-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OByiqVVX+gPT3ZU1d/AjirFrRe2ZymGsCXX9WRY5KGWJKTuPSEy7M4OoCKrxoVzg 1VbcXUFUGot0+MVE0gU2QA== 0000950116-00-001010.txt : 20000501 0000950116-00-001010.hdr.sgml : 20000501 ACCESSION NUMBER: 0000950116-00-001010 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000428 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PECO ENERGY CO CENTRAL INDEX KEY: 0000078100 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 230970240 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 001-01401 FILM NUMBER: 612336 BUSINESS ADDRESS: STREET 1: 2301 MARKET ST STREET 2: P O BOX 8699 CITY: PHILADELPHIA STATE: PA ZIP: 19101 BUSINESS PHONE: 2158414000 FORMER COMPANY: FORMER CONFORMED NAME: PHILADELPHIA ELECTRIC CO DATE OF NAME CHANGE: 19920703 10-K/A 1 10-K/A ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-K/A /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________________ to ___________________ Commission File Number 1-1401 --------------------- PECO ENERGY COMPANY (Exact name of registrant as specified in its charter)
Pennsylvania 23-0970240 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) P.O. Box 8699 2301 Market Street, Philadelphia, PA (215) 841-4000 19101 (Address of principal executive offices) (Registrant's telephone number, including area code) (Zip Code)
--------------------- Securities registered pursuant to Section 12(b) of the Act: First and Refunding Mortgage Bonds (Listed on the New York Stock Exchange): 55/8% Series due 2001 63/8% Series due 2005 73/8% Series due 2001 61/2% Series due 2003
Cumulative Preferred Stock -- without par value (Listed on the New York and Philadelphia Stock Exchanges): $4.68 Series $4.40 Series $4.30 Series $3.80 Series Common Stock -- without par value (Listed on the New York and Philadelphia Stock Exchanges) Trust Receipts of PECO Energy Capital Trust II, each representing an 8.00% Cumulative Monthly Income Pre ferred Security, Series C, $25 stated value, issued by PECO Energy Capital, L.P. and unconditionally guaranteed by the Company (Listed on the New York Stock Exchange) Trust Receipts of PECO Energy Capital Trust III, each representing an 7.38% Cumulative Preferred Security, Series D, $25 stated value, issued by PECO Energy Capital, L.P. and unconditionally guaranteed by the Com pany (Listed on the New York Stock Exchange) Securities registered pursuant to Section 12(g) of the Act: Cumulative Preferred Stock--without par value: $7.48 Series $6.12 Series --------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes X No . --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amend ment to this Form 10-K. / / The aggregate market value of the registrant's common stock (only voting stock) held by non- affiliates of the registrant was $6,895,064,888 at March 24, 2000. Indicate the number of shares outstanding of each of the registrant's classes of common stock as of the latest practicable date. Common Stock-- without par value: 181,449,076 shares outstanding at March 24, 2000. ================================================================================ TABLE OF CONTENTS
Page No. --------- PART I ITEM 1. BUSINESS .................................................................... 1 General ..................................................................... 1 Distribution Business Unit .................................................. 2 General ................................................................... 2 Retail Electric Services .................................................. 2 Transmission Services ..................................................... 6 Gas ....................................................................... 6 Generation Business Unit .................................................... 7 General ................................................................... 7 Generation Assets ......................................................... 7 Limerick Generating Station ............................................... 9 Peach Bottom Atomic Power Station ......................................... 10 Salem Generating Station .................................................. 11 Fuel ...................................................................... 11 Power Marketing Group ..................................................... 13 Unregulated Retail Energy Supplier ........................................ 14 AmerGen Energy Company, LLC ............................................... 15 Ventures Business Unit ...................................................... 15 Exelon Infrastructure Services, Inc ....................................... 15 Telecommunications Ventures ............................................... 15 PECO Energy Transition Trust, PECO Energy Capital Corp. and Related Entities 15 Segment Information ......................................................... 16 Competition ................................................................. 16 Year 2000 Readiness Disclosure .............................................. 16 Capital Requirements ........................................................ 17 Construction ................................................................ 18 Employee Matters ............................................................ 18 Environmental Regulations ................................................... 18 Water ..................................................................... 19 Air ....................................................................... 19 Solid and Hazardous Waste ................................................. 21 Costs ..................................................................... 23 ITEM 2. PROPERTIES .................................................................. 24 ITEM 3. LEGAL PROCEEDINGS ........................................................... 25 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ......................... 26 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ....................................................... 26 ITEM 6. SELECTED FINANCIAL DATA ..................................................... 27 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ................................................. 29 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK .................. 45 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ................................. 47 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE .................................................. 79 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT .......................... 79 ITEM 11. EXECUTIVE COMPENSATION ...................................................... 85 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ................................................................ 90 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS .............................. 91 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K ............................................................... 92 Financial Statements and Financial Statement Schedule ....................... 92 SCHEDULE II-- VALUATION AND QUALIFYING ACCOUNTS ............................. 93 Exhibits .................................................................... 94 Reports on Form 8-K ......................................................... 97 SIGNATURES ........................................................................... 98
i PART I ITEM 1. BUSINESS General Incorporated in Pennsylvania in 1929, PECO Energy Company (Company) is engaged principally in the production, purchase, transmission, distribution and sale of electricity to residential, commercial, industrial and wholesale customers and the distribution and sale of natural gas to residential, commercial and industrial customers. Pursuant to the Pennsylvania Electricity Generation Customer Choice and Competition Act (Competition Act), the Commonwealth of Pennsylvania has required the unbundling of retail electric services in Pennsylvania into separate generation, transmission and distribution services with open retail competition for generation services. Since the commencement of deregulation in 1999, the Company serves as the local distribution company providing electric distribution services in its franchised services territory in southeastern Pennsylvania and bundled electric service to customers who do not choose an alternate electric generation supplier. The Company engages in the wholesale marketing of electricity on a national basis. Through its Exelon Energy division, the Company is a competitive generation supplier offering competitive energy supply to customers throughout Pennsylvania. The Company's infrastructure services subsidiary, Exelon Infrastructure Services, Inc. (EIS), provides utility infrastructure services to customers in several regions of the United States. The Company owns a 50% interest in AmerGen Energy Company, LLC (AmerGen), a joint venture with British Energy, Inc., a wholly owned subsidiary of British Energy plc (British Energy), that acquires and operates nuclear generating facilities. The Company also participates in joint ventures which provide telecommunications services in the Philadelphia metropolitan region. The Company is a public utility under the Pennsylvania Public Utility Code and a transmitting utility and electric utility under the Federal Power Act. As a result, the Company is subject to regulation by the Pennsylvania Public Utility Commission (PUC) as to electric distribution, certain retail electric rates, retail gas rates, issuances of securities and certain other aspects of the Company's operations and by the Federal Energy Regulatory Commission (FERC) as to transmission rates. Specific operations of the Company are also subject to the jurisdiction of various other federal, state, regional and local agencies, including the United States Nuclear Regulatory Commission (NRC), the United States Environmental Protection Agency (EPA), the United States Department of Energy (DOE), the Delaware River Basin Commission (DRBC) and the Pennsylvania Department of Environmental Protection (PDEP). The Company's Muddy Run Pumped Storage Project and the Conowingo Hydroelectric Project are subject to the licensing jurisdiction of the FERC. Due to its ownership of subsidiary- company stock, the Company is a holding company as defined by the Public Utility Holding Company Act of 1935 (1935 Act); however, it is predominantly an operating company and, by filing an exemption statement annually, is exempt from all provisions of the 1935 Act, except Section 9(a)(2) relating to the acquisition of securities of a public utility company. On September 22, 1999, the Company and Unicom Corporation (Unicom) entered into an Agreement and Plan of Exchange and Merger providing for a merger of equals. On January 7, 2000, the Agreement and Plan of Exchange and Merger was amended and restated (Merger Agreement). The Merger Agreement has been approved by both companies' Boards of Directors. The transaction will be accounted for as a purchase with the Company as acquiror. The Merger Agreement provides for (a) the exchange of each share of outstanding common stock, no par value, of the Company for one share of common stock of the new company, Exelon Corporation (Exelon) (Share Exchange) and (b) the merger of Unicom with and into Exelon (Merger and together with the Share Exchange, Merger Transaction). In the Merger, each share of outstanding common stock, no par value, of Unicom will be converted into 0.875 shares of common stock of Exelon plus $3.00 in cash. In the Merger Agreement, the Company and Unicom agree to repurchase approximately $1.5 billion of common stock prior to the closing of the Merger, with Unicom to repurchase approximately $1.0 billion of its common stock, and the Company to repurchase approximately $500 million of its common stock. As a result of the Share Exchange, the Company will become a wholly owned subsidiary of Exelon. As a result of the Merger, Unicom will cease to exist and its subsidiaries, including Commonwealth Edison Company, an Illinois corporation (ComEd), will become subsidiaries of Exelon. Following the Merger Transaction, Exelon will be a holding company with two principal utility subsidiaries, ComEd and the Company. 1 The Merger Transaction is conditioned, among other things, upon the approvals of the common shareholders of both companies and the approval of certain regulatory agencies. See "Distribution Business Unit-Retail Electric Services." The companies have filed an application with the Securities and Exchange Commission (SEC) to register Exelon as a holding company under the 1935 Act. At December 31, 1997, the Company discontinued the use of regulatory accounting in its financial statements for its electric generation operations. In connection with the discontinuance of Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation," the Company performed a market value analysis of its generation assets and wrote-off $1.8 billion (net of income taxes) of unrecoverable electric plant costs and regulatory assets. Prior to 1999, substantially all of the Company's retail electric and gas revenues were derived pursuant to bundled rates regulated by the PUC, and prior to 1996 all of the Company's wholesale electric revenue was derived pursuant to rates regulated by the FERC. As a result of the adoption of the Competition Act and deregulation initiatives by the FERC, electric services have been unbundled into separate generation, transmission and distribution services with open competition for both retail and wholesale generation services. Certain transmission and distribution services remain subject to regulation. Annual and quarterly operating results can be significantly affected by weather. Traditionally, sales of electricity are higher in the second and third quarters due to warmer weather and sales of gas are higher in the first and fourth quarters due to colder weather. In 1999, the Company completed the redesign of its internal reporting structure to separate its distribution, generation and ventures operations into business units and provide financial and operational data on the same basis to senior management. The Company has also requested authorization from the PUC (whether or not the merger with Unicom is consummated) to create a holding company structure in which the Company would continue as the distribution company and the generation and ventures businesses would be conducted through separate unregulated subsidiaries. Distribution Business Unit General The Company's distribution business unit consists of its regulated operations including electric transmission and distribution services, regulated retail sales of generation services and retail gas sales and services. The Company's traditional retail service territory covers 2,107 square miles in southeastern Pennsylvania. The Company's distribution business unit provides electric transmission and distribution service and generation service to customers who do not purchase generation service from an electric generation supplier (EGS) in an area of 1,972 square miles, with a population of approximately 3.6 million, including 1.6 million in the City of Philadelphia. Natural gas service is supplied in a 1,475 square mile area in southeastern Pennsylvania adjacent to Philadelphia with a population of 1.9 million. Rates for retail service provided by the Company's distribution business unit are set by the PUC. Retail Electric Services The Competition Act was enacted in December 1996 and provided for the restructuring of the electric utility industry in Pennsylvania, including open retail competition for generation services Generation services may be provided by EGSs licensed by the PUC. Under the Competition Act, EGSs are subject to certain limited financial and disclosure requirements but are otherwise unregulated by the PUC. The Competition Act required utilities to submit restructuring plans, including their stranded costs resulting from retail competition for generation services. Stranded costs include regulatory assets, nuclear decommissioning costs and long-term power purchase commitments for which full recovery is allowed and other costs, including investment in generating plants, spent-fuel disposal, retirement costs and reorganization costs, for which an opportunity for recovery is allowed in an amount determined by the PUC as just and reasonable. Under the Competition Act, a utility is subject to a generation rate cap through the earlier of December 31, 2005 or until 2 the utility is no longer recovering stranded costs. The generation cap provides that total charges to customers cannot exceed rates in place at December 31, 1996, subject to certain exceptions. The Competition Act also caps transmission and distribution rates from December 31, 1996 through June 30, 2002, subject to certain exceptions. As a mechanism for utilities to recover their allowed stranded costs, the Competition Act provides for the imposition and collection of non-bypassable charges on customers' bills called competitive transition charges (CTCs). CTCs are assessed to and collected from all retail customers who have been assigned stranded cost responsibility and access the utilities' transmission and distribution systems. As the CTCs are based on access to the utility's transmission and distribution system, they will be assessed regardless of whether such customer purchases electricity from the utility or an alternate EGS. The Competition Act provides, however, that the utility's right to collect CTCs is contingent on the continued operation at reasonable availability levels of the assets for which the stranded costs were awarded, except where continued operation is no longer cost efficient because of the transition to a competitive market. The Competition Act also authorizes the PUC to issue qualified rate orders approving the issuance of transition bonds to facilitate the recovery or financing of qualified transition expenses of an electric utility or its assignee. The transition bonds are payable from intangible transition charges (ITCs) which are collected in lieu of CTCs. In accordance with the provisions of the Competition Act, in April 1997, the Company filed with the PUC a comprehensive restructuring plan detailing its proposal to implement full customer choice of EGSs. The Company's restructuring plan identified $7.5 billion of retail electric generation-related stranded costs. On April 29, 1998, the Company and all but one of the 25 parties who had challenged the Company's restructuring plan filed a joint petition and settlement (Settlement) with the PUC. In May 1998, the PUC entered an Opinion and Order (Final Restructuring Order) approving the Settlement. The Settlement authorizes the Company to recover $5.26 billion of stranded costs, together with a return of 10.75% thereon. The PUC authorized the recovery of stranded costs over a 12-year transition period beginning January 1, 1999 and ending December 31, 2010. Stranded costs and the allowed return thereon are recovered through CTCs and, at the Company's election to issue or cause the issuance of transition bonds, ITCs, designed to recover the $5.26 billion of stranded costs. Under the Settlement, the CTCs were established assuming annual growth in sales of 0.8% and are reconciled annually to actual sales. The following table shows the estimated average levels of CTCs and/or ITCs for the years 1999 through 2010, based on estimated 0.8% annual sales growth assumed in the Settlement. TABLE 1 Annual Stranded Cost Amortization And Return
Revenue Excluding Annual CTC Gross Receipts Tax Year Sales and/or ITC(2) Total Return @ 10.75% Amortization ---- ----- ------------- ----- --------------- ------------ MWh(1) $/kWh ($000) ($000) ($000) 1999 33,569,358 $0.0172 (3) $ 551,988(3) $ 566,134(3) $ (14,146) 2000 33,837,913 0.0192 621,102 564,222 56,879 2001 34,108,616 0.0233 (4) 761,097(4) 490,417(4) 270,680 2002 34,381,485 0.0251 825,004 516,869 308,135 2003 34,656,537 0.0247 818,352 482,401 335,951 2004 34,933,789 0.0243 811,540 444,798 366,742 2005 35,213,260 0.0240 807,933 403,555 404,378 2006 35,494,966 0.0266 902,623 353,070 549,553 2007 35,778,925 0.0266 909,844 290,627 619,217 2008 36,065,157 0.0266 917,123 220,312 696,811 2009 36,353,678 0.0266 924,459 141,229 783,231 2010 36,644,507 0.0266 931,855 52,381 879,474
3 - ------------ (1) Subject to reconciliation of actual sales and collections. (2) Both the CTCs and the ITCs are subject to adjustment. (3) The actual CTC/ITC rate for 1999 was $0.0171/kWh resulting in total CTC/ITC collections of $565 million. (4) Reflects reduction required by PUC Order on March 16, 2000 as described below. The Settlement required the Company to unbundle its retail electric rates on January 1, 1999 into the following components: (i) distribution and transmission charges, (ii) CTCs and, if applicable, ITCs and (iii) a capacity and energy charge for generation, which is the maximum amount the Company, as the provider of last resort (PLR), can charge customers who do not or cannot choose to purchase electricity from alternate EGS. The Settlement required the Company to reduce rates during 1999 and 2000 by 8% and 6%, respectively, from rates in existence on December 31, 1996. Further, the Settlement provided for a one-time additional discount in 2000 if there was an overcollection of ITC and CTC in 1999. Overcollections for two customer categories (residential and small commercial and industrial) occurred in 1999 resulting in reductions in these rate categories of 7% and 8.3%, respectively, in 2000. The Settlement also extended the rate caps on generation rates at higher levels than required by the Competition Act, until December 1, 2010 and extended the rate caps on transmission and distribution rates until June 30, 2005. The Company's unbundled rates, rate reductions and rate caps are reflected in the schedule of system-wide average rates included in the Settlement and shown in Table 2 below. TABLE 2 Schedule of System-Wide Average Rates (dollars per kilowatthour (kWh))(1)
T&D CTC Shopping Generation Effective Date Transmission(2) Distribution Rate Cap and/or ITC(3) Credit Rate Cap -------------- --------------- ------------ -------- ------------- ------ -------- (1) (2) (3)=(1) + (2) (4) (5) (6)=(4) + (5) January 1, 1999 $ 0.0045 $ 0.0253 $ 0.0298 $ 0.0172 $ 0.0446 $ 0.0618 January 1, 2000 0.0045 0.0253 0.0298 0.0192 0.0446 0.0638 January 1, 2001 0.0045 0.0253 0.0298 0.0233(4) 0.0447 0.0680(4) January 1, 2002 0.0045 0.0253 0.0298 0.0251 0.0447 0.0698 January 1, 2003 0.0045 0.0253 0.0298 0.0247 0.0451 0.0698 January 1, 2004 0.0045 0.0253 0.0298 0.0243 0.0455 0.0698 January 1, 2005 0.0045(5) 0.0253(5) 0.0298(5) 0.0240 0.0458 0.0698 January 1, 2006 N/A N/A N/A 0.0266 0.0485 0.0751 January 1, 2007 N/A N/A N/A 0.0266 0.0535 0.0801 January 1, 2008 N/A N/A N/A 0.0266 0.0535 0.0801 January 1, 2009 N/A N/A N/A 0.0266 0.0535 0.0801 January 1, 2010 N/A N/A N/A 0.0266 0.0535 0.0801
- ------------ (1) All charges reflect average retail billing for all rate classes (including gross receipts tax). (2) The transmission charge listed is for unbundled rates only. The PUC does not regulate the rates for transmission service. (3) Both the CTCs and the ITCs are subject to adjustment. (4) Reflects reduction required by PUC Order on March 16, 2000 as described below. (5) Effective until June 30, 2005. Under the Settlement, customer choice of EGSs was phased in between January 1, 1999 and January 1, 2000 with one-third of each rate class entitled to choose their EGS by January 1, 1999, an additional one-third by January 2, 1999 and the remaining one-third by January 1, 2000. As of December 31, 1999, approximately 17% of the Company's residential load, approximately 39% of its commercial load and approximately 59% of 4 its industrial load were purchasing generation service from an alternative EGS. If on January 1, 2001 and January 1, 2003 less than 35% and 50%, respectively, of all of the Company's residential and commercial customers by rate class are obtaining generation service from alternate EGSs, including 20% of residential customers assigned to an EGS as a PLR default supplier, non-shopping customers will be randomly assigned to EGSs, including those affiliated with the Company, to meet those thresholds. Assignment of non-shopping customers will be through a PUC-approved process. Customers assigned to a PLR, other than the Company will be counted as customers receiving service from an alternate EGS. On January 1, 1999, the Company unbundled its retail electric rates for metering, meter reading, and billing and collection services to provide credits for those customers that have elected to have alternate suppliers perform these services. Effective January 1, 1999, PUC-licensed entities, including EGSs, may act as agents to provide a single bill and provide associated billing and collection services to retail customers located in the Company's retail electric service territory. In such event, the EGS or other third party replaces the customer as the obligor with respect to the customer's bill and the Company generally has no right to collect such receivable from the customer. The PUC-licensed entities, including EGSs, may also finance, install, own, maintain, calibrate and remotely read advanced meters for service to retail customers located in the Company's retail electric service territory. Only the Company can physically disconnect or reconnect a customer's distribution service. Physical termination of the service may only be permitted for failure to pay transmission and distribution service or PLR service. Under the Settlement, the Company acts as a PLR for all retail electric customers in its retail electric service territory who do not choose or cannot choose to purchase power from an alternative EGS through December 31, 2010, subject to certain terms, conditions and qualifications. On April 30, 1999, the PUC adopted regulations providing for Competitive Default Service. Under the regulations, entities that desire to act as a Competitive Default Supplier have until April 1, 2000 to submit both their qualifications to act as a Competitive Default Supplier and their bid for providing such service. Competitive Default Service will begin on January 1, 2001 for 20% of the Company's residential customers. The Settlement also provides for flexible generation service pricing for customers served by Competitive Default Service, authorization of the Company to transfer its generation assets to a separate subsidiary, inclusion of a sustainable energy and economic development fund (funded at a rate of .01 cents per kilowatthour on all power sold, to be included in the capped transmission and distribution rates) and expansion and modification of the Company's program for low-income customers. Pursuant to authorization of the PUC granted as part of the Settlement, PECO Energy Transition Trust (PETT), a special purpose entity and wholly owned subsidiary of the Company, issued $4 billion of its Transition Bonds on March 25, 1999 to securitize a portion of the Company's stranded cost recovery. As required by the Competition Act, the proceeds from the securitization were applied to reduce stranded costs, including related capitalization. For additional information, see ITEM 7. - Management's Discussion and Analysis of Financial Condition and Results of Operations. On March 16, 2000, the PUC issued an order approving a Joint Petition for Full Settlement of PECO Energy Company's Application for a Qualified Rate Order (QRO) authorizing the Company to securitize up to an additional $1 billion of its authorized recoverable stranded costs. In accordance with the terms of the Joint Petition for Full Settlement, when the QRO becomes final and non-appealable, the Company, through its distribution business unit, will provide its retail customers with rate reductions in the total amount of $60 million beginning on January 1, 2001. The rate reduction will be effective for calendar year 2001 only and will not be contingent upon the issuance of Transition Bonds pursuant to the QRO. On March 24, 2000, the Company submitted for approval a joint petition for settlement reached with various parties to the Company's proceeding before the PUC involving the proposed merger with Unicom. The Company reached agreement with advocates for residential, small business and large industrial customers, and representatives of marketers, environmentalists, municipalities and elected officials. Under the comprehensive settlement agreement, the Company has agreed to $200 million in rate reductions for all customers over the period January 1, 2002 through 2005 and extended rate caps on the Company's retail electric distribution charges through December 31, 2006, electric reliability and customer service standards, mechanisms to enhance competition and customer choice, expanded assistance to low-income customers, extensive funding for wind and solar 5 energy and community education, nuclear safety research funds, customer protection against nuclear costs outside of Pennsylvania, and maintenance of charitable and civic contributions and employment for the Company's headquarters in Philadelphia. Transmission Services The Company's distribution business unit also provides wholesale transmission service under rates established by FERC. FERC Order No. 888 required all public utilities that own, control or operate interstate transmission facilities to file open-access transmission tariffs for wholesale transmission services in accordance with non-discriminatory terms and conditions established by FERC. In response to Order 888, the Company has filed an individual compliance tariff with FERC. The Company provides regional transmission service pursuant to a regional transmission tariff filed by the Company and the other transmission owners who are members of the PJM Interconnection LLC (PJM). PJM is a power pool that integrates, through central dispatch, the generation and transmission operations of its member companies across a 50,000 square mile territory. Under the PJM tariff, transmission service is provided on a region-wide, open-access basis using the transmission facilities of the PJM members at rates based on the costs of transmission service. PJM's Office of Interconnection is the independent system operator (ISO) for PJM and is responsible for operation of the PJM control area and administration of the PJM open-access transmission tariff. The Company and the other transmission owners in PJM have turned control of their transmission facilities to the ISO. On December 20, 1999, the FERC issued Order No. 2000, in which it stated an expectation that all jurisdictional transmission-owning public utilities participate in regional transmission organizations (RTOs) by specified deadlines. Transmission owners like the Company who are participants in existing ISO arrangements must make a compliance filing on or before January 15, 2001 to address their compliance with the RTO Rule. FERC has also set December 15, 2001 as the deadline for transferring control over transmission facilities to approved RTOs. The Company's transmission facilities are presently under the control of the PJM ISO. Gas Historically, the Company's gas sales and gas transportation revenues were derived pursuant to rates regulated by the PUC. The PUC has established through regulated proceedings the base rates that the Company may charge for gas service in Pennsylvania. The Company's gas rates are subject to a purchased gas cost (PGC) adjustment clause and a State Tax Adjustment Surcharge (STAS). The PGC is designed to recover or refund the difference between the actual cost of purchased gas and the amount included in base rates. The PGC is adjusted quarterly. The STAS is designed to recover or refund increases or decreases in certain state taxes not recovered in base rates. On June 22, 1999, Pennsylvania Governor Tom Ridge signed into law the Natural Gas Choice and Competition Act (Act) which expands choice of gas suppliers to residential and small commercial customers and eliminates the 5% gross receipts tax on gas distribution companies' sales of gas. Large commercial and industrial customers have been able to choose their suppliers since 1984. Currently, approximately one-third of the Company's total yearly throughput is supplied by third parties. The Act permits gas distribution companies to continue to make regulated sales of gas to their customers. The Act does not deregulate the transportation service provided by gas distribution companies, which remains subject to rate regulation. Gas distribution companies will continue to provide billing, metering, installation, maintenance and emergency response services. In compliance with the schedule ordered by the PUC on December 1, 1999, the Company filed with the PUC a restructuring plan for the implementation of gas deregulation and customer choice of gas service suppliers in its service territory effective July 1, 2000. The Company believes there will be no material impact on the financial condition or operations of the Company because of the PUC's existing requirement that gas distribution companies cannot collect more than the actual cost of gas from customers, and the Act's requirement that suppliers must accept assignment or release, at contract rates, the portion of the gas distribution company's firm interstate pipeline contracts required to serve the suppliers' customers. 6 The Company's natural gas supply is provided by purchases from a number of suppliers for terms of up to five years. These purchases are delivered under several long-term firm transportation contracts with Texas Eastern Transmission Corporation (Texas Eastern) and Transcontinental Gas Pipe Line Corporation (Transcontinental). The Company's aggregate annual entitlement under these firm transportation contracts is 87.5 million dekatherms. Peak gas is provided by the Company's liquefied natural gas facility and propane-air plant. For additional information, see ITEM 2. Properties. The Company has under contract 21.5 million dekatherms of underground storage through service agreements with Texas Eastern, Transcontinental, Equitrans, Inc. and CNG Transmission Corporation. Natural gas from underground storage represents approximately 40% of the Company's 1999-2000 heating season supplies. The gas industry is continuing to undergo structural changes in response to FERC policies designed to increase competition. Generation Business Unit General The Company's generation business unit consists of its generation assets, its power marketing group, its unregulated retail energy supplier and its investment in AmerGen. The generation business unit, through the power marketing group, manages the output of the Company's generation assets to serve native load in the Company's franchised service territory and markets excess generation in the wholesale market. The power marketing group maintains a net positive supply of energy and capacity, through the Company's generation assets and long, intermediate and short-term contracts to protect it from the potential operational failure of one of its owned or contracted power generating units. The unregulated retail energy supplier, Exelon Energy, offers competitive energy supply to customers throughout Pennsylvania. AmerGen is a 50% owned joint venture with British Energy formed to pursue opportunities to acquire and operate nuclear generating stations in the United States. The Company established specific goals to increase its generation capacity from 9 gigawatts to 25 gigawatts by 2003. The Company is developing a generation portfolio capable of taking advantage of periods of increased demand. In order to meet this strategic objective, the Company may require significant capital resources. The following discussion of the Company's generation assets does not include the generation assets of AmerGen. See "AmerGen Energy Company, LLC." Generation Assets The net installed electric generating capacity (summer rating) of the Company and its subsidiaries at December 31, 1999 was as follows:
Type of Capacity Megawatts(MW) % of Total ---------------- ------------- ---------- Nuclear .................................. 4,154 44.7% Mine-mouth, coal-fired ................... 709 7.6 Service-area, coal-fired ................. 725 7.8 Oil-fired ................................ 1,176 12.7 Gas-fired ................................ 261 2.8 Hydro (includes pumped storage) .......... 1,422 15.3 Internal combustion ...................... 849 9.1 ----- ----- Total .................................... 9,296(1) 100.0% ===== =====
- ------------ (1) See "Fuel" for sources of fuels used in electric generation. The all-time maximum hourly demand on the Company's system was 7,959 MW which occurred on July 6, 1999. The all-time maximum PJM demand of 51,700 MW occurred on July 6, 1999. PJM's installed capacity (summer rating) is 56,188 MW. The Company expects to be able to contract for its installed capacity to meet its obligation to supply its PJM reserve margin share during the period 1999-2002. The Company's nuclear-generated electricity is supplied by Limerick Generating Station (Limerick) Units No. 1 and No. 2, Peach Bottom Atomic Power Station (Peach Bottom) Units No. 2 and No. 3, which are operated by the Company, and Salem Generating Station (Salem) Units No. 1 and No. 2, which are operated by Public 7 Service Electric and Gas Company (PSE&G). The Company owns 100% of Limerick, 42.49% of Peach Bottom and 42.59% of Salem. Limerick Units No. 1 and No. 2 have a capacity of 1,134 MW and 1,150 MW respectively; Peach Bottom Units No. 2 and No. 3 each has a capacity of 1,093 MW, of which the Company is entitled to 464 MW of each unit; and Salem Units No. 1 and No. 2 each has a capacity of 1,106 MW, of which the Company is entitled to 471 MW of each unit. The Company's nuclear generating facilities represent 44.7% of its installed generating capacity. In 1999, approximately 41% of the Company's electric output was generated from the Company's nuclear generating facilities. Changes in regulations by the NRC that require a substantial increase in capital expenditures for nuclear generating facilities or that result in increased operating costs of nuclear generating units could adversely affect the Company. The Price-Anderson Act currently limits the liability of nuclear reactor owners to $9.5 billion for claims that could arise from a single incident. The limit is subject to change to account for the effects of inflation and changes in the number of licensed reactors. The Company carries the maximum available commercial insurance of $200 million and the remaining $9.3 billion is provided through mandatory participation in a financial protection pool. Under the Price-Anderson Act, all nuclear reactor licensees can be assessed up to $88 million per reactor per incident, payable at no more than $10 million per reactor per incident per year. This assessment is subject to inflation and state premium taxes. In addition, the U.S. Congress could impose revenue raising measures on the nuclear industry to pay claims if the damages from an incident at a licensed nuclear facility exceed $9.5 billion. The Price-Anderson Act and the extensive regulation of nuclear safety by the NRC do not preclude claims under state law for personal, property or punitive damages related to radiation hazards. Property insurance in the amount of $2.75 billion is maintained for each nuclear power plant in which the Company has an ownership interest. The Company is responsible for its proportionate share of such insurance based on its ownership interest. The Company's insurance policies provide coverage for decontamination liability expense, premature decommissioning and loss or damage to its nuclear facilities. These policies require that insurance proceeds first be applied to assure that, following an accident, the facility is in a safe and stable condition and can be maintained in such condition. Within 30 days of stabilizing the reactor, the licensee must submit a report to the NRC which provides a clean-up plan, including the identification of all clean-up operations necessary to decontaminate the reactor to permit either the resumption of operations or decommissioning of the facility. Under the Company's insurance policies, proceeds not already expended to place the reactor in a stable condition must be used to decontaminate the facility. If, as a result of an accident, the decision is made to decommission the facility, a portion of the insurance proceeds will be allocated to a fund which the Company is required by the NRC to maintain to decommission the facility. These proceeds would be paid to the fund to make up any difference between the amount of money in the fund at the time of the early decommissioning and the amount that would have been in the fund if contributions had been made over the normal life of the facility. The Company is unable to predict what effect these requirements may have on the timing of the availability of insurance proceeds to the Company for the Company's bondholders and the amount of such proceeds which would be available. Under the terms of the various insurance agreements, the Company could be assessed up to $32 million for losses incurred at any plant insured by the insurance companies. The Company is self-insured to the extent that any losses may exceed the amount of insurance maintained. Any such losses could have a material adverse effect on the Company's financial condition or results of operations. The Company is a member of an industry mutual insurance company which provides replacement power cost insurance in the event of a major accidental outage at a nuclear station. The policy contains a waiting period before recovery of costs can commence. The premium for this coverage is subject to assessment for adverse loss experience. The Company's maximum share of any assessment is $10 million per year. NRC regulations require that licensees of nuclear generating facilities demonstrate reasonable assurance that funds will be available in certain minimum amounts at the end of the life of the facility to decommission the facility. Based on estimates of decommissioning costs for each of the nuclear facilities in which the Company has an ownership interest, the PUC permits the Company to collect from its customers and deposit in segregated accounts amounts which, together with earnings thereon, will be used to decommission such nuclear facilities. At December 31, 1999, the Company's current estimate of its nuclear facilities' decommissioning cost is $1.4 billion in 1998 dollars. Decommissioning costs are recoverable through regulated rates. At December 31, 1999, the Company held $408 million in trust accounts, representing amounts recovered from customers and net realized and unrealized investment earnings thereon, to fund future decommissioning costs. 8 In 1996, the NRC requested that all nuclear plant operators inform the NRC whether their nuclear units are operated and maintained within the design bases of the facilities and confirm that any deviations have been or will be reconciled in a timely manner. The Company responded to the NRC's request on February 4, 1997 with a detailed description of ongoing activities and new initiatives to ensure that Limerick and Peach Bottom are operated and maintained within their design bases. PSE&G provided a similar response to the NRC on February 11, 1997 concerning Salem. Since the information that was submitted will be used by the NRC to determine follow-up inspection activity or potential enforcement actions, the Company cannot predict what impact the NRC's request will have. In 1998, the NRC suspended its Systematic Assessment of License Performance (SALP) program for an interim period until the NRC staff completes a review of its nuclear power plant performance assessment process. During the interim period while the SALP program is suspended, the NRC will utilize the results of its plant performance reviews to provide nuclear power plant performance information to licensees, state and local officials and the public. These reviews are intended to identify performance trends since the previous assessment and make any appropriate changes to the NRC's inspection plans. The NRC has decided to substitute an alternative program which bases the level of NRC oversight on the results of NRC inspections and evaluations of specific plant performance and any identified changes in performance levels. Limerick Generating Station Limerick Unit No. 1 achieved a capacity factor of 98% in 1999 and 77% in 1998. Limerick Unit No. 2 achieved a capacity factor of 86% in 1999 and 95% in 1998. Limerick Units No. 1 and No. 2 are each on a 24-month refueling cycle. The last refueling outages for Units No. 1 and No. 2 were in the spring of 1998 and 1999, respectively. On May 9, 1997, the NRC issued its periodic SALP report for Limerick for the period April 2, 1995 to March 29, 1997. Limerick achieved ratings of "1," the highest of three rating categories, in the areas of Operations, Maintenance and Plant Support. In the area of Engineering, Limerick achieved a rating of "2." In October 1990, General Electric Company (GE) reported that crack indications were discovered near the seam welds of the core shroud assembly in a GE Boiling Water Reactor (BWR) located outside the United States. As a result, GE issued a letter requesting that the owners of GE BWRs take interim corrective actions, including a review of fabrication records and visual examinations of accessible areas of the core shroud seam welds. Each of the reactors at Limerick and Peach Bottom is a GE BWR. Initial examination of Limerick Unit No. 1 was completed during the February 1996 refueling outage. Although crack indications were identified at one location, the Company concluded that there is a substantial margin for each core shroud weld to allow for continued operation of Unit No. 1 for a minimum of the next two operating cycles. In accordance with industry experience and guidance, initial examination of Limerick Unit No. 2 was completed during the April 1999 refueling outage. Although crack indications were identified, the results of the inspections and evaluations concluded that the condition of the Limerick Unit No. 2 core shroud, projected through at least the next operating cycle, will support the required safety margins, specified in the ASME Code and reinforced by industry recommendations. Peach Bottom Unit No. 3 was initially examined during its refueling outage in the fall of 1993. Although crack indications were identified at two locations, the Company presented its findings to the NRC and recommended continued operation of Unit No. 3 for a two-year cycle. Unit No. 3 was re-examined during its refueling outage in the fall of 1995 and the extent of cracking identified was determined to be within industry-established guidelines. The Company has concluded, and the NRC has concurred, that there is a substantial margin for each core shroud weld to allow for continued operation of Unit No. 3. Peach Bottom Unit No. 2 was initially examined during its October 1994 refueling outage and the examination revealed a minimal number of flaws. Unit No. 2 was re-examined during its refueling outage in September 1996. Although the examination revealed additional minor flaw indications, the Company concluded, and the NRC concurred, that neither repair nor modification to the core shroud was necessary. The Company is also participating in a GE BWR Owners Group to develop long-term corrective actions. As a result of several BWRs experiencing clogging of some emergency core cooling system suction strainers, which are part of the water supply system for emergency cooling of the reactor core, the NRC issued a bulletin in May 1996 to operators of BWRs requesting that measures be taken to minimize the potential for clogging. The NRC proposed three resolution options, including the installation of large capacity passive strain- 9 ers, with a request that actions be completed by the end of the unit's first refueling outage after January 1997. Strainers have been installed at Peach Bottom Units No. 2 and No. 3 and Limerick Units No. 1 and No. 2. The NRC has raised concerns that the Thermo-Lag 330 fire barrier systems used to protect cables and equipment at certain nuclear facilities, including Limerick and Peach Bottom, may not provide the necessary level of fire protection and has requested licensees to describe short-term and long-term measures being taken to address this concern. The Company informed the NRC that it had taken short-term corrective actions to address the inadequacies of the Thermo-Lag barriers installed at Limerick and Peach Bottom and was participating in an industry-coordinated program to provide long-term corrective solutions. By letter dated December 21, 1992, the NRC stated that the Company's interim actions were acceptable. In 1995, the Company completed its engineering re-analysis for both Limerick and Peach Bottom. This re-analysis identified modifications at both plants in order to implement the long-term measures addressing the concern over Thermo-Lag use. On May 19, 1998, the NRC issued a confirmatory order modifying the license for Peach Bottom Units No. 2 and No. 3 requiring that the Company complete final implementation of corrective actions on the Thermo-Lag 330 issue by completion of the October 1999 refueling outage of Peach Bottom Unit No. 3. On October 12, 1999, the Company confirmed to the NRC that the corrective actions associated with the Thermo-Lag fire barriers at Peach Bottom had been completed. In addition, the NRC issued a confirmatory order modifying the license for Limerick Units No. 1 and No. 2 requiring that the Company complete final implementation of corrective actions on the Thermo-Lag 330 issue by completion of the April 1999 refueling outage of Limerick Unit No. 2. The confirmatory order was subsequently modified by letter from the NRC dated May 3, 1999 to require completion of the Limerick Thermo-Lag upgrades by September 30, 1999. On September 17, 1999, the Company provided notification to the NRC of completion of the Thermo-Lag fire barrier corrective actions at Limerick. Water for the operation of Limerick is drawn from the Schuylkill River adjacent to Limerick and from the Perkiomen Creek, a tributary of the Schuylkill River. During certain periods of the year, generally the summer months but possibly for as much as six months or more in some years, the Company would not be able to operate Limerick without the use of supplemental cooling water due to existing regulatory water withdrawal constraints applicable to the Schuylkill River and the Perkiomen Creek. Supplemental cooling water for Limerick is provided by a supplemental cooling water system which draws water from the Delaware River at the Point Pleasant Pumping Station, transports it to the Bradshaw Reservoir, then to the east and main branches of the Perkiomen Creek and finally to Limerick. The supplemental cooling water system also provides water for public use to two Montgomery County water authorities. Certain of the permits relating to the operation of the supplemental cooling water system must be renewed periodically. The Company has entered into an agreement with a municipality to secure a backup source of water for the operation of Limerick should the amount of water from the supplemental cooling water system not be sufficient. Should the supplemental cooling water system be completely unavailable, this backup source is capable of providing cooling water to operate both Limerick units simultaneously at 70% of rated capacity for short periods of time. Peach Bottom Atomic Power Station Peach Bottom Unit No. 2 achieved a capacity factor of 99% in 1999 and 80% in 1998. Peach Bottom Unit No. 3 achieved a capacity factor of 90% in 1999 and 92% in 1998. Peach Bottom Units No. 2 and No. 3 are each on a 24-month refueling cycle. The last refueling outages for Units No. 2 and No. 3 were in the fall of 1998 and 1999, respectively. On July 17, 1997, the NRC issued its periodic SALP report for Peach Bottom for the period October 15, 1995 to June 7, 1997. Peach Bottom achieved a rating of "1," in the areas of Plant Operations, Maintenance and Plant Support. In the area of Engineering, Peach Bottom achieved a rating of "2." The Company, Delmarva Power & Light Company (Delmarva) and PSE&G have agreed to an operating performance standard through December 31, 2007 for Peach Bottom and through December 31, 2011 for Salem. Under the standard, the operator of each respective station would be required to make payments to the non-operating owners if the three-year capacity factor, determined annually, of such station falls below 40 percent, subject to a maximum of $25 million per year. The initial three-year period began on January 1, 1998 and April 17, 1998 for Peach Bottom and Salem, respectively. The parties have also agreed to forego litigation in the future, except for limited cases in which the operator would be responsible for damages of no more than $5 million per year. 10 On September 30, 1999, the Company announced it has reached an agreement to purchase an additional 7.51% ownership interest in Peach Bottom from Atlantic City Electric Company and Delmarva bringing the Company's ownership to 50%. The sale is expected to be completed by mid-2000 subject to federal and state approvals. In addition to the matters discussed above, see "Limerick Generating Station" for a discussion of certain matters which affect both Peach Bottom and Limerick. Salem Generating Station The Company has been informed by PSE&G that Salem Unit No. 1 achieved a capacity factor of 83% in 1999 and 66% in 1998. Salem Unit No. 2 achieved a capacity factor of 82% in 1999 and 80% in 1998. Salem Units No. 1 and No. 2 are each on an 18-month refeuling cycle. The last refueling outages for Units No. 1 and No. 2 were in the spring of 1999 and fall of 1999, respectively. The Company has been informed by PSE&G that on September 15, 1998, the NRC issued its latest SALP for Salem for the period March 1, 1997 to August 1, 1998. In the areas of Operations and Plant Support, Salem achieved a rating of "1". In the areas of Maintenance and Engineering, Salem achieved a rating of "2". In addition to the matters discussed above, see "Peach Bottom Atomic Power Station,""Environmental Regulations - Water," and ITEM 3. Legal Proceedings. Fuel The following table shows the Company's sources of electric output for 1999 and as estimated for 2000:
1999 2000 (Est.) ---------- ------------ Nuclear .................................................. 41.3% 42.1% Mine-mouth, coal-fired ................................... 6.8 6.8 Service-area, coal-fired ................................. 3.5 4.2 Oil-fired ................................................ 1.8 1.7 Hydro (includes pumped storage) .......................... 1.2 1.6 Internal combustion ...................................... 0.1 0.2 Purchased, interchange and nonutility generated .......... 45.3 43.4 ----- ----- 100.0% 100.0% ===== =====
Nuclear The cycle of production and utilization of nuclear fuel includes the mining and milling of uranium ore into uranium concentrates; the conversion of uranium concentrates to uranium hexafluoride; the enrichment of the uranium hexafluoride; the fabrication of fuel assemblies; and the utilization of the nuclear fuel in the generating station reactor. The Company does not anticipate difficulty in obtaining the necessary uranium concentrates or conversion, enrichment or fabrication services for Limerick or Peach Bottom. PSE&G has informed the Company that it presently has sufficient contracts for uranium and services related to the nuclear fuel cycle to fully meet its current projected requirements. The following table summarizes the years through which the Company has contracts for the segments of the nuclear fuel supply cycle:
Concentrates (1) Conversion (2) Enrichment Fabrication ------------------ ---------------- ------------ ------------ Limerick Unit No. 1 .............. 2002 2002 2004 2003 Limerick Unit No. 2 .............. 2002 2002 2004 2004 Peach Bottom Unit No. 2 .......... 2002 2002 2004 2002 Peach Bottom Unit No. 3 .......... 2002 2002 2004 2003
- ------------ (1) The Company's contracts for uranium concentrates are allocated to Limerick and Peach Bottom on an as-needed basis. The Company has commitments for at least 80% of concentrates requirements for Limerick and Peach Bottom in 2002, and about 20% of requirements in 2003 and 2004. (2) The Company has commitments for at least 90% of the conversion services requirements for Limerick and Peach Bottom in 2002 and about 20% of requirements in 2003 and 2004. 11 There are no commercial facilities for the reprocessing of spent nuclear fuel currently in operation in the United States, nor has the NRC licensed any such facilities. The Company currently stores all spent nuclear fuel from its nuclear generating facilities in on-site, spent-fuel storage pools. Limerick has on-site facilities with capacity to store spent fuel with full core discharge capability until 2006. Peach Bottom has on-site pools with capacity to store spent fuel until 2000 for Unit No. 2 and 2001 for Unit No. 3. The Company has completed construction of a dry spent-fuel storage facility at Peach Bottom to maintain full core discharge capacity in the spent-fuel pools. An NRC monitored dry run of storage operations was completed in March 2000 in anticipation of a summer 2000 spent-fuel storage campaign for Peach Bottom Unit No. 2. The cost of the facility, including the first nine storage casks, was approximately $33.5 million. The independent spent-fuel storage facility is expected to provide life of plant storage capacity. The Company expects to purchase storage casks to maintain spent-fuel storage capacity at an estimated cost of $6 million per year. The Company has been informed by PSE&G that as a result of reracking the two spent-fuel pools at Salem, spent-fuel storage capacity of Salem Units No. 1 and No. 2 is estimated to be 2012 and 2016, respectively. PSE&G is also currently assessing available options which could satisfy the potential need for additional storage capacity, including the option of constructing an on-site dry storage facility that would satisfy the spent-fuel storage needs of Salem. Under the Nuclear Waste Policy Act of 1982 (NWPA), the DOE is required to begin taking possession of all spent nuclear fuel generated by the Company's nuclear units for long-term storage by no later than 1998. Based on recent public pronouncements, it is not likely that a permanent disposal site will be available for the industry before 2015, at the earliest. In reaction to statements from the DOE that it was not legally obligated to begin to accept spent fuel in 1998, a group of utilities and state government agencies filed a lawsuit against the DOE which resulted in a decision by the U.S. Court of Appeals for the District of Columbia (D.C. Court of Appeals) in July 1996 that the DOE had an unequivocal obligation to begin to accept spent fuel in 1998. In accordance with the NWPA, the Company pays the DOE one mil ($.001) per kilowatthour of net nuclear generation for the cost of nuclear fuel disposal. This fee may be adjusted prospectively in order to ensure full cost recovery. Because of inaction by the DOE following the D.C. Court of Appeals finding of the DOE's obligation to begin receiving spent fuel in 1998, a group of forty-two utility companies, including the Company, and forty-six state agencies, filed suit against the DOE seeking authorization to suspend further payments to the U.S. government under the NWPA and to deposit such payments into an escrow account until such time as the DOE takes effective action to meet is 1998 obligations. In November 1997, the D.C. Court of Appeals issued a decision in which it held that the DOE had not abided by its prior determination that the DOE has an unconditional obligation to begin disposal of spent nuclear fuel by January 31, 1998. The D.C. Court of Appeals also precluded the DOE from asserting that it was not required to begin receiving spent nuclear fuel because it had not yet prepared a permanent repository or an interim storage facility. The DOE and one of the utility companies filed Petitions for Reconsideration of the decision which were denied, as were petitions seeking U.S. Supreme Court review of the decision. In addition, the DOE is exploring other options to address delays in the waste acceptance schedule. As a by-product of their operations, nuclear generating units, including those in which the Company owns an interest, produce low level radioactive waste (LLRW). LLRW is accumulated at each facility and permanently disposed of at a federally licensed disposal facility. The Company is currently shipping LLRW generated at Peach Bottom and Limerick to the disposal site located in Barnwell, South Carolina and Clive, Utah for disposal. On-site storage facilities have been constructed at Peach Bottom and Limerick, with twenty-five year and five-year storage capacities, respectively. The Company is also pursuing alternative disposal strategies for LLRW generated at Peach Bottom and Limerick, including a LLRW reduction program. Pennsylvania, which had agreed to be the host site for a LLRW disposal facility for generators located in Pennsylvania, Delaware, Maryland and West Virginia, has suspended the search for a permanent disposal site. The Company contributed $12 million towards the total cost of a permanent Pennsylvania disposal site prior to its suspension. Salem has on-site LLRW storage facilities with a five-year storage capacity. The Company has been informed by PSE&G that PSE&G ships LLRW generated at Salem to Barnwell, South Carolina and currently uses the Salem facility for interim storage. 12 The National Energy Policy Act of 1992 (Energy Act) requires, among other things, that utilities with nuclear reactors pay for the decommissioning and decontamination of the DOE nuclear fuel enrichment facilities. The total costs to domestic utilities are estimated to be $150 million per year for 15 years, of which the Company's share is $5 million per year. The Energy Act provides that these costs are to be recoverable in the same manner as other fuel costs. The Company is currently recovering these costs through regulated rates. The Company is currently recovering in rates the costs for nuclear decommissioning and decontamination and related spent-fuel storage. The Company believes that the ultimate costs of decommissioning and decontamination, spent-fuel disposal and any assessment under the Energy Act will continue to be recoverable through rates. Coal The Company has a 20.99% ownership interest in Keystone Station (Keystone) and a 20.72% ownership interest in Conemaugh Station (Conemaugh), coal-fired, mine-mouth generating stations in western Pennsylvania operated by Sithe Energy, Inc. A majority of Keystone's fuel requirements is supplied by one coal company under a contract which expires on December 31, 2004. The contract calls for between 3.0 and 3.5 million tons for 1999 and a total of 6.5 million tons of coal purchases for the years 2000 through 2004. Approximately 80% of Conemaugh's 2000 fuel requirements are secured by a long-term contract and the remainder by several short-term contracts or spot purchases. The Company has entered into contracts for a significant portion of its coal requirements and makes spot purchases for the balance of coal required by its Philadelphia-area, coal-fired units at Eddystone Generating Station (Eddystone) and Cromby Station (Cromby). At January 1, 2000, the Company had contracts with two suppliers for 1.5 million tons per year or approximately 80% of expected annual requirements. Both contracts expire on December 31, 2001. Purchases pursuant to these contacts represented approximately 2.8% of the Company's Fuel and Energy Interchange Expense in 1999. Oil The Company purchases fuel oil through a combination of short-term contracts and spot market purchases. The contracts are normally not longer than one year in length. Fuel oil inventories are managed such that in the winter months sufficient volumes of fuel are available in the event of extreme weather conditions and during the remaining months inventory levels are managed to take advantage of favorable market pricing. Natural Gas The Company obtains natural gas for electric generation through a combination of short-term contracts and spot purchases as well as through the Company's own gas tariff. The Company obtains the limited quantities of natural gas used by the auxiliary boilers and pollution control equipment at Eddystone through the same means. The Company has the capability to use either oil or natural gas at Cromby Unit No. 2 and Eddystone Units No. 3 and No. 4. Power Marketing Group The Company competes in the wholesale electric generation business on a national basis. The Company enters into bilateral arrangements for the purchase, sale and delivery of energy and competes in the developing wholesale spot market for electricity, including the hourly energy market in PJM known as the PJM Power Exchange (PJM PX). The FERC's stated goal in promulgating Order No. 888 and related orders is to remove impediments to competition in the wholesale bulk power marketplace and to bring more efficient and lower cost power to electricity consumers. The Company has received authorization from FERC to sell energy at market-based rates within and outside the geographical boundaries of PJM. The Company's wholesale operations include the physical delivery and marketing of power obtained through Company-owned generation capacity, and long, intermediate and short-term contracts. The Company maintains a net positive supply of energy and capacity, through Company-owned generation assets and power purchase and lease agreements, to protect it from the potential operational failure of one of its owned or contracted power generating units. The Company has also contracted for access to additional generation through 13 bilateral long-term power purchase agreements. These agreements are firm commitments related to power generation of specific generation plants and/or are dispatchable in nature - similar to asset ownership. The Company enters into power purchase agreements with the objective of obtaining low-cost energy supply sources to meet its physical delivery obligations to its customers. The Company has also purchased firm transmission rights to ensure that it has reliable transmission capacity to physically move its power supplies to meet customer delivery needs. The intent and business objective for the use of its capital assets and contracts is to provide the Company with physical power supply to enable it to deliver energy to meet customer needs. The Company does not use financial contracts in its wholesale marketing activities and as a matter of business practice does not "pair off" or net settle its contracts. All contracts result in the delivery and/or receipt of power. The Company has entered into bilateral long-term contractual obligations for sales of energy to other load-serving entities including electric utilities, municipalities, electric cooperatives, and retail loan aggregators. The Company also enters into contractual obligations to deliver energy to wholesale market participants who primarily focus on the resale of energy products for delivery. The Company provides delivery of its energy to these customers in and out of PJM through access to Company-owned transmission assets or rights for firm transmission. The Company has entered into three long-term power purchase agreements with Independent Power Producers (IPP) under which the Company makes fixed capacity payments to the IPP in return for exclusive rights to the energy and capacity of the generating units for a fixed period. The terms of the long-term power purchase agreements enable the Company to supply the fuel and dispatch energy from the plants. The plants are currently being constructed and are scheduled to begin operations in 2000, 2001 and 2002, respectively. On March 10, 1999, the FERC issued an order granting a pending application by other PJM utilities for market-based rate authority for sales of energy and certain ancillary services into the PJM PX. Although the Company was not a party to that application, the FERC expressly granted the Company market-based rate authority for sales of energy and ancillary services into the PJM PX. Previously, the FERC restricted generators located within PJM, including the Company, to cost-based bids. The FERC order expanded the Company's existing ability to engage in wholesale marketing of power and certain associated ancillary services at market-based rates to include transactions with the PJM PX. The FERC also granted anyone else with market-based rate authority the same right. On March 10, 1999, the FERC also entered an order establishing a Market Monitoring Plan (MMP) for the PJM control area. The MMP will be administered by a newly created Market Monitoring Unit (MMU) under the PJM and authorizes the MMU to monitor and report on market activity and alleged exercises of market power by market participants. The FERC order directs additional modifications to the proposed MMP that will increase the level of coordination of the MMU with various governmental authorities. It is unclear what impact either the MMP or the MMU ultimately will have on power transactions within the PJM PX in particular and on wholesale bilateral transactions generally. Unregulated Retail Energy Supplier The Company's Exelon Energy division is an unregulated supplier of generation and natural gas supply services. Exelon Energy offers competitive generation services to residential, commercial and industrial customers throughout Pennsylvania and natural gas supply services to large commercial and industrial customers in Pennsylvania and New Jersey. At December 31, 1999, Exelon Energy had 134,000 electric generation services customers and 1,300 natural gas supply services customers. Exelon Energy acquires generation services supplied to customers through the Company's power marketing group. Exelon Energy purchases its natural gas supply in the open market. Exelon Energy is licensed by the PUC, the New Jersey Board of Public Utilities, the Maryland Public Service Commission and the Massachusetts Department of Telecommunications and Energy to provide energy supply in these states. As a division of a PUC-regulated distribution company, Exelon Energy must maintain its operations separate and distinct from the Company's distribution business. Exelon Energy is subject to a Code of Conduct that prohibits the sharing of information between the distribution business and Exelon Energy that would put unrelated generation suppliers at a competitive disadvantage. Exelon Energy has established its own infrastructure, including its own call center and billing, pricing and procurement systems. 14 AmerGen Energy Company, LLC In 1997, the Company and British Energy formed AmerGen to pursue opportunities to acquire and operate nuclear generating stations in the United States. The Company and British Energy each own a 50% equity interest in AmerGen. The Company accounts for its investment in AmerGen under the equity method of accounting. In 1999, AmerGen, purchased Clinton Nuclear Power Station (Clinton) and Three Mile Island Unit No. 1 Nuclear Generating Facility (TMI). Clinton is a BWR nuclear facility with a capacity of 930 MW. TMI is a pressurized water reactor nuclear facility with a capacity of 786 MW. In 1999, AmerGen also entered into agreements to purchase Nine Mile Point Unit No. 1 Nuclear Generating Facility, a 59% undivided interest in Nine Mile Point Unit No. 2 Nuclear Generating Facility, Oyster Creek Nuclear Generating Facility and Vermont Yankee Nuclear Power Station. These purchases are expected to be completed in 2000 upon receipt of the required federal and state approvals. In conjunction with each of the completed acquisitions, AmerGen has received fully funded decommissioning trust funds which have sufficient assets to fully cover the anticipated costs to decommission each nuclear plant following its licensed life, including an annual net growth rate of 2% in accordance with NRC regulations. AmerGen believes that the amount of the trust funds and investment earnings thereon will be sufficient to meet its decommissioning obligations. Ventures Business Unit The Company's ventures business unit consists of its infrastructure services business, its telecommunications equity investments and other investments. Exelon Infrastructure Services, Inc. In the second quarter of 1999, the Company formed EIS, an unregulated subsidiary of the Company, to provide infrastructure services, including infrastructure construction, operation management and maintenance services to owners of electric, gas and telecommunications systems, including industrial and commercial customers, utilities and municipalities. In October 1999, EIS acquired the stock or assets of six utility service contracting companies for an aggregate purchase price of approximately $233 million, including $11 million of EIS stock. The purchase price also contains estimated contingent payments of $20 million based upon the achievement of targeted earnings of the acquired companies over a one-year period. The acquisitions were accounted for using the purchase method of accounting. Telecommunications Ventures In 1995, the Company and Hyperion Telecommunications, Inc., a subsidiary of Adelphia Cable Company, formed PECO Hyperion Telecommunications. The partnership is a Competitive Local Exchange Carrier (CLEC) and provides local phone service in the Philadelphia metropolitan region. PECO Hyperion utilizes a large-scale fiber optic cable-based network that currently extends over 700 miles and is connected to major long-distance carriers and local businesses. The Company and Hyperion Telecommunications, Inc. each holds a 50% interest in the partnership. In 1996, the Company and AT&T Corp. formed AT&T Wireless PCS of Philadelphia, LLC to provide a new digital wireless Personal Communications Services (PCS) network in the Philadelphia metropolitan trading area. The Company has completed the initial build-out of the new digital wireless PCS network. Commercial launch of PCS in the Philadelphia area occurred in October 1997. The Company holds a 49% equity interest in the venture. PECO Energy Transition Trust, PECO Energy Capital Corp. and Related Entities PETT, a statutory business trust established by the Company under the laws of the State of Delaware and a wholly owned subsidiary of the Company, was formed on June 23, 1998 pursuant to a trust agreement between the Company, as grantor, First Union Trust Company, N.A., as issuer trustee, and two beneficiary trustees appointed by the Company. PETT was created for the sole purpose of issuing transition bonds to securitize a 15 portion of the Company's authorized stranded cost recovery. On March 25, 1999, PETT issued $4 billion of its Transition Bonds, Series 1999-A. The Transition Bonds are solely obligations of PETT secured by intangible transition property, representing the right to collect ITC's sufficient to pay the principal and interest on the Transition Bonds, sold by the Company to PETT. PECO Energy Capital Corp., a wholly owned subsidiary, is the sole general partner of PECO Energy Capital, L.P., a Delaware limited partnership (Partnership). The Partnership was created solely for the purpose of issuing preferred securities, representing limited partnership interests and lending the proceeds thereof to the Company and entering into similar financing arrangements. The loans to the Company are evidenced by the Company's subordinated debentures (Subordinated Debentures), which are the only assets of the Partnership. The only revenues of the Partnership are interest on the Subordinated Debentures. All of the operating expenses of the Partnership are paid by PECO Energy Capital Corp. As of December 31, 1999, the Partnership held $128.1 million aggregate principal amount of the Subordinated Debentures. PECO Energy Capital Trust II (Trust II) was created in June 1997 as a statutory business trust under the laws of the State of Delaware solely for the purpose of issuing trust receipts (Trust II Receipts) each representing an 8.00% Cumulative Monthly Income Preferred Security, Series C (Series C Preferred Securities) of the Partnership. The Partnership is the sponsor of the Trust II. As of December 31, 1999, the Trust II had outstanding 2,000,000 Trust II Receipts. At December 31, 1999, the assets of the Trust II consisted solely of 2,000,000 Series C Preferred Securities with an aggregate stated liquidation preference of $50 million. Distributions were made on the Trust II Receipts during 1999 in the aggregate amount of $4 million. Expenses of the Trust II for 1999 were approximately $50,000, all of which were paid by PECO Energy Capital Corp. The Trust II Receipts are issued in book-entry only form. PECO Energy Capital Trust III (Trust III) was created in April 1998 as a statutory business trust under the laws of the State of Delaware solely for the purpose of issuing trust receipts (Trust III Receipts) each representing an 7.38% Cumulative Preferred Security, Series D (Series D Preferred Securities) of the Partnership. The Partnership is the sponsor of the Trust III. As of December 31, 1999, the Trust III had outstanding 78,105 Trust III Receipts. At December 31, 1999, the assets of the Trust III consisted solely of 78,105 Series D Preferred Securities with an aggregate stated liquidation preference of $78.1 million. Distributions were made on the Trust III Receipts during 1999 in the aggregate amount of $5.8 million. Expenses of the Trust III for 1999 were approximately $50,000, all of which were paid by PECO Energy Capital Corp. The Trust III Receipts are issued in book-entry only form. Segment Information Segment information is incorporated herein by reference to Note 3 of Notes to Consolidated Financial Statements included in ITEM 8. - Financial Statements and Supplementary Data. Competition The Company competes in deregulated retail electric generation markets and the national wholesale electric generation market. Retail competition for electric generation supply in Pennsylvania commenced in January 1999. The Company, through Exelon Energy, the Company's new competitive supplier, actively competes for a share of the generation supply market throughout Pennsylvania. The Company also participates in the generation supply market in its traditional service territory through its distribution business unit. Generation services provided by the distribution business unit are at the energy and capacity charge mandated by the Final Restructuring Order. Generation services offered by Exelon Energy are at competitive market prices. Customers who choose to take generation service from the distribution business unit may choose an alternate generation supplier at any time. For additional information, see ITEM 7. - Management's Discussion and Analysis of Financial Condition and Results of Operations. Year 2000 Readiness Disclosure During 1999 and 1998, the Company successfully addressed, through its Year 2000 Project (Y2K Project), the issue resulting from computer programs using two digits rather than four to define the applicable year and other programming techniques that constrain date calculations or assign special meanings to certain dates. 16 The Y2K Project was divided into four main sections - Information Technology Systems (IT Systems), Embedded Technology (devices to control, monitor or assist the operation of equipment, machinery or plant), Supply Chain (third-party suppliers and customers) and Contingency Planning. The IT Systems section included both the conversion of applications software that was not Y2K ready and the replacement of software when available from the supplier. The Supply Chain section included the process of identifying and prioritizing critical suppliers and communicating with them about their plans and progress in addressing the Y2K issue. The current estimated total cost of the Y2K Project is $61 million, the majority of which is attributable to testing. This represents a $9 million reduction of the previously estimated cost of the Y2K Project. This estimate includes the Company's share of Y2K costs for jointly owned facilities. The total amount expended on the Y2K Project through December 31, 1999 was $56 million. The Company is funding the Y2K Project from operating cash flows. The Company's systems experienced no Y2K difficulties on December 31, 1999 or since that date. The Company's operations have not, to date, been adversely affected by any Y2K difficulties that suppliers or customers may have experienced. The Company's Y2K Project also successfully addressed concerns with the date February 29, 2000. The Company will continue to monitor its systems for potential Y2K difficulties through the remainder of 2000. Capital Requirements The following table shows the Company's most recent estimate of capital requirements for 2000:
(Millions of $) ---------------- Construction ......................................... $ 517 New ventures (1) ..................................... 410 Long-term debt maturities and sinking funds .......... 127 ------ Total capital requirements ........................... $1,054 ======
- ------------ (1) A portion of these expenditures will be expensed. Under the Company's mortgage (Mortgage), additional mortgage bonds may not be issued on the basis of property additions or cash deposits unless earnings before income taxes and interest during 12 consecutive calendar months of the preceding 15 calendar months from the month in which the additional mortgage bonds are issued are at least two times the pro forma annual interest on all mortgage bonds outstanding and then applied for. For the purpose of this test, the Company has not included Allowance for Funds Used During Construction which is included in net income in the Company's consolidated financial statements. The coverage under the earnings test of the Mortgage for the twelve months ended December 31, 1999 was 11.60 times. The coverage under the earnings test of the Mortgage for the twelve months ended December 31, 1998 was 5.47 times. At December 31, 1999, the Company had at least $2.26 billion of available property additions against which $1.36 billion of mortgage bonds could have been issued. In addition at December 31, 1999, the Company was entitled to issue approximately $1.64 billion of mortgage bonds without regard to the earnings and property additions tests against previously retired mortgage bonds. Under the Company's Amended and Restated Articles of Incorporation (Articles), the issuance of additional preferred stock requires an affirmative vote of the holders of two-thirds of all preferred shares outstanding unless certain tests are met. Under the most restrictive of these tests, additional preferred stock may not be issued without such a vote unless earnings after income taxes but before interest on debt during 12 consecutive calendar months of the preceding 15 calendar months from the month in which the additional shares of stock are issued are at least 1.5 times the aggregate of the pro forma annual interest and preferred stock dividend requirements on all indebtedness and preferred stock. Coverage under this earnings test of the Articles for the twelve months ended December 31, 1999 was 2.45 times. Coverage under this earnings test of the Articles for the twelve months ended December 31, 1998 was 2.81 times. 17 The following table sets forth the Company's ratios of earnings to fixed charges and the ratios of earnings to combined fixed charges and preferred stock dividends for the periods indicated:
1999 1998 1997 1996 1995 --------- --------- --------- --------- --------- Ratio of Earnings to Fixed Charges .......... 3.42 3.60 2.71 3.29 3.41 Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends .............. 3.24 3.40 2.50 3.04 3.12
For purposes of these ratios, (i) earnings consist of income from continuing operations before income taxes and fixed charges and (ii) fixed charges consist of all interest deductions and the financing costs associated with capital leases. For purposes of calculating these ratios, income from continuing operations for 1999 does not include the extraordinary charge against income of $62 million ($37 million net of income taxes ), for 1998 does not include the extraordinary charge against income of $33 million ($20 million net of income taxes) and for 1997 does not include the extraordinary charge against income of $3.1 billion ($1.8 billion net of income taxes). For additional information, see ITEM 7. - Management's Discussion and Analysis of Financial Condition and Results of Operations. Construction The following table shows the Company's most recent estimate of capital expenditures for plant additions and improvements for 2000: (Millions of $) ---------------- Electric: Production ............................ $175 Nuclear fuel .......................... 95 Transmission and distribution ......... 195 ---- Total electric ...................... 465 Gas .................................... 40 Other .................................. 12 ---- Total ................................. $517 ==== The Company's current construction program does not include any new generating facilities. At December 31, 1999, construction work in progress, excluding nuclear fuel, aggregated $232 million. Employee Matters The Company and its subsidiaries had 11,737 employees, including approximately 5,000 EIS employees, at December 31, 1999. The number of employees does not include employees of joint ventures. None of the employees of the Company or its subsidiaries, other than certain EIS employees, are represented by a union. Over the past several years, a number of unions have filed petitions with the National Labor Relations Board to hold certification elections with regard to different segments of employees within the Company. In all cases, the Company employees, other than certain EIS employees, have rejected union representation. The Company expects that such petitions will continue to be filed in the future. As part of the Cost Competitiveness Review (CCR), in April 1998, the Board of Directors authorized the implementation of a retirement incentive program and an enhanced severance benefit program to achieve targeted workforce reductions. See Note 22 of Notes to Consolidated Financial Statements included in ITEM 8. - Financial Statements and Supplementary Data. Environmental Regulations Environmental controls at the federal, state, regional and local levels have a substantial impact on the Company's operations due to the cost of installation and operation of equipment required for compliance with such controls. In addition to the matters discussed below, see "Generation Business Unit -- Limerick Generating Station." 18 An environmental issue with respect to construction and operation of electric transmission and distribution lines and other facilities is whether exposure to electro-magnetic fields (EMF) causes adverse human health effects. A large number of scientific studies have examined this question and certain studies have indicated an association between exposure to EMF and adverse health effects, including certain types of cancer. However, the scientific community still has not reached a consensus on the issue. Additional research intended to provide a better understanding of EMF is continuing. The Company supports further research in this area and is funding and monitoring such studies. Public concerns about the possible health risks of exposure to EMF have adversely affected, and are expected in the future to adversely affect, the costs of, and time required to, site new distribution and transmission facilities and upgrade existing facilities. The Company cannot predict at this time what effect, if any, this issue will have on other future operations. Water The Company has been informed by PSE&G that PSE&G is implementing the 1994 New Jersey Pollutant Discharge Elimination System (NJPDES) permit issued for Salem by the New Jersey Department of Environmental Protection (NJDEP) which requires, among other things, water intake screen modifications and wetlands restoration. Under the 1994 permit, which remains in effect until such time as a renewal permit is issued, PSE&G is continuing to restore wetlands and to conduct the requisite management and monitoring associated with the implementation of the special conditions of that permit. The existing permit remains in full force and effect indefinitely upon submission of a timely renewal filing. The Company's share of costs is 42.59% and is included in the Company's capital requirements. On March 4, 1999, PSE&G filed a comprehensive application for the renewal of Salem's NJDEP permit. The Company cannot currently predict the outcome of the review of this application. An unfavorable determination could have a material adverse effect on the Company's financial condition and results of operations. The DRBC issued a revised Docket for Salem in 1995 (Revised Docket) approving a modification to the 1970 Salem Docket that approved the construction and operation of the station's cooling water system. The Revised Docket authorized, among other things, the continued operation of Salem's cooling water system for an additional five years. The Revised Docket provides that the authorization expires September 27, 2000 absent review of the Docket on or before August 31, 1999 and renewal by the DRBC. DRBC review of the matter commenced in the second quarter of 1999. The DRBC modified the Revised Docket to provide that it shall remain in effect until six months after the NJDEP acts on PSE&G's permit, or at a later date established by the DRBC. PSE&G has informed the Company that it believes that the current operations of Salem are in compliance with the Federal Water Pollution Control Act (FWPCA) and will vigorously pursue its applications to continue operations of Salem with present cooling water intake structures. The EPA, as a result of litigation by environmental groups, is conducting a rulemaking under the FWPCA that may result in the establishment of regulatory guidance on material issues with respect to the FWPCA permitting decisions, such as guidance on determinations of adverse environmental impacts and best technology available. The rulemaking may impact NJDEP determinations with respect to PSE&G's permit renewal applications. Air Air quality regulations promulgated by the EPA, the PDEP and the City of Philadelphia in accordance with the Federal Clean Air Act and the Clean Air Act Amendments of 1990 (Amendments) impose restrictions on emission of particulates, sulfur dioxide (SO(2)), nitrogen oxides (NO(x)) and other pollutants and require permits for operation of emission sources. Such permits have been obtained by the Company and must be renewed periodically. The Amendments establish a comprehensive and complex national program to substantially reduce air pollution. The Amendments include a two-phase program to reduce acid rain effects by significantly reducing emissions of SO(2) and NO(x) from electric power plants. Flue-gas desulfurization systems (scrubbers) have been installed at Conemaugh Units No. 1 and No. 2 to reduce SO(2) emissions to meet the Phase I requirements of 19 the Amendments. Keystone Units No. 1 and No. 2 are subject to the Phase II SO(2) and NO(x) limits of the Amendments which must be met by January 1, 2000. The Company and the other Keystone co-owners have several Phase II compliance options for Keystone, including the purchase of SO(2) emission allowances. The Company's service-area, coal-fired generating units at Eddystone and Cromby are equipped with scrubbers and their SO(2) emissions meet the SO(2) emission rate limits of both Phase I and Phase II of the Amendments. The Company has completed the implementation of measures, including the installation of NO(x) emissions controls and the imposition of certain operational constraints, to comply with the Reasonably Available Control Technology limitations of the Amendments. The Company expects that the cost of compliance with anticipated air-quality regulations may be substantial due to further limitations on permitted NO(x) emissions. On September 24, 1998, the EPA announced the issuance of a final regulation which will require 22 states and the District of Columbia to reduce emissions of NO(x) by more than 1 million tons annually beginning in 2003. The main goal of the regulation is to limit the transport of ozone pollution into the northeastern states, including Pennsylvania, by reducing NO(x) emissions in southern and midwestern states. Pennsylvania utilities, including the Company, are already subject to strict NO(x) emission limits. A group of southern and midwestern states and utilities appealed the issuance of the EPA regulation to the Federal Court of Appeals. On March 3, 2000, the District of Columbia Circuit Court of Appeals substantively upheld an October 1998 EPA final regulation to reduce summertime regional NO(x) emissions in 19 eastern states beginning May 1, 2003. The Court's ruling on the regulation (which is aimed at reducing the interstate transport of ozone pollution) is expected to be appealed by at least some of the involved litigants. This appeal may involve a request for rehearing and/or review by the U.S. Supreme Court. On January 18, 2000, in response to petitions filed by four northeastern states under Section 126 of the Clean Air Act (CAA), EPA issued an additional regulation which will require NO(x) reductions from electric generation and large industrial sources in twelve states beginning May 1, 2003. In addition to affecting Pennsylvania emission sources, the Section 126 regulation also covers sources in Delaware, Indiana, Kentucky, Maryland, Michigan, North Carolina, New Jersey, New York, Ohio, Virginia and West Virginia. It is expected that EPA's Section 126 regulation will also be litigated in the federal court. As a result of time lost due to past and current litigation, there is a possibility that the federal program implementation date may be delayed for some, or all, affected states. PDEP is in the process of finalizing state regulations to implement the federal 2003 emission reduction requirements. Pennsylvania is currently operating under a more restrictive NO(x) program than states located to the south and west of the Commonwealth. To calculate state NO(x) emission budgets for the 2003 program, the new federal regulations applied a uniform reduction requirement to the covered electric generation units in each state. Current PDEP NO(x) regulations, as well as those to be adopted to implement the federal requirements, could restrict the operation of the Company's fossil-fired units, require the purchase of NO(x) emission allowances from others, or require the installation of additional control equipment. Many other provisions of the Amendments affect the Company's business. The Amendments establish stringent control measures for geographical regions which have been determined by the EPA to not meet National Ambient Air Quality Standards; establish limits on the purchase and operation of motor vehicles and require increased use of alternative fuels; establish stringent controls on emissions of toxic air pollutants and provide for possible future designation of some utility emissions as toxic; establish new permit and monitoring requirements for sources of air emissions; and provide for significantly increased enforcement power, and civil and criminal penalties. The EPA has filed complaints in several federal district courts against 11 utility companies claiming that modifications to their coal-fired electric generating stations were implemented without pre-construction permits required by New Source Regulations (NSR) and without conducting Prevention of Significant Deterioration (PSD) reviews, all in violation of the CAA. The EPA complaints were part of a new initiative targeting coal-fired electric generating stations with emission limits higher than stations coming on line after the effective date of CAA regulations imposing very low emission rates. The Company's Eddystone Generating Station meets the initial age and output screening criteria for EPA scrutiny and enforcement. To date, none of the Company's generation stations have been targeted by EPA with information requests or site visits. However, indications are that 20 the EPA's initiative will extend well beyond the 11 utilities targeted to date. Findings of NSR or PSD violations of the CAA pose risks of significant penalties. The Company believes that its activities over the last 20 years in maintaining the equipment at its coal-fired units was lawful and not in violation of the CAA. The Company will vigorously defend its actions if challenged by the EPA. Solid and Hazardous Waste The Comprehensive Environmental Response, Compensation, and Liability Act of 1980 and the Superfund Amendments and Reauthorization Act of 1986 (collectively CERCLA) authorize the EPA to cause potentially responsible parties (PRPs) to conduct (or for the EPA to conduct at the PRPs' expense) remedial action at waste disposal sites that pose a hazard to human health or the environment. Parties contributing hazardous substances to a site or owning or operating a site typically are viewed as jointly and severally liable for conducting or paying for remediation and for reimbursing the government for related costs incurred. PRPs may agree to allocate liability among themselves, or a court may perform that allocation according to equitable factors deemed appropriate. In addition, the Company is subject to the Resource Conservation and Recovery Act (RCRA) which governs treatment, storage and disposal of solid and hazardous wastes. By notice issued in November 1986, the EPA notified over 800 entities, including the Company, that they may be PRPs under CERCLA with respect to releases of radioactive and/or toxic substances from the Maxey Flats disposal site, a low-level radioactive waste disposal site near Moorehead, Kentucky, where Company wastes were deposited. Approximately 90 PRPs, including the Company, formed a steering committee and entered into an administrative consent order with the EPA to conduct a remedial investigation and feasibility study (RI/FS), which was substantially revised based on the EPA comments. In September 1991, following public review and comment, the EPA issued a Record of Decision (ROD) in which it selected a natural stabilization remedy for the Maxey Flats disposal site. The steering committee has preliminarily estimated that implementing the EPA proposed remedy at the Maxey Flats site would cost $60-$70 million in 1993 dollars. A settlement has been reached among the federal and private PRPs, the Commonwealth of Kentucky and the EPA concerning their respective roles and responsibilities in conducting remedial activities at the site. Under the settlement, the private PRPs will perform the initial remedial work at the site and the Commonwealth of Kentucky will assume responsibility for long-range maintenance and final remediation of the site. The Company estimates that it will be responsible for $800,000 of the remediation costs to be incurred by the private PRPs. On April 18, 1996, a consent decree, which included the terms of the settlement, was entered by the United States District Court for the Eastern District of Kentucky. The PRPs have entered into a contract for the design and implementation of the remedial plan and work has commenced. By notice issued in December 1987, the EPA notified several entities, including the Company, that they may be PRPs under CERCLA with respect to wastes resulting from the treatment and disposal of transformers and miscellaneous electrical equipment at a site located in Philadelphia, Pennsylvania (the Metal Bank of America site). Several of the PRPs, including the Company, formed a steering committee to investigate the nature and extent of possible involvement in this matter. On May 29, 1991, a Consent Order was issued by the EPA pursuant to which the members of the steering committee agreed to perform the RI/FS as described in the work plan issued with the Consent Order. The Company's share of the cost of the RI/FS was approximately 30%. On October 14, 1994, the PRPs submitted to the EPA the RI/FS which identified a range of possible remedial alternatives for the site from taking no action to removal of essentially all contaminated material with an estimated cost range of $2 million to $90 million. On July 19, 1995, the EPA issued a proposed plan for remediation of the site which involves removal of contaminated soil, sediment and groundwater and which the EPA estimates would cost approximately $17 million to implement. On October 18, 1995, the PRPs submitted comments to the EPA on the proposed plan which identified several inadequacies with the plan, including substantial underestimates of the costs associated with remediation. In December 1997, the EPA finalized its ROD for the site. In January 1998, the EPA sent letters to approximately 20 PRPs, including the Company, giving them 60 days to negotiate with the EPA to perform the proposed remedy. The Company, along with the nine other PRPs in the utility PRP group, responded to the EPA's letter by offering to conduct the Remedial Design (RD) but not the Remedial Action (RA) outlined in the ROD. The EPA rejected the PRP group's offer and, on June 26, 1998, issued an Order to the non-de minimis PRP Group members, and others, including the owner, to implement the RD and RA. The PRP Group is proceeding as required by the Order. It has selected a contractor which has been 21 approved by the EPA, and, on November 5, 1998, submitted the draft RD work plan. The EPA has approved the PRP Group's RD work plan and based upon the RD investigation, EPA has indicated that it is considering reducing the scope of the required remediation. EPA and the PRPs are also involved in litigation with the site owner, concerning remediation liability. The Company is unable to estimate its share of the costs of the remedial activities. By notice issued in September 1985, the EPA notified the Company that it has been identified as a PRP for the costs associated with the cleanup of a site (Berks Associates/Douglassville site) where waste oils generated from Company operations were transported, treated, stored and disposed. In August 1991, the EPA filed suit in the Eastern District Court against 36 named PRPs, not including the Company, seeking a declaration that these PRPs are jointly and severally liable for cleanup of the Berks Associates/Douglassville site and for costs already expended by the EPA on the site. Simultaneously, the EPA issued an Administrative Order against the same named defendants, not including the Company, which requires the PRPs named in the Administrative Order to commence cleanup of a portion of the site. On September 29, 1992, the Company and 169 other parties were served with a third-party complaint joining these parties as additional defendants. Subsequently, an additional 150 parties were joined as defendants. A group of approximately 100 PRPs with allocated shares of less than 1%, including the Company, have formed a negotiating committee to negotiate a settlement offer with the EPA. In December 1994, the EPA proposed a de minimis PRP settlement which would have required the Company to pay approximately $992,000 in exchange for the EPA agreeing not to sue. Subsequently, the non-de minimis parties successfully challenged the ROD remedy. A ROD amendment was finalized and, on October 27, 1998, the EPA settled with the de minimis parties. Under the provisions of the settlement, the Company would be required to pay approximately $520,000 for liabilities resulting from the government's past and potential future costs. The Department of Justice approved the settlement in the May of 1999. With the expiration of the public comment period in August 1999, the settlement with the Company was effective. In October 1995, the Company, along with over 500 other companies, received a General Notice from the EPA advising that the Company had been identified as having sent hazardous substances to the Spectron/Galaxy Superfund Site and requesting the companies to conduct an RI/FS at the site. The Company had previously been identified as a de minimis PRP and paid $2,100 to settle an earlier phase. Additionally, the Company had participated in a PRP agreement and consent order related to further work at the Spectron site. In conjunction with the EPA's General Notice, the existing PRP group has proposed a preliminary settlement which, based on the volume of hazardous substances sent to the Spectron site by the Company, would allow the Company to settle the matter as a de minimis party for less than $10,000. To date, no formal settlement has been proposed. On October 16, 1989, the EPA and the NJDEP commenced a civil action in the United States District Court for the District of New Jersey (New Jersey District Court) against 26 defendants, not including the Company, alleging the right to collect past and future response costs for cleanup of the Helen Kramer landfill located in New Jersey. In October 1991, the direct defendants joined the Company and over 100 other parties as third-party defendants. The third-party complaint alleges that the Company generated materials containing hazardous substances that were transported to and disposed at the landfill by a third party. The Company, together with a number of other direct and third-party defendants, has agreed to participate in a proposed de minimis settlement which would allow the Company to settle its potential liability at the site for approximately $40,000. The Company had been named as a defendant in a Superfund matter involving the Greer Landfill in South Carolina. The plaintiff's motion to dismiss the complaint against the Company was granted. The Company was not required to contribute to the cleanup of this site. No other defendant has pursued any cross-claims against the Company. On November 18, 1996, the Company received a notice from the EPA that the Company is a PRP at the Malvern TCE Superfund Site, located in Malvern, Pennsylvania. In April 1998, the Company was notified of a de minimus settlement under which the Company was allocated a total cost of $16,000 for EPA past and future costs. The settlement was reached in September 1999. On February 3, 1997, the Company was served with a third-party complaint involving the Pennsauken Sanitary Landfill. The Company is currently unable to estimate the amount of liability it may have with respect to this site. 22 In June 1989, a group of PRPs (Metro PRP Group) entered into an Administrative Order of Consent with the EPA pursuant to which they agreed to perform certain removal activities at the Metro Container Superfund Site located in Trainer, Pennsylvania. In January 1990, the Metro PRP Group notified the Company that the group considered the Company to be a PRP at the site. Since that time, the Company has reviewed, and continues to review its files and records and has been unable to locate any information which would indicate any connection to the site. The Company does not believe that it has any liability with respect to this site. In November 1987, the Company received correspondence from the EPA which indicated that the EPA was investigating the release of hazardous substances from the Blosenski Landfill located in West Caln Township, Chester County, Pennsylvania. The Company has been unable to locate any information which would indicate any connection to this site. The Company does not believe it has any liability with respect to this site. The Company has identified 28 sites where former manufactured gas plant (MGP) activities may have resulted in site contamination. Past activities at several sites have resulted in actual site contamination. The Company is presently engaged in performing various levels of activities at these sites, including initial evaluation to determine the existence and nature of the contamination, detailed evaluation to determine the extent of the contamination and the necessity and possible methods of remediation, and implementation of remediation. The PDEP has approved the Company's clean-up of three sites. Ten other sites are currently under some degree of active study and/or remediation. At December 31, 1999, the Company had accrued $32 million for investigation and remediation of these MGP sites that currently can be reasonably estimated. The Company believes that it could incur additional liabilities with respect to MGP sites, which cannot be reasonably estimated at this time. The Company has sued a number of insurance carriers seeking indemnity/coverage for remediation costs associated with these former MGP sites. The Company has also responded to various governmental requests, principally those of the EPA pursuant to CERCLA, for information with respect to the possible deposit of Company waste materials at various disposal, processing and other sites. On June 4, 1993, the Company entered into a Corrective Action Consent Order (CACO) from the EPA under the RCRA. The CACO order requires the Company to investigate the extent of alleged releases of hazardous wastes and to evaluate corrective measures, if necessary, for a site located along the Delaware River in Chester, Pennsylvania, which had previously been leased to Chem Clear, Inc. Chem Clear operated an industrial waste water pretreatment facility on the site. In October 1994, the Company entered into an agreement with Clean Harbors, the successor to Chem Clear, pursuant to which the Company will be responsible for approximately 25% of the costs incurred under the CACO and Clean Harbors will be responsible for 75% of the costs. The required investigation was completed in the summer of 1998 and a comprehensive RCRA Facility Investigation Report (RFI) is being prepared for submission to the EPA. The Company performed interim measures at the site. In January 1998, the Chester Waterfront Redevelopment Project was developed as an alternative to an expanded RCRA Corrective Action Project. The Company together with the EPA and the PDEP have agreed that potential remediation of the Chem Clear property and the investigation and potential remediation of all contiguous properties be moved from the EPA's RCRA Program to the PDEP Act 2 program. The PDEP Act 2 program is a land recycling program allowing remediation of properties more efficiently through redevelopment. At December 31, 1999, the Company had spent approximately $3.6 million to comply with the CACO and $700,000 on the Chester Waterfront Project. At the completion of the required RCRA investigation, the Company will combine the projects and will be able to predict the nature and cost of any potential corrective action. Costs At December 31, 1999, the Company had accrued $57 million for various investigation and remediation costs that can be reasonably estimated, including approximately $32 million for investigation and remediation of former MGP sites as described above. The Company cannot currently predict whether it will incur other significant liabilities for additional investigation and remediation costs at sites presently identified or additional sites which may be identified by the Company, environmental agencies or others or whether all such costs will be recoverable through rates or from third parties. The Company's budget for capital requirements for 2000 for compliance with environmental requirements total approximately $7 million. In addition, the Company may be required to make significant additional expenditures not presently determinable. 23 ITEM 2. PROPERTIES The principal plants and properties of the Company are subject to the lien of the Mortgage under which the Company's First and Refunding Mortgage Bonds are issued. The following table sets forth the Company's net electric generating capacity by station at December 31, 1999:
Net Generating Estimated Capacity (1) Retirement Station Location (Kilowatts) Year ------- -------- ----------- ---- Nuclear Limerick .................. Limerick Twp., PA ................... 2,284,000 2024, 2029 Peach Bottom .............. Peach Bottom Twp., PA ............... 928,000(2) 2013, 2014 Salem ..................... Hancock's Bridge, NJ ................ 942,000(2) 2016, 2020 Hydro Conowingo ................. Harford Co., MD ..................... 512,000 2014 Pumped Storage Muddy Run ................. Lancaster Co., PA ................... 910,000 2014 Fossil (Steam Turbines) Cromby .................... Phoenixville, PA .................... 345,000 (3) Delaware .................. Philadelphia, PA .................... 250,000 (3) Eddystone ................. Eddystone, PA ....................... 1,341,000 2009, 2010, 2011 Schuylkill ................ Philadelphia, PA .................... 166,000 (3) Conemaugh ................. New Florence, PA .................... 352,000(2) 2005, 2006 Keystone .................. Shelocta, PA ........................ 357,000(2) 2002, 2003 Fossil (Gas Turbines) Chester ................... Chester, PA ......................... 39,000 (3) Croydon ................... Bristol Twp., PA .................... 380,000 (3) Delaware .................. Philadelphia, PA .................... 56,000 (3) Eddystone ................. Eddystone, PA ....................... 60,000 (3) Fairless Hills ............ Falls Twp., PA ...................... 60,000 (3) Falls ..................... Falls Twp., PA ...................... 51,000 (3) Moser ..................... Lower Pottsgrove Twp., PA. .......... 51,000 (3) Pennsbury ................. Falls Twp., PA ...................... 6,000 (3) Richmond .................. Philadelphia, PA .................... 96,000 (3) Schuylkill ................ Philadelphia, PA .................... 30,000 (3) Southwark ................. Philadelphia, PA .................... 52,000 (3) Salem ..................... Hancock's Bridge, NJ. ............... 16,000(2) (3) Fossil (Internal Combustion) Cromby. ................... Phoenixville, PA .................... 2,700 (3) Delaware .................. Philadelphia, PA .................... 2,700 (3) Schuylkill ................ Philadelphia, PA .................... 2,800 (3) Conemaugh ................. New Florence, PA .................... 2,300(2) 2006 Keystone .................. Shelocta, PA ........................ 2,300(2) 2003 ----------- Total ................... 9,296,800
- ------------ (1) Summer rating. (2) Company portion. (3) Retirement dates are under on-going review by the Company. Current plans call for the continued operation of these units beyond 2000. The following table sets forth the Company's major transmission and distribution lines in service at December 31, 1999: 24 Voltage in Kilovolts (Kv) Conductor Miles - ------------------------- --------------- Transmission: 500 Kv ............................ 891 220 Kv ............................ 1,634 132 Kv ............................ 15 66 Kv ............................. 570 33 Kv and below ................... 29 Distribution: 33 Kv and below ................... 48,222 At December 31, 1999, the Company's principal electric distribution system included 21,009 pole-line miles of overhead lines and 21,002 cable miles of underground cables. The following table sets forth the Company's gas pipeline miles at December 31, 1999: Pipeline Miles --------------- Transmission .................... 28 Distribution .................... 5,884 Service piping .................. 4,726 ----- Total ........................... 10,638 ====== The Company has a liquefied natural gas facility located in West Conshohocken, Pennsylvania which has a storage capacity of 1,200,000 mcf and a sendout capacity of 157,000 mcf/day and a propane-air plant located in Chester, Pennsylvania, with a tank storage capacity of 1,980,000 gallons and a peaking capability of 28,800 mcf/day. In addition, the Company owns 25 natural gas city gate stations at various locations throughout its gas service territory. At December 31, 1999, the Company had 644 miles of fiber optic cable. Also, an additional 211 miles of fiber cable network is owned jointly by the Company and Adelphia Business Solutions. The Company owns an office building in downtown Philadelphia, in which it maintains its headquarters, and also owns or leases elsewhere in its service area a number of properties which are used for office, service and other purposes. Information regarding rental and lease commitments is incorporated herein by reference to Note 6 of Notes to Consolidated Financial Statements included in ITEM 8. -- Financial Statements and Supplementary Data. The Company maintains property insurance against loss or damage to its principal plants and properties by fire or other perils, subject to certain exceptions. Although it is impossible to determine the total amount of the loss that may result from an occurrence at a nuclear generating station, the Company maintains its $2.75 billion proportionate share for each station. Under the terms of the various insurance agreements, the Company could be assessed up to $30 million for property losses incurred at any plant insured by the insurance companies. For additional information, see ITEM 1. Business -- Generation Business Unit-Nuclear. The Company is self-insured to the extent that any losses may exceed the amount of insurance maintained. Any such losses could have a material adverse effect on the Company's financial condition and results of operations. ITEM 3. LEGAL PROCEEDINGS On May 27, 1998, the United States Department of Justice, on behalf of the Rural Utilities Service (RUS) and the Chapter 11 Trustee for the Cajun Electric Power Cooperative Inc. (Cajun), filed an action claiming breach of contract against the Company in the United States District Court for the Middle District of Louisiana (Louisiana District Court) arising out of the Company's termination of the contract to purchase Cajun's interest in the River Bend nuclear power plant. In the complaint, RUS seeks the full purchase price of the 30% interest in the River Bend nuclear power plant, that is, $50 million, plus interest and the Trustee seeks alleged consequential damages to Cajun's Chapter 11 estate as a result of the termination. On August 16, 1998, the Company 25 moved to dismiss the complaint filed by the United States and the Trustee. On July 13, 1999, the Louisiana District Court denied the Company's Motion to Dismiss the Complaint. The court expressly reserved to the parties the right to file a motion for summary judgment. The parties to the litigation are presently engaged in pre-trial discovery. While the Company cannot predict the outcome of this matter, the Company believes that it validly exercised its right of termination and did not breach the agreement. During the shutdown of Salem, examinations of the steam generator tubes at Salem Unit No. 1 revealed significant cracking. On February 27, 1996, the Company, PSE&G, Atlantic Electric Company and Delmarva, the co-owners of Salem, filed an action in the New Jersey District Court against Westinghouse Electric Corporation, the designer and manufacturer of the Salem steam generators. The suit alleged that the significant cracking of the steam generator tubes was the result of defects in the design and fabrication of the steam generators and that Westinghouse knew that the steam generators supplied to Salem were defective and that Westinghouse deliberately concealed this from PSE&G. The suit alleged violations of both the federal and New Jersey Racketeer Influenced and Corrupt Organizations Acts (RICO), fraud, negligent misrepresentation and breach of contract. Westinghouse filed a motion for summary judgment on the grounds that the claim of the plaintiffs is barred by the statute of limitations. On January 27, 2000, the Company, PSE&G, Atlantic Electric Company, Delmarva and Westinghouse Electric Corporation entered into an agreement resolving all litigation concerning this matter. The Company is involved in tax appeals regarding two of its nuclear facilities, Limerick (Montgomery County) and Peach Bottom (York County). The Company is also involved in the tax appeal for Three Mile Island Unit No. 1 Nuclear Generating Facility (Dauphin County) through AmerGen. The Company does not believe the outcome of these matters will have a material adverse effect on the Company's results of operations or financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is listed on the New York and Philadelphia Stock Exchanges. At February 25, 2000, there were 129,573 owners of record of the Company's common stock. The following table sets forth the quarterly high, low and closing prices and dividends for the Company's common stock on the New York Stock Exchange for the past two years.
1999 1998 ------------------------------------------------------ ----------------------------------------------------- Fourth Third Second First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter ------- ------- ------- ------- ------- ------- ------- ------- High price ......... $38 13/16 $44 3/16 $50 1/2 $46 7/16 $42 $36 3/4 $30 5/8 $24 11/16 Low price .......... $31 1/2 $35 7/8 $41 7/8 $35 1/4 $36 1/2 $28 1/2 $21 3/16 $18 7/8 Close .............. $34 3/4 $37 1/2 $41 7/8 $46 1/4 $41 3/4 $36 3/4 $29 3/16 $22 1/8 Dividends .......... $ 0.25 $ 0.25 $ 0.25 $ 0.25 $ 0.25 $ 0.25 $ 0.25 $ 0.25
The book value of the Company's common stock at December 31, 1999 was $9.78 per share. Dividends may be declared on common stock out of funds legally available for dividends whenever full dividends on all series of preferred stock outstanding at the time have been paid or declared and set apart for payment for all past quarter-yearly dividend periods. No dividends may be declared on common stock, however, at any time when the Company has failed to satisfy the sinking fund obligations with respect to certain series of the Company's preferred stock. Future dividends on common stock will depend upon earnings, the Company's financial condition and other factors, including the availability of cash. 26 The Company's Articles prohibit payment of any dividend on, or other distribution to the holders of, common stock if, after giving effect thereto, the capital of the Company represented by its common stock together with its Other Paid-In Capital and Retained Earnings is, in the aggregate, less than the involuntary liquidating value of its then outstanding preferred stock. At December 31, 1999, such capital ($1.8 billion) amounted to about 9 times the liquidating value of the outstanding preferred stock ($193.1 million). The Company may not declare dividends on any shares of its capital stock in the event that: (1) the Company exercises its right to extend the interest payment periods on the Subordinated Debentures which were issued to the Partnership; (2) the Company defaults on its guarantee of the payment of distributions on the Series C or Series D Preferred Securities of the Partnership; or (3) an event of default occurs under the Indenture under which the Subordinated Debentures are issued. ITEM 6. SELECTED FINANCIAL DATA The selected consolidated financial data presented below has been derived from the audited financial statements of the Company. This data is qualified in its entirety by reference to, and should be read in conjunction with the Company's Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations included elsewhere herein.
For the Years Ended December 31, -------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- ---- (In Millions, except per share data) Statement of Income Data: Operating Revenues ....................... $ 5,437 $ 5,263 $ 4,601 $ 4,284 $ 4,186 $ 4,041 Operating Income ......................... 1,409 1,286 1,006 1,249 1,401 1,064 Income before Extraordinary Item ......... 619 532 337 517 610 427 Extraordinary Item (net of income taxes) .................................. (37) (20) (1,834) -- -- -- Net Income (Loss) ........................ 582 513 (1,497) 517 610 427 Earnings (Loss) Applicable to Com- mon Stock ............................... 570 500 (1,514) 499 587 389 Earnings per Average Common Share: Income Before Extraordinary Item ......... $ 3.10 $ 2.33 $ 1.44 $ 2.24 $ 2.64 $ 1.76 Extraordinary Item ....................... ( 0.19) ( 0.09) ( 8.24) -- -- -- ------- ------- -------- -------- -------- -------- Net Income (Loss) ........................ $ 2.91 $ 2.24 $ (6.80) $ 2.24 $ 2.64 $ 1.76 ======= ======= ========= ======== ======== ======== Dividends per Common Share ............... $ 1.00 $ 1.00 $ 1.80 $ 1.755 $ 1.65 $ 1.545 ======= ======= ========= ======== ======== ======== Common Stock Equity ...................... $ 9.78 $ 13.61 $ 12.25 $ 20.88 $ 20.40 $ 19.41 ======= ======= ========= ======== ======== ======== Average Shares of Common Stock Outstanding ............................. 196.3 223.2 222.5 222.5 221.9 221.6 ======= ======= ========= ======== ======== ========
27
At December 31, --------------------------------------------------------------------------- 1999 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- ---- (In Millions) Balance Sheet Data: Current Assets ....................... $ 1,213 $ 582 $ 1,003 $ 420 $ 426 $ 427 Property, Plant and Equipment, net 5,045 4,804 4,671 10,942 10,939 11,003 Deferred Debits and Other Assets ..... 6,862 6,662 6,683 3,899 3,944 3,992 ------- ------- ------- ------- ------- ------- Total Assets ......................... $13,120 $12,048 $12,357 $15,261 $15,309 $15,422 ======= ======= ======= ======= ======= ======= Current Liabilities .................. $ 1,304 $ 1,735 $ 1,619 $ 1,103 $ 1,052 $ 850 Long-Term Debt ....................... 5,969 2,920 3,853 3,936 4,199 4,786 Deferred Credits and Other Liabilities ......................... 3,753 3,756 3,576 4,982 4,933 4,892 COMRPS ............................... 128 349 352 302 302 221 Mandatorily Redeemable Preferred Stock ............................... 56 93 93 93 93 93 Shareholders' Equity ................. 1,910 3,195 2,864 4,845 4,730 4,580 ------- ------- ------- ------- ------- ------- Total Liabilities and Shareholders' Equity .............................. $13,120 $12,048 $12,357 $15,261 $15,309 $15,422 ======= ======= ======= ======= ======= =======
28 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General On September 22, 1999, the Company and Unicom Corporation (Unicom) entered into an Agreement and Plan of Exchange and Merger providing for a merger of equals. On January 7, 2000, the Agreement and Plan of Exchange and Merger was amended and restated (Merger Agreement). The Merger Agreement has been approved by both companies' Boards of Directors. The transaction will be accounted for as a purchase with the Company as acquiror. The Merger Agreement provides for (a) the exchange of each share of outstanding common stock, no par value, of the Company for one share of common stock of the new company, Exelon Corporation (Exelon) (Share Exchange) and (b) the merger of Unicom with and into Exelon (Merger and together with the Share Exchange, Merger Transaction). In the Merger, each share of the outstanding common stock, no par value, of Unicom will be converted into 0.875 shares of common stock of Exelon plus $3.00 in cash. In the Merger Agreement, the Company and Unicom agree to repurchase approximately $1.5 billion of common stock prior to the closing of the Merger, with Unicom to repurchase approximately $1.0 billion of its common stock, and the Company to repurchase approximately $500 million of its common stock. As a result of the Share Exchange, the Company will become a wholly owned subsidiary of Exelon. As a result of the Merger, Unicom will cease to exist and its subsidiaries, including Commonwealth Edison Company, an Illinois corporation (ComEd), will become subsidiaries of Exelon. Following the Merger Transaction, Exelon will be a holding company with two principal utility subsidiaries, ComEd and the Company. The Merger Transaction is conditioned, among other things, upon the approvals of the common shareholders of both companies and the approval of certain regulatory agencies. The companies have filed an application with the Securities and Exchange Commission (SEC) to register Exelon as a holding company under the Public Utility Holding Company Act of 1935. The Company is engaged principally in the production, purchase, transmission, distribution and sale of electricity to residential, commercial, industrial and wholesale customers and the distribution and sale of natural gas to residential, commercial and industrial customers. Pursuant to the Pennsylvania Electricity Generation Customer Choice and Competition Act (Competition Act), the Commonwealth of Pennsylvania has required the unbundling of retail electric services in Pennsylvania into separate generation, transmission and distribution services with open retail competition for generation services. Since the commencement of deregulation in 1999, the Company serves as the local distribution company providing electric distribution services in its franchised service territory in southeastern Pennsylvania and bundled electric service to customers who do not choose an alternate electric generation supplier. The Company engages in the wholesale marketing of electricity on a national basis. Through its Exelon Energy division, the Company is a competitive generation supplier offering competitive energy supply to customers throughout Pennsylvania. The Company's infrastructure services subsidiary, Exelon Infrastructure Services, Inc. (EIS), provides utility infrastructure services to customers in several regions of the United States. The Company owns a 50% interest in AmerGen Energy Company, LLC (AmerGen), a joint venture with British Energy, Inc., a wholly-owned subsidiary of British Energy plc (British Energy), to acquire and operate nuclear generating facilities. The Company also participates in joint ventures which provide telecommunications services in the Philadelphia metropolitan region. At December 31, 1997, the Company determined that its electric generation business no longer met the criteria of Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation." In connection with the discontinuance of SFAS No. 71, the Company performed a market value analysis of its generation assets and wrote off $1.8 billion (net of income taxes) of unrecoverable electric plant costs and regulatory assets. See Note 5 of Notes to Consolidated Financial Statements. In May 1998, the Pennsylvania Public Utility Commission (PUC) entered an Opinion and Order (Final Restructuring Order) approving a joint petition and settlement of the Company's restructuring case. Under the Final Restructuring Order, the Company received approval to recover stranded costs of $5.3 billion over 12 years beginning January 1, 1999 with a return on the unamortized balance of 10.75%. The Final Restructuring Order 29 provides for the phase-in of customer choice of electric generation supplier (EGS) for all customers: one-third of the peak load of each customer class on January 1, 1999; one-third on January 2, 1999; and the remaining one-third on January 1, 2000. The Final Restructuring Order called for an across-the-board retail electric rate reduction of 8% in 1999. This rate reduction decreased to 6% in 2000. At December 31, 1999, approximately 17% of the Company's residential load, 39% of its commercial load and 59% of its industrial load were purchasing generation service from an alternative EGS. As of that date, Exelon Energy, the Company's alternative EGS, was providing electric generation service to approximately 134,000 business and residential customers located throughout Pennsylvania. See Note 4 of Notes to Consolidated Financial Statements. On March 25, 1999, PECO Energy Transition Trust (PETT), a wholly owned subsidiary of the Company, issued $4 billion of PETT Transition Bonds (Transition Bonds) to securitize a portion of the Company's stranded cost recovery. In accordance with the terms of the Competition Act, the Company has utilized the proceeds from the issuance of the Transition Bonds principally to reduce stranded costs including related capitalization. The Company expects that competition for both retail and wholesale generation services will substantially affect its future results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Outlook." Results of Operations The Company's Consolidated Statements of Income for 1998 and 1997 reflect the reclassification of the results of operations of the Company's non-regulated retail energy supplier, Exelon Energy, from Other Income and Deductions. In 1999, the Company completed the redesign of its internal reporting structure to separate its distribution, generation, and ventures operations into business units and provide financial and operational data on the same basis to senior management. The Company's distribution business unit consists of its regulated operations including electric transmission and distribution services, retail sales of generation services and retail gas sales and services. The Company's generation business unit consists of its generation assets, its power marketing group, its unregulated retail energy supplier and its investment in AmerGen. The Company's ventures business unit consists of its infrastructure services business, its telecommunications equity investments and other investments. General corporate expenses include the cost of executive management, corporate accounting and finance, information technology, risk management, human resources, and legal functions and employee benefits. In the fourth quarter of 1999, EIS acquired six infrastructure services companies. EIS, formed in the second quarter of 1999, provides infrastructure services including infrastructure construction, operation management and maintenance services to owners of electric, gas and telecommunications systems, including industrial and commercial customers, utilities and municipalities. 30 Significant Operating Items
Revenue and Expense Percentage Items as a Percentage Dollar Changes of Operating Revenue 1999- 1998- 1999 1998 1997 1998 1997 - -------- -------- -------- ----------- ---------- 89% 92% 90% Electric --% 16% 9% 8% 10% Gas 11% (4%) 2% --% --% Infrastructure Services 100% --% -- --- --- 100% 100% 100% Total Operating Revenues 3% 14% === === === 39% 34% 28% Fuel and Energy Interchange 19% 39% 25% 22% 31% Operating and Maintenance 22% (20%) --% 2% --% Early Retirement and Separation (100%) 100% Programs 4% 12% 13% Depreciation and Amortization (63%) 11% 5% 5% 7% Taxes Other Than Income (6%) (10%) --- --- --- 73% 75% 79% Total Operating Expenses 1% 10% --- --- --- 27% 25% 21% Operating Income 10% 28% --- --- --- (8%) (7%) (8%) Interest Charges 15% (6%) (1%) (1%) --% Equity in Losses of Telecommunications (30%) 283% Investments --% (1%) 1% Other Income and Deductions 188% (217%) ---- --- --- 18% 16% 14% Income Before Income Taxes and 15% 35% Extraordinary Item 7% 6% 6% Income Taxes 12% 9% --- --- --- 11% 10% 8% Income Before Extraordinary Item 16% 58% === === ===
Year Ended December 31, 1999 Compared To Year Ended December 31, 1998 Operating Revenues Electric revenues increased $17 million to $4,847 million in 1999. The increase was primarily attributable to higher revenues from the generation business unit of $589 million, partially offset by lower revenues from the distribution business unit of $572 million. The increase from the generation business unit was attributable to $473 million from increased volume in Pennsylvania as a result of the sale of competitive electric generation services by Exelon Energy, increased wholesale revenues of $133 million from the marketing of excess generation capacity as a result of retail competition and revenues of $99 million from the sale of generation from Clinton Nuclear Power Station (Clinton) to Illinois Power (IP), partially offset by the inclusion of $116 million of PJM Interconnection, L.L.C. (PJM) network transmission service revenue in 1998. The decrease from the distribution business unit was primarily attributable to lower volume associated with the effects of retail competition of $508 million and $278 million related to the 8% across-the-board rate reduction mandated by the Final Restructuring Order. These decreases were partially offset by $149 million of PJM network transmission service revenue and $59 million related to higher volume as a result of weather conditions as compared to 1998. PJM network transmission service revenues and charges which commenced April 1, 1998 were recorded in the generation business unit in 1998 but are being recognized by the distribution business unit in 1999 as a result of the Federal Energy Regulatory Commission (FERC) approval of the PJM Regional Transmission Owners' rate case settlements. Stranded cost recovery is included in the Company's retail electric rates beginning January 1, 1999. Under its Amended Management Agreement with IP, effective April 1, 1999, the Company was responsible for the payment of all direct operating and maintenance (O&M) costs and direct capital costs incurred by IP and allocable to the operation of Clinton. These costs are reflected in the Company's O&M expenses. IP was responsible for fuel and indirect costs such as pension benefits, payroll taxes and property taxes. Following the restart 31 of Clinton on June 2, 1999, and through December 15, 1999, the Company agreed to sell 80% of the output of Clinton to IP. The remaining output was sold by the Company in the wholesale market. Under a separate agreement with the Company, British Energy agreed to share 50% of the costs and revenues associated with the Amended Management Agreement. Effective December 15, 1999, AmerGen acquired Clinton. Accordingly, the results of operations of Clinton have been accounted for under the equity method of accounting in the Company's Consolidated Statements of Income since the acquisition date. Gas revenues increased $48 million, or 11%, to $481 million in 1999 primarily as a result of higher revenues from the distribution business unit of $50 million. The increase in the distribution business unit was primarily attributable to increased volume as a result of weather conditions of $27 million and increased volume from new and existing customers of $20 million as compared to 1998. This increase was partially offset by lower revenues from the generation business unit of $2 million, primarily attributable to lower volume from existing customers of Exelon Energy. Infrastructure services revenues increased $109 million as a result of growth from the EIS acquisitions in 1999. Fuel and Energy Interchange Expense Fuel and energy interchange expense increased $349 million, or 19%, to $2,145 million in 1999. The increase was attributable to higher fuel and energy interchange expenses associated with the distribution business unit of $187 million and the generation business unit of $162 million. The increase from the distribution business unit was attributable to $98 million of PJM network transmission service charges, $51 million of purchases in the spot market and $38 million of additional volume as a result of weather conditions. The increase from the generation business unit was primarily attributable to $565 million related to increased volume from Exelon Energy sales and a $36 million reserve related to the Massachusetts Health and Education Authority (HEFA) contract as a result of higher than anticipated cost of supply in the New England power pool. These increases were partially offset by $277 million of fuel savings from wholesale operations as a result of lower volume and efficient operation of the Company's generating assets, the inclusion of PJM network transmission service charges of $116 million in 1998, and the reversal of $27 million in reserves associated with the Grays Ferry Cogeneration Partnership (Grays Ferry) in connection with the final settlement of litigation and expected prices of electricity over the remaining life of the power purchase agreements. In addition, the Company experienced $19 million of fuel savings associated with the full return to service of Salem Generating Station (Salem) in April 1998 which decreased the need to purchase power to replace the output from these units. As a percentage of revenue, fuel and energy interchange expense was 39% as compared to 34% in 1998. The increase was primarily attributable to reduced margins resulting from retail competition for generation services. Operating and Maintenance Expense O&M expense, exclusive of the Early Retirement and Separation charge of $124 million incurred in 1998, increased $249 million, or 22%, to $1,384 million in 1999. As a percentage of revenue, O&M expense was 25% as compared to 22% in 1998. The increase in O&M expense was attributable to higher O&M expenses associated with the generation business unit of $112 million, the ventures business unit of $109 million and corporate of $28 million. The increase from the generation business was primarily a result of $70 million related to Clinton, $24 million related to the growth of Exelon Energy, $13 million of charges related to the abandonment of two information systems implementations, $10 million associated with the Salem inventory write-off for excess and obsolete inventory, and $7 million related to the true-up of 1998 reimbursement of joint-owner expenses. These decreases were partially offset by $10 million of lower O&M expenses as a result of the full return to service of Salem in April 1998. The increase from the ventures business unit was related to the infrastructure services business. In addition, the Company incurred additional corporate costs including $15 million associated with Year 2000 (Y2K) remediation expenditures, $11 million of compensation expense and $9 million related to nuclear property insurance, partially offset by $17 million of lower pension and post-retirement benefit expense primarily as 32 a result of the performance of the investments in the Company's pension plan. The distribution business unit's O&M expenses were consistent with the prior year and included $11 million of additional expenses related to restoration activities as a result of Hurricane Floyd which were offset by lower electric transmission and distribution expenses. Depreciation and Amortization Expense Depreciation and amortization expense decreased $406 million, or 63%, to $237 million in 1999. As a percentage of revenue, depreciation and amortization expense was 4% as compared to 12% in 1998. The decrease in depreciation and amortization expense was associated with the December 1997 restructuring charge through which the Company wrote down a significant portion of its generating plant and regulatory assets. In connection with this restructuring charge, the Company reduced generation-related assets by $8.4 billion, established a regulatory asset, Deferred Generation Costs Recoverable in Current Rates of $424 million, which was fully amortized in 1998, and established an additional regulatory asset, Competitive Transition Charge (CTC) of $5.3 billion, which will begin to be amortized in 2000 in accordance with the terms of the Final Restructuring Order. Taxes Other Than Income Taxes other than income decreased $18 million, or 6%, to $262 million in 1999. As a percentage of revenue, taxes other than income were 5%, which was consistent with 1998. The decrease in taxes other than income was primarily attributable to a $34 million credit related to an adjustment of the Company's Pennsylvania capital stock tax base as a result of the 1997 restructuring charge, partially offset by an increase of $17 million in real estate taxes as a result of changes in tax laws for utility property in Pennsylvania. Interest Charges Interest charges consist of interest expense, distributions on Company Obligated Mandatorily Redeemable Preferred Securities of a Partnership (COMRPS) and Allowance for Funds Used During Construction (AFUDC). Interest charges increased $55 million, or 15%, to $413 million in 1999. As a percentage of revenue, interest charges were 8% as compared to 7% in 1998. The increase in interest charges was primarily attributable to interest on the Transition Bonds of $179 million, partially offset by a $98 million reduction in interest charges resulting from the use of Transition Bond proceeds to repay long-term debt and COMRPS. In addition, the Company's ongoing program to reduce or refinance higher cost, long-term debt reduced interest charges by $26 million. Equity in Losses of Telecommunications Investments Equity in losses of telecommunications investments decreased $17 million or 30%, to $38 million in 1999. The lower losses are attributable to customer base growth for each of the Company's telecommunications joint ventures. Other Income and Deductions Other income and deductions, excluding interest charges and equity in losses of telecommunications investments, increased $40 million, or 188%, to income of $19 million in 1999 as compared to a loss of $21 million in 1998. The increase in other income and deductions was primarily attributable to $28 million of interest income earned on the unused portion of the Transition Bond proceeds prior to application, $14 million of gain on the sale of assets, a $10 million donation to a City of Philadelphia street lighting project in 1998 and a $7 million write-off of a non-regulated business venture in 1998. These increases were partially offset by a $15 million write-off of the investment in Grays Ferry in connection with the settlement of litigation. Income Taxes The effective tax rate was 36.6% in 1999 as compared to 37.5% in 1998. The decrease in the effective tax rate was primarily attributable to an income tax benefit of approximately $11 million related to the favorable resolution of certain outstanding issues in connection with the settlement of an Internal Revenue Service audit and tax benefits associated with the implementation of state tax planning strategies, partially offset by the non-recognition for state income tax purposes of certain operating losses. 33 Extraordinary Items In 1999, the Company incurred extraordinary charges aggregating $62 million ($37 million, net of tax) related to prepayment premiums and the write-off of unamortized debt costs associated with the repayment of $811 million of First Mortgage Bonds with a portion of the Transition Bond proceeds and the refinancing of $156 million of pollution control notes. In 1998, the Company incurred extraordinary charges aggregating $33 million ($20 million, net of tax) related to prepayment premiums and the write-off of unamortized debt costs associated with the repayment of $525 million of First Mortgage Bonds. Preferred Stock Dividends Preferred stock dividends decreased $1 million or 7%, to $12 million in 1999. The decrease was attributable to the retirement of $37 million of preferred stock in August 1999 with a portion of the Transaction Bond proceeds. Earnings Earnings applicable to common stock increased $71 million, or 14%, to $570 million in 1999. Earnings per average common share increased $0.67 per share or 30%, to $2.91 per share in 1999, reflecting the increase in net income and a decrease in the weighted average shares of common stock outstanding as a result of the repurchase of approximately 44.1 million shares with a portion of the Transition Bond proceeds. Year Ended December 31, 1998 Compared To Year Ended December 31, 1997 Operating Revenues Electric revenues increased $680 million, or 16%, to $4,830 million in 1998. The increase was attributable to higher revenues from the generation business unit of $682 million, partially offset by lower revenues from the distribution business unit of $2 million. The increase from the generation business unit was primarily attributable to increased wholesale revenues of $663 million as a result of higher volume attributable to more favorable weather and market conditions and revenues associated with the pilot program for retail competition of $19 million which commenced in 1998. The decrease from the distribution business unit was primarily attributable to a greater portion of its volume being derived from customers in lower rate classes of $57 million, partially offset by increased volume as a result of weather conditions of $55 million. Gas revenues decreased $18 million, or 4%, to $433 million in 1998. The decrease was attributable to lower revenues from the distribution business unit of $52 million, partially offset by higher revenues from the generation business unit of $34 million. The decrease from the distribution unit was primarily attributable to lower volume as a result of less favorable weather conditions of $47 million and lower volume from existing customers of $5 million. The increase from the generation business unit was attributable to gas revenues from gas deregulation pilot program outside of Pennsylvania of $34 million. Fuel and Energy Interchange Expense Fuel and energy interchange expense increased $506 million, or 39%, to $1,796 million in 1998. The increase was attributable to higher fuel and energy interchange expenses associated with the generation business unit of $532 million, partially offset by lower fuel and energy interchange expenses from the distribution business unit of $26 million. The increase from the generation business unit was attributable to increased volume from wholesale operations of $608 million and additional fuel expense related to the pilot program for retail competition of $44 million, partially offset by fuel savings of $120 million associated with the full return to service of Salem in April 1998 which decreased the need to purchase power to replace the output from these units. The decrease from the distribution business unit was primarily attributable to lower gas volume associated with less favorable weather conditions. 34 As a percentage of revenue, fuel and energy interchange expenses were 34% as compared to 28% in 1997. The increase was primarily attributable to increased energy interchange purchases to support increased wholesale volume. Operating and Maintenance Expense Exclusive of certain one-time charges totaling $187 million that occurred in 1997, O&M expense decreased $93 million, or 7%, to $1,135 million in 1998. As a percentage of revenue, operating and maintenance expenses were 22% as compared to 31% in 1997. The decrease in O&M expense was attributable to lower O&M expense associated with the distribution business unit of $41 million, corporate of $34 million, and the generation business unit of $18 million. The one-time charges incurred in 1997 consisted of $37 million for environmental remediation, $33 million as a result of a change in fringe benefit policies relating to sick and vacation time, $27 million for joint-owner expenses related to the discontinuance of SFAS No. 71, $24 million in workers' compensation claim reserves, $21 million for excess and obsolete inventory, $16 million for the write-off of information systems development charges in accordance with EITF Issue 97-13, "Accounting for Costs Incurred in Connection with a Consulting Contract or an Internal Project That Combines Business Process Reengineering and Information Technology Transformation," $13 million for the write-off of a customer service information system and $16 million of other reserves including the write-off of appliance sale accounts receivable and losses on the sales of real estate. The decrease from the distribution business unit was primarily the result of lower uncollectible expenses of $28 million as a result of the implementation of new collection procedures and lower transmission and distribution expenses of $27 million as a result of system reliability improvements made in 1997. These decreases were partially offset by a $12 million reserve for Customer Assistance Program receivables mandated by the Final Restructuring Order. The decrease from corporate was primarily attributable to lower pension expense of $31 million as a result of the performance of the investments in the Company's pension plan, lower property insurance expense of $14 million, lower post-retirement benefit expense of $14 million as a result of the reclassification of these expenses to Deferred Generation Costs Recoverable in Current Rates and lower workers compensation expense of $11 million. These decreases were partially offset by Y2K remediation expenditures of $15 million. The decrease from the generation business unit was primarily attributable to the full return to service of Salem which resulted in lower restart expenses of $38 million, partially offset by increased power marketing expenses of $20 million. Early Retirement and Separation Programs In April 1998, the Board of Directors authorized the implementation of a retirement incentive program and an enhanced severance benefit program. The retirement incentive program allowed employees age 50 and older, who have been designated as excess or who are in job classifications facing reduction, to retire from the Company. The enhanced severance benefit program provided non-retiring excess employees with fewer than ten years of service benefits equal to two weeks pay per year of service. Non-retiring excess employees with more than ten years of service received benefits equal to three weeks pay per year of service. In 1998, the Company incurred a charge of $125 million ($74 million, net of income taxes) for its Early Retirement and Separation Program relating to 1,157 employees across the Company who were considered excess or were in job classifications facing reduction. Of the 1,157 employees, 711 were eligible for and agreed to take the retirement incentive program. The remaining employees were eligible for the enhanced severance benefit program. As of December 31, 1999, 494 employees were eligible for and have taken the retirement incentive program and 433 employees were terminated with the enhanced severance benefit program. The remaining employees are scheduled for termination through the end of June 2000. The charge for Early Retirement and Separation Program consisted of the following: $121 million for the actuarially determined pension and other postretirement benefits costs and $4 million for outplacement services costs and the continuation of benefits for one year. Approximately $0.8 million of the $125 million charge was related to the Company's non-utility operations and accordingly was recorded in Other Income and Deductions. The reserve for separation benefits was approximately $47 million, of which $28 million was paid through 35 December 31, 1999. The remaining balance of $19 million is expected to be paid by June 2000. Retirement benefits of approximately $78 million are being paid to the retirees over their lives. All cash payments related to the early retirement and severance program are expected to be funded through the assets of the Company's Service Annuity Plan. Depreciation and Amortization Expense Depreciation and amortization expense increased $62 million, or 11%, to $643 million in 1998. As a percentage of revenue, depreciation and amortization expense was 12% as compared to 13% in 1997. The increase in depreciation and amortization expense was primarily associated with the amortization of Deferred Generation Costs Recoverable in Current Rates during 1998. Included in this amortization were $37 million of charges that were included in operating and maintenance expense and interest expense in 1997. Taxes Other Than Income Taxes other than income decreased $31 million, or 10%, to $280 million in 1998. As a percentage of revenue, taxes other than income were 5%, as compared to 7% in 1997. The decrease in taxes other than income was primarily attributable to lower real estate taxes of $14 million, lower gross receipts tax of $8 million and lower capital stock tax of $5 million. Interest Charges Interest charges decreased $22 million, or 6%, to $358 million in 1998. As a percentage of revenue, interest charges were 7% as compared to 8% in 1997. The decrease in interest charges was primarily attributable to interest savings of $18 million from the Company's program to reduce and/or refinance higher cost, long-term debt and the discontinuance of amortization of the loss on reacquired debt of $16 million related to electric generation operations as of December 31, 1997. These decreases were partially offset by $11 million of lower AFUDC and capitalized interest resulting from fewer projects in the construction base in 1998 and the replacement of $62 million of preferred stock with COMRPS in the third quarter of 1997. Equity in Losses of Telecommunications Investments Equity in losses of telecommunications investments increased $40 million or 283%, to $54 million in 1998. The increased losses were principally attributable to the first full year of service for the Company's telecommunications joint ventures in 1998. Both of the Company's telecommunications joint ventures commenced operations in 1997. Other Income and Deductions Other income and deductions, excluding interest charges and equity in losses of telecommunications investments, decreased $39 million, or 217% to a loss of $21 million in 1998 as compared to a gain of $18 million in 1997. The decrease in other income and deductions was primarily attributable to a $70 million settlement of litigation arising from the shutdown of Salem in 1997, a $10 million donation to a City of Philadelphia street lighting project and a $7 million write-off of a non-regulated business venture. These decreases were partially offset by a $14 million settlement of a power purchase agreement, $17 million of interest income related to a gross receipts tax refund and a $20 million write-off of a telecommunications investment in 1997. Income Taxes The effective tax rate was 37.5% in 1998 as compared to 46.5% in 1997. The decrease in the effective tax rate was primarily attributable to the full normalization of deferred taxes associated with deregulated generation plant. Extraordinary Items In 1998, the Company incurred extraordinary charges aggregating $33 million ($20 million, net of tax) related to prepayment premiums and the write-off of unamortized debt costs associated with the repayment of $525 million of First Mortgage Bonds. In 1997, the Company recorded an extraordinary charge of $3.1 billion ($1.8 billion, net of taxes) for electric generation-related stranded costs that will not be recovered from customers. 36 Preferred Stock Dividends Preferred stock dividends decreased $4 million or 22%, to $13 million in 1998. The decrease was attributable to the replacement of $62 million of preferred stock with COMRPS in the third quarter of 1997. Earnings Earnings applicable to common stock increased $2,013 million to $500 million in 1998. Earnings per average common share increased $9.04 per share from a loss of $6.80 per share in 1997 to income of $2.24 per share in 1998. These increases reflect the effects of the restructuring charge incurred in 1997 and the increase in income before extraordinary item. Liquidity and Capital Resources The Company's capital resources are primarily provided by internally generated cash flows from utility operations and, to the extent necessary, external financing. Capital resources are used primarily to fund the Company's capital requirements, including investments in new and existing ventures, to repay maturing debt and to make preferred and common stock dividend payments. On March 25, 1999, PETT issued $4 billion of its Transition Bonds to securitize a portion of the Company's authorized stranded cost recovery. PETT used the $3.95 billion of proceeds from the issuance of Transition Bonds to purchase the Intangible Transition Property (ITP) from the Company. In accordance with the Competition Act, the Company utilized the proceeds from the securitization of a portion of its stranded cost recovery principally to reduce stranded costs including related capitalization. The Company utilized the net proceeds, and interest income earned on the net proceeds, to repurchase 44.1 million shares of common stock for an aggregate purchase price of $1,705 million and $150 million of accounts receivable; to retire: $811 million of First Mortgage Bonds, a $400 million term loan, $532 million of commercial paper, a $139 million capital lease obligation and $37 million of preferred stock; to redeem $221 million of COMRPS; and to pay $25 million of debt issuance costs. As a result of the issuance of the Transition Bonds and the application of the proceeds thereof, at December 31, 1999, the Company's capital structure consisted of 21.6% common equity; 4.0% preferred stock and COMRPS (which comprised 1.6% of the Company's total capitalization structure); and 74.4% long-term debt including Transition Bonds issued by PETT (which comprised 64.8% of the Company's long-term debt). The weighted average cost of debt and preferred securities that have been retired was approximately 7.2%. The additional interest expense associated with the Transition Bonds, which currently have an effective interest rate of approximately 5.8%, is partially offset by the interest savings associated with the debt and preferred securities that have been retired. The Company currently estimates that the impact of this additional expense, combined with the reduction in common equity, will result in earnings per share benefits of approximately $0.50 in 2000 as compared to $0.28 in 1999. The Transition Bonds are solely obligations of PETT, secured by the ITP sold by the Company to PETT, but are included in the consolidated long-term debt of the Company. Upon issuance of the Transition Bonds, a portion of the CTC being collected by the Company to recover stranded costs was designated as Intangible Transition Charge (ITC). The ITC is an irrevocable non-bypassable, usage-based charge that is calculated to allow for the recovery of debt service and costs related to the issuance of the Transition Bonds. The ITC revenue, as well as all interest expense and amortization expense associated with the Transition Bonds, is reflected on the Company's Consolidated Statements of Income. The combined schedule for amortization of the CTC and ITC assets is in accordance with the amortization schedule set forth in the Final Restructuring Order. On March 16, 2000, the PUC issued an order approving a Joint Petition for Full Settlement of PECO Energy Company's Application for Issuance of a Qualified Rate Order (QRO) authorizing the Company to securitize up to an additional $1 billion of its authorized recoverable stranded costs. In accordance with the terms of the Joint Petition for Full Settlement, when the QRO becomes final and non-appealable, the Company, through its distribution business unit, will provide its retail customers with rate reductions in the total amount of $60 37 million beginning on January 1, 2001. This rate reduction will be effective for calendar year 2001 only and will not be contingent upon the issuance of additional transition bonds pursuant to the QRO. The Company will use the proceeds from any additional securitization principally to reduce stranded costs including related capitalization. In January 2000, in connection with the Merger Agreement, the Company entered into a forward purchase agreement to purchase up to $500 million of its common stock from time to time through open-market, privately negotiated and/or other types of transactions in conformity with the rules of the SEC. This forward purchase agreement can be settled from time to time, at the Company's election, on a physical, net share or net cash basis. The amount at which these agreements can be settled is dependent principally upon the market price of the Company's common stock as compared to the forward purchase price per share and the number of shares to be settled. Cash flows from operations were $888 million in 1999 as compared to $1,492 million in 1998 and $1,068 million in 1997. The decrease in 1999 was principally attributable to a reduction in cash generated by operations of $308 million and changes in working capital of $296 million, principally related to accounts receivable from unregulated energy sales and the repurchase of accounts receivable with a portion of the proceeds from the issuance of Transition Bonds. Cash flows used in investing activities were $885 million in 1999 as compared to $521 million in 1998 and $604 million in 1997. Expenditures under the Company's construction program increased by $76 million to $491 million in 1999. The Company acquired six infrastructure services companies for $222 million and made investments in and advances to joint ventures of $118 million. Net funds invested in other activities in 1999 were $54 million, including $29 million for nuclear plant decommissioning trust fund contributions, $22 million for costs of removal of retired plant and $15 million for other investments, partially offset by proceeds from the sale of investments of $12 million. Cash flows provided by financing activities were $177 million in 1999 as compared to cash flows used in financing activities of $956 million in 1998 and $461 million in 1997. Cash flows from financing activities in 1999 were primarily attributable to the securitization of stranded cost recovery and the use of related proceeds. The Company estimates that it will spend approximately $927 million for capital expenditures and other investments in 2000. Certain facilities under construction and to be constructed may require permits and licenses which the Company has no assurance will be granted. The Company has commitments to provide AmerGen with capital contributions equivalent to 50% of the purchase price of any acquisitions AmerGen makes in 2000. As of December 31, 1999, the Company expects to make $97 million of capital contributions, excluding nuclear fuel, if all of the acquisition agreements that AmerGen entered into in 1999 close in 2000. In addition, the Company and British Energy have each agreed to provide up to $55 million to AmerGen at any time for operating expenses. See Note 26 of Notes to Consolidated Financial Statements. The Company has entered into three long-term power purchase agreements with Independent Power Producers (IPP) under which the Company makes fixed capacity payments to the IPP in return for exclusive rights to the energy and capacity of the generating units for a fixed period. The terms of the long-term power purchase agreements enable the Company to supply the fuel and dispatch energy from the plants. The plants are currently being constructed and are scheduled to begin operations in 2000, 2001 and 2002, respectively. The Company expects to make capacity payments of $18 million in 2000. In 1999, the Company entered into a lease for two buildings that will be the headquarters for its generation business unit. These buildings are being constructed in Kennett Square, Pennsylvania and are anticipated to be completed on or about June 1, 2000 and September 1, 2000, respectively. The lease terms are for 20 years with renewal options. Estimated lease payments for 2000 are $4 million. The Company meets its short-term liquidity requirements primarily through the issuance of commercial paper and borrowings under bank credit facilities. The Company has a $900 million unsecured revolving credit facility with a group of banks, which consists of a $450 million 364-day credit agreement and a $450 million three-year credit agreement. The Company uses the credit facility principally to support its $600 million commercial paper program. 38 At December 31, 1999, the Company had outstanding $163 million of notes payable, $142 million of which were commercial paper and $21 million of lines of credit. In addition, at December 31, 1999, the Company had available formal and informal lines of bank credit aggregating $100 million and available revolving credit facilities aggregating $900 million which support its commercial paper program. At December 31, 1999, the Company had no short-term investments. Outlook General The Company has entered a period of financial uncertainty as a result of the deregulation of its electric generation operations. The Final Restructuring Order and retail competition have resulted in reduced revenues from regulated rates. In addition, the Company is selling an increasing portion of its energy at market-based rates. The Company believes that the deregulation of its electric generation operations and other regulatory initiatives designed to encourage competition have increased the Company's risk profile by changing and increasing the number of factors upon which the Company's financial results are dependent. This may result in more volatility in the Company's future results of operations. The Company believes that it has significant advantages that will strengthen its position in the increasingly competitive electric generation environment. These advantages include the ability to produce and contract for electricity at a low variable cost and the demonstrated ability to market and deliver power in the competitive wholesale markets. The Company's future financial condition and results of operations are substantially dependent upon the effects of the Final Restructuring Order and retail and wholesale competition for generation services. Additional factors that affect the Company's financial condition and results of operations include operation of nuclear generating facilities, gas restructuring in Pennsylvania, new accounting pronouncements, inflation, weather, compliance with environmental regulations and the profitability of the Company's investments in EIS and other new ventures. Merger As a result of legislative initiatives aimed at restructuring, the electric utility industry has undergone rapid change in recent years. Among other things, competition has increased, particularly with respect to energy supply and retail energy services. Many states, including the states in which the Company and Unicom currently operate, have either passed or proposed legislation that provides for retail electric competition and deregulation of the price of energy supply. In addition, the wholesale electric energy market has significantly expanded and geographic boundaries are becoming less important. During 1999, a substantial amount of electric generation assets were sold in the United States. The Company expects this trend to continue. Mergers continue at a rapid pace not only between electric companies, but also between electric and gas companies that are seeking to capture value through the convergence of the two industries. At the same time, other companies are focusing on specific portions of the energy industry by disaggregating their generation, transmission, distribution and retail operations, spinning off non-core assets and acquiring assets consistent with their strategic focus. Currently, industry participants are attempting to prepare themselves for increased competition and position themselves to take advantage of these trends. The Company believes that the consolidation and transformation of the electric and natural gas segments of the energy industry will result in the emergence of a limited number of substantial competitors. These large entities will have assets and skills that are necessary to create value in one or more of the traditional segments of the utility industry. The Company believes that companies that have the financial strength, strategic foresight and operational skills to establish scale and an early leadership position in key segments of the energy industry will be best positioned to compete in the new marketplace. The Company's Board of Directors has focused significant attention on strategic planning to adapt to the evolving competitive environment. The strategic planning activities have concentrated on those factors that would best position the Company for enhanced shareholder value and continued leadership in the competitive energy marketplace. 39 The Company and Unicom are aggressively pursuing all necessary regulatory approvals and expect to complete the Merger in the second half of 2000. While the Company believes that the parties will receive the necessary regulatory approvals, a substantial delay in obtaining satisfactory approvals or the imposition of unfavorable terms or conditions in the approvals could have a material adverse effect on the business, financial condition or results of operations of the Company or Unicom or may cause the abandonment of the Merger. In addition to other factors, the price of shares of the Company's common stock may vary significantly as a result of market expectations of the likelihood that the Merger will be completed and the timing of completion, the prospects of post-merger operations, including the successful consolidation and integration of the Company's and Unicom's organizations and the effect of any conditions or restrictions imposed on or proposed with respect to the combined company by regulators. On March 24, 2000, the Company submitted for approval a joint petition for settlement reached with various parties to the Company's proceeding before the PUC involving the proposed merger with Unicom. The Company reached agreement with advocates for residential, small business and large industrial customers, and representatives of marketers, environmentalists, municipalities and elected officials. Under the comprehensive settlement agreement the Company has agreed to $200 million in rate reductions for all customers over the period January 1, 2002 through 2005 and extended rate caps on the Company's retail electric distribution charges through December 31, 2006, electric reliability and customer service standards, mechanisms to enhance competition and customer choice, expanded assistance to low-income customers, extensive funding for wind and solar energy and community education, nuclear safety research funds, customer protection against nuclear costs outside of Pennsylvania, and maintenance of charitable and civic contributions and employment for the Company's headquarters in Philadelphia. Competition The Final Restructuring Order contains a number of provisions that are designed to encourage competition for generation services. The provisions include above-market shopping credits for generation service which provide an economic incentive for customers to choose an alternate EGS, periodic assignments of a portion of the Company's non-shopping customers to alternate EGSs and the selection of an alternate supplier as the PLR for a portion of the Company's customers. The Final Restructuring Order established market share thresholds to ensure that a minimum number of residential and commercial customers choose an EGS or a Company affiliate. If less than 35% and 50% of residential and commercial customers have chosen an EGS, including 20% of residential customers assigned to an EGS as a PLR default supplier, by January 1, 2001 and January 1, 2003, respectively, the number of customers sufficient to meet the necessary threshold levels shall be randomly selected and assigned to an EGS through a PUC-determined process. The Final Restructuring Order requires that on January 1, 2001, 20% of all of the Company's residential customers, determined by random selection and without regard to whether such customers are obtaining generation service from an alternate EGS, shall be assigned to a PLR default supplier other than the Company through a PUC-approved bidding process. The Final Restructuring Order caps the Company's retail transmission and distribution rates at their current levels through June 30, 2005. The Final Restructuring Order also established rate caps for generation services, consisting of the charge for stranded cost recovery and a charge for energy and capacity, through 2010. The rate caps limit the Company's ability to pass cost increases through to customers, but also allows the Company to retain cost savings. The Company's recovery of stranded costs is based on the level of transition charges established in the Final Restructuring Order and the projected annual retail sales in the Company's service territory. Recovery of transition charges for stranded costs and the Company's allowed return on its recovery of stranded costs are included in operating revenue. In 1999, CTC revenue was $565 million and is scheduled to increase to $932 million by 2010, the final year of stranded cost recovery. Amortization of the Company's stranded cost recovery, which is a regulatory asset, will be included in depreciation and amortization beginning in 2000. As provided by the Final Restructuring Order, there was no amortization of this regulatory asset in 1999. The amortization expense for 2000 will be approximately $43 million and will increase to $879 million by 2010. 40 The Company competes in deregulated retail electric generation markets and the national wholesale electric generation market. Competition for electric generation services has created new uncertainties in the utility industry. These uncertainties include future prices of generation services in both the wholesale and retail markets; changes in the Company's customer profiles, both at the retail level where change is expected to be ongoing as a result of customer choice, and between the retail and wholesale markets; and supply and demand volatility. The Company, through Exelon Energy, the Company's new competitive supplier, actively competes for a share of the generation supply market throughout Pennsylvania. The Company also participates in the generation supply market in its traditional service territory through its distribution business unit. The charge for energy services provided by the distribution business unit is mandated by the Final Restructuring Order. The charge for energy services offered by Exelon Energy are at competitive market prices. Customers who continue to take generation service from the distribution business unit may choose an alternate EGS at any time. Because the shopping credit established by the PUC in the Restructuring Order remains above current retail market prices for generation services, including those offered by Exelon Energy, the Company's retail revenues will be reduced to the extent customers choose an alternate EGS, including Exelon Energy. Since prices in the competitive retail and wholesale markets are currently lower on average than those charged by the distribution business unit, this will adversely affect the Company's revenues and profit margins. The Company is a low variable-cost electricity producer, which puts it in a favorable position to take advantage of opportunities in the electric retail and wholesale generation markets. The Company's competitive position and its future financial condition and results of operations are dependent on the Company's ability to successfully operate its low variable-cost power plants and market its power effectively in competitive wholesale markets. The Company competes in the wholesale market by selling energy and capacity from the Company's installed capacity not utilized in the retail market and buying and selling energy from third parties. The Company's wholesale power marketing activities include short-term and long-term commitments to purchase and sell energy and energy-related products with the intent and ability to deliver or take delivery. See Notes 1 and 6 of Notes to Consolidated Financial Statements. On June 22, 1999, Pennsylvania Governor Tom Ridge signed into law the Natural Gas Choice and Competition Act (Act) which expands choice of gas suppliers to residential and small commercial customers and eliminates the 5% gross receipts tax on gas distribution companies' sales of gas. Large commercial and industrial customers have been able to choose their suppliers since 1984. Currently, approximately one-third of the Company's total yearly throughput is supplied by third parties. The Act permits gas distribution companies to continue to make regulated sales of gas to their customers. The Act does not deregulate the transportation service provided by gas distribution companies, which remains subject to rate regulation. Gas distribution companies will continue to provide billing, metering, installation, maintenance and emergency response services. In compliance with the schedule ordered by the PUC on December 1, 1999, the Company filed with the PUC a restructuring plan for the implementation of gas deregulation and customer choice of gas service suppliers in its service territory effective July 1, 2000. The Company believes there will be no material impact on the financial condition or operations of the Company because of the PUC's existing requirement that gas distribution companies cannot collect more than the actual cost of gas from customers, and the Act's requirement that suppliers must accept assignment or release, at contract rates, the portion of the gas distribution company's firm interstate pipeline contracts required to serve the suppliers' customers. Expansion of Generation Portfolio In 1998, the Company established specific goals to increase its generation capacity from 9 gigawatts to 25 gigawatts by 2003. The Company is developing a generation portfolio capable of taking advantage of periods of increased demand. In order to meet this strategic objective the Company may require significant capital resources. 41 In 1999, AmerGen purchased Clinton and Three Mile Island Unit No. 1 Nuclear Generating Facility (TMI) and entered into agreements to purchase Nine Mile Point Unit 1 Nuclear Generating Facility, a 59% undivided interest in Nine Mile Point Unit 2 Nuclear Generating Facility, Oyster Creek Nuclear Generating Facility and Vermont Yankee Nuclear Power Station. These purchases are expected to be completed in 2000 subject to federal and state approvals. The Company accounts for its investment in AmerGen under the equity method of accounting. On September 30, 1999, the Company announced it has reached an agreement to purchase an additional 7.51% ownership interest in Peach Bottom Atomic Power Station (Peach Bottom) from Atlantic City Electric Company and Delmarva Power & Light Company bringing the Company's ownership interest to 50%. The sale is expected to be completed by mid-2000 subject to federal and state approvals. The Company consolidates its proportionate interest in Peach Bottom. In 1999, the Company also entered into two long-term power purchase agreements with Independent Power Producers (IPP) under which the Company makes fixed capacity payments to the IPP in return for exclusive rights to the energy and capacity of the generating units for a fixed period. Regulation and Operation of Nuclear Generating Facilities The Company's financial condition and results of operations are in part dependent on the continued successful operation of its nuclear generating facilities. The Company's nuclear generating facilities represent 45% of its installed generating capacity. Because of the Company's reliance on its nuclear generating units, any changes in regulations by the NRC requiring additional investments or resulting in increased operating or decommissioning costs of nuclear generating units could adversely affect the Company. During 1999, Company-operated nuclear plants operated at a 93% weighted-average capacity factor and Company-owned nuclear plants operated at a 92% weighted-average capacity factor. Company-owned nuclear plants produced 41% of the electricity generated by the Company. Nuclear generation is currently the most cost-effective way for the Company to meet customer needs and commitments for sales to other utilities. In December 1999, AmerGen acquired Clinton and TMI marking the first acquisitions by the Company's joint venture. Accordingly, AmerGen's financial condition and results of operations are also dependent on the continued successful operation of its nuclear generating facilities. AmerGen's nuclear generating facilities represent 100% of its installed generating capacity. Because of AmerGen's reliance on its nuclear generating units, any changes in regulations by the NRC requiring additional investments or resulting in increased operating or decommissioning costs of nuclear generating units could adversely affect AmerGen and, accordingly, the Company's investment in AmerGen. In conjunction with each of the completed acquisitions, AmerGen has received fully funded decommissioning trust funds which have sufficient assets to fully cover the anticipated costs to decommission each nuclear plant following its licensed life, including an annual net growth rate of 2% in accordance with NRC regulations. AmerGen believes that the amount of the trust funds and investment earnings thereon will be sufficient to meet its decommissioning obligations. Combining the nuclear operations of the Company and Unicom will present significant challenges. The combined nuclear operations of Exelon will be significantly larger than either company's nuclear operations and will require the integration of nuclear operations among the Company and Unicom. Exelon's nuclear operation will be the largest in the United States in terms of size and geographic scope. Exelon will have to build on the successful nuclear management of the Company and Unicom to maintain and improve the safe and efficient operation of its nuclear generating plants. Other Factors Annual and quarterly operating results can be significantly affected by weather. Since the Company's peak retail demand is in the summer months, temperature variations in summer months are generally more significant than variations during winter months. 42 Inflation affects the Company through increased operating costs and increased capital costs for utility plant. As a result of the rate caps imposed under the Final Restructuring Order and price pressures due to competition, the Company may not be able to pass the costs of inflation through to customers. The Company's operations have in the past and may in the future require substantial capital expenditures in order to comply with environmental laws. Additionally, under federal and state environmental laws, the Company is generally liable for the costs of remediating environmental contamination of property now or formerly owned by the Company and of property contaminated by hazardous substances generated by the Company. The Company owns or leases a number of real estate parcels, including parcels on which its operations or the operations of others may have resulted in contamination by substances which are considered hazardous under environmental laws. The Company is currently involved in a number of proceedings relating to sites where hazardous substances have been deposited and may be subject to additional proceedings in the future. The Company has identified 28 sites where former manufactured gas plant (MGP) activities have or may have resulted in actual site contamination. The Company is presently engaged in performing various levels of activities at these sites, including initial evaluation to determine the existence and nature of the contamination, detailed evaluation to determine the extent of the contamination and the necessity and possible methods of remediation, and implementation of remediation. The Pennsylvania Department of Environmental Protection has approved the Company's clean-up of three sites. Ten other sites are currently under some degree of active study and/or remediation. As of December 31, 1999 and 1998, the Company had accrued $57 million and $60 million, respectively, for environmental investigation and remediation costs, including $32 million and $33 million, respectively, for MGP investigation and remediation that currently can be reasonably estimated. The Company expects to expend $7 million for environmental remediation activities in 2000. The Company cannot predict whether it will incur other significant liabilities for any additional investigation and remediation costs at these or additional sites identified by the Company, environmental agencies or others, or whether such costs will be recoverable from third parties. For a discussion of other contingencies, see Note 6 of Notes to Consolidated Financial Statements. New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," (SFAS No. 133) to establish accounting and reporting standards for derivatives. The new standard requires recognizing all derivatives as either assets or liabilities on the balance sheet at their fair value and specifies the accounting for changes in fair value depending upon the intended use of the derivative. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133," which delayed the effective date for SFAS No. 133 until fiscal years beginning after June 15, 2000. The Company expects to adopt SFAS No. 133 in the first quarter of 2001. The Company is in the process of evaluating the impact of SFAS No. 133 on its financial statements. Year 2000 Readiness Disclosure During 1999 and 1998, the Company successfully addressed, through its Year 2000 Project (Y2K Project), the issue resulting from computer programs using two digits rather than four to define the applicable year and other programming techniques that constrain date calculations or assign special meanings to certain dates. The Y2K Project was divided into four main sections -- Information Technology Systems (IT Systems), Embedded Technology (devices to control, monitor or assist the operation of equipment, machinery or plant), Supply Chain (third-party suppliers and customers) and Contingency Planning. The IT Systems section included both the conversion of applications software that was not Y2K-ready and the replacement of software when available from the supplier. The Supply Chain section included the process of identifying and prioritizing critical suppliers and communicating with them about their plans and progress in addressing the Y2K issue. The current estimated total cost of the Y2K Project is $61 million, the majority of which is attributable to testing. This represents a $9 million reduction of the previously estimated cost of the Y2K Project. This estimate includes the Company's share of Y2K costs for jointly owned facilities. The total amount expended on the Y2K Project through December 31, 1999 was $56 million. The Company is funding the Y2K Project from operating cash flows. 43 The Company's systems experienced no Y2K difficulties on December 31, 1999 or since that date. The Company's operations have not, to date, been adversely affected by any Y2K difficulties that suppliers or customers may have experienced. The Company's Y2K Project also successfully addressed concerns with the date February 29, 2000. The Company will continue to monitor its systems for potential Y2K difficulties through the remainder of 2000. Forward-Looking Statements Except for the historical information contained herein, certain of the matters discussed in this Report are forward-looking statements which are subject to risks and uncertainties. The factors that could cause actual results to differ materially include those discussed herein as well as those listed in Note 6 of Notes to Consolidated Financial Statements and other factors discussed in the Company's filings with the SEC. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Report. The Company undertakes no obligation to publicly release any revision to these forward-looking statements to reflect events or circumstances after the date of this Report. 44 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risks associated with commodity price and supply, interest rates and equity prices. Commodity Risk The Company engages in the wholesale and retail marketing of electricity, and, accordingly, is exposed to risk associated with the price of electricity. The Company's wholesale operations include the physical delivery and marketing of power obtained through Company-owned generation capacity and long, intermediate and short-term contracts. The Company maintains a net positive supply of energy and capacity, through Company-owned generation assets and power purchase and lease agreements, to protect it from the potential operational failure of one of its owned or contracted power generating units. These operations have resulted in the expansion of the Company's load-servicing capabilities beyond its primary operating environment, the PJM control area. A majority of the Company's contractual supplies may be economically moved into this primary operating environment. The Company has also contracted for access to additional generation through bilateral long-term power purchase agreements. These agreements are firm commitments related to power generation of specific generation plants and/or are dispatchable in nature - similar to asset ownership. The Company enters into power purchase agreements with the objective of obtaining low-cost energy supply sources to meet its physical delivery obligations to its customers, and generally with the ability to import these supplies to PJM to displace more expensive energy supplied by Company-owned generation assets. The Company has also purchased firm transmission rights to ensure that it has reliable transmission capacity to physically move its power supplies to meet customer delivery needs. The intent and business objective for the use of its capital assets and contracts is the same - provide the Company with physical power supply to enable it to deliver energy to meet customer needs. The Company's principal risk management activities focus on management of volume risks (supply and transmission) and operational risks (plant or transmission outages) consistent with its business philosophy, not price risks. The Company does not use financial contracts in its wholesale marketing activities and as a matter of business practice does not "pair off" or net settle its contracts. All contracts result in the delivery and/or receipt of power. The Company has entered into bilateral long-term contractual obligations for sales of energy to other load-serving entities including electric utilities, municipalities, electric cooperatives, and retail load aggregators. The Company also enters into contractual obligations to deliver energy to wholesale market participants who primarily focus on the resale of energy products for delivery. The Company provides delivery of its energy to these customers in and out of PJM through access to Company-owned transmission assets or rights for firm transmission. The Company completed a thorough review of its activities after the issuance of EITF 98-10, "Accounting for Contracts Involved in Energy Trading and Risk Management Activities" in the first quarter of 1999 and concluded, based on the indicators included in EITF 98-10, that its activities were not "trading" activities. The Company continues to believe that its business philosophy, performance measurement and other management activities are not consistent with that of a "trading organization." The Company's short-term and long-term commitments to purchase and sell energy and energy-related products are carried at the lower of cost or market. The Company reports the revenue and expense associated with all of its energy contracts at the time the underlying physical transaction closes consistent with its business philosophy of generating and delivering physical power to customers. The Company's retail operations include the regulated sales of electricity through its distribution business unit and unregulated sales of electricity through its generation business unit. Both energy suppliers secure supply through the Company's wholesale operations. The transmission and distribution component of the Company's rates for regulated sales of electricity are capped through December 2006. Additionally, generation rate caps, defined as the sum of the applicable transition charge and energy and capacity charge, will remain in effect through 2010. Accordingly, the Company does not have the ability to pass on increases in the price of electricity through rate increases to its customers. As of December 31, 1999, a hypothetical 10% increase in the cost of electricity would result in a $82 million decrease in pretax earnings for 2000. The Company's rates for unregulated sales of electricity are not subject to rate caps. 45 Under the Final Restructuring Order, the Company's customers have been permitted to shop for their generation supplier since January 1, 1999. The Final Restructuring Order established market share thresholds to ensure that a minimum number of residential and commercial customers choose an EGS or a Company affiliate. If less than 35% and 50% of residential and commercial customers have chosen an EGS, including 20% of residential customers assigned to an EGS as a PLR default supplier, by January 1, 2002 and January 1, 2003, respectively, the number of customers sufficient to meet the necessary threshold levels shall be randomly selected and assigned to an EGS through a PUC-determined process. As of December 31, 1999, the Company estimates that the impact on pretax earnings for 2000 would be insignificant. Interest Rate Risk The Company uses a combination of fixed rate and variable rate debt to reduce interest rate exposure. Interest rate swaps may be used to adjust exposure when deemed appropriate, based upon market conditions. These strategies attempt to provide and maintain the lowest cost of capital. As of December 31, 1999, a hypothetical 10% increase in the interest rates associated with variable rate debt would result in a $1 million decrease in pretax earnings for 2000. The Company has entered into interest rate swaps to manage interest rate exposure associated with the floating rate series of Transition Bonds. At December 31, 1999, these interest rate swaps had a fair market value of $102 million which was based on the present value difference between the contracted rate and the market rates at December 31, 1999. The aggregate fair value of the Transition Bond derivative instruments that would have resulted from a hypothetical 50 basis point decrease in the spot yield at December 31, 1999 is estimated to be $63 million. If the derivative instruments had been terminated at December 31, 1999, this estimated fair value represents the amount to be paid by the counterparties to the Company. The aggregate fair value of the Transition Bond derivative instruments that would have resulted from a hypothetical 50 basis point increase in the spot yield at December 31, 1999 is estimated to be $137 million. If the derivative instruments had been terminated at December 31, 1999, this estimated fair value represents the amount to be paid by the counterparties to the Company. In February 2000, the Company entered into forward starting interest rate swaps for a notional amount of $1 billion in anticipation of the issuance of $1 billion of transition bonds in the second quarter of 2000. Equity Price Risk The Company maintains trust funds, as required by the Nuclear Regulatory Commission (NRC), to fund certain costs of decommissioning its nuclear plants. As of December 31, 1999, these funds were invested primarily in domestic equity securities and fixed rate, fixed income securities and are reflected at fair value on the Consolidated Balance Sheet. The mix of securities is designed to provide returns to be used to fund decommissioning and to compensate for inflationary increases in decommissioning costs. However, the equity securities in the trusts are exposed to price fluctuations in equity markets, and the value of fixed rate, fixed income securities are exposed to changes in interest rates. The Company actively monitors the investment performance and periodically reviews asset allocation in accordance with the Company's nuclear decommissioning trust investment policy. A hypothetical 10% increase in interest rates and decrease in equity prices would result in a $29 million reduction in the fair value of the trust assets. The Company's restructuring settlement agreement provides for the collection of authorized nuclear decommissioning costs through the CTC. Additionally, the Company is permitted to seek recovery from customers of any increases in these costs. Therefore, the Company's equity price risk is expected to remain immaterial. 46 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Report of Independent Accountants To the Shareholders and Board of Directors of PECO Energy Company: In our opinion, the consolidated financial statements listed in the accompanying index appearing under Item 14(a)1. present fairly, in all material respects, the financial position of PECO Energy Company and Subsidiary Companies at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 14(a)2. presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Philadelphia, PA February 29, 2000, except for certain information included in Notes 2 and 4, for which the dates are March 24, 2000 and March 16, 2000, respectively. 47 PECO Energy Company and Subsidiary Companies Consolidated Statements of Income
For the Years Ended December 31, ---------------------------------------------------------------------- 1999 1998 1997 ---- ---- ---- In Thousands, except per share data Operating Revenues Electric .......................................... $4,847,126 $4,829,639 $ 4,149,845 Gas ............................................... 481,069 432,893 451,232 Infrastructure Services ........................... 108,558 -- -- ---------- ---------- ------------ Total Operating Revenues ......................... 5,436,753 5,262,532 4,601,077 Operating Expenses Fuel and Energy Interchange ....................... 2,145,175 1,795,887 1,290,164 Operating and Maintenance ......................... 1,383,885 1,134,579 1,414,596 Early Retirement and Separation Programs .......... -- 124,200 -- Depreciation and Amortization ..................... 236,790 642,842 580,595 Taxes Other Than Income ........................... 261,732 279,515 310,091 ---------- ---------- ------------ Total Operating Expenses ......................... 4,027,582 3,977,023 3,595,446 Operating Income ................................... 1,409,171 1,285,509 1,005,631 Other Income and Deductions Interest Expense .................................. (395,670) (330,842) (372,857) Company Obligated Mandatorily Redeemable Preferred Securities of a Partnership, which holds Solely Subordinated Debentures of the Company ................................... (21,162) (30,694) (28,990) Allowance for Funds Used During Construction ..................................... 3,891 3,522 21,771 Settlement of Salem Litigation .................... -- -- 69,800 Equity in Losses of Telecommunications Investments ...................................... (37,857) (54,385) (14,195) Other, Net ........................................ 18,611 (21,078) (51,833) ---------- ---------- ------------ Total Other Income and Deductions ................ (432,187) (433,477) (376,304) ---------- ---------- ------------ Income Before Income Taxes and Extraordinary Item ................................ 976,984 852,032 629,327 Income Taxes ....................................... 357,998 319,654 292,769 ---------- ---------- ------------ Income Before Extraordinary Item ................... 618,986 532,378 336,558 Extraordinary Item (net of income taxes of $25,415, $13,757, and $1,290,961 for 1999, 1998, and 1997, respectively) ..................................... (36,572) (19,654) (1,833,664) ---------- ---------- ------------ Net Income (Loss) .................................. 582,414 512,724 (1,497,106) Preferred Stock Dividends .......................... 12,176 13,109 16,804 ---------- ---------- ------------ Earnings (Loss) Applicable to Common Stock ......... $ 570,238 $ 499,615 $ (1,513,910) ========== ========== ============ Average Shares of Common Stock Outstanding ......... 196,285 223,219 222,543 ========== ========== ============ Earnings Per Average Common Share: Basic: Income Before Extraordinary Item ................. $ 3.10 $ 2.33 $ 1.44 Extraordinary Item ............................... $ (0.19) $ (0.09) $ (8.24) ---------- ---------- ------------ Net Income (Loss) ................................ $ 2.91 $ 2.24 $ (6.80) ========== ========== ============ Diluted: Income Before Extraordinary Item ................. $ 3.08 $ 2.32 $ 1.44 Extraordinary Item ............................... $ (0.19) $ (0.09) $ (8.24) ---------- ---------- ------------ Net Income (Loss) ................................ $ 2.89 $ 2.23 $ (6.80) ========== ========== ============ Dividends per Common Share ........................ $ 1.00 $ 1.00 $ 1.80 ========== ========== ============
See Notes to Consolidated Financial Statements 48 PECO Energy Company and Subsidiary Companies Consolidated Statements of Cash Flows
For the Years Ended December 31, -------------------------------------------------- 1999 1998 1997 ---- ---- ---- In Thousands Cash Flows from Operating Activities Net Income (Loss) ...................................... $ 582,414 $ 512,724 $ (1,497,106) Adjustments to reconcile Net Income (Loss) to Net Cash provided by Operating Activities: Depreciation and Amortization ........................ 358,027 764,641 703,394 Extraordinary Item (net of income taxes) ............. 36,572 19,654 1,833,664 Provision for Uncollectible Accounts ................. 59,418 71,667 88,263 Deferred Income Taxes ................................ 7,511 (115,640) (17,228) Amortization of Investment Tax Credits ............... (14,301) (18,066) (18,201) Early Retirement and Separation Charge ............... -- 125,000 -- Deferred Energy Costs ................................ 22,973 5,818 (5,652) Salem Litigation Settlement .......................... -- -- 69,800 Equity in Losses of Telecommunications Investments ........................................ 37,857 54,385 14,195 Losses (Gains) on the Disposal of Assets, net ........ 37,832 -- -- Other Items Affecting Operations ..................... (24,290) (8,627) 63,847 Changes in Working Capital: Accounts Receivable .................................. (159,475) 2,576 (347,787) Repurchase of Accounts Receivable .................... (150,000) -- -- Inventories .......................................... (43,390) 14,192 28,628 Accounts Payable ..................................... 63,861 8,971 93,881 Other Current Assets and Liabilities ................. 73,390 54,263 58,539 ------------ ---------- ------------ Net Cash Flows provided by Operating Activities ........ 888,399 1,491,558 1,068,237 ------------ ---------- ------------ Cash Flows from Investing Activities Investment in Plant ................................... (491,097) (415,331) (490,200) Exelon Infrastructure Services Acquisitions ........... (222,492) -- -- Investments in and Advances to Joint Ventures ......... (117,615) (58,653) (30,086) Proceeds from the Sale of Investments ................. 12,226 -- -- Increase in Other Investments ......................... (66,467) (46,742) (83,261) ------------ ---------- ------------ Net Cash Flows used in Investing Activities ............ (885,445) (520,726) (603,547) ------------ ---------- ------------ Cash Flows from Financing Activities Issuance of Long-Term Debt, net of issuance costs ..... 4,169,883 13,486 161,813 Common Stock Repurchase ............................... (1,705,319) -- -- Retirement of Long-Term Debt .......................... (1,343,334) (841,755) (283,303) Change in Short-Term Debt ............................. (388,319) 123,500 114,000 Redemption of COMRPS .................................. (221,250) (80,794) -- Issuance of COMRPS .................................... -- 78,105 50,000 Dividends on Preferred and Common Stock ............... (208,059) (236,307) (417,383) Capital Lease Payments ................................ (138,998) (59,923) (39,100) Termination of Interest Rate Swap Agreements .......... 79,969 -- -- Prepayment Premiums ................................... (48,307) (27,250) -- Preferred Stock Redemptions ........................... (37,091) -- (61,895) Proceeds from Exercise of Stock Options ............... 13,951 50,700 117 Loss on Reacquired Debt ............................... 6,454 6,753 22,752 Other Items Affecting Financing ....................... (2,420) 17,332 (7,522) ------------ ---------- ------------ Net Cash Flows provided by (used in) Financing Activities ............................................ 177,160 (956,153) (460,521) ------------ ---------- ------------ Increase in Cash and Cash Equivalents .................. 180,114 14,679 4,169 ------------ ---------- ------------ Cash and Cash Equivalents at beginning of period ....... 48,083 33,404 29,235 ------------ ---------- ------------ Cash and Cash Equivalents at end of period ............. $ 228,197 $ 48,083 $ 33,404 ============ ========== ============
See Notes to Consolidated Financial Statements 49 PECO Energy Company and Subsidiary Companies Consolidated Balance Sheets
At December 31, ------------------------------- 1999 1998 ---- ---- In Thousands Assets Current Assets Cash and Cash Equivalent ........................................................... $ 228,197 $ 48,083 Accounts Receivable, net Customer ......................................................................... 396,453 181,210 Other ............................................................................ 295,011 129,546 Inventories Fossil Fuel ...................................................................... 112,739 92,288 Materials and Supplies ........................................................... 93,077 82,068 Deferred Energy Costs -- Gas ....................................................... 6,874 29,847 Other .............................................................................. 80,264 19,013 ------------ ----------- Total Current Assets ............................................................. 1,212,615 582,055 ------------ ----------- Property, Plant and Equipment, net .................................................. 5,045,008 4,804,469 Deferred Debits and Other Assets Competitive Transition Charge ...................................................... 5,274,624 5,274,624 Recoverable Deferred Income Taxes .................................................. 638,060 614,445 Deferred Non-Pension Postretirement Benefits Costs ................................. 84,421 90,915 Investments ........................................................................ 538,231 497,648 Loss on Reacquired Debt ............................................................ 70,711 77,165 Goodwill, net ...................................................................... 120,500 -- Other .............................................................................. 135,339 107,042 ------------ ----------- Total Deferred Debits and Other Assets ........................................... 6,861,886 6,661,839 ------------ ----------- Total Assets ..................................................................... $ 13,119,509 $12,048,363 ============ =========== Liabilities and Shareholders' Equity Current Liabilities Notes Payable, Bank ................................................................ $ 163,193 $ 525,000 Long-Term Debt Due Within One Year ................................................. 127,762 361,523 Capital Lease Obligations .......................................................... Due Within One Year ................................................................ 13 69,011 Accounts Payable ................................................................... 429,492 316,292 Taxes Accrued ...................................................................... 203,011 170,495 Interest Accrued ................................................................... 119,200 61,515 Deferred Income Taxes .............................................................. 14,584 14,168 Other .............................................................................. 246,816 217,416 ------------ ----------- Total Current Liabilities ........................................................ 1,304,071 1,735,420 ------------ ----------- Long-Term Debt ...................................................................... 5,968,658 2,919,592 Deferred Credits and Other Liabilities Capital Lease Obligations .......................................................... 455 85,297 Deferred Income Taxes .............................................................. 2,410,769 2,376,792 Unamortized Investment Tax Credits ................................................. 285,698 299,999 Pension Obligations ................................................................ 212,198 219,274 Non-Pension Postretirement Benefits Obligation ..................................... 442,780 421,083 Other .............................................................................. 400,686 354,037 ------------ ----------- Total Deferred Credits and Other Liabilities ..................................... 3,752,586 3,756,482 ------------ ----------- Company Obligated Mandatorily Redeemable Preferred Securities of a Partnership, which holds Solely Subordinated Debentures of the Company ................................ 128,105 349,355 Mandatorily Redeemable Preferred Stock .............................................. 55,609 92,700 Commitments and Contingencies (Note 6) Shareholders' Equity Common Stock ....................................................................... 3,575,514 3,557,035 Preferred Stock .................................................................... 137,472 137,472 Other Paid-In Capital .............................................................. 1,236 1,236 Accumulated Deficit ................................................................ (102,742) (500,929) Treasury Stock, at cost ............................................................ (1,705,015) -- Accumulated Other Comprehensive Income ............................................. 4,015 -- ------------ ----------- Total Shareholders' Equity ....................................................... 1,910,480 3,194,814 ------------ ----------- Total Liabilities and Shareholders' Equity .......................................... $ 13,119,509 $12,048,363 ============ ===========
See Notes to Consolidated Financial Statements 50 PECO Energy Company and Subsidiary Companies Consolidated Statements of Changes in Common Shareholders' Equity and Preferred Stock
Retained Common Stock Other Earnings ------------------------ Paid-in (Accumulated All Amounts in Thousands Shares Amount Capital Deficit) - ------------------------------------------ --------- ------------- ------------- -------------- Balance at January 1, 1997 ............... 222,542 $3,506,003 $ 1,326 $ 1,138,652 Net Loss ................................. (1,497,106) Other Comprehensive Income ............... Comprehensive Income ..................... Cash Dividends Declared: Preferred Stock (at specified annual rates) ............ (16,804) Common Stock ($1.80 per share) .......... (400,579) Capital Stock Activity: Expenses of Capital Stock Activity....... 98 Stock Repurchase Forward Contract (4,889) Long-Term Incentive Plan Issuances 5 117 Preferred Stock Redemptions ............. (87) ------- ---------- ------ ------------ Balance at December 31, 1997 ............. 222,547 3,506,120 1,239 (780,628) Net Income ............................... 512,724 Other Comprehensive Income ............... Comprehensive Income ..................... Cash Dividends Declared: Preferred Stock (at specified annual rates) ............ (13,109) Common Stock ($1.00 per share) .......... (223,198) Capital Stock Activity: Expenses of Capital Stock Activity....... 2,731 Stock Repurchase Forward Contract (7,677) Long-Term Incentive Plan Issuances 2,137 50,915 (3) 8,228 ------- ---------- --------- ------------ Balance at December 31, 1998 ............. 224,684 3,557,035 1,236 (500,929) Net Income ............................... 582,414 Other Comprehensive Income: Unrealized Gain on Securities, net of $2,757 tax ............................. Comprehensive Income ..................... Cash Dividends Declared: Preferred Stock (at specified annual rates) ............ (12,176) Common Stock ($1.00 per share) .......... (195,883) Capital Stock Activity: Stock Repurchase Forward Contract Settlement ............................. 12,118 Repurchase of Common Stock .............. Long-Term Incentive Plan Issuances 670 18,479 -- 11,714 ------- ---------- --------- ------------ Preferred Stock Redemptions ............. Balance at December 31, 1999 ............. 225,354 $3,575,514 $ 1,236 $ (102,742) ======= ========== ======== ============
(RESTUBBED TABLE)
Accumulated Other Treasury Stock Compre- Compre- Preferred Stock ----------------------------- hensive hensive ----------------- All Amounts in Thousands Shares Amount Income Income Shares Amount - ------------------------------------------ ---------- ----------------- ------------ ---------------- --------- -------- Balance at January 1, 1997 ............... -- $ -- $ -- -- 2,921 $ 292,067 Net Loss ................................. $ (1,497,106) Other Comprehensive Income ............... -- ------------ Comprehensive Income ..................... (1,497,106) ============ Cash Dividends Declared: Preferred Stock (at specified annual rates) ............ Common Stock ($1.80 per share) .......... Capital Stock Activity: Expenses of Capital Stock Activity....... Stock Repurchase Forward Contract Long-Term Incentive Plan Issuances Preferred Stock Redemptions ............. -- -- (619) (61,895) ------ ------ ------ ----- -------- Balance at December 31, 1997 ............. -- -- -- 2,302 230,172 Net Income ............................... 512,724 Other Comprehensive Income ............... -- ------------ Comprehensive Income ..................... 512,742 ============ Cash Dividends Declared: Preferred Stock (at specified annual rates) ............ Common Stock ($1.00 per share) .......... Capital Stock Activity: Expenses of Capital Stock Activity....... Stock Repurchase Forward Contract Long-Term Incentive Plan Issuances ------ ------ ------ ------- -------- Balance at December 31, 1998 ............. -- -- -- 2,302 230,172 Net Income ............................... 582,414 Other Comprehensive Income: Unrealized Gain on Securities, net of $2,757 tax ............................. 4,015 4,015 ------------ Comprehensive Income ..................... $ 586,429 ============ Cash Dividends Declared: Preferred Stock (at specified annual rates) ............ Common Stock ($1.00 per share) .......... Capital Stock Activity: Stock Repurchase Forward Contract Settlement ............................. 24,489 (695,934) Repurchase of Common Stock .............. 22,610 (1,009,385) Long-Term Incentive Plan Issuances (17) 304 Preferred Stock Redemptions ............. (371) (37,091) ------ ------------- ------ ----- -------- Balance at December 31, 1999 ............. 44,082 $ (1,705,015) $ 4,015 1,931 $ 193,081 ====== ============= ======= ===== =========
See Notes to Consolidated Financial Statements 51 PECO Energy Company and Subsidiary Companies NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Significant Accounting Policies Description of Business Incorporated in Pennsylvania in 1929, PECO Energy Company (Company) is engaged principally in the production, purchase, transmission, distribution and sale of electricity to residential, commercial, industrial and wholesale customers and the distribution and sale of natural gas to residential, commercial and industrial customers. Pursuant to the Pennsylvania Electricity Generation Customer Choice and Competition Act (Competition Act), the Commonwealth of Pennsylvania has required the unbundling of retail electric services in Pennsylvania into separate generation, transmission and distribution services with open retail competition for generation services. Since the commencement of deregulation in 1999, the Company serves as the local distribution company providing electric distribution services in its franchised service territory in southeastern Pennsylvania and bundled electric service to customers who do not choose an alternate electric generation supplier. The Company also engages in the wholesale marketing of electricity on a national basis. Through its Exelon Energy division, the Company is a competitive generation supplier offering competitive energy supply to customers throughout Pennsylvania. The Company's infrastructure services subsidiary, Exelon Infrastructure Services, Inc. (EIS), provides utility infrastructure services to customers in several regions of the United States. The Company owns a 50% interest in AmerGen Energy Company, LLC (AmerGen), a joint venture with British Energy, Inc. a wholly-owned subsidiary of British Energy plc, to acquire and operate nuclear generating facilities. The Company also participates in joint ventures which provide telecommunications services in the Philadelphia metropolitan region. Basis of Presentation The consolidated financial statements of the Company include the accounts of its majority-owned subsidiaries after the elimination of its intercompany transactions. The Company accounts for investments in its 50% owned joint ventures under the equity method of accounting. The Company consolidates its proportionate interest in its jointly owned electric utility plants. The Company accounts for its less than 20% owned investments under the cost method of accounting. Accounting policies for regulated operations are in accordance with those prescribed by the regulatory authorities having jurisdiction, principally the Pennsylvania Public Utility Commission (PUC) and the Federal Energy Regulatory Commission (FERC). Accounting for the Effects of Regulation The Company accounts for all of its regulated electric and gas operations in accordance with Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation," requiring the Company to record the financial statement effects of the rate regulation to which such operations are currently subject. Use of SFAS No. 71 is applicable to the utility operations of the Company which meet the following criteria: (1) third-party regulation of rates; (2) cost-based rates; and (3) a reasonable assumption that all costs will be recoverable from customers through rates. The Company believes that it is probable that regulatory assets associated with these operations will be recovered. If a separable portion of the Company's business no longer meets the provisions of SFAS No. 71, the Company is required to eliminate the financial statement effects of regulation for that portion. Effective December 31, 1997, the Company determined that the electric generation portion of its business no longer met the criteria of SFAS No. 71 and, accordingly, implemented SFAS No. 101, "Regulated Enterprises -- Accounting for the Discontinuation of FASB Statement No. 71," for that portion of its business. See Note 5 -- Restructuring Charge. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 52 Revenues Electric and gas revenues are recorded as service is rendered or energy is delivered to customers. At the end of each month, the Company accrues an estimate for the unbilled amount of energy delivered or services provided to its electric and gas customers. The Company recognizes contract revenue and profits on long-term contracts from its infrastructure services business by the percentage-of-completion method of accounting based on costs incurred as a percentage of estimated total costs of individual contracts. Purchased Gas Adjustment Clause The Company's gas rates are subject to a fuel adjustment clause designed to recover or refund the difference between the actual cost of purchased gas and the amount included in base rates. Differences between the amounts billed to customers and the actual costs recoverable are deferred and recovered or refunded in future periods by means of prospective quarterly adjustments to rates. Nuclear Fuel The cost of nuclear fuel is capitalized and charged to fuel expense on the unit of production method. Estimated costs of nuclear fuel disposal are charged to fuel expense as the related fuel is consumed. Nuclear Outage Costs Incremental nuclear maintenance and refueling outage costs are accrued over the unit operating cycle. For each unit, an accrual for incremental nuclear maintenance and refueling outage expense is estimated based upon the latest planned outage schedule and estimated costs for the outage. Differences between the accrued and actual expense for the outage are recorded when such differences are known. Depreciation, Amortization and Decommissioning Depreciation is provided over the estimated service lives of property, plant, and equipment on a straight line basis. Annual depreciation provisions for financial reporting purposes, expressed as a percentage of average service life for each asset category are presented in the table below:
Asset Category 1999 1998 1997 - -------------- ---- ---- ---- Electric -- Transmission and Distribution .......... 1.83% 1.96% 1.88% Electric -- Generation ............................. 5.12% 5.26% 3.90% Gas ................................................ 2.36% 2.40% 2.33% Common ............................................. 2.13% 4.54% 3.94% Other Property and Equipment ....................... 8.61% 2.80% 1.97%
Amortization of regulatory assets is provided over the recovery period as specified in the related regulatory agreement. Goodwill related to the EIS acquisitions in 1999 is being amortized over 20 years. The Company's current estimate of the costs for decommissioning its ownership share of its nuclear generating stations is currently included in regulated rates and is charged to operations over the expected service life of the related plant. The amounts recovered from customers are deposited in trust accounts and invested for funding of future costs. The Company accounts for its investments in decommissioning trust funds by recording a charge to depreciation expense and a corresponding liability in accumulated depreciation for the current period's cost of decommissioning. Unrealized gains and losses are reflected as regulatory liabilities and assets, respectively. The Company believes that the amounts being recovered from customers through electric rates will be sufficient to fully fund the unrecorded portion of its decommissioning obligation. Capitalized Interest Effective January 1, 1998, the Company ceased accruing Allowance for Funds Used During Construction (AFUDC) for electric generation-related construction projects and began using SFAS No. 34, "Capitalizing Interest Costs," to calculate the costs during construction of debt funds used to finance its electric generation-related construction projects. The Company recorded capitalized interest of $6 million and $7 million in 1999 and 1998, respectively. 53 AFUDC is the cost, during the period of construction, of debt and equity funds used to finance construction projects for regulated operations. AFUDC is recorded as a charge to Construction Work in Progress and as a credit to AFUDC included in Other Income and Deductions. The rates used for capitalizing AFUDC, which averaged 6.25% in 1999, 8.63% in 1998 and 8.88% in 1997, are computed under a method prescribed by regulatory authorities. AFUDC is not included in regular taxable income and the depreciation of capitalized AFUDC is not tax deductible. Income Taxes Deferred federal and state income taxes are provided on all significant timing differences between book bases and tax bases of assets and liabilities, transactions that reflect taxable income in a year different from book income and tax carryforwards. Investment tax credits previously used for income tax purposes have been deferred on the Consolidated Balance Sheets and are recognized in book income over the life of the related property. The Company and its subsidiaries file a consolidated federal income tax return. Income taxes are allocated to each of the Company's subsidiaries within the consolidated group based on the separate return method. Gains and Losses on Reacquired Debt Effective January 1, 1998, gains and losses on reacquired debt are being recognized in the Company's Consolidated Statements of Income as incurred. Gains and losses on reacquired debt related to regulated operations incurred prior to January 1, 1998, have been deferred and are being amortized to interest expense over the period approved for ratemaking purposes based on management's assessment of the likelihood of recovery. Comprehensive Income Comprehensive income includes all changes in equity during a period except those resulting from investments by and distributions to shareholders. Comprehensive income is reflected in the Consolidated Statements of Changes in Common Shareholders' Equity and Preferred Stock. Cash and Cash Equivalents The Company considers all temporary cash investments purchased with an original maturity of three months or less to be cash equivalents. Marketable Securities Marketable securities are classified as available-for-sale securities and are reported at fair value, with the unrealized gains and losses, net of tax, reported in other comprehensive income. The Company has no held-to-maturity or trading securities. Inventories Inventories are carried at the lower of average cost or market. Derivative Financial Instruments Hedge accounting is applied only if the derivative reduces the risk of the underlying hedged item and is designated at inception as a hedge, with respect to the hedged item. If a derivative instrument ceased to meet the criteria for deferral, any gains or losses are recognized in income. The Company does not hold or issue derivative financial instruments for trading purposes. Property, Plant and Equipment Property, plant and equipment is recorded at cost. The Company evaluates the carrying value of property, plant and equipment and other long-term assets based upon current and anticipated undiscounted cash flows, and recognizes an impairment when it is probable that such estimated cash flows will be less than the carrying value of the asset. Measurement of the amount of impairment, if any, is based upon the difference between carrying value and fair value. 54 Capitalized Software Costs Costs incurred during the application development stage of software projects for software which is developed or obtained for internal use are capitalized. At December 31, 1999 and 1998, capitalized software costs totaled $105 million and $84 million, respectively, net of $32 million and $37 million accumulated amortization, respectively. Such capitalized amounts are amortized ratably over the expected lives of the projects when they become operational, not to exceed ten years. Retail and Wholesale Energy Commitments The Company's retail and wholesale activities include short-term and long-term commitments, which are carried at the lower of cost or market, to purchase and sell energy and energy-related products in the retail and wholesale markets with the intent and ability to deliver or take delivery. As such, revenue and expense associated with energy commitments is reported at the time the underlying physical transaction closes. New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," to establish accounting and reporting standards for derivatives. The new standard requires recognizing all derivatives as either assets or liabilities on the balance sheet at their fair value and specifies the accounting for changes in fair value depending upon the intended use of the derivative. In June 1999, the FASB issued SFAS No. 137 "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133," which delayed the effective date for SFAS No. 133 until fiscal years beginning after June 15, 2000. The Company expects to adopt SFAS No. 133 in the first quarter of 2001. The Company is in the process of evaluating the impact of SFAS No. 133 on its financial statements. Reclassifications Certain prior year amounts have been reclassified for comparative purposes. These reclassifications had no effect on net income or shareholders' equity. 2. Merger with Unicom Corporation On September 22, 1999, the Company and Unicom Corporation (Unicom) entered into an Agreement and Plan of Exchange and Merger providing for a merger of equals. On January 7, 2000, the Agreement and Plan of Exchange and Merger was amended and restated (Merger Agreement). The Merger Agreement has been approved by both companies' Boards of Directors. The transaction will be accounted for as a purchase with the Company as acquiror. The Merger Agreement provides for (a) the exchange of each share of outstanding common stock, no par value, of the Company for one share of common stock of the new company, Exelon Corporation (Exelon) (Share Exchange) and (b) the merger of Unicom with and into Exelon (Merger and together with the Share Exchange, Merger Transaction). In the Merger, each share of the outstanding common stock, no par value, of Unicom will be converted into 0.875 shares of common stock of Exelon plus $3.00 in cash. In the Merger Agreement, the Company and Unicom agree to repurchase approximately $1.5 billion of common stock prior to the closing of the Merger with Unicom to repurchase approximately $1.0 billion of its common stock, and the Company to repurchase approximately $500 million of its common stock. As a result of the Share Exchange, the Company will become a wholly owned subsidiary of Exelon. As a result of the Merger, Unicom will cease to exist and its subsidiaries, including Commonwealth Edison Company, an Illinois corporation (ComEd), will become subsidiaries of Exelon. Following the Merger Transaction, Exelon will be a holding company with two principal utility subsidiaries, ComEd and the Company. The Merger Transaction is conditioned, among other things, upon the approvals of the common shareholders of both companies and the approval of certain regulatory agencies. The companies have filed an application with the Securities and Exchange Commission (SEC) to register Exelon as a holding company under the Public Utility Holding Company Act of 1935. 55 On March 24, 2000, the Company submitted for approval a joint petition for settlement reached with various parties to the Company's proceeding before the PUC involving the proposed merger with Unicom. The Company reached agreement with advocates for residential, small business and large industrial customers, and representatives of marketers, environmentalists, municipalities and elected officials. Under the comprehensive settlement agreement the Company has agreed to $200 million in rate reductions for all customers over the period January 1, 2002 through 2005 and extended rate caps on the Company's retail electric distribution charges through December 31, 2006, electric reliability and customer service standards, mechanisms to enhance competition and customer choice, expanded assistance to low-income customers, extensive funding for wind and solar energy and community education, nuclear safety research funds, customer protection against nuclear costs outside of Pennsylvania, and maintenance of charitable and civic contributions and employment for the Company's headquarters in Philadelphia. 3. Segment Information The Company evaluates the performance of its business segments based on Earnings Before Interest Expense and Income Taxes (EBIT). The Company's general corporate expenses and certain non-recurring expenses are excluded from the internal evaluation of reportable segment performance. General corporate expenses include the cost of executive management, corporate accounting and finance, information technology, risk management, human resources and legal functions and employee benefits. The Company's distribution business unit consists of its regulated operations including electric transmission and distribution services, retail sales of generation services and retail gas sales and services. The Company's generation business unit consists of its generation assets, its power marketing group, its unregulated retail energy supplier and its investment in AmerGen. The Company's ventures business unit consists of its infrastructure services business, its telecommunications equity investments and other investments. An analysis and reconciliation of the Company's business segment information to the respective information in the consolidated financial statements are as follows (in thousands):
Intersegment Distribution Generation Ventures Corporate Revenues Consolidated -------------- --------------- -------------- --------------- --------------- ------------- Revenues: 1999 $ 3,256,718 $ 2,868,835 $ 110,056 $ -- $ (798,856) $ 5,436,753 1998 $ 3,778,264 $ 2,492,886 $ -- $ -- $ (1,008,618) $ 5,262,532 1997 $ 3,831,453 $ 1,721,417 $ -- $ -- $ (951,793) $ 4,601,077 EBIT: 1999 $ 1,381,686 $ 238,825 $ (41,098) $ (189,488) $ -- $ 1,389,925 1998 $ 1,372,875 $ 233,339 $ (138,605) $ (257,563) $ -- $ 1,210,046 1997 $ 1,754,385 $ (380,985) $ (81,948) $ (282,049) $ -- $ 1,009,403 Depreciation and Amortization: 1999 $ 107,686 $ 125,154 $ 3,950 $ -- $ -- $ 236,790 1998 $ 532,602 $ 110,224 $ 16 $ -- $ -- $ 642,842 1997 $ 100,988 $ 479,301 $ 306 $ -- $ -- $ 580,595 Capital Expenditures: 1999 $ 204,404 $ 244,916 $ 1,408 $ 40,369 $ -- $ 491,097 1998 $ 174,974 $ 205,081 $ 6,271 $ 29,005 $ -- $ 415,331 1997 $ 219,776 $ 210,579 $ 6,393 $ 53,452 $ -- $ 490,200 Total Assets: 1999 $10,293,379 $ 1,779,103 $ 640,375 $ 406,652 $ -- $13,119,509 1998 $ 9,759,174 $ 1,686,771 $ 216,870 $ 385,548 $ -- $12,048,363 1997 $10,008,820 $ 1,729,920 $ 222,418 $ 395,410 $ -- $12,356,568
Equity in losses of telecommunications investments of $38 million, $54 million, and $14 million for 1999, 1998, and 1997, respectively, are included in the ventures business unit's EBIT. 56 4. Rate Matters On May 14, 1998, the PUC issued a final order (Final Restructuring Order) approving a Joint Petition for Settlement filed by the Company and numerous parties to the Company's restructuring proceeding mandated by the Competition Act. The Competition Act provides for the restructuring of the electric utility industry in Pennsylvania, including the deregulation of generation operations and the institution of retail competition for generation services beginning in 1999. The Final Restructuring Order provided for the recovery of $5.3 billion of stranded costs through transition charges to distribution customers over a 12-year period beginning in 1999 with a 10.75% return on the balance. During the 12-year stranded cost recovery period, the Company is amortizing the recoverable stranded costs in accordance with the rate schedules determined in the Final Restructuring Order. The Final Restructuring Order provided for the phase-in of customer choice of electric generation supplier (EGS) for all customers: one-third of the peak load of each customer class on January 1, 1999; one-third on January 2, 1999; and the remaining one-third on January 1, 2000. The Final Restructuring Order also established market share thresholds to ensure that a minimum number of residential and commercial customers choose an EGS or a Company affiliate. If less than 35% and 50% of residential and commercial customers have chosen an EGS, including 20% of residential customers assigned to an EGS as a PLR default supplier, by January 1, 2001 and January 1, 2003, respectively, the number of customers sufficient to meet the necessary threshold levels shall be randomly selected and assigned to an EGS through a PUC-determined process. Effective January 1, 1999, electric rates were unbundled into transmission and distribution components, a Competitive Transition Charge (CTC) for recovery of stranded costs and an energy and capacity charge. Eligible customers who choose an alternative EGS are not charged the energy and capacity charge or the transmission charge and instead purchase their electric energy supply and transmission at market-based rates from their EGS. The Company is in turn reimbursed by the EGS, via the PJM Interconnection, L.L.C., for the cost of the transmission service at a rate approximately equivalent to the unbundled transmission rate. Also effective January 1, 1999, the Company unbundled its retail electric rates for metering, meter reading and billing and collection services to provide credits to those customers who elect to have an alternative supplier perform these services. In accordance with the Competition Act and the Final Restructuring Order, the Company's retail electric rates are capped at the year-end 1996 levels (system-wide average of 9.96 cents/kilowatt hour [kWh]) through June 2005. The Final Restructuring Order required the Company to reduce its retail electric rates by 8% from the 1996 system-wide average rate on January 1, 1999. This rate reduction decreased to 6% on January 1, 2000 until January 1, 2001, when the system-wide average rate cap will revert to 9.96 cents/kWh. The transmission and distribution rate component will remain capped at a system-wide average rate of 2.98 cents/kWh through June 30, 2005. Additionally, generation rate caps, defined as the sum of the applicable transition charge and energy and capacity charge, will remain in effect through 2010. The Final Restructuring Order requires that on January 1, 2001, 20% of all of the Company's residential customers, determined by random selection and without regard to whether such customers are obtaining generation service from an alternate EGS, shall be assigned to a provider of last resort default supplier other than the Company through a PUC-approved bidding process. The Final Restructuring Order authorized the issuance of up to $4 billion of transition bonds (Transition Bonds). In preparation for the issuance of Transition Bonds, the Company formed the PECO Energy Transition Trust (PETT), an independent statutory business trust organized under the laws of Delaware and a wholly owned subsidiary of the Company. On March 25, 1999, PETT issued $4 billion of its Transition Bonds to securitize a portion of the Company's authorized stranded cost recovery. PETT used the $3.95 billion of proceeds from the issuance of Transition Bonds to purchase the Intangible Transition Property (ITP) from the Company. In accordance with the Competition Act, the Company utilized the proceeds from the securitization of a portion of its stranded cost recovery principally to reduce stranded costs including related capitalization. The Company utilized the net proceeds, and interest income earned on the net proceeds, to repurchase 44.1 million shares of Common Stock for an aggregate purchase price of $1,705 million and $150 million of accounts receivable; to retire: $811 million of First Mortgage Bonds, a $400 million term loan, $532 million of commercial paper, a $139 million capital lease obligation and $37 million of preferred stock; to redeem $221 million of COMRPS; and to pay $25 million of debt issuance costs. The Transition Bonds are obligations of PETT, secured by ITP. ITP represents the irrevocable right of the Company or its assignee to collect non-bypassable charges from customers to recover stranded costs. 57 On March 16, 2000, the PUC issued an order approving a Joint Petition for Full Settlement of PECO Energy Company's Application for Issuance of a Qualified Rate Order (QRO) authorizing the Company to securitize up to an additional $1 billion of its authorized recoverable stranded costs. In accordance with the terms of the Joint Petition for Full Settlement, when the QRO becomes final and non-appealable, the Company, through its distribution business unit, will provide its retail customers with rate reductions in the total amount of $60 million beginning on January 1, 2001. This rate reduction will be effective for calendar year 2001 only and will not be contingent upon the issuance of additional transition bonds pursuant to the QRO. The Company will use the proceeds from any additional securitization principally to reduce stranded costs and related capitalization. 5. Restructuring Charge As required by SFAS No. 101, at December 31, 1997, the Company performed an impairment test of its electric generation assets pursuant to SFAS No. 121, on a plant-specific basis and determined that $6.1 billion of its $7.1 billion of electric generation assets would be impaired as of December 31, 1998. The Company estimated the fair value for each of its electric generating units by determining its estimated future operating cash inflows and outflows. Cash flows were determined based on projections of operating revenue, fuel costs, operating and maintenance costs including administrative and general costs, other taxes, nuclear decommissioning costs, capital expenditures, required life extension costs and income taxes. Each plant whose gross future operating cash flows did not exceed the net book value of the plant was determined to have failed the first impairment test and was subjected to a second impairment test. In the second impairment test, generation-related CTC of $3.3 billion, as provided by the PUC in the Final Restructuring Order, was allocated on a pro rata basis to the gross future operating cash flows of the plants determined to have failed the first test. For each plant that failed either impairment test, the Company wrote down the difference between the sum of the gross future operating cash flows and the net book value. Since the Company's retail electric rates continued to be cost-based through January 1, 1999, $333 million representing depreciation expense on electric generation-related assets in 1998 and $91 million representing amortization of other regulatory assets in 1998 were reclassified to a regulatory asset and were amortized in 1998. At December 31, 1997, the Company had total electric generation-related stranded costs of $8.4 billion, representing $5.8 billion of net stranded electric generation plant and $2.6 billion of electric generation-related regulatory assets. The original PUC restructuring order, issued in December 1997, allowed the Company to recover $5.3 billion of its generation-related stranded costs from customers. This resulted in a net unrecoverable amount of $3.1 billion. Accordingly, the Company recorded an extraordinary charge at December 31, 1997 of $3.1 billion ($1.8 billion, net of taxes) of electric generation-related stranded costs that will not be recovered from customers. The Final Restructuring Order did not change the amount of allowable stranded costs. 58 A summary, as of December 31, 1997, of the electric generation-related stranded costs and the amount of such stranded costs written off by the Company is shown in the following table: In Thousands Electric generation-related asset impairment determined pursuant to SFAS No. 121 Net book value of electric generation-related assets before write-down .................. $ 7,115,155 December 31, 1998 market value of electric generation-related assets pursuant to SFAS No. 121 .......................................................................... (990,376) Expected 1998 change in net plant recognized for recovery until cost-based rates cease at December 31, 1998 .................................................................... (303,800) ------------ Electric generation-related asset impairment ............................................. 5,820,979 Electric generation-related regulatory assets Recoverable Deferred Income Taxes ....................................................... 1,762,946 Deferred Limerick Costs ................................................................. 321,420 Deferred Non-Pension Postretirement Benefits Other Than Pensions ........................ 120,899 Deferred Energy Costs - Electric ........................................................ 92,021 Loss on Reacquired Debt ................................................................. 177,183 Above-market component of a purchase power agreement .................................... 90,000 Preliminary survey and investigation charges ............................................ 38,173 Deferred employee compensation absences ................................................. 20,760 Customer education program .............................................................. 31,547 Other post-retirement employee benefit obligations ...................................... 6,384 Feasibility studies cost ................................................................ 8,434 Regulatory asset recognized for recovery until cost-based rates cease at December 31, 1998 .................................................................................. (91,497) ------------ Total electric generation-related regulatory assets ...................................... 2,578,270 ------------ Total electric generation-related stranded costs ......................................... 8,399,249 Amounts approved for collection from customers (regulatory asset pursuant to EITF No. 97-4) ............................................ (5,274,624) ------------ Total Extraordinary Item ................................................................. $ 3,124,625 ============
In 1994, the Company accelerated the recognition of $180 million of non-pension postretirement benefit transition obligation as a result of a voluntary workforce reduction program which resulted in significant reductions in eligibility for future benefits under the postretirement benefit plans. A corresponding regulatory asset was recorded because the Company was permitted to recover the curtailment costs through increased electric base rates. The $121 million of deferred non-pension postretirement benefits other than pensions included in the calculation of stranded costs represents the remaining balance of the generation portion of the regulatory asset. 6. Commitments and Contingencies Capital Commitments The Company estimates that it will spend approximately $927 million for capital expenditures and other investments in 2000. The Company has commitments to provide AmerGen with capital contributions equivalent to 50% of the purchase price of any acquisitions AmerGen makes in 2000. As of December 31, 1999, the Company expects to make $97 million of capital contributions, excluding nuclear fuel, if all of the acquisition agreements that AmerGen entered into in 1999 close in 2000. In addition, the Company and British Energy plc have each agreed to provide up to $55 million to AmerGen at any time for operating expenses. See Note 26 - AmerGen Energy Company, L.L.C. Nuclear Insurance As of December 31, 1999, the Price-Anderson Act limited the liability of nuclear reactor owners to $9.5 billion for claims that could arise from a single incident. The limit is subject to change to account for the effects 59 of inflation and changes in the number of licensed reactors. The Company carries the maximum available commercial insurance of $200 million and the remaining $9.3 billion is provided through mandatory participation in a financial protection pool. Under the Price-Anderson Act, all nuclear reactor licensees can be assessed up to $88 million per reactor per incident, payable at no more than $10 million per reactor per incident per year. This assessment is subject to inflation and state premium taxes. In addition, the U.S. Congress could impose revenue- raising measures on the nuclear industry to pay claims. The Company carries property damage, decontamination and premature decommissioning insurance in the amount of its $2.75 billion proportionate share for each station loss resulting from damage to its nuclear plants. In the event of an accident, insurance proceeds must first be used for reactor stabilization and site decontamination. If the decision is made to decommission the facility, a portion of the insurance proceeds will be allocated to a fund which the Company is required by the Nuclear Regulatory Commission (NRC) to maintain to provide for decommissioning the facility. The Company is unable to predict the timing of the availability of insurance proceeds to the Company for the Company's bondholders, and the amount of such proceeds which would be available. Under the terms of the various insurance agreements, the Company could be assessed up to $32 million for losses incurred at any plant insured by the insurance companies. The Company is self-insured to the extent that any losses may exceed the amount of insurance maintained. Such losses could have a material adverse effect on the Company's financial condition and results of operations. The Company is a member of an industry mutual insurance company which provides replacement power cost insurance in the event of a major accidental outage at a nuclear station. The premium for this coverage is subject to assessment for adverse loss experience. The Company's maximum share of any assessment is $10 million per year. Nuclear Decommissioning and Spent Fuel Storage The Company's current estimate of its nuclear facilities' decommissioning cost is $1.4 billion in 1998 dollars. Decommissioning costs are recoverable through regulated rates. Under rates in effect through December 31, 1999, the Company collected and expensed approximately $29 million in 1999 from customers which was accounted for as a component of depreciation expense and accumulated depreciation. At December 31, 1999 and 1998, $383 million and $336 million, respectively, were included in accumulated depreciation. In order to fund future decommissioning costs, at December 31, 1999 and 1998, the Company held $408 million and $380 million, respectively, in trust accounts which are included as Investments in the Company's Consolidated Balance Sheets and include both net unrealized and realized gains. Net unrealized gains of $45 million and $60 million, respectively, were recognized as a Deferred Credits in the Company's Consolidated Balance Sheets at December 31, 1999 and 1998, respectively. The Company recognized net realized gains of $14 million, $12 million, and $11 million as Other Income in the Company's Consolidated Statement of Income for the years ended December 31, 1999, 1998 and 1997, respectively. The Company believes that the amounts being recovered from customers through regulated rates will be sufficient to fully fund the unrecorded portion of its decommissioning obligation. Under the Nuclear Waste Policy Act of 1982 (NWPA), the U.S. Department of Energy (DOE) is required to begin taking possession of all spent nuclear fuel generated by the Company's nuclear units for long-term storage by no later than 1998. Based on recent public pronouncements, it is not likely that a permanent disposal site will be available for the industry before 2010, at the earliest. In reaction to statements from the DOE that it was not legally obligated to begin to accept spent fuel in 1998, a group of utilities and state government agencies filed a lawsuit against the DOE which resulted in a decision by the U.S. Court of Appeals for the District of Columbia (D.C. Court of Appeals) in July 1996 that the DOE had an unequivocal obligation to begin to accept spent fuel in 1998. In accordance with the NWPA, the Company pays the DOE one mill ($.001) per kilowatthour of net nuclear generation for the cost of nuclear fuel long-term storage and disposal. This fee may be adjusted prospectively in order to ensure full cost recovery. Because of inaction by the DOE following the D.C. Court of Appeals finding of the DOE's obligation to begin receiving spent fuel in 1998, a group of forty-two utility companies, including the Company, and forty-six state agencies, filed suit against the DOE seeking authorization to suspend further payments to the U.S. government under the NWPA and to deposit such payments into an escrow account until such time as the DOE takes effective action to meet its 1998 obligations. In November 60 1997, the D.C. Court of Appeals issued a decision in which it held that the DOE had not abided by its prior determination that the DOE has an unconditional obligation to begin disposal of spent nuclear fuel by January 31, 1998. The D.C. Court of Appeals also precluded the DOE from asserting that it was not required to begin receiving spent nuclear fuel because it had not yet prepared a permanent repository or an interim storage facility. The DOE and one of the utility companies filed Petitions for Reconsideration of the decision which were denied, as were petitions seeking U.S. Supreme Court review of the decision. In addition, the DOE is exploring other options to address delays in the waste acceptance schedule. Peach Bottom Atomic Power Station (Peach Bottom) has on-site pools with capacity to store spent nuclear fuel discharged from the units through 2000 for Unit No. 2 and 2001 for Unit No. 3. Life-of-plant storage capacity will be provided by an on-site dry cask storage facility, the construction of which was essentially completed in 1999. The first use of this facility is scheduled for mid-2000. Limerick Generating Station (Limerick) has on-site facilities with capacity to store spent nuclear fuel to 2007. Salem Generating Station (Salem) has on-site facilities with spent-fuel storage capacity through 2012 for Unit No. 1 and 2016 for Unit No. 2. Energy Commitments The Company's wholesale operations include the physical delivery and marketing of power obtained through Company-owned generation capacity, and long, intermediate and short-term contracts. The Company maintains a net positive supply of energy and capacity, through Company-owned generation assets and power purchase and lease agreements, to protect it from the potential operational failure of one of its owned or contracted power generating units. The Company has also contracted for access to additional generation through bilateral long-term power purchase agreements. These agreements are firm commitments related to power generation of specific generation plants and/or are dispatchable in nature - similar to asset ownership. The Company enters into power purchase agreements with the objective of obtaining low-cost energy supply sources to meet its physical delivery obligations to its customers. The Company has also purchased firm transmission rights to ensure that it has reliable transmission capacity to physically move its power supplies to meet customer delivery needs. The intent and business objective for the use of its capital assets and contracts is to provide the Company with physical power supply to enable it to deliver energy to meet customer needs. The Company does not use financial contracts in its wholesale marketing activities and as a matter of business practice does not "pair off" or net settle its contracts. All contracts result in the delivery and/or receipt of power. The Company has entered into bilateral long-term contractual obligations for sales of energy to other load-serving entities including electric utilities, municipalities, electric cooperatives, and retail load aggregators. The Company also enters into contractual obligations to deliver energy to wholesale market participants who primarily focus on the resale of energy products for delivery. The Company provides delivery of its energy to these customers in and out of PJM through access to Company-owned transmission assets or rights for firm transmission. The Company has entered into three long-term power purchase agreements with Independent Power Producers (IPP) under which the Company makes fixed capacity payments to the IPP in return for exclusive rights to the energy and capacity of the generating units for a fixed period. The terms of the long-term power purchase agreements enable the Company to supply the fuel and dispatch energy from the plants. The plants are currently being constructed and are scheduled to begin operations in 2000, 2001 and 2002, respectively. These agreements provide for access to capacity of up to 800 megawatts (MW), 1,700 MW and 2,500 MW in 2000, 2001 and 2002, respectively. 61 At December 31, 1999, the Company had long-term commitments, in megawatt hours (MWhs) and dollars, relating to the purchase and sale of energy, capacity and transmission rights from unaffiliated utilities and others as expressed in the tables below (in thousands): Power Only ----------------------------------------------- Purchases Sales --------------------- ----------------------- MWhs Dollars MWhs Dollars ------- ----------- -------- ------------ 2000 8,389 $182,188 16,291 $ 499,966 2001 6,684 121,194 9,324 322,496 2002 6,684 128,119 6,309 232,898 2003 6,684 135,060 4,539 108,391 2004 4,928 113,277 3,246 74,501 Thereafter 2,936 82,500 6,396 152,521 -------- ---------- Total $762,338 $1,390,773 ======== ========== Capacity Capacity Transmission Purchases Sales Rights in Dollars in Dollars in Dollars ------------ ------------ ------------- 2000 $ 44,723 $ 62,971 $ 99,817 2001 131,991 68,493 60,295 2002 142,153 58,190 30,326 2003 169,479 54,332 27,156 2004 153,676 41,459 19,811 Thereafter 1,355,200 66,714 19,811 ---------- -------- -------- Total $1,997,222 $352,159 $257,216 ========== ======== ======== In November 1997, the Company signed an agreement with the Massachusetts Health and Education Facilities Authority (HEFA) to provide power to HEFA's members and employees in anticipation of deregulation of the electricity industry in Massachusetts. In the third quarter of 1999, the Company determined that, based upon anticipated prices of energy in Massachusetts through the remaining life of the HEFA contract, it had incurred a loss of approximately $36 million. On April 23, 1999, the Company and Grays Ferry Cogeneration Partnership (Grays Ferry) entered into a final settlement of litigation, subject to the resolution of certain issues. The settlement resulted in a restructuring of the power purchase agreements between the Company and Grays Ferry. The settlement also required the Company to contribute its partnership interest in Grays Ferry to the remaining partners. Accordingly, in the first quarter, the Company recorded a charge to earnings of $14.6 million for the transfer of its partnership interest. The charge for the partnership interest transfer is recorded in Other Income and Deductions on the Company's Consolidated Statements of Income. The settlement also resolved the litigation with Westinghouse Power Generation and the Chase Manhattan Bank. During the third quarter of 1999, the Company revised its estimate for losses associated with the Grays Ferry power purchase agreements and reversed approximately $26 million of reserves, which consisted of the remaining balance of the reserve recognized in 1997. Environmental Issues The Company's operations have in the past and may in the future require substantial capital expenditures in order to comply with environmental laws. Additionally, under federal and state environmental laws, the Company is generally liable for the costs of remediating environmental contamination of property now or formerly owned by the Company and of property contaminated by hazardous substances generated by the Company. The Company owns or leases a number of real estate parcels, including parcels on which its operations or the operations of others may have resulted in contamination by substances which are considered hazardous under environmental laws. The Company is currently involved in a number of proceedings relating to sites where hazardous substances have been deposited and may be subject to additional proceedings in the future. 62 The Company has identified 28 sites where former manufactured gas plant (MGP) activities have or may have resulted in actual site contamination. The Company is presently engaged in performing various levels of activities at these sites, including initial evaluation to determine the existence and nature of the contamination, detailed evaluation to determine the extent of the contamination and the necessity and possible methods of remediation, and implementation of remediation. The Pennsylvania Department of Environmental Protection has approved the Company's clean up of three sites. Ten other sites are currently under some degree of active study and/or remediation. As of December 31, 1999 and 1998, the Company had accrued $57 million and $60 million, respectively, for environmental investigation and remediation costs, including $32 million and $33 million, respectively, for MGP investigation and remediation, that currently can be reasonably estimated. The Company cannot reasonably estimate whether it will incur other significant liabilities for additional investigation and remediation costs at these or additional sites identified by the Company, environmental agencies or others, or whether such costs will be recoverable from third parties. 63 Leases Leased property included in property, plant and equipment was as follows: At December 31, --------------------------- In Thousands 1999 1998 - ------------ ----------- ------------- Nuclear fuel ..................... $ -- $ 523,325 Electric plant ................... 2,321 2,321 -------- ---------- Gross leased property ............ 2,321 525,646 Accumulated amortization ......... (1,853) (371,338) -------- ---------- Net leased property .............. $ 468 $ 154,308 ======== ========== Amortization of leased property totaled $17 million, $60 million, and $39 million for the years ended December 31, 1999, 1998, and 1997, respectively. Interest expense on capital lease obligations was $3 million, $9 million, and $9 million in 1999, 1998, and 1997, respectively. Minimum future lease payments as of December 31, 1999 were: In Thousands For the Years Capital Operating Ending December 31, Leases Leases Total - ------------------- --------- ------------- ---------- 2000 ........................... $ 92 $ 48,421 $ 48,513 2001 ........................... 92 40,179 40,271 2002 ........................... 92 34,531 34,623 2003 ........................... 92 41,113 41,205 2004 ........................... 92 29,720 29,812 Remaining years ................ 629 487,663 488,292 ------ -------- -------- Total minimum future lease payments ...................... $1,089 $681,627 $682,716 ======== ======== Imputed interest (17%) ......... (621) ------ Present value of net minimum future lease payments ......... $ 468 ====== Rental expense under operating leases totaled $54 million, $69 million and $74 million in 1999, 1998 and 1997, respectively. In 1999, the Company entered into a lease for two buildings that will be the headquarters for its generation business unit. These buildings are being constructed in Kennett Square, Pennsylvania and are anticipated to be completed on or about June 1, 2000 and September 1, 2000, respectively. The lease terms are for 20 years with renewal options. Estimated lease payments for 2000 are $4 million. Litigation Cajun Electric Power Cooperative, Inc. On May 27, 1998, the United States Department of Justice, on behalf of the Rural Utilities Service and the Chapter 11 Trustee for the Cajun Electric Power Cooperative, Inc. (Cajun), filed an action claiming breach of contract against the Company in the United States District Court for the Middle District of Louisiana arising out of the Company's termination of the contract to purchase Cajun's interest in the River Bend nuclear power plant. This action seeks the full purchase price of the 30% interest in the River Bend nuclear plant, $50 million, plus interest and consequential damages. While the Company cannot predict the outcome of this matter, the Company believes that it validly exercised its right of termination and did not breach the agreement. 64 Pennsylvania Real Estate Tax Appeals The Company is involved in tax appeals regarding two of its nuclear facilities, Limerick (Montgomery County) and Peach Bottom (York County). The Company is also involved in the tax appeal for Three Mile Island Unit No. 1 Nuclear Generating Facility (Dauphin County) through AmerGen. The Company does not believe the outcome of these matters will have a material adverse effect on the Company's results of operations or financial condition. General The Company is involved in various other litigation matters. The ultimate outcome of such matters, while uncertain, is not expected to have a material adverse effect on the Company's financial condition or results of operations. 7. Retirement Benefits The Company and its subsidiaries have a defined benefit pension plan and postretirement benefit plans applicable to essentially all employees. The following provides a reconciliation of benefit obligations, plan assets and funded status of the plans.
Pension Benefits Other Postretirement Benefits ----------------------------------- ------------------------------- In Thousands 1999 1998 1999 1998 - ---------------------------------------------------- ------------------ -------------- -------------- -------------- Change in Benefit Obligation Net benefit obligation at beginning of year ........ $ 2,309,586 $2,141,040 $ 847,771 $ 779,231 Service cost ....................................... 28,780 30,167 18,756 18,375 Interest cost ...................................... 153,740 153,644 57,518 53,924 Plan participants' contributions ................... -- -- 419 397 Plan amendments .................................... 25,000 -- -- -- Actuarial (gain)/loss .............................. (299,667) 143,274 (76,651) (8,260) Curtailments ....................................... -- (73,330) -- 10,403 Settlements ........................................ -- (46,541) -- -- Special termination benefits ....................... -- 114,182 -- 29,712 Gross benefits paid ................................ (163,496) (152,850) (49,329) (36,011) ------------ ---------- ---------- ---------- Net benefit obligation at end of year .............. $ 2,053,943 $2,309,586 $ 798,484 $ 847,771 ============ ========== ========== ========== Change in Plan Assets Fair value of plan assets at beginning of year ..... $ 2,745,347 $2,538,039 $ 223,285 $ 178,045 Actual return on plan assets ....................... 399,863 343,754 20,076 23,535 Employer contributions ............................. 495 16,404 50,047 57,319 Plan participants' contributions ................... -- -- 419 397 Gross benefits paid ................................ (163,496) (152,850) (49,329) (36,011) ------------ ---------- ---------- ---------- Fair value of plan assets at end of year ........... $ 2,982,209 $2,745,347 $ 244,498 $ 223,285 ============ ========== ========== ========== Funded status at end of year ....................... $ 928,266 $ 435,761 $ (553,986) $ (624,486) Unrecognized net actuarial (gain)/loss ............. (1,129,187) (659,480) (42,738) 37,617 Unrecognized prior service cost .................... 84,923 65,419 -- -- Unrecognized net transition obligation (asset) ..... (26,071) (30,512) 153,944 165,786 ------------ ---------- ---------- ---------- Net amount recognized at end of year ............... $ (142,069) $ (188,812) $ (442,780) $ (421,083) ============ ========== ========== ========== Amounts recognized in the consolidated balance sheets consist of: Prepaid benefit cost .............................. $ 70,129 $ 30,462 N/A N/A Accrued benefit cost .............................. (212,198) (219,274) (442,780) (421,083) ------------ ---------- ---------- ---------- Net amount recognized at end of year ............... $ (142,069) $ (188,812) $ (442,780) $ (421,083) ============ ========== ========== ==========
65
Pension Benefits Other Postretirement Benefit ---------------------------------- ------------------------------------------------ 1999 1998 1997 1999 1998 1997 Weighted-average assumptions as of December 31, Discount rate .......................... 8.00% 7.00% 7.25% 8.00% 7.00% 7.25% Expected return on plan assets ......... 9.50% 9.50% 9.50% 8.00% 8.00% 8.00% Rate of compensation increase .......... 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% Health care cost trend on covered charges ............................... N/A N/A N/A 8.00% 6.50% 7.00% decreasing decreasing decreasing to ultimate to ultimate to ultimate trend of 5.0% trend of 5.0% trend of 5.0% in 2006 in 2002 in 2002
Pension Benefits Other Postretirement Benefit ------------------------------------------- -------------------------------------- 1999 1998 1997 1999 1998 1997 Components of net periodic benefit cost (benefit) Service cost ............................ $ 28,780 $ 30,167 $ 25,368 $ 18,756 $ 18,375 $ 14,401 Interest cost ........................... 153,740 153,644 150,057 57,518 53,924 54,149 Expected return on assets ............... (222,166) (209,976) (182,866) (16,372) (13,243) (9,984) Amortization of: Transition obligation (asset) .......... (4,441) (4,538) (4,538) 11,842 14,882 14,882 Prior service cost ..................... 5,496 6,441 6,441 -- -- -- Actuarial (gain)loss ................... (7,657) (7,028) (3,898) -- -- -- Curtailment charge (credit) ............. -- (62,002) -- -- 52,961 -- Settlement charge (credit) .............. -- (13,439) -- -- -- -- ---------- ---------- ---------- --------- --------- -------- Net periodic benefit cost (benefit) ..... $ (46,248) $ (106,731) $ (9,436) $ 71,744 $ 126,899 $ 73,448 ========== ========== ========== ========= ========= ======== Special termination benefit charge . $ -- $ 114,182 $ -- $ -- $ 29,712 $ -- ========== ========== ========== ========= ========= ========
Sensitivity of retiree welfare results Effect of a one percentage point increase in assumed health care cost trend on total service and interest cost components ................................................................... $ 11,240 on postretirement benefit obligation ............................................................................ $ 90,130 Effect of a one percentage point decrease in assumed health care cost trend on total service and interest cost components .................................................................. $ (9,150) on postretirement benefit obligation ........................................................................... $ (74,980)
Prior service cost is amortized on a straight-line basis over the average remaining service period of employees expected to receive benefits under the plans. During 1999, all retirees and beneficiaries who began receiving benefit payments prior to January 1, 1994 were granted a cost-of-living adjustment resulting in a $25 million increase in the projected benefit obligation. During 1998, costs were recognized for special termination benefits in connection with the retirement incentives and enhanced severance benefits provided under the Company's Workforce Reduction Program. The Company provides certain health care and life insurance benefits for retired employees. Company employees become eligible for these benefits if they retire from the Company with ten years of service. These benefits and similar benefits for active employees are provided by several insurance companies whose premiums are based upon the benefits paid during the year. The Company sponsors a qualifying savings plan covering all employees. Contributions made by participating employees are matched based on a specified percentage of employee contribution up to 5% of the employees' pay base. The cost of the Company's matching contribution to the savings plan totaled $7 million, $7 million and $3 million in 1999, 1998 and 1997, respectively. 66 8. Accounts Receivable Accounts receivable -- Customer at December 31, 1999 and 1998 included unbilled operating revenues of $153 million and $142 million, respectively. The allowance for uncollectible accounts at December 31, 1999 and 1998 was $112 million and $122 million, respectively. Accounts receivable -- Other at December 31, 1999 and 1998 included notes receivable from a telecommunications investment of $153 million and $89 million, respectively. The interest rate on the notes receivable was 5.66% and 4.28% at December 31, 1999 and 1998, respectively. Interest income related to the notes receivable was $6 million and $3 million in 1999 and 1998, respectively. The Company is party to an agreement with a financial institution under which it can sell or finance with limited recourse an undivided interest, adjusted daily, in up to $275 million of designated accounts receivable until November 2000. At December 31, 1999, the Company had sold a $275 million interest in accounts receivable, consisting of a $226 million interest in accounts receivable which the Company accounted for as a sale under SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities," and a $49 million interest in special-agreement accounts receivable which were accounted for as a long-term note payable. See Note 14 -- Long-Term Debt. The Company retains the servicing responsibility for these receivables. The agreement requires the Company to maintain the $275 million interest, which, if not met, requires the Company to deposit cash in order to satisfy such requirements. At December 31, 1999, the Company met this requirement and was not required to make a deposit. As of December 31, 1999, the Company was not in compliance with one of the requirements of the agreement; however, a waiver has been obtained. 9. Property, Plant and Equipment A summary of property, plant and equipment by classification as of December 31, 1999 and 1998 is as follows:
In Thousands 1999 1998 - ------------ ------------- ------------- Electric -- Transmission & Distribution ......................... $3,953,321 $3,833,780 Electric -- Generation .......................................... 1,941,881 1,713,430 Gas ............................................................. 1,175,598 1,131,999 Common .......................................................... 403,760 407,320 Nuclear Fuel .................................................... 1,551,501 932,156 Construction Work in Progress ................................... 231,721 272,590 Leased Property ................................................. 2,321 525,646 Other Property, Plant and Equipment ............................. 152,029 44,520 ---------- ---------- Total Property, Plant and Equipment .......................... 9,412,132 8,861,441 Less Accumulated Depreciation (including accumulated amortiza- tion of nuclear fuel of $1,280,850 and $790,249 in 1999 and 1998, respectively) ......................................... 4,367,124 4,056,972 ---------- ---------- Property, Plant and Equipment, net .............................. $5,045,008 $4,804,469 ========== ==========
Depreciation expense was $188 million, $182 million, and $489 million in 1999, 1998 and 1997, respectively. 10. Common Stock At December 31, 1999 and 1998, common stock without par value consisted of 500,000,000 shares authorized and 181,271,692 and 224,684,306 shares outstanding, respectively. At December 31, 1999, there were 5,800,841 shares reserved for issuance under the Company's Dividend Reinvestment and Stock Purchase Plan. Stock Repurchase During 1997, the Company's Board of Directors authorized the repurchase of up to 25 million shares of its common stock from time to time through open-market, privately negotiated and/or other types of transactions in 67 conformity with the rules of the SEC. Pursuant to these authorizations, the Company entered into forward purchase agreements to be settled from time to time, at the Company's election, on a physical, net share or net cash basis. The Company utilized the proceeds from the securitization of a portion of its stranded cost recovery to physically settle these agreements in the first quarter of 1999, resulting in the purchase of 21.5 million shares of common stock for $696 million. In connection with the settlement of these agreements, the Company received $18 million in accumulated dividends on the repurchased shares and paid $6 million of interest. In January 2000, in connection with the Merger Agreement, the Company entered into a forward purchase agreement to purchase $500 million of its common stock from time to time through open-market, privately negotiated and/or other types of transactions in conformity with the rules of the SEC. This forward purchase agreement can be settled from time to time, at the Company's election, on a physical, net share or net cash basis. The amount at which these agreements can be settled is dependent principally upon the market price of the Company's common stock as compared to the forward purchase price per share and the number of shares to be settled. Stock Option Plans The Company maintains a Long-Term Incentive Plan (LTIP) for certain full-time salaried employees of the Company and a broad-based incentive program for all other employees. The types of long-term incentive awards which have been granted under the LTIP are non-qualified options to purchase shares of the Company's common stock and shares of restricted common stock. The types of long-term incentive awards which have been granted under the broad-based incentive program are non-qualified options to purchase shares of the Company's common stock. At December 31, 1999, there were 9,000,000 options authorized for issuance under the LTIP and 2,000,000 options authorized under the broad-based incentive program. The Company uses the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." If the Company elected to account for its stock option plans based on SFAS No. 123, it would have recognized compensation expense of $10 million, $6 million and $2 million, respectively for 1999, 1998 and 1997, respectively. In addition, earnings applicable to common stock would have been $560 million, $494 million and $(1,516) million for 1999, 1998 and 1997, respectively, and earnings per average common share would have been $2.84, $2.20 and $(6.81) for 1999, 1998 and 1997, respectively. The exercise price of the stock options is equal to the fair market value of the underlying stock on the date of issue. 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, 1999 and changes for the three years then ended, is as follows:
Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Price Price Price Shares (per share) Shares (per share) Shares (per share) 1999 1999 1998 1998 1997 1997 ------------- ------------- --------------- ------------- ------------- ------------ Balance at January 1 ........... 4,663,008 $ 27.71 3,816,794 $ 26.14 2,961,194 $ 26.68 Options granted ................ 2,049,789 39.32 3,087,558 28.37 1,139,000 22.49 Options exercised .............. (568,000) 25.17 (2,130,744) 23.86 -- -- Options canceled ............... (78,900) 38.14 (110,600) 26.40 (283,400) 24.96 --------- ---------- --------- Balance at December 31 ......... 6,065,897 31.91 4,663,008 28.65 3,816,794 26.14 ========= ========== ========= Exercisable at December 31 . 3,331,903 25.60 3,462,550 23.91 2,800,794 26.65 ========= ========== ========= Weighted average fair value of options granted during year .......................... $ 8.24 $ 3.43 $ 2.97 ======= ======= =======
68 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 1999, 1998 and 1997, respectively:
1999 1998 1997 --------- --------- --------- Dividend yield ................... 5.7% 6.8% 6.2% Expected volatility .............. 30.5% 21.4% 19.5% Risk-free interest rate .......... 5.9% 5.5% 6.4% Expected life (years) ............ 9.5 9.5 5
At December 31, 1999, the option groups outstanding, based on ranges of exercise prices, were as follows:
Options Outstanding Options Exercisable --------------------------------------- --------------------------- Weighted Average Remaining Weighted Weighted Contractual Average Average Range of Number Life Exercise Number Exercise Exercise Prices Outstanding (years) Price Exercisable Price - ----------------------- ------------- ---------- ---------- ------------- ----------- $15.75-$20.00 ......... 827,150 7.71 $19.61 827,150 $19.61 $20.01-$25.00 ......... 890,500 7.75 22.17 890,500 22.17 $25.01-$30.00 ......... 1,204,300 4.73 27.43 1,201,800 27.43 $30.01-$35.00 ......... 203,400 9.49 33.51 44,000 32.92 $35.01-$50.00 ......... 2,940,547 9.23 40.03 368,453 40.53 --------- --------- Total ................. 6,065,897 3,331,903 ========= =========
The Company issued 120,300 and 7,000 shares of restricted common stock during 1999 and 1998, respectively. Vesting for the restricted common stock awards is over a period not to exceed 10 years from the grant date. Compensation cost of $5 million and $0.2 million, respectively, associated with these awards is amortized to expense over the vesting period. The related accumulated amortization was approximately $2 million at December 31, 1999. 11. Earnings Per Share Diluted earnings per average common share is calculated by dividing earnings applicable to common stock by the weighted average shares of common stock outstanding including stock options outstanding under the Company's stock option plans considered to be common stock equivalents. The following table shows the effect of these stock options on the weighted average number of shares outstanding used in calculating diluted earnings per average common share (in thousands):
1999 1998 1997 --------- --------- ---------- Average Common Shares Outstanding ............................. 196,285 223,219 222,543 Assumed Conversion of Stock Options ........................... 1,331 685 -- ------- ------- ------- Potential Average Dilutive Common Shares Outstanding .......... 197,616 223,904 222,543 ======= ======= =======
69 12. Preferred and Preference Stock At December 31, 1999 and 1998, Series Preference Stock, no par value, consisted of 100,000,000 shares authorized, of which no shares were outstanding. At December 31, 1999 and 1998, cumulative Preferred Stock, no par value, consisted of 15,000,000 shares authorized and the amounts set forth below:
Shares Outstanding Amount in Thousands --------------------------- ----------------------- Current Redemption At December 31, Price (a) 1999 1998 1999 1998 -------------- ------------ ------------ ---------- ---------- Series (without mandatory redemption) $4.68 $104.00 150,000 150,000 $ 15,000 $ 15,000 $4.40 112.50 274,720 274,720 27,472 27,472 $4.30 102.00 150,000 150,000 15,000 15,000 $3.80 106.00 300,000 300,000 30,000 30,000 $7.48 (b) 500,000 500,000 50,000 50,000 ------- ------- -------- -------- 1,374,720 1,374,720 137,472 137,472 Series (with mandatory redemption) $6.12 (c) 556,200 927,000 55,609 92,700 --------- --------- -------- -------- Total preferred stock 1,930,920 2,301,720 $193,081 $230,172 ========= ========= ======== ========
(a) Redeemable, at the option of the Company, at the indicated dollar amounts per share, plus accrued dividends. (b) None of the shares of this series are subject to redemption prior to April 1, 2003. (c) The Company exercised its right to double (to 370,800 shares, from the original 185,400 share requirement) the first annual sinking fund requirement for the $6.12 Series on August 2, 1999. Future annual sinking fund requirements in 2000 to 2002 are $18.5 million. 13. Company Obligated Mandatorily Redeemable Preferred Securities of a Partnership (COMRPS) At December 31, 1999 and 1998, PECO Energy Capital, L.P. (Partnership), a Delaware limited partnership of which a wholly owned subsidiary of the Company is the sole general partner, had outstanding COMRPS as set forth in the following table:
Trust Receipts Outstanding Amount in Thousands --------------------------- ------------------------- Mandatory Distri- Redemption bution At December 31, Series Date Rate 1999 1998 1999 1998 - --------------- ------------ ---------- ------------ ------------ ----------- ----------- A (a) ......... 2043 9.00% -- 8,850,000 $ -- $221,250 C (b) ......... 2037 8.00% 2,000,000 2,000,000 50,000 50,000 D (c) ......... 2028 7.38% 78,105 78,105 78,105 78,105 --------- --------- -------- -------- Total ......... 2,078,105 10,928,105 $128,105 $349,355 ========= ========== ======== ========
(a) On July 30, 1999, PECO Energy Capital Trust I redeemed all outstanding Trust Receipts, each representing a 9.00% Cumulative Monthly Income Preferred Security, Series A of PECO Energy Capital, L.P. (b) Ownership of this series is evidenced by Trust Receipts, each representing an 8.00% COMRPS, Series C with a liquidation value of $25, representing limited partnership interests. The Trust Receipts were issued by PECO Energy Capital Trust II, the sole assets of which are 8.00% COMRPS, Series C. Each holder of Trust Receipts is entitled to withdraw the corresponding number of 8.00% COMRPS, Series C from the Trust in exchange for the Trust Receipts so held. (c) Ownership of this series is evidenced by Trust Receipts, each representing a 7.38% COMRPS, Series D with a liquidation value of $1,000, representing limited partnership interests. The Trust Receipts were issued by PECO Energy Capital Trust III, the sole assets of which are 7.38% COMRPS, Series D. Each holder of Trust Receipts is entitled to withdraw the corresponding number of 7.38% COMRPS, Series D from the Trust in exchange for the Trust Receipts so held. Each series is supported by the Company's deferrable interest subordinated debentures, held by the Partnership, which bear interest at rates equal to the distribution rates on the related series of COMRPS. The interest expense on the debentures is included in Other Income and Deductions in the Consolidated Statements of Income and is deductible for tax purposes. 70 14. Long-Term Debt PECO Energy Transition Trust -- Series 1999-A Transition Bonds
At December 31, Expected -------------------------- 1999 1998 Final -------------- ------- Payment Termination Rate Date(a) Date(a) In Thousands Class --------------- ---------- ------------ -------------------------- A-1 5.48% 2001 2003 $ 201,970 $ -- A-2 5.63% 2003 2005 275,371 -- A-3 6.06%(b) 2004 2006 667,000 -- A-4 5.80% 2005 2007 458,519 -- A-5 6.14%(b) 2007 2009 464,600 -- A-6 6.05% 2007 2009 993,386 -- A-7 6.13% 2008 2009 896,654 -- Unamoritized debt discount (4,886) -- ---------- ---- PECO Energy Transition $3,952,614 $ -- Trust subtotal
PECO Energy Company
First and refunding mortgage bonds (c) Due 7 1/2%-9 1/4% .......... 1999 -- 325,000 5 5/8%-7 3/8% .......... 2001 330,000 330,000 7 1/8%-8% .............. 2002 500,000 500,000 6 1/2%-6 5/8% .......... 2003 450,000 450,000 6 3/8%-10 1/4% ......... 2005-2009 107,500 111,562 (d) .................... 2010-2014 154,200 154,200 6 5/8%-8 3/4% .......... 2020-2024 150,710 1,082,130 ------- --------- Total first and refunding mortgage bonds ............... 1,692,410 2,952,892 Notes payable .......................................... 17,236 15,930 Pollution control notes (e) ............................ 369,125 212,705 Medium-term notes (f) .................................. 20,000 50,000 Note Payable -- accounts receivable agreement (g) ...... 49,381 66,837 Unamortized debt discount and premium, net ............. (4,897) (17,249) --------- --------- PECO Energy Company subtotal ........................... 2,143,255 3,281,115 Other .................................................. 551 -- --------- --------- Total long-term debt ................................... 6,096,420 3,281,115 Due within one year (h) ................................ 127,762 361,523 --------- --------- Long-Term debt ......................................... $5,968,658 $2,919,592 ========== ==========
(a) The Expected Final Payment Date is the date when all principal and interest of the related class of Transition Bonds is expected to be paid in full in accordance with the expected amortization schedule for the applicable class. The Termination Date is the date when all principal and interest of the related class of Transition Bond must be paid in full. The current portion of Transition Bonds is based upon the expected maturity date. (b) Floating rate, as of December 31, 1999, based upon the London Interbank Offering Rate (LIBOR) plus 0.125% for the A-3 class and LIBOR plus 0.20% for the A-5 class. (c) Utility plant is subject to the lien of the Company's mortgage. (d) Pollution control notes issued under the First and Refunding Mortgage. The average annual floating rate was 3.23% at December 31, 1999. (e) Floating rates, which were an average annual interest rate of 4.03% at December 31, 1999. (f) Medium-term notes collateralized by mortgage bonds. The average annual interest rate was 9.095% at December 31, 1999. (g) Floating rate which was 6.06% at December 31, 1999. 71 (h) Long-term debt maturities, including mandatory sinking fund requirements, in the period 2000-2004 are as follows (in millions): 2000 -- $127,762; 2001 -- $525,656; 2002 -- $785,951; 2003 -- $927,461; 2004 -- $523,156 and $3,206,434 thereafter. In 1998, the Company entered into treasury forwards and forward starting interest rate swaps to manage interest rate exposure associated with the anticipated issuance of Transition Bonds. On March 18, 1999, these instruments were settled with net proceeds to the Company of approximately $80 million which were deferred and are being amortized over the life of the Transition Bonds as a reduction of interest expense consistent with the Company's hedge accounting policy. Through December 31, 1999, the Company has amortized approximately $9 million of the deferred gain. In 1999, the Company incurred extraordinary charges aggregating $62 million ($37 million, net of tax) related to prepayment premiums and the write-off of unamortized debt costs associated with the repayment of $811 million of First Mortgage Bonds with a portion of the proceeds from the securitization of stranded cost recovery and the refinancing of $156 million of pollution control notes. In 1998, the Company incurred extraordinary charges aggregating $33 million ($20 million, net of tax) related to prepayment premiums and the write-off of unamortized debt costs associated with the repayment of $525 million of First Mortgage Bonds. 15. Notes Payable, Banks
In Thousands 1999 1998 1997 - ------------ ------------- ------------- ------------- Average borrowings ....................................... $ 241,636 $ 209,261 $ 248,111 Average interest rates, computed on daily basis .......... 5.62% 5.83% 5.83% Maximum borrowings outstanding ........................... $ 728,000 $ 525,000 $ 464,500 Average interest rates, at December 31 ................... 6.80% 6.17% 6.74%
The Company paid off its $400 million one-year term loan on March 26, 1999 with the proceeds from the securitization of stranded costs. The Company has a $900 million unsecured revolving credit facility with a group of banks. The credit facility consists of a $450 million 364-day credit agreement and a $450 million three-year credit agreement. The Company uses the credit facility principally to support its $600 million commercial paper program. There was no debt outstanding under this credit facility at December 31, 1999 or 1998. At December 31, 1999 and 1998, the amount of commercial paper outstanding was $142 million and $125 million, respectively. At December 31, 1999, the Company had $21 million outstanding on lines of credit. In addition, at December 31, 1999 and 1998, the Company had available formal and informal lines of credit with banks aggregating $100 million. 72 16. Income Taxes Income tax expense (benefit) is comprised of the following components:
For the Years Ended December 31, In Thousands 1999 1998 1997 - ------------ ------------ ------------- --------------- Included in operations: Federal Current ............................ $ 293,093 $ 358,051 $ 251,509 Deferred ........................... 6,686 (109,211) (11,378) Investment tax credit, net ......... (14,301) (18,066) (18,201) State Current ............................ 71,695 95,309 76,689 Deferred ........................... 825 (6,429) (5,850) --------- ---------- ------------ $ 357,998 $ 319,654 $ 292,769 ========= ========== ============ Included in extraordinary item: Federal Current ............................ (19,693) (10,583) (123) Deferred ........................... -- -- (987,234) State Current ............................ (5,722) (3,174) (29) Deferred ........................... -- -- (303,575) --------- ---------- ------------ (25,415) (13,757) (1,290,961) --------- ---------- ------------ Total ............................... $ 332,583 $ 305,897 $ (998,192) ========= ========== ============
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:
In Thousands 1999 1998 1997 - ------------ ------------ ------------ ----------- Income Before Extraordinary Item ................................ $ 618,986 $ 532,378 $ 336,558 Total income tax provisions ..................................... 357,998 319,654 292,769 --------- --------- --------- Income Before Income Taxes and Extraordinary Item ............... $ 976,984 $ 852,032 $ 629,327 ========= ========= ========= Income taxes on above at federal statutory rate of 35% .......... $ 341,944 $ 298,211 $ 220,264 Increase (decrease) due to: Property basis differences ..................................... (7,926) (10,262) 40,828 State income taxes, net of federal income tax benefit .......... 46,704 57,582 46,046 Amortization of investment tax credit .......................... (14,301) (18,066) (18,201) Prior period income taxes ...................................... (7,153) (12,951) (2,985) Other, net ..................................................... (1,270) 5,140 6,817 --------- --------- --------- Total income tax provisions ..................................... $ 357,998 $ 319,654 $ 292,769 ========= ========= ========= Effective income tax rate ....................................... 36.6% 37.5% 46.5% ========= ========= =========
73 Provisions for deferred income taxes consist of the tax effects of the following temporary differences:
In Thousands 1999 1998 1997 - ------------ -------------- -------------- --------------- Depreciation and amortization ........................... $ 23,067 $ 140,448 $ 57,530 Deferred generation charges recoverable ................. -- (174,787) -- Transition bond hedge ................................... (29,010) -- -- Deferred energy costs ................................... (9,341) (2,491) 2,256 Retirement and separation programs ...................... 7,076 (51,146) (12,734) Incremental nuclear outage costs ........................ 3,610 (7,434) (981) Uncollectible accounts .................................. 10,676 4,764 (1,710) Reacquired debt ......................................... (1,697) (5,026) (8,607) Unbilled revenue ........................................ (2,802) 3,579 (5,110) Environmental clean-up costs ............................ 3,507 (3,574) (15,121) Obsolete inventory ...................................... 976 4,206 (7,074) Limerick plant disallowances and phase-in plan .......... -- -- (747) AMT credits ............................................. -- (42,067) -- Other nuclear operating costs ........................... (6) 9,926 (9,892) Other ................................................... 1,455 7,962 (15,038) -------- ---------- ------------ Subtotal ................................................ 7,511 (115,640) (17,228) -------- ---------- ------------ Extraordinary item ...................................... (25,415) (13,757) (1,290,961) -------- ---------- ------------ Total ................................................... $(17,904) $ (129,397) $ (1,308,189) ======== ========== ============
The tax effect of temporary differences giving rise to the Company's net deferred tax liability as of December 31, 1999 and 1998 is as follows:
Liability or (Asset) In Thousands 1999 1998 - ------------ ------------- ------------- Nature of temporary difference: Plant basis difference ................................... $2,703,627 $2,653,760 Deferred investment tax credit ........................... 285,698 299,999 Deferred debt refinancing costs .......................... 36,923 37,575 Deferred pension and post-retirement obligations ......... (147,977) (157,166) Other, net ............................................... (167,220) (143,209) ---------- ---------- Deferred income taxes (net) on the balance sheet ......... $2,711,051 $2,690,959 ========== ==========
The net deferred tax liability shown above as of December 31, 1999 and 1998 was comprised of $3,140 million and $3,123 million of deferred tax liabilities, and $429 million and $432 million of deferred tax assets, respectively. In accordance with SFAS No. 71, the Company recorded a recoverable deferred income tax asset of $638 million and $614 million at December 31, 1999 and 1998, respectively. These balances are applicable only to regulated assets, due to the discontinuance of SFAS No. 71 for the Company's electric generation operations. These recoverable deferred income taxes include the deferred tax effects associated principally with liberalized depreciation accounted for in accordance with the ratemaking policies of the PUC, as well as the revenue impacts thereon, and assume continued recovery of these costs in future rates. The Internal Revenue Service (IRS) has completed and settled its examinations of the Company's federal income tax returns through 1993. The 1994 through 1996 federal income tax returns have been examined and the Company and the IRS are in the process of settling the audit which is not expected to have a material adverse impact on financial condition or results of operations of the Company. 74 17. Taxes Other Than Income -- Operating For the Years Ended December 31, In Thousands 1999 1998 1997 - ------------------------ ----------- ----------- ----------- Gross receipts ......... $155,115 $155,663 $163,552 Capital stock .......... 4,473 43,754 48,085 Real estate ............ 72,083 51,313 69,597 Payroll ................ 27,867 30,068 25,976 Other .................. 2,194 (1,283) 2,881 -------- -------- -------- Total .................. $261,732 $279,515 $310,091 ======== ======== ======== 18. Jointly Owned Electric Utility Plant The Company's ownership interests in jointly owned electric utility plant at December 31, 1999, were as follows:
Production Plants Transmission ---------------------------------------------------------------- and Peach Bottom Salem Keystone Conemaugh Other Plant Public Service Electric PECO Energy and Gas Sithe Sithe Various Operator Company Company Energy Inc. Energy Inc. Companies - --------------------------------------- -------------- --------------- ------------- ------------- ------------- Participating interest ................ 42.49% 42.59% 20.99% 20.72% 21% to 43% Company's share (In Thousands): Utility plant ......................... $387,869 $17,739 $119,920 $192,555 $83,806 Accumulated depreciation .............. 197,827 11,986 83,933 92,047 33,848 Construction work in progress ......... 23,936 2,163 1,967 5,646 2,794
The Company's participating interests are financed with Company funds and, when placed in service, all operations are accounted for as if such participating interests were wholly owned facilities. On September 30, 1999, the Company reached an agreement to purchase an additional 7.51% ownership interest in Peach Bottom from certain operating subsidiaries of Atlantic City Electric and Delmarva Power & Light Company for $17.5 million. The sale is expected to be completed by mid-2000, subject to federal and state approvals. 19. Supplemental Cash Flow Information The following disclosures supplement the accompanying Consolidated Statements of Cash Flows:
In Thousands 1999 1998 1997 - ------------ ----------- ----------- ----------- Cash paid during the year: Interest (net of amount capitalized) ..................... $349,522 $384,932 $405,838 Income taxes (net of refunds) ............................ 304,473 346,539 345,232 Noncash investing and financing: Capital lease obligations incurred ....................... -- 38,307 32,909 Issuance of Exelon Infrastructure Services stock ......... 11,000 -- --
75 20. Investments
At December 31, In Thousands 1999 1998 - ------------ ----------- ----------- Trust accounts for decommissioning nuclear plants ......... $408,450 $379,938 Telecommunications ventures ............................... 23,349 48,391 Investment in AmerGen ..................................... 39,624 -- Energy services and other ventures ........................ 58,108 69,319 Marketable securities ..................................... 8,700 -- -------- -------- Total ..................................................... $538,231 $497,648 ======== ========
21. Financial Instruments Fair values of financial instruments, including liabilities, are estimated based on quoted market prices for the same or similar issues. The carrying amounts and fair values of the Company's financial instruments as of December 31, 1999 and 1998 were as follows:
1999 1998 Carrying Carrying In Thousands Amount Fair Value Amount Fair Value - ------------ ------------ ------------ ------------ ------------- Non-derivatives: Assets Cash and cash equivalents ............................ $ 228,197 $ 228,197 $ 48,083 $ 48,083 Trust accounts for decommis sioning nuclear plants ... 408,450 408,450 379,938 379,938 Marketable securities ................................ 8,700 8,700 -- -- Liabilities Long-term debt (including amounts due within one year) 6,096,420 5,821,697 3,281,115 3,404,250 Derivatives: Treasury forwards .................................... -- -- -- (300) Interest rate swaps .................................. -- 35,800 -- -- Forward interest rate swaps .......................... -- 66,100 -- (4,400)
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash equivalents and customer accounts receivable. The Company places its cash equivalents with high-credit quality financial institutions. Generally, such investments are in excess of the Federal Deposit Insurance Corporation limit. Concentrations of credit risk with respect to customer accounts receivable are limited due to the Company's large number of customers and their dispersion across many industries. The fair value of derivatives generally reflects the estimated amounts that the Company would receive or pay to terminate the contracts at the reporting date, thereby taking into account the current unrealized gains or losses of open contracts. Dealer quotes are available for all of the Company's derivatives. The Company has entered into interest rate swaps relating to its two variable rate series of Transition Bonds in the aggregate notional amount of $1.1 billion with an average interest rate of 6.65%. The Company has also entered into forward starting interest rate swaps relating to its two variable rate series of Transition Bonds in the aggregate notional amount of $1.1 billion with an average interest rate of 6.01%. The notional amount of derivatives do not represent amounts that are exchanged by the parties and, thus, are not a measure of the Company's exposure. The amounts exchanged are calculated on the basis of the notional or contract amounts, as well as on the other terms of the derivatives, which relate to interest rates and the volatility of these rates. The Company would be exposed to credit-related losses in the event of non-performance by the counterparties that issued the derivative instruments. The Company does not expect that counterparties to the interest rate swaps will fail to meet these obligations, given their high credit ratings. The credit exposure of derivatives contracts is represented by the fair value of contracts at the reporting date. The Company's interest rate swaps are documented under master agreements. Among other things, these agreements provide for a maximum credit exposure for both parties. Payments are required by the appropriate party when the maximum limit is reached. 76 22. Early Retirement and Separation Program In April 1998, the Board of Directors authorized the implementation of a retirement incentive program and an enhanced severance benefit program. The retirement incentive program allowed employees age 50 and older, who have been designated as excess or who are in job classifications facing reduction, to retire from the Company. The enhanced severance benefit program provided non-retiring excess employees with fewer than ten years of service benefits equal to two weeks pay per year of service. Non-retiring excess employees with more than ten years of service received benefits equal to three weeks pay per year of service. Through its Cost Competitiveness Review, the Company identified 1,157 employees across the Company who were considered excess or were in job classifications facing reduction. Of the 1,157 employees, 711 were eligible for and agreed to take the retirement incentive program. The remaining employees are eligible for the enhanced severance benefit program. As of December 31, 1999, 494 employees were eligible for and have taken the retirement incentive program and 433 employees were terminated with the enhanced severance benefit program. The remaining employees are scheduled for termination through the end of June 2000. At December 31, 1998, the Company incurred a charge of $125 million ($74 million, net of income taxes) for its Early Retirement and Separation Program relating to 1,157 employees. This charge consisted of the following: $121 million for the actuarially determined pension and other postretirement benefits costs and $4 million for outplacement services costs and the continuation of benefits for one year. Approximately $0.8 million of the $125 million charge was related to the Company's non-utility operations and accordingly was recorded in Other Income and Deductions. The estimated cost of separation benefits was approximately $47 million, of which $28 million was paid through December 31, 1999. The remaining balance of $19 million is expected to be paid by June 2000. Retirement benefits of approximately $78 million are being paid to the retirees over their lives. All cash payments related to the early retirement and severance program are expected to be funded through the assets of the Company's Service Annuity Plan. 23. Other Income and Deductions Settlement of Salem Litigation In 1997, the Company received $70 million pursuant to the May 1997 settlement agreement with Public Service Electric and Gas Company resolving a suit filed by the Company concerning the shutdown of Salem. Other, Net consists of the following:
At December 31, ------------------------------------------ In Thousands 1999 1998 1997 - ------------------------------------------------ ----------- ------------- ------------ Interest income ................................ $ 51,619 $ 26,349 $ -- Gain on sale of assets ......................... 13,954 1,511 -- Settlement of power purchase agreement ......... -- 14,250 -- Write-off of investments ....................... (14,618) (7,128) (20,045) Nonutility activities .......................... (34,806) (49,234) (33,246) Other .......................................... 2,462 (6,826) 1,458 --------- --------- --------- Total .......................................... $ 18,611 $ (21,078) $ (51,833) ========= ========= =========
77 24. Regulatory Assets At December 31, 1999 and 1998, the Company had deferred the following regulatory assets on the Consolidated Balance Sheets:
In Thousands 1999 1998 - ---------------------------------------------------------- ------------- ------------- Competitive transition charge (see Note 5) ............... $5,274,624 $5,274,624 Recoverable deferred income taxes (see Note 16) .......... 638,060 614,445 Loss on reacquired debt .................................. 70,711 77,165 Compensated absences ..................................... 4,298 4,289 Deferred energy costs .................................... 6,874 29,847 Non-pension postretirement benefits ...................... 84,421 90,915 ---------- ---------- Total .................................................... $6,078,988 $6,091,285 ========== ==========
At December 31, 1999, the CTC includes the unamortized balance of $3.9 billion of ITP sold to PETT in connection with the securitization of stranded cost recovery. ITP represents the irrevocable right of the Company or its assignee to collect non-bypassable charges from customers to recover stranded costs. See Note 4 -- Rate Matters. 25. Exelon Infrastructure Services Acquisitions In October 1999, EIS, an unregulated subsidiary of the Company, acquired the stock or assets of six utility service contracting companies for an aggregate purchase price of approximately $233 million, including $11 million of EIS stock. The purchase price also contains estimated contingent payments of $20 million based upon the achievement of targeted earnings of the acquired companies over a one year period. The acquisitions were accounted for using the purchase method of accounting. The allocation of purchase price to the fair value of assets acquired and liabilities assumed is as follows (in thousands): Current Assets ................ $ 143,249 Long-Term Assets .............. 85,893 Goodwill ...................... 121,110 Current Liabilities ........... (115,408) Long-Term Liabilities ......... (1,352) ---------- Total ......................... $ 233,492 ========== Goodwill associated with these acquisitions is being amortized over 20 years. At December 31, 1999, Other Current Assets includes $48 million of Costs and Earnings in Excess of Billings on uncompleted contracts and Other Current Liabilities includes $9 million of Billings in Excess of Costs and Earnings on uncompleted contracts. 26. AmerGen Energy Company, L.L.C. In 1999, AmerGen, the Company's joint venture with British Energy plc, purchased Clinton Nuclear Power Station (Clinton) and Three Mile Island Unit No. 1 Nuclear Generating Facility. In 1999, AmerGen also entered into agreements to purchase Nine Mile Point Unit 1 Nuclear Generating Facility, a 59% undivided interest in Nine Mile Point Unit 2 Nuclear Generating Facility, Oyster Creek Nuclear Generating Facility and Vermont Yankee Nuclear Power Station. These purchases are expected to be completed in 2000 upon receipt of the required federal and state approvals. The Company accounts for its investment in AmerGen under the equity method of accounting. In conjunction with each of these acquisitions, AmerGen has received a fully funded decommissioning trust fund which has been computed assuming the anticipated costs to appropriately decommission each nuclear plant discounted to net present value using the NRC's mandated rate of 2%. AmerGen believes that the amount of the trust funds and investment earnings thereon will be sufficient to meet its decommissioning obligations. 78 27. Quarterly Data (Unaudited) The data shown below include all adjustments which the Company considers necessary for a fair presentation of such amounts:
Income (Loss) Operating Operating Before Net Revenues Income Extraordinary Item Income (Loss) In Millions 1999 1998 1999 1998 1999 1998 1999 1998 - ---------------------- --------- --------- -------------- ------ ----------- -------------- ------ ------- Quarter ended March 31 ............. $1,256 $1,190 $ 376(a) $287 $ 157 $ 114 $157 $ 114 June 30 .............. 1,194 1,215 252 366 96(b) 151 69 151 September 30 ......... 1,732 1,786 484 549 231 274 231 274 December 31 .......... 1,255 1,072 297 84 135 (7)(c) 125 (26)
Earnings (Loss) Earnings (Loss) Per Average Earnings Applicable to Average Shares Share Before (Loss) Per Common Stock Outstanding Extraordinary Item Average Share In Millions 1999 1998 1999 1998 1999 1998 1999 1998 - ---------------------- ------ -------- ---------- ---------- ----------- ---------- ---------- ---------- Quarter ended March 31 ............. $153 $ 110 223.4 222.5 $ 0.69 $ 0.50 $ 0.69 $ 0.50 June 30 .............. 66 148 192.0 222.7 0.48 0.66 0.34 0.66 September 30 ......... 228 270 186.6 223.1 1.22 1.21 1.22 1.21 December 31 .......... 123 (28) 183.8 224.5 0.71 (0.04) 0.66 (0.13)
(a) Includes the reclassification of a $7 million charge for the abandonment of an information system implementation from Other Income and Deduction to Operating and Maintenance Expense (O&M). (b) Reflects increased fuel and energy interchange expenses related to Exelon Energy and O&M expenses related to Clinton. (c) Reflects a $125 million charge related to the Early Retirement and Separation Program. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (a) Identification of Directors. The PECO Energy board of directors consists of 12 members, divided into three classes. The three-year terms of each class are staggered so that the term of one class expires at each annual meeting. The terms of the four Class I directors will expire at the 2000 annual meeting. Biographical Information of PECO Energy Directors CORBIN A. McNEILL, JR.* Director since 1990 Mr. McNeill, age 60, is Chairman, President and Chief Executive Officer of PECO Energy. He was elected Executive Vice President, Nuclear in 1988, President and Chief Operating Officer in 1990, Chief Executive Officer in 1995 and Chairman in 1997. Before joining PECO Energy in 1988, he was Senior Vice President, Nuclear of Public Service Electric and Gas Company. 79 SUSAN W. CATHERWOOD Director since 1988 Ms. Catherwood, age 56, is the former Chairman of the Trustee Board, University of Pennsylvania Medical Center and Health System and Vice Chairman of the Board of the University of Pennsylvania. She was formerly Chairman of the Board of Overseers of the University of Pennsylvania Museum. Ms. Catherwood is also a director of the Glenmede Corporation, the Glenmede Trust Company, the Glenmede Trust Company of New Jersey and the Pew Charitable Trusts. DANIEL L. COOPER Director since 1997 Admiral Cooper, age 64, is the former Vice President and General Manager, Nuclear Services Division of Gilbert/Commonwealth, Inc. He retired from the Navy in 1991 as Assistant Chief of Naval Operations (Undersea Warfare). His Navy career included service as Commander, Submarine Force, of the U.S. Atlantic Fleet; Director of Navy Program Planning; and Director, Navy Budget. He is a former director and Vice Chairman of the Board of USAA insurance company, an insurance and financial services company; and until December 1999 was Chairman of the Advisory Board of Applied Research Laboratory, Penn State University. M. WALTER D'ALESSIO Director since 1983 Mr. D'Alessio, age 66, is Chairman, President and Chief Executive Officer of Legg Mason Real Estate Services, commercial mortgage banking and pension fund advisors. He is also a director of the Philadelphia Beltline Railroad, Independence Blue Cross and the Brandywine Real Estate Investment Trust. G. FRED DiBONA, JR. Director since 1997 Mr. DiBona, age 49, is President and Chief Executive Officer of Independence Blue Cross, a health insurance organization. He also serves as Chairman, President and Chief Executive Officer of Keystone Health Plan East, a subsidiary of Independence Blue Cross. He is past chairman of the National Blue Cross and Blue Shield Association. He is also a director of Tasty Baking Company, Philadelphia Suburban Corporation, Eclipsys Corporation and Magellan Health Services, Inc. R. KEITH ELLIOTT Director since 1997 Mr. Elliott, age 58, is the former Chairman and Chief Executive Officer of Hercules Incorporated, which produces specialty chemicals and related products. He is also a director of Wilmington Trust Company and Computer Task Group. RICHARD H. GLANTON* Director since 1991 Mr. Glanton, age 53, is a partner of the law firm of Reed Smith Shaw & McClay LLP. Mr. Glanton is also a director of CGU Corporation of North America, Philadelphia Suburban Corporation, Philadelphia Suburban Water Company, Wackenhut Corrections Corporation and is Chairman of Philadelphia Television Network, Inc. Reed Smith Shaw & McClay LLP provided legal services to PECO Energy during 1999. Under the board's conflict of interest policy, the board specifically reviewed the proposal to engage Mr. Glanton's partners to perform particular legal services and concluded that the representation was in the best interest of PECO Energy. ROSEMARIE B. GRECO* Director since 1998 Ms. Greco, age 53, is the Principle of GRECO ventures and is the former President of CoreStates Financial Corporation and Chief Executive Officer, President and director of CoreStates Bank, N.A. She is also a director of Sunoco, Inc., Pennsylvania Real Estate Investment Trust, Cardone Industries, Inc., Genuardi's Family Markets, Inc., PWRT ComServe, Inc. and Radian Group, Inc. 80 JOHN M. PALMS, Ph.D. Director since 1990 Dr. Palms, age 64, is President of the University of South Carolina and Professor of Physics. He previously served as President of Georgia State University and was the Charles Howard Chandler Professor of Physics and Vice President for Academic Affairs of Emory University. He is also director of Fortis, Inc., Policy Management Systems Corporation, Chairman of the Board of Trustees of the Institute for Defense Analyses and a member of the Advisory Council for the Institute of Nuclear Power Operations. JOSEPH F. PAQUETTE, JR. Director since 1988 Mr. Paquette, age 65, retired as Chairman of the Board in 1997. During his career with PECO Energy, he also held the positions of President, Chief Executive Officer and Chief Operating Officer. He is also a director of AAA Mid-Atlantic Inc. and Keystone Insurance Companies. RONALD RUBIN Director since 1988 Mr. Rubin, age 68, is Chief Executive Officer of The Pennsylvania Real Estate Investment Trust, a real estate management and development company. In 1997, the Rubin Organization, Inc. was acquired by The Pennsylvania Real Estate Investment Trust. He is a former director of Continental Bank and Midlantic Bank. ROBERT SUBIN* Director since 1994 Mr. Subin, age 61, retired as Senior Vice President--Global Sourcing & Engineering for Campbell Soup Company in 1998. During his career at Campbell Soup Company, he held the positions of Senior Vice President--Finance, President of the Bakery and Confectionery Division, President of the International Specialty Foods Division and President of the Campbell Europe/America Division. * Nominee for election at 2000 annual meeting Committees of the PECO Energy Board of Directors Audit Committee The Audit Committee reviews auditing, accounting, financial reporting and internal control functions. The committee also reviews officers' and directors' expenses, corporate code of conduct, environmental and legal compliance matters and Year 2000 issues. This committee recommends the independent auditors and approves the scope of the annual audit by the independent auditors and internal auditors. All members of this committee are non-employee directors. The committee meets outside of the presence of management for portions of its meetings with both the independent auditors and the internal auditors. Compensation Committee The Compensation Committee reviews the executives' compensation and administers and oversees the employee benefit plans and programs. The committee makes compensation decisions, which are approved by the full board, for the positions of Chairman, Chief Executive Officer, President, Senior Vice President, Vice President and Corporate Secretary. The committee uses the services of an independent compensation consultant who reports directly to the committee. All members are non-employee directors. Corporate Governance Committee The Corporate Governance Committee considers and recommends nominees for election as directors. The committee reviews individual committee self- assessments and makes recommendations on board and committee structure, membership, functions, compensation and effectiveness. The committee oversees management succession planning and development programs on behalf of the board. The committee also establishes the job description and performance criteria of the chief executive officer and initially evaluates the chief executive officer's performance for the board. All members are non-employee directors. 81 Finance Committee The Finance Committee reviews and makes recommendations to the board about significant financial matters and business opportunities. The committee serves as the fiduciary of PECO Energy's qualified pension and savings plans, establishes the investment policy and reviews the transactions and performance of the investment managers. All members are non-employee directors. Nuclear Committee The Nuclear Committee oversees nuclear operations of PECO Energy for safety, reliability and quality and effectiveness of management and management systems. The committee uses an independent consultant to assist it in performing its functions. Public Affairs Committee The Public Affairs Committee advises management on matters of legislative, regulatory and public policy. Each director attended at least 92% of the meetings of the board and the meetings of committees of which he or she was a member. Committee Membership Roster
Corporate Public Name Board Audit Compensation Governance Finance Nuclear Affairs ---- ----- ----- ------------ ---------- ------- ------- ------- C. A. McNeill, Jr. .............. X* X* S. W. Catherwood ................ X X* X D. L. Cooper .................... X X X X M. W. D'Alessio ................. X X* X X G. F. DiBona, Jr. ............... X X X R. K. Elliott ................... X X X* R. H. Glanton ................... X X X R. B. Greco ..................... X X X X X J. M. Palms ..................... X X X X* J. F. Paquette, Jr. ............. X X X R. Rubin ........................ X X X X R. Subin ........................ X X* X No. of Meetings in 1999 ......... 10 3 5 4 11 13 2
- ------------ * Chairperson 82 (b) Identification of Executive Officers. Executive Officers of the Registrant at December 31, 1999
Age at Effective Date of Election Name Dec. 31, 1999 Position to Present Position ---- ------------- -------- ------------------- C. A. McNeill, Jr ......... 60 Chairman of the Board, President and Chief Executive Officer ...................................... July 1, 1997 G. R. Rainey .............. 50 President and Chief Nuclear Officer, PECO Nuclear . June 1, 1998 G. A. Cucchi .............. 50 Senior Vice President, Corporate and President, PECO Energy Ventures. .................................. June 22, 1998 J. W. Durham .............. 62 Senior Vice President and General Counsel ............... October 24, 1988 M. J. Egan ................ 46 Senior Vice President, Finance and Chief Financial Officer ................................................ October 13, 1997 K. G. Lawrence ............ 52 Senior Vice President, Corporate and President, PECO Energy Distribution ............................... June 22, 1998 I. P. McLean .............. 50 President, Power Team ................................... September 22, 1999 G. N. Rhodes .............. 56 Vice President, Corporate and President Exelon Energy ................................................. April 19, 1999 W. H. Smith, III .......... 51 Senior Vice President, Business Services Group .......... November 7, 1997 D. W. Woods ............... 42 Senior Vice President, Corporate and Public Affairs . December 1, 1998 J. J. Hagan ............... 49 Senior Vice President, Nuclear Operations, PECO Nuclear ................................................ January 26, 1999 E. M. Cavanaugh ........... 43 Vice President, Electric Supply and Transmission PECO Energy Distribution ............................... July 27, 1999 J. B. Cotton .............. 54 Vice President, Three Mile Island, PECO Nuclear ................................................ December 20, 1999 M. T. Coyle ............... 56 Vice President, Clinton Power Station, PECO Nuclear ........................................... December 15, 1999 D. G. DeCampli ............ 42 Vice President, Operations, PECO Energy Distribution ........................................... July 27, 1999 J. Doering, Jr ............ 55 Vice President, Peach Bottom Atomic Power Station, PECO Nuclear .................................. March 2, 1998 G. N. Dudkin .............. 41 Vice President, Customer and Marketing Services, PECO Energy Distribution ..................... July 27, 1999 D. B. Fetters ............. 48 Vice President, Nuclear Acquisitions, PECO Nuclear ................................................ August 7, 1999 J. H. Gibson .............. 43 Vice President and Controller ........................... May 31, 1998 P. E. Haviland ............ 45 Vice President, Corporate Development March 4, 1998 T. P. Hill, Jr ............ 51 Vice President, Regulatory and External Affairs, PECO Energy Distribution ...................... April 9, 1998 C. A. Jacobs .............. 47 Vice President, Support Services ........................ November 9, 1998 J. W. Langenbach .......... 53 Vice President, Station Support, PECO Nuclear ................................................ December 20, 1999 C. P. Lewis ............... 36 Vice President, Finance, PECO Nuclear ................... October 13, 1999 C. A. Matthews ............ 48 Vice President, Information Technology and Chief Information Officer .............................. July 28, 1997 J. B. Mitchell ............ 51 Vice President, Treasury and Evaluation, and Treasurer .............................................. December 1, 1994 J. A. Muntz ............... 43 Vice President, Fossil Operations ....................... January 26, 1999 J. D. von Suskil .......... 53 Vice President, Limerick Generating Station, PECO Nuclear ........................................... January 26, 1998 R. G. White ............... 41 Vice President, Corporate Planning. ..................... September 28, 1998 K. K. Combs ............... 49 Corporate Secretary ..................................... November 1, 1994
Each of the above executive officers holds such office at the discretion of the Company's Board of Directors until his or her replacement or earlier resignation, retirement or death. 83 Prior to his election to his current position, Mr. McNeill was President and Chief Executive Officer, President and Chief Operating Officer and Executive Vice President -- Nuclear. Prior to his election to his current position, Mr. Rainey was Vice President -- Peach Bottom Atomic Power Station, Vice President -- Nuclear Services and Plant Manager -- Eddystone Generating Station; Prior to his election to his current position, Mr. Cucchi was Vice President -- Power Delivery, Vice President -- Corporate Planning and Development, Director of System Planning and Performance, and Manager -- System Planning. Prior to joining the Company, Mr. Egan was Senior Vice President and Chief Financial Officer of Aristech Chemical Company and Vice President of Planning and Control of ARCO Chemical Company, Americas. Prior to his election to his current position, Mr. Lawrence was Senior Vice President -- Local Distribution Company, Senior Vice President -- Finance and Chief Financial Officer, and Vice President -- Gas Operations. Prior to joining the Company in 1999, Mr. McLean was Group Vice President of Engelhard Corporation. Prior to joining the Company in 1999, Mr. Rhodes was Chief Marketing Officer with Aerial Communications, Inc. and Vice President, Business Development/Marketing with Sprint Corporation. Prior to his election to his current position, Mr. W. H. Smith, III was Vice President and Group Executive -- Telecommunications Group, Vice President - -- Station Support, Vice President -- Planning and Performance, and Manager -- Corporate Strategy and Performance. Prior to joining the Company in 1998, Mr. Woods was the Chief of Staff for the Pennsylvania Senate Majority Leader. Prior to his election to his current position in 1999, Mr. Hagen was Senior Vice President, Nuclear Operations, Vice President Station Support, Vice President, Operations with Entergy Operations, Inc., General Manager, Operations with Entergy Operations, Inc. and Vice President, Electric Power Generation with Public Service Electric and Gas Company. Prior to her election to her current position, Ms. Cavanaugh was Assistant General Counsel and Director of Risk Management. Prior to his election to his current position in 1999, Mr. Coyle was Assistant Vice President, Clinton Power Station, Senior Manager, Nuclear Generation, Deputy Commander for Engineering, U.S. Navy and Fleet Maintenance Officer, U. S. Navy. Prior to his election to his current position in 1999, Mr. DeCampli was Director of Engineering Services, Director of Transmission and Substations and Director of Reengineering. Prior to her election to her current position, Ms. Gibson was Director of Audit Services and Director of the Tax Division. Prior to joining the Company in 1998, Mr. Haviland was Senior Vice President -- Planning and Administration with Bovis Construction Group. Prior to his election to his current position, Mr. Hill was Vice President and Controller. Prior to joining the Company in 1998, Ms. Jacobs was Vice President of Industrial Operations, Americas and Vice President Professional Development and Senior Director of Materials Management with Rhone-Polenc Rorer Corporation. Prior to joining the Company in 1999, Mr. Langenbach was Vice President and Director of Three Mile Island Power Station, Director Materials and Services and Outage Director, Oyster Creek Power Station with GPU Nuclear, Inc. Prior to his election to his current position in 1999, Mr. Lewis was SBU Vice President of Finance, Director Nuclear Planning and Development and Director of Corporate Development. 84 Prior to her election to her current position, Ms. Matthews was Director of Consumer Energy Information Systems and Distributed Information Officer. Prior to joining the Company in 1996, Ms. Matthews was Vice President of Strategic Business Development for Europe Online S.A. Luxembourg. Prior to his election to his current position, Mr. Muntz was Vice President Electric Supply and Transmission, Director of Nuclear Planning and Development and Director, Site Engineering, Limerick Generating Station. Prior to his election to his current position, Mr. von Suskil was Director - -- Engineering, Manager -- Planning and Assistant Manager -- Outages. Prior to joining the Company in 1995, Mr. von Suskil was a Captain in the United States Navy. Prior to joining the Company, Mr. White was Corporate Finance Manager and Corporate Operations Consultant for ARCO Chemical Company. Prior to their election to the positions shown above, the following executive officers held other positions with the Company since January 1, 1995: Mr. Cotton was Vice President, Special Projects, Director -- Nuclear Engineering, Director -- Nuclear Quality Assurance and Superintendent -- Operations; Mr. Doering was Plant Manager -- Limerick, Director -- Nuclear Strategies Support, and General Manager Operations; Mr. Dudkin was Vice President, Operations, Acting General Manager -- Power Delivery, Regional Director Power Delivery and Manager -- Electric Operations; Mr. Fetters was Vice President -- Nuclear Development, Vice President -- Nuclear Planning and Development, Director -- Nuclear Engineering, Director -- Limerick Maintenance and a Project Manager. There are no family relationships among directors or executive officers of the Company. Section 16(a) Beneficial Ownership Reporting Compliance The federal securities laws require PECO Energy's directors and executive officers to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of any securities of PECO Energy. To PECO Energy's knowledge, based solely on a review of the copies of these reports given to PECO Energy and written representations that no other reports were required during 1999, all of PECO Energy's directors and executive officers made the required filings except that Rosemarie Greco, a director of PECO Energy, filed one late report of changes in beneficial ownership on Form 4 relating to a purchase of shares of PECO Energy common stock, and except that Ian McLean, an officer of PECO Energy, filed an initial statement of beneficial ownership late. ITEM 11. EXECUTIVE COMPENSATION Board Compensation Employee directors receive no compensation, other than their normal salary, for serving on the board or its committees. PECO Energy's total compensation target for directors who are not officers of PECO Energy is between the lowest 25th and the 50th percentile of the general industry average. Directors are paid in cash and deferred stock units as set forth below, and are reimbursed expenses, if any, for attending meetings: o $21,000 Annual board retainer, o $1,000 Meeting fee, o $2,000 Annual retainer for chairmanship of audit and nuclear committees, o $1,000 Annual retainer for chairmanship of compensation, corporate governance and finance committees, and o 1,000 Deferred stock units. 85 Directors are required to own at least 3,000 shares of PECO Energy common stock or stock units within three years after their election to the board. Effective January 1997, PECO Energy terminated all future retirement benefit accruals and stock option grants for non-employee directors. Accrued benefits under the previous retirement plan have been replaced with a one-time grant of deferred stock units equal to the January 1997 value of all accrued benefits. The expected values of the future benefits under the previous retirement plan have been replaced with annual grants of deferred stock units. Each deferred stock unit is the right to receive one share of PECO Energy common stock at retirement. Before retirement, deferred stock units accrue dividend equivalents for each year the director serves on the board. Upon retirement, the director can receive the accumulated shares in a lump sum or spread the distribution over a period of up to ten years. Directors can elect to receive all or a portion of their compensation in stock or to defer receiving it until retirement, death or until they no longer serve as director. Deferred compensation is put in an unfunded account and credited with interest, equal to the amount that would have been earned had the compensation been invested in one or more of eight designated mutual funds. The deferred amounts and accrued interest are unfunded obligations of PECO Energy and cannot be distributed to the director until he or she reaches 65, retires or is no longer a director. There are exceptions to this rule for financial hardship. In 1999, non-employee directors received $520,000 as a group. At its April 27, 1999 meeting, the corporate governance committee reviewed the overall level of director compensation and increased the annual allocation of deferred stock units from 715 to 1,000. 86 Summary Compensation Table Compensation of Executive Officers The amounts listed under "All Other Compensation" are matching contributions made by PECO Energy under the PECO Energy Employee Savings Plan.
Annual Compensation ---------------------------------------------- Name and Principal Position Year Salary ($) Bonus ($) Other ($) - -------------------------------- ------ ------------ ----------- ----------- Corbin A. McNeill, Jr. ......... 1999 659,857 1,000,000 0 Chairman of the Board, 1998 585,476 708,100 0 President and Chief 1997 551,112 330,200 0 Executive Officer Michael J. Egan ................ 1999 326,312 311,400 0 Senior Vice President, 1998 317,439 235,700 0 Finance and Chief 1997 63,003 229,148 0 Financial Officer Gerald R. Rainey ............... 1999 310,386 289,000 0 President and Chief 1998 269,308 193,700 0 Nuclear Officer, 1997 215,260 99,783 0 PECO Energy Nuclear James W. Durham ................ 1999 298,831 274,500 0 Senior Vice President, 1998 298,952 225,300 0 and General Counsel 1997 294,639 111,733 0 Kenneth G. Lawrence ............ 1999 291,847 241,200 0 Senior Vice President, 1998 282,164 200,700 0 Corporate and President, 1997 255,126 107,142 0 PECO Energy Distribution
(RESTUBBED TABLE)
Long-Term Compensation -------------------------------------------------------------- Awards Payouts -------------------------- ---------------------------------- Restricted Stock Long-Term All Other Award(s) Options Incentive Plan Compensation Name and Principal Position ($) (#)(A) Payouts ($) ($) - -------------------------------- --------------- --------- ---------------- ---------------- Corbin A. McNeill, Jr. ......... 942,188 0 0 3,200 Chairman of the Board, 0 500,000 0 3,200 President and Chief 0 50,000 0 3,200 Executive Officer Michael J. Egan ................ 150,750 0 0 0 Senior Vice President, 0 125,000 0 0 Finance and Chief 99,851(B) 298,000 0 200,000(C) Financial Officer Gerald R. Rainey ............... 150,750 0 0 2,076 President and Chief 0 90,000 0 2,040 Nuclear Officer, 0 10,000 0 3,200 PECO Energy Nuclear James W. Durham ................ 120,600 30,000 0 3,200 Senior Vice President, 0 34,000 0 3,200 and General Counsel 0 20,000 0 3,200 Kenneth G. Lawrence ............ 94,219 0 0 3,200 Senior Vice President, 0 115,000 0 3,107 Corporate and President, 0 20,000 0 3,200 PECO Energy Distribution
- ------------ (A) In 1998, Messrs. McNeill, Egan, Rainey and Lawrence received a multi- year grant of stock options. Therefore, they did not receive any stock options in 1999. (B) At December 31, 1999, Mr. Egan held 4,475 shares of restricted stock with an aggregate value of $155,506. These shares vest on October 13, 2000 and Mr. Egan will receive dividends on these shares during the vesting period. (C) The signing bonus that Mr. Egan received when he was elected an officer effective October 13, 1997. 87 Option Grants in 1999 The options listed below become exercisable in full based on a combination of PECO Energy stock price performance and time. Once the stock has closed at a price of $41.00, one third of the options will vest 12 months from the date of grant, one-third will vest 24 months from the date of grant and one-third will vest 36 months from the date of grant. Values indicated are an estimate based on the Black-Scholes option pricing model. Although executives risk forfeiting these options in some circumstances, these risks are not factored into the calculated values. The actual value of these options will be determined by the excess of the stock price over the exercise price on the date the option is exercised. There is no certainty that the actual value realized will be at or near the value estimated by the Black-Scholes option pricing model. Assumptions used for the Black-Scholes model are as of December 31, 1999 and are as follows: Risk-free interest rate ..................................... 5.41% Volatility .................................................. .2836 Dividend yield .............................................. 6.26% Time of exercise ............................................ 9.5 years
Grant Date Individual Grants Value ---------------------------------- ----------------- % of Total Number of Options Securities Granted Underlying Options to Employees Exercise or Base Grant Date Name Granted(#) in 1999 Price($/SH) Expiration Date Present Value($) - -------------------------------- -------------------- -------------- ------------------ ----------------- ----------------- Corbin A. McNeill, Jr. ......... 0 0 N/A N/A 0 Chairman of the Board, President and Chief Executive Officer Michael J. Egan ................ 0 0 N/A N/A 0 Senior Vice President, Finance and Chief Financial Officer Gerald R. Rainey ............... 0 0 N/A N/A 0 President and Chief Nuclear Officer, PECO Energy Nuclear James W. Durham ................ 30,000 .16 37.6875 02/23/09 241,800 Senior Vice President and General Counsel Kenneth G. Lawrence ............ 0 0 N/A N/A 0 Senior Vice President, Corporate and President, PECO Energy Distribution
88 Option Exercises and Year-End Value This table shows the number and value of exercised and unexercised stock options for the named executive officers during 1999. Value is determined using the market value of PECO Energy common stock at the year-end price of $34.75 per share, minus the value of PECO Energy common stock at the exercise price. All options whose exercise price exceeds the market value are valued at zero.
Number of Securities Value of Underlying Unexercised Unexercised in-the-Money Options at Options at 12/31/98 12/31/98 Shares ---------------- --------------- Acquired Value (#)Exercisable ($)Exercisable Name on Exercise(#) Realized($) Unexercisable Unexercisable - ------------------------------------------ ---------------- ------------- ---------------- --------------- Corbin A. McNeill, Jr. ................... 25,000 596,875 E 823,500 E 10,725,375 Chairman of the Board, U 0 U 0 President and Chief Executive Officer Michael J. Egan .......................... 0 0 E 423,000 E 5,379,039 Senior Vice President, U 0 U 0 Finance and Chief Financial Officer Gerald R. Rainey ......................... 0 0 E 0 E 0 President and Chief Nuclear Officer, U 0 U 0 PECO Energy Nuclear James W. Durham .......................... 0 0 E 174,000 E 1,580,250 Senior Vice President and General Counsel U 20,000 U 0 Kenneth G. Lawrence ...................... 20,000 497,760 E 108,000 E 1,108,500 Senior Vice President, Corporate and U 0 U 0 President, PECO Energy Distribution
89 Pension Plan Table
Average Annual Compensation for Highest Consecutive Years of Service Five Years 10 years 15 years 20 Years 25 Years 30 Years 35 Years 40 Years - --------------------- ---------- ---------- ---------- ----------------- ---------- ---------- ---------- $ 100,000.00 $ 19,343 $ 26,514 $ 33,686 $ 40,857 $ 48,029 $ 55,200 $ 62,372 200,000.00 39,843 54,764 69,686 84,607 99,529 114,450 129,372 300,000.00 60,343 83,014 105,686 128,357 151,029 173,700 196,372 400,000.00 80,843 111,264 141,686 172,107 202,529 232,950 263,372 500,000.00 101,343 139,514 177,686 215,857 254,029 292,200 330,372 600,000.00 121,843 167,764 213,686 259,607 305,529 351,450 397,372 700,000.00 142,343 196,014 249,686 303,357 357,029 410,700 464,372 800,000.00 162,843 224,264 285,686 347,107 408,529 469,950 531,372 900,000.00 183,343 252,514 321,686 390,857 460,029 529,200 598,372 1,000,000.00 203,843 280,764 357,686 434,607 511,529 588,450 665,372
Retirement Plans The above table shows the estimated annual retirement benefits payable on a straight-life annuity basis to participating employees, including officers, in the earnings and year of service classes indicated, under PECO Energy's non-contributory retirement plans. The amounts shown in the table are not subject to any deduction for Social Security or other offset amounts. Covered compensation includes salary and bonus which is disclosed in the Summary Compensation Table on page 87 for the named executive officers. The calculation of retirement benefits under the plans is based upon average earnings for the highest consecutive five-year period. The Internal Revenue Code limits the annual benefits that can be paid from a tax-qualified retirement plan. As permitted by the Employee Retirement Income Security Act of 1974, PECO Energy has supplemental plans which allow the payment out of general funds of PECO Energy of any benefits calculated under provisions of the applicable retirement plan which may be above these limits. Messrs. McNeill, Egan, Rainey, Durham and Lawrence have 32, 2, 30, 21 and 30 credited years of service, respectively, under PECO Energy's pension program. Mr. Durham has been granted one year of additional service, for purposes of calculating his benefits under PECO Energy's pension program, for each year of service up to a maximum of 10 additional years. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Beneficial Ownership The following table indicates how much PECO Energy common stock was owned by the directors, named executive officers and beneficial owners of more than 5% owned as of December 31, 1999. In reviewing this table, please note the following: o the shares listed as "Beneficially Owned" include shares in the Employee Savings Plan, the Officers and Directors Deferred Compensation Plan and the Directors Deferred Stock Unit Plan, o the shares listed as "May Be Acquired" include shares of PECO Energy common stock which can be acquired upon the exercise of stock options granted under the PECO Energy Long-Term Incentive Plan, and o beneficial ownership of directors and officers as a group represents less than 1% of the outstanding shares of PECO Energy common stock. 90
Number of Common Shares -------------------------------------------- Beneficially May Be Name Owned Acquired Total - ------------------------------------------------------ -------------- ------------ ------------ Susan W. Catherwood, Director ........................ 9,165 6,000 15,165 Daniel L. Cooper, Director ........................... 2,992 0 2,992 M. Walter D'Alessio, Director ........................ 9,798 6,000 15,798 G. Fred DiBona, Jr., Director ........................ 2,958 0 2,958 James W. Durham, Officer ............................. 17,095 194,000 211,095 Michael J. Egan, Officer ............................. 20,134 423,000 443,134 R. Keith Elliott, Director ........................... 3,958 0 3,958 Richard H. Glanton, Director ......................... 5,723 0 5,723 Rosemarie B. Greco, Director ......................... 4,523 0 4,523 Kenneth G. Lawrence, Officer ......................... 11,828 108,000 119,828 Corbin A. McNeill, Jr., Director and Officer ......... 90,391 848,500 938,891 John M. Palms, Ph.D., Director ....................... 9,577 6,000 15,577 Joseph F. Paquette, Jr., Director .................... 42,034 90,000 132,034 Gerald R. Rainey, Officer ............................ 25,970 0 25,970 Ronald Rubin, Director ............................... 10,266 6,000 16,266 Robert Subin, Director ............................... 5,439 5,000 10,439 Directors and Officers as a group (42) ............... 411,557 2,679,100 3,090,657
This table does not include 533,293 shares of common stock held under PECO Energy's Service Annuity Plan. Messrs. Cooper, D'Alessio, Elliott, Paquette and Rubin are members of the finance committee which monitors the investment policy and performance of the investments under that plan. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Change-of-Control Agreements PECO Energy has entered into change-of-control agreements with most of its executive officers, including the individuals named in the Summary Compensation Table. The purpose of the agreements is to assure the objective judgment, and to keep the loyalties, of key executives when PECO Energy is faced with a potential change of control by providing for a continuation of salary, bonus, health and other benefits for a maximum period of three years. In addition, PECO Energy's long-term incentive plan allows the committee administering this plan to terminate the restrictions on stock options and restricted stock grants at any time. PECO Energy has also entered into two trust agreements to provide for the payment of retirement benefits and deferred compensation benefits of directors and officers that include provisions requiring full funding in the event of a change of control. 91 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Index Reference (Page) - ----- ---------------- (a) 1. Financial Statements Report of Independent Accountants ................................... 47 Consolidated Statements of Income for the years ended December 31, 1999, 1998 and 1997 .................................. 48 Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 .................................. 49 Consolidated Balance Sheets as of December 31, 1999 and 1998 .............................................................. 50 Consolidated Statements of Changes in Common Shareholders' Equity and Preferred Stock for the years ended December 31, 1999, 1998 and 1997 ............................................... 51 Notes to Consolidated Financial Statements .......................... 52 2. Financial Statement Schedules Schedule II--Valuation and Qualifying Accounts for the years ended December 31, 1999, 1998 and 1997 ............................ 93 3. Exhibits ............................................................ 94
All other schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements and notes thereto. 92 PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS (Thousands of Dollars)
Column A Column B Column C Column D Column E -------- -------- -------- -------- -------- Additions ----------------------- Charged to Balance at Charged to Other Balance at Beginning of Costs and Accounts- Deductions End of Description Period Expenses Describe Describe(1) Period ----------- ------------ ---------- ---------- ----------- ----------
FOR THE YEAR ENDED DECEMBER 31, 1999 ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS ......... $122,139 $59,418 $-- $69,543 $112,014 ======== ======= === ======= ========
FOR THE YEAR ENDED DECEMBER 31, 1998 ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS ......... $133,810 $71,667 $ -- $83,338 $122,139 ======== ======= ==== ======= ========
FOR THE YEAR ENDED DECEMBER 31, 1997(2) ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS ......... $128,459 $88,263 $ -- $82,912 $133,810 ======== ======= ==== ======= ========
- ------------ (1) Write-off of individual accounts receivable. (2) Restated to reflect valuation allowance activity for Customer Assistance 93 Exhibits Certain of the following exhibits have been filed with the SEC pursuant to the requirements of the Acts administered by the Commission. Such exhibits are identified by the references following the listing of each such exhibit and are incorporated herein by reference under Rule 12b-32 of the Securities and Exchange Act of 1934, as amended. Certain other instruments which would otherwise be required to be listed below have not been so listed because such instruments do not authorize securities in an amount which exceeds 10% of the total assets of the Company and its subsidiaries on a consolidated basis and the Company agrees to furnish a copy of any such instrument to the Commission upon request.
Exhibit No. Description - ---------------------------------------------------------------------------------------------------- 2-1 Amended and Restated Agreement and Plan of Merger dated as of January 7, 2000, among PECO Energy Company, Exelon Corporation and Unicom Corporation (Current Report on Form 8-K dated January 13, 2000, Exhibit 2-1). 3-1 Amended and Restated Articles of Incorporation of PECO Energy Company (1993 Form 10-K, Exhibit 3-1). 3-2 Bylaws of the Company, adopted February 26, 1990 and amended January 26, 1998. (1997 Form 10-K, Exhibit 3-2) 4-1 First and Refunding Mortgage dated May 1, 1923 between The Counties Gas and Electric Company (predecessor to the Company) and Fidelity Trust Company, Trustee (First Union National Bank, successor), (Registration No. 2-2881, Exhibit B-1). 4-2 Supplemental Indentures to the Company's First and Refunding Mortgage:
Dated as of File Reference Exhibit No. ----------------------------------------------------------------------------- May 1, 1927 2-2881 B-1(c) March 1, 1937 2-2881 B-1(g) December 1, 1941 2-4863 B-1(h) November 1, 1944 2-5472 B-1(i) December 1, 1946 2-6821 7-1(j) September 1, 1957 2-13562 2(b)-17 May 1, 1958 2-14020 2(b)-18 March 1, 1968 2-34051 2(b)-24 March 1, 1981 2-72802 4-46 March 1, 1981 2-72802 4-47 December 1, 1984 1984 Form 10-K 4-2(b) July 15, 1987 Form 8-K dated July 21, 1987 4(c)-63 July 15, 1987 Form 8-K dated July 21, 1987 4(c)-64 October 15, 1987 Form 8-K dated October 7, 1987 4(c)-66 October 15, 1987 Form 8-K dated October 7, 1987 4(c)-67 April 15, 1988 Form 8-K dated April 11, 1988 4(e)-68 April 15, 1988 Form 8-K dated April 11, 1988 4(e)-69 October 1, 1989 Form 8-K dated October 6, 1989 4(e)-72 October 1, 1989 Form 8-K dated October 18, 1989 4(e)-73 April 1, 1991 1991 Form 10-K 4(e)-76 December 1, 1991 1991 Form 10-K 4(e)-77 April 1, 1992 March 31, 1992 Form 10-Q 4(e)-79 June 1, 1992 June 30, 1992 Form 10-Q 4(e)-81 July 15, 1992 June 30, 1992 Form 10-Q 4(e)-83 September 1, 1992 1992 Form 10-K 4(e)-85 March 1, 1993 1992 Form 10-K 4(e)-86 March 1, 1993 1992 Form 10-K 4(e)-87 May 1, 1993 March 31, 1993 Form 10-Q 4(e)-88 May 1, 1993 March 31, 1993 Form 10-Q 4(e)-89
94
Dated as of File Reference Exhibit No. ------------------------------------------------------------------------------ May 1, 1993 March 31, 1993 Form 10-Q 4(e)-90 August 15, 1993 Form 8-A dated August 19, 1993 4(e)-91 August 15, 1993 Form 8-A dated August 19, 1993 4(e)-92 November 1, 1993 Form 8-A dated October 27, 1993 4(e)-94 November 1, 1993 Form 8-A dated October 27, 1993 4(e)-95 May 1, 1995 Form 8-K dated May 24, 1995 4(e)-96
4-3 Indenture, dated as of July 1, 1994, between the Company and First Union National Bank, as successor trustee (1994 Form 10-K, Exhibit 4-5). 4-4 Second Supplemental Indenture, dated as of June 1, 1997, between the Company and First Union National Bank, as successor trustee, to Indenture dated as of July 1, 1994. (1997 Form 10-K, Exhibit 4-5). 4-5 Third Supplemental Indenture, dated as of April 1, 1998, between the Company and First Union National Bank, as successor trustee, to Indenture dated as of July 1, 1994. (1998 Form 10-K, Exhibit 4-6) 4-6 Payment and Guarantee Agreement, dated as of June 6, 1997, executed by the Company in favor of the holders of Cumulative Monthly Income Preferred Securities, Series C of PECO Energy Capital, L.P. (1997 Form 10-K, Exhibit 4-8). 4-7 Payment and Guarantee Agreement, dated as of April 6, 1998, executed by the Company in favor of the holders of Cumulative Monthly Income Preferred Securities, Series D of PECO Energy Capital, L.P. (1998 Form 10-K, Exhibit 4-10) 4-8 Revolving Credit Agreement, dated as of September 15, 1999, among the Company, as bor- rower, and certain banks named therein. 4-9 364-day Credit Agreement, dated as of September 15, 1999, among the Company, as borrower, and certain banks named therein. 4-10 PECO Energy Company Dividend Reinvestment and Stock Purchase Plan, as amended Janu- ary 28, 1994 (Post-Effective Amendment No. 1 to Registration No. 33-42523, Exhibit 28). 10-1 Amended and Restated Operating Agreement of PJM Interconnection, L.L.C., dated June 2, 1997, (Revised December 31, 1997). (1997 Form 10-K, Exhibit 10-1). 10-2 Agreement, dated November 24, 1971, between Atlantic City Electric Company, Delmarva Power & Light Company, Public Service Electric and Gas Company and the Company for ownership of Salem Nuclear Generating Station (1988 Form 10-K, Exhibit 10-3); supplemen- tal agreement dated September 1, 1975; supplemental agreement dated January 26, 1977 (1991 Form 10-K, Exhibit 10-3); and supplemental agreement dated May 27, 1997. (1997 Form 10-K, Exhibit 10-2). 10-3 Agreement, dated November 24, 1971, between Atlantic City Electric Company, Delmarva Power & Light Company, Public Service Electric and Gas Company and the Company for ownership of Peach Bottom Atomic Power Station; supplemental agreement dated September 1, 1975; supplemental agreement dated January 26, 1977 (1988 Form 10-K, Exhibit 10-4) and supplemental agreement dated May 27, 1997. (1997 Form 10-K, Exhibit 10-3). 10-4 Deferred Compensation and Supplemental Pension Benefit Plan.* (Form 10-K, Exhibit 10-4). 10-5 Management Group Deferred Compensation and Supplemental Pension Benefit Plan.* (Form 10-K, Exhibit 10-5). 10-6 Unfunded Deferred Compensation Plan for Directors.* (Form 10-K, Exhibit 10-6). 10-7 Forms of Agreement between the Company and certain officers (1995 Form 10-K, Exhibit 10-5).
95 10-8 PECO Energy Company 1989 Long-Term Incentive Plan, amended April 9, 1997 (1997 Proxy Statement, Appendix B).* 10-9 PECO Energy Company Management Incentive Compensation Plan (1997 Proxy Statement, Appendix A).* 10-10 PECO Energy Company 1998 Stock Option Plan (Registration No. 333-67367, Exhibit 4.2). 10-11 Amended and Restated Limited Partnership Agreement of PECO Energy Capital, L.P., dated July 25, 1994 (1994 Form 10-K, Exhibit 10-7). 10-12 Amendment No. 2 to the Amended and Restated Limited Partnership Agreement of PECO Energy Capital, L.P. (1995 Form 10-K, Exhibit 10-9). 10-13 Amendment No. 3 to the Amended and Restated Limited Partnership Agreement of PECO Energy Capital, L.P. (1998 Form 10-K, Exhibit 10-14) 10-14 Amended and Restated Trust Agreement of PECO Energy Capital Trust II, dated as of Decem- ber 19, 1995. 10-15 Amended and Restated Trust Agreement of PECO Energy Capital Trust III, dated as of April 6, 1998. (1998 Form 10-K, Exhibit 10-16) 10-16 Amended and Restated Trust Agreement for PECO Energy. Transition Trust dated as of Feb- ruary 19, 1999 among George Shicora and Diana Moy Kelly, as Beneficiary Trustees, First Union Trust Company, National Association, as Issuer Trustee, Delaware Trustee and Indepen- dent Trustee, and PECO Energy Company, as Grantor and Owner (PECO Energy Transition Trust Current Report on Form 8-K dated March 31, 1999, Exhibit 4.1.2) 10-17 Intangible Transition Property Sale Agreement dated as of March 25, 1999 between PECO Energy Transition Trust and PECO Energy Company (PECO Energy Transition Trust Current Report on Form 8-K dated March 31, 1999, Exhibit 10.1). 10-18 Master Servicing Agreement between PECO Energy Transition Trust and PECO Energy Com- pany (PECO Energy Transition Trust Current Report on Form 8-K dated March 31, 1999, Exhibit 10.2). 10-19 Form of Intangible Transition Property Sale Agreement between PECO Energy Transition Trust and PECO Energy Company (Registration Statement No. 333-31646, Exhibit 10.1) 10-20 Form of Intangible Transition Property Sale Agreement between PECO Energy Transition Trust and PECO Energy Company (Registration Statement No. 333-31646, Exhibit 10.2) 10-21 Joint Petition for Full Settlement of PECO Energy Company's Restructuring Plan and Related Appeals and Application for a Qualified Rate Order and Application for Transfer of Genera- tion Assets dated April 29, 1998. (Registration Statement No. 333-31646, Exhibit 10.3) 10-22 Form of Second Amended and Restated Trust Agreement for PECO Energy Transition Trust (Registration Statement No. 333-31646). 12-1 Ratio of Earnings to Fixed Charges. 12-2 Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends. 21 Subsidiaries of the Registrant. 23 Consent of Independent Accountants. 24 Powers of Attorney. 27 Financial Data Schedule.
- ------------ * Compensatory plans or arrangements in which directors or officers of the Company participate and which are not available to all employees. 96 Reports on Form 8-K During the quarter ended December 31, 1999, the Company filed the following Current Reports on Form 8-K: Date of earliest event reported: September 22, 1999 reporting information under "ITEM 5. OTHER EVENTS" and "ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS" regarding pro forma financial information about the merger of the Company and Unicom. Date of earliest event reported: October 19, 1999 reporting information under "ITEM 5. OTHER EVENTS" regarding Exelon Infrastructure Services, Inc., a subsidiary of the Company, announcing the acquisition of five utility service companies. Date of earliest event reported: October 19, 1999 reporting information under "ITEM 5. OTHER EVENTS" regarding AmerGen's accepted bid to acquire Vermont Yankee Nuclear Power Station from Vermont Yankee Nuclear Power Corporation. Date of earliest event reported: December 16, 1999 reporting information under "ITEM 5. OTHER EVENTS" regarding AmerGen's signing of the closing documents that officially transfer ownership of Clinton to the Company. Date of earliest event reported: December 21, 1999 reporting information under "ITEM 5. OTHER EVENTS" regarding AmerGen's completion of the sale of the Three Mile Island Unit 1 Nuclear Generating Facility to the Company. Subsequent to December 31, 1999, the Company filed the following Current Reports on Form 8-K: Date of earliest event reported: January 7, 2000 reporting information under "ITEM 5. OTHER EVENTS" regarding the approval by the Board of Directors of the Company and Unicom Corporation to accelerate the repurchase of $1.5 billion in stock and adjust shareholder consideration. Date of earliest event reported: January 13, 1999 reporting information under "ITEM 5. OTHER EVENTS" regarding the provision of the Amended Merger Agreement and additional information, including pro forma financial information, about the transactions contemplated by the Amended Merger Agreement before the Company commences repurchases of shares of its common stock. Date of earliest event reported: March 21, 2000 reporting information under "ITEM 5. OTHER EVENTS" regarding the issuance of an order by the Pennsylvania Public Utility Commission approving a Joint Petition for Full Settlement of PECO Energy Company's Application for Issuance of a Qualified Rate Order authorizing the Company to securitize up to an additional $1.0 billion of its authorized recoverable stranded costs. Date of earliest event reported: March 24, 2000 reporting information under "ITEM 5. OTHER EVENTS" regarding the filing with the PUC of a joint petition for settlement reached with various parties to the Company's proceeding before the PUC involving the proposed merger with Unicom. 97 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant, PECO ENERGY COMPANY, has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Philadelphia, and Commonwealth of Pennsylvania, on the 28th day of April 2000. PECO ENERGY COMPANY By /s/ C.A. McNeill, Jr. ------------------------- C.A. McNeill, Jr., Chairman of the Board, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this annual report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ C. A. McNeill, Jr. Chairman of the Board, President, Chief April 28, 2000 - -------------------------- Executive Officer and Director (Principal C. A. McNeill, Jr. Executive Officer) /s/ M. J. Egan Senior Vice President -- Finance and Chief April 28, 2000 - -------------------------- Financial Officer (Principal Financial and M. J. Egan Accounting Officer
This annual report has also been signed below by C. A. McNeill, Jr., Attorney-in-Fact, on behalf of the following Directors on the date indicated: SUSAN W. CATHERWOOD ROSEMARIE B. GRECO DANIEL L. COOPER JOHN M. PALMS M. WALTER D'ALESSIO JOSEPH F. PAQUETTE, JR. G. FRED DIBONA, JR. RONALD RUBIN R. KEITH ELLIOTT ROBERT SUBIN RICHARD H. GLANTON By /s/ C. A. McNeill, Jr. April 28, 2000 - --------------------------------------- C.A. McNeill, Jr. Attorney-in-Fact 98 EX-4.8 2 EXHIBIT 4.8 $450,000,000 REVOLVING CREDIT AGREEMENT dated as of September 15, 1999 among PECO ENERGY COMPANY as Borrower THE BANKS NAMED HEREIN as Banks THE FIRST NATIONAL BANK OF CHICAGO as Administrative Agent CITIBANK, N.A. as Documentation Agent and BANC ONE CAPITAL MARKETS, INC. as Lead Arranger TABLE OF CONTENTS ----------------- Section Page - ------- ---- ARTICLE I DEFINITIONS AND ACCOUNTING TERMS 1.01 Certain Defined Terms......................................... 1 1.02 Computation of Time Periods................................... 9 1.03 Accounting Principles......................................... 9 ARTICLE II AMOUNTS AND TERMS OF THE ADVANCES 2.01 The Advances.................................................. 10 2.02 Making the Advances........................................... 10 2.03 Fees.......................................................... 11 2.04 Reduction of the Commitments.................................. 11 2.05 Repayment of Advances......................................... 11 2.06 Interest on Advances.......................................... 12 2.07 Additional Interest on Advances............................... 12 2.08 Interest Rate Determination................................... 12 2.09 Conversion of Advances........................................ 13 2.10 Prepayments................................................... 13 2.11 Increased Costs............................................... 14 2.12 Illegality.................................................... 15 2.13 Payments and Computations..................................... 15 2.14 Taxes......................................................... 16 2.15 Sharing of Payments, Etc...................................... 18 2.16 Extension of Termination Date................................. 18 2.17 Additional Lenders............................................ 19 ARTICLE III CONDITIONS OF LENDING 3.01 Conditions Precedent to Initial Advances...................... 20 3.02 Conditions Precedent to Certain Borrowings.................... 21 ARTICLE IV REPRESENTATIONS AND WARRANTIES 4.01 Representations and Warranties of the Borrower................ 21 ARTICLE V COVENANTS OF THE BORROWER 5.01 Affirmative Covenants......................................... 23 5.02 Negative Covenants............................................ 25 -i- Section Page - ------- ---- ARTICLE VI EVENTS OF DEFAULT 6.01 Events of Default............................................. 27 ARTICLE VII THE AGENTS 7.01 Authorization and Action...................................... 28 7.02 Agents' Reliance, Etc......................................... 29 7.03 Agents and Affiliates......................................... 29 7.04 Lender Credit Decision........................................ 29 7.05 Indemnification............................................... 29 7.06 Successor Administrative Agent................................ 30 7.07 Documentation Agent and Lead Arranger......................... 30 ARTICLE VIII MISCELLANEOUS 8.01 Amendments, Etc............................................... 30 8.02 Notices, Etc.................................................. 30 8.03 No Waiver; Remedies........................................... 31 8.04 Costs and Expenses; Indemnification........................... 31 8.05 Right of Set-off.............................................. 32 8.06 Binding Effect................................................ 32 8.07 Assignments and Participations................................ 32 8.08 Governing Law................................................. 35 8.09 Consent to Jurisdiction....................................... 35 8.10 Execution in Counterparts; Integration........................ 35 Schedule I List of Applicable Lending Offices Exhibit A Form of Note Exhibit B Notice of a Borrowing Exhibit C Assignment and Acceptance Exhibit D Form of Opinion of Special Counsel for the Borrower Exhibit E Form of Opinion of Counsel to the Administrative Agent Exhibit F Form of Annual and Quarterly Compliance Certificate Exhibit G Form of Additional Lender Supplement -ii- REVOLVING CREDIT AGREEMENT dated as of September 15, 1999 PECO Energy Company, a Pennsylvania corporation (the "Borrower"), the banks listed on the signature pages hereof (the "Banks"), The First National Bank of Chicago ("First Chicago"), as administrative agent for the Lenders hereunder (in such capacity, the "Administrative Agent"), Citibank, N.A., as documentation agent for the Lenders hereunder (in such capacity, the "Documentation Agent"), and Banc One Capital Markets, Inc. ("Banc One Capital Markets"), as lead arranger hereunder (in such capacity, the "Lead Arranger"), hereby agree as follows: ARTICLE I DEFINITIONS AND ACCOUNTING TERMS SECTION 1.01. Certain Defined Terms. As used in this Agreement, each of the following terms shall have the meaning set forth next to such term below (each such meaning to be equally applicable to both the singular and plural forms of the term defined): "Additional Lender" has the meaning specified in Section 2.17. "Administrative Agent" means First Chicago in its capacity as administrative agent for the Lenders pursuant to Article VII, and not in its individual capacity as a Lender, and any successor Administrative Agent appointed pursuant to Article VII. "Advance" means an advance by a Lender to the Borrower as part of a Borrowing and refers to a Base Rate Advance or a Eurodollar Rate Advance, each of which shall be a "Type" of Advance. "Affiliate" means, as to any Person, any other Person that, directly or indirectly, controls, is controlled by or is under common control with such Person or is a director or officer of such Person. "Agents" means the Administrative Agent, the Documentation Agent and the Lead Arranger, collectively. "Applicable Commitment Fee Rate" means (i) during any Level 1 Rating Period, 0.10% per annum, (ii) during any Level 2 Rating Period, 0.125% per annum, (iii) during any Level 3 Rating Period, 0.150% per annum, (iv) during any Level 4 Rating Period, 0.1875% per annum and (v) during any Level 5 Rating Period, 0.30% per annum. The Applicable Commitment Fee Rate shall change when and as the Rating Period changes. "Applicable Lending Office" means, with respect to each Lender, such Lender's Domestic Lending Office in the case of a Base Rate Advance, and such Lender's Eurodollar Lending Office in the case of a Eurodollar Rate Advance. "Applicable Margin" means, on any date, for a Base Rate Advance or a Eurodollar Rate Advance, the interest rate per annum set forth below in the column entitled "Base Rate" or "Eurodollar Rate", as appropriate, opposite the applicable Rating Period in effect on such date: Rating Period Base Rate Eurodollar Rate ------------- --------- --------------- Level 1 0 .375% Level 2 0 .450% Level 3 0 .600% Level 4 0 .750% Level 5 0 1.00% provided, that the Applicable Margin for Eurodollar Advances shall be increased by .10% for any day when the unused portion of the Commitments is less than or equal to 50% of the aggregate Commitments. The Applicable Margin applicable to an outstanding Advance shall change when and as the Rating Period changes, and when and as the unused portion of the Commitments changes. "Assignment and Acceptance" means an assignment and acceptance entered into by a Lender and an Eligible Assignee, and accepted by the Administrative Agent, in substantially the form of Exhibit C hereto. "Base Rate" means, for any period, a fluctuating interest rate per annum as shall be in effect from time to time which rate per annum shall at all times be equal to the higher of: (a) the rate of interest announced by First Chicago, from time to time, as its corporate base rate; and (b) the sum of 1/2 of 1% per annum plus the Federal Funds Rate in effect from time to time. "Base Rate Advance" means an Advance that bears interest as provided in Section 2.06(a). "Benchmark Debt" means the Borrower's senior secured long-term debt or, in the event that the Borrower has no senior secured long-term debt rated by S&P (or by a generally recognized successor to S&P) or by Moody's (or by a generally recognized successor to Moody's), the Borrower's senior unsecured long-term debt. "Borrowing" means a borrowing consisting of simultaneous Advances of the same Type and, if such Borrowing comprises Eurodollar Rate Advances, having Interest Periods of the same duration, made by each of the Lenders pursuant to Section 2.01 or Converted pursuant to Section 2.10. "Business Day" means a day of the year on which banks are not required or authorized to close in Philadelphia, Pennsylvania, Chicago, Illinois or New York, New York, and, if the applicable Business Day relates to any Eurodollar Rate Advances, on which dealings are carried on in the London interbank market. "Closing Date" shall mean the date of the initial Advances hereunder. "Code" means the Internal Revenue Code of 1986, and the regulations promulgated thereunder, in each case as amended, reformed or otherwise modified from time to time. -2- "Commitment" has the meaning specified in Section 2.01. "Consolidated Adjusted Total Capitalization" on any date shall mean the sum, without duplication, of the following with respect to the Borrower and its consolidated Subsidiaries (exclusive, in each case, of Nonrecourse Transition Bond Debt, to the extent Nonrecourse Transition Bond Debt would otherwise be included in such item): (a) total capitalization as of such date, as determined in accordance with GAAP, (b) the current portion of liabilities which as of such date would be classified in whole or part as long-term debt in accordance with GAAP (it being understood that the noncurrent portion of such liabilities is included in the total capitalization referred to in clause (a)), (c) all obligations as lessee which, in accordance with GAAP, are capitalized as liabilities (including the current portion thereof), and (d) all other liabilities which would be classified as short-term debt in accordance with GAAP (including, without limitation, all liabilities of the types classified as "Notes Payable, Bank" on the Borrower's audited balance sheet for December 31, 1998). "Consolidated Adjusted Total Debt" on any date shall mean the sum, without duplication, of the following with respect to the Borrower and its consolidated Subsidiaries (exclusive, in each case, of Nonrecourse Transition Bond Debt, to the extent Nonrecourse Transition Bond Debt would otherwise be included in such item): (a) all liabilities which as of such date would be classified in whole or in part as long-term debt in accordance with GAAP (including the current portion thereof), (b) all obligations as lessee which, in accordance with GAAP, are capitalized as liabilities (including the current portion thereof), and (c) all other liabilities which would be classified as short-term debt in accordance with GAAP (including, without limitation, all liabilities of the types classified as "Notes Payable, Bank" on the Borrower's audited balance sheet for December 31, 1998). "Controlled Group" means all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control that, together with the Borrower or any Subsidiary, are treated as a single employer under Section 414(b) or 414(c) of the Code. "Convert", "Conversion" and "Converted" each refers to a conversion of Advances of one Type into Advances of another Type or the selection of a new, or the renewal of the same, Interest Period for Eurodollar Rate Advances pursuant to Section 2.09. "Debt" means (i) indebtedness for borrowed money, (ii) obligations evidenced by bonds, debentures, notes or other similar instrument, (iii) obligations to pay the deferred purchase price of property or services (other than trade payables incurred in the ordinary course of business), (iv) obligations as lessee under leases that shall have been or are required to be, in accordance with GAAP, recorded as capital leases, (v) obligations (contingent or otherwise) under reimbursement or similar agreements with respect to the issuance of letters of credit (other than obligations in respect of documentary letters of credit opened to provide for the payment of goods or services purchased in the ordinary course of business) and (vi) obligations under direct or indirect guaranties in respect of, and obligations (contingent or otherwise) to purchase or otherwise acquire, or otherwise to assure a creditor against loss in respect of, indebtedness or obligations of others of the kinds referred to in clauses (i) through (v) above. "Documentation Agent" means Citibank, N.A., in its capacity as Documentation Agent. "Domestic Lending Office" means, with respect to any Lender, the office of such Lender specified as its "Domestic Lending Office" opposite its name on Schedule I hereto or in the Assignment and Acceptance pursuant to which it became a Lender, or such other office of such Lender as such Lender may from time to time specify to the Borrower and the Administrative Agent. -3- "Eligible Assignee" means (i) a commercial bank organized under the laws of the United States, or any State thereof; (ii) a commercial bank organized under the laws of any other country that is a member of the OECD or has concluded special lending arrangements with the International Monetary Fund associated with its General Arrangements to Borrow, or a political subdivision of any such country, provided that such bank is acting through a branch or agency located in the United States; (iii) a finance company, insurance company or other financial institution or fund (whether a corporation, partnership or other entity) engaged generally in making, purchasing or otherwise investing in commercial loans in the ordinary course of its business; or (iv) the central bank of any country that is a member of the OECD; provided, however, that (A) any such Person described in clause (i), (ii) or (iii) above shall also (x) have outstanding unsecured long-term debt that is rated BBB- or better by S&P and Baa3 or better by Moody's (or an equivalent rating by another nationally recognized credit rating agency of similar standing if either such corporation is no longer in the business of rating unsecured indebtedness of entities engaged in such businesses) and (y) have combined capital and surplus (as established in its most recent report of condition to its primary regulator) of not less than $100,000,000 (or its equivalent in foreign currency), and (B) any Person described in clause (ii), (iii) or (iv) above shall, on the date on which it is to become a Lender hereunder, be entitled to receive payments hereunder without deduction or withholding of any United States Federal income taxes (as contemplated by Section 2.14(e)). "Eligible Successor" means a Person which (i) is a corporation duly incorporated, validly existing and in good standing under the laws of one of the states of the United States or the District of Columbia, (ii) is qualified to do business in Pennsylvania, (iii) as a result of the contemplated acquisition, consolidation or merger, will succeed to all or substantially all of the consolidated business and assets of the Borrower and its Subsidiaries, (iv) upon giving effect to the contemplated acquisition, consolidation or merger, will have all or substantially all of its consolidated business and assets conducted and located in the United States and (v) is acceptable to the Majority Lenders as a credit matter. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated and rulings issued thereunder, each as amended and modified from time to time. "Eurocurrency Liabilities" has the meaning assigned to that term in Regulation D of the Board of Governors of the Federal Reserve System, as in effect from time to time. "Eurodollar Lending Office" means, with respect to any Lender, the office of such Lender specified as its "Eurodollar Lending Office" opposite its name on Schedule I hereto or in the Assignment and Acceptance pursuant to which it became a Lender (or, if no such office is specified, its Domestic Lending Office), or such other office of such Lender as such Lender may from time to time specify to the Borrower and the Administrative Agent. "Eurodollar Rate" means, for the Interest Period for each Eurodollar Rate Advance made as part of the same Borrowing, an interest rate per annum equal to the average (rounded upward to the nearest whole multiple of 1/16 of 1% per annum, if such average is not such a multiple) of the rate per annum at which deposits in U.S. dollars are offered by the principal office of each of the Reference Banks in London, England, to prime banks in the London interbank market at 11:00 A.M. (London time) two Business Days before the first day of such Interest Period in an amount substantially equal to such Reference Bank's Eurodollar Rate Advance made as part of such Borrowing and for a period equal to such Interest Period. The Eurodollar Rate for the Interest Period for each Eurodollar Rate Advance made as part of the same Borrowing shall be determined by the Administrative Agent on the basis of applicable rates furnished to and received by the Administrative Agent from the Reference Banks two Business Days before the first day of such Interest Period, subject, however, to the provisions of Section 2.08. -4- "Eurodollar Rate Advance" means an Advance that bears interest as provided in Section 2.06(b). "Eurodollar Rate Reserve Percentage" of any Lender for the Interest Period for any Eurodollar Rate Advance means the reserve percentage applicable during such Interest Period (or if more than one such percentage shall be so applicable, the daily average of such percentages for those days in such Interest Period during which any such percentage shall be so applicable) under regulations issued from time to time by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement (including, without limitation, any emergency, supplemental or other marginal reserve requirement) for such Lender with respect to liabilities or assets consisting of or including Eurocurrency Liabilities having a term equal to such Interest Period. "Events of Default" has the meaning specified in Section 6.01. "Exchange Act" means the Securities Exchange Act of 1934, as amended and modified from time to time. "Existing Credit Agreements" shall mean (i) the $450,000,000 364-Day Credit Agreement dated as of October 7, 1997, among the Borrower, the banks named therein, certain banks specified therein as lead managers, certain banks specified therein as co-agents, First Chicago Capital Markets, Inc., Mellon Bank, N.A., and Citicorp Securities, Inc, as syndication agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent, and (ii) the $450,000,000 Credit Agreement dated as of October 7, 1997, among the Borrower, the banks named therein, certain specified banks, as lead arrangers, certain specified banks, as co-agents, First Chicago Capital Markets, Inc., Mellon Bank, N.A., and Citicorp Securities, Inc., as syndication agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent, in each case as amended, modified or supplemented from time to time. "Federal Funds Rate" means, for any period, a fluctuating interest rate per annum equal for each day during such period to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by it. "GAAP" shall have the meaning given that term in Section 1.03. "Granting Bank" shall have the meaning given that term in Section 8.07(h). "Interest Period" means, for each Advance, the period commencing on the date of such Advance or the date of the Conversion of any Advance into such an Advance and ending on the last day of the period selected by the Borrower pursuant to the provisions below and, thereafter, each subsequent period commencing on the last day of the immediately preceding Interest Period and ending on the last day of the period selected by the Borrower pursuant to the provisions below. The duration of each such Interest Period shall be 1, 2, 3 or 6 months in the case of a Eurodollar Rate Advance, as the Borrower may select in accordance with Section 2.02 or 2.09; provided, however, that: -5- (i) the Borrower may not select any Interest Period that ends after the Termination Date then in effect; (ii) Interest Periods commencing on the same date for Advances made as part of the same Borrowing shall be of the same duration, and (iii) whenever the last day of any Interest Period would otherwise occur on a day other than a Business Day, the last day of such Interest Period shall be extended to occur on the next succeeding Business Day, provided, in the case of any Interest Period for a Eurodollar Rate Advance, that if such extension would cause the last day of such Interest Period to occur in the next following calendar month, the last day of such Interest Period shall occur on the next preceding Business Day. "Lead Arranger" means Banc One Capital Markets in its capacity as Lead Arranger. "Lenders" means the Banks listed on the signature pages hereof and each Eligible Assignee that shall become a party hereto pursuant to Section 2.17 or 8.07. "Level 1 Rating Period" means any period during which the Benchmark Debt is rated A- or higher by S&P (or a comparable rating from any generally recognized successor to S&P) or A3 or higher by Moody's (or a comparable rating from any generally recognized successor to Moody's) (it being understood that, for this purpose, such ratings shall be subject to the Split Rating Adjustment). "Level 2 Rating Period" means any period which does not qualify as a Level 1 Rating Period during which the Benchmark Debt is rated BBB+ or higher by S&P (or a comparable rating from any generally recognized successor to S&P) or Baa1 or higher by Moody's (or a comparable rating from any generally recognized successor to Moody's) (it being understood that, for this purpose, such ratings shall be subject to the Split Rating Adjustment). "Level 3 Rating Period" means any period which does not qualify as a Level 1 or Level 2 Rating Period during which the Benchmark Debt is rated BBB or higher by S&P (or a comparable rating from any generally recognized successor to S&P) or Baa2 or higher by Moody's (or a comparable rating from any generally recognized successor to Moody's) (it being understood that, for this purpose, such ratings shall be subject to the Split Rating Adjustment). "Level 4 Rating Period" means any period which does not qualify as a Level 1, Level 2 or Level 3 Rating Period during which the Benchmark Debt is rated BBB- or higher by S&P (or a comparable rating from any generally recognized successor to S&P) or Baa3 or higher by Moody's (or a comparable rating from any generally recognized successor to Moody's) (it being understood that, for this purpose, such ratings shall be subject to the Split Rating Adjustment). "Level 5 Rating Period" means any period which does not qualify as a Level 1, Level 2, Level 3 or Level 4 Rating Period (it being understood that, for this purpose, such ratings shall be subject to the Split Rating Adjustment). "Lien" means any lien (statutory or other), mortgage, pledge, security interest or other charge or encumbrance, or any other type of preferential arrangement (including, without limitation, the interest of a vendor or lessor under any conditional sale, capitalized lease or other title retention agreement). "Majority Lenders" means, at any time prior to the Termination Date, Lenders having at least 51% of the Commitments, and, at any time on or after the Termination Date, Lenders having at least -6- 51% of the Advances outstanding (provided that, for purposes hereof, neither the Borrower, nor any of its Affiliates, if a Lender, shall be included in (i) the Lenders having such amount of the Commitments or the Advances or (ii) determining the total amount of the Commitments or the Advances). "Material Adverse Change" and "Material Adverse Effect" each means, relative to any occurrence, fact or circumstances of whatsoever nature (including, without limitation, any determination in any litigation, arbitration or governmental investigation or proceeding), (i) any materially adverse change in, or materially adverse effect on, the financial condition, operations, assets or business of the Borrower and its consolidated Subsidiaries, taken as a whole or (ii) any materially adverse effect on the validity or enforceability of this Agreement or any of the Notes. "Moody's" means Moody's Investors Service, Inc. "Mortgage" means the First and Refunding Mortgage, dated as of May 1, 1923, between The Counties Gas & Electric Company (to which the Borrower is successor) and Fidelity Trust Company, Trustee (to which First Union National Bank is successor), as amended, supplemented or refinanced from time to time, provided, that no effect shall be given to any amendment, supplement or refinancing after the date of this Agreement that would broaden the definition of "excepted encumbrances" as defined in the Mortgage as constituted on the date of this Agreement. "Multiemployer Plan" means a Plan maintained pursuant to a collective bargaining agreement or any other arrangement to which the Borrower or any member of the Controlled Group is a party to which more than one employer is obligated to make contributions. "Non-Consenting Lender" has the meaning specified in Section 2.16(a). "Nonrecourse Transition Bond Debt" means obligations evidenced by "transition bonds" (as defined in 66 Pa. Cons. Stat. Ann. ss. 2812(g) (West Supp. 1997), or any successor provision of similar import), rated AA or higher by S&P (or a comparable rating from a generally recognized successor to S&P) or Aa2 or higher by Moody's (or a comparable rating from a generally recognized successor to Moody's), representing a securitization of "intangible transition property" (as defined in the foregoing statute), as to which obligations neither the Borrower nor any Subsidiary of the Borrower (other than a Special Purpose Subsidiary) has any direct or indirect liability (whether as primary obligor, guarantor, or surety, provider of collateral security, put option, asset repurchase agreement or capital maintenance agreement, debt subordination agreement, or through other right or arrangement of any nature providing direct or indirect assurance of payment or performance of any such obligations in whole or in part), except for liability to repurchase "intangible transition property" conveyed to the securitization vehicle, on terms and conditions customary in receivables securitizations, in the event such "intangible transition property" violates representations and warranties of scope customary in receivables securitizations. "Special Purpose Subsidiary" means a direct or indirect wholly-owned corporate Subsidiary of the Borrower, substantially all of the assets of which are "intangible transition property" and proceeds thereof, formed solely for the purpose of holding such assets and issuing such "transition bonds," and which complies with the requirements customarily imposed on bankruptcy-remote corporations in receivables securitizations. "Note" means a promissory note of the Borrower payable to the order of any Lender, in substantially the form of Exhibit A hereto, evidencing the aggregate indebtedness of the Borrower to such Lender resulting from the Advances made by such Lender. "Notice of a Borrowing" has the meaning specified in Section 2.02(a). "OECD" means the Organization for Economic Cooperation and Development. -7- "Order of Registration" has the meaning assigned to that term in Section 3.01(a)(iii). "PBGC" means the Pension Benefit Guaranty Corporation and any entity succeeding to any or all of its functions under ERISA. "Person" means an individual, partnership, corporation (including a business trust), joint stock company, trust, unincorporated association, joint venture, limited liability company or other entity, or a government or any political subdivision or agency thereof. "Plan" means an employee pension benefit plan that is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code as to which the Borrower or any member of the Controlled Group may have any liability. "PPUC" means the Pennsylvania Public Utility Commission. "Principal Subsidiary" means (i) each Utility Subsidiary and (ii) from and after the date on which the aggregate book value of the assets of the Subsidiaries of the Borrower that are not Utility Subsidiaries exceeds $250,000,000, each such Subsidiary the assets of which exceeded $75,000,000 in book value at any time during the preceding 24-month period. "Rating Period" means a Level 1 Rating Period, a Level 2 Rating Period, a Level 3 Rating Period, a Level 4 Rating Period or a Level 5 Rating Period, as the case may be. "Reference Banks" means First Chicago and Citibank, N.A. "Register" has the meaning specified in Section 8.07(c). "Reportable Event" means a reportable event as defined in Section 4043 of ERISA and regulations issued under such section with respect to a Plan, excluding, however, such events as to which the PBGC by regulation waived the requirement of Section 4043(a) of ERISA that it be notified within 30 days of the occurrence of such event, provided that a failure to meet the minimum funding standard of Section 412 of the Code and Section 302 of ERISA shall be a Reportable Event regardless of the issuance of any such waivers in accordance with either Section 4043(a) of ERISA or Section 412(d) of the Code. "S&P" means Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc. "Securities Certificate" has the meaning assigned to that term in Section 3.01(a)(iii). "Single Employer Plan" means a Plan maintained by the Borrower or any member of the Controlled Group for employees of the Borrower or any member of the Controlled Group. "SPC" shall have the meaning assigned to that term in Section 8.07(h). "Special Purpose Subsidiary" has the meaning assigned to that term in the definition of "Nonrecourse Transition Bond Debt." "Split Rating Adjustment": For the purpose of determining the appropriate Rating Period, the rating of the Benchmark Debt shall be subject to adjustment as follows. In the event that the Benchmark Debt is rated at equivalent rating levels or not more than one rating level apart by S&P (or any generally accepted successor to S&P) and Moody's (or any generally accepted successor to Moody's), then no adjustment shall apply. Otherwise, the higher of the two ratings shall be deemed to be reduced to the next lower rating level. For this purpose, (i) determination of the rating level shall take into account "+" and "-" -8- modifiers to S&P ratings and numerical modifiers to Moody's ratings (so that, for example, an S&P rating of A- shall be deemed equivalent to a Moody's rating of A3, an S&P rating of BBB+ shall be deemed equivalent to a Moody's rating of Baa1, an S&P rating of BBB shall be deemed equivalent to a Moody's rating of Baa2, an S&P rating of BBB- shall be deemed equivalent to a Moody's rating of Baa3, and so on), and (ii) by way of clarification, in the event the Benchmark Debt is rated by only one of the two referenced rating agencies, such rating shall be deemed to be reduced to the next lower rating level. "Subsidiary" means, with respect to any Person, any corporation or unincorporated entity of which more than 50% of the outstanding capital stock (or comparable interest) having ordinary voting power (irrespective of whether or not at the time capital stock, or comparable interests, of any other class or classes of such corporation or entity shall or might have voting power upon the occurrence of any contingency) is at the time directly or indirectly owned by such Person (whether directly or through one or more other Subsidiaries). "Termination Date" means the earlier of (i) September 15, 2002 (or, if such date is not a Business Day, the next preceding Business Day) or such later date that may be established pursuant to Section 2.16(a) or (ii) the date of termination in whole of the Commitments pursuant to Section 2.04 or Section 6.01. "Unfunded Liabilities" means, (i) in the case of any Single Employer Plan, the amount (if any) by which the present value of all vested nonforfeitable benefits under such Plan exceeds the fair market value of all Plan assets allocable to such benefits, all determined as of the then most recent evaluation date for such Plan, and (ii) in the case of any Multiemployer Plan, the withdrawal liability that would be incurred by the Controlled Group if all members of the Controlled Group completely withdrew from such Multiemployer Plan. "Utility Subsidiary" means each Subsidiary of the Borrower that is engaged principally in the generation, transmission, or distribution of electricity or gas and is subject to regulation as a public utility by federal or state regulatory authorities. "Year 2000 Problem" shall mean that the computer hardware, software or equipment containing embedded microchips of the Borrower or any of its Subsidiaries which is essential to its business or operation will, as a result of processing dates or time periods occurring after December 31, 1999, malfunction, causing a system failure or miscalculations resulting in disruptions of operations, including, among other things, a temporary inability to process transactions, send bills, operate generation stations, or engage in similar normal business activities. "364-Day Credit Agreement" means that certain 364-Day Credit Agreement, dated as of the date hereof, among the Borrower, the banks named therein, First Chicago, as administrative agent for the lenders thereunder, Citibank, N.A., as documentation agent, and Banc One Capital Markets, as lead arranger, as the same may be amended, modified or supplemented from time to time. SECTION 1.02. Computation of Time Periods. In this Agreement in the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including" and the words "to" and "until" each means "to but excluding". SECTION 1.03. Accounting Principles. As used in this Agreement, "GAAP" shall mean generally accepted accounting principles in the United States, applied on a basis consistent with the principles used in preparing the Borrower's audited consolidated financial statements as of -9- December 31, 1998 and for the fiscal year then ended. In this Agreement, except to the extent, if any, otherwise provided herein, all accounting and financial terms shall have the meanings ascribed to such terms by GAAP, and all computations and determinations as to accounting and financial matters shall be made in accordance with GAAP. In the event that the financial statements generally prepared by the Borrower apply accounting principles other than GAAP, the compliance certificate delivered pursuant to Section 5.01(b)(iv) accompanying such financial statements shall include information in reasonable detail reconciling such financial statements to GAAP to the extent relevant to the calculations set forth in such compliance certificate. ARTICLE II AMOUNTS AND TERMS OF THE ADVANCES SECTION 2.01. The Advances. Each Lender severally agrees, on the terms and conditions hereinafter set forth, to make Advances to the Borrower from time to time on any Business Day during the period from the date hereof until (but excluding) the Termination Date in an aggregate amount not to exceed at any time outstanding the amount set forth opposite such Lender's name on the signature pages hereof or, if such Lender has entered into any Assignment and Acceptance or Additional Lender Supplement, set forth for such Lender in the Register maintained by the Administrative Agent pursuant to Section 8.07(c), as such amount may be reduced pursuant to Section 2.04 or 2.16 (such Lender's "Commitment"). Each Borrowing shall consist of Advances of the same Type made or Converted on the same day by the Lenders ratably according to their respective Commitments. Each Borrowing comprising Base Rate Advances shall be in an aggregate amount not less than $5,000,000, and each Borrowing comprising Eurodollar Rate Advances shall be in an aggregate amount not less than $10,000,000. Within the limits of each Lender's Commitment, the Borrower may from time to time borrow, prepay pursuant to Section 2.10 and reborrow under this Section 2.01. SECTION 2.02. Making the Advances. (a) Each Borrowing (other than pursuant to a Conversion) shall be made on notice, given not later than 10:00 A.M. (Chicago time) on the third Business Day prior to the date of any proposed Borrowing comprising Eurodollar Rate Advances, and on the date of any proposed Borrowing comprising Base Rate Advances, by the Borrower to the Administrative Agent, which shall give to each Lender prompt notice thereof. Each such notice of a Borrowing (a "Notice of a Borrowing") shall be sent by telecopier, telex or cable, confirmed immediately in writing, in substantially the form of Exhibit B hereto, specifying therein the requested (i) date of such Borrowing, (ii) Type of Advances to be made in connection with such Borrowing, (iii) aggregate amount of such Borrowing, and (iv) in the case of a Borrowing comprising Eurodollar Rate Advances, initial Interest Period for the Advances to be made in connection with such Borrowing. Each Lender shall, before 12:00 Noon (Chicago time) on the date of such Borrowing, make available for the account of its Applicable Lending Office to the Administrative Agent at its address referred to in Section 8.02, in same day funds, such Lender's ratable portion of such Borrowing. After the Administrative Agent's receipt of such funds and upon fulfillment of the applicable conditions set forth in Article III, the Administrative Agent will make such funds available to the Borrower at the Administrative Agent's aforesaid address. (b) Each Notice of a Borrowing shall be irrevocable and binding on the Borrower. In the case of any Borrowing that the related Notice of a Borrowing specifies is to comprise Eurodollar Rate Advances, the Borrower shall indemnify each Lender against any loss, cost or expense incurred by such Lender as a result of any failure to fulfill on or before the date specified in such Notice of a Borrowing for such Borrowing the applicable conditions set forth in Article III, including, without limitation, any loss, cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such Lender to fund the Advance to be made by such Lender as part of such Borrowing when such Advance, as a result of such failure, is not made on such date. -10- (c) Unless the Administrative Agent shall have received notice from a Lender prior to the date of any Borrowing that such Lender will not make available to the Administrative Agent such Lender's ratable portion of such Borrowing, the Administrative Agent may assume that such Lender has made such portion available to the Administrative Agent on the date of such Borrowing in accordance with subsection (a) of this Section 2.02 and the Administrative Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent that such Lender shall not have so made such ratable portion available to the Administrative Agent, such Lender and the Borrower severally agree to repay to the Administrative Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Administrative Agent, at (i) in the case of the Borrower, the interest rate applicable at the time to Advances made in connection with such Borrowing and (ii) in the case of such Lender, the Federal Funds Rate. If such Lender shall repay to the Administrative Agent such corresponding amount, such amount so repaid shall constitute such Lender's Advance as part of such Borrowing for purposes of this Agreement. (d) The failure of any Lender to make the Advance to be made by it as part of any Borrowing shall not relieve any other Lender of its obligation, if any, hereunder to make its Advance on the date of such Borrowing, but no Lender shall be responsible for the failure of any other Lender to make the Advance to be made by such other Lender on the date of any Borrowing. (e) Notwithstanding anything to the contrary contained herein, no more than sixteen (16) Borrowings comprising Eurodollar Rate Advances may be outstanding at any time. SECTION 2.03. Fees. (a) The Borrower agrees to pay to the Administrative Agent for the account of each Lender a commitment fee on the average daily unused portion of such Lender's Commitment from the date on which the Administrative Agent determines the conditions set forth in Section 3.01 are satisfied in the case of each Bank, and from the effective date specified in the Assignment and Acceptance or the Additional Lender Supplement pursuant to which it became a Lender in the case of each other Lender, until the Termination Date, and, in the case of the termination in whole of a Lender's Commitment pursuant to Section 2.04 or 2.16, the date of such termination, payable on the last day of each March, June, September and December during such period, and on the Termination Date, and, in the case of the termination in whole of a Lender's Commitment pursuant to Section 2.04 or 2.16, the date of such termination, at a percentage rate per annum equal to the Applicable Commitment Fee Rate in effect from time to time, changing when and as the Applicable Commitment Fee Rate changes. (b) The Borrower agrees to pay to the Administrative Agent for the account of each Bank a facility fee in an amount equal to .075% of such Bank's Commitment as in effect on the Closing Date, payable on the Closing Date. (c) The Borrower agrees to pay to the Administrative Agent and the Lead Arranger for their respective accounts, such additional fees, in such amounts and payable on such dates as may be agreed to in writing from time to time between the Borrower and the Administrative Agent or the Lead Arranger, as the case may be. SECTION 2.04. Reduction of the Commitments. The Borrower shall have the right, upon at least two Business Days' notice to the Administrative Agent, to terminate in whole or reduce ratably in part the unused portions of the respective Commitments of the Lenders; provided, that the aggregate amount of the Commitments of the Lenders shall not be reduced to an amount that is less than the aggregate principal amount of the Advances then outstanding; and provided, further, that each partial reduction shall be in the aggregate amount of $10,000,000 or an integral multiple thereof. SECTION 2.05. Repayment of Advances. The Borrower shall repay the principal amount of each Advance made by each Lender in accordance with the Note to the order of such Lender. -11- SECTION 2.06. Interest on Advances. The Borrower shall pay interest on the unpaid principal amount of each Advance made by each Lender from the date of such Advance until such principal amount shall be paid in full, at the following rates per annum: (a) Base Rate Advances. If such Advance is a Base Rate Advance, a rate per annum equal at all times to the Base Rate in effect from time to time, payable quarterly on the last day of each March, June, September and December during such periods and on the date such Base Rate Advance shall be Converted or paid in full. (b) Eurodollar Rate Advances. Subject to Section 2.07, if such Advance is a Eurodollar Rate Advance, a rate per annum equal at all times during the Interest Period for such Advance to the sum of the Eurodollar Rate for such Interest Period plus the Applicable Margin for such Eurodollar Rate Advance in effect from time to time, payable on the last day of the Interest Period for such Eurodollar Rate Advance (or, if the Interest Period for such Advance is six months, accrued interest shall be payable on the day that is three months and on the day that is six months from the date such Advance was made) or, if earlier, on the date such Eurodollar Rate Advance shall be Converted or paid in full. SECTION 2.07. Additional Interest on Advances. The Borrower shall pay to each Lender, so long as such Lender shall be required under regulations of the Board of Governors of the Federal Reserve System to maintain reserves with respect to liabilities or assets consisting of or including Eurocurrency Liabilities, additional interest on the unpaid principal amount of each Eurodollar Rate Advance of such Lender, from the date of such Advance until such principal amount is paid in full or Converted, at an interest rate per annum equal at all times to the remainder obtained by subtracting (i) the Eurodollar Rate for the Interest Period for such Advance from (ii) the rate obtained by dividing such Eurodollar Rate by a percentage equal to 100% minus the Eurodollar Rate Reserve Percentage of such Lender for such Interest Period, payable on each date on which interest is payable on such Advance; provided, that no Lender shall be entitled to demand such additional interest more than 90 days following the last day of the Interest Period in respect of which such demand is made; provided further, however, that the foregoing proviso shall in no way limit the right of any Lender to demand or receive such additional interest to the extent that such additional interest relates to the retroactive application of the reserve requirements described above if such demand is made within 90 days after the implementation of such retroactive reserve requirements. Such additional interest shall be determined by such Lender and notified to the Borrower through the Administrative Agent, and such determination shall be conclusive and binding for all purposes, absent manifest error. SECTION 2.08. Interest Rate Determination. (a) Each Reference Bank agrees to furnish to the Administrative Agent timely information for the purpose of determining each Eurodollar Rate. If any one of the Reference Banks shall not furnish such timely information to the Administrative Agent for the purpose of determining any such interest rate, the Administrative Agent shall determine such interest rate on the basis of timely information furnished by the remaining Reference Banks. (b) The Administrative Agent shall give prompt notice to the Borrower and the Lenders of the applicable interest rate determined by the Administrative Agent for purposes of Section 2.06(a) or (b), and the applicable rate, if any, furnished by each Reference Bank for the purpose of determining the applicable interest rate under Section 2.06(b). (c) If either or both Reference Banks fail to furnish timely information to the Administrative Agent for determining the Eurodollar Rate for any Eurodollar Rate Advances, (i) the Administrative Agent shall forthwith notify the Borrower and the Lenders that the interest rate cannot be determined for such Eurodollar Rate Advances, -12- (ii) each such Advance will automatically, on the last day of the then existing Interest Period therefor, Convert into a Base Rate Advance (or if such Advance is then a Base Rate Advance, will continue as a Base Rate Advance), and (iii) the obligation of the Lenders to make, or to Convert Advances into, Eurodollar Rate Advances shall be suspended until the Administrative Agent shall notify the Borrower and the Lenders that the circumstances causing such suspension no longer exist. (d) If, with respect to any Eurodollar Rate Advances, the Majority Lenders notify the Administrative Agent that the Eurodollar Rate for any Interest Period for such Advances will not adequately reflect the cost to such Majority Lenders of making, funding or maintaining their respective Eurodollar Rate Advances for such Interest Period, the Administrative Agent shall forthwith so notify the Borrower and the Lenders, whereupon (i) each Eurodollar Rate Advance will automatically, on the last day of the then existing Interest Period therefor (unless prepaid or Converted to any Type of Advance other than a Eurodollar Rate Advance prior to such date), Convert into a Base Rate Advance, and (ii) the obligation of the Lenders to make, or to Convert Advances into, Eurodollar Rate Advances shall be suspended until the Administrative Agent shall notify the Borrower and the Lenders that the circumstances causing such suspension no longer exist. SECTION 2.09. Conversion of Advances. (a) Voluntary. The Borrower may on any Business Day, upon notice given to the Administrative Agent not later than 10:00 A.M. (Chicago time) on the third Business Day prior to the date of any proposed Conversion into Eurodollar Rate Advances, and on the date of any proposed Conversion into Base Rate Advances, and subject to the provisions of Sections 2.08 and 2.12, Convert all Advances of one Type made in connection with the same Borrowing into Advances of another Type or Types or Advances of the same Type having the same or a new Interest Period; provided, however, that any Conversion of Eurodollar Rate Advances into Base Rate Advances or Eurodollar Advances having the same or new Interest Periods shall be made on, and only on, the last day of an Interest Period for such Eurodollar Rate Advances, unless the Borrower shall also reimburse the Lenders in respect thereof pursuant to Section 8.04(b) on the date of such Conversion. Each such notice of a Conversion shall, within the restrictions specified above, specify (i) the date of such Conversion, (ii) the Advances to be Converted, and (iii) if such Conversion is into, or with respect to, Eurodollar Rate Advances, the duration of the Interest Period for each such Advance. (b) Automatic. If the Borrower shall fail to select the Type of any Advance or the duration of any Interest Period for any Borrowing comprising Eurodollar Rate Advances in accordance with the provisions contained in the definition of "Interest Period" in Section 1.01 and Section 2.09(a), the Administrative Agent will forthwith so notify the Borrower and the Lenders and such Advances will automatically, on the last day of the then existing Interest Period therefor, Convert into Base Rate Advances. SECTION 2.10. Prepayments. The Borrower may, upon at least three Business Days' notice in the case of any prepayment of Eurodollar Advances or one Business Day's notice in the case of any prepayment of Base Rate Advances, to the Administrative Agent stating the proposed date and aggregate principal amount of the prepayment, and if such notice is given the Borrower shall, prepay the outstanding principal amounts of the Advances made as part of the same Borrowing in whole or ratably in part, together with accrued interest to the date of such prepayment on the principal amount prepaid; provided, however, that (i) each partial prepayment shall be in an aggregate principal amount not less than $10,000,000 in the case of any prepayment of Eurodollar Advances or $5,000,000 in the case of any prepayment of Base Rate Advances, or any integral multiple of $1,000,000 in excess thereof, and (ii) in the case of -13- any such prepayment of a Eurodollar Rate Advance, the Borrower shall be obligated to reimburse the Lenders in respect thereof pursuant to Section 8.04(b) on the date of such prepayment. SECTION 2.11. Increased Costs. (a) If on or after the date of this Agreement, any Lender determines that (i) the introduction of or any change (other than any change by way of imposition or increase of reserve requirements, in the case of Eurodollar Rate Advances, included in the Eurodollar Rate Reserve Percentage) in or in the interpretation of any law or regulation or (ii) the compliance with any guideline or request from any central bank or other governmental authority (whether or not having the force of law) shall increase the cost to such Lender of agreeing to make or making, funding or maintaining Eurodollar Rate Advances, then the Borrower shall from time to time, upon demand by such Lender (with a copy of such demand to the Administrative Agent), pay to the Administrative Agent for the account of such Lender additional amounts (without duplication of any amount payable pursuant to Section 2.14) sufficient to compensate such Lender for such increased cost; provided, that no Lender shall be entitled to demand such compensation more than 90 days following the last day of the Interest Period in respect of which such demand is made; provided further, however, that the foregoing proviso shall in no way limit the right of any Lender to demand or receive such compensation to the extent that such compensation relates to the retroactive application of any law, regulation, guideline or request described in clause (i) or (ii) above if such demand is made within 90 days after the implementation of such retroactive law, interpretation, guideline or request. A certificate as to the amount of such increased cost, submitted to the Borrower and the Administrative Agent by such Lender, shall be conclusive and binding for all purposes, absent manifest error. (b) If any Lender determines that, after the date of this Agreement, compliance with any law or regulation or any guideline or request from any central bank or other governmental authority (whether or not having the force of law) regarding capital adequacy requirements affects or would affect the amount of capital required or expected to be maintained by such Lender or any corporation controlling such Lender (including, in any event, any determination after the date of this Agreement by any such governmental authority or central bank that, for purposes of capital adequacy requirements, any Lender's Commitment hereunder does not constitute a commitment with an original maturity of one year or less) and that the amount of such capital is increased by or based upon the existence of such Lender's commitment to lend hereunder and other commitments of this type or the Advances made by such Lender, then, upon demand by such Lender (with a copy of such demand to the Administrative Agent), the Borrower shall immediately pay to the Administrative Agent for the account of such Lender, from time to time as specified by such Lender, additional amounts sufficient to compensate such Lender or such corporation in the light of such circumstances, to the extent that such Lender determines such increase in capital to be allocable to the existence of such Lender's commitment to lend hereunder or the Advances made by such Lender; provided, that no Lender shall be entitled to demand such compensation more than one year following the payment to or for the account of such Lender of all other amounts payable hereunder and under any Note held by such Lender and the termination of such Lender's Commitment; provided further, however, that the foregoing proviso shall in no way limit the right of any Lender to demand or receive such compensation to the extent that such compensation relates to the retroactive application of any law, regulation, guideline or request described above if such demand is made within one year after the implementation of such retroactive law, interpretation, guideline or request. A certificate as to such amounts submitted to the Borrower and the Administrative Agent by such Lender shall be conclusive and binding, for all purposes, absent manifest error. (c) Any Lender claiming compensation pursuant to this Section 2.11 shall use its best efforts (consistent with its internal policy and legal and regulatory restrictions) to change the jurisdiction of its Applicable Lending Office if the making of such a change would avoid the need for, or reduce the amount of, any such compensation that may thereafter accrue and would not, in the reasonable judgment of such Lender, be otherwise disadvantageous to such Lender. -14- SECTION 2.12. Illegality. Notwithstanding any other provision of this Agreement, if any Lender shall notify the Administrative Agent that the introduction of or any change in or in the interpretation of any law or regulation makes it unlawful, or any central bank or other governmental authority asserts that it is unlawful, for such Lender or its Eurodollar Lending Office to perform its obligations hereunder to make Eurodollar Rate Advances or to fund or maintain Eurodollar Rate Advances hereunder, (i) the obligation of such Lender to make, or to Convert Advances into, Eurodollar Rate Advances shall be suspended (subject to the following paragraph of this Section 2.12) until the Administrative Agent shall notify the Borrower and the Lenders that the circumstances causing such suspension no longer exist and (ii) all Eurodollar Rate Advances of such Lender then outstanding shall, on the last day of then applicable Interest Period (or such earlier date as such Lender shall designate upon not less than five Business Days prior written notice to the Administrative Agent), be automatically Converted into Base Rate Advances. If the obligation of any Lender to make, fund or maintain Eurodollar Rate Advances has been suspended pursuant to the preceding paragraph, then, unless and until the Administrative Agent shall notify the Borrower and the Lenders that the circumstances causing such suspension no longer exist (i) all Advances that would otherwise be made by such Lender as Eurodollar Rate Advances shall instead be made as Base Rate Advances and (ii) to the extent that Eurodollar Rate Advances of such Lender have been Converted into Base Rate Advances pursuant to the preceding paragraph or made instead as Base Rate Advances pursuant to the preceding clause (i), all payments and prepayments of principal that would have otherwise been applied to such Eurodollar Rate Advances of such Lender shall be applied instead to such Base Rate Advances of such Lender. SECTION 2.13. Payments and Computations. (a) The Borrower shall make each payment hereunder and under the Notes not later than 10:00 A.M. (Chicago time) on the day when due in U.S. dollars to the Administrative Agent at its address referred to in Section 8.02 in same day funds without setoff, counterclaim or other deduction. The Administrative Agent will promptly thereafter cause to be distributed like funds relating to the payment of principal or interest or commitment and facility fees ratably (other than amounts payable pursuant to Section 2.02(c), 2.07, 2.11, 2.14, 2.16(a) or 8.04(b)) to the Lenders for the account of their respective Applicable Lending Offices, and like funds relating to the payment of any other amount payable to any Lender to such Lender for the account of its Applicable Lending Office, in each case to be applied in accordance with the terms of this Agreement. Upon its acceptance of an Assignment and Acceptance and recording of the information contained therein in the Register pursuant to Section 8.07(d), from and after the effective date specified in such Assignment and Acceptance, the Administrative Agent shall make all payments hereunder and under the Notes in respect of the interest assigned thereby to the Lender assignee thereunder, and the parties to such Assignment and Acceptance shall make all appropriate adjustments in such payments for periods prior to such effective date directly between themselves. (b) The Borrower hereby authorizes each Lender, if and to the extent payment owed to such Lender is not made when due hereunder or under any Note held by such Lender, to charge from time to time against any or all of the Borrower's accounts with such Lender any amount so due. (c) All computations of interest based on the Base Rate shall be made by the Administrative Agent on the basis of a year of 365 or 366 days, as the case may be, and all computations of interest based on the Eurodollar Rate or the Federal Funds Rate and of commitment fees shall be made by the Administrative Agent, and all computations of interest pursuant to Section 2.07 shall be made by a Lender, on the basis of a year of 360 days, in each case for the actual number of days (including the first day but excluding the last day) occurring in the period for which such interest or commitment fees are payable. Each determination by the Administrative Agent (or, in the case of Section 2.07, by a Lender) of an interest rate hereunder shall be conclusive and binding for all purposes, absent manifest error. (d) Whenever any payment hereunder or under the Notes shall be stated to be due on a day other than a Business Day, such payment shall be made -15- on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of payment of interest or commitment fee, as the case may be; provided, however, if such extension would cause payment of interest on or principal of Eurodollar Rate Advances to be made in the next following calendar month, such payment shall be made on the next preceding Business Day. (e) Unless the Administrative Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Lenders hereunder that the Borrower will not make such payment in full, the Administrative Agent may assume that the Borrower has made such payment in full to the Administrative Agent on such date and the Administrative Agent may, in reliance upon such assumption, cause to be distributed to each Lender on such due date an amount equal to the amount then due such Lender. If and to the extent that the Borrower shall not have so made such payment in full to the Administrative Agent, each Lender shall repay to the Administrative Agent forthwith on demand such amount distributed to such Lender together with interest thereon, for each day from the date such amount is distributed to such Lender until the date such Lender repays such amount to the Administrative Agent, at the Federal Funds Rate. (f) Notwithstanding anything to the contrary contained herein, any amount payable by the Borrower hereunder or under any Note that is not paid when due (whether at stated maturity, by acceleration or otherwise) shall (to the fullest extent permitted by law) bear interest from the date when due until paid in full at a rate per annum equal at all times to the Base Rate plus 2%, payable upon demand. SECTION 2.14. Taxes. (a) Any and all payments by the Borrower hereunder or under the Notes shall be made, in accordance with Section 2.13, free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding, in the case of each Lender and the Administrative Agent, taxes imposed on its income, and franchise taxes imposed on it, by the jurisdiction under the laws of which such Lender or the Administrative Agent (as the case may be) is organized or any political subdivision thereof and, in the case of each Lender, taxes imposed on its income, and franchise taxes imposed on it, by the jurisdiction of such Lender's Applicable Lending Office or any political subdivision thereof (all such non-excluded taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "Taxes"). If the Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder or under any Note to any Lender or the Administrative Agent, (i) the sum payable shall be increased as may be necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 2.14) such Lender or the Administrative Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions and (iii) the Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law. (b) In addition, the Borrower agrees to pay any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies to the extent arising from the execution, delivery or registration of this Agreement or the Notes (hereinafter referred to as "Other Taxes"). (c) No Lender may claim or demand payment or reimbursement in respect of any Taxes or Other Taxes pursuant to this Section 2.14 if such Taxes or Other Taxes, as the case may be, were imposed solely as the result of a voluntary change in the location of the jurisdiction of such Lender's Applicable Lending Office. (d) The Borrower will indemnify each Lender and the Administrative Agent for the full amount of Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes imposed by any jurisdiction on amounts payable under this Section 2.14) paid by such Lender or the -16- Administrative Agent (as the case may be) and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted. This indemnification shall be made within 30 days from the date such Lender or the Administrative Agent (as the case may be) makes written demand therefor. (e) Prior to the date of the initial Borrowing in the case of each Bank, and on the date of the Assignment and Acceptance or Additional Lender Supplement pursuant to which it became a Lender in the case of each other Lender, and from time to time thereafter within 30 days from the date of request if requested by the Borrower or the Administrative Agent, each Lender organized under the laws of a jurisdiction outside the United States shall provide the Administrative Agent and the Borrower with the forms prescribed by the Internal Revenue Service of the United States certifying that such Lender is exempt from United States withholding taxes with respect to all payments to be made to such Lender hereunder and under the Notes. If for any reason during the term of this Agreement, any Lender becomes unable to submit the forms referred to above or the information or representations contained therein are no longer accurate in any material respect, such Lender shall notify the Administrative Agent and the Borrower in writing to that effect. Unless the Borrower and the Administrative Agent have received forms or other documents satisfactory to them indicating that payments hereunder or under any Note are not subject to United States withholding tax, the Borrower or the Administrative Agent shall withhold taxes from such payments at the applicable statutory rate in the case of payments to or for any Lender organized under the laws of a jurisdiction outside the United States and no Lender may claim or demand payment or reimbursement for such withheld taxes pursuant to this Section 2.14. (f) Any Lender claiming any additional amounts payable pursuant to this Section 2.14 shall use its best efforts (consistent with its internal policy and legal and regulatory restrictions) to change the jurisdiction of its Applicable Lending Office if the making of such a change would avoid the need for, or reduce the amount of, any such additional amounts which may thereafter accrue and would not, in the reasonable judgment of such Lender, be otherwise disadvantageous to such Lender. (g) If the Borrower makes any additional payment to any Lender pursuant to this Section 2.14 in respect of any Taxes or Other Taxes, and such Lender determines that it has received (i) a refund of such Taxes or Other Taxes or (ii) a credit against or relief or remission for, or a reduction in the amount of, any tax or other governmental charge attributable solely to any deduction or credit for any Taxes or Other Taxes with respect to which it has received payments under this Section 2.14, such Lender shall, to the extent that it can do so without prejudice to the retention of such refund, credit, relief, remission or reduction, pay to the Borrower such amount as such Lender shall have determined to be attributable to the deduction or withholding of such Taxes or Other Taxes. If, within one year after the payment of any such amount to the Borrower, such Lender determines that it was not entitled to such refund, credit, relief, remission or reduction to the full extent of any payment made pursuant to the first sentence of this Section 2.14(g), the Borrower shall upon notice and demand of such Lender promptly repay the amount of such overpayment. Any determination made by such Lender pursuant to this Section 2.14(g) shall in the absence of bad faith or manifest error be conclusive, and nothing in this Section 2.14(g) shall be construed as requiring any Lender to conduct its business or to arrange or alter in any respect its tax or financial affairs (except as required by Section 2.14(f)) so that it is entitled to receive such a refund, credit or reduction or as allowing any person to inspect any records, including tax returns, of any Lender. (h) Without prejudice to the survival of any other agreement of the Borrower or any Lender hereunder, the agreements and obligations of the Borrower and the Lenders contained in this Section 2.14 shall survive the payment in full of principal and interest hereunder and under the Notes; provided, that no Lender shall be entitled to demand any payment under this Section 2.14 more than one year following the payment to or for the account of such Lender of all other amounts payable hereunder and under any Note held by such Lender and the termination of such Lender's Commitment; provided further, however, that the foregoing proviso shall in no way limit the right of any Lender to demand or receive any payment under this Section 2.14 to the extent that such payment relates to the retroactive application of any Taxes or Other -17- Taxes if such demand is made within one year after the implementation of such Taxes or Other Taxes. SECTION 2.15. Sharing of Payments, Etc. If any Lender shall obtain any payment (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise) on account of the Advances made by it (other than pursuant to Section 2.02(c), 2.07, 2.11, 2.14, 2.16(a) or 8.04(b)) in excess of its ratable share of payments on account of the Advances obtained by all the Lenders, such Lender shall forthwith purchase from the other Lenders such participations in the Advances made by them as shall be necessary to cause such purchasing Lender to share the excess payment ratably with each of them, provided, however, that if all or any portion of such excess payment is thereafter recovered from such purchasing Lender, such purchase from each Lender shall be rescinded and such Lender shall repay to the purchasing Lender the purchase price to the extent of such recovery together with an amount equal to such Lender's ratable share (according to the proportion of (i) the amount of such Lender's required repayment to (ii) the total amount so recovered from the purchasing Lender) of any interest or other amount paid or payable by the purchasing Lender in respect of the total amount so recovered. The Borrower agrees that any Lender so purchasing a participation from another Lender pursuant to this Section 2.15 may, to the fullest extent permitted by law, exercise all its rights of payment (including the right of set-off) with respect to such participation as fully as if such Lender were the direct creditor of the Borrower in the amount of such participation. SECTION 2.16. Extension of Termination Date. (a) Unless the Termination Date shall have occurred, the Borrower may request the Lenders, by written notice to the Administrative Agent not more than 90 days and not less than 60 days prior to the then effective Termination Date, to consent to extension of the Termination Date to the date which is one year after the then effective Termination Date (or, if such date is not a Business Day, the next preceding Business Day). Each Lender shall, in its sole discretion, determine whether to consent to such request and shall notify the Administrative Agent of its determination not more than 45 days and not less than 30 days prior to the then-effective Termination Date. Any Lender which fails to give such notice to the Administrative Agent shall be deemed to have not consented to such request. If any Lender shall not have consented to such request 30 days prior to the then effective Termination Date (such Lender being referred to herein as a "Non-Consenting Lender"), the Administrative Agent shall promptly so notify the Borrower and the other Lenders, whereupon each other Lender may, not more than 30 days and not less than 25 days prior to the then effective Termination Date, revoke any consent to such extension previously given by such Lender (in which case such Lender shall be deemed a Non-Consenting Lender). If such request shall have been consented to by the Majority Lenders (as determined after giving effect to the replacement of any Non-Consenting Lender pursuant to Section 8.07(g)), the Administrative Agent shall notify the Borrower and the Lenders in writing of such consent, and such extension shall become effective (other than with respect to any Non-Consenting Lender) upon the delivery by the Borrower to the Administrative Agent and each Lender, on or prior to the then-effective Termination Date, of (i) a certificate of a duly authorized officer of the Borrower, dated such date, as to the accuracy, both before and after giving effect to such proposed extension, of the representations and warranties set forth in Section 4.01 and as to the absence, both before and after giving effect to such proposed extension, of any Event of Default or event that with the giving of notice or the passage of time or both would constitute an Event of Default, (ii) certified copies of all corporate and governmental approvals, if any, required to be obtained by the Borrower in connection with such proposed extension and (iii) an opinion of counsel to the Borrower (who shall be satisfactory to the Administrative Agent) as to the matters set forth in Exhibit D, upon giving effect to the extension of the Termination Date, and such other matters as any Lender, through the Administrative Agent, may reasonably request, all of the foregoing to be satisfactory in form and substance to the Administrative Agent. In the event of any such extension of the Termination Date, the Commitment of each Non-Consenting Lender that has not been replaced pursuant to Section 8.07(g) shall be terminated in whole as of such former Termination Date, the aggregate principal amount of all Advances made by each Non-Consenting Lender, together with accrued and unpaid interest, commitment fees and facility fees, and all other amounts payable hereunder to or for the account of each Non-Consenting Lender shall be due and payable on such former Termination Date, and upon such reduction and payment of such amounts each Non-Consenting Lender shall cease to be a party to this Agreement (although each -18- Non-Consenting Lender shall continue to be entitled to indemnification pursuant to Section 8.04(c)). (b) Upon the effectiveness of any extension of the Termination Date pursuant to subsection (a) above, each reference in Section 4.01(e) and Exhibit D to (i) the year-end financial statements of the Borrower, (ii) December 31 of any year, (iii) the quarter-end financial statements of the Borrower and (iv) the last day of any fiscal quarter (other than December 31) of any year, shall be deemed to be amended to be references to (A) the year-end financial statements of the Borrower included in the Borrower's Annual Report on Form 10-K most recently delivered to the Lenders pursuant to Section 5.01(b)(iii), (B) December 31 of the year of the financial statements described in clause (A) above, (C) the fiscal quarter-end financial statements of the Borrower included in the Borrower's Quarterly Report on Form 10-Q most recently delivered to the Lenders pursuant to Section 5.01(b)(ii) and (D) the last day of the fiscal quarter of the financial statements described in clause (C) above, respectively. SECTION 2.17. Additional Lenders. (a) For a period of 60 days after extension of a Termination Date pursuant to Section 2.16(a) that has resulted in a reduction of the aggregate Commitments of the Lenders, the Borrower may request that one or more additional banks or other Persons (each, an "Additional Lender") become party to this Agreement as Lenders and that the aggregate amount of the Commitments of the Lenders be increased to reflect the Commitments allocated to each such Additional Lender; provided, that the aggregate Commitments of the Lenders after giving effect to such increase shall not exceed the aggregate Commitments of the Lenders immediately prior to such former Termination Date. Addition of an Additional Lender shall be made only with the written consent of the Administrative Agent (which consent shall not be unreasonably withheld or delayed) and with the written consent of the Borrower (which consent may be granted or withheld in its absolute discretion). Each Additional Lender must be an Eligible Assignee and, without the consent of the Administrative Agent, the initial Commitment of each Additional Lender shall not be less than $10,000,000. (b) Addition of an Additional Lender shall be effected by the Additional Lender executing and delivering to the Administrative Agent, for its acceptance and recording in the Register, a duly completed Additional Lender Supplement in substantially the form of Exhibit G attached hereto. The Borrower shall execute and deliver to the Administrative Agent for transmittal to such Additional Lender a Note in substantially the form of Exhibit A attached hereto in the amount of the Commitment of such Additional Lender. Acceptance by the Administrative Agent of an Additional Lender is subject to the conditions that the Administrative Agent shall have received, with a counterpart for each Lender, (i) a certificate of a duly authorized officer of the Borrower, dated the effective date of such Additional Lender Supplement, as to the accuracy, both before and after giving effect to such proposed addition, of the representations and warranties set forth in Section 4.01 and as to the absence, both before and after giving effect to such proposed extension, of any Event of Default or event that with the giving of notice or the passage of time or both would constitute an Event of Default, (ii) certified copies of all corporate and governmental approvals, if any, required to be obtained by the Borrower in connection with such proposed addition, (iii) an opinion of counsel to the Borrower (who shall be satisfactory to the Administrative Agent) as to the matters set forth in Exhibit D (appropriately modified to include, in addition to the other matters set forth therein, such Additional Lender Supplement and the new Note), and such other matters as any Lender, through the Administrative Agent, may reasonably request, and (iv) such other certificates and documents as the Administrative Agent may reasonably request, all of the foregoing to be satisfactory in form and substance to the Administrative Agent. Upon execution and delivery of the Additional Lender Supplement, acceptance by the Administrative Agent and recording in the Register, from and after the effective date specified in such Additional Lender Supplement, such Additional Lender shall be a party hereto and shall, to the extent of the Commitment specified in such Additional Lender Supplement, have the rights and obligations of a Lender hereunder. -19- (c) If, at the time an Additional Lender is to become party to this Agreement, the continuing Lenders have any outstanding Advances, such Additional Lender shall offer to purchase from each continuing Lender, effective as of the date such Additional Lender becomes party to this Agreement, a portion of each continuing Lender's outstanding Advances, in such amounts as will have the result that, immediately after giving effect to such Additional Lender becoming party to this Agreement and to such purchases, each Lender (including the Additional Lender) shall share in the outstanding Advances in the same proportion as their respective Commitments. The Additional Lender shall offer in writing to purchase the requisite portion of each continuing Lender's outstanding Advances, at a price equal to the outstanding principal amount thereof together with accrued and unpaid interest thereon to the date of purchase, and a continuing Lender shall not unreasonably decline to accept such offer. Each such purchase shall be made in accordance with Section 8.07 (with the related Assignment and Acceptance modified, mutatis mutandis, to reflect that such purchase is not a purchase of any portion of the Commitment of the continuing Lender). Such purchases shall not be subject to the provisions of clause (ii) of Section 8.07(a), and the Borrower shall be responsible for all amounts payable to the Administrative Agent pursuant to clause (iv) of Section 8.07(a). The Borrower shall pay to each continuing Lender on demand any amount that would be payable to such continuing Lender pursuant to Section 8.04(b) (which for this purpose shall be applied as if such assignment were a prepayment of the Advances assigned by such continuing Lender), and shall reimburse each continuing Lender on demand for all reasonable fees and expenses (including reasonable fees and expenses of counsel) incurred by it in connection with such assignment. ARTICLE III CONDITIONS OF LENDING SECTION 3.01. Conditions Precedent to Initial Advances. The obligation of each Lender to make its initial Advance is subject to the satisfaction, prior to or concurrently with, the making of such initial Advance, of each of the following conditions precedent: (a) Documents and Other Agreements. The Administrative Agent shall have received on or before the day of the initial Borrowing the following, each dated the same date, in form and substance satisfactory to the Administrative Agent and (except for the Notes) with one copy for each Lender: (i) The Notes payable to the order of each of the Lenders, respectively; (ii) Certified copies of the resolutions of the Board of Directors of the Borrower approving the transactions contemplated by this Agreement and the Notes, and of all documents evidencing other necessary corporate action with respect to this Agreement and the Notes; (iii) A certificate of the Secretary or an Assistant Secretary of the Borrower certifying (A) the names and true signatures of the officers of the Borrower authorized to sign this Agreement and the Notes and the other documents to be delivered hereunder; (B) that attached thereto are true and correct copies of the Restated Articles of Incorporation and the By-laws of the Borrower, in each case in effect on such date; and (C) that attached thereto are true and correct copies of all governmental and regulatory authorizations and approvals required for the due execution, delivery and performance of this Agreement and the Notes, including, without limitation, the Securities Certificate filed with the PPUC by the Borrower (the "Securities Certificate") and the Order of Registration issued by the PPUC registering the Securities Certificate (the "Order of Registration"); -20- (iv) Copies of the financial statements referred to in Section 4.01(e); (v) A certificate signed by either the chief financial officer, principal accounting officer or treasurer of the Borrower stating that (A) the representations and warranties contained in Section 4.01 are correct on and as of the date of such certificate as though made on and as of such date, (B) no event has occurred and is continuing on the date of such certificate that constitutes an Event of Default or would constitute an Event of Default but for the requirement that notice be given or time elapse or both and (C) stating the specific provision of the Securities Certificate or the Order of Registration pursuant to which this Agreement is authorized and stating that the Borrower is in compliance with such provision; (vi) A favorable opinion of Ballard Spahr Andrews & Ingersoll, special counsel for the Borrower, substantially in the form of Exhibit D hereto; and (vii) A favorable opinion of Reed Smith Shaw & McClay LLP, counsel for the Administrative Agent, substantially in the form of Exhibit E hereto. (b) Termination of Prior Credit Facility. The Administrative Agent shall have received evidence of (i) the payment in full of all obligations of the Borrower under the Existing Credit Agreements, and (ii) the termination of the "Commitments" under the Existing Credit Agreements. SECTION 3.02. Conditions Precedent to Certain Borrowings. The obligation of each Lender to make an Advance on the occasion of each Borrowing (including the initial Borrowing) that would increase the aggregate amount of Advances outstanding shall be subject to the further conditions precedent that on the date of such Borrowing the following statements shall be true, and each of the giving of the applicable Notice of a Borrowing and the acceptance by the Borrower of the proceeds of such Borrowing shall constitute a representation and warranty by the Borrower that on the date of such Borrowing such statements are true: (A) The representations and warranties contained in Section 4.01 are correct on and as of the date of such Borrowing, before and after giving effect to such Borrowing and to the application of the proceeds therefrom, as though made on and as of such date; and (B) No event has occurred and is continuing, or would result from such Borrowing or from the application of the proceeds therefrom, that constitutes an Event of Default or would constitute an Event of Default but for the requirement that notice be given or time elapse or both (it being understood for clarification that (i) without limiting the foregoing, it is a condition of this clause (B) that the Borrower shall be in compliance with Section 5.01(a)(iv), Section 5.02(a) and Section 5.02(c) upon giving effect to such Borrowing and (ii) the conditions of this clause (B) shall apply whether or not the respective Commitments of the Lenders have been terminated pursuant to Section 6.01). ARTICLE IV REPRESENTATIONS AND WARRANTIES SECTION 4.01. Representations and Warranties of the Borrower. The Borrower represents and warrants as follows: (a) The Borrower is a corporation duly organized. validly existing and in good standing under the laws of the Commonwealth of Pennsylvania. -21- (b) The execution, delivery and performance by the Borrower of this Agreement and the Notes are within the Borrower's corporate powers, have been duly authorized by all necessary corporate action, and do not and will not contravene (i) the Borrower's Restated Articles of Incorporation or By-laws, (ii) applicable law or (iii) any contractual or legal restriction binding on or affecting the Borrower or its properties. (c) No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for the due execution, delivery and performance by the Borrower of this Agreement or the Notes except for the filing of the Securities Certificate with, and the final approval of, and the Order of Registration issued by, the PPUC, which filing has been duly made and which final approval and Order of Registration have been duly obtained; such Order of Registration is in full force and effect and is final; and on and after the date of the initial Borrowing hereunder, the action of the PPUC registering the Securities Certificate shall no longer be subject to appeal. (d) This Agreement is, and the Notes when delivered hereunder will be, legal, valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their respective terms, except as the enforceability thereof may be limited by equitable principles or bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally. (e) The consolidated balance sheet of the Borrower and its Subsidiaries as at December 31, 1998, and the related statements of income and retained earnings and of cash flows of the Borrower and its Subsidiaries for the fiscal year then ended, certified by Pricewaterhouse Coopers LLP, and the unaudited consolidated balance sheet of the Borrower and its Subsidiaries as at June 30, 1999, and the related unaudited statements of income for the six-month period then ended, copies of which have been furnished to each Lender, fairly present in all material respects (subject, in the case of such balance sheets and statements of income for the period ended June 30, 1999, to year-end adjustments) the consolidated financial condition of the Borrower and its Subsidiaries as at such dates and the consolidated results of the operations of the Borrower and its Subsidiaries for the periods ended on such dates, all in accordance with GAAP, and since June 30, 1999, there has been no Material Adverse Change. (f) Except as disclosed in the Borrower's Annual, Quarterly or Current Reports, each as filed with the Securities and Exchange Commission and delivered to the Lenders (including reports filed prior to the date of execution and delivery of this Agreement and reports delivered to the Lenders pursuant to Section 5.01(b)), there is no pending or threatened action, investigation or proceeding affecting the Borrower or any of its Subsidiaries before any court, governmental agency or arbitrator that may reasonably be anticipated to have a Material Adverse Effect. There is no pending or threatened action or proceeding against the Borrower or its Subsidiaries that purports to affect the legality, validity, binding effect or enforceability of this Agreement or any Note. (g) No proceeds of any Advance have been or will be used directly or indirectly in connection with the acquisition of in excess of 5% of any class of equity securities that is registered pursuant to Section 12 of the Exchange Act or any transaction subject to the requirements of Section 13 or 14 of the Exchange Act. (h) The Borrower is not engaged in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation U issued by the Board of Governors of the Federal Reserve System), and no proceeds of any Advance will be used to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying any margin stock. Not more than 25% of the value of the assets of the Borrower and its Principal Subsidiaries is represented by margin stock. -22- (i) The Borrower (i) is exempt from the provisions of the Public Utility Holding Company Act of 1935, as amended, other than Section 9(a)(2) thereof, pursuant to Section 3(a)(2) thereof, and (ii) is not an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (j) During the twelve consecutive month period prior to the date of the execution and delivery of this Agreement and prior to the date of any Borrowing under this Agreement, no steps have been taken to terminate any Plan, and no contribution failure by the Borrower or any member of the Controlled Group has occurred with respect to any Plan. No condition exists or event or transaction has occurred with respect to any Plan (including any Multiemployer Plan) which might result in the incurrence by the Borrower or any member of the Controlled Group of any material liability, fine or penalty. (k) The Borrower is reviewing its operations and those of its Subsidiaries with a view to assessing whether its business, or the business of any of its Subsidiaries (i) will be vulnerable to a Year 2000 Problem or (ii) will be vulnerable to the effects of a Year 2000 Problem suffered by the Borrower's or any of its Subsidiaries' major counterparties, in the case of (ii) as described in the Borrower's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999. The Borrower represents and warrants that it does not believe that any Year 2000 Problem will impair the Borrower's ability to pay principal or interest on the Notes in accordance with their terms. ARTICLE V COVENANTS OF THE BORROWER SECTION 5.01. Affirmative Covenants. So long as any Note or any amount payable by the Borrower hereunder shall remain unpaid or any Lender shall have any Commitment hereunder (except with respect to subsection (a)(iv), which shall be applicable only as of the date hereof and at any time that any Advance is outstanding hereunder), the Borrower will, and, in the case of Section 5.01(a), will cause its Principal Subsidiaries to, unless the Majority Lenders shall otherwise consent in writing: (a) Keep Books; Corporate Existence; Maintenance of Properties; Compliance with Laws; Insurance; Taxes. (i) keep proper books of record and account, all in accordance with generally accepted accounting principles; (ii) subject to Section 5.02(b), preserve and keep in full force and effect its existence; (iii) maintain and preserve all of its properties (except such properties the failure of which to maintain or preserve would not have, individually or in the aggregate, a Material Adverse Effect) which are used or useful in the conduct of its business in good working order and condition, ordinary wear and tear excepted; (iv) comply in all material respects with the requirements of all applicable laws, rules, regulations and orders (including those of any governmental authority and including with respect to environmental matters) to the extent the failure to so comply, individually or in the aggregate, would have either a Material Adverse Effect or a material adverse effect on the ability of the Borrower to perform its obligations under this Agreement and the Notes; -23- (v) maintain insurance with responsible and reputable insurance companies or associations, or self-insure, as the case may be, in each case in such amounts and covering such contingencies, casualties and risks as is customarily carried by or self-insured against by companies engaged in similar businesses and owning similar properties in the same general areas in which the Borrower and its Principal Subsidiaries operate; (vi) at any reasonable time and from time to time, pursuant to prior notice delivered to the Borrower, permit any Lender, or any agents or representatives of any thereof, to examine and, at such Lender's expense, make copies of, and abstracts from the records and books of account of, and visit the properties of, the Borrower and any of its Principal Subsidiaries and to discuss the affairs, finances and accounts of the Borrower and any of its Subsidiaries with any of their respective officers; provided, that any non-public information (which has been identified as such by the Borrower) obtained by any Lender, or any of their respective agents or representatives pursuant to this subsection (vi) shall be treated confidentially by such Person; provided, further, that such Person may disclose such information to any other party to this Agreement, its examiners, affiliates, outside auditors, counsel or other professional advisors in connection with the Agreement or if otherwise required to do so by law or regulatory process; (vii) use the proceeds of the Advances for general corporate purposes (including, without limitation, the refinancing of its commercial paper, the repayment of outstanding Advances, and the making of acquisitions) but in no event for any purpose which would be contrary to clause (g) or clause (h) of Section 4.01; (viii) take the actions and commit the resources deemed necessary by the National Electric Reliance Council ("NERC"), the Mid-Atlantic Area Counsel, the Nuclear Regulatory Commission and the PUC to mitigate against the Year 2000 Problem; and (ix) at the request of the Administrative Agent, provide the Administrative Agent with any reports submitted by the Borrower to NERC relating to the Year 2000 Problem, within a reasonable time after such request. (b) Reporting Requirements. Furnish to the Lenders: (i) as soon as possible, and in any event within 5 Business Days after the occurrence of each Event of Default or each event which, with the giving of notice or lapse of time, or both, would constitute an Event of Default, continuing on the date of such statement, a statement of an authorized officer of the Borrower setting forth details of such Event of Default or event and the action which the Borrower proposes to take with respect thereto; (ii) as soon as available and in any event within 60 days after the end of each of the first three quarters of each fiscal year of the Borrower, a copy of the Borrower's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission with respect to such quarter, together with a certificate of an authorized officer of the Borrower stating that no Event of Default, or event which, with notice or lapse of time or both, would constitute an Event of Default, has occurred and is continuing or, if any Event of Default or such event has occurred and is continuing, a statement as to the nature thereof and the action which the Borrower proposes to take with respect thereto; -24- (iii) as soon as available and in any event within 105 days after the end of each fiscal year of the Borrower, a copy of the Borrower's Annual Report on Form 10-K filed with the Securities and Exchange Commission with respect to such fiscal year, together with a certificate of an authorized officer of the Borrower stating that no Event of Default, or event which, with notice of lapse of time or both, would constitute an Event of Default, has occurred and is continuing or, if any Event of Default or such event has occurred and is continuing, a statement as to the nature thereof and the action which the Borrower proposes to take with respect thereto; (iv) concurrently with the delivery of the annual and quarterly reports referred to in Sections 5.01(b)(ii) and 5.01(b)(iii), a compliance certificate in substantially the form set forth in Exhibit F, duly completed and signed by the Chief Financial Officer, Treasurer or an Assistant Treasurer of the Borrower; (v) except as otherwise provided in subsections (ii) and (iii) above, promptly after the sending or filing thereof, copies of all reports that the Borrower sends to any of its security holders, and copies of all Reports on Form 10-K, 10-Q or 8-K, and registration statements and prospectuses that the Borrower or any of its Subsidiaries files with the Securities and Exchange Commission or any national securities exchange (except to the extent that any such registration statement or prospectus relates solely to the issuance of securities pursuant to employee or dividend reinvestment plans of the Borrower or such Subsidiary); (vi) promptly upon becoming aware of the institution of any steps by the Borrower or any other Person to terminate any Plan, or the failure to make a required contribution to any Plan if such failure is sufficient to give rise to a lien under section 302(f) of ERISA, or the taking of any action with respect to a Plan which could result in the requirement that the Borrower furnish a bond or other security to the PBGC or such Plan, or the occurrence of any event with respect to any Plan, which could result in the incurrence by the Borrower or any member of the Controlled Group of any material liability, fine or penalty; and (vii) such other information respecting the condition, operations, business or prospects, financial or otherwise, of the Borrower or any of its Subsidiaries as any Lender, through the Administrative Agent, may from time to time reasonably request. SECTION 5.02. Negative Covenants. So long as any Note or any amount payable by the Borrower hereunder shall remain unpaid or any Lender shall have any Commitment hereunder (except with respect to subsection (a), which shall be applicable only as of the date hereof and at any time any Advance is outstanding hereunder), the Borrower will not, without the written consent of the Majority Lenders: (a) Limitation on Liens. Create, incur, assume or suffer to exist, or permit any of its Principal Subsidiaries to create, incur, assume or suffer to exist, any Lien on its respective property, revenues or assets, whether now owned or hereafter acquired except (i) Liens upon or in any property acquired by the Borrower or any of its Principal Subsidiaries in the ordinary course of business to secure the purchase price of such property or to secure any obligation incurred solely for the purpose of financing the acquisition of such property, (ii) Liens existing on such property at the time of its acquisition (other than any such Lien created in contemplation of such acquisition unless permitted by the preceding clause (i)), (iii) Liens granted under the Mortgage and "excepted encumbrances" as defined in the Mortgage, (iv) Liens granted in connection with any financing arrangement for the purchase of nuclear fuel or the financing of pollution control facilities, limited to the fuel or facilities so purchased or acquired, (v) Liens arising in connection -25- with sales or transfers of, or financing secured by, accounts receivable or related contracts, (vi) Liens securing the Borrower's notes collateralized solely by mortgage bonds of the Borrower issued under the terms of the Mortgage, (vii) Liens arising in connection with sale and leaseback transactions, but only to the extent (x) the proceeds received by the Borrower or such Principal Subsidiary from such sale shall immediately be applied to retire mortgage bonds of the Borrower issued under the terms of the Mortgage, or (y) the aggregate purchase price of assets sold pursuant to such sale and leaseback transactions where such proceeds are not so applied shall not exceed $1,000,000,000, (viii) Liens granted by a Special Purpose Subsidiary to secure Nonrecourse Transition Bond Debt of such Special Purpose Subsidiary, and (ix) Liens, other than those described in clauses (i) through (viii) of this subsection granted by the Borrower or any of its Principal Subsidiaries in the ordinary course of business securing Debt of the Borrower and its Principal Subsidiaries in an amount not to exceed $50,000,000 in the aggregate at any one time outstanding. (b) Mergers and Consolidations; Disposition of Assets. Merge with or into or consolidate with or into, or sell, assign, lease or otherwise dispose of (whether in one transaction or in a series of transactions) all or substantially all of its assets (whether now owned or hereafter acquired) to any Person or permit any Principal Subsidiary to do so, except that (i) the Borrower or any Principal Subsidiary may merge with or into or consolidate with or transfer assets to any other Principal Subsidiary, (ii) any Principal Subsidiary may merge with or into or consolidate with or transfer assets to the Borrower and (iii) the Borrower may merge with or into or consolidate with or transfer assets to any other Person; provided in each case, immediately thereafter in giving effect thereto, no Event of Default or event that would, with the giving of notice or the passage of time or both constitute an Event of Default shall have occurred and be continuing and (A) in the case of any such merger, consolidation or transfer of assets to which the Borrower is a party, either (x) the Borrower shall be the surviving corporation or (y) the surviving corporation shall be an Eligible Successor and shall have assumed all of the obligations of the Borrower under this Agreement and the Notes pursuant to a written instrument in form and substance satisfactory to the Administrative Agent and (B) subject to clause (A) above, in the case of any such merger to which a Principal Subsidiary is a party, a Principal Subsidiary shall be the surviving corporation. (c) Financial Covenant. Permit Consolidated Adjusted Total Debt to exceed 65% of Consolidated Adjusted Total Capitalization at any time. (d) Continuation of Businesses. (i) Generation Business. (A) Cease to own (through the Borrower or wholly-owned Subsidiaries) the business of generating electricity, or (B) reduce the net installed electric generating capacity (summer rating) of the electricity generation business owned by the Borrower and its wholly-owned Subsidiaries taken as a whole to less than 7821 Megawatts. (ii) Distribution, Transmission and Gas Businesses. Cease to own (directly by the Borrower, and not through Subsidiaries) the business of distributing electricity to end-users, the business of transmitting electricity, or the businesses of transmitting and distributing natural gas, each substantially as conducted by the Borrower as of the date of this Agreement (and the Borrower warrants that as of the date of this Agreement substantially all of such businesses conducted by the Borrower on a consolidated basis, and the assets relating thereto, are operated and owned by the Borrower directly and not through Subsidiaries). -26- ARTICLE VI EVENTS OF DEFAULT SECTION 6.01. Events of Default. If any of the following events ("Events of Default") shall occur and be continuing: (a) The Borrower shall fail to pay any principal of any Advance when the same becomes due and payable, or interest thereon or any other amount payable under this Agreement or any of the Notes within three Business Days after the same becomes due and payable; or (b) Any representation or warranty made by the Borrower herein or by the Borrower (or any of its officers) pursuant to the terms of this Agreement shall prove to have been incorrect or misleading in any material respect when made; or (c) The Borrower shall fail to perform or observe (i) any term, covenant or agreement contained in Section 5.02, Section 5.01(a)(vii) or Section 5.01(b)(i), or (ii) any other term, covenant or agreement contained in this Agreement on its part to be performed or observed if the failure to perform or observe such other term, covenant or agreement shall remain unremedied for 30 days after written notice thereof shall have been given to the Borrower by the Administrative Agent (which notice shall be given by the Administrative Agent at the written request of any Lender); or (d) The Borrower or any Principal Subsidiary shall fail to pay any principal of or premium or interest on any Debt that is outstanding in a principal amount in excess of $50,000,000 in the aggregate (but excluding Debt evidenced by the Notes and Nonrecourse Transition Bond Debt) of the Borrower or such Principal Subsidiary (as the case may be) when the same becomes due and payable (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise), and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such Debt; or any other event shall occur or condition shall exist under any agreement or instrument relating to any such Debt and shall continue after the applicable grace period, if any, specified in such agreement or instrument, if the effect of such event or condition is to accelerate, or to permit the acceleration of, the maturity of such Debt; or any such Debt shall be declared to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment), prior to the stated maturity thereof, other than any acceleration of any Debt secured by equipment leases or fuel leases of the Borrower or a Principal Subsidiary as a result of the occurrence of any event requiring a prepayment (whether or not characterized as such) thereunder, which prepayment will not result in a Material Adverse Change; or (e) The Borrower or any Principal Subsidiary (other than a Special Purpose Subsidiary) shall generally not pay its debts as such debts become due, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against the Borrower or any Principal Subsidiary (other than a Special Purpose Subsidiary) seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, custodian or other similar official for it or for any substantial part of its property and, in the case of any such proceeding instituted against it (but not instituted by it), either such proceeding shall remain undismissed or unstayed for a period of 60 days, or any of the actions sought in such proceeding (including, without limitation, the entry of an order for relief against, or the appointment of a receiver, trustee, custodian or other similar official for, it or for any substantial part of its property,) shall occur; or the Borrower or any Principal Subsidiary (other than a Special Purpose Subsidiary) shall take any corporate action to authorize or to consent to any of the actions set forth above in this subsection (e); or -27- (f) One or more judgments or orders for the payment of money in an aggregate amount exceeding $50,000,000 (excluding any such judgments or orders which are fully covered by insurance, subject to any customary deductible, and under which the applicable insurance carrier has acknowledged such full coverage in writing) shall be rendered against the Borrower or any Principal Subsidiary and either (i) enforcement proceedings shall have been commenced by any creditor upon such judgment or order or (ii) there shall be any period of 30 consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; or (g) (i) any Reportable Event that the Majority Lenders determine in good faith might constitute grounds for the termination of any Plan or for the appointment by the appropriate United States District Court of a trustee to administer a Plan shall have occurred and be continuing 30 days after written notice to such effect shall have been given to the Borrower by the Administrative Agent or (ii) any Plan shall be terminated, or (iii) a Trustee shall be appointed by an appropriate United States District Court to administer any Plan or (iv) the PBGC shall institute proceedings to terminate any Plan or to appoint a trustee to administer any Plan; provided, however that on the date of any event described in clauses (i) through (iv) above the Unfunded Liabilities of such Plan exceed $20,000,000; or (h) any "Event of Default" shall occur under the 364-Day Credit Agreement; then, and in any such event, the Administrative Agent (i) shall at the request, or may with the consent, of the Majority Lenders, by notice to the Borrower, declare the respective Commitments of the Lenders to be terminated, whereupon the same shall forthwith terminate, and (ii) shall at the request, or may with the consent, of the Majority Lenders, by notice to the Borrower, declare the principal amount outstanding under the Notes, all interest thereon and all other amounts payable under this Agreement to be forthwith due and payable, whereupon the principal amount outstanding under the Notes, all such interest and all such amounts shall become and be forthwith due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by the Borrower; provided, however, that in the event of an actual or deemed entry of an order for relief with respect to the Borrower or any Principal Subsidiary under the Federal Bankruptcy Code, (A) the obligation of each Lender to make Advances shall automatically be terminated and (B) the principal amount outstanding under the Notes, all such interest and all such amounts shall automatically and immediately become due and payable, without presentment, demand, protest or any notice of any kind, all of which are hereby expressly waived by the Borrower. ARTICLE VII THE AGENTS SECTION 7.01. Authorization and Action. Each Lender hereby appoints and authorizes the Administrative Agent to take such action as administrative agent on its behalf and to exercise such powers under this Agreement as are delegated to the Administrative Agent by the terms hereof, together with such powers as are reasonably incidental thereto. As to any matters not expressly provided for by this Agreement (including, without limitation, enforcement or collection of the Notes), the Administrative Agent shall not be required to exercise any discretion or take any action, but shall be required to act or to refrain from acting (and shall be fully protected in so acting or refraining from acting) upon the instructions of the Majority Lenders, and such instructions shall be binding upon all Lenders and all holders of Notes; provided, however, that the Administrative Agent shall not be required to take any action which exposes the Administrative Agent to personal liability or which is contrary to this Agreement or applicable law. The Administrative Agent agrees to give to each Lender prompt notice of each notice given to it by the Borrower pursuant to the terms of this Agreement. -28- SECTION 7.02. Agents' Reliance, Etc. Neither the Administrative Agent nor any of its directors, officers, agents or employees shall be liable for any action taken or omitted to be taken by it or them under or in connection with this Agreement, except for its or their respective own gross negligence or willful misconduct. Without limitation of the generality of the foregoing: (i) the Administrative Agent may treat the payee of any Note as the holder thereof until the Administrative Agent receives and accepts an Assignment and Acceptance entered into by the Lender which is the payee of such Note, as assignor, and an Eligible Assignee, as assignee, as provided in Section 8.07; (ii) the Administrative Agent may consult with legal counsel (including counsel for the Borrower), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts; (iii) the Administrative Agent makes no warranty or representation to any Lender and shall not be responsible to any Lender for any statements, warranties or representations (whether written or oral) made in or in connection with this Agreement; (iv) the Administrative Agent shall not have any duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of this Agreement on the part of the Borrower or to inspect the property (including the books and records) of the Borrower; (v) the Administrative Agent shall not be responsible to any Lender for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other instrument or document furnished pursuant hereto; and (vi) the Administrative Agent shall not incur any liability under or in respect of this Agreement by acting upon any notice, consent, certificate or other instrument or writing (which may be by telecopier, telegram, cable or telex) believed by it to be genuine and signed or sent by the proper party or parties. SECTION 7.03. Agents and Affiliates. With respect to its Commitment, Advances and Notes, each of First Chicago and Citibank, N.A. shall have the same rights and powers under this Agreement as any other Lender and may exercise the same as though it were not an Agent; and the term "Lender" or "Lenders" shall, unless otherwise expressly indicated, include each of First Chicago and Citibank, N.A. in its individual capacity. Each of First Chicago and Citibank, N.A. and their affiliates may accept deposits from, lend money to, act as trustee under indentures of, and generally engage in any kind of business with, the Borrower, any of its subsidiaries and any Person who may do business with or own securities of the Borrower or any such subsidiary, all as if it were not an Agent and without any duty to account therefor to the Lenders. SECTION 7.04. Lender Credit Decision. Each Lender acknowledges that it has, independently and without reliance upon the Administrative Agent or any other Lender and based on the financial statements referred to in Section 4.01(e) and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon the Administrative Agent or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement. SECTION 7.05. Indemnification. The Lenders agree to indemnify each Agent (to the extent not reimbursed by the Borrower), ratably according to the respective principal amounts of the Notes then held by each of the Lenders (or if no Notes are at the time outstanding, ratably according to the respective amounts of their Commitments), from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by, or asserted against any such Agent in any way relating to or arising out of this Agreement or any action taken or omitted by any such Agent under this Agreement, provided that no Lender shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from such Agent's gross negligence or willful misconduct. Without limitation of the foregoing, each Lender agrees to reimburse each such Agent promptly upon demand for its ratable share of any out-of-pocket expenses (including reasonable counsel fees) incurred by such Agent in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement, to the extent that such -29- expenses are reimbursable by the Borrower but for which such Agent is not reimbursed by the Borrower. SECTION 7.06. Successor Administrative Agent. The Administrative Agent may resign at any time by giving written notice thereof to the Lenders and the Borrower and may be removed at any time with or without cause by the Majority Lenders. Upon any such resignation or removal, the Majority Lenders shall have the right to appoint a successor Administrative Agent. If no successor Administrative Agent shall have been so appointed by the Majority Lenders, and shall have accepted such appointment, within 30 days after the retiring Administrative Agent's giving of notice of resignation or the Majority Lenders' removal of the retiring Administrative Agent, then the retiring Administrative Agent may, on behalf of the Lenders, appoint a successor Administrative Agent, which shall be a commercial bank described in clause (i) or (ii) of the definition of "Eligible Assignee" and having a combined capital and surplus of at least $150,000,000. Upon the acceptance of any appointment as Administrative Agent hereunder by a successor Administrative Agent, such successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations under this Agreement. After any retiring Administrative Agent's resignation or removal hereunder as Administrative Agent, the provisions of this Article VII shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent under this Agreement. Notwithstanding the foregoing, if no Event of Default, and no event that with the giving of notice or the passage of time, or both, would constitute an Event of Default, shall have occurred and be continuing, then no successor Administrative Agent shall be appointed under this Section 7.06 without the prior written consent of the Borrower, which consent shall not be unreasonably withheld or delayed. SECTION 7.07. Documentation Agent and Lead Arranger. The titles "Documentation Agent" and "Lead Arranger" are purely honorific, and the "Documentation Agent" and the "Lead Arranger" shall have no duties or responsibilities in such capacity. ARTICLE VIII MISCELLANEOUS SECTION 8.01. Amendments, Etc. No amendment or waiver of any provision of this Agreement or the Notes, nor consent to any departure by the Borrower therefrom, shall in any event be effective unless the same shall be in writing and signed by the Majority Lenders, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that no amendment, waiver or consent shall, unless in writing and signed by all the Lenders (other than any Lender that is the Borrower or an Affiliate of the Borrower), do any of the following: (a) waive any of the conditions specified in Section 3.01 or 3.02, (b) increase the Commitments of the Lenders or subject the Lenders to any additional obligations, (c) reduce the principal of, or interest on, the Notes or any fees or other amounts payable hereunder, (d) postpone any date fixed for any payment of principal of, or interest on, the Notes or any fees or other amounts payable hereunder, (e) change the percentage of the Commitments or of the aggregate unpaid principal amount of the Notes, or the number of Lenders, that shall be required for the Lenders or any of them to take any action hereunder, or (f) amend this Section 8.01; provided, further, that no amendment, waiver or consent shall, unless in writing and signed by the Administrative Agent, in addition to the Lenders required above to take such action, affect the rights or duties of the Administrative Agent under this Agreement or any Note. SECTION 8.02. Notices, Etc. All notices and other communications provided for hereunder shall be in writing (including telecopier, telegraphic, telex or cable communication) and mailed, telecopied, telegraphed, telexed, cabled or delivered, if to the Borrower, at its address at 2301 Market -30- Street, Philadelphia, Pennsylvania 19101, Attention: Vice President-Finance and Treasurer, S21-1, Telecopy: (215) 557-9885; if to any Bank, at its Domestic Lending Office specified opposite its name on Schedule I hereto; if to any other Lender, at its Domestic Lending Office specified in the Assignment and Acceptance or Additional Lender Supplement pursuant to which it became a Lender; and if to the Administrative Agent, at its address at One First National Plaza, Mail Suite 0634, 1FPN-10, Chicago, Illinois 60670, Attention: Mr. Ron Cromey, Telecopy: (312) 732-4840 or, as to each party, at such other address as shall be designated by such party in a written notice to the other parties. All such notices and communications shall, when mailed, telecopied, telegraphed, telexed or cabled, be effective when deposited in the mails, telecopied, delivered to the telegraph company, confirmed by telex answerback or delivered to the cable company, respectively, except that notices and communications to the Administrative Agent pursuant to Article II or VII shall not be effective until received by the Administrative Agent. SECTION 8.03. No Waiver; Remedies. No failure on the part of any Lender or the Administrative Agent to exercise, and no delay in exercising, any right hereunder or under any Note shall operate as a waiver thereof; nor shall any single or partial exercise of any such right preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. SECTION 8.04. Costs and Expenses; Indemnification. (a) The Borrower agrees to pay on demand all costs and expenses incurred by the Administrative Agent and the Lead Arranger in connection with the preparation, execution, delivery, administration, syndication, modification and amendment of this Agreement, the Notes and the other documents to be delivered hereunder, including, without limitation, the reasonable fees, internal charges and out-of-pocket expenses of counsel (including, without limitation, in-house counsel) for such Agents with respect thereto and with respect to advising such Agents as to their respective rights and responsibilities under this Agreement. The Borrower further agrees to pay on demand all costs and expenses, if any (including, without limitation, counsel fees and expenses of outside counsel and of internal counsel), incurred by the any Agent or any Lender in connection with the collection and enforcement (whether through negotiations, legal proceedings or otherwise) of this Agreement, the Notes and the other documents to be delivered hereunder, including, without limitation, reasonable counsel fees and expenses in connection with the enforcement of rights under this Section 8.04(a). (b) If any payment of principal of, or Conversion of any Eurodollar Rate Advance is made other than on the last day of the Interest Period for such Advance, as a result of a payment or Conversion pursuant to Section 2.09 or 2.12 or acceleration of the maturity of the Notes pursuant to Section 6.01 or for any other reason, the Borrower shall, upon demand by any Lender (with a copy of such demand to the Administrative Agent), pay to the Administrative Agent for the account of such Lender any amounts required to compensate such Lender for any additional losses, costs or expenses which it may reasonably incur as a result of such payment or Conversion, including, without limitation, any loss, cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by any Lender to fund or maintain such Advance. (c) The Borrower hereby agrees to indemnify and hold each Lender, each Agent and each of their respective Affiliates, officers, directors and employees (each, an "Indemnified Person") harmless from and against any and all claims, damages, losses, liabilities, costs or expenses (including reasonable attorney's fees and expenses, whether or not such Indemnified Person is named as a party to any proceeding or is otherwise subjected to judicial or legal process arising from any such proceeding) that any of them may pay or incur arising out of or relating to this Agreement, the Notes or the transactions contemplated thereby, or the use by the Borrower or any of its subsidiaries of the proceeds of any Advance, provided that the Borrower shall not be liable for any portion of such claims, damages, losses, liabilities, costs or expenses resulting from such Indemnified Person's gross negligence or willful misconduct. The Borrower's obligations under this Section 8.04(c) shall survive the repayment of all amounts owing to the Lenders and the Administrative Agent under this Agreement and the Notes and the termination of the Commitments. If and to the extent that the obligations of the Borrower under this Section 8.04(c) are unenforceable for any reason, the Borrower agrees to make the -31- maximum contribution to the payment and satisfaction thereof which is permissible under applicable law. SECTION 8.05. Right of Set-off. Upon (i) the occurrence and during the continuance of any Event of Default and (ii) the making of the request or the granting of the consent specified by Section 6.01 to authorize the Administrative Agent to declare the Notes due and payable pursuant to the provisions of Section 6.01, each Lender is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Lender to or for the credit or the account of the Borrower against any and all of the obligations of the Borrower now or hereafter existing under this Agreement and any Note held by such Lender, whether or not such Lender shall have made any demand under this Agreement or such Note and although such obligations may be unmatured. Each Lender agrees promptly to notify the Borrower after any such set-off and application made by such Lender, provided that the failure to give such notice shall not affect the validity of such set-off and application. The rights of each Lender under this Section 8.05 are in addition to other rights and remedies (including, without limitation, other rights of set-off) that such Lender may have. SECTION 8.06. Binding Effect. This Agreement shall become effective when it shall have been executed by the Borrower and the Agents and when the Administrative Agent shall have been notified by each Bank that such Bank has executed it and thereafter shall be binding upon and inure to the benefit of the Borrower, the Agents and each Lender and their respective successors and assigns, except that the Borrower shall not have the right to assign its rights hereunder or any interest herein without the prior written consent of the Lenders. SECTION 8.07. Assignments and Participations. (a) Each Lender may, with the prior written consent of the Borrower and the Administrative Agent (neither of which consents shall be unreasonably withheld or delayed), and if demanded by the Borrower pursuant to subsection (g) hereof shall to the extent required by such subsection (g), assign to one or more banks or other entities all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Commitment, the Advances owing to it and the Note or Notes held by it); provided, however, that (i) each such assignment shall be of a constant, and not a varying, percentage of all of the assigning Lender's rights and obligations under this Agreement, (ii) the amount of the Commitment of the assigning Lender being assigned pursuant to each such assignment (determined as of the date of the Assignment and Acceptance with respect to such assignment) shall in no event be less than $10,000,000 or, if less, the entire amount of such Lender's Commitment, and shall be an integral multiple of $1,000,000 or such Lender's entire Commitment, (iii) each such assignment shall be to an Eligible Assignee, (iv) the parties to each such assignment shall execute and deliver to the Administrative Agent, for its acceptance and recording in the Register, an Assignment and Acceptance, together with any Note or Notes subject to such assignment and a processing and recordation fee of $3,500 (which shall be payable by one or more of the parties to the Assignment and Acceptance, and not by the Borrower, and shall not be payable if the assignee is a Bank, any Affiliate of any Bank or the Federal Reserve Bank), and (v) the consent of the Borrower shall not be required after the occurrence and during the continuance of any Event of Default. Upon such execution, delivery, acceptance and recording, from and after the effective date specified in each Assignment and Acceptance, (x) the assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, have the rights and obligations of a Lender hereunder and (y) the Lender assignor thereunder shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights and be released from its obligations under this Agreement and, in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto (although an assigning Lender shall continue to be entitled to indemnification pursuant to Section 8.04(c)). Notwithstanding anything contained in this Section 8.07(a) to the contrary, (A) the consent of the Borrower and the Administrative Agent shall not be required with respect to any assignment by any Lender to an Affiliate of such Lender or to another Lender and (B) any Lender may at any time, without the consent of the Borrower or the Administrative -32- Agent, and without any requirement to have an Assignment and Acceptance executed, assign all or any part of its rights under this Agreement and its Notes to a Federal Reserve Bank, provided that such assignment does not release the transferor Lender from any of its obligations hereunder. (b) By executing and delivering an Assignment and Acceptance, the Lender assignor thereunder and the assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (i) other than as provided in such Assignment and Acceptance, such assigning Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other instrument or document furnished pursuant hereto; (ii) such assigning Lender makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrower or the performance or observance by the Borrower of any of its obligations under this Agreement or any other instrument or document furnished pursuant hereto; (iii) such assignee confirms that it has received a copy of this Agreement, together with copies of the financial statements referred to in Section 4.01(e) and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (iv) such assignee will, independently and without reliance upon the Administrative Agent, such assigning Lender or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (v) such assignee confirms that it is an Eligible Assignee; (vi) such assignee appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to the Administrative Agent by the terms hereof, together with such powers as are reasonably incidental thereto; and (vii) such assignee agrees that it will perform in accordance with their terms all of the obligations which by the terms of this Agreement are required to be performed by it as a Lender. (c) The Administrative Agent shall maintain at its address referred to in Section 8.02 a copy of each Assignment and Acceptance and each Additional Lender Supplement delivered to and accepted by it and a register for the recordation of the names and addresses of the Lenders and the Commitment of, and principal amount of the Advances owing to, each Lender from time to time (the "Register"). The entries in the Register shall be conclusive and binding for all purposes, absent manifest error, and the Borrower, the Administrative Agent and the Lenders may treat each Person whose name is recorded in the Register as a Lender hereunder for all purposes of this Agreement. The Register shall be available for inspection by the Borrower or any Lender at any reasonable time and from time to time upon reasonable prior notice. (d) Upon its receipt of an Assignment and Acceptance executed by an assigning Lender and an assignee representing that it is an Eligible Assignee, together with any Note or Notes subject to such assignment, the Administrative Agent shall, if such Assignment and Acceptance has been completed and is in substantially the form of Exhibit C hereto, (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register and (iii) give prompt notice thereof to the Borrower. Within five Business Days after its receipt of such notice, the Borrower, at its own expense, shall execute and deliver to the Administrative Agent in exchange for the surrendered Note or Notes a new Note to the order of such Eligible Assignee in an amount equal to the Commitment assumed by it pursuant to such Assignment and Acceptance and, if the assigning Lender has retained a Commitment hereunder, a new Note to the order of the assigning Lender in an amount equal to the Commitment retained by it hereunder. Such new Note or Notes shall be in an aggregate principal amount equal to the aggregate principal amount of such surrendered Note or Notes, shall be dated the effective date of such Assignment and Acceptance and shall otherwise be in substantially the form of Exhibit A hereto. (e) Each Lender may sell participations to one or more banks or other entities (each, a "Participant") in or to all or a portion of its -33- rights and/or obligations under this Agreement (including, without limitation, all or a portion of its Commitment, the Advances owing to it and the Note or Notes held by it); provided, however, that (i) such Lender's obligations under this Agreement (including, without limitation, its Commitment to the Borrower hereunder) shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) such Lender shall remain the holder of any such Note for all purposes of this Agreement, (iv) the Borrower, the Administrative Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement and (v) such Lender shall retain the sole right to approve, without the consent of any Participant, any amendment, modification or waiver of any provision of this Agreement or the Note or Notes held by such Lender, other than any such amendment, modification or waiver with respect to any Advance or Commitment in which such Participant has an interest that forgives principal, interest or fees or reduces the interest rate or fees payable with respect to any such Advance or Commitment, postpones any date fixed for any regularly scheduled payment of principal of, or interest or fees on, any such Advance or Commitment, releases any guarantor of any such Advance or releases any substantial portion of collateral, if any, securing any such Advance. (f) Any Lender may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 8.07, disclose to the assignee or participant or proposed assignee or participant, any information relating to the Borrower furnished to such Lender by or on behalf of the Borrower; provided that, prior to any such disclosure, the assignee or participant or proposed assignee or participant shall agree to preserve the confidentiality of any confidential information relating to the Borrower received by it from such Lender (subject to customary exceptions regarding regulatory requirements, compliance with legal process and other requirements of law). (g) If (i) any Lender shall make demand for payment under Section 2.11(a), 2.11(b) or 2.14, or (ii) shall deliver any notice to the Administrative Agent pursuant to Section 2.12 resulting in the suspension of certain obligations of the Lenders with respect to Eurodollar Rate Advances or (iii) shall fail to consent to, or shall revoke its consent to, the extension of any Termination Date pursuant to Section 2.16 or (iv) shall fail to consent to, or shall revoke its consent to, any extension of the "Termination Date" (as defined in the 364-Day Credit Agreement) requested by the Borrower pursuant to Section 2.16 of the 364-Day Credit Agreement as originally constituted (or any successor provision of similar import), then (in the case of clause (i)) within 60 days after such demand (if, but only if, such payment demanded under Section 2.11(a), 2.11(b) or 2.14 has been made by the Borrower), or (in the case of clause (ii)) within 60 days after such notice (if such suspension is still in effect), or (in the case of clauses (iii) and (iv)) no later than 10 days prior to the then effective Termination Date, as the case may be, the Borrower may demand that such Lender assign in accordance with this Section 8.07 to one or more Eligible Assignees designated by the Borrower and reasonably acceptable to the Administrative Agent all (but not less than all) of such Lender's Commitment and the Advances owing to it within the next succeeding 30 days (in the case of clause (i) or clause (ii)), or within the next succeeding 5 days (in the case of clauses (iii) and (iv)) . If any such Eligible Assignee designated by the Borrower shall fail to consummate such assignment on terms acceptable to such Lender, or if the Borrower shall fail to designate any such Eligible Assignee for all of such Lender's Commitment or Advances, then such Lender may (but shall not be required to) assign such Commitment and Advances to any other Eligible Assignee in accordance with this Section 8.07 during such period. (h) Notwithstanding anything to the contrary contained herein, any Lender (a "Granting Bank") may grant to a special purpose funding vehicle (an "SPC"), identified as such in writing from time to time by the Granting Bank to the Administrative Agent and the Borrower, the option to provide to the Borrower all or any part of any Advance that such Granting Bank would otherwise be obligated to make to the Borrower pursuant to this Agreement; provided that (i) nothing herein shall constitute a commitment by any SPC to make any Advance, (ii) if an SPC elects not to exercise such option or otherwise fails to provide all or any part of such Advance, the Granting Bank shall be obligated to make -34- such Advance pursuant to the terms hereof. The making of an Advance by an SPC hereunder shall utilize the Commitment of the Granting Bank to the same extent, and as if, such Advance were made by such Granting Bank. Each party hereto hereby agrees that no SPC shall be liable for any indemnity or similar payment obligation under this Agreement (all liability for which shall remain with the Granting Bank). In furtherance of the foregoing, each party hereto hereby agrees (which agreement shall survive the termination of this Agreement) that, prior to the date that is one year and one day after the payment in full of all outstanding commercial paper or other senior indebtedness of any SPC, it will not institute against, or join any other person in instituting against, such SPC any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings under the laws of the United States or any State thereof. In addition, notwithstanding anything to the contrary contained in this Section 8.07(h), any SPC may (i) with notice to, but without the prior written consent of, the Borrower and the Administrative Agent and without paying any processing fee therefor, assign all or a portion of its interests in any Advances to the Granting Bank or to any financial institutions (consented to by the Borrower and Administrative Agent) providing liquidity and/or credit support to or for the account of such SPC to support the funding or maintenance of Advances and (ii) disclose on a confidential basis any non-public information relating to its Advances to any rating agency, commercial paper dealer or provider of any surety, guarantee or credit or liquidity enhancement to such SPC. This Section may not be amended without the written consent of the Granting Bank. SECTION 8.08. Governing Law. THIS AGREEMENT AND THE NOTES SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA. SECTION 8.09. Consent to Jurisdiction. THE BORROWER HEREBY IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF THE COURTS OF THE COMMONWEALTH OF PENNSYLVANIA AND ANY UNITED STATES DISTRICT COURT SITTING IN THE COMMONWEALTH OF PENNSYLVANIA IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE NOTES AND THE BORROWER HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT AND IRREVOCABLY WAIVES ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT OR THAT SUCH COURT IS AN INCONVENIENT FORUM. NOTHING HEREIN SHALL LIMIT THE RIGHT OF THE ADMINISTRATIVE AGENT OR ANY LENDER TO BRING PROCEEDINGS AGAINST THE BORROWER IN THE COURTS OF ANY OTHER JURISDICTION. SECTION 8.10. Execution in Counterparts; Integration. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. This Agreement constitutes the entire agreement and understanding among the parties hereto and supersedes all prior and contemporaneous agreements and understandings, oral or written, relating to the subject matter hereof. [Remainder of the page intentionally left blank] -35- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. [SEAL] PECO ENERGY COMPANY PECO ENERGY COMPANY By /s/ J.B. Mitchell --------------------------------------------- Name: J. B. Mitchell Title: Vice President - Finance and Treasurer /s/ Todd D. Cutler - ------------------ Todd D. Cutler Assistant Secretary THE FIRST NATIONAL BANK OF CHICAGO, as Administrative Agent By /s/ Kenneth J. Bauer --------------------------------------------- Name: Kenneth J. Bauer Title: Authorized Agent CITIBANK, N.A., as Documentation Agent By: /s/ Robert J. Harrity, Jr. -------------------------------------------- Title: Managing Director BANC ONE CAPITAL MARKETS, INC., as Lead Arranger By /s/ Kenneth J. Bauer --------------------------------------- Name: Kenneth J. Bauer Title: Vice President/Senior Banker This is a signature page to the Revolving Credit Agreement, dated as of September 15, 1999, among PECO Energy Company, as Borrower, the banks named therein, as Banks, The First National Bank of Chicago, as Administrative Agent, Citibank, N.A., as Documentation Agent, and Banc One Capital Markets, Inc., as Lead Arranger. -36- THE BANKS Commitment $60,000,000 THE FIRST NATIONAL BANK OF CHICAGO, as Administrative Agent and as Bank By /s/ Kenneth J. Bauer ----------------------------------- Name: Kenneth J. Bauer Title: Authorized Agent This is a signature page to the Revolving Credit Agreement, dated as of September 15, 1999, among PECO Energy Company, as Borrower, the banks named therein, as Banks, The First National Bank of Chicago, as Administrative Agent, Citibank, N.A., as Documentation Agent, and Banc One Capital Markets, Inc., as Lead Arranger. -37- Commitment $60,000,000 CITIBANK, N.A., as Documentation Agent and as Bank By /s/ Robert J. Harrity, Jr. ---------------------------- Name: Robert J. Harrity, Jr. Title: Managing Director This is a signature page to the Revolving Credit Agreement, dated as of September 15, 1999, among PECO Energy Company, as Borrower, the banks named therein, as Banks, The First National Bank of Chicago, as Administrative Agent, Citibank, N.A., as Documentation Agent, and Banc One Capital Markets, Inc., as Lead Arranger. -38- Commitment $50,000,000 BANK OF AMERICA, N.A. as Bank By /s/ Lawrence Saunders, Jr. --------------------------------- Name: Lawrence Saunders, Jr. Title: Managing Director This is a signature page to the Revolving Credit Agreement, dated as of September 15, 1999, among PECO Energy Company, as Borrower, the banks named therein, as Banks, The First National Bank of Chicago, as Administrative Agent, Citibank, N.A., as Documentation Agent, and Banc One Capital Markets, Inc., as Lead Arranger. -39- Commitment $50,000,000 THE BANK OF NEW YORK, as Bank By /s/ John N. Watt --------------------------- Name: John N. Watt Title: Vice President This is a signature page to the Revolving Credit Agreement, dated as of September 15, 1999, among PECO Energy Company, as Borrower, the banks named therein, as Banks, The First National Bank of Chicago, as Administrative Agent, Citibank, N.A., as Documentation Agent, and Banc One Capital Markets, Inc., as Lead Arranger. -40- Commitment $50,000,000 CREDIT SUISSE FIRST BOSTON, as Bank By /s/ Douglas E. Maher -------------------------------- Name: Douglas E. Maher Title: Vice President This is a signature page to the Revolving Credit Agreement, dated as of September 15, 1999, among PECO Energy Company, as Borrower, the banks named therein, as Banks, The First National Bank of Chicago, as Administrative Agent, Citibank, N.A., as Documentation Agent, and Banc One Capital Markets, Inc., as Lead Arranger. -41- Commitment $50,000,000 FIRST UNION NATIONAL BANK, as Bank By /s/ Joe K. Dancey ------------------------------ Name: Joe K. Dancey Title: Vice President This is a signature page to the Revolving Credit Agreement, dated as of September 15, 1999, among PECO Energy Company, as Borrower, the banks named therein, as Banks, The First National Bank of Chicago, as Administrative Agent, Citibank, N.A., as Documentation Agent, and Banc One Capital Markets, Inc., as Lead Arranger. -42- Commitment $50,000,000 MELLON BANK, N.A., as Bank By /s/ Mark W. Rogers ------------------------ Name: Mark W. Rogers Title: Vice President This is a signature page to the Revolving Credit Agreement, dated as of September 15, 1999, among PECO Energy Company, as Borrower, the banks named therein, as Banks, The First National Bank of Chicago, as Administrative Agent, Citibank, N.A., as Documentation Agent, and Banc One Capital Markets, Inc., as Lead Arranger. -43- Commitment $25,000,000 UNION BANK OF CALIFORNIA, N.A., as Bank By /s/ Robert J. Cole ------------------------------- Name: Robert J. Cole Title: Vice President This is a signature page to the Revolving Credit Agreement, dated as of September 15, 1999, among PECO Energy Company, as Borrower, the banks named therein, as Banks, The First National Bank of Chicago, as Administrative Agent, Citibank, N.A., as Documentation Agent, and Banc One Capital Markets, Inc., as Lead Arranger. -44- Commitment $25,000,000 TORONTO DOMINION (TEXAS), INC., as Bank By /s/ Jimmy Simien ------------------------ Name: Jimmy Simien Title: Vice President This is a signature page to the Revolving Credit Agreement, dated as of September 15, 1999, among PECO Energy Company, as Borrower, the banks named therein, as Banks, The First National Bank of Chicago, as Administrative Agent, Citibank, N.A., as Documentation Agent, and Banc One Capital Markets, Inc., as Lead Arranger. -45- Commitment $17,500,000 COMMERCE BANK, N.A., as Bank By /s/ Kurt J. Fuoti ----------------------------- Name: Kurt J. Fuoti Title: Vice President This is a signature page to the Revolving Credit Agreement, dated as of September 15, 1999, among PECO Energy Company, as Borrower, the banks named therein, as Banks, The First National Bank of Chicago, as Administrative Agent, Citibank, N.A., as Documentation Agent, and Banc One Capital Markets, Inc., as Lead Arranger. -46- Commitment $12,500,000 BARCLAYS BANK PLC, as Bank By /s/ Sydney G. Dennis ---------------------------- Name: Sydney G. Dennis Title: Director This is a signature page to the Revolving Credit Agreement, dated as of September 15, 1999, among PECO Energy Company, as Borrower, the banks named therein, as Banks, The First National Bank of Chicago, as Administrative Agent, Citibank, N.A., as Documentation Agent, and Banc One Capital Markets, Inc., as Lead Arranger. -47- SCHEDULE I Revolving Credit Agreement, dated as of September 15, 1999, among PECO Energy Company, as Borrower, the banks named therein, as Banks, The First National Bank of Chicago, as Administrative Agent, Citibank, N.A., as Documentation Agent, and Banc One Capital Markets, Inc., as Lead Arranger.
Domestic Eurodollar Name of Bank Lending Office Lending Office - ------------ -------------- -------------- The First National Bank One First National Plaza Same of Chicago Mail Suite 0634, 1FNP-10 Chicago, IL 60670 Attn: Gwendolyn Watson Phone: (312) 732-4509 Fax: (312) 732-4840 The Bank of New York One Wall Street, 19th Floor Same Energy Industries Division New York, NY 10286 Attn: Theresa A. Foran Phone: (212) 635-7921 Fax: (212) 635-7923 Citibank, N.A. 399 Park Avenue Same 4th Floor, Zone 20 New York, NY 10043 Attn: Tracy Smith Phone: (302) 894-6098 Fax: (302) 894-6120 Credit Suisse First Boston 11 Madison Avenue Same 20th Floor New York, NY 10010-3629 Attn: Jenaro Sarasola Phone: (212) 322-1384 Fax: (212) 325-0593/0576 First Union National Bank 201 South College Street Same 24th Floor Charlotte, NC 28288-1183 Attn: Holly Benson Phone: (704) 383-0296 Fax: (704) 383-7999 Mellon Bank, N.A. Three Mellon Bank Center Room 2303 Same (Loan Administration) Pittsburgh, PA 15259-0003 Attn: Cathy Capp Phone: (412) 234-1870 Fax: (412) 236-2027, 2028
Domestic Eurodollar Name of Bank Lending Office Lending Office - ------------ -------------- -------------- Union Bank of Energy Capital Services Same California, N.A. 445 S. Figueroa Street 20th Floor Los Angeles, CA 90071 Attn: Yolande C. Hollis Phone: (213) 236-6199 Fax: (213) 236-4096 Commerce Bank, N.A. 2005 Market Street Same One Commerce Square 2nd Floor Philadelphia, PA 19103 Attn: Kim Dunda AIM #200-01-35 Phone: (888) 751-9000 Ext. 8570 Fax: (856) 642-7704 Toronto Dominion (Texas) 909 Fannin, Suite 1700 Same Inc. Houston, TX 77010 Attn: Herbert Simien Phone: (713) 653-8242 Fax: (713) 951-9921 Barclays Bank PLC 222 Broadway Same New York, NY 10038 Attn: Marsha L. Hamlette Phone: (212) 412-4081 Fax: (212) 412-5306 Bank of America, N.A. 6610 Rockledge Drive Same 6th Floor Bethesda, MD 20817 Attn: Paula Kramp Phone: (301) 571-0713 Fax: (301) 571-0719
-2- EXHIBIT A FORM OF NOTE $____________________ Dated: [ ], 1999 FOR VALUE RECEIVED, the undersigned, PECO Energy Company, a Pennsylvania corporation (the "Borrower"), HEREBY PROMISES TO PAY to the order of (the "Lender") for the account of its Applicable Lending Office (such term and other capitalized terms herein being used as defined in the Credit Agreement referred to below) on the Termination Date the principal sum of U.S.$[amount of the Lender's Commitment in figures] or, if less, the aggregate principal amount of the Advances made by the Lender to the Borrower pursuant to the Credit Agreement outstanding on the Termination Date. The Borrower promises to pay interest on the unpaid principal amount of each Advance from the date of such Advance until such principal amount is paid in full, at such interest rates, and payable at such times, as are specified in the Credit Agreement. Both principal and interest are payable in lawful money of the United States of America to The First National Bank of Chicago, as Administrative Agent, at One First National Plaza, Chicago, Illinois 60670, in same day funds. Each Advance made by the Lender to the Borrower pursuant to the Credit Agreement, and all payments made on account of principal thereof, shall be recorded by the Lender and, prior to any transfer hereof, endorsed on the grid attached hereto which is part of this Promissory Note. This Promissory Note is one of the Notes referred to in, and is entitled to the benefits of, the Revolving Credit Agreement, dated as of September 15, 1999 among PECO Energy Company, as Borrower, the banks named therein, as Banks, The First National Bank of Chicago, as Administrative Agent, Citibank, N.A., as Documentation Agent, and Banc One Capital Markets, Inc., as Lead Arranger (as amended, modified or supplemented from time to time, the "Credit Agreement"). The Credit Agreement, among other things, (i) provides for the making of Advances by the Lender to the Borrower from time to time in an aggregate amount not to exceed at any time outstanding the U.S. dollar amount first above mentioned, the indebtedness of the Borrower resulting from each such Advance being evidenced by this Promissory Note, and (ii) contains provisions for acceleration of the maturity hereof upon the happening of certain stated events and also for prepayments on account of principal hereof prior to the maturity hereof upon the terms and conditions therein specified. The Borrower hereby waives presentment, demand, protest and notice of any kind. No failure to exercise, and no delay in exercising, any rights hereunder on the part of the holder hereof shall operate as a waiver of such rights. THIS PROMISSORY NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA. PECO ENERGY COMPANY By___________________________________ Name: Title: -2- ADVANCES, MATURITIES, AND PAYMENTS OF PRINCIPAL - -------------------------------------------------------------------------------- Amount of Maturity Principal Unpaid Amount of of Paid or Principal Notation Date Advance Advance Prepaid Balance Made By - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- EXHIBIT B NOTICE OF A BORROWING The First National Bank of Chicago, as Administrative Agent for the Lenders parties to the Credit Agreement referred to below One First National Plaza Chicago, Illinois 60670 [Date] Attention: Utilities Department North American Finance Group Ladies and Gentlemen: The undersigned, PECO Energy Company, refers to the Revolving Credit Agreement, dated as of September 15, 1999, among PECO Energy Company, as Borrower, the banks named therein, as Banks, The First National Bank of Chicago, as Administrative Agent, Citibank, N.A., as Documentation Agent, and Banc One Capital Markets, Inc., as Lead Arranger (as amended, modified or supplemented from time to time, the "Credit Agreement"), and hereby gives you notice, irrevocably, pursuant to Section 2.02 of the Credit Agreement that the undersigned hereby requests a Borrowing under the Credit Agreement, and in that connection sets forth below the information relating to such Borrowing (the "Proposed Borrowing") as required by Section 2.02(a) of the Credit Agreement: (i) The Business Day of the Proposed Borrowing is___, 19/20__. (ii) The Type of Advances to be made in connection with the Proposed Borrowing is [Base Rate Advances] [Eurodollar Rate Advances]. (iii) The aggregate amount of the Proposed Borrowing is $____. (iv) The Interest Period for each Advance made as part of the Proposed Borrowing is [__days] [__month[s]]. The undersigned hereby certifies that the following statements are true on the date hereof, and will be true on the date of the Proposed Borrowing: (A) the representations and warranties contained in Section 4.01 are correct, before and after giving effect to the Proposed Borrowing and to the application of the proceeds therefrom, as though made on and as of such date; and (B) no event has occurred and is continuing, or would result from such Proposed Borrowing or from the application of the proceeds therefrom, that constitutes an Event of Default or would constitute an Event of Default but for the requirement that notice be given or time elapse or both. Very truly yours, PECO ENERGY COMPANY By_______________________________ Name: Title: -2- EXHIBIT C ASSIGNMENT AND ACCEPTANCE Dated , 19/20 ---------- -- Reference is made to the Revolving Credit Agreement, dated as of September 15, 1999 among PECO Energy Company, as Borrower, the banks named therein, as Banks, The First National Bank of Chicago, as Administrative Agent, Citibank, N.A., as Documentation Agent, and Banc One Capital Markets, Inc., as Lead Arranger (as amended, modified or supplemented from time to time, the "Credit Agreement"). Terms defined in the Credit Agreement are used herein with the same meaning. ____________ (the "Assignor") and ____________ (the "Assignee") agree as follows: 1. The Assignor hereby sells and assigns to the Assignee, and the Assignee hereby purchases and assumes from the Assignor, that interest in and to all of the Assignor's rights and obligations under the Credit Agreement as of the date hereof which represents the percentage interest specified on Schedule 1 of all outstanding rights and obligations under the Credit Agreement, including, without limitation, such interest in the Assignor's Commitment, the Advances owing to the Assignor, and the Note[s] held by the Assignor. After giving effect to such sale and assignment, the Assignee's Commitment and the amount of the Advances owing to the Assignee will be as set forth in Section 2 of Schedule 1. 2. The Assignor (i) represents and warrants that it is the legal and beneficial owner of the interest being assigned by it hereunder and that such interest is free and clear of any adverse claim; (ii) makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Credit Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Credit Agreement or any other instrument or document furnished pursuant thereto; (iii) makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrower or the performance or observance by the Borrower of any of its obligations under the Credit Agreement or any other instrument or document furnished pursuant thereto; and (iv) attaches the Note[s] referred to in paragraph 1 above and requests that the Administrative Agent exchange such Note[s] for a new Note payable to the order of the Assignee in an amount equal to the Commitment assumed by the Assignee pursuant hereto or new Notes payable to the order of the Assignee in an amount equal to the Commitment assumed by the Assignee pursuant hereto and the Assignor in an amount equal to the Commitment retained by the Assignor under the Credit Agreement, respectively as specified on Schedule 1 hereto. 3. The Assignee (i) confirms that it has received a copy of the Credit Agreement, together with copies of the financial statements referred to in Section 4.01 thereof and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Acceptance; (ii) agrees that it will, independently and without reliance upon the Administrative Agent, the Assignor or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Agreement; (iii) confirms that it is an Eligible Assignee; (iv) appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under the Credit Agreement as are delegated to the Administrative Agent by the terms thereof, together with such powers as are reasonably incidental thereto; (v) agrees that it will perform in accordance with their terms all of the obligations which by the terms of the Credit Agreement are required to be performed by it as a Lender; (vi) none of the consideration used to make the purchase being made by the Assignee hereunder are "plan assets" as defined under ERISA and the rights and interests of the Assignee in and under the Credit Agreement will not be "plan assets" under ERISA [and] (vii) specifies as its, Domestic Lending Office (and address for notices) and Eurodollar Lending Office the offices set forth beneath its name on the signature pages hereof [and (viii) attaches the forms prescribed by the Internal Revenue Service of the United States certifying that it is exempt from United States withholding taxes with respect to all payments to be made to the Assignee under the Credit Agreement and the Notes].1 4. Following the execution of this Assignment and Acceptance by the Assignor and the Assignee, it will be delivered to the Administrative Agent for acceptance and recording by the Administrative Agent. The effective date of this Assignment and Acceptance shall be the date of acceptance thereof by the Administrative Agent, unless otherwise specified on Schedule 1 hereto (the "Effective Date"). 5. Upon such acceptance and recording by the Administrative Agent, as of the Effective Date, (i) the Assignee shall be a party to the Credit Agreement and, to the extent provided in this Assignment and Acceptance, have the rights and obligations of a Lender thereunder and (ii) the Assignor shall, to the extent provided in this Assignment and Acceptance, relinquish its rights and be released from its obligations under the Credit Agreement. 6. Upon such acceptance and recording by the Administrative Agent, from and after the Effective Date, the Administrative Agent shall make all payments under the Credit Agreement and the Notes in respect of the interest assigned hereby (including, without limitation, all payments of principal, interest and commitment fees with respect thereto) to the Assignee. The Assignor and Assignee shall make all appropriate adjustments in payments under the Credit Agreement and the Notes for periods prior to the Effective Date directly between themselves. 7. THIS ASSIGNMENT AND ACCEPTANCE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA. - ---------- (1) If the Assignee is organized under the laws of a jurisdiction outside the United States. -2- IN WITNESS WHEREOF, the parties hereto have caused this Assignment and Acceptance to be executed by their respective officers thereunto duly authorized, as of the date first above written, such execution being made on Schedule 1 hereto. [NAME OF ASSIGNOR] By__________________________________ Name: Title: [NAME OF ASSIGNEE] By_________________________________ Name: Title: Domestic Lending Office (and address for notices): [Address] Eurodollar Lending Office: [Address] Consented to this _____ day of _____________, 19/20__ PECO ENERGY COMPANY By_______________________ Name: Title: Consented to and Accepted this _____ day of _________________, 19/20__ [NAME OF ADMINISTRATIVE AGENT] By_______________________ Name: Title: -3- Schedule 1 to Assignment and Acceptance Dated _______, 19/20__ Section 1. Percentage Interest: ___% Section 2. Assignee's Commitment: $___ Aggregate Outstanding Principal Amount of Advances owing to the Assignee: $___ A Note payable to the order of the Assignee Dated:_________, 19/20__ Principal amount: $__ A Note payable to the order of the Assignor Dated:_________, 19/20__ Principal amount: $__ Section 3. Effective Date(2): _________, 19/20__ - ---------- (2) This date should be no earlier than the date of acceptance by the Administrative Agent. EXHIBIT D FORM OF OPINION OF BALLARD SPAHR ANDREWS & INGERSOLL __________, 19/20__ To each of the Banks, the Administrative Agent, and the Lead Arranger party to the Revolving Credit Agreement, dated as of September 15, 1999, among PECO Energy Company, as Borrower, the banks named therein, as Banks, The First National Bank of Chicago, as Administrative Agent, Citibank, N.A., as Documentation Agent, and Banc One Capital Markets, Inc., as Lead Arranger Re: PECO Energy Company ------------------- Ladies and Gentlemen: This opinion is furnished to you pursuant to Section 3.01(a)(vi) of the Revolving Credit Agreement, dated as of September 15, 1999, among PECO Energy Company, as Borrower, the banks named therein, as Banks, The First National Bank of Chicago, as Administrative Agent, Citibank, N.A., as Documentation Agent, and Banc One Capital Markets Inc, as Lead Arranger (as amended, modified or supplemented from time to time, the "Credit Agreement"). Unless otherwise specified, terms defined in the Credit Agreement are used herein as therein defined. We have acted as special counsel for the Borrower in connection with the preparation, execution and delivery of the Credit Agreement. In that capacity we have examined the following: (i) The Credit Agreement and the Notes; (ii) The documents furnished by the Borrower pursuant to Section 3.01 of the Credit Agreement; (iii) The Amended and Restated Articles of Incorporation of the Borrower and all amendments thereto (the "Charter"); (iv) The by-laws of the Borrower and all amendments thereto (the "By-laws"); and (v) A certificate of the Secretary of State of the Commonwealth of Pennsylvania, dated _________, 1999, attesting to the continued subsistence of the Borrower in Pennsylvania. We have also examined the originals, or copies certified to our satisfaction, of such other corporate records of the Borrower, certificates of public officials and of officers of the Borrower, and agreements, instruments and documents, as we have deemed necessary as a basis for the opinions hereinafter expressed. We have assumed the legal capacity and competence of natural persons, the genuineness of all signatures, the authenticity of all documents submitted to us as originals and the conformity to original documents of documents submitted to us as certified, conformed or photostatic copies. We have assumed that the Agents and the Banks have duly executed and delivered, with all necessary power and authority (corporate and otherwise), the Credit Agreement. When an opinion or confirmation is given to our knowledge or with reference to matters of which we are aware or which are known to us, or with another similar qualification, the relevant knowledge or awareness is limited to the actual knowledge or awareness of the lawyer who is the current primary contact for the Borrower and the individual lawyers in this firm who have participated in the specific transaction to which this opinion relates and without any special or additional investigation undertaken for the purposes of this opinion, except as otherwise noted herein. Based upon the foregoing and subject to the exceptions, limitations and qualifications set forth herein, we are of the following opinion: 1. The Borrower is a corporation duly incorporated and validly subsisting under the laws of the Commonwealth of Pennsylvania. 2. The execution, delivery and performance by the Borrower of the Credit Agreement and the Notes are within the Borrower's corporate powers, have been duly authorized by all necessary corporate action, do not contravene (i) the Charter or the By-laws or (ii) any law of the United States or the Commonwealth of Pennsylvania (including, without limitation, any order, rule or regulation of the PPUC or (iii) to the best of our knowledge, any agreement or instrument to which the Borrower is a party or by which it is bound, and do not result in or require the creation of any lien, security interest or other charge or encumbrance upon or with respect to any of its properties. 3. No authorization, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body of the United States or the Commonwealth of Pennsylvania is required for the due execution, delivery and performance by the Borrower of the Credit Agreement or the Notes except for the filing of the Securities Certificate with, and the final approval of, and the Order of Registration issued by, the PPUC, which filing has been duly made and which final approval and Order of Registration have been duly obtained; such Order of Registration is in full force and effect and is final; and the action of the PPUC registering the Securities Certificate is no longer subject to appeal. 4. The Credit Agreement and the Notes have been duly executed and delivered by the Borrower, and the Credit Agreement and the Notes are the legal, valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their respective terms. 5. The Borrower (i) is exempt from the provisions of the Public Utility Holding Company Act of 1935, as amended, other than Section 9(a)(2) thereof, pursuant to Section 3(a)(2) thereof, and (ii) is not an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. 6. We confirm to you that to our knowledge, after inquiry of each lawyer who is the current primary contact for the Borrower or who has devoted substantive attention to matters on behalf of the Borrower during the preceding twelve months and who is still currently employed by or a member of this firm, except as disclosed in the Borrower's Annual Report on Form 10-K for the year ended December 31, 1998 and the Borrower's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999, no litigation or governmental proceeding is pending or threatened in writing against the Borrower (i) with respect to the Credit Agreement or the Notes, or (ii) which is likely to have a material adverse effect upon the financial -2- condition, business, properties or prospects of the Borrower and its subsidiaries taken as a whole. We draw to your attention the existence of the following two Pennsylvania statutes in connection with the fact that the Advances bear floating rates of interest: (i) Section 911 of the Pennsylvania "Crime Code," 18 Pa. C.S.A. ss.911, enacted by the Act of December 6, 1972, P.L. 1482. Section 911 of the Crime Code bears a close resemblance to certain of the provisions of the Federal Racketeer Influenced and Corrupt Organizations Act of 1970, 18 U.S.C. ss.ss.1961-1968, commonly known as RICO, and is referred to hereinafter as the "Pennsylvania RICO Act." The Pennsylvania RICO Act provides, among other things, that it is a criminal offense, punishable as a felony, to "use or invest, directly or indirectly ... in the acquisition of any interest in, or the establishment or operation of, any enterprise" any income collected in full or partial satisfaction of a loan made "at a rate of interest exceeding 25% per annum... ." (ii) The Act of December 29, 1982, P.L. 1671, 18 Pa. C.S.A.ss.4806.1 et seq. (superseded volume) (the "Criminal Usury Statute"). The Criminal Usury Statute provides, among other things, that it is a criminal offense, punishable as a felony, to engage in, "charging, taking or receiving any money ... on the loan ... of any money ... at a rate exceeding thirty-six percent per annum... ." The Criminal Usury Statute may have been repealed, but the manner in which the repeal was enacted leaves the matter subject to uncertainty. Both the Pennsylvania RICO Act and the Criminal Usury Statute appear to be intended by the legislature to apply only to racketeering and loan sharking type activities, and not to the type of commercial loan transaction evidenced by the Loan Document. Nevertheless, in view of the plain language of the Pennsylvania courts, we cannot say that the ultimate resolution of this issue is free from doubt. The foregoing opinions are subject to the following exceptions, limitations and qualifications: (a) Our opinion is subject to the effect of applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, fraudulent transfer or similar laws affecting creditors' rights and remedies generally, general principles of equity, including without limitation, concepts of materiality, reasonableness, good faith and fair dealing (regardless of whether such enforceability is considered in a proceeding in equity or at law); and limitations on enforceability of rights to indemnification by federal or state securities laws or regulations or by public policy. (b) We express no opinion as to the application or requirements of the Pennsylvania Securities Act or federal or state securities, patent, trademark, copyright, antitrust and unfair competition, pension or employee benefit, labor, environmental health and safety or tax laws in respect of the transactions contemplated by or referred to in the Credit Agreement. (c) We express no opinion as to the validity or enforceability of any provision of the Credit Agreement or the Notes which (i) permits the Lenders to increase the rate of interest in the event of delinquency or default if such increase would be deemed a penalty under applicable law; (ii) -3- purports to be a waiver by Borrower of any right or benefit except to the extent permitted by applicable law; (iii) purports to require that waivers must be in writing to the extent that an oral agreement or implied agreement by trade practice or course of conduct modifying provisions of the Credit Agreement or the Notes has been made; or (iv) purports to exculpate any party from its own negligent acts. We express no opinion as to the law of any jurisdiction other than the law of the Commonwealth of Pennsylvania and the federal law of the United States. The foregoing opinion is solely for your benefit in connection with the consummation of the transaction described herein and may not be used or relied upon by you or any other Person without our express written consent for any other purpose other than (i) any Eligible Assignee that may become a Lender under the Credit Agreement after the date hereof and (ii) Reed Smith Shaw & McClay LLP, which may rely upon this opinion in rendering their opinion furnished pursuant to Article III of the Credit Agreement. The opinions given herein are as of the date hereof, and we assume no obligation to update or supplement this opinion to reflect facts or circumstances which may hereafter come to our attention or any changes in laws which may hereafter occur. Very truly yours, BALLARD SPAHR ANDREWS & INGERSOLL -4- EXHIBIT E FORM OF OPINION OF REED SMITH SHAW & McCLAY LLP __________, 1999 To each of the Banks, the Administrative Agent, and the Lead Arranger party to the Revolving Credit Agreement, dated as of September 15, 1999 among PECO Energy Company, as Borrower, the banks named therein, as Banks, The First National Bank of Chicago, as Administrative Agent, Citibank, N.A., as Documentation Agent, and Banc One Capital Markets, Inc., as Lead Arranger Re: PECO Energy Company ------------------- Ladies and Gentlemen: We have acted as counsel to The First National Bank of Chicago, individually and as Administrative Agent, in connection with the preparation, execution and delivery of the Revolving Credit Agreement, dated as of September 15, 1999, among PECO Energy Company, as Borrower, the banks named therein, as Banks, The First National Bank of Chicago, as Administrative Agent, Citibank, N.A., as Documentation Agent, and Banc One Capital Markets, Inc., as Lead Arranger (as amended, modified or supplemented from time to time, the "Credit Agreement"). We are delivering this opinion pursuant to Section 3.01(a)(vii) of the Credit Agreement. Unless otherwise defined herein, terms defined in the Credit Agreement are used herein as therein defined. In that connection, we have examined (i) counterparts of the Credit Agreement, executed by the Borrower, the Banks, the Administrative Agent and the Lead Arranger, (ii) the Notes, executed by the Borrower and (iii) the other documents listed on Exhibit A hereto, including the opinion of Ballard Spahr Andrews & Ingersoll, counsel to the Borrower (the "Opinion"), furnished to the Administrative Agent pursuant to Section 3.01(a) of the Credit Agreement. In our examination of the documents referred to above, we have assumed the authenticity of all such documents submitted to us as originals, the genuineness of all signatures, the due authority of the parties executing such documents and the conformity to the originals of all such documents submitted to us as copies. We have also assumed that the Banks, the Administrative Agent and the Lead Arranger have duly executed and delivered, with all necessary power and authority (corporate and otherwise), the Credit Agreement. As to matters of fact, we have relied solely upon the documents we have examined. Based upon the foregoing, we are of the opinion that, while we have not independently considered the matters covered by the Opinion to the extent necessary to enable us to express the conclusions stated therein, each of the Opinion and the other documents listed in Exhibit A hereto are substantially responsive to the corresponding requirements set forth in Section 3.01 of the Credit Agreement pursuant to which the same have been delivered. Please note that Richard H. Glanton, Esquire, a partner in this firm, is a director of PECO Energy Company. We have rendered and continue to render legal services to PECO Energy Company. The foregoing opinion is solely for your benefit and may not be relied upon by any other Person other than any Person that may become a lender under the Credit Agreement after the date hereof. Very truly yours, NJS:RKM EXHIBIT F FORM OF ANNUAL AND QUARTERLY COMPLIANCE CERTIFICATE ______________________, 19/20__ Pursuant to the Revolving Credit Agreement, dated as of September 15, 1999, among PECO Energy Company, as Borrower, the banks named therein, as Banks, The First National Bank of Chicago, as Administrative Agent, Citibank, N.A., as Documentation Agent, and Banc One Capital Markets, Inc., as Lead Arranger (as amended, modified or supplemented from time to time, the "Credit Agreement"), the undersigned, being ______________________ of the Borrower, hereby certifies on behalf of the Borrower as follows: 1. Delivered herewith are the financial statements prepared pursuant to Section 5.01(b)(ii) and Section 5.01(b)(iii) of the Credit Agreement, for the fiscal ________ ended ___________, 19/20__. All such financial statements comply with the applicable requirements of the Credit Agreement. 2. Schedule I hereto sets forth in reasonable detail the information and calculations necessary to establish compliance with the provisions of Section 5.02(c) of the Credit Agreement as of the end of the fiscal period referred to in paragraph 1 above. 3. (Check one and only one:) __ No Event of Default, or event which with notice or lapse of time or both would constitute an Event of Default, has occurred and is continuing or exists. __ An Event of Default, or event which with notice or lapse of time or both would constitute an Event of Default, has occurred and is continuing or exists, and the document(s) attached hereto as Schedule II specify in detail the nature and period of existence of such Event of Default or such other event as well as any and all actions with respect thereto taken or contemplated to be taken by the Borrower. 4. The undersigned has personally reviewed the Credit Agreement, and this certificate was based on an examination made by or under the supervision of the undersigned sufficient to assure that this certificate is accurate. 5. Capitalized terms used in this certificate and not otherwise defined shall have the meanings given in the Credit Agreement. PECO ENERGY COMPANY By _______________________________________ Name:_____________________________________ Title:____________________________________ Date:__________________ EXHIBIT G FORM OF ADDITIONAL LENDER SUPPLEMENT THIS SUPPLEMENT, dated as of ____________, 19/20_____, by the undersigned. Recitals: A. This Supplement is being executed and delivered in accordance with Section 2.17 of the Revolving Credit Agreement, dated as of September 15, 1999, among PECO Energy Company, as Borrower, the banks named therein, as Banks, The First National Bank of Chicago, as Administrative Agent, Citibank, N.A., as Documentation Agent, and Banc One Capital Markets, Inc., as Lead Arranger (as amended, modified or supplemented from time to time, the "Credit Agreement"). Capitalized terms used herein without definition have the meanings specified in the Credit Agreement. B. The undersigned wishes to become a Lender party to the Credit Agreement, as an Additional Lender. NOW, THEREFORE, the undersigned, intending to be legally bound, hereby agrees as follows: 1. The undersigned hereby becomes party to the Credit Agreement as Lender thereunder, and shall be subject to and bound by all of the provisions thereof. 2. The Commitment of the undersigned shall be $_____________. 3. The undersigned (i) confirms that it has received a copy of the Credit Agreement, together with copies of the financial statements referred to in Section 4.01 thereof and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Additional Lender Supplement; (ii) agrees that it will, independently and without reliance upon the Administrative Agent or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Agreement; (iii) confirms that it is an Eligible Assignee; (iv) appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under the Credit Agreement as are delegated to the Administrative Agent by the terms thereof, together with such powers as are reasonably incidental thereto; (v) agrees that it will perform in accordance with their terms all of the obligations which by the terms of the Credit Agreement are required to be performed by it as a Lender; (vi) none of the consideration used to make the purchase being made by the undersigned hereunder are "plan assets" as defined under ERISA and the rights and interests of the undersigned in and under the Credit Agreement will not be "plan assets" under ERISA [and] (vii) specifies as its Domestic Lending Office (and address for notices) and Eurodollar Lending Office the offices set forth beneath its name on the signature pages hereof [and (viii) attaches the forms prescribed by the Internal Revenue Service of the United States certifying that it is exempt from United States withholding taxes with respect to all payments to be made to the undersigned under the Credit Agreement and the Notes].(3) - ---------- (3) If the undersigned is organized under the laws of a jurisdiction outside the United States. 4. This Supplement shall be effective upon the date of acceptance thereof by the Administrative Agent, unless otherwise specified under the undersigned's name signature below. 5. THIS SUPPLEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA. IN WITNESS WHEREOF, the undersigned has caused this Supplement to be executed and delivered by a duly authorized officer on the date first above written. [NAME OF ADDITIONAL LENDER] By:__________________________ Name:________________________ Title:_______________________ Domestic Lending Office (and address for notices): [Address] Eurodollar Lending Office: [Address] Effective Date(4): __________, 19/20__ CONSENTED TO: [NAME OF ADMINISTRATIVE AGENT] By:___________________________ Name:_________________________ Title:________________________ CONSENTED TO: PECO ENERGY COMPANY By:_________________________ Name:______________________ Title:_______________________ - ---------- (4) This date should be no earlier than the date of acceptance by the Administrative Agent. -2- EX-4.9 3 EXHIBIT 4.9 $450,000,000 364-DAY CREDIT AGREEMENT dated as of September 15, 1999 among PECO ENERGY COMPANY as Borrower THE BANKS NAMED HEREIN as Banks THE FIRST NATIONAL BANK OF CHICAGO as Administrative Agent CITIBANK, N.A. as Documentation Agent and BANC ONE CAPITAL MARKETS, INC. as Lead Arranger TABLE OF CONTENTS Section Page - ------- ---- ARTICLE I DEFINITIONS AND ACCOUNTING TERMS 1.01 Certain Defined Terms................................................ 1 1.02 Computation of Time Periods.......................................... 9 1.03 Accounting Principles................................................ 9 ARTICLE II AMOUNTS AND TERMS OF THE ADVANCES 2.01 The Advances.........................................................10 2.02 Making the Advances..................................................10 2.03 Fees.................................................................11 2.04 Reduction of the Commitments.........................................11 2.05 Repayment of Advances................................................11 2.06 Interest on Advances.................................................12 2.07 Additional Interest on Advances......................................12 2.08 Interest Rate Determination..........................................12 2.09 Conversion of Advances...............................................13 2.10 Prepayments..........................................................13 2.11 Increased Costs......................................................14 2.12 Illegality...........................................................15 2.13 Payments and Computations............................................15 2.14 Taxes................................................................16 2.15 Sharing of Payments, Etc.............................................18 2.16 Extension of Termination Date........................................18 2.17 Additional Lenders...................................................19 ARTICLE III CONDITIONS OF LENDING 3.01 Conditions Precedent to Initial Advances.............................20 3.02 Conditions Precedent to Certain Borrowings...........................21 ARTICLE IV REPRESENTATIONS AND WARRANTIES 4.01 Representations and Warranties of the Borrower.......................21 ARTICLE V COVENANTS OF THE BORROWER 5.01 Affirmative Covenants................................................23 5.02 Negative Covenants...................................................25 -i- ARTICLE VI EVENTS OF DEFAULT 6.01 Events of Default....................................................27 ARTICLE VII THE AGENTS 7.01 Authorization and Action.............................................28 7.02 Agents' Reliance, Etc................................................29 7.03 Agents and Affiliates................................................29 7.04 Lender Credit Decision...............................................29 7.05 Indemnification......................................................29 7.06 Successor Administrative Agent.......................................30 7.07 Documentation Agent and Lead Arranger................................30 ARTICLE VIII MISCELLANEOUS 8.01 Amendments, Etc......................................................30 8.02 Notices, Etc.........................................................30 8.03 No Waiver; Remedies..................................................31 8.04 Costs and Expenses; Indemnification..................................31 8.05 Right of Set-off.....................................................32 8.06 Binding Effect.......................................................32 8.07 Assignments and Participations.......................................32 8.08 Governing Law........................................................35 8.09 Consent to Jurisdiction..............................................35 8.10 Execution in Counterparts; Integration...............................35 Schedule I List of Applicable Lending Offices Exhibit A Form of Note Exhibit B Notice of a Borrowing Exhibit C Assignment and Acceptance Exhibit D Form of Opinion of Special Counsel for the Borrower Exhibit E Form of Opinion of Counsel to the Administrative Agent Exhibit F Form of Annual and Quarterly Compliance Certificate Exhibit G Form of Additional Lender Supplement -ii- 364-DAY CREDIT AGREEMENT dated as of September 15, 1999 PECO Energy Company, a Pennsylvania corporation (the "Borrower"), the banks listed on the signature pages hereof (the "Banks"), The First National Bank of Chicago ("First Chicago"), as administrative agent for the Lenders hereunder (in such capacity, the "Administrative Agent"), Citibank, N.A., as documentation agent for the Lenders hereunder (in such capacity, the "Documentation Agent"), and Banc One Capital Markets, Inc. ("Banc One Capital Markets"), as lead arranger hereunder (in such capacity, the "Lead Arranger"), hereby agree as follows: ARTICLE I DEFINITIONS AND ACCOUNTING TERMS SECTION 1.01. Certain Defined Terms. As used in this Agreement, each of the following terms shall have the meaning set forth next to such term below (each such meaning to be equally applicable to both the singular and plural forms of the term defined): "Additional Lender" has the meaning specified in Section 2.17. "Administrative Agent" means First Chicago in its capacity as administrative agent for the Lenders pursuant to Article VII, and not in its individual capacity as a Lender, and any successor Administrative Agent appointed pursuant to Article VII. "Advance" means an advance by a Lender to the Borrower as part of a Borrowing and refers to a Base Rate Advance or a Eurodollar Rate Advance, each of which shall be a "Type" of Advance. "Affiliate" means, as to any Person, any other Person that, directly or indirectly, controls, is controlled by or is under common control with such Person or is a director or officer of such Person. "Agents" means the Administrative Agent, the Documentation Agent and the Lead Arranger, collectively. "Applicable Commitment Fee Rate" means (i) during any Level 1 Rating Period, 0.08% per annum, (ii) during any Level 2 Rating Period, 0.100% per annum, (iii) during any Level 3 Rating Period, 0.125% per annum, (iv) during any Level 4 Rating Period, 0.1625% per annum and (v) during any Level 5 Rating Period, 0.275% per annum. The Applicable Commitment Fee Rate shall change when and as the Rating Period changes. "Applicable Lending Office" means, with respect to each Lender, such Lender's Domestic Lending Office in the case of a Base Rate Advance, and such Lender's Eurodollar Lending Office in the case of a Eurodollar Rate Advance. "Applicable Margin" means, on any date, for a Base Rate Advance or a Eurodollar Rate Advance, the interest rate per annum set forth below in the column entitled "Base Rate" or "Eurodollar Rate", as appropriate, opposite the applicable Rating Period in effect on such date: Rating Period Base Rate Eurodollar Rate ------------- --------- --------------- Level 1 0 .375% Level 2 0 .450% Level 3 0 .600% Level 4 0 .750% Level 5 0 1.00% provided, that the Applicable Margin for Eurodollar Advances shall be increased by .10% for any day when the unused portion of the Commitments is less than or equal to 50% of the aggregate Commitments. The Applicable Margin applicable to an outstanding Advance shall change when and as the Rating Period changes, and when and as the unused portion of the Commitments changes. "Assignment and Acceptance" means an assignment and acceptance entered into by a Lender and an Eligible Assignee, and accepted by the Administrative Agent, in substantially the form of Exhibit C hereto. "Base Rate" means, for any period, a fluctuating interest rate per annum as shall be in effect from time to time which rate per annum shall at all times be equal to the higher of: (a) the rate of interest announced by First Chicago, from time to time, as its corporate base rate; and (b) the sum of 1/2 of 1% per annum plus the Federal Funds Rate in effect from time to time. "Base Rate Advance" means an Advance that bears interest as provided in Section 2.06(a). "Benchmark Debt" means the Borrower's senior secured long-term debt or, in the event that the Borrower has no senior secured long-term debt rated by S&P (or by a generally recognized successor to S&P) or by Moody's (or by a generally recognized successor to Moody's), the Borrower's senior unsecured long-term debt. "Borrowing" means a borrowing consisting of simultaneous Advances of the same Type and, if such Borrowing comprises Eurodollar Rate Advances, having Interest Periods of the same duration, made by each of the Lenders pursuant to Section 2.01 or Converted pursuant to Section 2.10. "Business Day" means a day of the year on which banks are not required or authorized to close in Philadelphia, Pennsylvania, Chicago, Illinois or New York, New York, and, if the applicable Business Day relates to any Eurodollar Rate Advances, on which dealings are carried on in the London interbank market. "Closing Date" shall mean the date of the initial Advances hereunder. "Code" means the Internal Revenue Code of 1986, and the regulations promulgated thereunder, in each case as amended, reformed or otherwise modified from time to time. -2- "Commitment" has the meaning specified in Section 2.01. "Consolidated Adjusted Total Capitalization" on any date shall mean the sum, without duplication, of the following with respect to the Borrower and its consolidated Subsidiaries (exclusive, in each case, of Nonrecourse Transition Bond Debt, to the extent Nonrecourse Transition Bond Debt would otherwise be included in such item): (a) total capitalization as of such date, as determined in accordance with GAAP, (b) the current portion of liabilities which as of such date would be classified in whole or part as long-term debt in accordance with GAAP (it being understood that the noncurrent portion of such liabilities is included in the total capitalization referred to in clause (a)), (c) all obligations as lessee which, in accordance with GAAP, are capitalized as liabilities (including the current portion thereof), and (d) all other liabilities which would be classified as short-term debt in accordance with GAAP (including, without limitation, all liabilities of the types classified as "Notes Payable, Bank" on the Borrower's audited balance sheet for December 31, 1998). "Consolidated Adjusted Total Debt" on any date shall mean the sum, without duplication, of the following with respect to the Borrower and its consolidated Subsidiaries (exclusive, in each case, of Nonrecourse Transition Bond Debt, to the extent Nonrecourse Transition Bond Debt would otherwise be included in such item): (a) all liabilities which as of such date would be classified in whole or in part as long-term debt in accordance with GAAP (including the current portion thereof), (b) all obligations as lessee which, in accordance with GAAP, are capitalized as liabilities (including the current portion thereof), and (c) all other liabilities which would be classified as short-term debt in accordance with GAAP (including, without limitation, all liabilities of the types classified as "Notes Payable, Bank" on the Borrower's audited balance sheet for December 31, 1998). "Controlled Group" means all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control that, together with the Borrower or any Subsidiary, are treated as a single employer under Section 414(b) or 414(c) of the Code. "Convert", "Conversion" and "Converted" each refers to a conversion of Advances of one Type into Advances of another Type or the selection of a new, or the renewal of the same, Interest Period for Eurodollar Rate Advances pursuant to Section 2.09. "Debt" means (i) indebtedness for borrowed money, (ii) obligations evidenced by bonds, debentures, notes or other similar instrument, (iii) obligations to pay the deferred purchase price of property or services (other than trade payables incurred in the ordinary course of business), (iv) obligations as lessee under leases that shall have been or are required to be, in accordance with GAAP, recorded as capital leases, (v) obligations (contingent or otherwise) under reimbursement or similar agreements with respect to the issuance of letters of credit (other than obligations in respect of documentary letters of credit opened to provide for the payment of goods or services purchased in the ordinary course of business) and (vi) obligations under direct or indirect guaranties in respect of, and obligations (contingent or otherwise) to purchase or otherwise acquire, or otherwise to assure a creditor against loss in respect of, indebtedness or obligations of others of the kinds referred to in clauses (i) through (v) above. "Documentation Agent" means Citibank, N.A., in its capacity as Documentation Agent. "Domestic Lending Office" means, with respect to any Lender, the office of such Lender specified as its "Domestic Lending Office" opposite its name on Schedule I hereto or in the Assignment and Acceptance pursuant to which it became a Lender, or such other office of such Lender as such Lender may from time to time specify to the Borrower and the Administrative Agent. -3- "Eligible Assignee" means (i) a commercial bank organized under the laws of the United States, or any State thereof; (ii) a commercial bank organized under the laws of any other country that is a member of the OECD or has concluded special lending arrangements with the International Monetary Fund associated with its General Arrangements to Borrow, or a political subdivision of any such country, provided that such bank is acting through a branch or agency located in the United States; (iii) a finance company, insurance company or other financial institution or fund (whether a corporation, partnership or other entity) engaged generally in making, purchasing or otherwise investing in commercial loans in the ordinary course of its business; or (iv) the central bank of any country that is a member of the OECD; provided, however, that (A) any such Person described in clause (i), (ii) or (iii) above shall also (x) have outstanding unsecured long-term debt that is rated BBB- or better by S&P and Baa3 or better by Moody's (or an equivalent rating by another nationally recognized credit rating agency of similar standing if either such corporation is no longer in the business of rating unsecured indebtedness of entities engaged in such businesses) and (y) have combined capital and surplus (as established in its most recent report of condition to its primary regulator) of not less than $100,000,000 (or its equivalent in foreign currency), and (B) any Person described in clause (ii), (iii) or (iv) above shall, on the date on which it is to become a Lender hereunder, be entitled to receive payments hereunder without deduction or withholding of any United States Federal income taxes (as contemplated by Section 2.14(e)). "Eligible Successor" means a Person which (i) is a corporation duly incorporated, validly existing and in good standing under the laws of one of the states of the United States or the District of Columbia, (ii) is qualified to do business in Pennsylvania, (iii) as a result of the contemplated acquisition, consolidation or merger, will succeed to all or substantially all of the consolidated business and assets of the Borrower and its Subsidiaries, (iv) upon giving effect to the contemplated acquisition, consolidation or merger, will have all or substantially all of its consolidated business and assets conducted and located in the United States and (v) is acceptable to the Majority Lenders as a credit matter. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated and rulings issued thereunder, each as amended and modified from time to time. "Eurocurrency Liabilities" has the meaning assigned to that term in Regulation D of the Board of Governors of the Federal Reserve System, as in effect from time to time. "Eurodollar Lending Office" means, with respect to any Lender, the office of such Lender specified as its "Eurodollar Lending Office" opposite its name on Schedule I hereto or in the Assignment and Acceptance pursuant to which it became a Lender (or, if no such office is specified, its Domestic Lending Office), or such other office of such Lender as such Lender may from time to time specify to the Borrower and the Administrative Agent. "Eurodollar Rate" means, for the Interest Period for each Eurodollar Rate Advance made as part of the same Borrowing, an interest rate per annum equal to the average (rounded upward to the nearest whole multiple of 1/16 of 1% per annum, if such average is not such a multiple) of the rate per annum at which deposits in U.S. dollars are offered by the principal office of each of the Reference Banks in London, England, to prime banks in the London interbank market at 11:00 A.M. (London time) two Business Days before the first day of such Interest Period in an amount substantially equal to such Reference Bank's Eurodollar Rate Advance made as part of such Borrowing and for a period equal to such Interest Period. The Eurodollar Rate for the Interest Period for each Eurodollar Rate Advance made as part of the same Borrowing shall be determined by the Administrative Agent on the basis of applicable rates furnished to and received by the Administrative Agent from the Reference Banks two Business Days before the first day of such Interest Period, subject, however, to the provisions of Section 2.08. -4- "Eurodollar Rate Advance" means an Advance that bears interest as provided in Section 2.06(b). "Eurodollar Rate Reserve Percentage" of any Lender for the Interest Period for any Eurodollar Rate Advance means the reserve percentage applicable during such Interest Period (or if more than one such percentage shall be so applicable, the daily average of such percentages for those days in such Interest Period during which any such percentage shall be so applicable) under regulations issued from time to time by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement (including, without limitation, any emergency, supplemental or other marginal reserve requirement) for such Lender with respect to liabilities or assets consisting of or including Eurocurrency Liabilities having a term equal to such Interest Period. "Events of Default" has the meaning specified in Section 6.01. "Exchange Act" means the Securities Exchange Act of 1934, as amended and modified from time to time. "Existing Credit Agreements" shall mean (i) the $450,000,000 364-Day Credit Agreement dated as of October 7, 1997, among the Borrower, the banks named therein, certain banks specified therein as lead managers, certain banks specified therein as co-agents, First Chicago Capital Markets, Inc., Mellon Bank, N.A., and Citicorp Securities, Inc, as syndication agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent, and (ii) the $450,000,000 Credit Agreement dated as of October 7, 1997, among the Borrower, the banks named therein, certain specified banks, as lead arrangers, certain specified banks, as co-agents, First Chicago Capital Markets, Inc., Mellon Bank, N.A., and Citicorp Securities, Inc., as syndication agents, First Chicago Capital Markets, Inc. and Mellon Bank, N.A., as arrangers, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent, in each case as amended, modified or supplemented from time to time. "Federal Funds Rate" means, for any period, a fluctuating interest rate per annum equal for each day during such period to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by it. "FERC" means the Federal Energy Regulatory Commission. "FERC Application" has the meaning assigned to that term in Section 3.01(a)(iii). "FERC Authorization" has the meaning assigned to that term in Section 3.01(a)(iii). "GAAP" shall have the meaning given that term in Section 1.03. "Granting Bank" shall have the meaning given that term in Section 8.07(h). "Interest Period" means, for each Advance, the period commencing on the date of such Advance or the date of the Conversion of any Advance into such an Advance and ending on the last day of the period selected by the Borrower pursuant to the provisions below and, thereafter, each subsequent period -5- commencing on the last day of the immediately preceding Interest Period and ending on the last day of the period selected by the Borrower pursuant to the provisions below. The duration of each such Interest Period shall be 1, 2, 3 or 6 months in the case of a Eurodollar Rate Advance, as the Borrower may select in accordance with Section 2.02 or 2.09; provided, however, that: (i) the Borrower may not select any Interest Period that ends after the Termination Date then in effect; (ii) Interest Periods commencing on the same date for Advances made as part of the same Borrowing shall be of the same duration, and (iii) whenever the last day of any Interest Period would otherwise occur on a day other than a Business Day, the last day of such Interest Period shall be extended to occur on the next succeeding Business Day, provided, in the case of any Interest Period for a Eurodollar Rate Advance, that if such extension would cause the last day of such Interest Period to occur in the next following calendar month, the last day of such Interest Period shall occur on the next preceding Business Day. "Lead Arranger" means Banc One Capital Markets in its capacity as Lead Arranger. "Lenders" means the Banks listed on the signature pages hereof and each Eligible Assignee that shall become a party hereto pursuant to Section 2.17 or 8.07. "Level 1 Rating Period" means any period during which the Benchmark Debt is rated A- or higher by S&P (or a comparable rating from any generally recognized successor to S&P) or A3 or higher by Moody's (or a comparable rating from any generally recognized successor to Moody's) (it being understood that, for this purpose, such ratings shall be subject to the Split Rating Adjustment). "Level 2 Rating Period" means any period which does not qualify as a Level 1 Rating Period during which the Benchmark Debt is rated BBB+ or higher by S&P (or a comparable rating from any generally recognized successor to S&P) or Baa1 or higher by Moody's (or a comparable rating from any generally recognized successor to Moody's) (it being understood that, for this purpose, such ratings shall be subject to the Split Rating Adjustment). "Level 3 Rating Period" means any period which does not qualify as a Level 1 or Level 2 Rating Period during which the Benchmark Debt is rated BBB or higher by S&P (or a comparable rating from any generally recognized successor to S&P) or Baa2 or higher by Moody's (or a comparable rating from any generally recognized successor to Moody's) (it being understood that, for this purpose, such ratings shall be subject to the Split Rating Adjustment). "Level 4 Rating Period" means any period which does not qualify as a Level 1, Level 2 or Level 3 Rating Period during which the Benchmark Debt is rated BBB- or higher by S&P (or a comparable rating from any generally recognized successor to S&P) or Baa3 or higher by Moody's (or a comparable rating from any generally recognized successor to Moody's) (it being understood that, for this purpose, such ratings shall be subject to the Split Rating Adjustment). "Level 5 Rating Period" means any period which does not qualify as a Level 1, Level 2, Level 3 or Level 4 Rating Period (it being understood that, for this purpose, such ratings shall be subject to the Split Rating Adjustment). "Lien" means any lien (statutory or other), mortgage, pledge, security interest or other charge or encumbrance, or any other type of preferential arrangement (including, without limitation, the interest of a vendor or lessor -6- under any conditional sale, capitalized lease or other title retention agreement). "Majority Lenders" means, at any time prior to the Termination Date, Lenders having at least 51% of the Commitments, and, at any time on or after the Termination Date, Lenders having at least 51% of the Advances outstanding (provided that, for purposes hereof, neither the Borrower, nor any of its Affiliates, if a Lender, shall be included in (i) the Lenders having such amount of the Commitments or the Advances or (ii) determining the total amount of the Commitments or the Advances). "Material Adverse Change" and "Material Adverse Effect" each means, relative to any occurrence, fact or circumstances of whatsoever nature (including, without limitation, any determination in any litigation, arbitration or governmental investigation or proceeding), (i) any materially adverse change in, or materially adverse effect on, the financial condition, operations, assets or business of the Borrower and its consolidated Subsidiaries, taken as a whole or (ii) any materially adverse effect on the validity or enforceability of this Agreement or any of the Notes. "Moody's" means Moody's Investors Service, Inc. "Mortgage" means the First and Refunding Mortgage, dated as of May 1, 1923, between The Counties Gas & Electric Company (to which the Borrower is successor) and Fidelity Trust Company, Trustee (to which First Union National Bank is successor), as amended, supplemented or refinanced from time to time, provided, that no effect shall be given to any amendment, supplement or refinancing after the date of this Agreement that would broaden the definition of "excepted encumbrances" as defined in the Mortgage as constituted on the date of this Agreement. "Multiemployer Plan" means a Plan maintained pursuant to a collective bargaining agreement or any other arrangement to which the Borrower or any member of the Controlled Group is a party to which more than one employer is obligated to make contributions. "Non-Consenting Lender" has the meaning specified in Section 2.16(a). "Nonrecourse Transition Bond Debt" means obligations evidenced by "transition bonds" (as defined in 66 Pa. Cons. Stat. Ann. ss. 2812(g) (West Supp. 1997), or any successor provision of similar import), rated AA or higher by S&P (or a comparable rating from a generally recognized successor to S&P) or Aa2 or higher by Moody's (or a comparable rating from a generally recognized successor to Moody's), representing a securitization of "intangible transition property" (as defined in the foregoing statute), as to which obligations neither the Borrower nor any Subsidiary of the Borrower (other than a Special Purpose Subsidiary) has any direct or indirect liability (whether as primary obligor, guarantor, or surety, provider of collateral security, put option, asset repurchase agreement or capital maintenance agreement, debt subordination agreement, or through other right or arrangement of any nature providing direct or indirect assurance of payment or performance of any such obligations in whole or in part), except for liability to repurchase "intangible transition property" conveyed to the securitization vehicle, on terms and conditions customary in receivables securitizations, in the event such "intangible transition property" violates representations and warranties of scope customary in receivables securitizations. "Special Purpose Subsidiary" means a direct or indirect wholly-owned corporate Subsidiary of the Borrower, substantially all of the assets of which are "intangible transition property" and proceeds thereof, formed solely for the purpose of holding such assets and issuing such "transition bonds," and which complies with the requirements customarily imposed on bankruptcy-remote corporations in receivables securitizations. -7- "Note" means a promissory note of the Borrower payable to the order of any Lender, in substantially the form of Exhibit A hereto, evidencing the aggregate indebtedness of the Borrower to such Lender resulting from the Advances made by such Lender, including any Notes delivered pursuant to Section 2.16. "Notice of a Borrowing" has the meaning specified in Section 2.02(a). "OECD" means the Organization for Economic Cooperation and Development. "PBGC" means the Pension Benefit Guaranty Corporation and any entity succeeding to any or all of its functions under ERISA. "Person" means an individual, partnership, corporation (including a business trust), joint stock company, trust, unincorporated association, joint venture, limited liability company or other entity, or a government or any political subdivision or agency thereof. "Plan" means an employee pension benefit plan that is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code as to which the Borrower or any member of the Controlled Group may have any liability. "Principal Subsidiary" means (i) each Utility Subsidiary and (ii) from and after the date on which the aggregate book value of the assets of the Subsidiaries of the Borrower that are not Utility Subsidiaries exceeds $250,000,000, each such Subsidiary the assets of which exceeded $75,000,000 in book value at any time during the preceding 24-month period. "Rating Period" means a Level 1 Rating Period, a Level 2 Rating Period, a Level 3 Rating Period, a Level 4 Rating Period or a Level 5 Rating Period, as the case may be. "Reference Banks" means First Chicago and Citibank, N.A. "Register" has the meaning specified in Section 8.07(c). "Reportable Event" means a reportable event as defined in Section 4043 of ERISA and regulations issued under such section with respect to a Plan, excluding, however, such events as to which the PBGC by regulation waived the requirement of Section 4043(a) of ERISA that it be notified within 30 days of the occurrence of such event, provided that a failure to meet the minimum funding standard of Section 412 of the Code and Section 302 of ERISA shall be a Reportable Event regardless of the issuance of any such waivers in accordance with either Section 4043(a) of ERISA or Section 412(d) of the Code. "Revolving Credit Agreement" means that certain Revolving Credit Agreement, dated as of the date hereof, among the Borrower, the banks named therein, First Chicago, as administrative agent for the lenders thereunder, Citibank, N.A., as documentation agent, and Banc One Capital Markets, as lead arranger, as the same may be amended, modified or supplemented from time to time. "S&P" means Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc. "Single Employer Plan" means a Plan maintained by the Borrower or any member of the Controlled Group for employees of the Borrower or any member of the Controlled Group. "SPC" shall have the meaning assigned to that term in Section 8.07(h). -8- "Special Purpose Subsidiary" has the meaning assigned to that term in the definition of "Nonrecourse Transition Bond Debt." "Split Rating Adjustment": For the purpose of determining the appropriate Rating Period, the rating of the Benchmark Debt shall be subject to adjustment as follows. In the event that the Benchmark Debt is rated at equivalent rating levels or not more than one rating level apart by S&P (or any generally accepted successor to S&P) and Moody's (or any generally accepted successor to Moody's), then no adjustment shall apply. Otherwise, the higher of the two ratings shall be deemed to be reduced to the next lower rating level. For this purpose, (i) determination of the rating level shall take into account "+" and "-" modifiers to S&P ratings and numerical modifiers to Moody's ratings (so that, for example, an S&P rating of A- shall be deemed equivalent to a Moody's rating of A3, an S&P rating of BBB+ shall be deemed equivalent to a Moody's rating of Baa1, an S&P rating of BBB shall be deemed equivalent to a Moody's rating of Baa2, an S&P rating of BBB- shall be deemed equivalent to a Moody's rating of Baa3, and so on), and (ii) by way of clarification, in the event the Benchmark Debt is rated by only one of the two referenced rating agencies, such rating shall be deemed to be reduced to the next lower rating level. "Subsidiary" means, with respect to any Person, any corporation or unincorporated entity of which more than 50% of the outstanding capital stock (or comparable interest) having ordinary voting power (irrespective of whether or not at the time capital stock, or comparable interests, of any other class or classes of such corporation or entity shall or might have voting power upon the occurrence of any contingency) is at the time directly or indirectly owned by such Person (whether directly or through one or more other Subsidiaries). "Termination Date" means the earlier of (i) September 13, 2000 (or, if such date is not a Business Day, the next preceding Business Day) or such later date that may be established pursuant to Section 2.16(a) or (ii) the date of termination in whole of the Commitments pursuant to Section 2.04 or Section 6.01. "Unfunded Liabilities" means, (i) in the case of any Single Employer Plan, the amount (if any) by which the present value of all vested nonforfeitable benefits under such Plan exceeds the fair market value of all Plan assets allocable to such benefits, all determined as of the then most recent evaluation date for such Plan, and (ii) in the case of any Multiemployer Plan, the withdrawal liability that would be incurred by the Controlled Group if all members of the Controlled Group completely withdrew from such Multiemployer Plan. "Utility Subsidiary" means each Subsidiary of the Borrower that is engaged principally in the generation, transmission, or distribution of electricity or gas and is subject to regulation as a public utility by federal or state regulatory authorities. "Year 2000 Problem" shall mean that the computer hardware, software or equipment containing embedded microchips of the Borrower or any of its Subsidiaries which is essential to its business or operation will, as a result of processing dates or time periods occurring after December 31, 1999, malfunction, causing a system failure or miscalculations resulting in disruptions of operations, including, among other things, a temporary inability to process transactions, send bills, operate generation stations, or engage in similar normal business activities. SECTION 1.02. Computation of Time Periods. In this Agreement in the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including" and the words "to" and "until" each means "to but excluding". -9- SECTION 1.03. Accounting Principles. As used in this Agreement, "GAAP" shall mean generally accepted accounting principles in the United States, applied on a basis consistent with the principles used in preparing the Borrower's audited consolidated financial statements as of December 31, 1998 and for the fiscal year then ended. In this Agreement, except to the extent, if any, otherwise provided herein, all accounting and financial terms shall have the meanings ascribed to such terms by GAAP, and all computations and determinations as to accounting and financial matters shall be made in accordance with GAAP. In the event that the financial statements generally prepared by the Borrower apply accounting principles other than GAAP, the compliance certificate delivered pursuant to Section 5.01(b)(iv) accompanying such financial statements shall include information in reasonable detail reconciling such financial statements to GAAP to the extent relevant to the calculations set forth in such compliance certificate. ARTICLE II AMOUNTS AND TERMS OF THE ADVANCES SECTION 2.01. The Advances. Each Lender severally agrees, on the terms and conditions hereinafter set forth, to make Advances to the Borrower from time to time on any Business Day during the period from the date hereof until (but excluding) the Termination Date in an aggregate amount not to exceed at any time outstanding the amount set forth opposite such Lender's name on the signature pages hereof or, if such Lender has entered into any Assignment and Acceptance or Additional Lender Supplement, set forth for such Lender in the Register maintained by the Administrative Agent pursuant to Section 8.07(c), as such amount may be reduced pursuant to Section 2.04 or 2.16 (such Lender's "Commitment"). Each Borrowing shall consist of Advances of the same Type made or Converted on the same day by the Lenders ratably according to their respective Commitments. Each Borrowing comprising Base Rate Advances shall be in an aggregate amount not less than $5,000,000, and each Borrowing comprising Eurodollar Rate Advances shall be in an aggregate amount not less than $10,000,000. Within the limits of each Lender's Commitment, the Borrower may from time to time borrow, prepay pursuant to Section 2.10 and reborrow under this Section 2.01. SECTION 2.02. Making the Advances. (a) Each Borrowing (other than pursuant to a Conversion) shall be made on notice, given not later than 10:00 A.M. (Chicago time) on the third Business Day prior to the date of any proposed Borrowing comprising Eurodollar Rate Advances, and on the date of any proposed Borrowing comprising Base Rate Advances, by the Borrower to the Administrative Agent, which shall give to each Lender prompt notice thereof. Each such notice of a Borrowing (a "Notice of a Borrowing") shall be sent by telecopier, telex or cable, confirmed immediately in writing, in substantially the form of Exhibit B hereto, specifying therein the requested (i) date of such Borrowing, (ii) Type of Advances to be made in connection with such Borrowing, (iii) aggregate amount of such Borrowing, and (iv) in the case of a Borrowing comprising Eurodollar Rate Advances, initial Interest Period for the Advances to be made in connection with such Borrowing. Each Lender shall, before 12:00 Noon (Chicago time) on the date of such Borrowing, make available for the account of its Applicable Lending Office to the Administrative Agent at its address referred to in Section 8.02, in same day funds, such Lender's ratable portion of such Borrowing. After the Administrative Agent's receipt of such funds and upon fulfillment of the applicable conditions set forth in Article III, the Administrative Agent will make such funds available to the Borrower at the Administrative Agent's aforesaid address. (b) Each Notice of a Borrowing shall be irrevocable and binding on the Borrower. In the case of any Borrowing that the related Notice of a Borrowing specifies is to comprise Eurodollar Rate Advances, the Borrower shall indemnify each Lender against any loss, cost or expense incurred by such Lender as a result of any failure to fulfill on or before the date specified in such Notice of a Borrowing for such Borrowing the applicable conditions set forth in Article III, including, without limitation, any loss, cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such -10- Lender to fund the Advance to be made by such Lender as part of such Borrowing when such Advance, as a result of such failure, is not made on such date. (c) Unless the Administrative Agent shall have received notice from a Lender prior to the date of any Borrowing that such Lender will not make available to the Administrative Agent such Lender's ratable portion of such Borrowing, the Administrative Agent may assume that such Lender has made such portion available to the Administrative Agent on the date of such Borrowing in accordance with subsection (a) of this Section 2.02 and the Administrative Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent that such Lender shall not have so made such ratable portion available to the Administrative Agent, such Lender and the Borrower severally agree to repay to the Administrative Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Administrative Agent, at (i) in the case of the Borrower, the interest rate applicable at the time to Advances made in connection with such Borrowing and (ii) in the case of such Lender, the Federal Funds Rate. If such Lender shall repay to the Administrative Agent such corresponding amount, such amount so repaid shall constitute such Lender's Advance as part of such Borrowing for purposes of this Agreement. (d) The failure of any Lender to make the Advance to be made by it as part of any Borrowing shall not relieve any other Lender of its obligation, if any, hereunder to make its Advance on the date of such Borrowing, but no Lender shall be responsible for the failure of any other Lender to make the Advance to be made by such other Lender on the date of any Borrowing. (e) Notwithstanding anything to the contrary contained herein, no more than sixteen (16) Borrowings comprising Eurodollar Rate Advances may be outstanding at any time. SECTION 2.03. Fees. (a) The Borrower agrees to pay to the Administrative Agent for the account of each Lender a commitment fee on the average daily unused portion of such Lender's Commitment from the date on which the Administrative Agent determines the conditions set forth in Section 3.01 are satisfied in the case of each Bank, and from the effective date specified in the Assignment and Acceptance or the Additional Lender Supplement pursuant to which it became a Lender in the case of each other Lender, until the Termination Date, and, in the case of the termination in whole of a Lender's Commitment pursuant to Section 2.04 or 2.16, the date of such termination, payable on the last day of each March, June, September and December during such period, and on the Termination Date, and, in the case of the termination in whole of a Lender's Commitment pursuant to Section 2.04 or 2.16, the date of such termination, at a percentage rate per annum equal to the Applicable Commitment Fee Rate in effect from time to time, changing when and as the Applicable Commitment Fee Rate changes. (b) The Borrower agrees to pay to the Administrative Agent for the account of each Bank a facility fee in an amount equal to .075% of such Bank's Commitment as in effect on the Closing Date, payable on the Closing Date. (c) The Borrower agrees to pay to the Administrative Agent and the Lead Arranger for their respective accounts, such additional fees, in such amounts and payable on such dates as may be agreed to in writing from time to time between the Borrower and the Administrative Agent or the Lead Arranger, as the case may be. SECTION 2.04. Reduction of the Commitments. The Borrower shall have the right, upon at least two Business Days' notice to the Administrative Agent, to terminate in whole or reduce ratably in part the unused portions of the respective Commitments of the Lenders; provided, that the aggregate amount of the Commitments of the Lenders shall not be reduced to an amount that is less than the aggregate principal amount of the Advances then outstanding; and provided, further, that each partial reduction shall be in the aggregate amount of $10,000,000 or an integral multiple thereof. -11- SECTION 2.05. Repayment of Advances. The Borrower shall repay the principal amount of each Advance made by each Lender in accordance with the Note to the order of such Lender. SECTION 2.06. Interest on Advances. The Borrower shall pay interest on the unpaid principal amount of each Advance made by each Lender from the date of such Advance until such principal amount shall be paid in full, at the following rates per annum: (a) Base Rate Advances. If such Advance is a Base Rate Advance, a rate per annum equal at all times to the Base Rate in effect from time to time, payable quarterly on the last day of each March, June, September and December during such periods and on the date such Base Rate Advance shall be Converted or paid in full. (b) Eurodollar Rate Advances. Subject to Section 2.07, if such Advance is a Eurodollar Rate Advance, a rate per annum equal at all times during the Interest Period for such Advance to the sum of the Eurodollar Rate for such Interest Period plus the Applicable Margin for such Eurodollar Rate Advance in effect from time to time, payable on the last day of the Interest Period for such Eurodollar Rate Advance (or, if the Interest Period for such Advance is six months, accrued interest shall be payable on the day that is three months and on the day that is six months from the date such Advance was made) or, if earlier, on the date such Eurodollar Rate Advance shall be Converted or paid in full. SECTION 2.07. Additional Interest on Advances. The Borrower shall pay to each Lender, so long as such Lender shall be required under regulations of the Board of Governors of the Federal Reserve System to maintain reserves with respect to liabilities or assets consisting of or including Eurocurrency Liabilities, additional interest on the unpaid principal amount of each Eurodollar Rate Advance of such Lender, from the date of such Advance until such principal amount is paid in full or Converted, at an interest rate per annum equal at all times to the remainder obtained by subtracting (i) the Eurodollar Rate for the Interest Period for such Advance from (ii) the rate obtained by dividing such Eurodollar Rate by a percentage equal to 100% minus the Eurodollar Rate Reserve Percentage of such Lender for such Interest Period, payable on each date on which interest is payable on such Advance; provided, that no Lender shall be entitled to demand such additional interest more than 90 days following the last day of the Interest Period in respect of which such demand is made; provided further, however, that the foregoing proviso shall in no way limit the right of any Lender to demand or receive such additional interest to the extent that such additional interest relates to the retroactive application of the reserve requirements described above if such demand is made within 90 days after the implementation of such retroactive reserve requirements. Such additional interest shall be determined by such Lender and notified to the Borrower through the Administrative Agent, and such determination shall be conclusive and binding for all purposes, absent manifest error. SECTION 2.08. Interest Rate Determination. (a) Each Reference Bank agrees to furnish to the Administrative Agent timely information for the purpose of determining each Eurodollar Rate. If any one of the Reference Banks shall not furnish such timely information to the Administrative Agent for the purpose of determining any such interest rate, the Administrative Agent shall determine such interest rate on the basis of timely information furnished by the remaining Reference Banks. (b) The Administrative Agent shall give prompt notice to the Borrower and the Lenders of the applicable interest rate determined by the Administrative Agent for purposes of Section 2.06(a) or (b), and the applicable rate, if any, furnished by each Reference Bank for the purpose of determining the applicable interest rate under Section 2.06(b). (c) If either or both Reference Banks fail to furnish timely information to the Administrative Agent for determining the Eurodollar Rate for any Eurodollar Rate Advances, (i) the Administrative Agent shall forthwith notify the Borrower and the Lenders that the interest rate cannot be determined for such Eurodollar Rate Advances, -12- (ii) each such Advance will automatically, on the last day of the then existing Interest Period therefor, Convert into a Base Rate Advance (or if such Advance is then a Base Rate Advance, will continue as a Base Rate Advance), and (iii) the obligation of the Lenders to make, or to Convert Advances into, Eurodollar Rate Advances shall be suspended until the Administrative Agent shall notify the Borrower and the Lenders that the circumstances causing such suspension no longer exist. (d) If, with respect to any Eurodollar Rate Advances, the Majority Lenders notify the Administrative Agent that the Eurodollar Rate for any Interest Period for such Advances will not adequately reflect the cost to such Majority Lenders of making, funding or maintaining their respective Eurodollar Rate Advances for such Interest Period, the Administrative Agent shall forthwith so notify the Borrower and the Lenders, whereupon (i) each Eurodollar Rate Advance will automatically, on the last day of the then existing Interest Period therefor (unless prepaid or Converted to any Type of Advance other than a Eurodollar Rate Advance prior to such date), Convert into a Base Rate Advance, and (ii) the obligation of the Lenders to make, or to Convert Advances into, Eurodollar Rate Advances shall be suspended until the Administrative Agent shall notify the Borrower and the Lenders that the circumstances causing such suspension no longer exist. SECTION 2.09. Conversion of Advances. (a) Voluntary. The Borrower may on any Business Day, upon notice given to the Administrative Agent not later than 10:00 A.M. (Chicago time) on the third Business Day prior to the date of any proposed Conversion into Eurodollar Rate Advances, and on the date of any proposed Conversion into Base Rate Advances, and subject to the provisions of Sections 2.08 and 2.12, Convert all Advances of one Type made in connection with the same Borrowing into Advances of another Type or Types or Advances of the same Type having the same or a new Interest Period; provided, however, that any Conversion of Eurodollar Rate Advances into Base Rate Advances or Eurodollar Advances having the same or new Interest Periods shall be made on, and only on, the last day of an Interest Period for such Eurodollar Rate Advances, unless the Borrower shall also reimburse the Lenders in respect thereof pursuant to Section 8.04(b) on the date of such Conversion. Each such notice of a Conversion shall, within the restrictions specified above, specify (i) the date of such Conversion, (ii) the Advances to be Converted, and (iii) if such Conversion is into, or with respect to, Eurodollar Rate Advances, the duration of the Interest Period for each such Advance. (b) Automatic. If the Borrower shall fail to select the Type of any Advance or the duration of any Interest Period for any Borrowing comprising Eurodollar Rate Advances in accordance with the provisions contained in the definition of "Interest Period" in Section 1.01 and Section 2.09(a), the Administrative Agent will forthwith so notify the Borrower and the Lenders and such Advances will automatically, on the last day of the then existing Interest Period therefor, Convert into Base Rate Advances. SECTION 2.10. Prepayments. The Borrower may, upon at least three Business Days' notice in the case of any prepayment of Eurodollar Advances or one Business Day's notice in the case of any prepayment of Base Rate Advances, to the Administrative Agent stating the proposed date and aggregate principal amount of the prepayment, and if such notice is given the Borrower shall, prepay the outstanding principal amounts of the Advances made as part of the same Borrowing in whole or ratably in part, together with accrued interest to the date of such prepayment on the principal amount prepaid; provided, however, that (i) each partial prepayment shall be in an aggregate principal amount not less than $10,000,000 in the case of any prepayment of Eurodollar Advances or $5,000,000 in the case of any prepayment of Base Rate Advances, or any integral -13- multiple of $1,000,000 in excess thereof, and (ii) in the case of any such prepayment of a Eurodollar Rate Advance, the Borrower shall be obligated to reimburse the Lenders in respect thereof pursuant to Section 8.04(b) on the date of such prepayment. SECTION 2.11. Increased Costs. (a) If on or after the date of this Agreement, any Lender determines that (i) the introduction of or any change (other than any change by way of imposition or increase of reserve requirements, in the case of Eurodollar Rate Advances, included in the Eurodollar Rate Reserve Percentage) in or in the interpretation of any law or regulation or (ii) the compliance with any guideline or request from any central bank or other governmental authority (whether or not having the force of law) shall increase the cost to such Lender of agreeing to make or making, funding or maintaining Eurodollar Rate Advances, then the Borrower shall from time to time, upon demand by such Lender (with a copy of such demand to the Administrative Agent), pay to the Administrative Agent for the account of such Lender additional amounts (without duplication of any amount payable pursuant to Section 2.14) sufficient to compensate such Lender for such increased cost; provided, that no Lender shall be entitled to demand such compensation more than 90 days following the last day of the Interest Period in respect of which such demand is made; provided further, however, that the foregoing proviso shall in no way limit the right of any Lender to demand or receive such compensation to the extent that such compensation relates to the retroactive application of any law, regulation, guideline or request described in clause (i) or (ii) above if such demand is made within 90 days after the implementation of such retroactive law, interpretation, guideline or request. A certificate as to the amount of such increased cost, submitted to the Borrower and the Administrative Agent by such Lender, shall be conclusive and binding for all purposes, absent manifest error. (b) If any Lender determines that, after the date of this Agreement, compliance with any law or regulation or any guideline or request from any central bank or other governmental authority (whether or not having the force of law) regarding capital adequacy requirements affects or would affect the amount of capital required or expected to be maintained by such Lender or any corporation controlling such Lender (including, in any event, any determination after the date of this Agreement by any such governmental authority or central bank that, for purposes of capital adequacy requirements, any Lender's Commitment hereunder does not constitute a commitment with an original maturity of one year or less) and that the amount of such capital is increased by or based upon the existence of such Lender's commitment to lend hereunder and other commitments of this type or the Advances made by such Lender, then, upon demand by such Lender (with a copy of such demand to the Administrative Agent), the Borrower shall immediately pay to the Administrative Agent for the account of such Lender, from time to time as specified by such Lender, additional amounts sufficient to compensate such Lender or such corporation in the light of such circumstances, to the extent that such Lender determines such increase in capital to be allocable to the existence of such Lender's commitment to lend hereunder or the Advances made by such Lender; provided, that no Lender shall be entitled to demand such compensation more than one year following the payment to or for the account of such Lender of all other amounts payable hereunder and under any Note held by such Lender and the termination of such Lender's Commitment; provided further, however, that the foregoing proviso shall in no way limit the right of any Lender to demand or receive such compensation to the extent that such compensation relates to the retroactive application of any law, regulation, guideline or request described above if such demand is made within one year after the implementation of such retroactive law, interpretation, guideline or request. A certificate as to such amounts submitted to the Borrower and the Administrative Agent by such Lender shall be conclusive and binding, for all purposes, absent manifest error. (c) Any Lender claiming compensation pursuant to this Section 2.11 shall use its best efforts (consistent with its internal policy and legal and regulatory restrictions) to change the jurisdiction of its Applicable Lending Office if the making of such a change would avoid the need for, or reduce the amount of, any such compensation that may thereafter accrue and would not, in the reasonable judgment of such Lender, be otherwise disadvantageous to such Lender. -14- SECTION 2.12. Illegality. Notwithstanding any other provision of this Agreement, if any Lender shall notify the Administrative Agent that the introduction of or any change in or in the interpretation of any law or regulation makes it unlawful, or any central bank or other governmental authority asserts that it is unlawful, for such Lender or its Eurodollar Lending Office to perform its obligations hereunder to make Eurodollar Rate Advances or to fund or maintain Eurodollar Rate Advances hereunder, (i) the obligation of such Lender to make, or to Convert Advances into, Eurodollar Rate Advances shall be suspended (subject to the following paragraph of this Section 2.12) until the Administrative Agent shall notify the Borrower and the Lenders that the circumstances causing such suspension no longer exist and (ii) all Eurodollar Rate Advances of such Lender then outstanding shall, on the last day of then applicable Interest Period (or such earlier date as such Lender shall designate upon not less than five Business Days prior written notice to the Administrative Agent), be automatically Converted into Base Rate Advances. If the obligation of any Lender to make, fund or maintain Eurodollar Rate Advances has been suspended pursuant to the preceding paragraph, then, unless and until the Administrative Agent shall notify the Borrower and the Lenders that the circumstances causing such suspension no longer exist (i) all Advances that would otherwise be made by such Lender as Eurodollar Rate Advances shall instead be made as Base Rate Advances and (ii) to the extent that Eurodollar Rate Advances of such Lender have been Converted into Base Rate Advances pursuant to the preceding paragraph or made instead as Base Rate Advances pursuant to the preceding clause (i), all payments and prepayments of principal that would have otherwise been applied to such Eurodollar Rate Advances of such Lender shall be applied instead to such Base Rate Advances of such Lender. SECTION 2.13. Payments and Computations. (a) The Borrower shall make each payment hereunder and under the Notes not later than 10:00 A.M. (Chicago time) on the day when due in U.S. dollars to the Administrative Agent at its address referred to in Section 8.02 in same day funds without setoff, counterclaim or other deduction. The Administrative Agent will promptly thereafter cause to be distributed like funds relating to the payment of principal or interest or commitment and facility fees ratably (other than amounts payable pursuant to Section 2.02(c), 2.07, 2.11, 2.14, 2.16(a) or 8.04(b)) to the Lenders for the account of their respective Applicable Lending Offices, and like funds relating to the payment of any other amount payable to any Lender to such Lender for the account of its Applicable Lending Office, in each case to be applied in accordance with the terms of this Agreement. Upon its acceptance of an Assignment and Acceptance and recording of the information contained therein in the Register pursuant to Section 8.07(d), from and after the effective date specified in such Assignment and Acceptance, the Administrative Agent shall make all payments hereunder and under the Notes in respect of the interest assigned thereby to the Lender assignee thereunder, and the parties to such Assignment and Acceptance shall make all appropriate adjustments in such payments for periods prior to such effective date directly between themselves. (b) The Borrower hereby authorizes each Lender, if and to the extent payment owed to such Lender is not made when due hereunder or under any Note held by such Lender, to charge from time to time against any or all of the Borrower's accounts with such Lender any amount so due. (c) All computations of interest based on the Base Rate shall be made by the Administrative Agent on the basis of a year of 365 or 366 days, as the case may be, and all computations of interest based on the Eurodollar Rate or the Federal Funds Rate and of commitment fees shall be made by the Administrative Agent, and all computations of interest pursuant to Section 2.07 shall be made by a Lender, on the basis of a year of 360 days, in each case for the actual number of days (including the first day but excluding the last day) occurring in the period for which such interest or commitment fees are payable. Each determination by the Administrative Agent (or, in the case of Section 2.07, by a Lender) of an interest rate hereunder shall be conclusive and binding for all purposes, absent manifest error. (d) Whenever any payment hereunder or under the Notes shall be stated to be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be -15- included in the computation of payment of interest or commitment fee, as the case may be; provided, however, if such extension would cause payment of interest on or principal of Eurodollar Rate Advances to be made in the next following calendar month, such payment shall be made on the next preceding Business Day. (e) Unless the Administrative Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Lenders hereunder that the Borrower will not make such payment in full, the Administrative Agent may assume that the Borrower has made such payment in full to the Administrative Agent on such date and the Administrative Agent may, in reliance upon such assumption, cause to be distributed to each Lender on such due date an amount equal to the amount then due such Lender. If and to the extent that the Borrower shall not have so made such payment in full to the Administrative Agent, each Lender shall repay to the Administrative Agent forthwith on demand such amount distributed to such Lender together with interest thereon, for each day from the date such amount is distributed to such Lender until the date such Lender repays such amount to the Administrative Agent, at the Federal Funds Rate. (f) Notwithstanding anything to the contrary contained herein, any amount payable by the Borrower hereunder or under any Note that is not paid when due (whether at stated maturity, by acceleration or otherwise) shall (to the fullest extent permitted by law) bear interest from the date when due until paid in full at a rate per annum equal at all times to the Base Rate plus 2%, payable upon demand. SECTION 2.14. Taxes. (a) Any and all payments by the Borrower hereunder or under the Notes shall be made, in accordance with Section 2.13, free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding, in the case of each Lender and the Administrative Agent, taxes imposed on its income, and franchise taxes imposed on it, by the jurisdiction under the laws of which such Lender or the Administrative Agent (as the case may be) is organized or any political subdivision thereof and, in the case of each Lender, taxes imposed on its income, and franchise taxes imposed on it, by the jurisdiction of such Lender's Applicable Lending Office or any political subdivision thereof (all such non-excluded taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "Taxes"). If the Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder or under any Note to any Lender or the Administrative Agent, (i) the sum payable shall be increased as may be necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 2.14) such Lender or the Administrative Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions and (iii) the Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law. (b) In addition, the Borrower agrees to pay any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies to the extent arising from the execution, delivery or registration of this Agreement or the Notes (hereinafter referred to as "Other Taxes"). (c) No Lender may claim or demand payment or reimbursement in respect of any Taxes or Other Taxes pursuant to this Section 2.14 if such Taxes or Other Taxes, as the case may be, were imposed solely as the result of a voluntary change in the location of the jurisdiction of such Lender's Applicable Lending Office. (d) The Borrower will indemnify each Lender and the Administrative Agent for the full amount of Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes imposed by any jurisdiction on amounts payable under this Section 2.14) paid by such Lender or the Administrative Agent (as the case may be) and any liability (including penalties, interest and -16- expenses) arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted. This indemnification shall be made within 30 days from the date such Lender or the Administrative Agent (as the case may be) makes written demand therefor. (e) Prior to the date of the initial Borrowing in the case of each Bank, and on the date of the Assignment and Acceptance or Additional Lender Supplement pursuant to which it became a Lender in the case of each other Lender, and from time to time thereafter within 30 days from the date of request if requested by the Borrower or the Administrative Agent, each Lender organized under the laws of a jurisdiction outside the United States shall provide the Administrative Agent and the Borrower with the forms prescribed by the Internal Revenue Service of the United States certifying that such Lender is exempt from United States withholding taxes with respect to all payments to be made to such Lender hereunder and under the Notes. If for any reason during the term of this Agreement, any Lender becomes unable to submit the forms referred to above or the information or representations contained therein are no longer accurate in any material respect, such Lender shall notify the Administrative Agent and the Borrower in writing to that effect. Unless the Borrower and the Administrative Agent have received forms or other documents satisfactory to them indicating that payments hereunder or under any Note are not subject to United States withholding tax, the Borrower or the Administrative Agent shall withhold taxes from such payments at the applicable statutory rate in the case of payments to or for any Lender organized under the laws of a jurisdiction outside the United States and no Lender may claim or demand payment or reimbursement for such withheld taxes pursuant to this Section 2.14. (f) Any Lender claiming any additional amounts payable pursuant to this Section 2.14 shall use its best efforts (consistent with its internal policy and legal and regulatory restrictions) to change the jurisdiction of its Applicable Lending Office if the making of such a change would avoid the need for, or reduce the amount of, any such additional amounts which may thereafter accrue and would not, in the reasonable judgment of such Lender, be otherwise disadvantageous to such Lender. (g) If the Borrower makes any additional payment to any Lender pursuant to this Section 2.14 in respect of any Taxes or Other Taxes, and such Lender determines that it has received (i) a refund of such Taxes or Other Taxes or (ii) a credit against or relief or remission for, or a reduction in the amount of, any tax or other governmental charge attributable solely to any deduction or credit for any Taxes or Other Taxes with respect to which it has received payments under this Section 2.14, such Lender shall, to the extent that it can do so without prejudice to the retention of such refund, credit, relief, remission or reduction, pay to the Borrower such amount as such Lender shall have determined to be attributable to the deduction or withholding of such Taxes or Other Taxes. If, within one year after the payment of any such amount to the Borrower, such Lender determines that it was not entitled to such refund, credit, relief, remission or reduction to the full extent of any payment made pursuant to the first sentence of this Section 2.14(g), the Borrower shall upon notice and demand of such Lender promptly repay the amount of such overpayment. Any determination made by such Lender pursuant to this Section 2.14(g) shall in the absence of bad faith or manifest error be conclusive, and nothing in this Section 2.14(g) shall be construed as requiring any Lender to conduct its business or to arrange or alter in any respect its tax or financial affairs (except as required by Section 2.14(f)) so that it is entitled to receive such a refund, credit or reduction or as allowing any person to inspect any records, including tax returns, of any Lender. (h) Without prejudice to the survival of any other agreement of the Borrower or any Lender hereunder, the agreements and obligations of the Borrower and the Lenders contained in this Section 2.14 shall survive the payment in full of principal and interest hereunder and under the Notes; provided, that no Lender shall be entitled to demand any payment under this Section 2.14 more than one year following the payment to or for the account of such Lender of all other amounts payable hereunder and under any Note held by such Lender and the termination of such Lender's Commitment; provided further, however, that the foregoing proviso shall in no way limit the right of any Lender to demand or receive any payment under this Section 2.14 to the extent that such payment relates to the retroactive application of any Taxes or Other Taxes if such demand is made within one year after the implementation of such Taxes or Other Taxes. -17- SECTION 2.15. Sharing of Payments, Etc. If any Lender shall obtain any payment (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise) on account of the Advances made by it (other than pursuant to Section 2.02(c), 2.07, 2.11, 2.14, 2.16(a) or 8.04(b)) in excess of its ratable share of payments on account of the Advances obtained by all the Lenders, such Lender shall forthwith purchase from the other Lenders such participations in the Advances made by them as shall be necessary to cause such purchasing Lender to share the excess payment ratably with each of them, provided, however, that if all or any portion of such excess payment is thereafter recovered from such purchasing Lender, such purchase from each Lender shall be rescinded and such Lender shall repay to the purchasing Lender the purchase price to the extent of such recovery together with an amount equal to such Lender's ratable share (according to the proportion of (i) the amount of such Lender's required repayment to (ii) the total amount so recovered from the purchasing Lender) of any interest or other amount paid or payable by the purchasing Lender in respect of the total amount so recovered. The Borrower agrees that any Lender so purchasing a participation from another Lender pursuant to this Section 2.15 may, to the fullest extent permitted by law, exercise all its rights of payment (including the right of set-off) with respect to such participation as fully as if such Lender were the direct creditor of the Borrower in the amount of such participation. SECTION 2.16. Extension of Termination Date. (a) Unless the Termination Date shall have occurred, the Borrower may request the Lenders, by written notice to the Administrative Agent not more than 90 days and not less than 60 days prior to the then effective Termination Date, to consent to extension of the Termination Date to the date which is 364 days after the then effective Termination Date (or, if such date is not a Business Day, the next preceding Business Day). Each Lender shall, in its sole discretion, determine whether to consent to such request and shall notify the Administrative Agent of its determination not more than 45 days and not less than 30 days prior to the then-effective Termination Date. Any Lender which fails to give such notice to the Administrative Agent shall be deemed to have not consented to such request. If any Lender shall not have consented to such request 30 days prior to the then effective Termination Date (such Lender being referred to herein as a "Non-Consenting Lender"), the Administrative Agent shall promptly so notify the Borrower and the other Lenders, whereupon each other Lender may, not more than 30 days and not less than 25 days prior to the then effective Termination Date, revoke any consent to such extension previously given by such Lender (in which case such Lender shall be deemed a Non-Consenting Lender). If such request shall have been consented to by the Majority Lenders (as determined after giving effect to the replacement of any Non-Consenting Lender pursuant to Section 8.07(g)), the Administrative Agent shall notify the Borrower and the Lenders in writing of such consent, and such extension shall become effective (other than with respect to any Non-Consenting Lender) upon the delivery by the Borrower to the Administrative Agent and each Lender, on or prior to the then-effective Termination Date, of (i) a certificate of a duly authorized officer of the Borrower, dated such date, as to the accuracy, both before and after giving effect to such proposed extension, of the representations and warranties set forth in Section 4.01 and as to the absence, both before and after giving effect to such proposed extension, of any Event of Default or event that with the giving of notice or the passage of time or both would constitute an Event of Default, (ii) certified copies of all corporate and governmental approvals, if any, required to be obtained by the Borrower in connection with such proposed extension , (iii) new Notes dated such date, substantially in the form of Exhibit A hereto with the blanks appropriately completed, payable to the order of each Lender (other than a Non-Consenting Lender) in the principal amount of such Lender's Commitment and (iv ) an opinion of counsel to the Borrower (who shall be satisfactory to the Administrative Agent) as to the matters set forth in Exhibit D, upon giving effect to the extension of the Termination Date and the new Notes, and such other matters as any Lender, through the Administrative Agent, may reasonably request, all of the foregoing to be satisfactory in form and substance to the Administrative Agent. In the event of any such extension of the Termination Date, the Commitment of each Non-Consenting Lender that has not been replaced pursuant to Section 8.07(g) shall be terminated in whole as of such former Termination Date, the aggregate principal amount of all Advances made by each Non-Consenting Lender, together with accrued and unpaid interest, -18- commitment fees and facility fees, and all other amounts payable hereunder to or for the account of each Non-Consenting Lender shall be due and payable on such former Termination Date, and upon such reduction and payment of such amounts each Non-Consenting Lender shall cease to be a party to this Agreement (although each Non-Consenting Lender shall continue to be entitled to indemnification pursuant to Section 8.04(c)). (b) Upon the effectiveness of any extension of the Termination Date pursuant to subsection (a) above, each reference in Section 4.01(e) and Exhibit D to (i) the year-end financial statements of the Borrower, (ii) December 31 of any year, (iii) the quarter-end financial statements of the Borrower and (iv) the last day of any fiscal quarter (other than December 31) of any year, shall be deemed to be amended to be references to (A) the year-end financial statements of the Borrower included in the Borrower's Annual Report on Form 10-K most recently delivered to the Lenders pursuant to Section 5.01(b)(iii), (B) December 31 of the year of the financial statements described in clause (A) above, (C) the fiscal quarter-end financial statements of the Borrower included in the Borrower's Quarterly Report on Form 10-Q most recently delivered to the Lenders pursuant to Section 5.01(b)(ii) and (D) the last day of the fiscal quarter of the financial statements described in clause (C) above, respectively. SECTION 2.17. Additional Lenders. (a) For a period of 60 days after extension of a Termination Date pursuant to Section 2.16(a) that has resulted in a reduction of the aggregate Commitments of the Lenders, the Borrower may request that one or more additional banks or other Persons (each, an "Additional Lender") become party to this Agreement as Lenders and that the aggregate amount of the Commitments of the Lenders be increased to reflect the Commitments allocated to each such Additional Lender; provided, that the aggregate Commitments of the Lenders after giving effect to such increase shall not exceed the aggregate Commitments of the Lenders immediately prior to such former Termination Date. Addition of an Additional Lender shall be made only with the written consent of the Administrative Agent (which consent shall not be unreasonably withheld or delayed) and with the written consent of the Borrower (which consent may be granted or withheld in its absolute discretion). Each Additional Lender must be an Eligible Assignee and, without the consent of the Administrative Agent, the initial Commitment of each Additional Lender shall not be less than $10,000,000. (b) Addition of an Additional Lender shall be effected by the Additional Lender executing and delivering to the Administrative Agent, for its acceptance and recording in the Register, a duly completed Additional Lender Supplement in substantially the form of Exhibit G attached hereto. The Borrower shall execute and deliver to the Administrative Agent for transmittal to such Additional Lender a Note in substantially the form of Exhibit A attached hereto in the amount of the Commitment of such Additional Lender. Acceptance by the Administrative Agent of an Additional Lender is subject to the conditions that the Administrative Agent shall have received, with a counterpart for each Lender, (i) a certificate of a duly authorized officer of the Borrower, dated the effective date of such Additional Lender Supplement, as to the accuracy, both before and after giving effect to such proposed addition, of the representations and warranties set forth in Section 4.01 and as to the absence, both before and after giving effect to such proposed extension, of any Event of Default or event that with the giving of notice or the passage of time or both would constitute an Event of Default, (ii) certified copies of all corporate and governmental approvals, if any, required to be obtained by the Borrower in connection with such proposed addition, (iii) an opinion of counsel to the Borrower (who shall be satisfactory to the Administrative Agent) as to the matters set forth in Exhibit D (appropriately modified to include, in addition to the other matters set forth therein, such Additional Lender Supplement and the new Note), and such other matters as any Lender, through the Administrative Agent, may reasonably request, and (iv) such other certificates and documents as the Administrative Agent may reasonably request, all of the foregoing to be satisfactory in form and substance to the Administrative Agent. Upon execution and delivery of the Additional Lender Supplement, acceptance by the Administrative Agent and recording in the Register, from and after the effective date specified in such Additional Lender Supplement, such Additional Lender -19- shall be a party hereto and shall, to the extent of the Commitment specified in such Additional Lender Supplement, have the rights and obligations of a Lender hereunder. (c) If, at the time an Additional Lender is to become party to this Agreement, the continuing Lenders have any outstanding Advances, such Additional Lender shall offer to purchase from each continuing Lender, effective as of the date such Additional Lender becomes party to this Agreement, a portion of each continuing Lender's outstanding Advances, in such amounts as will have the result that, immediately after giving effect to such Additional Lender becoming party to this Agreement and to such purchases, each Lender (including the Additional Lender) shall share in the outstanding Advances in the same proportion as their respective Commitments. The Additional Lender shall offer in writing to purchase the requisite portion of each continuing Lender's outstanding Advances, at a price equal to the outstanding principal amount thereof together with accrued and unpaid interest thereon to the date of purchase, and a continuing Lender shall not unreasonably decline to accept such offer. Each such purchase shall be made in accordance with Section 8.07 (with the related Assignment and Acceptance modified, mutatis mutandis, to reflect that such purchase is not a purchase of any portion of the Commitment of the continuing Lender). Such purchases shall not be subject to the provisions of clause (ii) of Section 8.07(a), and the Borrower shall be responsible for all amounts payable to the Administrative Agent pursuant to clause (iv) of Section 8.07(a). The Borrower shall pay to each continuing Lender on demand any amount that would be payable to such continuing Lender pursuant to Section 8.04(b) (which for this purpose shall be applied as if such assignment were a prepayment of the Advances assigned by such continuing Lender), and shall reimburse each continuing Lender on demand for all reasonable fees and expenses (including reasonable fees and expenses of counsel) incurred by it in connection with such assignment. ARTICLE III CONDITIONS OF LENDING SECTION 3.01. Conditions Precedent to Initial Advances. The obligation of each Lender to make its initial Advance is subject to the satisfaction, prior to or concurrently with, the making of such initial Advance, of each of the following conditions precedent: (a) Documents and Other Agreements. The Administrative Agent shall have received on or before the day of the initial Borrowing the following, each dated the same date, in form and substance satisfactory to the Administrative Agent and (except for the Notes) with one copy for each Lender: (i) The Notes payable to the order of each of the Lenders, respectively; (ii) Certified copies of the resolutions of the Board of Directors of the Borrower approving the transactions contemplated by this Agreement and the Notes, and of all documents evidencing other necessary corporate action with respect to this Agreement and the Notes; (iii) A certificate of the Secretary or an Assistant Secretary of the Borrower certifying (A) the names and true signatures of the officers of the Borrower authorized to sign this Agreement and the Notes and the other documents to be delivered hereunder; (B) that attached thereto are true and correct copies of the Restated Articles of Incorporation and the By-laws of the Borrower, in each case in effect on such date; and (C) that attached thereto are true and correct copies of all governmental and regulatory authorizations and approvals required for the due execution, delivery and performance of this Agreement and the Notes, including, without limitation, the Application -20- for Authorization filed with FERC by the Borrower (the "FERC Application") and the Authorization issued by FERC approving the FERC Application (the "FERC Authorization"); (iv) Copies of the financial statements referred to in Section 4.01(e); (v) A certificate signed by either the chief financial officer, principal accounting officer or treasurer of the Borrower stating that (A) the representations and warranties contained in Section 4.01 are correct on and as of the date of such certificate as though made on and as of such date, (B) no event has occurred and is continuing on the date of such certificate that constitutes an Event of Default or would constitute an Event of Default but for the requirement that notice be given or time elapse or both and (C) stating the specific provision of the FERC Application or the FERC Authorization pursuant to which this Agreement is authorized and stating that the Borrower is in compliance with such provision; (vi) A favorable opinion of Ballard Spahr Andrews & Ingersoll, special counsel for the Borrower, substantially in the form of Exhibit D hereto; and (vii) A favorable opinion of Reed Smith Shaw & McClay LLP, counsel for the Administrative Agent, substantially in the form of Exhibit E hereto. (b) Termination of Prior Credit Facility. The Administrative Agent shall have received evidence of (i) the payment in full of all obligations of the Borrower under the Existing Credit Agreements, and (ii) the termination of the "Commitments" under the Existing Credit Agreements. SECTION 3.02. Conditions Precedent to Certain Borrowings. The obligation of each Lender to make an Advance on the occasion of each Borrowing (including the initial Borrowing) that would increase the aggregate amount of Advances outstanding shall be subject to the further conditions precedent that on the date of such Borrowing the following statements shall be true, and each of the giving of the applicable Notice of a Borrowing and the acceptance by the Borrower of the proceeds of such Borrowing shall constitute a representation and warranty by the Borrower that on the date of such Borrowing such statements are true: (A) The representations and warranties contained in Section 4.01 are correct on and as of the date of such Borrowing, before and after giving effect to such Borrowing and to the application of the proceeds therefrom, as though made on and as of such date; and (B) No event has occurred and is continuing, or would result from such Borrowing or from the application of the proceeds therefrom, that constitutes an Event of Default or would constitute an Event of Default but for the requirement that notice be given or time elapse or both (it being understood for clarification that (i) without limiting the foregoing, it is a condition of this clause (B) that the Borrower shall be in compliance with Section 5.01(a)(iv), Section 5.02(a) and Section 5.02(c) upon giving effect to such Borrowing and (ii) the conditions of this clause (B) shall apply whether or not the respective Commitments of the Lenders have been terminated pursuant to Section 6.01). -21- ARTICLE IV REPRESENTATIONS AND WARRANTIES SECTION 4.01. Representations and Warranties of the Borrower. The Borrower represents and warrants as follows: (a) The Borrower is a corporation duly organized. validly existing and in good standing under the laws of the Commonwealth of Pennsylvania. (b) The execution, delivery and performance by the Borrower of this Agreement and the Notes are within the Borrower's corporate powers, have been duly authorized by all necessary corporate action, and do not and will not contravene (i) the Borrower's Restated Articles of Incorporation or By-laws, (ii) applicable law or (iii) any contractual or legal restriction binding on or affecting the Borrower or its properties. (c) No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for the due execution, delivery and performance by the Borrower of this Agreement or the Notes except for the filing of the FERC Application with, and the final approval of, and the FERC Authorization issued by, FERC, which filing has been duly made and which final approval and FERC Authorization have been duly obtained; such FERC Authorization is in full force and effect and is final; and on and after the date of the initial Borrowing hereunder, the action of FERC approving the FERC Application shall no longer be subject to appeal. (d) This Agreement is, and the Notes when delivered hereunder will be, legal, valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their respective terms, except as the enforceability thereof may be limited by equitable principles or bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally. (e) The consolidated balance sheet of the Borrower and its Subsidiaries as at December 31, 1998, and the related statements of income and retained earnings and of cash flows of the Borrower and its Subsidiaries for the fiscal year then ended, certified by Pricewaterhouse Coopers LLP, and the unaudited consolidated balance sheet of the Borrower and its Subsidiaries as at June 30, 1999, and the related unaudited statements of income for the six-month period then ended, copies of which have been furnished to each Lender, fairly present in all material respects (subject, in the case of such balance sheets and statements of income for the period ended June 30, 1999, to year-end adjustments) the consolidated financial condition of the Borrower and its Subsidiaries as at such dates and the consolidated results of the operations of the Borrower and its Subsidiaries for the periods ended on such dates, all in accordance with GAAP, and since June 30, 1999, there has been no Material Adverse Change. (f) Except as disclosed in the Borrower's Annual, Quarterly or Current Reports, each as filed with the Securities and Exchange Commission and delivered to the Lenders (including reports filed prior to the date of execution and delivery of this Agreement and reports delivered to the Lenders pursuant to Section 5.01(b)), there is no pending or threatened action, investigation or proceeding affecting the Borrower or any of its Subsidiaries before any court, governmental agency or arbitrator that may reasonably be anticipated to have a Material Adverse Effect. There is no pending or threatened action or proceeding against the Borrower or its Subsidiaries that purports to affect the legality, validity, binding effect or enforceability of this Agreement or any Note. (g) No proceeds of any Advance have been or will be used directly or indirectly in connection with the acquisition of in excess of 5% of any class of equity securities that is registered pursuant to Section 12 of the Exchange Act -22- or any transaction subject to the requirements of Section 13 or 14 of the Exchange Act. (h) The Borrower is not engaged in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation U issued by the Board of Governors of the Federal Reserve System), and no proceeds of any Advance will be used to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying any margin stock. Not more than 25% of the value of the assets of the Borrower and its Principal Subsidiaries is represented by margin stock. (i) The Borrower (i) is exempt from the provisions of the Public Utility Holding Company Act of 1935, as amended, other than Section 9(a)(2) thereof, pursuant to Section 3(a)(2) thereof, and (ii) is not an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (j) During the twelve consecutive month period prior to the date of the execution and delivery of this Agreement and prior to the date of any Borrowing under this Agreement, no steps have been taken to terminate any Plan, and no contribution failure by the Borrower or any member of the Controlled Group has occurred with respect to any Plan. No condition exists or event or transaction has occurred with respect to any Plan (including any Multiemployer Plan) which might result in the incurrence by the Borrower or any member of the Controlled Group of any material liability, fine or penalty. (k) The Borrower is reviewing its operations and those of its Subsidiaries with a view to assessing whether its business, or the business of any of its Subsidiaries (i) will be vulnerable to a Year 2000 Problem or (ii) will be vulnerable to the effects of a Year 2000 Problem suffered by the Borrower's or any of its Subsidiaries' major counterparties, in the case of (ii) as described in the Borrower's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999. The Borrower represents and warrants that it does not believe that any Year 2000 Problem will impair the Borrower's ability to pay principal or interest on the Notes in accordance with their terms. ARTICLE V COVENANTS OF THE BORROWER SECTION 5.01. Affirmative Covenants. So long as any Note or any amount payable by the Borrower hereunder shall remain unpaid or any Lender shall have any Commitment hereunder (except with respect to subsection (a)(iv), which shall be applicable only as of the date hereof and at any time that any Advance is outstanding hereunder), the Borrower will, and, in the case of Section 5.01(a), will cause its Principal Subsidiaries to, unless the Majority Lenders shall otherwise consent in writing: (a) Keep Books; Corporate Existence; Maintenance of Properties; Compliance with Laws; Insurance; Taxes. (i) keep proper books of record and account, all in accordance with generally accepted accounting principles; (ii) subject to Section 5.02(b), preserve and keep in full force and effect its existence; (iii) maintain and preserve all of its properties (except such properties the failure of which to maintain or preserve would not have, individually or in the aggregate, a Material Adverse Effect) which are -23- used or useful in the conduct of its business in good working order and condition, ordinary wear and tear excepted; (iv) comply in all material respects with the requirements of all applicable laws, rules, regulations and orders (including those of any governmental authority and including with respect to environmental matters) to the extent the failure to so comply, individually or in the aggregate, would have either a Material Adverse Effect or a material adverse effect on the ability of the Borrower to perform its obligations under this Agreement and the Notes; (v) maintain insurance with responsible and reputable insurance companies or associations, or self-insure, as the case may be, in each case in such amounts and covering such contingencies, casualties and risks as is customarily carried by or self-insured against by companies engaged in similar businesses and owning similar properties in the same general areas in which the Borrower and its Principal Subsidiaries operate; (vi) at any reasonable time and from time to time, pursuant to prior notice delivered to the Borrower, permit any Lender, or any agents or representatives of any thereof, to examine and, at such Lender's expense, make copies of, and abstracts from the records and books of account of, and visit the properties of, the Borrower and any of its Principal Subsidiaries and to discuss the affairs, finances and accounts of the Borrower and any of its Subsidiaries with any of their respective officers; provided, that any non-public information (which has been identified as such by the Borrower) obtained by any Lender, or any of their respective agents or representatives pursuant to this subsection (vi) shall be treated confidentially by such Person; provided, further, that such Person may disclose such information to any other party to this Agreement, its examiners, affiliates, outside auditors, counsel or other professional advisors in connection with the Agreement or if otherwise required to do so by law or regulatory process; (vii) use the proceeds of the Advances for general corporate purposes (including, without limitation, the refinancing of its commercial paper, the repayment of outstanding Advances, and the making of acquisitions) but in no event for any purpose which would be contrary to clause (g) or clause (h) of Section 4.01; (viii) take the actions and commit the resources deemed necessary by the National Electric Reliance Council ("NERC"), the Mid-Atlantic Area Counsel, the Nuclear Regulatory Commission and the PUC to mitigate against the Year 2000 Problem; and (ix) at the request of the Administrative Agent, provide the Administrative Agent with any reports submitted by the Borrower to NERC relating to the Year 2000 Problem, within a reasonable time after such request. (b) Reporting Requirements. Furnish to the Lenders: (i) as soon as possible, and in any event within 5 Business Days after the occurrence of each Event of Default or each event which, with the giving of notice or lapse of time, or both, would constitute an Event of Default, continuing on the date of such statement, a statement of an authorized officer of the Borrower setting forth details of such Event of Default or event and the action which the Borrower proposes to take with respect thereto; -24- (ii) as soon as available and in any event within 60 days after the end of each of the first three quarters of each fiscal year of the Borrower, a copy of the Borrower's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission with respect to such quarter, together with a certificate of an authorized officer of the Borrower stating that no Event of Default, or event which, with notice or lapse of time or both, would constitute an Event of Default, has occurred and is continuing or, if any Event of Default or such event has occurred and is continuing, a statement as to the nature thereof and the action which the Borrower proposes to take with respect thereto; (iii) as soon as available and in any event within 105 days after the end of each fiscal year of the Borrower, a copy of the Borrower's Annual Report on Form 10-K filed with the Securities and Exchange Commission with respect to such fiscal year, together with a certificate of an authorized officer of the Borrower stating that no Event of Default, or event which, with notice of lapse of time or both, would constitute an Event of Default, has occurred and is continuing or, if any Event of Default or such event has occurred and is continuing, a statement as to the nature thereof and the action which the Borrower proposes to take with respect thereto; (iv) concurrently with the delivery of the annual and quarterly reports referred to in Sections 5.01(b)(ii) and 5.01(b)(iii), a compliance certificate in substantially the form set forth in Exhibit F, duly completed and signed by the Chief Financial Officer, Treasurer or an Assistant Treasurer of the Borrower; (v) except as otherwise provided in subsections (ii) and (iii) above, promptly after the sending or filing thereof, copies of all reports that the Borrower sends to any of its security holders, and copies of all Reports on Form 10-K, 10-Q or 8-K, and registration statements and prospectuses that the Borrower or any of its Subsidiaries files with the Securities and Exchange Commission or any national securities exchange (except to the extent that any such registration statement or prospectus relates solely to the issuance of securities pursuant to employee or dividend reinvestment plans of the Borrower or such Subsidiary); (vi) promptly upon becoming aware of the institution of any steps by the Borrower or any other Person to terminate any Plan, or the failure to make a required contribution to any Plan if such failure is sufficient to give rise to a lien under section 302(f) of ERISA, or the taking of any action with respect to a Plan which could result in the requirement that the Borrower furnish a bond or other security to the PBGC or such Plan, or the occurrence of any event with respect to any Plan, which could result in the incurrence by the Borrower or any member of the Controlled Group of any material liability, fine or penalty; and (vii) such other information respecting the condition, operations, business or prospects, financial or otherwise, of the Borrower or any of its Subsidiaries as any Lender, through the Administrative Agent, may from time to time reasonably request. SECTION 5.02. Negative Covenants. So long as any Note or any amount payable by the Borrower hereunder shall remain unpaid or any Lender shall have any Commitment hereunder (except with respect to subsection (a), which shall be applicable only as of the date hereof and at any time any Advance is outstanding hereunder), the Borrower will not, without the written consent of the Majority Lenders: (a) Limitation on Liens. Create, incur, assume or suffer to exist, or permit any of its Principal Subsidiaries to create, incur, assume or suffer to exist, any Lien on its respective property, revenues or assets, whether now -25- owned or hereafter acquired except (i) Liens upon or in any property acquired by the Borrower or any of its Principal Subsidiaries in the ordinary course of business to secure the purchase price of such property or to secure any obligation incurred solely for the purpose of financing the acquisition of such property, (ii) Liens existing on such property at the time of its acquisition (other than any such Lien created in contemplation of such acquisition unless permitted by the preceding clause (i)), (iii) Liens granted under the Mortgage and "excepted encumbrances" as defined in the Mortgage, (iv) Liens granted in connection with any financing arrangement for the purchase of nuclear fuel or the financing of pollution control facilities, limited to the fuel or facilities so purchased or acquired, (v) Liens arising in connection with sales or transfers of, or financing secured by, accounts receivable or related contracts, (vi) Liens securing the Borrower's notes collateralized solely by mortgage bonds of the Borrower issued under the terms of the Mortgage, (vii) Liens arising in connection with sale and leaseback transactions, but only to the extent (x) the proceeds received by the Borrower or such Principal Subsidiary from such sale shall immediately be applied to retire mortgage bonds of the Borrower issued under the terms of the Mortgage, or (y) the aggregate purchase price of assets sold pursuant to such sale and leaseback transactions where such proceeds are not so applied shall not exceed $1,000,000,000, (viii) Liens granted by a Special Purpose Subsidiary to secure Nonrecourse Transition Bond Debt of such Special Purpose Subsidiary, and (ix) Liens, other than those described in clauses (i) through (viii) of this subsection granted by the Borrower or any of its Principal Subsidiaries in the ordinary course of business securing Debt of the Borrower and its Principal Subsidiaries in an amount not to exceed $50,000,000 in the aggregate at any one time outstanding. (b) Mergers and Consolidations; Disposition of Assets. Merge with or into or consolidate with or into, or sell, assign, lease or otherwise dispose of (whether in one transaction or in a series of transactions) all or substantially all of its assets (whether now owned or hereafter acquired) to any Person or permit any Principal Subsidiary to do so, except that (i) the Borrower or any Principal Subsidiary may merge with or into or consolidate with or transfer assets to any other Principal Subsidiary, (ii) any Principal Subsidiary may merge with or into or consolidate with or transfer assets to the Borrower and (iii) the Borrower may merge with or into or consolidate with or transfer assets to any other Person; provided in each case, immediately thereafter in giving effect thereto, no Event of Default or event that would, with the giving of notice or the passage of time or both constitute an Event of Default shall have occurred and be continuing and (A) in the case of any such merger, consolidation or transfer of assets to which the Borrower is a party, either (x) the Borrower shall be the surviving corporation or (y) the surviving corporation shall be an Eligible Successor and shall have assumed all of the obligations of the Borrower under this Agreement and the Notes pursuant to a written instrument in form and substance satisfactory to the Administrative Agent and (B) subject to clause (A) above, in the case of any such merger to which a Principal Subsidiary is a party, a Principal Subsidiary shall be the surviving corporation. (c) Financial Covenant. Permit Consolidated Adjusted Total Debt to exceed 65% of Consolidated Adjusted Total Capitalization at any time. (d) Continuation of Businesses. (i) Generation Business. (A) Cease to own (through the Borrower or wholly-owned Subsidiaries) the business of generating electricity, or (B) reduce the net installed electric generating capacity (summer rating) of the electricity generation business owned by the Borrower and its wholly-owned Subsidiaries taken as a whole to less than 7821 Megawatts. (ii) Distribution, Transmission and Gas Businesses. Cease to own (directly by the Borrower, and not through Subsidiaries) the business of distributing electricity to end-users, the business of transmitting electricity, or the businesses of transmitting and distributing natural gas, each substantially as conducted by the Borrower as of the date of -26- this Agreement (and the Borrower warrants that as of the date of this Agreement substantially all of such businesses conducted by the Borrower on a consolidated basis, and the assets relating thereto, are operated and owned by the Borrower directly and not through Subsidiaries). ARTICLE VI EVENTS OF DEFAULT SECTION 6.01. Events of Default. If any of the following events ("Events of Default") shall occur and be continuing: (a) The Borrower shall fail to pay any principal of any Advance when the same becomes due and payable, or interest thereon or any other amount payable under this Agreement or any of the Notes within three Business Days after the same becomes due and payable; or (b) Any representation or warranty made by the Borrower herein or by the Borrower (or any of its officers) pursuant to the terms of this Agreement shall prove to have been incorrect or misleading in any material respect when made; or (c) The Borrower shall fail to perform or observe (i) any term, covenant or agreement contained in Section 5.02, Section 5.01(a)(vii) or Section 5.01(b)(i), or (ii) any other term, covenant or agreement contained in this Agreement on its part to be performed or observed if the failure to perform or observe such other term, covenant or agreement shall remain unremedied for 30 days after written notice thereof shall have been given to the Borrower by the Administrative Agent (which notice shall be given by the Administrative Agent at the written request of any Lender); or (d) The Borrower or any Principal Subsidiary shall fail to pay any principal of or premium or interest on any Debt that is outstanding in a principal amount in excess of $50,000,000 in the aggregate (but excluding Debt evidenced by the Notes and Nonrecourse Transition Bond Debt) of the Borrower or such Principal Subsidiary (as the case may be) when the same becomes due and payable (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise), and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such Debt; or any other event shall occur or condition shall exist under any agreement or instrument relating to any such Debt and shall continue after the applicable grace period, if any, specified in such agreement or instrument, if the effect of such event or condition is to accelerate, or to permit the acceleration of, the maturity of such Debt; or any such Debt shall be declared to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment), prior to the stated maturity thereof, other than any acceleration of any Debt secured by equipment leases or fuel leases of the Borrower or a Principal Subsidiary as a result of the occurrence of any event requiring a prepayment (whether or not characterized as such) thereunder, which prepayment will not result in a Material Adverse Change; or (e) The Borrower or any Principal Subsidiary (other than a Special Purpose Subsidiary) shall generally not pay its debts as such debts become due, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against the Borrower or any Principal Subsidiary (other than a Special Purpose Subsidiary) seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, custodian or other similar official for it or for any substantial part of its property and, in the case of any such proceeding instituted against it (but not instituted by it), either such proceeding shall remain undismissed or unstayed for a period of 60 days, or any of the actions sought in such proceeding (including, without limitation, the entry of an order for relief against, or the -27- appointment of a receiver, trustee, custodian or other similar official for, it or for any substantial part of its property,) shall occur; or the Borrower or any Principal Subsidiary (other than a Special Purpose Subsidiary) shall take any corporate action to authorize or to consent to any of the actions set forth above in this subsection (e); or (f) One or more judgments or orders for the payment of money in an aggregate amount exceeding $50,000,000 (excluding any such judgments or orders which are fully covered by insurance, subject to any customary deductible, and under which the applicable insurance carrier has acknowledged such full coverage in writing) shall be rendered against the Borrower or any Principal Subsidiary and either (i) enforcement proceedings shall have been commenced by any creditor upon such judgment or order or (ii) there shall be any period of 30 consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; or (g) (i) any Reportable Event that the Majority Lenders determine in good faith might constitute grounds for the termination of any Plan or for the appointment by the appropriate United States District Court of a trustee to administer a Plan shall have occurred and be continuing 30 days after written notice to such effect shall have been given to the Borrower by the Administrative Agent or (ii) any Plan shall be terminated, or (iii) a Trustee shall be appointed by an appropriate United States District Court to administer any Plan or (iv) the PBGC shall institute proceedings to terminate any Plan or to appoint a trustee to administer any Plan; provided, however that on the date of any event described in clauses (i) through (iv) above the Unfunded Liabilities of such Plan exceed $20,000,000; or (h) any "Event of Default" shall occur under the Revolving Credit Agreement; then, and in any such event, the Administrative Agent (i) shall at the request, or may with the consent, of the Majority Lenders, by notice to the Borrower, declare the respective Commitments of the Lenders to be terminated, whereupon the same shall forthwith terminate, and (ii) shall at the request, or may with the consent, of the Majority Lenders, by notice to the Borrower, declare the principal amount outstanding under the Notes, all interest thereon and all other amounts payable under this Agreement to be forthwith due and payable, whereupon the principal amount outstanding under the Notes, all such interest and all such amounts shall become and be forthwith due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by the Borrower; provided, however, that in the event of an actual or deemed entry of an order for relief with respect to the Borrower or any Principal Subsidiary under the Federal Bankruptcy Code, (A) the obligation of each Lender to make Advances shall automatically be terminated and (B) the principal amount outstanding under the Notes, all such interest and all such amounts shall automatically and immediately become due and payable, without presentment, demand, protest or any notice of any kind, all of which are hereby expressly waived by the Borrower. ARTICLE VII THE AGENTS SECTION 7.01. Authorization and Action. Each Lender hereby appoints and authorizes the Administrative Agent to take such action as administrative agent on its behalf and to exercise such powers under this Agreement as are delegated to the Administrative Agent by the terms hereof, together with such powers as are reasonably incidental thereto. As to any matters not expressly provided for by this Agreement (including, without limitation, enforcement or collection of the Notes), the Administrative Agent shall not be required to exercise any discretion or take any action, but shall be required to act or to refrain from acting (and shall be fully protected in so acting or refraining from acting) upon the instructions of the Majority Lenders, and such instructions shall be binding upon all Lenders and all holders of Notes; provided, however, that the Administrative Agent shall not be required to take any action which exposes the -28- Administrative Agent to personal liability or which is contrary to this Agreement or applicable law. The Administrative Agent agrees to give to each Lender prompt notice of each notice given to it by the Borrower pursuant to the terms of this Agreement. SECTION 7.02. Agents' Reliance, Etc. Neither the Administrative Agent nor any of its directors, officers, agents or employees shall be liable for any action taken or omitted to be taken by it or them under or in connection with this Agreement, except for its or their respective own gross negligence or willful misconduct. Without limitation of the generality of the foregoing: (i) the Administrative Agent may treat the payee of any Note as the holder thereof until the Administrative Agent receives and accepts an Assignment and Acceptance entered into by the Lender which is the payee of such Note, as assignor, and an Eligible Assignee, as assignee, as provided in Section 8.07; (ii) the Administrative Agent may consult with legal counsel (including counsel for the Borrower), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts; (iii) the Administrative Agent makes no warranty or representation to any Lender and shall not be responsible to any Lender for any statements, warranties or representations (whether written or oral) made in or in connection with this Agreement; (iv) the Administrative Agent shall not have any duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of this Agreement on the part of the Borrower or to inspect the property (including the books and records) of the Borrower; (v) the Administrative Agent shall not be responsible to any Lender for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other instrument or document furnished pursuant hereto; and (vi) the Administrative Agent shall not incur any liability under or in respect of this Agreement by acting upon any notice, consent, certificate or other instrument or writing (which may be by telecopier, telegram, cable or telex) believed by it to be genuine and signed or sent by the proper party or parties. SECTION 7.03. Agents and Affiliates. With respect to its Commitment, Advances and Notes, each of First Chicago and Citibank, N.A. shall have the same rights and powers under this Agreement as any other Lender and may exercise the same as though it were not an Agent; and the term "Lender" or "Lenders" shall, unless otherwise expressly indicated, include each of First Chicago and Citibank, N.A. in its individual capacity. Each of First Chicago and Citibank, N.A. and their affiliates may accept deposits from, lend money to, act as trustee under indentures of, and generally engage in any kind of business with, the Borrower, any of its subsidiaries and any Person who may do business with or own securities of the Borrower or any such subsidiary, all as if it were not an Agent and without any duty to account therefor to the Lenders. SECTION 7.04. Lender Credit Decision. Each Lender acknowledges that it has, independently and without reliance upon the Administrative Agent or any other Lender and based on the financial statements referred to in Section 4.01(e) and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon the Administrative Agent or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement. SECTION 7.05. Indemnification. The Lenders agree to indemnify each Agent (to the extent not reimbursed by the Borrower), ratably according to the respective principal amounts of the Notes then held by each of the Lenders (or if no Notes are at the time outstanding, ratably according to the respective amounts of their Commitments), from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by, or asserted against any such Agent in any way relating to or arising out of this Agreement or any action taken or omitted by any such Agent under this Agreement, provided that no Lender shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from such Agent's gross negligence or willful misconduct. Without limitation of the foregoing, each Lender agrees to reimburse each such Agent promptly upon demand for its ratable -29- share of any out-of-pocket expenses (including reasonable counsel fees) incurred by such Agent in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement, to the extent that such expenses are reimbursable by the Borrower but for which such Agent is not reimbursed by the Borrower. SECTION 7.06. Successor Administrative Agent. The Administrative Agent may resign at any time by giving written notice thereof to the Lenders and the Borrower and may be removed at any time with or without cause by the Majority Lenders. Upon any such resignation or removal, the Majority Lenders shall have the right to appoint a successor Administrative Agent. If no successor Administrative Agent shall have been so appointed by the Majority Lenders, and shall have accepted such appointment, within 30 days after the retiring Administrative Agent's giving of notice of resignation or the Majority Lenders' removal of the retiring Administrative Agent, then the retiring Administrative Agent may, on behalf of the Lenders, appoint a successor Administrative Agent, which shall be a commercial bank described in clause (i) or (ii) of the definition of "Eligible Assignee" and having a combined capital and surplus of at least $150,000,000. Upon the acceptance of any appointment as Administrative Agent hereunder by a successor Administrative Agent, such successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations under this Agreement. After any retiring Administrative Agent's resignation or removal hereunder as Administrative Agent, the provisions of this Article VII shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent under this Agreement. Notwithstanding the foregoing, if no Event of Default, and no event that with the giving of notice or the passage of time, or both, would constitute an Event of Default, shall have occurred and be continuing, then no successor Administrative Agent shall be appointed under this Section 7.06 without the prior written consent of the Borrower, which consent shall not be unreasonably withheld or delayed. SECTION 7.07. Documentation Agent and Lead Arranger. The titles "Documentation Agent" and "Lead Arranger" are purely honorific, and the "Documentation Agent" and the "Lead Arranger" shall have no duties or responsibilities in such capacity. ARTICLE VIII MISCELLANEOUS SECTION 8.01. Amendments, Etc. No amendment or waiver of any provision of this Agreement or the Notes, nor consent to any departure by the Borrower therefrom, shall in any event be effective unless the same shall be in writing and signed by the Majority Lenders, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that no amendment, waiver or consent shall, unless in writing and signed by all the Lenders (other than any Lender that is the Borrower or an Affiliate of the Borrower), do any of the following: (a) waive any of the conditions specified in Section 3.01 or 3.02, (b) increase the Commitments of the Lenders or subject the Lenders to any additional obligations, (c) reduce the principal of, or interest on, the Notes or any fees or other amounts payable hereunder, (d) postpone any date fixed for any payment of principal of, or interest on, the Notes or any fees or other amounts payable hereunder, (e) change the percentage of the Commitments or of the aggregate unpaid principal amount of the Notes, or the number of Lenders, that shall be required for the Lenders or any of them to take any action hereunder, or (f) amend this Section 8.01; provided, further, that no amendment, waiver or consent shall, unless in writing and signed by the Administrative Agent, in addition to the Lenders required above to take such action, affect the rights or duties of the Administrative Agent under this Agreement or any Note. -30- SECTION 8.02. Notices, Etc. All notices and other communications provided for hereunder shall be in writing (including telecopier, telegraphic, telex or cable communication) and mailed, telecopied, telegraphed, telexed, cabled or delivered, if to the Borrower, at its address at 2301 Market Street, Philadelphia, Pennsylvania 19101, Attention: Vice President-Finance and Treasurer, S21-1, Telecopy: (215) 557-9885; if to any Bank, at its Domestic Lending Office specified opposite its name on Schedule I hereto; if to any other Lender, at its Domestic Lending Office specified in the Assignment and Acceptance or Additional Lender Supplement pursuant to which it became a Lender; and if to the Administrative Agent, at its address at One First National Plaza, Mail Suite 0634, 1FPN-10, Chicago, Illinois 60670, Attention: Mr. Ron Cromey, Telecopy: (312) 732-4840 or, as to each party, at such other address as shall be designated by such party in a written notice to the other parties. All such notices and communications shall, when mailed, telecopied, telegraphed, telexed or cabled, be effective when deposited in the mails, telecopied, delivered to the telegraph company, confirmed by telex answerback or delivered to the cable company, respectively, except that notices and communications to the Administrative Agent pursuant to Article II or VII shall not be effective until received by the Administrative Agent. SECTION 8.03. No Waiver; Remedies. No failure on the part of any Lender or the Administrative Agent to exercise, and no delay in exercising, any right hereunder or under any Note shall operate as a waiver thereof; nor shall any single or partial exercise of any such right preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. SECTION 8.04. Costs and Expenses; Indemnification. (a) The Borrower agrees to pay on demand all costs and expenses incurred by the Administrative Agent and the Lead Arranger in connection with the preparation, execution, delivery, administration, syndication, modification and amendment of this Agreement, the Notes and the other documents to be delivered hereunder, including, without limitation, the reasonable fees, internal charges and out-of-pocket expenses of counsel (including, without limitation, in-house counsel) for such Agents with respect thereto and with respect to advising such Agents as to their respective rights and responsibilities under this Agreement. The Borrower further agrees to pay on demand all costs and expenses, if any (including, without limitation, counsel fees and expenses of outside counsel and of internal counsel), incurred by the any Agent or any Lender in connection with the collection and enforcement (whether through negotiations, legal proceedings or otherwise) of this Agreement, the Notes and the other documents to be delivered hereunder, including, without limitation, reasonable counsel fees and expenses in connection with the enforcement of rights under this Section 8.04(a). (b) If any payment of principal of, or Conversion of any Eurodollar Rate Advance is made other than on the last day of the Interest Period for such Advance, as a result of a payment or Conversion pursuant to Section 2.09 or 2.12 or acceleration of the maturity of the Notes pursuant to Section 6.01 or for any other reason, the Borrower shall, upon demand by any Lender (with a copy of such demand to the Administrative Agent), pay to the Administrative Agent for the account of such Lender any amounts required to compensate such Lender for any additional losses, costs or expenses which it may reasonably incur as a result of such payment or Conversion, including, without limitation, any loss, cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by any Lender to fund or maintain such Advance. (c) The Borrower hereby agrees to indemnify and hold each Lender, each Agent and each of their respective Affiliates, officers, directors and employees (each, an "Indemnified Person") harmless from and against any and all claims, damages, losses, liabilities, costs or expenses (including reasonable attorney's fees and expenses, whether or not such Indemnified Person is named as a party to any proceeding or is otherwise subjected to judicial or legal process arising from any such proceeding) that any of them may pay or incur arising out of or relating to this Agreement, the Notes or the transactions contemplated thereby, or the use by the Borrower or any of its subsidiaries of the proceeds of any Advance, provided that the Borrower shall not be liable for any portion of such claims, damages, losses, liabilities, costs or expenses resulting from such -31- Indemnified Person's gross negligence or willful misconduct. The Borrower's obligations under this Section 8.04(c) shall survive the repayment of all amounts owing to the Lenders and the Administrative Agent under this Agreement and the Notes and the termination of the Commitments. If and to the extent that the obligations of the Borrower under this Section 8.04(c) are unenforceable for any reason, the Borrower agrees to make the maximum contribution to the payment and satisfaction thereof which is permissible under applicable law. SECTION 8.05. Right of Set-off. Upon (i) the occurrence and during the continuance of any Event of Default and (ii) the making of the request or the granting of the consent specified by Section 6.01 to authorize the Administrative Agent to declare the Notes due and payable pursuant to the provisions of Section 6.01, each Lender is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Lender to or for the credit or the account of the Borrower against any and all of the obligations of the Borrower now or hereafter existing under this Agreement and any Note held by such Lender, whether or not such Lender shall have made any demand under this Agreement or such Note and although such obligations may be unmatured. Each Lender agrees promptly to notify the Borrower after any such set-off and application made by such Lender, provided that the failure to give such notice shall not affect the validity of such set-off and application. The rights of each Lender under this Section 8.05 are in addition to other rights and remedies (including, without limitation, other rights of set-off) that such Lender may have. SECTION 8.06. Binding Effect. This Agreement shall become effective when it shall have been executed by the Borrower and the Agents and when the Administrative Agent shall have been notified by each Bank that such Bank has executed it and thereafter shall be binding upon and inure to the benefit of the Borrower, the Agents and each Lender and their respective successors and assigns, except that the Borrower shall not have the right to assign its rights hereunder or any interest herein without the prior written consent of the Lenders. SECTION 8.07. Assignments and Participations. (a) Each Lender may, with the prior written consent of the Borrower and the Administrative Agent (neither of which consents shall be unreasonably withheld or delayed), and if demanded by the Borrower pursuant to subsection (g) hereof shall to the extent required by such subsection (g), assign to one or more banks or other entities all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Commitment, the Advances owing to it and the Note or Notes held by it); provided, however, that (i) each such assignment shall be of a constant, and not a varying, percentage of all of the assigning Lender's rights and obligations under this Agreement, (ii) the amount of the Commitment of the assigning Lender being assigned pursuant to each such assignment (determined as of the date of the Assignment and Acceptance with respect to such assignment) shall in no event be less than $10,000,000 or, if less, the entire amount of such Lender's Commitment, and shall be an integral multiple of $1,000,000 or such Lender's entire Commitment, (iii) each such assignment shall be to an Eligible Assignee, (iv) the parties to each such assignment shall execute and deliver to the Administrative Agent, for its acceptance and recording in the Register, an Assignment and Acceptance, together with any Note or Notes subject to such assignment and a processing and recordation fee of $3,500 (which shall be payable by one or more of the parties to the Assignment and Acceptance, and not by the Borrower, and shall not be payable if the assignee is a Bank, any Affiliate of any Bank or the Federal Reserve Bank), and (v) the consent of the Borrower shall not be required after the occurrence and during the continuance of any Event of Default. Upon such execution, delivery, acceptance and recording, from and after the effective date specified in each Assignment and Acceptance, (x) the assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, have the rights and obligations of a Lender hereunder and (y) the Lender assignor thereunder shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights and be released from its obligations under this Agreement and, in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender's rights and obligations under this Agreement, such Lender shall cease to -32- be a party hereto (although an assigning Lender shall continue to be entitled to indemnification pursuant to Section 8.04(c)). Notwithstanding anything contained in this Section 8.07(a) to the contrary, (A) the consent of the Borrower and the Administrative Agent shall not be required with respect to any assignment by any Lender to an Affiliate of such Lender or to another Lender and (B) any Lender may at any time, without the consent of the Borrower or the Administrative Agent, and without any requirement to have an Assignment and Acceptance executed, assign all or any part of its rights under this Agreement and its Notes to a Federal Reserve Bank, provided that such assignment does not release the transferor Lender from any of its obligations hereunder. (b) By executing and delivering an Assignment and Acceptance, the Lender assignor thereunder and the assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (i) other than as provided in such Assignment and Acceptance, such assigning Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other instrument or document furnished pursuant hereto; (ii) such assigning Lender makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrower or the performance or observance by the Borrower of any of its obligations under this Agreement or any other instrument or document furnished pursuant hereto; (iii) such assignee confirms that it has received a copy of this Agreement, together with copies of the financial statements referred to in Section 4.01(e) and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (iv) such assignee will, independently and without reliance upon the Administrative Agent, such assigning Lender or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (v) such assignee confirms that it is an Eligible Assignee; (vi) such assignee appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to the Administrative Agent by the terms hereof, together with such powers as are reasonably incidental thereto; and (vii) such assignee agrees that it will perform in accordance with their terms all of the obligations which by the terms of this Agreement are required to be performed by it as a Lender. (c) The Administrative Agent shall maintain at its address referred to in Section 8.02 a copy of each Assignment and Acceptance and each Additional Lender Supplement delivered to and accepted by it and a register for the recordation of the names and addresses of the Lenders and the Commitment of, and principal amount of the Advances owing to, each Lender from time to time (the "Register"). The entries in the Register shall be conclusive and binding for all purposes, absent manifest error, and the Borrower, the Administrative Agent and the Lenders may treat each Person whose name is recorded in the Register as a Lender hereunder for all purposes of this Agreement. The Register shall be available for inspection by the Borrower or any Lender at any reasonable time and from time to time upon reasonable prior notice. (d) Upon its receipt of an Assignment and Acceptance executed by an assigning Lender and an assignee representing that it is an Eligible Assignee, together with any Note or Notes subject to such assignment, the Administrative Agent shall, if such Assignment and Acceptance has been completed and is in substantially the form of Exhibit C hereto, (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register and (iii) give prompt notice thereof to the Borrower. Within five Business Days after its receipt of such notice, the Borrower, at its own expense, shall execute and deliver to the Administrative Agent in exchange for the surrendered Note or Notes a new Note to the order of such Eligible Assignee in an amount equal to the Commitment assumed by it pursuant to such Assignment and Acceptance and, if the assigning Lender has retained a Commitment hereunder, a new Note to the order of the assigning Lender in an amount equal to the Commitment retained by it hereunder. Such new Note or Notes shall be in an aggregate principal amount equal to the aggregate principal amount of such surrendered Note or Notes, shall be dated the effective date of such Assignment and Acceptance and shall otherwise be in substantially the form of Exhibit A hereto. -33- (e) Each Lender may sell participations to one or more banks or other entities (each, a "Participant") in or to all or a portion of its rights and/or obligations under this Agreement (including, without limitation, all or a portion of its Commitment, the Advances owing to it and the Note or Notes held by it); provided, however, that (i) such Lender's obligations under this Agreement (including, without limitation, its Commitment to the Borrower hereunder) shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) such Lender shall remain the holder of any such Note for all purposes of this Agreement, (iv) the Borrower, the Administrative Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement and (v) such Lender shall retain the sole right to approve, without the consent of any Participant, any amendment, modification or waiver of any provision of this Agreement or the Note or Notes held by such Lender, other than any such amendment, modification or waiver with respect to any Advance or Commitment in which such Participant has an interest that forgives principal, interest or fees or reduces the interest rate or fees payable with respect to any such Advance or Commitment, postpones any date fixed for any regularly scheduled payment of principal of, or interest or fees on, any such Advance or Commitment, releases any guarantor of any such Advance or releases any substantial portion of collateral, if any, securing any such Advance. (f) Any Lender may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 8.07, disclose to the assignee or participant or proposed assignee or participant, any information relating to the Borrower furnished to such Lender by or on behalf of the Borrower; provided that, prior to any such disclosure, the assignee or participant or proposed assignee or participant shall agree to preserve the confidentiality of any confidential information relating to the Borrower received by it from such Lender (subject to customary exceptions regarding regulatory requirements, compliance with legal process and other requirements of law). (g) If (i) any Lender shall make demand for payment under Section 2.11(a), 2.11(b) or 2.14, or (ii) shall deliver any notice to the Administrative Agent pursuant to Section 2.12 resulting in the suspension of certain obligations of the Lenders with respect to Eurodollar Rate Advances or (iii) shall fail to consent to, or shall revoke its consent to, the extension of any Termination Date pursuant to Section 2.16 or (iv) shall fail to consent to, or shall revoke its consent to, any extension of the "Termination Date" (as defined in the Revolving Credit Agreement) requested by the Borrower pursuant to Section 2.16 of the Revolving Credit Agreement as originally constituted (or any successor provision of similar import), then (in the case of clause (i)) within 60 days after such demand (if, but only if, such payment demanded under Section 2.11(a), 2.11(b) or 2.14 has been made by the Borrower), or (in the case of clause (ii)) within 60 days after such notice (if such suspension is still in effect), or (in the case of clauses (iii) and (iv)) no later than 10 days prior to the then effective Termination Date, as the case may be, the Borrower may demand that such Lender assign in accordance with this Section 8.07 to one or more Eligible Assignees designated by the Borrower and reasonably acceptable to the Administrative Agent all (but not less than all) of such Lender's Commitment and the Advances owing to it within the next succeeding 30 days (in the case of clause (i) or clause (ii)), or within the next succeeding 5 days (in the case of clauses (iii) and (iv)) . If any such Eligible Assignee designated by the Borrower shall fail to consummate such assignment on terms acceptable to such Lender, or if the Borrower shall fail to designate any such Eligible Assignee for all of such Lender's Commitment or Advances, then such Lender may (but shall not be required to) assign such Commitment and Advances to any other Eligible Assignee in accordance with this Section 8.07 during such period. (h) Notwithstanding anything to the contrary contained herein, any Lender (a "Granting Bank") may grant to a special purpose funding vehicle (an "SPC"), identified as such in writing from time to time by the Granting Bank to the Administrative Agent and the Borrower, the option to provide to the Borrower all or any part of any Advance that such Granting Bank would otherwise be -34- obligated to make to the Borrower pursuant to this Agreement; provided that (i) nothing herein shall constitute a commitment by any SPC to make any Advance, (ii) if an SPC elects not to exercise such option or otherwise fails to provide all or any part of such Advance, the Granting Bank shall be obligated to make such Advance pursuant to the terms hereof. The making of an Advance by an SPC hereunder shall utilize the Commitment of the Granting Bank to the same extent, and as if, such Advance were made by such Granting Bank. Each party hereto hereby agrees that no SPC shall be liable for any indemnity or similar payment obligation under this Agreement (all liability for which shall remain with the Granting Bank). In furtherance of the foregoing, each party hereto hereby agrees (which agreement shall survive the termination of this Agreement) that, prior to the date that is one year and one day after the payment in full of all outstanding commercial paper or other senior indebtedness of any SPC, it will not institute against, or join any other person in instituting against, such SPC any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings under the laws of the United States or any State thereof. In addition, notwithstanding anything to the contrary contained in this Section 8.07(h), any SPC may (i) with notice to, but without the prior written consent of, the Borrower and the Administrative Agent and without paying any processing fee therefor, assign all or a portion of its interests in any Advances to the Granting Bank or to any financial institutions (consented to by the Borrower and Administrative Agent) providing liquidity and/or credit support to or for the account of such SPC to support the funding or maintenance of Advances and (ii) disclose on a confidential basis any non-public information relating to its Advances to any rating agency, commercial paper dealer or provider of any surety, guarantee or credit or liquidity enhancement to such SPC. This Section may not be amended without the written consent of the Granting Bank. SECTION 8.08. Governing Law. THIS AGREEMENT AND THE NOTES SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA. SECTION 8.09. Consent to Jurisdiction. THE BORROWER HEREBY IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF THE COURTS OF THE COMMONWEALTH OF PENNSYLVANIA AND ANY UNITED STATES DISTRICT COURT SITTING IN THE COMMONWEALTH OF PENNSYLVANIA IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE NOTES AND THE BORROWER HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT AND IRREVOCABLY WAIVES ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT OR THAT SUCH COURT IS AN INCONVENIENT FORUM. NOTHING HEREIN SHALL LIMIT THE RIGHT OF THE ADMINISTRATIVE AGENT OR ANY LENDER TO BRING PROCEEDINGS AGAINST THE BORROWER IN THE COURTS OF ANY OTHER JURISDICTION. SECTION 8.10. Execution in Counterparts; Integration. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. This Agreement constitutes the entire agreement and understanding among the parties hereto and supersedes all prior and contemporaneous agreements and understandings, oral or written, relating to the subject matter hereof. [Remainder of the page intentionally left blank] -35- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. [SEAL] PECO ENERGY COMPANY PECO ENERGY COMPANY By /s/ J. B. Mitchell -------------------------------------------- Name: J. B. Mitchell Title: Vice President - Finance and Treasurer /s/ Todd D. Cutler - ------------------- Todd D. Cutler Assistant Secretary THE FIRST NATIONAL BANK OF CHICAGO, as Administrative Agent By /s/ Kenneth J. Bauer ------------------------------------ Name: Kenneth J. Bauer Title: Authorized Agent CITIBANK, N.A., as Documentation Agent By: /s/ Robert J. Harrity, Jr. ---------------------------------------- Title: Managing Director BANC ONE CAPITAL MARKETS, INC., as Lead Arranger By /s/ Kenneth J. Bauer ------------------------------------ Name: Kenneth J. Bauer Title: Vice President/Senior Banker This is a signature page to the 364-Day Credit Agreement, dated as of September 15, 1999, among PECO Energy Company, as Borrower, the banks named therein, as Banks, The First National Bank of Chicago, as Administrative Agent, Citibank, N.A., as Documentation Agent, and Banc One Capital Markets, Inc., as Lead Arranger. -36- THE BANKS Commitment $60,000,000 THE FIRST NATIONAL BANK OF CHICAGO, as Administrative Agent and as Bank By /s/ Kenneth J. Bauer ----------------------------------- Name: Kenneth J. Bauer Title: Authorized Agent This is a signature page to the 364-Day Credit Agreement, dated as of September 15, 1999, among PECO Energy Company, as Borrower, the banks named therein, as Banks, The First National Bank of Chicago, as Administrative Agent, Citibank, N.A., as Documentation Agent, and Banc One Capital Markets, Inc., as Lead Arranger. -37- Commitment $60,000,000 CITIBANK, N.A., as Documentation Agent and as Bank By: /s/ Robert J. Harrity, Jr. -------------------------------- Name: Robert J. Harrity, Jr. Title: Managing Director This is a signature page to the 364-Day Credit Agreement, dated as of September 15, 1999, among PECO Energy Company, as Borrower, the banks named therein, as Banks, The First National Bank of Chicago, as Administrative Agent, Citibank, N.A., as Documentation Agent, and Banc One Capital Markets, Inc., as Lead Arranger. -38- Commitment $50,000,000 BANK OF AMERICA, N.A. as Bank By /s/ Lawrence Saunders, Jr. ------------------------------- Name: Lawrence Saunders, Jr. Title: Managing Director This is a signature page to the 364-Day Credit Agreement, dated as of September 15, 1999, among PECO Energy Company, as Borrower, the banks named therein, as Banks, The First National Bank of Chicago, as Administrative Agent, Citibank, N.A., as Documentation Agent, and Banc One Capital Markets, Inc., as Lead Arranger. -39- Commitment $50,000,000 THE BANK OF NEW YORK, as Bank By /s/ John N. Watt ------------------------------- Name: John N. Watt Title: Vice President This is a signature page to the 364-Day Credit Agreement, dated as of September 15, 1999, among PECO Energy Company, as Borrower, the banks named therein, as Banks, The First National Bank of Chicago, as Administrative Agent, Citibank, N.A., as Documentation Agent, and Banc One Capital Markets, Inc., as Lead Arranger. -40- Commitment $50,000,000 CREDIT SUISSE FIRST BOSTON, as Bank By /s/ Douglas E. Maher ------------------------------ Name: Douglas E. Maher Title: Vice President This is a signature page to the 364-Day Credit Agreement, dated as of September 15, 1999, among PECO Energy Company, as Borrower, the banks named therein, as Banks, The First National Bank of Chicago, as Administrative Agent, Citibank, N.A., as Documentation Agent, and Banc One Capital Markets, Inc., as Lead Arranger. -41- Commitment $50,000,000 FIRST UNION NATIONAL BANK, as Bank By /s/ Joe K. Dancey ------------------------------- Name: Joe K. Dancey Title: Vice President This is a signature page to the 364-Day Credit Agreement, dated as of September 15, 1999, among PECO Energy Company, as Borrower, the banks named therein, as Banks, The First National Bank of Chicago, as Administrative Agent, Citibank, N.A., as Documentation Agent, and Banc One Capital Markets, Inc., as Lead Arranger. -42- Commitment $50,000,000 MELLON BANK, N.A., as Bank By /s/ Mark W. Rogers ---------------------------- Name: Mark W. Rogers Title: Vice President This is a signature page to the 364-Day Credit Agreement, dated as of September 15, 1999, among PECO Energy Company, as Borrower, the banks named therein, as Banks, The First National Bank of Chicago, as Administrative Agent, Citibank, N.A., as Documentation Agent, and Banc One Capital Markets, Inc., as Lead Arranger. -43- Commitment $25,000,000 UNION BANK OF CALIFORNIA, N.A., as Bank By /s/ Robert J. Cole ------------------------------ Name: Robert J. Cole Title: Vice President This is a signature page to the 364-Day Credit Agreement, dated as of September 15, 1999, among PECO Energy Company, as Borrower, the banks named therein, as Banks, The First National Bank of Chicago, as Administrative Agent, Citibank, N.A., as Documentation Agent, and Banc One Capital Markets, Inc., as Lead Arranger. -44- Commitment $25,000,000 TORONTO DOMINION (TEXAS), INC., as Bank By /s/ Jimmy Simien --------------------------------- Name: Jimmy Simien Title: Vice President This is a signature page to the 364-Day Credit Agreement, dated as of September 15, 1999, among PECO Energy Company, as Borrower, the banks named therein, as Banks, The First National Bank of Chicago, as Administrative Agent, Citibank, N.A., as Documentation Agent, and Banc One Capital Markets, Inc., as Lead Arranger. -45- Commitment $17,500,000 COMMERCE BANK, N.A., as Bank By /s/ Kurt J. Fuoti ------------------------------- Name: Kurt J. Fuoti Title: Vice President This is a signature page to the 364-Day Credit Agreement, dated as of September 15, 1999, among PECO Energy Company, as Borrower, the banks named therein, as Banks, The First National Bank of Chicago, as Administrative Agent, Citibank, N.A., as Documentation Agent, and Banc One Capital Markets, Inc., as Lead Arranger. -46- Commitment $12,500,000 BARCLAYS BANK PLC, as Bank By /s/ Sydney G. Dennis --------------------------------- Name: Sydney G. Dennis Title: Director This is a signature page to the 364-Day Credit Agreement, dated as of September 15, 1999, among PECO Energy Company, as Borrower, the banks named therein, as Banks, The First National Bank of Chicago, as Administrative Agent, Citibank, N.A., as Documentation Agent, and Banc One Capital Markets, Inc., as Lead Arranger. -47- SCHEDULE I 364-Day Credit Agreement, dated as of September 15, 1999, among PECO Energy Company, as Borrower, the banks named therein, as Banks, The First National Bank of Chicago, as Administrative Agent, Citibank, N.A., as Documentation Agent, and Banc One Capital Markets, Inc., as Lead Arranger.
Domestic Eurodollar Name of Bank Lending Office Lending Office ------------ -------------- -------------- The First National Bank of One First National Plaza Same Chicago Mail Suite 0634, 1FNP-10 Chicago, IL 60670 Attn: Gwendolyn Watson Phone: (312) 732-4509 Fax: (312) 732-4840 The Bank of New York One Wall Street, 19th Floor Same Energy Industries Division New York, NY 10286 Attn: Theresa A. Foran Phone: (212) 635-7921 Fax: (212) 635-7923 Citibank, N.A. 399 Park Avenue Same 4th Floor, Zone 20 New York, NY 10043 Attn: Tracy Smith Phone: (302) 894-6098 Fax: (302) 894-6120 Credit Suisse First Boston 11 Madison Avenue Same 20th Floor New York, NY 10010-3629 Attn: Jenaro Sarasola Phone: (212) 322-1384 Fax: (212) 325-0593/0576 First Union National Bank 201 South College Street Same 24th Floor Charlotte, NC 28288-1183 Attn: Holly Benson Phone: (704) 383-0296 Fax: (704) 383-7999 Mellon Bank, N.A. Three Mellon Bank Center Room Same 2303 (Loan Administration) Pittsburgh, PA 15259-0003 Attn: Cathy Capp Phone: (412) 234-1870 Fax: (412) 236-2027, 2028
Union Bank of Energy Capital Services Same California, N.A. 445 S. Figueroa Street 20th Floor Los Angeles, CA 90071 Attn: Yolande C. Hollis Phone: (213) 236-6199 Fax: (213) 236-4096 Commerce Bank, N.A. 2005 Market Street Same One Commerce Square 2nd Floor Philadelphia, PA 19103 Attn: Kim Dunda AIM #200-01-35 Phone: (888) 751-9000 Ext. 8570 Fax: (856) 642-7704 Toronto Dominion (Texas) Inc. 909 Fannin, Suite 1700 Same Houston, TX 77010 Attn: Herbert Simien Phone: (713) 653-8242 Fax: (713) 951-9921 Barclays Bank PLC 222 Broadway Same New York, NY 10038 Attn: Marsha L. Hamlette Phone: (212) 412-4081 Fax: (212) 412-5306 Bank of America, N.A. 6610 Rockledge Drive Same 6th Floor Bethesda, MD 20817 Attn: Paula Kramp Phone: (301) 571-0713 Fax: (301) 571-0719
-2- EXHIBIT A FORM OF NOTE $____________________ Dated: [ ], 1999 FOR VALUE RECEIVED, the undersigned, PECO Energy Company, a Pennsylvania corporation (the "Borrower"), HEREBY PROMISES TO PAY to the order of (the "Lender") for the account of its Applicable Lending Office (such term and other capitalized terms herein being used as defined in the Credit Agreement referred to below) on [insert then effective Termination Date] the principal sum of U.S.$[amount of the Lender's Commitment in figures] or, if less, the aggregate principal amount of the Advances made by the Lender to the Borrower pursuant to the Credit Agreement outstanding on [insert then effective Termination Date]. The Borrower promises to pay interest on the unpaid principal amount of each Advance from the date of such Advance until such principal amount is paid in full, at such interest rates, and payable at such times, as are specified in the Credit Agreement. Both principal and interest are payable in lawful money of the United States of America to The First National Bank of Chicago, as Administrative Agent, at One First National Plaza, Chicago, Illinois 60670, in same day funds. Each Advance made by the Lender to the Borrower pursuant to the Credit Agreement, and all payments made on account of principal thereof, shall be recorded by the Lender and, prior to any transfer hereof, endorsed on the grid attached hereto which is part of this Promissory Note. This Promissory Note is one of the Notes referred to in, and is entitled to the benefits of, the 364-Day Credit Agreement, dated as of September 15, 1999 among PECO Energy Company, as Borrower, the banks named therein, as Banks, The First National Bank of Chicago, as Administrative Agent, Citibank, N.A., as Documentation Agent, and Banc One Capital Markets, Inc., as Lead Arranger (as amended, modified or supplemented from time to time, the "Credit Agreement"). The Credit Agreement, among other things, (i) provides for the making of Advances by the Lender to the Borrower from time to time in an aggregate amount not to exceed at any time outstanding the U.S. dollar amount first above mentioned, the indebtedness of the Borrower resulting from each such Advance being evidenced by this Promissory Note, and (ii) contains provisions for acceleration of the maturity hereof upon the happening of certain stated events and also for prepayments on account of principal hereof prior to the maturity hereof upon the terms and conditions therein specified. The Borrower hereby waives presentment, demand, protest and notice of any kind. No failure to exercise, and no delay in exercising, any rights hereunder on the part of the holder hereof shall operate as a waiver of such rights. THIS PROMISSORY NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA. PECO ENERGY COMPANY By_______________________________ Name: Title: -2- ADVANCES, MATURITIES, AND PAYMENTS OF PRINCIPAL
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EXHIBIT B NOTICE OF A BORROWING The First National Bank of Chicago, as Administrative Agent for the Lenders parties to the Credit Agreement referred to below One First National Plaza Chicago, Illinois 60670 [Date] Attention: Utilities Department North American Finance Group Ladies and Gentlemen: The undersigned, PECO Energy Company, refers to the 364-Day Credit Agreement, dated as of September 15, 1999, among PECO Energy Company, as Borrower, the banks named therein, as Banks, The First National Bank of Chicago, as Administrative Agent, Citibank, N.A., as Documentation Agent, and Banc One Capital Markets, Inc., as Lead Arranger (as amended, modified or supplemented from time to time, the "Credit Agreement"), and hereby gives you notice, irrevocably, pursuant to Section 2.02 of the Credit Agreement that the undersigned hereby requests a Borrowing under the Credit Agreement, and in that connection sets forth below the information relating to such Borrowing (the "Proposed Borrowing") as required by Section 2.02(a) of the Credit Agreement: (i) The Business Day of the Proposed Borrowing is _____, 19/20__. (ii) The Type of Advances to be made in connection with the Proposed Borrowing is [Base Rate Advances] [Eurodollar Rate Advances]. (iii) The aggregate amount of the Proposed Borrowing is $_______. (iv) The Interest Period for each Advance made as part of the Proposed Borrowing is [____days] [___ month[s]]. The undersigned hereby certifies that the following statements are true on the date hereof, and will be true on the date of the Proposed Borrowing: (A) the representations and warranties contained in Section 4.01 are correct, before and after giving effect to the Proposed Borrowing and to the application of the proceeds therefrom, as though made on and as of such date; and (B) no event has occurred and is continuing, or would result from such Proposed Borrowing or from the application of the proceeds therefrom, that constitutes an Event of Default or would constitute an Event of Default but for the requirement that notice be given or time elapse or both. Very truly yours, PECO ENERGY COMPANY By__________________________________________ Name: Title: -2- EXHIBIT C ASSIGNMENT AND ACCEPTANCE Dated _________, 19/20__ Reference is made to the 364-Day Credit Agreement, dated as of September 15, 1999 among PECO Energy Company, as Borrower, the banks named therein, as Banks, The First National Bank of Chicago, as Administrative Agent, Citibank, N.A., as Documentation Agent, and Banc One Capital Markets, Inc., as Lead Arranger (as amended, modified or supplemented from time to time, the "Credit Agreement"). Terms defined in the Credit Agreement are used herein with the same meaning. _____________ (the "Assignor") and _____________ (the "Assignee") agree as follows: 1. The Assignor hereby sells and assigns to the Assignee, and the Assignee hereby purchases and assumes from the Assignor, that interest in and to all of the Assignor's rights and obligations under the Credit Agreement as of the date hereof which represents the percentage interest specified on Schedule 1 of all outstanding rights and obligations under the Credit Agreement, including, without limitation, such interest in the Assignor's Commitment, the Advances owing to the Assignor, and the Note[s] held by the Assignor. After giving effect to such sale and assignment, the Assignee's Commitment and the amount of the Advances owing to the Assignee will be as set forth in Section 2 of Schedule 1. 2. The Assignor (i) represents and warrants that it is the legal and beneficial owner of the interest being assigned by it hereunder and that such interest is free and clear of any adverse claim; (ii) makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Credit Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Credit Agreement or any other instrument or document furnished pursuant thereto; (iii) makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrower or the performance or observance by the Borrower of any of its obligations under the Credit Agreement or any other instrument or document furnished pursuant thereto; and (iv) attaches the Note[s] referred to in paragraph 1 above and requests that the Administrative Agent exchange such Note[s] for a new Note payable to the order of the Assignee in an amount equal to the Commitment assumed by the Assignee pursuant hereto or new Notes payable to the order of the Assignee in an amount equal to the Commitment assumed by the Assignee pursuant hereto and the Assignor in an amount equal to the Commitment retained by the Assignor under the Credit Agreement, respectively as specified on Schedule 1 hereto. 3. The Assignee (i) confirms that it has received a copy of the Credit Agreement, together with copies of the financial statements referred to in Section 4.01 thereof and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Acceptance; (ii) agrees that it will, independently and without reliance upon the Administrative Agent, the Assignor or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Agreement; (iii) confirms that it is an Eligible Assignee; (iv) appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under the Credit Agreement as are delegated to the Administrative Agent by the terms thereof, together with such powers as are reasonably incidental thereto; (v) agrees that it will perform in accordance with their terms all of the obligations which by the terms of the Credit Agreement are required to be performed by it as a Lender; (vi) none of the consideration used to make the purchase being made by the Assignee hereunder are "plan assets" as defined under ERISA and the rights and interests of the Assignee in and under the Credit Agreement will not be "plan assets" under ERISA [and] (vii) specifies as its, Domestic Lending Office (and address for notices) and Eurodollar Lending Office the offices set forth beneath its name on the signature pages hereof [and (viii) attaches the forms prescribed by the Internal Revenue Service of the United States certifying that it is exempt from United States withholding taxes with respect to all payments to be made to the Assignee under the Credit Agreement and the Notes].(1) 4. Following the execution of this Assignment and Acceptance by the Assignor and the Assignee, it will be delivered to the Administrative Agent for acceptance and recording by the Administrative Agent. The effective date of this Assignment and Acceptance shall be the date of acceptance thereof by the Administrative Agent, unless otherwise specified on Schedule 1 hereto (the "Effective Date"). 5. Upon such acceptance and recording by the Administrative Agent, as of the Effective Date, (i) the Assignee shall be a party to the Credit Agreement and, to the extent provided in this Assignment and Acceptance, have the rights and obligations of a Lender thereunder and (ii) the Assignor shall, to the extent provided in this Assignment and Acceptance, relinquish its rights and be released from its obligations under the Credit Agreement. 6. Upon such acceptance and recording by the Administrative Agent, from and after the Effective Date, the Administrative Agent shall make all payments under the Credit Agreement and the Notes in respect of the interest assigned hereby (including, without limitation, all payments of principal, interest and commitment fees with respect thereto) to the Assignee. The Assignor and Assignee shall make all appropriate adjustments in payments under the Credit Agreement and the Notes for periods prior to the Effective Date directly between themselves. 7. THIS ASSIGNMENT AND ACCEPTANCE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA. - -------------- (1) If the Assignee is organized under the laws of a jurisdiction outside the United States. -2- IN WITNESS WHEREOF, the parties hereto have caused this Assignment and Acceptance to be executed by their respective officers thereunto duly authorized, as of the date first above written, such execution being made on Schedule 1 hereto. [NAME OF ASSIGNOR] By________________________________ Name: Title: [NAME OF ASSIGNEE] By________________________________ Name: Title: Domestic Lending Office (and address for notices): [Address] Eurodollar Lending Office: [Address] Consented to this ___ day of _________________, 19/20 PECO ENERGY COMPANY By_________________________ Name: Title: Consented to and Accepted this __ day of ____________, 19/20 [NAME OF ADMINISTRATIVE AGENT] By_________________________ Name: Title: -3- Schedule 1 to Assignment and Acceptance Dated _______, 19/20__
Section 1. Percentage Interest: __% Section 2. Assignee's Commitment: $___________ Aggregate Outstanding Principal Amount of Advances owing to the Assignee: $___________ A Note payable to the order of the Assignee Dated _______, 19/20__ Principal amount: $___________ A Note payable to the order of the Assignor Dated _______, 19/20__ Principal amount: $___________ Section 3. Effective Date(2): _______, 19/20__
- --------------- (2) This date should be no earlier than the date of acceptance by the Administrative Agent. EXHIBIT D FORM OF OPINION OF BALLARD SPAHR ANDREWS & INGERSOLL _______, 19/20__ To each of the Banks, the Administrative Agent, and the Lead Arranger party to the 364-Day Credit Agreement, dated as of September 15, 1999, among PECO Energy Company, as Borrower, the banks named therein, as Banks, The First National Bank of Chicago, as Administrative Agent, Citibank, N.A., as Documentation Agent, and Banc One Capital Markets, Inc., as Lead Arranger Re: PECO Energy Company Ladies and Gentlemen: This opinion is furnished to you pursuant to Section 3.01(a)(vi) of the 364-Day Credit Agreement, dated as of September 15, 1999, among PECO Energy Company, as Borrower, the banks named therein, as Banks, The First National Bank of Chicago, as Administrative Agent, Citibank, N.A., as Documentation Agent, and Banc One Capital Markets Inc, as Lead Arranger (as amended, modified or supplemented from time to time, the "Credit Agreement"). Unless otherwise specified, terms defined in the Credit Agreement are used herein as therein defined. We have acted as special counsel for the Borrower in connection with the preparation, execution and delivery of the Credit Agreement. In that capacity we have examined the following: (i) The Credit Agreement and the Notes; (ii) The documents furnished by the Borrower pursuant to Section 3.01 of the Credit Agreement; (iii) The Amended and Restated Articles of Incorporation of the Borrower and all amendments thereto (the "Charter"); (iv) The by-laws of the Borrower and all amendments thereto (the "By-laws"); and (v) A certificate of the Secretary of State of the Commonwealth of Pennsylvania, dated , 1999, attesting to the continued subsistence of the Borrower in Pennsylvania. We have also examined the originals, or copies certified to our satisfaction, of such other corporate records of the Borrower, certificates of public officials and of officers of the Borrower, and agreements, instruments and documents, as we have deemed necessary as a basis for the opinions hereinafter expressed. We have assumed the legal capacity and competence of natural persons, the genuineness of all signatures, the authenticity of all documents submitted to us as originals and the conformity to original documents of documents submitted to us as certified, conformed or photostatic copies. We have assumed that the Agents and the Banks have duly executed and delivered, with all necessary power and authority (corporate and otherwise), the Credit Agreement. When an opinion or confirmation is given to our knowledge or with reference to matters of which we are aware or which are known to us, or with another similar qualification, the relevant knowledge or awareness is limited to the actual knowledge or awareness of the lawyer who is the current primary contact for the Borrower and the individual lawyers in this firm who have participated in the specific transaction to which this opinion relates and without any special or additional investigation undertaken for the purposes of this opinion, except as otherwise noted herein. Based upon the foregoing and subject to the exceptions, limitations and qualifications set forth herein, we are of the following opinion: 1. The Borrower is a corporation duly incorporated and validly subsisting under the laws of the Commonwealth of Pennsylvania. 2. The execution, delivery and performance by the Borrower of the Credit Agreement and the Notes are within the Borrower's corporate powers, have been duly authorized by all necessary corporate action, do not contravene (i) the Charter or the By-laws or (ii) any law of the United States or the Commonwealth of Pennsylvania (including, without limitation, any order, rule or regulation of the PPUC or (iii) to the best of our knowledge, any agreement or instrument to which the Borrower is a party or by which it is bound, and do not result in or require the creation of any lien, security interest or other charge or encumbrance upon or with respect to any of its properties. 3. No authorization, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body of the United States or the Commonwealth of Pennsylvania is required for the due execution, delivery and performance by the Borrower of the Credit Agreement or the Notes except for the filing of the FERC Application with, and the final approval of, and the FERC Authorization issued by, FERC, which filing has been duly made and which final approval and FERC Authorization have been duly obtained; such FERC Authorization is in full force and effect and is final; and the action of FERC approving the FERC Application is no longer subject to appeal. 4. The Credit Agreement and the Notes have been duly executed and delivered by the Borrower, and the Credit Agreement and the Notes are the legal, valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their respective terms. 5. The Borrower (i) is exempt from the provisions of the Public Utility Holding Company Act of 1935, as amended, other than Section 9(a)(2) thereof, pursuant to Section 3(a)(2) thereof, and (ii) is not an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. 6. We confirm to you that to our knowledge, after inquiry of each lawyer who is the current primary contact for the Borrower or who has devoted substantive attention to matters on behalf of the Borrower during the preceding twelve months and who is still currently employed by or a member of this firm, except as disclosed in the Borrower's Annual Report on Form 10-K for the year ended December 31, 1998 and the Borrower's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999, no litigation or governmental proceeding is pending or threatened in writing against the Borrower (i) with respect to the Credit Agreement or the Notes, or (ii) which is likely to have a material -2- adverse effect upon the financial condition, business, properties or prospects of the Borrower and its subsidiaries taken as a whole. We draw to your attention the existence of the following two Pennsylvania statutes in connection with the fact that the Advances bear floating rates of interest: (i) Section 911 of the Pennsylvania "Crime Code," 18 Pa. C.S.A. ss.911, enacted by the Act of December 6, 1972, P.L. 1482. Section 911 of the Crime Code bears a close resemblance to certain of the provisions of the Federal Racketeer Influenced and Corrupt Organizations Act of 1970, 18 U.S.C. ss.ss.1961-1968, commonly known as RICO, and is referred to hereinafter as the "Pennsylvania RICO Act." The Pennsylvania RICO Act provides, among other things, that it is a criminal offense, punishable as a felony, to "use or invest, directly or indirectly ... in the acquisition of any interest in, or the establishment or operation of, any enterprise" any income collected in full or partial satisfaction of a loan made "at a rate of interest exceeding 25% per annum... ." (ii) The Act of December 29, 1982, P.L. 1671, 18 Pa. C.S.A.ss.4806.1 et seq. (superseded volume) (the "Criminal Usury Statute"). The Criminal Usury Statute provides, among other things, that it is a criminal offense, punishable as a felony, to engage in, "charging, taking or receiving any money ... on the loan ... of any money ... at a rate exceeding thirty-six percent per annum... ." The Criminal Usury Statute may have been repealed, but the manner in which the repeal was enacted leaves the matter subject to uncertainty. Both the Pennsylvania RICO Act and the Criminal Usury Statute appear to be intended by the legislature to apply only to racketeering and loan sharking type activities, and not to the type of commercial loan transaction evidenced by the Loan Document. Nevertheless, in view of the plain language of the Pennsylvania courts, we cannot say that the ultimate resolution of this issue is free from doubt. The foregoing opinions are subject to the following exceptions, limitations and qualifications: (a) Our opinion is subject to the effect of applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, fraudulent transfer or similar laws affecting creditors' rights and remedies generally, general principles of equity, including without limitation, concepts of materiality, reasonableness, good faith and fair dealing (regardless of whether such enforceability is considered in a proceeding in equity or at law); and limitations on enforceability of rights to indemnification by federal or state securities laws or regulations or by public policy. (b) We express no opinion as to the application or requirements of the Pennsylvania Securities Act or federal or state securities, patent, trademark, copyright, antitrust and unfair competition, pension or employee benefit, labor, environmental health and safety or tax laws in respect of the transactions contemplated by or referred to in the Credit Agreement. (c) We express no opinion as to the validity or enforceability of any provision of the Credit Agreement or the Notes which (i) permits the Lenders to increase the rate of interest in the event of delinquency or default if such increase would be deemed a penalty under applicable law; (ii) purports to be a waiver by Borrower of any right or benefit except to the extent permitted by applicable law; (iii) -3- purports to require that waivers must be in writing to the extent that an oral agreement or implied agreement by trade practice or course of conduct modifying provisions of the Credit Agreement or the Notes has been made; or (iv) purports to exculpate any party from its own negligent acts. We express no opinion as to the law of any jurisdiction other than the law of the Commonwealth of Pennsylvania and the federal law of the United States. The foregoing opinion is solely for your benefit in connection with the consummation of the transaction described herein and may not be used or relied upon by you or any other Person without our express written consent for any other purpose other than (i) any Eligible Assignee that may become a Lender under the Credit Agreement after the date hereof and (ii) Reed Smith Shaw & McClay LLP, which may rely upon this opinion in rendering their opinion furnished pursuant to Article III of the Credit Agreement. The opinions given herein are as of the date hereof, and we assume no obligation to update or supplement this opinion to reflect facts or circumstances which may hereafter come to our attention or any changes in laws which may hereafter occur. Very truly yours, BALLARD SPAHR ANDREWS & INGERSOLL -4- EXHIBIT E FORM OF OPINION OF REED SMITH SHAW & McCLAY LLP __________, 1999 To each of the Banks, the Administrative Agent, and the Lead Arranger party to the 364-Day Credit Agreement, dated as of September 15, 1999 among PECO Energy Company, as Borrower, the banks named therein, as Banks, The First National Bank of Chicago, as Administrative Agent, Citibank, N.A., as Documentation Agent, and Banc One Capital Markets, Inc., as Lead Arranger Re: PECO Energy Company Ladies and Gentlemen: We have acted as counsel to The First National Bank of Chicago, individually and as Administrative Agent, in connection with the preparation, execution and delivery of the 364-Day Credit Agreement, dated as of September 15, 1999, among PECO Energy Company, as Borrower, the banks named therein, as Banks, The First National Bank of Chicago, as Administrative Agent, Citibank, N.A., as Documentation Agent, and Banc One Capital Markets, Inc., as Lead Arranger (as amended, modified or supplemented from time to time, the "Credit Agreement"). We are delivering this opinion pursuant to Section 3.01(a)(vii) of the Credit Agreement. Unless otherwise defined herein, terms defined in the Credit Agreement are used herein as therein defined. In that connection, we have examined (i) counterparts of the Credit Agreement, executed by the Borrower, the Banks, the Administrative Agent and the Lead Arranger, (ii) the Notes, executed by the Borrower and (iii) the other documents listed on Exhibit A hereto, including the opinion of Ballard Spahr Andrews & Ingersoll, counsel to the Borrower (the "Opinion"), furnished to the Administrative Agent pursuant to Section 3.01(a) of the Credit Agreement. In our examination of the documents referred to above, we have assumed the authenticity of all such documents submitted to us as originals, the genuineness of all signatures, the due authority of the parties executing such documents and the conformity to the originals of all such documents submitted to us as copies. We have also assumed that the Banks, the Administrative Agent and the Lead Arranger have duly executed and delivered, with all necessary power and authority (corporate and otherwise), the Credit Agreement. As to matters of fact, we have relied solely upon the documents we have examined. Based upon the foregoing, we are of the opinion that, while we have not independently considered the matters covered by the Opinion to the extent necessary to enable us to express the conclusions stated therein, each of the Opinion and the other documents listed in Exhibit A hereto are substantially responsive to the corresponding requirements set forth in Section 3.01 of the Credit Agreement pursuant to which the same have been delivered. Please note that Richard H. Glanton, Esquire, a partner in this firm, is a director of PECO Energy Company. We have rendered and continue to render legal services to PECO Energy Company. The foregoing opinion is solely for your benefit and may not be relied upon by any other Person other than any Person that may become a lender under the Credit Agreement after the date hereof. Very truly yours, NJS:RKM EXHIBIT F FORM OF ANNUAL AND QUARTERLY COMPLIANCE CERTIFICATE ______________________, 19/20__ Pursuant to the 364-Day Credit Agreement, dated as of September 15, 1999, among PECO Energy Company, as Borrower, the banks named therein, as Banks, The First National Bank of Chicago, as Administrative Agent, Citibank, N.A., as Documentation Agent, and Banc One Capital Markets, Inc., as Lead Arranger (as amended, modified or supplemented from time to time, the "Credit Agreement"), the undersigned, being ______________________ of the Borrower, hereby certifies on behalf of the Borrower as follows: 1. Delivered herewith are the financial statements prepared pursuant to Section 5.01(b)(ii) and Section 5.01(b)(iii) of the Credit Agreement, for the fiscal ________ ended ___________, 19/20__. All such financial statements comply with the applicable requirements of the Credit Agreement. 2. Schedule I hereto sets forth in reasonable detail the information and calculations necessary to establish compliance with the provisions of Section 5.02(c) of the Credit Agreement as of the end of the fiscal period referred to in paragraph 1 above. 3. (Check one and only one:) __ No Event of Default, or event which with notice or lapse of time or both would constitute an Event of Default, has occurred and is continuing or exists. __ An Event of Default, or event which with notice or lapse of time or both would constitute an Event of Default, has occurred and is continuing or exists, and the document(s) attached hereto as Schedule II specify in detail the nature and period of existence of such Event of Default or such other event as well as any and all actions with respect thereto taken or contemplated to be taken by the Borrower. 4. The undersigned has personally reviewed the Credit Agreement, and this certificate was based on an examination made by or under the supervision of the undersigned sufficient to assure that this certificate is accurate. 5. Capitalized terms used in this certificate and not otherwise defined shall have the meanings given in the Credit Agreement. PECO ENERGY COMPANY By_______________________________________ Name:____________________________________ Title:___________________________________ Date:__________________ EXHIBIT G FORM OF ADDITIONAL LENDER SUPPLEMENT THIS SUPPLEMENT, dated as of ____________, 19/20_____, by the undersigned. Recitals: A. This Supplement is being executed and delivered in accordance with Section 2.17 of the 364-Day Credit Agreement, dated as of September 15, 1999, among PECO Energy Company, as Borrower, the banks named therein, as Banks, The First National Bank of Chicago, as Administrative Agent, Citibank, N.A., as Documentation Agent, and Banc One Capital Markets, Inc., as Lead Arranger (as amended, modified or supplemented from time to time, the "Credit Agreement"). Capitalized terms used herein without definition have the meanings specified in the Credit Agreement. B. The undersigned wishes to become a Lender party to the Credit Agreement, as an Additional Lender. NOW, THEREFORE, the undersigned, intending to be legally bound, hereby agrees as follows: 1. The undersigned hereby becomes party to the Credit Agreement as Lender thereunder, and shall be subject to and bound by all of the provisions thereof. 2. The Commitment of the undersigned shall be $_____________. 3. The undersigned (i) confirms that it has received a copy of the Credit Agreement, together with copies of the financial statements referred to in Section 4.01 thereof and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Additional Lender Supplement; (ii) agrees that it will, independently and without reliance upon the Administrative Agent or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Agreement; (iii) confirms that it is an Eligible Assignee; (iv) appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under the Credit Agreement as are delegated to the Administrative Agent by the terms thereof, together with such powers as are reasonably incidental thereto; (v) agrees that it will perform in accordance with their terms all of the obligations which by the terms of the Credit Agreement are required to be performed by it as a Lender; (vi) none of the consideration used to make the purchase being made by the undersigned hereunder are "plan assets" as defined under ERISA and the rights and interests of the undersigned in and under the Credit Agreement will not be "plan assets" under ERISA [and] (vii) specifies as its Domestic Lending Office (and address for notices) and Eurodollar Lending Office the offices set forth beneath its name on the signature pages hereof [and (viii) attaches the forms prescribed by the Internal Revenue Service of the United States certifying that it is exempt from United States withholding taxes with respect to all payments to be made to the undersigned under the Credit Agreement and the Notes].(3) - --------------------- (3) If the undersigned is organized under the laws of a jurisdiction outside the United States. 4. This Supplement shall be effective upon the date of acceptance thereof by the Administrative Agent, unless otherwise specified under the undersigned's name signature below. 5. THIS SUPPLEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA. IN WITNESS WHEREOF, the undersigned has caused this Supplement to be executed and delivered by a duly authorized officer on the date first above written. [NAME OF ADDITIONAL LENDER] By:_________________________________ Name:_______________________________ Title:______________________________ Domestic Lending Office (and address for notices): [Address] Eurodollar Lending Office: [Address] Effective Date(4):________, 19/20__ CONSENTED TO: [NAME OF ADMINISTRATIVE AGENT] By:_________________________________ Name:_______________________________ Title:______________________________ CONSENTED TO: PECO ENERGY COMPANY By:_________________________________ Name:_______________________________ Title:______________________________ - ----------------- (4) This date should be no earlier than the date of acceptance by the Administrative Agent. EX-10.14 4 EXHIBIT 10.14 ================================================================================ AMENDED AND RESTATED TRUST AGREEMENT OF PECO ENERGY CAPITAL TRUST II PECO ENERGY CAPITAL, L.P., as Grantor and FIRST UNION TRUST COMPANY, NATIONAL ASSOCIATION, as Trustee Dated as of June 6, 1997 ================================================================================ TABLE OF CONTENTS
Page ---- ARTICLE I DEFINITIONS ARTICLE II CONTINUATION OF TRUST SECTION 2.01. Continuation of Trust............................................................................ 4 SECTION 2.02. Trust Account.................................................................................... 5 SECTION 2.03. Title to Trust Property.......................................................................... 5 SECTION 2.04. Situs of Trust................................................................................... 5 SECTION 2.05. Powers of Trustee Limited........................................................................ 5 SECTION 2.06. Liability of Holders of Receipts................................................................. 5 ARTICLE III FORM OF RECEIPTS, EXECUTION AND DELIVERY, TRANSFER AND SURRENDER OF RECEIPTS SECTION 3.01. Form and Transferability of Receipts............................................................. 5 SECTION 3.02. Issuance of Receipts............................................................................. 6 SECTION 3.03. Registration, Transfer and Exchange of Receipts.................................................. 6 SECTION 3.04. Lost or Stolen Receipts, Etc..................................................................... 8 SECTION 3.05. Cancellation and Destruction of Surrendered Receipts............................................................................. 8 ARTICLE IV DISTRIBUTIONS AND OTHER RIGHTS OF HOLDERS OF RECEIPTS SECTION 4.01. Distributions of Monthly Distributions on Preferred Securities.......................................................................... 10 SECTION 4.02. Redemptions of Preferred Securities.............................................................. 10 SECTION 4.03. Distributions in Liquidation of Grantor.......................................................... 11 SECTION 4.04. Fixing of Record Date for Holders of Receipts.................................................... 12 SECTION 4.05. Payment of Distributions......................................................................... 12 SECTION 4.06. Special Representative and Voting Rights......................................................... 12 SECTION 4.07. Changes Affecting Preferred Securities nd Reclassifications, Recapitalizations, Etc..................................................... 13
i
Page ---- ARTICLE V THE GUARANTEE SECTION 5.01. The Guarantee.................................................................................... 13 ARTICLE VI THE TRUSTEE SECTION 6.01. Eligibility...................................................................................... 14 SECTION 6.02. Obligations of the Trustee....................................................................... 14 SECTION 6.03. Resignation and Removal of the Trustee; Appointment of Successor Trustee........................................................ 16 SECTION 6.04. Corporate Notices and Reports.................................................................... 17 SECTION 6.05. Status of Trust.................................................................................. 17 SECTION 6.06. Appointment of Grantor to File on Behalf of Trust..........................................................................................18 SECTION 6.07. Indemnification by the General Partner........................................................... 18 SECTION 6.08. Fees, Charges and Expenses....................................................................... 18 SECTION 6.09. Appointment of Co-Trustee or Separate Trustee.................................................... 19 ARTICLE VII AMENDMENT AND TERMINATION SECTION 7.01. Supplemental Trust Agreement..................................................................... 20 SECTION 7.02. Termination...................................................................................... 21 ARTICLE VIII MERGER, CONSOLIDATION, ETC. OF GRANTOR SECTION 8.01. Limitation on Permitted Merger Consolidation, Etc. of Grantor................................................................... 21 ARTICLE IX MISCELLANEOUS SECTION 9.01. Counterparts..................................................................................... 21 SECTION 9.02. Exclusive Benefits of Parties.................................................................... 22 SECTION 9.03. Invalidity of Provisions......................................................................... 22 SECTION 9.04. Notices.......................................................................................... 22 SECTION 9.05. Trustee's Agents................................................................................. 23 SECTION 9.06. Holders of Receipts Are Parties.................................................................. 23 SECTION 9.07. Governing Law.................................................................................... 23 SECTION 9.08. Headings......................................................................................... 23 SECTION 9.09. Receipts Non-Assessable and Fully Paid........................................................... 23 SECTION 9.10. No Preemptive Rights............................................................................. 23
ii AMENDED AND RESTATED TRUST AGREEMENT AMENDED AND RESTATED TRUST AGREEMENT, dated as of June 6, 1997 (as amended from time to time, this "Trust Agreement") is among PECO ENERGY CAPITAL, L.P., a Delaware limited partnership, as grantor (the "Grantor"), FIRST UNION TRUST COMPANY, NATIONAL ASSOCIATION, as trustee (the "Trustee"), and joined in by PECO ENERGY CAPITAL CORP., a Delaware corporation and the general partner of the Grantor, not as a grantor, trustee or beneficiary but solely for the purposes stated herein (the "General Partner"). W I T N E S S E T H: WHEREAS, the Trustee and the Grantor established the Trust (as defined below) under the Delaware Business Trust Act (12 Del. C. ss. 3801, et seq.) (as amended from time to time, the "Business Trust Act"), pursuant to a Trust Agreement, dated as of May 20, 1997 (the "Original Trust Agreement"), and a Certificate of Trust filed with the Secretary of State of the State of Delaware on May 20, 1997; and WHEREAS, the Trustee and the Grantor hereby desire to continue the Trust and to amend and restate in its entirety the Original Trust Agreement; and WHEREAS, the Trust proposes to issue Receipts each representing a 8% Cumulative Monthly Income Preferred Security, Series C, representing a limited partner interest of the Grantor (the "Preferred Securities"); and WHEREAS, interests in the Trust are to be evidenced by Receipt certificates issued by the Trustee in accordance with this Trust Agreement, which are to be delivered to the Holders; NOW, THEREFORE, in consideration of the premises contained herein and intending to be legally bound hereby, it is agreed by and among the parties hereto to amend and restate in its entirety the Original Trust Agreement as follows: ARTICLE I DEFINITIONS The following definitions shall apply to the respective terms (in the singular and plural forms of such terms) used in this Trust Agreement and the Receipts: "Affiliate" of any specified Person means any other Person controlling or controlled by or under common control with such specified Person. For the purposes of this definition, "control" when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly whether through the ownership of voting securities, by contract or otherwise, and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Business Day" means any day other than a day on which banking institutions in the City of New York or the State of Delaware are closed for business. "Business Trust Act" shall have the meaning set forth in the recitals to this Trust Agreement. "Commission" shall have the meaning set forth in Section 6.06 of this Trust Agreement. "Corporate Office" means the office of the Trustee at which at any particular time its business in respect of matters governed by this Trust Agreement shall be administered, which at the date of this Trust Agreement is located at 1 Rodney Square, 920 King Street, First Floor, Wilmington, Delaware 19801. "DTC" means the Depositary Trust Company or any successor thereto. "Exchange" shall have the meaning set forth in Section 6.06 to this Trust Agreement. "Exchange Act" shall have the meaning set forth in Section 6.06 to this Trust Agreement. "Exchange Act Reports" shall have the meaning set forth in Section 6.06 to this Trust Agreement. "General Partner" means PECO Energy Capital Corp., a Delaware corporation, as general partner of the Grantor, and any successor thereto pursuant to the terms of the Partnership Agreement. "Grantor" means PECO Energy Capital, L.P., a Delaware limited partnership, and its successors. "Guarantee" means the Payment and Guarantee Agreement dated as of June 6, 1997, as amended from time to time with respect to the Preferred Securities delivered by PECO Energy to the Grantor. 2 "Holder" means the Person in whose name a certificate representing one or more Receipts is registered on the Register maintained by the Registrar for such purposes. "Partnership Agreement" means the Amended and Restated Limited Partnership Agreement of the Grantor dated as of July 25, 1994, as amended from time to time, together with any Action (as defined in the Partnership Agreement) established by the General Partner. "Paying Agent" means the Person from time to time acting as Paying Agent as provided in Section 4.05 of this Trust Agreement. "PECO Energy" means PECO Energy Company, a Pennsylvania corporation. "Person" means any individual, general partnership, limited partnership, corporation, limited liability company, joint venture, trust, business trust, cooperative or association and the heirs, executors, administrators, legal representatives, successors and assigns of such Person where the context so admits. "Preferred Securities" means the 8% Cumulative Monthly Income Preferred Securities, Series C, representing limited partner interests of the Grantor, or any Successor Securities issued to the Trust and held by the Trustee (unless withdrawn under Section 3.06) from time to time under this Trust Agreement for the benefit of the Holders. "Receipt" shall mean a trust receipt issued hereunder representing an interest in the Trust equal to and representing a Preferred Security and evidenced by a certificate issued by the Trustee pursuant to Article III. "Redemption Date" shall have the meaning set forth in Section 4.02 of this Trust Agreement. "Register" shall have the meaning set forth in Section 3.03 of this Trust Agreement. "Registrar" shall mean any bank or trust company appointed to register Receipt certificates and to register transfers thereof as herein provided. "Special Representative" shall have the meaning set forth in Section 13.02(d) of the Partnership Agreement. "Successor Securities" shall have the meaning set forth in Section 13.02(e) of the Partnership Agreement. 3 "Trust" means the trust governed by this Trust Agreement. "Trust Agreement" shall mean this Amended and Restated Trust Agreement, as the same may be amended, modified or supplemented from time to time. "Trust Estate" means all right, title and interest of the Trust in and to the Preferred Securities (including any Successor Securities), and all distributions and payments with respect thereto, including payments by PECO Energy under the Guarantee. "Trust Estate" shall not include any amounts paid or payable to the Trustee pursuant to this Trust Agreement, including, without limitation, fees, expenses and indemnities. "Trustee" shall mean First Union Trust Company, National Association, a Delaware banking corporation, in its capacity as Trustee and not in its individual capacity and any successor as trustee hereunder. "1933 Act Registration Statement" shall have the meaning set forth in Section 6.06 to this Trust Agreement. "1934 Act Registration Statement" shall have the meaning set forth in Section 6.06 to this Trust Agreement. ARTICLE II CONTINUATION OF TRUST SECTION 2.01. Continuation of Trust. (a) The Trust continued hereby shall be known as "PECO Energy Capital Trust II." The Trust exists for the sole purpose of issuing Receipts representing the Preferred Securities held by the Trust and performing functions directly related thereto. The Grantor hereby delivers to the Trustee for deposit in the Trust a certificate representing 2,000,000 Preferred Securities for the benefit of the Holders. Each Holder is intended by the Grantor to be the beneficial owner of the number of Preferred Securities represented by the Receipts held by such Holder, not to hold an undivided interest in all of the Preferred Securities. To the fullest extent permitted by law, without the need for any other action of any Person, including the Trustee and any other Holder, each Holder shall be entitled to enforce in the name of the Trust the Trust's rights under the Preferred Securities represented by the Receipts held by such Holder and any recovery on such an enforcement action shall belong solely to such Holder who brought the action, not to the Trust, Trustee or any other Holder individually or to Holders as a group. Subject to Section 7.02, this Trust shall be irrevocable. 4 (b) The Trustee hereby acknowledges receipt of the Preferred Securities, registered in the name of the Trust, and its acceptance on behalf of the Trust of the Preferred Securities, and declares that it shall hold the Preferred Securities (including any Successor Securities) in the Trust for the benefit of the Holders. SECTION 2.02. Trust Account. The Trustee shall open an account entitled "PECO Energy Capital Trust II - Trust Account." All funds received by the Trustee on behalf of the Trust from the Preferred Securities or pursuant to Article V will be deposited in such account by the Trustee until distributed as provided in Article IV. SECTION 2.03. Title to Trust Property. Legal title to all of the Trust Estate shall be vested at all times in the Trustee. SECTION 2.04. Situs of Trust. The situs of the Trust shall be in Wilmington, Delaware. The Trust's bank account shall be maintained with a bank in the State of Delaware. The Trustee shall cause to be maintained the books and records of the Trust at the Corporate Office. The Trust Estate shall be held in the State of Delaware. Notwithstanding the foregoing, the Trustee may transfer such of the books and records of the Trust to a Co-Trustee appointed pursuant to Section 6.09 or to such agents as it may appoint in accordance with the Section 9.05 hereof, as shall be reasonably necessary (and for so long as may be reasonably necessary) to enable such Co-Trustee or agents to perform the duties and obligations for which such Co-Trustee or agents may be so employed. SECTION 2.05. Powers of Trustee Limited. The Trustee shall have no power to create, assume or incur indebtedness or other liabilities in the name of the Trust. The Trustee shall have full power to conduct the business of the Trust of holding the Preferred Securities for the Holders and taking the other actions provided by this Trust Agreement. SECTION 2.06. Liability of Holders of Receipts. With respect to the Trust, Holders of Receipts shall be entitled to the same limitation of personal liability to which stockholders of private corporations for profit organized under the General Corporation Law of the State of Delaware are extended. 5 ARTICLE III FORM OF RECEIPTS, EXECUTION AND DELIVERY, TRANSFER AND SURRENDER OF RECEIPTS SECTION 3.01. Form and Transferability of Receipts. (a) Except as otherwise required by DTC, Receipts shall be evidenced by certificates engraved or printed or lithographed with steel-engraved borders and underlying tint in substantially the form set forth in Exhibit A annexed to this Trust Agreement, with the appropriate insertions, modifications and omissions, as hereinafter provided. (b) Certificates evidencing Receipts shall be executed by the Trustee by the manual signature of a duly authorized signatory of the Trustee, provided, however, that such signature may be a facsimile if a Registrar (other than the Trustee) shall have countersigned the Receipts by manual signature of a duly authorized signatory of the Registrar. No certificate evidencing one or more Receipts shall be entitled to any benefit under this Trust Agreement or be valid or obligatory for any purpose unless it shall have been executed as provided in the preceding sentence. The Registrar shall record on the Register each Receipt certificate executed as provided above and delivered as hereinafter provided. (c) Certificates evidencing Receipts shall be in denominations of any whole number of Preferred Securities. All Receipt certificates shall be dated the date of their execution or countersignature. (d) Certificates evidencing Receipts may be endorsed with or have incorporated in the text thereof such legends or recitals or changes not inconsistent with the provisions of this Trust Agreement as may be required by the Trustee or required to comply with any applicable law or regulation or with the rules and regulations of any securities exchange upon which the Receipts may be listed or to conform with any usage with respect thereto. (e) Title to any Receipt certificate that is properly endorsed or accompanied by a properly executed instrument of transfer or endorsement shall be transferable by delivery with the same effect as in the case of a negotiable instrument; provided, however, that until the transfer shall be registered on the Register as provided in Section 3.03, the Trust, the Trustee, the Registrar and the Grantor may, notwithstanding any notice to the contrary, treat the Holder thereof at such time as the absolute owner thereof for the purpose of determining the Person entitled to distributions or to any notice provided for in this Trust Agreement and for all other purposes. 6 SECTION 3.02. Issuance of Receipts. Upon receipt by the Trustee on behalf of the Trust of a certificate or certificates for the Preferred Securities, subject to the terms and conditions of this Trust Agreement, the Trustee, on behalf of the Trust, shall execute and deliver to DTC certificates evidencing the Receipts in the name of DTC's nominee, who shall thereupon be the initial Holder of Receipts. SECTION 3.03. Registration, Transfer and Exchange of Receipts. The Trustee shall cause the Register to be kept at the office of the Registrar in which, subject to such reasonable regulations as the Trustee and the Registrar may prescribe, the Trustee shall provide for the registration of Receipt certificates and of transfers and exchanges of Receipt certificates as herein provided. The Grantor hereby appoints First Union Trust Company, National Association as the Registrar. The Registrar shall also act as transfer agent. The Grantor may remove the Registrar and, upon removal or resignation of the Registrar, appoint a successor Registrar. Subject to the terms and conditions of this Trust Agreement, the Registrar shall register the transfers on the Register from time to time of Receipt certificates upon any surrender thereof by the Holder in person or by a duly authorized attorney, properly endorsed or accompanied by a properly executed instrument of transfer or endorsement, together with evidence of the payment of any transfer taxes as may be required by law. Upon such surrender, the Trustee shall execute a new Receipt certificate representing the same number of Preferred Securities in accordance with Section 3.01(b) and deliver the same to or upon the order of the Person entitled thereto. At the option of a Holder, Receipt certificates may be exchanged for other Receipt certificates representing the same number of Preferred Securities. Upon surrender of a Receipt certificate at the office of the Registrar or such other office as the Trustee may designate for the purpose of effecting an exchange of Receipt certificates, subject to the terms and conditions of this Trust Agreement, the Trustee shall execute and deliver a new Receipt certificate representing the same number of Preferred Securities as the Receipt certificate surrendered. As a condition precedent to the registration of the transfer or exchange of any Receipt certificate, the Registrar may require (i) production of proof satisfactory to it as to the identity and genuineness of any signature; and (ii) compliance with such regulations, if any, as the Trustee or the Registrar may establish not inconsistent with the provisions of this Trust Agreement. No service charge shall be made to a Holder of Receipts for any registration of transfer or exchange of Receipt certificates, but the Trustee or the Registrar shall require payment of a sum sufficient to cover any tax or governmental charge that may be imposed in connection with any transfer or exchange of Receipt certificates. 7 Neither the Trustee nor the Registrar shall be required (a) to register the transfer of or exchange any Receipt certificate for a period beginning at the opening of business ten days preceding any selection of Receipts to be redeemed and ending at the close of business on the day of the mailing a notice of redemption of Receipts or (b) to register the transfer of or exchange of Receipts called or being called for redemption in whole or in part, except as provided in Section 4.02. SECTION 3.04. Lost or Stolen Receipts, Etc. In case any Receipt certificate shall be mutilated or destroyed or lost or stolen and in the absence of notice to the Trustee that such Receipt has been acquired by a bona fide purchaser, the Trustee shall execute and deliver a Receipt certificate of like form and tenor in exchange and substitution for such mutilated Receipt certificate or in lieu of and in substitution for such destroyed, lost or stolen Receipt certificate, provided, however, that the Holder thereof provides the Trustee with (i) evidence satisfactory to the Trustee of such destruction, loss or theft of such Receipt certificate, of the authenticity thereof and of his ownership thereof, (ii) reasonable indemnification satisfactory to the Trustee and (iii) payment of any expense (including fees, charges and expenses of the Trustee) in connection with such execution and delivery. Any duplicate Receipt certificate issued pursuant to this Section 3.04 shall constitute complete and indefeasible evidence of ownership in the Trust, as if originally issued, whether or not the lost, stolen or destroyed Receipt certificate shall be found at any time. SECTION 3.05. Cancellation and Destruction of Surrendered Receipts. All Receipt certificates surrendered to the Trustee shall be cancelled by the Trustee. Except as prohibited by applicable law or regulation, at any time after six years from the date of surrender of any Receipt certificate, the Trustee may destroy such cancelled Receipt certificates. SECTION 3.06. Surrender of Receipts and Withdrawal of Preferred Securities. Any beneficial owner of Receipts may withdraw all, but not less than all, of the Preferred Securities represented by such Receipts by providing a written notice and an agreement to be bound by the terms of the Partnership Agreement to the Trustee at the Corporate Office or at such other office as the Trustee may designate for such withdrawals, all in form satisfactory to the Trustee, in its sole discretion. Within a reasonable period after such request has been properly made, the Trustee shall instruct DTC to reduce the number of Receipts represented by the global certificate held by DTC by an amount equal to the number of Receipts to be so withdrawn by the 8 withdrawing owner, the Trustee shall issue to the withdrawing owner a certificate, in form substantially similar to that certificate attached hereto as Exhibit A, representing the number of Preferred Securities so withdrawn and the Trustee shall reduce the number of Preferred Securities represented by the global certificate held by the Trustee by a like amount; provided, that the Trustee shall not issue any fractional number of Preferred Securities. If a withdrawing owner of Receipts withdraws Preferred Securities in accordance with this Section 3.06, such withdrawing owner of Receipts shall cease to be a beneficial owner in the Trust. The Series C Preferred Securities will only be issued in certificated form. A withdrawing owner who wishes to withdraw Series C Preferred Securities in accordance with this Section 3.06 will be required to provide the Grantor with a completed Form W-8 or such other documents or information as are requested by the Grantor for tax reporting purposes and thereafter shall be admitted to the Grantor as a preferred partner of the Grantor upon such withdrawing owner's receipt of a certificate evidencing such Preferred Securities registered in such withdrawing owner's name. The Trustee shall deliver the Preferred Securities represented by the Receipts surrendered to the withdrawing owner in accordance with this Section 3.06 at the Corporate Office, except that, at the request, risk and expense of the withdrawing owner and for the account of the withdrawing owner thereof, such delivery may be made at such other place as may be designated by such withdrawing owner. Notwithstanding anything in this Section 3.06 to the contrary, if the Preferred Securities represented by Receipts have been called for redemption in accordance with the Partnership Agreement, no withdrawing owner of such Receipts may withdraw any or all of the Preferred Securities represented by such Receipts. SECTION 3.07. Redeposit of Preferred Securities. Subject to the terms and conditions of this Trust Agreement, any holder of Preferred Securities may redeposit withdrawn Preferred Securities under this Trust Agreement by delivery to the Trustee of a certificate or certificates for the Preferred Securities to be deposited, properly endorsed or accompanied, if required by the Trustee, by a properly executed instrument of transfer or endorsement in form satisfactory to the Trustee and in compliance with the terms of the Partnership Agreement, together with all such certifications as may be required by the Trustee in its sole discretion and in accordance with the provisions of this Trust Agreement. Within a reasonable period after such deposit is properly made, the Trustee shall instruct DTC to increase the number of Receipts represented by the global certificate held by DTC by an amount equal to the Preferred Securities to be 9 deposited. The Preferred Trust Receipts will not be issued in certificated form. The Trustee will only accept the deposit of such Preferred Securities upon payment by such holder of Preferred Securities to the Trustee of all taxes and other governmental charges and any fees payable in connection with such deposit and the transfer of the deposited Preferred Securities. If required by the Trustee, Preferred Securities presented for deposit at any time shall also be accompanied by an agreement or assignment, or other instrument satisfactory to the Trustee, that will provide for the prompt transfer to the Trustee or its nominee of any distribution or other right that any Person in whose name the Preferred Securities are registered may thereafter receive upon or in respect of such deposited Preferred Securities, or in lieu thereof such agreement of indemnity or other agreement as shall be satisfactory to the Trustee. SECTION 3.08. Filing Proofs, Certificates, and Other Information. Any Person presenting Preferred Securities for redeposit in accordance with Section 3.07 may be required from time to time to file such proof of residence or other information, to execute such Preferred Security certificates and to make such representations and warranties as the Trustee may reasonably deem necessary or proper. The Trustee may withhold or delay the delivery of any Receipt or Receipts, the transfer, redemption or exchange of any Receipt or Receipts or the making of any distribution until such proof or other information is filed, such certificates are executed or such representations and warranties are made. ARTICLE IV DISTRIBUTIONS AND OTHER RIGHTS OF HOLDERS OF RECEIPTS SECTION 4.01. Distributions of Monthly Distributions on Preferred Securities. Whenever the Trustee shall receive any cash distribution representing a monthly distribution on the Preferred Securities (whether or not distributed by the Grantor on the regular monthly distribution date therefor) or payment under the Guarantee in respect thereof pursuant to Article V of this Agreement, the Trustee acting directly or through any Paying Agent shall distribute to Holders of Receipts on the record date fixed pursuant to Section 4.04, such amounts in proportion to the respective numbers of Preferred Securities represented by the Receipts held by such Holders. SECTION 4.02. Redemptions of Preferred Securities. Whenever the Grantor shall elect or is required to redeem Preferred Securities in accordance with the Partnership Agreement, it shall (unless otherwise agreed in writing with the Trustee) give the Trustee not less than 40 days' prior notice 10 thereof. The Trustee shall, as directed by the Grantor, mail, or cause to be mailed, first-class postage prepaid, notice of the redemption of Preferred Securities and the proposed simultaneous redemption of the Receipts to be redeemed in connection herewith, not less than 30 and not more than 60 days prior to the date fixed for redemption (the "Redemption Date") of the Receipts. Such notice shall be mailed to the Holders of the Receipts to be redeemed, at the addresses of such Holders as the same appear on the records of the Registrar. No defect in the notice of redemption or in the mailing or delivery thereof or publication of its contents shall affect the validity of the redemption proceedings. The Grantor shall provide the Trustee with such notice, and each such notice shall state: the Redemption Date; the redemption price at which the Receipts and the Preferred Securities are to be redeemed; that all outstanding Receipts are to be redeemed or, in the case of a redemption of fewer than all outstanding Receipts in connection with a partial redemption of Preferred Securities, the number of such Receipts to be so redeemed; the place or places where Receipts to be redeemed are to be surrendered for redemption; and specifying the CUSIP number assigned to the Receipts. In case fewer than all the outstanding Receipts are to be redeemed, the Receipts to be redeemed shall be selected by lot or pro rata (as nearly as may be practicable without creating fractional shares) or by any other equitable method determined by the Trustee. The Grantor agrees that if a partial redemption of the Preferred Securities would result in a delisting of the Receipts from any national exchange on which the Receipts are then listed, the Grantor will only redeem the Preferred Securities in whole. On the date of any such redemption of Preferred Securities, provided that the Grantor (or PECO Energy pursuant to the Guarantee) shall then have deposited with the Trustee the aggregate amount payable upon redemption of the Preferred Securities to be redeemed, the Trustee shall redeem (using the funds so deposited with it) Receipts representing the same number of Preferred Securities redeemed by the Grantor. Notice having been mailed by the Trustee as aforesaid, from and after the Redemption Date (unless the Grantor shall have failed to redeem the Preferred Securities to be redeemed by it as set forth in the Grantor's notice provided for in this Section 4.02 and PECO Energy shall have failed to pay the redemption price of the Preferred Securities under the Guarantee), the Receipts called for redemption shall be deemed no longer to be outstanding and all rights of the Holders of Receipts (except the right to receive cash upon surrender of Receipts) shall cease and terminate. Upon surrender in accordance with said notice of the Receipts endorsed or assigned for transfer, if the Trustee shall so require, the Holders of such Receipts shall receive for each such Receipt an amount equal to the redemption price for each Preferred Security, in addition to accrued and unpaid distributions thereon to the date fixed for redemption. 11 If fewer than all of the Receipts of any Holder are called for redemption, the Registrar will deliver to the Holder of such Receipts upon surrender of the certificate evidencing such Receipts a new certificate evidencing the number of Receipts not called for redemption. SECTION 4.03. Distributions in Liquidation of Grantor. Upon receipt by the Trust of any distribution from the Grantor upon the liquidation of the Grantor or any payment under the Guarantee in respect thereof pursuant to Article V of this Trust Agreement, after satisfaction of creditors of the Trust as required by applicable law, the Trustee shall distribute to the Holders of Receipts on the record date fixed pursuant to Section 4.04, such amounts in proportion to the respective number of Preferred Securities which were represented by the Receipts held by such Holders. SECTION 4.04. Fixing of Record Date for Holders of Receipts. Whenever any distribution (other than upon any redemption) shall become payable, or whenever the Trustee shall receive notice of any meeting at which holders of Preferred Securities are entitled to vote or of which holders of Preferred Securities are entitled to notice, the Trustee shall in each such instance fix a record date (which shall be the same date as the record date fixed by the General Partner with respect to the Preferred Securities) for the determination of the Holders of Receipts who shall be entitled (i) to receive such distribution, and (ii) to receive notice of, and to give instructions for the exercise of voting rights at, any such meeting. SECTION 4.05. Payment of Distributions. The Grantor shall appoint one or more Paying Agents for the purpose of paying monthly distributions on, the redemption price of, and distributions in liquidation on the Receipts. The Grantor hereby appoints First Union Trust Company, National Association to act as Paying Agent and designates the Wilmington office of the Paying Agent as the place of payment of the redemption price of and of distributions in liquidation on the Receipts. The aforesaid appointment and designation shall remain in effect until changed by the Grantor. Payments of monthly distributions on the Receipts shall be payable by wire transfer into the accounts of or check mailed to the addresses of the Holders thereof on the record date therefor. Payments of the redemption price of Receipts and distributions in liquidation shall be made upon surrender of such Receipts at the office of the Paying Agent. The Trustee is hereby authorized to direct the Grantor to pay monthly distributions on, the redemption price of, and distributions in liquidation on, the Preferred Securities directly to the Paying Agent for distribution in accordance with the terms of this Trust Agreement. 12 SECTION 4.06. Special Representative and Voting Rights. (a) If the holders of the Preferred Partner Interests (as defined in the Partnership Agreement), acting as a single class, are entitled to appoint and authorize a Special Representative pursuant to Section 13.02(d) of the Partnership Agreement, the Trustee shall notify the Holders of the Receipts of such right, request direction of each Holder of a Receipt as to the appointment of a Special Representative and vote the Preferred Securities represented by such Receipt in accordance with such direction. If the General Partner fails to convene a general meeting of the Partnership as required in Section 13.02(d) of the Partnership Agreement, the Trustee shall notify the Holders of the Receipts and, if so directed by the Holders of Receipts representing Preferred Securities constituting at least 10% of the aggregate stated liquidation preference of the outstanding Preferred Partner Interests (as defined in the Partnership Agreement) shall convene such meeting. (b) Upon receipt of notice of any meeting at which the Holders of Preferred Securities are entitled to vote, the Trustee shall, as soon as practicable thereafter, mail to the Holders of Receipts a notice, which shall be provided by the General Partner and which shall contain (i) such information as is contained in such notice of meeting, (ii) a statement that the Holders of Receipts at the close of business on a specified record date fixed pursuant to Section 4.04 will be entitled, subject to any applicable provision of law or of the Partnership Agreement, to instruct the Trustee as to the exercise of the voting rights pertaining to the amount of Preferred Securities represented by their respective Receipts, and (iii) a brief statement as to the manner in which such instructions may be given. Upon the written request of a Holder of a Receipt on such record date, the Trustee shall vote or cause to be voted the number of Preferred Securities represented by the Receipts evidenced by such Receipt in accordance with the instructions set forth in such request. The Grantor hereby agrees to take all reasonable action that may be deemed necessary by the Trustee in order to enable the Trustee to vote such Preferred Securities or cause such Preferred Securities to be voted. In the absence of specific instructions from the Holder of a Receipt, the Trustee will abstain from voting to the extent of the Preferred Securities represented by such Receipt. SECTION 4.07. Changes Affecting Preferred Securities and Reclassifications, Recapitalizations, Etc. Upon any consolidation, amalgamation, merger, replacement or conveyance, transfer or lease by the Partnership of its properties and assets 13 as an entirety in accordance with Section 13.02(e) of the Partnership Agreement, the Trustee shall, upon the instructions of the Grantor, treat any Successor Securities or other property (including cash) that shall be received by the Trustee in exchange for or upon conversion of or in respect of the Preferred Securities as part of the Trust Estate and Receipts then outstanding shall thenceforth represent the proportionate interests of Holders thereof in the new deposited property so received in exchange for or upon conversion or in respect of such Preferred Securities. ARTICLE V THE GUARANTEE SECTION 5.01. The Guarantee. In connection with the issuance of the Preferred Securities, PECO Energy has delivered to the General Partner the Guarantee for the benefit of the holders of the Preferred Securities. If the General Partner or the Grantor receives any payment under the Guarantee, the General Partner or the Grantor, as the case may be, will immediately transfer such payment to the Trustee. All rights to enforce the Guarantee shall remain in the General Partner, except to the extent set forth in Section 2.04 of the Guarantee. ARTICLE VI THE TRUSTEE SECTION 6.01. Eligibility. This Trust Agreement shall at all times have a Trustee which is a bank that has its principal place of business in the State of Delaware and shall have a combined capital and surplus of at least $50,000,000. If such corporation publishes reports of conditions at least annually, pursuant to law or to the requirements of Federal, State, Territorial or District of Columbia supervising or examining authority, then for the purposes of this Section 6.01, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of conditions so published. In case at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section 6.01, the Trustee shall resign immediately in the manner and with the effect specified in Section 6.03. The Trustee shall make available for inspection by Holders of Receipts at the Corporate Office and at such other places as it may from time to time deem advisable during normal business hours any reports and communications received from the Grantor, the General Partner or PECO Energy by the Trustee as the holder of Preferred Securities. 14 Promptly upon request from time to time by the Grantor, the Trustee shall cause the Registrar to furnish to it a list, at the sole expense of the General Partner, as of a recent date, of the names, addresses and holdings of all Persons in whose names Receipts are registered on the Register. SECTION 6.02. Obligations of the Trustee. The Trustee does not assume any obligation nor shall it be subject to any liability under this Trust Agreement or any Receipt to Holders of Receipts other than that it agrees to use good faith in the performance of such duties as are specifically assigned to the Trustee in this Trust Agreement. The Trustee shall not be under any obligation to appear in, prosecute or defend any action, suit or other proceeding with respect to Preferred Securities or Receipts that in its opinion may involve it in expense or liability, unless indemnity satisfactory to it against all expense and liability be furnished as often as may be required. In the event that the Trustee is uncertain as to application or interpretation of any provision of this Trust Agreement or must choose between alternative courses of action, the Trustee may seek the instructions of the Grantor (or the Special Representative if one has been appointed) by written notice requesting instructions. The Trustee shall take and be protected in taking such action as has been directed by the Grantor (or the Special Representative if one has been approved) provided that if the Trustee does not receive instructions within 10 days or such shorter time as is set forth in the Trustee notice, the Trustee shall be under no duty to take or refrain from taking such action not inconsistent with this Trust Agreement as it shall deem advisable and in the interest of the Holders. The Trustee shall not be liable to any Holder or any other party having an interest hereunder for any action or any failure to act by it in reliance upon the advice of or information from legal counsel, accountants, any Holder of a Receipt or any other Person believed by it in good faith to be competent to give such advice or information. The Trustee may rely and shall be protected from any and all liability in acting upon any written notice, request, direction or other document believed by it to be genuine and to have been signed or presented by the proper party or parties. The Trustee, its parent, Affiliates or subsidiaries may own, buy, sell or deal in any class of securities of the Grantor, the General Partner or PECO Energy and its Affiliates and in 15 Receipts or become pecuniarily interested in any transaction in which the Grantor, the General Partner or PECO Energy or its Affiliates may be interested or contract with or lend money to or otherwise act as fully or as freely as if it were not the Trustee hereunder. The Trustee may also act as transfer agent or registrar of any of the securities of the Grantor, the General Partner or PECO Energy and its Affiliates or act in any other capacity for PECO Energy or its Affiliates. The Trustee (and its officers, directors, employees and agents) makes no representation nor shall it have any liability for or responsibility with respect to the issuance of Receipts or as to the validity of the registration statement pursuant to which the Receipts are registered under the Securities Act, the Preferred Securities, the Guarantee or the Receipts (except for its counter-signatures thereon) or any instruments referred to therein or herein, or as to the correctness of any statement made therein or herein; provided, however, that the Trustee is responsible for its representations in this Trust Agreement. The Trustee assumes no responsibility for the correctness of the description that appears in the Receipts, which can be taken as a statement of the Grantor summarizing certain provisions of this Trust Agreement. Notwithstanding any other provision herein or in the Receipts, the Trustee makes no warranties or representations as to the validity, genuineness or sufficiency of any Preferred Securities or the Guarantee or of the Receipts, as to the validity or sufficiency of this Trust Agreement, as to the value of the Receipts or as to any right, title or interest of the Holders of Receipts, except that the Trustee hereby represents and warrants as follows: (i) the Trustee has been duly organized and is validly existing and in good standing under federal law, with full power, authority and legal right under such laws to execute, deliver and carry out the terms of this Trust Agreement; (ii) this Trust Agreement has been duly authorized, executed and delivered by the Trustee; and (iii) this Section 6.02 of the Trust Agreement constitutes a valid and binding obligation of the Trustee enforceable against the Trustee in accordance with its terms subject to equitable principles and laws affecting the enforcement of creditors' rights generally. SECTION 6.03. Resignation and Removal of the Trustee; Appointment of Successor Trustee. The Trustee may at any time resign as Trustee hereunder by notice of its election to do so delivered to the Grantor and the General Partner, such resignation to take effect upon the appointment of a successor trustee and its acceptance of such appointment as hereinafter provided. The Trustee may at any time be removed by the Grantor, provided that an Event of Default has not occurred and is then continuing under the Indenture dated as of July 1, 1994 between 16 PECO Energy and First Union National Bank, as successor trustee, as supplemented, or the Guarantee, by notice of such removal delivered to the Trustee, such removal to take effect upon the appointment of a successor trustee and its acceptance of such appointment as hereinafter provided. In case at any time the Trustee acting hereunder shall resign or be removed, the Grantor shall, within 45 days after the delivery of the notice of resignation or removal, as the case may be, appoint a successor trustee, which shall be a bank or trust company, or an Affiliate of a bank or trust company, having its principal office in the State of Delaware and having a combined capital and surplus of at least $50,000,000. If a successor Trustee shall not have been appointed in 45 days, the resigning Trustee may petition a court of competent jurisdiction to appoint a successor trustee, and the expenses of such proceeding shall be borne by the General Partner. Every successor trustee shall execute and deliver to its predecessor and to the Grantor and the General Partner an instrument in writing accepting its appointment hereunder, and thereupon such successor trustee, without any further act or deed, shall become fully vested with all the rights, powers, duties and obligations of its predecessor and for all purposes shall be the Trustee under this Trust Agreement, and such predecessor, upon payment of all sums due it and on the written request of the Grantor, shall promptly execute and deliver an instrument transferring to such successor all rights and powers of such predecessor hereunder, shall duly assign, transfer and deliver all rights, title and interest in the Preferred Securities and any moneys or property held hereunder to such successor and shall deliver to such successor a list of the Holders of all outstanding Receipts. Any successor Trustee shall promptly mail notice of its appointment to the Holders of Receipts. Any Person into or with which the Trustee may be merged, consolidated or converted, or any Person succeeding to the corporate trust business of the Trustee, shall be the successor of such Trustee without the execution or filing of any document or any further act, provided such Person shall be eligible under the provisions of the immediately preceding paragraph. SECTION 6.04. Corporate Notices and Reports. The General Partner agrees that it will give timely notice to the Trustee and any Paying Agent of any record date, which record date shall become the record date with respect to the Receipts pursuant to Section 4.04 hereof, for the Preferred Securities and that it will deliver to the Trustee, and the Trustee will, promptly after receipt thereof, transmit to the Holders of Receipts, in each case at the address recorded on the Register, copies of all notices and reports (including financial statements) required by law, by the rules of any national 17 securities exchange upon which the Receipts are listed or by the Partnership Agreement to be furnished to holders of Preferred Securities. Such transmission will be at the expense of the General Partner and the General Partner will provide the Trustee with such number of copies of such documents as the Trustee may reasonably request. In addition, the Trustee will transmit to the Holders of Receipts at the Grantor's expense such other documents as may be requested by the Grantor. SECTION 6.05. Status of Trust. It is intended that the Trust shall not be an "investment company" under the Investment Company Act of 1940, as amended. While it is expressly understood and agreed that the Trustee is acting only in a ministerial capacity hereunder, the Securities and Exchange Commission (the "Commission") has determined that as of the date hereof, the Trust is an issuer under the Federal securities laws and is thus required to sign any registration statement filed or to be filed in connection with the Receipts. SECTION 6.06. Appointment of Grantor to File on Behalf of Trust. The Grantor and the Trustee hereby authorize and direct the Grantor, as the sponsor of the Trust (i) to file with the Commission and execute, in each case on behalf of the Trust, (a) the Registration Statement on Form S-3 (the "1933 Act Registration Statement"), including any pre-effective or post- effective amendments to such 1933 Act Registration Statement (including the prospectus and the exhibits contained therein), relating to the registration under the Securities Act of 1933, as amended, of the Receipts of the Trust and certain other securities; (b) a Registration Statement on Form 8-A (the "1934 Act Registration Statement"), including all pre-effective and post-effective amendments thereto relating to the registration of the Receipts under Section 12(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"); and (c) any reports or other papers or documents required to be filed by, or desirable to be filed with, the Commission, under the Exchange Act ("Exchange Act Reports"); (ii) to file with the New York Stock Exchange or Philadelphia Stock Exchange (each an "Exchange") and execute on behalf of the Trust one or more listing applications and all other applications, statements, certificates, agreements and other instruments as shall be necessary or desirable to cause the Receipts to be listed on any of the Exchanges; and (iii) to file and execute on behalf of the Trust such applications, reports, surety bonds, irrevocable consents, appointments of attorney for service of process and other papers and documents as shall be necessary or desirable to register the Receipts under the securities or "Blue Sky" laws of such jurisdictions as the Grantor, on behalf of the Trust, may deem necessary or desirable. SECTION 6.07. Indemnification by the General Partner. To the fullest extent permitted by law, the General Partner agrees to indemnify and defend the Trustee, the Registrar and any 18 Paying Agent and their directors, officers, employees and agents against, and hold each of them harmless from, any liability, costs and expenses (including reasonable attorneys' fees) that may arise out of or in connection with its acting as the Trustee or the Registrar or Paying Agent, respectively, under this Trust Agreement and the Receipts, except for any liability arising out of negligence, bad faith or willful misconduct on the part of any such Person or Persons. SECTION 6.08. Fees, Charges and Expenses. No fees, charges or expenses of the Trustee or any Trustee's agent hereunder or of any Registrar shall be payable by any Person other than the General Partner, provided that if the Trustee incurs fees, charges or expenses for which it is not otherwise liable under this Trust Agreement due to any action taken at the election of a Holder of Receipts or other Person, such Holder or other Person will be liable for such fees, charges and expenses. SECTION 6.09. Appointment of Co-Trustee or Separate Trustee. (a) Notwithstanding any other provisions of this Trust Agreement, at any time, for the purpose of meeting any legal requirements of any jurisdiction in which any property of the Trust must at the time be located, the Trustee shall have the power and may execute and deliver all instruments to appoint one or more Persons to act as co-trustee or co-trustees, or separate trustee or separate trustees, of all or any part of the Trust, and to vest in such Person or Persons, in such capacity and for the benefit of the Holders, such title to the Trust, or any part thereof, and, subject to the other provisions of this Section 6.09, such powers, duties, obligations, rights and trusts as the Trustee may consider necessary or desirable. No co-trustee or separate trustee hereunder shall be required to meet the terms of eligibility as successor trustee under Section 6.03 and no notice to the Holders of the appointment of any co-trustee or separate trustee shall be required. (b) Every separate trustee and co-trustee shall, to the extent permitted by law, be appointed and act subject to the following provisions and conditions: (i) all rights, powers, duties and obligations conferred or imposed upon and exercised or performed by the Trustee and such separate trustee or co-trustee jointly (it being understood that such separate trustee or co-trustee is not authorized to act separately without the Trustee joining in such act), except to the extent that under any laws of any jurisdiction in which any particular act or acts are to be performed, the Trustee shall be incompetent or unqualified to perform such act or acts, in which event such rights, powers, duties and obligations (including the 19 holding of title to the Trust or any portion thereof in any such jurisdiction) shall be exercised and performed singly by such separate trustee or co-trustee, but solely at the direction of the Trustee; (ii) no Trustee hereunder shall be personally liable by reason of any act or omission of any other trustee hereunder; and (iii) the Trustee may at any time accept the resignation of or remove any separate trustee or co-trustee. (c) Any notice, request or other writing given to the Trustee shall be deemed to have been given to each of the then separate trustees and co-trustees, as effectively as if given to each of them. Every instrument appointing any separate trustee or co-trustee shall refer to this Trust Agreement. Each separate trustee and co-trustee, upon its acceptance of the trusts conferred, shall be vested with the estates or property specified in its instrument of appointment, either jointly with the Trustee or separately, as may be provided therein, subject to all the provisions of this Trust Agreement, specifically including every provision of this Trust Agreement relating to the conduct of, affecting the liability of, or affording protection to, the Trustee. Every such instrument shall be filed with the Trustee and a copy thereof given to the Grantor. (d) Any separate trustee or co-trustee may at any time constitute the Trustee as its agent or attorney-in-fact with full power and authority, to the extent not prohibited by law, to do any lawful act under or in respect to this Trust Agreement on its behalf and in its name. If any separate trustee or co-trustee shall die, become incapable of acting, resign or be removed, all of its estates, properties, rights, remedies and trusts shall vest in and be exercised by the Trustee, to the extent permitted by law, without the appointment of a new or successor trustee. ARTICLE VII AMENDMENT AND TERMINATION SECTION 7.01. Supplemental Trust Agreement. The Grantor or the General Partner may, and the Trustee shall, at any time and from time to time, without the consent of the Holders, enter into one or more agreements supplemental hereto, in form satisfactory to the Trustee, for any of the following purposes: (a) to evidence the succession of another partnership, corporation or other entity to the Grantor or the General Partner and the assumption by any such successor of the covenants of the Grantor or the General Partner herein contained; or 20 (b) to add to the covenants of the Grantor or the General Partner for the benefit of the Holders, or to surrender any right or power herein conferred upon the Grantor or the General Partner; or (c) (i) to correct or supplement any provision herein which may be defective or inconsistent with any other provision herein or (ii) to make any other provisions with respect to matters or questions arising under this Trust Agreement, provided that any such action taken under subsection (c)(ii) hereof shall not materially adversely affect the interests of the Holders; or (d) to cure any ambiguity or correct any mistake. Any other amendment or agreement supplemental hereto must be in writing and approved by Holders of 66-2/3% of the then outstanding Receipts. SECTION 7.02. Termination. The Trust Agreement shall terminate on the date that all outstanding Receipts have been redeemed or there has been a final distribution in respect of the Preferred Securities in connection with any liquidation, dissolution or winding up of the Grantor and such distribution has been made to the Holders of the Receipts. Except as provided in Section 6.07 and Section 6.08, upon termination of this Trust Agreement and the Trust in accordance with the foregoing, the respective obligations and responsibilities of the Trustee, the Grantor and the General Partner created hereby shall terminate. ARTICLE VIII MERGER, CONSOLIDATION, ETC. OF GRANTOR SECTION 8.01. Limitation on Permitted Merger Consolidation, Etc. of Grantor. The Grantor agrees that it will not consolidate, amalgamate, merge with or into, or be replaced by, or convey, transfer or lease its properties and assets substantially in their entirety to any corporation or other entity without the consent of the Holders of 66-2/3% of the Receipts unless permitted by Section 13.02(e) of the Partnership Agreement and (i) such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease does not cause the Receipts to be delisted by any national securities exchange or other organization on which the Receipts are then listed, (ii) such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease does not cause the Receipts to be downgraded by any "nationally recognized statistical rating 21 organization," as that term is defined by the Commission for purposes of Rule 436(g)(2) under the Securities Act of 1933, as amended, and (iii) prior to such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease, PECO Energy has received an opinion of counsel (which may be regular counsel to PECO Energy or an Affiliate, but not an employee thereof) experienced in such matters to the effect that Holders of outstanding Receipts will not recognize any gain or loss for Federal income tax purposes as a result of the merger, consolidation, amalgamation, replacement, conveyance, transfer or lease. ARTICLE IX MISCELLANEOUS SECTION 9.01. Counterparts. This Trust Agreement may be executed by the Grantor, the Trustee and the General Partner in separate counterparts, each of which counterparts, when so executed and delivered shall be deemed an original, but all such counterparts taken together shall constitute one and the same instrument. Delivery of an executed counterpart of a signature page to this Trust Agreement by telecopier shall be effective as delivery of a manually executed counterpart of this Trust Agreement. Copies of this Trust Agreement shall be filed with the Trustee and the Trustee's agents and shall be open to inspection during business hours at the Corporate Office and the respective offices of the Trustee's agents, if any, by any Holder of a Receipt. SECTION 9.02. Exclusive Benefits of Parties. This Trust Agreement is for the exclusive benefit of the parties hereto and the Holders of the Receipts and the Preferred Securities, and their respective successors hereunder, and shall not be deemed to give any legal or equitable right, remedy or claim to any other Person whatsoever. SECTION 9.03. Invalidity of Provisions. In case any one or more of the provisions contained in this Trust Agreement or in the Receipts should be or become invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein or therein shall in no way be affected, prejudiced or disturbed thereby. SECTION 9.04. Notices. Any notices to be given to the Grantor or the General Partner hereunder shall be in writing and shall be deemed to have been duly given if personally delivered or sent by mail, or by telegram or telex or telecopier confirmed by letter, addressed to the General Partner at 1013 Centre Road, Suite 350F, Wilmington, Delaware 19805, Attention: President, or at any other place to which the General Partner may have transferred its principal executive office. 22 Any notices to be given to the Trustee hereunder or under the Receipts shall be in writing and shall be deemed to have been duly given if personally delivered or sent by mail, or by telegram or telex or telecopier confirmed by letter, addressed to the Trustee at the Corporate Office. Any notices given to any Holder of a Receipt hereunder or under the Receipts shall be in writing and shall be deemed to have been duly given if personally delivered or sent by mail, or by telegram or telex or telecopier confirmed by letter, addressed to such Holder at the address of such Holder as it appears on the books of the Trustee or, if such Holder shall have timely filed with the Trustee a written request that notices intended for such Holder be mailed to some other address, at the address designated in such request. Delivery of a notice sent by mail, or by telegram or telex or telecopier shall be deemed to be effected at the time when a duly addressed letter containing the same (or a duly addressed letter confirming an earlier notice in the case of a telegram or telex or telecopier message) is deposited, postage prepaid, in a post office letter box. The Trustee may, however, act upon any telegram or telex or telecopier message received by it from the other or from any Holder of a Receipt, notwithstanding that such telegram or telex or telecopier message shall not subsequently be confirmed by letter as aforesaid. SECTION 9.05. Trustee's Agents. The Trustee may from time to time appoint agents to act in any respect for the Trustee for the purposes of this Trust Agreement. The Trustee shall have no liability for the acts or omissions of agents selected by it with due care. The Trustee will notify the General Partner prior to any such action. SECTION 9.06. Holders of Receipts Are Parties. Notwithstanding that Holders of Receipts have not executed and delivered this Trust Agreement or any counterpart thereof, the Holders of Receipts from time to time shall be bound by all of the terms and conditions hereof and of the Receipts by acceptance of delivery of Receipts. SECTION 9.07. Governing Law. This Trust Agreement and the Receipts and all rights hereunder and thereunder and provisions hereof and thereof shall be governed by, and construed in accordance with, the law of the State of Delaware without giving effect to principles of conflict of laws. SECTION 9.08. Headings. The headings of articles and sections of this Trust Agreement and in the form of the Receipt 23 set forth in Exhibit A hereto have been inserted for convenience only and are not to be regarded as part of this Trust Agreement or to have any bearing upon the meaning or interpretation of any provision contained herein or in the Receipts. SECTION 9.09. Receipts Non-Assessable and Fully Paid. The Holders of the Receipts shall not be personally liable for obligations of the Trust, the interests in the Trust represented by the Receipts shall be non-assessable for any losses or expenses of the Trust or for any reason whatsoever, and the Receipts upon delivery thereof by the Trustee pursuant to this Trust Agreement are and shall be deemed fully paid. SECTION 9.10. No Preemptive Rights. No Holder shall be entitled as a matter of right to subscribe for or purchase, or have any preemptive right with respect to, any part of any new or additional interest in the Trust, whether now or hereafter authorized and whether issued for cash or other consideration or by way of distribution. 24 IN WITNESS WHEREOF, the Grantor and the Trustee and the General Partner have duly executed this Trust Agreement as of the day and year first above set forth. PECO ENERGY CAPITAL, L.P. By: PECO ENERGY CAPITAL CORP., its general partner By: /s/ J. Barry Mitchell -------------------------------- Name: J. Barry Mitchell Title: President FIRST UNION TRUST COMPANY, NATIONAL ASSOCIATION, as trustee By: /s/ George Rayzis --------------------------------- Name: George Rayzis Title: Vice President The General Partner joins in this Trust Agreement solely for the purposes of obligating itself under Sections 6.04, 6.07 and 6.08 of this Trust Agreement and not as grantor, trustee or beneficiary. PECO ENERGY CAPITAL CORP. By: /s/ J. Barry Mitchell -------------------------------- Name: J. Barry Mitchell Title: President 25 EXHIBIT A TRUST RECEIPTS OF PECO ENERGY CAPITAL TRUST II, a Delaware Business Trust, each Representing an ____% Cumulative Monthly Income Preferred Security, Series C of PECO Energy Capital, L.P. (a Delaware limited partnership) No. _________ ___________ Receipts First Union Trust Company, National Association, not in its individual capacity, but solely as Trustee (the "Trustee"), hereby certifies that ______________ is the registered owner of __________ Receipts (the "Receipts"), each representing a ____% Cumulative Monthly Income Preferred Security, Series C (the "Preferred Securities") of PECO Energy Capital, L.P., a Delaware limited partnership (the "Grantor"), deposited in trust by the Grantor with the Trustee pursuant to an Amended and Restated Trust Agreement of PECO Energy Capital Trust II dated as of June ___, 1997 (as amended or supplemented from time to time, the "Trust Agreement") among the Grantor, the Trustee and PECO Energy Capital Corp., the general partner of the Grantor (the "General Partner"). Subject to the terms of the Trust Agreement, the registered Holder hereof is entitled to a full interest in the same number of Preferred Securities held by the Trustee under the Trust Agreement, as are represented by the Receipts including the distribution, voting, liquidation and other rights of the Preferred Securities specified in the Amended and Restated Limited Partnership Agreement of the Grantor, as amended, a copy of which is on file at the Corporate Office. 1. The Trust Agreement. The Receipts are issued upon the terms and conditions set forth in the Trust Agreement. The Trust Agreement (a copy of which is on file at the Corporate Office of the Trustee) sets forth the rights of Holders of Receipts and the rights and duties of the Trustee, the Grantor and the General Partner. The statements made herein are summaries of certain provisions of the Trust Agreement and are subject to the detailed provisions thereof, to which reference is hereby made. In the event of any conflict or discrepancy between the provisions hereof and the provisions of the Trust Agreement, the provisions of the Trust Agreement will govern. Unless otherwise expressly herein provided, all defined terms used herein shall have the meanings ascribed thereto in the Trust Agreement. 2. Enforcement of Rights; Withdrawal of Preferred Securities. To the fullest extent permitted by law, without the need for any other action of any Person, including the Trustee and any other Holder, each Holder shall be entitled to enforce in A-1 the name of the Trust the Trust's rights under the Preferred Securities represented by the Receipts held by such Holder and any recovery on such an enforcement action shall belong solely to such Holder who brought the action, not to the Trust, Trustee or any other Holder individually or to Holders as a group. Any beneficial owner of Receipts may withdraw all, but not less than all, of the Preferred Securities represented by such Receipts by providing a written notice and an agreement to be bound by the terms of the Partnership Agreement to the Trustee at the Corporate Office, with evidence of beneficial ownership in form satisfactory to the Trustee; provided, however, that the Trustee shall not issue any fractional number of Preferred Securities. 3. Distributions of Monthly Distributions on Preferred Securities. Whenever the Trustee shall receive any cash distribution representing a monthly distribution on the Preferred Securities (whether or not distributed by the Grantor on the regular monthly distribution date therefor) or payment by PECO Energy Company ("PECO Energy") under the Payment and Guarantee Agreement dated as of June ___, 1997 (the "Guarantee") in respect thereof, the Trustee acting directly or through any Paying Agent shall distribute to Holders of Receipts on the record date therefor, such amounts in proportion to the respective numbers of Preferred Securities represented by the Receipts held by such Holders. 4. Redemptions of Preferred Securities. Whenever the Grantor shall elect or is required to redeem Preferred Securities in accordance with the Partnership Agreement, it shall (unless otherwise agreed in writing with the Trustee) give the Trustee not less than 40 days' prior notice thereof. The Trustee shall, as directed by the Grantor, mail, first-class postage prepaid, notice of the redemption of Preferred Securities and the proposed simultaneous redemption of the Receipts to be redeemed, not less than 30 and not more than 60 days prior to the date fixed for redemption of such Preferred Securities and Receipts. Such notice shall be mailed to the Holders of the Receipts, at the addresses of such Holders as the same appear on the records of the Trustee. No defect in the notice of redemption or in the mailing or delivery thereof or publication of its contents shall affect the validity of the redemption proceedings. In case fewer than all the outstanding Receipts are to be redeemed, the Receipts to be redeemed shall be selected by lot or pro rata (as nearly as may be practicable without creating fractional shares) or by any other equitable method determined by the Grantor. On the date of any such redemption of Preferred Securities, provided that the Grantor (or PECO Energy pursuant to the Guarantee) shall then have deposited with the Trustee the aggregate amount payable upon redemption of the Preferred Securities to be redeemed, the Trustee shall redeem (using the funds so deposited with it) Receipts representing the same number of Preferred Securities to be redeemed by the Grantor. A-2 5. Distributions in Liquidation. Upon receipt by the Trustee of any distribution from the Grantor upon the liquidation of the Grantor or any payment under the Guarantee in respect thereof, after satisfaction of creditors of the Trust required by applicable law, the Trustee shall distribute to Holders of Receipts on the record date therefor, such amounts in proportion to the respective number of Preferred Securities which were represented by the Receipts held by such Holders. 6. Fixing of Record Date for Holders of Receipts. Whenever any distribution (other than upon any redemption) shall become payable, or whenever the Trustee shall receive notice of any meeting at which holders of Preferred Securities are entitled to vote or of which holders of Preferred Securities are entitled to notice, the Trustee shall in each such instance fix a record date (which shall be the same date as the record date fixed by the General Partner with respect to the Preferred Securities) for the determination of the Holders of Receipts who shall be entitled (i) to receive such distribution or (ii) to receive notice of, and to give instructions for the exercise of voting rights at, any such meeting. 7. Payment of Distributions. Payments of monthly distributions on the Receipts shall be payable by wire transfer into the accounts of or check mailed to the addresses of the Holders thereof on the record date therefor. Payments of the redemption price of Receipts and distributions in liquidation shall be made against surrender of such Receipts at the office of First Union Trust Company, National Association, as the Paying Agent. 8. Special Representative; Voting Rights. (a) If the holders of the Preferred Partner Interests (as defined in the Partnership Agreement), acting as a single class, are entitled to appoint and authorize a Special Representative pursuant to Section 13.02(d) of the Partnership Agreement, the Trustee shall notify the Holders of the Receipts of such right, request direction of each Holder of a Receipt and vote the Preferred Securities represented by such Receipt in accordance with such direction. If the General Partner fails to convene a general meeting of the Partnership as required in Section 13.02(d) of the Partnership Agreement, the Trustee shall notify the Holders of the Receipts and, if so directed by the Holders of Receipts representing Preferred Securities constituting at least 10% of the aggregated stated liquidation preference of the outstanding Preferred Partner Interests (as defined in the Partnership Agreement) shall convene such meeting. (b) Upon receipt of notice of any meeting at which the holders of Preferred Securities are entitled to vote, the Trustee shall, as soon as practicable thereafter, mail to the Holders of Receipts a notice, which shall be provided by the A-3 Grantor and which shall contain (i) such information as is contained in such notice of meeting, (ii) a statement that the Holders of Receipts at the close of business on a specified record date therefor will be entitled, subject to any applicable provision of law or of the Partnership Agreement, to instruct the Trustee as to the exercise of the voting rights pertaining to the amount of Preferred Securities represented by their respective Receipts, and (iii) a brief statement as to the manner in which such instructions may be given. Upon the written request of a Holder of a Receipt on such record date, the Trustee shall vote or cause to be voted the number of Preferred Securities represented by the Receipts in accordance with the instructions set forth in such request. In the absence of specific instructions from the Holder of a Receipt, the Trustee will abstain from voting to the extent of the Preferred Securities represented by such Receipt. 9. Changes Affecting Preferred Securities and Reclassifications, Recapitalizations, Etc. Upon any consolidation, amalgamation, merger, replacement or conveyance, transfer or lease by the Grantor of its properties and assets substantially in their entirety in accordance with Section 13.02(e) of the Partnership Agreement, the Trustee shall, upon the instructions of the Grantor, treat any Successor Securities or other property that shall be received by the Trustee in exchange for or upon conversion of or in respect of the Preferred Securities as part of the Trust Estate, and Receipts then outstanding shall thenceforth represent the proportionate interests of Holders thereof in the new deposited property so received in exchange for or upon conversion or in respect of such Preferred Securities. 10. Transfer and Exchange of Receipts. Subject to the terms and conditions of the Trust Agreement, the Trustee shall register the transfer on its books from time to time of Receipt certificates upon any surrender thereof by the Holder in person or by a duly authorized attorney, properly endorsed or accompanied by a properly executed instrument of transfer or endorsement, together with evidence of the payment of any transfer taxes as may be required by law. Upon such surrender, the Trustee shall execute a new Receipt representing the same aggregate number of the Receipts surrendered in accordance with the Trust Agreement and deliver the same to or upon the order of the Person entitled thereto. Upon surrender of a Receipt at the Corporate Office or such other office as the Trustee may designate for the purpose of effecting an exchange of Receipt certificates, subject to the terms and conditions of the Trust Agreement, the Trustee shall execute and deliver a new Receipt certificate representing the same number of Preferred Securities as the Receipt certificate surrendered. A-4 As a condition precedent to the registration of transfer or exchange of any Receipt certificate, the Registrar, may require (i) the production of proof satisfactory to it as to the identity and genuineness of any signature; and (ii) compliance with such regulations, if any, as the Trustee or the Registrar may establish not inconsistent with the provisions of the Trust Agreement. Neither the Trustee nor the Registrar shall be required (a) to register the transfer or exchange of any Receipt certificate for a period beginning at the opening of business ten days next preceding any selection of Receipts to be redeemed and ending at the close of business on the day of the mailing a notice of redemption of Receipts or (b) to transfer or exchange Receipts called or being called for redemption in whole or in part. 11. Title to Receipts. It is a condition of the Receipt, and every successive Holder hereof by accepting or holding the same consents and agrees, that title to this Receipt certificate, when properly endorsed or accompanied by a properly executed instrument of transfer or endorsement, is transferable by delivery with the same effect as in the case of a negotiable instrument; provided, however, that until the transfer of this Receipt certificate shall be registered on the books of the Trustee, the Trustee may, notwithstanding any notice to the contrary, treat the Holder hereof at such time as the absolute owner hereof for the purpose of determining the Person entitled to distributions or to any notice provided for in the Trust Agreement and for all other purposes. 12. Reports, Inspection of Transfer Books. The Trustee shall make available for inspection by Holders of Receipts at the Corporate Office and at such other places as it may from time to time deem advisable during normal business hours any reports and communications received by the Trustee as the record holder of Preferred Securities. The Registrar shall keep books at the corporate office for the registration of transfer of Receipts, which books at all reasonable times will be open for inspection by the Holders of Receipts as and to the extent provided by applicable law. 13. Supplemental Trust Agreement. The Grantor or the General Partner may, and the Trustee shall, at any time and from time to time, without the consent of the Holders, enter into one or more agreements supplemental hereto, in form satisfactory to the Trustee, for any of the following purposes: (a) to evidence the succession of another partnership, corporation or other entity to the Grantor or the General Partner and the assumption by any such successor of the covenants of the Grantor or the General Partner herein contained; or (b) to add to the covenants of the Grantor or the General Partner for the benefit of the A-5 Holders, or to surrender any right or power herein conferred upon the Grantor or the General Partner; or (c)(i) to correct or supplement any provision herein which may be defective or inconsistent with any other provision herein or (ii) to make any other provisions with respect to matters or questions arising under this Trust Agreement, provided that any such action taken under subsection (ii) hereof shall not materially adversely affect the interests of the Holders; or (d) to cure any ambiguity or correct any mistake. Any other amendment or agreement supplemental hereto must be in writing and approved by Holders of 66-2/3% of the then outstanding Receipts. 14. Governing Law. The Trust Agreement and this Receipt and all rights thereunder and hereunder and provisions thereof and hereof shall be governed by, and construed in accordance with, the law of the State of Delaware without giving effect to principles of conflict of laws. 15. Receipt Non-Assessable and Fully Paid. Holders of Receipts shall not be personally liable for obligations of the Trust, the interest in the Trust represented by the Receipts shall be non-assessable for any losses or expenses of the Trust or for any reason whatsoever and the Receipts upon delivery thereof by the Trustee pursuant to the Trust Agreement are and shall be deemed fully paid. 16. Liability of Holders of Receipts. Holders of Receipts shall be entitled to the same limitation of personal liability extended to stockholders of private corporations for profit organized under the General Corporation Law of the State of Delaware. 17. No Preemptive Rights. No Holder shall be entitled as a matter of right to subscribe for or purchase, or have any preemptive right with respect to, any part of any new or additional interest in the Trust, whether now or hereafter authorized and whether issued for cash or other consideration or by way of distribution. This Receipt certificate shall not be entitled to any benefits under the Trust Agreement or be valid or obligatory for any purpose unless this Receipt certificate shall have been executed manually or, if a Registrar for the Receipts (other than the Trustee) shall have been appointed, by facsimile signature of a duly authorized signatory of the Trustee and, if executed by facsimile signature of the Trustee, shall have been countersigned manually by such Registrar by the signature of a duly authorized signatory. THE TRUSTEE IS NOT RESPONSIBLE FOR THE VALIDITY OF ANY PREFERRED SECURITIES. THE TRUSTEE ASSUMES NO RESPONSIBILITY FOR THE CORRECTNESS OF THE FOREGOING DESCRIPTION WHICH CAN BE TAKEN A-6 AS A STATEMENT OF THE GRANTOR SUMMARIZING CERTAIN PROVISIONS OF THE TRUST AGREEMENT. THE TRUSTEE MAKES NO WARRANTIES OR REPRESENTATIONS AS TO THE VALIDITY, GENUINENESS OR SUFFICIENCY OF PREFERRED SECURITIES OR OF RECEIPTS; AS TO THE VALIDITY OR SUFFICIENCY OF THE TRUST AGREEMENT; AS TO THE VALUE OF RECEIPTS OR AS TO ANY RIGHT, TITLE OR INTEREST OF THE HOLDERS OF RECEIPTS IN AND TO RECEIPTS. Dated: June ___, 1997 First Union Trust Company, National Association, as Trustee, By:________________________________ Name: Title: A-7 [FORM OF ASSIGNMENT] FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and transfers unto ____________________ the within Receipt and all rights and interests represented by the Receipts evidenced thereby, and hereby irrevocably constitutes and appoints ____________________ attorney, to transfer the same on the books of the within-named Trustee, with full power of substitution in the premises. Dated:_________________ Signature:________________________ NOTE: The signature to this assignment must correspond with the name as written upon the face of the Receipt in every particular, without alteration or enlargement, or any change whatever. Signature Guarantee: _______________________ EX-12.1 5 EXHIBIT 12.1 EXHIBIT 12-1 PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES ($000s, except ratio data) 12 MONTHS ENDED 12/31/99 ----------- NET INCOME $ 576,814 ADD BACK: INCOME TAXES: OPERATING INCOME 359,160 NON-OPERATING INCOME (5,058) ---------- NET TAXES 354,102 FIXED CHARGES: INTEREST APPLICABLE TO DEBT 374,518 ANNUAL RENTALS ESTIMATE 3,272 CAPITALIZED INTEREST 6,983 ---------- TOTAL FIXED CHARGES 384,773 ---------- ADJUSTED EARNINGS INCLUDING AFUDC $1,315,689 ========== RATIO OF EARNINGS TO FIXED CHARGES 3.42 ========== AFUDC 3,891 ---------- ADJUSTED EARNINGS EXCLUDING AFUDC $1,311,798 ========== RATIO OF EARNINGS EXCLUDING AFUDC TO FIXED CHARGES 3.41 ========== EX-12.2 6 EXHIBIT 12.2 EXHIBIT 12-2 PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDEND REQUIREMENTS ($000s, except ratio data) 12 MONTHS ENDED 12/31/99 ----------- NET INCOME $576,814 ADD BACK: INCOME TAXES: OPERATING INCOME 359,160 NON-OPERATING INCOME (5,058) ----------- NET TAXES 354,102 FIXED CHARGES: INTEREST APPLICABLE TO DEBT 374,518 ANNUAL RENTALS ESTIMATE 3,272 CAPITALIZED INTEREST 6,983 ----------- TOTAL FIXED CHARGES 384,773 EARNINGS REQUIRED FOR PREFERRED DIVIDENDS: DIVIDENDS ON PREFERRED STOCK 12,176 ADJUSTMENT TO PREFERRED DIVIDENDS* 7,475 ----------- 19,651 ----------- FIXED CHARGES AND PREFERRED DIVIDENDS $404,424 ========== EARNINGS BEFORE INCOME TAXES AND FIXED CHARGES $1,315,689 ========== RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDEND REQUIREMENTS 3.24 ========== * ADDITIONAL CHARGE EQUIVALENT TO EARNINGS REQUIRED TO ADJUST DIVIDENDS ON PREFERRED STOCK TO A PRE-TAX BASIS EX-21 7 EXHIBIT 21 Exhibit 21 PECO Energy Company Subsidiaries PECO Energy Power Company (PA) Susquehanna Power Company (MD) The Proprietors of the Susquehanna Canal (inactive) (MD) Susquehanna Electric Company (MD) Eastern Pennsylvania Development Company (PA) Adwin Equipment Company (PA) Adwin (Schuylkill) Cogeneration, Inc. (PA) Adwin Realty Company (PA) Energy Performance Services, Inc. (PA) PECO Energy Capital Corp (DE) Horizon Energy Company (PA) PECO Wireless, LLC (DE) Exelon Corporation (PA) Energy Trading Company (DE) ATNP Finance Company (DE) PEC Financial Services, LLC (PA) NEWHOLDCO Corporation (PA) Buttonwoods Associates, Inc. (DE) Route 213 Enterprises, Inc. (DE) EX-23 8 EXHIBIT 23 Consent of Independent Accountants We hereby consent to the incorporation by reference in the Registration Statement on Form S-3 (File Nos. 333-27721, 33-43523, 333-47985, 33-49887, 33-54935, 33-59152) and Form S-8 (File Nos. 333-00451, 333-27799, 333-27805, 333-27807, 33-30317, 333-36739, 333-67367) of PECO Energy Company and Subsidiary Companies of our report dated February 29, 2000 except for certain information included in Notes 2 and 4, for which the dates are March 24, 2000 and March 16, 2000, respectively relating to the financial statements and financial statement schedule, which appears in this Form 10-K. PricewaterhouseCoopers LLP Philadelphia, PA March 30, 2000 EX-27 9 FINANCIAL DATA SCHEDULE
OPUR1 12-MOS DEC-31-1999 DEC-31-1999 PER-BOOK 5,045 538 1,213 6,189 135 13,120 3,576 1 (103) 1,910 56 138 5,969 163 0 125 128 0 0 0 4,893 13,120 5,437 358 3,670 4,028 1,409 (15) 1,394 396 582 12 570 196 396 899 2.91 2.89 (1) Net Income includes an extraordinry item of $37 million (net of income taxes) related to prepayment premiums and the write-off of unamortized debt costs associated with repayment related to the First Mortgage Bonds and refinancing of pollution control notes.
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