/ ,.. - ,./"' : ........................ >/ 'v_·,. ........................................· Powering-I 9904210122 ·990414 PDR ADOCK 05000272 l .J PDR '------~ •• Financial Highlights Comparison of 5 Year (Thousands of Dollars) 1998 1997 % Change Cumulative Total Return Operating Revenues $ 5,210,482 $ 4,617,901 12.8% $ 700 invested on 7213 7193 in stock or index Operating Expenses, excluding taxes $ 3,647,653 $ 3,302, 179 10.5% ini:luding reinvestment of dividends. dollars Taxes Charged to Operations $ 599,169 $ 602,860 (0.6%) Operating Income $1,283,314 $ 1,005,631 27.6% Extraordinary Item $ (19,654) $ (1,833,664) 98.9% (Net of taxes) Earnings Applicable to Common Stock $ 499,615 $ (1,513,910) (After extraordinary item) Earnings Applicable to Common Stock $ 519,269 $ 319,754 62.4% (Before extraordinary item) Earnings per Average Common Share (Dollars) $ 2.24 $ (6.80) (After extraordinary item) Cash Dividends Paid per Common Share (Dollars) $ 1.00 $ 1.80 (44.4%) Average Shares of Common Stock 94 95 96 97 98 Outstanding (Thousands) 223,219 222,543 0.3% PECO Energy Company Capital Expenditures $ 415,331 $ 490,200 (15.3%) S&PSOO . I Dow Jones Utilities Average Common Shareholders' Equity $ 3,057,342 $ 2,726,731 12.1% Book Value Per Average Common Share (Dollars) $ 13.61 $ 12.25 11.1 % PECO Energy Company is a leader in generating and marketing electricity in competitive markets across the United States. Since 1929, we have provided retail electric and natural gas service to customers in southeastern Pennsylvania, serving more than 1.5 million customers in 1998. With the advent of deregulation, we have developed a wide range of competitive businesses that build upon a broad asset base, our market knowledge and our core capabilities. Our generation portfolio of more than 9,000 megawatts is among the most competitive in the United States. Our power marketing division, Power Team, is one of the. leading • real-time deliverers of wholesale electricity operating throughout the continental United States. Through our Exelon division, we provide a variety of unregulated energy and utility infrastructure services, including electric supply to business and residential customers across Pennsylvania and competitive wireless and fiber optics-based communications services. While our performance in 1998 was impressive, we are still powe~_JY..e-ax:e-onlyjust-~ . • begin~~the positive impact ;f ;:;Ur ·.·. renT~nization, vision .and st~~teg_}r. w;ft are building our leadership position 1n ~rgulated markets by continuing to increase r ur powers of: Performance demonstrated by excellent financial and operating results in 1998 2 Vision becoming the world's leading provider of clean energy 5 Boldness aggressively growing a competitive generation portfolio 6 I i Experience ' leacjin·g the industry in power marketing 8 \ . \ ' I ,. \ \ ··\.. ' I Innovation .· growing and developing new ventures 10 ' .' \ , Alignment our people and performance to shareholder interests 12 '~-- ---- • -: •• -- --,, r \ ,..-=- -, ,r:- --,\ ,'-- -\ 1 1 1 , / \ 1 1 I \ J ' / I --- I 1 / /' \ / , r 1 _ _ ~ 1 ·' ... ~ ---.. ' 'I I I I I 1 I / ' ___ .--" / We will continue to tap these business powers to create value for our shareholders and customers that no other energy company can equal. }\ L - '---, ' ' J / / 1 I I , 1 1 " \ 1, ' ,: I \/ / 1 I I I To My Fellow Shareholders: • PECO Energy was nqmed "Energy number one spot in the rankings for What a difference a year makes! Company of the Year" by the total shareholder return among the When I wrote my letter to you a year Washington International 25 largest U.S. electric utilities. The ago, our company was in one of its Energy Group. catalysts to our dramatically greatest periods of uncertainty. We improved valuation were the favor­ were facing what could have been a Strong Financial Results able completion of our long and dif­ protracted legal challenge to an Earnings per share in 1998, before ficult regulatory restructuring pro­ unfavorable regulatory order; Wall special items, were $2.66. That repre­ ceeding and the p_rogress we have Street's confidence in our competitive sents a 46% increase over 1997 earn­ made in executing our competitive future was weakened, and our finan­ ings from operations. After account­ growth strategy. cial results for 1997 were most disap­ ing for an extraordinary charge relat­ pointing. Today, that picture has dra­ ed to the redemption of higher cost Favorable Restructuring Plan matically changed for the better, and debt and a year-end adjustment for in Place I am proud to report to you that the cost of our on-going workforce The most significant event of 1998 1998 was a year of powerful perfor­ reduction program, earnings were was the successful completion of our mance for PECO Energy. $2.24 per share. Our power market­ restructuring proceeding before the ing activities contributed significantly Pennsylvania Public Utility Among our most significant to our strong earnings performance, Commission (PUC). In May, the PUC accomplishments in 1998: particularly in the third quarter when approved a fair and balanced plan • Earnings per share were $2.66 we achieved the highest quarterly that on January 1, 1999 opened our before special items, an increase earnings in our company's history. electric generation business to com­ of 46% over 1997 performance. During 1998, we also benefited from petition. The plan provides our cus­ • PECO Energy's common stock deliv­ lower operating and maintenance tomers with guaranteed savings ered a total annual return of 78%. expenses, significantly lower fuel and through across-the-board rate cuts • We negotiated a fair and balanced replacement power costs following the for the next two years as well as the electric deregulation plan. Salem Nuclear Generating Station's full freedom to choose their energy sup­ • Our power marketing group, return to service in early 1998, and a plier. PECO Energy will continue to Power Team, increased sales vol­ lower effective income tax rate. provide regulated distribution ser­ ume 13%. vices to all customers in our tradition­ • Our unregulated energy supply PECO Energy Delivered al service territory. business, Exelon Energy, became Excellent Returns in 1998 For PECO Energy, the restructuring the most successful player in the PECO Energy's shares of common plan provides a very reasonable tran­ new Pennsylvania Electric stock closed 1998 at $41.75, a 74% sition to retail competition while Choice program. increase over the 1997 close of $24 maintaining a solid financial found. • AmerGen, our joint venture with per share. The unprecedented tion upon which we're building ne British Energy, successfully negoti­ increase in our common stock price, competitive businesses. A central ele- ated the first-ever U.S. purchase of combined with dividends paid, result­ ment of the plan is the allowed a nuclear generating station, ed in a total return to our sharehold­ recovery of almost $5.3 billion in scheduled for completion this year. ers of 78%, winning PECO Energy the 3 stranded investments. On January 1, Pursuing 1999, we began recovering these Aggressive investments from our customers Growth through a special transition charge Objectives that will remain in place for 12 years, To mark our while earning a 10.75% return on the progress in balance. The plan also gives us the achieving our ability to securitize the majority of our long-term vision recoverable stranded costs through for the Company, he issuance of up to $4 billion of in 1998 we estab­ "transition bonds." The issuance of lished the follow­ these highly rated bonds will enable us ing goals that we to significantly realign our capital struc­ will work to meet ture, most notably through the retire­ by the year 2003: ment of debt and preferred stock, and • To retain a the repurchase of common stock. 75% market share in our Our Vision for the Future traditional ser­ Corbin A. McNeill, Jr., Our business and industry are clearly vice territory, PECO Energy Chairman, President and Chief Executive Officer moving into a vastly different and achieved bilities, and continuously work to exciting era. Given the speed of this through customer retention by our optimize the cost efficiency of PECO change, we think it is essential to local distribution company, PECO Energy Distribution Company. have a clear picture of where we're Energy Distribution, as well as going, and the kind of company we market share growth by Exelon Building a Competitive Retail want to be when we get there. In Energy. Market Share 1998, we developed a powerful new • To nearly triple our electric gener­ Our long-term goal is to maintain a corporate vision - To become the ation capabilities to 25 gigawatts very strong market share in our tradi­ world's leading provider of clean through acquisitions and long­ tional electric service area, plus estab­ energy. (Our complete vision and mis­ term supply agreements by the lish a significant position in other sion statements are presented on year 2003. electric retail markets across page 5 of this report.) This mission • To achieve a 50% increase in our Pennsylvania, and ultimately other will guide and propel our progress earnings per share between 1998 regions of the United States. As of for years to come, and we are contin­ and 2003. January 2, 1999, two-thirds of uing to build the processes and struc- To achieve these aggressive earnings Pennsylvania's electric customers ures to make it a reality. and growth objectives, we will build gained the ability to choose their upon our strengths in power genera­ energy suppliers. In anticipation of tion and power marketing. We will the opening of retail markets, Exelon also continue to develop ventures Energy conducted a marketing cam- that leverage our core business capa- • paign in 1998 that has helped it gain The growth of our generating New Corporate Structure more than 130,000 retail customers.