Text

PECO Energy 1998 Annual Rept. with
	ML20205K038
Person / Time
Site:	Peach Bottom, Limerick
Issue date:	12/31/1998
From:	Geoffrey Edwards, Corbin McNeil; PECO ENERGY CO., (FORMERLY PHILADELPHIA ELECTRIC
To:	; NRC OFFICE OF INFORMATION RESOURCES MANAGEMENT (IRM)
References
	NUDOCS 9904120302
	Download: ML20205K038 (52)
	v • d • e

{{#Wiki_filter:.,e 6-g.A $10 CFR 50.71(b)". V PECO NUCLEAR n m e v-Nuclear Group Headquarters ' " A (4Nir or PECO Emacy 965 Chesterbrook Boulevard' - Wayne. PA 19087-5691 ~ March 29,1999 Docket Nos. 50-277.. 50-278. 50-352-- 50-353. License Nos. DPR-44 - DPR-56 e NPF-39. NPF-85 U. S. Nuclear Regulatory Commission Attn: Document Control Desk Washington, DC 20555

Subject:

Peach Bottom Atomic Power Station, Units 2 and 3 Limerick Generating Station, Units 1 and 2 PECO Energy Company Annual Financial Statements

Dear Sir / Madam:

Attached is the 1998 Annual Financial Report for PECO Energy Company, operator of Peach. Bottom Atomic Power Station, Units 2 and 3, and Limerick Generating Station, Units 1 and 2. This Annual Report contains the annual financial statements for 1998. This information is being submitted in accordance with the requirements of 10 CFR 50.71(b) and 10 CFR 50.4. If you have any questions or require additional information, please do not hesitate to contact us. Very truly yours, Garrett D. Edwards Director-Licensing p {l Attachment. cc: . H. J.' Miller, Administration, Region I, USNRC. ,~ ~ A. L. Burritt, USNRC Senior Resident inspector, LGS A. C. McMurtray, USNRC Senior Resident inspector, PBAPS r 9904120302 1 PDR ADOCR:0 77 Y ') ana h ) c y q ,.l-i ej _ s

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a a l l Financial Highlights Comparson of 5 Year (Thousands o/ Dollars) 1998 1997 % Change Cumulative Total Return Operating Revenues $ 5.210,482 $ 4.617,901 12.6% Operating Expenses, excluding taxes $ 3,647,653 $ 3,302,179 10.5% l' Taxes Charged to Operations $ 599,169 $ 602,860 (0.6%) a,w,, sw Operating income $ 1,283,314 5 1,005,631 27.6 % Extraordinary item $ (19,654) $(1,833,664) 98.9 % sao (Net of taxes) Earnings Applicable to Common Stock $ 499,615 $(1.513,910) sma (After extraordinary item) Earnmgs Applicable to Common Stock 5 519,269 $ 319,754 62.4 % suo- _,,.mer (Before extraordinary item) Earnings per Average Common Share (Dollars) 2.24 (6.80) ~- s se (After extraordinary item) Cash Davidends Paid per Common Share (Dollars) 1.00 1.80 (44.4 %) Average Shares of Common Stock 94 95 96 97 98 Outstanding (Thousands) 223,219 222,543 0.3% I Pt(O Dw'gv Cmipet Capital Expenditures $ 415,331 $ 490.200 (15.3%) S & P 500 on. >,ws usate Aer ig,. Common Shareholders' Equity $ 3,057,342 $ 2,726.731 12.1 % e Book Value Per Average Common Share (Doitars) 13.61 12.25 11.1 % ve at r g ani rah t nq ek coc.'y m ce"e' m r, ek en as's "-e U" 'ed 5 a 's. Sint e G29. e t.ase p' uded reta 1 i t C i ( m '.:y ( (, pe,y - a h uno+ o.] Nt a f g.w st"vn t s at ne", in soup entem Fernsyhan.3, serenq rv <re '* y 15 naluan custarierS in 1M V..th the ad ent Of deo e, Jason. we i% r r p t.%e tu,Yne',<,es ttat t,dd upon a boad awt f,ase. Oct r 4 k et k r.Ow;edy and OG' t a'e (d;ubbes Our ge e' awn fiu atwh pd cl wde f.ier e et (i: r t P'i..de ?> tr 9 ' ()O Plegln ctM !., 3"tiQ11g the lYg G( r.Qf" pet,itV{' 41 tN (Jr 1(td h(,'jjgd, Ogf g:/ g'yg g ry,jp k p!q /_; jtya ign, hgy,{.f ]( re"I, is ()I'e (3f the bddlfl] h [P 1f t' ti n ; 'A j feill

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t Perfo l l l PECO Energy was named " Energy number one spot in the rankings for To My Fellow Shareholders: What a difference a year makes! Company of the Year" by the total shareholder return among the When I wrote my letter to you a year Washington International 25 largest U.S. electric utilities. The ago, our company was in one of its Energy Group. catalysts to our dramatically greatest periods of uncertainty. We improved valuation were the favor-were facing what could have been a Strong Financial Results able completion of our long and dif-protracted legal challenge to an Earnings per share in 1998, before ficult regulatory restructuring pro-unfavorable regulatory order; Wall special items, were $2.66. That repre-ceeding and the progress we have Street's confidence in our competitive sents a 46% increase over 1997 earn-made in executing our competitive future was weakened, and our finan-ings from operations. After account-growth strategy. cial results for 1997 were most disap-ing for an extraordinary charge relat-pointing. Today, that picture has dra-ed to the redernption of higher cost Favorable Restructuring Plan matically changed for the better, and debt and a year-end adjustment for in Place I am proud to report to you that the cost of our on-going workforce The most significant event of 1998 1998 was a year of powerful perfor-reduction program, earnings were was the successful completion of our mance for PECO Energy. $2.24 per share. Our power market-restructuring proceeding before the ing activities contributed significantly Pennsylvania Public Utility Among our most significant to our strong earnings performance, Commission (PUC). In May, the PUC accomplishments in 1998: particularly in the third quarter when approved a fair and balanced plan Earnings per share were $2.66 we achieved the highest quarterly that on January 1,1999 opened our before special items, an increase earnings in our company's history. electric generation business to com-of 46% over 1997 performance. During 1998, we also benefited from petition. The plan provides our cus-PECO Energy's common stock deliv-lower operating and maintenance tomers with guaranteed savings cred a total annual return of 78%. expenses, significantly lower fuel and through across-the-board rate cuts We negotiated a fair and balanced replacement power costs following the for the next two years as well as the electric deregulation plan. Salem Nuclear Generating Station's full freedom to choose their energy sup-Our power marketing group, return to service in early 1998, and a plier. PECO Energy will continue to Power Team, increased safer, vol-lower effective income tax rate, provide regulated distribution ser-ume 13%. vices to all customers in our tradition-Our unregulated energy supply PECO Energy Delivered al service territory. business, Exelon Energy, became Excellent Returns in 1998 For PECO Energy, the restructuring the most successful player in the PECO Energy's shares of common plan provides a very reasonable tran-new Penny,;vania Electric stock closed 1998 at $41.75, a 74% sition to retail competition while Choice program. increase over the 1997 close of $24 maintaining a solid financial founda-AmerGen, our joint venture with per share. The unprecedented tion upon which we're building new, British Energy, successfully negoti-increase in our common stock price, competitive businesses. A central ele-ated the first-ever U.S. purchase of combined with dividends paid, result-ment of the plan is the allowed a nuclear generating station, ed in a total return to our sharehold-recovery of almost $5.3 billion in scheduled for completion this year. ers of 78%, winning PECO Energy the

( While our performance in 1998 was impressive, we are still powerm.,c# gyp,;We:are only j. ust beginning t#festfhe positive impact of our renewed Y mization, vision and strategy. cr Wof'are building our leadership position in pp deregulated markets by continuing to increase aour powers of: li/ yyj k[ Performance demonstrated by excellent financial and operating results in 1998 2 jfl VislOn becoming the world's leading provider of clean energy 5 g aggrest vely growing a competitive generation portfolio a Boldness i Experience leading the industry in power marketing 8 InnOVatlOn growing and developing new ventures 10 Alignment linking our people and performance to shareholder interests 12

/

We will continue to tap these business powers to create value for our shareholders and customers that no other energy company can equal.

3 rmartCO l 1 stranded investments. On January 1, Pursuing 1999, we began recovering these Aggressive a investments from our customers Growth through a special transition charge Objectives 3 c - E that will remain in place for 12 years, To mark our while earning a 10.75% return on the progress in ' i ~ l balance. The plan uso gives us the achieving our ability to securitize the majority of our long term vision 4-recoverable stranded costs through for the Company, the issuance of up to $4 billion of in 1998 we estab- -. M; " transition bonds." The issuance of lished the follow-these high'y rated bonds will enable us ing goals that we to significantly realign our capital struc-will work to rneet ,f M ture, most notably through the retire-by the year 2003: ment of debt and preferred stock, and . To retain a ~ the repurchase of common stock. 75% market share in our Our Vision for the Future traditional ser-Corbin A. McNeill, Jr., Our business and industry are clearly vice territory, PECo Energy Chairrnar,, President and Chief Executive officer moving into a vastly different and achieved bilities, and continuously work to exciting era. Given the speed of this through customer retention by our o tin'ize the cost efficiency of PECO change, we think it is essential to local distribution company, PECO Energy listribution Company. have a clear pictuie of where we're Energy Distribution, as well as going, and the kind of company we market share growth by Exelon Building a Competitive Retail want to be when we get there. In Energy. Market Sanre 1998, we developed a powerful new

To nearly triple our electric gener-Our long-tern. goal is to maintain a corporate vision - To become the ation capabilities to 25 gigawatts very strong market share in our tradi-world's leading provider of clean through acquisitions and long-tional electric service area, plus estab-energy. (Our complete vision and mis-term supply agreements by the lish a significant position in other sion statements are presented on year 2003.

electric retail markets across page 5 of this report.) This mission To achieve a 50% increase.in our Pennsylvania, and ultimately other will guide and propel our progress earnings per share between 1990 regions of the United States. As of for years to come, and we are contin-and 2003. Jcnuary 2,1999, two-thirds of uing to build the processes and struc-To achieve these aggressive earnings Pennsylvania's electric customers tures to make it a reality. and growth objectives, we will build gained the ability to choose their upon our strengths in power genera-energy suppliers. In anticipation of tion and power marketing. We will the opening of retail markets, Exelon also continue to develop ventures Energy conducted a marketing cam-that leverage our core business capa- }

paign in 1998 that has helped it gain The growth of our generating New Corporate Structure more than 130,000 retail customers. capacity will go hand-in-hand with Proposed To date, Exelon Energy has estab-the growth of Power Team's whole-In 1999, we will be asking common lished the largest competitive market sale energy marketing operations. shareholders to vote on a proposal to share in the state and is one of the Power Team has developed the create a holding company structure few suppliers with customers in all of expertise, market knowledge and a for PECO Energy that, if approved, Pennsylvania's electric franchise areas. portfolio management strategy that will establish a new corporate holding Even with the new opportunities consistently produce superior value company named PECO Energy for choice that our customers have, I for PECO Energy. In 1998, Power Team Corporation. This will be the first step am pleased to note that a large num-delivered 100% of the power it con-in establishing separate subsidiaries ber of our customers have opted not tracted to provide. This deliverability organized around our three key lines to switch their energy supplier and record was particularly impressive of business: power generation and have remained with PECO Energy givers the supply problems experi-marketing, gas & electric distribution Distribution. I be 'ieve this loyalty is a enced by other marketers during last and unregulated energy service-relat-testament to our strong ties to the summer's shortages in the Midwest. ed businesses. We believe that this communities we serve as well as our proposed structure will give us the proud history of service excellence. Managing our Businesses to flexibility to compete in new markets Achieve Excellence and grow our businesses as new In:reasing PECO's Generation Now more than ever, we need a tal-opportunities arise. Crpabilities ented and motivated workforce to Before closing, I want to recognize Wetr.k the first important step in help us accomplish the goals we have and thank fellow board member expa Jing our generation portfolio set. We are fulfilling that need by Admiral Kir.naird R. McKee, who in July of 1998, when we entered building an employee team which is stepped down from our Board of into an agreement to purchase Unit 1 smart, ambitious and motivated to Directors in 1998 after completing 10 of Three Mile Island Nuclear succeed. Over the past year, we have years of service. I would also like to Generating Static 7 (TMI) from GPU, added significantly to our talent base welcome Rosemarie Greco, who Inc. We will purchase the unit and have recruited leaders from a joined our board la 1998. And finally, l through AmerGen, our joint venture variety of competitive industries, such I want to thank you, our sharehold-with British Energy, and expect to as oil, gas and chemicals. ers, for your continued support and complete the transaction by mid-I believe in challenging our work-confidence. Ai! of us who are a part 1999. TMI Unit 1 has one of the force, providing the right incentives of PECO Energy are excited about finest operational and safety records to achieve our goals and then building on our competitive strengths in the industry. We see real opportu-rewarding excellent results. In 1998 in the coming year and beyond. nities for even stronger performance we put in place a new incentive com-by applying the same spirit of innova-pensation system that includes stock tion and operational excellence that option grants for every employee, has earned our Peach Bottom and which vest only aftcr our stock price Limerick nuclear stations world-class meets aggressive price targets. We status in performance, safety and also began offering quarterly cash Corbin A. McNeill, Jr. PECO Energy Chairman, President and cost efficiency. Based on our latest bonuses to employees when their estimates, we believe the TMI Unit 1 respective business units meet value-

"fg'99 acquisition will make a positive con-driven business and operational tribution to earnings in its first year.

objectives. Under this new system, employees and management will only enjoy financial rewards when we create value for our shareholders. l

5 t V s on Becoming the world's leading pmvider of clean energy. In 1998, we developed a powerful vision statement - to become the

We are an energy company that I

world's leading provider of clean energy. This vision is guiding and pro-measures our success by our I pelling our strategy, our actions and ultimately our success. impact on the lives of others.

We will provide energy safely, reliably and affordably to power the 21st century dreams s -

,4 - o p ..fFe.A of families and businesses. g d

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We will create value for our y,

- + shareholders and our cus-kc@ c p ' j j.j.. tomers that no other energy '"S T company can equal. A 4

We will ensure that air and water are cleaner for

,n "aN generations to come.

We will be a company respect-ph d;i/

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d A Our key for k , q} \\ success in deregu-t, lated ~ '{.,.. m power g4 y _, M generation markets will 14* be to own or

7. 'i control a significant amount of environmentally clean and efficient gen-erating we capacity make in targeted acquisi-regions of the tions, we United States, will work to As part of our develop res,r) vision to become the al groups of geo-world's leading provider graphically synergistic of clean energy, we set a plants that allow us to goal of increasing our generation leverage our resources capacity from just over 9,000 and expertise in specific geo-megawatts to 25,000 rnegawatts asset owners.

graphic areas. in the next five years. Under our acquisition program, in 1998, we began expanding We are working to achieve this we are targeting attractively our Mid-Atlantic operating goal through an aggressive yet priced, environmentally and oper-group, consisting of the four disciplined acquisition program, ationally sound plants that have nuclear units we operate at and through securing long-term the potential for outstanding per-Limerick and Peach Bottom str supply contracts with generation formance and strong returns. As tions. In October, we reached a

1 .ness We are pursuing a hold national strategy designed to nearly triple our generating capacity within five years and strengthen our market presence throughout the United States. final agreement to purchase Building Our Portfolio of High Performers Unit 1 at GPU's Three Mile Island Nuclear Generating Station through AmerGen, our joint ven-g ture with British Energy. TMl r Unit 1, with its strong operating ( Aegsdsition Lee record and 786 megawatts of , M, T nuclear baseload capacity, will be 7,d { an excellent addition to our gen-erating portfolio. This plant has I twice set world records for con-tinuous days of operation. o" AmerGen is obtaining all neces-CAPAC6IY FACiOH sary governmental ap9rovals and PECO is building its portfolio by targeting generating plants with potential for high expects to complete this transac. Sapacity factors and low operating costs, and will use its operating strengths to tion by mid-1999. Leversging Our Operational Excellence Good acquisitions are not tors and lowest production costs create a balanced portfolio of enough. It is what we do with in the nation. We are targeting generation assets, including the plants after they are acquired additional plants with similar nuclear, hydroelectric and clean-that determines their true value. high performance potential. burning fossil fuel plants. This The second pillar of our genera-in 1999, we plan to continue to strategy positions us to be a tion strategy is our proven oper-expand our generation portfolio leader in power generation in ating expertise. Our Limerick and through a strategy that focuses North America and achieve our Peach Bottom nuclear stations first and foremost on building bold aspiration of becoming the are among the safest and best-earnings potential and strong world's leading provider of performing nuclear plants in the investment returns. We will seek clean energy, industry. These facilities have out the best possible plants at some of the highest capacity fac-competitive prices, working to J

i -vwmmn p~ aA g#% 3 v 't R 7 J ygh y\\yy emr4 .[ Vf }' W f--] J 33 w y i 1 Jg p g%4 (jff h6 y b a u, d d # h l qQ / My Law A pioneer in the industry, PECO's Power Team continues to demonstrate its leadership in marketing and delivering wholesale power tlur>ughout the United States. The expertise of our power mar-Power Team has nearly tripled its assets asross the United States keting group, Power Team, was sales to become one of the that have become more valuable again proven in 1998 with a largest "real time" deliverers of as competition has increased. record of 100% delivery in highly wholesale electricity in the conti-These assets give Power Team the competitive and rapidly changing nental United States. Today, flexibility to move power quickly U.S. power markets. Power Team Power Team's customer base to arem where demand is strongest. continues to use its expertise to includes municipal utilities, expand its assets and markets in investor-owned utilities, rural Expanding Power Sources and Markets the United States and Canada cooperatives and marketers. l in 1998, Power Team continued l and increase its contributions to Power Team's most significant to diversify its power sources and j our bottom line. At the same competitive advantage is a m rkets. Power Team expanded time, our strategy of growing our diverse portfolio of generation its styply portfolio by adding generation portfolio will provide assets, including both PECO-gen-gener ting sources outside of Power Team with additional erated power and a variety of PECO Energy's traditional service sources of low-cost power. long-term and short-term power territory. PECO-generated power purchase contracts with other cc un f r only about a l The Value of Experience suppliers. As an early player, Power Team's knowledge, supply Power Team also established posi-portfolio and marketing strategy tions in generation and have driven its rapid growth. transmission Since pioneering the development of the wholesale power s ,f fl market in 1994, TA g /h^ [* g - y-4 f. 'i g x . ~. a U ng s g .r

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< h v@ %M7 p M %f da A $lks/ %A Gi %&W N%f quarter of our total supply port-To respond to the more com-emerging opportunities in retail folio and Power Team continues plex needs of customers in dereg-markets as they open to competi-to add new capacity. For exam-ulated markets, Power Team has tion across the country and as we ple, through a partnership with created innovative solutions for add low-cost, strategically located Tenaska, Inc., Power Team will customers. For example, we supply to our portfolio. market the output of a new 800-developed products that enable megawatt plant, which will be us to serve entire municipalities the largest merchant power plant in Pennsylvania and Maine. In in the United States when it addition, Power Team has devel-opens in 2000. oped arrangements that allow us Power Team's Growing Drawing upon our broad sup-to support our hydro-based cus-Geographic Reach and ply portfolio, Power Team also tomers in periods of low hydro. Wholesale Customers expanded the size and scope of power generation. With a sales across the United States. For marketing operation that runs 24 the first time, Power Team solo hours per day,7 days per week, gj ) more power outside PECO's tradi-our national transmission access 3 8% tional Mid-Atlantic service territo-and our unique and innovative MQgM g ,l d 5l(ll g ] ry than inside (see chart). delivery knowledge, we can provide power just about wherev-er and whenever it is needed. .U d MN R -.p > As the market becomes 3 ~ / 1 y. ~ a r 3 l l W. /t, more crowded and 33,, f [ 924 hlu$ }{ competitive, our $&qg O / ' A. _,A. demonstrated n M ~ :- n+ experience

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}'3 Will pg,, ,, x / 4t< / / southeast +' beCome my A,,..,-' more valu-Northeast ,,f udest / ,, ~, s_; n e' W s .[' j able. We are Md-Atla"t'c [ T' well posi- +**"""m ^g w g f* tioned to f For the first time, Power Team sold more t-take advan-power outside the Mid-Atlantic region l tage of than inside as we continued to grow car ) wholesale market.

s I BEI'd e g Under the mnbrella brand of Exelon, we are developing diverse businesses that leverage our assets and skills in high-potential markets. In 1998, we increased our power lenge of competition, becom-and skilled staff have allowed of innovation by developing and ing the largest electric genera-us to 6 -viraless cell sites expanding several new business-tion supplier in Pennsylvania's rapid ( and efficiently, by uti-es, brought together under the Electric Choice program - lizing existing assets. We devel-umbrella brand of Exelon. These building market share not only oped innovative approaches to ventures, which leverage our core in our traditional service area piggyback antennas and cell competencies into new areas, but also in every distribution sites on top of electrical trans-have high potential for future area of the state. The :trong mission poles and towers. In growth. Among our early systems we developed in 1998 the first year, the joint venture achievements we have: estab-for customer acquisition, cus-built a base of over 100,000 lished ourselves as the most suc-tomer care, energy supply and subscribers, well above our cessful electric generation suppli-billing ensure we are well posi-target, and established a sig-er in Pennsylvania's Electric tioned for the expanded choice nificant network in the Phils-Choice program; signed up over program in 1999. With the delphia area. We are well 100,000 wireless phone customers; unique experience we've prepared to pursue the esti-installed a telecommunications gained in Pennsylvania, we are mated two million new cus-network consisting of over 27,000 poised to move quickly into tomers expected to sign up for fiber miles; and began to prove any U.S. market where regula-wireless service in the region in the viability of a new infrastruc-tory conditions provide open the next five years. In partner-ture services business. retail competition. ship with Hyperion

Communications:-

Communications, a leading Lsveraging Our Strengths Exelon Communications is provider of competitive com-This year, we leveraged our core working with experienced munications services, we also strengths in operations and utility partners to develop wireless installed 27,000 fiber miles in infrastructure to launch or phone networks and local fiber the PECO service territory as expand several new ventures: optics communications services well as Allentown, Bethlehem, Energy: in the Philadelphia region. In Easton and Reading. This ven-o Exelon Energy provides com-its first full year, Exelon's joint ture redeploys our strengths in petitively priced electricity and venture with AT&T Wireless building and maintaining our natural gas to residential, com-has become a significant com-current power delivery net-mercial and industrial clients in petitor in the region's wireless work to establish a new com-deregulated retail energy mar-telecommunications business. munications platform. kets. Exelon has been success-Our transmission infrastructure ful in meeting the initial chal-

11 h.,? % "m w%$aklW W 1 2 \\ j infrastructure: this e One of the most cre-market. ative ways we are lever-

Overall, aging our strengths in man-Exelon aging complex infrastructures I

offers a is a new service business we laboratory launched in 1998 to provide for rapidly C0"' infrastructure construction and gg maintenance to other utilities. struction, In new residential construction, we began build-for exampir, electric, gas, tele. ing a utility infrastructure h maintenance business, includ. is P one and cable companies opportunities. Exelon. devel-ing contracts to mainta.in street traditionally use separate ser, oping a wide range of other vice technicians to install their IIghting in Philadelphia, pro-lines. We are developing a ven. vide design services in southern grams with high future growth ture to provide s. ingle-source New Jersey and assess utility potential. The flow of innova-service. By combining installa_ maintenance operations at a tive projects,n the pipel,ne i i tion of electric, gas, telephone midwestern utility. As utilities and strong early results are and cable, Exelon infrastructure face pressures to cut costs, they signs of the potential contribu-Services reduced total costs by a will find it increasingly attrac-tions of the power of innova-third in instal 8ing service to tive to outsource many con-tion to our future progress and struction and maintenance more than 8,000 homes in shareholder value. 1998. In addition to new functions. We are well posi-tioned to continue to grow

1 3 3 Alig We have refocused our performance measures and compensation systems to align our organization around aggressive goals designed to enhance shareholder value. Cullding Upon a Solid To achieve this goal, we Promoting a Performance Frundation restructured PED to focus on Ethic Our local distribution company, financial performance, market in 1998, we began to implement PECO Energy Distribution (PED), share, cost containment and one of the most rigorous perfor-provides a strong foundation of increasing service levels to opti. mance-based cornpensation and earnings, cash flow and core mize customer satisfaction and management systems in the expertise to support our other retention. By the end of 2000, we industry. It provides opportunities non-regulated growth initiatives. expect to reduce our 1998 PED for stock ownership at all levels in 1998, we reorganized PED to staff by more than 20%. of the organization through stock ensure we are positioned for These actions are part of an option grants that vest only when competition and to increase overall corporate initiative to performance goals are met. It is alignment with shareholder inter-increase performance and align-designed to promote a perfor-ests. The changes in PED were the ment. We conducted a Cost mance ethic throughout the centerpiece of a company-wide Competitiveness Review that organization and align employ-shift in performance measures, identified potential annual cost ees' interests directly with the management systems and incen-savings of $150 million across the interests of shareholders. tives to increase alignment and entire corporation, which We embedded our vision and ownership. we are actively working to real-objectives in a coordinated system With our rates for delivering ize. Our goal in making these of goals, organization, perfor-energy capped by regulators reductions is not only to decrease mance feedback and consequence through mid-2005, our greatest operating costs, but to do so management. In 1998, we began opportunity for optimizing the while continuing to improve cus-implementing a new system of earnings contribution of PED tomer-related performance incentives based upon corporate comes from reducing our operat-through improved processes, and business unit performance ing costs while sustaining high per-that will be applied across all lev-formance and service. We began els of the organization. We shift-driving down our cost of delivery ed more compensation from base in 1998, with a goal of reducing pay to performance-based pay. A costs by nearly 20% by 2000. new incentive plan in our nuclear division, for example, has tied compensation to safety and

13 l nment l operating goals for every employ-We have transformed a company ee. it has been very successful in that performed well in regional, boosting performance anci shar-regulated markets into an organi- 'l 9 ing the rewards with employees. zation prepared to succeed in s k^ As part of our plan to push per-world-class competition. .I formance incentives throughout . f"%, ' '( g the organization, we announced grants of options to purchase 300 shares of PECO Energy common stock to all employ-ees by year-end 1999. But these options -like per-7 formance-based stock s-options granted to k senior executives - 'L ~ are not gifts or s fl rewards for longevi-U" 4;., ' + 4 i j ty. They must be 4 earned, vesting only %O ' when aggressive perfor- /' mance goals are reached. The cmployees win only if {- j shareholders win. We are {/ i one of the few companies

[f; to create such a perfor-mance-based plan.

These new approaches - /j. 'y to managing the business have fundamentally /,' I reshaped our culture. / /\\ r

.y

. f L . / 1.

14 Performance Earnings

and Total Debt and Dividends Interest Charges Capitalization dalbu s per <luv+

imilum s art Jollan 1O 30 $000 - li._ _Illli .. l= I l-ill-l'l:1 Illil .a,.inlap '~ ". _ Lbbi i mnggi "suuss I!Il

nEEEE 11:11 II 94 95 96 97* 98*

94 95 96 97 98 94 95 96 97 98 E larnings E Tota! Debt h umg Tenn De bt a ~~o suu c-s Ei n a..eas .. a, res1C uroes per Comenon Share g C omrnon [qwty 3l,7s$7s'pg,*9 Cash Flow from t owgr Operations and Gas Sales and Capital Total Electric Sales Transported Gas Expenditures bolhorn olintamatthoun bullunn of onhu fa ct ,,ulhorn uf d/utn = 80 120 1400 N 70 em ,,al.. 00 3 so 1 11111 nwaBa i s 11111 i ~;E HB1H s i ns

sessa 1llll ap aus 94 95 96 97 98 94 95 96 97 98 94 95 96 97 98

! Retail 5 ales "; Cash Flow frorn Operations N Sales to Other $ Cap:tal Expenditures Utiktes and interchange

< Management's Discussion and Analysis of Financial Condition and Results of Operations. 15 4. Management's Discussion and Analysis of FinaW Condition and Results of Operations G:neral the Board of Directors authorized the implementation of a retirement incentive program and an enhanced severance Th3 Electricity Generation Customer Choice and Competition benefit program to accompany targeted workforce reduc - tions. In the fourth quarter of 1998, the Company incurred an Act (Competition Act), enacted in December 1996, provided after-tax charge to earnings of $74 million to recognize costs for the restructuring of the electric utility industry in related to the CCR workforce reduction. P:nnsylvania, including the institution of retail competition for generation supply beginning in 1999. Pursuant to the Competition Act, in April 1997, the Company filed with the P:nnsylvania Public Utility Commission (PUC) a restructuring p!:n in which it identified $7.5 bil lion of retail electric genera-Discussion of Operating Results teor >related stranded costs. At December 31,1997, the Company determined that its Earnings electric generation business no longer met the criteria of The Company recorded basic eamings per average common Statement of Financial Accounting Standardt (SFAS) No. 71, share of $2.24 in 1998 as compared with a loss of $6.80 per " Accounting for the Effects of Certain Types of Regulation." share in 1997 and eamings per share of $2.24 in 1996. In connection with the discontinuance of SFAS No. 71, the Earnings per share in 1998 reflect higher revenues net of fuel Company performed a market value analysis of its generation of $0.14 per share primarily attributable to sales to other utili- - assets and wrote-off $1.8 billion (net of income taxes) of ties and interchange sales; lower operating and maintenance unrecoverable electric plant costs and regulatory assets. See expenses of $0.10 per share and lower fuel expenses of Note 4 of Notes to Consolidated Financial Statements. $0.22 per share as a result of the full retum to service of in May 1998, the PUC entered an Opinion and Order Salem Nuclear Generating Station (Salem); and lower operat-(Final Restructuring Order) approving a joint petition and set-ing and maintenance expenses of $0.21 por share. In ti: ment of the Company's restructuring case. Under the Final addition, earnings include the effects of a lower effective Rastructuring Order, the Company has received approval to income tax rate of $0.34 per share. These increases were recover stranded costs of $5.26 billion over 12 years begin' partially offset by higher depreciation and amoc cation ning January 1,1999 vs sh a retum of 10.75E The Final expense of $0.17 per share; a charge of $0.33 per share Rastructuring Order provides for the phase-in of customer related to the CCR workforce reduction program initiated in choice of electric generation suppliers (EGS) for all cus-1998; and an extraordinary charge of $0.09 per share for pre-tomers: One-third of the peak load of each customer class on miums paid in connection with the redemption of higher cost January 1,1999; one-third on January 2,1999; and the long-term debt. remainder on January 2,2000. The Final Restructuring Order The loss in 1997 of $6.80 per common share was pri-calls for an across the board tr' tait electric rate reduction of marily due to an extraordinary charge of $8.24 per share 8% in 1999. This rate reductic 1 will decrease to 6% in 2000. reflecting the effects of the PUC Restructuring Order and See Note 3 of Notes to Consolidated Financial Statements. deregulation of the Company's electric generation operations. Based on the estimated annual sales of the Company in 1997 earnings were also reduced by several one-time the Final Restructuring Order, the rate reductions are expect-charges totating $0.56 per share for changes in employee ed to reduce the Company's revenues from retail electnc benefits, write-offs of information systems development siles by $270 million in 1999 and $200 mdlion in 2000. The charges reflecting clarification of accounting guidelines and Company believes that its revenues from retail electric sales additional reserves, including those for environmental site will be further reduced by competition for electric generation remediation; by $0.30 per share for higher depreciation szrvices within its traditional service territory. The Company expense resulting from a full yecr*s increase in depreciation is actively part cipa'ing in the competitive electnc generation and amortization of assets associated with Limerick i supply market throughout Pennsylvania. In addition, the Generating Station (i.imerick) and other assets; by $0.12 per. Company anticipates lowF depreciation and amortization share for income tax adjustments; by $0.09 per share for expense in 1999 as a re of the amortization schedule for losses from new non-utility ventures; and by $0.05 per share thD Company's stranded cost recovery. for increased depreciation expense due to plant additions. In light of the expected impact on future revenues of the Those decreases were partially offset by a one-time $0.18 - Final Restructuring Order and competition for electric genera-per share credit relating to the settlement of litigation arising tion services, the Company is continuing its cost management from the outage of Salem; $0.08 per share for operational cfforts through e Cost Competitiveness Review (CCR). The ' efficiencies; and higher revenues net of fuel of $0.06 per goal of CCR is to achieve significant cost savings while main-share primarily due to increased sales to other utilities.- taining high levels of service quality, reliability, safety and _ overall performance. The cost-control targets of CCR include reducing annua! operat;ng and maintenance expense by at

least $150 million by 2001, The expense reductions will be realized, in part, through the elimination of approximately 1,200 employee positions'. As part of the CCR. in April 1998, 2.

16' 'ECO Energy Comparv sad Subsidiary Companies Significant Operating items Rmnue end Expense iterne as a Percentage _of Total Operating Revenues Percenta$e Dollar Changes 1998 1997 1996 ' 1998-1997-1997-1998 92 % 90 % 90 % Electric 15 % c'% 8% 10 % 10% ' Gas - (11 %) 5% 100 % - 100 % 100 % ' Total Operating Revenues 13%E 8% - 34 % 28 % 23 % Fuel and Energy Interchange ' 36% 33 % i 24 % 31 % 30 % Operating and Maintenance * (12%) ' 12 % .12% 12 % 11 % Depreciation and Amortization 11 % 19% ' 5%- T 7% Taxes Other Than income (10%)1 4% 75 % 78% 71 % Total Operating Expenses 9% -' 19% 25 % 22 % 29 % Operating income 28% (19%) - (7%) (9%) (10%) Interest Expense ' - (10%) (2%) (9%) (8%) (9%)' Total Other Income and Deductions (15%) - 4% ~ 16 % _ 14% 20 % income Before Taxes and Extraordinary item 35 % .a %) ' 6%' 6% 8% income Taxes 9% (14%) - 10% 8% 12 % income Before Extraordinary item 58 % ~ (35%)

Includes Early Retirement and Separation Programs Expense in 1998-Opr 'ing Revenues increases /(docreases) in electric sales and revenues by class of customer for 1998 compared to 1997 and 1907 com-Totai Jng reveaues increased in 1998 by $593 million to

$5,210 million. This repiesented a $644 million increase in pared to 1996 are set forth as follows: electric revenues and a $51 million decrease in gas revenues compared to 1997. Electric revenues increased as a result of a sa ewi;i,r a s n additional sales to other utilities and interchange sales, in __sain_ aman., sein _ nma.=_

- M Juw.gst w,ufw mmist addition to higher wholesale prices. The decrease in gas rev-enues was primarily attributable to lower sales to house Residential 356

$' 30 (48) ' 5 ' (1) heating, sma!! commercial and residential customers Gs a House Heating (140) (10) (217) (12) result of milder weather conditions in 1998, parMy offset by Small Commercial ' higher purchased gas clause revenues Jorged in 1998 com-and Industrial 203 5 194 30~ pared to 1997. Large Commercial Total operating revenues increased in 1997 by $334 mil-and industrial 644 (11) (174) (21) lion to $4,618 million. This represented a $312 million increase Other (38) 2 .(61) 8 Unbilled 61 (18) 397 45 in electric revenues and a $22 million increase in gas revenues over 1996. The increase in electric revenues was primarily due Senrice krMory 1A86 (2) 91 - 49 Interchange Sales 1,556 ' 152 992 33 to increased sales to other utilities. The increase in gas rev-Sales t Other Utilities 8,365 494 _ 8,650 230 enues was primarily due to higher revenues from sales to I H, 8 9, 8 M2 - commercial, house heating and residential customers result-ing from higher purchased gas clause revenues charged in 1997 compared to 1996, partially offset by lower sales result-Fuel and Energy Interchange Expense ~ ing from mdder weather conditions in 1997. This increase was partially offset by reduced sabs to interruptible customers Fuel and energy interchange expense increased in 1998' by $462 million to $1,752 million. The increase was pnmanly due - switching to transportation service.' to increased energy purchases associated with increased rsles to other utilities and interchange sales partially offset by reduced replacement power expense related to Salem.. Increases in purchases of non-utility generation also con-- tributed to increased fuel expense in 1998. Fuel and energy. interchange expense as a percentage of operating revenues,'. increased from 28% to 34% principally as a result of energy purchases associated with increased sales to other utilities and interchange sales. Fuel and energy interchange expense increased in 1997 L ' by $318 million to $1,290 million. The increase was primarily ' due to purchases associated with increased sales to other - L 1:

Managernent's Discussion and Anitysis of Fininckl Condition tnd Results of Operttions 17 e (nilities and a one-time bilkng credit in 1996 from a non-utiltty Interest charges decreased in 1997 by $9 million to $380 generator. Fuel and energy interchange expense as a percent. million. The decrease was primarily due to the Company's ag3 of operating revenues increased from 23% to 28% program to reduce and/or refinance higher cost, long-term principally due to purchases associated witn increased sales debt. This decrease was partially offset by the replacement to other utilities, of $62 million of preferred stock with COMRPS1.the third quarter of 1997. Operating and Maintenance Expense Operating and maintenance expense, inclusive of expenses Other income and Deductions associated with early retirement and separation programs. Excluding Interest Charges decreased in 1998 by $178 million to $1,253 million. The Other income and deductions excluding interest charges decrease in 1998 was primarily attributable to the full return decreased in 1998 by $77 million to a deduction of $73 mil-- to service of Salem which resulted in lower restart expenses, lion. The decrease was primarily due to the settlement of a credit to pension and benefits expense related to the per-litigation arising from the shutdown of Salem recognized in formance of pension plan investments and lower property 1997 and losses from the Company's non-utility ventures, insurance and workers compensation insurance. These which are accounted for under the equity method, partially - decreases were partially offset by the charge associated with offset by interest income on a gross receipts tax refund. ~ the CCR workforce reduction program and increased power Other income and deductions excluding interest charges marketing expenses. increased in 1997 by $6 rnillion to $4 million. The increase was Operatirig and maintenance expei.,e increased in 1997 primarily due to the settlement of litigation arising from the shut-by $157 million to $1,431 million primanly due to several one-down of Salem, partially off sot by losses from the Company's time charges totaling $187 million, including charges for non-utility verrtures. Also offsetting the incre,ase was the write-changes in employee benefits, write-offs of information sys-off of one of the Company's telecommunications investments as tems development cha ges reflecting claiification of a result of the auctioning of personal communications systems accounting guidelines and add:tional reserves, including

C-block" licen9s by the Federal Communication Commission.

reserves for environmental site remediation. These increases were partially offset by lower operating costs at Company-Income Taxes operated nuclear generating stations and lower administrativ Income taxes increased in 1998 by $27 million to $320 mil-and general expenses resulting from the Company s ongoing ,s effective income tax rate decreased, cost-control efforts. however, from 46.5% to 37.5% in 1998 primarily as a result of full normalization of deferred taxes associated with deregu-D:preciation and Amortization Expense lated generation plant. Depreciation and amortiration expense increased in 1998 by income taxes decreased in 1997 by $47 million to $293 $62 million to $643 million. The increase was primarily due to million. The Company's effective income tax rate increased, the amortization of Deferred Generation Costs Recoverable in however, from 39.7% to 46.5% in 1997 primarily attnbutable Current Rates during 1998, preceding the Company's transi-to reduced tax depreciation benefits from plant and regulato-Won to market-based pricing of electric generation in 1999. ry assets which were not fully normalized for ratemaking tiuded in this amortization were charge s that were included purposes. perating and maintenance expense aad interest expense in 1997. Preferred Stock Dividends Depreciation and amortization expense increased in 1997 Preferred stock dividendt decreased in 1998 by $4 miilion to by $92 million to $581 million. The increase was pnmanly due b N W O Mim M 07 du to increased depreciation of assets associated with Limerick a d h WmW d which became effective October 1,1996. Depreciation and $62 million of preferred stock with COMRPS in the third amortization expense also increased due to additions to plant g7 in service. Inttrest Charges DISCUSSION of Liquidity and Capital Resources Interest charges consist of interest expense, distributions on The Company's capital ' esources are primarily provided by r Company Obligated Mandatority Redeemable Preferred Szcurities of a Partnership (COMRPS) and Allowance for internally generated cash flows from utility operations and, to Funds Used During Construction (AFUDC). Interest charges the extent necessary, extemal financing. Such capital d: creased in 1998 by $22 rnillion to $358 million. The resources are used to fund the Company's capital require-decrease was primarily due to the Company's program to. ments, including investments in new and existing ventures, reduce and/or refinance higher cost, long-term debt, lower to repay maturing debt and to make preferred and common viriable interest rates and the discontinuance'of amortization stock dividend payments. of the loss on reacquired debt related to electric generation Cash flows from operations were $1,433 million in 1998 j. operations as of December 31,1997. These decreases were as compared to $1,038 million in 1997 and $1,172 million in . partially offset by lower AFUDC and capitalized interest 1996. The increase in 1998 was principally attributable to l r:sulting from fewer projects in the construction base in - improved operating results and changes in working capital ,1998 and the replacement of $62 million of preferred stock with COMRPS in the third quarter of 1997,

18 PECO Energy Cornpany end Subsiditry Comp,anies Cash ficws used ir: investing activities were $462 milkon in be included in the consolidated capitalization of the Company. 1998 as corripared to $li?3 million in 1997 and $663 million in Because the Transition Bonds will be obligations of the SPS, 1996. Expenditures urider the Company's construction program payable from the ITP owned by the SPS, the Company does decreased to $415 million in 1998. Net funds invested in diver-not expect the issuance of Transition Bonds to adversely sified activities in 1998 were $47 million, consisting of $17 affect the ratings on the Company's securities which remain million for telecomrnunications ventures, $21 million for nuclear outstanding after issuance of Transition Bonds. plant decommissioning trust funds and $9 milli - ~ for other in anticipation of the issuance of Transition Bonds, the deposits and ventures. ln 1997 and 1996, funds used in similar Company's Board of Directors authorized the repurchase of activities were $83 million and $114 million, respectively, up to 25 million shares of the Company's common stock Cash flows used in financing activities were $956 million from time to time through open market, privately negotiated in 1998 as compared to $461 million in 1997 and $501 million and/or other types of transactions. The Company has entered in 1996. The increase in 1998 was primarHy attributable to into forward purchase agreements to be settled from time to increased retirement of long-term debt partially offset by time, at the Company's election on either a physical, net lower dividends on common stock. During 1998, in anticipa-share or not cash basis. The amount at which these agree-tion of competition, which is expected to reduce cash flows, monts can be settled is dependent principally upon the

Smpany reduced its dividend payment requirements by market price of the Company's common stock as compared reducing its common stock dividend to $1 per share. The to the forward purchase price per share and the number of decrease in 1997 was primarily due to fewer retirements of shares to be settled. If these agreements had been settled higher-cost debt.

on a net share basis at December 31,1998, based on the The Company's capital expenditures me currently esti-closing price of the Company's common stock on that date, mated to be $440 million in 1999. Certain facilities under the Company would have received approximately 4.6 million construction and to be constructed may require permits and shares of the Company's common stock. hcenses which the Company has no assurance will be grant-The Company has entered into treasury forwards and ed. Capital expenditures do not include investments in joint forward starting interest rate swaps to manage interest rate ventures including investments related to the Company's exposure associated with the anticipated issuance of strategy to expand its generation portfolio. See" Outlook-Transition Bonds. The fair value of ($4.7 mirkon) was based Expansion of Generation Portfolio." The Company nwy use on the present value dfference between the contracted rate intemally generated funds or external financing or o combina-(i.e., hedged rate) ard the market rates at December 31, tien of both to finance any acquisition. 1998. The Company meets its short-term liquidity requirements The aggregate change in fair value of the Transition Bond pnmarily through the issuance of commercial paper and bor-derivative instruments that would have resulted from a hypo-rowings under bank credit facihties. The Company has a $900 thetical 50 basis point decrease in the spot yield at million unsecured revolving credit facility with a group of December 31,1998 is estimated to be $128 milhon. If the banks which consists of a $450 million 364-day credit agree-denvative instruments had been terminated at December 31, ment and a $450 million three-year credit agreement. The 1998, this estimated fair value represents the amount to be Company uses the credit facihty principally to support its paid by the Company to the counterparties. $600 milhon commercial paper program. There was no debt The aggregate change in fair value of the Transition Bond outstanding under this credit facihty at December 31,1998. derivative instruments that would have resulted from a hypo-The Company had $525 million of short-term debt, consisting thetical 50 basis point increase in the spot yield at December of $125 million of commercial paper, and a $400 milkon term 31,1998 is estimated to be $113 million. If the derivative loan, outstanding at December 31,1998. instruments had been terminated at December 31,1998, this At December 31,1998, the Company's embedded cost estimated fair value represents the amount to be paid by the of debt was 6.65% with 29% of the Company's long-term counterparties to the Company. debt having floating rates. At December 31,1998, the Company's capital structure consisted of 44.2% common equity; 8.4% preferred stock Outlook i and COMRPS (which comprised 5.1% of the Company's total capitahzation structure); and 47.4% long-term debt Tha Company is entering a period of financial uncertainty cs a in the Final Restructuring Order, the PUC authorized the result of the deregulation of its electric generation operations. Company to securitize up to $4 billion of its allowed $5.26 bil. Under the terms of the Final Restructuring Order, revenues hon stranded cost recovery through the issuance of transition from regulated rates will decrease. In addition, the Company bonds (Transition Bonds). The proceeds of eny securitization will sell an increasing portion of its energy at market-based are required to be used by the Company principally to reduce rates. The Company believes that the deregulation of its elec-its stranded costs and related capitalization. The Company tric generation operations and other regulatory initiatives currently proposes to securitize its allowed stranded asset designed to encourage competition will increase the recovery, up to the maximum amount authorized by the PUC, Company's risk profile by changing and increasing the num- ' through the iss'.e ice of Transition Bonds by a special pur-ber of factors upon which the Company's financial results are pose subsidiary (SPS). The Transition Bonds will be dependent. This may result in more volatikty in the obligations of the SPS secured by intangible transition proper. Company's future results of operations. The Company ty (ITP). ITP represents' the inevocable right of the Company believes that it has significant advantages that will strengthen or its assignee, to collect non-bypassable charges from cus, its position in the increasingly competitive electric generation - tomers to recover stranded costs. The Transition Bonds will

Muagement's Discussion end Analysis of Fin:nciil Condition tnd Results of Operations 19 environment. These adventages include the ability to produce supplier will be selected by a PUC-approved bidding process. ciectricity at a low variable-cost and the demonstrated ability The right to provide this competitive default service will be to marl (et power in the competitive wholesale markets. rebid annually, and if the number of residential customers-The Company's future financial condition and results of served by this service falls below 17%, further random selec-operations are substantially dependent upon the effects of tion of customers will be assigned to achieve the 20% level. the Final Restructuring Order and retail and wholesale em The Company's recovery of stranded costs is based on petition for generation services. Additional factors that aia the level of transition charges established in the Final the Company's financial condition and results of operations Restructuring Order and the projected annual retail sales in include operation of nuclear generating facilities, Year 2000 the Company's service territory. Recovery of transition issues, new accounting pronouncements, inflation, weather, charges for stranded costs will be included in operating rev-compliance with environmental regulations and the profitabili-enue and are expected to be C552 million in 1999, increasing ty of the Company's investments in new ventures. to $932 million by 2010, the final year of stranded cost recov-ery. Amortization of the Company's stranded cost recovery, Final Restructuring Order which is a regulatory asset, will be included in depreciation and amortization, beginning in 1999 at a level of ($14) million The Final Restructuring Order contains a number of provi-and increasing by 2010 to.$879 million. The Company is sions which the Company expects will significantly impact its allowed a 10.75% retum on the unamortized balance, As a future results of operations and financial condition, including result of this amortization schedule, the Company expects its mandated rate reductions, extended rate caps, provisions earnings to be disproportionately benefited by the recovery of designed to enhance competition for generation services, the stranded assets in the early years of the transition period amortization of the Company's stranded cost recovery and declining over the life of the recovery as the balance of the the securitization of stranded cost recovery. unamoM regulatory assa is re&M The Final Restructuring Order mandates retail electric Under the Final Restructuring Order, the Company may rate reductions of 8% in 1999 and 6% in 2000 from rates in secuntize up to $4 billion of its $5.26 billion oT stranded cost existence on December 31,1996. Based on the estimated recovery through the issuance of Transition Bonds.The rate annual sales of the Company in the Final Restructuring Order, reductions and rate caps of the Final Restructuring Order these rate reductions will reduce the Company's revenue anticipate the benefits of securitization and no adjustment in from retail electric sales by $270 million and $200 million in the Company,s base rates will be made upon the issuance of 1999 and 2000, respectively. The Company's revenue from Transition Bonds. As a result of the 10.75% allowed return on retail electric sales will be further reduced to the extent that the unamortized balance of stranded cost recovery and customers purchase generation service from attemate EGS. expected costs of securitization substantially below this The Final Restructuring Order caps the Company's retail allowed return, the Company anticipates that successful transmission and distribution rato at their current levels securitization, resulting in a reduction of its common equity, through June 30,2005. The Fhal Restructuring Order also will improve the Company s future financial results. established rate caps for generation services, consisting of the charge for stranded cost tecovery and a charge for energy and capacity, through 2010. The rate caps will limit the Competition Company's ability to pass cost increases through to customers. The Company competes in both the retail electric generation The Final Restructuring Order contains a number of pro-market in Pennsylvania and the wholesale electric generation visions which are designed to encourage competition for market nationally. Competition for electric generation services generation services. The Final Restructuring Order estabhsh-is expected to create new uncertainties in the utility industry. es an above-market shopping credit for generation services, These uncertainties include future prices of generation ser-equivalent to the Company's energy and capacity charge, in vices in both the wholesale and retail markets; potential order to provide an economic incentive for customers to changes in the Company's customer profiles, both at the choose an altemate EGS. If market prices of retail generation retail level where change is expected to be ongoing as a services remain below the shopping credits for generation result of customer choice, and between the retail and whole-established by the Final Restructuring Order, this economic sale markets; and supply and demand volatility, incentive to choose an attemate EGS will continue. If, on the Retail competition for generation supply commenced in other hand, market prices of retail generation services January 1999, with two-thirds of Pennsylvania electric utility exceed the shopping credits for generation, customers will consumers having the right to choose their suppliers of gen-have an economic incentive to purchase generation services eration service. The Company is actively competing for a from the Company as the provider of last resort (PLR) at share of the generation supply market in its traditional service below market rates. Additionally,if on January 1 2001 and territory through PECO Energy Distribution as the PLR for JInuary 1,2003, less than 35% and 50%, respectively, of the customers who do not or cannot choose an attemate EGS Company's iesidential and commercial customers are obtain-and throughout Pennsylvania through Exelca Energy, the ing generation service from alternate EGS, the non-shopping Company's new competitive supplier, Generation services customers will be randomly assigned to EGS, including those provided by PECO Energy Distribution are at the energy and affiliated with the Company, to meet these thresholds. capacity charge mandated by the Final Restructuring Order. Further, on January 1,2001,20% of all the Company's resi-Generation services offered by Exelon Energy are at competi-d;ntial customers, whether or not such customers are tive market prices. Customers who continue to take obtrining generation service from an attemate EGS, will be generation service from PECO Energy Distribution may essigned to a PLR other than the Company. Such alternate choose an alternate generation supplier at any time. As of

20 PECO En rgy Company and Subsidi ry Companies January 12,1999, approximately 12% of the Company's resi-During 1998, Company-operated nuclear plants operated dential and small commercial customers and approximately at an 86% weighte+ average capacity factor and Company-50% of its large commercial and industrial customers had owned nuclear plants operated at an 83% weighted-everage - selected an alternate EGS. As of that date, Exelon Energy is capacity factor. Company-owned nuclear plants produced providing generation service to approximately 135,000 busi-39% of the Company's electricity. Nuclear generation is cur-ness and residential customers throughout Pennsylvania. rently the most cost-effective way for the Company to meet Because the energy and capacity charge (shopping credit) customer needs and commitments for sales to other utilities. established by the PUC in the Restructuring Order remains See " Expansion of Generation Portfolio" above current retail market prices for generation services, acluding those offered by Exelon Energy, the Company's New Accounting Pronouncements retail revenues will be reduced to the extent customers in June 1998, the Financial Accounting Standards Board choose an alternate EGS, including Exelon Energy. To the (FASB) issued SFAS No.133, " Accounting for Derivative extent thst the Company cannct replace lost retail sales Instruments and Hedging Activities," to establish accounting through PECO Energy Distribution with retail sales by Exelon and reporting standards for derivatives. The new standard ' Energy, the Company will be required to sell a larger portion requires recognhing all derivatives as either assets or liabili-of its energy and capacity in the wholesale market. Since ties on the balance sheet at their fair value and specifies the prices in the wholesale market are currently lower on average accounting for changes in fair value depending upon the than those charged in the competitive retail market, this will intended use of the derivative. The new standard is effective adversely affect the Company's revenues and profit margins. for fiscal years beginning after June 15,1999. The Company The Company is a low variable-cost electricity producer, expects to adopt SFAS No.133 in the first quarter of 2000. which puts it in a favorable position to take advantage of The Company is in the process of evaluating the impact of opportunities in the electnc retail and wholesale generation SFAS No.133 on its financial statements. markets. The Company's competitive position and its future in November 1998, the FASB's Emerging issues Task financial condition and results of operations are dependent on Force issued EITF 98-10, " Accounting for Contracts involved the Company's ability to successfully operate its low variable-in Energy Trading and Risk Management Activities." EITF 98-cost power plants and market its power effectively in 10 outlines attributes that may be indicative of an energy competitive whofesafe markets. trading operation and gives further guidance on the account-The Company competes in the wholesale market by sell-ing for contracts entered into by an energy trading operation. ing the energy and capacity from the Company's installed This accounting guidance requires mark-to-market accounting capacity not utilized in the retail market and buying and sell-for contracts considered to be a trading activity. EITF 98-10 is ing energy from third parties. The Company enters into both applicable for f; scal years beginning after December 15,1998 long-term and short-term commitments to buy and sell w th any impact recorded as a cumulative effect adjustment power. Currently, the Company's long-term commitments, through retained eamings at the date of adoption. At together with the energy the Company expects to market December 31,1998, the Company has evaluated its wholesale from the Company's installed capacity, make the Company a marketing operation and related contracts under the guidance net power soller. This long position, however, exposes the rovided in EITF 98-10. For those contracts entered into in the Company to the risk of declining revenues in periods of low over-the-counter market and considered to be a trading activity, wholesale demand for generation services. See Note 5 of the Company believes the impact to be immateiial. However, Notes to Consolidated Financial Statements. with respect to the long-term commitments considered to be There is an initiative in tha Pennsylvania leg. lature t is trading activities, the Company is continuing to evo;uate these deregulate the gas industry, which has the support of the commitrrsrcs and the impact of adopting EITF 98-10. governor. The Company cannot predict whether the Pennsylvania legislature will enact legislation that deregulates Other Factors the gas industry or whether the govemor will ultimately sign into law any such legislation. The Company cannot predict Annual and quarterly operating results can be significantly the ultimate effect of gas industry deregulation on its future affected by weather. Since the Company's peak demand is in financial condition or results of operations, the summer months, temperature variations in summer months are generally more significant than variations during winter months. R:gulation and Operation of Nuclear Generating Mflation affects the Company through increased operat-Fecilities ing costs and increased capital costs for utility plant. As a The Company's financial condition and results of operations result of the rate caps imposed under the Final Restructuring are in part dependent on the continued successful operation Order and expected price pressures due to competition, the of its nuclear generating facilities. The Company's nuclear Company may have a limited opportunity to pass the costs of generating facilities represent 44% of its installed generating inflation through to customers. ' cepacity. Because of the Company's reliance on its nuclear The Company's operations have in the past and may in generating units, any changes in regulations by the Nuclear the future require substantial capital expenditures in order to - Regulatory Commission (NRC) requiring additional invest-comply with environmentallaws. Additionally, under federal ments or resulting in increased operating costs of nuclear and state environmental laws, the Company is generally liable generating units could adversely affect the Company-for the costs of remediating environmental contamination of-property now or formerly owned by the Company and of property contaminated by hazardous substances generated ~

Management's Discussion and Analysis of Fin'nchl Condition and Results of Operations 21 4 by the Company. The Company owns or leases a number of this potential impact are not presently quantifiable. raal estatp parcels, including parcels on which its operations The Company is utilizing both intemal and external or the operations 6f others may have resulted in contamina-resources to reprogram, or replace and test software and tion by substances which are considered hazardous under computer systems for the Project. The Project is scheduled environmental laws. The Company is currently involved in a for completion by July 1,1999, except for a small number of number of proceedings relating to sites where hazardous modifications, conversions or replacements that are impacted substances have been deposited and may be subject to addi-by vendor dates and/or are being incorporated into scheduled tional proceedings in the future. plant outages between July and October 1999. The Company has identified 28 sites where former man-The Project is divided into four major sections - ufactured gas plant (MGP) activities have or may have Information Technology Systems (IT Systems), Embedded resulted in actual site centamination. The Company is Technology (devices used to control, monitor or assist the presently engaged in performing various levels of activities 31 operation of equipment, machinery or plant), Supply Chain these sites, inciuding initial evaluation to determine the exis-(third-party suppliers and customers), and Contingency tence and nature of the contamination, detailed evaluation to Planning. The general phases common to all sections are: (1) determine the extent of the contamination and the necessity inventorying Y2K items; (2) assigning priorities to identified and possible methods of remediation, and implementation of items; (3) assessing the Y2K readiness of items determined remediation. The Pennsylvania Department of Environmental to be material to the Company; (4) converting material items Protection has approved the Company's clean-up of three that are determined not to be Y2K ready; (5) testing material sites. Eight other sites are currently under some degree of items; and (6) designing and implementing contingency plans active study and/or remediation. for each critical Company process. Material items are those As of December 31,19S3 and 1997, the Company,'N believed by the Company to have a risk involving the safety accrued $60 and $63 million, respectively, for environmental of individuels, may causa damage to property or the environ-investigation and remediation costs, including $33 and $30 ment, or affect revenues. million, respectively, for MGP investigation and remediation The IT Systems section includes both the conversion of that currently can be reasonably estimated. The Company applications software that is not Y2K ready and the replace-expects to expend $3 million for environmental remediatico ment of software when available from the supplier. The activities in 1999. T he Company cannot predict whether it will Company estimates that the software conversio.n phase was incur other significant liabilities for any additional investigation approximately 66% complete at January 27,1999, and the and remediation costs at these or additional sites identified remaining conversions are expected to ts completed by tlki by the Company, environmental agencies or others, or scheduled end date. The Company has been experiencing whether such costs will be recoverable from third parties slippage in delivery dates of vendor supplied products " nich For a discussion of other contingencies, see Note 5 of may have a minor impact on the July 1,1999 target comple-Notes to Consolidated Financial Statements. tion date. Contingency planning for IT Systems is scheduled to be completed by July 1,1999 with an interim date of Yerr 2000 Readiness Disclosure March 31,1999 that addresses PUC contingency planning requirements. The Project has identified 380 critical systems Due to the severity of the potential impact of the Year 2000 of which 238 are IT Systems. The current readiness status of issue (Y2K lssue) on the electric utility industry, the Company IT Systems is set forth below: has adopted a comprehensive schedule to achieve Y2K readi-ne: by the time specified by the NRC. The Company has Number of Systems Progress Status dedicated extensive resources to its Y2K Project (Project) and 79 Systems Y2K Ready believes the project is progressing on schedule. 65 Systems in Testing The Project is addressing the issue resulting from com-puter programs using two digits rather than four to define the 87 Systems in Active Code Modification, Or Package Upgrading applicable year and other programming techniques that con. strain date calculations or assign special meanings to certain 7 Systems Not Started dates. Any of the Company's computer systems that have date-sensitive software or microprocessors may recogrize a The Embedded Technology section consists of hardware date using "00" as the year 1900 rather than the year 2000. ond systems software other than IT Cyr,tems The Company This could result in a system failure or miscalculations caus, estimates that the Embedded Tect nology sec tion was ing disruptions of operations including, a temporary inability approximately 75% complete at Jani:ary 27,1999. The to process transactions, send bills, cperate generating sta-remaining conversions are on scheoule to De tested and tions, or engage in similar normal business activities, ready by July 1,1999, except for a smail number of systems The Company has determined that it will be required to which will be extended into the fall of 1999 because their - modify, convert or replace significant portions of its software final tests will occur during a planned generating plant out-and a subset of its system hardware and embedded technol, age. Contingency planning for Embedded Technology is - ogy so that its computer systems vill properly utilize dates scheduled to be completed by July 1,1999 with an interim beyond December 31,1999. The Company presently beliew s date of March 31,1999 that addresses PUC contingency th-t with these modifications, conversions and replacements planning requirements. The Project has identified 142 critical the effect of the Y2K issue on the Company can be mitigat-Embedded Technology systems. The current readiness status cd. If such modifications, conversions and replacements are of those systems is set forth below: not made, or aro not completed in a timely manner, the Y2K issu? could have a material impact on the operations and financial condition of the Company. The costs associated with

22 PECO Energy Comp ny and Subsiditry Comp:nies. Number of Systems Progress Status of trained personnel, the ability to locate and correct all rele. 31 Systems Y2K Ready vant computer programs and microprocessors. 29 Systems in Final Quality Review The Project is expected to significantly Yeduce the 76 Systems in Progress Company's level of uncertainty about the Y2K issue. The 6 Systems Not Started Company believes that the completion of the Project, as scheduled, minimizes the possibility of significant interrup-The Supply Chain section includes the process of identi-tions of normal operations. tying and prioritizing critical suppliers and communicating with them about their plans and pr gress in addressing the Expansion of Generation Portfolio s Y2K issue. The Company initiated formal communications The Company established specific goals to increase its gener-with all of its critical suppliers to determine the extent to ation capacity from 9 gigawatts to 25 gigawatts by 2003. The which the Company may be vulnerable to their Y2K issues. Company is targeting a balanced portfolio of nuclear, hydro Tbs process of evaluating these critical suppliers has com-and clean buming fossil capacity through the acquisition of menced and is scheduled to be completed by March 31, plants and long-term supply agreements. In order to meet ~ 1999. this strategic objective the Company may require significant The Company, like other companies, is interconnected capital resources, with many businesses, including electric utilities, natural gas in October 1998, the Company through AmerGen Energy pipelines and municipalities. The Company is working with Company, LLC, a 50% owned joint venture with British businesses where interconnections exist to determine and Energy, Inc., entered into a definitive asset purchase agree-monitor their Y2K readiness efforts. In addition, the Company ment with GPU, Inc. (GPU) to acquire GPU's 786 megawatt is currently developing contingency plans to address how to Three Mile Island Unit No.1 Nuclear Generating Facility for respond to events which may disrupt normal operations. approximately $23 million in cash, $77 million for nuclear fuel These plans address Y2K risk scenarios that cross depart-payable over five years and certain contingent payments mental, business unit and industry lines as well as specific based upon future wholesale market prices. The Company risks from various intemal and external sources, including currently expects the acquisition, which is subject to various supplier readiness. Emergency plans already exist that cover regulatory approvals, to close by mid-yea.1999. various aspects of the Company's business. These plans are being reviewed and updated, as needed, to address the Y2K Corporate Restructuring issue. The Company is also participating in industry contim in 1999, the Company's common shareholders will vote on a gency planning efforts. management proposal for the formation of a holding compa-The estimated total cost of the Project is $75 million, the M M W@ h majority of which will be incurred during testing. This esti-e change of PECO Energy common stock for common stock mate includes the Company's share of Y2K costs for j,ointly of the holding company. As a result, the Company will owned facilities. The total amount expended on the Project become a wholly owned subsidiary of the holding company. through December 31,1998 was $21 million. The Company The formation of the holding company will not affect the expects to fund the Project from operating cash flows. Comptny's other securities. Management has proposed the The Company s failure to become Y2K ready could result formation of the holding corrpany to facilitate the disaggrega-in an interruption in or a failure of certain normal business tion of the Company's transmission and distribution, activities or operations. In addition, there can be no assur-generation and unregulated businesses and corporate central ance that the systems of other companies on which the services in order to create increased financial, managernent Company's systems rely or with which they communicate and organizational flexibility, will be converted in a timely manner, or that a failure to con-vert by another company, or a conversion that is incompatible with the Company's systems, will not have a material Forward-Looking Statements adverse effect on the Company. Such failures could material-Except for the historical information chined herein, certain ly and adversely affect the Company's results of operations, of the matters discussed in this Repo t a'e forward-looking liquidity and financial condition. The Company is currently statements which are subject to risks and uncertainties. The developing contingency plans to address how to respond to factors that could cause actual results to differ rnaterially events that may disrupt normal operations, including activities include those discussed herein as well as those listed in with PJM Interconnection, LLC; Note 5 of Notes to Consolidated Financial Statements and The costs of the Project and the date on which the other factors discussed in the Company's filings with the

Company plans to complete the Y2K modifications are based Securities and Exchange Comrnission. Readers are cautioned.

on estimates, that were derived utilizing numerous assump-not to place undue reliance on these forward-looking state-tions of future events, including the continued availability of monts, which speak only as of the date of this Report. The certain resources, thirdparty modification plans and other fac-Company undertakes no obligation to publicly release any tors, such as regulatory requirementa that impact key revision to.these forward-looking statements to reflect events - systems. There can be no assurance that these estimates or circumstances after the date of this Report. will be achieved. Actual results could differ materially from tha projections. Specific factors that might cause a material ' change include, but are not limited to, the availability and cost

23 Report of Independent Accountants To the Shareholders and Board of Directors of PECO Energy Company: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, cash flows and changes in common shcreholders' equity and preferred stock present fairly, in all material respects, the financial position of PECO Energy Company and' Subsidiary Companies at December 31,1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31,1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted audit-ing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant esti-mates made by management and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. fff ~ Philadelphia, Pennsylvania February 5,1999

24 ' PECO Energy Company and Subsidiary Companies CenSolidated Staw ients of income - r For the Years Ended December 31, 1900 1997 1996 Thornands of oollars Operating Revenues Electric 4,810,840 $ 4,166,609 $ :3,854,836 Gas 399,642 451,232 428,814-Total Operating Revenues 5,210,482 - 4,617,901 4,283,650 , Operating Expenses Fuel and Energy Interchange 1,751,819 1,290,164 972,380 Operating and Maintenance 1,128,792 1,431,420 1,274,222 Ecrly Retirement and Separation Programs 124,200 D:preciation and Amortization 642,842 580,595 489,001 Taxes Other Than Income 279,515 310,091 299,546 ' Total Operating Expenses 3,927,168 3,612,270 '3,035,149 Operating income - 1,283,314 1,005,631 1,248,501 Other income and Deductions interest Expense (330,842) (372,857) (382,443). Company Obligated Mandatorily Redeernable Preferred Securities of a Partnership, which holds Solely Subordinated Debentures of the Company (30,894)- (28,990) (26,723) Allowance for Funds Used During Construction ' 3,522 21,771 19,947 Settlement of Salem Litigation 69,800 Other, net (73,268). (66,028) (1,976) Total Other Ir.como and Deductions (431,282) (376,304) (391,195) Income Before income Taxes and Extraordinary item 852,032 629,327 857,306 Income Taxes 319,654 292,769 340,101' income Before Extraordinary item 532,378 336,558 517,205 Extraordicary item (net of income taxes of $13,757 and $1,290,961 for 1998 and 1997, respectively) (19,654) (1,833,664) N2t income (Loss) 512,724 (1,497.106) 517,205 Preferred Stock Cividends, 13 109 16,804 18,036 2 Earnings (Loss) Applicable to Common Stock 8 499,815 $ (1.513,910) $ 499,169 Average Shares of Common Stock Outstanding (Thousands > 223,219 222,543 222,490 B: sic Earnings per Average Common Share Before Extraordinary item roostan) 2.33 $ 1.44 $ . 2.24 Extraordinary item (ootlan) S (0.09) $ (8.24); $ Basic Earnings per Average Common Share (ooltars) S 2.24 $ (6.80) $ 2.24 Diluted Earnings per Average Common Share Before Extraordinary item (ootters) : S 2.32 1.44 $ 2.24 Extraordinary item toolian) S' (0.09).$ (8.24)__ $ ' x Diluted Earnings per Average Common Share (oottan> ' S 2.23 $ '(6.80) - $ 2.24' Y , ' Dividends per Common Share roottars) - S 1.00 ' $ '1.80 1.755'- See Notes to Consolidated FinancialState'ments. 4 5'- )., m' ...Q.,..

PEGO Energy Company and Subsidiary Nmpanies. ' 25 1 Consolidated Statements of Cash Flows For the Years Ended December 31, 1998 1997 1996 -j nousands orcottars Ccsh Flows from Operating Activities N:t income (Loss) 512,724 $ (1,497,106) $- 517,205 Extraordinary item (net of income taxes) (19,654)_ (1,833,664) Income Before Extraordinary item 532,378 336,558 517,205 Adjustments to reconcile Net incorne to Net Cash provided by Operating Activities: Depreciation and Amortization 704,718 664,294 566,412 Deferred income Tr.xes (115,640) (17,228) 166,770 Amortization of Investment Tax Credits (18,066) (18,201) -(15,979) Early Retirement and Separation Charge 125,000 )' 69,800 Salem Litigation Settlement Deferred Energy Costs ' 5,818 (5,652) -(66,151) 1 Amortization of Leased Property 59,923 39,100 31,400 Changes in Working Capital: Accounts Receivable 15,590 (289,610) 53,681 Inventories 14,192 28,628 (2,729) Accounts Payable 8,971 93,881 (86,765) Other Current Assets and Liabilities 54,263 58,539 (25,040) -) Other Deferred Credits - Other 49,948 78,846 (4,609) Other items affecting Operations (4,190L (804) 38,050 Net Cash Flows from Operating Activities 1,432,905 1,038,151 1,172,245 : Cash Flows from investing Activities j investment in Plant (415,331) (490,200) (548,854) ( Increase in Other Investments (46,7421 (83,261) (114,126) Net Cash Flows from Investing Activities (462,073) (573,461) (662,980) Cash flows from Financing Activities Change in Short-Term Debt 123,500 114,000 287,500 Proceeds from Exercise of Stock Options 50,700 117 11,301 Retirement of Company Obligated Mandatorily Redeemable ( Preferred Securities of a Partnership (80,794) (61,895) lssuance of Company Obligated Mandatorily Redeemable Preferred Secunties of a Partnership 78,105 50,000 Issuance of Long-Term Debt 13,486 161,813 43,700 Retirement of Long-Term Debt (841,755) (283,303) (427,463) 6,753 22,752-24,724 Loss on Reacquired Debt (236,307)- (417,383) (411,569).- Dividends on Preferred and Common Stock Capital Lease Payments (59,923) -(39,100) L(31,400) Other items Affecting Financing (9,918) (7 52_2) 2,575 2 t Net Cash Flows from Financing Activities'- (956,153). (460,521)_ '(500 6321 locrease in Cash and Cash Equivalents - 14,679 4,169 8,633 - Cash and Cash Equivalents at beginning of period 33,404 29,235 ~ 20,602- ? Cash and Cash Equivalents at end of period 8 48,083 $ 33.404 ' $ '29.235 . See Notes to Consolidated Financial Statements, ' h!

26 PECO Energy Company and Subsidiary Companies i Censolidated Balance Sheets At December 31, 1998-1997 Thousands of Dollars Assets Utility Plant El:ctric-Transmission & Distribution S 3,833,780. $ 3,617,666 Electric 4eneration 1,713,430-1,434,895 Gas 1,131,999 1,071,819 Common 407,320 302,672 7,036,529 6,427,052 Less Accumulated Provision for Depreciation 2,891,321 _ 2,690,824 4,195,208 3,736,228 Nuclear Fuel, net 141,907 147,359 Construction Work in Progress 272,590 611,204 Leased Property, net 154,308_ 175,933 Net Utility Plant 4,764,013 4,670,724 Current Assets Cash and Temporary Cash investments 48,083 33,404 Accounts Receivable, net Customers 97,527 173,350 Other 213,229 139,996 Inventories, at average cost Fossil Fuel 79,488 84,858 Materials and Supplies 82,068 90,890 Deferred Energy Costs-Gas 29,847 35,665 Dsferred Generation Costs Recoverable in Current Rates 424,497 Other 19,013 20,115 Total Current Assets 569,255 - 1,002,775 Def:rred Debits and Other Assets Competitive Transition Charge 5,274,624 5,274,624 Recoverable Deferred Income Taxes 614,445 590,267 Deferred Non-Pension Postretirement Benefits Costs 90,915 - 97,409 Investments - 550,904 515,835 Loss on Reacquired Debt 77,165 83,918 - Oth3r '107 0 _42 121,016 t Total Deferred Debits and Other Assets 6,715,095 6,683,069-7 Total Assets. S 12,048,363 $ 12,356,568 i er Notes to Consolidated Financial 5tatements.. E 1 - n. =

PECOlnergy Company and Subsidiary Companies 27 l I Consolidated Balance Sheets (continued) 1990 1997 At December 31, Thouunds of Doltm Capitalization and Liabilities Capitalization Common Shareholders' Equity Common Stock 3,589,031 $ 3,517,731 Other Paid-In Capital 1,236 1,239 Retained Eamings (Accumulated Deficit) (532,925) (792,239) 3,057,342 2,726,731 Preferred and Preference Stock Without Mandatory Redemption 137,472 137,472 With Mandatory Redemption 92,700 ' 92,700 Company Obligated Mandatorily Redeemable Preferred Securities of a Partnership, which holds Solely Subordinated Debentures of the Company 349,355 352,085 Long-Term Debt 2,919,592_ 3,853,141 Total Capitalization 6,556,461 7,162,129 Current Liabilities Notes Payable 525,000 401,500-Long-Term Debt Due Within One Year 361,523 247,087 Capital Lease Obligations Due Within One Year 69,011 55,808 Accounts Payable 316,292 323,816 Taxes Accrued 170,495 66,397 Interest Accrued 61,515 77,911 Deferred income Taxes 14,168 185,696 Other 217,416_ 260,4:;7 Total Current Liabilities 1,735,420_ 1.618,672 Deferred Credits and Other Liabilities Capital Lease Obligations 85,297 120,125 Deferred income Taxes 2,376,792 2,297,042 Unamortized Investment Tax Credits 299,999 318,065 Pension Obligation 219,274 211,596 Non-Pension Postratirement Benefrts Obligation 421,083 324,850 Other 354,037 304,089__ Total Deferred Credits and Other Liabilities 3,754,482 3,575,767 Commitments and Contingencies (Note 5) Total Capitalization and Liabilities S 12,048,363 $ 12.356,568 See Notes to Consolidated Financial Statements.

L 28 PECO Energy Company tnd Subsidirry Companies I Consolidated Statements of Changes in Common Shareholders' Equity and Preferred Stock Retained - Other Earnings Common Stock Paid 4n (Accumulated Preferred Stock A// Amounts in Thousands Shares Amount CJa tal Defidt) Shares Amount 8: lance at January 1,1996 222,172 $ 3,506,313 $ 1,326 $ 1,023,708 2,921 $ 292,067 Net income 517,205 Cash Dividends Declared Preferred Stock (at specified annual rates) (21,042) Common Stock ($1.755 per share) (390,527) Expenses of CapitalStock Activity (275) Capital Stock Activity Long-Term incentive Plan issuances 370 11,301 (2,028) _ l Bilance at December 31,1996 222,542 3,517,614 1,326 1,127,041 '2,921 292,067 l l Net Loss (1,497,106) Cash Dividends Declared Preferred Stock (at specified annual rates) (16,804) Common Stock ($1.80 per share) (400,578) j Expenses of Capital Activity 97 Stock Repurchase Forward Contract (4,889) Capital Stock Activity Long-Term incentive Plan issuances 5 117 Preferred Stock Redemptions (87) (619) (61,895) Balance at December 31,1997 222,547 8 3,517,731 S 1,239 8 (792,239) 2,302 S 230,172 Net income 512,724 Cash Dividends Declared Preferred Stock (at specified annual rates) (13,109) Common Stock ($1.00 per share) (223,198) Expenses of Capital Stock Activity 2,731 Stock Repurchase Forward Contract (7,677) Capital Stock Activity Long-Term lncentive Plan issuances ___2,137 71,300 (3) (12,157) Bilance at December 31,1998 224,684 8 3,589,031 8 1,236 8 (532,925) 2,302 S 230,172 ' See Notes to Consolidated Financist Statements. -- _=

Notes to Consolidated Financial Statements 29 Notes to Consolidated Financial Statements

1. Significant Accounting Policies base rates. Differences between the amounts billed to cus-tomers and the actual costs recoverable are deferred and General recovered or refunded in future periods by means of prospec-The consolidated financial statements of PECO Energy Company (the Company) include the accounts of its utility tive quarterly adjustments to rates.

Prior to December 31,1996, the Company's retail elec-subsidiary companies, all of which are wholly owned. tric rates were subject to an Energy Cost Adjustment (ECA) Accounting policies for all of the Company's operations are in accordance with generally accepted accounting principles clause designed to recover or refund the difference between the actual cost of fuel, energy interchange or purchased (GAAP). Accounting policies for regulated operations are also power and the amount of such costs included in base rates. in accordance with those prescribed by the regulatory author. Effective December 31,1996, the PUC approved the roll-in of ities having jurisdiction, principally the Pennsylvania Public Utilrty Commission (PUC) and the Federal Energy Regulatory electric energy costs into the base rates charged to the Company's retail electric customers and such rates are no Commission (FERC). The Company has unconsolidated non-utility subsidiaries which are not material. The unconsolidated longer subject to the ECA. subsidiaries are accounted for u-der the equity method. Nuclear Fuel The cost of nuclear fuel is capitalized and charged to fuel Use of Estimates expense on the unit of production method. Estimated costs The preparation of financial statements in conformity with of nuclear fuel disposal are charged to fuel expense as the GAAP requires management to make estimates and assump-related fuel is consumed. The Company's nuclear fuel at tions that affect the reported amounts of assets and liabilities Peach Bottom Atomic Power Station (Peach Bottom) and and disclosure of contingent assets and liabilities at the date Salem Generating Station (Salem) is accounted for as a capi-of the financial statements and the reported amounts of rev-tal lease. Nuclear fuel at Limerick Generating Station enues and expenses during the reporting period. Actual (Limerick) is owned. results could differ from those estimates. Estimates are used by the Company in accounting for unbilled revenue, the allowance for uncollectible accounts, Nuclear Outage Costs Incremental nuclear ma;ntenance and refuefing outage costs purchased gas adjustment clause, depreciation and amortiza. are accrued over the unit operating cycle. Fct each unit, an tion, taxes, reserves foi contingencies, employee benefits, accrual for incremental nuclear maintenance and refueling certain fair value and recoverability determinations, and outage expense is estimated based upon the latest planned nuclear outage costs, among others. outage schedule and estimated costs for the outage. Differences between the accrued and actual expense for the Accounting for the Effects of Regulation The Company accounts for all of its electric transmission and outage are recorded when such differences are known. distribution and gas operations in accordance with Statement of Financial Accounting Standards (SFAS) No. 71, Depreciation, Amortization and Decommissioning " Accounting for the Effects of Certain Types of Regulation,- Depreciation is provided ovei che estimated service lives of plant on the straight-line methadAnnual depreciation provi-requiring the Company to record the financial statement sions for financial reporting puiooses, expressed as a effects of the rate regulation to which such operations are currently subject. If a separable portion of the Company's percentage of average depreciause utility plant in service, I business no longer meets the provisions of SFAS No. 71, the were approximately 2.8% in 1998,3.3% in 1997 and 2.9% in 1996. See note 3 for information conceming the change in Company is required to eliminate the financial statement effects of regulation for that portion. Effective December 31, 1996 to depreciation and amortization. The Company's current estimate of the costs for decom-1997, the Company determined that the electric generation portion of its business no longer met the cnteria of SFAS No. missioning its ownership share of its nuclear generating 71 and, accordingly, implemented SFAS No.101, " Regulated stations is currently included in regulated rates and is charged Enterprises - Accounting for the Discontinuation of FASB to operations over the expected service life of the related plant. The amounts recovered from customers are deposited in trust Statement No 71," for that portion of its business. accounts and invested for funding of future costs. These amounts, and realized investment eamings thereon, are credit-Revenues ed to accumulated depreciation. The Company believes that the Electric and gas revenues are recorded as service is rendered or energy is delivered to customers. At the end of each month, amounts being recovered from customers through efectric rates the Company accrues an estimate for the unbilled amount of will be sufficient to fu0y fund the unrecorded portion of its energy delivered or services provided to customers, decommissioning obligation. Purchased Gas and Energy Cost Adjustment Clauses A!!owance for Funds Used During Construction (AFUDC) The Company's gas rates are subject to a fuel adjustment AFUDC is the cost, during the period of construction, of debt clause desig'ned to recover or refund the difference between and equity funds used to finance construction projects for the actual cost of purchased gas and the amount included in regulated operations. AFUDC is recorded as a charge to Construction Work in Progress and as a credit to AFUDC C- -

30 PECO Energy Cornpany and Subsidiiry Companies l I included in Other income and Deductions. The rates used for New Accounting Pronouncements l capitalizing AFUDC, which averaged 8.63% in 1998, 8.88% in in 1998, the Company adopted SFAS No.131, Disclosures 1997 and 9.38% in 1996, are computed under a method pre-about Segments of an Enterprise and Related information" scribed by regulatory authorities. AFUDC is not included in (SFAS No.131). SFAS No.131 supersedes SFAS No.14, regular taxable income and the depreciation of capitalized " Financial Reporting for Segments of a Business Enterprise," AFUDC is not tax deductible. replacing the industry segment" approach with the " man-Effective January 1,1998, the Company ceased accruing agement" approach. The management approach designates AFUDC for electric generation-related construction projects and the intemal organization that is used by management for began using SFAS No. 34, " Capitalizing Interest Costs," to cab making operating decisions and assessing performance as culate the costs during construction of debt funds used to the source of the Company's reportable segments. SFAS No. finance its electric generation-related construction projects. The 131 also requires disclosures about products and services, Company recorded capitalized interest of $7 million in 1998. geographic areas and major customers. The adoption of SFAS l No.131 did not affect the Company's financial condition or Gains and Losses on Reacr;uired Debt results of operations (see note 2). Prior to December 31,1997, gains and losses on reacquired in 1998, the Company adopted SFAS No.132, debt were deferred and amortized to interest expense over the " Employers' Disclosures about Pensions and Other period approved for ratemaking purposes. Effective January 1 Postretirement Benefits," (SFAS No.132) which revises and 1998. gains and losses on reacquired debt associated with the standardizes employers' disclosures about pension and other electr c generation portion of the Company's operations are postretirement benefit plans but does not change the mea-expensed as incurred. Gains and losses on reacquired debt surement or recognition of those plans. The adoption of SFAS associated with the Company's regulated operations continue No.132 did not affect the Company's financial condition or to be deferred and amortized to interest expense over the perb results of operations (see note 6). od approved for ratemaking purposes based on management's in June 1998, the Financial Accounting Standards Board assessment of the likehhood of recovery. (FASB) issued SFAS No.133, " Accounting for Derivative instruments and Hedging Activities " (SFAS No.133) to income Taxes establish accounting and reporting standards for derivatives. Deferred Federal and state income taxes are provided on all The new standard requires recognizing all derivatives as significant timing differences between book bases and tax either assets or liabilities on the balance sheet at their fair I bases of assets and liabilities, transactions that reflect taxable value and specifies the accounting for changes in fair value income in a year different than book income and tax carry for-depending upon the intended u:.,e of the derivative. The new wards. Investment tax credits previously used for inc ame tax standard will be effective for fiscal years beginning after June purposes have been deferred on the Consolidated Balance 15,1999. The Company expects to adopt SFAS No.133 in Sheet and are recognized in book income over the life of the the first quarter of 2000. The Company is in the process of related property. The Company and its subsidiaries file a evaluating the impact of SFAS No.133 on its financial state-Consolidated Federal income tax retum. Income taxes are ments. allocated to each of the Company's subsidiaries within the in November 1998, the FASB's Emerging Issues Task consolidated group based on the separate return method. Force issued EITF 98-10. " Accounting for Contracts Involved in Energy Trading and Risk Management Activities." EITF 98-Derivative Financia! Instruments 10 outlines attributes that may be indicative of an energy Hedge accounting it, epplied only if the derivative reduces the trading operation and gives further guidance on the account-risk of the underlying nedged item and is designated at incep-ing for contracts entered into by an energy trading operation. tion as a hedge, with respect to the hedged item. If a This accounting guidance requires mark-to-market accounting derivative instrument ceased to meet the enteria for deferral, for contracts considered to be a trading activity. EITF 98-10 is any gains or losses would be currently recognized in income. applicable for fiscal years beginning after December 15,1998 The Company does not hold or issue derivative financial with any impact recorded as a cumulative effect adjustment instruments for trading purposes. through retained eamings at the date of adoption. At December 31,1998, the Company has evaluated its whole-Utility Plant sale marketing operation and related contracts under the Effective December 31,1997, electric generation plant is vah guidance provided in EITF 98-10. For those contracts entered ued at the lower of original cost or market pursuant to SFAS into in the over the counter market and considered to be a No.121, " Accounting for the impairment of Long-Lived trading activity, the Company believes the impact to be Assets and for Long-Lived Assets to Be Disposed Of *(SFAS immaterial. However, due to the duration, complexity, and No.121). All other utility plant continues to be valued at origi-uncertainties surrounding the long-term commitments consid-nal cost. ered to be trading activities, the Company is continuing to evaluate these commitments and the impact of adopting. Crpitalized Software Costs EITF 98-10. Software projects which exceed $5 million are capitalized. At Oscember 31,1998 and 1997, capitalized software costs Reclassifications totiled $84 and $86 million (net of $37 and $29 million accu-Certain prior-year amounts have been reclassified for compar-mutated amortization), respectively. Such capitalized amounts ative purposes. These reclassifications had no effect on net are amortized rotably over the expected lives of the projects income or common shareholders' equity. when they become operational, not to exceed ten years. j

i Notes to Consolidated Financial St'tements 31 j

2. Nature of Operations and Information about Products and Services The Company is primarily a vertically integrated public utility that provides retail electric and natural gas service to the public in its.

l traditional service territory and retail electric generation service throughout Pennsylvania in conjunction with Pennsylvanic' j Customer Choice Program. The Company also engages in the wholesale marketing of electricity on a national basis. The Company participates in joint ventures which provide services such as telecommunications in the Philadelphia metropolitan area. Revenues and expenses associated with these activities, the Customer Choice Program, joint ventures and other projects are reflected in Other income'and Oeductions in the Company's Consolidated Statements of income. l For the Yeers Ended December 31, 1998 1997 1996- . Thousands of Dollars i Operating Revenues from Electric Operations Residential 1,377,237 1,357,449-1,370,158 Small commercial and industrial 783,682 778,743 748,561' Large commercial and industrial 1,066,868 1,077,374 1,098,307 Other 149,424 147,523 140,133 Unbilled 1,409 19,130 (25,950) Service territor. 3,378,620 3,380,219 3,331,209 Interchange sales 210,965 58,614 25,991 Sales to other utilities 1,221,255 727,836 497,636 Total operating revenues S 4,810,840 4,166,669 3,854,836 Operating Revenues from Gas Operations Residential 15,968 16,852 15,716 House heating 236,430 265,299 249,5C Commercial and industrial 124,548 144,801 132.822 Other 2,037 3,228 11,462 Unbilled (2,960) (969) (4,250) Subtotal 376,023 429,211 405,257 Other revenues (including gas transported for customers) 23,619 22.021 23,557 T(, sal operating revenues S 399,642 451.232 428.814

3. Rate Matters tomers choose an EGS. If less than 35% and 50% of residen-

,) tial and commercial customers have chosen an EGS by ' Final Restructuring Order On May 14,1998, the PUC issued a final order (Final January 1,2001 and January 1,2003, respectively, the num-i ber of customers sufficient to meet the necessary threshold l Restructuring Order) approving a Joint Petition for Settlement levels shall be randomly selected and assigned to an EGS ] (Global Settlement) filed by the Company and numerous par. ties to the Company's restructuring proceeding mandated by through a PUC-determined process. Beginn,ng January 1,1999, electric rates will be unbun-i the Electricity Generation Competition and Customer Choice died into transmission and distribution components, a Act (Competition Act). The Competition Act provides for the restructuring of the electric utility industry in Pennsylvania, Competitive Transition Charge (CTC) for recovery of stranded including the deregulation of generation operations and the costs and an energy and capacity charge. Eligible customers who choose an attemative EGS will not be charged the ener-institution of retail competition for generation supply begin-ning in 1999. The Final Restructuring Order provided for the gy and capacity charge or the transmission charge and ) recovery of $5.26 billion of stranded costs through transition instead will purchase their electric energy supply and trans-missinn at market-based rates from their EGS. The Company charges to distribution customers over a 12 year period beginning in 1999 with a 10.75% return on the balance and - will in tum be reimbursed by the EGS, via the PJM Interconnection, LLC, for the cost of the transmission supercedes all prior orders regarding recovery of generation. service at a rate approximately equivalent to the unbundled related regulatory assets and liabilities. During the 12 year stranded cost recovery period, the Company will amortize the transmission rate. Also, beginning January 1,1999, the recoverabb stranded costs in accordance with the rate Company will unbundle its retail electric rates for metering, schedules determined in the Final Restructuring Order. meter reading and billing and collection services to provide : credits to those customers who elect to have an attemative The Final Restructuring Order provided K the phase-in of customer choice of electric generation supplier (EGS) k:, supplier perform these services. all customers: one-third of the peak load of each customer in accordance with the Competition Act and the Final class on January 1,1999; one-third on January 2,1999; and Restructuring Order, the Company's retail electric rates are , the remainder on' January 2, 2000. The Final Restructuring capped at the year-end 1996 fevels (system-wide average of Order also established market share thresholds to ensure. 9.96 cents / kilowatt hour (kWh)) through June 2005. The Final that a minimum number of residential and commercial cus. Restructuring Order requires the Company to reduce its retail

32 PECO Energy Comp:ny end Subsiditry Czmpanies electric rates by 8% from the 1996 system-wide average rate recorded as revenue net of fuel costs $82 million, as a result of on Januaru 1,1999. The rate decrease will become 6% from the sale of the 399 MW of capacity and/or associated erjergy January 1,2000 until January 1,2001, when the system-wide and the Company's share of Limerick energy sdvings. average rate cap will revert to 9.96 cents /kWh. The transmis-sion and distribution rate component will remain capped at o Declaratory Accounting Order system-wide average rate of 2.98 cents /kWh through June Pursuant to a PUC Declaratory Order, effective October 1, 30,2005. Additionally, generation rate caps, defined as the 1996, the Company increased depreciation and amortization sum of the applicable transition charge and energy and capac-on assets associated with Limerick by $100 million per year ity charge, will remain in effect through 2010. and decreased depreciation and amortization on other The Final Restructunng Order requires '. hat on January 1, Company assets by $10 million per year, for a net increase in 2001,20% of all of the Company's residential customers, depreciation and amortization of $90 million per year. At determined by random selection and without regard to December 31,1997, $90 mi!! ion of depreciation and smortiza-whether such customers are obtaining generation service tion that would have been recognized in 1098 was deferred from an alternate EGS, shall be assigned to a provider of last as a regulatory asset since the Company's rates continued to resort default supplier other than the Company through a be cost-based until January 1,1999. During 1998 these PUC-approved bidding process. amounts were amortized and recovered. The Final Restructuring Order authorizes the issuance of up to $4 billion of transition bonds (Transition Bonds). In Energy Cost Adjustment (ECA) preparation for the issuance of Transition Bonds, the Through December 31,1996, the Company was subject to a Company formed a special purpose subsidiary (SPS). The pro-PUC-established electric ECA which, in addition to reconciling ceeds of the Transition Bonds are required to be used fuel costs and revenues, incorporated a nuclear performance principally to reduce "ecoverable stranded costs and related standard which allowed for financial bonuses or penalties capitalization. The Transition Bonds will be obligations of the depending on whether the Company's system nuclear capaci-SPS, secured by intangible transition property (ITP). ITP repre-ty factor exceeded or fell below a specified range. For the sents the irrevocable right of the Company or its assignee, to year ended December 31,1996 the Company recorded a collect non-bypassable charges from customers to recover bonus of $22 million. stranded costs. The Company filed complaints in federal and state courts relating to the restructuring orders issued by the PUC in

4. Accounting Changes December 1997, January 1998 and February 1998. In addi-The Company accounts for its electric transmission and distri.

tion, numerous other parties filed appeals and cross appeals bution and gas operations in accordance with SFAS No. 71 of these orders. In accordance with the terms of the Final which requires the Cothpany to record the financial state-Restructuring Order, all appeals and cross-appeals filed by the ment effects of the rate regulation to which the Company is signatories to the Global Settlement have been placed in a subject. Use of SFAS No. 71 is applicable to the utility opera-pending but inactive status. Such appeals and cross appeals tions of the Company which meet the following criteria: (1) will be permanently withdrawn at such time that the Final third-party regulation of rates; (2) cost-based rates; and (3) a Restructuring Order is no longer subject to admin'strative or reasonable assumption that all costs will be recoverable from tudicial challenge. customers through rates. The Company believes that it is In an appeal of a PUC order. issued in May 1997, an. ter-in robable that regulatory assets associated with these opera-venor brought an action asserting that the stranded cost tions will be recovered. recovery provisions of the Coinpetition Act violated the Effective December 31,1997, the Company discontin-Commerce Clause of the United States Constitution. On May ued the application of SFAS No. 71 for its retail electric 7,1998, the Commonwealth Court of Pennsylvania unani-d @M h Wsh d SMS mously rejected the claim. The intervenor petitioned the No.101 " Regulated Enterprises - Accounting for the Supreme Court of Pennsylvania for allowance of appeal. On September 29,1998, the Pennsylvania Supreme Court denied Dentinh v We d FMB Smem % R As required by SFAS No.101, at Dece:rher 31,1997, the petition. On December 28,1998, the intervenor filed a the Company performed an impairment teu of its electric petition for certiorari with the United States Supreme court. generation assets pursuant to SFAS No.121, on a plant spe-cific basis and determined that $6.1 billion of its $7.1 billion Limerick Through 1997, the Company was recovering certain deferred of electric generation assets would be impaired as of December 31,1998 The Company estimated the fa,r value i Limerick costs. At December 31,1997, the unamortized por-tion of these regulatory assets of $321 million was included f r each of its electnc generating units by determining its as part of electric generation-related regulatory assets. estimated future operating cash inflows and outflows. The Under its electric tariffs and ECA, the Company was net future cash flows for each electnc generating plant were allowed to retain for shareholders any proceeds above the then compared to its net book value. For any electne generat-av: rage energy cost for sales of 399 megawatts (MW) of near-ing plant with future undiscounted cash flows less than its t:rm excess capacity and/or associated energy and to share in book value, net cash flows were discounted using a discount the benefits which resulted from the operation of both rate commensurate with the risk of each electric generating Limerick Units No.1 and No. 2, The Company's ECA was dis-plant. Since the Company's retail electric rates continued to continued at Decen ber 31,1996. During 1996, the Company be cost-based through January 1,1999, $333 million repre-senting depreciation expense on electric generation-related

f ' Noteg to Consolidated Finincial Statements 33 asssts in 1998 and $91 million representing amortization of insurance proceeds to the Company for the Company's bond-other regulatory assets in 1998 were reclassified to a regula-holders, and the amount of such proceeds which would be tory asset and were amortized and recovered in 1998. available. Under the terms of the various insurance agree-i At December 31,1997, the Company had total electric ments, the Company could be assessed up to $30 million for generation-related stranded costs of $8.4 billion, representing losses incurred at any plant insured by the insurance compa- $5.8 billion of net stranded electric generation plant and $2.6 nies. The Company is self-insured to the extent that any billion of electric generation-related regulatory assets. The losses may exceed the amount of insurance maintained. original PUC restructuring order allowed the Company to Such losses could have a material adverse effect on the recover $5.3 billion of its generatiort related stranded costs Company's financial condition and results of operations. from customers. This resulted in a net unrecoverable amount The Company is a member of an industry mutual insur-of $3.1 billion. Accordingly, the Company recorded an extraor-ance company which provides replacement power cost dinary charge at December 31,1997 of $3.1 billion ($1.8 billion insurance in the event of a major accidental outage at a net of taxes) of electric -)eneration-related stranded costs that nuclear station. The premium for this coverage is subject to will not be recovered from customers. The Final Restructuring assessment for adverse loss experience. The Company's Order did not change the amount of allowable stranded costs. maximum share of any assessment is $10 million per year. Effective December 31,1997, the Company discontin-ued the application of SFAS No. 71 for its wholesale energy Nuclear Decommissioning and Spent Fuel Storage sales operations. Based on projections of the Company's The Company's current estimate of its nuclear facilities' retail load growth, the Company concluded all of its owned decommissioning cost is $1.5 billion in 1997 dollars. Through generation capacity would be necessary to meet its electric 1998, this amount was being collected through electric rates retailload. As a result, the discontinuance of SFAS No. 71 for over the life of each generating unit. Beginning in 1999, its wholesale energy sales operations did not result in a decommissioning costs will be recoverable through regulated charge against income. rates. Under rates in effect through December 31,1998, the Company collected and expensed approximately $20 million - annually from customers which was accounted for as a com-

5. Commitments and Contingencies p nent of depreciation expense and accumulated depreciation. At December 31,1998 and 1997, $336 and $294 Capital Comm,tments million, respectively, were included in accumulated deprecia-i The Company estimates $440 million of capital expenditures tion. In order to fund future decommissionine, costs, at in 1999. Certain facilities under construction and to be con-December 31,1998 and 1997, the Company held $378 and structed may require permits and licenses which the

$320 million, respectively, in trust accowns which are includ-Company has no assurance will be granted. Capital expend.i-ed as Investments in the Company's Consolidated Balance tures do not include investments in joint ventures including Sheets and include both net unrealized and realized gains. investments related to the Company's strategy to expand its Net unrealized gains of $60 and $43 million were recognized generation portfoho. as a Deferred Credit in the Company's Consolidated Balance Sheet at December 31,1998 and 1997, respectively. The Nu&ar insurance Company recognized net realized gains of $12, $11 and $10 As of December 31,1998, the Price-Anderson Act limited the million as Other income in the Company's Consolidated liability of nuclear reactor owners to $9 8 billion for claims Statement of Income for the years ended December 31, that could arise from a single incident. The limit is suoject to 1998.1997 and 1996, respectively. The Company believes change to account for the effects of inflation and changes in that the amounts being recovered from customers through the numoer of licensed reactors. The Company carries the regulated rates will be sufficient to fully fund the unrecorded maximum available commercialinsurance of $200 million and portion of its decommissioning obligation. the remaining $9.6 bilhon is provided through mandatory par-In an Exposure Draft issued in 1996, the FASB proposed ticipation in a financial protection pool. Under the changes in the accounting for closure and removal costs of Pnce-Anderson Act, all nuchar reactor licensees can be production facihties, including the recognition, measurement Essessed up to $88 milkon per reactor per incident, payable and classification of decommissioning costs for nuclear gen-at no more than $10 milhon per reactor per incident per year. erating stations. The FASB has expanded the scope of the This assessment is subject to inflation and state r emium Exposure Draft to include closure or removal liabilities that taxes. In addition, the U.S. Congress could impose revenue are incurred at any time during the operating life of the relat-raising measures on the nuclear industry 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 rasulting 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-decommissianing could increase and the estimated cost for for stabilization and site decontamination, if the decision is decommissioning could be recorded as a hability rather than rmd3 to decommission the facility, 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) t Under the Nuclear Waste Policy Act of 1982 (NWPA), the mzintain to provide for decommissioning the facility. 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

34 PECO Energy Company cnd Subsidiary Companies a Comp ,'s nuclear units for long-term storage by no later 1999, with 2,054 MW of capecity during the period 2000 - thin 1998. Based on recent public pronouncements, it is not through 2002 and with 2,431 MW of capacity thereafter. lik !y that a permanent disposal site will be available for the During 1998, purchases under long-term commitme6ts industry before 2015, at the earliest. In reaction to state-resulted in expenditures of $170 million. As of December 31, m:nts from the DOE that it was not legally obligated to begin 1S98, these purchase commitments result in obligations of to accept spent fuel in 1998, a group of utilities and state approximately $121 million for 1999, $526 million for 2000 government agencies fi:ad a lawsuit against the DOE which thro.gh 2002 ano $805 million thereafter. These purchases resulted in a decision by the U.S. Court of Appeals for the will be utilized through a combination of retail sales to cus-District of Columbia (D.C. Court of Appeals) in July 1996 that tomers, long-term sales to other utilities and open market ths DOE had an unequivocal obligation to begin to accept sales. sp nt fuel in 1998. In accordance with the NWPA, the At December 31,1998 the Companv had entered into Company pays the DOE one mill ($.001) per kilowatthour of long term agreements with unaffiliated util' s to sell energy net nuclear generation for the cost of nuclear fuel long-term associated with 5,094 MW of capacity, of wnich 1,030 MW of storage and disposal. This fee may be adjusted prospectively these agreements are for 1999,2,202 MW are for 2000 through in order to ensure full cost recovery. Because of inaction by 2002 and the remaining 1,862 MW extend through 2009. the DOE following the D.C. Court of Appeals finding of the At December 31,1998, the Company had entered into long-DOE's obligation to begin receiving spent fuelin 1998, a term agreements w;th unaffiliated utilities to purchase group of forty-two utility companies including the Company, transmission rights. These purchase commitments result in and forty six state agencies, filed suit egainst the DOE seek-obligations of approximately $21 million in 1999, $19 million in ing authonzation to suspend further payme7ts to ths U.S. 2000 and $9 million per year in 2001 through 2003. govemment under the NWPA and to deposit such payments into an escrow account until such time as the DOE takes Environmentalissues offoctive action to meet its 1998 obligations. In November The Company's operations have in the past and may in the 1997, the D.C. Court of Appeals issued a decision in which it future require substantial capital expenditures in order to held that the DOE had not abided by its prior determination comply with environmental laws. Additionally, under federal that the DOE has an unconditional obligation to begin dispos-and state environmental laws, the Company la gencrally liable al of spent nuclear fuel by January 31,1998. The D.C. Court for the costs of remediating environmental contamination of of Appeals also precluded the DOE frrm asserting that it was property now or formerly owned by the Company and of not required L begin receiving spent nuclear fuel because it property contaminated by hazardous substances Dentrated had not yet prepared a permanent repository or an interim by the Company. The Company owns or leases a nur.iber of storaga iteility. The DOE and one of the utility companies real estate parcels, including parcels on which its operations filed Petita.as for Reconsideration of the decision which were or the operations of others may have resulted in contamina-denied, as were petitions seeking U.S. Supreme Court tion by substances which are considered hazardous unc: r review of the decision. In addition, the DOE is exploring other environmental laws. The Company is currently involved in a options to address delays in the waste acceptance schedule. number of proceedings relating to sites where hazardous Peach Bottom has on-site facilities with capacity to store substances have been deposited and may be subject to addi-spent nuclear fuel discharged from the units through 2000 for tional proceedings in the future. On ; No. 2 and 2001 for Unit No. 3. Ufe-of-plant storage The Company has identified 28 sites where former man-capacity will be provided by on site dry cask storage facilities, uf actured gas plant (MGP) activities have or may have the construction of which began in 1998. Limerick has on-site resulted in actual site contamination. The Company is facilitif s with capacity to store spent nuclear fuel to 2007. presently engaged in performing various levels of activities at Salem has on-site f acilities with spent fuel storage capacity these sites, including initial evaluation to determine the exis-through 2008 for Unit No.1 and 2012 for Unit No. 2. tence and nature of the contamination, detailed evaluatio1 to determine the extent of the contamination and the necessity Energy Commitments and possible methods of remediation, and implementation of The Company's electric utility operations include the whol remediation. The Pennsylvania Department of Environmental e ssle marketing of electricity. The Company utilized certain Protection has approved 'h9 Company's clean up of three types of fixed-price contracts and other risk management sites. Eight other sites are currently under some degree of instruments in connection with its wholesale marketing oper-active study and/or remediatior; ations. These contracts include long-term contracts which As of December 31,1998 and 1997, the Company had commit the Company to purchase or sell energy at fixed accrued $60 and $63 million, respectively, for environmental prices in the future (i.e. 4ed-price forward purchase and investigation and remediation costs, including $33 and $35 sales ontracts), and short-term bilateral swaps and options million, respectively, for MGP investigation and remediation, contracted for in the over the-counter market. Under some of that currently can be reasonably estimated. The Company these contracts, the Company mey purchase at its option cannot reasonably estimate whether it will incur other nignifi-additional power as needed. The use of the foregoing types cant liabilities for additional investigation and remediation. of contracts is so that the Company may manage and hedge costs at these or additional sites identified by the Company, its retail and wholesalo commitments in coordination with the environmental egencies or others, or whether such costs will economic dispatch of the Company's installed capacity. be recoverable from third parties. ' At December 31,1998, the Company had long-term com-mitments relating to the purchase from unaffiliated utilities. ud others of energy associated with 632 MW of capacity in

Notts to Consolidated financtil Statirnents 35 .4 Litigation filed a complaint against the Company alleging tortious inter-Gr:ys Ferry Cogeneration Partnership ference by the Company in the credit agreements between On April 9,1998, Grays Ferry Cogeneration Partnership (Grays, Grays Ferry and the banks and breach of contract of a letter - ' Ferry), two of three partners of Gravs Ferry and Trigen. agreement between the Company and the banks. The Philadelphia Energy Corporation, filed a complaint in Philadelphia Company ca'inot predict the outcome of these matters. County cf Common Pleas apainst the Company for specific per-formance, b'each of contract, fraud and breach of implied Cajun Electric Power Cooperative,Inc. covenant of good faith and fair ceakng, conversion, unjust enrich-On May 27,1998, the United States Department of Justice, on ment, breach of fiduciary duties and tortious interference with behalf of the Rural Utilities Service and the Chapter 11 Trustee respect to two power purchase agreements (PPAs) that the for the Cajun Electric Power Cooperative, Inc. (Cajun), filed an Compan' had entered into with Grays Ferry. The plaintiff seeks action claiming breach of contract against the Company in the United States Distric' Court for the Middle District of Louisiana specific pvrformance, damages in excess of $200 million and punitive damages. A preliminary injunction was entered against arising out of the Company's termination of the contract to pur-the Company on May 5,1998, enjoining the Company from ter. chase Cajun's interest in the River Bend nu': lear power plant, minating the PPAs. On Mev 29,1998, Westinghouse Power This action seeks $67 million in damages. The Company cannot Generation filed a complaint in the Philadelphia Court of predict the outcome of this matter. Common P%as ap3 inst the Company for tortious interference with two s,eged contracts that Westinghouse has with Grays The Company is involved in various other 1rtigation matters. The ultimate outcome of such matters, while uncertain, is not Ferry. On Septernber 4,1998, The Chase Manhattan Bank, as agent for a syndicate of banks that are lenders to Grays Ferry, expected to have a material adverse effect on the Company's financial condition or results of operations.

6. Retirement Benefits Tte Company and its subsidiaries have a defined benefit pension plan and postretirement benefit plans applicable to essentially all employees. The following provides a reconciliation of benefit obligations, plan assets and funded status of the plans.

Other Postretirernent Thousands of Doliars ension Benef ts _ Benefits Ch nge in Benefit Obligation Net benefit obligation at beginning of year 8 2,141,040 $ 1,982,915 5 779,231 $ 662.701 Service cost 30,167 25,368 - 1R,375 14,401 Interest cost 153,644 150,057 53,924 54,149 397 Plan participants' contributions (3.052) Plan amendments Actuarial (gain)/ loss 143,274 129,148 (8.260) 85,452 Curtailments (73,330) 10,403 Settlements (46,541) Special termination benehts 114,182 29,712 Gross benefits paid _H52 8501 (143,3961 (36A11[ (37,472) 1 Net benefit obligation at end of year S 2,309,586 $ 2,141,040_ $ 847,771 $ 779,231 Ch nge in Plen Assets Fair value of plan assets at begintung of year $ 2,538,039 $ 2,302,935 $ 178,045 $ 126,661 Actual return on plan assets 343,754 377,803 23,535 22,691 Employer contnbutions 1G,404 697 57,319 66.165 Plan participants' contributions 397 Gross benefits paid _j152,850) (143J96) (36,01.1L (37,472) Fair ulue of plan assets at end of year S 2,745,347 $ 2,538.039 $ - 223,285 $ ' 178,045 Funded status at end of year s 435,761 $ 396,999 $ (624,486). $ (601,18G) Unrecognized net actuarial (gain)/ loss - (859,480) (649,903) 37,617 53,110-Unrecognized prior service cost 65,419 - 83,188 Unrecognized net transition obligation (asset) (30,512[ (35,713) 165,7_96_ 223 A 6_ Net amount recognized at end of year S (188,812) $ (205,429) $ (421,083) $ (324,850) Amou,ts recognized in the consolidated balance sheet consist of; Prepaid benefit cost

$^

30,462.. $ 6,167 ' s ..N/A N/A ' Accrued benefit cost J219J74}. (211.596JL _.1421,0831 (324,85_01 N;t amount recognized at end of year - S (188,812) $ (205A29) $ (421,083) $ (324,850) ' ,,j

36:. PECO Ertrgy Company and Subsidiary Companies c nwnt Beneus _&" Spa.8'"5 gDP8H25tle,t ' Weighted-evere9e essumptions - es of December 31 Discount rate 7,00 % 7.25 % 7.75 % 7,00 % 7.25% - = 7.75 % Expected return on plan assets 9.50 % 9.50 % 9.50 % 8.00% ' ' 8.00%

8.00%:

Rate of compensation increase 5.00 % 5.00 % 5.00 % 5.00% ~ 5.00% - 5.00 % Hoatth care cost trend on 6.5% - 7.0% 8.0 % - covered cnarges - N/A. N/A N/A. decreasing to ' decreasing to decreasprig to ultimate trend ' ' uttimate tiarti 1 < ultimate trond : . of 6.0% in 2002 of 5.0% in3002 5.0% in 2002 s Components of not periodic benefit cost Service cost S 30,167 $ 25,368 $ 27,627 8 18,375 $ 14,401' $ 11,855 Interest cost 153,644 150,057 145,570 53,924. 54,149 48,524 Expected return on assets (209,976) (182,866) (171,207) -(13,243) (9,984) (3.937). Amortization of: Transition obligation (asset) (4,538) (4,538) (4,538) 14,882 14,882 14,882 Prior service cost 6,441 6,441 5,114 Actuarial (gain) loss f7,028) (3,898) 248 52,961 Curtailment charge (credit) 162,002) Settlement charge (credit) (13,439) Not periodic benefit cost S (106,731) $ (9.436) $ 2.814 S 126,899 $ 73,449 $ 71,324 Special termination benefit charge (credit) S 114 182 $ - S 29,712 $ Sensitivity of retiree welfore results Effect of a one percentage point increase in assumed health care cost trend on total service and intered cost components 10,432 on postretirement benefit obligation 90,490 Effect of a one percentage point decrease in assumed health care cost trend on total service and interest cost components (8.460) on postretirement benefit obligation $ (75,599) Prior service cost is amortized on a otraight4ine basis over tar benefits for active employees are provided by.an insur-the average remaining service period of employees expected ance company whose premiums are based upon the benefits to receive benefits under the plans. paid during the year. During 1998, costs were recognized for special termina-The Company sponsors a qualifying savings plan cover-tion benefits in connection with the retirement incentives ar.d ing all employees. Contributions made by participating enhanced severance benefits provided under the Company's employees are matched based on a specified percentage of Workforce Reduction Program. employee contribution up to 4% of the employees' pay base. The Company provides certain health care and life insur- , >e cost of the Company's matching contribution to the sav-ance benefits for retired employees.' Company empicyees ings plan totaled $7 million, $7 million and $3 million in 1998, become eligible for these benefits if they retire from the 1997 and 1996, respectively. Company with ten years of service. These benefits ard simi-s [- a, .m, d

37 potes to Consolidated Financial Statements

7. Accounts Receivable Accounts receivable at December 31,1998 and 1997 includ-million interest in accounts receivable which the Company ed unbilled operating revenues of $142 and $135 million, accounts for as a sale and a $67 million interest in special r:spectively. The ellowance for uncollectible accounts at agreement accounts receivable which were accounted for as December 31,1998 and 1997 was $20 and $32 million, a long-term note payable (see note 12). The Company retains respectively.

the servicing responsibility for these reci ables. The agree. The Company is party to an agreement wrth a financial ment requires the Company to maintain tts $425 million institution under which it can sell or finance with limited interest, which, if not met, requires the Company to deposit recourse an undivided interest, adjusted daily, in up to $425 cash in order to satisfy such requirements. At December 31, million of designated accounts receivable until November 1998, the Company did not meet this requirement and was 2000. At December 31,1998, the Company had sold a $425 required tc make a deposit of $7 million. million interest in accounts receivable, consisting of a $358

8. Common Stock At December 31,1998 and 1997, comrnon stock without par on a net share basis at December 31,1998, based on the value consisted of 500,000,000 shares authorized and closing price of the Company's common stock on that date, 224,684,306 rnd 222,546.562 shares outstanding, respective-the Company would have received approximately O million ly. At December 31,1998, there were 5,800,841 shares shares of Company common stock.

reserved for issuance under the Company's Dividend Reinvestment and Stock Purchase Plan. Stock Option Plans The Company maintains a Long-Term Incentive r'lan (LTIP) for Stock Repurchase cortain full-time salaried employees of the Company. The During 1997, the Company's Board of Directors authonzed types of long-term incentive awards which have oeen grant-the repurchase of up to 25 million shares of its common ed under the LTIP are non-qualified options to purchase stock from time to time through open-market, privately nego-shares of the Company's common stock and shares of tiated and/or other types of transactions in conformity with rest:icted common stock. In 1998, the Company initiated a the rules of the Securities and Exchange Commission. Broad-based incentive Program and awarded non-qualified Pursuant to these authorizations, the Company has options to all employees except those in electi insmission entered into forward purchase agreements to be settled from and distributien system ard gas operations. T < 1pany time to time, at the Company's election, on either a physical, uses the disclosure-only provisions of SFAS No, net share or net cash basis. The amount at which these " Accounting for Stock-Based Compensation." If the agreements can be settled is dependent principally upon the Company elected to account for the LTIP based on SFAS No. market price of the Company's common stock as compared 123, eamings soplicable to common stock and earnings per to the forward rJrchase price per share and the number of average com;non share would have been changed to the pro shares to be settled. If these agreements had been settled forma amounts as follows: 1998 1997 Thousands of Dollars Eamings (Loss) applicable to common stock As reported S 499,615 $ (1,513,910) Pro forma S 493,696 $ (1,515,895) Earnings (Loss) per average common share (Dollars) As reported S 2.24 (6.80) Pro forma S 2.20 (6.81) Options granted under the LTIP and the Broad-based incentive Program become exercisable upon attainment of a target share value and/or time. All options expire 10 years from the date of grant. Information with respect to the LTIP and the Broad-based incentive Program at December 31,1998 and changes for the three years then ended, is as follows:

-38 PECO Energy Company and Subsidiary Companies a Weighted Weighted Weeghted Avera9e - Average . Average Exercies Exercise . Exercise . Price Pnce Pnce Shares (per share) $ hares (per share) Shares. {per share). 1996 1998 1997 1997- ' 1996 - 199 _6 Balance at January 1 3,816,794 $ 26.14 2,961,194,. $ 26.68 2,591,765 26.16 Options granted 2,933,540 27,74 '1,139,000 22.49 786,500 28.12 (363,871) 25.07 Options exercised (2,130,744) 23.86 Options cancelled (91,000) 24.82 (283,400) 24,96 - (47,200) 29.36' Balance at December 31 4,5285io~ 27.71 3.816,794 '26.14 2,961,194 26.08 Enercisable at December 31 3,462,550 23.91 2,800,794 26.65 2,192,894 26.17 Weighted average fair value of options granted during year 3.43 2.97 8

2.78 The fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model with the following.

weighted average assumptions used for grants in 1998,1997 and 1996, respectively: 1888 1992._. '1996 Dividend yield 6.8% 6.2 % 6.2 % Expected volatility 21.4 % 19.5 % 16.6 % Risk-free interest rate 5.5% 6.4% 5.5% Expected life (years) 9.5 5 5 At December 31,1998, the option groups outstanding, based on ranges of exercise prices, were as follows: Optons. Outstand ng Optons Exercisable i Ikeighted-Average Weighted . Weighted-Remaining Average Average. Number Contractual ufe Exercise Number Exercise Range of Exercise Pnces Outstanding (Years) Pnce Exercisable Pnce $15.75 - $20.00 899,700 8.71 $ 19.60 899,700 $ 19.60 $20.01 - $25.00 1,019,750 8.41 22.15 1,004,750 22.18 $25 01 - $30.00 1,510,600 5.76 27.38 1,510,600 27.38 $30.01 $35.00 78,500 9.43 32.97 47,500 31.98 $35 01 - $50 00 _1 020,040 9.87 40.48 1 Total 4,528,590 3.462.550 The Company issued 7,000 and 4,475 shares of restricted common stock during 1998 and 1997, respectively. Vesting in the restricted common stock awards is over a period not to exceed 10 years from the grant date. The compensation cost associated with these awards is amortized to expense over the vesting period. Compensation cost associated with these awards b immaterial.

9. Earnings Per Share Diluted earnings per average common share is calculated by dividing eamings applicable to common Mock by the weighted everage shares of common stock outstanding including stock cptions outstanding under the Company's stock option plans con-sidered to be common stock equivalents. The following table shows the effect of these stock options on the weighted average number of shares outstanding used in calculating diluted earnings per average common share:

1998_ 1997 '1996_ Average Common Shares Outstanding ' 223,219,000 222,543,000 222,490.000 Assumed Conversion of Stock Options. 685,000 Potential Average Dilutive Common Shares Outstanding 223,904,000 222,543.000 222,490.000

Notes O Consolidated Financtl Statements ' 39 ~

10. Preferred and Preference Stock At Deceinber 31,' 1998 and 1997, Series Preference Stock consisted of 100,000,000 shares authorized, of which no shares wtre outstansng'. At December 31,1998 and 1997, cumulative Preferred Stock, no par value, consisted of 15,000,000 sharesj euthorized.

Current Shares Amount - Redempton Outstanding. Thousands of Dollars Senes of Preferred stock Pnce(a) 1998 1997 1998 '1997' Series (without mandatory redemption) $4.653 104.00 150,000 150,000 $ 15,000.. $ ' 15,000 $4.40 112.50 214,720 274,720 27,472 27,472 ' $4.30 112.00 150,000 150,000 15,000 15,000 $3.80 106.00 300,000 300,000 30,000-30,000. $7.48 (b) 500,0 _00 500.000 50,000 ' 5n,000 ' 1,374,720 1,374,720 137,472 131,472 Series (with mandstory redempCon) $6.12 (c) 927,000 927,000' 92,700' 92,700 ' Total preferred stock 2,301,720 2,301.720 $ 230,172 ' ~ $ 230.172 (a) Redeemacle, at the option of the Company, at the indicated dollar amounts per share, plus accrued dividends. (n) None of the snaras of this series are subject to redemption prior to Apnf 1,2003. (c) Annual sinking fund requirements in 1399 2003 are $18,540,000. None of the shares of this series are subject to redemp-tion pr'or to August 1,1999.

11. Ccv ted Mandatorily Aedeemable Preferred Securities of a Partnership (COMRPS)

At Dec . and 1997, PECO Energy Capitat L.P. (Partnerst.ip), a Delaware limited partnership of which a wholly owner' 1 Company is the sole general partner, had outstanding A, C and D series of COMRPS with liquidation values and $1,000 (D) per security. Each series is supported by the Companfs deterrable interest subordinated debentu. . m the Partnership, which bear interest at rates equal to the distribution rates on the related series of COMRPS.,,,e interest expense on the debentures is included in Other Income and Deductions in the Consolidated Statements ' of Income ard is deductible for tax purposes. Mandatory Amount Redemption Distnbution Trust Receipts Outstanding Thousands of Dollars At Decernber 3L_ Date Rate 1998 1997 1998 1997_ .j Series A 2043 9.00 % 8,850,000 8,850,000 $ 221,250 $ 221,250 B(a) 2025 8.72 % 3,124,183 80,835 C(b) 2037 8.00 % 2,000,000 2,000,000 50,000 50,000 D(c) 2028 7.38 % 78,105_ 78,105 Total 10,928,105 13.974,183 8 349,355 $ 352,085 (a) On May 15,1998, PECO Energy Capital Trust I (c) Ownership of this series is evidenced by Trust Receipts, redeemed all outstanding Trust Receipts, each represent-each representing an 7.38% COMRPS, Series D, repre-ing an 8.72% Cumulative Monthly income Preferred senting limited partnership interests. The Trust Receipts Secunty, Series B of PECO Energy Capital, L.P. were issued by PECO Energy Capital Trust lil, the sole (b) Ownership of this series is evidenced by Trust Receipts, assets of which are 7.38% COMRPS, Series D. Each ] each representing an 8.00% COMRPS, Series C, repre-holder of Trust Receipts is entitled to withdraw the corre-1 senting limited partnership interests. The Trust Receipts sponding number of 7.38% COMRPS, Series D from the were issued by PECO Energy Capital Trust II, the sole Trust in exchange for the Trust Receipts so held. This - assets'of which are 8.00% COMRPS, Series C. Each Series was issued on April C,1998 holder of Trust Receipts is entitled to withdraw the corre-sponding number of 8.00% COMRPS, Series C from the . Trust in exchange for.the Trust Receipu sc held. ?

40, PEco Energy Company cnd Subsidinry Compgnies i 12; Long Term Debt - At December 31. Seres Due 1988 1997 Tho'usands of Dollars ~

$ 225,000 mortgage bonds (a) 53/8 %

1998 8 - First and refur ~ 1 71/2W91/4% 1999 32f 300 325,000 55/8 7 3/8% - 2001 330,000. . 330,000 - 71/858% 2002 500,000 500,000 61/2&65/8% 2003 450,000 450,000 '63/8&101/4 % 2004 2008 111,562: 115,625 (b). 2009-2013. 154,200 ~ 154,2001 0 5/8W8 3/4% 2019-2024 1,082,130 1,607,130 Total first and refunding mortgage bonds 2,952,892 3,706,955 Notes payable 15,930 15,574 Pollution control notes tc) 212,705. 212,705 Mediurnterm notes - (d) 50,000 62,400 Note Payable - accounts receivable agreernent (e) 66,837 128,999 Unamortized debt discount and premium, net J17,249) (26,405) Total long term debt 3,281,115 4,100,228 Due within one year (f) 361,523 247,087 1.ong-term debt included in capitalization (g)' S 2,919,592 $ 3,853.141 (a) Utikty plant is subject to the lien of the Company's mort; (g) The annualized interest on long-term debt at December gage. 31,1998, was $222 million, of which $210 million was (b) Floating rates, which were an average annual dnterest associated with mortgage bonds and $12 million was rate of 3.13% at December 31,1998. associated with other long-term debt, (c) Floating rates, which were an average annual interest rate of 3.32% at December 31,1998. In the fourth quarter of 1998, the Company redeemed $525 (c) Medium-term notes collaterakzed by mortgage bonds. million of its First Mortgage Bonds consisting of: $150 million The average annualinterest rate was 9.09% at of its 8 3/4% r aries due 2022, $125 million of its 8 5/8% December 31,1998. series due 2022 and $250 million of its 81/4% series due (e) See note 7. 2022 at redemption prices of 105.75,105.20 and 104.85 plus (f) Long-term debt maturities, including mandatory sinking interest, respectively. As a result, the Company recognized fund requirements, in the period 1999-2003 are as fol-an extraordinary charge of $34 million ($20 million net of Icws: 1999 - $361,523,000; 2000 - $74,255,500; 2001 - income taxes). The extraordinary charge consisted primarily $337,431,500; 2002 - $507,436,500; 2003 - of premiums and the write-off of deferred charges. $406,534,500.

13. Short Term Debt 1998 1997 1996 Thousands of Dollars Average borrowings S

209,261 248,111 198,090 Average interest rates, computed on daily basis 5.83 % 5.83 % 5.64 % , Maximum borrowings outstanding 8 525,000 464,500 369.500 Average interest rates, at December 31 6.17 % 6.74 % 6.90 % The Company has a $400 million one-year term loan agree-credit facility principally to support its $600 million commer-ment with a group of banks, which expires on November 30, cial paper program. There was no debt outstanding under this 1999. At December 31,1998, $400 million of short-term debt credit facility at December 31,1998. At December 31,1998, was outstanding under this term loan agreement.~ $125 milken of commercial paper was outstanding. At The Company has a $900 million unsecured revoMng December 31,1998, the Company had available formal and - credtt facihty with a group of banks. The credit facility con-informallines of credit with banks aggregating $100 milliort . sists of a $450 million 3644ay credit agreement and a $450 milhon three year credit agreement. The Company uses the g

1r .j,,

41 J Notfs to Consolidated Financial Statements g.* :

14. Income Taxes income ta'x expense (benebt)is comprised of the following components:

For the Years Ended December 31, 1998- '1997' 1996 Thousands of Dollars. . Included in operations: , Federal - Current . S '358,051 - 251,509. .126.471. -Deferred .(109,211) -(11,378) '154,564 Investment tax credit, net (18,066)- -(18,201)_ (15,979)' -State Current ' 95,309 - 76,689 62,839' Deferred (6,429) (5,850) 12,206 ' 319,664 -292,769 '340,101 included in extraordinary item: Federal ? Current (10,583). (123) (987,234) Deferred State! Current (3,174) (29) (303,575) ~ Deferred (13,757) (1,290,961) Total { _ 305,897 (998.192) 340,101-The total income tax provisions, excluding the extraordinary item, differed from amounts computed by applying the federal statutory tax rate to pre-tax income as follows: 1998 '1997 1996 Thousands of Dollars Net income S 532,378 336,558 517,205 Total income tax provisions 319,654 292,769 340.101 income before income taxes S 852,032 629,327 857,306 income taxes on above at federal statutory rate of 35% 298,211 220,264 S' - ~300,057 ' increase (decroase) due to: Property basis differences .(10,262) 40,828 9,903' State income taxes, net of federal income tax berrfit 57,582-46,046 '48,779 Amortization of investment tax credit (18,066) (18,201) (15,979)- Prior period income taxes - (12,951) (2,985) (1,707) Other, net 5,140 6,817 (952) Total income tax provisions S 319,654 292,769 340.101 Effective income tax rate ' 37.5 % 46.5 % 39.7 % Y { j 4 't ?

42E PECO Energy Company and Subsidi;ry Compagiies - Provisions for deferred income taxes consist of the tax effects of the following temporary differences: 1998 1997 1996 Thousands of Dolksrs : Deferred generation charges recoverable (174,787) Depreciation and amortization ' 140,448 57,530. 42,3851 Deferred energy costs . (2,491) - 2,256 . 27,374. Retirement and separation programs (51,146) (12,734). 19,746 L Incremental nuclear outage costs ' (7,434) (081) 2,440 - Uncollectible accounts .4,764 ~ (1,710) ~ (2,805) Reacquired debt (5,026) (8.607) (9,578) Unbilled revenue 3,579 (5,110) 3,910 . Environmental clean up costs (3,574) (15,121)' (714) Obsolete inventory 4,206 (7,074) 5,829 (747) (747) Limerick plant disallowances and phase-in plan AMT credits (42,067) 83.,010 - Other nuclear operating costs 9,926 (9,892) Other 7,962 (15,038) (4,080) Subtotal (115,640) (17,228) 166,770 (1,'290,809) Extraordinary item Total (115,640) $ (1,308.037) 166,770 The tax effect of temporary differelcas, ving rise to the Company's not deferred tax liability as of December 31,1998 and 1997 is as follows: Uability or (Assed 1998 1997 Thousands of Dollars Nature of temporary difference: Plant basis difference 2,653,760 2,620.254 Deferred investment tax credit 299,999 318,065 Deferred debt refinancing costs 37,575 111,651 Other, not (300,375) (249,167) Deferred income taxes (net) on the balance sheet 2,690,959 2,800.803 The net deferred tax liability shown above as of December The Internal Revenue Service (IRS) has completed and 31,1998 and 1997 was comprised of $3,123 and $3,153 mil-settled its examinations of the Company's federalincome lion of deferred tax habilities, and $432 and $352 million of tax returns through 1990 which resulted in a net increase of deferred tax assets, respectively. $11 million in credits available for carry forward. The 1991 in accordance with SFAS No. 71, the Company recorded through 1993 federal income tax returns have been exam-a recoverable deferred income tax asset of $614 and $586 ined and the Company and the IRS are in the process of million at December 31,1998 and 1997, respectively. These settling the audit which will not have an adverse impact on balances are applicable only to regu!ated assets, due to the financial condition or results of operations of the Company. discontinuance of SFAS No. 71 for the Company's electric The years 1994 through 1996 are currently being examined generation operations. These recoveraole deferred income by the IRS. taxes include the deferred tax effects associated principally . With liberalized depreciation accounted for in accordance with the ratemaking policies of the PUC, as well as the revenue ' impacts thereon, and assume recovery of these costs in future rates. e .h A-m

.m ' Notes to Consolidat'ed Finandal Statements 43=

, y '

115 Taxes, Other Than income - Operating. For the Years Ended 'Decernber 31, 1988 1997 19rs6 Thcusands of Dollars - ' Gross receipts . 8 '- 155,8831 - $ 163,552! ~$ 160,246' Capital stock - 43,754 ' 48,085. 41,972-R:al estate ' 51,313 69,597 = 69,185. ' Payroll 30,088 .,25,976 - 127.,585-Other (1,283) 2,881 '558' ~ Total '279,515 $i 310,091 299,546:

16. Leases Leased property included in utility plant was as follows:

At December 31, 1998 ' 1997 Thousands of Dollars ' Nucleoduel 8 523,325 $l - 521,921' Ehetric plant 2,321 2,321-Gross leased property ' 525,848 - .524,242 Accumulated amortization (371,338). (348,309) Nat leased property 8 154,308 175,933 Nue: ear fuel is amortized as the fuel is consumed. Amortization of leased property totaled $60, $39 and $31 million for the years ended December 31,1998,1997 and 1996, respectively. Other operating expenses included interest on capital lease obligations of $9 million in 1998,1997 and 1996, respectively, Minimum future lease payments as of December 31,1998 were; Fo_r the Years Ending December 31, Capital Leases Operating Leases Total Thousands of Dollars 1999 69,026 48,806 J 117,832 ' 2000 65,714 45,457 111,171 2001 32,439 42,850 75,289 2002 92 42,056 ~ 42,148 2003 92 49,386 49,478 Rernaining years 721 511,164 511,885 Total minimum future lease payments 168,084 739,719, 907,803 Imputed interest (rates ranging from 6.5% to 17.0%) (13,776) Present value of net minimum future lease payments 154,308 Rental expense under operating leases totaled $69 million in 1998 and $74 million in 1997 and 1996, respectively. ~ k 'fy l t I

PECO Energy Company Cod Subsidicry Lompanies' . 44 : t V a.

17. Jointly Owned Electric Utility Plant
The Company's ownership interests in jointly owned electric utility plant at December 31,1998, were as follows

Transmisson Production Plants. and Other Plant ^ ~ Peach Bottom - Salem Keystone Conemaugh Public Serwce GPu GPU-Vano;s PECO Energy Electre and Generating Generating - Opwator Company Gas Company Corp Corpe .. Companies - Participating interest 42.49 % 42.59 % 20.99 % 20.72% ' 21% to'43% < . Company's share (Thousands of Doliarst 20,026 $ 118,256 1 9 0,672 82,078 - Utility plant $ 347,001 ' $ Accumulated depreciation' 183,383 12,929 ' 73,644 41,052 32,638 Construction work in progress 22,586 1,632 J 1,770 3,865 '1.300s The Company's participating interests are financed with Company funds and, when placed in service, all operations are accountf 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 of Cash flows: 1998 1997 1996 Thousands of Dollars Cash paid during the year: Interest (net of amount capitalized) ' 384,932 '405,838 415,063 income taxes (net of refunds) 346,539 345,232 251,554 Noncash investing and financing: Capital lease obligations incurred 38,307 32,909 33,063

19. Investments 1998 1997 At D2 ember 31,-

nnousands of Dollars Trust accounts for decommissioning nuclear plants S 377,970 320,442 Telecommunications ventures 48,391 85,601 Energy services and other ventures 39,359 65,578 Nonutility property 40,456 24,697 Other 44,728 19,517_ Total 550,904 515.835

20. Financial Instruments Fair values of financial instruments, including liabilities, are estimated based on quoted market prices for the same or similar issues.

The carrying amounts and fair values of the Company's financialinstruments as of December 31,1998 and 1997 were as follows: _D_ar.ia.n_ds of_D..o..lla.rs. . _ _.1998. _ 199_7 ~ ~. Amount Value Amount c Value Non-derivatives: ' Assets Cash and temporary cash investments 'S : 48,083, 8. 48,083 $ ' 33,404 '.$ 33,404 Trust accounts for decommissioning nuclear plan" 377,970 377,970 320,442 320,442 l " Usbilities ~ Long-term debt (including amounts due within one year) ; 3,281,115.- 3,404,250 4,100,22J E4,210,885 - Derivatives: ' Treasuro forwards... . (300) t Forward interest rate swaps '-

(4,400) -

Notes to Consolidated Firencl;l Stat;ments - 45' 1' Financial instruments which potentially subject the Company starting interest rate swaps in the aggregate notional amount to concentrations of credit risk consist principally of tempo-of $713 million with an average interest rate of 5.72E The. rary cash investments and customer accounts receivable. The notional amount of derivatives do not represent amounts that Company places its temporary cash investments with high-are exchanged by the parties and, thus, are not a measure of cred:t quality financial institutions. At times, such the Company's exposure The amounts exchanged are calcu-investments may be in excess of the Federal Deposit lated on the basis of the notional or contract araounts, as insurance Corporation limit. Concentrations of credit risk with well as on the other terms of the derivatives, which relate to respect to customer accounts receivable are limited due to interest rates and the volatility of these rates. the Company's large number of customers and their disper. The Company would be exposed to credit-related losses sion across many industries, in the event of non-performance by the counterparties that The f air value of derivatives generally reflects the esti-issued the derivative instruments. The Company does not mated amounts that the Company would receive or pay to expect that counterparties to the interest rate swaps and terminate the contracts at the reporting date, thereby taking treasury forwards will fail to meet these obligations, given into account the current unrealized gains or losses of open their high credit ratings The credit exposure of derivatives contracts. Dealer quotes are available for all of the contracts is represented by the fair value of contracts at the Company's derivatives. reporting date. The Company's interest-rate swaps are docu-The anticipated issuance of Transition Bonds significantly mented under master agreements. Among other things, exposes the Company to market risks of changes in interest these agreements provide for a maximum credit exposure for rates. Derivative financial instruments are used by the both parties. Payments are required by the appropriate party Company to reduce these risks. when the maximum limit is reached. The same maximum The Company has entered into treasury forwards in an credit exposure applies to the treasury forwards. aggregate notional amount of $4 billion with an average inter-est rate of 4.7151he Company has entered into forward

21. Early Retirement and Separation Program in Apnl 1998, the Board of Directors authorized the implemen-attrition and the early retirement and severance program. The tation of a retirement incentive program and an enhanced Company expects an additional 735 positions to be eliminat-severance benefit program. The retirement incentive program ed during 1999 and 2000.

allowed employees age 50 and older, who have been desig-The Company recorded an early retirement and separa-nated as excess or who are in job classifications facing tion program charge to camings of $125 million ($74 million, reduction, to retire from the Company. The enhanced sever-r.et of income taxes) in the fourth quarter of 1998 to recog-ance benefit program provided non-retiring excess employees nize costs related to the CCR workforce reduction program. with fewer than ten years of service benefits equal to two This charge consisted of the following: $121 million for the weeks pay per year of service. Non-retiring excess employees actuarially determined pension and other postretirement ben-with mo's than ten years of service receive benefits equal to efits costs and $4 million for outplacement services costs three weeks pay per year of service. and the continuation of benefits for one year. Approximately Through its Cost Competitiveness Review (CCR), the $0.8 million of the $125 million charge was related to the Company identified 1,157 employees across the Company Company's non-utility operations and accordingly was record-who were considered excess or were in job classifications ed in Other income and Deductions. All cash payments facing reduction. Of the 1,157 employees,711 were eligible related to the early retirement and severance program are for and agreed to take the retirement incentive program. The expected to be funded through the assets of the Company's remaining employees are eligible for the enhanced severance Service Annuity Plan. benefit program. The Company has eliminated approximately. 422 positions as of December 31,1998 through both

22. Other income and Deductions Szttlement of Salem Litigation Ventures On December 31,1997, the Company received $70 million The Company periodically reviews its investments to deter-pursuant to the May 1997 settlement agreement with Public mine that they are properly valued.in its financial statements.

Service Electric and Gas Company resolving a suit filed by Other Income and Deductions reflects write offs of these the Company conceming the shutdown of Salem. During the investments of $10 million and $20 million in 1998 and 1997, second quarter of 1997, the Company recorded $70 million respectively. ($41 million net of income taxes) as Other income, i l

L 46 PECO Energy Company and Subsidiary Companies,.

23. Regulatory Assets and Liabilities At December 31,1998 and 1997, the Company had deferred the following regulatory ' assets on the Consolidated, Balance Sheets:

-1998 1sc Thousande of Dollars ^ Competitive transition charge 5,274,624 5,274,624 - R:coverable deferred income taxes (see note 14) ~ 614,445 565,661 424.497 Deferred generation costs recoverable in current rates 1.oss on reacquired debt 77,165 83,918 Compensated absences 4,289 3.881 Diferred energy costs 29,847 35,665 Non-pension postretirement benefits 90,915 97,409 ; Total 8 6,091,285 ~ 6,505,655

14. Quarterly Data (Unaudited)

The data shown below include all adjustments which the Company considers necessary for a fair presentation of such amounts:- Opereting Revenues OperaqngJncome Net income (Loss) Mellsons of Dollars 1998 1997 1990 1997 1998 1997 Ouarter ended March 31 1,173 $ 1,163 ~ $ 285 $ 302 8 114 $ -113 June 30 1,207 1,032 362 250 151 123 September 30 1,774 1,278 546 388 274 158 December 31 1,056 1,145 90 66 (26) (1,891) Esmings Apphcable - Average Shares Eamings to_Commony,tock Outstanding Per Average Share - { M@ons o1Donarsleyep[per shafe data) 1998 1997 1998 1997 1998 1997 Quarter ended March 31 110 $ 109 222.5 222.5 $ 0.50 $ 0.49 June 30 148 118 222.7 222.5 0.66 0.53 September 30 270 154 223.1 222.5

1.21 0.69 December 31 (28)

(1,895) 224.5 222.5 (0.13) (8.51) The increase in 1998 second quarter results was primarily The increase in the fourth quarter results was primarily due to increased operating revenues net of related fuel costs, due to the extraordinary charge of $8.24 per share recorded Revenues from wholesale sales increased significantly com-in 1997 resulting from deregulation of the Company's electric pared to 1997. Second quarter 1998 earnings also benofited generation operations; several one-time adjustments for from the full return to service of Salem which decreased the changes in employee bencfits; write-offs of information sys-cost of fuel purchases and outage-related costs compared to tems development charges reflecting clarification of 1997, from decreased operating and maintenance expense accounting guidelines and additional reserves to revise esti-and from reduced uncollectible expenses. mates for accruals; higher income tax adjustments; and. The increase in 1998 third quarter results was due pri-higher losses from the Company's non-utility ventures. This marily to increased operating revenues net of related fuel increase was partially offset by an Early Retirement and costs. Revenues from wholesale sales increased significantly Severance charge and an extraordinary charge for the premi- - compared to 1997. Third quarter eamings also benefited from ums paid in connection with the redemption of higher-cost, ths full retum to service of Salem, reduction of operating and long-term debt recorded in the fourth quarter of 1998. m:intenance costs, reduction of uncollectible expenses and a '. on> time refund of gross rece' pts tax. i

L47j y *, Notes to Consolidated Financial Statements. Financial Statistics ~ Summary of Earnings and Financial Condition for the Years foded December 31, 1908 1997 1996' 1995 1994 1993 Millions of Dollars, except per share dets inc;me Data Operating Revenues 5,210' $1 4,618 $ 4,284 4,186 $ ' 4,041 $ 3,988 Op: rating income 1,283 1,006 1,249 1,401 1,064 1,390 Income before Extraordinary item 532 337. '517 610 -427 591 Extraordinary item (net of income taxes) (20) . (1,834) Net income (Loss) 513 (1,497) 517 610 427 591 Earnings Applicable to Common Stock 500 (1,514) 499 587 '389 542 Eamings per Average Common Share Before Extraordinary item 2.33 1.44 2.24 2.64 - 1.76 2.45 Extraordinary item (0.09) (8.24) Earnings per Average Common Share 2.24 (6.80) 2.24 2.64 1.76 2.45 Dividends per Common Share 1.00 1.80 1.755 1.65 1.545 1.43 Common Stock Equity 13.61 12.25-20.88 2.0.40 19.41 19.25 ) Average Shares of Common Stock Outstanding Wlillions) 223.2 222.5 222.5 221.9 221.6 221.1 At December 31. Bince Sheet Data Net Utility Plant 8 4,610 $ 4,495 $ 10,760 $ 10,758 $ 10,829 $ - 10,763 Leased Property, net 154 17e. 182 181 174 194 Total Current Assets 569 1,003 420 426 427 515 Total Deferred Debits and Other Assets 6,715 6,683 3,899 3,944' 3,992 3,905 Total Assets 8 12,048 $ 12.357 $ 15.261 $ 15,309 $ 15,422 $ 15,377 Common Shareholders' Equity 3,057 $ 2,727 $ 4,646 $ 4,531 $ 4,303 $ 4,263 Preferred and Preference Stock Without Mandatory Redemption 137 -137 199 199 277 423 With Mandatory Redemption 93 93 93 93 93 .187' Company Obligated Mandatority Redeemable Preferred Securities of a Partnwship 349-352 302 302 221 Long-Term Debt 2,920 3,853_ 3,936_ 4,199 4,786 4,884 Total Capitahzation - 6,556 7.162 9,176 9,324 9,680 9,757 Total Current Liabilities 1,735 1,619 1,103 1,052 850 954 Total Deferred Credits and Other Liabilities 3,757 3,576 4,982-4,933, 4,892 4,666 . Total Capitalization and. ' Liabilities 12,048_. $ 12.357 $ 15.261' $ 15,309 ' $ 15.422 $ 15,377 l[ wx x

> 48 PECO Energy Company and Subsidiary Compan

Opercting Statistics.

' For the Years fndedDecember Jf, 1988 1997' 1996 1995 1994 1993 Ehctric Operations Output (wllions of Kilowatthours) Fossil-10,262 9.659 10,856 10,792 11,239 ' 10,352 Nuclear 29,732 _ 25,853 24,373 25,499 ~ 28,195-27,026 - Hydro _ 1,715 1,558 2,404 1,425 1,970' 1,699 Pumped storage output 1,426 1,403 1,540 1,741 1,596 '1.,478 Pumped storage input (1,853) (1,924) (2,230) (2,507) (2,256). (2,192) Purchase and interchange 34,075 29,615 19,539 13,945 6,164 6,447 Internal combustion 176 144 179 175 106 56 Total electric output 75,533 66,308 56,661 51,070 - 47,014 44,866 $1l:s (Millions of Kilowatthours) Residential 10,623 10,407-10,671 10,636 10,859. 10,609 - Small commercial and industrial 6,888 6,685 6,491 6,200 6,150 5,769 Large commercial and industrial 15,678 15,034 15.208 15,763 15,968 15,956 Other 803 841 902 860 781 771 Unbilled 131 70 (327) 535 (205) 31 Service terntory 34,123 33,037 32,945 33,994 33,563 ' 33,136 Interchange sales 3,483 1,927 935 496 768 457 Sales to other utilities 37,258_ 28,893 20,243 14,041 10,039 8,670 Total electric sales 74,864 63,857 54.123 48,531 44,370 42,263 Number of Customers, owenersi, Residential 1,343,791 1,333,861 1,324,448 1,321,379 1,350,210 .1,341,873 Small commercial and industrial 145,055 144,142 142,431 141,653 143,605 142,363 Large commercial and industrial 3,248 3,308 3,299 3,394 3,603 3,742 Other 1,150 1f)94_ 1,051 959 944-888 Total electric customers 1,493,244 1,482,405 1,471,729 1,467,385-1,498,362 1,488,866 Optrating Revenues (Millions of Dollars) Residential S 1,377 $ 1,357 $ 1,370 $ 1,379 $ 1,371 $ 1,351 Small commercial and industrial 784 '" ) 749 730 710 679 Large commercial and industrial 1,067 1 1,098. 1,135 1,149 1,168 Other 150 14u 140 137 136 161 Unbilled 1 19 (26) - 43 (11) (1) Service territory 3,379 3,380 3,331 3,424 3,355 3,358 Interchange sales 211 59 26 17 23 14 Sales to other utilities 1,221 728 498 334 247 233 Total electric revenues S 4,8W $ 4,167 $ 3,855 $ 3,775 $ 3,625 $ 3,605 ~ Operating Expenses Operating expenses, excluding depreciation and amortization 2,993' $ 2,698 $ 2,244 $ 2,026 $ 2,209 $ 1,894 Depreciation and amortization 611_ 553 462 431_ 416 '401 Total operating expenses 3,604 3,251 2,706 2,457 2,625 2,295-Electric Operating income 1,207 $ 916 $ 1,149 $ 1,318 $ 1,000 $ 1,310 Avirage Use per Residential Customer (Kilowanhours> Without electric heating 6,948 6,695 6,771 6,908 6,736 6,727 . With electric heating 15,398 16,400-17,946 17,189 17,527 17,096-All customers 7,935 7,830 8,074 8,130 8,041 7,970 Electric Peak Load, Demand thsands or Kewaral 7,108 7,390 6,509 7,244 7,227 7,100 Net Electric Generating Capacity-Year-end Summer Rating - ~ (hsunds of wwstrsi 9,262.. 9,204. 9,201 ' 9,078 ' 8,956 8,877 Cost of Fuel por Million BTU S 0.82' $

0.84 $

0.93.. $ 0.87. $ 0.89 $ - 0.90

BTU per Net Kilowatthour Generated 10,496 ~

10,737 .10,682 .10,705 - 11,617 - 10,675 f.

., Notes to Consolidated Financl;l Stat;ments 49 Operating Statistks nontinuco for the Years Ended Decernber 31, 1998 1997 .1996'

1995 1994 -

1993 ' i G:s Operations f 5 les (Manons of Eubk reet) - Residential - 1,496 1,614 1,681 - 1,51 6 1,636; - 1,637 - House heating - 28,402 32,666' 35,471 30,698 ~ 32,246 '30,242 ' Cornmercial and industrial 16,757 19,8301 20,999 18,464 19,762 _18,6354 ' Other 554'. 673 ~ 2,571 - 1,582-7,039 '9,733: 1,710 - (474) 676___ Unbilled (440[ 21,2_ - (1,306)_ 53,970 60,209. 60,923: Total gas sales - 46,769 - 54,995 59,416 Gas transported for customers 28,204_ 30,412 27,891 ' 48,531 29,801? _ 22,946' Total gas sales and gas transported 74,973-85,407 .87,307 102,501. 90,010 83,869-Number of Customers Residential 55,417 65,592 56,003 -56,533 57,122 59,573. House heating 324,081 314,335 303,996 295,481 287,481 L 277,500 - Commercial and industrial 35,931 35,215 34,182 33,308 32,292 31,573_ Total gas customers 415,429 405.142 394,181 385,322 376,895 368,646.. Operating Revenues tuinions of Donars) 16 $ .15 Residential 16 $ 17 $ 16 $ 15 Houso heating 236 265 249 236 238 202 Commercial,and industria! 125 145 133 126 128 110' Other 2 3 11 5 20 28. Unbilled (3) (1) (4) 7 (3) - 5 Subtotal 376 424 405 389 399 360 Other revenues (including gas transported for customers) 24 22 24 22 17 23 Total gas revenues 400 $ 451 $ 429 5 411 $ 416 $= 383 Operating Expenses Operating expenses, excluding depreciation and amortization 291 $ 333 $ 302 $ 302 $ 326 $ 279 Depreciation and amortiration 32 28 27 26 26 24 G:s Operating income

323, 361_

329 328 352- <303 Total operating expenses S 77 $ 90 $ 100 $ 83 $ 64 $ 80-5:curities Statistics R: tings on PECO Energy Company's securities Preferred Stock Mortgage Bonds .Date ' Date Agency Rating Established Rating Established Duff and Phelps, Inc. A-10/98 BBB' 10/98-Fitch investors Service, Inc. A-9/92 BBB+ ' 9/92 Moody's investors Service Baal 4/92 baa2 4/92 Standard & Poor's Corporation BEB+ 4/92 ' BBB-2/99 NYS2-Composite Common Stock Prices., Earnings and Dividends by Quarter (Pershare) 1998 1997 ' Fcurth Third -Second First Fourth Third J Second _ First Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter High price. S42-3/16 8 36-3/4 $ 30-5/8 : $24-11/16 $ 25-1/8 ' $24-5/16 $ 21-1/8 - ~ $ 26-3/8 - Low price. S 36-1/2.5 28-1/2 S213/16. $ 18-7/8 $21-7/16 $ 20-3/4 $ 18-3/4 ' S -. 20 Close 5413/4 -S36-3/4 $29-3/16. S 22-1/8 $ 24-1/4 $23-7/16 $ 21 $ 20-3/8 . Ectnings : $ ' (0.13) $ 1.21 S 0.66. 8 0.50. $ - (8 51) $ - 0.69 L. $ 0.53 ' $ ' O.49 . Dividends S 025 S - 0.25 $ :0.25 8 0.25 $ 0.45 $ : ~ 0,45 :: $ ' O.45 R $ ' O.45 - q, p,

54 PECO Energy Company cnd Subsidiary Companies v, Board of Directors Officers Susan W. Catherwood (55) Corbin A. McNeill, Jr. (59) John B. Cotton (53y") Cassandra A Matthews (48) Chairman, Trustee Board, Chairman of the Board of Directors - Special Projects, PECO Nuclear %ce President, Inforrnation ' The University of Pennsylvania President and Chief Executive - John Doering, Jr. (55)ie - MedKal Center and Health System Officer ce President, Peach Bottom Daniel L Cooper (63) Gersid R. Rainey (49ft Atomic Power Station John P. McElwain (48)"5) Former %ce President and General President and Chief Nuclear Officer, Gregory P. Dudkin (41/m' Manager, Nuclear Services Division PECO Nuclear

1. *N' ce President, Operations, Gilbert / Commonwealth, Inc..

' J. Barry Mitchell(51) Nancy J. Bessey (45)# PECO Energy Distribution M. Walter D'Alessio (65) President, Power Team nt, hq aM - Drew B. Fetters (47)ne Prestient and Chief Executive - G A M990) Mce President, kn e em, ar

ent, Jam A knu &

Legg Mason Real [ state Services Corporate and President, PECO Nuclear Vice President, Fossil Operations - (Commercial mortgage banking O EnsgWemurn Jean H. Gibson (42)tm James D. von Suskil(52)m and pension fund advisors) James W. Durham (61) Vice President and Controller Vice President, G. Fred DiBona, Jr. (47p> Senior %ce President 0*""# "I President and Chief Executive Joseph !. Hagan (dare '"d

Officer, Senior Vice President, independence Blue Cross Michael J. Egan (45)

Nuclear Operations, Richard G. White (40Pa N"# " # ' b"*"

- - """9 R. Keith Elliott (56)

"8"' Chairman, Chief Executive Officer, Paul E. Haviland (44ym Katherine K. Combs (48)1 Hwcules, Inc. Kenneth G. Lawrence (51Pm Vice President.. Corporate Secretary Seni r Vice President, Corporate Development Richard H. Gianton (52P) Edward J. Cullen, Jr. (51) Corporate and President' Partner of the law firm Reed Smith Thomas P. Hill, Jr. (50yn Assistant Corporate Secretary 9# Shaw and McClay Vice President, Regulatory and A ta C ate retary Rosemarle B. Greco (52Fa b Businen Services Group O t Christine A.Jacobs(46FM Private Industry Council David W. Woods (41P4 Vice President, Support Services George R. Shicora (52) Corbin A. McNeill, Jr. (59yo Suzanne L Keenan (34y, Corp rate and Public Affairs Assistant Treasurer and Chairman of the Board V ce President, Customer & 9" President and Chief Executive Marketing Services, Officer of the Company PECO Energy Distribution John M. Palms, PhD. (63) si Membs of the Executwe President, Committee of the Board of Dirators Unwersity of ",outh Carolina (a Elected February 23,1998 Joseph F. Paquette, Jr. (64y" m EffectweJanuary26,1998 Former Chairman of the Board of im Effective March 2,1998 Directors of the Company (m Effective March 4,1998 Ronald Rubin (67) tm Effective Apnl8,1998 Chief Executive Officer. rn Effectue April 9,1998 Pennsylvania Real Estate Investment e Effectwe May 31,1998 Trust m Effective June 1,1998 Robert Subin (60) om Effective June 22,1998 Former Senior Wce President, ou Effectwe Au9ust 14,1998 Campbell Soup Company om Effective September 28,1998 om Effectwe November 9,1998 pe' Effective December 1,1998 os) Effectwe January 6,1999, no longer an offger of PECO Energy om Effective January 26,1999

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o Shareholder Information Stock Exchange Listings Annual Meeting Most Company secunties are listed on the New York Stock The Annual Meeting of the Shareholders of the Company will Exchange and the Philadelphia Stock Exchange under PE. be held at the Sunnybrook Ballroom and Conference Center in Pottstown, Pennsylvania on April 27,1999, at 9-30 AM. Dividends The record date for voting at the shareholders' meeting is March 5,1999. Prompt return of proxies will be appreciated. The Company has paid dividends on its common stock con-tinually since 1902. The Board of Directors normally To vote your proxy over the intemet visit considers cornmon stock divtdends for payment in March. http://www. vote-by-net.com June, September and December. The Company expects that the $100 per share dividend paid to common shareholders in To receive future Annual Reports and proxy statements 1998 is fully taxable as dividend income for federal income electronically, sign-up at-tax ppo',es http://www. vote-by-net com/signup/peco Shareholders may use their dividends to purchase additional shares of common stock through the Company's Dividend Form 10-K Roinvestment and Stock Purchase Plan (Plan). The Company Form 10-K, the annual report filed with the Secunties and pays all brokerage and service fees for Plan purchases All Exchange Commission, is available without charge to share-shareholders have the opportunity to invest addrtional funds holders by calbng 1-888-340-7326 or by obtaining a copy from in common stock of the Company, whether or not they have our internet site http://www/peco.com/ investor. their dividends reinvested, with all purchasing fees paid by the Compny Shareholders The Company had 142,794 shareholders of record of in 1998, over 57 percent of the Company's common share-common stock as of December 31,1998. holders were participants in the Plan. Information concerning the Plan may be obtained from-EquiServe, PECO Energy Company Plan, PO. Box 2598, Jersey City, NJ 07303-2598. Transfer Agents and Reg. trars is Preferred and Common Stock Registrar and Transfer Agent: Comments Welcomed First Chicago Trust. Division of Equiserve, (1-800-626-8729) PO. Box 2500, Jersey City, NJ 07303-2500 The Company is always pleased to answer questions and provide information. Please address your comments t First and Refunding Mortgage Bond Trustee: Kathenne K Combs, Corporate Secretary, PECO Energy First Union National Bank (1-800-665-9343) Company,2301 Market Street, PO. Box 8699 Philadelphia' Corporate Trust Operations Customer Information Center OW8 Redemption Bldg 3C3 Inquines relating to shareholder accounting records, Stock transfer and change of address should be directed to: EquiServe, PO. Box 2500, Jersey City, NJ 07303-2500. Internet Site Visit our internet site at http://www peco.com Toll-Free Telephone Lines Toll-free telephone knes are available to the Cornpany's share. General Office holders for inquines concerning their stock ownership Cails 2301 Market Street should be directed to 1-800-626-8729. Philadelphia, Pennsylvania 19103 (215) 841-4000 For current Company news call 1-888-340-7326

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