ML20196G440

LAR 278 to License DPR-50,requesting Consent to Transfer & Authorize Amergen to Possess,Use & Operate TMI-1 Under Essentially Same Conditions & Authorizations Included in Existing License.Supporting Documentation,Encl

ML20196G440
Person / Time
Site:	Three Mile Island
Issue date:	12/03/1998
From:	Broughton T, Smtih D AFFILIATION NOT ASSIGNED, GENERAL PUBLIC UTILITIES CORP.
To:	NRC OFFICE OF INFORMATION RESOURCES MANAGEMENT (IRM)
Shared Package
ML20138L963	List: ML20196G440 ML20196G453 ML20196G466 ML20196G486
References
1920-98-20591, NUDOCS 9812080013
Download: ML20196G440 (200)

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AmerGen A PECO Energy /Bntsh Energy Company AmerGen Energy Compan, , LLC 965 Chesterbrook Blvd,63C-3 i

_ s' Wayne, PA 19087-5691 I Telephone: 610 640 6600 Far 610 640 6611 December 3,1998 10 CFR Q 50.80 I

BY HAND DELIVERY ON DECEMBER 4,1998 1920-98-20591

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U.S. Nuclear Regulatory Commission ATTN: Document Control Desk Mail Stop O-P1-17 j One White Flint North  :

11555 Rockville Pike j Rockville, MD 20852-2738 '

Re: Three Mile Island Nuclear Station, Unit 1 (TMI-1)

Facility Operating License No. DPR-50, Docket No. 50-289 License Amendment Request No. 278 Eroposed License Transfer and Conforming Administrative License Amendments

Dear Sir / Madam:

l Pursuant to Section 184 of the Atomic Energy Act of1954, as amended (the Act), and 10 CFR Q 50.80, AmerGen Energy Company, LLC (AmerGen) and GPU Nuclear, Inc. (GPUN), acting for itself and on behalf of Metropolitan Edison Company (Met-Ed), Jersey Central Power &  !

Light Company (JCP&L), and Pennsylvania Electric Company (Penelec), hereby request that l the Nuclear Regulatory Commission (NRC) consent to the transfer of Facility Operating License No. DPR-50 for Three Mile Island Nuclear Station, Unit 1 (TMI-1) to AmerGen. This j application, which is provided in two white binders (Volume 1 of 2 & Volume 2 of 2), includes confidential information which should be withheld from public disclosure pursuan; to 10 CFR Q 9.17(a)(4) and the policy reflected in 10 CFR Q 2.790. A redacted version of this entire application suitable for public disclosure is being provided separately in two blue binders. l AmerGen and GPUN request that the NRC consent to this transfer and authorize AmerGen to I

possess, use, and operate TMI-1 under essentially the same conditions and authorizations l included in the existing license. No physical changes will be made to the TMI-l facility as a L result of this transfer, and there will be no significant change in the day-to-day operations of i TMI-1. AmerGen and GPUN also request NRC approval of administrative amendments to conform the license to reflect the proposed transfer action.  ;

Met-Ed, JCP&L, and Penelec (doing business as, and hereinafter referred to collectively as, GPU Energy) are wholly owned public utility subsidiaries of GPU, Inc. (GPU), an electric utility holding company registered under the Public Utility Holding Company Act of 1935.

D GPU Energy provides retail electric service to residential, industrial, and commercial h- 9812o00013 em anocx 981203 osoooasI,", J- -

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U.S. Nuclear Regulatory Commission (3 December 3,1998 U Page 2 consumers in portions of Pennsylvania, New Jersey, and New York. GPU Energy also sells electricity at wholesale and provides access to its transmission facilities through the regional open access transmission tariff administered by PJM Interconnection, LLC (PJM). l' GPUN, which is also a wholly owned subsidiary of GPU, is the licensed operator of TMI-1, and the GPU Energy companies are the licensed owners of TMI-1. Following the proposed transfer, AmerGen will become the sole licensed owner and operator of TMI-1.

AmerGen is a limited liability company formed to acquire and operate nuclear power plants in the United States. AmerGen's principal offices are located in Wayne, Pennsylvania.

AmerGen is orgar.' zed under the laws of the State of Delaware pursuant to the AmerGen Limited Liability Company Agreement, dated as of August 18,1997, as amended, among PECO Energy Company (PECO Energy), a Pennsylvania corporation; British Energy plc (British Energy), a Scottish corporation; and British Energy Inc. (BE Inc.), a Delaware corporation which is a wholly owned subsidiary of British Energy. British Energy is a party to the AmerGen Limited Liability Company Agreement, but only PECO Energy and BE Inc. are members of AmerGen, with each holding a 50% ownership interest in AmerGen.

Both PECO Energy and British Energy have more than twenty years of nuclear operating n experience. PECO Energy is a member of the Institute of Nuclear Power Operations (INPO)

U and is the licensed operator of four nuclear reactors at the Limerick and Peach Bottom nuclear generating stations. PECO Energy also owns 100% of the Limerick units,42.49% of the Peach Bottom units, and 42.59% of the two Salem nuclear units. British Energy is the owner and operator of fifteen nuclear reactors at eight nuclear operating sites in the United Kingdom, and it participates in the World Association of Nuclear Operators. British Energy generates approximately 21% of the electricity consumed in Great Britain.

The Chairman of the Management Committee of AmerGen is Michael J. Egan, the Chief Financial Officer of PECO Energy. The Chief Executive Officer (CEO) of AmerGen is Dickinson M. Smith, the former Senior Vice President and Chief Nuclear Officer (CNO) of PECO Energy. The President of AmerGen is Dr. Robin Jeffrey, FEng, the Deputy Chairman of British Energy. Gerald R. Rainey, PECO Energy's CNO, will also save as AmerGen's CNO for TMI-l and will report directly to Mr. Smith, AmerGen's CEO.

On October 12,1997, GPU announced its intention to begin the process of divesting its generation assets through an auction process (Divestiture Process). GPU's initiation of the Divestiture Process reflected GPU's desire to concentrate on its core business of delivering electricity to customers rather than using resources to expand generation capability enough to be a successful competitor in the merchant generation business. GPU's decision to divest was 11 See Pennsylvania-New Jersey-Maryland Interconnection, 81 FERC % 61,257 (l997).

i l U.S. Nuclear Regulatory Commission Q

V December 3,1998 l Page 3 l

also made in response to several other factors: (a) the ongoing restructuring of the electric utility industry in the United States, including recent decisions and orders by the Federal Energy Regulatory Commission promoting competition at the wholesale level and open access to transmission facilities; (b) restructuring legislation in Pennsylvania and orders of the Pennsylvania Public Utility Commission (PaPUC) requiring the unbundling of different utility functions and the transition to full competition at the retail level; and (c) similar guidance contained in the Findings and Recommendations For Restructuring the Electric Utility Industry in New Jersey, issued by the New Jersey Board of Public Utilities. GPU's Divestiture Process has received widespread support from the parties participating in the retail restructuring 1

proceedings for GPU Energy in Pennsylvania and New Jersey.  !

The sale of TMI-l is part of the Divestiture Process, and the PaPUC has stated its approval of this sale of TMI-1, pursuant to a Final Order dated October 20,1998 approving a Joint Petition for Settlement dated September 23,1998. As of October 15,1998, GPU Energy, GPUN, and AmerGen executed the TMI-l Asset Purchase Agreement, under which GPU Energy and GPUN will transfer their interests in TMI-l to AmerGen. # In accordance with the TMI-l 1 Asset Purchase Agreement, the closing of the transaction will take place on the Closing Date, as defined in the TMI-1 Asset Purchase Agreement, once all conditions precedent are catisfied i c and regulatory approvals are obtained. On and after the Closing Date, the following events b will occur pursuant to the Asset Purchase Agreement, the Interconnection Agreement, and the Power Purchase Agreement: (a) AmerGen will assume title to TMI-l (including all real estate, buildings, equipment, spare parts, fixtures, inventory, documents, records, assignable contracts, other property necessary for the operation and maintenance of TM1-1 and all used and spent nuclear fuel and other licensed materials at TMI-1, but excluding certain switchyard and transmission facilities and certain other property and equipment, e.g., TMI-2, on the TMI site being retained by GPU Energy) and assume all responsibility for the operation, maintenance, and eventual decommissioning of TMI-1; (b) GPUN's approximately 700 employees located at TMI-l involved in the operation and maintenance of TMI-l will become employees of AmerGen and continue to perform these functions for AmerGen; (c) AmerGen will have the right to offer to employ selected GPUN corporate support stafflocated at its Parsippany, New Jersey offices;(d) AmerGen will obtain interconnection services for TMI-l from Met-Ed and will obtain transmission and power services through PJM; (e) GPU Energy will purchase from AmerGen capacity and energy from TMI-l from the Closing Date until December 31,2001; and (f) GPU Energy will have made or will make additional deposits to the TMI-l decommissioning trust funds so that these funds total approximately S311-320 million (depending upon the actual Closing Date), which is adequate to fully fund the radiological decommissioning of TMI-l when expected real growth in eamings is credited.

2/ Met-Ed, JCP&L and Penelec currently hold ownership interests of 50%,25% and 25%,

respectively, in TMI-l as tenants-in-common.

U.S. Nuclear Regulatory Commission

/ December 3,1998

\ Page 4 Subject to cenain adjustments, GPU Energy and GPUN's consideration for the sale of TMI-l will be AmerGen's payment of $23 million at closing; AmerGen's payment of approximately l 577 million in nuclear fuel payments over five years; and AmerGen's possible additional i payments from 2002 through 2010 based upon the market price of electricity.

GPU Energy is not selling the Three Mile Island Nuclear Station, Unit 2 (TMI-2). However, Ameden, GPUN and GPU Energy have entered into a separate agreement for AmerGen to ,

provide certain support services to GPUN with respect to TMI-2, including Post-Defueling Monitored Storage services. GPU Energy will continue to own TMI-2, and GPUN will remain responsible for the monitored storage and eventual decommissioning of TMI-2. There will be no transfer of the TMI-2 license.

Additional information pertaining to the proposed transfer of TMI-1 and AmerGen's qualifications, including the information required under 10 CFR { 50.80, is provided in Appendix A. (Exhibits 5 and 6 to Appendix A contain certain financial projections that constitute proprietary commercial and financial information which should be withheld from public disclosure pursuant to 10 CFR 9.17(a)(4) and the policy reflected in 10 CFR 2.790.

Versions of these exhibits suitable for public disclosure are being provided as Exhibit 5R and p Exhibit 6R.) Appendix B contains a mark-up of the TMI-l license and the relevant portions of

( the TMI-l technical specifications, reflecting the confomling administrative amendments associated with the license transfer. Appendix C contains a safety evaluation of the conforming administrative amendments, which confimas the generic finding in 10 CFR Q 2.1315(a) that such conforming administrative amendments to the license of a utilization facility involve no significant hazards consideration. Copies of the Asset Purchase Agreement and its Exhibits are included in a separately bound Appendix D. (Designated information in this Appendix D is proprietary commercial and financial information which should be withheld from public disclosure pursuant to 10 CFR Q 9.17(a)(4) and the policy reflected in 10 CFR

{ 2.790. A version suitable for public disclosure is provided as Appendix DR.) The Asset Purchase Agreement also incorporates numerous voluminous schedules and ancillary agreements totaling thousands of pages which are not included in Appendix D. Copies of these additional documents will be made available fer review upon request.

AmerGen and GPUN believe that the information contained in these appendices demonstrates that: (1) AmerGen will possess the requisite technical and financial qualifications to own and operate TMI-1; (2) AmeWen will not be owned, controlled, or dominated by an alien, foreign i corporation or foreign government, within the meaning of Section 104d of the Act; (3) the l proposed transfer and conforming administrative amendments do not raise any significant I safety issues; and (4) the proposed transfer does not require antitrust review by the NRC. As i discussed in greater detail in Appendix A, the proposed transfer and conforming administrative amendments will involve certain organizational and administrative changes, but will not involve any other change to TMI-l's current licensing basis. The proposed transfer will not b

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involve any reduction in the commitments in its quality assurance plan, or any reduction in the I effectiveness of the emergency and security plans for TMI-1.

In summary, the proposed transfer will be consistent with the requirements set forth in the Act, NRC regulations, and the relevant NRC license and orders, and it will neither have any adverse impact on the public health and safety nor be inimical to the common defense and security.

l AmerGen and GPUN therefore respectfully request that the Commission consent to the transfer l

in accordance with 10 CFR 50.80 and approve the conforming administrative amendments pursuant to 10 CFR Q 50.92.

The Closing Date of the sale of TMI-l is dependent upon the receipt of all required regulatory

! approvals and will occur promptly after receipt of the necessary approvals. The specific closing terms set forth in Asset Purchase Agreement are based upon a closing which takes place following the refueling outage now scheduled for September / October 1999, and these terms will be subject to certain adjustments in the event that the closing occurs prior to the refueling outage. Thus, the parties have agreed in Section 6.l(e) to negotiate the l administrative details and adjustments to the closing terms which would apply in the event of

, an earlier closing. It is the parties' desire to close at the earliest practicable date following

' D. j lt receipt of all required regulatory approvals. Therefore, AmerGen and GPUN request that the NRC review this request on a schedule that will permit the issuance of NRC consent to the l license transfer, and approval of the conforming administrative license amendments, as promptly as possible, and in any event before April 15,1999. Such consent should be immediately effective upon issuance, and it should consent to the transfer occurring at any time l

through December 31,1999, or such later date as may be permitted by the NRC. AmerGen and GPUN will keep the NRC informed if there are any significant changes in the status of the l other required approvals or other developments that have an impact on this schedule.

If NRC requires additional information concerning this license transfer request, please contact David J. Distel of GPUN at (973) 316-7955. Service upon the applicants of comments, hearing requests, intervention petitions, or other pleadings, if applicable, should be made to David R. Lewis, counsel for GPUN, at Shaw Pittman Potts & Trowbridge,2300 N Street, N.W., Washington, DC 20037-1128 (tel: 202-663-8474; fax: 202-663-8007; l e-mail: david _ lewis @shawpittman.com) and Kevin P. Gallen, counsel for AmerGen, at i Morgan, Lewis & Bockius LLP,1800 M Street, NW, Washington, DC 20036-5869 l (tel: 202-467-7462; fax: 202-467-7176; e-mail: gall 7462@mlb.com).

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U.S. Nuclear Regulatory Commission December 3,1998 Page 6 l

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l. Sincerely,

_ :/

Dickinson M. Smith T. Gary Broughton

, AmerGen Energy Company, LLC GPU Nuclear, Inc. ,

l- Encl. (1) Affirmation of Dickinson M. Smith ,

(2) Affirmation of T. Gary Broughton

-(3) 10 CFR s 2.790 Affidavit of Dickinson M. Smith

.(4)- Certificate of Service for TMI-l License Amendment Request No. 278 .

(5) Appendices A - DR  ;

ce; . Administrator, Region I i TMI Senior Resident Inspector TMI-l Senior Project Manager  !

File No. 98152 L

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l Sincerely, O b u3 M IA Dickinson M. Smith . T. Gary Bro %ghton U

-AmerGen Energy Company, LLC GPU Nuclear, Inc. l l

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i Encl. (1)- Affirmation of Dickinson M. Smith 1 (2). Affirmation of T. Gary Broughton l

-(3) - 10 CFR { 2.790 Affidavit of Dickinson M. Smith . l (4) Certificate of Service for TMI-l License Amendment Request No. 278 l (5) Appendices A - DR O.

cc: Administrator, Region I TMI Senior Resident Inspector TMI-1 Senior Project Manager File No. 98152 l

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hR _ 1998. ' T , My Commission Expires; it km i pal 4 i l l lO AFFIRMATION O 1, T. Gary Broughton, being duly sworn, state that I am President and Chief Executive Officer of GPU Nuclear, Inc. (GPUN), that I am authorized to sign and file this " Proposed License Transfer and Conforming Administrative License Amendments," seeking NRC consent to the transfer of NRC Facility Operating License No. DPR-50 for TMI-1, and approval of the conforming administrative amendments associated with the transfer, with the Nuclear Regulatory Commission on behalf of GPUN, Metropolitan Edison Company, Jersey Central Power and Light Company, and Pennsylvania Electric Company, and that the statements made and the matters set forth herein pertaining to these current TMI-l licensees are true and correct to the best of my knowledge and belief. GPU Nuclear, Inc. bY % W $An  ! T. Gary Brodghton J President and Chief Executive Officer STATE O _ mdm g COUNTY OF es i Subscribed and sworn to me, a Notary Public, in and for the County and State above named, this Third day of December,1998. e . / My Commission Expires: /// 99 ~f f Notanal Seal Suzanne C. Miklosik. Notary Public ut*c"$"n,LTM*Mt% MemDef. Pennsylvania Association of Notanes l l l , 10 CFR 2.790 l( 4 AFFIDAVIT OF DICKINSON M. SMITII L) I, Dickinson M. Smith, Chief Executive Officer of AmerGen Energy Company, LLC (AmerGen), do hereby affirm and state: l j 1. I am authorized to execute this affidavit on behalf of AmerGen. l l 2. AmerGen is providing information in support ofits " Proposed License Transfer and Conforming Administrative License Amendments"(Facility Operating License No. DPR-50). The documents being provided in Exhibits 5 and 6 to Appendix A and portions of Appendix D contain AmerGen's financial projections related to the continued operation of TMI-I and the commercial terms of a unique transaction. These documents

constitute proprietary commercial and financial infonnation that should be held in i

confidence by the NRC pursuant to 10 CFR 9.17(a)(4) and the policy reflected in 10 CFR l 2.790, because:

i. This information is and has been held in confidence by AmerGen.

ii. This information is of a type that is held in confidence by AmerGen, and there is a rational basis for doing so because the information contains sensitive financial information concerning AmerGen's projected revenues and operating expenses. 3 l(d iii. This infonnation is being transmitted to the NRC in confidence. iv. This information is not available in public sources and could not be gathered readily from Mher publicly available information.

v. Public disclosure of this information would create substantial harm to the competitive position of AmerGen by disclosing AmerGen's intemal financial projections and the commercial terms of annique transaction to other parties j whose commercial interests may be adverse to those of AmerGen.

l I l l L' ) t i 3, Accordingly, AmerGen requests that the designated documents be withheld from public disclosure pursuant to the policy reflected in 10 CFR G 2.790(a)(4) and 9.17(a)(4). AmerGen Energy Company, LLC f Dickinson M. Smith Chief Executive Officer STATE OF hew 19 A gi COUNTY OF kk h>dchA Subscribed and sworn to me, a Notary Public, in and for the County and State above named, this Ab th day of huw k ,1998. t .1 h [v lw.,' . My C mmission Expires: NkuAAv If,Jdb/ { l l O UNITED STATES OF AMERICA NUCLEAR REGULATORY COMMISSION IN THE MATTER OF DOCKET NO. 50-289 GPU NUCLEAR INC. LICENSE NO. DPR-50 CERTIFICATE OF SERVICE This is to certify that a copy of GPU Nuclear and AmerGen's Proposed License Transfer and Conforming Administrative License Amendments, including License Amendment Request No. 278, to the Facility Operating License and Technical Specificaticas for Three Mile Island Nuclear Station Unit 1, has, on the date given below, been filed with executives of Londonderry Township, Dauphin County, Pennsylvania; Dauphin County, Pennsylvania; and the Pennsylvania Department of Environmental Resources, Bureau of Radiation Protection, by deposit in the , United States mail, addressed as follows: ' Mr. Darryl LeHew, Chairman Ms. Sally Klein, Chairman Board of Supervisors of Board of County Commissioners of r1 Londonderry Township Dauphin County i R.D. #1, Geyers Church Road Dauphin County Courthouse Middletown, PA 17057 Front & Market Streets Harrisburg, PA 17101 Director, Bureau of Radiation Protection PA Dept. of Environmental Resources Rachael Carson State Office Building P.O. Box 8469 Harrisburg, PA 17105-8469 Att: Mr. Stan Maingi GPU NUCLEAR INC. , BY: d, bur bMA ' President an"d Chief Exdeutive Officer DATE: December 4,1998 1 i - . . - _ - . ~ . . . - . - - _ _ . . . - - . - - - . - - - . . . . . . - 1 i I IST OF APPENDICES l l ) i A AdditionalInformation Submitted in Support of Proposed License Transfer and Conforming Administrative License Amendments (NRC Facility Operating License No. DPR-50) B Marked-up Pages of TMI-l License and Technical Specifications i l Reflecting Conforming Administrative License Amendments Associated With Proposed Transfer ofTMI-I License to AmerGen C Safety Evaluation of Conforming Administrative License Amendments Associated With Proposed Transfer of TMI-l License to AmerGen D Three Mile Island Unit 1 Nuclear Generating Facility Asset Purchase Agreement, By and Among GPU Nuclear, Inc., Jersey Central Power & l Light Company, Metropolitan Edison Company, Pennsylvar.ia Electric Company, as Sellers, and AmerGen Energy Company, LLC, as Buyer, Dated as of October 15,1998 (Bound separately as Volume 2 of 2) DR Redacted Version of Appendix D Provided For Public Disclosure (Bound separately as Volume 2 of 2) O l l l I iO e f - --y APPENDIX A (3 (,/ ADDITIONAL INFORMATION SUBMITTED IN SUPPORT OF PROPOSED LICENSE TRANSFER AND CONFORMING ADMINISTRATIVE LICENSE AMENDMENTS (NRC FACILITY OPERATING LICENSE NO. DPR-50) TABLF OF CONTENTS I. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A- I II. STATEMENT OF PURPOSE OF THE TRANSFER AND NATURE OF THE TRANSACTION MAKING THE TRANSFER NECESSARY OR DESIRABLE . . . . . . . . . . . . . . . . . . A-2 III. GENERAL CORPORATE INFORMATION REGARDING AMERG EN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-5 A. NAME OF NEW LICENS EE . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-5 B. AD D RE S S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-5 gg C. DESCRIPTION OF BUSINESS OR OCCUPATION . . . . . . . . . . . . A-5 b D. ORGANIZATION AND MANAGEMENT . . . . . . . . . . . . . . . . . . . . A-6

1. State of Establishment and Place of Business . . . . . . . . . . . . A-6

2. Management Committee . . . . . . .....................A-6

3. Principal Executives and Officers . . . . . . . . . . . . . . . . . . . . . . A-7 IV. FOREIGN PARTICIPATION IN AMERGEN . . . . . . . . . . . . . . . . . . . . . . . A-8 V. TECHNICAL QUALIFICATIONS OF AMERGEN . . . . . . . . . . . . . . . . A-11 VI. FINANCIAL QUALIFICATIONS OF AMERGEN . . . . . . . . . . . . . . . . . . A-14 A. PROJECTED OPERATING REVENUES AND OPERATING COSTS . . . . . . . . . . . . . . . . . . . ......... A-14 B. ADDITIONAL SOURCES OF FUNDS . . . . . . . . . . . . . . . . . . . . . A-17 C. DECOMMISSIONING FUNDING . . . . . . . . . . . . . . . . . . . . . . . . . . A-19 A-i v

i VII. ANTITRUST CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-23 C. VIIL RESTRICTED DATA AND CLASSIFIED NATIONAL SECURITY INFORMATION . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . A-24 l IX. CONTINUATION OF CURRENT DESIGN AND LICENSING BASIS . . A-24 ' A. PLANT RECORDS AND DESIGN / LICENSING BASIS  ! INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-25 i B. INTERFACES RELATING TO TMI-1 AND TMI-2 . . . . . . . . . . . . A-27 1 X. - ENVIRONMENTAL CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . A-28 I XL OTHER NUCLEAR REGULATORY ISSUES . . . . . . . . . . . . . . . . . . . . . A-28 i A. PRICE-ANDERSONINDEhMITY AND i .- NUCLEAR INSURANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-28 B. STANDARD CONTRACT FOR DISPOSAL l OF SPENT NUCLEAR FUEL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-29

. XII. OTHER REQUIRED REGULATORY APPROVALS . . . . . . . . . . . . . . . . . A-29 i

'O i i ~ i h. l A-ii i. l , - _ _. _ , . _ __ _ t APPENDIX A , O ADDITIONAL INFORMATION SUBMITTED IN SUPPORT OF PROPOSED LICENSE TRANSFER AND CONFORMING ADMINISTRATIVE LICENSE AMENDMENTS (NRC FACILITY OPERATING LICENSE NO. DPR-50) L INTRODUCTION AmerGen Energy Company, LLC (AcerGen) and GPU Nuclear, Inc. (GPUN), acting f l for itself and on behalfof Metropolitan Edison Company (Met-Ed), Jersey Central Power & l l l Light Company (JCP&L), and Pennsylvania Electric Company (Penelec), submit the following additional information in support of their request for Nuclear Regulatory Commission (NRC) consent to the transfer of Facility Operating License No. DPR-50 for Three Mile Island l Nuclear station, Unit 1 (TMI-1) to AmerGen. AmerGen and GPUN are requesting that the NRC consent to this transfer and authorize AmerGen to possess, use, and operate TMI-l under /~~' '( essentially the same conditions and authorizations included in the existing license. No physical changes will be made to the TMI-l facility as a result of this transfer, and there will be no significant change in the day-to-day operations of TMI-1. AmerGen and GPUN are also - requesting NRC approval of administrative amendments to conform the license to reflect the proposed transfer action. 1 TMI-l is an approximately 500 MW # nuclear power plant consisting of a Babcock & Wilcox (B&W) Pressurized Water Reactor (PWR), General Electric (GE) steam turbines, and other associated equipment located on Three Mile Island in the Susquehanna River 3/ TM1-1 is licensed to a maximum power level of 2,568 megawatts thermal (MWt).1.t ) operates at a base rating of 810 megawatts electric (MWe) in the winter,798 MWe m  ! the fall and spring, and 786 MWe in the summer. l ) [D A-1

%)

l i l l l approximately ten miles southeast of Harrisburg, Pennsylvania. The Three Mile Island

3 Nuclear Station, Unit 2 (TMI-2), which has been shut down and defueled and is being maintained in a Post-Defueling Monitored Storage (PDMS) condition pending its eventual decommissioning, is also located on the TMI site, but is not included in the transfer. NRC Facility Operating License No. DPR-50 for TMI-l was issued on April 19,1974, and will i

expire on April 19,2014. Met-Ed, JCP&L and Penelec are all wholly owned subsidiaries of GPU, Inc. (GPU), doing business as GPU Energy. (Hereinafter they are referred to j collectively as GPU Energy.) Under the terms of the license, Met-Ed, JCP&L, and Penelec are authorized to hold ownership interests of 50%,25% and 25%, respectively, in TMI-1 as l tenants-in-common. GPU Nuclear, Inc. (GPUN), which is also a wholly owned subsidiary of i GPU, is authorized to operate TMI-l on their behalf. l l l II. STATEMENT OF PURPOSE OF THE TRANSFER AND NATURE OF THE i

c. TRANSACTION MAKING THE TRANSFER NECESSARY OR DESIRABLE On October 12,1997, GPU announced its intention to begin the process of divesting its generation assets through an auction process (Divestiture Process). GPU's initiation of the Divestiture Process reflected GPU's desire to concentrate on its core business of delivering i l electricity to customers rather than using resources to expand generation capability enough to i

1 l be a successful competitor in the merchant generation business. GPU's decision to divest was i , also made in response to several other factors: (a) the ongoing restructuring of the electric j utility industry in the United States, including recent decisions and orders by the Federal ! Energy Regulatory Commission (FERC) promoting competition at the wholesale level and I open access to transmission facilities; (b) restructuring legislation in Pennsylvania and orders of the Pennsylvania Public Utility Commission (PaPUC) requiring the unbundling of different , /' A-2 .t I I utility functions and the transition to full competition at the retail level; and (c) similar j f D} guidance contained in the Findings and Recommendations For Restructuring the Electric  ; l Utility Industry in New Jersey, issued by the New Jersey Board of Public Utilities (NJBPU).  ! GPU's Divestiture Process has received widespread support from the parties participating in the retail restructuring proceedings for GPU Energy in Pennsylvania and New Jersey. The sale of TMI-l is part of the Divestiture Process, and the PaPUC has stated its approval of this sale of TMI-1, pursuant to a Final Order dated October 20,1998 approving a Joint Petition for Settlement dated September 23,1998. As of October 15,1998, GPU Energy, GPUN, and AmerGen executed the TMI-l Asset Purchase Agreement, under which GPU l Energy and GPUN will transfer their interests in TMI-l to AmerGen. In accordance with the TMI-l Asset Purchase Agreement, the closing of the transaction will take place on the Closing l Date, as defined in the TMI-l Asset Purchase Agreement, once all conditions precedent are n U satisfied and regulatory approvals are obtained. On and after the Closing Date, the following , l events will occur pursuant to the Asset Purchase Agreement, the Interconnection Agreement, and the Power Purchase Agreement: (a) AmerGen will assume title to TMI-l (including all real estate, buildings, equipment, spare parts, fixtures, inventory, documents, records, assignable contracts, other property necessary for the operation and maintenance of TMI-l and all used and spent nuclear fuel and other licensed materials at TMI-1, but excluding certain switchyard and transmission facilities and certain other property and equipment, e.g., TMI-2, on the TMI site being retained by GPU Energy) and assume all responsibility for the operation, maintenance, and eventual decommissioning of TMI-1; I 1 'N A-3 (G I (b) GPUN's approximately 700 employees located at TMI-l involved in the operation and maintenance of TMI-l will become employees of AmerGen and continue to perform their functions for AmerGen; (c) AmerGen will have the right to offer to employ selected GPUN corporate support staff located at its Parsippany, New Jersey offices; (d) AmerGen will obtain interconnection services for TMI-l from Met-Ed and will obtain transmission and power services through PJM; j (e) GPU Energy will purchase from AmerGen capacity and energy from TMI-l from the Closing Date until December 31,2001; and l (f) GPU Energy will have made or will make additional deposits to the TMI-l 1 decommissioning trust funds so that these funds total approximately $311-320 milhon 1 (depending upon the actual Closing Date), which is adequate to fully fund the ,V radiological decommissioning of TMI-l when expected real growth in eamings is  ! l credited. Subject to certain adjustments, GPU Energy's and GPUN's consideration for the' sale of TMI-l l l will be AmerGen's payment of $23 million at closing; AmerGen's payment of approximately $77 million in nuclear fuel payments over five years; and AmerGen's possible additional payments from 2002 through 2010 based upon the market price of electricity. l GPU Energy is not selling TMI-2. However, AmerGen, GPUN and GPU Energy have l l entered into a separate agreement for AmerGen to provide certain support services to GPUN with respect to TMI-2 which are essentially those being performed by the current on-site organization, includirg PDMS services. GPU Energy will continue to own TMI-2, and GPUN 7'N A-4 O [ l l will remain responsible for the monitored storage and eventual decommissioning of TMI-2. k There will be no transfer of the TMI-2 license. III. GENERAL CORPORATE INFORMATION REGARDING AMERGEN A. NAME OF NEW LICENSEE The new licensee is named AmerGen Energy Company, LLC. B. ADDRESS AmerGen's headquarters is located at 965 Chesterbrook Blvd, Wayne, PA 19087. C. DESCRIPTION OF BUSINESS OR OCCUPATION AmerGen is a limited liability company formed to acquire and operate nuclear power plants in the United States. AmerGen's principal offices are located in Wayne, Pennsylvania. AmerGen is organized under the laws of the State of Delaware pursuant to the Limited Liability Company Agreement of AmerGen dated as of August 18,1997, as amended i U' (LLC Agreement), among PECO Energy Company (PECO Energy), a Pennsylvania corporation, British Energy plc (British Energy), a Scottish corporation, and British Energy Inc. (BE Inc.), a Delaware corporation which is a wholly owned subsidiary of British Energy. British Energy is a party to the LLC Agreement, but only PECO Energy and BE Inc. are members of AmerGen, each holding a 50% ownership interest in AmerGen. Both PECO Energy and British Energy have more than twenty years of nuclear operating experience. PECO Energy is a member of the Institute of Nuclear Power Operations (INPO) and is the licensed operator of four nuclear reactors at the Umerick and Peach Bottom nuclear generating stations. PECO Energy also owns 100% of the Limerick units,42.49% of the Peach Bottom units, and 42.59% of the two Salem nuclear units. British Energy is the O A-5 V ._ _ _ _ _ _ _ _ _ _. . _ _ __ _ -_. _ _ - _ ~ _ _ . _ j i I owner and operator of fifteen nuclear reactors at eight nuclear operating sites in the United \ Kingdom, and it participates in the World Association of Nuclear Operators (WANO). Copies of the Certificate of Formation of AmerGen and the AmerGen LLC Agreement, as amended, are included in Exhibit 1. Copies of the 1995,1996, and 1997 Annual Reports of PECO Energy and 1996 Prospectus and 1996/97 and 1997/98 Annual Repons of British Energy are included in Exhibit 2. D. ORGANIZATION AND MANAGEMENT

1. State of Establishment and Place of Business AmerGen is a limited liability company established in the State of Delaware.

AmerGen's principal place of business is in the Commonwealth of Pennsylvania.

2. Management Committee The business and affairs of AmerGen are managed by or under the direction of a Management Committee, currently consisting of six Representatives, half of whom are appointed and serve at the discretion of the PECO Energy Member Group and half of whom are appointed and serve at the discretion of the BE Inc. Member Group. # The names, -

addresses and citizenship of the Representatives of the Management Committee are as follows: N At this time, BE Inc. is the only member of the BE Inc. Member Group, and PECO Energy is the only member of the PECO Energy Member Group. Pursuant to the terms of Article 7 of the LLC Agreement, BE Inc. and PECO Energy may transfer all or part of their interests in AmerGen to their respective subsidiaries or affiliates, which would become admitted as members and part of their respective Member Group. In all cases, the PECO Energy Member Group will consist of U.S. corporate entities within the PECO Energy corporate family and all of the PECO Energy Representatives on the Management Committee will be U.S. citizens. (~~} A-6 v l l (i) shril ca suotracted from such taxtola income or toss: i (iii) in lieu of the depreciation. amortization and other cost recovery  ! ceductions taken into account in computing such taxable income or loss. Depreciation for j such fiscal year shall be taken into account; ) (iv) if the Book Value of any Company asset is acJusted pursuant to ' clause (ii) or clause (iii) of the cefinition of Book Value, the amount of such adjustment  ; shall be taken into account as gain or loss from the disposition of sucn asset for i purposes of computing Profits or Losses: and j t (v) such taxable income or loss shall not be deemed to include items of income, gain, loss. or deduction allocated pursuant to Section 2.1(c)(iii) (to comply with Treasury Regulation unoer Code section 704(b)), Section 3.3 or expense taken into [ account in computing the Members' shares of Nonrecourse Deductions or Member  ! Nonrecourse Deductions. "Reorosentative"is defined in Section 6.1(b).  ; " Safety issue" means any matter which concems any of the following: ) (i) implementation or compliance witn any Genanc Letter, Bulletin. l Order, Confirmatory Order or similar requirement issued by the NRC; (ii) prevention or mitigation of a nuclear event or incident or the unauthorized release of radioactive material; j (iii) placement of the plant in a safe condition following any nuclear event or incident; l (iv) compliance with the Atomic Energy Act, the Energy Reorganization Act, or any NRC rule; (v) compliance with a specific operating license and its technical f l . specifications; l (vi) compliance with a specific Updated Final Safety Analysis Report, or other licensing basis document. Any matter on which the Management Committee shall vote in accordance with Section 6.3 that is not substantially or pnmanly one of nuclear safety shall not constitute a Safety issue, so that, for purposes of illustration only, any plant expenditure of a material nature intended to extend the economic operational life or improve the economic performance of the power station in question shall not be considered a Safety issue. "Section 7 2 Transferee"is defined in Section 7.2. l "Sellina Grouo"is defined in Section 7.3(a). " Subsidiary" means, as to any Person, any other Person of which more than 50% of equity interests are owned, directly or indirectly, through one or more inten,iediaries, or both, by such Person. }. l LO l e l l l  ! " Tax Matters Partner' :s a:finsa in Section 5 5(d). " Treasury Reaulations" means regulations issued by the Treasury Cecanment pursuant to the Code. " Wholly Owned Subsiciary" means, as to any Person, a Subsiciary all of the eculty interests of wnien are owned, directly or incirectly, througn one or more mtermedianes, or both, by sucn Person. 1.8 Recistered Office: Reaistered Acent. The address of the registered office of the Company in the State of Delaware shall be 1209 Orange Street Wilmington. New Castle County, Delaware 19801 or such other address as the Management Ccmmittee may determine. The registered agent for service of process on the Company in the State of Delaware shall be The Corporation Trust Company, or such other agent as the Management Committee may determine. If the registered agent ceases to act as such for any reason or if the registered office shall change the Management Commmee shall promptly designate a replacement registered agent or change the registered address, as tne case may be. If the Management Committee fails to designate a replacement registered agent or change of address of the registered office, any Memoer may designate a replacement registered agent or change the registerec address. 1.9 Representations and Warranties. (a) Each Member hereby represents and warrants to the other Member that: (a) if that Member is an organization, that it is duly organized, validly existing and in good stancing under the laws of its state of organization and that it has full power and authonty to execute and deliver this Agreement and to perform its obligatons. including the funding obligations under Secton 2.2, hereunder; and (b) the Member is acquinng its Interest for the Member's own account as an investment and without an intent as of the O b Effectve Date to distnbute such Interest.  ; (b) To the extent only that the foregoing representations and warranties are made by BE Inc., and in consideration of PECO Energy entenng into this Agreement, SE inc. enters into this Agreement for itself and on behalf of Bntish Energy (who shall for l the purpose hereof be a signatory to this Agreement) as if Bntish Energy were making such representations and warranties, provided, however, that PECO Energy snalt first I look to BE inc. in enforcing such representatons and warranties. , ARTICLE 2 CAPITALIZATION 2.1 Capital Accounts. (a) Establishment. A separate capital account (" Capital Account")is hereby established for each Member as of the Effective Date. (b) General Rules for Adiustment of Capital Accounts. The Capital Account of each Member shall be: l l l ._ . _ _ . . . _ . ._ m.- _ . _ _ _ _. _ _ _ _ _ _ _ . _ _ _ _ _ _ - _ .-- _ _ _ . . (i) increasso by-(A) the cggrsgate amount of sucn M0moers asn centnoutions to tne Company; v the initial Book Value of property contnouted by QV (B) sucn Memcer to the Company, net of liabilities secured by such property that tne Comcany is considered to assume or take subject to Code section 752 and Treasury Regulationr, thereunder; and (C) such Members cistnbutive snare of Profits and items of income and gain allocated to such Member pursuant to Secton 2.1(c)(iii) or Section 3.3. and i (ii) decreased by: I (A) cash distnbutions to such Member from the Company; 1 (B) the Book Value of property distnbuted in kind to sucn Member, net of liabilities secured by such property that such Member is ceemed to assume or take subject to under Code section 752 and Treasury Regulations inereuncer, and (C) such Members distnbutive share of Losses and items of loss or deduction allocated to such Member pursuant to Section 2.1(c)(iii) or j Secton 3.3. (iii) increased or decreased by the adjustment desenbed in Section 6.5. , O (c) Special Rules. (i) Time of Adiustment for Capital Contnbutions. For j i purposes of computing the balance in a Members Capital Account, no credit snalt be given for any capital contnbution which such Member is obligated to make until such  ! contnbution is actually made. (ii) Capital Account for Transferred interest. If any interest in j the Company or part thereof is transferred in accordance with the terms of this ' Agreement, the transferee shall succeed to the Capital Account of the transferor to the extent it relates to the transferred Interest. l (iii) Intent to Comcly with Treasury Reoulations. The foregoing provisions and the other provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with Treasury Regulation section 1.704-1(b), and shall be interpreted and applied in a manner consistent with such regulation. To the extent such provisions are inconsistent with such regulation or are incomplete with respect thereto, the Capital Accounts of the Members shall be maintained in accordance with such regulation except to the extent that doing so would materially distort the timing or amount of an allocation or distnbution to a Member. 10 3 1 1 2.2 C apital Contneutions. (a) On tne Effective Date, the interest of the BE Inc. Memeer Groue shall te 50% and the interest of the PECO Energy Memoer Groue snali ce 50% Exce=t l pI t as otnerwise proviced herein or as agreed by the Members. all capital contneutons snail  ! I be mace 50% by the SE Inc. Memoer Group ana 50% by the PECO Energy Mem::er Group. (b) The Management Committee shall have the nght to cail for capital contneutons (whicn call shall be a concition to any Member's obligation to make any  ; sucn capital contnbutont Each Member agrees tnat it snall promptly make ter be j subject to the consecuences oesenbed in Section 2.2(c) below) any such cacital contnbuton if such capital contnbution is for a specific transaction, project or commitment previously approved by the Management Committee or for a Safety Issue. l (c) In the event that a Member fails to make a required capital  ! contnbuton by the due cate required by the Management Committee (eacn cate being j referred to hereafter as the "Due Date," and such defaulting Member being referred to i hereafter as a "Non-Contnbuting Member"), the otner Member (the "Contnbunng Memcer") may elect any of the following attematives: (i) the Contnbuting Member may cause the Company to treat the amount required to be contnbuted by the Non-Contnbuting Member as a liability of such Non-Contnbutng $' ember and pursue apprepnate remedies for the recovery of such amount. Where the Contnbuting Member has made an electon pursuant to this Section 2.2(c)(i), the Non-Contnbuting Member.shall remain liable to the Company in respect of the defaulted contnbution or payment until such time as the amount is paid to the Company; or O V (ii) the Contnbuting Member may instead cause the Company (A) to allow the Contnbuting Member to withdraw its corresponding additional capital contnbution due to the failure of the Non-Contnbutng Member to make its required j j additional capital contnbution (the making of sucn required additional capital contnbution I by all Members being a condition to the obligaton of each Member to make its required additional capital contnbution), in which event the Company shall promptly retum any such contnbution to such Member and, pending such retum, the amount of such contnbution shall be deemed to be a demand loan from such Member to the Company, or (B) to borrow from the Contnbuting Member an amount equal to up to the entre amount required to be contnbuted above by the Non-Contnbuting Member (the " Shortfall Amount") in exchange for the issuance to the Contnbuting Member of the Company's Senior Secured Notes on the terms and conditions set forth on the Schedule attached to this Agreement. Where the Contnbuting Member has made an electon pursuant to this , Secton 2.2(c)(ii)(B), it shall be entitled to, and shall cause the Company to, register a charge over the Company's eamings from the asset in question to the extent practcable or the distnbutions of Distnbutable Cash by the Company to the Non-Contnbuting Member from the date of the payment by the Contnbuting Member of the Shortfall Amount until such time as the Contnbuting Member has been repaid the Shortfall Amount plus the applicable interest. The payments of interest and pnncipal on any Senior Secured Notes shall be made without any further acton on behalf of the Management Committee. (d) The Non-Contnbuting Member shallindemnify the other Member and the Company for allliabilities, obligations, damages, losses, costs and expenses 11 l .;nc:uc;ng out not am: tea to reascracia attemoys fees anc :: n ::sts) ansm; t t f sucn cefault. (c) No Memost shall have the ngnt to maxe any ca ital contnoutions l to the Company witnout the onor wntten consent of the Management Committee anc ! /3 unless the opportunity to make such contnbution has been extencec to all Memoers on i () the same terms. 2.3 No Withdrawals. Except as expressly set fortn nerein. no Member shall be entitled to withdraw any ponton of its capital contnbution or Capital Account balance. ARTICLE 3 PROFITS AND LOSSES 3.1 Profits. After giving effect to the special allocations set forth in Section 3.3 ano Section 6.5, Profits with respect to any fiscal year shall be allocated to the Members: (a) First, to the extent of the excess of Losses allocated to them pursuant to Section 3.2(b)(i) over Profits previously allocated to them under this Section 3.1(a), in reverse orcer of sucn allocations; and (b) The balance, in accordance with their respective interests. 3.2 Losses. (a) General Rtiq. After giving effect to the special allocations set forth in Section 3.3, Secton 3.2(b) and Section 6.5, losses with respect to any fiscal year shall be allocated to tne Me"abers in accordance with their respective Interests. (N (b) Limitation. Losses allocated to any Member pursuant to Section b 3.2(a) with respect to any fiscal year shall not exceed the maximum amount of Losses that may be so allocated without causing such Member to have an Adjusted Capital Account Deficit at the end of such fiscal year. All Losses in excess of the limitation set forth in this Section 3.2(b) shall be allocated: (i) First, to the Members that will not be subject to this limitation, ratably based on the aggregate of their interests, to the extent possible until such Members become subject to this limitation; and (ii) Any remaining amount, to the Members, ratably based on their Interests, unless otherwise required by the Co.de or Treasury Regulations. 3.3 Soecial Allocations. (a) Qualified income Offset. Subject to Secton 3.3(b), notwithstanding anything herein to the contrary, but only if required by Treasury Regulation section 1.704-1(b) in order for the allocations provided for herein to be considered to have substantial economic effect or to be deemed to be in accordance with the Member's Interests, if, for any fiscal year, a Member unexpectedly receives an adjustment. allocation or distnbution desenbed in Treasury Regulation sections 1.704-1(b)(2)(ii)(d)(4), (5) or (6), and such adjustment, allocation or distnbution causes or increases an Adjusted Capital Account Deficit, such Member shall be allocated items of income and gain (consisting of a pro rata portion of each item of Company income,, including gross income and gain) in the amount and manner sufficient to eliminate such 73 h 12 1 [ l l _ ~ _ _. _ _ . _ . _ _. _ . _ _. _ _ _._ _ . _._ _ _ _. _ __ _ __ _ _ _ _ _ _ _ _ _ - !usted Capitel Account Daficit as quickly as Dossiola. This Section 3 Stai:s ntenceo to comoly with Treasury Regulation section 1.704-1(b)(2)(ii)(c) ano snali ce :raemretec  ; censistently therewith. l (b) Minimum Gain Charceback. Notwithstanding any other crovision of this Article 3. if there is a net decrease in Company Minimum Gain cunng any fiscal j year, each Member shall, subject to the exceptions provided in Treasury Regu:ation l section 1.704-2(f), be allocated items of income and gain for sucn fiscal year ecual to sucn Member's share of the net decrease in Company Minirpum Gain within tne meaning L of Treasury Regulation section 1.704-2(g)(2) To the extent that this Section 3 3(b)is  ! incensistent with Treasury Regulations, the Minimum Gain Chargeoack proviced for l herein shall be applied and interpreted in accordance with such Treasury Regulation.  ! (c) Nonrecourse Deductions. Nonrecourse Deductions snalt be  ! allocated to the Members in accordar ce with their respective interests. j (d) QEg1;y Allocations. Special allocations of items of inccme or gain pursuant to Sections 3.3(a), 3.3(b), 3.3(e) or 2.1(c)(iii) may not be consistent with the manner in which the Members intend to divide the Profits, Losses, Nonrecourse l Deductions, gain and similar items. Accordingly, Profits, Losses, Nonrecourse Deductions, and other items shall be allocated subsequent to any ruch special - attocations among the Members in a manner consistent with Treasuiy Regulation  ! sections 1.704-1(b) and 1.704-2 so as to prevent such special allocations from distorting  ! the manner in which overall Company Profits, Losses and Nonrecourse Deductions are intended to be allocated among the Members pursuant to Sections 3.1,3.2 anc 3.3(c). i In general, the Members and the Company anticipate and agree that this will be accomplished by specially allocating other Profits, Losses and items of income gain, loss and deduction among the Members in the current year or subsequent years so that , O the not amount of such special or other unintended allocL%ns to each Member is zero after taking into account present value concepts. l l I i O n (e) c.-. - .- Vemcer Nonrecou*se Cect ror s anc Memeer Ve - 3a.n Charcecacx. (i) Memoer Nonrecourse Deductions. Any Memcer Nonrecourse Deductions for any fiscal year or other penod shall be allocated to the O Memoer that bears the economic nsk of loss with respect to the Member Nonrecourse Debt to wnich sucn Memoer Nonrecourse Deductions are attnbutable in accoraance with Treasury Regulation sections 1.704-2(i) and 1.704-2(k) and Member Minimum Gr.in Chargebacks ansing from any decreases in Memoer Minimum Gain shall be allocated to the Memoers as required by Treasury Regulation section 1.704-2(i). (ii) Memoer Minimum Gain Charceback. If there is a net decrease in Memoer Minimum Gain attnbutable to a Member Nonrecourse Debt cunng any Company fiscal year, within the meaning of Treasury Regulation sections 1.704-2(i)(3) and 1.704-2(k), each Member that, as of the beginning of such year, has a share of the Memoer Minimum Gain attnbutable to such Member Nonrecourse Debt, determined in accordance with Treasury Regulation sections 1.704 2(i)(5) ano 1.704-2(k), shall be allocated items of income and gain for such fiscal year (and, if necessary, subsequent fiscal years) in proportion to, and to the extent of, an amount equal to the greater nf (a) such Members share of the net decrease in Member Minimum Gain 1 attnbutsole to such Member Nonrecourse Debt that is allocable to the disposition of Company property subject to such Member Nonrecourse Debt. or (b) the Adjusted l Capital Account Deficit of such Member as of the end of such fiscal year, cetermined l before taking into account any allocation of Company income, gain, loss, deduction or l Code section 705(a)(2)(B) expenditure for such fiscal year equal to that Members share l of the not decrease in the Member Minimum Gain, determined in a manner consistent with Treasury Regulations section 1.704-2(g)(2). To the extent that this Section 3.3(e)(ii) - is inconsistent with Treasury Regulations, the Member Minimum Gain Chargeback provided for herein shall be applied and interpreted in accordance with such regulation. 3.4 Allocation of Credits. ' All tax credits shall be allocated among the Memoors in accordance with their respective interests or in accordance with applicable provisions of the Code or Treasury Regulations to the extent any such provision is inconsistent with such allocation. 3.5 Tax Allocations. l Contnbuted Property. In the event any property is contnbuted to (a) the capital of the Company, income, gem, loss and deduction with respect to such, property shall be allocated solely for tax purposes among the Members in accordance with Code section 704(c) so as to take account of any vanation between the adjusted j-basts of such property to the Company for federalincome tax purposes and its initial l l ! Book Value.  ! I Revalued Property. If the Company assets are revalued as set (b) forth in the definition of " Book Value", subsequent allocations of income, gain, loss and deduction with respect to revalued Company assets shall take into account any vanation between the adjusted basis of such assets for federalincome tax purposes and their adjusted value in the same manner as under Code section 704(c) and the Treasury Regulations thereunder. k (c) E!!g Allocnons pursuant to this Section 3.5 are solely for i purposes of federal, state ano local taxes and shall not affect, or in any way be taken i iO 4 u s l .nto account, in computng any Memetr's Capital Account er snara cf prof:ts :sses cr other items or distnoutons pursuant to any provision of tnis Agrstment. (d) Conformity of Reportina. The Memoers are aware of the income / tax consequences of the allocations made by this Section 3.5 and hereoy agree to ce b) bound by the provisions of this Section 3.5 in reponing their snares of Company gain. income. loss, deducton credits and other items for income tax purposes. except in the i case of fraud or manifest error. 3.6 Chance in Member's interests. In the event there is any change in the Memoers' respecuve interests dunng any fiscal year, Profits. Losses. Nonrecourse 1 Deductons and other items shall be allocated among the Memoers in accoraance with their respective interests from time to time dunng such fiscal year in accorcance with 1 Code secton 706, using any convention permitted by law and selected by the l Management Committee. l ARTICLE 4 DISTRIBUTIONS 4.1 Distnbutable Cash. It shall be the policy of the Company, and the Members shall airect their respective Representatives on the Management Committee to cause the Company, to distnbute Distnbutable Cash to the Members quarterly. For the purpose of this Secten 4.1 in the case of a charge over distributions of Distneutable Cash pursuant to Section 2.2(c)(ii)(B), each of the Members' foregoing obligation under this Section 4.1 shall, but without prejudice to the determination of Distnbutable Cash, be deemed to have been properly fulfi!!ed where the Contnbutng Member has for its part fulfilled such obligation. Any distnbutions of such Distnbutable Cash shall be made. O where applicable, first to each Member of the BE inc. Member Group in an amount eoual to the amount of the special allocations desenbed in the seventh and last sentences of 1 Secton 6.5(a) and the first sentence in Section 6.5(e) and to each Member of the PECO Energy Member Group, where applicable, in an amount equal to the amount of the , special allocatons desenbed in the next to the last sentence of Secton 6.5(a) and first I sentence of Secton 6.5(d), in eacn case at such quarter date as the Member elects at its sole discretion. The remaining distnbutions of Distnbutable Cash shall be made to the Members in accordance with their respective Interests, except in the case of a charge l over distnbutions of Distnbutable Cash pursuant to Section 2.2(c)(ii)(B). Notwithstanding the foregoing or any other provision of this Agreement to the contrary, the Company, and the Members, Management Committee and Representatives on behalf of the Company, shall not be required to make any distnbution of Distnbutable Cash to any Member on account of such Member's interest in the Company if such distnbution would violate Section 18-607 of the Act or other applicable law To the extent that any distnbutions of Distnbutable Cash corresponding to special allocatons provided for in this Secton 4.1 cannot be fully made within a particular fiscal year, such amounts that cannot be distnbuted shall be distnbuted in the next succeeding fiscal year. 4.2 Liouidatino Distnbutions. Distnbutions to the Members of cash or property in connection with a dissolution of the Company shall be made in accorcance with the Capital Account balances of the Members, as provided in Section 8.3(d)(ii). 15 l 43 Other 0 s:nect: ens No Memocr snail os entitec :c recewo any I distnoution from the Comoany witnout ina constnt of the Managemcnt Committeo or as otnerwisa previo:;d in Section 4.1 or 8.3(d). ARTICLE 5 j g 'i ACCOUNTING AND RECORDS I 5.1 Fiscal Year. The fiscal year of the Company shall be the year ending December 31. 5.2 Method of Accountino. Unless otherwise provided herein, the Company l books of account snail be maintained in accordance with GAAP; provided that for purposes of making allocatons and distnbutions hereunder (including distnbutions upon dissolution of the Company in accordance with Capital Account balances, as required by Secton 8.3(d)(ii)), the relevant items shall be determined in accordance with federal income tax accountng pnnciples utilizing the accrual method of accountng, with adjustments required by Treasury Regulation secton 1.704-1(b) to properly maintain Capital Accounts. Each Memner acknowledges that the Capital Account balances of the Memoers for the purposes destnbed in the preceding sentence are not computed in accordance with GAAP and accordingly that any GAAP financial statements for the Company do not reflect their true Capital Account balances. 5.3 Books and Records: Inspection. I (a) Books of Account and Records. Proper and complete records and books of accounts of the Company business for tax and financial purposes, including all such transactons and other matters as are usually entered into records and books of account maintained by Persons engaged in businesses of like enaracter or as are [ required by law, shall be kept by the Company at the Company's pnneipal office and  ; (- place of business. The Management Committee may delegate to a third party or any l Member the duty to maintain and oversee the preparation and maintenance of such l records and books of account. Books and records maintained for financial purposes I shall be maintained in accordance with GAAP, and books and recorcs maintained for tax purposes shall be maintained in accordance with the Code and applicable Treasury Regulations. Inspection. All records and documents desenbed in Secton 5.3(a) (b) shall be open to inspection and copying by any of the Members or their Representatives at any reasonable time dunng business hours. Notwithstanding anything in the Act (including Secton 18 305(c) of the Act) or this Agreement to the contrary, the Members and the Representatives shall not have the nght to keep confidential from any other Member or Representative. in their capacities as such, any informaton of the Company. ~ l 5.4 Financial Statements. Within 90 days after the end of each fiscal year, and 30 days after the end of each calendar quarter, the Management Committee shall cause to be furnished to each Member financial statements with respect to such fiscal year or quarter of the Company, consisting of (i) a balance sheet showing the Compa financial position as of the end of such fiscal year or quarter, (ii) supporting profit and loss statements, (iii) a statement of cash flows for such year or quarter and (iv) Member's Capital Accounts, provided that pnor to such dates the Company shall provide to each ' Member on a timely basis such financialinformation as may be required to permit each Member Group to prepare its annual and quarterly financial reports. The annual financial j ' statements of the Company shall, unless the Management Committee or the Members 16 i 1 I cctermina otherwise. De auotted (which aucit shall be conductec in accorcance with ! 3AAP) anc cenified by an irectosndant firm of certified public acccuntants seiected by

ne Manage,ient Committee or the Memoers (which firm may ce the firm requiarly engaged b3 any one or more of the Members). Each Member snali receive a c0py of all l

matenal financial reports and notices celivered by the Company to any thirc carty i cursuant to any other agreement. The Company shall also procute and cistnoute

! monthly revenue, operating expense and capital expenditure reports and sucn other j 'inancial statements as the Management Committee reasonably cetermines.

i. 5.5 Taxation.

i I (a) Status of the Comoany. The Members acknowledge that this j I l Agreement creates a partnership for federal income tax purposes, and hereoy agree not to elect to be excluded from the application of Subchapter K of Chapter 1 of Subtitle A of ine Code or any similar state statute. i (b) Tax Elections and Reoortino. l (i) - Generally. The Company shall make the fol!owing elections l l and take the following positions under United States income tax laws and Treasury j Regulations and any similar state laws and regulations: (A) Adopt the year ending December 31 as the annual accounting period (unless otherwise required by the Code and Treasury Regutations); (B) Adopt the accrual method of accounting; and (C) Insofar as permissible, report the Company's tax attnbutes and results using pnnciples consistent with those assumed in connection with O. entenng into this Agreement. (ii) Code Section 754 Election. The Management Committee shall, upon the wntten request of any Member, cause the Company to file an election under Code section 754 and the Treasury Regulations thereunder to adjust the basis of the Company's assets under Code section 734(b) or 743(b) and a corresponding election unoer the applicable sections of state and locallaw. (c) , Company Tax Retums. The Tax Matters Partner will prepare or cause to be prepared the domestic and foreign tax retums and information retums for , the Company at no charge to the Company, except for all reasonable out of-pocket l expentes (including accounting fees, if any). Any Member may, at its own expense, engage a third party to review the tax retums and information retums prepared by the Tax Matters Partner pursuant to the preceding sentence. Any and all other tax retums shall be prepared in a manner directed by the Tax Matters Partner consistent with the terms of this Agreement. Each Member shall provide such information,if any, as may be reasonably requested by the Company for purposes of propanng such tax and information retums. The Company shall use its best efforts to (i) cause copies of all tax l retums to be submitted to each Member within 45 days after the presentation of the l financial statements in Section 5.4 and (ii) deliver to each Member within 90 days after l the end of each taxable year any additional information in the possession of the Company that the Members may require for the preparation of their own income tax retums, provided that prior to such dates the Company shall provide to each Member on 17 i e a time!y casts sucn tax information as may b2 reou:reo to term:t eacn Mer et 3r0u: to Orcoare its cuartarty and annual tex filings. (d) Tax Audits. PECO Energy snail be the " tax matters partner " as that term is defined in Code section 6231(a)(7) (the " Tax Matters Partner") witn all of the O ngnts, duties ano powers provided for in sections 6221 througn 6232. inclusive. of the Code. proviced that the Tax Matters Partner shall not pay or agree to pay any aucit assessment, or any amount in settlement or compromise of any litigation, in respect of income items of the Company expected to have a tax impact in excess of $250.000 on any Member in any one instance or senes of related instances. unless approved by the Management Committee. The Tax Matters Partner, as an authonzed representative of tne Company, shall direct the defense of any tax claims made by the intemal Revenue Service or any other taxing jurisdiction to the extent tnat such claims relate to adjustment of Company items at the Company level and, in connection therewith, shall retain and pay the fees and expenses of counsel and other advisors chosen by the Tax Matters Partner. The Tax Matters Partner shall deliver to each Member and the Management Committee a semi-annual report on the status of all tax audits and open tax years relating to the Company, and shall consult with and keep all Members and the Management Committee advised of all significant developments in such matters coming to the attention of the Tax Matters Partner. The Tax Matters Partner shall also be responsive to reasonable requests of each Member and the Management Committee. All reasonable expenses of the Tax Matters Partner and its Affiliates (including reasonable intemal time charges and reasonable disbursements) and other reasonable fees and expenses in connection with such defense shall be bome by the Company. Except as provided in Article 9, neither the Tax Matters Partner nor the Company shall be liable for any additional tax, interest or penalties payable by a Member or any costs of ' separate counsel chosen by such Member to represent the Member with respect to any aspect of such challenge. , p ARTICLE 6 V MANAGEMENT 6.1 Manaaement Committee. The property, business and affairs of the Company shall be managed by or under the direction of a Management Committee (the " Management Committee"). In addition to the powers and authonties by this Agreement expressly conferred upon it, the Management Committee may exercise all sucn powers of the Company and do all such lawful acts and things as are not by statute or by this Agreement directed or required to be exercised or done by the Members. Except as determined by the Management Committee pursuant to this Article 6 or otherwise pursuant to this Agreement, no Member or Represuntative shall have any nght or authonty to take any action on behalf of the Company with respect to third parties or to bind the Company. O w Ia) Numoer of Reoresentatives Tho Manag3 ment Commitec Snail consist of signt indiviouais (esen, a "Reprasantative"), witn the BE inc. Memccr Groue naving tne ngnt to appoint four Representatives and PECO Energy Memoer Group naving tne ngnt to appoint four Representatives. Unless the Chief Executive Officer of p the Company is otherwise a Representative of a Member Group, the Chief Executive Officer shall be a non-voting additional Representative on the Management Committee. The Representatives shall not be " managers" of the Company as such term is used in the Act. (b) Initial Reoresentatives. The initial Representatives of the Management Committee snail be appointed by the respective Member Groues enor to the first meeting of the Management Committee. Eacn Member Group snail notify the other of its appointed Representatives. (c) Vacancies. Except for the Chief Executive Officer (provided the Chief Executive Officeris not otherwise a Representative of a Member Group), eacn i Representative shall hold office until death, resignation or removal at the pleasure of the  ; Member Group which appointed such Representative, if a vacancy occurs on the i Management Committee, the Managing Mernber of the Member Group that appointed the vacating Representative shall appoint such Representative's successor. j (d) Chairman. The Chairman of the Management Committee shall be , appointed by the PECO Energy Member Group and may only be removed by the PECO Energy Member Group. l ] (e) Chief Executive Officer. The Chief Executive Officer of the i Company shall be elected by the Management Committee. The Chief Executive Officer l shall be responsible for the day-to-day operations of the Company, and shall sign, *  ! execute and acknowledge contracts and agreements relating thereto on behalf of the  ! Company and shall perform such duties as are from time to time assigned by the Management Committee, and may delegate such responsibilities to the president or a vice president of the Company. The Chief Executive Officer may only be removed by the Management Committee. The Chief Executive Officer shall employ and retain on behalf of the Company, subject to approval by the Management Committee, such Persons as may be necessary or appropnate for the conduct of the Company's business (subject to the supervision and control of the Management Committee), including employees and agents who may be designated as officers with titles including but not limited to " president,""vice president," " treasurer," " secretary," " general manager," " director" and " chief financial officer," as and to the extent authorized by the Management Committee. The designation of any Person as an officer or other agent of the Company shall not by itself create any contract nghts. 6.2 Meetina Reauirements. (a) Reaular Meetinos. The Management Cemmittee shall meet no less frequently than four times each calendar year in Philadelphia, Pennsylvania or such  ; other place agreed to by the Members on a date and at a time and place established by i the Members. ' .b) Soic:al Meetiros A sot tial mteting cf the Mar.agemer.t Committ a or ina Mzmotrs snril ba nsid at the recuest of any Memoer. The iocation of sucn mc; ting snail b3 in Philao;lchia. Ptnnsylvania or such otn:r ciaco agreeo to ey the Memoers A / (c) Teleononic Meetinos. Any meeting of the Management Committee or the Members may be held by conference telepnene call or tnrougn similar communications equipment by means of which all persons partcicating en the meeting can hear each other. Partcipation in a telephonic meeting held cursuant to this Section 6.2(c) shall constitute presence in person at sucn meeting. (d) Notices. Notices of regular meetings and special meetings of the . Management Committee or the Memoers may be given by any Rer"esentatve or Memoer, as the case may be, and shall state the date hour ano purpose of the meeting. All such nottes shall be accompanied by an agenda for the meetings, as well as the texts of all resolutions proposed to be adopted at such meetings. No item may be discussed if not on the agenda unless a quorum is present and the Representattves present waive notice of the additionalitem(s). Notice of a regular or special meeting shall be given by facsimile, confirmed by registered mail not less than 14 days (in the case of a regular meeting) or 72 hours8.333333e-4 days <br />0.02 hours <br />1.190476e-4 weeks <br />2.7396e-5 months <br /> (in the case of a special meeting) before the cate of the meeting to each Representative at the facsimile number and address provided by the Representative to the Company from time to time. Any Representative may waive as to such Representative only in wnting the requirements for notice before, at or after a meeting. (e) Quorum. At each meeting of the Management Committee or the Members, the presence in person or by telephone of at least two Representatves of each Member Group shall be necessary to consttute a quorum for the transaction of business. l3 V (f) Written Consents. Any action required or permitted to be taken at a meeting of the Management Committee or the Members may be taken without a meeting if the requisite Representatives of each Member Group consent tnereto in wnting. 6.3 Actions by Manacement Committee. (a) Secoe of Authonty. The Management Committee shall have full power and authonty, as delegated to it by the Members, to direct and control the business affairs of the Company except with respect to those matters reserved specifically to the Members, and subject to the nght of the Management Committee to  : delegate such power and authonty to Persons responsible for day-to-day operaton of the Company, provided, however, notwithstanding anything to the contrary in this Agreement, the Chief Executive Officer and the other Persons who are responsible for l the dr.y-to-day operation of the Company shall have the authonty to make the daily l operating decisions, within the approved expenditure limits, necessary or appropnate for I the safe and efficient operation of the Company's facilities and assets, including entenng i into agreements with third partes for such day-to-day operations, without the pnor approval of the Management Committee. l (b) Acoroval Recuirements. f (i) Consent or approval of the Management Committee shall mean the affirmative vote of a majonty of the Representatives authonzed to vote and q O 20 1 i l l 1 soting at a culy nald masting of the Managsmsnt Committse. Notwitnstanc:ng anything to tne contrary in this Agreement. the Chairman snalt have a casting vote to creak a tie on all Safety issues and sucn casting vote by the Chairman shall. subject to Section G.S. I constitute the final and definitive determination by the Management Committee and shall O- not otherwise be suoject to review. (ii) Except as otherwise provided in tnis Agreement. each

epresentative shall be entitled to one vote on all matters submitted to a vote of the

'Aanagement Committee: provided that if one or more Representatives are acsent or not l appointed because of a vacancy on the Management Committee or otherwise. then a l majonty of the other Representatives of such absent Representative's Memcer Group nresent at the meeting shall have the nght to cast the votes of sucn absent Representatives. (iii) The Company snali provide each Representative of a Member Group with (A) adequate notice (in light of the time frame in which approval is l sought) of the substance of any matter requinng the approval of the Management Committee in order to afford such Representative sufficient time to review such matter and the analysis thereof and (B) an opportunity to consult with the management of the Company regarding such matter and possible attematives pnor to the meeting at which approvalis sought; provided that any alleged noncompliance with the provisions of this paragraph (iii) shall not affect the validity of any consent er approval pursuant to paragraphs (i) and (ii) above. (c) Budoets. The Management Committee snall adopt an annual t budget for the operations of the Company. The proposed budget shall be presented to the Management Committee no later than 60 days pnor to the commencement of each i fiscal year of the Company. 6.4 Actions by Members. (a) Notwithstanding any other provision in this Agreement to the contrary, the following actions require the pnor wntten approval of all Memoors: (i) dissolution of the Company in accordance with Section 8.2(a); (ii) amendment of this Agreement; and (iii) approval of funding of all plant acqLisition or construction approved by the Management Committee. (b) The Members shall establish the roles and responsibilities of the Members, Management Committee and Chief Executive Officer to the extent necessary and not otherwise provided for in this Agreement and shall cause the Management Committee to adopt resolutions implementing such roles and responsibilities, including establishing authonzed expenditure limits for the Chief Executive Officer, the management of due diligence in the acquisition of generating facilities, the approval of unbudgeted capital expenditures, and the approval of the disposal of Company assets. 6.5 Disaareements Relatino to Safety issues. (a) If the BE inc. Member Group is of the opinion that the Chairman has exercised his casting vote to break a tie in circumstances that could not reasonably be deemed to constitute a Safety issue, then the BE inc. Member Group shall notify the PECO Energy Member Group and the Company of such opinion in wnting within seven days of the date of the Management Committee vote. Within 10 business days of such notice (or such longer period as they may agree), the Chairmen of British Energy and 21 oECO Energy snall make a 9000 faith 6ffort to amiccoly resolva th3 matter. f ne Chairm:n are unable to amicably resolve the matter. the BE inc. M:moer Grouc moy refer tne issue to a mutually agrc:a upon exp2rt (tha 'Exp;rt"). The BE inc Memetr Group shall notify the PECO Energy Member Group of suen referrai ano for agreement , / on tne appointment of the Expen within five business days of terminatier, of discussions \ - on tne matter between the Chairmen. The BE inc. Memoer Group shall also notify the Company of such referral. The Expert shall deliver a decision as to whetner or not, at the time of the vote, the exercise of the casting vote by the Chairman could reasonably te ceemed to constitute a Safety issue. In the event that the Expert decices that the exercise of the casting vote at the time could not reasonably be ceemed to constitute a Safety issue, an amount of Company expenses for the year shall be specially allocated directly and proportionally to each Member of the PECO Energy Group of tne 4 expenditure commitment made by the Management Committee as can be rexsonably allocated to the agenda item relating to the issus on which the Management Ccmmittee a voted. The Expert shall also, subject to (b) below, if the matter is included in the referral to the Expert, determine what the amount of the contnbution should be. Such payment by the PECO Energy Member shall be made not later than 30 days from the cate of the Expert's decision. If the Expert decides that the exercise of the casting vote at the time auld reasonably be deemed to constitute a Safety issue, then each Memoer of the BE Inc. Member Group shall be specially allocated its proportional share of an amount of Company expenses for the year equal to the costs of the Expert. If the Expert cecides that the exercise of the casting vote at the time could not reasonably be ceemed to constitute a Safety issue, then each Member of the PECO Energy Memoer Group shalt be specially allocated its proportional share of an amount of Company expenses for the year equal to the costs of the Expert. (b) With regard to technical matters conceming determination of a Safety issue, the Expert shall be a qualified engineer, wsh not less than ten years 7 expenence, from a recognized nuclear engineenng consulting firm witn particular (V expertise in NRC regulation. With regard to financialissues conceming the expenditure commitment allocated to the aforesaid agenda item, the Expert shall be a financial accountant from a recognized accounting firm with expertise in NRC regulation. Should the Parties fail to agree on the appointment of the Expert within seven days of the notice of referral by the BE inc. Member, the Expert shali be appointed by the Presicent of the Amencan institute of Nuclear Engineers. The Expert shall consider the evidence he or she deems necessary to rendenng a decision, including speaking to persons representing each Member, requesting affidavits and questioning in person those making affidavits. The Expert shall render a wntten decision with reasons therefor within 15 days of the Expert's appointr" ;nt. (c) The Expert's decision shall be final and binding on the Members and the Parties hereby acknowledge that the Expert is acting as such and not as an arbrtrator on matters of legal dispute pursuant to Section 6.10. , (d) Within one year from completion of a modification for which each Member of the PECO Energy Member Group has been allocated expenses pursuant to Section 6.S(a), to the extent that the PECO Energy Member Group demonstrates that such modification has enhanced the value of the plant that was the subject of the i expenditure, each Member of the BE inc. Member Group shall be specially allocated an amount of Company expenses for the year equal to such Member's proportional share of the amount by which the Fair Market Value of such plant exceeds the Fair Market Value of the plant if such expenditure had not been made. Fair Market Value shall be determined in accordance with the procedures of Section 8.S(b). As a result of the lack

of a representative market for transactions involving nuclear powered generating 22

.. ~ .- - - - . - ~ , -_. - - - ,_ _ - ._ - - . - - - - - - ._-. - - - - - - - _ - k f acilities the Mameers agreo that it would ba difficutt to measure the effect on Fair Market Value of the expenditure using the definition of Fair Market Value provce :n ints Agreement. The Memoers, therefore, agree that. for ourposes of this Seccon S Sfc). Fair Market Value shall ce oetermined using a discounted casn flow analysis. 4 (e) Within one year from completion of a modification for wnich eacn Memoer of the PECO Energy Member Group has been allocated expenses pursuant to Section 6.5fa), to tne extent that the BE inc. Memoer Group demonstrates that sucn mooification has reduced the value of the plant that was the subject of the excenciture,  ; eacn Memeer of the PECO Energy Member Group shall be specially allocated an amount of Company expenses fer the year equal to an amount equal to sucn Memoer's proportional share of the amount by which the Fair Market Value of such plant is less  ; than the Fair Market Value of thre plant if such expenditure had not been maoe. Fair  ! Market Value shall be determined in accordance with the procedures of Section 8 5(b). I l For the reasons provided in Secton 6.5(d), the Memoers agree that, for purposes of this  ! Section 6.5(e), Fair Market Value shall be determined using a discounted casn flow analysis. i (f) Notwithstanding any reference hereinabove to an expert, nothing l  ! herein shall prevent the Company from proceeding to implement the decition of the Management Committee on any purported Safety issue in accordance with tne terms of such decision. (g) To the extent that any allocation provided for in this Section 6.5 cannot be fully made within a particular fiscal year, such amounts that cannot be  ; allocated shall be allocated in the next succeeding fiscal year. 6.6 Confidentiality. Each Member shall, and shall cause each of its Affiliates,  ! l  ; and each of its and their respective partners, members, managers, shareholders, I directors, officers, employees and agents (collectively, " Agents") to, keep secret and retain in stnctest confidence, and not use for any purpose except as contemplated by [ this Agreement, any and all confidential information relating to the Company which is (i)

• not otherwise in the public domain, (ii) not otherwise in the nghtful possession of such '

Member (or Affiliate) from third parties having no obligaton of confidentiality to a Member ' i or the Company and (iii) not required to be disclosed by such Member, its Affiliates or I Agents pursuant to Federal, state or locallaw, and shall not disclose such information. l and shall cause its Agents not to disclose such information, to anyone except (x) such . Member's Affiliates or Agents who have a need to know such information in connection  ; ( with the matters contemplated by this Agreement, and (y) other Persons (such as lenders l l l to a Member) who have a bona fide business reason for obtaining such informacon in l connection with their dealings with such Member and who agree in wnting to keep in l confidence all confidential information in accordance with the terms of this Section 6.6 !  ! and such other terms as shall be acceptable to the Management Committee. BE inc. and PECO Energy each agree that should the Business not be commenced, or should , ) the Business be terminated, then in such event each such pany shall own and be free to use the initial Business Plan (in the form and as of the date such parties determine that the Business will not be commenced or as of the date the Business is terminated, as the case may be) and jointly developed related work, subject to the previously signed confidentiality agreements between the parties. The confidentiality obligations under this Secuon 6.6 shall survive the termination of this Agreement for a period of three years. l The foregoing provisions of this Section 6.6 were negotiated in good faith by the parties f hereto and the parties hereto agree that such provisions are reasonable and are not more restnctive than is necessary to protect the legttimate interests of the Members and j ! 23 ' tne Comoany, To the futisst extsnt parmitt2d by law. if a Memcer or any of :ts Affiliates or Agtnts Dreacnss or threat 2ns to commit a brsacn of this Secton 6 6. the otner Memoers and the Company snail have the nght to have this Section 6.6 spec:fically enforced by any court having Junsciction it being acknowieoged and agreed that money O damages will not provide an adequate remedy to such other Memoers or the Company. Nothing in this Secton 6.6 shall be construed to hmit the ngnt of any Member or the Company to collect money damages in the event of a breach of this Section 6.6, nor to hmit the nght of any Member to riport the financial condition anc results of operations of the Company to its Members, in sucn manner as may be approvec by the other Members (sucn approval not to be unreasonably withheld or celayed) or to regulatory authonties to the extent required by law or regulation. i 6.7 Ownershio and Use of Inventions and Trade Secrets. Should the Company invent, or improve ey development, any device, process or technique that is patentable or otherwise a trade secret relevant to the Business the Company shall own the nghts created thereby, including any patent or copynght. Each Member and its Affiliate shall have the nght to use any such inventon, process technique or improvement without cost or obligaton to the Company or the other Memoer. Should a l Member or its Affiliate solely invent or improve as aforesaid, such Member or Affiliate j shall solely own the nghts created thereby, including any patent or copynght. Such l Memeer or Affiliate may license the use thereof to the Company, if the Company so ' - desires, on terms mutually agreed upon by the Member or Affiliate and the Company. - Without limiting the generahty of the foregoing, should a Member or its Affiliate and the Company jointly so invent or irrprove as aforesaid, such Member or Affiliate and the I Company shall each nevertheless retain joint ownership to and the nght to use such l invention, process, technique or improvement without cost or obhgation to the other. On any dissolution of the Company or termination of this Agreement pursuant to Article 8, each of the Members shall procure the assignment to each of them of the ownership nghts vested in the Company immediately prior to such dissolution or termination. 6.8 Other Business: Duties: Etc. (a) The Members and each of their respective Affiliates may engage in or possess an interest in other business ventures, and may engage in any otner actvities, of every kind and desenpuon (whether or not compettive with the business of the Company or otherwise affecting the Company), indepencently or with others and shall owe no duty or liability to the Company, its Members or their Affiliates in connection therewith except as expressly set fortn in this Agreement. None of the Company or other Members shall have any rights in or to such independent ventures or the income or profits therefrom by virtue of this Agreement. Each Member, however, agrees that should it become aware of an opportunity to acquire or develop a nuclear-powered generaton plant or project in the United States (excluding Limenck Generating Station. Hope Creek Nuclear Generating Station, Salem Generating Staton and Peach Bottom Atomic Power Station), it shall notty the Company as soon as practeable and provide the Company the nght of first refusal to pursue and develop such opportunity. 24 - 4 , (b) To tha extent that. at law or in 6Quity, any Affiliate cf a Memost or any director, officer, stocKnolder. employee. agent or representative of a Memcer or sucn Affiliate would have dutes (including fiduciary dutes) and liabilit:es to the Ccmpany, or to ine Members different from or in addition to those provided in this Agreement. all nghts O of the other Memoers ansing out of sucn duties and liabilities are nereoy waived and no sucn Person shall be liaole to the Company or to any Member for its good faith rehance on the provisions of this Agreement. , (c) The provisions of this Agreement, to the extent that tney e,tpand or restnct the duties and liabilities of any such Person otherwise existng at law or iri equity.- , are agreed by the Memoers to replace such other duties and liabilities of sucn Person, and no Member shall have any duties to or liabilities to the Company or any Member (in respect of a Person's status as a Member) except as expressly set forth in tnis Agreement. The terms of the contractual relationship agreed to in this Agreement, and not other concepts at law or in equity, define the Members' obligatons to eacn other and the Company. (d) Notwithstanding any provision to the contrary in this Agreement, for ' i purposes of this Agreement to the fullest extent permitted by law, each Representative other than the Chief Executve Officer (provided the Chief Executive Officer is not otherwise a Representative of a Member Group) shall be deemed the agent of the Member Group which appointed such Person a Representative, and such Representative shall not be deemed an agent or a sub-agent of the Company or the other Members or Member Groups and shall have no duty (fidue:ary or otherwise) to the Company or the other Members or Member Groups. (e) None of the provisions of Section 6.8 shallin any way be construed to permit any Member to carry out fraudulent or illegal acts or to excuse such O Member from any liability in connection therewith, Member Provided Products and Services. i 6.9 (a) With regard to the development of the Initial Business Plan and start-up activities of the Company, each Member Group shall contnbute human resources equitably with no reimbursement of the salary, benefits expenses or out-of-pocket expenses associated with such contnbutions to the provider, provided, however, that the Members shall mutually agree on the point in time and the compensaton that the i Company shall pay for the salary and benefits expenses of those employees of PECO Energy or British Energy or their Affiliates. Extemal consultants / experts shall be I employed by the Company as appropnate, and issues concoming their compensation ' shall be determined by the Management Committee at such time. (b) With regard to the potential acquisition of a generating asset of the Company, each Member Group shall contnbute human resources equitably with no reimbursement of the salary, benefits expenses or out-of-pocket expenses associated with such contributions to the provider; provided, however, that the Members shall mutually agree on the point in time and the compensation that the Company shall pay for the sa!ary and benefits expenses of those employees of PECO Energy or Bntish Energy or their Affiliates. Extemal consultants / experts shall be employed by the Company as appropnate, and issues concoming their compensation shall be determined by the Management Committee at such time. O , ._. - - --- - - . ~. - . - . . . - . _ - _ - . - - - . - tc) in conoucting its ousiness. the Comoany may reouest Tat any Vemcer tcirectly or througn an Affiliata d:signated by a Msmoer) su ply any service or proouct or seek comp:;ttiv3 bids to supply such ssrvico or proouct. If the Com0any seeks competitive bids. it shall permit any Member to oid (on benalf of itself or any C Affiliate cesignated by it). The Company shall take into account. when evaluating potent:al providers, the goal of the Company to cooroinate technical spec:ficatons. functional capabilities, and other business interests of the Company. Eacn of the Memoers shall be afforded the opportunity to match the best bid received from any sucn third party. Nothing in this Section shall require the Company to purcnase orcoucts or services from a Member (or its Affiliates) on an exclusive basis to the extent that reasonacle business judgment dictates that such prooucts or services ce octained from a vanety of sources or to the extent that such purchase would put the Company at a compettive disadvantage. Any such agreement for the provision of service or product to the Company by a Member shall be approved by the Management Committee. 6.10 Discute Resolution. (a) It is the intent of the Members to resolve any disagreement that would ordinanly be subject to litigation between the parties, such as those relating to the interpretation or construchon of any provision of this Agreement, or alleged breach thereof (a " Dispute") amicably to the greatest extent practicable. (b) in the case of a Dispute which the Members' Representatives are otherwise unable to resolve, upon notce at any time from any party, the Chatrmen of the Memoers (the Chairman of British Energy in the case of BE inc.) shall make a good faith effort to resolve the Dispute within 10 business days thereafter (or such longer period of time as they may agree). For the purpose of this Section 6.10(b) only, a Dispute shall include a disagreement under Section 6.5 or Secton 6.11. (c) Subject to the foregoing, each Party hereby acknowledges that any Dispute shall, except as provided in Section 6.5 and 6.11, be settled exclusively by binding aroitration in accordance with the Commercial Arbitration Rules of the Amencan Arbitraton Association ("AAA"), to the fullest extent such Rules are permitted by, and to the extent not inconsistent with, applicable law (including, without limitation, the Atomic Energy Act and Delaware law) and the rules set forth below, wnich shall be centrolling to the extent they differ from such rules of the AAA. The arDitraton shall be in Wilmington, Delaware. The Dispute shall be heard by a single arbitrator mutually agreed upon and appointed by the Parties, or the AAA in the event that the Parties are unable ro agree on such appointment within [one) month of the filing of such Dispute with the AAA. Tlie arbitrator shall have experience in the subject matter involved in the Dispute. The arbitrator shall not have any matenal past or present family, business or other relationship with any party, Affiliate, director or officer thereof, or any " associate"(as defined in Rule 12b 2 of the Secunties Exchange Act of 1934, as amended) of any such party, Affiliate, director or officer. The decision rendered by the arestrator may be entered in any court having junsdiction thereof. 6.11 investments by OngMember. If the Members are unable to agree on making a particular investment relating to a Company asset or facility, and such investment is a matenal capital expenditure and is not a Safety issue, then, upon pnor approval of the Management Committee, one Member may make such investment, provided that the Management Committee agrees on the terms of such investment, including the form of and formula for compensating such Member for such investment, and indemnification of the Company for any damages ansing out of such investment. Any disagreement among the Representatives of the Management Committee relating to 26 the maxing of or terms of sucn investment snail be suoject to tha orovisions cf Seccen 610(b), but not Secton 6.10(c). O ARTICLE 7 O l TRANSFER OR ENCUMBRANCE OF INTEREST 7.1 Restnction on Transfer or Encumorance. No Interest may be assigneo. l sold. transferred or otherwise disposed of, whether voluntanly or involuntanly, (any sucn transaction being . referred to in this Article 7 as a " transfer"), or pledged, hypotnecatec or otherwise encumcered, whether voluntanly or involuntanly, in whole or in part excect in accorcance with the terms of this Article 7 or as otherwise specifically proviced in this l Agreement. but in all events in accordance with Article IV and subject to the receipt of all regulatory approvals and consents. 7.2 Transfer of Members interest to a Subsidiary. A Member may transfer all or any part of its interest to any Person that is a Whotly Owned Subsidiary of a Memoer or of a Person of which such Member is also a Wholly Owned Subsidiary (any Person to which a transfer is permitted under this Section 7.2 being referred to herein as a "Secten 7.2 Transferee"); provided that pnor to any such transfer, the transfemng Member snail deliver to the other Member a notice setting forth the identity of the transferee and stating that such transferee complies with the condition above, and shall provide such other information as the other Member may reasonably request in connection therewith. A merger of a Memeer into, or a consolidation with, a Wholly Owned Subsidiary of the same Member or of a Person of which such Member is also a Wholly Owned Subsidiary shall be govemed by this Section 7.2 Subject to approval in wnting by the non-transfemng Member (which approval shall not unreasonably be withheld or delayed), a (q/ Secton 7.2 Transferee shall be admitted as a Member at the time such Person executes this Agreement or a counterpart to this Agreement, which evidences such Person's agreement to be bound by the terms and conditions of this Agreement. The transfemng Member shall promptly deliver this Agreement or such counterpart as so executed to the other Members. The transfemng Member and the Section 7.2 Transferee shall also execute such other documents as the other Members snall reasonably request. A merger with or into or consolidation with or into, or sale, or other disposition of all or substantially all of the assets of PECO Energy, Entish Energy, or similar transaction (s) having the same effect shall not be a transfer of sucn Member's interest under Article 7 of this Agreement. 7.3 Other Transfers: Rioht of First Refusal. A Member Group may transfer ah (but not less than all) of its Members' interests to any Person other than a Section 7.2 Transferee, but only subject to and to the extent permitted by the terms of this Secton 7.3. (a) Offer and Rioht to Sell. Commencing 24 months after the Effectve i Date, a Member Group (the " Selling Group") shall have the nght to sell all (but not less than all) of its Members' interests (the " Offered interest") pursuant to an offer (the " Offer") by a bona fide third party (the " Offeror") in which the consideration to be paid is all casn. deferred or otherwise: provided that the Selling Group first gives the otner Member Group a nght of first refusal to purchase the Offered interest as set forth herein. t \ 27 l D) Notico Th3 Selkng Group snail givG Wrtt0" "Ot ce Of ag ;ffer 'the 'Cff0r Notice') to tre otnsr M2most Group, wnich notice sna;I 4contify tre Cfferor. encioso a comomta anc correct copy of tha Offsr and irrevocaciy effer to the otner Memcer Group the ngnt to purenasa tha Off2r:d Interzst at the sama ence ano on tna same terms and conottions as specified in the Offer. O V (c) S!ection to Purchase. Within 30 days following receipt of the Offer Notice. the non-selling Memeer Group shall have the nght to elect to purchase. at the same pnce and on tne same terms and conditions specified in the Cffer, the Cffered Interest. Such election shall be made by delivery of a wntten notice to the Selling G oup. (d) Emino: Assionment of Riohts. In the event tnat the Memcer G oue (the *Purcnasing Group') duly elects to purcnase the Offerea interest the closing (the " Closing") of sucn purenase snall take place on a cate agreed to ey the Selling Group ano the Purcnasing Group, but in no event later than 30 days after octaining the requireo regulatory approvals. If sucn governmental or regulatory approval has been denied or has not been obtained within 180 days of exercise by the Purchasing Group of its election to purchase in a:cordance with subsection (c) above, unless the Selling Group agrees to extend such time penod, the Purchasing Group shall have the nght to assign its nght to purchase hereunder to any third party, and the Closing shall then ce held at such time as may be mutually agreed but in no event later than 180 days from the date of such assignment. (e) Representations at Closino. At a Closing pursuant to this Section 7.3, the Selling Group shall represent and warrant in wnting to the Purenasing Group that (i) the Selling Group is the sole beneficial and record owner of the Offered interest and has good and marketable title thereto free and clear of all Liens (other than restnctions imposed pursuant to this Agreement and applicable Federal and state secunt:es laws) and (ii) the Selling Group has the full power and authenty to sell such Interest without conflict with the terms of any agreement, law, order or instrument binding upon it; and ( the Selling Group shall deliver such customary instruments of assignment with respect to such interest as reasonably requested by the Purchasing Group. (f) Sale to Third Party. (i) If the non-selling Member Group fails to exercise its nght to purchase all of the Offered Interest (or fails to consummate such purchase) within the applicable time penods specified above in this Section 7.3, the Selling Group may accept the Offer and sell the Offered interest to the Offeror; provided that such sale shall be at the same pnce and on the same terms and conditions as specified in the Offer Notice; and provided further tnat sucn sale shall have been approved pursuant to the requirements of Section 7.3(g). If the sale by the Selling Group to the Offeror is not consummated within 30 days after obtaining the required regulatory approvals, such nght to sell shall lapse and the Selling Group shall not thereafter transfer its interest except in accordance with the provisions of this Section 7.3. (ii) At the closing of any sale of an Interest to a third party pursuant to this Section 7.3, such third party shall execute this Agreement or a counterpart to this Agreement and shall be bound by the provisions of and assume the obligations of the Selling Group under this Agreement. The Selling Group shallnot be reheved of any of its obligations under this Agreement arising pnor to such sale, to the extent such obligations shall not be discharged by the third party, but the Selling Group shall be relieved of any obligatons under this Agreement ansing subsequent to such sale. The Selling Group and the tnird party shall execute such documents as the non-28 ! selling Memo r Groue snail reasonaoly reouest to evioence sucn assumot:cn ano

entinuing ooligrtions. Any sala to a tnird osrty pursurnt to tnts Ssction 7 3 may oe structureo as two or more transfers of part of tha Interest being soid. wnsen taken l

together effectuate a transfer of the entire interest. all of wnien snati be consummated p uitnin 15 months from the cate of closing of the first of sucn transfers. V (g) Substituted Memoers. Any transfer pursuant to or oesenbed in this Section 7.3 must be approved in wnting the non-selling Memeer twnich aporoval may be Mthheld in such Memoers sole discretion) pnor to any such transfer. and no sucn transferee shall become a Memoer without such approval. l 7.4 Tao-Alona Richt. In lieu of exercising its ngnts unoer Sect:en 7.3. a Member Group may, within 30 days following receipt of the Offer Notice, e!ect to i participate in such sale by including therein its Interests in the Company provided. however, that in the event the Offer Notice does not contain an offer to purcnase the interests of all the Member Groups, the total consideration set forth in the Cffer Notice shall be applied pro rata to the Interests of the Member Groups and each sucn Member l Group shall transfer to such Offeror such pro rata share. Each sucn sale, if any, shall be made on the same terms and conditions as the sale desenbed in the Offer Notice (except that if other assets in addition to Interests are being transferred by the Selling Group orits Affiliates in such transaction or group of related transactions the consideration payable to the other Member Group shall be the Fair Market Value of its interests to be transferred) and the Selling Group may not consummate its sale unless such sale, if any, by the other Member Group is consummated simultaneously in accordance with the terms hereof. 7.5 Other Transfers. A transfer of a majonty of the capital stock or other equity interests in the Person that owns interests or in a Person that directly or indirectly g owns a majonty of the capital stock or other equity interests in the Person that owns the Ir,:arests shall be deemed to be a transfer of the Interests, subject to the provisions of (") Sections 7.1 and 7.3 hereof. The Person making the transfer shall be deemed to be the Selling Group as referred to in Section 7.3(a) and the capital stock or equity interests proposed to be transferred shall be deemed to be the Offered Interest; however, the provisions of Section 7.3(f)(ii) and Section 7.3(g) shall not be applicable. 7.6 Invalid Transfers Void. Any purponed transfer of an Interest or any part thereof not in compliance with the foregoing provisions of this Article 7 shall be void and of no force or effect and the transfernng Member shall be liable to the other Member and the Company for allliabilities, obligations, damages, losses, costs and expenses ] (including but not limited to reasonable attomeys' fees and court costs) ansing out of such noncomplying transfer. 7.7 Other Encumbrances on a Member's interest. Notwithstanding anything to the contrary in this Agreement or the Act, a Member may not pledge, hypothecate or otherwise encumber all or any portion of its interest, without the consent of the other Member. A pledge, hypothecation or other encumbrance of all of a Members interest shall not cause such Member to cease to be a member of the Company. l l 29 l l l ARTICLE B DISSOLUTION AND TERMINATION t 31 No Termination. Except as expressly previoed in ints Agreement or as cinerwise proviced by law, no Memoer shall have the nght, and eacn Memcer nereoy  ; O agrees not, to cissolve, terminate or tiquioate the Company, or to resign er w:tneraw as a Memcer. I 82 Events of Dissolution. The Comoany snalt be dissolved uoon tre first to i occur of the following: l (a) the agreement ist wnting of all of the Memoers to cissolve the  : Comoany, but only on the effective da:e of dissolution specified by such Memcers in l sucn agreement; I  ! (b) the death, insanity, retirement, expulsion, Bankruptcy or i ! dissolution of a Member, or the occurrence of any other event which terminates the continued memoership of a Member as a matter of law, unless within 30 days after notification to the other Member of the occurrence of any such event, the remaining i l Memoer agrees in wnting to continue the business of the Company, in which event, such l remaining Member shall. at its option, purenase for cash in accordance witn Section 8.5  ; . the interest of the non-remaining Member no later than 60 days after such remaining Member agrees in wnting to continue the business of the Company; the election of the Members within 90 days after the sale. 5 (c) l ! excnange, condemnation or involuntary transfer of all or substantially all of the assets of l < the Company; provided that this Section 8.2(c) shall not apply if part of the consideration i ! received by the Company in connection with any such event includes deferred payment l obligations and the Members determine that it is in the best interests of the Members to O keep the Company in existence for the sole purpose of collecting amounts payable under such obligations and distnbuting such amounts in accordance with the terms of this Agreement, upon the satisfaction of which obligations the Company shall dissolve; or l (d) any other event requinng the dissolution of the Company pursuant to this Agreement or the Act. B.3 Procedures Upon Dissolution. 1 .(a) General. In the event the Company dissolves it shall commence l winding up pursuant to the appropnate provisions of the Act and the procedures set forth ! in this Section 8.3. Notwithstanding the dissolution.of the Company, prior to the filing of i the certificate of cancellation of the certificate of formation of the Company, the business J of the Company and the affairs of the Members, as such, shall continue to be govemed l i by this Agreement. . (b) Control of Windino Up. The winding up of the Company shall be conducted under the direction of the Management Committee or such other Person as may be designated by a court of competent junsdiction (herein sometimes referred to as  ! the " Liquidator"); provided that any Member whose breach of this Agreement shall have caused the dissolution of the Company (and the Representatives appointed by such Member) shall not participate in the control of the winding up of the Company; and , i i

O 1

crovicec furtnef. tnat if the atssolution is caus:a oy entry of a decreo of juc.c:al . cissoiuton. :ne wincing up shall ba camco out in accor ance witn sucn cecree (c) Vanner of Windinc Uo. The Company snalt engage in no further O Dusiness following ctssolution other tnan that necessary for the or0erty wincing up of I (O bustness and distnbution of assets. The Company s maintenance of offices snail not ce deemed a continuation of business for purposes of this Section 8 3. Upon cissolution of the Ccmpany, the Liquidator snall, suoject to Section 8.3(a), sell the Comeany or all the Company propeny in such manner and on such terms as it deems fit, consistent witn its fidue:ary responsibility and having due regard to the activity and concition of the reievant market and general financial and economic conditions. Each Memoer snall share Profits. Losses anc ether items after the dissolution of the Company and dunng tne cenoc of eno:ng up in the same manner as desenbed in Article 3. (d) Apolication of Assets. Upon cissolution of the Company, the Company's assets (which shall, after the sale or sales referenced in Secton 8.3(c), consist of the proceeds thereof) shall be applied as follows: (i) Creditors. To creditors, including Members and Representatives who are creditors, to the extent otherwise permitted by law, in satisf action of liabilities of the Company (whether by payment or the reasonaole provision for the payment thereof). Any reserves set up by the Liquidator may oe paid over oy the Liquidator to an escrow agent or trustee, to 67 held in escrow or trust for the purpose of paying any such liabilities or obligations, ana, at the exp: ration of such penod as the Liquidator may ceem advisable, such reserves shall be distnbuted to the Memoers or their assigns in the manner set forth in Section 8.3(d)(ii). (ii) Members. Second, to the Members, ratably based on the excess of the positive balance in each Members Capital Account over any amount due (q/ by sucn Member on the Deferred Amount after all allocations of Profits or Losses and other items pursuant to Article 3. 8.4 Termination. Upon completion of the winding up of the Company and the distnbution of all Company assets, the Company's affairs shall terminate and the Memoers shall cause to be executed and filed any and all documents required by the Act to effect the termination of the Company, 8.5 Purchase of Non-Remainino Members Interest. In the event the remaining Member agrees in wnting to continue the business of the Company after the occurrence of an event that terminated tne continued membership of a Member under Section 8.2(b). then the remaining Member shall, at its option, purchase the Interest of the non-remaining Member at the lesser of (x) the Book Value or (y) the Fair Market Value determined pursuant to Section 8.5(b), as of the date of the termination event under Secton 8.2(b). (b) For purposes of Section 8.5, the Fair Market Value of Interests to be transferred shall be determined as set forth below. (i) Within ten days after the delivery of notice by a Member to elect to continue the business under Section 8.5(a), the Members shall attempt in good l f aith to agree on the Fair Market Value, and if the parties fail within ten days thereafter to l ' agree thereon, they shall promptly subject such matter to the procedure desenbed below l 31 ne horaisai P* :ccLro ano To cet:rminaten Of su0n 2::cra sec r :ra V.a m et / aa,,e snail oe conc:usivo and Dinoing upon the partias. (ii) Eacn party snali d2 liver a notica to tre otner acoointng as its acoraiser (" Appraiser") an indecenoent accounting or investment banking firm of nationally recognized stanoing, within 15 days after either party invokes tne Acpraisal O' Proceoure. If within 30 days after appointment of the two Appra:sers tney are unaole to agree upon the amount in cuestion. an independent accounting cr investment banking firm of nat onally recognized stanoing snall be cnosen to serve as a third Appraiser within 10 days thereafter by the mutual consent of such first two Appraisers or, if sucn first two Appraisers fail to agree upon the appointment of a tnird Appraiser (or if either party fails to appoint an Appraiser) within tne time allotted pursuant to this caragraon, sucn appointmer't shall be made by the Amencan Arbitration Associaton, or any organization successor thereto, from a panel of arbitrators having expenence in the appraisal of the type of property then the subject of appraisal. The cecision of the third Appraiser so appointed and chosen snall be given within 30 days after the selection of sucn third Appraiser. If three Appraisers shall be appointed and the determination of one Appraiser is disparate from the middle determination by more than twice the amount by wnich the other determination is disparate from the middle determination, then the determinaton of such Appraiser shall be excluded, the remaining two determinations chall be averaged and such average shall be binding and conclusive on the Memoers; otherwise the average of all three determinations shall be binding and conclusive. The costs of conducting any Appraisal Procedure shall be bome as follows: (w) the costs of the Appraiser designated by the continuing Member shall be bome by the continuing Member; (x) the costs of the Appraiser designated by the other Member shall be by it; (y) , other costs separately incurred shall be bome separately by the Member which incurred l such costs, and (z) the costs of the third Appraiser,if any, shall be bome equally among , the Members. l No Third Party Beneficiaries. The provisions of this Article 8 are intended l O 8.6  ! solely to benefit the Members and, to the fullest extent permitted by applicable law, shall not be construed as confemng any benefit upon any creditor of the Company (and no I i such creditor shall be a third-paity beneficiary of this Agreement), and no Member shall have any duty or obligation to any creditor of the Company to make any capital contnbutions to the Company and no Representative, Member or Management Committee shall have any duty or obligation to any creditor of the Company to issue any call for capital pursuant to this Article 8. ARECLE 9 . l l LIABILITY AND INDEMNIFICATION 9.1 No Personal Liability. (a) Except as otherwise provided by the Act, the debts, obligations and liabilities of the Company, whether ansing in contract, tort or otnerwise, shall be solely the debts, obligatons and liabilities of the Company, and no Indemnified Person (as defined in paragraph (b) below) shall be obligated personally for any such debt, obligation or liability of the Company solely by reason of being an indemnified Person. l (b) Except as otherwise provided in this Agreement, no Representative or Member or its Affiliates, or any of their respective shareholders, directors, officers, employees, agents, members, managers or partners, or any officer of the Company or other Persons designated by the Management Committee to act on 32 ochalf of the Company teacn. an lndemnifico Person'). snail co laom esocns:c.e er accountaola in armages or otnerwiss to ths Comoany or to any ciner incemntfied Person for any act or omission performed or omitted by an incemnif:eo Person sin its capacity as sucn), wnetner for mtstake of judgment or negligence or otner accon or iQ .naction, unless sucn action or omission constitutes willful misconcuct. gross negligence l V or bad faith. Each indemnified Person may consult with counsel. accountants and otner l experts in respect of the affairs of the Company and such Indemnified Person shall be fully protected and justified in any action or inaction which is taken in goca f aith in accordance with the aavice or opinion of sucn counsel, accountants or otner experts. crovided that they shall have oeen selected with reasonable care. , 9.2 Indemnification ov Company. Except as otherwise crovided in this i Agreement. to the maximum extent permitted by applicable law. the Company snall l protect, incemnify, defend and hold harmless each Indemnified Person for any acts or omissions performed or omitted by an indemnified Person (in its capacity as such) unless such action or omission constituted willful misconduct, gross negligence or oad faith. The indemnification authonzed under this Section 9.2 shallinclude payment on demand of reasonable attomeys' fees and other expenses incurred in connection with. or in settlement of, any legal proceedings (whether between the Indemnified Person and a third party or between the Indem ' 9d Person and another Indemnified Person or the Company), and the removal of any Liens affecting any property of the incemnified Person. Such indemnification nghts shall be in addition to any and all nghts. remedies and recourse to which any indemnified Person shall be entitled, whether or net pursuant to the provisions of this Agreement, at law or in equity. The indemnities provided for in this Section 9.2 shall be recoverable only from the assets of the Company, and there ' shall be no recourse to any Member or other Person for the payment of sucn indemnities. 9.3 Notice and Defense of Claims. (a) Notice of Claim. If any action, claim or proceeding ("C! aim") shall be brought or asserted against any Indemnified Person in respect of which indemnity may be sought under Section 9.2 from the Company, the Indemnified Person shall give prompt wntten notice of such Claim to the Company which may assume the defense thereof, including the employment of counsel reasonably satisfactory to the indemnified Person and the payment of all of such counsel's fees and expenses; provided that any delay or failure to so notify the Company shall relieve the Company of its ocligations hereunder only to the extent, if at all, that it is prejudiced by reason of such delay or f ailure. Any such notice shall (i) desenbe in reasonable detail the facts and circumstances with respect to the Claim being asserted and (ii) refer to Section 9.2. (b) Defense by the Comoany. In the event that the Company  : undertakes the defense of the Claim, the Company will keep the indemnified Person advised as to all matenal developments in connection with any Claim, including, but not , limited to, promptly fumishing to the Indemnified Person copies of all matenal documents  ! filed or served in connection therewith. The indemnified Person shall have the nght to j employ one separate counsel per jurisdiction in any of the foregoing Claims and to  ; participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of the Indemnified Person unless both the Indemnified Person and the Company are named as parties and representation by the same counselis inappropnate due to actual diffenng interests between them; provided that under no circumstances shall the Company be liable for the fees and expenses of more than one counsel per - junsdiction in any of the foregoing Claims for the indemnified Person together with its (v 33 I I l MMa Os anc their resp 3ctive officers. Oir0cters, emotoyees. agents success:rs ano assigns. taken coll 3ctivsly and not ssparat2ly. The Comptny may, witnout tne

ncemnifi@d Person's consent. ssttia or compromise any Claim or consent to me entry of any juogment if sucn ssttismsnt, compromis3 or judgmsnt involvss only the cayment of money camages by such Company or provides for unconditional release by tne claimant or tne ciaintiff of the indemnified Person from allliability in respect of sucn Cl aim.

(c) Defense ov the Indemnified Person. In the event that the Comcany, within 20 business days after receiving wntten notice of any such C: aim. fails to assume the defense thereof, the Indemnified Person shall have the right to uncertake the cefense, compromise or settlement of sucn Claim for the account of the Ccmpany. 9.4 Directors' and Officers'!nsurance. The Company shall provice approonate directors and officers' insurance to the extent such insurance is available to the Ccmpany on commercially reasonable terms. 9.5 Limitation of Liability. Notwithstanding anything in this Agreement to the contrary, no Member shall be directly liable to the other Member or the Company for special. consequential or indirect damages, including loss of profits or revenue, loss of use of power system, interest charges or cost of capital, cost of purchased or replacement power, fuel cost differential, whether based on contract, warranty, tort liability (including negligence), indemnity, stnct liability or otherwise; provided that nothing in this Section 9.5 shall restnct the liability to pay damages awarded to third parties. ARTICLE 10 REGULATORY APPROVALS 10.1 General. Each of the Members and the Company shall promptly make the necessary filings and obtain the appropnate approvait from applicable Govemmental Authonties and cooperate fully with each other in order for the Company to conduct its O. Business as contemplated by this Agreement and the initial Business Plan. 10.2 Re-examination Uoon Chances to the Atomic Enerav Act. This Agreement is prepared to assure compliance with the Atomic Energy Act of 1954, as amended (42 U.S.C 52133), inctuding section 103 thereof. To the extent that suen provtsion, such Act, or the application thereof matenally changes, tne parties willin good faith re-examine and re-negotiate the applicable provisions of this Agreement to take advantage of such changes on terms that are mutually acceptable to the parties. ARTICLE 11 MISCELLANEOUS PROVISIONS 11.1 Disclaimer of Acency. This Agreement does not create any relationship beyond the scope set forth herein, and except as otherwise expressly provided herein, this Agreement shall not constitute any Member the legal representative or agent of any other. nor (except as otherwise expressly provided herein) shall any Member have the nght or authonty to assume, create or incur any liability or obligation, express or implied, against, in the name of or on behalf of any other Member or the Company. 11.2 Amendment. Any amendment to this Agreement must be in wnting and approved by all the Members. O u E '13 Not:ces. All notic0s and ein:r communications neraunoar sna.i :;e sancty given or maca if ;n wntir.g wh n 0;tiv2 red p;rsonaily (by coun:r ssrvice or otnerwissi. wnen celivered by telecopy (with proof of transmission), or wh n actually receiveo wnen matied by first-class certified or registered United States mail, postage-preca:c anc retum receipt requested. in each case to the address or facsimile numcer of the party to m receive such notice or other communication set fortn below, or at such otner accress or facsimile number as any party hereto may from time to time advise the other parties pursuant to this Section: If to a Memoer or Representative of the PECO Energy Member Group. to sucn Memoer or Representative: clo PECO Energy Company 2301 Market Street P.O. Box 8699 Philadelphia, PA 13101-8699 Attn: Dickinsen M. Smith President PECO Nuclear Facsimile: (610)640-6611 with a copy to: do PECO Energy Company 2301 Market Street P.O. Box 8699 ~ Philadelphia, PA ~ 19101 Attn: James W. Durham Esq. p ' Senior Vice President and General Counsel ( Facsimile: (215) 568-3389 If to a Member or Representative of the BE Inc. Member Group, to such Member or Representative: do British Energy Inc. do The Corporation Trust Company 1209 Orange Street Wilmington, DE 19801 Facsimile: (302)655-5049 with a copy to: do British Energy plc 10 Lochside Place Edinburgh EH12 9DF Attn: Dr. Jean MacDonald Head of Legal Services Facsimile: 0131 527 2277 35 a - _ _ - . - , . . . -- ._ - _ ~ - - -. - - -. . - - - - .f to tne Comcany'  : clo AmerGen Enargy Company. LLC 955 Chesterorook Blvd. 62A-3 Wayne, PA 19087 with a copy to: clo PECO Energy Company 2301 Market Street S23-1 Philadelphia PA 19101 Attn: Edward J. Cullen, Jr. Facsimile: (215) 568-3389 ) Alllegal process with regard hereto shall be validly served when served in accordance l j ! with applicable law. l l 11.4 Entire Aareement. This Agreement, together with the Exhibits and Schedules hereto, embodies the entire agreement and understanding between the parties relating to the subject matter here of and superseos all pnor agreements and unoerstandings relating to such subject matter, whether oral or wntten. 11.5 Countercarts. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original, but which together shall l constitute one instrument. 11.6 Govemino Law. This Agreement and all disputes hereunder shall be govemed by and construed in accordance with the intemallaws of the State of Delaware I O without regard to pnnciples of conflicts of laws. 11.7 . Successors and Assions: No Third Party Beneficiaries. This Agreement shall be binding upon and shallinure to the benefit of and be enforceable by the parties l and their respective successors and assigns, provided that neither the rights nor the l

obligations of any party may be assigned or delegated without the prior wntten consent of the other parties, except to the extent otherwise expressly provided in this Agreement.

This Agreement is entered into solely for the benefit of the parties hereto and (to the i extent provided in Article 9) the Indemnified Persons and no Person other than those referred to in the preceding sentence and the Indemnified Persons shall be entitled to l ! exercise any right or enforce any obligation hereunder, 11.8 Severability. If any term of this Agreement or the application thereof to any party or any circumstance shall bw held invalid or unenforceable to any extent, the remainder of this Agreement and the application of such term to the other parties or circumstances shall not be affected thereby and shall be enforced to the greatest extent permitted by applicable law, so long as the economic and legal substance of the Agreement and the transactions contemplated hereby is not affected in any manner adverse to any party, 11.9 Survival of Riohts and Duties. Termination of this Agreement for any cause shall not release any Member from any liability which at the time of termination I has already accrued to any other Member or which thereafter may accrue in respect of any act or omission pnor to such termination, nor shall any such termination hereof affect 36 i .n any way the survival of any ngnt. duty or ooligation of any Mamter wrien s exoressiy stated elsswngre in this Agre2 ment to survive ttrmination noreof 11.10 No Rioht to Partition No Member shall have tne ngnt to onng ari action O for parttien against the Comoany. Each of '.he Memoers hereoy irrevocaoly waives any and all nghts wnich it may have to maintain an action to partition Comoany property or to compel any sate or transfer thereof. 11.11 Soecific Performance. The Members acknowieoge that money damages may not be an adequate remedy for violations of this Agreement and that any Memoer may, in its sole discretion through aroitration if applicable or in a court of comoetent junsoiction, apply for specific performance or injunctive or other relief as sucn arostrator or court may deem just and proper in order to enforce this Agreement or to prevent violation hereof and, to the extent permitted by applicable law. each Mem er waives any objection to the imposition of such relief. 11.12 Waiver. The failure of any party hereto to exercise any ngnt, power or remedy provided under this Agreement or otherwise available in respect hereof at law or in equity, or to insist upon compliance by any other party hereto with its obligations hereunder, and any custom or practice of the parties at vanance with the terms hereof, shall not constitute a waiver by such party of its right to exeretse any such other ncht, power or remedy or to demand such compliance. O 37 IN WITNESS WHEREOF. no can:es nerote nave executec :n:s Agreemert as of the ca:e first aoove wntt:n. PECO ENERGY COMPANY By: , Name: Corbin A. McNeill. Jr."

Title:

Chairman President and Chief Executive Officer BRITISk ERG PLC ,

By:

Name:" John Robb -

Title:

Chairman  !

BRITISH ENERGY INC.

B'y:

Name: Robin Jeffrey 5 }

i

Title:

President J LO  :

l f

I I

l l

' ~ ~ ^ ~

12 } 03/9 8 ' THt* 12i@G FAI 1"210" 641" 4 494 ' "fI@@o MGAL 2 2@l" "" ~ ~ ~ ~ ~ ~ @ 062-AMENDMENT OF LIMITED LIABILITY COMPANY AGREEMENT OF AMERGEN ENERGY COMPANY, LLC This AMENDMENT, dated as of March 13,1998, by and among PECO Energy Company, a Pennsylvania corporation ("PECO Energy), British Energy pic, a Scottish corporation (" British Energy"), and British Energy Inc., a Delaware corporation ("BE inc.") and a wholly owned subsidiary of British Energy.

RECITALS WHEREAS, PECO Energy, British Energy and BE inc. (collectively the " Parties" and each individually a

• Party") are parties to that certain Limited Liability Company Agreement of AmerGen Energy Company, LLC dated as of August 18,1997 (the " LLC Agreement") pursuant to which AmerGen Energy Company, LLC (the " LLC") was organized; and WHEREAS, the LLC Agreement provides that the Management Committee of the LLC shall consist of eight individuals (each, a " Representative"), with the BE inc. Member Group having the rightto appoint four Reprecentatives and the PECO Energy Member Group having the right to appoint four Representatives; and WHEREAS, the Parties wish to amend the LLC Agreement to expand the Management Committee of the LLC to ten Representatives; NOW, THEREFORE,in consideration of the mutual covenants, conditions and provisions hereafter set forth, the parties hereto agree as follows:

1. Section 6.1(a) of the LLC Agreement is amended and restated as follows*

Elumber of Representatives. The Management Committee shall consist of ten incfividuals (each, a " Representative), with the BE inc. Member Group having tre right to appoint five Representatives' and PECO Energy Member Group having the right to appoint five Representatives. Unless the Chief Executive Officer of the Company is otherwise a Representative of a Member Group, the Chief Executive Officer shall be a non-voting additional Representative on the Management Committee. The Representatives shall not be " managers" of the Company as such term is used in the Act.

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U@@0 MGAL 2fFC 18/03/08 MlR 18:99 FAE R 889 061 66T6 - - ~ 2 003 l

2. Capitalized terms used but not otherwise defined herein shall have the

( ) meanings assigned to them in the LLC Agreement.

3. Except to the extent modified hereby, the LLC Agreement shall remain in full force and effect.

4 This Amendment shall be binding upon, and shall inure to the benefit of, the -

Parties and their respective successors and assigns.

5. 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.

6. This Amendment sha!! be interpreted in accordance with the laws of the State of Delaware (without regard to the conflict of law principles) with all rights and remedies being governed by such laws.

IN WITNESS WHEREOF, the panies hereto have executed this Agreement as of the date first above written.

PdCO ENERGY COMPANY By: -

Name: 65nson M. Smith Tit;e: President, PECO Nuclear O)

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and Chief Nuclear Officer BRITISH ENERGY PLC By: l MM- 9 Name: Robin Jeffrey

Title:

Deputy Chairman BRITISH ENERGY INC.

By: I J-Name: Robin Jeffrey V Title. President } ,

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c) osc es 2S5e 23:es 1 as ea1 am m e.c2

. . _ . _ _ _ . . . _- _ . . _ - . . - . m . . _ . - _ _ . . . _ . _ - - _ _ . _ _ _ _ _ _ _ . _ . - . . . . . . . . _ _ _ _ . _ _

12/03/98 THt' 12:55 FAI_ 1 215_841 4,4_I4 .__, PECO LEGAL 22FL @ 004 I

AMEyDMENT NO. 2 TO I.

LIMITED LIABILITY COMPANY AGREEMENT OF I

AMERGEN ENERGY COMPANY, LLC This AMENDMENT, dated as of September 23,1998, by and among PECO Energy l Company, a Pennsylvania corporation ("PECO Energy"), British Energy plc, a Scottish l

' corporation ( British Energy"), and British Energy Inc., a Delaware corporation ("BE In is a wholly owned subsidiary of British Energy.

RECtTALS WHEREAS, PECO Energy British Energy and BE inc. (cottectively the " Parties" and each individually a " Party") are parties to that certain Limited Liability Company Agreement o I

AmerGen Energy Company, LLC dated as of August 18,1997, as amended (the LLC Agreement') pursuant to which AmerGen Energy Company, LLC (the " LLC *) was org and ~

WHEREAS, the LLC Agreement provides that the Management Committee of the LLC shall consist of ten individuals (each, a ' Representative"), with the BE Inc. Member Group having the right to appoint five Representatives and the PECO Energy Member Gro the right to appoint five Representatives; and WHEREAS, the Parties wish to further amend the LLC Agreement to reduce the Management Committee of the LLC to six Representatives; plus the Chief Executive O a non-voting additional Representative, unless the Chief Executive Officer is otherwise a Representative of a Member Group; NOW, THEREFORE, in consideration of the mutual covenants, conditions and provisions hereafter set forth, the parties hereto agree as follows:

1.

Section 6.1(a) of the LLC Agreementis amended and restated as follows:

Number of Reoresentatives. The Management Committee shall consist of six individuals (each, a " Representative"), with the BE inc. Member Group having the right to appoint three Representatives and the PECO Energy Member Group having the right to appoint three Representatives. Unless the Chief Executive Officer of the Company is otherwise a Representative of a Member Group, th's Chief Executive Officer shall be a non-voting additional l Representative on the Management Committee. The Representatives shall not be " managers" of the Company as such term is used in the Act.

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12/03/98_ THC 22:56 FAI 1 215 841 4474 FECO LEGAL 22FL 2 00s i

2. Capitalized terms used but not otherwise defined herein shall have the meanings assigned to them in the LLC Agreement.

3. Except to the extent modified hereby, the LLC Agreement shall remain in full force and effect.

4. This Amendment shall be bint rg upon, and shallinure to the benefit of, the Parties and their respective successors and assigns.

S.

This Amendment may be executed in counterparts, all of which together sha!I constitute one agreement binding on all parties hereto, notwithstanding that all such parties are not signatories to the original or same counterpart.

6. This Amendment shall be interpreted in accordance with the laws of the State of Delaware (without regard to the conflict of law principles) with all rights and remecies being govemed by such laws.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written.

PECO E G MPANY By: /dC / l '

Namsf Mi Egan m

Title:

Seni ice President, Finance Ctfief Financial Officer l

a  !

BRITISH ENERGY PLC By: I Md Name: Robin Jeffrey C )

Title:

Deputy Chairman BRITISH ENERGY INC.

By: bO ( l --

Name: Robin Jeffrey I'

Title:

President

}

O  ::.GE.c5 DEC 03 1999 13:cs 1 215 041 4474

APPENDIX A EXHIBIT 2 l '

l 1995,1996 & 1997 ANNUAL REPORTS FOR PECO ENERGY COMPANY AND 1996 PROSPECTUS AND 1996/97 & 1997/98 ANNUAL REPORTS FOR BRITISH ENERGY PLC '

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l APPENDIX A Q EXHIBIT 3 l l December 3,1998 .

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SUBJECT:

FOREIGN OWNERSHIP ISSUES RELATING TO THE TRANSFER OF THE TMI-l LICENSE FROM GPU TO l AMERGEN IN LIGHT OF BRITISH ENERGY'S PARTICIPATION IN A MERGEN l

INTRODUCTIOE:

l This memorandum reviews Sections 103d,104d and 184 of the Atomic Energy Act of 1954, as l amended ("the Act"), and established Commission precedent interpreting these sections to l assess foreign ownership issues raised by the proposed transfer of NRC Operating License l No. DPR-50, Docket No. 50-289, for the Three Mile Island Nuclear Station, Unit 1 (TMI-1) from the current licensees, all of whom are subsidiaries of GPU, Inc. (GPU), to AmerGen Energy Company, LLC (AmerGen). l The Commission has permitted foreign participation in U.S. reactor projects, including ownership ofinterests of up to 50%, where the license applicants demonstrated that the foreign  :

entities did not hold a majority interest in the project and that the licensed activities would be conducted under the direction and control of U.S. citizens. Typically, this has been l [V]

accomplished through licensee commitments or license conditions limiting the amount of i f foreign participation in the licensed activities. Transfer of an existing NRC reactor license l should therefore be permitted under circumstances where

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(a) the proposed transferee is a U.S. company or partnership; (b) the foreign entity does not hold more than a 50% ownership interest in the transferee; (c) the foreign entity does not dominate or control the board of directors, or

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I other equivalent executive or management committee of the transferee; (d) the chief executive officer (CEO) and chief nuclear officer (CNO) (if

! someone other than the CEO) of the transferee are U.S. citizens, charged l with the responsibility and exclusive authority of ensuring that the l business and activities under the license are at all times conducted in a manner consistent with the protection of the common defense and security of the United States; A-Ex.3-1

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1 (e) all directors, officers, managers, supervisors and employees havmg Q

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custody or control of special nuclear material, having access to the i restricted and vital areas, and/or having access to Restricted Data or classified National Security Information will have the necessary security clearances and access permits; and (f) the foreign entity is from a country such as the United Kingdom that is  ;

an ally of the Unit:J States, has strong nuclear non-proliferation l credentials, has close technical and economic ties to the United States, and otherwise has an important foreign policy relationship with the United States.

Based upon a review of the applicable precedent, the proposed transfer of the TMI-l license l from GPU to AmerGen should be permitted. l BACKGROUND:

On July 17,1998, AmerGen and GPU, the parent company of the various GPU companies licensed to own and operate TMI-1, entered into a Letter ofIntent to negotiate a Definitive Agreement for the acquisition of TMI-l by AmerGen. A definitive Asset Purchase Agreement l among the parties was executed as of October 15,1998. The closing of the transaction is to occur as soon as feasible in 1999, after all regulatory approvals are obtained.

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AmerGen is a limited liability company formed to acquire and operate nuclear power plants in I the United States. AmerGen's principal offices are located in Wayne, Pennsylvania.

AmerGen is organized under the laws of the State of Delaware pursuant to an Agreement among PECO Energy Company (PECO Energy), a Pennsylvania corporation, British Energy plc (British Energy), a Scottish corporation, and British Energy Inc. (BE Inc.), a Delaware corporation that is a wholly owned subsidiary of British Energy. Both PECO Energy and British Energy have more than twenty years of nuclear operating experience. PECO Energy is a member of the Institute of Nuclear Power Operations (INPO) and is the licensed operator of four nuclear reactors at the Limerick and Peach Bottom nuclear generating stations. It also owns 100% of the Limerick units,42.49% of the Peach Bottom units, and 42.59% of the two Salem nuclear units. British Energy is the owner and operator of fifteen nuclear reactors at eight nuclear operating sites in the United Kingdom, and it participates in the World Association of Nuclear Operators (WANO). British Energy generates approximately 21% of the electricity consumed in Great Britain.

TMI-l is a commercial nuclear reactor licensed under Section 104b of the Act. Thus, i AmerGen and GPU are requesting NRC's prior written consent to the transfer of this license pursuant to Section 184 of the Act and 10 CFR Q 50.80. In connection with its review and consent, NRC will need to review British Energy's interest in AmerGen, because Section 104d of the Act prohibits the NRC from issuing a Section 104 reactor license to any corporation or other entity "if the Commission knows or has reason to believe it is owned, controlled, or A-Ex.3-2 l

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dominated by an alien, a foreign corporation, or a foreign government." The Commission is (3 also prohibited from issuing a license to any person or entity if, in the opinion of the V Commission, it would be " inimical to the common defense and security" to do so.

AmerGen is governed by a Limited Liability Company Agreement dated as of August 18,1997, as amended (LLC Agreement). (Copies of the AmerGen LLC Agreement, as amended, and Certificate of Formation are provided in Appendix A, Exhibit 1.) There are two members of AmerGen, each of which has a fifty percent ownership interest in AmerGen. The two members are PECO Energy, a Pennsylvania corporation, and BE Inc., a Delaware corporation. British Energy is a party to the LLC Agreement, but is not a Member of AmerGen. The property, business, and affairs of AmerGen are directed and controlled by a Management Committee pursuant to Article 6.3 of the LLC Agreement. Under Article 6.l(a),

PECO Energy, through the PECO Energy Member Group, appoints and may remove half of the Representatives of the Management Committee, and BE Inc., through the BE Inc. Member Group, also has the power to appoint or remove half of the Representatives. # Pursuant to Article 6.l(d), PECO Energy appoints the Chairman of the Management Committee, and the Chairman can only be removed by PECO Energy.

Michael J. Egan, a citizen of the United States and Chief Financial Officer of PECO Energy, is the Chairman of the Management Committee. Dickinson M. Smith, a citizen of the United States and the former Senior Vice President and CNO of PECO Energy, is the CEO of AmerGen. Dr. Robin Jeffrey, FEng, a citizen of the United Kingdom and Deputy Chairman of British Energy, is the senior British Energy member of the Management Committee and the g current President of AmerGen. Gerald R. Rainey, PECO Energy's CNO, will also serve as W AmerGen's CNO for TMI-l and will report directly to Mr. Smith, AmerGen's CEO.

l Significantly, under Article 6.3(b)(i) of the LLC Agreement, the Chairman has a casting vote to break a tie on the Management Committee regarding "all Safety issues," assuring that PECO l Energy exercises control and domination over the NRC license for TMI-1. " Safety issue" is l defined in Article 1.7 of the LLC Agreement to include:

(i) implementation or compliance with any Generic Letter, Bulletin, Order, Confirmatory Order or similar requirement issued by the NRC; 4

1/ At this time, BE Inc. is the only member of the BE Inc. Member Group, and PECO Energy is the only member of the PECO Energy Member Group. Pursuant to the terms of Article 7 of the LLC Agreement, BE Inc. and PECO Energy may transfer all or part of their interests in AmerGen to their respective subsidiaries or affiliates, which would become admitted as members and part of their respective Member Group. In all cases, the PECO Energy Member Group will consist of U.S. corporate entities within the PECO Energy corporate family and all of the PECO Energy representatives on the Management Committee will be U.S. citizens.

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(ii) prevention or mitigation of a nuclear event or incident or the p unauthorized release of radioactive material; d (iii) placement of the plant in a rafe condition following any nuclear event or incident; (iv) compliance with the Atomic Energy Act, the Energy Reorganization Act, or any NRC mie; (v) compliance with a specific operating license and its technical specifications; (vi) compliance with a specific Updated Final Safety Analysis Report, or other licensing basis document.

This definition broadly includes all issues within the jurisdiction of the NRC and clearly includes all issues involving common defense and security as well as public health and safety.

See, e.g., Section 104d of the Act; 10 CFR 50.40(c) (issuance of a license may not "be inimical to the common defense and security or to the health and safety of the public").

The CEO is responsible for the day-to-day operations of AmerGen. He is elected by the Management Committee and can only be removed by a majority of the Management Committee. The CNO is also a U.S. citizen, who will report directly to the CEO. All directors, officers, managers, supervisors and employees having custody or control of special nuclear material, having access to the restricted and vital areas, and/or having access to Restricted Data or classified National Security Information will have the necessary security clearances and access permits.

O b As contemplated by the Letter ofIntent, the current site personnel at TMI-l (approximately l 700 employees) will be transferred to AmerGen from GPU Nuclear, Inc. (GPUN), the GPU l subsidiary licensed to operate TMI-1. These personnel will be augmented by qualified '

AmerGen employees and/or contractors. # Thus, the vast majority of the current site personnel responsible for the operation and maintenance of TMI-l will continue to perform similar functions for AmerGen. To the extent certain support functions are currently provided by GPUN's corporate headquarters staff personnel, such support functions will be assumed by AmerGen and performed by AmerGen employees or contractors,i.e., PECO Energy, GPUN, British Energy, or other qualified contractors. Notably, AmerGen will also have the right to offer to employ selected GPUN off-site personnel now located at GPUN's Parsippany, New I

2/ AmerGen anticipates that PECO Nuclear, a division of PECO Energy with substantial and recognized technical expertise, will provide on-site and/or corporate support functions under contract with AmerGen. AmerGen also intends to take advantage of the technical expertise of British Energy, which may also provide contract services to AmerGen. l A-Ex.3-4 i

l Jersey headquarters. There will be no degradation of any corporate support function and its integration with operations and maintenance. 2' (J3 Although British Energy is a foreign entity, substantial weight should be given to the fact that British Energy is a corporate citizen of the United Kingdom, and, as such, its interest in AmerGen (indirectly through the 50% interest ofits U.S. subsidiary, BE Inc.) does not pose any national defense or security risk. The non-proliferation credentials of the United Kingdom cannot be seriously questioned, nor can its important foreign policy relationship with the United States. For example, the Department of Energy concluded in a 1987 Analysis that was also adopted by the Department of State, as follows:

The United Kingdom is a party to the Treaty on the Non-Proliferation of Nuclear Weapons (NPT), and is a longstanding ally of the United States, a member of NATO, and otherwise has an important foreign policy relationship with the United States. The Govemment of the United Kingdom is stable, militarily secure, supports the International Atomic Energy Agency (IAEA) safeguards, and adheres to the Nuclear Supplier's guidelines.

Proposed Agreement Between the United States andJapan Concerning Peaceful Uses of Nuclear Energv, H.R. Doc. No. 100-128, at 398 (1987).

More recently, the Secretary of Energy reiterated a similar conclusion with respect to the countries which are members of the European Atomic Energy Community (EURATOM),

including the United Kingdom, in connection with her statutory finding that the advance

_) consent arrangement in the agreement for cooperation with EURATOM is not " inimical to the common defense and security of the United States." O' Leary, H.R., Determination and Judgment Under Section 131 ofthe Atomic Energy Act Regarding Advance Consent Arrangement in the Agreementfor Cooperation in the Peaceful Uses ofNuclear Energy Between the European Atomic Energy Community and the United States ofAmerica (Sept. 8, 1995). The Secretary concluded: -

The determination and judgment (that the advance consent arrangement will not be inimical to the common defense and security] is also supported by the strong nonproliferation credentials of the European Atomic Energy Community and its member states, their adherence to the Treaty on the Non-Proliferation of Nuclear Weapons, their lack ofincentives to acquire nuclear explosive devices, by the close technical and economic ties between member states, and by the 3/ At this time, AmerGen does not anticipate that there will be any unreviewed safety questions, reduction in effectiveness of the emergency and security plans, or reduction in quality assurance commitments in connection with the license transfer. Appropriate NRC approval will be sought if any changes subject to NRC approval are necessary or desirable.

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! intimate and important relationships the United States has with the European Atomic Energy Community and each ofits member states.

l British Energy is subject to the laws of the United Kingdom and the requirements of EURATOM. As such, the indirect participation in AmerGen by British Energy through its U.S. subsidiary does not pose a risk to the national defense and security of the United States, consistent with the purpose and requirements of Section 104d of the Act.

l I DISCUSSION:

Under Section 184 of the Act, no NRC license can be transferred "either voluntarily or involuntarily, directly or indirectly, through transfer of control of any license" to another party l without the review and written consent of the NRC. 42 U.S.C. Q 2234. Thus, AmerGen i

requires NRC's prior written consent to its proposed acquisition of TMI-l and the proposed transfer of NRC Operating License No. DPR-50 for TMI-l from GPU to AmerGen.

In connection with AmerGen's request for such consent, NRC will need to be satisfied that AmerGen is not " owned, controlled or dominated by an alien, a foreign corporation or a foreign government" and that the transfer is not " inimical to the conunon defense and security" of the United States. 42 U.S.C.A. 2134(d). Section 104d of the Act # provides:

No license may be issued to any corporation or other entity if the Commission knows or has reason to believe it is owned, controlled, or dominated by an alien,

{

s a foreign corporation, or a foreign government. In any event, no license may be issued to any person within the United States if, in the opinion of the Commission, the issuance of a license to such person would be inimical to the common defense and security or to the health and safety of the public.

NRC's implementing regulations in 10 CFR { 50.38 are consistent with this provision.

The prohibition against foreign ownership, control or domination of an NRC reactor licensee does not preclude a foreign corporation, or one ofits subsidiaries, from participation in a company that is an NRC licensee pursuant to Section 103 or 104 of the Act. For example, a foreign entity may own an interest in an NRC licensee which, in tum, actually owns and operates a reactor, and may also have contractual rights to participate in certain affairs of the l NRC licensee. This question was first addressed in a 1966 Atomic Energy Commission (AEC) l decision construing the foreign ownership, control, or domination provision of the Act.

General Electric Company (GE) and Southwest Atomic Energy Associates (SAEA) (Southwest Experimental Fast Oxide Reactor (SEFOR)),3 AEC 99 (1966).

4/ Section 103d of the Act contains a virtually identical provision. 42 U.S.C.A.

2133(d).

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In SEFOR, an Atomic Safety and Licensing Board had initially granted a conditional I O

V construction permit to GE and SAEA for the SEFOR test reactor. 3 AEC 40,41 (1965). The l

Licensing Board later suspended this construction permit on the grounds that a contract  ;

between SAEA and Gesellschaft fur Kernforschung (GFK), a non-profit association formed under the laws of the Federal Republic of Germany, violated the prohibition against foreign ownership, control, or domination contained in Section 104d of the Act. 3 AEC 96 (1966).

The contract between SAEA and GFK provided that GFK would contribute 50% of the construction costs of the SEFOR reactor, participate in project review and technical policy conunittees, designate scientists and engineers to participate in the design and construction of SEFOR subject to the approval and direction of GE, and be consulted on matters of policy and questions affecting costs. On review, the Commission reversed the Licensing Board and reinstated the construction permit. SEFOR,3 AEC 99,100 (1966).

In construing Section 104d, the Commission reviewed the legislative histog of the Act and found that "while sparse, [the legislative histoy] does establish that the criteria ' owned, controlled, or dominated' were substituted for a provision in the original bill which would have prohibited the issuance oflicenses to any corporation in which more than 5% of the voting stock was owned by alien." Id. at 101. The Conunission noted that this substitution "was probably responsive to the criticism of several witnesses at the hearings" that large corporations would have difficulty knowing the real nationality ofits stockholders and that "the denial of a license be prescribed when actual control or domination was in alien hands."

Id. (citing Legislative History ofthe Atomic Energy Act of1954, pp.1698,1861,1961-62, 2098, and 2239). It is significant that when Congress removed the 5% limitation in response to e

, criticism that it was too restrictive, Congress did not impose any specific higher limitation, but rather left it to the Commission to decide what level ofownership or other form of foreign participation would constitute actual control or domination by an alien. #

In SEFOR, the Commission held that "the words ' owned, controlled or dominated' refer to relationships where the will of one narty is subjugated to the will af another, and that the Congressional intent was to prohibit such relationships where an alien has the power to direct the actions of the licensee." 3 AEC at 101 (emphasis added). Under this bright line test, the l British Energy interest in AmerGen complies with the requirements of Section 104d, as i intended by Congress, because the power to direct actions with respect to safety and security l issues, including any NRC orders or regulations, is clearly reserved to PECO Energy. The BE Inc. Member Group can only control 50% of the Representatives of the Management Committee, which is insufficient to direct the actions of AmerGen, and the Chairman of the Management Committee, who can only be appointed or removed by PECO Energy and will always be a U.S. citizen, retains the specific power to cast the deciding vote on all Safety 4

i 5/ Similar provisions in other regulatory statutes, such as the Federal Communications Act, contain a specific limitation on the maximum ownership interest in a U.S. licensee that can be held by foreign national (e.g.,20-25 percent). Legislative History, at 1968.

5 No similar such limitation was adopted in Sections 103d and 104d.

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1 l Issues, including issues involving common defense and security, public health and safety, and

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,s compliance with NRC requirements with respect to such matters.

l The Commission's SEFOR decision emphasized that "[i]n context with the other provisions of i

Section 104d, the [ alien control] limitatio 1 should be given an orientation toward safeguarding the national defense and security." 3 AEC at 101. In this respect, the Commission was not concemed with GFK's contractual rights to designate scientists and engineers to participate in the design and construction of SEFOR, but rather focused on the fact that GFK had "no right or power to restrict or inhibit in any way compliance by [the licensees] with the security requirements of the Commission and its regulatory controls." Id. at 102. The Commission l concluded that "[t]he ability to restrict or inhibit compliance with the security and other regulations of the AEC, and the capacity to control the use of nuclear fuel and to dispose of special nuclear material generated in the reactor, would be of great at significance."Id. at 101.

Notably, through its control over the Chairman and half the Representatives of the Management Committee, PECO Energy retains control with respect to all security-related matters. Moreover, all directors, officers, managers, upervisors and employees having custody or control of special nuclear material, having access to the restricted and vital areas, and/or having access to Restricted Data or classified National Security Information will have the necessary security clearances and access permits.

In Commonwealth Edison Company (Zion Station, Units 1 and 2),4 AEC 231 (1969), the AEC affirmed the SEFOR decision's statement that the alien control issue should be "given an orientation toward safeguarding the national defense and security," 3 AEC at 101. The e Commission observed that "it has been our licensing practice to deal with the matter of alien l( control within the context of the required finding that issuance of a construction permit will not be inimical to the common defense and security." 4 AEC at 233. As noted above, findings of the Secretaries of Energy and State have consistently recognized that the United Kingdom not only has strong nuclear non-proliferation credentials, but also has an important foreign policy relationship and close technical and economic ties to the United States. Thus, even a substantial interest by a U.K. company in a U.S. reactor licensed under Section 104d should not raise any defense or security concems. This is particularly true when considered in light of PECO Energy's ongoing control over security and regulatory matters pursuant to the terms of the LLC Agreement.

i in a 1973 case involving a level of fore %n ownership interest that is identical to the level present here, the Commission consenued to the transfer of Section 104 licenses # to a new entity which was 50% owned by foreign interests. The Commission authorized the Gulf Oil Corporation (Gulf) to transfer various nuclear facilities to a newly formed partnership, the General Atomic Company, that was 50% owned by Gulf and 50% owned by Scallop Nuclear, Inc., a Delaware corporation, whose shares were owned via several intermediate fi/ The licenses transferred included three TRIGA research reactors and the Bamwell spent fuel reprocessing plant then under construction.

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corporations by Royal Dutch Petroleum, a Netherlands company, and Shell Transport and ~

Trading, a British Company. (See Letter from Atomic Energy Commission to General Atomic f]

U Company, re: Approval of License Transfer (December 14,1973).) In approving these transfers, AEC imposed the following conditions to assure that there would not be foreign control over the operations and activities of the partnership:

(1) the president and any officers of the partnership having direct responsibility for the control, and any employees having direct custody of, special nuclear material must be U.S. citizens; (2) a separate department of General Atomic must be responsible for special nuclear material, and the head of the department must report directly to the president; (3) the president shall be charged with the responsibility and exclusive authority of ensuring that the business and activities of the partnership are at all times conducted in a manner consistent with the protection of the common defense l and security of the United States; I (4) the foregoing conditions apply to the partnership and any entities in which the l partnership shall have voting control; and l (5) General Atomic will not change any of the foregoing conditions without q approval of the Director of Regulation of the AEC or of the person holding any V equivalent successor position with the Commission or its successor.

See " Legal Questions of Foreign Control and Domination Raised by Proposed Transfer of ,

Facility Operating License No. R-81 from Union Carbide Subsidiary 'B', Inc. to Cintichem, '

Inc.," pages 7-8 (Attachment to letter dated September 22,1983, from N. J. Palladino to A. Simpson). The day-to-day operations of AmerGen are controlled by its CEO, and the nuclear organization reports directly from the CNO to the CEO. These U.S. Citizens (the CEO and CNO) will be charged with the responsibility and exclusive authority for assuring that the business and activities of AmerGen with respect to the TMI-l license are at all times conducted in a manner consistent with the protection of the common defense and security of the United States. Thus, the conditions imposed in the General Atomic case are consistent with the commitments AmerGen will make in connection with its request for NRC consent to the transfer of the TMI-1 license, even though in AmerGen's case its President is a citizen of the U.K.

In 1983, in response to a congressional inquiry, the NRC's Office of the Executive Legal Director (OELD) conducted an analysis of the statutory prohibitions on foreign ownership and control and the AEC/NRC case law in this area. " Legal Questions of Foreign Control and Domination Raised by Proposed Transfer of Facility Operating License No. R-81 from Union Carbide Subsidiary 'B', Inc. to Cintichem, Inc.," pages 7-8 (Attachment to letter dated O

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September 22,1983, from N. J. Palladino to A. Simpson). This analysis was forwarded to O Crngress by the NRC Chairman with a cover letter discussing the proposed license transfer that had prompted the inquiry. It involved the proposed transfer of a license issued under .

Section 104b of the Act for an isotope-producing research reactor from a subsidiary of Union Carbide to Cintichem, Inc., a Delaware comoration whose ultimate parent was F. Hoffman-LaRoche and Co., Ltd., a Swiss Corporation. The Commission barred the transfer because it had reason to believe that the proposed transferee was 100% owned, controlled or dominated by an alien or a foreign corporation. Having decided the matter on this ground, the Commission did not consider whether foreign ownership, control or domination of the licensee would be inimical to the common defense or security. Subsequently, special legislation was enacted to allow the transfer to proceed, and NRC ultimately approved the transfer under conditions similar to those imposed in General Atomic. 2' After the special legislation was passed with respect to Cintichem, NRC addressed the "not inimical to common defense and security" requirements of Section 104d under the unique circumstances presented there, where Congress had authorized 100% foreign ownership, and the accompanying foreign control and domination over this particular licensee. Thus, NRC imposed additional conditions: (1) all of the directors of Cintichem had to be U.S. citizens l unless otherwise approved by the NRC; (2) any actions by Switzerland or changes in Swiss law which would affect ownership or control of Cintichem had to be reported immediately to the NRC; and (3) only individuals with security clearances would be permitted to have access to Restricted Data or classified National Security Information.

The Cintichem and General Atomic cases make clear that: (a) Sections 103d and 104d of the O. Act do not preclude foreign participation in U.S. nuclear reactor facilities, including foreign ownership of up to 50% of a reactor licensee, provided that appropriate license conditions are imposed to ensure that foreign participants do not control or dominate the licensee with respect to matters affecting the public health and safety or common defense and security; and (b) license conditions imposed to satisfy the Act's prohibitions on foreign ownership, control and domination will generally satisfy the related NRC finding that the transfer to the new licensee is not inimical to the common defense and security.

CONCLIJSIONS:

l 2/ Congress added a rider to the NRC's 1984 Authorization Bill permitting the NRC to transfer this specific license to an entity owned or controlled by a foreign corporation if: (a) the NRC could find that the transfer would not be inimical to the common defense and security, and (b) the license included such conditions as the NRC deemed necessary to ensure that the foreign corporation could not direct the actions of the

licensee in ways that would be inimical to the common defense and security. This ,

i provision was enacted into law. P.L. 98-55, y 109 (1984).

A-Ex.3-10 i

l As discussed above, the proposed acquisition of TMI-1 by AmerGen and transfer of the TMI-l

_T

[d license from GPU to AmerGen is consistent with the statutory requirements relating to foreign ownership, based upon the following facts:

(a) AmerGen is a U.S. company; j

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(b) British Energy, through its U.S. subsidiary, will not hold more l

than a 50% ownership interest in AmerGen or appoint more than -

half of the Representatives of AmerGen's Management l Committee; I (c) British Energy will not control or dominate the AmerGen Management l Committee, but rather PECO Energy will exercise control and '

domination over all security and regulatory matters through its power to appoint and remove the Chairman, who has the deciding vote on all safety issues, and half the Representatives of the Management i Committee, who will be U.S. citizens; j 1

(d) the CEO and CNO for TMI-l will be U.S. citizens, charged with the l responsibility and exclusive authority of ensuring that the business and activities of AmerGen with respect to the TMI-l license are at all times conducted in a manner consistent with the protection of the conunon defense and security of the United States; O

b (e) all directors, officers, and employees having custody or control of special nuclear material, having access to the restricted and vital areas, and/or having access to Restricted Data or classified National Security Information will have the necessary security clearances and access  !

permits; and l (f) British Energy participates in WANO and is a corporate citizen of the United Kingdom which is an ally of the United States, has strong ,

nuclear non-proliferation credentials, has close technical and economic l ties to the United States, and otherwise has an important foreign policy l relationship with the United States. i l

o A-Ex.3.I 1

APPENDIX A EXHIBIT 4 l

ADDITIONAL INFORMATION REGARDING SPECIFIC REGUI ATORY PI_ANS. PROGRAMS & PROCEDURES A. GENERAL DESIGN CRITERION 17 In compliance with General Design Criterion (GDC) 17, GPU Energy currently provides off-site power to TMI-l over transmission facilities owned and operated by GPU Energy. Functionally, GPU Energy's interconnection with TMI-l will not change as a result i of the proposed license transfer. GPU Energy has entered into an interconnection agreement with AmerGen pursuant to which GPU Energy will continue to provide the TMI-l site with interconnection services. A form of this agreement is provided as Exhibit E to the Asset i

1 Purchase Agreement. This interconnection agreement will enable AmerGen to have access to the PJM Interconnection, LLC (PJM), and AmerGen will enter into a separate transmission and power services agreement with a yet to be named provider. Discussions regarding such an agreement have been initiated with potential providers, and an agreement will be concluded prior to the license transfer. l GDC 17 specifically requires that there be an assured source of off-site power to the plant. Pursuant to this requirement, the interconnection agreement and transmission and power services agreement will provide adequate assurance that: (1) the TMI-l site will be provided with a continued source of off-site power; and (2) the arrangements for controlling operation, maintenance, repair, and other activities with respect to the TMI-I switching station, the l

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A-Ex.4-1

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transmission lines and the switchyard will continue to provide a reliable source of off-site power.

The obligations of GPU Energy under the interconnection agreement, and those of the transmission and power services provider under its agreement with AmerGen, will assure that GDC 17 criteria for TMI-1 will continue to be met. Moreover, both GPU Energy and PECO Energy are members of PJM. They are also members of a PJM " Nuclear Generation Owners / Operators (NGO) User Group" that has been formed by NRC license holders within the PJM control area. This group provides a forum for communications between PJM nuclear plant licensees nnd PJM on issues that arise from deregulation that are viewed as potentially impacting off-site power reliability.

Under the existing conditions at the TMI site, cenain transmission and interconnection facilities are shared by both TMI-1 and TMI-2. These facilities are currently managed, operated, and maintained by GPU Energy. Following the transfer, AmerGen's contractual arrangement with GPU Energy will assure that GPU Energy will provide the same interconnection services to AmerGen as it currently provides to GPUN with respect to TMI-1, and GPU Energy also will continue to provide the interconnection services it currently provides to TMI-2. Thus, GPU Energy's role with respect to the shared facilities will not i

materially change, and AmerGen will assume a role that is in all material respects the same as l l

GPUN's current role as the operating licensee for TMI-1.

B. EMERGENCY PLANNING Upon consummation of the transfer, AmerGen will assume authority and responsibility  !

for functions necessary to fulfill the emergency planning requirements specified in 10 CFR A Ex.4-2 I

l 50.47(b) and Part 50, Appendix E. Any changes made to the existing TMI-l emergency plan developed and implemented by the current licensees Wil be made in accordance with 10 CFR

{ 50.54(q). GPUN and AmerGen anticipate that no changes will be made that will result in a decrease in the effectiveness of the plans, and that the plans will continue to meet the standards of 10 CFR @ 50.47(b) and the requirements of Appendix E of Part 50. Any specific emergency plan changes will be submitted to the N~RC within 30 days after the changes are made, pursuant to 10 CFR { 50.54(q) and Appendix E,Section V. If GPUN or AmerGen identify any proposed changes that would decrease the effectiveness of the approved emergency plans, i

application to the Commission will be made and such proposed changes will not be l

implemented until approved by the Commission. Determinations as to whether any proposed change (s) would result in a decrease in effectiveness will be made in accordance with GPUN's e currently approved plans, programs and procedures.

(

AmerGen anticipates that no substantive changes will be made to the existing on-site emergency organization, but that cenain corporate support and/or corporate oversight functions may be changed, transferred on-site, or transferred to an AmerGen corporate support organization. This organization will provide support functions to TMI-1, which may be provided through contractual arrangements with PECO Energy, GPUN, and/or British Energy.

Persons assigned to perform these functions will meet the same qualifications requirements as the existing responsible GPUN corporate support personnel. Transition plans will be established to ensure that the support desenbed in the existing emergency plan will be maintained throughout any transition period associated with the transfer.

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' ' A-Ex.4-3 l

, The current off-site emergency facilities and equipment, including the Emergency

( \

Operations Facility (EOF), the Training Center (Joint Information Center), Simulator Building (manned for EP suppon), and radiation monitoring equipment, will be transferred to AmerC:n.

Ownership of off-site emergency sirens will also be transferred to AmerGen, and any existing easemems for the siren locations will be assigned to AmerGen. Additional easements will be provided for those sirens on Met-Ed properties.

Existing agreements for support from organizations and agencies not affiliated with the current licensees will be assigned to AmerGen. GPUN and AmerGen plan to notify the parties to such agreements in advance of the transfer of the TMI-l license to AmerGen and advise those parties of AmerGen's responsibility for management and operation of TMI-1. In sum, the proposed license transfer will not impact compliance with the emergency planning requirements.

l I

n G '\ C. EXCLUSION AREA Upon the transfer of the license to AmerGen, AmerGen will have authority to determine and control all activities within the TMI-l Exclusion Area for TMI-1, as defined in Section 5.1 of Appendix A," Technical Specifications" to the TMI-l License, to the extent required by 10 CFR Part 100. The current licensees have the authority to determine and  ;

control all activities in the Exclusion Area, including exclusion of personnel and property from the area, and they will transfer such authority to AmerGen.

Under the Asset Purchase Agreement, GPU Energy will transfer most of the property within the Exclusion Area to AmerGen, but AmerGen is not acquiring certain assets and property owned by GPU Energy, such as TMI-2 and cenain switchyard and transmission

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I facilities, which are located within the Exclusion Area. However, prior to the transfer of the TMI-l license, AmerGen and GPU Energy will enter into an Exclusion Area Agreement under which GPU Energy will provide AmerGen with authority, within those parts of the Exclusion Area for TMI-1 owned and controlled by the GPU companies, to determine and control all

• 1 activities in the Exclusion Area, including exclusion of personnel and property from the area, l 4

to the extent necessary to comply with applicable NRC requirements. (A copy of the form of this Agreement is appended as Exhibit K to the Asset Purchase Agreement.) To the extent permitted by NRC requirements, AmerGen will, of course, exercise this conirol in such a fashion whereby GPU Energy's access to the switching station and transmission facilities for I proper operation and maintenance of the electric systems on the TMI-l site will not be unduly l

restricted. l i

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With respect to the activities unrelated to plant operation that occur in the Exclusion j

, Area identified in Section 5.1 of the Technical Specifications, there will be no change.

l AmerGen will assume responsibility for the Emergency Plan as discussed above. l l

D. SECURITY Upon consummation of the transfer, AmerGen will assume authority and responsibility for the functions necessary to fulfill the security planning requirements specified in 10 CFR Part 73. Any changes made to the existing NRC-approved physical security, guard training and qualification, and safeguards contingency plans developed and implemented by the current licensees will be made in accordance with 10 CFR Q 50.54(p). GPUN and Ame Gen anticipate that no changes will be made that will result in a decrease in the effectiveness of the plans, and that the plans will continue to meet the standards of 10 CFR Part 73, Appendix C. Any

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(- A-Ex.4-5

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specific security plan changes will be submitted to the NRC within two months after the I -

changes are made, pursuant to 10 CFR { 50.54(p)(2). If GPUN or AmerGen identify any proposed changes that would decrease the effectiveness of the approved security plans, l i application to the Commission will be made, and such proposed changes will not be implemented until approved by the Commission. Determinations as to whether any proposed change (s) would result in a decrease in effectiveness will be made in accordance with GPUN's currently approved plans, programs and procedures.

l AmerGen anticipates that no substantive changes will be made to the existing on-site security organization, but that certain corporate support and/or corporate oversight functions may be changed, transferred on-site, or transferred to an AmerGen corporate support organization. This organization will provide support functions to TMI-1, which may be provided through contractual arrangements with PECO Energy, GPUN, and/or British Energy.

Persons assigned to perform these functions will meet the same qualification requirements as the existing responsible GPUN corporate support personnel. Transition plans will be established to ensure that the support described in the existing security plans will be maintained throughout any transition period associated with the transfer.

Existing agreements for support from organizations ad agencies not affiliated with the current licensees will be assigned to AmerGen. GPUN and AmerGen plan to notify the parties to such agreemer.ts in advance of the transfer of the TMI-l license to AmerGen, and advise those parties of AmerGen's responsibility for management and operation of TMI-1. In sum, i

the proposed license transfer will not impact compliance with physical security requirements.

sb A-Ex.4-6 l

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E. QUALITY ASSURANCE PROGRAM Upon consummation of the transfer, AmerGen will assume authority and responsibility for the functions necessary to fulfill the quality assurance (QA) requirements of 10 CFR Part 50, Appendix B. Any changes made to the existing TMI-l Quality Assurance Plan developed and implemented by the current licensees will be made in accordance with 10 CFR

@ 50.54(a). GPUN and AmerGen anticipate that no changes will be made that will result in a reduction in the commitments in the Quality Assurance Plan description previously accepted by the NRC. If AmerGen or GPUN identifies any changes to the Quality Assurance Plan that would result in a reduction in commitments, application to the Commission will be made, and such proposed changes will not be implemented until approved by the Commission.

Determinations as to whether any proposed change (s) would result in a reduction in p commitment will be made in accordance with GPUN's currently approved plans, programs and b procedures.

AmerGen anticipates that it will be able to assume all of the current functions of the existing QA organization by assigning qualified AmerGen personnel or contractor personnel, i.e., PECO Energy, GPUN, British Energy or other qualified contractors, to each of the positions named in the current Quality Assurance Plan (or equivalent positions). Persons assigned to perform these functions will meet the same qualification requirements as the existing responsible GPUN personnel. Transition plans will be established to ensure that the support described in the existing Quality Assurance Plan will be maintained throughout any transition period associated with the transfer.

(\

U A-Ex.4-7 l

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F. FINAL SAFETY ANALYSIS REPORT With the exception of areas discussed in this application, the proposed license transfer and conforming administrative amendments will not change or invalidate information presently appearing in the TMI-l Final Safety Analysis Report (FSAR), and any licensing basis commitments will remain in effect. Changes necessary to accommodate the proposed transfer and conforming administrative license amendments will be incorporated into the FSAR, in accordance with 10 CFR { 50.71(c), following NRC approval of this request for consent to license transfer.

G. TRAINING As already noted, the off-site Training Center and Simulator Buildings, including any off-site staff currently working at these facilities, will be transferred to AmerGen. The proposed license amendment will not impact compliance with the operator re-qualification program requirements of 10 CFR { 50.54 and related sections, nor maintenance of the Institute of Nuclear Power Operations accreditation for licensed and non-licensed training. Upon transfer of the license, AmerGen will assume ultimate responsibility for implementation of present training programs. Changes to the programs to reflect the transfer will not decrease the scope of the approved operator re-qualification program without the specific authorization of the NRC in accordance with 10 CFR { 50.54(i).

O A-Ex.4-8

i APPENDIX A EXIIIBIT 5 PROJECTED INCOME STATEMENT FOR TMI-1 (JANUARY 1,2000 - APRIL 19,2014)

[THIS DOCUMENT INTENTIONALLY OMITTED BECAUSE IT CONTAINS CONFIDENTIAL INFORMATION WITHHELD FROM PUBLIC DISCLOSURE PURSUANT TO 10 CFR { 2.790 AND 9.17(a)(4).]

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PROJECTED INCOME STATEMENT FOR TMI-1 l

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(JANUARY 1,2000- APRIL 19,2014) l l

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[THE ENCLOSED REDACTED VERSION OF EXHIBIT 5 IS PROVIDED FOR PUBLIC DISCLOSURE.!

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($1088Monsi 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 2000 2001 2002 2003 2004 2005 2006 2007 2006 2009 2010 2011 2012 2013 2014 Opomems Movenues Sales ~

Revenue Shanng Total Revenues Opereeing Empenses Fuel Amortization

. Spor 4 Fuel ODI Transition Expense Bonk Depreoanon Tames Other Total Operating Expenses Opereeing income (Loes)  !

Otherincome F ' .;)

Other income ,

Interest WExpense) ,

Total Other Iname income before income Temos Teses Saeed on income M DienmeqLoes) sene The empicise mcarne semi-ere ciuses acome imm ine oecommesenma r une una ine __,_ _. . pens tam me reveiorveism er me proi cied u. _., e penses kir me purposes ce e eneirs vne oecon.russaa,=no I and e seaoiece to ex>mr me pW engsenses. Furmer tw Dessmrrumeene Fund a esened so tie sumoore to apver es pmpacted A . . e=penses mench doni commente unas 20$4 Fmsey, me inencm3 e# of tus enctssaan a merumal i

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APPENDIX A O EXHIBIT 6 OPENING BALANCE SHEET SliOWING AMERGEN'S ANTICIPATED ASSETS, LIABILITIES AND CAPITAL STRUCTURE (As of Closing Date)

[THIS DOCUMENT INTENTIONALLY OMITTED BECAUSE IT CONTAINS CONFIDENTIAL INFORMATION WITHHELD FROM PUBLIC DISCLOSURE PURSUANT TO 10 CFR 2.790 AND 9.17(a)(4).]

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OPENING BALANCE SHEET SHOWING AMERGEN'S ANTICIPATED ASSETS, LIABILITIES AND CAPITAL STRUCTURE i

(REDACTED VERSION) l

[THE ENCLOSED REDACTED VERSION OF EXHIBIT 6 IS PROVIDED FOR PUBLIC DISCLOSURE.] ]

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A-Ex.6R-1

O O O PROJECTED OPENING BALANCE SHEET

($ Millions)

ASSETS LIABILITIES Current Assets Current Liabilities Cash & Accounts Receivable Accounts Payable Current Portion of L-T Ncte Fixed Assets Total Current Liabilities Plant Fuel Non-Current Liabilities Total Fixed Assets Long-Term Note Payable ,

Post Retirement Liability I Other Decommissioning Decom Fund Total Non-Current Liabilities  :

Goodwill Total Liabilities Total Assets OWNERS EQUITY  ;

Equity Total Liabililities & Owners Equity Note: The Decommissioning Liability includes both radiological and non-radiological decommissioning liabilities.

AmerGen

APPENDIX A EXHIBIT 7 LETTER AGREEMENTS OF PECO ENERGY AND BRITISH ENERGY TO FUND CLOSING PAYMENTS i

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- - Mc British Energy October 15,1998 GPU Nuclear, Inc.

Jersey Central Power & Light Company Metropolitan Edison Company Pennsylvania Electric Company Ladies and Gentlemen:

Reference is made to the Asset Purchase Agreement, dated as of October 15,1998 (the

' Agreement"), by and among GPU Nuclear, Inc., Jersey Central Power & Light Company, Metropolitan Edison Company and Pennsylvania Electric Company (collectively, " Sellers")

on the one hand, and AmerGen Energy Company, LLC ("AmerGen"), on the other hand.

PECO Energy Company ("PECO") and British Energy, Inc., a wholly owned subsidiary of British Energy plc (" British Energy"), are the members of AmerGen, with each such entity having a fifty (50) percent interest in the ownership of AmerGen. The Agreement provides,

]

v among other things, for the sale by Sellers to AmerGen of the Three Mile Island Unit i Nuclear Generating Station and certain related assets and AmerGen's assumption of certain Assumed Liabilities and Obligations subject to the terms and conditions of the Agreement.

Capitalized terms used herein shall have the meanings given to them in the Agreement unless othenvise defined herein.

In order to induce Sellers to enter into the Agreement, and as additional consideration i therefor, British Energy hereby agrees that subject to the terms and conditions of the Agreement, on or prior to the Closing Date, British Energy will make a cash capital contribution, directly or indirectly, to AmerGen of US $11.5 million. British Energy represents and warrants to, and agrees with, Sellers that as a result of such capital contribution and a simultaneous capital contribution by PECO in the same amount, AmerGen will be capitalized with sufficient cash to enable it to make the Closing Payment, in full, to Sellers as and when provided by the Agreement.

British Energy further represents and warrants to, and agrees with, Sellers that PECO and British Energy will either: (a) cause AmerGen to make all such additional payments to Sellers (including without limitation, the Fuel Payment and the Deal Strike Price Adjustment)

(" Additional Payments") as and when AmerGen is required from time to time to do so under the Agreement or (b) make or cause to be made directly to Sellers all such Additional Payments as and when required under the Agreement; provided, however, that British 7eerphane 0131 J272000 Feennde 0131 J272277 Agamed at she ehe., ashbee Raewered Needse f 62M

,q GPU Nuclear, Inc.

Q October 15,1998 Page 2 Energy's maximum liability hereunder shall not exceed fifty (50) percent of AmerGen's obligations for the Additional Payments.

British Energy hereby represents and warrants to Sellers that its agreements hereunder are valid, binding and enforceable obligations of British Energy in accordance with their terms (subject to bankruptcy, insolvency, reorganization and similar laws affecting creditors rights generally and general equitable principles) and does not require the consent, approval or authorization of any Governmental Agency or third party other than those which have been obtained and are in full force and effect (or will be obtained on or prior to the Closing Date),

l copies of which shall be delivered to Sellers. Anything herein to the contrary notwithstanding, the obligations of British Energy under this letter agreement are subject to and conditioned on the effectiveness of the approval by the Pennsylvania Public Utility Commission of PECO's obligations under a letter agreement of even date herewith.

British Energy acknowledges and agrees that its obligations under this letter agicement are independent of AmerGen's obligations, and a separate action or actions may be brought against British Energy to enforce these obligations. Accordingly, British Energy's obligations g hereunder shall, to the fullest extent permitted by law be unaffected by any event of

(- bankruptcy, reorganization or insolvency with respect to AmerGen; by amendment, supplement, reformation or other modification of the Ag,reement; the exercise or non-exercise '

or delay in exercising by Sellers any rights under this letter agreement or the Agreement; any change in the time, manner or place of payment, or in any other terms of, AmerGen's obligations or any other amendment or waiver of, or any consent or departure from, the Agreement or any other agreement, document or instrument relating thereto; the permitted assignment or transfer of the Agreement in whole or in part; any change in the ownership or control of Sellers, British Energy or AmerGen; and the absence of any notice to, or knowledge by, British Energy of the existence of any of the aforesaid matters or events.

British Energy hereby irrevocably, unconditionally and expressly waives, and agrees that it shall not at any time assert any claim or take the benefit or advantage of, any appraisal, valuation, stay, extension, marshalling of assets or redemption laws, any bankruptcy, insolvency or similar proceedings, or exemption, whether now or anv time hereafter in force, which may delay, prevent or otherwise affect the performance by Britisb Energy ofits obligations hereunder. British Energy also hereby irrevocably, unconditionally and expressly waives all notices, diligence, presentment and demand of every kind and any requirement that Sellers exhaust any rights or first proceed against AmerGen or any other person or entity.

British Energy agrees that it will not exercise any subrogation rights it may acquire, by payment made hereunder or otherwise, until all of the Additional Payments to Sellers have been made in full.

/3 V

.O.CT. .,16.,19,98 10.:.48 FR

... .... .14166538662 TO 12159635299.......P.. 05/05...

l f GPU Nuclear, Inc.

October 15,1998 Page 3 l

l i The obligations of British Energy under this letter agreement and the obligations of PECO under a letter agreemet of even date herewith are several ed notjoint, and nothing {

herein is intended to consitute a guarantee by Bridah Energy of the obligations of PECO or a partnership, joint venture or other contractual relationship between British Energy or PECO.

This letter agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania without giving effect to conflict oflaw prmeiples. The  ;

representations, wanaties and agreements of British Energy hereunder will survive the Closing. {

l l Very truly yours, l I

W Dr. RobinJeffrey g l Executive Director, No America l

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1 Phdadettua. PA 19101-8699 l 215 841 5600 Fax 215 8414214 October 16,1998 GPU Nuclear, Inc.

Jersey Central Power & Light Company Metropolitan Edison Company Pennsylvania Electric Company i

Ladies and Gentlemen: .

Reference is made to the Asset Purchase Agreement, dated as of October 15, 1998 (the " Agreement"), by and among GPU Nuclear, Inc., Jersey Central Power O

V

& Light Company, Metropolitan Edison Company and Pennsylvania Electric Company (collectively, " Sellers") on the one hand, and AmerGen Energy l Company, LLC ("AmerGen"), on the other hand. PECO Energy Company

("PECO") and British Energy, Inc., a wholly owned subsidiary of British Energy plc l

(" British Energy"), are the members of AmerGen, with each such entity having a fifty (50) percent interest in the ownership of AmerGen. The Agreement provides, among other things, for the sale by Sellers to AmerGen of the Three Mile Island Unit i Nuclear Generating Station and certain related assets and AmerGen's assumption of certain Assumed Liabilities and Obligations subject to the terms and conditions of the Agreement. Capitalized terms used herein shall have the meanings given to them in the Agreement unless otherwise defined herein.

In order to induce Sellers to enter into the Agreement, and as additional consideration therefor, PECO hereby agrees that subject to the terms and conditions of the Agreement, on or prior to the Closing Date, PECO will make a cash capital contribution, directly or indirectly, to AmerGen of US $11.5 million.

PECO represents and warrants to, and agrees with, Sellers that as a result of such capital contribution and a simultaneous capital contribution by British Energy in the same amount, AmerGen will be capitalized with sufficient cash to enable it to make the Closing Payment, in full, to Sellers as and when provided by the Agreement.

a

GPU Nucistr, Inc.

October 16,1998 Page 2 PECO further represents and warrants to, and agrees with, Sellers that PECO and British Energy will either (a) cause AmerGen to make all such additional payments to Sellers (including without limitation, the Fuel Payment and the Deal Strike Price Adjustment) (" Additional Payments") as and when AmerGen is required from time to time to do so under the Agreement or (b) make or cause to be made directly to Sellers all such Additional Payments as and when required under the Agreement; provided, however, that PECO's maximum liability hereunder shall not exceed fifty (50) percent of AmerGen's obligations for the Additional Payments.

PECO hereby represents and warrants to Sellers that, subject to its receipt of the governmental approval referred to below, its agreements hereunder are valid, binding and enforceable obligations of PECO in accordance with their terms (subject to bankruptcy, insolvency, reorganization and similar laws affecting creditors rights generally and general equitable principles) and does not require the consent, approval or authorization of any other Governmental Agency or third party other than those which have been obtained and are in full force and effect (or will be obtained on or prior to the Closing Date), copies of which shall be delivered to Sellers. Anything herein to the contrary notwithsunding, the e obligations of PECO under this letter agreement are subject to and conditioned on l the prior approval of the Pennsylvania Public Utility Commission.

PECO acknowledges and agrees that its obligations under this letter agreement are independent of AmerGen's obligations, and a separate action or actions may be brought against PECO to enforce these obligations. Accordingly, PECO's obligations hereunder shall, to the fullest extent permitted by law be unaffected by any event of bankruptcy, reorganization or insolvency with respect to AmerGen; by amendment, supplement, reformation or other modification of the Agreement; the exercise or non-exercise or delay in exercising by Sellers any rights under this letter agreement or the Agreement; any change in the time, manner or place of payment, or in any other terms of, AmerGen's obligations or any other amendment or waiver of, or any consent or departure from, the Agreement or any other agreement, document or instrument relating thereto; the permitted assignment or transfer of the Agreement in whole or in part; any change in the ownership or control of Sellers, PECO or AmerGen; and the absence of any notice to, or knowledge by, PECO of the existence of any of the aforesaid matters or events.

PECO hereby irrevocably, unconditionally and expressly waives, and agrees that it shall not at any time assert any claim or take the benefit or advantage of, any appraisal, valuation, stay, extension, marshalling of assets or O

GPU Nuclair, Inc.

October 16,1998 Page 3 i l

redemption laws, any bankruptcy, insolvency or similar proceedings, or exemption, whether now or any time hereafter in force, which may delay, prevent or otherwise affect the performance by PECO ofits obligations hereunder. PECO also hereby irrevocably, unconditionally and expressly waives all notices, l diligence, presentment and demand of every kind and any requirement that Sellers exhaust any rights or first proceed against AmerGen or any other person or entity. PECO agrees that it will not exercise any subrogation rights it may acquire, by payment made hereunder or otherwise, until all of the Additional l Payments to Sellers have been made in full.

The obligat;ons of PECO under this letter agreement and the obligations of British Energy under a letter agreement of even date herewith are several and not joint, and nothing herein is intended to constitute a guarantee by PECO of the I

' obligations of British Energy or a partnership, joint venture or other contractual relationship between PECO and British Energy.

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This letter agreement shall be govemed by and construed in accordance with the laws of the Commonwealth of Pennsylvania without giving effect to conflict of law principles. The representations, warranties and agreements of PECO hereunder will survive the Closing.

Very truly yours, I J

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APPENDIX A EXHIBIT 8 l .

i LETTER AGREEMENTS FOR PECO ENERGY AND BRITISH ENERGY TO PROVIDE FUNDING TO AMERGEN l

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Michael J.Egan Sernor Ves Pr:sident andChief Financelofficer PECO ENERGY ecco sne. c ,a,

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2301 Market Street

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Po Box 8699 Philadelphia. PA 19101-8699

215 B415600 Fax 215 8414214 December 3, 1998 l

AmerGen Energy Company 965 Chesterbrook Boulevard l Wayne, PA 19087 Ladies and Gentlemen:

Reference is made to the Asset Purchase Agreement, dated as of October 15,1998 (the

" Agreement"), by and among GPU Nuclear, Inc., Jersey Central Power & Light Company, Metropolitan Edison Company and Pennsylvania Electric Company (collectively, " Sellers") on the one hand, and AmerGen Energy Company, LLC

("AmerGen"), on the other hand. PECO Energy Company ("PECO") and British Energy, Inc. ("BE Inc."), a wholly owned subsidiary of British Energy plc (" British Energy"), are l

the members of AmerGen. The Agreement provides, among other things, for the sale by Sellers to AmerGen of the Three Mile Island Unit 1 Nuclear Generating Station ("TMI-1")

and certain related assets and AmerGen's assumption of certain At sumed Liabilities and

, Obligations subject to the terms and conditions of the Agreement. Capitalized terms used herein shall have the meanings given to them in the Agreement unless otherwise defined herem. 4 in consideration of the benefits to be derived by PECO from AmerGen's ownership and ,

! operation of TMI-1, the mutual benefits to be derived by AmerGen, PECO, and British I i

Energy from the commitments contemplated hereunder, in furtherance of the Limited l Liability Company Agreement of AmerGen (the " LLC Agreement") dated as of  ;

August 18,1997, and any provision in the LLC Agreement which could limit application of this letter agreement notwithstanding, PECO hereby agrees that, subject to the terms and conditions of this agreement, it will provide its share of funds to AmerGen to assure i that AmerGen will have sufficient funds available to meet its operating expenses. PECO l represents and warrants that it will provide funding to AmerGen, at any time that the l l Management Committee of AmerGen determines that, in order to protect the public health  ;

and safety and/or to comply with NRC requirements, such funds are necessary te meet the ongoing operating expenses at TMI-l or such funds are necessary to safely maintain TMI-1; provided, however, that PECO's maximum liability to provide funding hereunder shall not exceed the lesser of(x) fifty (50) percent of the total funding required by AmerGen from time to time pursuant to this and a similar letter agreement between

! AmerGen and British Energy of even date herewith, or (y) 532.5 million cumulatively over the life of this agreement. PECO shall pay such amounts to AmerGen at the same time or times as the same amount is paid by British Energy under a similar letter agreement p between AmerGen and British Energy of even date herewith.

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! This agreement shall take effect upon the transfer of TMI-l to AmerGen, as approved by the NRC, and will remain in effect and remain irrevocable until such time as either:

(1) AmerGen has submitted to the NRC a written certification meeting the requirements of 10 CFR s 50.4(b)(8) that the TMI-l fuel has been permanently removed from the reactor vessel, i.e., after AmerGen has determined to permanently cease TMI-l operations, or (2)

NRC has given its prior written consent to the discontinuance of the funding arrangements contemplated by this letter agreement and a similar letter agreement between AmerGen and British Energy of even date herewith. PECO or British Energy shall have the right to demand that AmerGen permanently cease TMI-l operations rather than using funds available under this agreement for continued operations, provided that, in such event, AmerGen will nevertheless have the right to continue to obtain the funds necessary to assure the safe and orderly shutdown of TMI-l and to continue the safe maintenance of TMI-l until AmerGen can certify to the NRC that the fuel has been permanently removed from the reactor vessel.

PECO hereby represents and warrants to AmerGen that, subject to its receipt of the governmental approval referred to below, its obligations under this letter agreement .are valid, binding and enforceable obligations of PECO in accordance with their terms (subject to bankruptcy, insolvency, reorganization and similar laws affecting creditors' rights generally and general equitable principles) and does not require the consent, approval or authorization of any Governmental Agency or third party other than those which have been obtained and are in full force and effect (or will be obtained on or prior to the Closing Date). Anythin'g herein to the contrary notwithstanding, the obligations of PECO under this letter agreement are subject to and conditioned on the effectiveness of the approval of this agreement by the Pennsylvania Public Utility Commission.

PECO hereby irrevocably, unconditionally and expressly waives, and agrees that it shall not at any time assert any claim or take the benefit or advantage of, any appraisal, valuation, stay, extension, marshaling of assets or redemption laws, any bankruptcy, insolvency or similar proceedings. m stion, whether now or any time hereatler in force, which may delay, prever -

ae affect the performance by PECO ofits obligations hereunder.

The obligations of PECO under this letter agreement and the obligations of British Energy under its letter agreement of even date herewith are several and not joint, and nothing herein is intended to constitute a guarantee by PECO of the obligations of British Energy or a partnership, joint venture or other contractual relationship between PECO and British Energy.

This letter agreement shall be governed and constmed in accordance with the laws of the

. Commonwealth of Pennsylvania without giving effect to conflict oflaw principles.

i Very truly yours, jA/

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lV, November 5,1998 British Energy AmerGen Energy Company 965 Chesterbrook Boulevard Wayne, PA 19037 Ladies and Gentlemen:

Reference is made to the Asset Purchase Agreement, dated as of October 15,1998 (the  !

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" Agreement"), by and amoing GPU Nuclear, Inc., Jersey Central Power & Light Company, I l Metropolitan Edison Company and Pennsylvania Electric Company (collectively, " Sellers") on the l one hand, and ArnerGen Energy Company, LLC ("AmerGen"), on the other hand. PECO Energy i l Company ("PECO") and British Energy, Inc. ("BE Inc."), a wholly owned subsidiary of British i Energy plc (" British Energy"), are the members of AmerGen. The Agreement provides, among l other things, for the sale by Sellers to AmerGen of the Three Mile Island Unit 1 Nuclear Generating Station ("TMI-l") and certain related assets and AmerGen's assumption of cenain Assumed Liabilities and Obligations subject to the terms and conditions of the Agreement. ,

Capitalized terms used herein shall have the meanings given to them in the Agreement unless  ;

otherwise defined herein. i in consideration of the benefits to be derived by British Energy and BE Inc. from AmerGen's ownership and operation of TMI-1, the mutual benefits to be derived by AmerGen, p British Energy, and PECO from the commitments contemplated hereunder, in furth~erance of the l

Limited Liability Company Agreement of AmerGen (the " LLC Agreement") dated as of August 18,1997, and any provision in the LLC Agreement which could limit application of this  !

letter agreement notwithstanding, British Energy hereby agrees that, subject to the terms and conditions of this agreement, it will provide its share of funds to AmerGen to assure that AmerGen will have sufficient funds available to meet its operating expenses. British Energy represents and warrants that it will provide funding to AmerGen, at any time that the Management Committee of AmerGen determines that, in order to, protect the public health and safety and/or to comply with NRC requirements, such funds are necessary to meet the ongoing operating expenses at TMI-I or such funds are necessary to safely maintain TMI-1; provided, however, that British Energy's maximum liability to provide funding hereunder shall not exceed the lesser of(x) fifty (50) percent of the total funding required by AmerGen from time to time pursuant to this and a similar letter agreement between AmerGen and PECO of even date herewith, or (y) $32.5 million cumulatively over the life of this agreement. British Energy shall pay such amounts to AmerGen at the same time or times as the same amount is paid by PECO under a similar letter agreement between AmerGen and PECO of even date herewith.

This agreement shall take effect upon the transfer of TMI-l to AmerGen, as approved by the NRC, and will remain in effect and remain irrevocable unti ! such time as either: (1) AmerGen has submitted to the NRC a written certification meeting the requirements of 10 CFR 50 4(b)(8) waartano1 l

O lintrsh Enerp plc 10 Lahude Pixe iJmburgh iHl2 *DF Telephone 011142' 2000 i Aumile oI H (2" 22" flegarered as ihr Ane aJJrcu Itruntered %mm b 27

that the Thil-1 fuel has been permanently removed from the reactor vessel,i.e., after AmerGen has determined to permanently cease Thil-1 operations, or (2) NRC has given its written consent O to the discontinuance of the funding arrangement contemplated by this letter agreement and a similar letter agreement between AmerGen and PECO of even date herewith. British Energy or PECO shall have the right to demand that AmerGen permanently cease ThiI-l operations rather than using funds available under this agreement for continued operations, provided that in such event, AmerGen will nevertheless have the right to continue to obtain the funds necessary to assure the safe and orderly shutdown of Thil-1 and to continue the safe maintenance of Thil-1 until AmerGen can certify to the NRC that the fuel has been permanently removed from the reactor vessel.

British Energy hereby represents and warrants to AmerGen that its obligations under this letter agreement are valid, binding and enforceable obligations of British Energy in accordance with their terms (subject to bankruptcy, insolvency, reorganization and similar laws affecting creditors' rights generally and general equitable principles) and does not require the consent, approval or authorization of any Governmental Agency or third party other than those which have been obtained and are in full force and effect (or will be obtained on or prior to the Closing Date),

provided, however, that the obligations of British Energy under this letter agreement are subject to and conditioned on the effectiveness of the approval by the Pennsylvania Public Utility Commission of PECO's obligations under a similar letter agreement between AmerGen and PECO of even date herewith.

British Energy hereby irrevocably, unconditionally and expressly waives, and agrees that it shall not at any time assert any claim or take the benefit or advantage of, any appraisal, valuation, O stay, extension, marshaling of assets or redemption laws, any bankruptcy, insolvency or similar proceedings, or exemption, whether now or any time hereafter in force, which may delay, prevent or otherwise affect the performance by British Energy ofits obligations hereunder.

The obligations of British Energy under this letter agreement and the obligations of PECO under its letter agreement of even date herewith are several and not joint, and nothing herein is intended to constitute a guarantee by British Energy of the obligations of PECO or a partnership, joint venture or other contractual relationship between British Energy and PECO.

l This letter agreement shall be governed and construed in accordance with the laws of the Commonwealth of Pennsylvania without giving effect to conflict oflaw principles.

Very truly yours, Dr. Robin Jeffrey l Executive Director, North America i

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s i APPENDIX A 4

EXHIBIT 9 4

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DECOMMISSIONING FUND ADJUSTMENTS-1 TWO PERCENT ANNUAL REAL RATE OF RETURN i

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12/31/96 Bolence (SesMelon) 1933$

j totet $320 0 7erget ($8IIIIlon) $365 4 NftC Noel Growth Rote: 20%

neel Discount Rese: 40%

Value As Of December 31,1990 $424.7 (Value @ 2% Real Rate of Retum)

Period +

Begn 1/1/00 1/1/01 1/1/02 1/1/03 1/144 1/1/05 1/1/06 1/1/07 1/148 1/129 1/1/10 1/1/11 1/1/12 1/1/13 1/1/14-End 12/31/99 12/3120 12/3141 12/31/02 12/31/03 12/31/04 12/3145 12f31/06 12f31/07 12/3128 12/31/09 12/31/10 12/31/11 12/31/12 12/31/13 4/19/14 .;

-t Fund Selence (19998)

Begn $3200 $326 4 $332.9 $339 6 $346 4 $353.3 $360 4 $367.6 $374 9 $382 4 $3901 - $397 9 $405 8 $4140 $422 2  ;

Reaf Growth $6 4 $6 5 $6.7 $6 8 $6 9 $7.1 $ 7.2 $74 $ 7.5 $ 7.6 $7.8 $8 0 $8.1 $8 2 $2.5 End $320 0 $326 4 $332.9 $339 6 $346 4 $353.3 $360 4 $367.8 $374 9 $382.4 $3901 $297 9 $4058 $414 0 $422.2 $4247 i

i Velve As Of April 15,1999 $418 9 (Value @ 2% Real Rate of Retum)

Period Begn 4/15/99 1/100 1/1/01 1/1/02 1/1/03 1/1/04 1/1/05 1/1/06 1/1/07 1/1/06 1/1/09 1/1/10 1/1/11 1/1/12 1/1/13 1/1/14 End 12r31!99 12/31/00 12r31/01 12r31/02 12f31/03 12f31/04 - 12/31/05 12/31/06 12/31/07 12/3U06 12/31/09 12/31/10 12f31/11 12/31/12 12/31/13 4/19/14 Fund Solence (19998)

Begn $3112 $315 6 $3219 $328 4 $334 9 $3416 $348 5 $355 4 $362.5 5369 8 $377.2 $384 7 $392 4 $400 3 $408.3 $416 4

• Real Growth $4 4 $6.3 $6 4 $6 6 $6 7 $6 8 $ 7.0 $7.1 $7.3 $7.4 $7.5 $ 7.7 $ 7.8 $8 0 $8 2 $2.5 End $315 6 $3219 $328 4 $334 9 $3416 $348 5 $355 4 $362.5 $3698 $377.2 $384.7 $392 4 $400 3 $408.3 $416 4 $41a 9 l t

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APPENDIX A EXHIBIT 10 CALCULATION OF NRC FORMULA AMOUNT FOR DECOMMISSIONING TMI-I (10 CFR { 50.75(c))

Attached is AmerGen and GPUN's calculation of the generic NRC formula amount for the decommissioning of TMI-l pursuant to 10 CFR Q 50.75(c). This calculation assigns the Bmial escalation factor in the formula by using two-thirds of the applicable value for South Carolina published in NUREG-1307, Rev. 7, and by using one-third of the applicable value for

, Washington. Based upon current industry experience and a site-specific assessment, AmerGen believes that more than one-third of the low-level waste for TMI-l can be processed at various i

! facilities currently available (e.g., volume reduction) and/or can be disposed of at Envirocare's i

facility located in Utah, at an average cost that is less than or comparable to the cost of disposal at the Hanford site which is reflected in the cost value assigned to Washington in  !

NUREG-1307. Neither NRC regulations nor guidance relating to 10 CFR { 50.75(c) and NUREG-1307 provide explicit direction with respect to the circumstances under which a ,

i licensee may use the Washington values versus the South Carolina values, or with respect to l

using these values on a percentage basis. Because one-third of the TMI-l low-level waste can clearly be disposed at costs comparable or lower than the Washington value, this value is a i

logical surrogate for one-third of the Burial Factor when calculating the formula amount.

AmerGen has selected the value for South Carolina (the Barnwell facility) for two-thirds of the  !

Burial Factor, because two-thirds of the TMI-l low-level waste can clearly be disposed of at A Ex.10-1 4

, costs comparable or lower than the South Carolina value. Using this methodology GPU has l I(3  !

V calculated the current formula amount for TMI-l to be 5344.7 million.

l Significantly, the current revision to NUREG-1307 does not take into account the l

reduced volumes oflow-level waste that are currently anticipated in connection with l decommissioning. Based upon a 1995 site specific decommissioning cost study by TLG i l

Engineering, GPUN estimates that the volume oflow-level waste from TMI-l will be l

118,552/ft', whereas GPUN estimates that the volume oflow-level waste for TMI-I assumed l

in NUREG-1307 is 647,585/ff. Therefore, AmerGen's calculation of the formula amount using the methodology described above is all the more conservative, because the cost of burying all ofits waste at the Bamwell facility would be one-fifth of the cost assumed in NUREG-1307.

If NRC believes that an exemption is required to permit this methodology for r.

calculating the NRC formula amount, or to permit funding to GPU's site specific cost estimate in lieu of funding to an NRC fonnula amount calculated pursuant to an alternative methodology, an exemption is clearly warranted under the criteria set forth in 10 CFR Q 50.12. ,

As already indicated, the methodology described above is conservative, in that more than l one-third of the low-level waste at TMI-l could currently be disposed of at a cost at or below the costs represented in the NUREG-1307 value, and even more significantly, the actual quantity oflow-level waste to be disposed ofis less than one-fifth of the quantity assumed in l NUREG-1307. Alternatively, an exemption should be granted to permit AmerGen to provide 1

decommissioning funding assurance by funding to a prepaid amount based upon GPU's

! current site specific cost estimate for the radiological decommissioning of TMI-1. Either

]v A-Ex.10-2

exemption is clearly authorized by law, will not present an undue risk to the public health and C

4

\ safety, and is consistent with the common defense and security. The special circumstances I

present include the following:

(1) The underlying purpose of 10 CFR 50.75(c) is to provide an appropriate minimum amount for determining the level of financial assurance for decommissioning funding, l

without causing decommissioning funds to be grossly over funded. Moreover, the minimum amount is based upon a detailed generic cost estimate adjusted for inflation, and NRC's reevaluation ofits generic cost estimates confirms that the formula amount overestimates the current quantity oflow-level waste to be disposed of, because it fails to take into account current volume reduction and processing practices. It also fails to l

account for the opportunities available for certain kinds oflow-level waste to be disposed of at alternative facilities, for which no explicit cost factors are provided in NUREG-1307. The methodology for calculating the formula amount described above is consistent with the underlying purpose of the rule, because it accounts for these opportunities by using an appropriate cost factor from NUREG-1307 (the Washington cost factor) as a surrogate for a conservatively estimated portion of the Burial Factor in the formula. Moreover, GPUN's site specific cost estimate is a realistic and conservative minimum amount for decommissioning funding consistent with the underlying purpose of the rule.

(2) Calculation of the NRC formula amount in a manner that does not trke into account the l

lower low level waste burial disposal costs of at least one-third of the low-level waste at TMI-1, or the imposition of a minimum funding amount based upon an NRC l

1 (G

%)

i A-Ex.10-3 l

I formula amount calculated without taking this into account, rather than based upon the

,p b current GPUN site specific estimate, would impose an undue hardship on AmerGen. It I

would require funding to an amount much higher than is necessary to assure adequate

! funding for decommissioning. Moreover, the entire over-funded amount would have to be prepaid, which could have a significant impact upon the financial viability of the proposed transaction.

(3) The requested exemption would have no adverse impact upon the public health and safety, but rather the public health and safety would benefit if this exemption were approved in conjunction with the proposed transfer of the TMI-l license to AmerGen because adequate prepaid decommissioning funding would be provided up front, and decommissioning funding would be assured without relying upon future payments j subject to inherent uncertainties.

f'h)

C (4) The current version of NUREG-1307 fails to account for a material change in circumstances due to the significantly reduced volumes oflow-level waste to be disposed of during the decommissioning process and the availability oflow-level waste processing and disposal at the Envirocare facility (for certain kinds cflow-level waste),

which can be accomplished at costs significantly lower than the costs assumed in the NRC formula amount using the South Carolina Burial cost factor.

Thus, NRC should either grant AmerGen an exemption permitting it to calculate the NRC formula amount as described above, or an exemption permitting AmerGen to provide financial assurance for decommissioning funding in an amount based upon the current site specific cost

estimate for TMI-1.

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V REACTOR TYPE f BASE COST october 2,1998  :

PWRs (1200MWt- 3400 MWt)

($75 +,0.0088 P (in MWt))

[

($75 + 0.0088 (2.568))

$97.5984 million ESCALAllON_EACIOR Labor Energy (PWR) Waste Washington (33.33%) S. Carolina (66.67%)

(0.65L + 0.13E + 0.22B) E = (0.58P + 0.42F) (Hanford) (Bamwell) 1998 x scaling factor /1986 P = 1998 /1986 F = 1998 /1986 3.112 15.852 136 x 1.55 /130.5 P = 126.7 /114.2 F = 48.3 / 82.0 P = 1.109 F = 0.589 [

E = (0.58 x 1.109) + (0.42 x 0.589)

E = 0.643 + 0.247 L = 1.6153256 E = 0.89 B = 3.112 B = 15.852 (0.65L + 0.13E + O228) 0.65 x 1.6153 0.13 x 0.89 0.22 x 3.112 022 x 15.852 1.050 0.116 0.685 x 0.3333 . 3.487 x .6667

[

RAarch 1998 Escalation Factor 1.050 0.116 0 228 (33.33 %) 2.325(66.67%) .

(L + E + B) [

Iotal B Total Escalation = 3.719 L = 1.050 E = 0.116 B = 2.553 I

TOTAL COST f 10 CFR.50.I5) IQIALCOsT f 10 CFR 5015)

$97.5984 million x 3.719 i

5362.968 million i

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f I FINANCIAL HIGHLIGHTS l 1996  % Change 1997 (Thousands of Dollars) $4.283,650 7.8%

                                                         $ 4,617,901 Operating Revenues                                                                       20.7%
                                                         $3,302,179    $ 2,7 3 5,603                                     l Operating Expenses, excluding taxes                                                                   -

(

                                                           $ 602,860     $639,647        (5.8%)

Tanes Charged to Operations

                                                         $ 1,005,631   $ 1.248,501     (19.5%)_

Operating Income -

                                                                                               -                           1 1

($1,833,664) Extraordinary Item (Net of taxes) $499,169 (403.3%) ($1,513,910)  ; Earnings Applicable to Common Stock (After extraordinary item) ~2

                                                            $ 319,754     $499,169      (35.9%)                             !

Earnings Applicable to Cominon Stock l (Before extraordinary item) }

                                                                               $2.24  (403.6%)                               '

Earnings per Average Common Share (Douars) ($ 6.80) (After extraordinary item) 2.6%

                                                                $ 1.80        $1.755 Cash Dividends Faid per Common Share (Dollars) 222,543       222,490              -

Average Shares of Common Stock Ortstanding (Thousands)

                                                            $ 490,200      $548,854     (10.7%)

Constructior Expenditures

                                                          $ 2,72 6,731  $4,645,981       (41.3%)

Common Shareholders' Equity

                                                               $ 12.25        $20.88     (41.3%)                               f' I Book Value Per Average Common Share (Dollars)

This Annual Report contains forwarddooking statements which should be read in conjunction with the cautionary statement on forward-looking statements located on page 20.

3 l i l l l l in November, we signed an agreement with the Massachusetts Health This year also marks the retirement of three dedicated members of ? and Education Facilities Authority to provide more than one billion kilo- your Board - Joseph J. McLaughlin, Richard G. Gilmore and James A. watthours annually to its 462-member organization and 130,000 Hagen. We thank them for their long years of service to our Company, employees. We believe that this type of agreement could serve as a blue. Another change in the Board occurred last summer when Joe b rint p in the new, competitive power marketplace. Paquette retired as chairman. for more than four decades he Thrnughout the year we took these and other actions to committed himself to the success of PECO Energy. implement our strategic architecture, which focuses His vision, guidance and leadership set our on our core competencies of infrastructure E course,and we are pleased that he excellence, energy logistics and customized  ;( continues to serve as a valuable solutions. This strategy is aimed at i member of your Board. adding shareholder value through There were also several.signif-future growth opportunities. p , icant senior management Building upon our core compe. I S changes last year. Michael J. tency of infrastructure excellence, Egan was named Senior Vice , Oil grow our generation President of Finance and L jss. 0ur ability to success- , Chief Financial 0fficer, fully manage energy logistics, demonstrated by the rapid 4" ~ E C [ Kenneth G. Lawrence m became Senior Vice expansion of the Company's #- N\ Presidentof thelocal h Power Team into 47 states, gives j g Distribution Company, Gregory y us many value-added opportuni- F A. Cucchi was named Senior ties. From these two core - Vice President of Ventures and i competencies we built the third - William H. Smith, til became Senior i customized solutions - to enable us to Vice President of Business Services. provide our customers with the solutions These are,indeed, challenging that best suit their energy needs- The three rays of the Company's strategic I mes. While we are confronting changes in

 -     You'll read more about our strategic architecture,            Architecture represent the paths that                   our industry unlike any we have seen before, we ICU Eurgy          ta n oder to e          i

, what it means today and in the future, in this annual report. , p ,, , ,, ,

are taking the actions that are difficult but necessary The Company benefits from the guidance and coun- Infrastructure Excellence,the world class to successfully compete in the future. I strongly J ' set of a qualified and involved Board of Oirectors. In 'P"'"'"d"'i""*"**''i'i'*- believe that PECO Energy will emerge from this peri-and Energy Logistics, the informational June 1997, Daniel L Cooper, a retired vict, admiral in and physical espects of buying. selling od of transition as a strong competitor - a national the U.S. Navy and retired vice president and general and delivering energy products and ser. company with global opportunities. With your contin- l l manager of the Nuclear Services Division of 'i'",',,

                                                                     ,          l
                                                                                ,;,'** *'[ ,,E nergy,g,s d s Ued support, I am co7fident we can overcome the best. customized solutions - delivering challenges, seize the opportunities before us and

[ Gilbert / Commonwealth, Inc., joined the Board. i to customers the specific services that continue to add Value to your investment. meet customers' needs - grew from i these core competencies. Catnn A lANedi. Jr., PECO Energy chanman, hosdent and Chief lucutw oWer february 2,1998

4 l ECO Energy has clearly demonstrated and maintenance services its world-class capabilities in infrastruc- to the gas and electric dis-Pture excellence, which grew out of the processes developed over several years tribution systems for that site. These opportunities at the Company's Peach Bottom and Limerick arose, in part, from the nuclear generating stations. Company's Vision Quest

                   " Infrastructure excellence is really what        program, which reduced PECO Nuclear is all about," said Dickinson             costs vshile improving on-                       ,                ,,

Smith, PECO Energy's Chief Nuclear Officer. time delivery and reliability

                                                                                                           's           "&                'i "We're world class managers of nuclear                 at its fossil and hydro-elec-            i       N *$4[' M I power plants, evidenced by our ability to put           tric plants.                          f     'N-

[' Vh M systems in place that can operate nuclear The Company's new k s , d-plants safely and efficiently." Distributed Network - i AmerGen, a joint venture with British Energy, Management program will _ combines the core competencies of PECO take the work management Energy and British Energy. AmerGen is evaluat- philosophy developed at ing nuclear plants for acquisition and will bring PECO Nuclear and apply it its collective best practices and proven work to power delivery services . processes to improve the safety and efficiency offered to smaller entities. _ of acquired plants. "Under this venture, we 4 &  ;

                    "AmerGen will combine the shared values           take the infrastructure excel-and cultures of PECO Energy and British Energy           ler ce skills from nuclear, and transplant them into the acquired plants as a        combine them with those of complete package," said Smith,                          power delivery and provide                                                    s Another example of infrastructure excellence        them to network managers is the Company's joint venture with AT&T                through a performance con-Wireless Services. The ability of PECO Energy's         tract to operate and Power Delivery and Telecommunications groups             maintain their systems,"

to install Personal Communications System said Greg Cucchi, Senior (PCS) equipment atop the Company's existing Vice President of Ventures. towers and buildings was a major contribution to "This will become more and more attractive as this venture. the industry deregulates and managers come "PECO Energy was the first utility AT&T under increased pressure to operate their sys-worked with in building a PCS network and we tems efficiently." were very impressed by its skills and project Most recently, on January 5,1998, Illinois management," said Daniel R. Hesse, CEO and Power Company of Decatur, Illinois, chose President of AT&T Wireless. PECO Nuclear to manage its Clinton nuclear Another venture, based on the Company's plant, shut down by the Nuclear Regulatory extensive fiber optic network, became the back- Commission in September 1997. Under the bone of a new telecommunications system three-y6ar contract, which may be renewed for providing services to medium and large busi- an additional five years, a core group of PECO nesses. PECO Hyperion Telecommunications, a Nuclear employees will provide management joint venture between PECO Energy and expertise to Illinois Power. Hyperion Telecommunications of Pennsylvania, a in the future, as PECO Energy further devel-subsidiary of Adelphia Cable Company, will pro- ops and enhances its expertise in infrastructure vide a lower-cost local link to a subscriber's long excellence, the Company will expand geographi-distance carrier. cally and bring its capabilities to an increasing Exelon Corporation, a subsidiary of PECO number of customers. Energy, operates the cogeneration facility on the site of the former USX Fairless Plant in Bucks County, Pennsylvania, and provides operating

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Beginning in late 1995, the three PECO Nuc! ear was chosen due According to McElwain,"One of "What PECO Nuclear is selling is units at Millstone Nuclear Station in to its experience in returning its the major concerns with the operational excellence," said PECO Connecticut, operated by Northeast Peach Bottom station to service Millstone restart activities was the Nuclear's Dickinson Smith. "We feel Utilities (NU), were shut down due to after an NRC-ordered shutdown. lack of acceptance of responsibility capable of entering almost any numerous problems associated with Peach Bottom is now recognized for the work to be done. It was our situation anel delivering a safe, cost-the units. as an industry leader in safe, job to reverse this attitude." effective and workable solution." NU executives realized that,in reliable operations. Recognizing PECO Nuclear's PECO Energy's role at Millstone to return the units to A group of PECO Nuclear employ- strength in infrastructure excellence, has recently been expanded. It is i freial operation, NU must ees. led by John McElwein, pef'O NU approached the Company about now assisting with the restart Lustrate to the NRC that NU is Energy's Vice President of Nuclear not only returning Millstone to operations at Unit No. 3. able to effectively operate the facility. Projects, was assigned to Millstone commercial operation, but also NU contracted with PICO Nuclear to to implement PECO Nuclear's work how NU could adopt PECO Nuclear's provide core management support for management processes. philosophies. the restart of Millstone Unit No.1. l _ __ J

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        , 4.y                                                   Energy, has helped make Power Team, highly reliable product.' We built on this foundation of responsibility,                                                                                             business, itis necessary to have all                                                                                                       the largest national real-time
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deliverer of electricity. Power Team's strong position is reliability and service orientation that the systems in place to complete

 'Q.:n                                                          enhanced by PECO Energy's                                                                                      started with PECO Energy."                                                                                                     thousands of transactions each day                                                                                                                  Another major strength of Power

f.:/b i generating capacity, located in the Power Team is viewed as a unique smoothly and quickly. Team is its employees. "The one V. ':R entity in the national power-marketing "We have the advantage of having thing we can really be proud o '

3. y middle of the Northeast Corridor. By 1,usiness, building a large supply been building our system for quite that we hn't have the trader using this generating capacity and its

     !.?' .rc                                                                                                                                                                   business while maintaining integrity                                                                                          some time." Bessey said. "Before any- turnover that a lot of our compe Qj$                                                               access to transmission, Power Team body even thought about an open                                                                                                              have," Bessey noted. "That's because is exceptionally reliable and is not                                                                           of product delivery.

i. ff "This is a supply and demand market for electricity,we were al- our people know we are here for the YE;:9 just a go-between in transactions.

business," Bessey said. "So, the ready aflocating resources to systems long haul; they see success here and ff.T

  .S. y "We have developed a culture that clearly distinguishes us from the other more supply we can obtain and                                                                                                                                                                          development.We                                              were                 marketers                                                  they realize that this success is going before marketing was cool."                                                                                                                  to continue."

f, . 7. . players," she says. "That culture

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[';H1 xpertise in energy logistics enables the and other utilities. Also targeted are national M Company to efficiently manage the accounts like fast-food chains and national y h ^ ~ complex informational and physical retailers; regional accounts, such as supermar-LiG aspects of buying, selling and delivering ket chains; and state and federal governments. energy products and cervices so that these ser- In addition, the Company expects to gain vices can be used by customers anytime, access to retail customers outside of its tradi-  ; anywhere. tional service territory through agreements with With ample reliable generation and a location power resellers. in the center of the Northeast Corridor, PECO A key element of energy logistics is energy Energy began with a strong position in energy supply, which concentrates on the marketing of logistics and was able to easily begin moving electricity, gas and other fuels for customers. supply to other areas. PowIr Team recently entered into an agree-

                   "We started with a competitive supply," said     ment with Tenaska, Inc., of Omaha, Nebraska, to Nancy Bessey, the Company's Vice President of        market the output of an 800-megawatt, natural Power Transactions and President of Power            gas-fired merchant power plant to be developed, Team. "From there we simply started expanding.       financed, constructed, owned and operated by p          Our competitors were in a more difficult position. Tenaska. Upon completion, scheduled for the V          If they didn't have direct access to competitive     year 2000, the plant will be the largest merchant power, they had to go out and buy it."               power plant in the U.S.

Since beginning operations in 1994, the "The strategy is to build upon the portfolio of growth of the Company's wholesale power-mar- assets we have," said Bessey. "Everybody else I keting business has made the Company's Power in this business seems to be talking about con-k Team one of the top power marketers in the U.S. For now, Power Team sells electricity to solidation or merger. Based upc e our firsthand knowledge of the market, we will acquire access wholesale purchasers - primarily utilities - and to energy to serve the demand where it exists." helps to serve the load in PECO Energy's tradi-tional service territory. As the Company expands its. sources of electric generation through acquisi-tions, partnerships and marketing agreements, its power-marketing business will explore the option of adding natural gas to its marketing portfolio. u As deregulatior, of electric generation acceler-ates PECO Energy is poised to pursue retail sales directly to large power users, such as large l industrial customers and national commercial l accounts. This type of business-to-business energy service will be the gateway to new customers. This is a key mission of the Ventures Group, the Company's business unit formed to seek out (U ) energy-related opportunities in emerging markets. The focus will be on large commercial and industrial customers and large load aggregators such as electric co-operatives, municipalities l l l

8 O ECO Energy is building on its core com- The Company converted Yeatman's 80-horse-petencies of infrastructure excellence power portable steam boiler into a dual-fuel r Ptomers with specific targeted serv and energy logistics to provide cus- boi!er that can use either oil or gas. The boiler generates steam needed to kill bacteria and - that meet their needs. mold and to facilitate cornpost pasteurization. In June 1997, the Company announced it Yeatman also converted three oil-fired, hot-water

                                                                                                           ~

would offer a variety of services, previously avail- boilers used for temperature control. able only on an individual basis, to industrial and "PECO Energy came up with the idea for commercial customers under its customized applying this technology to our boilers and made energy solutions program. The aim of the pro- sure the project went smoothly," Hahn said. gram is to provide larger customers with a single PECO Energy is focused on helping its cus-point of contact for energy products and ser- tomers be competitive in their marketplaces by vices. The diverse offerings range from building strong relationships. With customized traditional utility services to those not associated energy solutions, PECO Energy can focus on with the generation of electricity. what it does best and customers can focus on Traditional utility areas such as plant opera- what they do best. tions and gas delivery have led to the dedgn and For instance, based on the Company's cc development of on-site programs for custc ners' buying and handling capabilities, Exelon generation needs, management of their fuel sup- Corporation obtained a contract with the City of plies and general oversight of their power-related Vineland, New Jersey, to supply its coal. Exelon operations and maintenance. provides Vineland with a fully integrated fuel Based on its broad experience in providing management system, including the purchase of energy, the Company also provides customers 20,000 tons of coal annually, as well as storage, with information on economic development and handling and transportation. Vineland uses the relocation services, as well as information as coal to provide electricity to homes and busi-diverse as specialized financing, information sys- nesses in the city. tems and management services. For example, the owners of C.P. Yeatman

 & Sons, a 240-acre mushroom farm, wanted to spend less of their time on fuel handling in the pasteurization and growing processes and more time on its basic business - raising                                                               ,

mushrooms. They came to PECO Energy looking for a solution.

     "PECO Energy understands our business,"

said Tim Hahn, Yeatman's controller, corporate secretary and treasurer. O

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In November 1997, PECO Energy The Co npany will provide more of Pennsylvania," said Greg Cucchi, programs with that extra $100,000 signed an agreement with the than one billion kilowatthours PECO Energy's Senior Vice President minimum and $200,000 on the upside." Massachusetts Health and Education annually to HEFA's 462-member of Ventures. The Wa/IStreetJournalaiso noted Facilities Authority (HEFA) which organization and its 130,000 Anticipating expected savings of that many critics of deregulation could serve as a blueprint in the employees. between 10 and 20 percent. HEFKs cfaim that " individuals would be the emerging market for competitive HEFA's power-buying consortium is members expressed satisfaction with last in line to benefit from power. the largest in New England and one the PECO Energy contract. competition because they'd be too use of the Company's of the largest in the country. PECO Warren Young, director of small for power marketers to bother abilities to manage plants Energy won the contract in a engineering services for the Boston with. But the authority's agreement she iciently move power,it was competition with 27 other companies Museum of Fine Arts, told The Wall with PECO (which includes 130,000 possible to develop a customized who responded to HEIKs request for StreetJournal, "We spend a little employees of member organizations) energy solution which met proposal. over one million dollars a year on enables the small customers to l HEFA's needs. *0ursontract with HEFA heralds electricity. It's a significant part of our benefit by being part of the large our amtry into retail markets outside operating budget. You can do a lot of buying group." u.m

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n l em hile PECO Energy's strategic architecture will (' help the Company grow into a national compa-ny with global opportunities, it remains l critically important for the Company's future success that it operate a safe, efficient and cost-effective Local Distribution Company (LDC) in Southeastern Pennsylvania.  : PECO Energy is committed to "We can give utilities the abil;ty Kenneth G. Lawrence, PECO Energy's Senior Vice l' providing high-quality,value-added to be immediately competitive," said President of the LDC, said the mission of the LDC is to pro-l ' services to customers in its Andy Guarriello, CEO of Energy 0ne. . traditional service territory.To it is anticipated that Energy 0ne vide high-quality energy services to customers. Doing th.is will p enhanca its ability to provide such will serve more than 30 million help to enhance shareholder value as the LDC assumes services the Company entered into customers nationwide over the next ' responsibility for more than $3 billion in revenue for PECO e partnership with UtiliCorp United three to five years, while providing of Kansas City, Missouri, and formed three major benefits for PECO Energy. , . " Energy 0ne.The goalof Energy 0ne Energy. "When most people in the Greater Philadelphia area think , is to create the industry's first First,it will provide a branding nationwide, branded energy of PECO Energy what they will be thinking of is the LDC," strategy to compete with national marketing company that will enable brand entities in PECO Energy's Lawrence said. "Our highest priority is to focus on the cus- J its franchisees to provide customors traditional service territory. Second, tomer. We want to make sure our high levels of service and , with one-stop shopping for a variety it will establish a national of products and services. Local reliability are continued as we enter a customer choice envi- i distribution channel for products , electric utilities, the Energy 0ne that PECO Energy develops. And ronment, and that customers are pleased with the quality of i franchised distributors, will provide third, it will provide an opportunity service they receive from PECO Energy. Additionally, the LDC l to customers a single invoice and to earn revenues from other utilities will work to assure that customers will be able to move more l point-of-payment for a full range of who som Energy 0ne as franchisees. I services. smoothly into the new competitive marketplace.,, t la order to build a strong national The Company formed the LDC in 1997 as a separate busi-

   . bra name, nergy0"'                   "'                                                                                                                  !

p, d e ness unit and will continue to shape it through 1998. ly known and respected. "The year 1998 will really be one of integration, reinvention Energy 0ne contracted with and repositioning of the LDC. Beginning in 1998 and continu- [P 8"C[;**

                     ;        AT&
                            ,,er ices; ADT                                          ing into the year 2000, PECO Energy and the LDC will focus j _ for home and business security and                                               on the continued transition of the business to competition,"

environmental monitoring services; Lawrence said. AT&T Solutions to establish and manage Energy 0ne's integrated call Beyond that, the LDC plar.s to assist customers with new l center services; and Itron for and improved applications for electric and gas use, while l advanced metering and keeping its sights on enhancing shareholder value. The LDC's commu.:ications technology. Adding to its strong stable of key roles in the transition to customer choice have already suppliers Energy 0ne recently been defined by the Pennsylvania Public Utility Commission. It

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     ,            '{"9 is charged with the responsibility of providing reliable service provider of convergent billing                                                 to customers, and is designated as the default supplier for

• solutions for the telecommuni- those customers who do not select an alternative electricity supplier. Its responsibility will be to secure competitively e the f rsti egrat d bili

  . system for utility services in the U.S.                                         priced electric supplies for those customers who do not elect            j marht PECO Energy / Energy 0ne,                                                to change.                                                               i

! d "' i "',"y* "'p',9 "Just because we have been designated as the deliverer of traditional service territory, will electnc and gas energy to customers, we cannot rest on our be the first Energy 0ne franchisee laurels," said Lawrence. "We must continue to maintain our l Pe nsy va s e ec r e co petition existing infrastructure and improve our level of service in order l nilot program. to continue to provide reliable energy services to our cus- -

         "With Energy 0ne, we're able to                                            tomers. I believe we are up to that challenge "

M in front of the marketplace," l t ( lC0 Energy Chairman Corbin f_ill. "And, we can do this

• ' without the risks and costs of going it alone, while being among the leaders la a new business category l -integrated utility services."

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Management's Discussion and Analysis of financial Condition and Results of Operations 13

 - n           Management's Discussion and Analysis of Financial Condition and Results of Operations I      L hV General -                                                                       Discussion of Operating Results in December 1996, Pennsylvania Governor Ridge signed into                       Earnings law the Electricity Generation Customer Choice and                              The Company recorded a loss per common share of $6.80 in Competition Act (Competition Act) which provides for the                        1997 as compared with eamings per share of $2.24 and restructuring of the electric utitty industry in Pennsylvania,                  $2.64 in 1996 and 1995, respectively. The loss in 1997 was including retail competition for generation beginning in 1999-                  primarily due to an extraordinary charge of $8.24 per share Pursuant to the Competition Act, in April 1997, the                       reflecting the effects of the PUC Restructuring Order and Company filed with the Pennsylvania Public Utility                              deregulation of the Company's electric generation operations.

Commission (PUC) a comprehensive restructuring plan detail- 1997 eamings vvere also reduced by several one-time ing its proposal to implement full customer choice of electric - charges totakng $0.56 per share for changes in employee k generation supplier The Company's restructuring plan identi- benefits, write-offs of information systems development fied $7.5 billion of stranded costs (the loss in value of the charges reflecung clarification of accounting guidelines and Company's electric generation-related assets which will result additional reserves, including for environmental site remedia-from competition). In August 1997, the Company and vanous tion; by $0.30 per share for higher depreciation expense intervenors in the Compar-/s restructuring proceeding filed resulting from a full year's increase in depreciation and amor-with the PUC a Joint Petition for Partial Settlement tization of assets associated with Limerick Generating Station (Pennsylvania Plan). (Limerick) and other assets; by $0.12 per share for income in December 1997, the PUC rejected the Pennsylvania tax adjustments; by $0.09 per share for losses from new Plan and entered an Opinion and Order, revised in January non-utility ventures; and by $0.05 per share for increased 1998 (PUC Restructuring Order), that deregulates the depreciation expense due to normal plant additions. These Company's electric generation operations. The PUC decreases were partially offset by a one-time $0.18 per share Restructuring Order authorizes the Company to recover recognition of income resulting from the settlement of litiga-stranded costs of $4.9 billion on a discounted basis, or $5.3 tion arising from the current outage of Salem Generating , /' 7 billion on a book value basis, over 8% years beginning in Station (Salem); by $0.08 per share for operational efficien- 'T'j 1999. In January 1998, the Company filed appeals of the PUC cies; and by higher revenues net of fuel of $0.06 per share Restructuring Order with the U.S. District Court for the primarily due to increased sales to other utilities. Eastern District of Pennsylvania (Eastem District Court) and The $0.40 per share decrease in 1996 earnings was pri-the Commonwealth Court of Pennsylvania (Commonwealth marily due to higher Salem outage-telated replacement Court). power end maintenance costs which reduced earnings by The Company believes that the PUC Restructuring $0.27 per share. Eamings also decreased by $0.18 per share Order provides sufficient details regarding the deregulation of in 1996 due to lower electric revenues resulting from milder the Company's electric generation operations to require the weather conditions compared to 1995; by $0.12 per share Company to discontinue the use of regulatory accounting in due to the gain recognized in 1995 on the sale of Conowingo its financial statements for those operations. The Company Power Company (COPCO); by $0.11 per share due to higher determined that at December 31,1997, $5.8 billion of its customer expenses; and by $0.10 per share due to the

              $7.1 bilhon of electric generation assets were impaired and it                  increased depreciation of assets associated with Limerick had $2.6 billion of other electric generation-related regulatory                These decreases were partially offset by $0.18 per share due assets. Effective December 31,1997, the Company recorded                        to the Company's continuing cost control initiatives; by $0.09 t
 ;            an extraordinary charge against income of $3.1 billion ($1.8                    per share due to savings resulting from the Company's ongo-billion net of income taxes) to reflect the amount of such                      ing debt and preferred stock refunding and refinancing electric generation-related assets which will not be recovered                  program; and by $0.08 per share due to higher revenues from customers either prior to the commencement of com-                         resulting from increased sales to other utilities.

F petition or under the PUC Restructuring Order. For additional l

             . information regarding the extraordinary charge, see note 4 of Notes to Consolidated Financial Statements.

On January 26,1998, the Company's Board of Directors reduced the quarterly common stock dividend from $0.45 per share to $0.25 per share, effective with the dividend payable on March 31,1998. The Board of Directors concluded that, given the impact of the PUC Restructuring Order, the divi- ,p dend reduction was necessary to provide the Company with n the financial flexibility needed to meet the demands of com-(V petition Although the Company cannot predict the ultimate effect of the PUC Restructuring Order and competition for electric generation services, the Company believes that its future financial condition and results of operations will be adversely affected. See Outlook-PUC Restructuring Order."

                           ~                   -             _
                                                                                              - ~ ~ _ _ _PECO Energy Company and SuisidiaryTompmr---

14 Significant Operating Items _ _ Per_ cent. age Doliar Changes ._ O 1997 1996 1996-1995 Reyenue encf ExpenseJterns as a_ Percentage of Total Operat(ng Revenues _ 1996 1997 8% 2% 1995 90 % 90 % Electric 5% 4% _ 90 % 10 % Gas 8% _ _ 2% 10 % 10 % 100%_ Total Operating flevenues 33 % 27 % 100 % _ 100 % _ 28 % Fuel and Energy Interchange 12 % 2% 18 % 23 % 31 % Operation and Maintenance 19 % 7% 30 % 30 % " 11 % 12 % Depreciation 4% _ 5%) ( 11 % 7% 7% Taxes Other Than income 19% _ 9% 8% _ 78%_ Total Operating Expenses (19%) (11%) , 71 % 67% __ _ 22%_ Operating income (2%) _ (8%) 33% _ 29% _ interest Expense 4% (9%) (10%) (9%)_ (11 %) _ (18%) l (9%) (9%) (8%) Total Other income and Deductions (27%) income Before Taxes and Extraordinary item (21%) l 24 % 20 % 14 % (14%) _ 6%_ Income Taxes (35%)_ (15%) 10% _ 8% 14 % 12 % _ 8% Income Before Extraordinary Item O m ma _ _','"j _ mete _. Operating Revenues Total operating revenues increased in 1997 by $334 million to "[ ,'j,, [,'*""*,,

    $4,618 million. This represented a $312 million increase in electric revenues and a $22 mi!! ion increase in gas revenues RMUME]aWEOWC
                                                                                                             $ (1)                  (86)    $ (14)

(48) over 1996. The increase in efectric revenues was primarily Residential (12) 121 5 House Heating (217) due to increased sales to other utikties. The increase in gas revenues was primarily due to higher revenues from sa!esSmall to Comrnercial 291 19 194 30 commercial, house heating and residential customers resuit- and Industnal

                                                                           **                                                                      (37) ing from higher purchased gas-clause revenues charged                       in and tn us r a           (174)            (21)         (555) 3 1997 compared to 1996, partially offset by lower sales vol'                                                       8             42 161)

Other 45 1862) (69) ume resulting from milder weather conditions in 1997. This UnbiUed 397 (93) 49 (1,049) increase was partia!!y offset by reduced sales to interruptible Service Territory 91 9 992 33 439 customers switching to transportation service. interchange Sales 6,202 164 230 Total operating revenues increased in 1996 by $98 mil-Sales to other Utihties 8.650 5,592 S 80 9,733 $ 312 lion to $4,284 million. This represented an $80 million Total increase in electric revenues and an $18 million increase in gas revenues over 1995. The increase in electric revenues was primarily due to increased sales to other utihties, partially . offset by decreased retail sales due to milder weather conde-tions. The increase in gas revenues was primarily due to Fuel and Energy Interchange Expense increased sales to retail customers from colder weather con- interchange expense increased in 1997 by Fuel and energy - ditions in the first half of 1996 and higher levels of firm sales

                                                                            $318 milhon to $1,290 million. The increase was primarity due resulting from customers switching from transportation ser.

vice to firm service. These increases were partially offsettobypurchases needed for increased sales to other utilities and a one-time billing cred!t in 1996 from a non-utility generator. decreased sales and transportation revenues resulting from Fuel and energy interchange expense as a percentage of unusually mild weather in December 1996. Increases /(decreases) in electric sales and operating rev-operating revenues increased from 23% to 28% principally enues by class of customer for 1997 compared to 1996due to purchases needed for increased sales to other utilities. andFuel and energy interchange expense increased in 1996 by 1996 compared to 1995 are set forth as follows:

                                                                             $210 million to $973 million. The increase was primanly due to purchases needed for increased sales to other utshties, increased replacement power costs resulting from the shut-down of Salem and a net credit to expense in 1995 from certait energy sales to other utibties. Fuel and energy interchange expense as a percentage of operating revenues increased from 18% to 23% principally due to increased replacement power costs resutting from the shutdown of Salem.

Managernent's Discussion and Analysis of Financial Condition and Rrsults of Operations 15 f I t Operating and Maintenance Expense Other Income and Deductions l , Operating and maintenance expense increased in 1997 by Other income and deductions excluding interest charges

         \        $157 million to $1,431 million primarily due to several one-                    increased in 1997 by $6 million to $4 million. The increase         l time charges totaling $187 million, including charges for                       was primanly due to the settlement of litigation arising from changes in employee benefits, write-offs of information sys-                    the shutdown of Salem. The increase was partially offset by tems development charges reflecting clarification of                            losses from the Company's new.non-utility ventures. Also accounting guidelines and additional reserves, including for                    offsetting the increase was the write-off of one of the             '

environmental site remediation. These increases were partial- Company's telecommunications investments as a result of ly offset by lower operating costs at Company-operated the circumstances involved in the Federal Communication j nuclear generating stations and lower administrative and gen- Commission's auctioning of the personal communications eral expenses resulting from Company's ongoing cost-control systems "C-block" licenses. , efforts. Other income and deductions excluding interest charges  ; Operating and maintenance expense increased in 1996 decreased in 1996 by $60 million to a net deduction of $2 l by $23 million to $1,274 million due to higher customer million. The decrease was primarily due to the gain recog-  ! expenses, higher contractor costs and higher nuclear generat- nized in 1995 on the sale of COPCO.  ; c ' ing station charges resulting from the shutdown of Salem. [ These increases were partially offset by lower operating Income Taxes  ; costs at Company-operated nuclear generating stations and ' income taxes on operating and non-operating income lower administrative and general expenses resulting from the decreased in 1997 by $47 million to $293 million. The Company's ongoing cost-control efforts. decrease was primarily due to lower operating income. The decrease was partially offset by reduced tax depreciation . Depreciation Expense benefits from plant and regulatory assets which are not fully  : Effective October 1,1996, the Company increased deprecia- normalized for ratemaking purposes. I [ tion and amortization on assets associated with Limerick by income taxes decreased in 1996 by $92 million to $340 i

                  $100 million per year and decreased depreciation and amorti-                    million. The decrease was primarily due to lower operating          i zation on other Company assets by $10 million per year.                         income and the gain recognized in 1995 on the sale of               ;

Depreciation expense increased in 1997 by $92 million to COPCO.

                  $581 million. The increase was primarily due to increased                                                                                           j jQ depreciation of assets associated with Limerick. Depreciation                           Preferred Stock Dividends                                           t Q expense also increased due to additions to plant in service.                             Preferred stock dividends decreased in 1997 by $1 million to Depreciation expense increased in 1996 by $32 milhon t
                                                                                                  $17 million. The decrease was primarily due to the replace-         l
                  $489 million. The increase was pnmanly due to increased ment of $62 million of preferred stock with MIPS in the third       I depreciation of assets associated with Limerick. Depreciation quarter of 1997.                                                    !

expense also increased due to additinns to plant in service. Preferred stock dividends decreased in 1996 by $5 mil- I lion to $18 million. The decrease was primarily due to the  ! Interest Charges replacement of $78 milhon of preferred stock with MIPS in Interest charges decreased in 1997 by $7 million to $402 the fourth quarter of 1995. million. The decrease was primarily due to the Company's ongoing program to reduce and/or refinance higher-cost, long-  : term debt. This decrease was partially offset by the Discussion of Liquidity and Capital Resources  ! replacement of $62 million of preferred stock with Monthly income Dreferred Securities (MIPS) in the third quarter of The Company's capital resources are primarily provided by 1997. MIPS are recorded in the financial statements as internally generated cash flows from utility operations and, to l- Company Obligated Mandatorily Redeemable Preferred the extent necessary, external financing. Such capital Securities of a Partnership. resources are generally used to fund the Company s capital Interest charges decreased in 1996 by $36 million to requirements, including investments in new and existing ven-

   --             $409 million. The decrease was primarily due to the                             tures, to repay maturing debt and to make preferred and Company's ongoing program to reduce and/or refinance high-                      common stock dividend payments, er-cost, long-term debt. This decrease was partially offset by                         in 1997,1996 and 1995, intemally generated cash the replacement of $78 million_ of preferred stock with MIPS                    exceeded the Company's capital requirements and dividend in the fourth quarter of 1995,                                                  payments. The Company anticipates that it will be able to meet its capital requirements with intemally generated cash from utility operations in 1998. Beginning in 1999, the Company expects that intemally generated cash will be reduced due to price pressures resulting from competition for         !

4 electric generation services and the effects of the PUC  !

 '                                                                                                 Restructuring Order. In anticipation of this expected reduction

, of internally generated cash, in January 1998, the Board of Directors voted to reduce the Company's common stock divi-dend, effective with the first quarter 1998 dividend. Based upon the 222.5 million shares of common stock currently out-

PECO Energy Company and Subsidicry Cornpanies 16 and $82 mi!! ion, respectively.1995 cash flows benefited from standing. the common stock dividend reduction will reduce the sale of COPCO. the Company's cash requirernents by $178 million per year, Cash flows used in financing activities were $461 million Absent increases in the market price of efectric generation in 1997 as compared to $501 million in 1996 and $802 million services, the Company expects that internally generatec cash in 1995. The decreases in 1997 and 1996 were primarily due will be further reduced in 2007, when the Company com-to less available cash permitting fewer retirements of higher-pletes the recovery of its allowed stranded costs from 1 customers. The magnitude of the reduction of internally gen- cost debt. The Company meets its short-term liquidity requirements erated cash will be affected by a number of factors, including primarily through the issuance of commercial paper and bor-  ! how quickly electric generation competition develops, the l rowings under an unsecured credit facility with a group of Company's ability to compete, the impact of additional cost-  ; banks. The Company had $402 million of short-term debt, cutting initiatives, future market prices of electric generation and the outcome of the Company's appeals of the PUC including $314 million of commercial paper, outstanding at , December 31,1997. J Restructuring Order. At December 31,1997, the Company's embedded cost The Competition Act authorizes the securitization of the of debt was 6.9% with 12.0% of the Company's long-term recovery of allowed stranded costs. Under the Competition debt having floating rates. As a result of the extraordinary *' Act, secuntization proceeds must be used principally to reduce qualified stranded costs and related capitalization. charge in December 1997, the Company does not expect to Unless extended by the PUC, the Company has authorization meet the eamings test under the Company's mortgage until May 22,1998 to secuntize $1.1 billion of stranded costs. required for the issuance of additional bonds against property additions for the twelve months ended December 31,1998. It is unlikely that the Company will securitize the recovery of its stranded costs until the appeals of the PUC Restructuring As of December 31,1997, the Company was entitled to issue Order are resolved. If the Company does securitize, it cannot approximately $3.6 billion of mortgage bonds without regard pradict the level of stranded cost recovery that it would be to the eamings test against previously retired mortgage bonds. As a result of the extraordinary charge, the Company permitted to secuntize or the impact of such secuntization on also does not expect to meet the coverage test under the Company's capitalization. At December 31,1997, the Company's capital structure Company's Articles of incorporation required for the issuance consisted of 36.8% common equity; 7.9% preferred stock of additional preferred stock for the twelve months ended and Company obligated mandatorily redeemable preferred December 31,1998. securities (which comprised 4.8% of the Company's total The Company cannot predict whether the Competition capitalization structure); and 55.3% long-term debt. Act or the PUC Restructuring Order will ultimately affect the The Company expects its level of net capital investment Company's credit ratings. to decrease in future years. Total capital expenditures, primari-ly for utility plant, were $573 million in 1997 and are estimated to be $600 million in 1998 Due to the expected adverse Outlook impact of the PUC Restructuring Order and competition for The Company is entering a period of financial uncertainty electric generating services on its future capital resources, the with the deregulation of its electric generation operations in Company is currently evaluating its capital commitments for which revenues from regulated rates will be replaced by rev-1999 and beyond. Certain facilities under construction and to enues from the competitive sale of electric generation at be constructed may require permits and licenses which the market prices. The Company believes that the deregulation of Company has no assurance will be granted. its electric generation operations and other regulatory initia-The Company's operations have in the past and may in tives designed to encourage competition will increase the the future require substantial capital expenditures in order to Company's risk profile by changing and increasing the num-comply with environmental laws. l ber of factors upon which the Company's financial results are The Company has undertaken a number of new ven-dependent. This may result in more volatihty in the , tures, principally through its Telecommunications Group, Company's future results of operations. The Company some of which require significant cash commitments. For believes that it has significant advantages that will assist it in 1998, the Company's expected capital expenditures include the increasingly comretitive electric generation environment. approximately $150 million in such ventures. ' These advantages include the ability to produce electricity at Cash flows from operaticns were $1,038 million in 1997 a low marginal-cos a high reserve margin and the demon-as compared to $1,172 million in 1996 and $1,240 million in strated ability to efficiently operate its electric generation

1995. Cash flows consist of earnings, non-cash charges of depreciation and deferred income taxes. facilities.

l The Company's future financial condition and results of Cash flows used in investing activities were $573 million operations are substantially dependent upon the effects of the in 1997 as compared to $663 million in 1996 and $465 million Competition Act and the PUC Restructuring Order. Additional in 1995. Expenditures under the Company's construction pro-l factors that affect the Company's financial condition and gram decreased in 1997. The Compcny has also made l results of operations include operation of nuclear generating significant investments in diversified activities and other I obligations. Net funds used in these activities in 1997 were facilitie,s, sales to other utilities, accounting issues, inflation,

   $83 million, consisting of $26 million for telecommunications     weather and compliance with environmental regulations.

i ventures, $54 million for nuclear plant decommissioning trust Another factor affecting the Company's future financial funds and $3 million for other deposits and ventures. In 1996 condition is its ability to develop its investments in new ven-and 1995, funds used in similar activities were $114 million tures into profitabfe enterprises. l l l

                                .           -_      . .                     . . . __                     ~ . . _-        - .-_              _          . - -

Management's Discussion and Anitysis of Finandal Condition and Results of Operations 17

I l

3 PUC Restructuring Order Uncertainties of Electric Generation Restructuring l

              ) The Competition Act was enacted in December 1996, provid-

[V ing for the restructuring of the electric utility industry in Competition in wholesale and retail electric generation is expected to create new uncertainties in the utikty industry.

                                                                                                                                                                      ]

Per,nsylvania, including retail competition for generation These uncertainties include future prices of electricity in both  ! beginning in 1999. The Competition Act requires the the retail and wholesale . markets, potential changes in the unbundling of electric services into separate generation, _ Company's sales portfolio and supply and demand volatility. 1 transmission and distribution services with open retail com- The Company expects that deregulation of the  ; petition for generation. Electric distribution and transmission Company's electric generating operations will result in price l services will remain regulated by the PUC, The Competition ' pressures that will reduce the Company's future revenues. Act requires utilities to submit to the PUC restructuring plans,

                                                                                                                                                                      )

While the Company cannot predict the ultimate impact of the including their quantification of stranded costs which will PUC Restructunng Order on customer bills, the PUC esti-result from competition. The Competition Act authorizes the mates that customers will save up to 15% of their total

recovery of stranded costs through charges to distribution electric bill beginning in 1999 through June 30, 2007 and will customers for up to nine years (or for an attemative period save 30% of their total electric bill thereaf ter, determined by the PUC for good cause shown). During that Competition is also expected to affect the ultimate com-g period, the utility is subject to a rate cap which provides that position of the Company's electricity sales. The " shopping l' total charges to customers cannot exceed rates in place as of credit" estabf;shed by the PUC encourages electric retail cus- ,

December 31,1996, subject to certain exceptions. The tomers to choose a supplier. The Company cannot predict Competition Act also caps transmission and distribution rates l how successful its affiliated generation marketers will be in  ; from December 31,1996 through June 30,2001, subject to competing for these customers and customers elsewhere in  ! certain exceptions. Pennsylvania. To the extent that the Company loses retail l Pursuant to the Competition Act, in April 1997, the customers, it will be compelled to sell generation previously l Company filed with the PUC a comprehensive restructuring used to serve retail customers in the wholesale market, plan. In December 1997, the PUC adopted its own restructor- Since margins in the wholesale market are currently lower ing plan which deregulates the Company's electric generation than in the retail market, this could adversely affect the operations and allows the Company to recover stranded Company's profit margins. l costs of $4.9 billion on a discounted basis, or $5.3 bil! ion on a The Company is a low marginal-cost electricity producer, j book value basis, over 8% years beginning in 1999. Recovery which puts it in a favorable position to take advantage of I of allowed stranded costs will be through a separate charge opportunities in the electric retail and wholesale generation to be levelized over the recovery period using a 7.47% cost markets. The Company's competitive position and its future ,. of capital. Other major provisions of the PUC Restructuring financial condition and results of operations are dependent ! Order include capping customer bills at the year-end 1996 on the Company's ability to successfully operate its low system-wide average of 9.95 cents per kWh; beginning marginal-cost power plants. 3 January 1,1999, unbundling rates into a transmission and dis- The Company enters into commitments to buy and sell l (ribution component, the charge for recovery of stranded power. Currently, these commitments make the Company a , costs and a shopping credit" for generation; and phasing-in net power purchaser. Since the price and supply volatility of I customer choice of electric generation supplier for all cus- electricity generation cannot be predicted at this time, the

               . tomers in three steps, one-third of the peak load of each                        Company's position as a net purchaser exposes it to risk to customer class on January 1,1999, one-third on January 2,                      the extent that it has entered into contracts that may require 1999 (one day later) and the remainder on January 2, 2000.                     the Company to pay prices for purchased power in excess of To encourage competition, the PUC established the " shop-                      market prices, ping credit" for generation in excess of current market prices.                      The Company, as the local distribution provider, is obli-On January 21,1998, the Company filed a complaint in                      gated under the PUC Restructuring Order to serve as the
               ; the Eastem District Court seeking injunctive and monetary                        electric generation suppher of last resort in its service territo-(*                  relief on the grounds that the Competition Act and the PUC                     ry. This obligation will include all customers who do not elect i                   Restructuring Order: (1) are preempted by Section 201(b) of                    to choose an electricity supplier as well as all customers who the Federal Power Act; (2) effect a taking of private property                 seek a new energy supplier but are unable to reach a service a                without just compensation in violation of the Fif th and                       agreement with another supplier. The Company's rates are Fourteenth Amendments to the U.S. Constitution; (3) violate                    capped at 1996 levels. If energy prices nse above that level,

(- the Due Process Clause, the Contract Clause and the First the Company would still be obligated to serve these cus-Amendment of the U.S. Constitution; and (4) deprive the tomers at the capped rate. Company of certain other federally protected rights. On January 22,1998, the Company filed two Petitions Other Competitive Initiatives for Review in the Commonwealth Court, appealing the PUC Dunng 1996, the Federal Energy Regulatory Commission

               - Restructuring Order. The petitions state that the PUC (FERC) issued Order No. 888 which requires public utilities to Restructunng Order must be set aside because ,t            i is based f le open-access transmission tariff s for wholesale transmis-

_ upon errors of law, is not supported by substantial evidence, sion services in accordance with non-discriminatory terms

            / constitutes an arbitrary and capricious abuse of administrative                     and conditions established by the FERC.

discretion and deprives the Company of the due process of in response to Order No. 888, in December 1996, the law, to which it is entitled under Article I of the Pennsylvania Company and the other members of FJM Interconnection, Constitution. 1 L.C. (PJM) filed a joint compliance filing with the FERC

PECO Ercrgy Company and Subsidiary Companies 18 proposing to restructure PJM. In November 1997, the FERC Public Service Electric and Gas Company (PSE&G), the issued an order which allows for the establishment of an operator of Salem Units No.1 and No. 2, which are 42.59% Independent System Operatcr to operate the day to-day oper- owned by the Company, removed the units from service in ations of PJM. Transmission service is on a pool-wide, the second quarter of 1995. PSE&G informed the NRC at that open-access basis using the transmission facilities of the time that it had determined to keep the Salem units shut eight historical PJM companies with a flat rate based on the down pending review and resolution of certain equipment costs of the transmission system where the point of delivery and managemt.t issues and NRC agreement that each unit is located (thus there are eight rates). By January 1,2003, is suffic'ently prepared to restart. Unit No. 2 retumed to ser. PJM is required to have in place a uniform system-wide vice on August 30,1997 and Unit No.1 is expected to return transmission rate. to service late in the first quarter of 1998. The Company The Company received approval from the FERC to expects to incur and expense at least $20 miflion in 1998 for remove the existing cost-based cap on prices charged for increased costs related to the shutdown. As of December 31, power purchased by the Company in anticipation of later 1997,1996 and 1995, the Company had incurred and , resale in the wholesale market and certain changes regarding expensed $152, $149 and $50 million, respectively, for the terms of the buy-for-resa'e agreements. The new tariff replacement power and maintenance costs related to the provisions allow the Ccmpany to purchase and to-sell energy shutdown of Salem. See note 5 of Notes to Consolidated

                                                                                                                                          *=

at market-based rates both within PJM and outside PJM. Financial Statements. The gas industry is continuing to undergo structural changes in response to FERC policies designed to increase Sales to Other Utilities comnetition. FERC policies have required interstate gas The Company's electric utility operations include the whole-pipelines to unbundle their gas sales service from other regu- sale marketing of electricity. At December 31,1997, the lated tariff services, such as transportation and storage. In Company had long-term commitments relating to the pur-anticipation of these changes, the Company has modified its chase from unaffiliated utilities and others, energy associated gas purchasing arrangements to enable the purchase of gas with 1,330 megawatts (MW) of capacity in 1998, with 2,540 and transportation at lower cost. The Company, through MW of capacity during the period 1999 through 2002 and Horizon Energy Company, a wholly owned subsidiary, has with 2,430 MW of capacity thereafter. These purchases will successfully participated in pilot programs outside the be utilized through a combination of sa!es to jurisdictional Company s gas service territory to market natural gas and customers, long-term sales to other utilities and open-market other services. sales. Under some of these contracts, the Company may pur-There is an initiative in the Pennsylvania leg.is lature t chase, at its option, additional power as needed. The deregulate the gas industry, which has tne support of Company's future results of operations are dependent in part Govemor Ridge. The Company cannot predict whether the on its ability to successfully market the rest of this genera-Pennsylvania legislature.will enact legislation that deregulates tion. See note 5 of Notes to Consolidated Financial , the gas indurtry or whether Govemor Ridge will ultimately Statements. Sign into law any such legislation. The Company cannot pre- in the wholesale market, the Company has increased its dict the ultimate effect of gas industry deregulation on its sales to other utilities, but increased competition has reduced future financial condition or results of operations. the Company's profit margins on these sales. At December As a result of competitive pressures, the Company has 31,1997, the Company had entered into long-term agree-continued to negotiate long-term contracts with many of its ments with unaffiliated utilities to sell energy associated with I larger-volume industrial customers. Although these agree- 4,280 MW of capacity, of which 540 MW of inese agree- 1 ments have generally resulted in reduced margins, they have ments are for 1998,1,700 MW are for 1999 through 2002 l permitted the Company to retain these customers. and the remaining 2,040 MW extend through 2022. Regulation and Operation of Accounting Issues . Nuclear Generating facilities Effective December 31,1997, the Company discontinued The Company's financial condition and results of operations accounting for its electric generation operations in accor- .are in part dependent on the continued successful operation dance with Statement of Financial Accounting Standards i of its nuclear generating facilities. The Company's nuclear (SFAS) No. 71, " Accounting for the Effects of Certain Types , I generating facihties represent approximately 44% of its of Regulation." For further information, see note 4 of Notes l installed generating capacity. Because of the Company's to Consolidated Financial Statements. The Company believes reliance on its nuclear generatir.g units, any changes in regu' that its electric transmission and distribution system and gas lations by the Nuclear Regulatory Commission (NRC) operations continue to meet the provisions of SFAS No. 71. requiring additional investment 5 or resulting in increased The Company believes that it is probable that regulatory operating costs of nuclear gentirating units could adversely assets associated with these operations will be recovered. affect the Company. In 1997, the Financial Accounting Standards Board During 1997, Company-ope < ated nuclear plants operated (FASB) issued SFAS No.130, " Reporting Comprehensive at a 90% weighted-average capavty factor and Company- Income," to estabhsh standards for reporting and display of owned nuclear plants operated at a N% weighted-average comprehensive income and its components in financial state-capacity factor. Company-owned nuclear plants poduced ments. The new standard requires an entity to classify items 39% of the Company's electricity. despite the shutdown of of other comprehensive income by their nature in a financial the Salem unrts. Nuclear generation is the most cost-effec- statement and to display the accumulated balance of other tive way for the Company to meet customer needs and comprehensive income swetely from retained eamings and commitments for sales to othec utikties.

i Management's Discussion and Arelysis of Firencial Condition and RIsults of Operations . 19 l

                                                                                                                                                                    )

l additional paid-in capital in the equity section of a statement The Company has determined that it will be required to [g of financial position. The new standard is effective for fiscal modify or replace significant portions of its software so that ( years beginning after December 15,1997. The Company will adopt SFAS No.130 in 1998. Adoption of SFAS No.130 will its computer systems will properly utilize dates beyond December 31,1999. The Company presently believes that, not affect the Company's financial condition or results of with modifications to existing software and conversions to operations. The Company is evaluating the impact on its dis- new software, the Year 2000 Issue can be mitigated. closures, but does not expect SFAS No.130 to materially However, if such modifications and conversions are not made, change its disclosures. or are not completed timely, the Year 2000 Issue could have a

                   , in 1997, the FASB issued SFAS No.131, " Disclosures                       material adverse impact on the operations and financial condi-About Segments of an Enterprise and Related information,"                        tion of the Company. The costs associated with this potential to establish standards for reporting information about operat-                   impact are speculative and not presently quantifiable.

ing segments in annual financial statements and to require The Company initiated formal communications with all of g reporting of selected information about operating segments its significant suppliers in March 1997 to determine the in interim financial reports issued to shareholders. It also extent to which the Company is vulnerable to the suppliers' establishes standards for related disclosures about products failure to remediate their own Year 2000 issue. The and services, geographical areas and major customers. The Company's estimated total Year 2000 project costs include new standard is effective for fiscal years beginning af ter the estimated costs and time associated with the impact of December 31,1997 Adoption of SFAS No.131 will not affect Year 2000 issues of third parties and are based on presently the Company's financial condition or results of operations. available information. There can be no guarantee that the sys-The Company is evaluating the impact on its operating seg- tems of other companies on which the Company's systems ment disclosures. rely will be timely converted, or that a failure to convert by During 1996, the FASB issued the Exposure Draft another company, or a conversion that is incompatible with

               " Accounting for Certain Liabilities Related to Closure or                      the Company's systems, would not have a material adverse Removal of Long-Lived Assets." The FASB has expanded the                        impact on the Company.                                                l scope of the project to include closure or removal liabikties                         The Company will utilize both internal and extemal             I that are incurred at any time in the operating life of the relat.                resources to reprogram, or replace, and test software and ed long-lived asset. The FASB has decided that it should                        computer systems for Year 2000 modifications. Management proceed toward either a final Statement or a revised                            believes that adequate resources are being devoted to the Exposure Draft. The timing of this project is still to be deter.                Year 2000 lssue. The Company plans to complete the Year h mined. Until such time that the final Statement is issued, the                          2000 project not later than June 1,1999. To date, the V Company will be unable to determine what, if any, effect this                           Company has funded the Year 2000 project from current issue might have on its financial condition or results of opera-                operating cash flows as a base level of activity for the tions. See note 5 of Notes to Consolidated Financial                            preliminary efforts in connection with its Year 2000 assess-Statements.                                                                     ment and remediation plan. The Company expects the remaining costs of the Year 2000 project to be approximately Other Factors                                                                   $25 milhon.

Annual and quarterly operating results can be significantly The costs of the project and the date on which the Company plans to complete the Year 2000 modifications are affected by weather. Since the Company's peak demand is in the summer months, temperature variations in summer based on Management's best estimates, which were derived utilizing numerous assumptions of future events including the months are generally more significant than variations during continued availabPity of certain resources, third-party modifi-winter months. cation plans and other factors. However, there can be no Inflatiorr affects the Company through increased operat-guarantee that these estimates will be achieved; actual ing costs and increased capital costs for utikty plant. As a results could differ materially from those plans. Specific fac-result of the rate cap imposed by the Competition Act, the

   "                                                                                           tors that might cause such material differences include, but elimination of the Energy Cost Adjustment and cxpected are not limited to, the availability and cost of personnel price pressures due to competition, ine Company may have trained in this area, the ability to locate and correct all rele-hmrted opportunity to pass the costs of inflation through to vant computer programs and microprocessors, and similar customers.

The Year 2000 issue is the result of computer programs WWams. The Company's operations have ,n i the past and may .in being written using two digits rather than four to define the the future require substantial capit' . expenditures in order to applicable year and other programming techniques which comply with environmental laws. Additionally, under federal constrain date calculations or assign special meanings to cer-and state environmental laws, the Company ,s i generally liable tain dates. Any of the Company's computer systems that for the costs of r3 mediating environmental contamination of have date-sensitive software or microprocessors may recog-property now or formerly owned by the Company and of nize a date using "00" as the year 1900 rather than the year property contaminated by hazardous substances generated 2000. This could result in a system failure or miscalculations  ; by the Company. The Company owns or leases a number of I causing disruptions of operations, including, among other O' things, a temporary inabihty to process transactions, send bills or operate electric generation stations. real estate parcels, including parcels on which its operations r the operations of others may have resulted in contamina-l j tion by substances which are considered hazardous under  ; environmental laws. The Company is currently involved in a number of proceedings relating to sites where hazardous 1

                                                                                                                                                                    )

PECO Energy Company and Subsidiary Companics l l substances have been deposited and may be subject to addi-tional proceedings in the future. The Comparty has identified 27 sites where former man-uf actured gas plant (MGP) activities have or may have resulted in site contamination. The Company is presently engaged in performing various levels of activities at these sites, including initial evaluation *o determine the existence and nature of the contamination, detailed evaluation to deter-mine the extent of the contamination end the necessity and possible methods of remediation, and implementation of remediation. The Pennsylvania Department of Environmental Protection has approved the Company's clean-up of two sites. Six other sites are currently under some degree of , active study and/or remediation. As of December 31,1997 and 1996, the Company had accrued $63 and $28 million, respectively, for environmental *! investigation and remediation costs, including $35 and $16 million, respectively, for MGP investigation and remediation that currently can be reasonably estimated. The Company expects to expend $5 million for environrnental remediation activities in 1998. The Company cannot currently predict whether it will incur other significant liabilities for any addi-tional investigation and remediation costs at these or additional sites identified by the Company, environmental agencies or others, or whether such costs will be recoverable from third parties. For a discussion of other contingencies, see notes 3,4 and 5 of Notes to Consolidated Financial Statements. Forward-Looking Statements Except for the historical information contained herein, certain of the matters discussed in this Report are forward-looking statements which are subject to nsks and uncertainties. The factors that could cause actual results to differ materially include those discussed herein as well as those listed in notes 3,4 and 5 of Notes to Consolidated Financial Statements and other factors discussed in the Company's fil-ings 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 R: port. 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. O O

l 6 l 21 l i  ! f r Report of Independent Accountants  : O , t l To the Shareholders and Board of Directors  ! PECO Energy Company: i l^ i We have audited the accompanying consolidated balance sheets of PECO Energy l Company and Subsidiary Companies as of December 31,1997 and 1996, and the l related consolidated statements of income, cash flows, and changes in common f I shareholders' equity and preferred stock for each of the three years in the period l . ended December 31,1997. These financial statements are the responsibility of the  ; t Companies' management. Our responsibility is to express an opinion on these finan-  ; [ cial statements based on our audits. j We conducted our audits in accordance with generally accepted auditing stan-l l l dards. Those standards require that we plan and perform the audit to obtain  ; reasonable assurcnce about whether the financial statements are free of material l misstatement. An audit includes examining, on a test basis, evidence supporting the i amounts and disclosures in the financial statements. An audit also includes assess-i ing the accounting principles used and significant estimates made by management, j at well as evaluating the overall financial statement presentation. We believe that l our audits provide a reasonable basis for our opinion.  ! l i j In our opinion, the financial statements referred to above present fairly, in all  ; l~ material respects, the consolidated financial position of PECO Energy Company and [ Subsidiary Companies as of December 31,1997 and 1996, and the consolidated j results of their operations and their cash flows for each of the three years in the period ended December 31,1997, in conformity with generally accepted accounting

  .                                principles.

J

                                                   +

I AY i 2400 Eleven Penn Center Philadelphia, Pennsylvania

    %                              february 2,1998                                                                                 !

PECO Energy Company and Subsidiary Companies f 22 ConsAidated Statements of Income 1997 1996 1995 For the Years Ended December 31, Thousands of 0000rs Operating Revenues

                                                              $   4,166,669 $        3,854,836 $          3,775,326 Electric 451,232_            428.814             410,830 Gas 4,617,901          4,283,650            4,186,156 Total Operating Revenues Operating Expenses 1,290,164             972,380             762,762 Fuel and Energy interchange 1,431,420           1,274,222           1,251,273 Operating and Maintenance                                                                                                   ~

580,595 489,001 457,254 Depreciation 310,091 299,546 314,071 Taxes Other Than income Total Operating Expenses 3,612,270 3,035,149 2,785,360 1,005,631 1,248,501 1,400,796 Operating Income Other Income and Deductions interest Expense (372,857) (382,443) (423,711) Company Obligated Mandatorily Redeemable Preferred Securities of a Partnership, which holds Solely Subordinated Debentures of the Company (28,990) (26,723) (20,987) A!!owance for Funds Used During Construction 21,771 19.947 27,050 Settlement of Salem Litigation 69,800 - - Gain on Sale of Subsidiary - - 58,745 Other, net (66,028) (1,976) (444) Total Other locome and Deductions (376,304) (391,195) (359,347) Income Before income Taxes and Extraordinary item 629,327 857,306 1,041,449 income Taxes 292,769 340,101 431,717 Income Before Extraordinary item 336,558 517,205 609.732 Extraordinary item (net of $1,290,961 income taxes) (1,833,664) - - (1,497,106) 517,205 609,732 N:t (Loss) Income Preferred Stock Dividends 16,804 18.036 23,217 Earnings Applicable to Common Stock $ (1,513,910) $ 499,169 $ 586.515 Average Shares of Common Stock Outstanding (roousands) 222,543 222.490 221,859 Basic and Dilutive Earnings per Average Common Share

                                                                                                                            ~

Before Extraordinary Item pona,) $ 1.44 $ 2.24 $ 2.64 Extraordinary Item (pouan) $ (8.24) $ - $ - Basic and Dilutive Earnings per Average Common Share coauan) $ (6.80) $ 2.24 $ 2 64

                                                                                                                            ~

Dividends per Common Share (occors) $ 1.80 $ 1.755 $ 1.65 O See Notes to Consolidated financial Statements. l l

r PECO Energy Company and Subsidiary Companies 23 l

      , Consolidated Statements of Cash Flows i

l ( For the Years Ended December 31, 1997 1996 1995 Thousonds of Dollars Cash Flows from Operating Activities

Net income $ (1,497,106) $ 517,205 $ 609,732

! Extraordinary item (net of $1,290,961 income taxes) (1,833,664) - - Income Before Extraordinary item 336,558 517,205 609,732 Adjustments to reconcile Net income to Net Cash provided by Operating Activities: g Depreciation and AmorGzation 664,294 566,412 531,299

l. Deferred Income Taxes (17,228) 166,771 183,514 Salem Litigation Settlement 69,800 - -

Gain on Sale of Subsidiary - - (58,745) Deferred Energy Costs (5,652) (66,151) (71,104) Amortization of Leased Property 39,100 31,400 42,900 Changes in Working Capital: Accounts Receivable (289,610) 53,681 (8,198) Inventories 28,628 (2,729) (10,872) ! Accounts Payable 93,881 (86,765) (4,686) l Other Current Assets and Liabilities 58,539 (25,040) 9,641 Deferred Credits - Other 78,846 (4,609) 5,172

    -         Other items affecting Operations                          (19,005)        22,070              11,683 i     Net Cash Flows from Operating Activities                     1,038,151    1,172.245            1,240,336 l        Cash Flows frorn Investing Activities                                                                            l l        Investment in Plant                                           (490,2001      (548,854)           (532,614)

Proceeds from Sale of Subsidiary - - 150,000 increase in Other Investments (83,261) (114,126) (82,04J Net Cash Flows from Investing Activities (573,461) (662,980) (464,tiSS) L Cash Flows from Financing Activities  ! Change in Short-Term Debt 114,000 287,500 (11,499) 5 Issuance of Common Stock 117 11,301 15,585 I Retirement of Preferred Stock (61,895) - (78,105) I issuance of Company Obligeted Mandatorily Redeemable Preferred Securities of a Partnership 50,000 - 81,032 Issuance of Long-Term Debt 161,813 43,700 182,540 Retirement of Long-Term Debt (283,303) (427,463) (575,713) Loss on Reacquired Debt 22,752 24,724 12,302 l~ Dividends on Preferred and Common Stock (417,383) (411,569) (390,340) Change in Dividends Payable (5,438) 1,685 5,626 Expenses of issuing Long-Term Debt and Capital Stock (2,084) 890 (577) Capital Lease Payments (39,100)_ (31,400) (42,900) Net Cash Flows from Financing Activities (460,521) (500,632) (802,049) Increase (Decrease) in Cash and Cash Equivalents 4,169 8,633 (26,368) Cash and Cash Equivalents at beginning of period 29,235 20,602 46,970 l Cash and Cash Equivalents at end of period S 33,404 $ 29235 $ 20,602 l [ l l l b 1 See Notes to Consolidated financial Statements. I-

PECO Energy Company and Subsidiary Companies 24 Censolidated Balance Sheets O 1997 1996 At December 31, Thousands of Dollars Assets Utility Plar:t ~ S 3,617,666 $ 3.494,778 Electric-Transmission & Distribution 1,434,895 10,127.602 Electric-Ge7eration 1,071,819 1,005,507 Gas

• 302,672 317,065 Common 6,427,052 14,944,952 Less Accumulated Provision for Depreciation 2,690,824_ 5,046,950 3,736,228 9,898,002 147,359 199,579 Nuclear Fuel, net 611,204 661,871 Construction Work in Progress 175,933 182,088 Leased Property, net 4,670/124 10,941,540 Net Utility Plant Current Assets 33,404 29,235 Cash and Temporary Cash Investments Accounts Receivable, net 173,350 19,159 Customers 139,996 74.377 Other inventories, at average cost 84,858 84.633 Fossil Fuel 90,890 119,743 Materials and Supplies 424,497 -

Deferred Generation Costs Recoverable in Current Rates 35,665 30,013 Deferred Energy Costs-Gas 20,115 63,234 Other 1,002,775 420,394 Total Current Assets DIferred Debits and Other Assets Competitive Transition Charge 5,274,624 - 590,267 2,325,721 Recoverable Deferred income Taxes

                                                                                           -            361,762 Deferred Limerick Costs 97,409                 233,492      .

Deferred Non-Pension Postretirement Benefits Costs

                                                                                           -             92,021 Deferred Energy Costs-Electric 515,835                 432,574 Investments Losa on Reacquired Debt                                                       83,918                 283.853 121,016                 169,262 Other 6,683,069               3,898,685 Total Deferred Debits and Other Assets
                                                                        & 12,356,568 $ 15.260.619 Total Assets See Notes to Consolidated Financial Statements.

  .,          , ,            - . .     ,,           - , . . _ . ~ . - , - . .                       _ . _ . - . - . . - . - ~ . . -                                           . . . -     _ . - . - . . - .
           ' PECO Energy Company and Subsidiary Companies                                                                                                                                                 25 i

Consolidated Balance Sheets (continued) i f

       \

i t.t Decem'ber 3t, 1997 1996 Thousands of Dollars Capitalization and Liabilities l l Capitalization I Common Shareholders' Equity Common Stock 8 3,517,731 $ 3,517,614 * [ Other Paid-In Capital 1,239 1,326 i j Retained (Deficit) Earnings i (792,2391 1,127,041 l 2,726,731 4,645,981  ; l Preferred and Preference Stock . l l Without Mandatory Redemption 137,472 199,367  ; j With Mandatory Redemption 92,700 92,700 l t Company Obligated Mandatorily Redeemable Preferred  ; L Securities of a Partnership, which holds Solely  ; Subordinated Debentures of the Company 352,085 302,182 Long-Term Debt 3,853,141 3,935,514 I Total Capitalization 7,162,129 9,175,744 l i Current Liabilities  !

       ,O    Notes Payable, Bank                                                                                                                                      401,500              287,500 f

Long-Term Debt Due Within One Year 247,087 283,303 i Capital Lease Obligations Due Within One Year 55,808 49,347 $ Accounts Payable 306,847 212,966  ! Taxes Accrued 66,397 71,482 , Interest Accrued 77,911 82,006 1 Dividends Payable 16,969 22,407 '! Deferred income Taxes 185,696 2,745 Other 260 457_ 91,608 Total Current Liabilities ' 1,618,672 1,103,364 I l Deferred Credits and Other Liabilities Capital Lease Obligations 120,125 132,741 Deferred income Taxes 2,297,042 3,745,242 l Unamortized Investment Tax Credits 318,065 336,132 I Pension Obligation 211,596 224,454  : Non-Pension Postretirement Benefits Obligation 324,850 315,058 l c Other 304,089 227,884- l Total Deferred Credits and Other Liabilities 3,575,767 4,981,511 i Commitments and Contingencies (Notes 3,4 and 5)  ! I i - Total Capitalization and Liabilities 8 12,356,568 $ 15,260,619 i l_ ' See hotes to Consolidated Hnancial Statements. I i

PECO Energy Company and Subsidiary Companies 26 Consolidated Statements of Changes in Common Shareholders' Equity and Preferred Stock Other Retained Common Stock Paid-In Earnings ._ _ _ Prt ferred Stock __ _ , Shares __ Amount Capital _ __._(Deficit) ___ _ _ Shares __._ Amount _ All Amounts in Thousomis __ 221,609 $ 3,490,/28 $ 1,271 5 810,507 3,702 $ 370,172 Balance at January 1,1995 609,732 Net income Cash Dividends Declared Preferred Stock (24,253) (at specified annual rates) Common Stock ($1.65 per share) (366,087) Expenses of Capital Stock Activity (4,035) . Capital Stock Activity Longterm incentive Plan Issuances 563 15,585 (2,156) Preferred Stock Issurices 55 Preferred Stock Redemptions (781) (78,105) Balance at December 31,1995 222,172 3,506,313 1,326 1,023,708 2,921 292,067 517,205 Net income Cash Dividends Declared Preferred Stock (at specified annual rates) (21,042) Common Stock ($1.755 per share) (390,527) Expenses of Capital Stock Activity (275) Capital Stock Activity Long-Term incentive Plan Issuances 370 11,301 (2,028) Balance at December 31,1996 222,542 3,517,614 1,326 1,127,041 2,921 292,067 Net Loss (1,497,106) Cash Dividends Declared Preferred Stock (at specified annual rates) (16,805) Common Stock ($1.80 per share) (400,578) Expenses of Capital Stock Activity 98 Interest on Stock Repurchase Forward Contract (4,889) Capital Stock Activity Longterm 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 S 230,172 O See Notes to Consolidated financial Statements. l l

Notes to Consolidated Financial Statzents 27 1

      ,       Notes to Consolidated Financial Statements
         \
    \

1. Significant Accounting Policies Energy and Purchased Gas Cost Adjustment Clause The Company's gas rates are subject to a fuel adjustment General clause designed to recover or refund the difference between The consolidated financial statements of PECO Energy the actual cost of purchased gas and the amount included in Company include the accounts of its utihty subsidiary corr pa- base rates. Differences between the amounts billed to cus-nies, all of which are wholly owned. Accounting policies are tomers and the actual costs recoverable are deferred and in accordance with those prescribed by the regulatory author- recovered or refunded in future periods by means of prospec-ities having jurisdiction, principally the Pennsylvania Public tive adjustments to rates. Such rates are adjusted quarterly.

Utility Commission (PUC) and the Federal Energy Regulatory Prior to December 31,1996, the Company's retail elec-Commission (FERC). The Company has unconsolidated non- tric rates were subject to an Energy Cost Adjustment (ECA) utility subsidiaries which are r.ot material. The unconsolidated clause designed to recover or refund the difference between 3 subsidiaries are accounted ',or under the equity method. the actual cost of fuel, energy interchange or purchased power and the amount of such costs included in base rates. Use of Estirnate: Effective December 31,1996, the PUC approved the roll-in of The preparation of financial statements in conformity with electric energy costs into the base rates charged to the generally accepted accounting principles requires manage- ompany's retail electric customers and such rates are no ment to make estimates and assumptions that affect the longer subject to the ECA. reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial Utility Plant statements and the reported amounts of revenues and Effective December 31,1997, electric generation plant ;s va!- expenses during the reporting period. Actual results could dif- ued at the lower of original cost or market pursuant to SFAS fer from those estimates. No.121, "Ar, counting for the impairment of Long-Lived Estimates are used in the Company's accounting for Assets and for Long-Lived Assets to be Disposed Of." All unbilled revenue, the allowance for uncollectible accounts, other utility plant continues to be valued at original cost (see fuel adjustment clause, depreciation and amortization, taxes, note 4). g reserves for contingencies, employee benefits, certain fair value and recoverability determinations, and nuclear outage Nuclear Fuel costs, among others. The cost of nuclear fuel is capitalized and charged to suel expense on the unit of production method. Estimated costs Accounting for the [ffects of Regulation of nuclear fuel disposal are e.harged to fuel expense as the The Company accounts for all of its regulated operations in related fuel is consumed. The Company's share of nuclear accordance with Statement of Financial Accounting fuel at Peach Bottom Atomic Powe,- Station (Peach Bottom) Standards (SFAS) No, 71, " Accounting for the Effects of and Salem Generating Station (Salem) is accounted for as a Certain Types of Regulation," requinng the Company to capital lease. Nuclear fuel at Limerick Generating Station record the financial statement effects of the rate regulation to (Limerick) is owned, which the Company is currently subject. If a separable por-tion of the Company's business no longer meets the Depreciation and Decornmissioning provisions of SFAS No. 71, the Company is required to elimi_ Depreciation is provided over the estimated service hves of nate the financial statement effects of regulation for that plant on the straight-line method. The Company is currently

,          portion. Effective December 31,1997, the Company deter.             reviewing the useful lives of its electric generation assets.

mined that the electric generation portion of its business no Annual depreciation provisions for financial reporting purpos-longer met the criteria of SFAS No. 71 and, accordingly, es, expressed as a percentage of average depreciable utility implemented SFAS No.101, " Regulated Enterprises . plant in service, were approximately 3.3% in 1997,2.9% in Accounting for the Discontinuation of FASB Statement No. 1996 and 2.8% in 1995. See note 3 for information concern-71," for that portion of its business (see note 4). ing the change in 1996 to depreciation and amortization.

               ~

The Company's current estimate of the costs for decom-Revenues missioning its ownership share of its nucles generating Electric and gas revenues are recorded as service is rendered stations is currently included in electric base rates and is or energy is defivered to customers. At the end of each charged to operations over the expected service hfe of the month, the Company accrues an estimate for the unbilled related plant. The amounts recovered from customers are amount of energy delivered or services provided to cus- deposited in trust accounts and invested for funding of future costs. These amounts, and realized investment eamings jf) tomers (see note 8). thereon, are credited to accumulated depreciation. The V Company believes that the amounts being recovered from customers through electric rates will be sufficient to fully fund the unrecorded portion of its decommissioning obliga-tion (see note 5).

PECO Energy Company and Subsidiary Compants Differences between the accrued and actual expense for the Incorne Taxes The Company uses an asset and liability approach for finan-outage are recorded when such differences are known, cial accounting and reporting of income taxes. Investment tax Capitalized Software Costs credits are deferred and amortized to income over the esti-mated useful life of the related property (see note 14). Software projects which exceed $5 million are capitalized. At December 31,1997 and 1996, capitalized software costs Allowance for Funds Used During Construction (AFUDC) totaled $86 and $78 million (net of $29 million accumulated AFUDC is the cost, during the period of construction, of debt amortization in each year), respectively. Such capitalized amounts are amortized ratably over the expected lives of the and equity funds used to finance construction projects. AFUDC is recorded as a charge to Construction Work in projects when they become operational, not to exceed ten Progress and as a credit to Other Income and Deductions. years. The rates used for capitalizing AFUDC, which averaged 8.88% in 1997,9.38% in 1996 and 9.88% in 1995, are com- Gains and Losses on Reacquired Debt , puted under a method prescribed by regulatory authorities. Prior to December 31,1997, gains and losses on reacquired AFUDC is not included in regular taxable income and the debt were deferred and amortized to interest expense over depreciation of capitalized AFUDC is not tax deductible. the period approved for raternaking purposes. Effective

• Effective January 1,1998, the Company ceased accruing January 1,1998, gains and losses on reacquired debt associ-AFUDC for electric generation-related construction projects ated with the electric generation portion of the Company's and will use SFAS No. 34, " Capitalizing Interest Costs," to operations will be expensed as incurred. Gains and losses on calculate the costs during the period of construction of debt reacquired debt associated with the Company's regulated funds used to finance its electric generation-related construc- operations will continue to be deferred and amortized to tion projects. interest expense over the period approved for ratemaking purposes.

Nuclear Outage Costs ' incremental nuclear maintenance and refueling outage costs Reclassifications are accrued over the unit operating cycle. For each unit, an Certain prior-year amounts have been reclassified for compar-accrual for incremental nuclear maintenance and refueling ative purposes. These reclassifications had no effect on net outage expense is estimated based upon the latest planned income or common shareholders' equity. outage schedule and estimated costs for the outage.

2. Nature of Operations and Segment Information O

The Company provides retail electric and natural gas service with a population of 3.6 million, including 1.6 million in the l to the public in southeastem Pennsylvania and, in pilot pro. City of Philadelphia. Approximately 94% of the retail electric grams, natural gas service to areas in Maryland and New service area and 64% of retail kilowatthour (kWh) sales are in the suburbs around Philadelphia, and 6% of the retail service Jersey. The Company also engages in the wholesale market. area and 36% of such safes are in the City of Philadelphia. ing of electricity on a national basis. The Company participates in joint ventures which provide telecommunica. Natural gas service is supplied in a 1,475-square-mile area of tions services in the Philadelphia area. The Company's southeastern Pennsylvania adjacent to Philadelphia with a trad:tional retail service territory covers 2,107 square miles. popufation of 1.9 miffion. Electric service is fumished to an area of 1,972 square mi!es 1- For the Years Ended Decernber 31, 1997 1996 l 199s_ Thousands of Dollars Electric Operations l Operating revenues: l' Residential $ 1,357,449 $ 1,370,158 $ 1,379,046 , Small commercial and industrial 778,743 748,561 730,220 l l Large commercial and industrial 1,077,374 1,098,307 1,135,550 i Other 147,523 140,133 136,988 Ur billed 19,130 (25,950) 42,580 l Service territory 3,380,219 3,331,209 3,424,384 Interchange sales 58,614 25,991 17,488 Sales to other utilities 727,836_ 497,636 333,454 Total operating revenues 4,166,669 3,854,836 3,775,326 Operating expenses, excluding depreciation 2,697,877 2,243,094 2,026,112 1 Depreciation 552,667 462,315 430,993 Operating income $ 916,125 $ 1,149,427 $ 1.318,221 Utility plant additions S 382,157 $ 447,105 $ 435.400

Notes to C nsolidated Fiendal Stat:ments 29 For the Years Ended December 31, 1997 1996

      ,                                                                                                                                        1995 Thousands of Dollars Gas Operations Operating revenues:

Residential 8 16,852 $ 15,716 $ 15,482 House heating 265,299 249,507 235.456 Commercial and industrial 144,801 132,822 125,631 Other 3,228 11.462 5,382 Unbilled 1989) (4,250) 6,540 Subtotal 429,211 405,257 388,491 Other revenues (including transported for customers) 22,021 23,557 22.339 Total operating revenues 451,232 428,814 410,830

         . Operating expenses, excluding depreciation                                         333,798               303,054              301.994 Depreciation                                                                       27,928                 26,686               26,261 Operating income                                                     S       89,506        $        99,074       $       82,575 Utility plant additions                                                    S       85,212        $        68,394       5      63,192 Identifiable Assets

• at December 31, Electric $ 9,610,984 $ 10,287,444 $ 10,408,105 Gas 966,685 858,471 785,881 Nonallocable assets 1,778,899 4,114,704 4,114,519 Total assets S 12,356,568 $ 15.260.619 $ 15.308.505 Includes utility plant less accumulated depreciation, inventories, segment-specific regulatory assets and allocated common utility property.

3'. Rate ' Matters - In December 1997, the PUC rejected the Pennsylvania Competition Act Plan and entered an Opinion and Order, revised in January The Electricity Generation Customer Choice and Competition 1998 (PUC Restructuring Order), that deregulates the Act (Competition Act) was enacted in December 1996, pro. Company's electric generation operations. The PUC viding for the restructuring of the electric utility industry in Restructuring Order allows the Company to recover $4.9 bil-Pennsylvania, including retail competition for generation lion on a discounted basis, or $5.3 billion on a book value beginning in 1999. The Competition Act requires the basis, over 8% years beginning in 1999. Recovery of allowed unbundling of electric services into separate generation, stranded costs will be through a separate charge to be lev-transmission and distribution services with open retail com- elized over the recovery period using a 7.47% cost of capital. petition for generation. Electric distribution and transmission Other major provisions of the PUC Restructuring Order services will remain regulated by the PUC. The Competition include capping customer bills at the year-end 1996 system-Act requires utilities to submit to the PUC restructuring plans, wide average of 9.95 cents per kWh; beginning January 1, including their wantification of stranded costs (the loss in 1999, unbundling rates into a transmission and distribution value of the. C pany's electric generation-related assets, component, the charge for recovery of stranded costs and a which will rewit from competition). The Competition Act " shopping credit" for generation; and phasing-in customer authorizes the recovery of stranded costs through charges to choice of electric generation supplier for all customers in distribution customers for up to nine years (or for an alterna. three steps: one-third of the peak load of each customer tive period determined by the PUC for good cause shown). class on January 1,1999, one-third on January 2,1999 (one During that period, the utility is subject to a rate cap which day later) and the remainder on January 2, 2000. To encour-provides that total charges to customers cannot exceed rates age competition, the PUC established the " shopping credit" in place as of December 31,1996, subject to certain excep. for generation in excess of current market prices. tions. The Competition Act also caps transmission and On January 21,1998, the Company filed a complaint in distribution rates from December 31,1996 through June 30, the U.S. District Court for the Eastern District of Pennsylvania 2001, subject to certain exceptions. seeking injunctive and monetary relief on the grounds that Pursuant to the Competition Act, in April 1997, the the Competition Act and the PUC Restructuring Order: (1) are Company filed with the PUC a comprehensive restructuring pre-empted by Section 201(b) of the Federal Power Act; (2) O plan detailing its proposal to implement full customer choice effect a taking of private property without just compensation of electric generation supplier. The Company's restructuring in violation of the Fifth and Fourteenth Amendments to the plan identified $7.5 billion of stranded costs. In August 1997, U.S. Constitution; (3) violate the Due Process Clause, the the Company and various intervenors in the Company's Contract Clause and the First Amendment of the U.S. rzstructuring proceeding filed with the PUC a Joint Petition for Constitution; and (4) deprive the Company of certain other Partial Settlement (Pennsylvania Plan). federally protected rights.

                   }

c PECO Energy Company and Subsidiary Companies 30 deposited $26 and $47 million, respectively, in trust accounts On January 22,1998, the Company filed two Petitions to fund its retail electric non-pension postretirement benefits for Review in the Commonwealth Court of Pennsylvania, costs. These costs include amounts charged to operating , appealing the PUC Restructuring Order. The petitions state that the PUC Restructuring Order must be set aside because expense or capitalized during 1997 and 1996. At December l 1 it is based upon errors of law, is not supported by substantial 31,1997,$121 million of the previously recorded transition evidence, constitutes an arbitrary and capricious abuse of obligation was included as part of electric generation-related j administrative discretion and deprives the Company of the regulatory assets (see note 4L l The Company recognizes $2.8 million in non-pension due process of law, to which it is entitled under Article 1 of the Pennsylvania Constitution. postretirement benehts costs annually associated with gas utility operations. Dunng 1997 and 1996, the Company deposited $2.8 and $2.9 milkon, respectively, in trust Lirnerick accounts to fund its gas non-pension postretirement benefits Under its electric tanffs through December 31,1997, the Company was recovering $285 million of deferred Limerick costs. costs representing carrying charges and depreciation associ-ated with 50% of Limerick common facilities. The Company Energy Cost Adjustment also deferred certain operating and maintenance expenses, Through December 31,1996, the Company was subject to a - PUC-established electoc ECA which, in addition to reconciling depreciation and accrued carrying charges on its capital fuel costs and revenues, incorporated a nuciear performance investment in Limerick Unit No. 2 and 50% of Limerick com-standard which allowed for financial bonuses or penalties mon facilities. These costs were included in base rates and were being recovered over a nine-year period oeginning depending on whether the Company's system nuclear capaci-October 1,1996. The Company was also recovenng $137 ty factor exceeded or fell below a specified range. For the million of Limerick Unit No.1 costs over a ten-year period years ended December 31,1996 and 1995, the Company without a return on investment. At December 31,1997, the recorded bonuses of $22 and $13 million, respectively. unamortized portion of these regulatory assets wer6 included as part of electric generation-related regulatory assets (see n te 4L 4. Accounting Changes Under its electric tanffs and ECA, the Company was The Company accounts for all of its regulated operations in allowed to retain for shareholders any proceeds above the accordance with SFAS No. 71 which allows the Company to average energy cost for sales of 399 megawatts (MW) of record the financial statement effects of the rate regulation to near-term excess capacity and/or associated energy and to which the Company is subject. Use of SFAS No. 71 is applic-share in the benefits of energy savings which resulted from able to the utility operations of the Company which meet the the operation of both Limerick Units No.1 and No. 2. The f 11 wing cnteria: (1) third-party regulation of rates; (2) cost-Company's ECA was discontinued at December 31,1996. based rates; and (3) a reasonable assumption that all costs During 1996 anL 1995, the Company recorded as revenue will be recoverable from customers through rates. net of fuel costs $82 and $79 million, respectively, as a result in 1997, the Financial Accounting Standards Board of the sale of the 399 MW of capacity and/or associated (FASB) through its Emerging Issues Task Force (EITF) issued enargy and the Company's share of Limerick energy savings. EITF No. 97-4, " Deregulation of the Pricing of Electricity - issues Ac;ated to the Application of FASB Statements No. , Declaratory Accounting Order ,A ounting for the Effects of Certain Types of Regulation, Pursuant to a PUC Declaratory Order, effective October 1 and No 101, Regulated Enterprises - Accounting for the 1996, the Company increased depreciation and amortization Discon inuation of Appkcation of FASB Statement No. 71." on assets associated with Limerick by $100 million per year The EUF agreed that: a) an entity should cease to apply SFAS and decreased depreciation and amortization on other No. 71 no later than the date the specific deregulation plan is Company assets by $10 million per year, for a net increase in enacted and the details of that plan are known, and b) both depreciation and amortization of $90 million per year. stranded costs and regulated assets and liabilities should con-Effective December 31,1997, the Company ceased this tinue to be recognized to the extent that the transition plan increased depreciation since this Declaratory Order has been prov des for their recovery through the regulated transmis-superseded by the PUC Restructuring Order. At December sion and distribution portion of the business. - 31,1997, the $90 miliion of depreciation and amortization The Company believes that the PUC Restructunng Order that would have been recognized in 1998 was deferred as a pr vides sufficient details regarding the deregulation of the regulatory asset, since the Company's rates will continue to Company s electric generation operations to require the be cost based until January 1,1999, and will be amortized Company to discontinue the appbcation of SFAS No. 71 for and recovered in 1998. those operations. Effective December 31,1997, the Company adopted the provisions of SFAS No.101 for its Rzcovery of Non-Pension Postretirernent Benefits Costs n op abons. FAS No.101 requires a 9 Effective January 1995, the Company increased electnc base determination of impairment of plant assets under SFAS No. rates by $25 milkon per year to recover the increased costs, 121, and the ehmination of all effects of rate regulation that including the annual amortization of the transition obhgation have been recognized as assets and liabikties pursuant to (over 18 years) deferred in 1994 and 1993, associated with "' the implementation of SFAS No.106, " Employers' Accounting for Postretirement Benefits Other Than Pensions" (see note 7). During 1997 and 1996, the Company

            . ..                      _           . . -        ~-            -                 -,        --_ ~ . . _        .-

l Notis to Consolidated Financial Statements 3t I I l At December 31,1997, the Company performed an (Thousands of Dollars) l l [ ' impairment test of its electric generation assets pursuant to l ( SFAS No.121 on a plant specific basis and determined that

            $6.1 billion of its $7.1 bi!! ion of electric generation assets Electric generation-related asset impairment determined pursuant to SFAS No.121 i

would be impaired as of December 31,1998. The Company Net book value of electric estimated the fair value for each of its electric generating generation-related assets l l units by determining its estimated future operating cash before write-down $. 7,115,155 l inflows and outflows. The net future cash flows for each December 31,1998 market value of l l dectric generating plant were then compared to its net book electric generation-related assets l t value. For any electric generation plant with future undis- pursuant to SFAS No.121 (990,376) ) I counted cash flows less than its book value, net cash flows Expected 1998 change in net plant L were discounted using a discount rate commensurate with - recognized for recovery until the risk of each electric generating plant. Since the cost-based rates cease at Company's retail electric rates will continue to be cost-based December 31,1998 (303,800) until January 1,1999, $0.3 billion representing depreciation Electric generation-related asset expense on electric generation-related assets in 1998 has impairment 5,820,979 been reclassified to a regulatory asset and will be amortized l - and recovered in 1998. Electric generation-related regulatory assets l At December 31,1997, the Company had $2.7 billion of Recoverable Deferred income Taxes 1,762,946 electric generation-related regulatory assets, of which $0.1 Deferred Limerick Costs 321,420 j billion will be amortized and recovered through cost-based Deferred Non-Pension Postretirement l rates in 1998. Benefits Other Than Pensions 120,899 , At December 31,1997, the Company had total electric Deferred Energy Costs - Electric 92.021 l generation-related stranded costs of $8.4 billion, representing Loss on Reacquired Debt 177,183 ! $5.8 billion of net stranded electric generation plant and $2.6 Additional assets written-off pursuant to l billion of electric generation-related regulatory assets. The discontinuance of SFAS No. 71 104,818 PUC Restructuring Order allows the Company to recover Other 90,480 l $4.9 billion on a discounted bt. sis, or $5.3 billion on a book- Regulato y asset recognized for , l value basis, of its generation-related stranded costs from recovery until cost-based

                                                                                                                                                           ]

[  % customers. This results in a net unrecoverable amount of rates cease at December 31,1998 (91.497) i ! , / $3.1 billion. Total electric generation-related l Although the Company is appealing the PUC regulatory assets 2,578,270 Restructuring Order, Management believes that EITF No. 97-4 required it to write off all electric generation-related Total electric generation-related stranded costs for which recovery through rates has not been stranded costs 8,399,249 . provided. Accortaly, the Company recorded an extraordi- ) nary charge atQecember 31,1997 of $3.1 billion ($1.8 billion Amounts approved for collection I l net of taxes) of electric generation-related stranded costs that from customers (regulatory asset will not be recovered from customers. pursuant to EITF No. 97-4) (5,274,624) A summary as of December 31,1997 of the electric gen-eration-related stranded costs and the amount of such Total Extraordinary item 8 3,124,625 stranded costs written-off by the Company is shown in the i following table: Due to the market-based pricing of electric generation

. provisions of the PJM laterconnection, L.L.C. restructuring  ;

order aproved by the FERC in November 1997, the  ! ! Company believes that its wholesale energy sales operations  ! are no longer subject to the provisions of SFAS No. 71. l Based on projections of the Company's retail load growth, l the Company believes all of its owned generation capacity is ' necessary to meet its electric retail load. As a result, the dis- I continuance of SFAS No. 71 for its wholesale energy sales i operations has not resulted in an additional charge against  ; l income. The Company believes that its electric transmission and distribut:on system and gas operations continue to meet the g provisior s of SFAS NoL71 The Company believes that it is l !( probable tnat regulatory assets associated with these opera-

  \                                                                            tions will be recovered.

l

PECO Energy Company and Subsidiary Compani:s 12 available. Under the terms of the various insurance agree-The Company has adopted SFAS No.128, " Earnings Per Share," which is designed to simplify the existing computa- ments, thn Company could be assessed up to $26 million for tional guidelines for the eamings per share (EPS) information losses incurred at any plant insured by the insurance compa-nies. The Company is self-insured to the extent that any j provided in financial statements, to revise the disclosure requirements and to increase the comparabikty of EPS data losses may exceed the amount of insurance maintained. l on an international basis. Pursuant to SFAS No.128, the Such losses could have a matenal adverse effect on the Company reflected on its Consohdated Statements cl Income Company's financial condition and results of operations. j 1 basic EPS and dilutive EPS for the years ended December The Company is a member of an industry mutual insur-31,1997,1996 and 1995. Adoption of SFAS No.128 did not ance company which provides replacement power cost impact the amount of EPS reported and there is no differ- insurance in the event of a major accidentaf outage at a nuclear station. The premium for this coverage is subject to ence in the amounts calculated as basic EPS and dilutive assessment for adverse loss experience. The Company's EPS. maximum share of any assessment is $13 million per year. . Nuclear Decommissioning and Spent Fuel 5torage

5. Commitments and Contingencies -

The Company's current estimate of its nuclear facilities' C Capital Commitments decommissioning cost of $1.5 billion in 1997 dollars is being Total capital expenditures, primarily for utility plant, are esti- collected through efectnc rates over the life of each generat-mated to be $600 million in 1998. Due to the expected ing unit. Beginning in 1999, these amounts will be adverse impact of the PUC Restructuring Order and competi- recoverable through transmission and distribution rates. tion for electric generating services on its future capital Under current rates, the Company collects and expenses resources, the Company is currently evaluating its capital approximately $20 million annually from customers. The commitments for 1999 and beyond. Certain facihties under expense is accounted for as a component of depreciation construction and to be constructed may require permrts and expense and accumulated depreciation. At December 31, licenses which the Company has no assurance will be grant- 1997 and 1996, $294 and $256 million, respectively, was ed. The Company has undertaken a number of new ventures, included in accumulated depreciation. In order to fund f uture principally through its Telecommunications Group, some of decommissioning costs, at December 31,1997 and 1996, the which require significant cash commitments. For 1993, the Company held $320 and $266 million, respectively, in trust Company's expected capital expenditures include approxi- accounts which are included as an investment in the mately $150 million in such ventures. Company's Consolidated Balance Sheet and include both net The Company's operations have in the past and may in unrealized and realized gains. Net unrealized gains of $43 and the future require substantial capital expenditures in order to $26 million were recognized as a Deferred Credit in the comply with environmental laws. Company's Consolidated Balance Sheet at December 31, 1997 and 1996, respectively. The Company recognized net Nuclear Insurance realized gains of $11, $10 and $9 million as Other income in The Price-Anderson Act currently limits the liability of nuclear the Company's Consolidated Statement of income for the reactor owners to $8.9 billion for claims that could arise from years ended December 31,1997,1996 and 1995, respective-a single incident. The limit is subject to change to account for ly. The Company believes that the amounts being recovered the affects of inflation and changes in the number of licensed from customers through electric rates will be sufficient to reactors. The Company carries the maximum availabie com- fully fund the unrecorded portion of its decommissioning mercial insurance of $200 million and the remaining $9 7 obligation. billion is provided through mandatory participation in a finan- In an Exposure Draft issued in 1996, the FASB proposed cial protection pool. Under the Price-Anderson Act, aii r,uclear changes in the accounting for closure and removal costs of reactor licensees can be assessed i'p to $79 million per reac- production facilities, including the recognition, measurement tor per incident, payable at no more than $10 million per and classification of decommissioning costs for nuclear gen- . reactor per incident per year. This assessment is subject to erating stations. The FASB has expanded the scope of the inflation and state premium taxes. In addition, Congress Exposure Draft to include closure or removal liabilities that could impose revenue raising measures on the nuclear indus- are incurred at any time during the operating life of the relat- , try to pay claims. ed long-lived asset. The FASB has decided that it should The Company carries property damage, decontamination proceed toward either a final Statement or a revised and premature decommissioning insurance in the amount of Exposure Draft. The timing of this project is still to be deter-its $2.75 billion proportionate share for each station loss mined. If current electric utility industry accounting practices  ; resulting from damage to its nuclear plants. In the event of for decommissioning are changed, annual provisions for an accident, insurance proceeds must first be used for reac- decommissioning could increase and the estimated cost for for stabilization and site decontamination. If the decision is decommissioning could be recorded as a liability rather than made to decommission the facihty, a portion of the insurance as accumulated depreciation with recognition of an increase proceeds will be allocated to a fund, which the Company is in the cost of a related regulatory asset. required by the Nuclear Regulatory Commission (NRC) to Under the Nuclear Waste Policy Act of 1982 (NWPA), the mcintain, to provide for decommissioning the f ac.lity. The U.S. Department of Energy (DOE) is required to begin taking Company is unable to predict the timing of the availability of possession of all spent nuclear fuel generated by the insurance proceeds to the Company for the Company's bond- Company's nuclear units for long-term storage by no later holders, and the amount of such proceeds which would be than 1998. Based on recent pubhc pronouncema.ts, it is not

   -      .                  -           -        -- . ~ - _ ~           .,          .         - - - - . - - - - - ~ -_. -          - - . . _ .       .-

Notes to Consolidated Financial Statements 33 i' likely that a permanent disposal site will be available for the in the wholesale market, the Company has increased its industry before 2015, at the earliest. In reaction to state- sales to other utilities, but increased competition has reduced k . ments from the DOE that it was not legally obligated to begin the Company's profit margins on these sales. At December to accept spent fuelin 1998, a group of utilities and state 31,1997, the Company had entered into long-term agree-government agencies filed a lawsuit against the DOE which ments with unaffiliated utilities to sell energy associated with resulted in a decision by the U.S. Court of Appeals for the 4,280 MW of capacity, of which 540 MW of these agree-District of Columbia (D.C. Court of Appeals) in July 1996 that ments are for 1998,1,700 MW are for 1999 through 2002 the DOE had an unequivocal obligation to begin to accept and the remaining 2,040 MW extend through 2022. spent fuel in 1998. In accordance with the NWPA, the Company pays the DOE one mill ($.001) per kilowatthour of Environmental Issues net nuclear generation for the cost of nuclear fuel disposal. The Company's operations have in the past and may in the This fee may be adjusted prospectively in order to ensure full future require substantial capital expenditures in order to  ; cost recovery. Because of inaction by the DOE following the comply with environmental laws. Additionally, under federal D.C. Court of Appeals finding of the DOE's obligation to begin and state environmental laws, the Company is generally liable receiving spent fuel in 1998, a group of forty-two utility com- for the costs of remediating environmental contamination of panies, including the Company, and forty-six state agencies, property now or formerly owned by the Company and of filed suit against the DOE seeking authorization to suspend property contaminated by hazardous substances generated further payments to the U.S. govemment under the NWPA by the Company. The Company owns or leases a number of and to deposit such payments into an escrow account until real estate parcels, including parcels on which its operations such time as the DOE takes effective action to meet its 1998 or the operations of others may have resulted in contamina-obligations. In November 1997, the D.C. Court of Appeals tion by substances which are considered hazardous under issued a decision in which it held that the DOE had not abid- environmental laws. The Company is currently involved in a l ed by its prior determination that the DOE has an number of proceedings relating to sites where hazardous unconditional obligation to begin disposal of spent nuclear l substances have been deposited and may be subject to addi-fuel by January 31,1998. The D.C.. Court of Appeals also pre- tional proceedings in the future.

                                                                                                                                                         )

j cluded the DOE from asserting that it was not required to The Company has identified 27 sites where former begin receiving spent nuclear fuel because it had not yet pre- manufactured gas plant (MGP) activities have or may have pared a permanent repository or an interim storage facility. resulted in actual site contamination. The Company is

            - The DOE and one of the utility companies have filed a               presently engaged in performing various I,svols of activities Petition for Reconsideration of the decision. The U.S. House     at these sites, including initial evaluation to determine the          ,

v of Representatives and the U.S. Senate passed separate bills existence and nature of the contamination, detailed evalua-l in 1997 authorizing construction of a temporary storage facili- tion to determine the extent of the contamination and the ty which could accept spent nuclear fuel from utilities in necessity and possible methods of remediation, and imple-2003. In addition, the DOE is exploring other options to mentation of remediation. The Pennsylvania Department of address delays in the waste acceptance schedule. Environmenta: Protection has approved the Company's Peach Bottom has on-site facilities with capacity to store clean-up of two sites. Six other sites are currently under spent nuclear fuel discharged from the units through 2000 for some degree of active study and/or remediation. Unit No. 2 and 2001 for Unit No. 3. Life-of-plant storage As of December 31,1997 and 1996, the Company had capacity will be provided by on-site dry cask storage facilities, accrued $63 and $28 million, respectively, for environmental the construction of which will begin in 1998. Limerick has on- investigation and remediation costs, including $35 and $16 , site facilrties with capacity to store spent nuclear fuel to million, respectively, for MGP investigation and remediation. l 2007 Salem has on-site facilities with spent fuel storage that currently can be reasonably estimated. The Company l capacity through 2008 for Unit No.1 and 2012 for Unit No. 2. cannot predict whether it will incur other significant liabilities Public Service Electric and Gas Company (PSE&G) is the for additional investigation and remediation costs at these or operator of Salem, which is 42.59% Cwned by the Company. additional sites identified by the Company, environmental agencies or others, or whether such costs will be recoverable l Energy Commitments from third parties, y The Company's electric utility operations include the whole- i l sale marketing of electricity. At December 31,1997, the Shutdown of Salem Generating Station l Company had long-term commitments relating to the pur- PSE&G removed Salem Units No.1 and No. 2 from service in l chase from unaffiliated utilities and others energy associated the second quarter of 1995 and informed the NRC at that i l with 1,330 MW of capacity in 1998, with 2,540 MW of capaci- time that it had determined to keep the Salem units shut

ty during the period 1999 through 2002 and with 2,430 MW of down pending review and resolution of certain equipment capacity thereafter. During 1997, purchases under long-term and management issues and NRC agreement that each unit commitments resulted in expenditures of $311 million. As of is sufficiently prepared to restart. Unit No. 2 retumed to ser.

December 31,1997, these purchases result in commitments vice on August 30,1997, and PSE&G estimates the restart of of approximately $240 million for 1998, $620 million for 1999 Unit No.1 to occur late in the first quarter of 1998. For the through 2002 and $830 million thereafter. These purchases years ended December 31,1997,1996 and 1995, the will be utilized through a combination of sales to jurisdictional Company incurred and expensed approximately $152, $149 customers, long-term sales to other utilities and open market and $50 million of shutdown-related replacement power and sales. Under some of these contracts, the Company may pur- maintenance costs, respectively (see note 21). chase, at its option, additional power as needed.

PECO Energy Company and Subsidiary Companies 34 Litigation Ticommunications The Company periodically reviews its investments to The Company is involved in various other litigation matters, The ultimate outcome of such matters, while uncertain, is not determine that they are properly valued in its financial state-expected to have a material adverse effect on the Company's ments. Due to circumstances involved in the Federal Communication Commission's auctioning of the personal financial condition or results of operations. communications systems "C-block" licenses, the Company has determined that $20 million of its telecommunications investments were impaired at December 31,1997. Accordingly, at December 31,1997, the Company incurred a

 $20 million charge against Other income and Deductions to write off this telecommunications investment.

6. Retirement Benefits The Company and its subsidianes have a non-contributory trusteed retirement plan applicable to all regular employees. The ben- ]

efits are based primarily upon employees' years of service and average earnings prior to retirement. The Company's funding j policy is to contribute, at a minimum, amounts sufficient to meet the Employee Retirement income Security Act requirements. 1 Approximately 89%,80% and 74% of pension costs were charged to operations in 1997,1996 and 1995, respectively, and the remainder, associated with construction labor, to the cost of new util'ty plant. Pension costs for 1997,1996 and 1995 included the following components: 1997 1996 1995 Thousands of Dollars Service cost benefits earned during the period $ 25,368 $ 27,627 $ 19,710 Interest cost on projected benefit obligation 150,057 145,570 147,261 Actual return on plan assets (377,803) (320.247) (456,057) (4,538) (4,538) (4,538) Amortization of transition asset 197,480 154.402 300,214 Amortization and deferral Net pension cost $ (9,436) $ 2.814 $ 6.590 The changes in net periodic pension costs in 1997,1996 and 1995 were as follows: 1997 1996 1995 Thousands of Dollars Change in number, characteristics and salary levels of participants and net actuarial gain $ (7,839) $ (12,893) $ 1,486 Change in plan provisions 3,118 - (8.305) Change in actuarial assumptions (7,529) 9,117 (3,136) Net change S (12,250) $ (3.776) $ (9.955) Plan assets consist pnncipally of common stock, U.S. govern- 1996 and 7.25% at December 31,1995. The average rate of ment obligations and other fixed income instruments. In increase in future compensation levels ranged frcm 4% to ' determining pension costs, the assumed long-term rate of 6% at December 31,1997,1996 and 1995. retum on assets was 9 5% for 1997,1996 and 1995. Prior service cost is amortized on a straight-line basis The weighted-average discount rate used in determining over the average remaining service penod of employees the actuarial present value of the projected benefit obligation expected to receive benefits under the plan, was 7.25% at December 31,1997,7.75% at December 31, l r i O

Notes to Consolidat:d Financi:t Statements 35 l-i , I L  ! !' The funded status of the plan at December 31,1997 and 1996 is summanzed as follows: Thousands of Dollars

             ' Actuarial present value of accumulated plan benefit obligations:

Vested benefit obligation S 1,794,222 $ = 1,657,098 Accumulated benefit obligation 1,890,848 1,742,116 Projected benefit obligation for services rendered to date S 2,141,040 $ 1,982,915 Plan assets at fair value (2,538,039) (2,302,935) Funded status (396,999) (320.020) Unrecognized transition asset 35,713 40,251 t Unrecognized prior service costs (83,188) (92,682) Unrecognized net gain 649,903 588,013 R Pension obligation recognized on the balance sheet A 205,429 $ 215.562

7. Non-Pension Postretirement Benefits I The Company provides certain health care and life insurance _ The transition obligation was determined by application benefits for retired employees. Company employees of the terms of medical, dental and life insurance plans, become eligible for these benefits if they retire from the including the effects of established maximums on covered Company with ten years of service. These benefits and simi- costs, together with relevant actuarial assumptions and lar benefits for active employees are provided by an health care cost trend rates, which are projected to range insurance company whose premiums are based upon the from 7% in 1998 to 5% in 2002. The effect of a 1% annual benefits paid during the year. increase in these assumed cost trend rates would increase The transition obligation, which represents the previously the accumulated postretirement benefit obligation by $85 mil-unrecognized accumulated non-pension postretirement bene- lion and the annual service and interest costs by $10 million.

fit obligation, is being amortized on a straight-line basis over Total costs for all plans were $73 million in 1997 and $71 A - an allowed 20-year period. At December 31,1997, the million in 1996 and 1995.

              - Company accelerated recognition of $121 million of its non-pension postretirement benefits obligation related to its electric generation operations and included this regulatory asset as part of electric generation-related regulatory assets (see note 4),

The net periodic benefits costs for 1997,1996 and 1995 included the following components: 1997 1996 1995-Thousands of Dollars Service cost benefits eamed during the period S 14,401 $ 11,855 $ 8.681

    ,           Interest cost on projected benefit obligation                                            54,149                     48,524               48,641
 ,              Amortization of transition asset                                                         14,882                      14,882              14,882 Actual return on plan assets                                                            (22,691)                   (13,257)               (2,075)

Deferred asset gain 12,707 9,320 1,359 Net postretirement benefits costs S 73,448 $ 71.324 $ 71,488 Plan assets consist principally of common stock, U.S. govem- was 7.75% at January 1,1997,7.50% at January 1,1996 ment obligations and other fixed income instruments. In and 8.50% at January 1,1995. The average rate of increase  ! determining non-pension postretirement benefits costs, the in future compensation levels ranged from 4% to 6% at i assumed long-term rate of retum on assets was 8% for December 31,1997,1996 and 1995. 1997,1996 and 1995. Prior service cost is amortized on a straight-line basis The weighted-average discount rate used in determining over the average remaining service period of employees p expected to receive benefits under the plan. the actuarial present value of the projected benefit obligation l 4

PECO Energy Comp 1ny and Subsidiary Companies 36 i The funded status of the plan at December 31,1997 and 1996 is summarized as follows: OI _ . _ _ _ _98b ... ___E Thousands of Dollars Accumulated postretirement benefit obligation: S 697,084 $ 609,206 Retirees 8,875 4,509 Fully eligible active plan participants 73,272 48,986 Other active plan participants 779,231 662,701 Total (178,045) (126,661) Plan assets at fair value Accumulated postretirement benefit obligation in excess of plan assets 601,186 536,040 (223,226) (238,108) Unrecognized transition obligation (53,110) 17,126 Unrecognized net gain Accrued postretirement benefits obligation recognized on the balance sheet S 324,850 $ 315.058 , Measurement of the accumulated postretirement benefits obligation was based on a 7.25% and 7.75% assumed discount rate as of December 31,1997 and 1996, respectively.

8. Accounts Receivable Accounts receivable at December 31,1997 and 1996 includ- The Company is party to an agreement with a financial cd unbilled operating revenues of $135 and $117 million, institution under which it can sell or finance with hmited respectively. Accounts receivable at December 31,1997 and recourse an undivided interest, adjusted dailv, in up to $425 mii-1996 were net of an allowance for uncollectible accounts of lion of designated accounts receivable until November 2000. At

 $32 and $24 million, respectively.                                      December 31,1997, the Company had sold a $425 million inter-The Company has adopted SFAS No.125, " Accounting             est in accounts receivable, consisting of a $296 million interest for Transfers and Servicing of Financial Assets and                     in accounts receivable which the Company accounts for as a Extinguishments of Liabikties," which provides a standard for           sale under SFAS No.125 and a $129 million interest in special distinguishing between transfers of financial assets that are           agreement accounts receivable which were accounted for as a accounted for as sales from those that are accounted for as             long-term note payable (see note 12). The Company retains the secured borrowings.                                                     servicing responsibility for these receivables.

9. Common Stock At December 31,1997 and 1996, common stock without par agreements can be settled is dependent principally upon the value consisted of 500,000,000 shares authorized and rnarket price of the Company's common stock as compared 222,546,562 and 222,542,087 shares outstanding, respective- to the forward purchase price per share and the number of ly. At December 31,1997, there were 5,800,841 shares shares to be settled. If these agreements had been settled reserved for issuance under the Company's Dividend on a net share basis at December 31,1997, based on the Rebvestmcat and Stock Purchase Plan. closing price of the Company's Common Stock on that date, the Company would have received approximately 1,160,000 5t ck Repurchase shares of Company common stock. ,

During 1997, the Company's Board of Directors authorized the ret urchase of up to 25 million shares of its common Long-Terr.ilacentive Plan (LTIP) stock from time to time through open-market, privately nego- The Company maintains an LTIP for certain full-time salaried tiated and/or other types of transactions in conformity with employees of the Company. The types of long term incentive the rules of the Securities and Exchange Commission. awards which have been granted under the LTIP are non-quah-Pursuant to these authorizations, the Company has fied options to purchase shares of the Company's common entered into forward purchase agreements to be settled from stock, dividend equivalents and shares of restricted common time to time, at the Company's election, on either a physical, stock. The Company uses the disclosure-only provisions of net share or net cash basis. Tht amount at which these SFAS No.123, " Accounting for Stock-Based Compensation." O i l 1

              . _ _             .      .              .. __.         , . . .          _.m_          -_              ._..._.>,m..                 _ . . . -       _ _ . _ . ._

Notes to Consolidatrd Financial Statements 37 11 the Company elected to account for the LTIP based on SFAS No.123, earnings applicable to common stock and earnings per average common share would have been changed to the pro forma amounts as follows: 1997 1996 , c Thousands of Dollars Eamings applicable to common stock As reported . 8 (1,513,910) $ 499,169 Pro forma S (1,515,395) $ 497,887. Earnings per average common share (Dollars) As reported S (6.80) $ 2.24 Pro forma $ (6.81) $ 2.24 Options granted under the LTIP become exercisable one ' year after the date of grant and all options e pire 10 years from the date of the grant. Information with respect to the LTIP at December 31,1997 and changes for the three years then ended, is as follows' Weighted Weighted Weighted Averego Average Average Exercise Exercise Exercise Price Price Price Shores (per share) Shares (per share) Shares (per share) 1997 1997 1996 1998 1995 1995_ l Balance at January 1 2,961,194 S 26.68 2,591,765 $ 26.16 2,651,397 $ 26.73 '  : Options granted 1,1?9,000 ' 22.49 786,500 28.12 - 850,700- 26.46 l Options exercised -

                                                                                      .-          (369,871)              25.07           (561,232)                  23.91 Options cancelled                               (283,400)              24.96            (47,200)             29.36           (349,100)                  35.57 Balance at December 31                         3,816,794               26.14         2.961,194               26.68         2,591,765                    26.16 Exercisable at December 31                     2,800,794               26 65         2,192,694               26.17         1,813,565;                   25.91

>= Weighted average fair value of

    -(              options granted during year                         8           2.97                          $         2.78                           $        . 2.91 The fair value of each option is estimated on the date of the grant using the Black-Scholes option-pricing model, with the follow-ing weighted average assumptions used for grants in 1997 1996 and 1995, respectively:

1997 1996 1995 Dividend yield 6.2% 6.2% 6.2% Expected volatility 19.5 % 16.6 % 15.3 % Risk-free interest rate 6.4% 5.5% 6.9% Expected life (years) - 5 5 5 l At December 31,1997, the option groups outstanding based on ranges of exercise prices is as follows: P Options Outstanding Options Exercisable i Weighted- [ Average Weighted Weighted-Rernaining Average Average Number Contractual ute Exercise Number Exercise Range of Exercise Pnces Outstanding (Years) Pnce ExercisabJe _ Pnce_

            $15.75 - $20.00                                                      156,094                4.47 $            18.65             117,594 $                18.43        i
            $20.01 - $25.00                                                      863,500                8.23             22.35              153,000                  22.66        !
            $25.01 - $30.00                                                 2,607,000                   6.72             27.32         2,518,000                     27.22        1

' $30.01 - $50.00 190,200. 9.58 33.27 12,200 37.18

[- Total 3.816,794 2.800.794

G  !

lO l I

                          -                              ~                                                                                -

                  -- ~              -                      - - - - - - - -                                        _________                                        _

PECO Energy Company and Subsidiary Companies 38

20. Preferred and Preference Stock At December 31,1997 and 1996, Series Preference Stock consisted of 100,000,000 shares15,000,000 authorized, of which no shares shares were outstanding. At December 31,1997 and 1996, cumulative Preferred Stock, no par value, consisted of authorized.

Shares Amount Current Thousands of Dollars Redemption Outstanding 1996 1997 1996 Pncela) 1997 Series (without mandatory redemption) 150,000 $ 15,000 $ 15,000 104.00 150,000

$4.68                                                                                          274,720           274,720                 27,472           27,472 112.50
$4.40                                                                                           150,000          150,000                 15,000            15.000 102.00
$4.30                                                                                                            300,000                 30,000           30,000 106 00            300,000
$3.80                                                                               -                 -          618,954                      -           61,895
$7.96                                                                                           500,000          500,000                 50,000            50,000            -

(b)

$7.48                                                                                                          1,993,674                137,472          199,367

• 1,374,720 Series (with mandatory redemption) 927,000 92,700 92,700 (c) 927,000

 $6.12                                                                                        2,301,720         2.920.674 S 230,172 5 292.067 Total preferred stock (a)

Redeemable, at the option of the Company, at the indicated dollar amourits per share, plus accrued dividends. (b) None of the shares of this series are subject to redemption prior to April 1,2003. 1999 - 2003 are $18.540,000. (c) There are no annual sinking fund requirements in 1998. Annual sinking fund requirements in None of the shares of this series are subject to redemption prior to August 1,1999.

11. Company Obligated Mandatority Redeemable Preferred Securities of a Partnership (COMRPS)

Partnership, which bear interest at rates equal to the distribu-At December 31,1997 and 1996 PECO Energy Capital, LP. tion rates on the securities. The interest paid by the (Partnership), a Defaware limited partnership of which a whol-Company on the debentures is included in Other Income and ly owned subsidiary of the Company is the sole general partner, had outstanding three and two series, respectively, Deductions in the Consolidated Statements of Income and is deductible for income tax purposes. of cumulative COMRPS, each with a liquidation vafue of $25 per security. Each series is supported by the Company's deferrable interest subordinated debentures, held by the Amount Mandatory Thousands of Dollars Red.,mption Distnbutton Trust Recepts Outstanding 1996 1997 1996 Date Rate 1997 At December 3L__ Senes 2043 9.00 % 8,850,000 8,850,000 5 221,250 $ 221,250 A 3,124,183 80,835 80,932 2025 8.72 % 3,124,183 B(a) 2,000,000 - 50,000 - 2037 8.00 % C(b) 13,974,183 11.974.183 $ 352,085 $ 302,182 Total (b) Ownership of this series is evidenced by Trust Receipts. (a) Ownership of this series is evidenced by Trust Receipts, each representing an 8.00% COMRPS, Series C, repre-each representing an 8.72% COMRPS, Series B, repre-senting hmited partnership interests. The Trust Receipts , senting limited partnership interests. The Trust Receipts were issued by PECO Energy Capital Trust II, the sole were issued by PECO Energy Capital Trust I, the sole asse's of which are 8.00% COMRPS, Senes C. Each assets of which are 8.72% COMRPS, Series B. Each holder of Trust Receipts is entitled to withdraw the corre-holder of Trust Receipts is entitled to withdraw the corre-sponding number of 8.00% COMRPS, Series C from the sponding number of 8.72% COMRPS, Series 8 from the Trust in exchange for the Trust Receipts so held. Trust in exchange for the Trust Receipts so held. O I

                  .        _.     .a.  , -         .. . . .- _. . ..        . . . , .~            ,.--- . .                      . - - - -                   ~ . . .

Notrs to Consolidat;d Financial Statements 39 f t l L

12. Long-Term Debt  !

At December 31, senes Due 1997 1996 , Thousands of Dollars First and refunding mortgage bonds (a) 61/8 % 1997 8 - S 75,000 i 53/8 % 1998 225,000 225,000 , 71/2W91/4 % 1999 325,000 325,000 l 5 5/8 73/8 % 2001 330,000 330,000  : 71/8%8 % 2002 500,000 500,000  ? 63/8 10 1/4 % 2003-2007 565,625 569.688 (b) 2008-2012 154,200 154,200 , 6 5/8W8 3/4% 2018-2022 832,130 832,130  ! 71/8 7 3/4 % 775,000 2023-2024 775,00_0 Total first and refunding mortgage bonds 3,706,955 3,786.018 Notes payable 15,574 - Term loan agreements (c) 1997 - 175,000 Pollution control notes (d). 2016-2034 212,705 212,705 l Medium-term notes (e) 1998-2005 62,400 74,400  : Note payable - accounts receivable agreement (f) 2000 128,999 - Unamortized debt discount and premium, net (2_6,405) (29.306) Total long-term debt 4,100,228 4.218,817 i Due within one year (g) 247,087 283,303 i Long-term debt included in capitalization (h) $ 3,853,141 $ 3.935.514 (a) Utility plant is subject to the lien of the Company's (e) Medium-term notes collateralized by mortgage bonds. mortgage. The average annual interest rate was 8.75% at (b) . Floating rates, which were an average annual interest December 31,1997, , rate of 3.725% at December 31,1997. (f) See note 8. g' (c) The Company has a $900 million unsecured revolving (g) Long-term debt maturities, including mandatory sinking . credit facility with a group of banks. The credit facility is fund requirements, in the period 1998-2002 are as fol- , l composed of a $450 million 364-day credit agreement lows: 1998 - $247,087,409; 1999 - $361,945,982; I l- and a $450 million three-year credit agreement. The 2000 - $137,129,159; 2001 - $338,433,453; , Company uses the credit facihty principally to support the 2002 - $508,759,067. Company's commercial paper program, which was (h) The annualized interest on long-term debt at December l expanded from $300 million to $600 million in 1997. 31,1997, was $286 millinn, of which $269 million was There was no debt outstanding under this credit facility associated with mortgage bonds and $17 million was , at December 31,1997. associated with other long-term debt. (d) . Floating rates, which were an average annual interest i rate of 3.75% at December 31,1997. 1

13. Short-Term Debt 1997 1996 1995 Thousands of Dottars

[ Average borrowings s 248,111 $ 198,090 $ 17,560 l Average interest rates, computed on daily basis 5.83 % 5.64 % 6.25 % Maximum borrowings outstanding $ 464,500 $ 369.500 $ 182,000 Average interest rates, at December 31 6.74 % C 90% - l The Company has a $600 million commercial paper program which is supported by the 5900 million revolving credit facility (see

!       note 12). At December 31,1997, $314 million of commercial paper was outstanding. At December 31,1997, the Company had formal and informal lines of credit with banks aggregating $75 million. At December 31,1997, no short-term debt was outstand-g     ing under these lines.

1 I 4

PECO Energy Company and Susidiary Companks 40

14. Income Taxes income tax expense (benefit)is compnsed of the following components:

1997 1996 1995 For the Years Ended December 31, Thousands of Dollars included in operations: Federal 251,509 126,471 $ 190,796 S $ Current 154,564 167,526 (11,378) Deferred (15,979) (21,679) (18,201) investment tax credit, net State 62,839 79,086 l 76,689 Current 12,206 15,988 (5,850) Deferred 431,717 5 292,769 340,101 Included in extraordinary item: Federal - - Current (123) (987,234) - - Deferred State - Current (29) - (303,575) - - Deferred (1,290,961) - - l (998,192) $ 340.101 $ 431,717 Total $ The total income tax provisions, excluding the extraordinary item, differed from amounts computed by applying the federal statutory tax rate to income as follows: 1997 1996 1995 l Thousands of Dollars

                                                                        $       336,558      $      517,205         $       609,732 Net income Total income tax provisions                                                    292,769             340,101       _

431,717

                                                                        $       629,327      $      857,306         $    1,041,449 income before income taxes income taxes on above at federal statutory rate at 35%                 $       220,264      $      300,057         $       364,507 l Increase (decrease) due to:

Property basis differences 40,828 9,903 11,196 State income taxes, net of federal income tax benefit 46,046 48.779 61,799 Amortization of investment tax credit (18,201) (15,979) (13,604) - Prior period income taxes (2,985) (1,707) 1,791 - Other, net 6,817 (952) 6,028 Total income tax provisions $ 292,769 $ 340.101 $ 431,717 . l l Effective income tax rate 46.5 % 39.7 % 41.5 % O

n- A am.--,-. A. $ s.=> m kma.--- AAJ-n M -3b 5 +_4a. - OmAA48 yaw M6,,- 6+Vr+- 4Wr=-r+bA--4AblA46-"445.J++-A4&3 & AA 2 -M-- -+^"d-=--Ma-->J=4se%ee \ an M s4e<A4-es-

               - Notes to Consolidated Financial Statrmants                                                                                                                                               41 l

Provisions for deferred income taxes consist of the tax effects of the following temporary differences: 1997 1996 1995 Thousands of Dollars Depreciation and amortization S 57,530 $ 42,385 $ 32,287 1 Deferred energy costs 2,256 27,374 30,073 Retirement and separation programs (12,734) 19,746 15,733 Incremental nuclear outage costs (981) 2,440 8,079 Uncollectible acccunts 11,710) (2,805) (1,991) Reacquired debt (8,607) - (9,578) (3,266) i Unbilled revenue (5,110) 3,910 (5) i Environmental clean-up costs (15,121) (714) 2,433 ' Obsolete inventory (7,074) 5,829 6,362 Limerick plant disallowances and phase-in plan (747) (747) 2,507 AMT credits - 83,010 91,399 Other nuclear operating costs (9,892) - -

               - Other                                                                                         (15,038)                           (4,080)                                            (97)

Subtotal S (17,228) $ 166,770 $ 183,514 Extraordinary item (1,290,809) - - Total S (1,308,037) $ 166.770 $ 183.514 The tax effect of temporary differences giving rise to the Company's net deferred tax liability as of December 31,1997 and 1996 is as follows: Liability or (Asset) 1997 1996 Thousands of Dollare b . Nature of temporary difference: V Plant basis difference $ 2,620,254 $ 3.795,786 ) Deferred investment tax credit 318,065 336,132 Deferred debt refinancing costs 111,651 120,031 Other, net (249,167) (167,830) Deferred income taxes (net) on the balance sheet .S 2,800,803 $ 4.084.119 i The net deferred tax liability shown above as of December 31,1997, $1,763 million of electric generation-related recover-31,1997 and 1996 is comprised of $3,153 and $4,347 million able deferred income taxes were included as part of electric of deferred tax liabilities, and $352 and $263 million of generation-related regulatory assets (see note 4). deferred tax assets, resoectively. The internal Revenue Service (IRS) has completed and in accordance with SFAS No. 71, the Company recorded settled its examinations of the Company's federalincome tax a recoverable deferred income tax asset of $586 and $2,322 returns through 1986. The 1987 through 1990 federal income million at December 31,1997 and 1996, respectively. The tax f etums have been examined and the Company and the

     ,          December 31,1997 balance was applicable only to non-elec~                    IRS have reached a tentative settlement which would not                                                                   ,
 .              tric generation assets, due to the discontinuance of SFAS No.                result in an adverse impact on the Company. The years 1991                                                                 !
               - 71 for the Company's electric generation operations. These                  through 1993 are currently being examined by the IRS.

recoverable def erred income taxes include the deferred tax The AMT credit was fully utilized for tax purposes at j effects associated principally with liberalized depreciation December 31,1997, and reduced federal income taxes cur- 1 accounted for in accordance with the ratemaking policies of rently payable by $6 million in 1997. I the PUC, as well as the revenue impacts thereon, and  ! assume recovery of these costs in future rates. At December l I I l

PECO Energy Company and Subsidiary ;ompanies 42

15. Taxes, Other Than Income - Operating 1997 1996 199s For the Years Ended December 31, Thousands of DoIIers S 163,552 $ 160,246 $ 165,172 Gross receipts 41,972 42,444 48,085 Capital stock 69,185 71,600 69,597 Real estate 27,585 30,109 25,976 Payroff 4,746 2,881 558 Other S 310,091 $ 299.546 $ 314.071 l

Total

16. Leases ,

Leased property included in utility plant was as follows: 6 1997 1996 At December 31, Thousands of Dollars

                                                                                                     $       521,921               $      527.116 Nuclear fuel                                                                                               2,321                       2,069 Electric plant 524,242                     529,185 Gross leased property                                                                                 (348,309)                    (347,097)

Accumulated amortization S 175,933 $ 182.088 Net leased property Nuclear fuel is amortized as the fuel is consumed. Amortization of leased property totaled $39, $31 and $43 milhon for the years ended December 31,1997,1996 and 1995, respectively. Other operating expenses included interest on capital lease obligations of $9 million in 1997 and 1996, and $10 million in 1995. Minimum future lease payments as of December 31,1997 were: Capital Leases Operating Leases Total For the Years Ending December 31, Thousands of Dollars 69.820 $ 50,584 $ 120,404 1998 49,370 117,900 68,530 1999 45,923 89,750 43.827 2000 43,219 54,111 10,892 2001 42,327 42,419 92 2002 537,645 538,451 Remaining years 806_

                                                                               $       193.967        $        769.068                 $   963.035 Total minimum future lease payments Imputed interest (rates ranging from 6.5% to 17.0%)                             (18.034)

Present value of net minimum future lease payments $ 175.933 Rental expense under operating leases totaled $74 million ir'.1997 and 1996, and $115 million in 1995. O 1

_ _ _ _ . m.___. ._m , _ . _ _ . - - . . . , . - . ...m . _ . _ _ . ~ _ _ _ _ _ _ , _ . __ . Notes to Consolidated Financial Statements 43 i

17. Jointly Owned Electric Utility Plant -  ;

The Company s ownership interests in jointly owned electric utility plant at December 31,1997 were as follows: Transmisson Producten Plants e,nd Other Plant Peach Bottom Salem Keystone Conemaugh_ Putlic Service GPU GPU I PECO Energy Electne and Generating Generating Various . i Operator ' Company Gas Company Corp Corp. Compan es - ' Participating interest 42.49 % 42.59 % 20.99 % .20.72 % 21 % to 43% '  !

           ' Company's share crhousands of Dol:ars)

Utility plant . $ 307,029 $' 18,331 $ 110,661 - $ 184,037 $ 81,072  ! Accumulated depreciation J 175,304 11,134 ' 66,487 78,605 31,273. 9 Construction work in progress - 50,208- 713 10,067 9,100 1,943 l The Company's participating interests are financed with Company funds and, when placed in service, all operations are account-l ed 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 j

          - of Cash Flows:

_l 1997 1996 1995 Thousands of Dollars l . Cash paid dunng the year; f Interest (net of amount capitalized) $ 405,838 $ 415.063 $ 449,664 income taxes (net of refunds) 346,232 251,554 257,677 , _ G - Noncash investing and financing: j Capital lease obligations incurred 32,909 33,063 48,760

19. Investments At December 31, 1 9I17 1996 Thousands of Dollars l

Trust accounts for decommissioning nuclear plants 8 320,442 $ 266,270 Telecommunications ventures 85,601 79,833 l Energy services and other ventures 65,578 44,023 Nonutility property 24,697 26,349 (. _Other' 19,517 16,099 Total S 515,835 $ 432.574

         . 20. Financial Instruments                                                                                                                                                              ,

r~ l i Fair values of financialinstruments, including liabilities, are estimated based on quoted market prices for the same or similar { [, . issues. The carrying amounts and fair values of the Company's financial instruments as of December 31,1997 and 1996 were ! ' as folloWs: 2 Thousands of Dollars 1997 1996 , Carrying Fair Carrying Farr  ; Amount Value_ _ Amount _ Value_ ] 1

         - Cash and temporary cash investments                                                        S      33,404 8            33,404 $                29,235 $                29,235           l

,_ . l.ong-term debt (including amounts due within one year) 4,100,228 4,210,885 4,218,817 4,239,357 ) L Trust accounts for decommissioning nuclear plants 320,442 320,442 266,270 266,270 l l } Financial instruments which potentially subject the Company may be in excess of the Federal Deposit insurance to. concentrations of credit risk consist principally of temporary Corporation limit, Concentrations of credit nsk with respect to j cash investments and customer accounts receivable. The customer accounts receivable are limrted due to the i Company places its temporary cash investments with high- Company's large number of customers and their dispersion credit quality financial instrtutions. At times, such investments - across many industries, l

PECO Energy Company and Subsidiary Companies 44

21. Other income Sale of Subsidiary Settlement of Salem Litigation On December 31,1997, the Company received $70 million in June 1995, the Company completed the sale of Conowingo Power Company to Delmarva Power & Light pursuant to the May 1997 settlement agreement with PSE&G resolving a suit filed by the Company concerning the Company (Delmarva) for $150 million. The transaction also shutdown of Salem. The agreement also provides that if the included a ten-year contract for the Company to sell power to Delmarva. The Company's gain of $59 million ($27 million net outage exceeds 64 reactor unit months, PSE&G will pay the of taxes) on the sale was recorded in the second quarter of Company $1 million per reactor unit month. As of December 31,1997, the shutdcwn of Salem totaled 58 reactor unit 1995.

months. During the second quarter of 1997, the Company recorded $70 million ($41 million net of income taxes) as Other locome.

22. Regulatory Assets and Liabilities At December 31,1997 and 1996, the Company had deferred the following regulatory assets on the Consolidated Balance Sheet:

1997 1996 Thousands of Dollars

                                                                                                                      $    5,274,624          $               -

Competitive transition charge (see note 4) 2,321,692 585,661 Recoverable deferred income taxes (see note 14) Deferred generation costs recoverable in current 424,497 - rates (see note 4) - 361,762 Deferred Limerick costs (see note 3) 83,918 283,853 Loss on reacquired debt 37,727 3,881 Compensated absences 35,665 122,034 Deferred energy costs (see note 3) 233,492 97,409 Non-pension postretirement benefits (see note 3) S 6,505,655 $ 3.360.560 Total

23. Quarterly Data (Unaudited)

The data shown below include all adjustments which the Company considers necessary for a fair pesentation of such amounts: _ Operating income Net income (Loss) Operagng Revenues 1996 1997 1996 1997 1996 1997 MdI<ons of Dohars Quarter ended 113 $ 150 S 1,163 $ 1,171 $ 302 $ 357 $ March 31 123 99 1,032 989 250 267 June 30 158 150 1,278 1,110 388 347 September 30 (1,891) 118 1,144 1,014 66 278 December 31 Average Shares Earnings Earrungs Apphcable a Outstanding _,_ Per Average Share to Common Stock _ 1997 _ ,___ _ 1996__ losof a s 199? _ [996 _ _ _ _1997 _ _ _ 19.9u 146 222.5 222.4 $ 0.49 0.65 March 31 S 109 $ 94 222.5 222.5 0.53 0.43 June 30 118 145 222.5 222.5 0.69 0.65 September 30 154 222.5 222.5 (8.51) 0.51 (1,895) 114 December 31 The decrease in 1997 fourth quarter results was primarily The decrease in 1997 first quarter results was primarily due to increased fuel and energy interchange expense resulting due to the extraordinary charge of $8.24 per share resulting from the effects of the PUC Restructuring Order and deregu-primarily from additional purchases needed for increased sales to other utilities and higher replacement power costs lation of the Company's electric generation operations; due to the Salem outage, milder weather and increased several one-time adjustments for changes in employee benefits, write-offs of information systems development dapreciation of assets associate 1 with Limerick. The increase in 1997 second quarter results was primari- charges reflecting clarification of accounting guidelines and additional reserves to revise estimates for accruals; higher ly due to the recognition of the settlement of litigation arising from the Salem outage. Offsetting this increase was higher income tax adjustments; and higher losses from the d:preciation of assets associated with Limerick. Company's non-utility ventures. I l

          .            a_._        m      . <       _ _ - - . - . _.

Notes to consolidated Financial Stat;m:nts 45

Financial Statistics Summary of Earnings and Financial Condition '

                                                                                                                                                     \

For the Years Ended December 31, 1997 1996 1995 1994 1933 1992_ . I Milliotas of Douars l Income Data Operating' Revenues 8 4,618 $ 4,284 $ 4,186 $ 4,041 $ 3,988 5 3,963 Operating income 1,006 1,249 1,401 1,064 1,390 1,298 Income before Extraordinary item 337 517 610 427 591 479 I l Extraordinary item (net of income taxes) (1,834) - - - - - Net income (1,497) 517 610 427 591 479 Earnings Applicable to Common Stock Before Extraordinary item (1,514) 499 587 389 542 418 Earnings per Average Common Share Before Extraordinary item (Donars) 1.44 2.24 2.64 1.76 2.45 1.90 Extraordinary item (Per Share) l8.24) - - - - - Earnings per Average Common Share (6.80) 2.24 2.64 1.76 2.45 1.90' I Dividends per Common Share roonars) 1.80 1.755 .1.65 1,545- 1.43 1.325 Common Stock Equity (Per Sharo) 12.25 20.88 20.40 19.41 19.25 18.24 Average Shares of Common Stock j Outstanding unions) 222.5 222.5 221.9 221.6 221.1 220.2 l

!- [ ]                                                                                                                                             j At Decemoer 31,
       > Balance Sheet Data Net Utility Plant                               S         4,495 $  10,760 $          10,758 $ 10,829 $ 10,763 $             10,691        !

Leased Property, net 176 182 181 174 194 210 Total Current Assets - 1,003 420 426 427 515 550 Total Deferred Debits and  ; Other Assets 6,683 _ 3,8e3_ 3,944 3,992 3,905 1,127 l Total Assets S 12,357 $ 15.261 $ . 15.309 $ 15,422 $ 15.377 $ 12.578_ l Common Shareholders' Equity $ 2,727 $ 4,646 $ 4,531 5 4,303 $ 4,263 $ 4,022  ; Preferred and Preference Stock Without Mandatory Redemption 137 199 199 277 423 423 j ,, With Mandatory Redemption 93 93 93 93 187 231 , Company Obligated Mandatorily i Redeemable Preferred F Securities of a Partnership' 352 302 302 221 - - I Long-term Debt 3,853 3,936 4,199 4,786 4.884 5,204 Total Capitalization 7,162 9,176 9,324 9,680 9,757 9.880

                                                                                                                                                   )
       ' Total Current Liabilities                                  1,619    1,103             1,052      850       954                  830        l Total Deferred Credits and                                                                                                                   1 Other Liabilities                                  3,576     4,982             4,933    4,892    4,666                 1,868
              . Total Capitalization a id Liabilities                         8        12,357 $  15,261 $          15.309 $ 15.422 $ 15.377 $              12,578 i

e V-

PECO Energy Company and Subsidiary 5mpanies 46 Operating Statistics 1994 1993 1992 1997 1996 1995 For the Years Ended December 31, Electric Operations Output (Mduons of K4wouhou s) 11,239 10,352 8,082 9,659 10,856 10,792 Fossil 28,195 27.026 24,428 25,853 24,373 25.499 Nuclear 1,970 1,699 1,803 1,558 2,404 1,425 Hydro 1,596 1,478 1,597 1,403 1,540 1,741 Pumped storage output (2,256) (2,192) (2,217) (1,924) (2,230) (2,507) Pumped storage input 13,945 6,164 6.447 8,675 Purchase and interchange 29,615 19.539 175 106 56 29 144 179 Internal combustion 51,070 47,014 44,866 42,397 Total electric output 66,308 56.661 Sales (Manom of Kilowoto,ou 1) 10,636 10,859 10,609 9,965 i 10,407 10,671 ! Residential 6,200 6,150 5,769 5,396 . 6,685 6.491 15,829 l Small commercial and industrial 15,208 15,763 15,968 15,956 15,034 l Large commercial and industrial 791 771 962 841 902 860 Other 535_ (205) 31 (159)_ 70_ (327) Unbilled 33,994 33,563 33,136 31,993 33,037 32,945 Service territory 768 457 1,231 1,927 935 496 Interchange sales 14,041 8.670 6,699_ 28,893 20, 243_ 10 &39 Sales to other utilities 48,531 44,370 42,263 39,923 63,857 54,123 Total electric sales Number of Customers, he n 1,350,210 1,341,8/3 1,333,926 1,333,861 1,324,448 1,321,379 Residential 141,653 143,605 142,363 141,253 144,142 142,431 Smali commercial and industrial 3,394 3,603 3,742 3,972 3,308 3.299 Large commercial and industrial 944 888_ 857 1,094 1,051_ __ 959_ 1,480,008 Other 1,467,385 1,498,362 1,488,866 1,482,405 1,471,229 Tota' electric customers _ Operating Revenues (Moons of Mon) 1,370 $ 1,379 $ 1,371 $ 1,351 $ 1,308 S 1,357 $ Residential 730 710 679 672 779 749 Small commercial and industrial 1,135 1,149 1,168 1,225 1,077 1,098 Large commercial and industrial 136 161 168 148 140 137 Other 43 (11) (1) (7) 19 (26) Unbilled 3,424 3,355 3,358 3.366 3,380 3,331 Service territory 23 14 32 59 26 17 Interchange sales 247 233_ 199 728_ 498_ 334_ Sales to other utilities 3,625 3,605 3,597 4,167 3,855 3,775 Total electric revenues Operating E.xpenses , Operating expenses, 2,026 2,209 1,894 1,990 , 2,698 2,244 excluding depreciation 416 401 391 462 431

• Depreciation 553_ 2,625__ 2,295 2,381__

3,251_. 2,706 2,457

• Total operating expenses 1,318 $ 1,000 $ 1,310 $ 1,216 S 916 $ 1,149 $

Electric Operating Income Average Use per Residential Customer gamneou s) 6,908 6,736 6,727 6,259 6,695 6,771 Without electric heating 17,527 17,096 16,298 16,400 17,946 17,189 With electric heating 8,041 7,970 7,443 7,830 8,074 8.130 Total Electric Peak Load, Demand 7,227 7,100 6,617 7,390 6,509 7,244 (h'5FUS W KMW3ns> Net ElectrM Generating Capacity-Year-end Su,mer Rating 8,956 8,877 8,836 9,204 9,201 9,078 frnouwd3 of Kewanst

                                                $         0,84 $          0.93 $          0.87 $             0.89 $         0.90 $         0.82 Cost of Fuet per Mituon siu                                                                    11,617            10,675         10,657 ETU .per Net Kilowatthour Generated             10,737         10.682          10,705                                                        f 1

Company Profile incorporated in Pennsylvania in 1929, PECO Energy Company provides retail x electric and natural gas service in southeastern Pennsylvania and, through pilot programs, natural gas service to areas in Maryland and New Jersey. The 3 Company also engages in the wholesale marketing of electricity on a national basis and participates in joint ventures which provide telecommunication ser-vices in the Philadelphia area. PECO Energy's treditional retail service territory covers 2,107 square miles. Electric service is furnished to an area of 1,972 square miles with a population of about 3.6 million, including 1.6 million in the City of Philadelphia. Approximately 94% of the retail electric service area and 64% of retail kilo-watthour sales are in the suburbs around Philadelphia, and 6% of the retail service area and 36% of such sales are in the City of Philadelphia. Natural gas service is supplied in a 1,475-square mile area of southeastern Pennsylvania adjacent to Philadelphia with a population of 1.9 million. Through Horizon Energy, a wholly owned subsidiary of the Company, and PECO Energy / Energy 0ne, a franchised energy products brand, PECO Energy partici-pates in Pennsylvania's electric competition pilot program. Strategic Architecture

 ?   _                The year 1997 brought with it a tremendous change in Pennsylvania's electric

• utility industry. For the first time, although initially through limited pilot pro-

         ,            grams, Pennsylvania's retail electric customers have the opportunity to choose

(: their generation suppliers. After a phase-in period beginning in 1999, all ) - Pennsylvania electricity customers will have this opportunity. 1 l r -

           \          Knowing that the industry would soon be in turmoil with marketers from every corner of the nation wanting a piece of the deregulated energy pie,the Company began to look for other means to secure revenues and increase
 ,                    shareholder value.

y To this end, the Company reviewed its strategy and developed a new strategic

• f architecture. Keeping in mind what it does best- operating generating facili-D ties, constructing reliable power-delivery systems and marketing electric

( power - PECO Energy has ventured beyond the traditional bounds of the f industry, yet has not strayed from its core competencies. This annual report describes this strategic architecture and some of the innova-tive measures the Company is taking to enhance shareholder value.

                                                                                                                                                          .a Nineteen-ninety-seven was a tumultuous year for PECO Energy. It               in August, we announced a settlement agreement with a group of intervenors. The settlement included, among other things, the recovery of was a year that opened with the uncertainty of electric competition and
                                                                              $5.461 billion in stranded assets and costs; an agreement by the restiucturing in Pennsylvania, grew to one of great expectations of a fair transition to competition, but ended with the great disappointment of an     Company to write off $2 billion of additional stranded assets and costs; onerous restructuring rate order.                                            the transfer of generating assets and operations to a separate entity; and the voluntary reduction by the Company of the phase-in pericd to full During the year, there was much promise of an early resolution of the issues related to Pennsylvania's Electricity Generation Customer Choice      customer choice of generation supplier from three years to two. In addi-I and Competition Act. Over the summer, we worked in cooperation with          tion, tha settlement would have provided all of our customers an aversge other parties, some of whom had previously opposed our positions, to          ten percent rate reduction beginning September 1998.

structure a settlement which we felt was fair to both our customers and in December 1997, however, the Commission, in a 3-2 vote, reje:ted q I our shareholders. But at the end of the year, the Pennsylvania Public the settlement agreement and adopted its own radical plan. The l Commission reduced our stranded cost recovery to under $5 billion, Utility Commission voted, by a bare majority, to adopt a much more oner-f aus plan. This action led to the dramatic financial write-off and dividend reduced the return allowed on stranded costs, provided no guaranteed l rate reductions for customers and ordered that the transition to competi-reduction announced in January of this year. In facing these difficult decisions, I believe both management and tion be accelerated. the Board of Directors took the appropriate steps for the long-term Because of the adverse effect the Commission's decision woul interests of you, the investor. We have appealed the Commission's on the Company, we filed appeals in both the Commonwealth Court of actions in both Commonwealth and federal courts, but continue to move Pennsylvania and in U.S. District Court. Avoiding litigation was a primary factor leading to the settlement agreement; however, the Commission's quickly to position PECO Energy to be successful in the new competitive environment being created by a myriad of state and federal regulatory action left us with no alternative. The Company took numerous actions last year to put as in a strong actions and pending legislation. PECO Energy's 1997 financial results were dominated by the competitive position for the future. In September, we announced the for-Commission actions that transpired during the Jear. The Company report- maticn of AmerGen Energy Company, LLC, a joint venture with British ed a net loss of $1.5 billion or $6.80 per share. This loss was primarily Energy of Edinburgh, Scotland. AmerGen's mission is to pursue opportu-due to an extraordinary charge before taxes of $3.1 billion, or $8.24 per nities to acquire and operate nuclear generating stations in the U.S. share after taxes, to reflect the effects of the Commission's order in the AmerGen is backed with the recognized expertise of both PECO Energy and British Energy in operating nuclear power plants. This strategy is l Company's restructuring proceeding, along with several one-time charges ^ designed to position PECO Energy as one o. f the nation's major electric totaling $214 million before taxes, or $0.56 per share after taxes. Eamings per share for 1997, excluding the above items, were $2.00 generatira companies. [ Our expertise in operating and maintaining nuclear plants is also being versus $2.24 in 1996. The decision to reduce the dividend was a difficult one, but I firmly recognized, as evidenced by our agreement with Northeast Utilities to i believe it we the prudent thing to do. The one dollar per share dividend manage the return to service of two units at the Millstone, Connecticut, nuclear power plant and our three-year contract with lilinois Power to level wik give us the flexibikty we need to deal with the demands of competition while carrying out our non-regulated growth strategy. We manage the restart and operation of its Clinton nuclear power station. Last summer, we launched Energy 0ne with Utilicorp United of feel the new dividend level is sustainable. There is httle doubt that the most significant event of last year was Kansas City, Missouri, with the aim of developing a national energy the Company's restructuring proceeding before the Commissinn. We felt brand. PECO Energy is an equity partner with Utilicorp and the firs strongly that the interests of both customers and shareholders would Energy 0ne franchisee. best be served by reaching a settlement instead of enduring prot' acted litigation.

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Notes to Consolidated Financial Staternents 47 Op: rating Statistics (continued)  ! For the Years Ended Decernber 31, 1997' 1996 1995 1994 1993 1992 l. fi Gas Operations 5 les (Muuom o/ cubk Feet)

     . Residential                                               1,614                1,681           1,516                 1,636                 1,637                1,819
      ' House heating                                           32,666             35,471            30,698 -             32,246               30,242                30,218 Commercial and industrial                                19,830             20,999            18,464               19,762               18,635                 19.026 Other                                                       673                2.571           1,582                 7,039                 9,733                4,885 Unbilled                                                    212              (1,306)           1,710                  (474)                    676               -(736) l                Total gas sales                                 54,995             59,416            53,970               60,209               60,923                55,212 Gas transported for customers                            30,412             27,891            48,531               29,801               22,946                22,060 Total gas sales and gas transported                                 85,407             87,307           102,501               90,010               83,869                77,272 Number of Customers Residential                                              55,592             56,003            56,533               57,122               59.573                 59,859 l       House heating                                           314,335           303.996            295.481            287.481              277,500                 269,577 Commercial and industrial                                35,215             34,182            33,308               32,292               31,573                30,956 Total gas customers                            405,142           394.181            385,322            376,895              368,646                 360,392 Operating Revenues (wtums cf voam)                                                                                                                                              ;

Residential S 17 $ 16 $ 15 $ 16 $ 15 $ 16 House heating 265 249 236 238 202 203 Commercial and industrial 145 133 126 128 110 113 Other 3 11 5 20 28 12 Unbilled ~ (1) (4) 7 (3) 5 (lli

                                                                                                                                                                                 ~     '

Subtotal 429 405 389 399 360 343 Other revenues (including transported for customers) 22 24 22 17 23 23 l O Total gas revenues Operating Expenses 451 429 411 416 383 366 Operating expenses, , excluding depreciation 333 302 302 326 279 261 l Depreciation ~ 28 27 26 26 24 23 l Total operating expenses 361 329 328 352 303 284 l Gas Operating Income S 90 $ 100 $ 83 $ 64 $ 80 $ 82 t l l Securities Statistics Ratings on PECO Energy Company's securities Mortgage Bonds __ _ _ __ _ Preferred Stock . _ . . _ Date Date Agency ___ ,_ __ Hating _ _ _ _ Estabbshed __

                                                                                                                                    ._ Rat ngi_                  . Estabhshed p-Duff and Phelps, Inc.                                                BBB+                          4/92                          BBB-                            8/91 i       Fitch investors Service, Inc.                                        A-                            9/92                          BBB+                            9/92 f       Moody's investors Service                                            Baal                          4/92                          baa2                            4/92 Standard & Poor's Corporation                                        BBB+                          4/92                          BBB                             4/92 NYSE-Composite Common Stock Prices, Earnings and Dividends by Quarter (rer Shurt)

__._ ____188 L .._ _ .__.._. ,..-.._ _ . _ _ __. ._..._1996_ _ __ _ _ . _ _ , , Fourth Third Second First Fourth Third Second First __ Quarter _ _ Quarter.._ . Quarter _ _ Ouarter_ Ouarter Quarter Quarter Quarter ,x 7[ High price Low price

                                                   $ 25-1/8 S24-5/16 8211/8 $ 26-3/8 $ 27-3/8 $ 26-1/4 $ 26-7/8 $ 32-1/2
                                                   $217/16 $ 20-3/4 S 18-3/4 S                        20 $ 23 7/8 $                      23 $ 22-1/2 $ 26-1/4 Close                                       $ 24-1/4 $23 7/16 S                    21 $ 20-3/8 $ 25-1/4 $ 23-3/4 $                                  26 $ 26-5/8 Earnings                                      (88.51)           09c              53c          49c              51c              65c                43c             65c Dividends                                         45c           45C              45c          45c              45c           43.5e               43.5c          43.5c

__PECO Energy Company and Subsidiary Companies 48 Board of Director 5 Officers Corbin A. McNeill, Jr. (58) John Doering, Jr. (54) Susan W. Catherwood (54)  ! Chairman of the Board, Vice President, Operations, I Chairman, Trustee Board,

• Power Generation Group The University of Pennsylvania President and Chief Executive Medice'. Center and Health System Officer Gregory N. Dudkin (40)m vice President, Drniel L. Cooper (62)m Dickinson M. Smith (64)

President, PECO Nuclear Power DeUvery former Vice President and General Manager, Nuclear Services Division, and Chief Nuclear Officer Drew B. Fetters (46) Gilbert / Commonwealth, Irt p Senior Vice President, Nuclear Planning and Development ft Walter D'Alessio (64) Ventures Thomas P. Hill, Jr. (49) President and Chief Executive Vice President and Cont;oller James W. Durham (60) e ason Real Estate Services Semor Vice President. Legal and Math W (Commercial mortgage banking knera unsd Vice President, and pension fund advisors) " $Y 5****

                                                     'I*' 98"I"I I" ""'

G. Fred DiBona, Jr. (46) 5emor Vice President, Finance p, y President and Chief Executive '" "*" Vice President. Officer, Nuclear Projects, PECO Nuclear Independence Blue Cross William J. Kaschub (55)

                                               '"                "'      J. Barry Mitchell (50)

R. Keith Elliott (55) ""#"*" "'' Vice President, Chairman, President and Chief , Kenneth G. Lawrence (50)N Finance and Treasurer Executive Officer, i Senior Vice President, g Hercules, Inc. L cal Distribution Company & Pdd Richard G. Gilmore po)m John M. Madara, Jr. (54) Peach Bottom Atomic Power Former Senior Vice President, Senior Vice President, Station Finance and Chief Financial 0fficer of the Company Power Generation Group gg g p g William H. Smith, III (49)N Vice President, Richard H. Glanton, Esquire (51)m Senior Vice President, Support Services Partner of the law firm Reed Smith Business Services Group Shaw and McClay James D. von Suskit (51)* , Vice President, James A. Hagen (65) Alvin J. Weigand (59) Limerick Generating Station Former Chairman, Conrail, Inc. Senior Vice President Gerald R. Rainey (48) Katherine K. Combs (47) Admiral Kinnaird R. McKee (68) i Senior Vice President, Corporate Secretary Director Emerkus, Nuclear Operations y f U.S. Navy Nuclear Propulsion I Assistant Corporate Secretary Joseph J. McLaughlin (69)m Nancy J. Bessey (44) Vice President, former President and Chief Todd D. Cutler (37) Executive Officer, Power Transactions g $ Beneficial Mutual Savings Bank

                                                                                '"'      I*      (' I forbin A. McNeill, Jr. (58)m                  Vice President,                    '"I   ***"*                                                              ,

Chairman of the Board, Station Support George R. Shicora (51)  ! President and Chief Executive Assistant Treasurer Officer of the Company

• John M. Palms, PhD. (62)

President, , University of South Carolina , of the Board of Duettors Joseph F. Paquette, Jr. (63)m m Elected June 23,1997 Former Chairman of the m Effective June 1,1997 Board of the Company m Effective October 13,1997 Ronald Rubin (66)m m Ufectin Nowrnbe 7,1997 Chief Executive Ofhcer, m Effective April 9,1997

• The Rubin Organization,Inc. m Effective July 28,1997 (Real estate development and m Effective January 26,1998 management) b Robert Subin (59) j 5enior Vice President, Campbell 50up Company

                                                                                                                                                                  )

l

i SHAREH0LDER INF0RMATION 7 ) 4 i 1 3

,       Stock Exchange Listings                                            Annual Meeting 8

Most Company securities are' listed on the New York Stock The Annual Meeting of the Sha'eholders of the Company will be

.       Exchange and the Philadelphia Stock Exchange.                      held at the Valley Forge Convention Center in King of Prussia, Pennsylvania on April 8,1998 at 9.30 AM. The record date for Dividends                                                          voting at the shareholders' meeting is February 20, '998. Prompt The Company has paid dividends on its common stock continual-      return of proxies will be appreciated.

ly since 1902. The Board of Directors normally considers common stock dividends for payment in March, June, September and Form 10-K December. The Company expects that the $1.80 per share divi- Form 10-K, the annual report filed with the Securities and dend paid to common shareholders in 1997 is fully taxable as Exchange Commission, is available without charge to sharehold-dividend income for federal income tax purposes. ers upon wntten request to PECO Energy Company,2301 Market Street, P.O. Box 8699, Philadelphia, PA 19101-8699, Attention: Shareho)ders may use their dividends to purchase additional Investor and Shareholder Relations Division, S21-1 shares of common stock through the Company's Dividend Reinvestment and Stock Purchase Plan (Plan). The Company Shareholders pays all brokerage and service fees for Plan purchases. All share-The Company had 163,049 shareholders of record of common holders have the opportunity to invest additional funds in stock as of December 31,1997. n.mmon stock of the Company, whether or not they have the.ir

           ) ends reinvested, with all purchasing fees paid by the hpany.

Transfer Agents and Registrars Preferred and Common Stock Reg strar and Transfer Agent:

>       In 1997, over 55 percent of the Company's common sharehold-        First Chicago Trust Company of New York, P.O. Box 2500, Jersey ers were participants in the Plan. Information conceming the Plan  City, NJ 07303-2500, may be obtained from: First Chicago Trust Company of New York, PECO Energy Company Plan, P.O. Box 2598, Jersey City, NJ           First and Refunding Mortgage Bond Trustee:

07303-2598. First Union National Bank, Corporate Trust Operations, Customer information Center 1525 West W.T. Harris Blvd. Comments Welcomed Charlotte, NC 28288-1153 The Company is always pleased to answer questions and provide information. Please address your comments to Katherine K- New York Agent for bonds: Combs, Corporate Secretary, PECO Energy Company,2301 First Trust of New York, National Association Corporate Trust Market Street, P.O. Box 8699 Philadelphia, PA 19101-8699- Department,100 Wall Street, Suite 1600, New York, NY 10005. 4 Inquiries relating to shareholder accounting records, stock trans-Internet Site L'; fer and change of address should be directed to: First Chicago Visit our intemet site at http://www peco.codi

,       Trust Company of New York, PO. Box 2500, Jersey City, NJ
!       07303-2500.

General Office: T:ll-Free Telephone 2301 Market Street Philadelphia, Pennsylvania 19103 Toll-free telephone lines are available to the Company's share-(215) 841-4000 holders for inquiries concerning their stock ownership. Calls should be made to 1-800-626-8729. O L:

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