
ended December 31, 1998, 1997 and 1996 ............... -- 24
Consolidated Balance Sheets as of December 31, 1998
and 1997 ............................................. -- 26
Consolidated Statements of Cash Flows for the years
ended December 31, 1998, 1997 and 1996 ............... -- 25
Consolidated Statements of Changes in Common
Shareholders' Equity and Preferred Stock for the
years ended December 31, 1998, 1997 and 1996 ......... -- 28
Notes to Consolidated Financial Statements ............ -- 29
Data submitted herewith:
Report of Independent Accountants ..................... 34 --
Schedule II--Valuation and Qualifying Accounts for
the years ended December 31, 1998,
1997 and 1996 ................................. 35 --
</TABLE>
All other schedules are omitted since the required information is not
present or is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the consolidated
financial statements and notes thereto.
With the exception of the consolidated financial statements and the
independent accountants' report listed in the above index and the information
referred to in Items 1, 2, 5, 6, 7 and 8, all of which is included in the
Company's Annual Report to Shareholders for the year 1998 and incorporated by
reference into this Form 10-K, the Annual Report to Shareholders for the year
1998 is not to be deemed filed as part of this Form 10-K.
33
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
PECO Energy Company:
Our audits of the consolidated financial statements referred to in our
report dated February 5, 1999 (which report and consolidated financial
statements are incorporated by reference in this Annual Report on Form 10-K)
also included an audit of the financial statement schedule listed in Item 14 of
this Form 10-K. In our opinion, this financial statement schedule presents
fairly, in all material respects, the information set forth therein when read
in conjunction with the related consolidated financial statements.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 5, 1999
34
<PAGE>
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
(Thousands of Dollars)
<TABLE>
<CAPTION>
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
----------- ------------ ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, 1998
ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS..... $133,810 $71,667 $ -- $83,338 $122,139
-------- ------- ---- ------- --------
TOTAL .................................. $133,810 $71,667 $ -- $83,338 $122,139
======== ======= ==== ======= ========
FOR THE YEAR ENDED DECEMBER 31, 1997(2)
ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS . $128,459 $88,263 $ -- $82,912 $133,810
-------- ------- ---- ------- --------
TOTAL .................................. $128,459 $88,263 $ -- $82,912 $133,810
======== ======= ==== ======= ========
FOR THE YEAR ENDED DECEMBER 31, 1996(2)
ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS..... $118,525 $93,104 $ -- $83,170 $128,459
-------- ------- ---- ------- --------
TOTAL .................................. $118,525 $93,104 $ -- $83,170 $128,459
======== ======= ==== ======= ========
</TABLE>
- - ------------
(1) Write-off of individual accounts receivable.
(2) Restated to reflect valuation allowance activity for Customer Assistance
Program and Special Agreement accounts.
35
<PAGE>
Exhibits
Certain of the following exhibits have been filed with the Securities and
Exchange Commission (Commission) pursuant to the requirements of the Acts
administered by the Commission. Such exhibits are identified by the references
following the listing of each such exhibit and are incorporated herein by
reference under Rule 12b-32 of the Securities and Exchange Act of 1934, as
amended. Certain other instruments which would otherwise berequired to be
listed below have not been so listed because such instruments do not authorize
securities in an amount which exceeds 10% of the total assets of the Company
and its subsidiaries on a consolidated basis and the Company agrees to furnish
a copy of any such instrument to the Commission upon request.
Exhibit No. Description
- - ------------- ----------------------------------------------------------------
3-1 Amended and Restated Articles of Incorporation of PECO Energy
Company (1993 Form 10-K, Exhibit 3-1).
3-2 Bylaws of the Company, adopted February 26, 1990 and amended
January 26, 1998. (1997 Form 10-K, Exhibit 3-2)
4-1 First and Refunding Mortgage dated May 1, 1923 between The
Counties Gas and Electric Company (predecessor to the Company)
and Fidelity Trust Company, Trustee (First Union National Bank,
successor), (Registration No. 2-2881, Exhibit B-1).
4-2 Supplemental Indentures to the Company's First and Refunding
Mortgage:
Dated as of File Reference Exhibit No.
---------------------------------------------------------------------
May 1, 1927 2-2881 B-1(c)
March 1, 1937 2-2881 B-1(g)
December 1, 1941 2-4863 B-1(h)
November 1, 1944 2-5472 B-1(i)
December 1, 1946 2-6821 7-1(j)
September 1, 1957 2-13562 2(b)-17
May 1, 1958 2-14020 2(b)-18
March 1, 1968 2-34051 2(b)-24
March 1, 1981 2-72802 4-46
March 1, 1981 2-72802 4-47
December 1, 1984 1984 Form 10-K 4-2(b)
July 15, 1987 Form 8-K dated July 21, 1987 4(c)-63
July 15, 1987 Form 8-K dated July 21, 1987 4(c)-64
October 15, 1987 Form 8-K dated October 7, 1987 4(c)-66
October 15, 1987 Form 8-K dated October 7, 1987 4(c)-67
April 15, 1988 Form 8-K dated April 11, 1988 4(e)-68
April 15, 1988 Form 8-K dated April 11, 1988 4(e)-69
October 1, 1989 Form 8-K dated October 6, 1989 4(e)-72
October 1, 1989 Form 8-K dated October 18, 1989 4(e)-73
April 1, 1991 1991 Form 10-K 4(e)-76
December 1, 1991 1991 Form 10-K 4(e)-77
April 1, 1992 March 31, 1992 Form 10-Q 4(e)-79
June 1, 1992 June 30, 1992 Form 10-Q 4(e)-81
July 15, 1992 June 30, 1992 Form 10-Q 4(e)-83
September 1, 1992 1992 Form 10-K 4(e)-85
March 1, 1993 1992 Form 10-K 4(e)-86
March 1, 1993 1992 Form 10-K 4(e)-87
May 1, 1993 March 31, 1993 Form 10-Q 4(e)-88
36
<PAGE>
Dated as of File Reference Exhibit No.
---------------------------------------------------------------------
May 1, 1993 March 31, 1993 Form 10-Q 4(e)-89
May 1, 1993 March 31, 1993 Form 10-Q 4(e)-90
August 15, 1993 Form 8-A dated August 19, 1993 4(e)-91
August 15, 1993 Form 8-A dated August 19, 1993 4(e)-92
November 1, 1993 Form 8-A dated October 27, 1993 4(e)-94
November 1, 1993 Form 8-A dated October 27, 1993 4(e)-95
May 1, 1995 Form 8-K dated May 24, 1995 4(e)-96
4-3 Indenture, dated as of July 1, 1994, between the Company and First
Union National Bank, as successor trustee (1994 Form 10-K, Exhibit
4-5).
4-4 First Supplemental Indenture, dated as of December 1, 1995, between
the Company and First Union National Bank, as successor trustee, to
Indenture dated as of July 1, 1994 (1995 Form 10-K, Exhibit 4-7).
4-5 Second Supplemental Indenture, dated as of June 1, 1997, between the
Company and First Union National Bank, as successor trustee, to
Indenture dated as of July 1, 1994. (1997 Form 10-K, Exhibit 4-5).
4-6 Third Supplemental Indenture, dated as of April 1, 1998, between the
Company and First Union National Bank, as successor trustee, to
Indenture dated as of July 1, 1994.
4-7 Payment and Guarantee Agreement, dated July 27, 1994, executed by the
Company in favor of the holders of Cumulative Monthly Income
Preferred Securities, Series A of PECO Energy Capital, L.P. (1994
Form 10-K, Exhibit 4-7).
4-8 Payment and Guarantee Agreement, dated as of December 19, 1995,
executed by the Company in favor of the holders of Cumulative Monthly
Income Preferred Securities, Series B of PECO Energy Capital, L.P
(1995 Form 10-K, Exhibit 4-10).
4-9 Payment and Guarantee Agreement, dated as of June 6, 1997, executed
by the Company in favor of the holders of Cumulative Monthly Income
Preferred Securities, Series C of PECO Energy Capital, L.P. (1997
Form 10-K, Exhibit 4-8).
4-10 Payment and Guarantee Agreement, dated as of April 6, 1998, executed
by the Company in favor of the holders of Cumulative Monthly Income
Preferred Securities, Series D of PECO Energy Capital, L.P.
4-11 Revolving Credit Agreement, dated as of October 7, 1997, among the
Company, as borrower, and certain banks named therein. (1997 Form
10-K, Exhibit 4-9).
4-12 364-day Credit Agreement, dated as of October 7, 1997, among the
Company, as borrower, and certain banks named therein. (1997 Form
10-K, Exhibit 4-10).
4-13 Term Loan Agreement, dated as of November 30, 1998, among the Company
as borrower, and certain banks named therein.
4-14 PECO Energy Company Dividend Reinvestment and Stock Purchase Plan, as
amended January 28, 1994 (Post-Effective Amendment No. 1 to
Registration No. 33-42523, Exhibit 28).
10-1 Amended and Restated Operating Agreement of PJM Interconnection,
L.L.C., dated June 2, 1997, (Revised December 31, 1997). (1997 Form
10-K, Exhibit 10-1).
10-2 Agreement, dated November 24, 1971, between Atlantic City Electric
Company, Delmarva Power & Light Company, Public Service Electric and
Gas Company and the Company for ownership of Salem Nuclear Generating
Station (1988 Form 10-K, Exhibit 10-3); supplemental agreement dated
September 1, 1975; supplemental agreement dated January 26, 1977
(1991 Form 10-K, Exhibit 10-3); and supplemental agreement dated May
27, 1997. (1997 Form 10-K, Exhibit 10-2).
37
<PAGE>
10-3 Agreement, dated November 24, 1971, between Atlantic City Electric
Company, Delmarva Power & Light Company, Public Service Electric and
Gas Company and the Company for ownership of Peach Bottom Atomic
Power Station; supplemental agreement dated Septem- ber 1, 1975;
supplemental agreement dated January 26, 1977 (1988 Form 10-K,
Exhibit 10-4) and supplemental agreement dated May 27, 1997. (1997
Form 10-K, Exhibit 10-3).
10-4 Deferred Compensation and Supplemental Pension Benefit Plan.* (Form
10-K, Exhibit 10-4).
10-5 Management Group Deferred Compensation and Supplemental Pension
Benefit Plan.* (Form 10-K, Exhibit 10-5).
10-6 Unfunded Deferred Compensation Plan for Directors.* (Form 10-K,
Exhibit 10-6).
10-7 Forms of Agreement between the Company and certain officers (1995
Form 10-K, Exhibit 10-5).
10-8 PECO Energy Company 1989 Long-Term Incentive Plan, amended April 9,
1997 (1997 Proxy Statement, Appendix B).*
10-9 PECO Energy Company Management Incentive Compensation Plan (1997
Proxy State- ment, Appendix A).*
10-10 PECO Energy Company 1998 Stock Option Plan (Registration No.
333-67367, Exhibit 4.2).
10-11 Amended and Restated Limited Partnership Agreement of PECO Energy
Capital, L.P., dated July 25, 1994 (1994 Form 10-K, Exhibit 10-7).
10-12 Amendment No. 1 to the Amended and Restated Limited Partnership
Agreement of PECO Energy Capital, L.P. (1995 Form 10-K, Exhibit
10-8).
10-13 Amendment No. 2 to the Amended and Restated Limited Partnership
Agreement of PECO Energy Capital, L.P. (1995 Form 10-K, Exhibit
10-9).
10-14 Amendment No. 3 to the Amended and Restated Limited Partnership
Agreement of PECO Energy Capital, L.P.
10-15 Amended and Restated Trust Agreement of PECO Energy Capital Trust I,
dated as of December 19, 1995. (1995 Form 10-K, Exhibit 10-10).
10-16 Amended and Restated Trust Agreement of PECO Energy Capital Trust
III, dated as of April 6, 1998.
10-17 Form of Amended and Restated Trust Agreement for PECO Energy
Transition Trust among George Shicora and Diana Moy Kelly, as
Beneficiary Trustees, First Union Trust Company, National
Association, as Issuer Trustee, Delaware Trustee and Independent
Trustee, and PECO Energy Company, as Grantor and Owner (Post-
Effective Amendment No. 1 to Registration Statement No. 333-58055,
Exhibit 4.1.2).
10-18 Form of Intangible Transition Property Sale Agreement between PECO
Energy Transition Trust and PECO Energy Company (Post-Effective
Amendment No. 1 to Registration Statement No. 333-58055, Exhibit
10.1).
10-19 Form of Master Servicing Agreement between PECO Energy Transition
Trust and PECO Energy Company (Post-Effective Amendment No. 1 to
Registration Statement No. 333-58055, Exhibit 10.2).
12-1 Ratio of Earnings to Fixed Charges.
12-2 Ratio of Earnings to Combined Fixed Charges and Preferred Stock
Dividends.
13 Management's Discussion and Analysis of Financial Condition and
Results of Operations, Consolidated Financial Statements, Notes to
Consolidated Financial Statements, Financial Statistics, and
Operating Statistics of the Annual Report to Shareholders for the
year 1998.
21 Subsidiaries of the Registrant.
23 Consent of Independent Accountants.
24 Powers of Attorney.
27 Financial Data Schedule.
- - ------------
* Compensatory plans or arrangements in which directors or officers of the
Company participate and which are not available to all employees.
38
<PAGE>
Reports on Form 8-K
During the quarter ended December 31, 1998, the Company filed Current
Reports on Form 8-K, dated:
October 15, 1998 reporting information under "ITEM 5. OTHER EVENTS"
regarding AmerGen Energy Company, LLC, the joint venture between the
Company and British Energy Company, and GPU, Inc. signing a definitive
asset purchase agreement to purchase Unit No. 1 at the Three Mile Island
Nuclear Generating Station.
Subsequent to December 31, 1998, the Company filed Current Reports on Form
8-K, dated:
March 8, 1999 reporting information under "ITEM 5. OTHER EVENTS"
regarding the United States Supreme Court's denial of the petition of
certiorari in an action relating to Pennsylvania's Electricity Generation
Customer Choice and Competition Act.
March 25, 1999 reporting information under "ITEM 5. OTHER EVENTS"
regarding the issuance, by PECO Energy Transition Trust, a wholly owned
subsidiary of the Company, of $4 billion of Transition Bonds.
39
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant, PECO ENERGY COMPANY, has duly caused this
annual report to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Philadelphia, and Commonwealth of Pennsylvania, on
the 31st day of March 1999.
PECO ENERGY COMPANY
By /s/ C.A. McNeill, Jr.
-------------------------------
C.A. McNeill, Jr., Chairman of the Board,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
annual report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ C. A. McNeill, Jr. Chairman of the Board, President, Chief March 31, 1999
- - --------------------- Executive Officer and Director (Principal
C. A. McNeill, Jr. Executive Officer)
/s/ M. J. Egan Senior Vice President -- Finance and Chief March 31, 1999
- - --------------------- Financial Officer (Principal Financial and
M. J. Egan Accounting Officer)
</TABLE>
This annual report has also been signed below by C. A. McNeill, Jr.,
Attorney-in-Fact, on behalf of the following Directors on the date indicated:
SUSAN W. CATHERWOOD ROSEMARIE B. GRECO
DANIEL L. COOPER JOHN M. PALMS
M. WALTER D'ALESSIO JOSEPH F. PAQUETTE, JR.
G. FRED DIBONA, JR. RONALD RUBIN
R. KEITH ELLIOTT ROBERT SUBIN
RICHARD H. GLANTON
By /s/ C. A. McNeill, Jr. March 31, 1999
- - -------------------------
40
<PAGE>
THIRD SUPPLEMENTAL INDENTURE, dated as of April 1, 1998, by
and between PECO Energy Company, a Pennsylvania corporation (the "Company"), and
First Union National Bank, a national association, as successor Trustee, to an
Indenture, dated as of July 1, 1994 (the "Original Indenture"), by and between
the Company and Meridian Trust Company, the original Trustee, which was
supplemented by a First Supplemental Indenture (the "First Supplemental
Indenture") dated as of December 1, 1995 and a Second Supplemental Indenture
(the "Second Supplemental Indenture") dated as of June 1, 1997 (the Original
Indenture, as supplemented, the "Indenture").
WHEREAS, the Company has formed a wholly owned subsidiary,
PECO Energy Capital Corp., which is the general partner of PECO Energy Capital,
L.P., a Delaware limited partnership ("PECO Energy Capital"), to issue in series
from time to time its limited partner interests ("Preferred Securities") and to
loan the proceeds thereof, together with the investment by PECO Energy Capital
Corp. in PECO Energy Capital, to the Company and to effect other similar
arrangements.
WHEREAS, the Company has duly executed and delivered to the
Trustee the Original Indenture to provide for the issuance of one or more series
of deferrable interest subordinated debentures (herein sometimes called the
"Debentures"), issuable as in the Indenture provided, and authorized and issued
the initial series of Debentures which were designated therein as the 9%
Deferrable Interest Subordinated Debentures, Series A.
WHEREAS, the Company has duly executed and delivered to the
Trustee the First Supplemental Indenture authorizing and providing for the
issuance of the second series of Debentures which were designated the 8.72%
Deferrable Interest Subordinated Debentures, Series B.
WHEREAS, the Company has duly executed and delivered to the
Trustee the Second Supplemental Indenture authorizing and providing for the
issuance of the third series of Debentures which were designated the 8%
Deferrable Interest Subordinated Debentures, Series C.
WHEREAS, the Company desires to authorize and to effect the
issuance of a fourth series of Debentures in an aggregate principal amount of
$80,520,619 and to designate such series 7.38% Subordinated Deferrable Interest
Debentures, Series D (the "Series D Subordinated Debt Securities") under this
Third Supplemental Indenture.
WHEREAS, all things necessary to make the Series D
Subordinated Debt Securities when duly issued and executed by the Company and
authenticated and delivered hereunder, the valid obligations of the Company, and
to make this Third Supplemental Indenture a valid and binding agreement of the
Company, in accordance with its terms, have been done.
<PAGE>
NOW THEREFORE:
Each of the Company and the Trustee, intending to be legally
bound hereby, agrees as follows for the benefit of the other party and for the
equal and ratable benefit of the Holders of the Series D Subordinated Debt
Securities:
ARTICLE 1
DEFINITIONS AND INCORPORATION BY REFERENCE
SECTION 1.01. Definitions.
"Additional Interest", with respect to the Series D
Subordinated Debt Securities, means amounts, if any, which PECO Energy Capital
would be required to pay as taxes, duties, assessments or governmental charges
of whatever nature (other than withholding taxes) imposed by the United States,
or any other taxing authority, with respect to the Series D Subordinated Debt
Securities.
"Issue Date" means April 6, 1998.
"Series D Subordinated Debt Securities" means any of the
Company's 7.38% Subordinated Deferrable Interest Debentures, Series D issued
under this Third Supplemental Indenture.
"Series D Subordinated Debt Securityholder" or "Series D
Holder" means a Person in whose name a Series D Subordinated Debt Security is
registered on the Registrar's books.
"Series D Preferred Securities" means the 7.38% Cumulative
Preferred Securities, Series D, representing limited partner interests of PECO
Energy Capital.
Unless otherwise defined herein, all other capitalized terms
used herein have the meanings set forth in the Original Indenture.
<PAGE>
ARTICLE 2
THE SERIES D SUBORDINATED DEBT SECURITIES
SECTION 2.01. Form of the Series D Subordinated Debt Securities;
Denominations.
The Series D Subordinated Debt Securities and the Trustee's
certificate of authentication shall be substantially in the form of Exhibit A
attached hereto. The terms and provisions contained in the Series D Subordinated
Debt Securities, a form of which is annexed hereto as Exhibit A, shall
constitute, and are hereby expressly made, a part of this Third Supplemental
Indenture. The Company and the Trustee, by their execution and delivery of this
Third Supplemental Indenture, expressly agree to such terms and provisions and
to be bound thereby.
The Trustee shall authenticate and make available for delivery
the Series D Subordinated Debt Securities for original issuance in the aggregate
principal amount of $80,520,619 to evidence the Company's obligation with
respect to the loan from PECO Energy Capital, upon receipt by the Trustee of a
Board of Directors resolution and a written order of the Company signed by two
Officers of the Company, but without any further action by the Company. Such
order shall specify the amount of the Series D Subordinated Debt Securities to
be authenticated and the date on which the original issuance of Series D
Subordinated Debt Securities is to be authenticated and delivered to evidence
the Company's obligation with respect to the loan from PECO Energy Capital. The
aggregate principal amount of Series D Subordinated Debt Securities outstanding
at any time may not exceed $80,520,619 except as provided in Section 2.09 of the
Original Indenture.
The Series D Subordinated Debt Securities shall be issuable
only in registered form without coupons and only in denominations of $1,000 and
any integral multiple thereof.
SECTION 2.09. Replacement Debentures.
If (a) any mutilated Debenture is surrendered to the Company
or the Trustee, or (b) the Company and the Trustee receive evidence to their
satisfaction of the destruction, loss or theft of any Debenture, and there is
delivered to the Company and the Trustee such Debenture or indemnity as may be
required by them to save each of them harmless, then, in the absence of notice
to the Company or the Trustee that such Debenture has been acquired by a
protected purchaser, the Company shall execute in exchange for any such
mutilated Debenture or in lieu of any such destroyed, lost or stolen Debenture,
a new Debenture of like tenor and principal amount, bearing a number not
contemporaneously outstanding, and the Trustee shall authenticate and make such
new Debenture available for delivery.
<PAGE>
In case any such mutilated, destroyed, lost or stolen
Debenture has become or is about to become due and payable, or is about to be
redeemed by the Company pursuant to Article 3 hereof, the Company in its
discretion may, instead of issuing a new Debenture, pay or purchase such
Debenture, as the case may be.
Upon the issuance of any new Debentures under this Section
2.09, the Company may require the payment of a sum sufficient to cover any tax
or other governmental charge that may be imposed in relation thereto and any
other expenses (including the fees and expenses of the Trustee) in connection
therewith.
Every new Debenture issued pursuant to this Section 2.09 in
lieu of any mutilated, destroyed, lost or stolen Debenture shall constitute an
original additional contractual obligation of the Company whether or not the
mutilated, destroyed, lost or stolen Debenture shall be at any time enforceable
by anyone, and shall be entitled to all benefits of this Indenture equally and
ratable with any and all other Debentures duly issued hereunder.
The provisions of this Section 2.09 are exclusive and shall
preclude (to the extent lawful) all other rights and remedies with respect to
the replacement or payment of mutilated, destroyed, lost or stolen Debentures.
ARTICLE 3
REDEMPTION
SECTION 3.01. Redemption; Notice to Trustee.
(a) The Series D Subordinated Debt Securities are subject to
redemption prior to maturity as provided in the form thereof attached hereto as
Exhibit A.
(b) If any or all of the Series D Subordinated Debt Securities
are to be redeemed pursuant to paragraph (a) above, in addition to the notices
required by the Original Indenture, the Company shall give notice by first class
mail, postage prepaid, to the Trustee at least 40 days prior to the date of such
redemption. Any such notice of redemption shall state the date and price of
redemption.
<PAGE>
SECTION 3.02. Compliance with Terms of Indenture.
In case the Company shall desire to exercise such right to
redeem all or any part of said Series D Subordinated Debt Securities as
hereinbefore provided, it shall comply with all the terms and provisions of
Article III of the Original Indenture applicable thereto, and such redemption
shall be made under and subject to the terms and provisions of said Article III
and in the manner and with the effect therein provided, but at the time or times
and at the respective redemption rates and upon mailing of notice, all as
hereinbefore set forth in Section 3.01 of this Article.
ARTICLE 4
EXTENSION PERIOD
SECTION 4.01. Limitation on Right of Company to Extend Interest Payment
Period.
(b) Notwithstanding paragraph (a) of this Section 4.01 or any
other provision herein to the contrary, the Company shall have the right in its
sole and absolute discretion at any time and from time to time while the
Debentures are outstanding, so long as an Event of Default has not occurred and
is continuing, to extend the interest payment period for up to 60 consecutive
months, provided that such extended interest period shall not extend beyond the
stated maturity date or redemption date of any series of Debentures, and
provided further that at the end of each Extension Period the Company shall pay
all interest then accrued and unpaid (provided that with respect to any series
of Debentures payable other than on a monthly basis, the Company shall, at the
end of each Extension Period, pay all interest then accrued and payable),
together with interest thereon compounded daily to the extent permitted by
applicable law at the rate per annum borne by the Debentures. Prior to the
termination of an Extension Period, the Company may shorten or may further
extend the interest payment period, provided that such Extension Period together
with all such further extensions may not exceed 60 months. The Company shall
give the Trustee notice of its selection of such extended or shortened interest
payment period at least one Business Day prior to the earlier of (i) the date
selected by the Company to make the interest payment or (ii) the date PECO
Energy Capital is required to give notice of the record or payment date of such
related distribution to any national securities exchange on which the Preferred
Securities are then listed or other applicable self-regulatory organization, but
in any event not less than two Business Days prior to such record date fixed by
the Company for the payment of such interest. The Company shall give or cause
the Trustee to give such notice of the Company's selection of such extended
interest payment period to the Holders.
<PAGE>
ARTICLE 5
CONCERNING THE TRUSTEE
The Trustee hereby reaffirms acceptance of the trust herein
declared and provided and agrees to perform the same upon the terms and
conditions set forth in the Indenture, as supplemented by the First Supplemental
Indenture, the Second Supplemental Indenture and this Third Supplemental
Indenture, and upon the following terms and conditions:
SECTION 5.01. Not Responsible for Recitals.
The Trustee shall not be responsible in any manner whatsoever
for or in respect of the validity or sufficiency of this Third Supplemental
Indenture or the due execution thereof by the Company or for or in respect of
the recitals contained herein, all of which recitals are made solely by the
Company.
SECTION 5.02. Qualification Under Trust Indenture Act of 1939.
The Trustee hereby acknowledges that the Company proposes to
qualify this Third Supplemental Indenture under the Trust Indenture Act of 1939,
as amended.
ARTICLE 6
MISCELLANEOUS
SECTION 6.01. Trust Indenture Act Controls.
If any provision of this Third Supplemental Indenture limits,
qualifies or conflicts with the duties imposed by operation of subsection (c) of
Section 318 of the TIA, the imposed duties shall control. The provisions of
Sections 310 to 317, inclusive, of the TIA that impose duties on any Person
(including provisions automatically deemed included in an indenture unless the
indenture provides that such provisions are excluded) as a part of and govern
this Third Supplemental Indenture, except as, and to the extent, they are
expressly excluded from this Third Supplemental Indenture, as permitted by the
TIA.
SECTION 6.02. Severability Clause.
If any provision in this Third Supplemental Indenture or in
the Series D Subordinated Debt Securities shall be invalid, illegal or
unenforceable, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
<PAGE>
SECTION 6.03. Governing Law.
This Third Supplemental Indenture and the Series D
Subordinated Debt Securities shall be governed by and construed in accordance
with the laws of the Commonwealth of Pennsylvania as applied to contracts made
and performed within the Commonwealth of Pennsylvania, without regard to its
principles of conflicts of laws.
SECTION 6.04. No Recourse Against Others.
No director, officer, employee or stockholder, as such, of the
Company shall have any liability for any obligations of the Company under the
Series D Subordinated Debt Securities or this Third Supplemental Indenture or
for any claim based on, in respect of or by reason of such obligations or their
creation. By accepting a Series D Subordinated Debt Security, each Series D
Subordinated Debt Securityholder shall waive and release all such liability. The
waiver and release shall be part of the consideration for the issuance of the
Series D Subordinated Debt Securities.
SECTION 6.05. Use of Term "Trustee".
Unless otherwise clearly required by the context, the term,
"Trustee," or any other equivalent term used in this Third Supplemental
Indenture shall be held and construed to mean the Trustee under the Indenture
for the time being whether the original or a successor Trustee.
SECTION 6.06. Confirmation of Original Indenture.
As supplemented by the First Supplemental Indenture, the
Second Supplemental Indenture and this Third Supplemental Indenture, the
Original Indenture, is in all respects ratified and confirmed, and this Third
Supplemental Indenture shall be read, taken and construed as a part of the
Indenture so that all of the rights, remedies, terms, conditions, covenants and
agreements of the Indenture shall apply and remain in full force and effect with
respect to this Third Supplemental Indenture and to the Series D Subordinated
Debt Securities issued hereunder.
SECTION 6.07. Successors.
All agreements of the Company in this Third Supplemental
Indenture and the Series D Subordinated Debt Securities shall bind its
successors and assigns. All agreements of the Trustee in this Third Supplemental
Indenture shall bind its successors and assigns.
<PAGE>
SECTION 6.08. Multiple Original Copies of this Indenture.
The parties may sign any number of copies of this Third
Supplemental Indenture. Each signed copy shall be an original, but all of them
together represent the same agreement. Any signed copy shall be sufficient proof
of this Third Supplemental Indenture.
SECTION 6.09. Table of Contents; Headings, Etc.
The Table of Contents, Cross-Reference Table and headings of
the Articles and Sections of this Third Supplemental Indenture have been
inserted for convenience of reference only, are not to be considered a part
hereof, and shall in no way modify or restrict any of the terms or provisions
hereof.
SECTION 6.10. Benefits of the Indenture.
Except as expressly provided in Article 10 of the Original
Indenture, nothing in this Third Supplemental Indenture or in the Series D
Subordinated Debt Securities, express or implied, shall give to any Person,
other than the parties hereto and their successors hereunder, the Series D
Holders and the Special Representative, any benefit or any legal or equitable
right, remedy or claim under this Third Supplemental Indenture.
SECTION 6.11. Date of Indenture.
This Third Supplemental Indenture is dated as of April 1,
1998, but was actually executed and delivered on April 6, 1998.
<PAGE>
SECTION 6.12. Notices.
Any notice or communication shall be in writing and delivered
in person or mailed by first-class mail, postage prepaid, addressed as follows:
if to the Company:
PECO Energy Company
2301 Market Street
P.O. Box 8699
Philadelphia, Pennsylvania 19101
Attention: Todd D. Cutler, Esq.
Facsimile No.: (215) 841-5743
if to the Trustee:
First Union National Bank
Corporate Trust Administration
123 S. Broad Street (PA-1249)
Philadelphia, Pennsylvania 19109-1199
The Company or the Trustee, by giving notice to the other, may
designate additional or different addresses for subsequent notices or
communications. The Company shall notify the holder, if any, of Senior
Indebtedness of any such additional or different addresses of which the Company
receives notice from the Trustee.
Any notice or communication given to the Debentureholder other
than PECO Energy Capital shall be mailed to the Debentureholder at the
Debentureholder's address as it appears on the Register of the Registrar and
shall be sufficiently given if mailed within the time prescribed.
Failure to mail a notice or communication to a Debentureholder
or any defect in it shall not affect its sufficiency with respect to other
Debentureholders. If a notice or communication is mailed in the manner provided
above, it is duly given, whether or not received by the addressee.
If the Company mails a notice or communication to the
Debentureholders, it shall mail a copy to the Trustee and each Registrar, Paying
Agent or co-Registrar.
<PAGE>
SIGNATURES
IN WITNESS WHEREOF, the undersigned, being duly authorized,
have executed this Third Supplemental Indenture on behalf of the respective
parties hereto as of the date first above written.
PECO ENERGY COMPANY
By: /s/ J. Barry Mitchell
--------------------------------
Name: J. Barry Mitchell
------------------------------
Title: Vice President - Finance
-----------------------------
FIRST UNION NATIONAL BANK,
as Trustee
By: /s/ George J. Rayzis
--------------------------------
Name: George J. Rayzis
------------------------------
Title: Vice President
-----------------------------
PECO Energy Capital, L.P.
By its General Partner,
PECO Energy Capital Corp.
By: /s/ J. Barry Mitchell
----------------------------
Name: J. Barry Mitchell
--------------------------
Title: President
-------------------------
<PAGE>
Exhibit A
7.38% Subordinated Deferrable Interest Debentures,
Series D due 2028
No. 1
PECO Energy Company, a Pennsylvania corporation (the "Company"), which
term includes any successor corporation under the Indenture, as defined herein),
for value received, hereby promises to pay to PECO Energy Capital, L.P. or
registered assigns, the principal sum of Eighty Million Five Hundred Twenty
Thousand Six Hundred Nineteen Dollars ($80,520,619) on April 6, 2028, and to pay
interest on said principal sum from April 6, 1998 (the "Issue Date") or from the
most recent interest payment date (each such date, an "Interest Payment Date")
to which interest has been paid or duly provided for, semiannually in arrears on
April 30 and October 31 of each year commencing April 30, 1998 at the rate of
7.38% per annum plus Additional Interest, if any, until the principal hereof
shall have become due and payable, and on any overdue principal and premium, if
any, and (to the extent that payment of such interest is enforceable under
applicable law) on any overdue installment of interest at the same rate per
annum. If at any time PECO Energy Capital, L.P. ("PECO Energy Capital") would be
required to pay any taxes, duties or other governmental charges (other than
withholding taxes) imposed by the United States or any other taxing authority
then, in any such case, the Company also will pay as Additional Interest such
amounts as shall be required so that the net amounts received and retained by
PECO Energy Capital after paying any such taxes, duties or other governmental
charges will not be less than the amounts PECO Energy Capital would have
received had no such taxes, duties, assessments or other governmental charges
been imposed.
All capitalized terms used but not otherwise defined herein
have the meanings set forth in the Indenture (as defined herein).
The amount of interest payable on any Interest Payment Date
shall be computed on the basis of a 360-day year of twelve 30-day months. In the
event that any date on which interest is payable on the Series D Subordinated
Debt Securities is not a Business Day, then payment of interest payable on such
date will be made on the next succeeding day which is a Business Day (and
without any interest or other payment in respect of any such delay), except
that, if such Business Day is in the next succeeding calendar year, such payment
shall be made on the immediately preceding Business Day, in each case with the
same force and effect as if made on such date. The interest installment so
payable, and punctually paid or duly provided for, on any Interest Payment Date
will, as provided in the Indenture, be paid to the person in whose name this
Series D Subordinated Debt Security is registered at the close of business on
the regular record date for such interest installment, which shall be April 15
and October 15 of each year. Any such interest installment not punctually paid
or duly provided for shall forthwith cease to be payable to the registered
holders on such regular record date, and may be paid to the person in whose name
this Series D Subordinated Debt Security is registered at the close of business
on a special record date to be fixed by the Trustee for the payment of such
defaulted interest, notice whereof shall be given to the registered holders of
this series of Debentures not less than ten days prior to such special record
date, as more fully provided in the Indenture. The principal of (and premium, if
any) and the interest on this Series D Subordinated Debt Security shall be
payable at the office or agency of the Company maintained for that purpose in
Wilmington, Delaware in any coin or currency of the United States of America
which at the time of payment is legal tender for payment of public and private
debts; provided however, that payment of interest may be made at the option of
the Company by check mailed to the registered holder at such address as shall
appear in the Debenture Register. Notwithstanding the foregoing, so long as the
holder of this Series D Subordinated Debt Security is PECO Energy Capital, the
payment of the principal of (and premium) and interest (including Additional
Interest, if any) on this Series D Subordinated Debt Security will be made at
such place and to such account as may be designated by PECO Energy Capital.
A-1
<PAGE>
The indebtedness evidenced by this Series D Subordinated Debt
Security is, to the extent provided in the Indenture, subordinate and subject in
right of payment to the prior payment in full of all Senior Indebtedness, and
this Series D Subordinated Debt Security is issued subject to the provisions of
the Indenture with respect thereto. Each Holder of this Series D Subordinated
Debt Security, by accepting the same (a) agrees to and shall be bound by such
provisions, (b) authorizes and directs the Trustee on its behalf to take such
action as may be necessary or appropriate to acknowledge or effectuate the
subordination so provided and (c) appoints the Trustee its attorney-in-fact for
any and all such purposes. Each Holder hereof, by its acceptance hereof, hereby
waives all notice of the acceptance of the subordination provisions contained
herein and in the Indenture by each holder of Senior Indebtedness, whether now
outstanding or hereafter incurred, and waives reliance by each such Holder upon
said provisions.
This Series D Subordinated Debt Security is one of a duly
authorized series of Debentures of the Company (herein sometimes referred to as
the "Series D Subordinated Debt Securities"), specified in the Indenture,
limited in aggregate principal amount as specified in the Indenture, issued
under and pursuant to an Indenture dated as of July 1, 1994, between the Company
and Meridian Trust Company, as Trustee, as supplemented by a First Supplemental
Indenture, dated as of December 1, 1995, a Second Supplemental Indenture, dated
as of June 1, 1997 and a Third Supplemental Indenture dated as of April 1, 1998
(as supplemented, the "Indenture") executed and delivered between the Company
and First Union National Bank, as successor Trustee to which reference is made
to the Indenture for a description of the rights, limitations of rights,
obligations, duties and immunities thereunder of the Trustee, the Company and
the holders of the Series D Subordinated Debt Securities. By the terms of the
Indenture, Debentures are issuable in series which may vary as to amount, date
of maturity, rate of interest and in other respects as provided in the
Indenture.
A-2
<PAGE>
The Series D Subordinated Debt Securities are subject to
mandatory redemption prior to maturity at 100% of the principal amount thereof
plus accrued interest to the redemption date as follows:
(i) in whole upon the dissolution of PECO Energy Capital;
and
(ii) in whole or in part upon a redemption of the
Series D Preferred Securities, but if in
part, in an aggregate principal amount equal
to the aggregate stated liquidation
preference of the Series D Preferred
Securities redeemed.
In the event of redemption of this Series D Subordinated Debt
Security in part only, a new Series D Subordinated Debt Security or Securities
for the unredeemed portion hereof will be issued in the name of the Holder
hereof upon the cancellation hereof.
In case an Event of Default shall have occurred and be
continuing, the principal of all of the Debentures may be declared, and upon
such declaration shall become, due and payable, in the manner, with the effect
and subject to the conditions provided in the Indenture.
The Indenture contains provisions for defeasance at any time
of the entire indebtedness of this Series D Subordinated Debt Security upon
compliance by the Company with certain conditions set forth therein.
Subject to certain exceptions in the Indenture which require
the consent of every Holder, (i) the Indenture or the Series D Subordinated Debt
Securities may be amended with the written consent of the Holders of a majority
in aggregate principal amount of the Series D Subordinated Debt Securities at
the time outstanding, and (ii) certain defaults or noncompliance with certain
provisions may be waived by the written consent of the holders of a majority in
aggregate principal amount of the Series D Subordinated Debt Securities at the
time outstanding. Subject to certain exceptions in the Indenture, without the
consent of any Debentureholder, the Company and the Trustee may amend the
Indenture or the Debentures to cure any ambiguity, defect or inconsistency, to
bind a successor to the obligations of the Indenture, to provide for
uncertificated Debentures in addition to certificated Debentures, to comply with
any requirements of the Debentures or the Securities and Exchange Commission in
connection with the qualification of the Indenture under the TIA, or to make any
change that does not adversely affect the rights of any Debentureholder.
Amendments bind all Holders and subsequent Holders.
A-3
<PAGE>
No reference herein to the Indenture and no provision of this
Series D Subordinated Debt Security or of the Indenture shall alter or impair
the obligation of the Company, which is absolute and unconditional, to pay the
principal of and premium, if any, and interest on this Series D Subordinated
Debt Security at the time and place and at the rate and in the money herein
prescribed.
So long as an Event of Default has not occurred and is
continuing, the Company shall have the right at any time during the term of the
Series D Subordinated Debt Securities, from time to time to extend the interest
payment period of such Series D Subordinated Debt Securities to up to 60
consecutive months (the "Extended Interest Payment Period"), at the end of which
period the Company shall pay all interest then accrued and payable (together
with interest thereon at the rate specified for the Series D Subordinated Debt
Securities to the extent that payment of such interest is enforceable under
applicable law); provided that, during such Extended Interest Payment Period the
Company shall not declare or pay any dividend on, redeem or purchase any of its
capital stock. Prior to the termination of any such Extended Interest Payment
Period, the Company may further extend such Extended Interest Payment Period,
provided that such Period together with all such further extensions thereof
shall not exceed 60 consecutive months. At the termination of any such Extended
Interest Payment Period and upon the payment of all accrued and unpaid interest
and any additional amounts then due, the Company may select a new Extended
Interest Payment period.
As provided in the Indenture and subject to certain
limitations therein set forth, this Series D Subordinated Debt Security is
transferable by the registered holder hereof on the Debenture Register of the
Company, upon surrender of this Series D Subordinated Debt Security for
registration of transfer at the office or agency of the Registrar accompanied by
a written instrument or instruments of transfer in form satisfactory to the
Company or the Trustee duly executed by the registered holder hereof or its
attorney duly authorized in writing, and thereupon one or more new Series D
Subordinated Debt Securities of authorized denominations and for the same
aggregate principal amount and series will be issued to the designated
transferee or transferees. No service charge will be made for any such transfer,
but the Company may require payment of a sum sufficient to cover any tax or
other governmental charge payable in relation thereto.
A-4
<PAGE>
Prior to presentment for registration of transfer of this
Series D Subordinated Debt Security, the Company, the Trustee, any paying agent
and any Debenture Registrar may deem and treat the registered holder hereof as
the absolute owner hereof (whether or not this Series D Subordinated Debt
Security shall be overdue and notwithstanding any notice of ownership or writing
hereon made by anyone other than the Debenture Registrar) for the purpose of
receiving payment of or on account of the principal hereof and premium, if any,
and interest due hereon and for all other purposes, and neither the Company nor
the Trustee nor any payment agent nor any Debenture Registrar shall be affected
by any notice to the contrary.
No recourse shall be had for the payment of the principal of
or the interest on this Series D Subordinated Debt Security, or for any claim
based hereon, or otherwise in respect hereof, or based on or in respect of the
Indenture, against any incorporator, stockholder, officer or director, past,
present or future, as such, of the Company or of any predecessor or successor
corporation, whether by virtue of any constitution, statute or rule of law, or
by the enforcement of any assessment or penalty or otherwise, all such liability
being, by the acceptance hereof and as part of the consideration for the
issuance hereof, expressly waived and released. Series D Subordinated Debt
Securities issued are issuable only in registered form without coupons in
denominations of $1,000 and any integral multiple thereof. As provided in the
Indenture and subject to certain limitations therein set forth, Series D
Subordinated Debt Securities are exchangeable for a like aggregate principal
amount of Series D Subordinated Debt Securities of a different authorized
denomination, as requested by the Holder surrendering the same.
This Series D Subordinated Debt Security shall not be valid
until an authorized officer of the Trustee manually signs the Trustee's
Certificate of Authentication below.
A-5
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Series D
Subordinated Debt Security to be signed manually or by facsimile by its duly
authorized officers and a facsimile of its corporate seal to be affixed hereto
or imprinted hereon.
PECO ENERGY COMPANY
(Seal)
By: __________________________
Name: ________________________
Title: _______________________
Attest:_______________________
Dated: _______________________
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the Debentures referred
to in the within-mentioned Indenture.
FIRST UNION NATIONAL BANK, as Trustee
By: ___________________________________
Name:______________________________
Title:_____________________________
A-6
<PAGE>
PAYMENT AND GUARANTEE AGREEMENT
THIS PAYMENT AND GUARANTEE AGREEMENT ("Guarantee Agreement"),
dated as of April 6, 1998, is executed and delivered by PECO Energy Company, a
Pennsylvania corporation (the "Guarantor"), for the benefit of the Holders (as
defined below) of the Series D Preferred Securities (as defined below) of PECO
Energy Capital, L.P., a Delaware limited partnership ("PECO Energy Capital"),
the general partner of which is PECO Energy Capital Corp. (the "General
Partner"), a Delaware corporation and a wholly owned subsidiary of the
Guarantor.
WHEREAS, PECO Energy Capital is issuing on the date hereof
$78,105,000 aggregate stated liquidation preference of limited partner interests
of a series designated the 7.38% Cumulative Preferred Securities, Series D (the
"Series D Preferred Securities"), and the Guarantor desires to enter into this
Guarantee Agreement for the benefit of the Holders, as provided herein;
WHEREAS, the Guarantor will issue Series D Subordinated Debt
Securities (as defined below) in accordance with the Indenture (as defined
below) to PECO Energy Capital in an amount equal to the aggregate stated
liquidation preference of the Series D Preferred Securities and the capital
contribution of the General Partner to PECO Energy Capital (the "G.P. Capital
Contribution"); and
WHEREAS, the Guarantor desires to irrevocably and
unconditionally agree to the extent set forth herein to pay to the Holders the
Guarantee Payments (as defined below) and to make certain other undertakings on
the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and other
consideration, receipt of which is hereby acknowledged, the Guarantor, intending
to be legally bound hereby, agrees as follows:
ARTICLE I
---------
As used in this Guarantee Agreement, each term set forth
below, unless the context otherwise requires, shall have the following meaning.
Each capitalized term used but not otherwise defined herein shall have the
meaning assigned to such term in the Amended and Restated Limited Partnership
Agreement of
<PAGE>
PECO Energy Capital dated as of July 25, 1994 (as amended from time
to time, the "Limited Partnership Agreement").
"Capital Securities" shall mean the Capital Trust Pass-through
Securities issued by the Trust each representing a Series D Preferred Security.
"Guarantee Payments" shall mean the following payments,
without duplication, to the extent not paid by PECO Energy Capital: (i) any
accumulated and unpaid semiannual distributions on the Series D Preferred
Securities out of moneys legally available therefor held by PECO Energy Capital,
(ii) the Redemption Price (as defined below) payable with respect to any Series
D Preferred Securities called for redemption by PECO Energy Capital out of
moneys legally available therefor held by PECO Energy Capital, and (iii) upon
liquidation of PECO Energy Capital, the lesser of (a) the Liquidation
Distribution (as defined below) and (b) the amount of assets of PECO Energy
Capital available for distribution to the Holders in liquidation of PECO Energy
Capital.
"Holders" shall mean the persons or entities in whose name any
Series D Preferred Securities are registered on the registration books
maintained by PECO Energy Capital; provided, however, that in determining
whether the Holders of the requisite percentage of Series D Preferred Securities
have given any request, notice, consent or waiver hereunder, "Holder" shall not
include the Guarantor or any entity owned more than 50% by the Guarantor, either
directly or indirectly.
"Indenture" shall mean the Indenture, dated as of July 1, 1994
(the "Original Indenture"), as supplemented by the First Supplemental Indenture,
dated as of December 1, 1995, between the Guarantor and First Union National
Bank, as successor trustee, the Second Supplemental Indenture, dated as of June
1, 1997, between the Guarantor and First Union National Bank, as trustee, and
the Third Supplemental Indenture, dated as of April 1, 1998, between the
Guarantor and First Union National Bank, as trustee, pursuant to which the
Guarantor has issued and will issue its Deferrable Interest Subordinated
Debentures in series.
"Liquidation Distribution" shall mean the aggregate of the
stated liquidation preference of $1,000 per Series D Preferred Security and all
accumulated and unpaid distributions to the date of payment.
"Redemption Price" shall mean the aggregate of $1,000 per
Series D Preferred Security and all accumulated and unpaid distributions to the
date fixed for redemption.
2
<PAGE>
"Special Representative" shall mean any representative of the
Holders appointed pursuant to Section 13.02(d) of the Limited Partnership
Agreement.
"Supplemental Indenture" shall mean the Third Supplemental
Indenture, dated as of April 1, 1998, between the Guarantor and First Union
National Bank, as trustee, pursuant to which the Guarantor has issued its 7.38%
Subordinated Deferrable Interest Debentures, Series D (the "Series D
Subordinated Debt Securities") in an amount equal to the aggregate stated
liquidation preference of the Series D Preferred Securities and the G.P.
Capital Contribution.
"Trust" shall mean PECO Energy Capital Trust III, a Delaware
business trust.
"Trust Agreement" shall mean the Amended and Restated Trust
Agreement of PECO Energy Capital Trust III, as amended from time to time, among
PECO Energy Capital, L.P., as Grantor, First Union National Bank, as trustee,
and the General Partner, for the limited purpose stated therein, dated as of
April 6, 1998.
"Trustee" shall mean First Union National Bank or a successor
trustee under the Trust Agreement.
ARTICLE II
----------
SECTION 2.01. The Guarantor hereby irrevocably and
unconditionally agrees to pay in full to the Holders the Guarantee Payments, as
and when due (except to the extent paid by PECO Energy Capital), to the fullest
extent permitted by law, regardless of any defense, right of set-off or
counterclaim which the Guarantor may have or assert against PECO Energy Capital,
the General Partner, the Trust or the Trustee. The Guarantor's obligation to
make a Guarantee Payment may be satisfied by direct payment by the Guarantor to
the Holders or by payment of such amounts by PECO Energy Capital to the Holders.
Notwithstanding anything to the contrary herein, the Guarantor retains all of
its rights under Section 4.01(b) of the Indenture to extend the interest payment
period on the Series D Subordinated Debt Securities and the Guarantor shall not
be obligated hereunder to pay during an Extension Period any semiannual
distributions on the Series D Preferred Securities which are not paid by PECO
Energy Capital during such Extension Period.
SECTION 2.02. The Guarantor hereby waives notice of acceptance
of this Guarantee Agreement and of any liability to which it applies or may
apply, presentment, demand for payment, protest, notice of nonpayment, notice of
dishonor, notice of redemption and all other notices and demands.
3
<PAGE>
SECTION 2.03. Except as otherwise set forth herein, the
obligations, covenants, agreements and duties of the Guarantor under this
Guarantee Agreement shall in no way be affected or impaired by reason of the
happening from time to time of any of the following:
(a) the release or waiver, by operation of law or
otherwise, of the performance or observance by PECO Energy Capital of any
express or implied agreement, covenant, term or condition relating to the Series
D Preferred Securities to be performed or observed by PECO Energy Capital;
(b) the extension of time for the payment by PECO
Energy Capital of all or any portion of the distributions, Redemption Price,
Liquidation Distribution or any other sums payable under the terms of the Series
D Preferred Securities or the extension of time for the performance of any other
obligation under, arising out of, or in connection with, the Series D Preferred
Securities;
(c) any failure, omission, delay or lack of diligence
on the part of the Holders or the Special Representative to enforce, assert or
exercise any right, privilege, power or remedy conferred on the Holders or the
Special Representative pursuant to the terms of the Series D Preferred
Securities, or any action on the part of PECO Energy Capital granting indulgence
or extension of any kind;
(d) the voluntary or involuntary liquidation,
dissolution, receivership, insolvency, bankruptcy, assignment for the benefit of
creditors, reorganization, arrangement, composition or readjustment of debt of,
or other similar proceedings affecting, PECO Energy Capital or any of the assets
of PECO Energy Capital;
(e) any invalidity of, or defect or deficiency in,
any of the Series D Preferred Securities; or
(f) the settlement or compromise of any obligation
guaranteed hereby or hereby incurred.
There shall be no obligation to the Holders to give notice to,
or obtain the consent of, the Guarantor with respect to the occurrence of any of
the foregoing.
SECTION 2.04. The Guarantor expressly acknowledges that (i)
this Guarantee Agreement will be deposited with the General Partner to be held
for the benefit of the Holders; (ii) in the event of the appointment of a
Special Representative, the Special Representative may enforce this Guarantee
Agreement for such purpose; (iii) if no Special Representative has been
appointed, the General Partner has the right to enforce this
4
<PAGE>
Guarantee Agreement on behalf of the Holders; (iv) the holders of Capital
Securities, together with the holders of the Series D Preferred Securities other
than the Trust, representing not less than 10% in aggregate stated liquidation
preference of the Series D Preferred Securities have the right to direct the
time, method and place of conducting any proceeding for any remedy available in
respect of this Guarantee Agreement including the giving of directions to the
General Partner or the Special Representative as the case may be; and (v) if the
General Partner or the Special Representative fails to enforce this Guarantee
Agreement as above provided, any holder of Capital Securities representing
Series D Preferred Securities may institute a legal proceeding directly against
the Guarantor to enforce its rights under this Guarantee Agreement, without
first instituting a legal proceeding against PECO Energy Capital or any other
person or entity.
SECTION 2.05. This is a guarantee of payment and not of
collection. The General Partner or Special Representative may enforce this
Guarantee Agreement directly against the Guarantor, and the Guarantor will waive
any right or remedy to require that any action be brought against PECO Energy
Capital or any other person or entity before proceeding against the Guarantor.
The Guarantor agrees that this Guarantee Agreement shall not be discharged
except by payment of the Guarantee Payments in full (to the extent not paid by
PECO Energy Capital) and by complete performance of all obligations of the
Guarantor contained in this Guarantee Agreement.
SECTION 2.06. The Guarantor will be subrogated to all rights
of the Holders against PECO Energy Capital in respect of any amounts paid to the
Holders by the Guarantor under this Guarantee Agreement and shall have the right
to waive payment by PECO Energy Capital pursuant to Section 2.01; provided,
however, that the Guarantor shall not (except to the extent required by
mandatory provisions of law) exercise any rights which it may acquire by way of
subrogation or any indemnity, reimbursement or other agreement, in all cases as
a result of a payment under this Guarantee Agreement, if, at the time of any
such payment, any amounts remain due and unpaid under this Guarantee Agreement.
If any amount shall be paid to the Guarantor in violation of the preceding
sentence, the Guarantor agrees to pay over such amount to the Holders.
SECTION 2.07. The Guarantor acknowledges that its obligations
hereunder are independent of the obligations of PECO Energy Capital with respect
to the Series D Preferred Securities and that the Guarantor shall be liable as
principal and sole debtor hereunder to make Guarantee Payments pursuant to the
terms of this Guarantee Agreement notwithstanding the occurrence of any event
referred to in subsections (a) through (f), inclusive, of Section 2.03 hereof.
5
<PAGE>
ARTICLE III
-----------
SECTION 3.01. So long as any Series D Preferred Securities
remain outstanding, neither the Guarantor nor any majority owned subsidiary of
the Guarantor shall declare or pay any dividend on, or redeem, purchase, acquire
or make a liquidation payment with respect to, any of its capital stock (other
than dividends by a wholly owned subsidiary) if at such time the Guarantor shall
be in default with respect to its payment or other obligations hereunder or
there shall have occurred any event that, with the giving of notice or the lapse
of time or both, would constitute an Event of Default under the Indenture. The
Guarantor shall take all actions necessary to ensure the compliance of its
subsidiaries with this Section 3.01.
SECTION 3.02. So long as any Series D Preferred Securities are
outstanding, the Guarantor agrees to maintain its corporate existence; provided
that, the Guarantor may consolidate with or merge with or into, or sell, convey,
transfer or lease all or substantially all of its assets (either in one
transaction or a series of transactions) to, any person, corporation,
partnership, limited liability company, joint venture association, joint stock
company, trust or unincorporated association if such entity formed by or
surviving such consolidation or merger or to which such sale, conveyance,
transfer or lease shall have been made, if other than the Guarantor, (i) is
organized and existing under the laws of the United States of America or any
state thereof or the District of Columbia, and (ii) shall expressly assume all
the obligations of the Guarantor under this Guarantee Agreement.
SECTION 3.03. This Guarantee Agreement will constitute an
unsecured obligation of the Guarantor and will rank subordinate and junior in
right of payment to all general liabilities of the Guarantor.
ARTICLE IV
----------
This Guarantee Agreement shall terminate and be of no further
force and effect upon full payment of the Redemption Price of all Series D
Preferred Securities or upon full payment of the amounts payable to the Holders
upon liquidation of PECO Energy Capital; provided, however, that this Guarantee
Agreement shall continue to be effective or shall be reinstated, as the case may
be, if at any time the Holders must restore payments of any sums paid under the
Series D Preferred Securities or under this Guarantee Agreement for any reason
whatsoever.
6
<PAGE>
ARTICLE V
---------
SECTION 5.01. All guarantees and agreements contained in this
Guarantee Agreement shall bind the successors, assigns, receivers, trustees and
representatives of the Guarantor and shall inure to the benefit of the Holders.
Except as provided in Section 3.02, the Guarantor may not assign its obligations
hereunder without the prior approval of the Holders of not less than 66 2/3% of
the aggregate stated liquidation preference of all Series D Preferred Securities
then outstanding.
SECTION 5.02. This Guarantee Agreement may only be amended by
a written instrument executed by the Guarantor; provided that, so long as any of
the Series D Preferred Securities remain outstanding, any amendment that
materially adversely affects the Holders, any termination of this Guarantee
Agreement or any waiver of compliance with any covenant hereunder shall be
effected only with the prior approval of the holders of Capital Securities
together with the holders of Series D Preferred Securities other than the Trust,
representing not less than 66 2/3% of the aggregate liquidation preference of
all Series D Preferred Securities then outstanding.
SECTION 5.03. All notices, requests or other communications
required or permitted to be given hereunder to the Guarantor shall be deemed
given if in writing and delivered personally or by recognized overnight courier
or express mail service or by facsimile transmission (confirmed in writing) or
by registered or certified mail (return receipt requested), addressed to the
Guarantor at the following address (or at such other address as shall be
specified by like notice to the Holders):
PECO Energy Company
2301 Market Street
P.O. Box 8699
Philadelphia, Pennsylvania 19101
Facsimile No.: (215) 557-9885
Attention: Treasurer
All notices, requests or other communications required or
permitted to be given hereunder to the Holders shall be deemed given if in
writing and delivered by the Guarantor in the same manner as notices sent by
PECO Energy Capital to the Holders.
SECTION 5.04. This Guarantee Agreement is solely for the
benefit of the Holders and is not separately transferable from the Series D
Preferred Securities.
7
<PAGE>
SECTION 5.05. This Guarantee Agreement shall be governed by
and construed and interpreted in accordance with the laws of the Commonwealth of
Pennsylvania without giving effect to the conflict of law principles thereof.
THIS GUARANTEE AGREEMENT is executed as of the day and year
first above written.
PECO ENERGY COMPANY
By: /s/ J. Barry Mitchell
-----------------------------------
Name: J. Barry Mitchell
Title: Vice President-Finance
8
<PAGE>
EXECUTION COPY
$400,000,000
TERM LOAN AGREEMENT
dated as of November 30, 1998
among
PECO ENERGY COMPANY
as Borrower
THE BANKS NAMED HEREIN
as Banks
THE FIRST NATIONAL BANK OF CHICAGO
as Administrative Agent
SALOMON SMITH BARNEY INC.
as Syndication Agent
MELLON BANK, N.A.
as Documentation Agent
and
CERTAIN BANKS SPECIFIED HEREIN
as Co-Agents
FIRST CHICAGO CAPITAL MARKETS, INC.
As Arranger
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Section Page
- - ------- ----
<S> <C>
ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS
1.01 Certain Defined Terms............................................................... 1
1.02 Computation of Time Periods......................................................... 8
1.03 Accounting Principles............................................................... 8
ARTICLE II
AMOUNTS AND TERMS OF THE TERM ADVANCES
2.01 The Term Advances................................................................... 8
2.02 Making the Term Advances............................................................ 9
2.03 Fees................................................................................ 9
2.04 Repayment of Term Advances.......................................................... 10
2.05 Interest on Term Advances........................................................... 10
2.06 Additional Interest on Term Advances................................................ 11
2.07 Interest Rate Determination......................................................... 11
2.08 Conversion of Term Advances......................................................... 12
2.09 Prepayments......................................................................... 12
2.10 Increased Costs..................................................................... 12
2.11 Illegality.......................................................................... 13
2.12 Payments and Computations........................................................... 14
2.13 Taxes............................................................................... 14
2.14 Sharing of Payments, Etc............................................................ 16
ARTICLE III
CONDITIONS OF LENDING
3.01 Conditions Precedent to Term Borrowings............................................. 17
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
4.01 Representations and Warranties of the Borrower...................................... 18
ARTICLE V
COVENANTS OF THE BORROWER
5.01 Affirmative Covenants............................................................... 19
5.02 Negative Covenants.................................................................. 22
ARTICLE VI
EVENTS OF DEFAULT
6.01 Events of Default................................................................... 23
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
ARTICLE VII
THE AGENTS
7.01 Authorization and Action............................................................ 25
7.02 Agents' Reliance, Etc............................................................... 25
7.03 Agents and Affiliates............................................................... 25
7.04 Lender Credit Decision.............................................................. 25
7.05 Indemnification..................................................................... 26
7.06 Successor Administrative Agent...................................................... 26
7.07 Syndication Agent, Documentation Agent and Co-Agents ............................... 26
ARTICLE VIII
MISCELLANEOUS
8.01 Amendments, Etc..................................................................... 26
8.02 Notices, Etc........................................................................ 27
8.03 No Waiver; Remedies................................................................. 27
8.04 Costs and Expenses; Indemnification................................................. 27
8.05 Right of Set-off.................................................................... 28
8.06 Binding Effect...................................................................... 28
8.07 Assignments and Participations...................................................... 28
8.08 Governing Law....................................................................... 31
8.09 Consent to Jurisdiction............................................................. 31
8.10 Execution in Counterparts; Integration.............................................. 31
Schedule I List of Applicable Lending Offices
Exhibit A Form of Note
Exhibit B Notice of a Borrowing
Exhibit C Assignment and Acceptance
Exhibit D Form of Opinion of Special Counsel for the Borrower
Exhibit E Form of Opinion of Counsel to the Administration Agent
Exhibit F Form of Annual and Quarterly Compliance Certificate
</TABLE>
ii
<PAGE>
TERM LOAN AGREEMENT
dated as of November 30, 1998
PECO Energy Company, a Pennsylvania corporation (the
"Borrower"), the banks listed on the signature pages hereof (the "Banks"),
certain Banks specified herein, as co-agents hereunder (in such capacity, the
"Co-Agents"), Salomon Smith Barney Inc. ("Salomon Smith Barney"), as syndication
agent hereunder (in such capacity, the "Syndication Agent"), The First National
Bank of Chicago ("First Chicago"), as administrative agent for the Lenders
hereunder (in such capacity, the "Administrative Agent"), and Mellon Bank, N.A.
("Mellon"), as documentation agent for the Lenders hereunder (in such capacity,
the "Documentation Agent"), hereby agree as follows:
ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS
SECTION 1.01. Certain Defined Terms. As used in this
Agreement, each of the following terms shall have the meaning set forth next to
such term below (each such meaning to be equally applicable to both the singular
and plural forms of the term defined):
"Administrative Agent" means First Chicago in its capacity as
administrative agent for the Lenders pursuant to Article VII, and not
in its individual capacity as a Lender, and any successor
Administrative Agent appointed pursuant to Article VII.
"Advance" means a Term Advance.
"Affiliate" means, as to any Person, any other Person that,
directly or indirectly, controls, is controlled by or is under common
control with such Person or is a director or officer of such Person.
"Agents" means the Administrative Agent, the Documentation
Agent, the Syndication Agent and the Co-Agents, collectively.
"Applicable Lending Office" means, with respect to each Lender,
such Lender's Domestic Lending Office in the case of a Base Rate
Advance, and such Lender's Eurodollar Lending Office in the case of a
Eurodollar Rate Advance.
"Assignment and Acceptance" means an assignment and acceptance
entered into by a Lender and an Eligible Assignee, and accepted by the
Administrative Agent, in substantially the form of Exhibit C hereto.
"Base Rate" means, for any period, a fluctuating interest rate
per annum as shall be in effect from time to time which rate per annum
shall at all times be equal to the higher of:
(a) the rate of interest announced by First Chicago,
from time to time, as its corporate base rate; and
(b) the sum of 1/2 of 1% per annum plus the Federal
Funds Rate in effect from time to time.
"Base Rate Advance" means a Term Advance that bears interest
as provided in Section 2.05(a).
<PAGE>
"Business Day" means a day of the year on which banks are not
required or authorized to close in Philadelphia, Pennsylvania, Chicago,
Illinois or New York, New York, and, if the applicable Business Day
relates to any Eurodollar Rate Advances, on which dealings are carried
on in the London interbank market.
"Closing Date" has the meaning specified in Section 2.01.
"Closing Fee Percentage" has the meaning specified in Section
2.03(a).
"Co-Agent" means a Bank identified as such on the signature
pages to this Agreement, in its capacity as Co-Agent, and not in its
individual capacity as a Lender.
"Code" means the Internal Revenue Code of 1986, and the
regulations promulgated thereunder, in each case as amended, reformed
or otherwise modified from time to time.
"Commitment" has the meaning specified in Section 2.01.
"Consolidated Adjusted Total Capitalization" on any date shall
mean the sum, without duplication, of the following with respect to the
Borrower and its consolidated Subsidiaries (exclusive, in each case, of
Nonrecourse Transition Bond Debt, to the extent Nonrecourse Transition
Bond Debt would otherwise be included in such item): (a) total
capitalization as of such date, as determined in accordance with GAAP,
(b) the current portion of liabilities which as of such date would be
classified in whole or part as long-term debt in accordance with GAAP
(it being understood that the noncurrent portion of such liabilities is
included in the total capitalization referred to in clause (a)), (c)
all obligations as lessee which, in accordance with GAAP, are
capitalized as liabilities (including the current portion thereof), and
(d) all other liabilities which would be classified as short-term debt
in accordance with GAAP (including, without limitation, all liabilities
of the types classified as "Notes Payable, Bank" on the Borrower's
audited balance sheet for December 31, 1997).
"Consolidated Adjusted Total Debt" on any date shall mean the
sum, without duplication, of the following with respect to the Borrower
and its consolidated Subsidiaries (exclusive, in each case, of
Nonrecourse Transition Bond Debt, to the extent Nonrecourse Transition
Bond Debt would otherwise be included in such item): (a) all
liabilities which as of such date would be classified in whole or in
part as long-term debt in accordance with GAAP (including the current
portion thereof), (b) all obligations as lessee which, in accordance
with GAAP, are capitalized as liabilities (including the current
portion thereof), and (c) all other liabilities which would be
classified as short-term debt in accordance with GAAP (including,
without limitation, all liabilities of the types classified as "Notes
Payable, Bank" on the Borrower's audited balance sheet for December 31,
1997).
"Controlled Group" means all members of a controlled group of
corporations and all trades or businesses (whether or not incorporated)
under common control that, together with the Borrower or any
Subsidiary, are treated as a single employer under Section 414(b) or
414(c) of the Code.
"Convert", "Conversion" and "Converted" each refers to a
conversion of Advances of one Type into Advances of another Type or the
selection of a new, or the renewal of the same, Interest Period for
Eurodollar Rate Advances pursuant to Section 2.08.
"Debt" means (i) indebtedness for borrowed money, (ii)
obligations evidenced by bonds, debentures, notes or other similar
instrument, (iii) obligations to pay the deferred purchase price of
property or services (other than trade payables incurred in the
ordinary course of business), (iv) obligations as lessee under leases
that shall have been or are required to be, in accordance with GAAP,
recorded as capital leases, (v) obligations (contingent or otherwise)
under reimbursement or similar agreements with respect to the issuance
of letters of credit (other than obligations in respect of documentary
letters of credit opened to provide for the payment of goods or
services purchased in the ordinary course of business) and (vi)
obligations under direct or indirect guaranties in respect of, and
obligations (contingent or otherwise) to purchase or otherwise acquire,
or otherwise to assure a creditor against loss in respect of,
indebtedness or obligations of others of the kinds referred to in
clauses (i) through (v) above.
-2-
<PAGE>
"Documentation Agent" means Mellon in its capacity as
documentation agent pursuant to Article VII, and not in its individual
capacity as a Lender.
"Domestic Lending Office" means, with respect to any Lender,
the office of such Lender specified as its "Domestic Lending Office"
opposite its name on Schedule I hereto or in the Assignment and
Acceptance pursuant to which it became a Lender, or such other office
of such Lender as such Lender may from time to time specify to the
Borrower and the Administrative Agent.
"Eligible Assignee" means (i) a commercial bank organized
under the laws of the United States, or any State thereof; (ii) a
commercial bank organized under the laws of any other country that is a
member of the OECD or has concluded special lending arrangements with
the International Monetary Fund associated with its General
Arrangements to Borrow, or a political subdivision of any such country,
provided that such bank is acting through a branch or agency located in
the United States; (iii) a finance company, insurance company or other
financial institution or fund (whether a corporation, partnership or
other entity) engaged generally in making, purchasing or otherwise
investing in commercial loans in the ordinary course of its business;
or (iv) the central bank of any country that is a member of the OECD;
provided, however, that (A) any such Person described in clause (i),
(ii) or (iii) above shall also (x) have outstanding unsecured long-term
debt that is rated BBB- or better by S&P and Baa3 or better by Moody's
(or an equivalent rating by another nationally recognized credit rating
agency of similar standing if either such corporation is no longer in
the business of rating unsecured indebtedness of entities engaged in
such businesses) and (y) have combined capital and surplus (as
established in its most recent report of condition to its primary
regulator) of not less than $100,000,000 (or its equivalent in foreign
currency), and (B) any Person described in clause (ii), (iii) or (iv)
above shall, on the date on which it is to become a Lender hereunder,
be entitled to receive payments hereunder without deduction or
withholding of any United States Federal income taxes (as contemplated
by Section 2.13(e)).
"Eligible Successor" means a Person which (i) is a corporation
duly incorporated, validly existing and in good standing under the laws
of one of the states of the United States or the District of Columbia,
(ii) is qualified to do business in Pennsylvania, (iii) as a result of
the contemplated acquisition, consolidation or merger, will succeed to
all or substantially all of the consolidated business and assets of the
Borrower and its Subsidiaries, (iv) upon giving effect to the
contemplated acquisition, consolidation or merger, will have all or
substantially all of its consolidated business and assets conducted and
located in the United States and (v) is acceptable to the Majority
Lenders as a credit matter.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended from time to time, and the regulations promulgated and
rulings issued thereunder, each as amended and modified from time to
time.
"Eurocurrency Liabilities" has the meaning assigned to that
term in Regulation D of the Board of Governors of the Federal Reserve
System, as in effect from time to time.
-3-
<PAGE>
"Eurodollar Lending Office" means, with respect to any Lender,
the office of such Lender specified as its "Eurodollar Lending Office"
opposite its name on Schedule I hereto or in the Assignment and
Acceptance pursuant to which it became a Lender (or, if no such office
is specified, its Domestic Lending Office), or such other office of
such Lender as such Lender may from time to time specify to the
Borrower and the Administrative Agent.
"Eurodollar Rate" means, for the Interest Period for each
Eurodollar Rate Advance made as part of the same Term Borrowing, an
interest rate per annum equal to the average (rounded upward to the
nearest whole multiple of 1/16 of 1% per annum, if such average is not
such a multiple) of the rate per annum at which deposits in U.S.
dollars are offered by the principal office of each of the Reference
Banks in London, England, to prime banks in the London interbank market
at 11:00 A.M. (London time) two Business Days before the first day of
such Interest Period in an amount substantially equal to such Reference
Bank's Eurodollar Rate Advance made as part of such Term Borrowing and
for a period equal to such Interest Period. The Eurodollar Rate for the
Interest Period for each Eurodollar Rate Advance made as part of the
same Term Borrowing shall be determined by the Administrative Agent on
the basis of applicable rates furnished to and received by the
Administrative Agent from the Reference Banks two Business Days before
the first day of such Interest Period, subject, however, to the
provisions of Section 2.07.
"Eurodollar Rate Advance" means a Term Advance that bears
interest as provided in Section 2.05(c).
"Eurodollar Rate Reserve Percentage" of any Lender for the
Interest Period for any Eurodollar Rate Advance means the reserve
percentage applicable during such Interest Period (or if more than one
such percentage shall be so applicable, the daily average of such
percentages for those days in such Interest Period during which any
such percentage shall be so applicable) under regulations issued from
time to time by the Board of Governors of the Federal Reserve System
(or any successor) for determining the maximum reserve requirement
(including, without limitation, any emergency, supplemental or other
marginal reserve requirement) for such Lender with respect to
liabilities or assets consisting of or including Eurocurrency
Liabilities having a term equal to such Interest Period.
"Events of Default" has the meaning specified in Section 6.01.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended and modified from time to time.
"Existing Credit Agreements" means that certain Revolving
Credit Agreement, and that certain 364-Day Credit Agreement, each dated
as of October 7, 1997, among the Borrower, the banks named therein,
certain banks specified therein, as lead managers thereunder, certain
banks specified therein, as co-agents thereunder, First Chicago Capital
Markets, Mellon and CitiCorp, as syndication agents thereunder, First
Chicago Capital Markets and Mellon, as arrangers thereunder, First
Chicago, as administrative agent for the lenders thereunder, and
Mellon, as documentation agent for the lenders thereunder, as the same
may be amended, modified or supplemented from time to time.
"Federal Funds Rate" means, for any period, a fluctuating
interest rate per annum equal for each day during such period to the
weighted average of the rates on overnight Federal funds transactions
with members of the Federal Reserve System arranged by Federal funds
brokers, as published for such day (or, if such day is not a Business
Day, for the next preceding Business Day) by the Federal Reserve Bank
of New York, or, if such rate is not so published for any day which is
a Business Day, the average of the quotations for such day on such
transactions received by the Administrative Agent from three Federal
funds brokers of recognized standing selected by it.
-4-
<PAGE>
"GAAP" shall have the meaning given that term in Section 1.03.
"Interest Period" means, for each Term Advance, the period
commencing on the date of such Term Advance or the date of the
Conversion of any Term Advance into such a Term Advance and ending on
the last day of the period selected by the Borrower pursuant to the
provisions below and, thereafter, each subsequent period commencing on
the last day of the immediately preceding Interest Period and ending on
the last day of the period selected by the Borrower pursuant to the
provisions below. The duration of each such Interest Period shall be 1,
2, 3 or 6 months as the Borrower may select in accordance with Section
2.02 or 2.08; provided, however, that:
(i) the Borrower may not select any Interest Period
that ends after the Term Loan Maturity Date then in effect;
(ii) Interest Periods commencing on the same date for
Term Advances made as part of the same Term Borrowing shall be
of the same duration, and
(iii) whenever the last day of any Interest Period
would otherwise occur on a day other than a Business Day, the
last day of such Interest Period shall be extended to occur on
the next succeeding Business Day, provided, that if such
extension would cause the last day of such Interest Period to
occur in the next following calendar month, the last day of
such Interest Period shall occur on the next preceding
Business Day.
"Lenders" means the Banks listed on the signature pages hereof
and each Eligible Assignee that shall become a party hereto pursuant to
Section 8.07.
"Lien" means any lien (statutory or other), mortgage, pledge,
security interest or other charge or encumbrance, or any other type of
preferential arrangement (including, without limitation, the interest
of a vendor or lessor under any conditional sale, capitalized lease or
other title retention agreement).
"Material Adverse Change" and "Material Adverse Effect" each
means, relative to any occurrence, fact or circumstances of whatsoever
nature (including, without limitation, any determination in any
litigation, arbitration or governmental investigation or proceeding),
any materially adverse change in, or materially adverse effect on, the
financial condition, operations, assets or business of the Borrower and
its consolidated Subsidiaries, taken as a whole.
"Majority Lenders" means, at any time prior to the Closing
Date, Lenders having at least 66-2/3% of the Commitments, and, at any
time on or after the Closing Date, Lenders having at least 66-2/3% of
the Term Advances outstanding (provided that, for purposes hereof,
neither the Borrower, nor any of its Affiliates, if a Lender, shall be
included in (i) the Lenders having such amount of the Commitments or
the Term Advances or (ii) determining the total amount of the
Commitments or the Term Advances).
"Moody's" means Moody's Investors Service, Inc.
"Mortgage" means the First and Refunding Mortgage, dated as of
May 1, 1923, between The Counties Gas & Electric Company (to which the
Borrower is successor) and Fidelity Trust Company, Trustee (to which
First Union National Bank is successor), as amended, supplemented or
refinanced from time to time, provided, that no effect shall be given
to any amendment, supplement or refinancing after the date of this
Agreement that would broaden the definition of "excepted encumbrances"
as defined in the Mortgage as constituted on the date of this
Agreement.
-5-
<PAGE>
"Multiemployer Plan" means a Plan maintained pursuant to a
collective bargaining agreement or any other arrangement to which the
Borrower or any member of the Controlled Group is a party to which more
than one employer is obligated to make contributions.
"Nonrecourse Transition Bond Debt" means obligations evidenced
by "transition bonds" (as defined in 66 Pa. Cons. Stat. Ann. ss.
2812(g) (West Supp. 1997), or any successor provision of similar
import), rated AA or higher by S&P (or a comparable rating from a
generally recognized successor to S&P) or Aa2 or higher by Moody's (or
a comparable rating from a generally recognized successor to Moody's),
representing a securitization of "intangible transition property" (as
defined in the foregoing statute), as to which obligations neither the
Borrower nor any Subsidiary of the Borrower (other than a Special
Purpose Subsidiary) has any direct or indirect liability (whether as
primary obligor, guarantor, or surety, provider of collateral security,
put option, asset repurchase agreement or capital maintenance
agreement, debt subordination agreement, or through other right or
arrangement of any nature providing direct or indirect assurance of
payment or performance of any such obligations in whole or in part),
except for liability to repurchase "intangible transition property"
conveyed to the securitization vehicle, on terms and conditions
customary in receivables securitizations, in the event such "intangible
transition property" violates representations and warranties of scope
customary in receivables securitizations. "Special Purpose Subsidiary"
means a direct or indirect wholly-owned corporate Subsidiary of the
Borrower, substantially all of the assets of which are "intangible
transition property" and proceeds thereof, formed solely for the
purpose of holding such assets and issuing such "transition bonds," and
which complies with the requirements customarily imposed on
bankruptcy-remote corporations in receivables securitizations.
"Note" means a promissory note of the Borrower payable to the
order of any Lender, in substantially the form of Exhibit A hereto,
evidencing the aggregate indebtedness of the Borrower to such Lender
resulting from the Term Advances made by such Lender.
"Notice of Borrowing" has the meaning specified in Section
2.02(a).
"OECD" means the Organization for Economic Cooperation and
Development.
"Order of Registration" has the meaning assigned to that term
in Section 3.01(a)(iii).
"PBGC" means the Pension Benefit Guaranty Corporation and any
entity succeeding to any or all of its functions under ERISA.
"Person" means an individual, partnership, corporation
(including a business trust), joint stock company, trust,
unincorporated association, joint venture, limited liability company or
other entity, or a government or any political subdivision or agency
thereof.
"Plan" means an employee pension benefit plan that is covered
by Title IV of ERISA or subject to the minimum funding standards under
Section 412 of the Code as to which the Borrower or any member of the
Controlled Group may have any liability.
"PPUC" means the Pennsylvania Public Utility Commission.
"Principal Subsidiary" means (i) each Utility Subsidiary and
(ii) from and after the date on which the aggregate book value of the
assets of the Subsidiaries of the Borrower that are not Utility
Subsidiaries exceeds $250,000,000, each such Subsidiary the assets of
which exceeded $75,000,000 in book value at any time during the
preceding 24-month period.
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"Reference Banks" means First Chicago, Mellon and Citibank,
N.A.
"Register" has the meaning specified in Section 8.07(c).
"Reportable Event" means a reportable event as defined in
Section 4043 of ERISA and regulations issued under such section with
respect to a Plan, excluding, however, such events as to which the PBGC
by regulation waived the requirement of Section 4043(a) of ERISA that
it be notified within 30 days of the occurrence of such event, provided
that a failure to meet the minimum funding standard of Section 412 of
the Code and Section 302 of ERISA shall be a Reportable Event
regardless of the issuance of any such waivers in accordance with
either Section 4043(a) of ERISA or Section 412(d) of the Code.
"S&P" means Standard & Poor's Ratings Services, a division of
The McGraw-Hill Companies, Inc.
"Securities Certificate" has the meaning assigned to that term
in Section 3.01(a)(iii).
"Single Employer Plan" means a Plan maintained by the Borrower
or any member of the Controlled Group for employees of the Borrower or
any member of the Controlled Group.
"Special Purpose Subsidiary" has the meaning assigned to that
term in the definition of "Nonrecourse Transition Bond Debt."
"Subsidiary" means, with respect to any Person, any
corporation or unincorporated entity of which more than 50% of the
outstanding capital stock (or comparable interest) having ordinary
voting power (irrespective of whether or not at the time capital stock,
or comparable interests, of any other class or classes of such
corporation or entity shall or might have voting power upon the
occurrence of any contingency) is at the time directly or indirectly
owned by such Person (whether directly or through one or more other
Subsidiaries).
"Syndication Agent" means Salomon Smith Barney Inc., in its
capacity as Syndication Agent, and not in its individual capacity as a
Lender.
"Term Advance" means an advance by a Lender to the Borrower as
part of a Term Borrowing, and refers to a Base Rate Advance or a
Eurodollar Rate Advance, each of which shall be a "Type" of Term
Advance.
"Term Borrowing" means a borrowing consisting of simultaneous
Term Advances of the same Type and, if such Borrowing comprises
Eurodollar Rate Advances, having Interest Periods of the same duration,
made by each of the Lenders pursuant to Section 2.01 or Converted
pursuant to Section 2.08. For the avoidance of doubt, it is understood
that the Lenders will advance all funds under this Agreement only on
the Closing Date, and not thereafter. The use of the term "Term
Borrowing" is for convenience and for the sake of conformity with the
Existing Credit Agreements, and does not denote or imply that any
actual borrowing or funding will occur after the Closing Date or that
the outstanding principal amount of Term Borrowings may increase after
the Closing Date.
"Term Loan Maturity Date" shall mean the date which is the
one-year anniversary of the Closing Date.
"Termination Date" means December 23, 1998.
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"Unfunded Liabilities" means, (i) in the case of any Single
Employer Plan, the amount (if any) by which the present value of all
vested nonforfeitable benefits under such Plan exceeds the fair market
value of all Plan assets allocable to such benefits, all determined as
of the then most recent evaluation date for such Plan, and (ii) in the
case of any Multiemployer Plan, the withdrawal liability that would be
incurred by the Controlled Group if all members of the Controlled Group
completely withdrew from such Multiemployer Plan.
"Utility Subsidiary" means each Subsidiary of the Borrower
that is engaged principally in the generation, transmission, or
distribution of electricity or gas and is subject to regulation as a
public utility by federal or state regulatory authorities.
"Year 2000 Problem" shall mean that the computer hardware,
software or equipment containing embedded microchips of the Borrower or
any of its Subsidiaries which is essential to its business or
operations will, as a result of processing dates or time periods
occurring after December 31, 1999, malfunction causing a system failure
or miscalculations resulting in disruptions of operations, including,
among other things, a temporary inability to process transactions, send
bills, operate generation stations, or engage in similar normal
business activities.
SECTION 1.02. Computation of Time Periods. In this Agreement
in the computation of periods of time from a specified date to a later specified
date, the word "from" means "from and including" and the words "to" and "until"
each means "to but excluding".
SECTION 1.03. Accounting Principles. As used in this
Agreement, "GAAP" shall mean generally accepted accounting principles in the
United States, applied on a basis consistent with the principles used in
preparing the Borrower's audited consolidated financial statements as of
December 31, 1997 and for the fiscal year then ended. In this Agreement, except
to the extent, if any, otherwise provided herein, all accounting and financial
terms shall have the meanings ascribed to such terms by GAAP, and all
computations and determinations as to accounting and financial matters shall be
made in accordance with GAAP. In the event that the financial statements
generally prepared by the Borrower apply accounting principles other than GAAP,
the compliance certificate delivered pursuant to Section 5.01(b)(iv)
accompanying such financial statements shall include information in reasonable
detail reconciling such financial statements to GAAP to the extent relevant to
the calculations set forth in such compliance certificate.
ARTICLE II
AMOUNTS AND TERMS OF THE TERM ADVANCES
SECTION 2.01. The Term Advances. Each Lender severally agrees,
on the terms and conditions hereinafter set forth, to make Term Advances to the
Borrower on a single Business Day (the "Closing Date") during the period from
the date hereof until (but excluding) the Termination Date in an aggregate
amount not to exceed the amount set forth opposite such Lender's name on the
signature pages hereof or, if such Lender has entered into any Assignment and
Acceptance, set forth for such Lender in the Register maintained by the
Administrative Agent pursuant to Section 8.07(c) (such Lender's "Commitment").
Each Term Borrowing shall consist of Term Advances of the same Type made or
Converted on the same day by the Lenders ratably according to their respective
Commitments. Each Term Borrowing comprising Base Rate Advances shall be in an
aggregate amount not less than $5,000,000, and each Term Borrowing comprising
Eurodollar Rate Advances shall be in an aggregate amount not less than
$10,000,000. All Term Borrowings with respect to which Lenders advance funds to
the Borrower shall be made simultaneously on the Closing Date. Immediately after
the Term Borrowings are made on the Closing Date the Commitments shall
automatically be reduced to zero and no increase in the outstanding Term
Borrowings shall occur thereafter The Borrower may not reborrow amounts repaid
with respect to the Term Borrowings.
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SECTION 2.02. Making the Term Advances. (a) All Term
Borrowings (other than pursuant to a Conversion) shall be made on notice, given
not later than 10:00 A.M. (Chicago time) on the third Business Day prior to the
Closing Date (if Term Borrowings comprised of Eurodollar Rate Advances are
requested), or on the Closing Date (if the Term Borrowings are comprised only of
Base Rate Advances), by the Borrower to the Administrative Agent, which shall
give to each Lender prompt notice thereof. The notice of the Term Borrowings
(the "Notice of Borrowing") shall be sent by telecopier, telex or cable,
confirmed immediately in writing, in substantially the form of Exhibit B hereto,
specifying therein the requested (i) Closing Date, (ii) Types of Term Advances
to be made in connection with the Term Borrowings, (iii) the aggregate amount of
each Term Borrowing, and (iv) in the case of a Term Borrowing comprising
Eurodollar Rate Advances, the Interest Periods for such Eurodollar Advances.
Each Lender shall, before 11:00 A.M. (Chicago time) on the Closing Date make
available for the account of its Applicable Lending Office to the Administrative
Agent at its address referred to in Section 8.02, in same day funds, such
Lender's ratable portion of the Term Borrowings. After the Administrative
Agent's receipt of such funds and upon fulfillment of the applicable conditions
set forth in Article III, the Administrative Agent will make such funds
available to the Borrower at the Administrative Agent's aforesaid address.
(b) The Notice of Borrowing shall be irrevocable and binding
on the Borrower. In the case of any Term Borrowing that the Notice of Borrowing
specifies is to comprise Eurodollar Rate Advances, the Borrower shall indemnify
each Lender against any loss, cost or expense incurred by such Lender as a
result of any failure to fulfill on or before the Closing Date specified in the
Notice of Borrowing the applicable conditions set forth in Article III,
including, without limitation, any loss, cost or expense incurred by reason of
the liquidation or reemployment of deposits or other funds acquired by such
Lender to fund the Term Advances to be made by such Lender as part of such Term
Borrowings when such Term Advances, as a result of such failure, are not made on
the Closing Date.
(c) Unless the Administrative Agent shall have received notice
from a Lender prior to the Closing Date that such Lender will not make available
to the Administrative Agent such Lender's ratable portion of the Term
Borrowings, the Administrative Agent may assume that such Lender has made such
portion available to the Administrative Agent on the Closing Date in accordance
with subsection (a) of this Section 2.02 and the Administrative Agent may, in
reliance upon such assumption, make available to the Borrower on the Closing
Date a corresponding amount. If and to the extent that such Lender shall not
have so made such ratable portion available to the Administrative Agent, such
Lender and the Borrower severally agree to repay to the Administrative Agent
forthwith on demand such corresponding amount together with interest thereon,
for each day from the date such amount is made available to the Borrower until
the date such amount is repaid to the Administrative Agent, at (i) in the case
of the Borrower, the interest rate applicable at the time to Term Advances made
in connection with the Term Borrowings and (ii) in the case of such Lender, the
Federal Funds Rate. If such Lender shall repay to the Administrative Agent such
corresponding amount, such amount so repaid shall constitute such Lender's Term
Advances as part of such Term Borrowings for purposes of this Agreement.
(d) The failure of any Lender to make any Term Advance to be
made by it on the Closing Date shall not relieve any other Lender of its
obligation, if any, hereunder to make any Term Advance on the Closing Date but
no Lender shall be responsible for the failure of any other Lender to make any
Term Advance to be made by such other Lender on the Closing Date.
(e) Notwithstanding anything to the contrary contained
herein, no more than sixteen (16) Term Borrowings comprising Eurodollar Rate
Advances may be outstanding at any time.
SECTION 2.03. Fees. (a) The Borrower agrees to pay on the
Closing Date to the Administrative Agent for the account of each Lender a
closing fee equal to the Closing Fee Percentage for each Lender times such
Lender's Commitment hereunder. The "Closing Fee Percentage" for each Lender
shall be the percentage set forth in the table below opposite the amount that
such Lender indicated that it was willing to make available to Borrower under
this Term Loan Agreement (which may be greater than its final Commitment
hereunder) in a commitment letter executed and delivered by such Lender prior to
the date hereof.
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- - --------------------------------------------------------------------------------
Closing Fee Percentage Commitment Letter Amount
---------------------- ------------------------
- - --------------------------------------------------------------------------------
.09% Greater than or equal to $50,000,000
- - --------------------------------------------------------------------------------
.08% Less than $50,000,000, but greater than or equal to
$40,000,000
- - --------------------------------------------------------------------------------
.07% Less than $40,000,000 but greater than or equal to
$30,000,000
- - --------------------------------------------------------------------------------
.05% Less than $30,000,000 but greater than or equal to
$20,000,000
- - --------------------------------------------------------------------------------
0% Less than $20,000,000
- - --------------------------------------------------------------------------------
Regardless of the amount set forth in a Lender's commitment letter and used to
calculate such Lender's closing fee under this Section 2.03, no Lender shall be
obligated to make Term Borrowings in an aggregate principal amount in excess of
its Commitment hereunder.
(b) The Borrower agrees to pay to the Administrative Agent for
its own account a closing fee, and an Administrative Agent's administration fee,
each payable in such amounts and on such dates as may be agreed to in writing
from time to time between the Borrower and the Administrative Agent.
SECTION 2.04. Repayment of Term Advances. The Borrower shall
repay the principal amount of all Term Advances on or before the Term Loan
Maturity Date.
SECTION 2.05. Interest on Term Advances. The Borrower shall
pay interest on the unpaid principal amount of each Term Advance made by each
Lender from the Closing Date until such principal amount shall be paid in full,
at the following rates per annum:
(a) Base Rate Advances. If such Term Advance is a Base Rate
Advance, a rate per annum equal at all times to the Base Rate in effect from
time to time, payable quarterly on the last day of each March, June, September
and December during such periods and on the date such Base Rate Advance shall be
Converted or paid in full.
(b) Eurodollar Rate Advances. Subject to Section 2.06, if such
Term Advance is a Eurodollar Rate Advance, a rate per annum equal at all times
during the Interest Period for such Term Advance to the sum of the Eurodollar
Rate for such Interest Period plus 1%, payable on the last day of the Interest
Period for such Eurodollar Rate Advance (or, if the Interest Period for such
Advance is six months, accrued interest shall be payable on the day that is
three months and on the day that is six months from the date such Advance was
made) or, if earlier, on the date such Eurodollar Rate Advance shall be
Converted or paid in full.
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SECTION 2.06. Additional Interest on Term Advances. The
Borrower shall pay to each Lender, so long as such Lender shall be required
under regulations of the Board of Governors of the Federal Reserve System to
maintain reserves with respect to liabilities or assets consisting of or
including Eurocurrency Liabilities, additional interest on the unpaid principal
amount of each Eurodollar Rate Advance of such Lender, from the date of such
Term Advance until such principal amount is paid in full or Converted, at an
interest rate per annum equal at all times to the remainder obtained by
subtracting (i) the Eurodollar Rate for the Interest Period for such Term
Advance from (ii) the rate obtained by dividing such Eurodollar Rate by a
percentage equal to 100% minus the Eurodollar Rate Reserve Percentage of such
Lender for such Interest Period, payable on each date on which interest is
payable on such Term Advance; provided, that no Lender shall be entitled to
demand such additional interest more than 90 days following the last day of the
Interest Period in respect of which such demand is made; provided further,
however, that the foregoing proviso shall in no way limit the right of any
Lender to demand or receive such additional interest to the extent that such
additional interest relates to the retroactive application of the reserve
requirements described above if such demand is made within 90 days after the
implementation of such retroactive reserve requirements. Such additional
interest shall be determined by such Lender and notified to the Borrower through
the Administrative Agent, and such determination shall be conclusive and binding
for all purposes, absent manifest error.
SECTION 2.07. Interest Rate Determination. (a) Each Reference
Bank agrees to furnish to the Administrative Agent timely information for the
purpose of determining each Eurodollar Rate. If any one of the Reference Banks
shall not furnish such timely information to the Administrative Agent for the
purpose of determining such interest rate, the Administrative Agent shall
determine such interest rate on the basis of timely information furnished by the
remaining Reference Banks.
(b) The Administrative Agent shall give prompt notice to the
Borrower and the Lenders of the applicable interest rate determined by the
Administrative Agent for purposes of Section 2.05(a) or (b), and the applicable
rate, if any, furnished by each Reference Bank for the purpose of determining
the applicable interest rate under Section 2.05(b).
(c) If fewer than two Reference Banks furnish timely
information to the Administrative Agent for determining the Eurodollar Rate for
any Eurodollar Rate Advances,
(i) the Administrative Agent shall forthwith notify
the Borrower and the Lenders that the interest rate cannot be
determined for such Eurodollar Rate Advances,
(ii) each such Advance will automatically, on the
last day of the then existing Interest Period therefor,
Convert into a Base Rate Advance (or if such Advance is then a
Base Rate Advance, will continue as a Base Rate Advance), and
(iii) the obligation of the Lenders to make, or to
Convert Term Advances into, Eurodollar Rate Advances shall be
suspended until the Administrative Agent shall notify the
Borrower and the Lenders that the circumstances causing such
suspension no longer exist.
(d) If, with respect to any Eurodollar Rate Advances, the
Majority Lenders notify the Administrative Agent that the Eurodollar Rate for
any Interest Period for such Advances will not adequately reflect the cost to
such Majority Lenders of making, funding or maintaining their respective
Eurodollar Rate Advances for such Interest Period, the Administrative Agent
shall forthwith so notify the Borrower and the Lenders, whereupon
(i) each Eurodollar Rate Advance will automatically,
on the last day of the then existing Interest Period therefor
(unless prepaid), Convert into a Base Rate Advance, and
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(ii) the obligation of the Lenders to make, or to
Convert Term Advances into, Eurodollar Rate Advances shall be
suspended until the Administrative Agent shall notify the
Borrower and the Lenders that the circumstances causing such
suspension no longer exist.
SECTION 2.08. Conversion of Term Advances. (a) Voluntary. The
Borrower may on any Business Day, upon notice given to the Administrative Agent
not later than 10:00 A.M. (Chicago time) on the third Business Day prior to the
date of any proposed Conversion into Eurodollar Rate Advances and on the date of
any proposed Conversion into Base Rate Advances, and subject to the provisions
of Sections 2.07 and 2.11, Convert all Term Advances of one Type made in
connection with the same Term Borrowing into Advances of another Type or Types
or Term Advances of the same Type having the same or a new Interest Period;
provided, however, that any Conversion of Eurodollar Rate Advances into Advances
of another Type or Advances of the same Type having the same or new Interest
Periods shall be made on, and only on, the last day of an Interest Period for
such Eurodollar Rate Advances, unless the Borrower shall also reimburse the
Lenders in respect thereof pursuant to Section 8.04(b) on the date of such
Conversion. Each such notice of a Conversion shall, within the restrictions
specified above, specify (i) the date of such Conversion, (ii) the Term Advances
to be Converted, and (iii) if such Conversion is into, or with respect to,
Eurodollar Rate Advances, the duration of the Interest Period for each such Term
Advance.
(b) Automatic. If the Borrower shall fail to select the Type
of any Term Advance or the duration of any Interest Period for any Term
Borrowing comprising Eurodollar Rate Advances in accordance with the provisions
contained in the definition of "Interest Period" in Section 1.01 and Section
2.08(a), the Administrative Agent will forthwith so notify the Borrower and the
Lenders and such Advances will automatically, on the last day of the then
existing Interest Period therefor, Convert into Base Rate Advances.
SECTION 2.09. Prepayments. The Borrower may, upon at least two
Business Days' notice (or same day notice in the case of any prepayment of Base
Rate Advances) to the Administrative Agent stating the proposed date and
aggregate principal amount of the prepayment, and if such notice is given the
Borrower shall, prepay the outstanding principal amounts of the Term Advances
made as part of the same Term Borrowing in whole or ratably in part, together
with accrued interest to the date of such prepayment on the principal amount
prepaid; provided, however, that (i) each partial prepayment shall be in an
aggregate principal amount not less than $10,000,000 (or $5,000,000 in the case
of any prepayment of Base Rate Advances) or, in either case, larger multiples of
$1,000,000 and (ii) in the case of any such prepayment of an Eurodollar Rate
Advance, the Borrower shall be obligated to reimburse the Lenders in respect
thereof pursuant to Section 8.04(b) on the date of such prepayment.
SECTION 2.10. Increased Costs. (a) If on or after the date of
this Agreement, any Lender determines that (i) the introduction of or any change
(other than any change by way of imposition or increase of reserve requirements,
included in the Eurodollar Rate Reserve Percentage) in or in the interpretation
of any law or regulation or (ii) the compliance with any guideline or request
from any central bank or other governmental authority (whether or not having the
force of law) shall increase the cost to such Lender of agreeing to make or
making, funding or maintaining Eurodollar Rate Advances, then the Borrower shall
from time to time, upon demand by such Lender (with a copy of such demand to the
Administrative Agent), pay to the Administrative Agent for the account of such
Lender additional amounts (without duplication of any amount payable pursuant to
Section 2.13) sufficient to compensate such Lender for such increased cost;
provided, that no Lender shall be entitled to demand such compensation more than
90 days following the last day of the Interest Period in respect of which such
demand is made; provided further, however, that the foregoing proviso shall in
no way limit the right of any Lender to demand or receive such compensation to
the extent that such compensation relates to the retroactive application of any
law, regulation, guideline or request described in clause (i) or (ii) above if
such demand is made within 90 days after the implementation of such retroactive
law, interpretation, guideline or request. A certificate as to the amount of
such increased cost, submitted to the Borrower and the Administrative Agent by
such Lender, shall be conclusive and binding for all purposes, absent manifest
error.
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<PAGE>
(b) If any Lender determines that, after the date of this
Agreement, compliance with any law or regulation or any guideline or request
from any central bank or other governmental authority (whether or not having the
force of law) regarding capital adequacy requirements affects or would affect
the amount of capital required or expected to be maintained by such Lender or
any corporation controlling such Lender and that the amount of such capital is
increased by or based upon the existence of such Lender's commitment to lend
hereunder and other commitments of this type or the Advances made by such
Lender, then, upon demand by such Lender (with a copy of such demand to the
Administrative Agent), the Borrower shall immediately pay to the Administrative
Agent for the account of such Lender, from time to time as specified by such
Lender, additional amounts sufficient to compensate such Lender or such
corporation in the light of such circumstances, to the extent that such Lender
determines such increase in capital to be allocable to the existence of such
Lender's commitment to lend hereunder or the Advances made by such Lender;
provided, that no Lender shall be entitled to demand such compensation more than
one year following the payment to or for the account of such Lender of all other
amounts payable hereunder and under any Note held by such Lender and the
termination of such Lender's Commitment; provided further, however, that the
foregoing proviso shall in no way limit the right of any Lender to demand or
receive such compensation to the extent that such compensation relates to the
retroactive application of any law, regulation, guideline or request described
above if such demand is made within one year after the implementation of such
retroactive law, interpretation, guideline or request. A certificate as to such
amounts submitted to the Borrower and the Administrative Agent by such Lender
shall be conclusive and binding, for all purposes, absent manifest error.
(c) Any Lender claiming compensation pursuant to this Section
2.10 shall use its best efforts (consistent with its internal policy and legal
and regulatory restrictions) to change the jurisdiction of its Applicable
Lending Office if the making of such a change would avoid the need for, or
reduce the amount of, any such compensation that may thereafter accrue and would
not, in the reasonable judgment of such Lender, be otherwise disadvantageous to
such Lender.
SECTION 2.11. Illegality. Notwithstanding any other provision
of this Agreement, if any Lender shall notify the Administrative Agent that the
introduction of or any change in or in the interpretation of any law or
regulation makes it unlawful, or any central bank or other governmental
authority asserts that it is unlawful, for such Lender or its Eurodollar Lending
Office to perform its obligations hereunder to make Eurodollar Rate Advances or
to fund or maintain Eurodollar Rate Advances hereunder, (i) the obligation of
such Lender to make, or to Convert Advances into, Eurodollar Rate Advances shall
be suspended (subject to the following paragraph of this Section 2.11) until the
Administrative Agent shall notify the Borrower and the Lenders that the
circumstances causing such suspension no longer exist and (ii) all Eurodollar
Rate Advances of such Lender then outstanding shall, on the last day of then
applicable Interest Period (or such earlier date as such Lender shall designate
upon not less than five Business Days prior written notice to the Administrative
Agent), be automatically Converted into Base Rate Advances.
If the obligation of any Lender to make, fund or maintain
Eurodollar Rate Advances has been suspended pursuant to the preceding paragraph,
then, unless and until the Administrative Agent shall notify the Borrower and
the Lenders that the circumstances causing such suspension no longer exist (i)
all Advances that would otherwise be made by such Lender as Eurodollar Rate
Advances shall instead be made as Base Rate Advances and (ii) to the extent that
Eurodollar Rate Advances of such Lender have been Converted into Base Rate
Advances pursuant to the preceding paragraph or made instead as Base Rate
Advances pursuant to the preceding clause (i), all payments and prepayments of
principal that would have otherwise been applied to such Eurodollar Rate
Advances of such Lender shall be applied instead to such Base Rate Advances of
such Lender.
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SECTION 2.12. Payments and Computations. (a) The Borrower
shall make each payment hereunder and under the Notes not later than 10:00 A.M.
(Chicago time) on the day when due in U.S. dollars to the Administrative Agent
at its address referred to in Section 8.02 in same day funds. The Administrative
Agent will promptly thereafter cause to be distributed like funds relating to
the payment of principal or interest or facility fees ratably (other than
amounts payable pursuant to Section 2.02(c), 2.06, 2.10, 2.13 or 8.04(b)) to the
Lenders for the account of their respective Applicable Lending Offices, and like
funds relating to the payment of any other amount payable to any Lender to such
Lender for the account of its Applicable Lending Office, in each case to be
applied in accordance with the terms of this Agreement. Upon its acceptance of
an Assignment and Acceptance and recording of the information contained therein
in the Register pursuant to Section 8.07(d), from and after the effective date
specified in such Assignment and Acceptance, the Administrative Agent shall make
all payments hereunder and under the Notes in respect of the interest assigned
thereby to the Lender assignee thereunder, and the parties to such Assignment
and Acceptance shall make all appropriate adjustments in such payments for
periods prior to such effective date directly between themselves.
(b) The Borrower hereby authorizes each Lender, if and to the
extent payment owed to such Lender is not made when due hereunder or under any
Note held by such Lender, to charge from time to time against any or all of the
Borrower's accounts with such Lender any amount so due.
(c) All computations of interest based on the Base Rate shall
be made by the Administrative Agent on the basis of a year of 365 or 366 days,
as the case may be, and all computations of interest based on the Eurodollar
Rate or the Federal Funds Rate shall be made by the Administrative Agent, and
all computations of interest pursuant to Section 2.06 shall be made by a Lender,
on the basis of a year of 360 days, in each case for the actual number of days
(including the first day but excluding the last day) occurring in the period for
which such interest is payable. Each determination by the Administrative Agent
(or, in the case of Section 2.06, by a Lender) of an interest rate hereunder
shall be conclusive and binding for all purposes, absent manifest error.
(d) Whenever any payment hereunder or under the Notes shall be
stated to be due on a day other than a Business Day, such payment shall be made
on the next succeeding Business Day, and such extension of time shall in such
case be included in the computation of payment of interest, provided, however,
if such extension would cause payment of interest on or principal of Eurodollar
Rate Advances to be made in the next following calendar month, such payment
shall be made on the next preceding Business Day.
(e) Unless the Administrative Agent shall have received notice
from the Borrower prior to the date on which any payment is due to the Lenders
hereunder that the Borrower will not make such payment in full, the
Administrative Agent may assume that the Borrower has made such payment in full
to the Administrative Agent on such date and the Administrative Agent may, in
reliance upon such assumption, cause to be distributed to each Lender on such
due date an amount equal to the amount then due such Lender. If and to the
extent that the Borrower shall not have so made such payment in full to the
Administrative Agent, each Lender shall repay to the Administrative Agent
forthwith on demand such amount distributed to such Lender together with
interest thereon, for each day from the date such amount is distributed to such
Lender until the date such Lender repays such amount to the Administrative
Agent, at the Federal Funds Rate.
(f) Notwithstanding anything to the contrary contained herein,
any amount payable by the Borrower hereunder or under any Note that is not paid
when due (whether at stated maturity, by acceleration or otherwise) shall (to
the fullest extent permitted by law) bear interest from the date when due until
paid in full at a rate per annum equal at all times to the Base Rate plus 2%,
payable upon demand.
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SECTION 2.13. Taxes. (a) Any and all payments by the Borrower
hereunder or under the Notes shall be made, in accordance with Section 2.12,
free and clear of and without deduction for any and all present or future taxes,
levies, imposts, deductions, charges or withholdings, and all liabilities with
respect thereto, excluding, in the case of each Lender and the Administrative
Agent, taxes imposed on its income, and franchise taxes imposed on it, by the
jurisdiction under the laws of which such Lender or the Administrative Agent (as
the case may be) is organized or any political subdivision thereof and, in the
case of each Lender, taxes imposed on its income, and franchise taxes imposed on
it, by the jurisdiction of such Lender's Applicable Lending Office or any
political subdivision thereof (all such non-excluded taxes, levies, imposts,
deductions, charges, withholdings and liabilities being hereinafter referred to
as "Taxes"). If the Borrower shall be required by law to deduct any Taxes from
or in respect of any sum payable hereunder or under any Note to any Lender or
the Administrative Agent, (i) the sum payable shall be increased as may be
necessary so that after making all required deductions (including deductions
applicable to additional sums payable under this Section 2.13) such Lender or
the Administrative Agent (as the case may be) receives an amount equal to the
sum it would have received had no such deductions been made, (ii) the Borrower
shall make such deductions and (iii) the Borrower shall pay the full amount
deducted to the relevant taxation authority or other authority in accordance
with applicable law.
(b) In addition, the Borrower agrees to pay any present or
future stamp or documentary taxes or any other excise or property taxes, charges
or similar levies to the extent arising from the execution, delivery or
registration of this Agreement or the Notes (hereinafter referred to as "Other
Taxes").
(c) No Lender may claim or demand payment or reimbursement in
respect of any Taxes or Other Taxes pursuant to this Section 2.13 if such Taxes
or Other Taxes, as the case may be, were imposed solely as the result of a
voluntary change in the location of the jurisdiction of such Lender's Applicable
Lending Office.
(d) The Borrower will indemnify each Lender and the
Administrative Agent for the full amount of Taxes or Other Taxes (including,
without limitation, any Taxes or Other Taxes imposed by any jurisdiction on
amounts payable under this Section 2.13) paid by such Lender or the
Administrative Agent (as the case may be) and any liability (including
penalties, interest and expenses) arising therefrom or with respect thereto,
whether or not such Taxes or Other Taxes were correctly or legally asserted.
This indemnification shall be made within 30 days from the date such Lender or
the Administrative Agent (as the case may be) makes written demand therefor.
(e) Prior to the Closing Date in the case of each Bank, and on
the date of the Assignment and Acceptance pursuant to which it became a Lender
in the case of each other Lender, and from time to time thereafter within 30
days from the date of request if requested by the Borrower or the Administrative
Agent, each Lender organized under the laws of a jurisdiction outside the United
States shall provide the Administrative Agent and the Borrower with the forms
prescribed by the Internal Revenue Service of the United States certifying that
such Lender is exempt from United States withholding taxes with respect to all
payments to be made to such Lender hereunder and under the Notes. If for any
reason during the term of this Agreement, any Lender becomes unable to submit
the forms referred to above or the information or representations contained
therein are no longer accurate in any material respect, such Lender shall notify
the Administrative Agent and the Borrower in writing to that effect. Unless the
Borrower and the Administrative Agent have received forms or other documents
satisfactory to them indicating that payments hereunder or under any Note are
not subject to United States withholding tax, the Borrower or the Administrative
Agent shall withhold taxes from such payments at the applicable statutory rate
in the case of payments to or for any Lender organized under the laws of a
jurisdiction outside the United States and no Lender may claim or demand payment
or reimbursement for such withheld taxes pursuant to this Section 2.13.
(f) Any Lender claiming any additional amounts payable
pursuant to this Section 2.13 shall use its best efforts (consistent with its
internal policy and legal and regulatory restrictions) to change the
jurisdiction of its Applicable Lending Office if the making of such a change
would avoid the need for, or reduce the amount of, any such additional amounts
which may thereafter accrue and would not, in the reasonable judgment of such
Lender, be otherwise disadvantageous to such Lender.
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(g) If the Borrower makes any additional payment to any Lender
pursuant to this Section 2.13 in respect of any Taxes or Other Taxes, and such
Lender determines that it has received (i) a refund of such Taxes or Other Taxes
or (ii) a credit against or relief or remission for, or a reduction in the
amount of, any tax or other governmental charge attributable solely to any
deduction or credit for any Taxes or Other Taxes with respect to which it has
received payments under this Section 2.13, such Lender shall, to the extent that
it can do so without prejudice to the retention of such refund, credit, relief,
remission or reduction, pay to the Borrower such amount as such Lender shall
have determined to be attributable to the deduction or withholding of such Taxes
or Other Taxes. If, within one year after the payment of any such amount to the
Borrower, such Lender determines that it was not entitled to such refund,
credit, relief, remission or reduction to the full extent of any payment made
pursuant to the first sentence of this Section 2.13(g), the Borrower shall upon
notice and demand of such Lender promptly repay the amount of such overpayment.
Any determination made by such Lender pursuant to this Section 2.13(g) shall in
the absence of bad faith or manifest error be conclusive, and nothing in this
Section 2.13(g) shall be construed as requiring any Lender to conduct its
business or to arrange or alter in any respect its tax or financial affairs
(except as required by Section 2.13(f)) so that it is entitled to receive such a
refund, credit or reduction or as allowing any person to inspect any records,
including tax returns, of any Lender.
(h) Without prejudice to the survival of any other agreement
of the Borrower or any Lender hereunder, the agreements and obligations of the
Borrower and the Lenders contained in this Section 2.13 shall survive the
payment in full of principal and interest hereunder and under the Notes;
provided, that no Lender shall be entitled to demand any payment under this
Section 2.13 more than one year following the payment to or for the account of
such Lender of all other amounts payable hereunder and under any Note held by
such Lender and the termination of such Lender's Commitment; provided further,
however, that the foregoing proviso shall in no way limit the right of any
Lender to demand or receive any payment under this Section 2.13 to the extent
that such payment relates to the retroactive application of any Taxes or Other
Taxes if such demand is made within one year after the implementation of such
Taxes or Other Taxes.
SECTION 2.14. Sharing of Payments, Etc. If any Lender shall
obtain any payment (whether voluntary, involuntary, through the exercise of any
right of set-off, or otherwise) on account of the Term Advances made by it
(other than pursuant to Section 2.02(c), 2.06, 2.10, 2.13 or 8.04(b)) in excess
of its ratable share of payments on account of the Term Advances obtained by all
the Lenders, such Lender shall forthwith purchase from the other Lenders such
participations in the Term Advances made by them as shall be necessary to cause
such purchasing Lender to share the excess payment ratably with each of them,
provided, however, that if all or any portion of such excess payment is
thereafter recovered from such purchasing Lender, such purchase from each Lender
shall be rescinded and such Lender shall repay to the purchasing Lender the
purchase price to the extent of such recovery together with an amount equal to
such Lender's ratable share (according to the proportion of (i) the amount of
such Lender's required repayment to (ii) the total amount so recovered from the
purchasing Lender) of any interest or other amount paid or payable by the
purchasing Lender in respect of the total amount so recovered. The Borrower
agrees that any Lender so purchasing a participation from another Lender
pursuant to this Section 2.14 may, to the fullest extent permitted by law,
exercise all its rights of payment (including the right of set-off) with respect
to such participation as fully as if such Lender were the direct creditor of the
Borrower in the amount of such participation.
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ARTICLE III
CONDITIONS OF LENDING
SECTION 3.01. Conditions Precedent to Term Borrowings. The
obligation of each Lender to make its Term Advances on the Closing Date is
subject to the satisfaction, prior to or concurrently with, the making of the
Term Advances, of each of the following conditions precedent:
(a) Documents and Other Agreements. The Administrative Agent
shall have received on or before the Closing Date the following, each dated the
Closing Date, in form and substance satisfactory to the Administrative Agent and
(except for the Notes) with one copy for each Lender:
(i) The Notes payable to the order of each of the
Lenders, respectively;
(ii) Certified copies of the resolutions of the Board
of Directors of the Borrower approving the transactions
contemplated by this Agreement and the Notes, and of all
documents evidencing other necessary corporate action with
respect to this Agreement and the Notes;
(iii) A certificate of the Secretary or an Assistant
Secretary of the Borrower certifying (A) the names and true
signatures of the officers of the Borrower authorized to sign
this Agreement and the Notes and the other documents to be
delivered hereunder; (B) that attached thereto are true and
correct copies of the Restated Articles of Incorporation and
the By-laws of the Borrower, in each case in effect on such
date; (C) that attached thereto are true and correct copies of
all governmental and regulatory authorizations and approvals
required for the due execution, delivery and performance of
this Agreement and the Notes, including, without limitation,
the Securities Certificate filed with the PPUC by the Borrower
(the "Securities Certificate") and the Order of Registration
issued by the PPUC registering the Securities Certificate (the
"Order of Registration") and (D) that attached thereto is a
subsistence certificate from the Secretary of the Commonwealth
of Pennsylvania dated as of a recent date;
(iv) Copies of the financial statements referred to
in Section 4.01(e);
(v) A favorable opinion of Ballard Spahr Andrews &
Ingersoll, special counsel for the Borrower, substantially in
the form of Exhibit D hereto; and
(vi) A favorable opinion of Reed Smith Shaw & McClay
LLP, counsel for the Documentation Agent, substantially in the
form of Exhibit E hereto.
(b) Representations and Warranties; Events of Default.
(i) The representations and warranties contained in
Section 4.01 shall be correct on and as of the Closing Date,
before and after giving effect to the Term Borrowings and to
the application of the proceeds therefrom, as though made on
and as of the Closing Date;
(ii) No event shall have occurred and be continuing,
or shall result from the Term Borrowings or from the
application of the proceeds therefrom, that constitutes an
Event of Default or would constitute an Event of Default but
for the requirement that notice be given or time elapse or
both (it being understood for clarification that (A) without
limiting the foregoing, it is a condition of this clause (ii)
that the Borrower shall be in compliance with Section
5.01(a)(iv), Section 5.02(a) and Section 5.02(c) upon giving
effect to Term Borrowings, and (B) the conditions of this
clause (ii) shall apply whether or not the respective
Commitments of the Lenders have been terminated pursuant to
Section 6.01); and
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(iii) The Administrative Agent shall have received a
certificate dated the Closing Date signed by either the chief
financial officer, principal accounting officer or treasurer
of the Borrower stating that (A) the representations and
warranties contained in Section 4.01 are correct on and as of
the Closing Date as though made on and as of the Closing Date
and (B) no event has occurred and is continuing on the Closing
Date that constitutes an Event of Default or would constitute
an Event of Default but for the requirement that notice be
given or time elapse or both.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
SECTION 4.01. Representations and Warranties of the Borrower.
The Borrower represents and warrants as follows:
(a) The Borrower is a corporation duly organized, validly
existing and in good standing under the laws of the Commonwealth of
Pennsylvania.
(b) The execution, delivery and performance by the Borrower of
this Agreement and the Notes are within the Borrower's corporate powers, have
been duly authorized by all necessary corporate action, and do not and will not
contravene (i) the Borrower's Restated Articles of Incorporation or By-laws,
(ii) applicable law or (iii) any contractual or legal restriction binding on or
affecting the Borrower or its properties.
(c) No authorization or approval or other action by, and no
notice to or filing with, any governmental authority or regulatory body is
required for the due execution, delivery and performance by the Borrower of this
Agreement or the Notes except for the filing of the Securities Certificate with,
and the final approval of, and the Order of Registration issued by, the PPUC,
which filing has been duly made and which final approval and Order of
Registration have been duly obtained; such Order of Registration is in full
force and effect and is final; and on and after the date of the initial
Borrowing hereunder, the action of the PPUC registering the Securities
Certificate shall no longer be subject to appeal.
(d) This Agreement is, and the Notes when delivered hereunder
will be, legal, valid and binding obligations of the Borrower enforceable
against the Borrower in accordance with their respective terms, except as the
enforceability thereof may be limited by equitable principles or bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting the enforcement
of creditors' rights generally.
(e) The consolidated balance sheet of the Borrower and its
Subsidiaries as at December 31, 1997, and the related statements of income and
retained earnings and of cash flows of the Borrower and its Subsidiaries for the
fiscal year then ended, certified by Coopers & Lybrand, and the unaudited
consolidated balance sheet of the Borrower and its Subsidiaries as at June 30,
1998 and the related unaudited statements of income for the six-month period
then ended, copies of which have been furnished to each Lender, fairly present
in all material respects (subject, in the case of such balance sheets and
statements of income for the period ended June 30, 1998, to year-end
adjustments) the consolidated financial condition of the Borrower and its
Subsidiaries as at such dates and the consolidated results of the operations of
the Borrower and its Subsidiaries for the periods ended on such dates, all in
accordance with GAAP, and since December 31, 1997, there has been no Material
Adverse Change.
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(f) Except as disclosed in the Borrower's Annual, Quarterly or
Current Reports, each as filed with the Securities and Exchange Commission and
delivered to the Lenders (including reports filed prior to the date of execution
and delivery of this Agreement and reports delivered to the Lenders pursuant to
Section 5.01(b)), there is no pending or threatened action, investigation or
proceeding affecting the Borrower or any of its Subsidiaries before any court,
governmental agency or arbitrator that may reasonably be anticipated to have a
Material Adverse Effect. There is no pending or threatened action or proceeding
against the Borrower or its Subsidiaries that purports to affect the legality,
validity, binding effect or enforceability of this Agreement or any Note.
(g) No proceeds of any Advance have been or will be used
directly or indirectly in connection with the acquisition of in excess of 5% of
any class of equity securities that is registered pursuant to Section 12 of the
Exchange Act or any transaction subject to the requirements of Section 13 or 14
of the Exchange Act.
(h) The Borrower is not engaged in the business of extending
credit for the purpose of purchasing or carrying margin stock (within the
meaning of Regulation U issued by the Board of Governors of the Federal Reserve
System), and no proceeds of any Advance will be used to purchase or carry any
margin stock or to extend credit to others for the purpose of purchasing or
carrying any margin stock. Not more than 25% of the value of the assets of the
Borrower and its Principal Subsidiaries is represented by margin stock.
(i) The Borrower (i) is exempt from the provisions of the
Public Utility Holding Company Act of 1935, as amended, other than Section
9(a)(2) thereof, pursuant to Section 3(a)(2) thereof, and (ii) is not an
"investment company" or a company "controlled" by an "investment company" within
the meaning of the Investment Company Act of 1940, as amended.
(j) During the twelve consecutive month period prior to the
date of the execution and delivery of this Agreement and prior to the date of
any Borrowing under this Agreement, no steps have been taken to terminate any
Plan, and no contribution failure by the Borrower or any member of the
Controlled Group has occurred with respect to any Plan. No condition exists or
event or transaction has occurred with respect to any Plan (including any
Multiemployer Plan) which might result in the incurrence by the Borrower or any
member of the Controlled Group of any material liability, fine or penalty.
(k) The Borrower is reviewing its operations and those of its
Subsidiaries with a view to assessing whether its businesses, or the business of
any of its Subsidiaries, (i) will be vulnerable to a Year 2000 Problem or (ii)
will be vulnerable to the effects of a Year 2000 Problem suffered by the
Borrower's or any of its Subsidiaries' major counterparties, in the case of
clause (ii), as described in the Borrower's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1998. The Borrower represents and warrants that
it does not believe that any Year 2000 Problem will impair the Borrower's
ability to pay principal or interest on the Notes in accordance with their
terms.
ARTICLE V
COVENANTS OF THE BORROWER
SECTION 5.01. Affirmative Covenants. So long as any Note or
any amount payable by the Borrower hereunder shall remain unpaid or any Lender
shall have any Commitment hereunder (except with respect to subsection (a)(iv),
which shall be applicable only as of the date hereof and at any time that any
Advance is outstanding hereunder), the Borrower will, and, in the case of
Section 5.01(a), will cause its Principal Subsidiaries to, unless the Majority
Lenders shall otherwise consent in writing:
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(a) Keep Books; Corporate Existence; Maintenance of
Properties; Compliance with Laws; Insurance; Taxes.
(i) keep proper books of record and account, all in
accordance with generally accepted accounting principles;
(ii) subject to Section 5.02(b), preserve and keep in
full force and effect its existence;
(iii) maintain and preserve all of its properties
(except such properties the failure of which to maintain or
preserve would not have, individually or in the aggregate, a
Material Adverse Effect) which are used or useful in the
conduct of its business in good working order and condition,
ordinary wear and tear excepted;
(iv) comply in all material respects with the
requirements of all applicable laws, rules, regulations and
orders (including those of any governmental authority and
including with respect to environmental matters) to the extent
the failure to so comply, individually or in the aggregate,
would have either a Material Adverse Effect or a material
adverse effect on the ability of the Borrower to perform its
obligations under this Agreement and the Notes;
(v) maintain insurance with responsible and reputable
insurance companies or associations, or self-insure, as the
case may be, in each case in such amounts and covering such
contingencies, casualties and risks as is customarily carried
by or self-insured against by companies engaged in similar
businesses and owning similar properties in the same general
areas in which the Borrower and its Principal Subsidiaries
operate;
(vi) at any reasonable time and from time to time,
pursuant to prior notice delivered to the Borrower, permit any
Lender, or any agents or representatives of any thereof, to
examine and, at such Lender's expense, make copies of, and
abstracts from the records and books of account of, and visit
the properties of, the Borrower and any of its Principal
Subsidiaries and to discuss the affairs, finances and accounts
of the Borrower and any of its Subsidiaries with any of their
respective officers; provided, that any non-public information
(which has been identified as such by the Borrower) obtained
by any Lender, or any of their respective agents or
representatives pursuant to this subsection (vi) shall be
treated confidentially by such Person; provided, further, that
such Person may disclose such information to any other party
to this Agreement, its examiners, affiliates, outside
auditors, counsel or other professional advisors in connection
with the Agreement or if otherwise required to do so by law or
regulatory process;
(vii) use the proceeds of the Advances for working
capital and general corporate purposes (including, without
limitation, the refinancing of its commercial paper, the
repayment of outstanding Advances, the repayment of other
outstanding Debt and the making of acquisitions) but in no
event for any purpose which would be contrary to clause (g) or
clause (h) of Section 4.01;
(viii) take the actions and commit the resources
deemed necessary by the National Electric Reliance Counsel
("NERC"), the Mid-Atlantic Area Counsel, the Nuclear
Regulatory Commission and the PUC to mitigate against the Year
2000 Problem; and
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(ix) at the request of the Administrative Agent,
provide the Administrative Agent with any reports submitted by
Borrower to the NERC relating to the Year 2000 Problem, within
a reasonable time after such request.
(b) Reporting Requirements. Furnish to the Lenders:
(i) as soon as possible, and in any event within 5
Business Days after the occurrence of each Event of Default or
each event which, with the giving of notice or lapse of time,
or both, would constitute an Event of Default, continuing on
the date of such statement, a statement of an authorized
officer of the Borrower setting forth details of such Event of
Default or event and the action which the Borrower proposes to
take with respect thereto;
(ii) as soon as available and in any event within 60
days after the end of each of the first three quarters of each
fiscal year of the Borrower, a copy of the Borrower's
Quarterly Report on Form 10-Q filed with the Securities and
Exchange Commission with respect to such quarter, together
with a certificate of an authorized officer of the Borrower
stating that no Event of Default, or event which, with notice
or lapse of time or both, would constitute an Event of
Default, has occurred and is continuing or, if any Event of
Default or such event has occurred and is continuing, a
statement as to the nature thereof and the action which the
Borrower proposes to take with respect thereto;
(iii) as soon as available and in any event within
105 days after the end of each fiscal year of the Borrower, a
copy of the Borrower's Annual Report on Form 10-K filed with
the Securities and Exchange Commission with respect to such
fiscal year, together with a certificate of an authorized
officer of the Borrower stating that no Event of Default, or
event which, with notice of lapse of time or both, would
constitute an Event of Default, has occurred and is continuing
or, if any Event of Default or such event has occurred and is
continuing, a statement as to the nature thereof and the
action which the Borrower proposes to take with respect
thereto;
(iv) concurrently with the delivery of the annual and
quarterly reports referred to in Sections 5.01(b)(ii) and
5.01(b)(iii), a compliance certificate in substantially the
form set forth in Exhibit F, duly completed and signed by the
Chief Financial Officer, Treasurer or an Assistant Treasurer
of the Borrower;
(v) except as otherwise provided in subsections (ii)
and (iii) above, promptly after the sending or filing thereof,
copies of all reports that the Borrower sends to any of its
security holders, and copies of all Reports on Form 10-K, 10-Q
or 8-K, and registration statements and prospectuses that the
Borrower or any of its Subsidiaries files with the Securities
and Exchange Commission or any national securities exchange
(except to the extent that any such registration statement or
prospectus relates solely to the issuance of securities
pursuant to employee or dividend reinvestment plans of the
Borrower or such Subsidiary);
(vi) promptly upon becoming aware of the institution
of any steps by the Borrower or any other Person to terminate
any Plan, or the failure to make a required contribution to
any Plan if such failure is sufficient to give rise to a lien
under section 302(f) of ERISA, or the taking of any action
with respect to a Plan which could result in the requirement
that the Borrower furnish a bond or other security to the PBGC
or such Plan, or the occurrence of any event with respect to
any Plan, which could result in the incurrence by the Borrower
or any member of the Controlled Group of any material
liability, fine or penalty; and
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(vii) such other information respecting the
condition, operations, business or prospects, financial or
otherwise, of the Borrower or any of its Subsidiaries as any
Lender, through the Administrative Agent, may from time to
time reasonably request.
SECTION 5.02. Negative Covenants. So long as any Note or any
amount payable by the Borrower hereunder shall remain unpaid or any Lender shall
have any Commitment hereunder (except with respect to subsection (a), which
shall be applicable only as of the date hereof and at any time any Advance is
outstanding hereunder), the Borrower will not, without the written consent of
the Majority Lenders:
(a) Limitation on Liens. Create, incur, assume or suffer to
exist, or permit any of its Principal Subsidiaries to create, incur, assume or
suffer to exist, any Lien on its respective property, revenues or assets,
whether now owned or hereafter acquired except (i) Liens upon or in any property
acquired by the Borrower or any of its Principal Subsidiaries in the ordinary
course of business to secure the purchase price of such property or to secure
any obligation incurred solely for the purpose of financing the acquisition of
such property, (ii) Liens existing on such property at the time of its
acquisition (other than any such Lien created in contemplation of such
acquisition unless permitted by the preceding clause (i)), (iii) Liens granted
under the Mortgage and "excepted encumbrances" as defined in the Mortgage, (iv)
Liens granted in connection with any financing arrangement for the purchase of
nuclear fuel or the financing of pollution control facilities, limited to the
fuel or facilities so purchased or acquired, (v) Liens arising in connection
with sales or transfers of, or financing secured by, accounts receivable or
related contracts, (vi) Liens securing the Borrower's notes collateralized
solely by mortgage bonds of the Borrower issued under the terms of the Mortgage,
(vii) Liens arising in connection with sale and leaseback transactions, but only
to the extent (x) the proceeds received by the Borrower or such Principal
Subsidiary from such sale shall immediately be applied to retire mortgage bonds
of the Borrower issued under the terms of the Mortgage, or (y) the aggregate
purchase price of assets sold pursuant to such sale and leaseback transactions
where such proceeds are not so applied shall not exceed $1,000,000,000, (viii)
Liens granted by a Special Purpose Subsidiary to secure Nonrecourse Transition
Bond Debt of such Special Purpose Subsidiary, and (ix) Liens, other than those
described in clauses (i) through (viii) of this subsection granted by the
Borrower or any of its Principal Subsidiaries in the ordinary course of business
securing Debt of the Borrower and its Principal Subsidiaries in an amount not to
exceed $50,000,000 in the aggregate at any one time outstanding.
(b) Mergers and Consolidations; Disposition of Assets. Merge
with or into or consolidate with or into, or sell, assign, lease or otherwise
dispose of (whether in one transaction or in a series of transactions) all or
substantially all of its assets (whether now owned or hereafter acquired) to any
Person or permit any Principal Subsidiary to do so, except that (i) the Borrower
or any Principal Subsidiary may merge with or into or consolidate with or
transfer assets to any other Principal Subsidiary, (ii) any Principal Subsidiary
may merge with or into or consolidate with or transfer assets to the Borrower
and (iii) the Borrower may merge with or into or consolidate with or transfer
assets to any other Person; provided in each case, immediately thereafter in
giving effect thereto, no Event of Default or event that would, with the giving
of notice or the passage of time or both constitute an Event of Default shall
have occurred and be continuing and (A) in the case of any such merger,
consolidation or transfer of assets to which the Borrower is a party, either (x)
the Borrower shall be the surviving corporation or (y) the surviving corporation
shall be an Eligible Successor and shall have assumed all of the obligations of
the Borrower under this Agreement and the Notes pursuant to a written instrument
in form and substance satisfactory to the Administrative Agent and (B) subject
to clause (A) above, in the case of any such merger to which a Principal
Subsidiary is a party, a Principal Subsidiary shall be the surviving
corporation.
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(c) Financial Covenant. Permit Consolidated Adjusted Total
Debt to exceed 65% of Consolidated Adjusted Total Capitalization at any time.
(d) Continuation of Businesses.
(i) Generation Business. (A) Cease to own (through
the Borrower or wholly-owned Subsidiaries) the business of
generating electricity, or (B) reduce the net installed
electric generating capacity (summer rating) of the
electricity generation business owned by the Borrower and its
wholly-owned Subsidiaries taken as a whole to less than 7821
Megawatts.
(ii) Distribution, Transmission and Gas Businesses.
Cease to own (directly by the Borrower, and not through
Subsidiaries) the business of distributing electricity to
end-users, the business of transmitting electricity, or the
businesses of transmitting and distributing natural gas, each
substantially as conducted by the Borrower as of the date of
this Agreement (and the Borrower warrants that as of the date
of this Agreement substantially all of such businesses
conducted by the Borrower on a consolidated basis, and the
assets relating thereto, are operated and owned by the
Borrower directly and not through Subsidiaries).
ARTICLE VI
EVENTS OF DEFAULT
SECTION 6.01. Events of Default. If any of the following
events ("Events of Default") shall occur and be continuing:
(a) The Borrower shall fail to pay any principal of any Term
Advance when the same becomes due and payable, or interest thereon or any other
amount payable under this Agreement or any of the Notes within three Business
Days after the same becomes due and payable; or
(b) Any representation or warranty made by the Borrower herein
or by the Borrower (or any of its officers) pursuant to the terms of this
Agreement shall prove to have been incorrect or misleading in any material
respect when made; or
(c) The Borrower shall fail to perform or observe (i) any
term, covenant or agreement contained in Section 5.02, Section 5.01(a)(vii) or
Section 5.01(b)(i), or (ii) any other term, covenant or agreement contained in
this Agreement on its part to be performed or observed if the failure to perform
or observe such other term, covenant or agreement shall remain unremedied for 30
days after written notice thereof shall have been given to the Borrower by the
Administrative Agent (which notice shall be given by the Administrative Agent at
the written request of any Lender); or
(d) The Borrower or any Principal Subsidiary shall fail to pay
any principal of or premium or interest on any Debt that is outstanding in a
principal amount in excess of $50,000,000 in the aggregate (but excluding Debt
evidenced by the Notes and Nonrecourse Transition Bond Debt) of the Borrower or
such Principal Subsidiary (as the case may be) when the same becomes due and
payable (whether by scheduled maturity, required prepayment, acceleration,
demand or otherwise), and such failure shall continue after the applicable grace
period, if any, specified in the agreement or instrument relating to such Debt;
or any other event shall occur or condition shall exist under any agreement or
instrument relating to any such Debt and shall continue after the applicable
grace period, if any, specified in such agreement or instrument, if the effect
of such event or condition is to accelerate, or to permit the acceleration of,
the maturity of such Debt; or any such Debt shall be declared to be due and
payable, or required to be prepaid (other than by a regularly scheduled required
prepayment), prior to the stated maturity thereof, other than any acceleration
of any Debt secured by equipment leases or fuel leases of the Borrower or a
Principal Subsidiary as a result of the occurrence of any event requiring a
prepayment (whether or not characterized as such) thereunder, which prepayment
will not result in a Material Adverse Change; or
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(e) The Borrower or any Principal Subsidiary (other than a
Special Purpose Subsidiary) shall generally not pay its debts as such debts
become due, or shall admit in writing its inability to pay its debts generally,
or shall make a general assignment for the benefit of creditors; or any
proceeding shall be instituted by or against the Borrower or any Principal
Subsidiary (other than a Special Purpose Subsidiary) seeking to adjudicate it a
bankrupt or insolvent, or seeking liquidation, winding up, reorganization,
arrangement, adjustment, protection, relief, or composition of it or its debts
under any law relating to bankruptcy, insolvency or reorganization or relief of
debtors, or seeking the entry of an order for relief or the appointment of a
receiver, trustee, custodian or other similar official for it or for any
substantial part of its property and, in the case of any such proceeding
instituted against it (but not instituted by it), either such proceeding shall
remain undismissed or unstayed for a period of 60 days, or any of the actions
sought in such proceeding (including, without limitation, the entry of an order
for relief against, or the appointment of a receiver, trustee, custodian or
other similar official for, it or for any substantial part of its property,)
shall occur; or the Borrower or any Principal Subsidiary (other than a Special
Purpose Subsidiary) shall take any corporate action to authorize or to consent
to any of the actions set forth above in this subsection (e); or
(f) One or more judgments or orders for the payment of money
in an aggregate amount exceeding $50,000,000 (excluding any such judgments or
orders which are fully covered by insurance, subject to any customary
deductible, and under which the applicable insurance carrier has acknowledged
such full coverage in writing) shall be rendered against the Borrower or any
Principal Subsidiary and either (i) enforcement proceedings shall have been
commenced by any creditor upon such judgment or order or (ii) there shall be any
period of 30 consecutive days during which a stay of enforcement of such
judgment or order, by reason of a pending appeal or otherwise, shall not be in
effect; or
(g) (i) any Reportable Event that the Majority Lenders
determine in good faith might constitute grounds for the termination of any Plan
or for the appointment by the appropriate United States District Court of a
trustee to administer a Plan shall have occurred and be continuing 30 days after
written notice to such effect shall have been given to the Borrower by the
Administrative Agent or (ii) any Plan shall be terminated, or (iii) a Trustee
shall be appointed by an appropriate United States District Court to administer
any Plan or (iv) the PBGC shall institute proceedings to terminate any Plan or
to appoint a trustee to administer any Plan; provided, however that on the date
of any event described in clauses (i) through (iv) above the Unfunded
Liabilities of such Plan exceed $20,000,000; or
(h) any "Event of Default" shall occur under either of the
Existing Credit Agreements;
then, and in any such event, the Administrative Agent (i) shall at the request,
or may with the consent, of the Majority Lenders, by notice to the Borrower,
declare the respective Commitments of the Lenders to be terminated, whereupon
the same shall forthwith terminate, and (ii) shall at the request, or may with
the consent, of the Majority Lenders, by notice to the Borrower, declare the
principal amount outstanding under the Notes, all interest thereon and all other
amounts payable under this Agreement to be forthwith due and payable, whereupon
the principal amount outstanding under the Notes, all such interest and all such
amounts shall become and be forthwith due and payable, without presentment,
demand, protest or further notice of any kind, all of which are hereby expressly
waived by the Borrower; provided, however, that in the event of an actual or
deemed entry of an order for relief with respect to the Borrower or any
Principal Subsidiary under the Federal Bankruptcy Code, (A) the Commitments
shall automatically be terminated and (B) the principal amount outstanding under
the Notes, all such interest and all such amounts shall automatically become and
be due and payable, without presentment, demand, protest or any notice of any
kind, all of which are hereby expressly waived by the Borrower.
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ARTICLE VII
THE AGENTS
SECTION 7.01. Authorization and Action. Each Lender hereby
appoints and authorizes the Administrative Agent to take such action as
administrative agent on its behalf and to exercise such powers under this
Agreement as are delegated to the Administrative Agent by the terms hereof,
together with such powers as are reasonably incidental thereto. Each Lender
hereby appoints and authorizes the Administrative Agent to prepare this
Agreement and the Notes on behalf of the Lenders. As to any matters not
expressly provided for by this Agreement (including, without limitation,
enforcement or collection of the Notes), the Administrative Agent shall not be
required to exercise any discretion or take any action, but shall be required to
act or to refrain from acting (and shall be fully protected in so acting or
refraining from acting) upon the instructions of the Majority Lenders, and such
instructions shall be binding upon all Lenders and all holders of Notes;
provided, however, that the Administrative Agent shall not be required to take
any action which exposes the Administrative Agent to personal liability or which
is contrary to this Agreement or applicable law. The Administrative Agent agrees
to give to each Lender prompt notice of each notice given to it by the Borrower
pursuant to the terms of this Agreement.
SECTION 7.02. Agents' Reliance, Etc. Neither the
Administrative Agent nor any of its directors, officers, agents or employees
shall be liable for any action taken or omitted to be taken by it or them under
or in connection with this Agreement, except for its or their respective own
gross negligence or willful misconduct. Without limitation of the generality of
the foregoing: (i) the Administrative Agent may treat the payee of any Note as
the holder thereof until the Administrative Agent receives and accepts an
Assignment and Acceptance entered into by the Lender which is the payee of such
Note, as assignor, and an Eligible Assignee, as assignee, as provided in Section
8.07; (ii) the Administrative Agent may consult with legal counsel (including
counsel for the Borrower), independent public accountants and other experts
selected by it and shall not be liable for any action taken or omitted to be
taken in good faith by it in accordance with the advice of such counsel,
accountants or experts; (iii) the Administrative Agent makes no warranty or
representation to any Lender and shall not be responsible to any Lender for any
statements, warranties or representations (whether written or oral) made in or
in connection with this Agreement; (iv) the Administrative Agent shall have no
duty to ascertain or to inquire as to the performance or observance of any of
the terms, covenants or conditions of this Agreement on the part of the Borrower
or to inspect the property (including the books and records) of the Borrower;
(v) the Administrative Agent shall not be responsible to any Lender for the due
execution, legality, validity, enforceability, genuineness, sufficiency or value
of this Agreement or any other instrument or document furnished pursuant hereto;
and (vi) the Administrative Agent shall not incur any liability under or in
respect of this Agreement by acting upon any notice, consent, certificate or
other instrument or writing (which may be by telecopier, telegram, cable or
telex) believed by it to be genuine and signed or sent by the proper party or
parties.
SECTION 7.03. Agents and Affiliates. With respect to its
Commitment, Advances and their respective Note, First Chicago shall have the
same rights and powers under this Agreement as any other Lender and may exercise
the same as though it were not an Agent; and the term "Lender" or "Lenders"
shall, unless otherwise expressly indicated, include First Chicago in its
individual capacity. First Chicago and its affiliates may accept deposits from,
lend money to, act as trustee under indentures of, and generally engage in any
kind of business with, the Borrower, any of its subsidiaries and any Person who
may do business with or own securities of the Borrower or any such subsidiary,
all as if First Chicago was not the Administrative Agent and without any duty to
account therefor to the Lenders.
SECTION 7.04. Lender Credit Decision. Each Lender acknowledges
that it has, independently and without reliance upon the Administrative Agent,
or any other Lender and based on the financial statements referred to in Section
4.01(e) and such other documents and information as it has deemed appropriate,
made its own credit analysis and decision to enter into this Agreement. Each
Lender also acknowledges that it will, independently and without reliance upon
the Administrative Agent or any other Lender and based on such documents and
information as it shall deem appropriate at the time, continue to make its own
credit decisions in taking or not taking action under this Agreement.
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SECTION 7.05. Indemnification. The Lenders agree to indemnify
the Administrative Agent, the Documentation Agent and the Syndication Agent (to
the extent not reimbursed by the Borrower), ratably according to the respective
principal amounts of the Notes then held by each of the Lenders (or if no Notes
are at the time outstanding, ratably according to the respective amounts of
their Commitments), from and against any and all liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements of any kind or nature whatsoever which may be imposed on, incurred
by, or asserted against any such Agent in any way relating to or arising out of
this Agreement or any action taken or omitted by any such Agent under this
Agreement, provided that no Lender shall be liable for any portion of such
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses or disbursements resulting from such Agent's gross negligence or
willful misconduct. Without limitation of the foregoing, each Lender agrees to
reimburse each such Agent promptly upon demand for its ratable share of any
out-of-pocket expenses (including reasonable counsel fees) incurred by such
Agent in connection with the preparation, execution, delivery, administration,
modification, amendment or enforcement (whether through negotiations, legal
proceedings or otherwise) of, or legal advice in respect of rights or
responsibilities under, this Agreement, to the extent that such expenses are
reimbursable by the Borrower but for which such Agent is not reimbursed by the
Borrower.
SECTION 7.06. Successor Administrative Agent. The
Administrative Agent may resign at any time by giving written notice thereof to
the Lenders and the Borrower and may be removed at any time with or without
cause by the Majority Lenders. Upon any such resignation or removal, the
Majority Lenders shall have the right to appoint a successor Administrative
Agent. If no successor Administrative Agent shall have been so appointed by the
Majority Lenders, and shall have accepted such appointment, within 30 days after
the retiring Administrative Agent's giving of notice of resignation or the
Majority Lenders' removal of the retiring Administrative Agent, then the
retiring Administrative Agent may, on behalf of the Lenders, appoint a successor
Administrative Agent, which shall be a commercial bank described in clause (i)
or (ii) of the definition of "Eligible Assignee" and having a combined capital
and surplus of at least $150,000,000. Upon the acceptance of any appointment as
Administrative Agent hereunder by a successor Administrative Agent, such
successor Administrative Agent shall thereupon succeed to and become vested with
all the rights, powers, privileges and duties of the retiring Administrative
Agent, and the retiring Administrative Agent shall be discharged from its duties
and obligations under this Agreement. After any retiring Administrative Agent's
resignation or removal hereunder as Administrative Agent, the provisions of this
Article VII shall inure to its benefit as to any actions taken or omitted to be
taken by it while it was Administrative Agent under this Agreement.
Notwithstanding the foregoing, if no Event of Default, and no event that with
the giving of notice or the passage of time, or both, would constitute an Event
of Default, shall have occurred and be continuing, then no successor
Administrative Agent shall be appointed under this Section 7.06 without the
prior written consent of the Borrower, which consent shall not be unreasonably
withheld or delayed.
SECTION 7.07. Syndication Agent, Documentation Agent and
Co-Agents. The titles "Syndication Agent," "Documentation Agent," and
"Co-Agent," are purely honorific, and the Syndication Agent, Documentation Agent
and Co-Agents shall have no duties or responsibilities in such capacities.
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ARTICLE VIII
MISCELLANEOUS
SECTION 8.01. Amendments, Etc. No amendment or waiver of any
provision of this Agreement or the Notes, nor consent to any departure by the
Borrower therefrom, shall in any event be effective unless the same shall be in
writing and signed by the Majority Lenders, and then such waiver or consent
shall be effective only in the specific instance and for the specific purpose
for which given; provided, however, that no amendment, waiver or consent shall,
unless in writing and signed by all the Lenders (other than any Lender that is
the Borrower or an Affiliate of the Borrower), do any of the following: (a)
waive any of the conditions specified in Section 3.01, (b) increase the
Commitments of the Lenders or subject the Lenders to any additional obligations,
(c) reduce the principal of, or interest on, the Notes or any fees or other
amounts payable hereunder, (d) postpone any date fixed for any payment of
principal of, or interest on, the Notes or any fees or other amounts payable
hereunder, (e) change the percentage of the Commitments or of the aggregate
unpaid principal amount of the Notes, or the number of Lenders, that shall be
required for the Lenders or any of them to take any action hereunder, or (f)
amend this Section 8.01; provided, that no amendment, waiver or consent shall,
unless in writing and signed by the Administrative Agent, in addition to the
Lenders required above to take such action, affect the rights or duties of the
Administrative Agent under this Agreement or any Note.
SECTION 8.02. Notices, Etc. All notices and other
communications provided for hereunder shall be in writing (including telecopier,
telegraphic, telex or cable communication) and mailed, telecopied, telegraphed,
telexed, cabled or delivered, if to the Borrower, at its address at 2301 Market
Street, Philadelphia, Pennsylvania 19101, Attention: Vice President-Finance and
Treasurer, S21-1, Telecopy: (215) 841-5743; if to any Bank, at its Domestic
Lending Office specified opposite its name on Schedule I hereto; if to any other
Lender, at its Domestic Lending Office specified in the Assignment and
Acceptance pursuant to which it became a Lender; and if to the Administrative
Agent, at its address at One First National Plaza, Mail Suite 0634, 1FPN-10,
Chicago, Illinois 60670, Attention: Ms. Gwendolyn Watson, Telecopy: (312)
732-4840 or, as to each party, at such other address as shall be designated by
such party in a written notice to the other parties. All such notices and
communications shall, when mailed, telecopied, telegraphed, telexed or cabled,
be effective when deposited in the mails, telecopied, delivered to the telegraph
company, confirmed by telex answerback or delivered to the cable company,
respectively, except that notices and communications to the Administrative Agent
pursuant to Article II or VII shall not be effective until received by the
Administrative Agent.
SECTION 8.03. No Waiver; Remedies. No failure on the part of
any Lender or the Administrative Agent to exercise, and no delay in exercising,
any right hereunder or under any Note shall operate as a waiver thereof; nor
shall any single or partial exercise of any such right preclude any other or
further exercise thereof or the exercise of any other right. The remedies herein
provided are cumulative and not exclusive of any remedies provided by law.
SECTION 8.04. Costs and Expenses; Indemnification. (a) The
Borrower agrees to pay on demand all costs and expenses incurred by the
Administrative Agent, the Documentation Agent and the Syndication Agent in
connection with the preparation, execution, delivery, administration,
syndication, modification and amendment of this Agreement, the Notes and the
other documents to be delivered hereunder, including, without limitation, the
reasonable fees, internal charges and out-of-pocket expenses of counsel
(including, without limitation, in-house counsel) for such Agents with respect
thereto and with respect to advising the such Agents as to their respective
rights and responsibilities under this Agreement. The Borrower further agrees to
pay on demand all costs and expenses, if any (including, without limitation,
counsel fees and expenses of outside counsel and of internal counsel), incurred
by the Administrative Agent, the Documentation Agent and any Lender in
connection with the collection and enforcement (whether through negotiations,
legal proceedings or otherwise) of this Agreement, the Notes and the other
documents to be delivered hereunder, including, without limitation, reasonable
counsel fees and expenses in connection with the enforcement of rights under
this Section 8.04(a).
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(b) If any payment of principal of, or Conversion of, any
Eurodollar Rate Advance is made other than on the last day of the Interest
Period for such Advance, as a result of a payment or Conversion pursuant to
Section 2.08 or 2.11 or acceleration of the maturity of the Notes pursuant to
Section 6.01 or for any other reason, the Borrower shall, upon demand by any
Lender (with a copy of such demand to the Administrative Agent), pay to the
Administrative Agent for the account of such Lender any amounts required to
compensate such Lender for any additional losses, costs or expenses which it may
reasonably incur as a result of such payment or Conversion, including, without
limitation, any loss, cost or expense incurred by reason of the liquidation or
reemployment of deposits or other funds acquired by any Lender to fund or
maintain such Advance.
(c) The Borrower hereby agrees to indemnify and hold each
Lender, each Agent, First Chicago Capital Markets, Inc., as Arranger, and each
of their respective Affiliates, officers, directors and employees (each, an
"Indemnified Person") harmless from and against any and all claims, damages,
losses, liabilities, costs or expenses (including reasonable attorney's fees and
expenses, whether or not such Indemnified Person is named as a party to any
proceeding or is otherwise subjected to judicial or legal process arising from
any such proceeding) that any of them may pay or incur arising out of or
relating to this Agreement, the Notes or the transactions contemplated thereby,
or the use by the Borrower or any of its subsidiaries of the proceeds of any
Advance, provided that the Borrower shall not be liable for any portion of such
claims, damages, losses, liabilities, costs or expenses resulting from such
Indemnified Person's gross negligence or willful misconduct. The Borrower's
obligations under this Section 8.04(c) shall survive the repayment of all
amounts owing to the Lenders and the Administrative Agent under this Agreement
and the Notes and the termination of the Commitments. If and to the extent that
the obligations of the Borrower under this Section 8.04(c) are unenforceable for
any reason, the Borrower agrees to make the maximum contribution to the payment
and satisfaction thereof which is permissible under applicable law.
SECTION 8.05. Right of Set-off. Upon (i) the occurrence and
during the continuance of any Event of Default and (ii) the making of the
request or the granting of the consent specified by Section 6.01 to authorize
the Administrative Agent to declare the Notes due and payable pursuant to the
provisions of Section 6.01, each Lender is hereby authorized at any time and
from time to time, to the fullest extent permitted by law, to set off and apply
any and all deposits (general or special, time or demand, provisional or final)
at any time held and other indebtedness at any time owing by such Lender to or
for the credit or the account of the Borrower against any and all of the
obligations of the Borrower now or hereafter existing under this Agreement and
any Note held by such Lender, whether or not such Lender shall have made any
demand under this Agreement or such Note and although such obligations may be
unmatured. Each Lender agrees promptly to notify the Borrower after any such
set-off and application made by such Lender, provided that the failure to give
such notice shall not affect the validity of such set-off and application. The
rights of each Lender under this Section 8.05 are in addition to other rights
and remedies (including, without limitation, other rights of set-off) that such
Lender may have.
SECTION 8.06. Binding Effect. This Agreement shall become
effective when it shall have been executed by the Borrower and the Agents and
when the Administrative Agent shall have been notified by each Bank that such
Bank has executed it and thereafter shall be binding upon and inure to the
benefit of the Borrower, the Agents and each Lender and their respective
successors and assigns, except that the Borrower shall not have the right to
assign its rights hereunder or any interest herein without the prior written
consent of the Lenders.
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SECTION 8.07. Assignments and Participations. (a) Each Lender
may, with the prior written consent of the Borrower and the Administrative Agent
(neither of which consents shall be unreasonably withheld or delayed), and if
demanded by the Borrower pursuant to subsection (g) hereof shall to the extent
required by such subsection (g), assign to one or more banks or other entities
all or a portion of its rights and obligations under this Agreement (including,
without limitation, all or a portion of its Commitment, the Advances owing to it
and the Note or Notes held by it); provided, however, that (i) each such
assignment shall be of a constant, and not a varying, percentage of all of the
assigning Lender's rights and obligations under this Agreement, (ii) if the
assignment occurs prior to the Closing Date, the amount of the Commitment, or if
the assignment occurs on or after the Closing Date, the principal amount of the
Advances, of the assigning Lender being assigned pursuant to each such
assignment (determined as of the date of the Assignment and Acceptance with
respect to such assignment) shall in no event be less than $5,000,000 or, if
less, the entire amount of such Lender's Commitment, and shall be an integral
multiple of $1,000,000 or such Lender's entire Commitment, (iii) each such
assignment shall be to an Eligible Assignee, (iv) the parties to each such
assignment shall execute and deliver to the Administrative Agent, for its
acceptance and recording in the Register, an Assignment and Acceptance, together
with any Note or Notes subject to such assignment and a processing and
recordation fee of $3,500 (which shall be payable by one or more of the parties
to the Assignment and Acceptance, and not by the Borrower, and shall not be
payable if the assignee is a Bank, any Affiliate of any Bank or the Federal
Reserve Bank) and (v) the consent of the Borrower shall not be required after
the occurrence and during the continuance of any Event of Default. Upon such
execution, delivery, acceptance and recording, from and after the effective date
specified in each Assignment and Acceptance, (x) the assignee thereunder shall
be a party hereto and, to the extent that rights and obligations hereunder have
been assigned to it pursuant to such Assignment and Acceptance, have the rights
and obligations of a Lender hereunder and (y) the Lender assignor thereunder
shall, to the extent that rights and obligations hereunder have been assigned by
it pursuant to such Assignment and Acceptance, relinquish its rights and be
released from its obligations under this Agreement (and, in the case of an
Assignment and Acceptance covering all or the remaining portion of an assigning
Lender's rights and obligations under this Agreement, such Lender shall cease to
be a party hereto). Notwithstanding anything contained in this Section 8.07(a)
to the contrary, (A) the consent of the Borrower and the Administrative Agent
shall not be required with respect to any assignment by any Lender to an
Affiliate of such Lender or to another Lender and (B) any Lender may at any
time, without the consent of the Borrower or the Administrative Agent, and
without any requirement to have an Assignment and Acceptance executed, assign
all or any part of its rights under this Agreement and its Notes to a Federal
Reserve Bank, provided that such assignment does not release the transferor
Lender from any of its obligations hereunder.
(b) By executing and delivering an Assignment and Acceptance,
the Lender assignor thereunder and the assignee thereunder confirm to and agree
with each other and the other parties hereto as follows: (i) other than as
provided in such Assignment and Acceptance, such assigning Lender makes no
representation or warranty and assumes no responsibility with respect to any
statements, warranties or representations made in or in connection with this
Agreement or the execution, legality, validity, enforceability, genuineness,
sufficiency or value of this Agreement or any other instrument or document
furnished pursuant hereto; (ii) such assigning Lender makes no representation or
warranty and assumes no responsibility with respect to the financial condition
of the Borrower or the performance or observance by the Borrower of any of its
obligations under this Agreement or any other instrument or document furnished
pursuant hereto; (iii) such assignee confirms that it has received a copy of
this Agreement, together with copies of the financial statements referred to in
Section 4.01(e) and such other documents and information as it has deemed
appropriate to make its own credit analysis and decision to enter into such
Assignment and Acceptance; (iv) such assignee will, independently and without
reliance upon the Administrative Agent or the Documentation Agent, such
assigning Lender or any other Lender and based on such documents and information
as it shall deem appropriate at the time, continue to make its own credit
decisions in taking or not taking action under this Agreement; (v) such assignee
confirms that it is an Eligible Assignee; (vi) such assignee appoints and
authorizes the Administrative Agent to take such action as agent on its behalf
and to exercise such powers under this Agreement as are delegated to the
Administrative Agent by the terms hereof, together with such powers as are
reasonably incidental thereto; and (vii) such assignee agrees that it will
perform in accordance with their terms all of the obligations which by the terms
of this Agreement are required to be performed by it as a Lender.
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(c) The Administrative Agent shall maintain at its address
referred to in Section 8.02 a copy of each Assignment and Acceptance delivered
to and accepted by it and a register for the recordation of the names and
addresses of the Lenders and the Commitment of, and principal amount of the
Advances owing to, each Lender from time to time (the "Register"). The entries
in the Register shall be conclusive and binding for all purposes, absent
manifest error, and the Borrower, the Administrative Agent and the Lenders may
treat each Person whose name is recorded in the Register as a Lender hereunder
for all purposes of this Agreement. The Register shall be available for
inspection by the Borrower or any Lender at any reasonable time and from time to
time upon reasonable prior notice.
(d) Upon its receipt of an Assignment and Acceptance executed
by an assigning Lender and an assignee representing that it is an Eligible
Assignee, together with any Note or Notes subject to such assignment, the
Administrative Agent shall, if such Assignment and Acceptance has been completed
and is in substantially the form of Exhibit C hereto, (i) accept such Assignment
and Acceptance, (ii) record the information contained therein in the Register
and (iii) give prompt notice thereof to the Borrower. Within five Business Days
after its receipt of such notice, the Borrower, at its own expense, shall
execute and deliver to the Administrative Agent in exchange for the surrendered
Note or Notes:
(A) a new Note payable to the order of such Eligible Assignee
in an amount equal to the Commitment assumed by such Eligible Assignee
(if prior to the Closing Date) or the outstanding Advances purchased by
Eligible Assignee (if after the Closing Date); and
(B) if such Lender is retaining an interest in its Commitment
or outstanding Advances, a new Note payable to the order of the
Assignor in an amount equal to the Commitment retained by such Lender
(if prior to the Closing Date) or the outstanding Advances retained by
such Lender (if after the Closing Date,) all as specified on Schedule 1
hereto.
Such Note or Notes shall be dated the effective date of such Assignment and
Acceptance and shall otherwise be in substantially the form of Exhibit A hereto.
(e) Each Lender may sell participations to one or more banks
or other entities (each, a "Participant") in or to all or a portion of its
rights and obligations under this Agreement (including, without limitation, all
or a portion of its Commitment, the Advances owing to it and the Note or Notes
held by it); provided, however, that (i) such Lender's obligations under this
Agreement (including, without limitation, its Commitment to the Borrower
hereunder) shall remain unchanged, (ii) such Lender shall remain solely
responsible to the other parties hereto for the performance of such obligations,
(iii) such Lender shall remain the holder of any such Note for all purposes of
this Agreement, (iv) the Borrower, the Administrative Agent and the other
Lenders shall continue to deal solely and directly with such Lender in
connection with such Lender's rights and obligations under this Agreement and
(v) such Lender shall retain the sole right to approve, without the consent of
any Participant, any amendment, modification or waiver of any provision of this
Agreement or the Note or Notes held by such Lender, other than any such
amendment, modification or waiver with respect to any Advance or Commitment in
which such Participant has an interest that forgives principal, interest or fees
or reduces the interest rate or fees payable with respect to any such Advance or
Commitment, postpones any date fixed for any regularly scheduled payment of
principal of, or interest or fees on, any such Advance or Commitment, releases
any guarantor of any such Advance or releases any substantial portion of
collateral, if any, securing any such Advance.
(f) Any Lender may, in connection with any assignment or
participation or proposed assignment or participation pursuant to this Section
8.07, disclose to the assignee or participant or proposed assignee or
participant, any information relating to the Borrower furnished to such Lender
by or on behalf of the Borrower; provided that, prior to any such disclosure,
the assignee or participant or proposed assignee or participant shall agree to
preserve the confidentiality of any confidential information relating to the
Borrower received by it from such Lender (subject to customary exceptions
regarding regulatory requirements, compliance with legal process and other
requirements of law).
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(g) If (i) any Lender shall make demand for payment under
Section 2.10(a), 2.10(b) or 2.13, or (ii) shall deliver any notice to the
Administrative Agent pursuant to Section 2.11 resulting in the suspension of
certain obligations of the Lenders with respect to Eurodollar Rate Advances,
then (in the case of clause (i)) within 60 days after such demand (if, but only
if, such payment demanded under Section 2.10(a), 2.10(b) or 2.13 has been made
by the Borrower), or (in the case of clause (ii)) within 60 days after such
notice (if such suspension is still in effect), the Borrower may demand that
such Lender assign in accordance with this Section 8.07 to one or more Eligible
Assignees designated by the Borrower and reasonably acceptable to the
Administrative Agent all (but not less than all) of such Lender's Commitment and
the Advances owing to it within the next succeeding 30 days. If any such
Eligible Assignee designated by the Borrower shall fail to consummate such
assignment on terms acceptable to such Lender, or if the Borrower shall fail to
designate any such Eligible Assignee for all of such Lender's Commitment or
Advances, then such Lender may (but shall not be required to) assign such
Commitment and Advances to any other Eligible Assignee in accordance with this
Section 8.07 during such period.
SECTION 8.08. Governing Law. THIS AGREEMENT AND THE NOTES
SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF
ILLINOIS.
SECTION 8.09. Consent to Jurisdiction. THE BORROWER HEREBY
IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE
OF ILLINOIS AND ANY UNITED STATES DISTRICT COURT SITTING IN THE STATE OF
ILLINOIS IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS
AGREEMENT OR THE NOTES AND THE BORROWER HEREBY IRREVOCABLY AGREES THAT ALL
CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN
ANY SUCH COURT AND IRREVOCABLY WAIVES ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE
AS TO THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT
OR THAT SUCH COURT IS AN INCONVENIENT FORUM. NOTHING HEREIN SHALL LIMIT THE
RIGHT OF THE ADMINISTRATIVE AGENT OR ANY LENDER TO BRING PROCEEDINGS AGAINST THE
BORROWER IN THE COURTS OF ANY OTHER JURISDICTION.
SECTION 8.10. Execution in Counterparts; Integration. This
Agreement may be executed in any number of counterparts and by different parties
hereto in separate counterparts, each of which when so executed shall be deemed
to be an original and all of which taken together shall constitute one and the
same agreement. This Agreement constitutes the entire agreement and
understanding among the parties hereto and supersedes all prior and
contemporaneous agreements and understandings, oral or written, relating to the
subject matter hereof.
[Remainder of the page intentionally left blank]
-31-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their respective officers thereunto duly authorized,
as of the date first above written.
[SEAL] PECO ENERGY COMPANY
PECO ENERGY COMPANY
By /s/ J.B. Mitchell
----------------------------------------------
Name: J.B. Mitchell
Title: Vice President - Finance and Treasurer
/s/ Todd C. Cutler
- - ------------------------
Todd D. Cutler
Assistant Secretary
THE FIRST NATIONAL BANK OF CHICAGO,
as Administrative Agent
By
-------------------------------
Name: Kenneth J. Bauer
Title: Authorized Agent
MELLON BANK, N.A.,
as Documentation Agent
By
-------------------------------
Name: Mary Ellen Usher
Title: Vice President
SALOMON SMITH BARNEY INC.,
as Syndication Agent
By
-------------------------------
Name: Robert J. Harrity, Jr.
Title: Managing Director
This is a signature page to the Term Loan Agreement, dated as of November 30,
1998 among PECO Energy Company, as Borrower, the Banks named therein, as Banks,
certain Banks specified therein, as Co-Agents, Salomon Smith Barney Inc., as
Syndication Agent, The First National Bank of Chicago, as Administrative Agent,
and Mellon Bank, N.A., as Documentation Agent.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their respective officers thereunto duly authorized,
as of the date first above written.
[SEAL] PECO ENERGY COMPANY
PECO ENERGY COMPANY
By
----------------------------------------------
Name: J.B. Mitchell
Title: Vice President - Finance and Treasurer
- - ------------------------
Todd D. Cutler
Assistant Secretary
THE FIRST NATIONAL BANK OF CHICAGO,
as Administrative Agent
By /s/ Kenneth J. Bauer
-------------------------------
Name: Kenneth J. Bauer
Title: Authorized Agent
MELLON BANK, N.A.,
as Documentation Agent
By
-------------------------------
Name: Mary Ellen Usher
Title: Vice President
SALOMON SMITH BARNEY INC.,
as Syndication Agent
By
-------------------------------
Name: Robert J. Harrity, Jr.
Title: Managing Director
This is a signature page to the Term Loan Agreement, dated as of November 30,
1998 among PECO Energy Company, as Borrower, the Banks named therein, as Banks,
certain Banks specified therein, as Co-Agents, Salomon Smith Barney Inc., as
Syndication Agent, The First National Bank of Chicago, as Administrative Agent,
and Mellon Bank, N.A., as Documentation Agent.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their respective officers thereunto duly authorized,
as of the date first above written.
[SEAL] PECO ENERGY COMPANY
PECO ENERGY COMPANY
By
----------------------------------------------
Name: J.B. Mitchell
Title: Vice President - Finance and Treasurer
- - ------------------------
Todd D. Cutler
Assistant Secretary
THE FIRST NATIONAL BANK OF CHICAGO,
as Administrative Agent
By
-------------------------------
Name: Kenneth J. Bauer
Title: Authorized Agent
MELLON BANK, N.A.,
as Documentation Agent
By /s/ Mary Ellen Usher
-------------------------------
Name: Mary Ellen Usher
Title: Vice President
SALOMON SMITH BARNEY INC.,
as Syndication Agent
By
-------------------------------
Name: Robert J. Harrity, Jr.
Title: Managing Director
This is a signature page to the Term Loan Agreement, dated as of November 30,
1998 among PECO Energy Company, as Borrower, the Banks named therein, as Banks,
certain Banks specified therein, as Co-Agents, Salomon Smith Barney Inc., as
Syndication Agent, The First National Bank of Chicago, as Administrative Agent,
and Mellon Bank, N.A., as Documentation Agent.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their respective officers thereunto duly authorized,
as of the date first above written.
[SEAL] PECO ENERGY COMPANY
PECO ENERGY COMPANY
By
----------------------------------------------
Name: J.B. Mitchell
Title: Vice President - Finance and Treasurer
- - ------------------------
Todd D. Cutler
Assistant Secretary
THE FIRST NATIONAL BANK OF CHICAGO,
as Administrative Agent
By
-------------------------------
Name: Kenneth J. Bauer
Title: Authorized Agent
MELLON BANK, N.A.,
as Documentation Agent
By
-------------------------------
Name: Mary Ellen Usher
Title: Vice President
SALOMON SMITH BARNEY INC.,
as Syndication Agent
By /s/ Steven R. Motorin
-------------------------------
Name: Steven R. Motorin
Title: Attorney-in-Fact
This is a signature page to the Term Loan Agreement, dated as of November 30,
1998 among PECO Energy Company, as Borrower, the Banks named therein, as Banks,
certain Banks specified therein, as Co-Agents, Salomon Smith Barney Inc., as
Syndication Agent, The First National Bank of Chicago, as Administrative Agent,
and Mellon Bank, N.A., as Documentation Agent.
<PAGE>
THE BANKS
Commitment
$47,000,000
THE FIRST NATIONAL BANK OF
CHICAGO, as Administrative Agent
and as Bank
By /s/ Kenneth J. Bauer
-----------------------------
Name: Kenneth J. Bauer
Title: Authorized Agent
This is a signature page to the Term Loan Agreement, dated as of November 30,
1998 among PECO Energy Company, as Borrower, the Banks named therein, as Banks,
certain Banks specified therein, as Co-Agents, Salomon Smith Barney Inc., as
Syndication Agent, The First National Bank of Chicago, as Administrative Agent,
and Mellon Bank, N.A., as Documentation Agent.
<PAGE>
Commitment
$47,000,000
CITIBANK, N.A., as Bank
By /s/ Anita J. Brickell
------------------------
Name: Robert J. Harrity, Jr.
Title: Attorney-in-Fact
ANITA J. BRICKELL
Attorney-In-Fact
This is a signature page to the Term Loan Agreement, dated as of November 30,
1998 among PECO Energy Company, as Borrower, the Banks named therein, as Banks,
certain Banks specified therein, as Co-Agents, Salomon Smith Barney Inc., as
Syndication Agent, The First National Bank of Chicago, as Administrative Agent,
and Mellon Bank, N.A., as Documentation Agent.
<PAGE>
Commitment
$47,000,000
MELLON BANK, N.A., as
Documentation Agent and as Bank
By /s/ Mary Ellen Usher
-----------------------------
Name: Mary Ellen Usher
Title: Vice President
This is a signature page to the Term Loan Agreement, dated as of November 30,
1998 among PECO Energy Company, as Borrower, the Banks named therein, as Banks,
certain Banks specified therein, as Co-Agents, Salomon Smith Barney Inc., as
Syndication Agent, The First National Bank of Chicago, as Administrative Agent,
and Mellon Bank, N.A., as Documentation Agent.
<PAGE>
Commitment
$47,000,000
BANK OF MONTREAL, as Co-Agent
and as Bank
By /s/ Ian M. Plester
------------------------
Name: Ian M. Plester
Title: Director
This is a signature page to the Term Loan Agreement, dated as of November 30,
1998 among PECO Energy Company, as Borrower, the Banks named therein, as Banks,
certain Banks specified therein, as Co-Agents, Salomon Smith Barney Inc., as
Syndication Agent, The First National Bank of Chicago, as Administrative Agent,
and Mellon Bank, N.A., as Documentation Agent.
<PAGE>
Commitment
$47,000,000
FIRST UNION NATIONAL BANK, as
Co-Agent and as Bank
By /s/ Michael J. Kolosowsky
-------------------------------
Name: Michael J. Kolosowsky
Title: Vice President
This is a signature page to the Term Loan Agreement, dated as of November 30,
1998 among PECO Energy Company, as Borrower, the Banks named therein, as Banks,
certain Banks specified therein, as Co-Agents, Salomon Smith Barney Inc., as
Syndication Agent, The First National Bank of Chicago, as Administrative Agent,
and Mellon Bank, N.A., as Documentation Agent.
<PAGE>
Commitment
$47,000,000
TORONTO DOMINION (TEXAS),
INC., as Co-Agent and as Bank
By /s/ Alva J. Jones
-------------------------
Name: Alva J. Jones
Title: Vice President
This is a signature page to the Term Loan Agreement, dated as of November 30,
1998 among PECO Energy Company, as Borrower, the Banks named therein, as Banks,
certain Banks specified therein, as Co-Agents, Salomon Smith Barney Inc., as
Syndication Agent, The First National Bank of Chicago, as Administrative Agent,
and Mellon Bank, N.A., as Documentation Agent.
<PAGE>
Commitment
$30,000,000
COMERICA BANK, as Bank
By /s/ Kimberly S. Kersten
---------------------------
Name: Kimberly S. Kersten
Title: Vice President
This is a signature page to the Term Loan Agreement, dated as of November 30,
1998 among PECO Energy Company, as Borrower, the Banks named therein, as Banks,
certain Banks specified therein, as Co-Agents, Salomon Smith Barney Inc., as
Syndication Agent, The First National Bank of Chicago, as Administrative Agent,
and Mellon Bank, N.A., as Documentation Agent.
<PAGE>
Commitment
$30,000,000
PNC BANK, NATIONAL
ASSOCIATION, as Bank
By /s/ Christopher N. Moravec
------------------------------
Name: Christopher N. Moravec
Title: Senior Vice President
This is a signature page to the Term Loan Agreement, dated as of November 30,
1998 among PECO Energy Company, as Borrower, the Banks named therein, as Banks,
certain Banks specified therein, as Co-Agents, Salomon Smith Barney Inc., as
Syndication Agent, The First National Bank of Chicago, as Administrative Agent,
and Mellon Bank, N.A., as Documentation Agent.
<PAGE>
Commitment
$20,000,000
THE BANK OF NEW YORK, as Bank
By /s/ John N. Watt
--------------------------
Name: John N. Watt
Title: Vice President
This is a signature page to the Term Loan Agreement, dated as of November 30,
1998 among PECO Energy Company, as Borrower, the Banks named therein, as Banks,
certain Banks specified therein, as Co-Agents, Salomon Smith Barney Inc., as
Syndication Agent, The First National Bank of Chicago, as Administrative Agent,
and Mellon Bank, N.A., as Documentation Agent.
<PAGE>
Commitment
$20,000,000
BANK HAPOALIM B.M.,
Philadephia Branch, as Bank
By /s/ Carl Kopfinger
-------------------------------
Name: Carl Kopfinger
Title: Vice President
By /s/ Amram Lador
--------------------------------
Name: Amram (Rami) Lador
Title: First Vice President and Branch
Manager
This is a signature page to the Term Loan Agreement, dated as of November 30,
1998 among PECO Energy Company, as Borrower, the Banks named therein, as Banks,
certain Banks specified therein, as Co-Agents, Salomon Smith Barney Inc., as
Syndication Agent, The First National Bank of Chicago, as Administrative Agent,
and Mellon Bank, N.A., as Documentation Agent.
<PAGE>
Commitment
$18,000,000
CIBC, INC., as Bank
By /s/ Denis O'Meara
--------------------------------
Name: Denis O'Meara
Title: Executive Director
CIBC Oppenheimer Corp.,
AS AGENT
This is a signature page to the Term Loan Agreement, dated as of November 30,
1998 among PECO Energy Company, as Borrower, the Banks named therein, as Banks,
certain Banks specified therein, as Co-Agents, Salomon Smith Barney Inc., as
Syndication Agent, The First National Bank of Chicago, as Administrative Agent,
and Mellon Bank, N.A., as Documentation Agent.
<PAGE>
SCHEDULE I
Term Loan Agreement, dated as of November 30, 1998, among PECO Energy Company,
as Borrower, the banks named therein, as Banks, certain Banks specified therein,
as Co-Agents, Salomon Smith Barney Inc., as Syndication Agent, the First
National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as
Documentation Agent.
<TABLE>
<CAPTION>
Domestic Eurodollar
Name of Bank Lending Office Lending Office
- - ------------ -------------- --------------
<S> <C> <C>
The First National Bank of Chicago One First National Plaza Same
Suite 0634
Chicago, IL 60670
Attn: Lynn Pozsgay
Phone: (312) 732-8705
Fax: 312) 732-3055
First Union National Bank One First Union Center Same
301 South College Street
Charlotte, NC 28288-0735
Attn: Dana Maloney
Phone: (704) 383-0296
Fax: (704) 383-6670
Mellon Bank, N.A. Three Mellon Bank Center Same
Room 1203
(Loan Administration)
Pittsburgh, PA 15259-0003
Attn: Cathy Capp
Phone: (412) 234-1870
Fax: (412) 209-6111
The Toronto-Dominion Bank 909 Fannin Street Same
17th Floor
Houston, TX 77010
Attn: Alva J. Jones
Manager, Credit Administration
Phone: (713) 653-8261
Fax: (713) 951-9921
Bank Hapoalim B.M. Commercial Loan & Documentation Same
1515 Market Street, Suite 200
Philadelphia, PA 19102
Attn: Sheila D. Joe
Phone: (215) 665-2228
Fax: (215) 665-2217
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Domestic Eurodollar
Name of Bank Lending Office Lending Office
- - ------------ -------------- --------------
<S> <C> <C>
Bank of Montreal 115 South LaSalle Street Same
Chicago, IL 60603
Attn: Client Services
Phone: (312) 750-3748
Fax: (312) 750-4345
The Bank of New York One Wall Street, 19th Floor Same
Energy Industries Division
New York, NY 10286
Attn: Theresa A. Foran
Phone: (212) 635-7921
Fax: (212) 635-7923
Citibank, N.A. Two Penn's Way Same
Second Floor
New Castle, DE 19720
4th Floor, Zone 22
New York, New York 10021
Attn: Patrice Williams
Phone: (302) 894-6068
Fax: (302) 894-6120
Comerica Bank 500 Woodward Avenue Same
Mailcode 3280
Detroit, MI 48226
Attn: David Shirey
Phone: (313) 222-3647
Fax: (313) 222-3330
PNC Bank, National Association 249 Fifth Avenue Same
Pittsburgh, PA 15222-2707
Attn: Christopher N. Moravec
Phone: (412) 762-2540
Fax: (412) 762-2571
CIBC, Inc. 425 Lexington Street Same
New York, NY 10017
Attn: Dennis O'Meara
Phone: (212) 856-3758
Fax: (212) 856-3991
Two Paces West
2727 Paces Ferry Road
Suite 1200
Atlanta, GA 30339
Attn: Patrice Kellaher
Phone: (770) 319-4999
Fax: (770) 319-4950
</TABLE>
<PAGE>
EXHIBIT A
FORM OF PROMISSORY NOTE
$____________________ Dated: November 30, 1998
FOR VALUE RECEIVED, the undersigned, PECO Energy Company, a
Pennsylvania corporation (the "Borrower"), HEREBY PROMISES TO PAY to the order
of _________ (the "Lender") for the account of its Applicable Lending Office
(such term and other capitalized terms herein being used as defined in the Term
Loan Agreement referred to below) on the Term Loan Maturity Date the principal
sum of U.S.$[amount of the Lender's Commitment in figures] or, if less, the
aggregate principal amount of the Term Advances made by the Lender to the
Borrower pursuant to the Term Loan Agreement outstanding on the Term Loan
Maturity Date.
The Borrower promises to pay interest on the unpaid principal
amount of each Term Advance until such principal amount is paid in full, at such
interest rates, and payable at such times, as are specified in the Term Loan
Agreement.
Both principal and interest are payable in lawful money of the
United States of America to The First National Bank of Chicago, as
Administrative Agent, at One First National Plaza, Chicago, Illinois 60670, in
same day funds. Each Term Advance made by the Lender to the Borrower pursuant to
the Term Loan Agreement, and all payments made on account of principal thereof,
shall be recorded by the Lender and, prior to any transfer hereof, endorsed on
the grid attached hereto which is part of this Promissory Note.
This Promissory Note is one of the Notes referred to in, and
is entitled to the benefits of, the Term Loan Agreement, dated as of November
30, 1998, among PECO Energy Company, as Borrower, the banks named therein, as
Banks, certain Banks specified therein, as Co-Agents, Salomon Smith Barney Inc.,
as Syndication Agent, The First National Bank of Chicago, as Administrative
Agent, and Mellon Bank, N.A., as Documentation Agent (as amended, modified or
supplemented from time to time, the "Term Loan Agreement"). The Term Loan
Agreement, among other things, contains provisions for acceleration of the
maturity hereof upon the happening of certain stated events and also for
prepayments on account of principal hereof prior to the maturity hereof upon the
terms and conditions therein specified.
The Borrower hereby waives presentment, demand, protest and
notice of any kind. No failure to exercise, and no delay in exercising, any
rights hereunder on the part of the holder hereof shall operate as a waiver of
such rights.
THIS PROMISSORY NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF ILLINOIS.
PECO ENERGY COMPANY
By ____________________________________
Name:
Title:
<PAGE>
ADVANCES AND PAYMENTS OF PRINCIPAL
Amount of
Aggregate Principal Unpaid
Term Loan Paid or Principal Notation
Advances Prepaid Balance Made By
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
<PAGE>
EXHIBIT B
NOTICE OF BORROWING
The First National Bank of Chicago, as Administrative Agent
for the Lenders parties to the Term Loan Agreement referred to below
One First National Plaza
Chicago, Illinois 60670
[Date]
Attention: Utilities Department
North American Finance Group
Ladies and Gentlemen:
The undersigned, PECO Energy Company, refers to the Term Loan
Agreement, dated as of November 30, 1998, among PECO Energy Company, as
Borrower, the banks named therein, as Banks, certain Banks specified therein, as
Co-Agents, Salomon Smith Barney Inc., as Syndication Agent, The First National
Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as
Documentation Agent (as amended, modified or supplemented from time to time, the
"Term Loan Agreement"), and hereby gives you notice, irrevocably, pursuant to
Section 2.02 of the Term Loan Agreement that the undersigned hereby requests the
Term Borrowings under the Term Loan Agreement, and in that connection sets forth
below the information relating to such Term Borrowings (the "Proposed
Borrowings") as required by Section 2.02(a) of the Term Loan Agreement:
(i) The Closing Date is ________ , 1998.
(ii) The aggregate amount of the Proposed Borrowings
is $ ____________ .
(iii) Set forth below is the Type of each Term
Borrowing, the principal amount of each Term Borrowing and if
any Term Borrowing is comprised of Eurocurrency Advances, the
Interest Period applicable thereto:
- - --------------------------------------------------------------------------------
Type Principal Amount Interest Period
- - --------------------------------------------------------------------------------
The undersigned hereby certifies that the following statements
are true on the date hereof, and will be true on the Closing Date:
<PAGE>
(A) the representations and warranties contained in
Section 4.01 are correct, before and after giving effect to
the Proposed Borrowings and to the application of the proceeds
therefrom, as though made on and as of the Closing Date; and
(B) no event has occurred and is continuing, or would
result from such Proposed Borrowings or from the application
of the proceeds therefrom, that constitutes an Event of
Default or would constitute an Event of Default but for the
requirement that notice be given or time elapse or both.
Very truly yours,
PECO ENERGY COMPANY
By_____________________________
Name:
Title:
-2-
<PAGE>
EXHIBIT C
ASSIGNMENT AND ACCEPTANCE
Dated ________ , 19 ___
Reference is made to the Term Loan Agreement, dated as of
November 30, 1998, among PECO Energy Company, as Borrower, the banks named
therein, as Banks, certain Banks specified therein, as Co-Agents, Salomon Smith
Barney Inc., as Syndication Agent, The First National Bank of Chicago, as
Administrative Agent, and Mellon Bank, N.A., as Documentation Agent (as amended,
modified or supplemented from time to time, the "Term Loan Agreement"). Terms
defined in the Term Loan Agreement are used herein with the same meaning.
________ (the "Assignor") and __________ (the "Assignee")
agree as follows:
1. The Assignor hereby sells and assigns to the Assignee, and
the Assignee hereby purchases and assumes from the Assignor, that interest in
and to all of the Assignor's rights and obligations under the Term Loan
Agreement as of the date hereof which represents the percentage interest
specified on Schedule 1 of all outstanding rights and obligations under the Term
Loan Agreement, including, without limitation, such interest in the Assignor's
Commitment, the Advances owing to the Assignor, and the Note[s] held by the
Assignor. After giving effect to such sale and assignment, the Assignee's
Commitment and the amount of the Advances owing to the Assignee will be as set
forth in Section 2 of Schedule 1.
2. The Assignor (i) represents and warrants that it is the
legal and beneficial owner of the interest being assigned by it hereunder and
that such interest is free and clear of any adverse claim; (ii) makes no
representation or warranty and assumes no responsibility with respect to any
statements, warranties or representations made in or in connection with the Term
Loan Agreement or the execution, legality, validity, enforceability,
genuineness, sufficiency or value of the Term Loan Agreement or any other
instrument or document furnished pursuant thereto; (iii) makes no representation
or warranty and assumes no responsibility with respect to the financial
condition of the Borrower or the performance or observance by the Borrower of
any of its obligations under the Term Loan Agreement or any other instrument or
document furnished pursuant thereto; and (iv) attaches the Note[s] referred to
in paragraph 1 above and requests that the Administrative Agent exchange such
Note[s] for
(A) a new Note payable to the order of Assignee in an amount
equal to the Commitment assumed by Assignee (if prior to the Closing
Date) or the outstanding Advances purchased by Assignee (if after the
Closing Date); and
(B) if Assignor is retaining an interest in its Commitment or
outstanding Advances, a new Note payable to the order of the Assignor
in an amount equal to the Commitment retained by Assignor (if prior to
the Closing Date) or the outstanding Advances retained by Assignor (if
after the Closing Date),
all as specified on Schedule 1 hereto.
<PAGE>
3. The Assignee (i) confirms that it has received a copy of
the Term Loan Agreement, together with copies of the financial statements
referred to in Section 4.01 thereof and such other documents and information as
it has deemed appropriate to make its own credit analysis and decision to enter
into this Assignment and Acceptance; (ii) agrees that it will, independently and
without reliance upon the Administrative Agent, the Documentation Agent, the
Assignor or any other Lender and based on such documents and information as it
shall deem appropriate at the time, continue to make its own credit decisions in
taking or not taking action under the Term Loan Agreement; (iii) confirms that
it is an Eligible Assignee; (iv) appoints and authorizes the Administrative
Agent to take such action as agent on its behalf and to exercise such powers
under the Term Loan Agreement as are delegated to the Administrative Agent by
the terms thereof, together with such powers as are reasonably incidental
thereto; (v) agrees that it will perform in accordance with their terms all of
the obligations which by the terms of the Term Loan Agreement are required to be
performed by it as a Lender; (vi) none of the consideration used to make the
purchase being made by the Assignee hereunder are "plan assets" as defined under
ERISA and the rights and interests of the Assignee in and under the Term Loan
Agreement will not be "plan assets" under ERISA [and] (vii) specifies as its
Domestic Lending Office (and address for notices) and Eurodollar Lending Office
the offices set forth beneath its name on the signature pages hereof [and (viii)
attaches the forms prescribed by the Internal Revenue Service of the United
States certifying that it is exempt from United States withholding taxes with
respect to all payments to be made to the Assignee under the Term Loan Agreement
and the Notes].(1)
4. Following the execution of this Assignment and Acceptance
by the Assignor and the Assignee, it will be delivered to the Administrative
Agent for acceptance and recording by the Administrative Agent. The effective
date of this Assignment and Acceptance shall be the date of acceptance thereof
by the Administrative Agent, unless otherwise specified on Schedule 1 hereto
(the "Effective Date").
5. Upon such acceptance and recording by the Administrative
Agent, as of the Effective Date, (i) the Assignee shall be a party to the Term
Loan Agreement and, to the extent provided in this Assignment and Acceptance,
have the rights and obligations of a Lender thereunder and (ii) the Assignor
shall, to the extent provided in this Assignment and Acceptance, relinquish its
rights and be released from its obligations under the Term Loan Agreement.
6. Upon such acceptance and recording by the Administrative
Agent, from and after the Effective Date, the Administrative Agent shall make
all payments under the Term Loan Agreement and the Notes in respect of the
interest assigned hereby (including, without limitation, all payments of
principal , interest and fees with respect thereto) to the Assignee. The
Assignor and Assignee shall make all appropriate adjustments in payments under
the Term Loan Agreement and the Notes for periods prior to the Effective Date
directly between themselves.
7. THIS ASSIGNMENT AND ACCEPTANCE SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF ILLINOIS.
- - -----------------
(1) If the Assignee is organized under the laws of a jurisdiction outside the
United States.
-2-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Assignment and Acceptance to be executed by their respective officers thereunto
duly authorized, as of the date first above written, such execution being made
on Schedule 1 hereto.
[NAME OF ASSIGNOR]
By ________________________________
Name:
Title:
[NAME OF ASSIGNEE]
By ________________________________
Name:
Title:
Domestic Lending
Office (and address
for notices):
[Address]
Eurodollar Lending Office:
[Address]
Consented to this_________ day
of ___________ , 19 ___
PECO ENERGY COMPANY
By ___________________________
Name:
Title:
Consented to and Accepted this___ day
of ____________ , 19 ___
[NAME OF ADMINISTRATIVE AGENT]
By ____________________________
Name:
Title:
-3-
<PAGE>
Schedule 1
to
Assignment and Acceptance
Dated ______ , 19 ___
Section 1.
Percentage Interest: ____%
Section 2.
[Assignee's Commitment
(include for assignments prior
to the Closing Date only)]: $__
Aggregate Outstanding Principal
Amount of Advances
owing to the Assignee: $__
A Note payable to the
order of the Assignee
Dated:_________ , 19 __
Principal amount: $__
A Note payable to the
order of the Assignor
Dated:_________ , 19 __
Principal amount: $__
Section 3.
Effective Date(2): ______ , 19 __
- - ----------------
(2) This date should be no earlier than the date of acceptance by the
Administrative Agent.
<PAGE>
EXHIBIT D
FORM OF OPINION OF BALLARD SPAHR
ANDREWS & INGERSOLL
________ , 19
To each of the Banks, the Administrative Agent, the
Documentation Agent, the Syndication Agent, and the
Co-Agents party to the Term Loan Agreement, dated as
of November 30, 1998, among PECO Energy Company, as
Borrower, the banks named therein, as Banks, certain
Banks specified therein, as Co-Agents, Salomon Smith
Barney Inc., as Syndication Agent, The First
National Bank of Chicago, as Administrative Agent,
and Mellon Bank, N.A., as Documentation Agent
Re: PECO Energy Company
-------------------
Ladies and Gentlemen:
This opinion is furnished to you pursuant to Section
3.01(a)(v) of the Term Loan Agreement, dated as of November 30, 1998, among PECO
Energy Company, as Borrower, the banks named therein, as Banks, certain Banks
specified therein, as Co-Agents, Salomon Smith Barney Inc., as Syndication
Agent, The First National Bank of Chicago, as Administrative Agent, and Mellon
Bank, N.A., as Documentation Agent (as amended, modified or supplemented from
time to time, the "Term Loan Agreement"). Unless otherwise specified, terms
defined in the Term Loan Agreement are used herein as therein defined.
We have acted as special counsel for the Borrower in
connection with the preparation, execution and delivery of the Term Loan
Agreement. In that capacity we have examined the following:
(i) The Term Loan Agreement, and the Notes;
(ii) The documents furnished by the Borrower pursuant
to Section 3.01 of the Term Loan Agreement;
(iii) The Amended and Restated Articles of
Incorporation of the Borrower and all amendments thereto (the
"Charter");
(iv) The by-laws of the Borrower and all amendments
thereto (the "By-laws"); and
(v) A certificate of the Secretary of State of the
Commonwealth of Pennsylvania, dated , 19 ,
attesting to the continued subsistence of the Borrower in
Pennsylvania.
We have also examined the originals, or copies certified to
our satisfaction, of such other corporate records of the Borrower, certificates
of public officials and of officers of the Borrower, and agreements, instruments
and documents, as we have deemed necessary as a basis for the opinions
hereinafter expressed. We have assumed the legal capacity and competence of
natural persons, the genuineness of all signatures, the authenticity of all
documents submitted to us as originals and the conformity to original documents
of documents submitted to us as certified, conformed or photostatic copies. We
have assumed that the Agents and the Banks have duly executed and delivered,
with all necessary power and authority (corporate and otherwise), the Term Loan
Agreement.
<PAGE>
When an opinion or confirmation is given to our knowledge or
with reference to matters of which we are aware or which are known to us, or
with another similar qualification, the relevant knowledge or awareness is
limited to the actual knowledge or awareness of the lawyer who is the current
primary contact for the Borrower and the individual lawyers in this firm who
have participated in the specific transaction to which this opinion relates and
without any special or additional investigation undertaken for the purposes of
this opinion, except as otherwise noted herein. Based upon the foregoing and
subject to the exceptions, limitations and qualifications set forth herein, we
are of the following opinion:
1. The Borrower is a corporation duly incorporated
and validly subsisting under the laws of the Commonwealth of
Pennsylvania.
2. The execution, delivery and performance by the
Borrower of the Term Loan Agreement and the Notes are within
the Borrower's corporate powers, have been duly authorized by
all necessary corporate action, do not contravene (i) the
Charter or the By-laws or (ii) any law of the United States or
the Commonwealth of Pennsylvania (including, without
limitation, any order, rule or regulation of the PPUC) or
(iii) to the best of our knowledge, any agreement or
instrument to which the Borrower is a party or by which it is
bound, and do not result in or require the creation of any
lien, security interest or other charge or encumbrance upon or
with respect to any of its properties.
3. No authorization, approval or other action by, and
no notice to or filing with, any governmental authority or
regulatory body of the United States or the Commonwealth of
Pennsylvania is required for the due execution, delivery and
performance by the Borrower of the Term Loan Agreement or the
Notes except for the filing of the Securities Certificate
with, and the final approval of, and the Order of Registration
issued by, the PPUC, which filing has been duly made and which
final approval and Order of Registration have been duly
obtained; such Order of Registration is in full force and
effect and is final; and the action of the PPUC registering
the Securities Certificate is no longer subject to appeal.
4. The Term Loan Agreement and the Notes have been
duly executed and delivered by the Borrower.
5. The Term Loan Agreement and the Notes are the
legal, valid and binding obligations of the Borrower
enforceable against the Borrower in accordance with their
respective terms.
6. The Borrower (i) is exempt from the provisions of
the Public Utility Holding Company Act of 1935, as amended,
other than Section 9(a)(2) thereof, pursuant to Section
3(a)(2) thereof, and (ii) is not an "investment company" or a
company "controlled" by an "investment company" within the
meaning of the Investment Company Act of 1940, as amended.
-2-
<PAGE>
7. We confirm to you that to our knowledge, after
inquiry of each lawyer who is the current primary contact for
the Borrower or who has devoted substantive attention to
matters on behalf of the Borrower during the preceding twelve
months and who is still currently employed by or a member of
this firm, except as disclosed in the Borrower's Annual Report
on Form 10-K for the year ended December 31, 1997 and the
Borrower's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998, no litigation or governmental proceeding
is pending or threatened in writing against the Borrower (i)
with respect to the Term Loan Agreement or the Notes, or (ii)
which is likely to have a material adverse effect upon the
financial condition, business, properties or prospects of the
Borrower and its subsidiaries taken as a whole.
We draw to your attention the existence of the following two
Pennsylvania statutes in connection with the fact that the Advances bear
floating rates of interest:
(i) Section 911 of the Pennsylvania "Crime Code," 18
Pa. C.S.A. ss.911, enacted by the Act of December 6, 1972,
P.L. 1482. Section 911 of the Crime Code bears a close
resemblance to certain of the provisions of the Federal
Racketeer Influenced and Corrupt Organizations Act of 1970, 18
U.S.C. ss.ss.1961-1968, commonly known as RICO, and is
referred to hereinafter as the "Pennsylvania RICO Act." The
Pennsylvania RICO Act provides, among other things, that it is
a criminal offense, punishable as a felony, to "use or invest,
directly or indirectly ... in the acquisition of any interest
in, or the establishment or operation of, any enterprise" any
income collected in full or partial satisfaction of a loan
made "at a rate of interest exceeding 25% per annum... ."
(ii) The Act of December 29, 1982, P.L. 1671, 18 Pa.
C.S.A. ss.4806.1 et seq. (superseded volume) (the "Criminal
Usury Statute"). The Criminal Usury Statute provides, among
other things, that it is a criminal offense, punishable as a
felony, to engage in, "charging, taking or receiving any money
... on the loan ... of any money ... at a rate exceeding
thirty-six percent per annum... ."
The Criminal Usury Statute may have been repealed, but the
manner in which the repeal was enacted leaves the matter subject to uncertainty.
Both the Pennsylvania RICO Act and the Criminal Usury Statute
appear to be intended by the legislature to apply only to racketeering and loan
sharking type activities, and not to the type of commercial loan transaction
evidenced by the Term Loan Agreement and the Notes. Nevertheless, in view of the
plain language of the Pennsylvania courts, we cannot say that the ultimate
resolution of this issue is free from doubt.
The foregoing opinions are subject to the following
exceptions, limitations and qualifications:
(a) Our opinion is subject to the effect of
applicable bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance, fraudulent transfer or similar laws
affecting creditors' rights and remedies generally, general
principles of equity, including without limitation, concepts
of materiality, reasonableness, good faith and fair dealing
(regardless of whether such enforceability is considered in a
proceeding in equity or at law); and limitations on
enforceability of rights to indemnification by federal or
state securities laws or regulations or by public policy.
-3-
<PAGE>
(b) We express no opinion as to the application or
requirements of the Pennsylvania Securities Act or federal or
state securities, patent, trademark, copyright, antitrust and
unfair competition, pension or employee benefit, labor,
environmental health and safety or tax laws in respect of the
transactions contemplated by or referred to in the Term Loan
Agreement.
(c) We express no opinion as to the validity or
enforceability of any provision of the Term Loan Agreement or
the Notes which (i) permits the Lenders to increase the rate
of interest in the event of delinquency or default if such
increase would be deemed a penalty under applicable law; (ii)
purports to be a waiver by Borrower of any right or benefit
except to the extent permitted by applicable law; (iii)
purports to require that waivers must be in writing to the
extent that an oral agreement or implied agreement by trade
practice or course of conduct modifying provisions of the Term
Loan Agreement or the Notes has been made; or (iv) purports to
exculpate any party from its own negligent acts.
We express no opinion as to the law of any jurisdiction other
than the law of the Commonwealth of Pennsylvania and the federal law of the
United States. For purposes of the opinion expressed in Paragraph 5 above, we
have assumed, with your permission, that Illinois law is identical to
Pennsylvania law in all respects.
The foregoing opinion is solely for your benefit in connection
with the consummation of the transaction described herein and may not be used or
relied upon by you or any other Person without our express written consent for
any other purpose other than (i) any Eligible Assignee that may become a Lender
under the Term Loan Agreement after the date hereof and (ii) Reed Smith Shaw &
McClay LLP, which may rely upon this opinion in rendering their opinion
furnished pursuant to Article III of the Term Loan Agreement. The opinions given
herein are as of the date hereof, and we assume no obligation to update or
supplement this opinion to reflect facts or circumstances which may hereafter
come to our attention or any changes in laws which may hereafter occur.
Very truly yours,
BALLARD SPAHR
ANDREWS & INGERSOLL
-4-
<PAGE>
EXHIBIT E
FORM OF OPINION OF REED SMITH SHAW & McCLAY LLP
________ , 19 __
To each of the Banks, the Administrative Agent, the
Documentation Agent, the Syndication Agent, and the
Co-Agents party to the Term Loan Agreement, dated as
of November 30, 1998, among PECO Energy Company, as
Borrower, the banks named therein, as Banks, certain
Banks specified therein, as Co-Agents, Salomon Smith
Barney Inc., as Syndication Agent, The First
National Bank of Chicago, as Administrative Agent,
and Mellon Bank, N.A., as Documentation Agent
Re: PECO Energy Company
-------------------
Ladies and Gentlemen:
We have acted as counsel to The First National Bank of
Chicago, individually and as Administrative Agent, in connection with the
preparation, execution and delivery of the Term Loan Agreement, dated as of
November 30, 1998, among PECO Energy Company, as Borrower, the banks named
therein, as Banks, certain Banks specified therein, as Co-Agents, Salomon Smith
Barney Inc., as Syndication Agent, The First National Bank of Chicago, as
Administrative Agent, and Mellon Bank, N.A., as Documentation Agent (as amended,
modified or supplemented from time to time, the "Term Loan Agreement"). We are
delivering this opinion pursuant to Section 3.01(a)(vi) of the Term Loan
Agreement. Unless otherwise defined herein, terms defined in the Term Loan
Agreement are used herein as therein defined.
In that connection, we have examined (i) counterparts of the
Term Loan Agreement, executed by the Borrower, the Banks, the Administrative
Agent, the Documentation Agent, the Syndication Agent, and the Co-Agents, (ii)
the Notes, executed by the Borrower, and (iii) the other documents listed on
Exhibit A hereto, including the opinion of Ballard Spahr Andrews & Ingersoll,
counsel to the Borrower (the "Opinion"), furnished to the Administrative Agent
pursuant to Section 3.01(a) of the Term Loan Agreement.
In our examination of the documents referred to above, we have
assumed the authenticity of all such documents submitted to us as originals, the
genuineness of all signatures, the due authority of the parties executing such
documents and the conformity to the originals of all such documents submitted to
us as copies. We have also assumed that the Banks, the Administrative Agent, the
Documentation Agent, the Syndication Agent, the Arrangers, the Co-Agents and the
Lead Managers have duly executed and delivered, with all necessary power and
authority (corporate and otherwise), the Term Loan Agreement. As to matters of
fact, we have relied solely upon the documents we have examined.
Based upon the foregoing, we are of the opinion that, while we
have not independently considered the matters covered by the Opinion to the
extent necessary to enable us to express the conclusions stated therein, each of
the Opinion and the other documents listed in Exhibit A hereto are substantially
responsive to the corresponding requirements set forth in Section 3.01 of the
Term Loan Agreement pursuant to which the same have been delivered.
<PAGE>
Please note that Richard H. Glanton, Esquire, a partner in
this firm, is a director of PECO Energy Company. We have rendered and continue
to render legal services to PECO Energy Company.
The foregoing opinion is solely for your benefit and may not
be relied upon by any other Person other than any Person that may become a
lender under the Term Loan Agreement after the date hereof.
Very truly yours,
KCK:BJB:RKM
-2-
<PAGE>
Other Documents
Certificate of the Secretary or Assistant Secretary of the Borrower pursuant to
Section 3.01(a)(ii) of the Term Loan Agreement.
Certificate of the Secretary or Assistant Secretary of the Borrower pursuant to
Section 3.01(a)(iii) of the Term Loan Agreement.
Certificate of the Chief Financial Officer, Principal Accounting Officer or
Treasurer of the Borrower pursuant to Section 3.01(b)(iii) of the Term Loan
Agreement.
Opinion of Ballard Spahr Andrews & Ingersoll pursuant to Section 3.01(a)(v) of
the Term Loan Agreement.
-3-
<PAGE>
EXHIBIT F
FORM OF ANNUAL AND QUARTERLY COMPLIANCE CERTIFICATE
______________________, 19__
Pursuant to the Term Loan Agreement, dated as of November 30,
1998, among PECO Energy Company, as Borrower, the banks named therein, as Banks,
certain Banks specified therein, as Co-Agents, Salomon Smith Barney Inc., as
Syndication Agent, The First National Bank of Chicago, as Administrative Agent,
and Mellon Bank, N.A., as Documentation Agent (as amended, modified or
supplemented from time to time, the "Term Loan Agreement"), the undersigned,
being ______________________ of the Borrower, hereby certifies on behalf of the
Borrower as follows:
1. Delivered herewith are the financial statements prepared
pursuant to Section 5.01(b)(ii) and Section 5.01(b)(iii) of the Term Loan
Agreement, for the fiscal ________ ended ___________, 19__. All such financial
statements comply with the applicable requirements of the Term Loan Agreement.
2. Schedule I hereto sets forth in reasonable detail the
information and calculations necessary to establish compliance with the
provisions of Section 5.02(c) of the Term Loan Agreement as of the end of the
fiscal period referred to in paragraph 1 above.
3. (Check one and only one:)
__ No Event of Default, or event which with notice or lapse
of time or both would constitute an Event of Default,
has occurred and is continuing or exists.
__ An Event of Default, or event which with notice or lapse
of time or both would constitute an Event of Default,
has occurred and is continuing or exists, and the document(s) attached hereto as
Schedule II specify in detail the nature and period of existence of such Event
of Default or such other event as well as any and all actions with respect
thereto taken or contemplated to be taken by the Borrower.
4. The undersigned has personally reviewed the Term Loan
Agreement, and this certificate was based on an examination made by or under the
supervision of the undersigned sufficient to assure that this certificate is
accurate.
5. Capitalized terms used in this certificate and not
otherwise defined shall have the meanings given in the Term Loan Agreement.
PECO ENERGY COMPANY
By _______________________________________
Name:_____________________________________
Title:____________________________________
Date:_________________________
<PAGE>
AMENDMENT NO. 3 TO THE
AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT
OF PECO ENERGY CAPITAL, L.P.
----------------------------
This Amendment No. 3 to the Amended and Restated Limited
Partnership Agreement of PECO Energy Capital, L.P., a Delaware limited
partnership (the "Partnership"), dated as of April 6, 1998 (this "Amendment"),
is made by and among PECO Energy Capital Corp., a Delaware corporation (the
"General Partner"), as general partner of the Partnership, and the Persons who
are limited partners of the Partnership.
WHEREAS, the General Partner and PECO Energy Company, a
Pennsylvania corporation, have heretofore formed a limited partnership pursuant
to the Delaware Act by filing a Certificate of Limited Partnership of the
Partnership with the Secretary of State of the State of Delaware on May 23,
1994, and by entering into a Limited Partnership Agreement of the Partnership
dated as of May 23, 1994 (the "Original Agreement");
WHEREAS, the Original Agreement was amended and restated in
its entirety by the Amended and Restated Limited Partnership Agreement of the
Partnership, dated as of July 25, 1994, and was further amended by Amendment No.
1, dated as of October 20, 1995 and by Amendment No. 2, dated as of March 1,
1996 (as amended, the "Partnership Agreement");
WHEREAS, the parties hereto desire to amend the
Partnership Agreement as described herein; and
WHEREAS, this Amendment does not adversely affect the powers,
preferences or special rights of any series of Preferred Partner Interests.
NOW, THEREFORE, the parties hereto, intending to be legally
bound hereby, agree to amend the Partnership Agreement as follows:
ARTICLE I - AMENDMENTS
----------------------
1.1 The first sentence of Section 13.02(a)(i) of the
Partnership Agreement is hereby amended and restated as follows:
The Preferred Partners shall be entitled to receive, when, as
and if declared by the General Partner out of funds held by
the Partnership to the extent that the Partnership has cash on
hand sufficient to permit such payments and funds legally
available therefor, cumulative cash distributions at a rate
per annum established by the General Partner, calculated on
the basis of a 360-day year consisting of twelve (12) months
of thirty (30) days each, and for any shorter period,
distributions will be computed on the basis of the actual
number of days elapsed in such period, and payable in United
States dollars, in arrears, with a payment frequency
determined by the General Partner at the time of issuance.
<PAGE>
1.2 The first sentence of Section 13.02(b)(ii) of the
Partnership Agreement is hereby amended by deleting the word "monthly" contained
therein.
1.3 The second sentence of the first paragraph of Section
13.02(d) of the Partnership Agreement is hereby amended and restated as follows:
If (i) the Partnership fails to pay distributions in full on
any series of Preferred Partner Interests for eighteen (18)
consecutive months; (ii) a default under the Indenture occurs
and is continuing; or (iii) PECO is in default on any of its
payment or other obligations under the Guarantee, then the
holders of the Preferred Partner Interests, acting as a single
class, will be entitled, by a vote of the majority of the
aggregate stated liquidation preference of outstanding
Preferred Partner Interests, to appoint and authorize a
special representative (the "Special Representative") to
enforce the Partnership's creditor rights under the
Subordinated Debentures and the Indenture against PECO and
enforce the obligations undertaken by PECO under the
Guarantee, including, after failure to pay distributions for
sixty (60) consecutive months, to declare and pay
distributions on such series of Preferred Partner Interests,
the General Partner agreeing to execute and deliver such
documents as may be necessary, appropriate or convenient for
the Special Representative to enforce such rights and
obligations.
1.4 The third paragraph of Section 13.02(d) of the Partnership
Agreement is hereby amended by (i) deleting the words "monthly distribution
periods" contained in the third (3rd) line therein and substituting therefor the
word "months", and (ii) deleting the word "monthly" contained in the seventh
(7th) line therein.
2
<PAGE>
ARTICLE II - MISCELLANEOUS
--------------------------
2.1 Capitalized Terms. Capitalized terms used but not
otherwise defined herein shall have the meanings assigned to them in the
Partnership Agreement.
2.2 Full Force and Effect. Except to the extent modified
hereby, the Partnership Agreement shall remain in full force and effect.
2.3 Successors and Assigns. This Amendment shall be binding
upon, and shall enure to the benefit of, the parties hereto and their respective
successors and assigns.
2.4 Counterparts. This Amendment may be executed in
counterparts, all of which together shall constitute one agreement binding on
all parties hereto, notwithstanding that all such parties are not signatories to
the original or same counterpart.
2.5 Governing Law. This Amendment shall be interpreted in
accordance with the laws of the State of Delaware (without regard to conflict of
law principles) with all rights and remedies being governed by such laws.
GENERAL PARTNER:
PECO ENERGY CAPITAL CORP.
By:/s/ J. Barry Mitchell
-------------------------------------------
Name: J. Barry Mitchell
Title: President
PREFERRED PARTNERS:
All Preferred Partners now
and hereafter admitted as
Limited Partners of the
Partnership pursuant to the
Powers of Attorney now or
hereafter executed in favor
of, and delivered to, the
General Partner.
By: PECO ENERGY CAPITAL CORP.
By:/s/ J. Barry Mitchell
-------------------------------------------
Name: J. Barry Mitchell
Title: President
3
<PAGE>
================================================================================
AMENDED AND RESTATED
TRUST AGREEMENT
OF
PECO ENERGY CAPITAL TRUST III
PECO ENERGY CAPITAL, L.P.,
as Grantor
and
FIRST UNION TRUST COMPANY, NATIONAL ASSOCIATION,
as Trustee
Dated as of April 6, 1998
================================================================================
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I
DEFINITIONS
ARTICLE II
CONTINUATION OF TRUST
SECTION 2.01. Continuation of Trust ....................................... 4
SECTION 2.02. Trust Account ............................................... 5
SECTION 2.03. Title to Trust Property ..................................... 5
SECTION 2.04. Situs of Trust .............................................. 5
SECTION 2.05. Powers of Trustee Limited ................................... 5
SECTION 2.06. Liability of Holders of Capital Securities .................. 5
ARTICLE III
FORM OF CAPITAL SECURITIES, EXECUTION AND
DELIVERY, TRANSFER AND SURRENDER OF CAPITAL SECURITIES
SECTION 3.01. Form and Transferability of Capital Securities .............. 6
SECTION 3.02. Issuance of Capital Securities .............................. 7
SECTION 3.03. Registration, Transfer and Exchange of
Capital Securities .......................................... 7
SECTION 3.04. Lost or Stolen Capital Securities, Etc. ..................... 8
SECTION 3.05. Cancellation and Destruction of Surrendered
Capital Securities .......................................... 8
SECTION 3.06. Surrender of Capital Securities and
Withdrawal of Preferred Securities .......................... 9
SECTION 3.07. Redeposit of Preferred Securities ........................... 10
SECTION 3.08. Filing Proofs, Certificates and other
Information ................................................. 10
ARTICLE IV
DISTRIBUTIONS AND OTHER RIGHTS OF HOLDERS OF CAPITAL SECURITIES
SECTION 4.01. Distributions of Semiannual Distributions
on Preferred Securities ..................................... 11
SECTION 4.02. Redemptions of Preferred Securities ......................... 11
SECTION 4.03. Distributions in Liquidation of Grantor ..................... 12
SECTION 4.04. Fixing of Record Date for Holders of Capital
Securities .................................................. 13
SECTION 4.05. Payment of Distributions .................................... 13
SECTION 4.06. Special Representative and Voting Rights .................... 13
SECTION 4.07. Changes Affecting Preferred Securities and
Reclassifications, Recapitalizations, Etc. .................. 14
ARTICLE V
THE GUARANTEE
SECTION 5.01. The Guarantee ............................................... 15
i
<PAGE>
Page
----
ARTICLE VI
THE TRUSTEE
SECTION 6.01. Eligibility ................................................. 15
SECTION 6.02. Obligations of the Trustee .................................. 16
SECTION 6.03. Resignation and Removal of the Trustee;
Appointment of Successor Trustee ............................ 18
SECTION 6.04. Corporate Notices and Reports ............................... 19
SECTION 6.05. Status of Trust ............................................. 19
SECTION 6.06. Appointment of Grantor to File on Behalf of
Trust ....................................................... 19
SECTION 6.07. Indemnification by the General Partner ...................... 20
SECTION 6.08. Fees, Charges and Expenses .................................. 20
SECTION 6.09. Appointment of Co-Trustee or Separate Trustee ............... 20
ARTICLE VII
AMENDMENT AND TERMINATION
SECTION 7.01. Supplemental Trust Agreement ................................ 22
SECTION 7.02. Termination ................................................. 22
ARTICLE VIII
MERGER, CONSOLIDATION, ETC. OF GRANTOR
SECTION 8.01. Limitation on Permitted Merger Consolidation,
Etc. of Grantor ............................................. 23
ARTICLE IX
MISCELLANEOUS
SECTION 9.01. Counterparts ................................................ 23
SECTION 9.02. Exclusive Benefits of Parties ............................... 24
SECTION 9.03. Invalidity of Provisions .................................... 24
SECTION 9.04. Notices ..................................................... 24
SECTION 9.05. Trustee's Agents ............................................ 25
SECTION 9.06. Holders of Capital Securities Are Parties ................... 25
SECTION 9.07. Governing Law ............................................... 25
SECTION 9.08. Headings .................................................... 25
SECTION 9.09. Capital Securities Non-Assessable and Fully Paid ............ 25
SECTION 9.10. No Preemptive Rights ........................................ 25
ii
<PAGE>
AMENDED AND RESTATED
TRUST AGREEMENT
AMENDED AND RESTATED TRUST AGREEMENT, dated as of April 6,
1998 (as amended from time to time, this "Trust Agreement") is among PECO ENERGY
CAPITAL, L.P., a Delaware limited partnership, as grantor (the "Grantor"), FIRST
UNION TRUST COMPANY, NATIONAL ASSOCIATION, as trustee (the "Trustee"), and
joined in by PECO ENERGY CAPITAL CORP., a Delaware corporation and the general
partner of the Grantor, not as a grantor, trustee or beneficiary but solely for
the purposes stated herein (the "General Partner").
W I T N E S S E T H:
WHEREAS, the Trustee and the Grantor established the Trust (as
defined below) under the Delaware Business Trust Act (12 Del. C. ss. 3801, et
seq.) (as amended from time to time, the "Business Trust Act"), pursuant to a
Trust Agreement, dated as of March 13, 1998 (the "Original Trust Agreement"),
and a Certificate of Trust filed with the Secretary of State of the State of
Delaware on March 13, 1998; and
WHEREAS, the Trustee and the Grantor hereby desire to continue
the Trust and to amend and restate in its entirety the Original Trust Agreement;
and
WHEREAS, the Trust proposes to issue Capital Securities each
representing a 7.38% Cumulative Preferred Security, Series D, representing a
limited partner interest of the Grantor (the "Preferred Securities"); and
WHEREAS, interests in the Trust are to be evidenced by Capital
Security certificates executed by the Trustee in accordance with this Trust
Agreement, which are to be delivered to the Holders;
NOW, THEREFORE, in consideration of the premises contained
herein and intending to be legally bound hereby, it is agreed by and among the
parties hereto to amend and restate in its entirety the Original Trust Agreement
as follows:
<PAGE>
ARTICLE I
DEFINITIONS
The following definitions shall apply to the respective terms
(in the singular and plural forms of such terms) used in this Trust Agreement
and the Capital Securities:
"Affiliate" of any specified Person means any other Person
controlling or controlled by or under common control with such specified Person.
For the purposes of this definition, "control" when used with respect to any
specified Person means the power to direct the management and policies of such
Person, directly or indirectly whether through the ownership of voting
securities, by contract or otherwise, and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Business Day" means any day other than a day on which banking
institutions in the City of New York or the State of Delaware are closed for
business.
"Business Trust Act" shall have the meaning set forth in the
recitals to this Trust Agreement.
"Capital Security" shall mean a Capital Trust Pass-through
Security issued hereunder representing an interest in the Trust equal to and
representing a Preferred Security and evidenced by a certificate executed by the
Trustee pursuant to Article III.
"Commission" shall have the meaning set forth in Section 6.05
of this Trust Agreement.
"Corporate Office" means the office of the Trustee at which at
any particular time its business in respect of matters governed by this Trust
Agreement shall be administered, which at the date of this Trust Agreement is
located at 1 Rodney Square, 920 King Street, First Floor, Wilmington, Delaware
19801.
"DTC" means the Depository Trust Company or any successor
thereto.
"Exchange" shall have the meaning set forth in Section 6.06 to
this Trust Agreement.
"Exchange Act" shall have the meaning set forth in Section
6.06 to this Trust Agreement.
"Exchange Act Reports" shall have the meaning set forth in
Section 6.06 to this Trust Agreement.
"General Partner" means PECO Energy Capital Corp., a Delaware
corporation, as general partner of the Grantor, and any successor thereto
pursuant to the terms of the Partnership Agreement.
"Grantor" means PECO Energy Capital, L.P., a Delaware limited
partnership, and its successors.
<PAGE>
"Guarantee" means the Payment and Guarantee Agreement dated as
of April 6, 1998, as amended from time to time with respect to the Preferred
Securities delivered by PECO Energy to the Grantor.
"Holder" means the Person in whose name a certificate
representing one or more Capital Securities is registered on the Register
maintained by the Registrar for such purposes.
"Partnership Agreement" means the Amended and Restated Limited
Partnership Agreement of the Grantor dated as of July 25, 1994, as amended from
time to time, together with any Action (as defined in the Partnership Agreement)
established by the General Partner.
"Paying Agent" means the Person from time to time acting as
Paying Agent as provided in Section 4.05 of this Trust Agreement.
"PECO Energy" means PECO Energy Company, a Pennsylvania
corporation.
"Person" means any individual, general partnership, limited
partnership, corporation, limited liability company, joint venture, trust,
business trust, cooperative or association and the heirs, executors,
administrators, legal representatives, successors and assigns of such Person
where the context so admits.
"Preferred Securities" means the 7.38% Cumulative Preferred
Securities, Series D, representing limited partner interests of the Grantor, or
any Successor Securities issued to the Trust and held by the Trustee (unless
withdrawn under Section 3.06) from time to time under this Trust Agreement for
the benefit of the Holders.
"Redemption Date" shall have the meaning set forth in Section
4.02 of this Trust Agreement.
"Register" shall have the meaning set forth in Section 3.03 of
this Trust Agreement.
"Registrar" shall mean any bank or trust company appointed to
register Capital Security certificates and to register transfers thereof as
herein provided.
"Special Representative" shall have the meaning set forth in
Section 13.02(d) of the Partnership Agreement.
"Successor Securities" shall have the meaning set forth in
Section 13.02(e) of the Partnership Agreement.
<PAGE>
"Trust" means the trust governed by this Trust Agreement.
"Trust Agreement" shall mean this Amended and Restated Trust
Agreement, as the same may be amended, modified or supplemented from time to
time.
"Trust Estate" means all right, title and interest of the
Trust in and to the Preferred Securities (including any Successor Securities),
and all distributions and payments with respect thereto, including payments by
PECO Energy under the Guarantee. "Trust Estate" shall not include any amounts
paid or payable to the Trustee pursuant to this Trust Agreement, including,
without limitation, fees, expenses and indemnities.
"Trustee" shall mean First Union Trust Company, National
Association, a national association, in its capacity as Trustee and not in its
individual capacity and any successor as trustee hereunder.
"1933 Act Registration Statement" shall have the meaning set
forth in Section 6.06 to this Trust Agreement.
"1934 Act Registration Statement" shall have the meaning set
forth in Section 6.06 to this Trust Agreement.
ARTICLE II
CONTINUATION OF TRUST
SECTION 2.01. Continuation of Trust.
(a) The Trust continued hereby shall be known as "PECO Energy
Capital Trust III." The Trust exists for the sole purpose of issuing Capital
Securities representing the Preferred Securities held by the Trust and
performing functions directly related thereto. The Grantor hereby delivers to
the Trustee for deposit in the Trust a certificate representing 78,105 Preferred
Securities for the benefit of the Holders. Each Holder is intended by the
Grantor to be the beneficial owner of the number of Preferred Securities
represented by the Capital Securities held by such Holder, not to hold an
undivided interest in all of the Preferred Securities. To the fullest extent
permitted by law, without the need for any other action of any Person, including
the Trustee and any other Holder, each Holder shall be entitled to enforce in
the name of the Trust the Trust's rights under the Preferred Securities
represented by the Capital Securities held by such Holder and any recovery on
such an enforcement action shall belong solely to such Holder who brought the
action, not to the Trust, Trustee or any other Holder individually or to Holders
as a group. Subject to Section 7.02, this Trust shall be irrevocable.
<PAGE>
(b) The Trustee hereby acknowledges receipt of the Preferred
Securities, registered in the name of the Trust, and its acceptance on behalf of
the Trust of the Preferred Securities, and declares that the Trust shall hold
the Preferred Securities (including any Successor Securities) for the benefit of
the Holders.
SECTION 2.02. Trust Account. The Trustee shall open an account
entitled "PECO Energy Capital Trust III - Trust Account." All funds received by
the Trustee on behalf of the Trust from the Preferred Securities or pursuant to
Article V will be deposited in such account by the Trustee until distributed as
provided in Article IV.
SECTION 2.03. Title to Trust Property. Legal title to all of
the Trust Estate shall be vested at all times in the Trust.
SECTION 2.04. Situs of Trust. The situs of the Trust shall be
in Wilmington, Delaware. The Trust's bank account shall be maintained with a
bank in the State of Delaware. The Trustee shall cause to be maintained the
books and records of the Trust at the Corporate Office. The Trust Estate shall
be held in the State of Delaware. Notwithstanding the foregoing, the Trustee may
transfer such of the books and records of the Trust to a co-trustee appointed
pursuant to Section 6.09 or to such agents as it may appoint in accordance with
the Section 9.05 hereof, as shall be reasonably necessary (and for so long as
may be reasonably necessary) to enable such co-trustee or agents to perform the
duties and obligations for which such co-trustee or agents may be so employed.
SECTION 2.05. Powers of Trustee Limited . The Trustee shall
have no power to create, assume or incur indebtedness or other liabilities in
the name of the Trust. The Trustee shall have full power to conduct the business
of the Trust of holding the Preferred Securities for the Holders and taking the
other actions provided by this Trust Agreement.
SECTION 2.06. Liability of Holders of Capital Securities. With
respect to the Trust, Holders of Capital Securities shall be entitled to the
same limitation of personal liability to which stockholders of private
corporations for profit organized under the General Corporation Law of the State
of Delaware are extended.
<PAGE>
ARTICLE III
FORM OF CAPITAL SECURITIES, EXECUTION AND
DELIVERY, TRANSFER AND SURRENDER OF CAPITAL SECURITIES
SECTION 3.01. Form and Transferability of Capital Securities .
(a) Except as otherwise required by DTC, Capital Securities
shall be evidenced by certificates engraved or printed or lithographed with
steel-engraved borders and underlying tint in substantially the form set forth
in Exhibit A annexed to this Trust Agreement, with the appropriate insertions,
modifications and omissions, as hereinafter provided.
(b) Certificates evidencing Capital Securities shall be
executed by the Trustee by the manual signature of a duly authorized signatory
of the Trustee, provided, however, that such signature may be a facsimile if a
Registrar (other than the Trustee) shall have countersigned the Capital Security
by manual signature of a duly authorized signatory of the Registrar. No
certificate evidencing one or more Capital Securities shall be entitled to any
benefit under this Trust Agreement or be valid or obligatory for any purpose
unless it shall have been executed as provided in the preceding sentence. The
Registrar shall record on the Register each Capital Security certificate
executed as provided above and delivered as hereinafter provided.
(c) Certificates evidencing Capital Securities shall be in
denominations of any whole number of Preferred Securities. All Capital Security
certificates shall be dated the date of their execution or countersignature.
(d) Certificates evidencing Capital Securities may be endorsed
with or have incorporated in the text thereof such legends or recitals or
changes not inconsistent with the provisions of this Trust Agreement as may be
required by the Trustee or required to comply with any applicable law or
regulation or with the rules and regulations of any securities exchange upon
which the Capital Securities may be listed or to conform with any usage with
respect thereto.
(e) Title to any Capital Security certificate that is properly
endorsed or accompanied by a properly executed instrument of transfer or
endorsement shall be transferable by delivery with the same effect as in the
case of a negotiable instrument; provided, however, that until the transfer
shall be registered on the Register as provided in Section 3.03, the Trust, the
Trustee, the Registrar and the Grantor may, notwithstanding any notice to the
contrary, treat the Holder thereof at such time as the absolute owner thereof
for the purpose of determining the Person entitled to distributions or to any
notice provided for in this Trust Agreement and for all other purposes.
<PAGE>
SECTION 3.02. Issuance of Capital Securities . Upon receipt by
the Trustee on behalf of the Trust of a certificate or certificates for the
Preferred Securities, subject to the terms and conditions of this Trust
Agreement, the Trustee, on behalf of the Trust, shall execute and deliver to DTC
one or more certificates evidencing the Capital Securities in the name of DTC's
nominee, who shall thereupon be the initial Holder of Capital Securities.
SECTION 3.03. Registration, Transfer and Exchange of Capital
Securities . The Trustee shall cause a Register (the "Register") to be kept at
the office of the Registrar in which, subject to such reasonable regulations as
the Trustee and the Registrar may prescribe, the Trustee shall provide for the
registration of Capital Security certificates and of transfers and exchanges of
Capital Security certificates as herein provided. The Grantor hereby appoints
First Union Trust Company, National Association as the Registrar. The Registrar
shall also act as transfer agent. The Grantor may remove the Registrar and, upon
removal or resignation of the Registrar, appoint a successor Registrar. Subject
to the terms and conditions of this Trust Agreement, the Registrar shall
register the transfers on the Register from time to time of Capital Security
certificates upon any surrender thereof by the Holder in person or by a duly
authorized attorney, properly endorsed or accompanied by a properly executed
instrument of transfer or endorsement, together with evidence of the payment of
any transfer taxes as may be required by law. Upon such surrender, the Trustee
shall execute a new Capital Security certificate representing the same number of
Preferred Securities in accordance with Section 3.01(b) and deliver the same to
or upon the order of the Person entitled thereto.
At the option of a Holder, Capital Security certificates may
be exchanged for other Capital Security certificates representing the same
number of Preferred Securities. Upon surrender of a Capital Security certificate
at the office of the Registrar or such other office as the Trustee may designate
for the purpose of effecting an exchange of Capital Security certificates,
subject to the terms and conditions of this Trust Agreement, the Trustee shall
execute and deliver a new Capital Security certificate representing the same
number of Preferred Securities as the Capital Security certificate surrendered.
As a condition precedent to the registration of the transfer
or exchange of any Capital Security certificate, the Registrar may require (i)
production of proof satisfactory to it as to the identity and genuineness of any
signature; and (ii) compliance with such regulations, if any, as the Trustee or
the Registrar may establish not inconsistent with the provisions of this Trust
Agreement.
<PAGE>
No service charge shall be made to a Holder of Capital
Securities for any registration of transfer or exchange of Capital Security
certificates, but the Trustee or the Registrar shall require payment of a sum
sufficient to cover any tax or governmental charge that may be imposed in
connection with any transfer or exchange of Capital Security certificates.
Neither the Trustee nor the Registrar shall be required (a) to
register the transfer of or exchange any Capital Security certificate for a
period beginning at the opening of business ten days preceding any selection of
Capital Securities to be redeemed and ending at the close of business on the day
of the mailing a notice of redemption of Capital Securities or (b) to register
the transfer of or exchange of Capital Securities called or being called for
redemption in whole or in part, except as provided in Section 4.02.
SECTION 3.04. Lost or Stolen Capital Securities, Etc. In case
any Capital Security certificate shall be mutilated or destroyed or lost or
stolen and in the absence of notice to the Trustee that such Capital Security
has been acquired by a protected purchaser (as such term is used in Section
8-405(a)(1) of the Delaware Uniform Commercial Code), the Trustee shall execute
and deliver a Capital Security certificate of like form and tenor in exchange
and substitution for such mutilated Capital Security certificate or in lieu of
and in substitution for such destroyed, lost or stolen Capital Security
certificate, provided, however, that the Holder thereof provides the Trustee
with (i) evidence satisfactory to the Trustee of such destruction, loss or theft
of such Capital Security certificate, of the authenticity thereof and of his
ownership thereof, (ii) reasonable indemnification satisfactory to the Trustee
and (iii) payment of any expense (including fees, charges and expenses of the
Trustee) in connection with such execution and delivery. Any duplicate Capital
Security certificate issued pursuant to this Section 3.04 shall constitute
complete and indefeasible evidence of beneficial ownership in the Trust, as if
originally issued, whether or not the lost, stolen or destroyed Capital Security
certificate shall be found at any time.
SECTION 3.05. Cancellation and Destruction of Surrendered
Capital Securities. All Capital Security certificates surrendered to the
Trustee shall be cancelled by the Trustee. Except as prohibited by applicable
law or regulation, at any time after six years from the date of surrender of any
Capital Security certificate, the Trustee may destroy such cancelled Capital
Security certificates.
<PAGE>
SECTION 3.06. Surrender of Capital Securities and Withdrawal
of Preferred Securities . Any Person who is the beneficial owner (an "Owner") of
the Capital Securities represented by the global certificate held by DTC or a
successor clearing agency (the "Clearing Agency") or, if a participant in the
Clearing Agency is not the Owner, then as reflected in the records of a Person
maintaining an account with such Clearing Agency (directly or indirectly), in
accordance with the rules of such Clearing Agency, may withdraw all, but not
less than all, of the Preferred Securities represented by such Capital
Securities by providing a written notice and an agreement to be bound by the
terms of the Partnership Agreement to the Trustee at the Corporate Office or at
such other office as the Trustee may designate for such withdrawals, all in form
satisfactory to the Trustee, in its sole discretion. Within a reasonable period
after such request has been properly made, (i) the Trustee shall instruct DTC to
reduce the number of Capital Securities represented by the global certificate
held by DTC by an amount equal to the number of Capital Securities to be so
withdrawn by the Owner, (ii) the Grantor shall issue to the Owner a certificate,
in form substantially similar to that certificate attached hereto as Exhibit A
to the Partnership Agreement, representing the number of Preferred Securities so
withdrawn and (iii) the Trustee, on behalf of the Trust, shall reduce the number
of Preferred Securities represented by the global certificate held by the
Trustee by a like amount; provided, that the Grantor shall not issue any
fractional number of Preferred Securities. If an Owner of Capital Securities
withdraws Preferred Securities in accordance with this Section 3.06, such Owner
of Capital Securities shall cease to be an Owner. The Preferred Securities will
only be issued by the Grantor in certificated form.
An Owner who wishes to withdraw Preferred Securities in
accordance with this Section 3.06 will be required to provide the Grantor with a
completed Form W-8 or such other documents or information as are requested by
the Grantor for tax reporting purposes and thereafter shall be admitted to the
Grantor as a preferred partner of the Grantor upon such Owner's receipt of a
certificate evidencing such Preferred Securities registered in such Owner's
name.
The Trustee shall deliver the Preferred Securities represented
by the Capital Securities surrendered to the Owner in accordance with this
Section 3.06 at the Corporate Office, except that, at the request, risk and
expense of the Owner and for the account of the Owner thereof, such delivery may
be made at such other place as may be designated by such Owner.
Notwithstanding anything in this Section 3.06 to the contrary,
if the Preferred Securities represented by Capital Securities have been called
for redemption in accordance with the Partnership Agreement, no Owner of such
Capital Securities may withdraw any or all of the Preferred Securities
represented by such Capital Securities.
<PAGE>
SECTION 3.07. Redeposit of Preferred Securities. Subject to
the terms and conditions of this Trust Agreement, any holder of Preferred
Securities may redeposit withdrawn Preferred Securities under this Trust
Agreement by delivery to the Trustee of a certificate or certificates for the
Preferred Securities to be deposited, properly endorsed or accompanied, if
required by the Trustee, by a properly executed instrument of transfer or
endorsement in form satisfactory to the Trustee and in compliance with the terms
of the Partnership Agreement, together with all such certifications as may be
required by the Trustee in its sole discretion and in accordance with the
provisions of this Trust Agreement. Within a reasonable period after such
deposit is properly made, the Trustee shall instruct DTC to increase the number
of Capital Securities represented by the global certificate held by DTC by an
amount equal to the Preferred Securities to be deposited. The Capital Securities
will not be issued in certificated form. The Trustee will only accept the
deposit of such Preferred Securities upon payment by such holder of Preferred
Securities to the Trustee of all taxes and other governmental charges and any
fees payable in connection with such deposit and the transfer of the deposited
Preferred Securities.
If required by the Trustee, Preferred Securities presented for
deposit at any time shall also be accompanied by an agreement or assignment, or
other instrument satisfactory to the Trustee, that will provide for the prompt
transfer to the Trustee or its nominee of any distribution or other right that
any Person in whose name the Preferred Securities are registered may thereafter
receive upon or in respect of such deposited Preferred Securities, or in lieu
thereof such agreement of indemnity or other agreement as shall be satisfactory
to the Trustee.
SECTION 3.08. Filing Proofs, Certificates and Other
Information. Any Person presenting Preferred Securities for redeposit in
accordance with Section 3.07 may be required from time to time to file such
proof of residence or other information, to execute such Preferred Security
certificates and to make such representations and warranties as the Trustee may
reasonably deem necessary or proper. The Trustee may withhold or delay the
delivery of any Capital Security or Capital Securities, the transfer, redemption
or exchange of any Capital Security or Capital Securities or the making of any
distribution until such proof or other information is filed, such certificates
are executed or such representations and warranties are made.
<PAGE>
ARTICLE IV
DISTRIBUTIONS AND OTHER RIGHTS OF HOLDERS OF CAPITAL SECURITIES
SECTION 4.01. Distributions of Semiannual Distributions on
Preferred Securities. Whenever the Trustee shall receive any cash distribution
representing a semiannual distribution on the Preferred Securities (whether or
not distributed by the Grantor on the regular semiannual distribution date
therefor) or payment under the Guarantee in respect thereof pursuant to Article
V of this Agreement, the Trustee acting directly or through any Paying Agent
shall distribute to Holders of Capital Securities on the record date fixed
pursuant to Section 4.04, such amounts in proportion to the respective numbers
of Preferred Securities represented by the Capital Securities held by such
Holders.
SECTION 4.02. Redemptions of Preferred Securities. Whenever
the Grantor shall elect or is required to redeem Preferred Securities in
accordance with the Partnership Agreement, it shall (unless otherwise agreed in
writing with the Trustee) give the Trustee not less than 40 days' prior notice
thereof. The Trustee shall, as directed by the Grantor, mail, or cause to be
mailed, first-class postage prepaid, notice of the redemption of Preferred
Securities and the proposed simultaneous redemption of the Capital Securities to
be redeemed in connection herewith, not less than 30 and not more than 60 days
prior to the date fixed for redemption (the "Redemption Date") of the Capital
Securities. Such notice shall be mailed to the Holders of the Capital Securities
to be redeemed, at the addresses of such Holders as the same appear on the
records of the Registrar. No defect in the notice of redemption or in the
mailing or delivery thereof or publication of its contents shall affect the
validity of the redemption proceedings. The Grantor shall provide the Trustee
with such notice, and each such notice shall state: the Redemption Date; the
redemption price at which the Capital Securities and the Preferred Securities
are to be redeemed; that all outstanding Capital Securities are to be redeemed
or, in the case of a redemption of fewer than all outstanding Capital Securities
in connection with a partial redemption of Preferred Securities, the number of
such Capital Securities to be so redeemed; the place or places where Capital
Securities to be redeemed are to be surrendered for redemption; and specifying
the CUSIP number assigned to the Capital Securities. In case fewer than all the
outstanding Capital Securities are to be redeemed, the Capital Securities to be
redeemed shall be selected by lot or pro rata (as nearly as may be practicable
without creating fractional shares) or by any other equitable method determined
by the Trustee.
The Grantor agrees that if a partial redemption of the
Preferred Securities would result in a delisting of the Capital Securities from
any national exchange on which the Capital Securities are then listed, the
Grantor will only redeem the Preferred Securities in whole.
<PAGE>
On the date of any such redemption of Preferred Securities,
provided that the Grantor (or PECO Energy pursuant to the Guarantee) shall then
have deposited with the Trust the aggregate amount payable upon redemption of
the Preferred Securities to be redeemed, the Trustee, on behalf of the Trust,
shall redeem (using the funds so deposited with it) Capital Securities
representing the same number of Preferred Securities redeemed by the Grantor.
Notice having been mailed by the Trustee as aforesaid, from
and after the Redemption Date (unless the Grantor shall have failed to redeem
the Preferred Securities to be redeemed by it as set forth in the Grantor's
notice provided for in this Section 4.02 and PECO Energy shall have failed to
pay the redemption price of the Preferred Securities under the Guarantee), the
Capital Securities called for redemption shall be deemed no longer to be
outstanding and all rights of the Holders of Capital Securities (except the
right to receive the redemption price in cash upon surrender of Capital
Securities) shall cease and terminate. Upon surrender in accordance with said
notice of the Capital Securities endorsed or assigned for transfer, if the
Trustee shall so require, the Holders of such Capital Securities shall receive
for each such Capital Security an amount equal to the redemption price for each
Preferred Security, in addition to accrued and unpaid distributions thereon to
the date fixed for redemption.
If fewer than all of the Capital Securities of any Holder are
called for redemption, the Registrar will deliver to the Holder of such Capital
Securities upon surrender of the certificate evidencing such Capital Securities
a new certificate evidencing the number of Capital Securities not called for
redemption.
SECTION 4.03. Distributions in Liquidation of Grantor.
Upon and to the extent of receipt by the Trust of any distribution from the
Grantor upon the liquidation of the Grantor or any payment under the Guarantee
in respect thereof pursuant to Article V of this Trust Agreement, after
satisfaction of creditors of the Trust as required by applicable law, the
Trustee shall distribute to the Holders of Capital Securities on the record date
fixed pursuant to Section 4.04, such amounts in proportion to the respective
number of Preferred Securities which were represented by the Capital Securities
held by such Holders.
SECTION 4.04. Fixing of Record Date for Holders of Capital
Securities. Whenever any distribution (other than upon any redemption) shall
become payable, or whenever the Trustee shall receive notice of any meeting at
which holders of Preferred Securities are entitled to vote or of which holders
of Preferred Securities are entitled to notice, the Trustee shall in each such
instance fix a record date (which shall be the same date as the record date
fixed by the General Partner with respect to the Preferred Securities, of which
the General Partner shall promptly inform the Trustee) for the determination of
the Holders of Capital Securities who shall be entitled (i) to receive such
distribution, and (ii) to receive notice of, and to give instructions for the
exercise of voting rights at, any such meeting.
<PAGE>
SECTION 4.05. Payment of Distributions. The Grantor shall
appoint one or more Paying Agents for the purpose of paying semiannual
distributions on, the redemption price of, and distributions in liquidation on,
the Capital Securities. The Grantor hereby appoints First Union Trust Company,
National Association to act as Paying Agent and designates the Wilmington office
of the Paying Agent as the place of payment of the redemption price of and of
distributions in liquidation on the Capital Securities. The aforesaid
appointment and designation shall remain in effect until changed by the Grantor.
Payments of semiannual distributions on the Capital Securities shall be payable
by wire transfer into the accounts of or check mailed to the addresses of the
Holders thereof on the record date therefor. Payments of the redemption price of
Capital Securities and distributions in liquidation shall be made upon surrender
of such Capital Securities at the office of the Paying Agent. The Grantor shall
pay semiannual distributions on, the redemption price of, and distributions in
liquidation on, the Preferred Securities directly to the Paying Agent for
distribution to the Holders in accordance with the terms of this Trust
Agreement.
SECTION 4.06. Special Representative and Voting Rights.
(a) If the holders of the Preferred Partner Interests (as
defined in the Partnership Agreement), acting as a single class, are entitled to
appoint and authorize a Special Representative pursuant to Section 13.02(d) of
the Partnership Agreement, the Trustee shall notify the Holders of the Capital
Securities of such right, request direction of each Holder of a Capital Security
as to the appointment of a Special Representative and vote the Preferred
Securities represented by such Capital Security in accordance with such
direction. If the General Partner fails to convene a general meeting of the
Partnership as required in Section 13.02(d) of the Partnership Agreement, the
Trustee shall notify the Holders of the Capital Securities and, if so directed
by the Holders of Capital Securities representing Preferred Securities
constituting at least 10% of the aggregate stated liquidation preference of the
outstanding Preferred Partner Interests (as defined in the Partnership
Agreement) shall convene such meeting.
<PAGE>
(b) Upon receipt of notice of any meeting at which the Holders
of Preferred Securities are entitled to vote, the Trustee shall, as soon as
practicable thereafter, mail to the Holders of Capital Securities a notice,
which shall be provided by the General Partner and which shall contain (i) such
information as is contained in such notice of meeting, (ii) a statement that the
Holders of Capital Securities at the close of business on a specified record
date fixed pursuant to Section 4.04 will be entitled, subject to any applicable
provision of law or of the Partnership Agreement, to instruct the Trustee as to
the exercise of the voting rights pertaining to the amount of Preferred
Securities represented by their respective Capital Securities, and (iii) a brief
statement as to the manner in which such instructions may be given. Upon the
written request of a Holder of a Capital Security on such record date, the
Trustee shall vote or cause to be voted the number of Preferred Securities
represented by the Capital Securities evidenced by such Capital Security in
accordance with the instructions set forth in such request. The Grantor hereby
agrees to take all reasonable action that may be deemed necessary by the Trustee
in order to enable the Trustee to vote such Preferred Securities or cause such
Preferred Securities to be voted. In the absence of specific instructions from
the Holder of a Capital Security, the Trustee will abstain from voting to the
extent of the Preferred Securities represented by such Capital Security.
SECTION 4.07. Changes Affecting Preferred Securities and
Reclassifications, Recapitalizations, Etc. Upon any consolidation, amalgamation,
merger, replacement or conveyance, transfer or lease by the Partnership of its
properties and assets as an entirety in accordance with Section 13.02(e) of the
Partnership Agreement, the Trustee shall, upon the instructions of the Grantor,
treat any Successor Securities or other property (including cash) that shall be
received by the Trustee in exchange for or upon conversion of or in respect of
the Preferred Securities as part of the Trust Estate, and Capital Securities
then outstanding shall thenceforth represent the proportionate interests of
Holders thereof in the new deposited property so received in exchange for or
upon conversion or in respect of such Preferred Securities.
ARTICLE V
THE GUARANTEE
SECTION 5.01. The Guarantee . In connection with the issuance
of the Preferred Securities, PECO Energy has delivered to the General Partner
the Guarantee for the benefit of the holders of the Preferred Securities. If the
General Partner or the Grantor receives any payment under the Guarantee, the
General Partner or the Grantor, as the case may be, will immediately transfer
such payment to the Trustee. All rights to enforce the Guarantee shall remain in
the General Partner, except to the extent set forth in Section 2.04 of the
Guarantee.
<PAGE>
ARTICLE VI
THE TRUSTEE
SECTION 6.01. Eligibility. This Trust Agreement shall at all
times have a Trustee which is a bank that has its principal place of business in
the State of Delaware and shall have a combined capital and surplus of at least
$50,000,000. If such corporation publishes reports of conditions at least
annually, pursuant to law or to the requirements of Federal, State, Territorial
or District of Columbia supervising or examining authority, then for the
purposes of this Section 6.01, the combined capital and surplus of such
corporation shall be deemed to be its combined capital and surplus as set forth
in its most recent report of conditions so published.
In case at any time the Trustee shall cease to be eligible in
accordance with the provisions of this Section 6.01, the Trustee shall resign
immediately in the manner and with the effect specified in Section 6.03.
The Trustee shall make available for inspection by Holders of
Capital Securities at the Corporate Office and at such other places as it may
from time to time deem advisable during normal business hours any reports and
communications received from the Grantor, the General Partner or PECO Energy by
the Trustee as the holder of Preferred Securities.
Promptly upon request from time to time by the Grantor, the
Trustee shall cause the Registrar to furnish to it a list, at the sole expense
of the General Partner, as of a recent date, of the names, addresses and
holdings of all Persons in whose names Capital Securities are registered on the
Register.
SECTION 6.02. Obligations of the Trustee . The Trustee does
not assume any obligation nor shall it be subject to any liability under this
Trust Agreement or any Capital Security to Holders of Capital Securities other
than that it agrees to use good faith in the performance of such duties as are
specifically assigned to the Trustee in this Trust Agreement.
The Trustee shall not be under any obligation to appear in,
prosecute or defend any action, suit or other proceeding with respect to
Preferred Securities or Capital Securities that in its opinion may involve it in
expense or liability, unless indemnity satisfactory to it against all expense
and liability be furnished as often as may be required.
<PAGE>
The Grantor may instruct the Trustee to dissolve the Trust and
distribute the Trust Estate on a pro rata basis to the Holders if the Trust, at
any time, is subject to federal income tax with respect to interest received on
its allocable share of interest on the Deferrable Interest Subordinated
Debentures, Series D issued by PECO Energy Company received by the Grantor, the
Trust is subject to more than a de minimis amount of other taxes, duties or
other governmental charges or if an Investment Company Act Event shall occur and
be continuing. "Investment Company Event" means that the Grantor shall have
received an opinion of counsel (which may be regular counsel to PECO Energy or
an affiliate but not an employee thereof) experienced in such matters to the
effect that a change in law or regulation or a change in official interpretation
of law or regulation by any legislative body, court, governmental agency or
regulatory authority has occurred (a "Change in 1940 Act Law") to the effect
that the Trust is or will be considered an "Investment Company" which is
required to be registered under the Investment Company Act of 1940, which Change
in 1940 Act Law becomes effective on or after the date of the issuance of the
Capital Securities.
In the event that the Trustee is uncertain as to application
or interpretation of any provision of this Trust Agreement or must choose
between alternative courses of action, the Trustee may seek the instructions of
the Grantor (or the Special Representative if one has been appointed) by written
notice requesting instructions. The Trustee shall take and be protected in
taking such action as has been directed by the Grantor (or the Special
Representative if one has been approved); provided that, if the Trustee does not
receive instructions within ten days or such shorter time as is set forth in the
Trustee notice, the Trustee shall be under no duty to take or refrain from
taking such action not inconsistent with this Trust Agreement as it shall deem
advisable and in the interest of the Holders.
The Trustee shall not be liable to any Holder or any other
party having an interest hereunder for any action or any failure to act by it in
reliance upon the advice of or information from legal counsel, accountants, any
Holder of a Capital Security or any other Person believed by it in good faith to
be competent to give such advice or information. The Trustee may rely and shall
be protected from any and all liability in acting upon any written notice,
request, direction or other document believed by it to be genuine and to have
been signed or presented by the proper party or parties.
<PAGE>
The Trustee, its parent, Affiliates or subsidiaries may own,
buy, sell or deal in any class of securities of the Grantor, the General Partner
or PECO Energy and its Affiliates and in Capital Securities or become
pecuniarily interested in any transaction in which the Grantor, the General
Partner or PECO Energy or its Affiliates may be interested or contract with or
lend money to or otherwise act as fully or as freely as if it were not the
Trustee hereunder. The Trustee may also act as transfer agent or registrar of
any of the securities of the Grantor, the General Partner or PECO Energy and its
Affiliates or act in any other capacity for PECO Energy or its Affiliates.
The Trustee (and its officers, directors, employees and
agents) makes no representation nor shall it have any liability for or
responsibility with respect to the issuance of Capital Securities or as to the
validity of the registration statement pursuant to which the Capital Securities
are registered under the Securities Act, the Preferred Securities, the Guarantee
or the Capital Securities (except for its counter-signatures thereon) or any
instruments referred to therein or herein, or as to the correctness of any
statement made therein or herein; provided, however, that the Trustee is
responsible for its representations in this Trust Agreement.
The Trustee assumes no responsibility for the correctness of
the description that appears in the Capital Securities, which can be taken as a
statement of the Grantor summarizing certain provisions of this Trust Agreement.
Notwithstanding any other provision herein or in the Capital Securities, the
Trustee makes no warranties or representations as to the validity, genuineness
or sufficiency of any Preferred Securities or the Guarantee or of the Capital
Securities, as to the validity or sufficiency of this Trust Agreement, as to the
value of the Capital Securities or as to any right, title or interest of the
Holders of Capital Securities, except that the Trustee hereby represents and
warrants as follows: (i) the Trustee has been duly organized and is validly
existing and in good standing under federal law, with full power, authority and
legal right under such laws to execute, deliver and carry out the terms of this
Trust Agreement; (ii) this Trust Agreement has been duly authorized, executed
and delivered by the Trustee; and (iii) this Section 6.02 of the Trust Agreement
constitutes a valid and binding obligation of the Trustee enforceable against
the Trustee in accordance with its terms subject to equitable principles and
laws affecting the enforcement of creditors' rights generally.
SECTION 6.03. Resignation and Removal of the Trustee;
Appointment of Successor Trustee. The Trustee may at any time resign as Trustee
hereunder by notice of its election to do so delivered to the Grantor and the
General Partner, such resignation to take effect upon the appointment of a
successor trustee and its acceptance of such appointment as hereinafter
provided.
<PAGE>
The Trustee may at any time be removed by the Grantor,
provided that an Event of Default has not occurred and is then continuing under
the Indenture dated as of July 1, 1994 between PECO Energy and First Union
National Bank, as successor trustee, as supplemented from time to time, or the
Guarantee, by notice of such removal delivered to the Trustee, such removal to
take effect upon the appointment of a successor trustee and its acceptance of
such appointment as hereinafter provided.
In case at any time the Trustee acting hereunder shall resign
or be removed, the Grantor shall, within 45 days after the delivery of the
notice of resignation or removal, as the case may be, appoint a successor
trustee, which shall be a bank or trust company, or an Affiliate of a bank or
trust company, having its principal office in the State of Delaware and having a
combined capital and surplus of at least $50,000,000. If a successor Trustee
shall not have been appointed in 45 days, the resigning Trustee may petition a
court of competent jurisdiction to appoint a successor trustee, and the expenses
of such proceeding shall be borne by the General Partner. Every successor
trustee shall execute and deliver to its predecessor and to the Grantor and the
General Partner an instrument in writing accepting its appointment hereunder,
and thereupon such successor trustee, without any further act or deed, shall
become fully vested with all the rights, powers, duties and obligations of its
predecessor and for all purposes shall be the Trustee under this Trust
Agreement, and such predecessor, upon payment of all sums due it and on the
written request of the Grantor, shall promptly execute and deliver an instrument
transferring to such successor all rights and powers of such predecessor
hereunder, shall duly assign, transfer and deliver all rights, title and
interest in the Preferred Securities and any moneys or property held hereunder
to such successor and shall deliver to such successor a list of the Holders of
all outstanding Capital Securities. Any successor Trustee shall promptly mail
notice of its appointment to the Holders of Capital Securities.
Any Person into or with which the Trustee may be merged,
consolidated or converted, or any Person succeeding to the corporate trust
business of the Trustee, shall be the successor of such Trustee without the
execution or filing of any document or any further act, provided such Person
shall be eligible under the provisions of the immediately preceding paragraph.
SECTION 6.04. Corporate Notices and Reports. The General
Partner agrees that it will give timely notice to the Trustee and any Paying
Agent of any record date, which record date shall become the record date with
respect to the Capital Securities pursuant to Section 4.04 hereof, for the
Preferred Securities and that it will deliver to the Trustee, and the Trustee
will, promptly after receipt thereof, transmit to the Holders of Capital
Securities, in each case at the address recorded on the Register, copies of all
notices and reports (including financial statements) required by law, by the
rules of any national securities exchange upon which the Capital Securities are
listed or by the Partnership Agreement to be furnished to holders of Preferred
Securities. Such transmission will be at the expense of the General Partner and
the General Partner will provide the Trustee with such number of copies of such
documents as the Trustee may reasonably request. In addition, the Trustee will
transmit to the Holders of Capital Securities at the Grantor's expense such
other documents as may be requested by the Grantor.
<PAGE>
SECTION 6.05. Status of Trust. It is intended that the Trust
shall not be an "investment company" under the Investment Company Act of 1940,
as amended. While it is expressly understood and agreed that the Trustee is
acting only in a ministerial capacity hereunder, the Securities and Exchange
Commission (the "Commission") has determined that as of the date hereof, the
Trust is an issuer under the Federal securities laws and is thus required to
sign any registration statement filed or to be filed in connection with the
Capital Securities.
SECTION 6.06. Appointment of Grantor to File on Behalf of
Trust. The Grantor and the Trustee hereby authorize and direct the Grantor, if
the Grantor deems it necessary, appropriate or convenient to do, as the sponsor
of the Trust (and any of the following are hereby confirmed if such action has
been taken) (i) to file with the Commission and execute, in each case on behalf
of the Trust, (a) the Registration Statement on Form S-3 (the "1933 Act
Registration Statement"), including any pre-effective or post-effective
amendments to such 1933 Act Registration Statement (including the prospectus and
the exhibits contained therein), relating to the registration under the
Securities Act of 1933, as amended, of the Capital Securities of the Trust and
certain other securities; (b) a Registration Statement on Form 8-A (the "1934
Act Registration Statement"), including all pre-effective and post-effective
amendments thereto relating to the registration of the Capital Securities under
Section 12(b) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"); and (c) any reports or other papers or documents required to be filed by,
or desirable to be filed with, the Commission, under the Exchange Act ("Exchange
Act Reports"); (ii) to file with the New York Stock Exchange or Philadelphia
Stock Exchange (each, an "Exchange") and execute on behalf of the Trust one or
more listing applications and all other applications, statements, certificates,
agreements and other instruments as shall be necessary or desirable to cause the
Capital Securities to be listed on any of the Exchanges; and (iii) to file and
execute on behalf of the Trust such applications, reports, surety bonds,
irrevocable consents, appointments of attorney for service of process and other
papers and documents as shall be necessary or desirable to register the Capital
Securities under the securities or "Blue Sky" laws of such jurisdictions as the
Grantor, on behalf of the Trust, may deem necessary or desirable.
<PAGE>
SECTION 6.07. Indemnification by the General Partner. To the
fullest extent permitted by law, the General Partner agrees to indemnify and
defend the Trustee, the Registrar and any Paying Agent and their directors,
officers, employees and agents against, and hold each of them harmless from, any
liability, costs and expenses (including reasonable attorneys' fees) that may
arise out of or in connection with its acting as the Trustee or the Registrar or
Paying Agent, respectively, under this Trust Agreement and the Capital
Securities, except for any liability arising out of gross negligence, bad faith
or willful misconduct on the part of any such Person or Persons.
SECTION 6.08. Fees, Charges and Expenses. No fees, charges or
expenses of the Trustee or any Trustee's agent hereunder or of any Registrar
shall be payable by any Person other than the General Partner; provided that, if
the Trustee incurs fees, charges or expenses for which it is not otherwise
liable under this Trust Agreement due to any action taken at the election of a
Holder of Capital Securities or other Person, such Holder or other Person will
be liable for such fees, charges and expenses.
SECTION 6.09. Appointment of Co-Trustee or Separate Trustee.
(a) Notwithstanding any other provisions of this Trust
Agreement, at any time, for the purpose of meeting any legal requirements of any
jurisdiction in which any property of the Trust must at the time be located, the
Trustee shall have the power and may execute and deliver all instruments to
appoint one or more Persons to act as co-trustee or co-trustees, or separate
trustee or separate trustees, of all or any part of the Trust, and to vest in
such Person or Persons, in such capacity and for the benefit of the Holders,
such title to the Trust, or any part thereof, and, subject to the other
provisions of this Section 6.09, such powers, duties, obligations, rights and
trusts as the Trustee may consider necessary or desirable. No co-trustee or
separate trustee hereunder shall be required to meet the terms of eligibility as
successor trustee under Section 6.03 and no notice to the Holders of the
appointment of any co-trustee or separate trustee shall be required.
<PAGE>
(b) Every separate trustee and co-trustee shall, to the extent
permitted by law, be appointed and act subject to the following provisions and
conditions:
(i) all rights, powers, duties and obligations conferred
or imposed upon and exercised or performed by the Trustee and such
separate trustee or co-trustee jointly (it being understood that such
separate trustee or co-trustee is not authorized to act separately
without the Trustee joining in such act), except to the extent that
under any laws of any jurisdiction in which any particular act or acts
are to be performed, the Trustee shall be incompetent or unqualified to
perform such act or acts, in which event, such rights, powers, duties
and obligations (including the holding of title to the Trust or any
portion thereof in any such jurisdiction) shall be exercised and
performed singly by such separate trustee or co-trustee, but solely at
the direction of the Trustee;
(ii) no Trustee hereunder shall be personally liable by
reason of any act or omission of any other trustee hereunder; and
(iii) the Trustee may at any time accept the resignation
of or remove any separate trustee or co-trustee.
(c) Any notice, request or other writing given to the Trustee
shall be deemed to have been given to each of the then separate trustees and
co-trustees, as effectively as if given to each of them. Every instrument
appointing any separate trustee or co-trustee shall refer to this Trust
Agreement. Each separate trustee and co-trustee, upon its acceptance of the
trusts conferred, shall be vested with the estates or property specified in its
instrument of appointment, either jointly with the Trustee or separately, as may
be provided therein, subject to all the provisions of this Trust Agreement,
specifically including every provision of this Trust Agreement relating to the
conduct of, affecting the liability of, or affording protection to, the Trustee.
Every such instrument shall be filed with the Trustee and a copy thereof given
to the Grantor.
(d) Any separate trustee or co-trustee may at any time
constitute the Trustee as its agent or attorney-in-fact with full power and
authority, to the extent not prohibited by law, to do any lawful act under or in
respect to this Trust Agreement on its behalf and in its name. If any separate
trustee or co-trustee shall die, become incapable of acting, resign or be
removed, all of its estates, properties, rights, remedies and trusts shall vest
in and be exercised by the Trustee, to the extent permitted by law, without the
appointment of a new or successor trustee.
<PAGE>
ARTICLE VII
AMENDMENT AND TERMINATION
SECTION 7.01. Supplemental Trust Agreement. The Grantor or
the General Partner, and the Trustee may, at any time and from time to time,
without the consent of the Holders, enter into one or more agreements
supplemental hereto, in form satisfactory to the Trustee, for any of the
following purposes:
(a) to evidence the succession of another partnership,
corporation or other entity to the Grantor or the General Partner and the
assumption by any such successor of the covenants of the Grantor or the General
Partner herein contained; or
(b) to add to the covenants of the Grantor or the General
Partner for the benefit of the Holders, or to surrender any right or power
herein conferred upon the Grantor or the General Partner; or
(c) (i) to correct or supplement any provision herein which
may be defective or inconsistent with any other provision herein or (ii) to make
any other provisions with respect to matters or questions arising under this
Trust Agreement, provided that any such action taken under subsection (c)(ii)
hereof shall not materially adversely affect the interests of the Holders; or
(d) to cure any ambiguity or correct any mistake.
Any other amendment or agreement supplemental hereto must be
in writing and approved by Holders of 66-2/3% of the then outstanding Capital
Securities.
SECTION 7.02. Termination. The Trust Agreement shall
terminate on the date that all outstanding Capital Securities have been redeemed
or there has been a final distribution in respect of the Preferred Securities in
connection with any liquidation, dissolution or winding up of the Grantor and
such distribution has been made to the Holders of the Capital Securities. Except
as provided in Section 6.07 and Section 6.08, upon termination of this Trust
Agreement and the Trust in accordance with the foregoing, the respective
obligations and responsibilities of the Trustee, the Grantor and the General
Partner created hereby shall terminate.
<PAGE>
ARTICLE VIII
MERGER, CONSOLIDATION, ETC. OF GRANTOR
SECTION 8.01. Limitation on Permitted Merger Consolidation,
Etc. of Grantor. The Grantor agrees that it will not consolidate, amalgamate,
merge with or into, or be replaced by, or convey, transfer or lease its
properties and assets substantially in their entirety to any corporation or
other entity without the consent of the Holders of 66-2/3% of the Capital
Securities unless permitted by Section 13.02(e) of the Partnership Agreement and
(i) such merger, consolidation, amalgamation, replacement, conveyance, transfer
or lease does not cause the Capital Securities to be delisted by any national
securities exchange or other organization on which the Capital Securities are
then listed, (ii) such merger, consolidation, amalgamation, replacement,
conveyance, transfer or lease does not cause the Capital Securities to be
downgraded by any "nationally recognized statistical rating organization," as
that term is defined by the Commission for purposes of Rule 436(g)(2) under the
Securities Act of 1933, as amended, and (iii) prior to such merger,
consolidation, amalgamation, replacement, conveyance, transfer or lease, PECO
Energy has received an opinion of counsel (which may be regular counsel to PECO
Energy or an Affiliate, but not an employee thereof) experienced in such matters
to the effect that Holders of outstanding Capital Securities will not recognize
any gain or loss for Federal income tax purposes as a result of the merger,
consolidation, amalgamation, replacement, conveyance, transfer or lease.
ARTICLE IX
MISCELLANEOUS
SECTION 9.01. Counterparts. This Trust Agreement may be
executed by the Grantor, the Trustee and the General Partner in separate
counterparts, each of which counterparts, when so executed and delivered shall
be deemed an original, but all such counterparts taken together shall constitute
one and the same instrument. Delivery of an executed counterpart of a signature
page to this Trust Agreement by telecopier shall be effective as delivery of a
manually executed counterpart of this Trust Agreement. Copies of this Trust
Agreement shall be filed with the Trustee and any Trustee's agents appointed
pursuant to Section 9.05 and shall be open to inspection during business hours
at the Corporate Office and the respective offices of such Trustee's agents, if
any, by any Holder of a Capital Security.
SECTION 9.02. Exclusive Benefits of Parties . This Trust
Agreement is for the exclusive benefit of the parties hereto and the Holders of
the Capital Securities and the Preferred Securities, and their respective
successors hereunder, and shall not be deemed to give any legal or equitable
right, remedy or claim to any other Person whatsoever.
<PAGE>
SECTION 9.03. Invalidity of Provisions. In case any one or
more of the provisions contained in this Trust Agreement or in the Capital
Securities should be or become invalid, illegal or unenforceable in any respect,
the validity, legality and enforceability of the remaining provisions contained
herein or therein shall in no way be affected, prejudiced or disturbed thereby.
SECTION 9.04. Notices. Any notices to be given to the Grantor
or the General Partner hereunder shall be in writing and shall be deemed to have
been duly given if personally delivered or sent by mail, or by telegram or telex
or telecopier confirmed by letter, addressed to the General Partner at 1013
Centre Road, Suite 350F, Wilmington, Delaware 19805, Attention: President, or at
any other place to which the General Partner may have transferred its principal
executive office.
Any notices to be given to the Trustee hereunder or under the
Capital Securities shall be in writing and shall be deemed to have been duly
given if personally delivered or sent by mail, or by telegram or telex or
telecopier confirmed by letter, addressed to the Trustee at the Corporate
Office.
Any notices given to any Holder of a Capital Security
hereunder or under the Capital Securities shall be in writing and shall be
deemed to have been duly given if personally delivered or sent by mail, or by
telegram or telex or telecopier confirmed by letter, addressed to such Holder at
the address of such Holder as it appears on the books of the Trustee or, if such
Holder shall have timely filed with the Trustee a written request that notices
intended for such Holder be mailed to some other address, at the address
designated in such request.
Delivery of a notice sent by mail, or by telegram or telex or
telecopier shall be deemed to be effected at the time when a duly addressed
letter containing the same (or a duly addressed letter confirming an earlier
notice in the case of a telegram or telex or telecopier message) is deposited,
postage prepaid, in a post office letter box. The Trustee may, however, act upon
any telegram or telex or telecopier message received by it from or on behalf of
the other parties hereof or from any Holder of a Capital Security,
notwithstanding that such telegram or telex or telecopier message shall not
subsequently be confirmed by letter as aforesaid.
SECTION 9.05. Trustee's Agents. The Trustee may from time to
time appoint agents to act in any respect for the Trustee for the purposes of
this Trust Agreement. The Trustee shall have no liability for the acts or
omissions of agents selected by it with due care. The Trustee will notify the
General Partner prior to any such action.
<PAGE>
SECTION 9.06. Holders of Capital Securities Are Parties .
Notwithstanding that Holders of Capital Securities have not executed and
delivered this Trust Agreement or any counterpart thereof, the Holders of
Capital Securities from time to time shall be bound by all of the terms and
conditions hereof and of the Capital Securities by acceptance of delivery of
Capital Securities.
SECTION 9.07. Governing Law . This Trust Agreement and the
Capital Securities and all rights hereunder and thereunder and provisions hereof
and thereof shall be governed by, and construed in accordance with, the law of
the State of Delaware without giving effect to principles of conflict of laws.
SECTION 9.08. Headings . The headings of articles and sections
of this Trust Agreement and in the form of the Capital Security set forth in
Exhibit A hereto have been inserted for convenience only and are not to be
regarded as part of this Trust Agreement or to have any bearing upon the meaning
or interpretation of any provision contained herein or in the Capital
Securities.
SECTION 9.09. Capital Securities Non-Assessable and Fully Paid
. The Holders of the Capital Securities shall not be personally liable for
obligations of the Trust, the interests in the Trust represented by the Capital
Securities shall be non-assessable for any losses or expenses of the Trust or
for any reason whatsoever, and the Capital Securities upon delivery thereof by
the Trustee pursuant to this Trust Agreement are and shall be deemed fully paid.
SECTION 9.10. No Preemptive Rights . No Holder shall be
entitled as a matter of right to subscribe for or purchase, or have any
preemptive right with respect to, any part of any new or additional interest in
the Trust, whether now or hereafter authorized and whether issued for cash or
other consideration or by way of distribution.
<PAGE>
IN WITNESS WHEREOF, the Grantor and the Trustee and the
General Partner have duly executed this Trust Agreement as of the day and year
first above set forth.
PECO ENERGY CAPITAL, L.P.
By: PECO ENERGY CAPITAL CORP.,
its general partner
By: /s/ J. Barry Mitchell
---------------------------
Name: J. Barry Mitchell
Title: President
FIRST UNION TRUST COMPANY,
NATIONAL ASSOCIATION, as
trustee
By: /s/ Doris J. Kruck
---------------------------
Name: Doris J. Kruck
Title: Vice President
The General Partner joins in this Trust Agreement solely for the
purposes of obligating itself under Sections 4.04, 4.06, 6.01, 6.04, 6.07 and
6.08 of this Trust Agreement and not as grantor, trustee or beneficiary.
PECO ENERGY CAPITAL CORP.
By: /s/ J. Barry Mitchell
---------------------------
Name: J. Barry Mitchell
Title: President
<PAGE>
EXHIBIT A
CAPITAL TRUST PASS-THROUGH SECURITIES
OF PECO ENERGY CAPITAL TRUST III,
a Delaware Business Trust,
each Representing a 7.38% Cumulative
Preferred Security, Series D of
PECO Energy Capital, L.P. (a Delaware limited partnership)
No. 1 78,105 Capital Securities
First Union Trust Company, National Association, not in its
individual capacity, but solely as Trustee (the "Trustee") on behalf of the
above-named Trust, hereby certifies that Cede & Co. is the registered owner of
78,105 Capital Trust Pass-through Securities ("Capital Securities"), each
representing a 7.38% Cumulative Preferred Security, Series D (the "Preferred
Securities") of PECO Energy Capital, L.P., a Delaware limited partnership (the
"Grantor"), deposited in trust by the Grantor with the Trustee pursuant to an
Amended and Restated Trust Agreement of PECO Energy Capital Trust III dated as
of April 6, 1998 (as amended or supplemented from time to time, the "Trust
Agreement") among the Grantor, the Trustee and PECO Energy Capital Corp., the
general partner of the Grantor (the "General Partner"). Subject to the terms of
the Trust Agreement, the registered Holder hereof is entitled to a full interest
in the same number of Preferred Securities held by the Trustee under the Trust
Agreement, as are represented by the Capital Securities, including the
distribution, voting, liquidation and other rights of the Preferred Securities
specified in the Amended and Restated Limited Partnership Agreement of the
Grantor, as amended, a copy of which is on file at the Corporate Office.
1. The Trust Agreement. The Capital Securities are issued upon
the terms and conditions set forth in the Trust Agreement. The Trust Agreement
(a copy of which is on file at the Corporate Office of the Trustee) sets forth
the rights of Holders of Capital Securities and the rights and duties of the
Trustee, the Grantor and the General Partner. The statements made herein are
summaries of certain provisions of the Trust Agreement and are subject to the
detailed provisions thereof, to which reference is hereby made. In the event of
any conflict or discrepancy between the provisions hereof and the provisions of
the Trust Agreement, the provisions of the Trust Agreement will govern. Unless
otherwise expressly herein provided, all defined terms used herein shall have
the meanings ascribed thereto in the Trust Agreement.
2. Enforcement of Rights; Withdrawal of Preferred Securities.
To the fullest extent permitted by law, without the need for any other action of
any Person, including the Trustee and any other Holder, each Holder shall be
entitled to enforce in the name of the Trust the Trust's rights under the
Preferred Securities represented by the Capital Securities held by such Holder
and any recovery on such enforcement action shall belong solely to such Holder
who brought the action, not to the Trust, Trustee or any other Holder
individually or to Holders as a group. Any beneficial owner of Capital
Securities may withdraw all, but not less than all, of the Preferred Securities
represented by such Capital Securities by providing a written notice and an
agreement to be bound by the terms of the Partnership Agreement to the Trustee
at the Corporate Office, with evidence of beneficial ownership in form
satisfactory to the Trustee; provided, however, that the Grantor shall not issue
any fractional number of Preferred Securities.
A-1
<PAGE>
3. Distributions of Semiannual Distributions on Preferred
Securities. Whenever and to the extent the Trustee shall receive any cash
distribution representing a semiannual distribution on the Preferred Securities
(whether or not distributed by the Grantor on the regular semiannual
distribution date therefor) or payment by PECO Energy Company ("PECO Energy")
under the Payment and Guarantee Agreement dated as of April 6, 1998 (the
"Guarantee") in respect thereof, the Trustee acting directly or through any
Paying Agent shall distribute to Holders of Capital Securities on the record
date therefor, such amounts in proportion to the respective numbers of Preferred
Securities represented by the Capital Securities held by such Holders.
4. Redemptions of Preferred Securities. Whenever the Grantor
shall elect or is required to redeem Preferred Securities in accordance with the
Partnership Agreement, it shall (unless otherwise agreed in writing with the
Trustee) give the Trustee not less than 40 days' prior notice thereof. The
Trustee shall, as directed by the Grantor, mail, with first-class postage
prepaid, notice of the redemption of Preferred Securities and the proposed
simultaneous redemption of the Capital Securities to be redeemed, not less than
30 and not more than 60 days prior to the date fixed for redemption of such
Preferred Securities and Capital Securities. Such notice shall be mailed to the
Holders of the Capital Securities, at the addresses of such Holders as the same
appear on the records of the Trustee. No defect in the notice of redemption or
in the mailing or delivery thereof or publication of its contents shall affect
the validity of the redemption proceedings. In case fewer than all the
outstanding Capital Securities are to be redeemed, the Capital Securities to be
redeemed shall be selected by lot or pro rata (as nearly as may be practicable
without creating fractional shares) or by any other equitable method determined
by the Grantor. On the date of any such redemption of Preferred Securities,
provided that the Grantor (or PECO Energy pursuant to the Guarantee) shall then
have deposited with the Trust the aggregate amount payable upon redemption of
the Preferred Securities to be redeemed, the Trustee, on behalf of the Trust,
shall redeem (using the funds so deposited with it) Capital Securities
representing the same number of Preferred Securities to be redeemed by the
Grantor.
A-2
<PAGE>
5. Distributions in Liquidation. Upon receipt by the Trustee
of any distribution from the Grantor upon the liquidation of the Grantor or any
payment under the Guarantee in respect thereof, after satisfaction of creditors
of the Trust required by applicable law, the Trustee shall distribute to Holders
of Capital Securities on the record date therefor, such amounts in proportion to
the respective number of Preferred Securities which were represented by the
Capital Securities held by such Holders.
6. Fixing of Record Date for Holders of Capital Securities.
Whenever any distribution (other than upon any redemption) shall become payable,
or whenever the Trustee shall receive notice of any meeting at which holders of
Preferred Securities are entitled to vote or of which holders of Preferred
Securities are entitled to notice, the Trustee shall in each such instance fix a
record date (which shall be the same date as the record date fixed by the
General Partner with respect to the Preferred Securities) for the determination
of the Holders of Capital Securities who shall be entitled (i) to receive such
distribution or (ii) to receive notice of, and to give instructions for the
exercise of voting rights at, any such meeting.
7. Payment of Distributions. Payments of semiannual
distributions on the Capital Securities shall be payable by wire transfer into
the accounts of or check mailed to the addresses of the Holders thereof on the
record date therefor. Payments of the redemption price of Capital Securities and
distributions in liquidation shall be made against surrender of such Capital
Securities at the office of First Union Trust Company, National Association, as
the Paying Agent.
8. Special Representative; Voting Rights. (a) If the holders
of the Preferred Partner Interests (as defined in the Partnership Agreement),
acting as a single class, are entitled to appoint and authorize a Special
Representative pursuant to Section 13.02(d) of the Partnership Agreement, the
Trustee shall notify the Holders of the Capital Securities of such right,
request direction of each Holder of a Capital Security and vote the Preferred
Securities represented by such Capital Security in accordance with such
direction. If the General Partner fails to convene a general meeting of the
Partnership as required in Section 13.02(d) of the Partnership Agreement, the
Trustee shall notify the Holders of the Capital Securities and, if so directed
by the Holders of Capital Securities representing Preferred Securities
constituting at least 10% of the aggregate stated liquidation preference of the
outstanding Preferred Partner Interests (as defined in the Partnership
Agreement), shall convene such meeting.
A-3
<PAGE>
(b) Upon receipt of notice of any meeting at which the holders
of Preferred Securities are entitled to vote, the Trustee shall, as soon as
practicable thereafter, mail to the Holders of Capital Securities a notice,
which shall be provided by the Grantor and which shall contain (i) such
information as is contained in such notice of meeting, (ii) a statement that the
Holders of Capital Securities at the close of business on a specified record
date therefor will be entitled, subject to any applicable provision of law or of
the Partnership Agreement, to instruct the Trustee as to the exercise of the
voting rights pertaining to the amount of Preferred Securities represented by
their respective Capital Securities, and (iii) a brief statement as to the
manner in which such instructions may be given. Upon the written request of a
Holder of a Capital Security on such record date, the Trustee shall vote or
cause to be voted the number of Preferred Securities represented by the Capital
Securities in accordance with the instructions set forth in such request. In the
absence of specific instructions from the Holder of a Capital Security, the
Trustee will abstain from voting to the extent of the Preferred Securities
represented by such Capital Security.
9. Changes Affecting Preferred Securities and
Reclassifications, Recapitalizations, Etc. Upon any consolidation, amalgamation,
merger, replacement or conveyance, transfer or lease by the Grantor of its
properties and assets substantially in their entirety in accordance with Section
13.02(e) of the Partnership Agreement, the Trustee shall, upon the instructions
of the Grantor, treat any Successor Securities or other property that shall be
received by the Trustee in exchange for or upon conversion of or in respect of
the Preferred Securities as part of the Trust Estate, and Capital Securities
then outstanding shall thenceforth represent the proportionate interests of
Holders thereof in the new deposited property so received in exchange for or
upon conversion or in respect of such Preferred Securities.
10. Transfer and Exchange of Capital Securities. Subject to
the terms and conditions of the Trust Agreement, the Trustee shall register the
transfer on its books from time to time of Capital Security certificates upon
any surrender thereof by the Holder in person or by a duly authorized attorney,
properly endorsed or accompanied by a properly executed instrument of transfer
or endorsement, together with evidence of the payment of any transfer taxes as
may be required by law. Upon such surrender, the Trustee shall execute a new
Capital Security representing the same aggregate number of the Capital
Securities surrendered in accordance with the Trust Agreement and deliver the
same to or upon the order of the Person entitled thereto.
A-4
<PAGE>
Upon surrender of a Capital Security at the Corporate Office
or such other office as the Trustee may designate for the purpose of effecting
an exchange of Capital Security certificates, subject to the terms and
conditions of the Trust Agreement, the Trustee shall execute and deliver a new
Capital Security certificate representing the same number of Preferred
Securities as the Capital Security certificate surrendered.
As a condition precedent to the registration of a transfer or
exchange of any Capital Security certificate, the Registrar, may require (i) the
production of proof satisfactory to it as to the identity and genuineness of any
signature; and (ii) compliance with such regulations, if any, as the Trustee or
the Registrar may establish not inconsistent with the provisions of the Trust
Agreement.
Neither the Trustee nor the Registrar shall be required (a) to
register the transfer or exchange of any Capital Security certificate for a
period beginning at the opening of business ten days next preceding any
selection of Capital Securities to be redeemed and ending at the close of
business on the day of the mailing of a notice of redemption of Capital
Securities or (b) to transfer or exchange Capital Securities called or being
called for redemption in whole or in part.
11. Title to Capital Securities. It is a condition of the
Capital Securities, and every successive Holder hereof by accepting or holding
the same consents and agrees, that title to this Capital Security certificate,
when properly endorsed or accompanied by a properly executed instrument of
transfer or endorsement, is transferable by delivery with the same effect as in
the case of a negotiable instrument; provided, however, that until the transfer
of this Capital Security certificate shall be registered on the books of the
Trustee, the Trustee may, notwithstanding any notice to the contrary, treat the
Holder hereof at such time as the absolute owner hereof for the purpose of
determining the Person entitled to distributions or to any notice provided for
in the Trust Agreement and for all other purposes.
12. Reports, Inspection of Transfer Books. The Trustee shall
make available for inspection by Holders of Capital Securities at the Corporate
Office and at such other places as it may from time to time deem advisable
during normal business hours any reports and communications received by the
Trustee as the record holder of Preferred Securities. The Registrar shall keep
books at the Corporate Office for the registration of transfer of Capital
Securities, which books at all reasonable times will be open for inspection by
the Holders of Capital Securities as and to the extent provided by applicable
law.
A-5
<PAGE>
13. Supplemental Trust Agreement. The Grantor or the General
Partner may, and the Trustee shall, at any time and from time to time, without
the consent of the Holders, enter into one or more agreements supplemental
hereto, in form satisfactory to the Trustee, for any of the following purposes:
(a) to evidence the succession of another partnership, corporation or other
entity to the Grantor or the General Partner and the assumption by any such
successor of the covenants of the Grantor or the General Partner herein
contained; (b) to add to the covenants of the Grantor or the General Partner for
the benefit of the Holders, or to surrender any right or power herein conferred
upon the Grantor or the General Partner; (c)(i) to correct or supplement any
provision herein which may be defective or inconsistent with any other provision
herein or (ii) to make any other provisions with respect to matters or questions
arising under this Trust Agreement, provided that any such action taken under
subsection (ii) hereof shall not materially adversely affect the interests of
the Holders; or (d) to cure any ambiguity or correct any mistake. Any other
amendment or agreement supplemental hereto must be in writing and approved by
Holders of 66-2/3% of the then outstanding Capital Securities.
14. Governing Law. The Trust Agreement and this Capital
Security and all rights thereunder and hereunder and provisions thereof and
hereof shall be governed by, and construed in accordance with, the law of the
State of Delaware without giving effect to principles of conflict of laws.
15. Capital Security Non-Assessable and Fully Paid. Holders of
Capital Securities shall not be personally liable for obligations of the Trust,
the interest in the Trust represented by the Capital Securities shall be
non-assessable for any losses or expenses of the Trust or for any reason
whatsoever and the Capital Securities upon delivery thereof by the Trustee
pursuant to the Trust Agreement are and shall be deemed fully paid.
16. Liability of Holders of Capital Securities. Holders of
Capital Securities shall be entitled to the same limitation of personal
liability extended to stockholders of private corporations for profit organized
under the General Corporation Law of the State of Delaware.
17. No Preemptive Rights. No Holder shall be entitled as a
matter of right to subscribe for or purchase, or have any preemptive right with
respect to, any part of any new or additional interest in the Trust, whether now
or hereafter authorized and whether issued for cash or other consideration or by
way of distribution.
A-6
<PAGE>
This Capital Security certificate shall not be entitled to any
benefits under the Trust Agreement or be valid or obligatory for any purpose
unless this Capital Security certificate shall have been executed manually or,
if a Registrar for the Capital Securities (other than the Trustee) shall have
been appointed, by facsimile signature of a duly authorized signatory of the
Trustee and, if executed by facsimile signature of the Trustee, shall have been
countersigned manually by such Registrar by the signature of a duly authorized
signatory.
THE TRUSTEE IS NOT RESPONSIBLE FOR THE VALIDITY OF ANY
PREFERRED SECURITIES. THE TRUSTEE ASSUMES NO RESPONSIBILITY FOR THE CORRECTNESS
OF THE FOREGOING DESCRIPTION WHICH CAN BE TAKEN AS A STATEMENT OF THE GRANTOR
SUMMARIZING CERTAIN PROVISIONS OF THE TRUST AGREEMENT. THE TRUSTEE MAKES NO
WARRANTIES OR REPRESENTATIONS AS TO THE VALIDITY, GENUINENESS OR SUFFICIENCY OF
PREFERRED SECURITIES OR OF CAPITAL SECURITIES; AS TO THE VALIDITY OR SUFFICIENCY
OF THE TRUST AGREEMENT; AS TO THE VALUE OF CAPITAL SECURITIES OR AS TO ANY
RIGHT, TITLE OR INTEREST OF THE HOLDERS OF CAPITAL SECURITIES IN AND TO CAPITAL
SECURITIES.
Dated: April 6, 1998
First Union Trust Company, National
Association, not in its individual
capacity, but solely as Trustee on
behalf of the Trust,
By:________________________________
Name:
Title:
A-7
<PAGE>
[FORM OF ASSIGNMENT]
FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and
transfers unto ____________________ the within Capital Security Certificate and
all rights and interests represented by the Capital Securities evidenced
thereby, and hereby irrevocably constitutes and appoints ____________________
attorney, to transfer the same on the books of the within-named Trustee, with
full power of substitution in the premises.
Dated:_________________ Signature:__________________________________
NOTE: The signature to this
assignment must correspond
with the name as written upon
the face of the Capital
Security in every particular,
without alteration or
enlargement or any change
whatever.
Signature Guarantee:
_______________________
<PAGE>
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
($000)
12 Months
Ended
12/31/1998
- - -------------------------------------------------------------------
NET INCOME $ 532,378
ADD BACK:
INCOME TAXES:
OPERATING INCOME 348,497
NON-OPERATING INCOME (28,843)
- - -------------------------------------------------------------------
NET TAXES $ 319,654
- - -------------------------------------------------------------------
FIXED CHARGES:
INTEREST APPLICABLE TO DEBT $ 317,243
ANNUAL RENTALS ESTIMATE $ 8,973
- - -------------------------------------------------------------------
TOTAL FIXED CHARGES $ 326,216
- - -------------------------------------------------------------------
ADJUSTED EARNINGS INCLUDING AFUDC $1,178,248
- - -------------------------------------------------------------------
RATIO OF EARNINGS TO FIXED CHARGES 3.61
===================================================================
AFUDC 3,522
===================================================================
ADJUSTED EARNINGS EXCLUDING AFUDC $1,174,726
- - -------------------------------------------------------------------
RATIO OF EARNINGS EXCLUDING AFUDC TO FIXED CHARGES 3.60
===================================================================
<PAGE>
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
AND PREFERRED STOCK DIVIDEND REQUIREMENTS
($000)
12 Months
Ended
12/31/1998
--------------
NET INCOME ................................................ $ 532,378
ADD BACK:
INCOME TAXES:
OPERATING INCOME ....................................... 348,497
NON-OPERATING INCOME ................................... (28,843)
----------
NET TAXES .............................................. $ 319,654
==========
FIXED CHARGES:
TOTAL INTEREST ......................................... $ 317,243
ANNUAL RENTALS ESTIMATE ................................ 8,973
----------
TOTAL FIXED CHARGES .................................... $ 326,216
==========
EARNINGS REQUIRED FOR PREFERRED DIVIDENDS:
DIVIDENDS ON PREFERRED STOCK ........................... $ 13,109
ADJUSTMENT TO PREFERRED DIVIDENDS* ..................... $ 7,871
==========
$ 20,980
==========
FIXED CHARGES AND PREFERRED DIVIDENDS .................. $ 347,196
==========
EARNINGS BEFORE INCOME TAXES AND FIXED CHARGES ......... $1,199,228
==========
RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND
EARNINGS REQUIRED FOR PREFERRED DIVIDENDS .............. 3.45
===========
- - ------------
* ADDITIONAL CHARGE EQUIVALENT TO EARNINGS REQUIRED TO ADJUST DIVIDENDS ON
PREFERRED STOCK TO A PRE-TAX BASIS
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
General
The Electricity Generation Customer Choice and Competition Act (Competition
Act), enacted in December 1996, provided for the restructuring of the
electric utility industry in Pennsylvania, including the institution of
retail competition for generation supply beginning in 1999. Pursuant to the
Competition Act, in April 1997, the Company filed with the Pennsylvania
Public Utility Commission (PUC) a restructuring plan in which it identified
$7.5 billion of retail electric generation-related stranded costs.
At December 31, 1997, the Company determined that its electric generation
business no longer met the criteria of Statement of Financial Accounting
Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of
Regulation." In connection with the discontinuance of SFAS No. 71, the Company
performed a market value analysis of its generation assets and wrote-off $1.8
billion (net of income taxes) of unrecoverable electric plant costs and
regulatory assets. See Note 4 of Notes to Consolidated Financial Statements.
In May 1998, the PUC entered an Opinion and Order (Final Restructuring
Order) approving a joint petition and settlement of the Company's restructuring
case. Under the Final Restructuring Order, the Company has received approval to
recover stranded costs of $5.26 billion over 12 years beginning January 1, 1999
with a return of 10.75%. The Final Restructuring Order provides for the phase-in
of customer choice of electric generation suppliers (EGS) for all customers:
One-third of the peak load of each customer class on January 1, 1999; one-third
on January 2, 1999; and the remainder on January 2, 2000. The Final
Restructuring Order calls for an across the board retail electric rate reduction
of 8% in 1999. This rate reduction will decrease to 6% in 2000. See Note 3 of
Notes to Consolidated Financial Statements.
Based on the estimated annual sales of the Company in the Final
Restructuring Order, the rate reductions are expected to reduce the Company's
revenues from retail electric sales by $270 million in 1999 and $200 million in
2000. The Company believes that its revenues from retail electric sales will be
further reduced by competition for electric generation services within its
traditional service territory. The Company is actively participating in the
competitive electric generation supply market throughout Pennsylvania. In
addition, the Company anticipates lower depreciation and amortization expense in
1999 as a result of the amortization schedule for the Company's stranded cost
recovery.
In light of the expected impact on future revenues of the Final
Restructuring Order and competition for electric generation services, the
Company is continuing its cost management efforts through a Cost Competitiveness
Review (CCR). The goal of CCR is to achieve significant cost savings while
maintaining high levels of service quality, reliability, safety and overall
performance. The cost-control targets of CCR include reducing annual operating
and maintenance expense by at least $150 million by 2001. The expense reductions
will be realized, in part, through the elimination of approximately 1,200
employee positions. As part of the CCR, in April 1998, the Board of Directors
authorized the implementation of a retirement incentive program and an enhanced
severance benefit program to accompany targeted workforce reductions. In the
fourth quarter of 1998, the Company incurred an after-tax charge to earnings of
$74 million to recognize costs related to the CCR workforce reduction.
<PAGE>
Discussion of Operating Results
Earnings
The Company recorded basic earnings per average common share of $2.24 in
1998 as compared with a loss of $6.80 per share in 1997 and earnings per
share of $2.24 in 1996. Earnings per share in 1998 reflect higher revenues
net of fuel of $0.14 per share primarily attributable to sales to other
utilities and interchange sales; lower operating and maintenance expenses
of $0.10 per share and lower fuel expenses of $0.22 per share as a result
of the full return to service of Salem Nuclear Generating Station (Salem);
and lower operating and maintenance expenses of $0.21 per share. In
addition, earnings include the effects of a lower effective income tax rate
of $0.34 per share. These increases were partially offset by higher
depreciation and amortization expense of $0.17 per share; a charge of $0.33
per share related to the CCR workforce reduction program initiated in 1998;
and an extraordinary charge of $0.09 per share for premiums paid in
connection with the redemption of higher cost long-term debt.
The loss in 1997 of $6.80 per common share was primarily due to an
extraordinary charge of $8.24 per share reflecting the effects of the PUC
Restructuring Order and deregulation of the Company's electric generation
operations. 1997 earnings were also reduced by several one-time charges totaling
$0.56 per share for changes in employee benefits, write-offs of information
systems development charges reflecting clarification of accounting guidelines
and additional reserves, including those for environmental site remediation; by
$0.30 per share for higher depreciation expense resulting from a full year's
increase in depreciation and amortization of assets associated with Limerick
Generating Station (Limerick) and other assets; by $0.12 per share for income
tax adjustments; by $0.09 per share for losses from new non-utility ventures;
and by $0.05 per share for increased depreciation expense due to plant
additions. These decreases were partially offset by a one-time $0.18 per share
credit relating to the settlement of litigation arising from the outage of
Salem; $0.08 per share for operational efficiencies; and higher revenues net of
fuel of $0.06 per share primarily due to increased sales to other utilities.
<PAGE>
Significant Operating Items
<TABLE>
<CAPTION>
Revenue and Expense Items as a Percentage of Total Operating Revenues Percentage Dollar Changes
- - ------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1998-1997 1997-1996
- - ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
92% 90% 90% Electric 15% 8%
8% 10% 10% Gas (11%) 5%
------ ----- ----- ------- ------
100% 100% 100% Total Operating Revenues 13% 8%
====== ===== ===== ======= ======
34% 28% 23% Fuel and Energy Interchange 36% 33%
24% 31% 30% Operating and Maintenance (a) (12%) 12%
12% 12% 11% Depreciation and Amortization 11% 19%
5% 7% 7% Taxes Other Than Income (10%) 4%
------ ----- ----- ------- ------
75% 78% 71% Total Operating Expenses 9% 19%
====== ===== ===== ======= ======
25% 22% 29% Operating Income 28% (19%)
====== ===== ===== ======= ======
(7%) (9%) (10%) Interest Expense (10%) (2%)
------ ----- ----- ------- ------
(9%) (8%) (9%) Total Other Income and Deductions (15%) 4%
------ ----- ----- ------- ------
16% 14% 20% Income Before Taxes and Extraordinary Item 35% (27%)
------ ----- ----- ------- ------
6% 6% 8% Income Taxes 9% (14%)
------ ----- ----- ------- ------
10% 8% 12% Income Before Extraordinary Item 58% (35%)
====== ===== ===== ======= ======
</TABLE>
(a) Includes Early Retirement and Separation Programs Expense in 1998.
Operating Revenues
Total operating revenues increased in 1998 by $593 million to $5,210
million. This represented a $644 million increase in electric revenues and
a $51 million decrease in gas revenues compared to 1997. Electric revenues
increased as a result of additional sales to other utilities and
interchange sales, in addition to higher wholesale prices. The decrease in
gas revenues was primarily attributable to lower sales to house heating,
small commercial and residential customers as a result of milder weather
conditions in 1998, partially offset by higher purchased gas clause
revenues charged in 1998 compared to 1997.
Total operating revenues increased in 1997 by $334 million to $4,618
million. This represented a $312 million increase in electric revenues and a $22
million increase in gas revenues over 1996. The increase in electric revenues
was primarily due to increased sales to other utilities. The increase in gas
revenues was primarily due to higher revenues from sales to commercial, house
heating and residential customers resulting from higher purchased gas clause
revenues charged in 1997 compared to 1996, partially offset by lower sales
resulting from milder weather conditions in 1997. This increase was partially
offset by reduced sales to interruptible customers switching to transportation
service.
Increases/(decreases) in electric sales and revenues by class of customer
for 1998 compared to 1997 and 1997 compared to 1996 are set forth as
follows:
<TABLE>
<CAPTION>
1998 - 1997 1997 - 1996
-----------------------------------------------------------------------
Electric Electric Electric Electric
Sales Revenues Sales Revenues
-----------------------------------------------------------------------
(Millions of kWh) (Millions of $) (Millions of kWh) (Millions of $)
----------------- --------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Residential 356 $ 30 (48) $ (1)
House Heating (140) (10) (217) (12)
Small Commercial
and Industrial 203 5 194 30
Large Commercial
and Industrial 644 (11) (174) (21)
Other (38) 2 (61) 8
Unbilled 61 (18) 397 45
----------------- --------------- ----------------- ---------------
Service Territory 1,086 (2) 91 49
Interchange Sales 1,556 152 992 33
Sales to Other Utilities 8,365 494 8,650 230
----------------- --------------- ----------------- ---------------
Total 11,007 $ 644 9,733 $ 312
================= =============== ================= ===============
</TABLE>
Fuel and Energy Interchange Expense
Fuel and energy interchange expense increased in 1998 by $462 million to
$1,752 million. The increase was primarily due to increased energy
purchases associated with increased sales to other utilities and
interchange sales partially offset by reduced replacement power expense
related to Salem. Increases in purchases of non-utility generation also
contributed to increased fuel expense in 1998. Fuel and energy interchange
expense as a percentage of operating revenues, increased from 28% to 34%
principally as a result of energy purchases associated with increased sales
to other utilities and interchange sales.
Fuel and energy interchange expense increased in 1997 by $318 million to
$1,290 million. The increase was primarily due to purchases associated with
increased sales to other utilities and a one-time billing credit in 1996 from a
non-utility generator. Fuel and energy interchange expense as a percentage of
operating revenues increased from 23% to 28% principally due to purchases
associated with increased sales to other utilities.
<PAGE>
Operating and Maintenance Expense
Operating and maintenance expense, inclusive of expenses associated with
early retirement and separation programs, decreased in 1998 by $178 million
to $1,253 million. The decrease in 1998 was primarily attributable to the
full return to service of Salem which resulted in lower restart expenses, a
credit to pension and benefits expense related to the performance of
pension plan investments and lower property insurance and workers
compensation insurance. These decreases were partially offset by the charge
associated with the CCR workforce reduction program and increased power
marketing expenses.
Operating and maintenance expense increased in 1997 by $157 million to
$1,431 million primarily due to several one-time charges totaling $187 million,
including charges for changes in employee benefits, write-offs of information
systems development charges reflecting clarification of accounting guidelines
and additional reserves, including reserves for environmental site remediation.
These increases were partially offset by lower operating costs at
Company-operated nuclear generating stations and lower administrative and
general expenses resulting from the Company's ongoing cost-control efforts.
Depreciation and Amortization Expense
Depreciation and amortization expense increased in 1998 by $62 million to
$643 million. The increase was primarily due to the amortization of
Deferred Generation Costs Recoverable in Current Rates during 1998,
preceding the Company's transition to market-based pricing of electric
generation in 1999. Included in this amortization were charges that were
included in operating and maintenance expense and interest expense in 1997.
Depreciation and amortization expense increased in 1997 by $92 million to
$581 million. The increase was primarily due to increased depreciation of assets
associated with Limerick which became effective October 1, 1996. Depreciation
and amortization expense also increased due to additions to plant in service.
Interest Charges
Interest charges consist of interest expense, distributions on Company
Obligated Mandatorily Redeemable Preferred Securities of a Partnership
(COMRPS) and Allowance for Funds Used During Construction (AFUDC). Interest
charges decreased in 1998 by $22 million to $358 million. The decrease was
primarily due to the Company's program to reduce and/or refinance higher
cost, long-term debt, lower variable interest rates and the discontinuance
of amortization of the loss on reacquired debt related to electric
generation operations as of December 31, 1997. These decreases were
partially offset by lower AFUDC and capitalized interest resulting from
fewer projects in the construction base in 1998 and the replacement of $62
million of preferred stock with COMRPS in the third quarter of 1997.
<PAGE>
Interest charges decreased in 1997 by $9 million to $380 million. The
decrease was primarily due to the Company's program to reduce and/or refinance
higher-cost, long-term debt. This decrease was partially offset by the
replacement of $62 million of preferred stock with COMRPS in the third quarter
of 1997.
Other Income and Deductions
Excluding Interest Charges
Other income and deductions excluding interest charges decreased in 1998 by
$77 million to a deduction of $73 million. The decrease was primarily due
to the settlement of litigation arising from the shutdown of Salem
recognized in 1997 and losses from the Company's non-utility ventures,
which are accounted for under the equity method, partially offset by
interest income on a gross receipts tax refund.
Other income and deductions excluding interest charges increased in 1997 by
$6 million to $4 million. The increase was primarily due to the settlement of
litigation arising from the shutdown of Salem, partially offset by losses from
the Company's non-utility ventures. Also offsetting the increase was the
write-off of one of the Company's telecommunications investments as a result of
the auctioning of personal communications systems "C-block" licenses by the
Federal Communication Commission.
Income Taxes
Income taxes increased in 1998 by $27 million to $320 million. The
Company's effective income tax rate decreased, however, from 46.5% to 37.5%
in 1998 primarily as a result of full normalization of deferred taxes
associated with deregulated generation plant.
Income taxes decreased in 1997 by $47 million to $293 million. The
Company's effective income tax rate increased, however, from 39.7% to 46.5% in
1997 primarily attributable to reduced tax depreciation benefits from plant and
regulatory assets which were not fully normalized for ratemaking purposes.
Preferred Stock Dividends
Preferred stock dividends decreased in 1998 by $4 million to $13 million
and decreased in 1997 by $1 million to $17 million. The decreases were
primarily a result of the replacement of $62 million of preferred stock
with COMRPS in the third
quarter of 1997.
Discussion of Liquidity and Capital Resources
The Company's capital resources are primarily provided by internally
generated cash flows from utility operations and, to the extent necessary,
external financing. Such capital resources are used to fund the Company's
capital requirements, including investments in new and existing ventures,
to repay maturing debt and to make preferred and common stock dividend
payments.
Cash flows from operations were $1,433 million in 1998 as compared to
$1,038 million in 1997 and $1,172 million in 1996. The increase in 1998 was
principally attributable to improved operating results and changes in working
capital.
<PAGE>
Cash flows used in investing activities were $462 million in 1998 as
compared to $573 million in 1997 and $663 million in 1996. Expenditures under
the Company's construction program decreased to $415 million in 1998. Net funds
invested in diversified activities in 1998 were $47 million, consisting of $17
million for telecommunications ventures, $21 million for nuclear plant
decommissioning trust funds and $9 million for other deposits and ventures. In
1997 and 1996, funds used in similar activities were $83 million and $114
million, respectively.
Cash flows used in financing activities were $956 million in 1998 as
compared to $461 million in 1997 and $501 million in 1996. The increase in 1998
was primarily attributable to increased retirement of long-term debt partially
offset by lower dividends on common stock. During 1998, in anticipation of
competition, which is expected to reduce cash flows, the Company reduced its
dividend payment requirements by reducing its common stock dividend to $1 per
share. The decrease in 1997 was primarily due to fewer retirements of
higher-cost debt.
The Company's capital expenditures are currently estimated to be $440
million in 1999. Certain facilities under construction and to be constructed may
require permits and licenses which the Company has no assurance will be granted.
Capital expenditures do not include investments in joint ventures including
investments related to the Company's strategy to expand its generation
portfolio. See"Outlook-Expansion of Generation Portfolio." The Company may use
internally generated funds or external financing or a combination of both to
finance any acquisition.
The Company meets its short-term liquidity requirements primarily through
the issuance of commercial paper and borrowings under bank credit facilities.
The Company has a $900 million unsecured revolving credit facility with a group
of banks which consists of a $450 million 364-day credit agreement and a $450
million three-year credit agreement. The Company uses the credit facility
principally to support its $600 million commercial paper program. There was no
debt outstanding under this credit facility at December 31, 1998. The Company
had $525 million of short-term debt, consisting of $125 million of commercial
paper, and a $400 million term loan, outstanding at December 31, 1998.
At December 31, 1998, the Company's embedded cost of debt was 6.65% with
29% of the Company's long-term debt having floating rates.
At December 31, 1998, the Company's capital structure consisted of 44.2%
common equity; 8.4% preferred stock and COMRPS (which comprised 5.1% of the
Company's total capitalization structure); and 47.4% long-term debt.
In the Final Restructuring Order, the PUC authorized the Company to
securitize up to $4 billion of its allowed $5.26 billion stranded cost recovery
through the issuance of transition bonds (Transition Bonds). The proceeds of any
securitization are required to be used by the Company principally to reduce its
stranded costs and related capitalization. The Company currently proposes to
securitize its allowed stranded asset recovery, up to the maximum amount
authorized by the PUC, through the issuance of Transition Bonds by a special
purpose subsidiary (SPS). The Transition Bonds will be obligations of the SPS
secured by intangible transition property (ITP). ITP represents the irrevocable
right of the Company or its assignee, to collect non-bypassable charges from
customers to recover stranded costs. The Transition Bonds will be included in
the consolidated capitalization of the Company. Because the Transition Bonds
will be obligations of the SPS, payable from the ITP owned by the SPS, the
Company does not expect the issuance of Transition Bonds to adversely affect the
ratings on the Company's securities which remain outstanding after issuance of
Transition Bonds.
<PAGE>
In anticipation of the issuance of Transition Bonds, the Company's Board of
Directors authorized the repurchase of up to 25 million shares of the Company's
common stock from time to time through open market, privately negotiated and/or
other types of transactions. The Company has entered into forward purchase
agreements to be settled from time to time, at the Company's election on either
a physical, net share or net cash basis. The amount at which these agreements
can be settled is dependent principally upon the market price of the Company's
common stock as compared to the forward purchase price per share and the number
of shares to be settled. If these agreements had been settled on a net share
basis at December 31, 1998, based on the closing price of the Company's common
stock on that date, the Company would have received approximately 4.6 million
shares of the Company's common stock.
The Company has entered into treasury forwards and forward starting
interest rate swaps to manage interest rate exposure associated with the
anticipated issuance of Transition Bonds. The fair value of ($4.7 million) was
based on the present value difference between the contracted rate (i.e., hedged
rate) and the market rates at December 31, 1998.
The aggregate change in fair value of the Transition Bond derivative
instruments that would have resulted from a hypothetical 50 basis point decrease
in the spot yield at December 31, 1998 is estimated to be $128 million. If the
derivative instruments had been terminated at December 31, 1998, this estimated
fair value represents the amount to be paid by the Company to the
counterparties.
The aggregate change in fair value of the Transition Bond derivative
instruments that would have resulted from a hypothetical 50 basis point increase
in the spot yield at December 31, 1998 is estimated to be $113 million. If the
derivativeinstruments had been terminated at December 31,1998, this estimated
fair value represents the amount to be paid by the counterparties to the
Company.
Outlook
The Company is entering a period of financial uncertainty as a result of the
deregulation of its electric generation operations. Under the terms of the Final
Restructuring Order, revenues from regulated rates will decrease. In addition,
the Company will sell an increasing portion of its energy at market-based rates.
The Company believes that the deregulation of its electric generation operations
and other regulatory initiatives designed to encourage competition will increase
the Company's risk profile by changing and increasing the number of factors upon
which the Company's financial results are dependent. This may result in more
volatility in the Company's future results of operations. The Company believes
that it has significant advantages that will strengthen its position in the
increasingly competitive electric generation environment. These advantages
include the ability to produce electricity at a low variable-cost and the
demonstrated ability to market power in the competitive wholesale markets.
<PAGE>
The Company's future financial condition and results of operations are
substantially dependent upon the effects of the Final Restructuring Order and
retail and wholesale competition for generation services. Additional factors
that affect the Company's financial condition and results of operations include
operation of nuclear generating facilities, Year 2000 issues, new accounting
pronouncements, inflation, weather, compliance with environmental regulations
and the profitability of the Company's investments in new ventures.
Final Restructuring Order
The Final Restructuring Order contains a number of provisions which the
Company expects will significantly impact its future results of operations
and financial condition, including mandated rate reductions, extended rate
caps, provisions designed to enhance competition for generation services,
the amortization of the Company's stranded cost recovery and the
securitization of stranded cost recovery.
The Final Restructuring Order mandates retail electric rate reductions of
8% in 1999 and 6% in 2000 from rates in existence on December 31, 1996. Based on
the estimated annual sales of the Company in the Final Restructuring Order,
these rate reductions will reduce the Company's revenue from retail electric
sales by $270 million and $200 million in 1999 and 2000, respectively. The
Company's revenue from retail electric sales will be further reduced to the
extent that customers purchase generation service from alternate EGS.
The Final Restructuring Order caps the Company's retail transmission and
distribution rates at their current levels through June 30, 2005. The Final
Restructuring Order also established rate caps for generation services,
consisting of the charge for stranded cost recovery and a charge for energy and
capacity, through 2010. The rate caps will limit the Company's ability to pass
cost increases through to customers.
The Final Restructuring Order contains a number of provisions which are
designed to encourage competition for generation services. The Final
Restructuring Order establishes an above-market shopping credit for generation
services, equivalent to the Company's energy and capacity charge, in order to
provide an economic incentive for customers to choose an alternate EGS. If
market prices of retail generation services remain below the shopping credits
for generation established by the Final Restructuring Order, this economic
incentive to choose an alternate EGS will continue. If, on the other hand,
market prices of retail generation services exceed the shopping credits for
generation, customers will have an economic incentive to purchase generation
services from the Company as the provider of last resort (PLR) at below market
rates. Additionally, if on January 1, 2001 and January 1, 2003, less than 35%
and 50%, respectively, of the Company's residential and commercial customers are
obtaining generation service from alternate EGS, the non-shopping customers will
be randomly assigned to EGS, including those affiliated with the Company, to
meet these thresholds. Further, on January 1, 2001, 20% of all the Company's
residential customers, whether or not such customers are obtaining generation
service from an alternate EGS, will be assigned to a PLR other than the Company.
Such alternate supplier will be selected by a PUC-approved bidding process. The
right to provide this competitive default service will be rebid annually, and if
the number of residential customers served by this service falls below 17%,
further random selection of customers will be assigned to achieve the 20% level.
<PAGE>
The Company's recovery of stranded costs is based on the level of
transition charges established in the Final Restructuring Order and the
projected annual retail sales in the Company's service territory. Recovery of
transition charges for stranded costs will be included in operating revenue and
are expected to be $552 million in 1999, increasing to $932 million by 2010, the
final year of stranded cost recovery. Amortization of the Company's stranded
cost recovery, which is a regulatory asset, will be included in depreciation and
amortization, beginning in 1999 at a level of ($14) million and increasing by
2010 to $879 million. The Company is allowed a 10.75% return on the unamortized
balance. As a result of this amortization schedule, the Company expects its
earnings to be disproportionately benefited by the recovery of stranded assets
in the early years of the transition period declining over the life of the
recovery as the balance of the unamortized regulatory asset is reduced.
Under the Final Restructuring Order, the Company may securitize up to $4
billion of its $5.26 billion of stranded cost recovery through the issuance of
Transition Bonds. The rate reductions and rate caps of the Final Restructuring
Order anticipate the benefits of securitization and no adjustment in the
Company's base rates will be made upon the issuance of Transition Bonds. As a
result of the 10.75% allowed return on the unamortized balance of stranded cost
recovery and expected costs of securitization substantially below this allowed
return, the Company anticipates that successful securitization, resulting in a
reduction of its common equity, will improve the Company's future financial
results.
Competition
The Company competes in both the retail electric generation market in
Pennsylvania and the wholesale electric generation market nationally.
Competition for electric generation services is expected to create new
uncertainties in the utility industry. These uncertainties include future
prices of generation services in both the wholesale and retail markets;
potential changes in the Company's customer profiles, both at the retail
level where change is expected to be ongoing as a result of customer
choice, and between the retail and wholesale markets; and supply and demand
volatility.
Retail competition for generation supply commenced in January 1999, with
two-thirds of Pennsylvania electric utility consumers having the right to choose
their suppliers of generation service. The Company is actively competing for a
share of the generation supply market in its traditional service territory
through PECO Energy Distribution as the PLR for customers who do not or cannot
choose an alternate EGS and throughout Pennsylvania through Exelon Energy, the
Company's new competitive supplier. Generation services provided by PECO Energy
Distribution are at the energy and capacity charge mandated by the Final
Restructuring Order. Generation services offered by Exelon Energy are at
competitive market prices. Customers who continue to take generation service
from PECO Energy Distribution may choose an alternate generation supplier at any
time. As of January 12, 1999, approximately 12% of the Company's residential and
small commercial customers and approximately 50% of its large commercial and
industrial customers had selected an alternate EGS. As of that date, Exelon
Energy is providing generation service to approximately 135,000 business and
residential customers throughout Pennsylvania. Because the energy and capacity
charge (shopping credit) established by the PUC in the Restructuring Order
remains above current retail market prices for generation services, including
those offered by Exelon Energy, the Company's retail revenues will be reduced to
the extent customers choose an alternate EGS, including Exelon Energy. To the
extent that the Company cannot replace lost retail sales through PECO Energy
Distribution with retail sales by Exelon Energy, the Company will be required to
sell a larger portion of its energy and capacity in the wholesale market. Since
prices in the wholesale market are currently lower on average than those charged
in the competitive retail market, this will adversely affect the Company's
revenues and profit margins.
<PAGE>
The Company is a low variable-cost electricity producer, which puts it in a
favorable position to take advantage of opportunities in the electric retail and
wholesale generation markets. The Company's competitive position and its future
financial condition and results of operations are dependent on the Company's
ability to successfully operate its low variable-cost power plants and market
its power effectively in competitive wholesale markets.
The Company competes in the wholesale market by selling the energy and
capacity from the Company's installed capacity not utilized in the retail market
and buying and selling energy from third parties. The Company enters into both
long-term and short-term commitments to buy and sell power. Currently, the
Company's long-term commitments, together with the energy the Company expects to
market from the Company's installed capacity, make the Company a net power
seller. This long position, however, exposes the Company to the risk of
declining revenues in periods of low wholesale demand for generation services.
See Note 5 of Notes to Consolidated Financial Statements.
There is an initiative in the Pennsylvania legislature to deregulate the
gas industry, which has the support of the governor. The Company cannot predict
whether the Pennsylvania legislature will enact legislation that deregulates the
gas industry or whether the governor will ultimately sign into law any such
legislation. The Company cannot predict the ultimate effect of gas industry
deregulation on its future financial condition or results of operations.
Regulation and Operation of Nuclear Generating Facilities
The Company's financial condition and results of operations are in part
dependent on the continued successful operation of its nuclear generating
facilities. The Company's nuclear generating facilities represent 44% of
its installed generating capacity. Because of the Company's reliance on its
nuclear generating units, any changes in regulations by the Nuclear
Regulatory Commission (NRC) requiring additional investments or resulting
in increased operating costs of nuclear generating units could adversely
affect the Company.
<PAGE>
During 1998, Company-operated nuclear plants operated at an 86%
weighted-average capacity factor and Company-owned nuclear plants operated at an
83% weighted-average capacity factor. Company-owned nuclear plants produced 39%
of the Company's electricity. Nuclear generation is currently the most
cost-effective way for the Company to meet customer needs and commitments for
sales to other utilities. See "Expansion of Generation Portfolio".
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," to
establish accounting and reporting standards for derivatives. The new
standard requires recognizing all derivatives as either assets or
liabilities on the balance sheet at their fair value and specifies the
accounting for changes in fair value depending upon the intended use of the
derivative. The new standard is effective for fiscal years beginning after
June 15, 1999. The Company expects to adopt SFAS No. 133 in the first
quarter of2000. The Company is in the process of evaluating the impact of
SFAS No. 133 on its financial statements.
In November 1998, the FASB's Emerging Issues Task Force issued EITF 98-10,
"Accounting for Contracts Involved in Energy Trading and Risk Management
Activities." EITF 98-10 outlines attributes that may be indicative of an energy
trading operation and gives further guidance on the accounting for contracts
entered into by an energy trading operation. This accounting guidance requires
mark-to-market accounting for contracts considered to be a trading activity.
EITF 98-10 is applicable for fiscal years beginning after December 15, 1998 with
any impact recorded as a cumulative effect adjustment through retained earnings
at the date of adoption. At December 31, 1998, the Company has evaluated its
wholesale marketing operation and related contracts under the guidance provided
in EITF 98-10. For those contracts entered into in the over-the-counter market
and considered to be a trading activity, the Company believes the impact to be
immaterial. However, with respect to the long-term commitments considered to be
trading activities, the Company is continuing to evaluate these commitments and
the impact of adopting EITF 98-10.
Other Factors
Annual and quarterly operating results can be significantly affected by
weather. Since the Company's peak demand is in the summer months,
temperature variations in summer months are generally more significant than
variations during winter months.
Inflation affects the Company through increased operating costs and
increased capital costs for utility plant. As a result of the rate caps imposed
under the Final Restructuring Order and expected price pressures due to
competition, the Company may have a limited opportunity to pass the costs of
inflation through to customers.
The Company's operations have in the past and may in the future require
substantial capital expenditures in order to comply with environmental laws.
Additionally, under federal and state environmental laws, the Company is
generally liable for the costs of remediating environmental contamination of
property now or formerly owned by the Company and of property contaminated by
hazardous substances generated by the Company. The Company owns or leases a
number of real estate parcels, including parcels on which its operations or the
operations of others may have resulted in contamination by substances which are
considered hazardous under environmental laws. The Company is currently involved
in a number of proceedings relating to sites where hazardous substances have
been deposited and may be subject to additional proceedings in the future.
The Company has identified 28 sites where former manufactured gas plant
(MGP) activities have or may have resulted in actual site contamination. The
Company is presently engaged in performing various levels of activities at these
sites, including initial evaluation to determine the existence and nature of the
contamination, detailed evaluation to determine the extent of the contamination
and the necessity and possible methods of remediation, and implementation of
remediation. The Pennsylvania Department of Environmental Protection has
approved the Company's clean-up of three sites. Eight other sites are currently
under some degree of active study and/or remediation.
<PAGE>
As of December 31, 1998 and 1997, the Company had accrued $60 and $63
million, respectively, for environmental investigation and remediation costs,
including $33 and $35 million, respectively, for MGP investigation and
remediation that currently can be reasonably estimated. The Company expects to
expend $3 million for environmental remediation activities in 1999. The Company
cannot predict whether it will incur other significant liabilities for any
additional investigation and remediation costs at these or additional sites
identified by the Company, environmental agencies or others, or whether such
costs will be recoverable from third parties.
For a discussion of other contingencies, see Note 5 of Notes to
Consolidated Financial Statements.
Year 2000 Readiness Disclosure
Due to the severity of the potential impact of the Year 2000 Issue (Y2K
Issue) on the electric utility industry, the Company has adopted a
comprehensive schedule to achieve Y2K readiness by the time specified by
the NRC. The Company has dedicated extensive resources to its Y2K Project
(Project) and believes the project is progressing on schedule.
The Project is addressing the issue resulting from computer programs using
two digits rather than four to define the applicable year and other programming
techniques that constrain date calculations or assign special meanings to
certain dates. Any of the Company's computer systems that have date-sensitive
software or microprocessors may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, a temporary
inability to process transactions, send bills, operate generating stations, or
engage in similar normal business activities.
The Company has determined that it will be required to modify, convert or
replace significant portions of its software and a subset of its system hardware
and embedded technology so that its computer systems will properly utilize dates
beyond December 31, 1999. The Company presently believes that with these
modifications, conversions and replacements the effect of the Y2K Issue on the
Company can be mitigated. If such modifications, conversions and replacements
are not made, or are not completed in a timely manner, the Y2K Issue could have
a material impact on the operations and financial condition of the Company. The
costs associated with this potential impact are not presently quantifiable.
<PAGE>
The Company is utilizing both internal and external resources to reprogram,
or replace and test software and computer systems for the Project. The Project
is scheduled for completion by July 1, 1999, except for a small number of
modifications, conversions or replacements that are impacted by vendor dates
and/or are being incorporated into scheduled plant outages between July and
October 1999.
The Project is divided into four major sections - Information Technology
Systems (IT Systems), Embedded Technology (devices used to control, monitor or
assist the operation of equipment, machinery or plant), Supply Chain
(third-party suppliers and customers), and Contingency Planning. The general
phases common to all sections are: (1) inventorying Y2K items; (2) assigning
priorities to identified items; (3) assessing the Y2K readiness of items
determined to be material to the Company; (4) converting material items that are
determined not to be Y2K ready; (5) testing material items; and (6) designing
and implementing contingency plans for each critical Company process. Material
items are those believed by the Company to have a risk involving the safety of
individuals, may cause damage to property or the environment, or affect
revenues.
The IT Systems section includes both the conversion of applications
software that is not Y2K ready and the replacement of software when available
from the supplier. The Company estimates that the software conversion phase was
approximately 66% complete at January 27, 1999, and the remaining conversions
are expected to be completed by the scheduled end date. The Company has been
experiencing slippage in delivery dates of vendor supplied products which may
have a minor impact on the July 1, 1999 target completion date. Contingency
planning for IT Systems is scheduled to be completed by July 1, 1999 with an
interim date of March 31, 1999 that addresses PUC contingency planning
requirements. The Project has identified 380 critical systems of which 238 are
IT Systems. The current readiness status of IT Systems is set forth below:
Number of Systems Progress Status
-----------------------------------------------------------
79 Systems Y2K Ready
65 Systems In Testing
87 Systems In Active Code Modification,
Or Package Upgrading
7 Systems Not Started
The Embedded Technology section consists of hardware and systems software
other than IT Systems. The Company estimates that the Embedded Technology
section was approximately 75% complete at January 27, 1999. The remaining
conversions are on schedule to be tested and ready by July 1, 1999, except for a
small number of systems which will be extended into the fall of 1999 because
their final tests will occur during a planned generating plant outage.
Contingency planning for Embedded Technology is scheduled to be completed by
July 1, 1999 with an interim date of March 31, 1999 that addresses PUC
contingency planning requirements. The Project has identified 142 critical
Embedded Technology systems. The current readiness status of those systems is
set forth below:
<PAGE>
Number of Systems Progress Status
-----------------------------------------------------------
31 Systems Y2K Ready
29 Systems In Final Quality Review
76 Systems In Progress
6 Systems Not Started
The Supply Chain section includes the process of identifying and
prioritizing critical suppliers and communicating with them about their plans
and progress in addressing the Y2K Issue. The Company initiated formal
communications with all of its critical suppliers to determine the extent to
which the Company may be vulnerable to their Y2K issues. The process of
evaluating these critical suppliers has commenced and is scheduled to be
completed by March 31, 1999.
The Company, like other companies, is interconnected with many businesses,
including electric utilities, natural gas pipelines and municipalities. The
Company is working with businesses where interconnections exist to determine and
monitor their Y2K readiness efforts. In addition, the Company is currently
developing contingency plans to address how to respond to events which may
disrupt normal operations. These plans address Y2K risk scenarios that cross
departmental, business unit and industry lines as well as specific risks from
various internal and external sources, including supplier readiness. Emergency
plans already exist that cover various aspects of the Company's business. These
plans are being reviewed and updated, as needed, to address the Y2K Issue. The
Company is also participating in industry contingency planning efforts.
The estimated total cost of the Project is $75 million, the majority of
which will be incurred during testing. This estimate includes the Company's
share of Y2K costs for jointly owned facilities. The total amount expended on
the Project through December 31, 1998 was $21 million. The Company expects to
fund the Project from operating cash flows.
The Company's failure to become Y2K ready could result in an interruption
in or a failure of certain normal business activities or operations. In
addition, there can be no assurance that the systems of other companies on which
the Company's systems rely or with which they communicate will be converted in a
timely manner, or that a failure to convert by another company, or a conversion
that is incompatible with the Company's systems, will not have a material
adverse effect on the Company. Such failures could materially and adversely
affect the Company's results of operations, liquidity and financial condition.
The Company is currently developing contingency plans to address how to respond
to events that may disrupt normal operations, including activities with PJM
Interconnection, LLC.
The costs of the Project and the date on which the Company plans to
complete the Y2K modifications are based on estimates, that were derived
utilizing numerous assumptions of future events, including the continued
availability of certain resources, third-party modification plans and other
factors, such as regulatory requirements that impact key systems. There can be
no assurance that these estimates will be achieved. Actual results could differ
materially from the projections. Specific factors that might cause a material
change include, but are not limited to, the availability and cost of trained
personnel, the ability to locate and correct all relevant computer programs and
microprocessors.
<PAGE>
The Project is expected to significantly reduce the Company's level of
uncertainty about the Y2K Issue. The Company believes that the completion of the
Project, as scheduled, minimizes the possibility of significant interruptions of
normal operations.
Expansion of Generation Portfolio
The Company established specific goals to increase its generation capacity
from 9 gigawatts to 25 gigawatts by 2003. The Company is targeting a
balanced portfolio of nuclear, hydro and clean burning fossil capacity
through the acquisition of plants and long-term supply agreements. In order
to meet this strategic objective the Company may require significant
capital resources.
In October 1998, the Company through AmerGen Energy Company, LLC, a 50%
owned joint venture with British Energy, Inc., entered into a definitive asset
purchase agreement with GPU, Inc. (GPU) to acquire GPU's 786 megawatt Three Mile
Island Unit No. 1 Nuclear Generating Facility for approximately $23 million in
cash, $77 million for nuclear fuel payable over five years and certain
contingent payments based upon future wholesale market prices. The Company
currently expects the acquisition, which is subject to various regulatory
approvals, to close by mid-year 1999.
Corporate Restructuring
In 1999, the Company's common shareholders will vote on a management
proposal for the formation of a holding company. The holding company will
be formed through the exchange of PECO Energy common stock for common stock
of the holding company. As a result, the Company will become a wholly owned
subsidiary of the holding company. The formation of the holding company
will not affect the Company's other securities. Management has proposed the
formation of the holding company to facilitate the disaggregation of the
Company's transmission and distribution, generation and unregulated
businesses and corporate central services in order to create increased
financial, management and organizational flexibility.
Forward-Looking Statements
Except for the historical information contained herein, certain of the matters
discussed in this Report are forward-looking statements which are subject to
risks and uncertainties. The factors that could cause actual results to differ
materially include those discussed herein as well as those listed in Note 5 of
Notes to Consolidated Financial Statements and other factors discussed in the
Company's filings with the Securities and Exchange Commission. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date of this Report. The Company undertakes no obligation
to publicly release any revision to these forward-looking statements to reflect
events or circumstances after the date of this Report.
<PAGE>
Report of Independent Accountants
To the Shareholders and Board of Directors
of PECO Energy Company:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, cash flows and changes in common
shareholders' equity and preferred stock present fairly, in all material
respects, the financial position of PECO Energy Company and Subsidiary
Companies at December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management and
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 5, 1999
<PAGE>
24 PECO Energy Company and Subsidiary Companies
Consolidated Statements of Income
<TABLE>
<CAPTION>
For the Years Ended December 31, 1998 1997 1996
- - ----------------------------------------------------------------------------------------------------------------------------
Thousands of Dollars
---------------------------------------------------------
<S> <C> <C> <C>
Operating Revenues
Electric $ 4,810,840 $ 4,166,669 $ 3,854,836
Gas 399,642 451,232 428,814
----------- ----------- -----------
Total Operating Revenues 5,210,482 4,617,901 4,283,650
----------- ----------- -----------
Operating Expenses
Fuel and Energy Interchange 1,751,819 1,290,164 972,380
Operating and Maintenance 1,128,792 1,431,420 1,274,222
Early Retirement and Separation Programs 124,200 -- --
Depreciation and Amortization 642,842 580,595 489,001
Taxes Other Than Income 279,515 310,091 299,546
----------- ----------- -----------
Total Operating Expenses 3,927,168 3,612,270 3,035,149
----------- ----------- -----------
Operating Income 1,283,314 1,005,631 1,248,501
----------- ----------- -----------
Other Income and Deductions
Interest Expense (330,842) (372,857) (382,443)
Company Obligated Mandatorily Redeemable
Preferred Securities of a Partnership, which
holds Solely Subordinated Debentures of
the Company (30,694) (28,990) (26,723)
Allowance for Funds Used During Construction 3,522 21,771 19,947
Settlement of Salem Litigation -- 69,800 --
Other, net (73,268) (66,028) (1,976)
----------- ----------- -----------
Total Other Income and Deductions (431,282) (376,304) (391,195)
----------- ----------- -----------
Income Before Income Taxes and Extraordinary Item 852,032 629,327 857,306
Income Taxes 319,654 292,769 340,101
----------- ----------- -----------
Income Before Extraordinary Item 532,378 336,558 517,205
Extraordinary Item (net of income taxes of
$13,757 and $1,290,961 for 1998 and 1997, respectively) (19,654) (1,833,664) --
----------- ----------- -----------
Net Income (Loss) 512,724 (1,497,106) 517,205
Preferred Stock Dividends 13,109 16,804 18,036
----------- ----------- -----------
Earnings (Loss) Applicable to Common Stock $ 499,615 $(1,513,910) $ 499,169
=========== =========== ===========
Average Shares of Common Stock
Outstanding (Thousands) 223,219 222,543 222,490
=========== =========== ===========
Basic Earnings per Average Common Share
Before Extraordinary Item (Dollars) $ 2.33 $ 1.44 $ 2.24
Extraordinary Item (Dollars) $ (0.09) $ (8.24) $ --
----------- ----------- -----------
Basic Earnings per Average Common Share (Dollars) $ 2.24 $ (6.80) $ 2.24
=========== =========== ===========
Diluted Earnings per Average Common Share
Before Extraordinary Item (Dollars) $ 2.32 $ 1.44 $ 2.24
Extraordinary Item (Dollars) $ (0.09) $ (8.24) $ --
----------- ----------- -----------
Diluted Earnings per Average Common Share (Dollars) $ 2.23 $ (6.80) $ 2.24
=========== =========== ===========
Dividends per Common Share (Dollars) $ 1.00 $ 1.80 $ 1.755
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
PECO Energy Company and Subsidiary Companies 25
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the Years Ended December 31, 1998 1997 1996
- - -----------------------------------------------------------------------------------------------------------------------
Thousands of Dollars
-------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net Income (Loss) $ 512,724 $(1,497,106) $ 517,205
Extraordinary Item (net of income taxes) (19,654) (1,833,664) --
----------- ----------- -----------
Income Before Extraordinary Item 532,378 336,558 517,205
Adjustments to reconcile Net Income to Net Cash
provided by Operating Activities:
Depreciation and Amortization 704,718 664,294 566,412
Deferred Income Taxes (115,640) (17,228) 166,770
Amortization of Investment Tax Credits (18,066) (18,201) (15,979)
Early Retirement and Separation Charge 125,000 -- --
Salem Litigation Settlement -- 69,800 --
Deferred Energy Costs 5,818 (5,652) (66,151)
Amortization of Leased Property 59,923 39,100 31,400
Changes in Working Capital:
Accounts Receivable 15,590 (289,610) 53,681
Inventories 14,192 28,628 (2,729)
Accounts Payable 8,971 93,881 (86,765)
Other Current Assets and Liabilities 54,263 58,539 (25,040)
Other Deferred Credits - Other 49,948 78,846 (4,609)
Other Items affecting Operations (4,190) (804) 38,050
----------- ----------- -----------
Net Cash Flows from Operating Activities 1,432,905 1,038,151 1,172,245
----------- ----------- -----------
Cash Flows from Investing Activities
Investment in Plant (415,331) (490,200) (548,854)
Increase in Other Investments (46,742) (83,261) (114,126)
----------- ----------- -----------
Net Cash Flows from Investing Activities (462,073) (573,461) (662,980)
----------- ----------- -----------
Cash Flows from Financing Activities
Change in Short-Term Debt 123,500 114,000 287,500
Proceeds from Exercise of Stock Options 50,700 117 11,301
Retirement of Company Obligated Mandatorily Redeemable
Preferred Securities of a Partnership (80,794) (61,895) --
Issuance of Company Obligated Mandatorily Redeemable
Preferred Securities of a Partnership 78,105 50,000 --
Issuance of Long-Term Debt 13,486 161,813 43,700
Retirement of Long-Term Debt (841,755) (283,303) (427,463)
Loss on Reacquired Debt 6,753 22,752 24,724
Dividends on Preferred and Common Stock (236,307) (417,383) (411,569)
Capital Lease Payments (59,923) (39,100) (31,400)
Other Items Affecting Financing (9,918) (7,522) 2,575
----------- ----------- -----------
Net Cash Flows from Financing Activities (956,153) (460,521) (500,632)
----------- ----------- -----------
Increase in Cash and Cash Equivalents 14,679 4,169 8,633
Cash and Cash Equivalents at beginning of period 33,404 29,235 20,602
----------- ----------- -----------
Cash and Cash Equivalents at end of period $ 48,083 $ 33,404 $ 29,235
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
26 PECO Energy Company and Subsidiary Companies
Consolidated Balance Sheets
<TABLE>
<CAPTION>
At December 31, 1998 1997
- - -------------------------------------------------------------------------------------------------
Thousands of Dollars
---------------------------------
<S> <C> <C>
Assets
Utility Plant
Electric-Transmission & Distribution $ 3,833,780 $ 3,617,666
Electric-Generation 1,713,430 1,434,895
Gas 1,131,999 1,071,819
Common 407,320 302,672
----------- -----------
7,086,529 6,427,052
Less Accumulated Provision for Depreciation 2,891,321 2,690,824
----------- -----------
4,195,208 3,736,228
Nuclear Fuel, net 141,907 147,359
Construction Work in Progress 272,590 611,204
Leased Property, net 154,308 175,933
----------- -----------
Net Utility Plant 4,764,013 4,670,724
----------- -----------
Current Assets
Cash and Temporary Cash Investments 48,083 33,404
Accounts Receivable, net
Customers 97,527 173,350
Other 213,229 139,996
Inventories, at average cost
Fossil Fuel 79,488 84,858
Materials and Supplies 82,068 90,890
Deferred Energy Costs-Gas 29,847 35,665
Deferred Generation Costs Recoverable in Current Rates -- 424,497
Other 19,013 20,115
----------- -----------
Total Current Assets 569,255 1,002,775
----------- -----------
Deferred Debits and Other Assets
Competitive Transition Charge 5,274,624 5,274,624
Recoverable Deferred Income Taxes 614,445 590,267
Deferred Non-Pension Postretirement Benefits Costs 90,915 97,409
Investments 550,904 515,835
Loss on Reacquired Debt 77,165 83,918
Other 107,042 121,016
----------- -----------
Total Deferred Debits and Other Assets 6,715,095 6,683,069
----------- -----------
Total Assets $12,048,363 $12,356,568
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
PECO Energy Company and Subsdiary Companies 27
Consolidated Balance Sheets (Continued)
<TABLE>
<CAPTION>
At December 31, 1998 1997
- - ----------------------------------------------------------------------------------------------------
Thousands of Dollars
-----------------------------------
<S> <C> <C>
Capitalization and Liabilities
Capitalization
Common Shareholders' Equity
Common Stock $ 3,589,031 $ 3,517,731
Other Paid-In Capital 1,236 1,239
Retained Earnings (Accumulated Deficit) (532,925) (792,239)
------------ ------------
3,057,342 2,726,731
Preferred and Preference Stock
Without Mandatory Redemption 137,472 137,472
With Mandatory Redemption 92,700 92,700
Company Obligated Mandatorily Redeemable Preferred
Securities of a Partnership, which holds Solely
Subordinated Debentures of the Company 349,355 352,085
Long-Term Debt 2,919,592 3,853,141
------------ ------------
Total Capitalization 6,556,461 7,162,129
------------ ------------
Current Liabilities
Notes Payable 525,000 401,500
Long-Term Debt Due Within One Year 361,523 247,087
Capital Lease Obligations Due Within One Year 69,011 55,808
Accounts Payable 316,292 323,816
Taxes Accrued 170,495 66,397
Interest Accrued 61,515 77,911
Deferred Income Taxes 14,168 185,696
Other 217,416 260,457
------------ ------------
Total Current Liabilities 1,735,420 1,618,672
------------ ------------
Deferred Credits and Other Liabilities
Capital Lease Obligations 85,297 120,125
Deferred Income Taxes 2,376,792 2,297,042
Unamortized Investment Tax Credits 299,999 318,065
Pension Obligation 219,274 211,596
Non-Pension Postretirement Benefits Obligation 421,083 324,850
Other 354,037 304,089
------------ ------------
Total Deferred Credits and Other Liabilities 3,756,482 3,575,767
------------ ------------
Commitments and Contingencies (Note 5)
Total Capitalization and Liabilities $ 12,048,363 $ 12,356,568
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
28
PECO Energy Company and Subsidiary Companies
Consolidated Statements of Changes in Common Shareholders' Equity and
Preferred Stock
<TABLE>
<CAPTION>
Retained
Other Earnings
Common Stock Paid-In (Accumulated Preferred Stock
All Amounts in Thousands Shares Amount Capital Deficit) Shares Amount
- - -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 222,172 $ 3,506,313 $ 1,326 $ 1,023,708 2,921 $ 292,067
Net Income 517,205
Cash Dividends Declared
Preferred Stock
(at specified annual rates) (21,042)
Common Stock ($1.755 per share) (390,527)
Expenses of Capital Stock Activity (275)
Capital Stock Activity
Long-Term Incentive Plan Issuances 370 11,301 (2,028)
--------- ------------ --------- ------------ -------- ----------
Balance at December 31, 1996 222,542 3,517,614 1,326 1,127,041 2,921 292,067
Net Loss (1,497,106)
Cash Dividends Declared
Preferred Stock
(at specified annual rates) (16,804)
Common Stock ($1.80 per share) (400,578)
Expenses of Capital Activity 97
Stock Repurchase Forward Contract (4,889)
Capital Stock Activity
Long-Term Incentive Plan Issuances 5 117
Preferred Stock Redemptions (87) (619) (61,895)
--------- ------------ --------- ------------ -------- ----------
Balance at December 31, 1997 222,547 $ 3,517,731 $ 1,239 $ (792,239) 2,302 $ 230,172
Net Income 512,724
Cash Dividends Declared
Preferred Stock
(at specified annual rates) (13,109)
Common Stock ($1.00 per share) (223,198)
Expenses of Capital Stock Activity 2,731
Stock Repurchase Forward Contract (7,677)
Capital Stock Activity
Long-Term Incentive Plan Issuances 2,137 71,300 (3) (12,157)
--------- ------------ --------- ------------ -------- ----------
Balance at December 31, 1998 224,684 $ 3,589,031 $ 1,236 $ (532,925) 2,302 $ 230,172
========= ============ ========= ============= ======== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
Notes to Consolidated Financial Statements 29
Notes to Consolidated Financial Statements
1. Significant Accounting Policies
General
The consolidated financial statements of PECO Energy Company (the Company)
include the accounts of its utility subsidiary companies, all of which are
wholly owned. Accounting policies for all of the Company's operations are
in accordance with generally accepted accounting principles (GAAP).
Accounting policies for regulated operations are also in accordance with
those prescribed by the regulatory authorities having jurisdiction,
principally the Pennsylvania Public Utility Commission (PUC) and the
Federal Energy Regulatory Commission (FERC). The Company has unconsolidated
non-utility subsidiaries which are not material. The unconsolidated
subsidiaries are accounted for under the equity method.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Estimates are used by the Company in accounting for unbilled revenue, the
allowance for uncollectible accounts, purchased gas adjustment clause,
depreciation and amortization, taxes, reserves for contingencies, employee
benefits, certain fair value and recoverability determinations, and nuclear
outage costs, among others.
Accounting for the Effects of Regulation
The Company accounts for all of its electric transmission and distribution
and gas operations in accordance with Statement of Financial Accounting
Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of
Regulation," requiring the Company to record the financial statement
effects of the rate regulation to which such operations are currently
subject. If a separable portion of the Company's business no longer meets
the provisions of SFAS No. 71, the Company is required to eliminate the
financial statement effects of regulation for that portion. Effective
December 31, 1997, the Company determined that the electric generation
portion of its business no longer met the criteria of SFAS No. 71 and,
accordingly, implemented SFAS No. 101, "Regulated Enterprises - Accounting
for the Discontinuation of FASB Statement No. 71," for that portion of its
business.
Revenues
Electric and gas revenues are recorded as service is rendered or energy is
delivered to customers. At the end of each month, the Company accrues an
estimate for the unbilled amount of energy delivered or services provided
to customers.
Purchased Gas and Energy Cost Adjustment Clauses
The Company's gas rates are subject to a fuel adjustment clause designed to
recover or refund the difference between the actual cost of purchased gas
and the amount included in base rates. Differences between the amounts
billed to customers and the actual costs recoverable are deferred and
recovered or refunded in future periods by means of prospective quarterly
adjustments to rates.
<PAGE>
Prior to December 31, 1996, the Company's retail electric rates were
subject to an Energy Cost Adjustment (ECA) clause designed to recover or refund
the difference between the actual cost of fuel, energy interchange or purchased
power and the amount of such costs included in base rates. Effective December
31, 1996, the PUC approved the roll-in of electric energy costs into the base
rates charged to the Company's retail electric customers and such rates are no
longer subject to the ECA.
Nuclear Fuel
The cost of nuclear fuel is capitalized and charged to fuel expense on the
unit of production method. Estimated costs of nuclear fuel disposal are
charged to fuel expense as the related fuel is consumed. The Company's
nuclear fuel at Peach Bottom Atomic Power Station (Peach Bottom) and Salem
Generating Station (Salem) is accounted for as a capital lease. Nuclear
fuel at Limerick Generating Station (Limerick) is owned.
Nuclear Outage Costs
Incremental nuclear maintenance and refueling outage costs are accrued over
the unit operating cycle. For each unit, an accrual for incremental nuclear
maintenance and refueling outage expense is estimated based upon the latest
planned outage schedule and estimated costs for the outage. Differences
between the accrued and actual expense for the outage are recorded when
such differences are known.
Depreciation, Amortization and Decommissioning
Depreciation is provided over the estimated service lives of plant on the
straight-line method. Annual depreciation provisions for financial
reporting purposes, expressed as a percentage of average depreciable
utility plant in service, were approximately 2.8% in 1998, 3.3% in 1997 and
2.9% in 1996. See note 3 for information concerning the change in 1996 to
depreciation and amortization.
The Company's current estimate of the costs for decommissioning its
ownership share of its nuclear generating stations is currently included in
regulated rates and is charged to operations over the expected service life of
the related plant. The amounts recovered from customers are deposited in trust
accounts and invested for funding of future costs. These amounts, and realized
investment earnings thereon, are credited to accumulated depreciation. The
Company believes that the amounts being recovered from customers through
electric rates will be sufficient to fully fund the unrecorded portion of its
decommissioning obligation.
Allowance for Funds Used During Construction (AFUDC)
AFUDC is the cost, during the period of construction, of debt and equity
funds used to finance construction projects for regulated operations. AFUDC
is recorded as a charge to Construction Work in Progress and as a credit to
AFUDC included in Other Income and Deductions. The rates used for
capitalizing AFUDC, which averaged 8.63% in 1998, 8.88% in 1997 and 9.38%
in 1996, are computed under a method prescribed by regulatory authorities.
AFUDC is not included in regular taxable income and the depreciation of
capitalized AFUDC is not tax deductible.
<PAGE>
30 PECO Energy Company and Subsidiary Companies
Effective January 1, 1998, the Company ceased accruing AFUDC for electric
generation-related construction projects and began using SFAS No. 34,
"Capitalizing Interest Costs," to calculate the costs during construction of
debt funds used to finance its electric generation-related construction
projects. The Company recorded capitalized interest of $7 million in 1998.
Gains and Losses on Reacquired Debt
Prior to December 31, 1997, gains and losses on reacquired debt were
deferred and amortized to interest expense over the period approved for
ratemaking purposes. Effective January 1, 1998, gains and losses on
reacquired debt associated with the electric generation portion of the
Company's operations are expensed as incurred. Gains and losses on
reacquired debt associated with the Company's regulated operations continue
to be deferred and amortized to interest expense over the period approved
for ratemaking purposes based on management's assessment of the likelihood
of recovery.
Income Taxes
Deferred Federal and state income taxes are provided on all significant
timing differences between book bases and tax bases of assets and
liabilities, transactions that reflect taxable income in a year different
than book income and tax carry forwards. Investment tax credits previously
used for income tax purposes have been deferred on the Consolidated Balance
Sheet and are recognized in book income over the life of the related
property. The Company and its subsidiaries file a Consolidated Federal
income tax return. Income taxes are allocated to each of the Company's
subsidiaries within the consolidated group based on the separate return
method.
Derivative Financial Instruments
Hedge accounting is applied only if the derivative reduces the risk of the
underlying hedged item and is designated at inception as a hedge, with
respect to the hedged item. If a derivative instrument ceased to meet the
criteria for deferral, any gains or losses would be currently recognized in
income. The Company does not hold or issue derivative financial instruments
for trading purposes.
Utility Plant
Effective December 31, 1997, electric generation plant is valued at the
lower of original cost or market pursuant to SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of"(SFAS No. 121). All other utility plant continues to be valued
at original cost.
Capitalized Software Costs
Software projects which exceed $5 million are capitalized. At December 31,
1998 and 1997, capitalized software costs totaled $84 and $86 million (net
of $37 and $29 million accumulated amortization), respectively. Such
capitalized amounts are amortized ratably over the expected lives of the
projects when they become operational, not to exceed ten years.
<PAGE>
New Accounting Pronouncements
In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" (SFAS No. 131). SFAS No. 131
supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise," replacing the "industry segment" approach with the
"management" approach. The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the Company's reportable segments.
SFAS No. 131 also requires disclosures about products and services,
geographic areas and major customers. The adoption of SFAS No. 131 did not
affect the Company's financial condition or results of operations (see note 2).
In 1998, the Company adopted SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits," (SFAS No. 132) which revises and
standardizes employers' disclosures about pension and other postretirement
benefit plans but does not change the measurement or recognition of those plans.
The adoption of SFAS No. 132 did not affect the Company's financial condition or
results of operations (see note 6).
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," (SFAS
No. 133) to establish accounting and reporting standards for derivatives. The
new standard requires recognizing all derivatives as either assets or
liabilities on the balance sheet at their fair value and specifies the
accounting for changes in fair value depending upon the intended use of the
derivative. The new standard will be effective for fiscal years beginning after
June 15, 1999. The Company expects to adopt SFAS No. 133 in the first quarter of
2000. The Company is in the process of evaluating the impact of SFAS No. 133 on
its financial statements.
In November 1998, the FASB's Emerging Issues Task Force issued EITF 98-10.
"Accounting for Contracts Involved in Energy Trading and Risk Management
Activities." EITF 98-10 outlines attributes that may be indicative of an energy
trading operation and gives further guidance on the accounting for contracts
entered into by an energy trading operation. This accounting guidance requires
mark-to-market accounting for contracts considered to be a trading activity.
EITF 98-10 is applicable for fiscal years beginning after December 15, 1998 with
any impact recorded as a cumulative effect adjustment through retained earnings
at the date of adoption. At December 31, 1998, the Company has evaluated its
wholesale marketing operation and related contracts under the guidance provided
in EITF 98-10. For those contracts entered into in the over-the-counter market
and considered to be a trading activity, the Company believes the impact to be
immaterial. However, due to the duration, complexity, and uncertainties
surrounding the long-term commitments considered to be trading activities, the
Company is continuing to evaluate these commitments and the impact of adopting
EITF 98-10.
Reclassifications
Certain prior-year amounts have been reclassified for comparative purposes.
These reclassifications had no effect on net income or common shareholders'
equity.
<PAGE>
2. Nature of Operations and Information about Products and Services
The Company is primarily a vertically integrated public utility that
provides retail electric and natural gas service to the public in its
traditional service territory and retail electric generation service
throughout Pennsylvania in conjunction with Pennsylvania's Customer Choice
Program. The Company also engages in the wholesale marketing of electricity
on a national basis. The Company participates in joint ventures which
provide services such as telecommunications in the Philadelphia
metropolitan area. Revenues and expenses associated with these activities,
the Customer Choice Program, joint ventures and other projects are
reflected in Other Income and Deductions in the Company's Consolidated
Statements of Income.
<TABLE>
<CAPTION>
For the Years Ended December 31, 1998 1997 1996
- - -------------------------------------------------------------------------------------------------------------------------
Thousands of Dollars
-------------------------------------------------------
<S> <C> <C> <C>
Operating Revenues from Electric Operations
Residential $ 1,377,237 $ 1,357,449 $ 1,370,158
Small commercial and industrial 783,682 778,743 748,561
Large commercial and industrial 1,066,868 1,077,374 1,098,307
Other 149,424 147,523 140,133
Unbilled 1,409 19,130 (25,950)
----------- ----------- -----------
Service territory 3,378,620 3,380,219 3,331,209
Interchange sales 210,965 58,614 25,991
Sales to other utilities 1,221,255 727,836 497,636
----------- ----------- -----------
Total operating revenues $ 4,810,840 $ 4,166,669 $ 3,854,836
=========== =========== ===========
Operating Revenues from Gas Operations
Residential $ 15,968 $ 16,852 $ 15,716
House heating 236,430 265,299 249,507
Commercial and industrial 124,548 144,801 132,822
Other 2,037 3,228 11,462
Unbilled (2,960) (969) (4,250)
----------- ----------- -----------
Subtotal 376,023 429,211 405,257
Other revenues (including gas transported for customers) 23,619 22,021 23,557
----------- ----------- -----------
Total operating revenues $ 399,642 $ 451,232 $ 428,814
=========== =========== ===========
</TABLE>
3. Rate Matters
Final Restructuring Order
On May 14, 1998, the PUC issued a final order (Final Restructuring Order)
approving a Joint Petition for Settlement (Global Settlement) filed by the
Company and numerous parties to the Company's restructuring proceeding
mandated by the Electricity Generation Competition and Customer Choice Act
(Competition Act). The Competition Act provides for the restructuring of
the electric utility industry in Pennsylvania, including the deregulation
of generation operations and the institution of retail competition for
generation supply beginning in 1999. The Final Restructuring Order provided
for the recovery of $5.26 billion of stranded costs through transition
charges to distribution customers over a 12 year period beginning in 1999
with a 10.75% return on the balance and supercedes all prior orders
regarding recovery of generation-related regulatory assets and liabilities.
During the 12 year stranded cost recovery period, the Company will amortize
the recoverable stranded costs in accordance with the rate schedules
determined in the Final Restructuring Order.
<PAGE>
31
The Final Restructuring Order provided for the phase-in of customer choice
of electric generation supplier (EGS) for all customers: one-third of the peak
load of each customer class on January 1, 1999; one-third on January 2, 1999;
and the remainder on January 2, 2000. The Final Restructuring Order also
established market share thresholds to ensure that a minimum number of
residential and commercial customers choose an EGS. If less than 35% and 50% of
residential and commercial customers have chosen an EGS by January 1, 2001 and
January 1, 2003, respectively, the number of customers sufficient to meet the
necessary threshold levels shall be randomly selected and assigned to an EGS
through a PUC-determined process.
Beginning January 1, 1999, electric rates will be unbundled into
transmission and distribution components, a Competitive Transition Charge (CTC)
for recovery of stranded costs and an energy and capacity charge. Eligible
customers who choose an alternative EGS will not be charged the energy and
capacity charge or the transmission charge and instead will purchase their
electric energy supply and transmission at market-based rates from their EGS.
The Company will in turn be reimbursed by the EGS, via the PJM Interconnection,
LLC, for the cost of the transmission service at a rate approximately equivalent
to the unbundled transmission rate. Also, beginning January 1, 1999, the Company
will unbundle its retail electric rates for metering, meter reading and billing
and collection services to provide credits to those customers who elect to have
an alternative supplier perform these services.
In accordance with the Competition Act and the Final Restructuring Order,
the Company's retail electric rates are capped at the year-end 1996 levels
(system-wide average of 9.96 cents/kilowatt hour (kWh)) through June 2005. The
Final Restructuring Order requires the Company to reduce its retail electric
rates by 8% from the 1996 system-wide average rate on January 1, 1999. The rate
decrease will become 6% from January 1, 2000 until January 1, 2001, when the
system-wide average rate cap will revert to 9.96 cents/kWh. The transmission and
distribution rate component will remain capped at a system-wide average rate of
2.98 cents/kWh through June 30, 2005. Additionally, generation rate caps,
defined as the sum of the applicable transition charge and energy and capacity
charge, will remain in effect through 2010.
<PAGE>
32 PECO Energy Company and Subsidiary Companies
The Final Restructuring Order requires that on January 1, 2001, 20% of all
of the Company's residential customers, determined by random selection and
without regard to whether such customers are obtaining generation service from
an alternate EGS, shall be assigned to a provider of last resort default
supplier other than the Company through a PUC-approved bidding process.
The Final Restructuring Order authorizes the issuance of up to $4 billion
of transition bonds (Transition Bonds). In preparation for the issuance of
Transition Bonds, the Company formed a special purpose subsidiary (SPS). The
proceeds of the Transition Bonds are required to be used principally to reduce
recoverable stranded costs and related capitalization. The Transition Bonds will
be obligations of the SPS, secured by intangible transition property (ITP). ITP
represents the irrevocable right of the Company or its assignee, to collect
non-bypassable charges from customers to recover stranded costs.
The Company filed complaints in federal and state courts relating to the
restructuring orders issued by the PUC in December 1997, January 1998 and
February 1998. In addition, numerous other parties filed appeals and cross
appeals of these orders. In accordance with the terms of the Final Restructuring
Order, all appeals and cross-appeals filed by the signatories to the Global
Settlement have been placed in a pending but inactive status. Such appeals and
cross appeals will be permanently withdrawn at such time that the Final
Restructuring Order is no longer subject to administrative or judicial
challenge.
In an appeal of a PUC order issued in May 1997, an intervenor brought an
action asserting that the stranded cost recovery provisions of the Competition
Act violated the Commerce Clause of the United States Constitution. On May 7,
1998, the Commonwealth Court of Pennsylvania unanimously rejected the claim. The
intervenor petitioned the Supreme Court of Pennsylvania for allowance of appeal.
On September 29, 1998, the Pennsylvania Supreme Court denied the petition. On
December 28, 1998, the intervenor filed a petition for certiorari with the
United States Supreme Court.
Limerick
Through 1997, the Company was recovering certain deferred Limerick costs.
At December 31, 1997, the unamortized portion of these regulatory assets of
$321 million was included as part of electric generation-related regulatory
assets.
Under its electric tariffs and ECA, the Company was allowed to retain for
shareholders any proceeds above the average energy cost for sales of 399
megawatts (MW) of near-term excess capacity and/or associated energy and to
share in the benefits which resulted from the operation of both Limerick Units
No. 1 and No. 2. The Company's ECA was discontinued at December 31, 1996. During
1996, the Company recorded as revenue net of fuel costs $82 million, as a result
of the sale of the 399 MW of capacity and/or associated energy and the Company's
share of Limerick energy savings.
<PAGE>
Declaratory Accounting Order
Pursuant to a PUC Declaratory Order, effective October 1, 1996, the Company
increased depreciation and amortization on assets associated with Limerick
by $100 million per year and decreased depreciation and amortization on
other Company assets by $10 million per year, for a net increase in
depreciation and amortization of $90 million per year. At December 31,
1997, $90 million of depreciation and amortization that would have been
recognized in 1998 was deferred as a regulatory asset since the Company's
rates continued to be cost-based until January 1, 1999. During 1998 these
amounts were amortized and recovered.
Energy Cost Adjustment (ECA)
Through December 31, 1996, the Company was subject to a PUC-established
electric ECA which, in addition to reconciling fuel costs and revenues,
incorporated a nuclear performance standard which allowed for financial
bonuses or penalties depending on whether the Company's system nuclear
capacity factor exceeded or fell below a specified range. For the year
ended December 31, 1996 the Company recorded a bonus of $22 million.
4. Accounting Changes
The Company accounts for its electric transmission and distribution and gas
operations in accordance with SFAS No. 71 which requires the Company to
record the financial statement effects of the rate regulation to which the
Company is subject. Use of SFAS No. 71 is applicable to the utility
operations of the Company which meet the following criteria: (1)
third-party regulation of rates; (2) cost-based rates; and (3) a reasonable
assumption that all costs will be recoverable from customers through rates.
The Company believes that it is probable that regulatory assets associated
with these operations will be recovered.
Effective December 31, 1997, the Company discontinued the application of
SFAS No. 71 for its retail electric generation operations and adopted the
provisions of SFAS No. 101 "Regulated Enterprises - Accounting for the
Discontinuation of Application of FASB Statement No. 71."
As required by SFAS No. 101, at December 31, 1997, the Company performed an
impairment test of its electric generation assets pursuant to SFAS No. 121, on a
plant specific basis and determined that $6.1 billion of its $7.1 billion of
electric generation assets would be impaired as of December 31, 1998. The
Company estimated the fair value for each of its electric generating units by
determining its estimated future operating cash inflows and outflows. The net
future cash flows for each electric generating plant were then compared to its
net book value. For any electric generating plant with future undiscounted cash
flows less than its book value, net cash flows were discounted using a discount
rate commensurate with the risk of each electric generating plant. Since the
Company's retail electric rates continued to be cost-based through January 1,
1999, $333 million representing depreciation expense on electric
generation-related assets in 1998 and $91 million representing amortization of
other regulatory assets in 1998 were reclassified to a regulatory asset and were
amortized and recovered in 1998.
<PAGE>
Notes to Consolidated Financial Statements 33
At December 31, 1997, the Company had total electric generation-related
stranded costs of $8.4 billion, representing $5.8 billion of net stranded
electric generation plant and $2.6 billion of electric generation-related
regulatory assets. The original PUC restructuring order allowed the Company to
recover $5.3 billion of its generation-related stranded costs from customers.
This resulted in a net unrecoverable amount of $3.1 billion. Accordingly, the
Company recorded an extraordinary charge at December 31, 1997 of $3.1 billion
($1.8 billion net of taxes) of electric generation-related stranded costs that
will not be recovered from customers. The Final Restructuring Order did not
change the amount of allowable stranded costs.
Effective December 31, 1997, the Company discontinued the application of
SFAS No. 71 for its wholesale energy sales operations. Based on projections of
the Company's retail load growth, the Company concluded all of its owned
generation capacity would be necessary to meet its electric retail load. As a
result, the discontinuance of SFAS No. 71 for its wholesale energy sales
operations did not result in a charge against income.
5. Commitments and Contingencies
Capital Commitments
The Company estimates $440 million of capital expenditures in 1999. Certain
facilities under construction and to be constructed may require permits and
licenses which the Company has no assurance will be granted. Capital
expenditures do not include investments in joint ventures including
investments related to the Company's strategy to expand its generation
portfolio.
Nuclear Insurance
As of December 31, 1998, the Price-Anderson Act limited the liability of
nuclear reactor owners to $9.8 billion for claims that could arise from a
single incident. The limit is subject to change to account for the effects
of inflation and changes in the number of licensed reactors. The Company
carries the maximum available commercial insurance of $200 million and the
remaining $9.6 billion is provided through mandatory participation in a
financial protection pool. Under the Price-Anderson Act, all nuclear
reactor licensees can be assessed up to $88 million per reactor per
incident, payable at no more than $10 million per reactor per incident per
year. This assessment is subject to inflation and state premium taxes. In
addition, the U.S. Congress could impose revenue raising measures on the
nuclear industry to pay claims.
The Company carries property damage, decontamination and premature
decommissioning insurance in the amount of its $2.75 billion proportionate share
for each station loss resulting from damage to its nuclear plants. In the event
of an accident, insurance proceeds must first be used for reactor stabilization
and site decontamination. If the decision is made to decommission the facility,
a portion of the insurance proceeds will be allocated to a fund which the
Company is required by the Nuclear Regulatory Commission (NRC) to maintain to
provide for decommissioning the facility. The Company is unable to predict the
timing of the availability of insurance proceeds to the Company for the
Company's bondholders, and the amount of such proceeds which would be available.
Under the terms of the various insurance agreements, the Company could be
assessed up to $30 million for losses incurred at any plant insured by the
insurance companies. The Company is self-insured to the extent that any losses
may exceed the amount of insurance maintained. Such losses could have a material
adverse effect on the Company's financial condition and results of operations.
<PAGE>
The Company is a member of an industry mutual insurance company which
provides replacement power cost insurance in the event of a major
accidental outage at a nuclear station. The premium for this coverage is
subject to assessment for adverse loss experience. The Company's maximum
share of any assessment is $10 million per year.
Nuclear Decommissioning and Spent Fuel Storage
The Company's current estimate of its nuclear facilities' decommissioning
cost is $1.5 billion in 1997 dollars. Through 1998, this amount was being
collected through electric rates over the life of each generating unit.
Beginning in 1999, decommissioning costs will be recoverable through
regulated rates. Under rates in effect through December 31, 1998, the
Company collected and expensed approximately $20 million annually from
customers which was accounted for as a component of depreciation expense
and accumulated depreciation. At December 31,1998 and 1997, $336 and $294
million, respectively, were included in accumulated depreciation. In order
to fund future decommissioning costs, at December 31, 1998 and 1997, the
Company held $378 and $320 million, respectively, in trust accounts which
are included as Investments in the Company's Consolidated Balance Sheets
and include both net unrealized and realized gains. Net unrealized gains of
$60 and $43 million were recognized as a Deferred Credit in the Company's
Consolidated Balance Sheet at December 31, 1998 and 1997, respectively. The
Company recognized net realized gains of $12, $11 and $10 million as Other
Income in the Company's Consolidated Statement of Income for the years
ended December 31, 1998, 1997 and 1996, respectively. The Company believes
that the amounts being recovered from customers through regulated rates
will be sufficient to fully fund the unrecorded portion of its
decommissioning obligation.
In an Exposure Draft issued in 1996, the FASB proposed changes in the
accounting for closure and removal costs of production facilities, including the
recognition, measurement and classification of decommissioning costs for nuclear
generating stations. The FASB has expanded the scope of the Exposure Draft to
include closure or removal liabilities that are incurred at any time during the
operating life of the related long-lived asset. The FASB has decided that it
should proceed toward either a final Statement or a revised Exposure Draft. The
timing of this project is still to be determined. If current electric utility
industry accounting practices for decommissioning are changed, annual provisions
for decommissioning could increase and the estimated cost for decommissioning
could be recorded as a liability rather than as accumulated depreciation with
recognition of an increase in the cost of a related regulatory asset.
Under the Nuclear Waste Policy Act of 1982 (NWPA), the U.S. Department of
Energy (DOE) is required to begin taking possession of all spent nuclear fuel
generated by the Company's nuclear units for long-term storage by no later than
1998. Based on recent public pronouncements, it is not likely that a permanent
disposal site will be available for the industry before 2015, at the earliest.
In reaction to statements from the DOE that it was not legally obligated to
begin to accept spent fuel in 1998, a group of utilities and state government
agencies filed a lawsuit against the DOE which resulted in a decision by the
U.S. Court of Appeals for the District of Columbia (D.C. Court of Appeals) in
July 1996 that the DOE had an unequivocal obligation to begin to accept spent
fuel in 1998. In accordance with the NWPA, the Company pays the DOE one mill
($.001) per kilowatthour of net nuclear generation for the cost of nuclear fuel
long-term storage and disposal. This fee may be adjusted prospectively in order
to ensure full cost recovery. Because of inaction by the DOE following the D.C.
Court of Appeals finding of the DOE's obligation to begin receiving spent fuel
in 1998, a group of forty-two utility companies, including the Company, and
forty-six state agencies, filed suit against the DOE seeking authorization to
suspend further payments to the U.S. government under the NWPA and to deposit
such payments into an escrow account until such time as the DOE takes effective
<PAGE>
34 PECO Energy Company and Subsidiary Companies
action to meet its 1998 obligations. In November 1997, the D.C. Court of Appeals
issued a decision in which it held that the DOE had not abided by its prior
determination that the DOE has an unconditional obligation to begin disposal of
spent nuclear fuel by January 31, 1998. The D.C. Court of Appeals also precluded
the DOE from asserting that it was not required to begin receiving spent nuclear
fuel because it had not yet prepared a permanent repository or an interim
storage facility. The DOE and one of the utility companies filed Petitions for
Reconsideration of the decision which were denied, as were petitions seeking
U.S. Supreme Court review of the decision. In addition, the DOE is exploring
other options to address delays in the waste acceptance schedule.
Peach Bottom has on-site facilities with capacity to store spent nuclear
fuel discharged from the units through 2000 for Unit No. 2 and 2001 for Unit No.
3. Life-of-plant storage capacity will be provided by on-site dry cask storage
facilities, the construction of which began in 1998. Limerick has on-site
facilities with capacity to store spent nuclear fuel to 2007. Salem has on-site
facilities with spent fuel storage capacity through 2008 for Unit No. 1 and 2012
for Unit No. 2.
Energy Commitments
The Company's electric utility operations include the wholesale marketing
of electricity. The Company utilized certain types of fixed-price contracts
and other risk management instruments in connection with its wholesale
marketing operations. These contracts include long-term contracts which
commit the Company to purchase or sell energy at fixed prices in the future
(i.e. fixed-price forward purchase and sales contracts), and short-term
bilateral swaps and options contracted for in the over-the-counter market.
Under some of these contracts, the Company may purchase at its option
additional power as needed. The use of the foregoing types of contracts is
so that the Company may manage and hedge its retail and wholesale
commitments in coordination with the economic dispatch of the Company's
installed capacity.
<PAGE>
At December 31,1998, the Company had long-term commitments relating to the
purchase from unaffiliated utilities and others of energy associated with 632 MW
of capacity in 1999, with 2,054 MW of capacity during the period 2000 through
2002 and with 2,431 MW of capacity thereafter. During 1998, purchases under
long-term commitments resulted in expenditures of $170 million. As of December
31, 1998, these purchase commitments result in obligations of approximately $121
million for 1999, $526 million for 2000 through 2002 and $805 million
thereafter. These purchases will be utilized through a combination of retail
sales to customers, long-term sales to other utilities and open market sales.
At December 31, 1998, the Company had entered into long-term agreements
with unaffiliated utilities to sell energy associated with 5,094 MW of capacity,
of which 1,030 MW of these agreements are for 1999, 2,202 MW are for 2000
through 2002 and the remaining 1,862 MW extend through 2009.
At December 31, 1998, the Company had entered into long-term agreements
with unaffiliated utilities to purchase transmission rights. These purchase
commitments result in obligations of approximately $21 million in 1999, $19
million in 2000 and $9 million per year in 2001 through 2003.
Environmental Issues
The Company's operations have in the past and may in the future require
substantial capital expenditures in order to comply with environmental laws.
Additionally, under federal and state environmental laws, the Company is
generally liable for the costs of remediating environmental contamination of
property now or formerly owned by the Company and of property contaminated by
hazardous substances generated by the Company. The Company owns or leases a
number of real estate parcels, including parcels on which its operations or the
operations of others may have resulted in contamination by substances which are
considered hazardous under environmental laws. The Company is currently involved
in a number of proceedings relating to sites where hazardous substances have
been deposited and may be subject to additional proceedings in the future.
The Company has identified 28 sites where former manufactured gas plant
(MGP) activities have or may have resulted in actual site contamination. The
Company is presently engaged in performing various levels of activities at these
sites, including initial evaluation to determine the existence and nature of the
contamination, detailed evaluation to determine the extent of the contamination
and the necessity and possible methods of remediation, and implementation of
remediation. The Pennsylvania Department of Environmental Protection has
approved the Company's clean up of three sites. Eight other sites are currently
under some degree of active study and/or remediation.
As of December 31, 1998 and 1997, the Company had accrued $60 and $63
million, respectively, for environmental investigation and remediation costs,
including $33 and $35 million, respectively, for MGP investigation and
remediation, that currently can be reasonably estimated. The Company cannot
reasonably estimate whether it will incur other significant liabilities for
additional investigation and remediation costs at these or additional sites
identified by the Company, environmental agencies or others, or whether such
costs will be recoverable from third parties.
<PAGE>
Notes to Consolidated Financial Statements 35
Litigation
Grays Ferry Cogeneration Partnership
On April 9, 1998, Grays Ferry Cogeneration Partnership (Grays Ferry), two of
three partners of Grays Ferry and Trigen-Philadelphia Energy Corporation, filed
a complaint in Philadelphia County of Common Pleas against the Company for
specific performance, breach of contract, fraud and breach of implied covenant
of good faith and fair dealing, conversion, unjust enrichment, breach of
fiduciary duties and tortious interference with respect to two power purchase
agreements (PPAs) that the Company had entered into with Grays Ferry. The
plaintiff seeks specific performance, damages in excess of $200 million and
punitive damages. A preliminary injunction was entered against the Company on
May 5, 1998, enjoining the Company from terminating the PPAs. On May29, 1998,
Westinghouse Power Generation filed a complaint in the Philadelphia Court of
Common Pleas against the Company for tortious interference with two alleged
contracts that Westinghouse has with Grays Ferry. On September 4, 1998, The
Chase Manhattan Bank, as agent for a syndicate of banks that are lenders to
Grays Ferry, filed a complaint against the Company alleging tortious
interference by the Company in the credit agreements between Grays Ferry and the
banks and breach of contract of a letter agreement between the Company and the
banks. The Company cannot predict the outcome of these matters.
Cajun Electric Power Cooperative, Inc.
On May 27, 1998, the United States Department of Justice, on behalf of the
Rural Utilities Service and the Chapter 11 Trustee for the Cajun Electric
Power Cooperative, Inc. (Cajun), filed an action claiming breach of
contract against the Company in the United States District Court for the
Middle District of Louisiana arising out of the Company's termination of
the contract to purchase Cajun's interest in the River Bend nuclear power
plant. This action seeks $67 million in damages. The Company cannot predict
the outcome of this matter.
The Company is involved in various other litigation matters. The ultimate
outcome of such matters, while uncertain, is not expected to have a
material adverse effect on the Company's financial condition or results of
operations.
6. Retirement Benefits
The Company and its subsidiaries have a defined benefit pension plan and
postretirement benefit plans applicable to essentially all employees. The
following provides a reconciliation of benefit obligations, plan assets and
funded status of the plans.
<PAGE>
<TABLE>
<CAPTION>
Other Postretirement
Thousands of Dollars Pension Benefits Benefits
- - --------------------------------------------------------------------------------------------------------------------------------
1998 1997 1998 1997
- - --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Change in Benefit Obligation
Net benefit obligation at beginning of year $ 2,141,040 $ 1,982,915 $ 779,231 $ 662,701
Service cost 30,167 25,368 18,375 14,401
Interest cost 153,644 150,057 53,924 54,149
Plan participants' contributions -- -- 397 --
Plan amendments -- (3,052) -- --
Actuarial (gain)/loss 143,274 129,148 (8,260) 85,452
Curtailments (73,330) -- 10,403 --
Settlements (46,541) -- -- --
Special termination benefits 114,182 -- 29,712 --
Gross benefits paid (152,850) (143,396) (36,011) (37,472)
----------- ----------- ------------- -----------
Net benefit obligation at end of year $ 2,309,586 $ 2,141,040 $ 847,771 $ 779,231
=========== =========== ============= ===========
Change in Plan Assets
Fair value of plan assets at beginning of year $ 2,538,039 $ 2,302,935 $ 178,045 $ 126,661
Actual return on plan assets 343,754 377,803 23,535 22,691
Employer contributions 16,404 697 57,319 66,165
Plan participants' contributions -- -- 397 --
Gross benefits paid (152,850) (143,396) (36,011) (37,472)
----------- ----------- ------------- -----------
Fair value of plan assets at end of year $ 2,745,347 $ 2,538,039 $ 223,285 $ 178,045
=========== =========== ============= ===========
Funded status at end of year $ 435,761 $ 396,999 $ (624,486) $ (601,186)
Unrecognized net actuarial (gain)/loss (659,480) (649,903) 37,617 53,110
Unrecognized prior service cost 65,419 83,188 -- --
Unrecognized net transition obligation(asset) (30,512) (35,713) 165,786 223,226
----------- ----------- ------------- -----------
Net amount recognized at end of year $ (188,812) $ (205,429) $ (421,083) $ (324,850)
=========== =========== ============= ===========
Amounts recognized in the consolidated balance sheet consist of:
Prepaid benefit cost $ 30,462 $ 6,167 $ N/A $ N/A
Accrued benefit cost (219,274) (211,596) (421,083) (324,850)
----------- ----------- ------------- -----------
Net amount recognized at end of year $ (188,812) $ (205,429) $ (421,083) $ (324,850)
=========== =========== ============= ===========
</TABLE>
<PAGE>
36
<TABLE>
<CAPTION>
PECO Energy Company and Subsidiary Companies
Pension Benefits Other Postretirement Benefits
- - --------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Weighted-average assumptions
as of December 31
Discount rate 7.00% 7.25% 7.75% 7.00% 7.25% 7.75%
Expected return on plan assets 9.50% 9.50% 9.50% 8.00% 8.00% 8.00%
Rate of compensation increase 5.00% 5.00% 5.00% 5.00% 5.00% 5.00%
Health care cost trend on
covered charges N/A N/A N/A 6.5% 7.0% 8.0%
decreasing to decreasing to decreasing to
ultimate trend ultimate trend ultimate trend
of 5.0% in 2002 of 5.0% in 2002 5.0% in 2002
Components of net periodic benefit cost
Service cost $ 30,167 $ 25,368 $ 27,627 $ 18,375 $14,401 $11,855
Interest cost 153,644 150,057 145,570 53,924 54,149 48,524
Expected return on assets (209,976) (182,866) (171,207) (13,243) (9,984) (3,937)
Amortization of:
Transition obligation (asset) (4,538) (4,538) (4,538) 14,882 14,882 14,882
Prior service cost 6,441 6,441 5,114 -- -- --
Actuarial (gain)loss (7,028) (3,898) 248 -- -- --
Curtailment charge (credit) (62,002) -- -- 52,961 -- --
Settlement charge (credit) (13,439) -- -- -- -- --
--------- -------- -------- -------- ------- -------
Net periodic benefit cost $(106,731) $ (9,436) $ 2,814 $126,899 $73,448 $71,324
========= ======== ======== ======== ======= =======
Special termination benefit
charge(credit) $ 114,182 $ -- $ -- $ 29,712 $ -- $ --
========= ======== ======== ======== ======= =======
</TABLE>
Sensitivity of retiree welfare results
<TABLE>
<CAPTION>
<S> <C>
Effect of a one percentage point increase in assumed health care cost trend
on total service and interest cost components $ 10,432
on postretirement benefit obligation $ 90,490
Effect of a one percentage point decrease in assumed health care cost trend
on total service and interest cost components $ (8,460)
on postretirement benefit obligation $ (75,599)
</TABLE>
Prior service cost is amortized on a straight-line basis over the average
remaining service period of employees expected to receive benefits under
the plans.
During 1998, costs were recognized for special termination benefits in
connection with the retirement incentives and enhanced severance benefits
provided under the Company's Workforce Reduction Program.
The Company provides certain health care and life insurance benefits for
retired employees. Company employees become eligible for these benefits if they
retire from the Company with ten years of service. These benefits and similar
benefits for active employees are provided by an insurance company whose
premiums are based upon the benefits paid during the year.
The Company sponsors a qualifying savings plan covering all employees.
Contributions made by participating employees are matched based on a specified
percentage of employee contribution up to 4% of the employees' pay base. The
cost of the Company's matching contribution to the savings plan totaled $7
million, $7 million and $3 million in 1998, 1997 and 1996, respectively.
<PAGE>
Notes to Consolidated Financial Statements 37
7. Accounts Receivable
Accounts receivable at December 31, 1998 and 1997 included unbilled
operating revenues of $142 and $135 million, respectively. The allowance
for uncollectible accounts at December 31, 1998 and 1997 was $20 and $32
million, respectively.
The Company is party to an agreement with a financial institution under
which it can sell or finance with limited recourse an undivided interest,
adjusted daily, in up to $425 million of designated accounts receivable until
November 2000. At December 31, 1998, the Company had sold a $425 million
interest in accounts receivable, consisting of a $358 million interest in
accounts receivable which the Company accounts for as a sale and a $67 million
interest in special agreement accounts receivable which were accounted for as a
long-term note payable (see note 12). The Company retains the servicing
responsibility for these receivables. The agreement requires the Company to
maintain the $425 million interest, which, if not met, requires the Company to
deposit cash in order to satisfy such requirements. At December 31, 1998, the
Company did not meet this requirement and was required to make a deposit of $7
million.
8. Common Stock
At December 31, 1998 and 1997, common stock without par value consisted of
500,000,000 shares authorized and 224,684,306 and 222,546,562 shares
outstanding, respectively. At December 31, 1998, there were 5,800,841
shares reserved for issuance under the Company's Dividend Reinvestment and
Stock Purchase Plan.
Stock Repurchase
During 1997, the Company's Board of Directors authorized the repurchase of
up to 25 million shares of its common stock from time to time through
open-market, privately negotiated and/or other types of transactions in
conformity with the rulesof the Securities and Exchange Commission.
Pursuant to these authorizations, the Company has entered into forward
purchase agreements to be settled from time to time, at the Company's election,
on either a physical, net share or net cash basis. The amount at which these
agreements can be settled is dependent principally upon the market price of the
Company's common stock as compared to the forward purchase price per share and
the number of shares to be settled. If these agreements had been settled
<PAGE>
on a net share basis at December 31, 1998, based on the closing price of
the Company's common stock on that date, the Company would have received
approximately 4.6 million shares of Company common stock.
Stock Option Plans
The Company maintains a Long-Term Incentive Plan (LTIP) for certain
full-time salaried employees of the Company. The types of long-term
incentive awards which have been granted under the LTIP are non-qualified
options to purchase shares of the Company's common stock and shares of
restricted common stock. In 1998, the Company initiated a Broad-based
Incentive Program and awarded non-qualified options to all employees except
those in electric transmission and distribution system and gas operations.
The Company uses the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." If the Company elected to
account for the LTIP based on SFAS No. 123, earnings applicable to common
stock and earnings per average common share would have been changed to the
pro forma amounts as follows:
<TABLE>
<CAPTION>
1998 1997
- - ------------------------------------------------------------------------------------------------------------
Thousands of Dollars
-----------------------------------------------------
<S> <C> <C> <C>
Earnings (Loss) applicable to common stock As reported $ 499,615 $ (1,513,910)
Pro forma $ 493,696 $ (1,515,895)
Earnings (Loss) per average common share (Dollars) As reported $ 2.24 $ (6.80)
Pro forma $ 2.20 $ (6.81)
</TABLE>
Options granted under the LTIP and the Broad-based Incentive Program become
exercisable upon attainment of a target share value and/or time. All
options expire 10 years from the date of grant. Information with respect to
the LTIP and the Broad-based Incentive Program at December 31, 1998 and
changes for the three years then ended, is as follows:
<PAGE>
38
<TABLE>
<CAPTION>
PECO Energy Company and Subsidiary
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Price Price Price
Shares (per share) Shares (per share) Shares (per share)
1998 1998 1997 1997 1996 1996
- - ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1 3,816,794 $ 26.14 2,961,194 $ 26.68 2,591,765 $ 26.16
Options granted 2,933,540 27.74 1,139,000 22.49 786,500 28.12
Options exercised (2,130,744) 23.86 -- -- (369,871) 25.07
Options cancelled (91,000) 24.82 (283,400) 24.96 (47,200) 29.36
---------- --------- ---------
Balance at December 31 4,528,590 27.71 3,816,794 26.14 2,961,194 26.68
========== ========= =========
Exercisable at December 31 3,462,550 23.91 2,800,794 26.65 2,192,694 26.17
========== ========= =========
Weighted average fair value of
options granted during year $ 3.43 $ 2.97 $ 2.78
========= ========= =========
</TABLE>
The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1998, 1997 and 1996, respectively:
1998 1997 1996
- - --------------------------------------------------------------------------------
Dividend yield 6.8% 6.2% 6.2%
Expected volatility 21.4% 19.5% 16.6%
Risk-free interest rate 5.5% 6.4% 5.5%
Expected life (years) 9.5 5 5
At December 31, 1998, the option groups outstanding, based on ranges of
exercise prices, were as follows:
<TABLE>
<CAPTION>
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
- - ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$15.75 - $20.00 899,700 8.71 $ 19.60 899,700 $ 19.60
$20.01 - $25.00 1,019,750 8.41 22.15 1,004,750 22.18
$25.01 - $30.00 1,510,600 5.76 27.38 1,510,600 27.38
$30.01 - $35.00 78,500 9.43 32.97 47,500 31.98
$35.01 - $50.00 1,020,040 9.87 40.48 -- --
--------- ---------
Total 4,528,590 3,462,550
========= =========
</TABLE>
The Company issued 7,000 and 4,475 shares of restricted common stock during 1998
and 1997, respectively. Vesting in the restricted common stock awards is ove r a
period not to exceed 10 years from the grant date. The compensation cost
associated with these awards is amortized to expense over the vesting period.
Compensation cost associated with these awards is immaterial.
9. Earnings Per Share
Diluted earnings per average common share is calculated by dividing
earnings applicable to common stock by the weighted average shares of
common stock outstanding including stock options outstanding under the
Company's stock option plans considered to be common stock equivalents. The
following table shows the effect of these stock options on the weighted
average number of shares outstanding used in calculating diluted earnings
per average common share:
<TABLE>
<CAPTION>
1998 1997 1996
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Average Common Shares Outstanding 223,219,000 222,543,000 222,490,000
Assumed Conversion of Stock Options 685,000 -- --
----------- ----------- -----------
Potential Average Dilutive Common Shares Outstanding 223,904,000 222,543,000 222,490,000
=========== =========== ===========
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements 39
10. Preferred and Preference Stock
At December 31, 1998 and 1997, Series Preference Stock consisted of
100,000,000 shares authorized, of which no shares were outstanding. At
December 31, 1998 and 1997, cumulative Preferred Stock, no par value,
consisted of 15,000,000 shares authorized.
<TABLE>
<CAPTION>
Current Shares Amount
Redemption Outstanding Thousands of Dollars
Series of Preferred Stock Price(a) 1998 1997 1998 1997
- - -------------------------------------------------------------------------------------------------------------
Series (without mandatory redemption)
<S> <C> <C> <C> <C> <C>
$4.68 104.00 150,000 150,000 $ 15,000 $ 15,000
$4.40 112.50 274,720 274,720 27,472 27,472
$4.30 112.00 150,000 150,000 15,000 15,000
$3.80 106.00 300,000 300,000 30,000 30,000
$7.48 (b) 500,000 500,000 50,000 50,000
--------- --------- ----------- -----------
1,374,720 1,374,720 137,472 137,472
Series (with mandatory redemption)
$6.12 (c) 927,000 927,000 92,700 92,700
--------- --------- ----------- -----------
Total preferred stock 2,301,720 2,301,720 $ 230,172 $ 230,172
========= ========= =========== ===========
</TABLE>
(a) Redeemable, at the option of the Company, at the indicated dollar amounts
per share, plus accrued dividends.
(b) None of the shares of this series are subject to redemption prior to April
1, 2003.
(c) Annual sinking fund requirements in 1999 - 2003 are $18,540,000. None of
the shares of this series are subject to redemption prior to August 1,
1999.
11. Company Obligated Mandatorily Redeemable Preferred Securities of a
Partnership (COMRPS)
At December 31, 1998 and 1997, PECO Energy Capital, L.P. (Partnership), a
Delaware limited partnership of which a wholly owned subsidiary of the
Company is the sole general partner, had outstanding A, C and D series of
COMRPS with liquidation values of $25 (A and C) and $1,000 (D) per
security. Each series is supported by the Company's deferrable interest
subordinated debentures, held by the Partnership, which bear interest at
rates equal to the distribution rates on the related series of
COMRPS. The interest expense on the debentures is included in Other Income
and Deductions in the Consolidated Statements of Income and is deductible
for tax purposes.
<TABLE>
<CAPTION>
Mandatory Amount
Redemption Distribution Trust Receipts Outstanding Thousands of Dollars
At December 31, Date Rate 1998 1997 1998 1997
- - ----------------------------------------------------------------------------------------------------------------------
Series
<S> <C> <C> <C> <C> <C> <C>
A 2043 9.00% 8,850,000 8,850,000 $ 221,250 $ 221,250
B (a) 2025 8.72% -- 3,124,183 -- 80,835
C (b) 2037 8.00% 2,000,000 2,000,000 50,000 50,000
D (c) 2028 7.38% 78,105 -- 78,105 --
---------- ---------- ------------- -------------
Total 10,928,105 13,974,183 $ 349,355 $ 352,085
========== ========== ============= =============
</TABLE>
(a) On May 15, 1998, PECO Energy Capital Trust I redeemed all outstanding Trust
Receipts, each representing an 8.72% Cumulative Monthly Income Preferred
Security, Series B of PECO Energy Capital, L.P.
(b) Ownership of this series is evidenced by Trust Receipts, each representing
an 8.00% COMRPS, Series C, representing limited partnership interests. The
Trust Receipts were issued by PECO Energy Capital Trust II, the sole assets
of which are 8.00% COMRPS, Series C. Each holder of Trust Receipts is
entitled to withdraw the corresponding number of 8.00% COMRPS, Series C from
the Trust in exchange for the Trust Receipts so held.
(c) Ownership of this series is evidenced by Trust Receipts, each representing
an 7.38% COMRPS, Series D, representing limited partnership interests. The
Trust Receipts were issued by PECO Energy Capital Trust III, the sole assets
of which are 7.38% COMRPS, Series D. Each holder of Trust Receipts is
entitled to withdraw the corresponding number of 7.38% COMRPS, Series D from
the Trust in exchange for the Trust Receipts so held. This Series was issued
on April 6, 1998.
<PAGE>
40
12. Long-Term Debt
<TABLE>
<CAPTION>
At December 31, Series Due 1998 1997
- - ----------------------------------------------------------------------------------------------------------
Thousands of Dollars
-------------------------------------------------------------
<S> <C> <C> <C> <C>
First and refunding mortgage bonds (a) 5 3/8% 1998 $ -- $ 225,000
7 1/2%-9 1/4% 1999 325,000 325,000
5 5/8%-7 3/8% 2001 330,000 330,000
7 1/8%-8% 2002 500,000 500,000
6 1/2%-6 5/8% 2003 450,000 450,000
6 3/8%-10 1/4% 2004-2008 111,562 115,625
(b) 2009-2013 154,200 154,200
6 5/8%-8 3/4% 2019-2024 1,082,130 1,607,130
---------- ----------
Total first and refunding mortgage bonds 2,952,892 3,706,955
Notes payable 15,930 15,574
Pollution control notes (c) 212,705 212,705
Medium-term notes (d) 50,000 62,400
Note Payable - accounts receivable agreement (e) 66,837 128,999
Unamortized debt discount and premium, net (17,249) (26,405)
---------- ----------
Total long-term debt 3,281,115 4,100,228
Due within one year (f) 361,523 247,087
---------- ----------
Long-term debt included in capitalization (g) $2,919,592 $3,853,141
========== ==========
</TABLE>
(a) Utility plant is subject to the lien of the Company's mortgage.
(b) Floating rates, which were an average annual interest rate of 3.13% at
December 31, 1998.
(c) Floating rates, which were an average annual interest rate of 3.32% at
December 31, 1998.
(d) Medium-term notes collateralized by mortgage bonds. The average annual
interest rate was 9.09% at December 31, 1998.
(e) See note 7.
(f) Long-term debt maturities, including mandatory sinking fund requirements, in
the period 1999-2003 are as follows: 1999 - $361,523,000; 2000 -
$74,255,500; 2001 - $337,431,500; 2002 - $507,436,500; 2003 - $406,534,500.
(g) The annualized interest on long-term debt at December 31, 1998, was $222
million, of which $210 million was associated with mortgage bonds and $12
million was associated with other long-term debt.
In the fourth quarter of 1998, the Company redeemed $525 million of its
First Mortgage Bonds consisting of: $150 million of its 8 3/4% series due
2022, $125 million of its 8 5/8% series due 2022 and $250 million of its 8
1/4% series due 2022 at redemption prices of 105.75, 105.20 and 104.85 plus
interest, respectively. As a result, the Company recognized an
extraordinary charge of $34 million ($20 million net of income taxes). The
extraordinary charge consisted primarily of premiums and the write-off of
deferred charges.
13. Short-Term Debt
<TABLE>
<CAPTION>
1998 1997 1996
- - ---------------------------------------------------------------------------------------------
Thousands of Dollars
--------------------------------------------
<S> <C> <C> <C>
Average borrowings $ 209,261 $ 248,111 $ 198,090
Average interest rates, computed on daily basis 5.83% 5.83% 5.64%
Maximum borrowings outstanding $ 525,000 $ 464,500 $ 369,500
Average interest rates, at December 31 6.17% 6.74% 6.90%
</TABLE>
The Company has a $400 million one-year term loan agreement with a group of
banks, which expires on November 30, 1999. At December 31, 1998, $400
million of short-term debt was outstanding under this term loan agreement.
The Company has a $900 million unsecured revolving credit facility with a
group of banks. The credit facility consists of a $450 million 364-day credit
agreement and a $450 million three-year credit agreement. The Company uses the
credit facility principally to support its $600 million commercial paper
program. There was no debt outstanding under this credit facility at December
31, 1998. At December 31, 1998, $125 million of commercial paper was
outstanding. At December 31, 1998, the Company had available formal and informal
lines of credit with banks aggregating $100 million.
<PAGE>
Notes to Consolidated Financial Statements 41
14. Income Taxes
Income tax expense (benefit) is comprised of the following components:
<TABLE>
<CAPTION>
For the Years Ended December 31, 1998 1997 1996
- - ---------------------------------------------------------------------------------------------------
Thousands of Dollars
-------------------------------------------------------
<S> <C> <C> <C>
Included in operations:
Federal
Current $ 358,051 $ 251,509 $ 126,471
Deferred (109,211) (11,378) 154,564
Investment tax credit, net (18,066) (18,201) (15,979)
State
Current 95,309 76,689 62,839
Deferred (6,429) (5,850) 12,206
----------- ----------- -----------
319,654 292,769 340,101
=========== =========== ===========
Included in extraordinary item:
Federal
Current (10,583) (123) --
Deferred -- (987,234) --
State
Current (3,174) (29) --
Deferred -- (303,575) --
----------- ----------- -----------
(13,757) (1,290,961) --
----------- ----------- -----------
Total $ 305,897 $ (998,192) $ 340,101
=========== =========== ===========
</TABLE>
The total income tax provisions, excluding the extraordinary item, differed
from amounts computed by applying the federal statutory tax rate to pre-tax
income as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- - ---------------------------------------------------------------------------------------------------
Thousands of Dollars
------------------------------------------------------
<S> <C> <C> <C>
Net Income $ 532,378 $ 336,558 $ 517,205
Total income tax provisions 319,654 292,769 340,101
--------- --------- ---------
Income before income taxes $ 852,032 $ 629,327 $ 857,306
========= ========= =========
Income taxes on above at federal statutory
rate of 35% $ 298,211 $ 220,264 $ 300,057
Increase (decrease) due to:
Property basis differences (10,262) 40,828 9,903
State income taxes, net of federal
income tax benefit 57,582 46,046 48,779
Amortization of investment tax
credit (18,066) (18,201) (15,979)
Prior period income taxes (12,951) (2,985) (1,707)
Other, net 5,140 6,817 (952)
--------- --------- ---------
Total income tax provisions $ 319,654 $ 292,769 $ 340,101
========= ========= =========
Effective income tax rate 37.5% 46.5% 39.7%
========= ========= =========
</TABLE>
<PAGE>
42 PECO Energy Company and Subsidiary Companies
Provisions for deferred income taxes consist of the tax effects of the
following temporary differences:
<TABLE>
<CAPTION>
1998 1997 1996
- - ---------------------------------------------------------------------------------------------------------------
Thousands of Dollars
-------------------------------------------------------
<S> <C> <C> <C>
Deferred generation charges recoverable $ (174,787) $ -- $ --
Depreciation and amortization 140,448 57,530 42,385
Deferred energy costs (2,491) 2,256 27,374
Retirement and separation programs (51,146) (12,734) 19,746
Incremental nuclear outage costs (7,434) (981) 2,440
Uncollectible accounts 4,764 (1,710) (2,805)
Reacquired debt (5,026) (8,607) (9,578)
Unbilled revenue 3,579 (5,110) 3,910
Environmental clean-up costs (3,574) (15,121) (714)
Obsolete inventory 4,206 (7,074) 5,829
Limerick plant disallowances and phase-in plan -- (747) (747)
AMT credits (42,067) -- 83,010
Other nuclear operating costs 9,926 (9,892) --
Other 7,962 (15,038) (4,080)
----------- ----------- -----------
Subtotal (115,640) (17,228) 166,770
Extraordinary item -- (1,290,809) --
----------- ----------- -----------
Total $ (115,640) $(1,308,037) $ 166,770
=========== =========== ===========
</TABLE>
The tax effect of temporary differences giving rise to the Company's net
deferred tax liability as of December 31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
Liability or (Asset)
1998 1997
- - ------------------------------------------------------------------------------------------------
Thousands of Dollars
- - ------------------------------------------------------------------------------------------------
<S> <C> <C>
Nature of temporary difference:
Plant basis difference $ 2,653,760 $ 2,620,254
Deferred investment tax credit 299,999 318,065
Deferred debt refinancing costs 37,575 111,651
Other, net (300,375) (249,167)
Deferred income taxes (net) on the balance sheet $ 2,690,959 $ 2,800,803
</TABLE>
The net deferred tax liability shown above as of December 31, 1998 and 1997
was comprised of $3,123 and $3,153 million of deferred tax liabilities, and
$432 and $352 million of deferred tax assets, respectively.
In accordance with SFAS No. 71, the Company recorded a recoverable deferred
income tax asset of $614 and $586 million at December 31,1998 and 1997,
respectively. These balances are applicable only to regulated assets, due to the
discontinuance of SFAS No. 71 for the Company's electric generation operations.
These recoverable deferred income taxes include the deferred tax effects
associated principally with liberalized depreciation accounted for in accordance
with the ratemaking policies of the PUC, as well as the revenue impacts thereon,
and assume recovery of these costs in future rates.
The Internal Revenue Service (IRS) has completed and settled its
examinations of the Company's federal income tax returns through 1990 which
resulted in a net increase of $11 million in credits available for carry
forward. The 1991 through 1993 federal income tax returns have been examined and
the Company and the IRS are in the process of settling the audit which will not
have an adverse impact on financial condition or results of operations of the
Company. The years 1994 through 1996 are currently being examined by the IRS.
<PAGE>
Notes to Consolidated Financial Statements 43
15. Taxes, Other Than Income - Operating
For the Years Ended December 31, 1998 1997 1996
- - -----------------------------------------------------------------------------
Thousands of Dollars
-----------------------------------------
Gross receipts $ 155,663 $ 163,552 $ 160,246
Capital stock 43,754 48,085 41,972
Real estate 51,313 69,597 69,185
Payroll 30,068 25,976 27,585
Other (1,283) 2,881 558
--------- ----------- -----------
Total $ 279,515 $ 310,091 $ 299,546
========= =========== ===========
16. Leases
Leased property included in utility plant was as follows:
<TABLE>
<CAPTION>
At December 31, 1998 1997
- - -------------------------------------------------------------
Thousands of Dollars
-------------------------
<S> <C> <C>
Nuclear fuel $ 523,325 $ 521,921
Electric plant 2,321 2,321
--------- -----------
Gross leased property 525,646 524,242
--------- -----------
Accumulated amortization (371,338) (348,309)
Net leased property $ 154,308 $ 175,933
========= ===========
</TABLE>
Nuclear fuel is amortized as the fuel is consumed. Amortization of leased
property totaled $60, $39 and $31 million for the years ended December 31,
1998, 1997 and 1996, respectively. Other operating expenses included
interest on capital lease obligations of $9 million in 1998, 1997 and 1996,
respectively.
Minimum future lease payments as of December 31, 1998 were:
<TABLE>
<CAPTION>
For the Years Ending December 31, Capital Leases Operating Leases Total
- - -----------------------------------------------------------------------------------------------------------------
Thousands of Dollars
---------------------------------------------------
<S> <C> <C> <C>
1999 $ 69,026 $ 48,806 $ 117,832
2000 65,714 45,457 111,171
2001 32,439 42,850 75,289
2002 92 42,056 42,148
2003 92 49,386 49,478
Remaining years 721 511,164 511,885
---------- ----------- ----------
Total minimum future lease payments $ 168,084 $ 739,719 $ 907,803
Imputed interest (rates ranging from 6.5% to 17.0%) (13,776) =========== ==========
----------
Present value of net minimum future lease payments $ 154,308
----------
</TABLE>
Rental expense under operating leases totaled $69 million in 1998 and $74
million in 1997 and 1996, respectively.
<PAGE>
44 PECO Energy Company and Subsidiary Companies
17. Jointly Owned Electric Utility Plant
The Company's ownership interests in jointly owned electric utility plant
at December 31, 1998, were as follows:
<TABLE>
<CAPTION>
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
- - -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Participating interest 42.49% 42.59% 20.99% 20.72% 21% to 43%
Company's share (Thousands of Dollars)
Utility plant $ 347,001 $ 20,026 $ 118,256 $ 190,672 $ 82,078
Accumulated depreciation 183,383 12,929 73,644 91,052 32,638
Construction work in progress 22,586 1,632 1,770 3,865 1,300
</TABLE>
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:
<TABLE>
<CAPTION>
1998 1997 1996
- - -----------------------------------------------------------------------------------------
Thousands of Dollars
----------------------------------------
<S> <C> <C> <C>
Cash paid during the year:
Interest (net of amount capitalized) $ 384,932 $ 405,838 $ 415,063
Income taxes (net of refunds) 346,539 345,232 251,554
Noncash investing and financing:
Capital lease obligations incurred 38,307 32,909 33,063
</TABLE>
19. Investments
<TABLE>
<CAPTION>
At December 31, 1998 1997
- - ---------------------------------------------------------------------------------------
Thousands of Dollars
----------------------------
<S> <C> <C>
Trust accounts for decommissioning nuclear plants $ 377,970 $ 320,442
Telecommunications ventures 48,391 85,601
Energy services and other ventures 39,359 65,578
Nonutility property 40,456 24,697
Other 44,728 19,517
------------ -----------
Total $ 550,904 $ 515,835
============ ===========
</TABLE>
20. Financial Instruments
Fair values of financial instruments, including liabilities, are estimated
based on quoted market prices for the same or similar issues. The carrying
amounts and fair values of the Company's financial instruments as of
December 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
Thousands of Dollars 1998 1997
- - ----------------------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------------------------------------------------------
<S> <C> <C> <C> <C>
Non-derivatives:
Assets
Cash and temporary cash investments $ 48,083 $ 48,083 $ 33,404 $ 33,404
Trust accounts for decommissioning nuclear plants 377,970 377,970 320,442 320,442
Liabilities
Long-term debt (including amounts due within one year) 3,281,115 3,404,250 4,100,228 4,210,885
Derivatives:
Treasure forwards -- (300) -- --
Forward interest rate swaps -- (4,400) -- --
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements 45
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash
investments and customer accounts receivable. The Company places its
temporary cash investments with high-credit quality financial institutions.
At times, such investments may be in excess of the Federal Deposit
Insurance Corporation limit. Concentrations of credit risk with respect to
customer accounts receivable are limited due to the Company's large number
of customers and their dispersion across many industries.
The fair value of derivatives generally reflects the estimated amounts that
the Company would receive or pay to terminate the contracts at the reporting
date, thereby taking into account the current unrealized gains or losses of open
contracts. Dealer quotes are available for all of the Company's derivatives.
The anticipated issuance of Transition Bonds significantly exposes the
Company to market risks of changes in interest rates. Derivative financial
instruments are used by the Company to reduce these risks.
The Company has entered into treasury forwards in an aggregate notional
amount of $4 billion with an average interest rate of 4.71%. The Company has
entered into forward starting interest rate swaps in the aggregate notional
amount of $713 million with an average interest rate of 5.72%. The notional
amount of derivatives do not represent amounts that are exchanged by the parties
and, thus, are not a measure of the Company's exposure. The amounts exchanged
are calculated on the basis of the notional or contract amounts, as well as on
the other terms of the derivatives, which relate to interest rates and the
volatility of these rates.
The Company would be exposed to credit-related losses in the event of
non-performance by the counterparties that issued the derivative instruments.
The Company does not expect that counterparties to the interest rate swaps and
treasury forwards will fail to meet these obligations, given their high credit
ratings. The credit exposure of derivatives contracts is represented by the fair
value of contracts at the reporting date. The Company's interest-rate swaps are
documented under master agreements. Among other things, these agreements provide
for a maximum credit exposure for both parties. Payments are required by the
appropriate party when the maximum limit is reached. The same maximum credit
exposure applies to the treasury forwards.
21. Early Retirement and Separation Program
In April 1998, the Board of Directors authorized the implementation of a
retirement incentive program and an enhanced severance benefit program. The
retirement incentive program allowed employees age 50 and older, who have
been designated as excess or who are in job classifications facing
reduction, to retire from the Company. The enhanced severance benefit
program provided non-retiring excess employees with fewer than ten years of
service benefits equal to two weeks pay per year of service. Non-retiring
excess employees with more than ten years of service receive benefits equal
to three weeks pay per year of service.
Through its Cost Competitiveness Review (CCR), the Company identified 1,157
employees across the Company who were considered excess or were in job
classifications facing reduction. Of the 1,157 employees, 711 were eligible for
and agreed to take the retirement incentive program. The remaining employees are
eligible for the enhanced severance benefit program. The Company has eliminated
approximately 422 positions as of December 31, 1998 through both
attrition and the early retirement and severance program. The Company
expects an additional 735 positions to be eliminated during 1999 and 2000.
The Company recorded an early retirement and separation program charge to
earnings of $125 million ($74 million, net of income taxes) in the fourth
quarter of 1998 to recognize costs related to the CCR workforce reduction
program. This charge consisted of the following: $121 million for the
actuarially determined pension and other postretirement benefits costs and $4
million for outplacement services costs and the continuation of benefits for one
year. Approximately $0.8 million of the $125 million charge was related to the
Company's non-utility operations and accordingly was recorded in Other Income
and Deductions. All cash payments related to the early retirement and severance
program are expected to be funded through the assets of the Company's Service
Annuity Plan.
22. Other Income and Deductions
Settlement of Salem Litigation
On December 31, 1997, the Company received $70 million pursuant to the May
1997 settlement agreement with Public Service Electric and Gas Company
resolving a suit filed by the Company concerning the shutdown of Salem.
During the second quarter of 1997, the Company recorded $70 million ($41
million net of income taxes) as Other Income.
Ventures
The Company periodically reviews its investments to determine that they are
properly valued in its financial statements. Other Income and Deductions
reflects write-offs of these investments of $10 million and $20 million in
1998 and 1997, respectively.
<PAGE>
46
23. Regulatory Assets and Liabilities
At December 31, 1998 and 1997, the Company had deferred the following
regulatory assets on the Consolidated Balance Sheets:
<TABLE>
<CAPTION>
1998 1997
- - ------------------------------------------------------------------------------------------
Thousands of Dollars
----------------------------------
<S> <C> <C>
Competitive transition charge $ 5,274,624 $ 5,274,624
Recoverable deferred income taxes (see note 14) 614,445 585,661
Deferred generation costs recoverable in current rates -- 424,497
Loss on reacquired debt 77,165 83,918
Compensated absences 4,289 3,881
Deferred energy costs 29,847 35,665
Non-pension postretirement benefits 90,915 97,409
------------- -------------
Total $ 6,091,285 $ 6,505,655
============= =============
</TABLE>
24. Quarterly Data (Unaudited)
The data shown below include all adjustments which the Company considers
necessary for a fair presentation of such amounts:
<TABLE>
<CAPTION>
Operating Revenues Operating Income Net Income (Loss)
----------------------------------------------------------------------------------
Millions of Dollars 1998 1997 1998 1997 1998 1997
- - -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Quarter ended
March 31 $ 1,173 $ 1,163 $ 285 $ 302 $ 114 $ 113
June 30 1,207 1,032 362 250 151 123
September 30 1,774 1,278 546 388 274 158
December 31 1,056 1,145 90 66 (26) (1,891)
Earnings Applicable Average Shares Earnings
to Common Stock Outstanding Per Average Share
----------------------------------------------------------------------------------
Millions of Dollars (except per share data) 1998 1997 1998 1997 1998 1997
- - -------------------------------------------------------------------------------------------------------------------------------
Quarter ended
March 31 $ 110 $ 109 222.5 222.5 $ 0.50 $ 0.49
June 30 148 118 222.7 222.5 0.66 0.53
September 30 270 154 223.1 222.5 1.21 0.69
December 31 (28) (1,895) 224.5 222.5 (0.13) (8.51)
</TABLE>
The increase in 1998 second quarter results was primarily due to increased
operating revenues net of related fuel costs. Revenues from wholesale
sales increased significantly compared to 1997. Second quarter 1998
earnings also benefited from the full return to service of Salem which
decreased the cost of fuel purchases and outage-related costs compared to
1997, from decreased operating and maintenance expense and from reduced
uncollectible expenses.
The increase in 1998 third quarter results was due primarily to increased
operating revenues net of related fuel costs. Revenues from wholesale sales
increased significantly compared to 1997. Third quarter earnings also benefited
from the full return to service of Salem, reduction of operating and maintenance
costs, reduction of uncollectible expenses and a one-time refund of gross
receipts tax.
The increase in the fourth quarter results was primarily due to the
extraordinary charge of $8.24 per share recorded in 1997 resulting from
deregulation of the Company's electric generation operations; several one-time
adjustments for changes in employee benefits; write-offs of information systems
development charges reflecting clarification of accounting guidelines and
additional reserves to revise estimates for accruals; higher income tax
adjustments; and higher losses from the Company's non-utility ventures. This
increase was partially offset by an Early Retirement and Severance charge and an
extraordinary charge for the premiums paid in connection with the redemption of
higher-cost, long-term debt recorded in the fourth quarter of 1998.
<PAGE>
Notes to Consolidated Financial Statements 47
Financial Statistics
Summary of Earnings and Financial Condition
<TABLE>
<CAPTION>
For the Years Ended December 31, 1998 1997 1996 1995 1994 1993
- - --------------------------------------------------------------------------------------------------------------------------------
Millions of Dollars, except per share data
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income Data
Operating Revenues $ 5,210 $ 4,618 $ 4,284 $ 4,186 $ 4,041 $ 3,988
Operating Income 1,283 1,006 1,249 1,401 1,064 1,390
Income before Extraordinary Item 532 337 517 610 427 591
Extraordinary Item (net of income taxes) (20) (1,834) -- -- -- --
Net Income (Loss) 513 (1,497) 517 610 427 591
Earnings Applicable to Common Stock 500 (1,514) 499 587 389 542
Earnings per Average Common Share
Before Extraordinary Item 2.33 1.44 2.24 2.64 1.76 2.45
Extraordinary Item (0.09) (8.24) -- -- -- --
Earnings per Average Common Share 2.24 (6.80) 2.24 2.64 1.76 2.45
Dividends per Common Share 1.00 1.80 1.755 1.65 1.545 1.43
Common Stock Equity 13.61 12.25 20.88 20.40 19.41 19.25
Average Shares of Common Stock
Outstanding (Millions) 223.2 222.5 222.5 221.9 221.6 221.1
At December 31,
- - --------------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data
Net Utility Plant $ 4,610 $ 4,495 $ 10,760 $ 10,758 $ 10,829 $ 10,763
Leased Property, net 154 176 182 181 174 194
Total Current Assets 569 1,003 420 426 427 515
Total Deferred Debits and
Other Assets 6,715 6,683 3,899 3,944 3,992 3,905
---------- ---------- --------- --------- -------- --------
Total Assets $ 12,048 $ 12,357 $ 15,261 $ 15,309 $ 15,422 $ 15,377
========== ========== ========= ========= ======== ========
Common Shareholders' Equity $ 3,057 $ 2,727 $ 4,646 $ 4,531 $ 4,303 $ 4,263
Preferred and Preference Stock
Without Mandatory Redemption 137 137 199 199 277 423
With Mandatory Redemption 93 93 93 93 93 187
Company Obligated Mandatorily
Redeemable Preferred
Securities of a Partnership 349 352 302 302 221 --
Long-Term Debt 2,920 3,853 3,936 4,199 4,786 4,884
---------- ---------- --------- --------- -------- --------
Total Capitalization 6,556 7,162 9,176 9,324 9,680 9,757
Total Current Liabilities 1,735 1,619 1,103 1,052 850 954
Total Deferred Credits and
Other Liabilities 3,757 3,576 4,982 4,933 4,892 4,666
---------- ---------- --------- --------- -------- --------
Total Capitalization and
Liabilities $ 12,048 $ 12,357 $ 15,261 $ 15,309 $ 15,422 $ 15,377
========== ========== ========= ========= ======== ========
</TABLE>
<PAGE>
Operating Statistics
<TABLE>
<CAPTION>
For the Years Ended December 31, 1998 1997 1996 1995 1994 1993
- - ----------------------------------------------------------------------------------------------------------------------------------
Electric Operations
Output (Millions of Kilowatthours)
<S> <C> <C> <C> <C> <C> <C>
Fossil 10,262 9,659 10,856 10,792 11,239 10,352
Nuclear 29,732 25,853 24,373 25,499 28,195 27,026
Hydro 1,715 1,558 2,404 1,425 1,970 1,699
Pumped storage output 1,426 1,403 1,540 1,741 1,596 1,478
Pumped storage input (1,853) (1,924) (2,230) (2,507) (2,256) (2,192)
Purchase and interchange 34,075 29,615 19,539 13,945 6,164 6,447
Internal combustion 176 144 179 175 106 56
---------- ---------- ----------- ----------- ----------- ----------
Total electric output 75,533 66,308 56,661 51,070 47,014 44,866
========== ========== =========== =========== =========== ==========
Sales (Millions of Kilowatthours)
Residential 10,623 10,407 10,671 10,636 10,859 10,609
Small commercial and industrial 6,888 6,685 6,491 6,200 6,150 5,769
Large commercial and industrial 15,678 15,034 15,208 15,763 15,968 15,956
Other 803 841 902 860 791 771
Unbilled 131 70 (327) 535 (205) 31
---------- ---------- ----------- ----------- ----------- ----------
Service territory 34,123 33,037 32,945 33,994 33,563 33,136
Interchange sales 3,483 1,927 935 496 768 457
Sales to other utilities 37,258 28,893 20,243 14,041 10,039 8,670
---------- ---------- ----------- ----------- ----------- ----------
Total electric sales 74,864 63,857 54,123 48,531 44,370 42,263
========== ========== =========== =========== =========== ==========
Number of Customers, December 31,
Residential 1,343,791 1,333,861 1,324,448 1,321,379 1,350,210 1,341,873
Small commercial and industrial 145,055 144,142 142,431 141,653 143,605 142,363
Large commercial and industrial 3,248 3,308 3,299 3,394 3,603 3,742
Other 1,150 1,094 1,051 959 944 888
---------- ---------- ----------- ----------- ----------- ----------
Total electric customers 1,493,244 1,482,405 1,471,229 1,467,385 1,498,362 1,488,866
========== ========== =========== =========== =========== ==========
Operating Revenues (Millions of Dollars)
Residential $ 1,377 $ 1,357 $ 1,370 $ 1,379 $ 1,371 $ 1,351
Small commercial and industrial 784 779 749 730 710 679
Large commercial and industrial 1,067 1,077 1,098 1,135 1,149 1,168
Other 150 148 140 137 136 161
Unbilled 1 19 (26) 43 (11) (1)
---------- ---------- ----------- ----------- ----------- ----------
Service territory 3,379 3,380 3,331 3,424 3,355 3,358
Interchange sales 211 59 26 17 23 14
Sales to other utilities 1,221 728 498 334 247 233
---------- ---------- ----------- ----------- ----------- ----------
Total electric revenues $ 4,811 $ 4,167 $ 3,855 $ 3,775 $ 3,625 $ 3,605
========== ========== =========== =========== =========== ==========
Operating Expenses
Operating expenses, excluding
depreciation and amortization $ 2,993 $ 2,698 $ 2,244 $ 2,026 $ 2,209 $ 1,894
Depreciation and amortization 611 553 462 431 416 401
---------- ---------- ----------- ----------- ----------- ----------
Total operating expenses 3,604 3,251 2,706 2,457 2,625 2,295
---------- ---------- ----------- ----------- ----------- ----------
Electric Operating Income $ 1,207 $ 916 $ 1,149 $ 1,318 $ 1,000 $ 1,310
========== ========== =========== =========== =========== ==========
Average Use per Residential Customer (Kilowatthours)
Without electric heating 6,948 6,695 6,771 6,908 6,736 6,727
With electric heating 15,398 16,400 17,946 17,189 17,527 17,096
All customers 7,935 7,830 8,074 8,130 8,041 7,970
Electric Peak Load, Demand
(Thousands of Kilowatts) 7,108 7,390 6,509 7,244 7,227 7,100
Net Electric Generating Capacity-
Year-end Summer Rating
(Thousands of Kilowatts) 9,262 9,204 9,201 9,078 8,956 8,877
Cost of Fuel per Million BTU $ 0.82 $ 0.84 $ 0.93 $ 0.87 $ 0.89 $ 0.90
BTU per Net Kilowatthour Generated 10,496 10,737 10,682 10,705 11,617 10,675
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Operating Statistics (continued)
For the Years Ended December 31, 1998 1997 1996 1995 1994 1993
- - --------------------------------------------------------------------------------------------------------------------------------
Gas Operations
Sales (Millions of Cubic Feet)
<S> <C> <C> <C> <C> <C> <C>
Residential 1,496 1,614 1,681 1,516 1,636 1,637
House heating 28,402 32,666 35,471 30,698 32,246 30,242
Commercial and industrial 16,757 19,830 20,999 18,464 19,762 18,635
Other 554 673 2,571 1,582 7,039 9,733
Unbilled (440) 212 (1,306) 1,710 (474) 676
--------- ---------- ---------- ---------- ---------- ----------
Total gas sales 46,769 54,995 59,416 53,970 60,209 60,923
Gas transported for customers 28,204 30,412 27,891 48,531 29,801 22,946
--------- ---------- ---------- ---------- ---------- ----------
Total gas sales and
gas transported 74,973 85,407 87,307 102,501 90,010 83,869
========= ========== ========== ========== ========== ==========
Number of Customers
Residential 55,417 55,592 56,003 56,533 57,122 59,573
House heating 324,081 314,335 303,996 295,481 287,481 277,500
Commercial and industrial 35,931 35,215 34,182 33,308 32,292 31,573
--------- ---------- ---------- ---------- ---------- ----------
Total gas customers 415,429 405,142 394,181 385,322 376,895 368,646
========= ========== ========== ========== ========== ==========
Operating Revenues (Millions of Dollars)
Residential $ 16 $ 17 $ 16 $ 15 $ 16 $ 15
House heating 236 265 249 236 238 202
Commercial and industrial 125 145 133 126 128 110
Other 2 3 11 5 20 28
Unbilled (3) (1) (4) 7 (3) 5
--------- ---------- ---------- ---------- ---------- ----------
Subtotal 376 429 405 389 399 360
Other revenues (including gas
transported for customers) 24 22 24 22 17 23
--------- ---------- ---------- ---------- ---------- ----------
Total gas revenues $ 400 $ 451 $ 429 $ 411 $ 416 $ 383
--------- ---------- ---------- ---------- ---------- ----------
Operating Expenses
Operating expenses, excluding
depreciation and amortization $ 291 $ 333 $ 302 $ 302 $ 326 $ 279
Depreciation and amortization 32 28 27 26 26 24
--------- ---------- ---------- ---------- ---------- ----------
Total operating expenses 323 361 329 328 352 303
--------- ---------- ---------- ---------- ---------- ----------
Gas Operating Income $ 77 $ 90 $ 100 $ 83 $ 64 $ 80
========= ========== ========== ========== ========== ==========
</TABLE>
Securities Statistics
Ratings on PECO Energy Company's securities
<TABLE>
<CAPTION>
Mortgage Bonds Preferred Stock
--------------------------------------------------------------
Date Date
Agency Rating Established Rating Established
- - ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Duff and Phelps, Inc. A- 10/98 BBB 10/98
Fitch Investors Service, Inc. A- 9/92 BBB+ 9/92
Moody's Investors Service Baa1 4/92 baa2 4/92
Standard & Poor's Corporation BBB+ 4/92 BBB- 2/99
</TABLE>
NYSE-Composite Common Stock Prices, Earnings and Dividends by Quarter (Per
Share)
<TABLE>
<CAPTION>
1998 1997
------------------------------------------------------------------------------------------
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
High price $42-3/16 $36-3/4 $ 30-5/8 $24-11/16 $ 25-1/8 $ 24-5/16 $21-1/8 $ 26-3/8
Low price $ 36-1/2 $28-1/2 $21-3/16 $ 18-7/8 $21-7/16 $ 20-3/4 $18-3/4 $ 20
Close $ 41-3/4 $36-3/4 $29-3/16 $ 22-1/8 $ 24-1/4 $ 23-7/16 $ 21 $ 20-3/8
Earnings $ (0.13) $ 1.21 $ 0.66 $ 0.50 $ (8.51) $ 0.69 $ 0.53 $ 0.49
Dividends $ 0.25 $ 0.25 $ 0.25 $ 0.25 $ 0.45 $ 0.45 $ 0.45 $ 0.45
</TABLE>
<PAGE>
50 PECO Energy Company and Subsidiary Companies
Board of Directors
Susan W. Catherwood (55)
Chairman, Trustee Board,
The University of Pennsylvania Medical Center and Health System
Daniel L. Cooper (63)
Former Vice President and General Manager, Nuclear Services Division
Gilbert/Commonwealth, Inc.
M. Walter D'Alessio (65)
President and Chief Executive Officer,
Legg Mason Real Estate Services
(Commercial mortgage banking and pension
fund advisors)
G. Fred DiBona, Jr. (47)(1)
President and Chief Executive
Officer,
Independence Blue Cross
R. Keith Elliott (56)
Chairman, Chief Executive Officer,
Hercules, Inc.
Richard H. Glanton (52)(1)
Partner of the law firm Reed Smith
Shaw and McClay
Rosemarie B. Greco (52)(2)
Former President and
Chief Executive Officer,
Private Industry Council
Corbin A. McNeill, Jr. (59)(1)
Chairman of the Board
President and Chief Executive
Officer of the Company
John M. Palms, PhD. (63)
President,
University of South Carolina
Joseph F. Paquette, Jr. (64)(1)
Former Chairman of the Board of
Directors of the Company
Ronald Rubin (67)
Chief Executive Officer,
Pennsylvania Real Estate Investment Trust
Robert Subin (60)
Former Senior Vice President,
Campbell Soup Company
<PAGE>
Officers
Corbin A. McNeill, Jr. (59)
Chairman of the Board of Directors
President and Chief Executive Officer
Gerald R. Rainey (49)(9)
President and Chief Nuclear Officer,
PECO Nuclear
Nancy J. Bessey (45)(6)
President, Power Team
Gregory A. Cucchi (49)(10)
Senior Vice President,
Corporate and President,
PECO Energy Ventures
James W. Durham (61)
Senior Vice President
and General Counsel
Michael J. Egan (45)
Senior Vice President, Finance
and Chief Financial Officer
Kenneth G. Lawrence (51)(10)
Senior Vice President,
Corporate and President,
PECO Energy Distribution
William H. Smith, III (50)
Senior Vice President,
Business Services Group
David W. Woods (41)(14)
Senior Vice President,
Corporate and Public Affairs
John B. Cotton (53)(11)
Special Projects, PECO Nuclear
John Doering, Jr. (55)(4)
Vice President, Peach Bottom Atomic Power Station
Gregory P. Dudkin (41)(6)
Vice President, Operations,
PECO Energy Distribution
Drew B. Fetters (47)(10)
Vice President,
Nuclear Development,
PECO Nuclear
Jean H. Gibson (42)(8)
Vice President and Controller
Joseph J. Hagan (48)(16)
Senior Vice President,
Nuclear Operations,
PECO Nuclear
Paul E. Haviland (44)(5)
Vice President,
Corporate Development
Thomas P. Hill, Jr. (50)(7)
Vice President, Regulatory and
External Affairs, PECO Energy
Distribution
Christine A. Jacobs (46)(13)
Vice President, Support Services
Suzanne L. Keenan (34)(6)
Vice President, Customer & Marketing Services,
PECO Energy Distribution
<PAGE>
Cassandra A. Matthews (48)
Vice President, Information
Technology and Chief Information Officer
John P. McElwain (48)(15)
Vice President,
Nuclear Projects, PECO Nuclear
J. Barry Mitchell (51)
Vice President, Treasury and
Evaluation, and Treasurer
James A. Muntz (41)(16)
Vice President, Fossil Operations
James D. von Suskil (52)(3)
Vice President,
Limerick Generating Station,
PECO Nuclear
Richard G. White (40)(12)
Vice President, Corporate Planning
Katherine K. Combs (48)
Corporate Secretary
Edward J. Cullen, Jr. (51)
Assistant Corporate Secretary
Todd D. Cutler (38)
Assistant Corporate Secretary
Diana Moy Kelly (44)
Assistant Treasurer
George R. Shicora (52)
Assistant Treasurer and
Cash Manager
(1) Member of the Executive
Committee of the Board of
Directors
(2) Elected February 23, 1998
(3) Effective January 26, 1998
(4) Effective March 2, 1998
(5) Effective March 4, 1998
(6) Effective April 8, 1998
(7) Effective April 9, 1998
(8) Effective May 31, 1998
(9) Effective June 1, 1998
(10) Effective June 22, 1998
(11) Effective August 14, 1998
(12) Effective September 28, 1998
(13) Effective November 9, 1998
(14) Effective December 1, 1998
(15) Effective January 6, 1999, no
longer an officer of PECO Energy
(16) Effective January 26, 1999
<PAGE>
Stock Exchange Listings
Most Company securities are listed on the New York Stock Exchange and the
Philadelphia Stock Exchange under PE.
Dividends
The Company has paid dividends on its common stock continually since 1902.
The Board of Directors normally considers common stock dividends for
payment in March, June, September and December. The Company expects that
the $1.00 per share dividend paid to common shareholders in 1998 is fully
taxable as dividend income for federal income tax purposes.
Shareholders may use their dividends to purchase additional shares of
common stock through the Company's Dividend Reinvestment and Stock Purchase
Plan (Plan). The Company pays all brokerage and service fees for Plan
purchases. All shareholders have the opportunity to invest additional funds
in common stock of the Company, whether or not they have their dividends
reinvested, with all purchasing fees paid by the Company.
In 1998, over 57 percent of the Company's common shareholders were
participants in the Plan. Information concerning the Plan may be obtained
from: EquiServe, PECO Energy Company Plan, P.O. Box 2598, Jersey City, NJ
07303-2598.
Comments Welcomed
The Company is always pleased to answer questions and provide information.
Please address your comments to Katherine K. Combs, Corporate Secretary,
PECO Energy Company, 2301 Market Street, P.O. Box 8699, Philadelphia, PA
19101-8699.
Inquiries relating to shareholder accounting records, stock transfer and
change of address should be directed to: EquiServe, P.O. Box 2500, Jersey
City, NJ 07303-2500.
Toll-Free Telephone Lines
Toll-free telephone lines are available to the Company's shareholders for
inquiries concerning their stock ownership. Calls should be directed to
1-800-626-8729.
For current Company news call 1-888-340-7326
<PAGE>
Shareholder Information
Annual Meeting
The Annual Meeting of the Shareholders of the Company will be held at the
Sunnybrook Ballroom and Conference Center in Pottstown, Pennsylvania on
April 27, 1999, at 9:30 AM. The record date for voting at the shareholders'
meeting is March 5, 1999. Prompt return of proxies will be appreciated.
To vote your proxy over the internet visit
http://www.vote-by-net.com
To receive future Annual Reports and proxy statements
electronically, sign-up at:
http://www.vote-by-net.com/signup/peco
Form 10-K
Form 10-K, the annual report filed with the Securities and Exchange
Commission, is available without charge to shareholders by calling
1-888-340-7326 or by obtaining a copy from our internet site
http://www/peco.com/investor.
Shareholders
The Company had 142,794 shareholders of record of
common stock as of December 31, 1998.
Transfer Agents and Registrars
Preferred and Common Stock Registrar and Transfer Agent: First Chicago
Trust, Division of EquiServe, (1-800-626-8729)
P.O. Box 2500, Jersey City, NJ 07303-2500
First and Refunding Mortgage Bond Trustee:
First Union National Bank, (1-800-665-9343)
Corporate Trust Operations Customer Information Center
Redemption Bldg 3C3
1525 West W.T. Harris Blvd.Charlotte, NC 28288-1153
Internet Site
Visit our internet site at http://www.peco.com
General Office
2301 Market Street
Philadelphia, Pennsylvania 19103
(215) 841-4000
<PAGE>
PECO Energy Company
Subsidiaries
PECO Energy Power Company (PA)
Susquehanna Power Company (MD)
The Proprietors of the Susquehanna Canal (inactive) (MD)
Susquehanna Electric Company (MD)
Eastern Pennsylvania Development Company (PA)
Adwin Equipment Company (PA)
Adwin (Schuylkill) Cogeneration, Inc. (PA)
Adwin Realty Company (PA)
Energy Performance Services, Inc. (PA)
PECO Energy Capital Corp (DE)
Horizon Energy Company (d/b/a Exelon Energy) (PA)
PECO Wireless, LLC (DE)
Exelon Corporation (PA)
Energy Trading Company (DE)
ATNP Finance Company (DE)
PEC Financial Services, LLC (PA)
PECO Energy Corporation (PA)
Buttonwoods Associates, Inc. (DE)
Route 213 Enterprises, Inc. (DE)
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
PECO Energy Company on Form S-3 (File Nos. 333-27721, 33-31436, 33-43523,
333-47985, 33-49887, 33-53785, 33-53785-01, 33-54935, 33-59152) and Form S-8
(File Nos. 333-00451, 333-27799, 333-27805, 333-27807, 33-30317, 333-36739,
333-67367) of our report dated February 5, 1999, on our audits of the
consolidated financial statements and financial statement schedules of PECO
Energy Company and Subsidiary Companies as of December 31, 1998 and 1997 and for
each of the three years in the period ended December 31, 1998, which report is
included (or incorporated by reference) in this Annual Report on Form 10-K
/s/ PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 30, 1999
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that I, Susan W. Catherwood of Bryn Mawr, PA, do
hereby appoint C. A. MC NEILL, JR. attorney for me and in my name and on my
behalf to sign the annual Securities and Exchange Commission report on Form
10-K for 1998 of PECO Energy Company, to be filed with the Securities and
Exchange Commission, and generally to do and perform all things necessary to be
done in the premises as fully and effectually in all respects as I could do if
personally present.
/s/ Susan W. Catherwood
-----------------------
DATE: 1/27/99
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that I, Daniel L. Cooper of Wyomissing, PA, do
hereby appoint C. A. MC NEILL, JR. attorney for me and in my name and on my
behalf to sign the annual Securities and Exchange Commission report on Form
10-K for 1998 of PECO Energy Company, to be filed with the Securities and
Exchange Commission, and generally to do and perform all things necessary to be
done in the premises as fully and effectually in all respects as I could do if
personally present.
/s/ Daniel L. Cooper
--------------------
DATE: 1/26/99
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that I, M. Walter D'Alessio of Philadelphia, PA,
do hereby appoint C. A. MC NEILL, JR. attorney for me and in my name and on my
behalf to sign the annual Securities and Exchange Commission report on Form
10-K for 1998 of PECO Energy Company, to be filed with the Securities and
Exchange Commission, and generally to do and perform all things necessary to be
done in the premises as fully and effectually in all respects as I could do if
personally present.
/s/ M. Walter D' Alessio
------------------------
DATE: 1/26/99
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that I, G. Fred DiBona, Jr. of Bryn Mawr, PA, do
hereby appoint C. A. MC NEILL, JR. attorney for me and in my name and on my
behalf to sign the annual Securities and Exchange Commission report on Form
10-K for 1998 of PECO Energy Company, to be filed with the Securities and
Exchange Commission, and generally to do and perform all things necessary to be
done in the premises as fully and effectually in all respects as I could do if
personally present.
/s/ G. Fred DiBona, Jr.
-----------------------
DATE: 2/2/99
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that I, R. Keith Elliott of Mendenhall, PA, do
hereby appoint C. A. MC NEILL, JR. attorney for me and in my name and on my
behalf to sign the annual Securities and Exchange Commission report on Form
10-K for 1998 of PECO Energy Company, to be filed with the Securities and
Exchange Commission, and generally to do and perform all things necessary to be
done in the premises as fully and effectually in all respects as I could do if
personally present.
/s/ R. Keith Elliott
--------------------
DATE: 1/26/99
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that I, Richard H. Glanton of Philadelphia, PA,
do hereby appoint C. A. MC NEILL, JR. attorney for me and in my name and on my
behalf to sign the annual Securities and Exchange Commission report on Form
10-K for 1998 of PECO Energy Company, to be filed with the Securities and
Exchange Commission, and generally to do and perform all things necessary to be
done in the premises as fully and effectually in all respects as I could do if
personally present.
/s/ Richard H. Glanton
----------------------
DATE: 1/26/99
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that I, Rosemarie B. Greco of Philadelphia, PA,
do hereby appoint C. A. MC NEILL, JR. attorney for me and in my name and on my
behalf to sign the annual Securities and Exchange Commission report on Form
10-K for 1998 of PECO Energy Company, to be filed with the Securities and
Exchange Commission, and generally to do and perform all things necessary to be
done in the premises as fully and effectually in all respects as I could do if
personally present.
/s/ Rosemarie B. Greco
----------------------
DATE: 1/26/99
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that I, Dr. John M. Palms of Columbia, SC, do
hereby appoint C. A. MC NEILL, JR. attorney for me and in my name and on my
behalf to sign the annual Securities and Exchange Commission report on Form
10-K for 1998 of PECO Energy Company, to be filed with the Securities and
Exchange Commission, and generally to do and perform all things necessary to be
done in the premises as fully and effectually in all respects as I could do if
personally present.
/s/ Dr. John M. Palms
---------------------
DATE: 1/26/99
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that I, Joseph F. Paquette, Jr. of Gladwyne, PA,
do hereby appoint C. A. MC NEILL, JR. attorney for me and in my name and on my
behalf to sign the annual Securities and Exchange Commission report on Form
10-K for 1998 of PECO Energy Company, to be filed with the Securities and
Exchange Commission, and generally to do and perform all things necessary to be
done in the premises as fully and effectually in all respects as I could do if
personally present.
/s/ Joseph F. Paquette, Jr.
---------------------------
DATE: 1/26/99
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that I, Ronald Rubin of Narberth, PA, do hereby
appoint C. A. MC NEILL, JR. attorney for me and in my name and on my behalf to
sign the annual Securities and Exchange Commission report on Form 10-K for 1998
of PECO Energy Company, to be filed with the Securities and Exchange
Commission, and generally to do and perform all things necessary to be done in
the premises as fully and effectually in all respects as I could do if
personally present.
/s/ Ronald Rubin
----------------
DATE: 1/26/99
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that I, Robert Subin of Blue Bell, PA, do hereby
appoint C. A. MC NEILL, JR. attorney for me and in my name and on my behalf to
sign the annual Securities and Exchange Commission report on Form 10-K for 1998
of PECO Energy Company, to be filed with the Securities and Exchange
Commission, and generally to do and perform all things necessary to be done in
the premises as fully and effectually in all respects as I could do if
personally present.
/s/ Robert Subin
----------------
DATE: 1/26/99
<TABLE> <S> <C>
<ARTICLE> OPUR1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 4,764
<OTHER-PROPERTY-AND-INVEST> 551
<TOTAL-CURRENT-ASSETS> 569
<TOTAL-DEFERRED-CHARGES> 5,980
<OTHER-ASSETS> 184
<TOTAL-ASSETS> 12,048
<COMMON> 3,589
<CAPITAL-SURPLUS-PAID-IN> 1
<RETAINED-EARNINGS> (533)
<TOTAL-COMMON-STOCKHOLDERS-EQ> 3,057
93
138
<LONG-TERM-DEBT-NET> 2,920
<SHORT-TERM-NOTES> 525
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 125
<LONG-TERM-DEBT-CURRENT-PORT> 362
0
<CAPITAL-LEASE-OBLIGATIONS> 85
<LEASES-CURRENT> 69
<OTHER-ITEMS-CAPITAL-AND-LIAB> 4,799
<TOT-CAPITALIZATION-AND-LIAB> 12,048
<GROSS-OPERATING-REVENUE> 5,211
<INCOME-TAX-EXPENSE> 320
<OTHER-OPERATING-EXPENSES> 3,927
<TOTAL-OPERATING-EXPENSES> 4,247
<OPERATING-INCOME-LOSS> 964
<OTHER-INCOME-NET> (70)
<INCOME-BEFORE-INTEREST-EXPEN> 894
<TOTAL-INTEREST-EXPENSE> 362
<NET-INCOME> 513
13
<EARNINGS-AVAILABLE-FOR-COMM> 500
<COMMON-STOCK-DIVIDENDS> 223
<TOTAL-INTEREST-ON-BONDS> 331
<CASH-FLOW-OPERATIONS> 1,433
<EPS-PRIMARY> 2.24
<EPS-DILUTED> 2.23
<FN>
(1) Net Income includes an extraordinary item of $20 million (net of income
taxes) reflecting the write-off of premium and deferred charges related to
the redemption of First Mortgage Bonds.
</FN>
</TABLE>
