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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------
                                    FORM 10-K
            [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                   For the fiscal year ended December 31, 1997
                                       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           (I.R.S. Employer Identification No.)
    incorporation or organization) 

                                  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):
     5 3/8% Series due 1998          5 5/8% Series due 2001         
     6 3/8% Series due 2005          7 3/4% Series 2 due 2023
     7 3/8% Series due 2001          6 1/2% Series due 2003         
     7 1/8% Series due 2023          7 1/4% Series due 2024

     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)

     9.00% Cumulative Monthly Income Preferred Securities,  Series A, $25 stated
value, issued by PECO Energy Capital, L.P. and unconditionally guaranteed by the
Company (Listed on the New York Stock Exchange)

     Trust Receipts of PECO Energy Capital Trust I, each  representing  an 8.72%
Cumulative Monthly Income Preferred Security, Series B, $25 stated value, issued
by PECO Energy  Capital,  L.P.  and  unconditionally  guaranteed  by the Company
(Listed on the New York Stock Exchange)

     Trust Receipts of PECO Energy Capital Trust II, each  representing an 8.00%
Cumulative Monthly Income Preferred Security, Series C, $25 stated value, issued
by PECO Energy  Capital,  L.P.  and  unconditionally  guaranteed  by the Company
(Listed on the New York Stock Exchange)

           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
amendment to this Form 10-K. [X]

     The aggregate  market value of the  registrant's  common stock (only voting
stock) held by non-affiliates  of the registrant was  $4,407,775,384 at February
28, 1998.

     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:  222,546,562  shares  outstanding  at
February 28, 1998.
                            ------------------------
                  DOCUMENTS INCORPORATED BY REFERENCE (In Part)
     Annual Report of PECO Energy Company to Shareholders for the year 1997
            is incorporated in part in Parts I, II and IV hereof, as
           specified herein. Proxy Statement of PECO Energy Company in
           connection with its 1998 Annual Meeting of Shareholders is
          incorporated in part in Part III hereof, as specified herein.
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<PAGE>
                                TABLE OF CONTENTS
                                                                        Page No.
PART I
     ITEM 1. BUSINESS..........................................................1
             The Company.......................................................1
             Deregulation and Rate Matters.....................................1
                Electric - Retail..............................................1
                Electric -Wholesale............................................3
                Gas............................................................4
                Competition....................................................5
             Electric Operations...............................................5
                General........................................................5
                Limerick Generating Station....................................8
                Peach Bottom Atomic Power Station.............................10
                Salem Generating Station......................................10
             Fuel ............................................................12
                Nuclear.......................................................12
                Coal..........................................................14
                Oil...........................................................14
                Natural Gas...................................................14
             Gas Operations...................................................14
             Segment Information..............................................15
             Construction.....................................................15
             Capital Requirements and Financing Activities....................16
             Employee Matters.................................................17
             Environmental Regulations........................................17
                Water.........................................................18
                Air...........................................................18
                Solid and Hazardous Waste.....................................18
                Costs.........................................................21
             Telecommunications and Other Ventures............................21
             PECO Energy Capital Corp. and Related Entities...................22
             Executive Officers of the Registrant.............................23
     ITEM 2. PROPERTIES.......................................................25
     ITEM 3. LEGAL PROCEEDINGS................................................27
     ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..............27
PART II
     ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
               RELATED STOCKHOLDER MATTERS....................................27
     ITEM 6. SELECTED FINANCIAL DATA..........................................28
     ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
               CONDITION AND RESULTS OF OPERATIONS............................28
     ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.......28
     ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......................28
     ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
               ON ACCOUNTING AND FINANCIAL DISCLOSURE.........................28
PART III
     ITEM 10.DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...............29
     ITEM 11.EXECUTIVE COMPENSATION...........................................29
     ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
               MANAGEMENT.....................................................29
     ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................29

PART IV
     ITEM 14.EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON 
               FORM 8-K.......................................................30
             Financial Statements and Financial Statement Schedule............30
             REPORT OF INDEPENDENT ACCOUNTANTS................................31
             SCHEDULE II-- VALUATION AND QUALIFYING ACCOUNTS..................32
             Exhibits.........................................................33
             Reports on Form 8-K..............................................36
     SIGNATURES

                                       i
<PAGE>
                                     PART I

ITEM 1.   BUSINESS

The Company

     Incorporated  in  Pennsylvania  in  1929,  PECO  Energy  Company  (Company)
provides retail  electric and natural gas service in  southeastern  Pennsylvania
and,  through pilot  programs,  natural gas service to areas in Maryland and New
Jersey. The Company also engages in the wholesale  marketing of electricity on a
national   basis   and    participates   in   joint   ventures   which   provide
telecommunication services in the Philadelphia area.

     The Company's  traditional  retail  service  territory  covers 2,107 square
miles.  Electric  service is  furnished  to an area of 1,972 square miles with a
population of  approximately  3.6 million,  including 1.6 million in the City of
Philadelphia.  Approximately  94% of the retail electric service area and 64% of
retail kilowatthour (kWh) sales are in the suburbs around  Philadelphia,  and 6%
of the  retail  service  area  and  36%  of  such  sales  are  in  the  City  of
Philadelphia.  Natural gas service is  supplied in a  1,475-square-mile  area of
southeastern   Pennsylvania  adjacent  to  Philadelphia  with  a  population  of
approximately 1.9 million.  Through Horizon Energy, a wholly owned subsidiary of
the Company, and PECO Energy/EnergyOne,  a franchised energy products brand, the
Company  participates in Pennsylvania's pilot program for retail competition for
generation.

     The electric and gas utility  industries  are both  undergoing  fundamental
restructuring.  In 1996, the Federal Energy Regulatory  Commission (FERC) issued
Order No. 888 providing  for  competition  in wholesale  generation by requiring
that all public  utilities  file  non-discriminatory,  open-access  transmission
tariffs.  In December  1996,  Pennsylvania  Governor  Ridge  signed into law the
Electricity  Generation  Customer Choice and Competition Act  (Competition  Act)
which  provides  for the  restructuring  of the  electric  utility  industry  in
Pennsylvania,  including retail competition for generation beginning in 1999. At
December 31, 1997, the Company discontinued the use of regulatory  accounting in
its financial statements for its electric generation operations.  For additional
information,  see "Management's  Discussion and Analysis of Financial  Condition
and Results of Operations" in the Company's  Annual Report to  Shareholders  for
the year 1997.

     The Company is subject to regulation  by the  Pennsylvania  Public  Utility
Commission  (PUC) as to retail  electric and gas rates,  issuances of securities
and certain  other  aspects of the  Company's  operations  and by the 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  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.

Deregulation and Rate Matters

     Historically,  all of the Company's  retail  electric and gas revenues have
been  derived  pursuant  to bundled  rates  regulated  by the PUC and all of the
Company's  wholesale  electric  revenue  has  been  derived  pursuant  to  rates
regulated by the FERC.  As a result of the adoption of the  Competition  Act and
deregulation initiatives by the FERC, electric services are being unbundled into
separate   generation,   transmission  and   distribution   services  with  open
competition  for  both  retail  and  wholesale  generation   services.   Certain
transmission and distribution services will remain subject to regulation.

Electric - Retail

     The  Competition  Act  was  enacted  in  December  1996  providing  for the
restructuring of the electric utility industry in Pennsylvania, including retail
competition for generation  beginning in 1999. The Competition Act 

                                       1

<PAGE>

required  each  electric  utility  in  Pennsylvania  to  submit  to  the  PUC  a
restructuring plan,  including its retail electric  generation-related  stranded
costs (the loss in value of electric generation-related assets which will result
from competition). The Competition Act authorizes the recovery of stranded costs
through charges to distribution customers beginning January 1, 1999 for a period
up to seven years (or for an alternative  period  determined by the PUC for good
cause  shown).  During that  period,  the utility is subject to a rate cap which
provides  that total  charges to  customers  cannot  exceed rates in place as of
December 31, 1996, subject to certain exceptions.  The Competition Act also caps
transmission  and  distribution  rates from  December  31, 1996 through June 30,
2001, subject to certain exceptions.

     Pursuant to the Competition  Act, in April 1997, the Company filed with the
PUC a comprehensive  restructuring plan detailing its proposal to implement full
customer choice of electric  generation  supplier.  The Company's  restructuring
plan  identified  $7.5 billion of retail  electric  generation-related  stranded
costs.  In August 1997,  the Company and various  intervenors  in the  Company's
restructuring  proceeding  filed  with  the PUC a  Joint  Petition  for  Partial
Settlement   (Pennsylvania  Plan).  In  December  1997,  the  PUC  rejected  the
Pennsylvania Plan and entered an Opinion and Order, revised in January 1998 (PUC
Restructuring  Order),  which  deregulates  the  Company's  electric  generation
operations.  The PUC Restructuring  Order allows the Company to recover stranded
costs of $4.9  billion on a  discounted  basis,  or $5.3 billion on a book value
basis,  over 8-1/2 years  beginning in 1999.  Recovery of stranded costs will be
through a separate charge to be levelized over the recovery period using a 7.47%
cost of capital.

     The PUC Restructuring  Order provides for the phasing in of customer choice
of electric generation supplier for all customers: one-third of the peak load of
each  customer  class on January 1, 1999;  one-third on January 2, 1999 (one day
later);  and the remainder on January 2, 2000.  All  customers  will continue to
take bundled  electric  service under the Company's  PUC-approved  rates through
December 31, 1998.  From January 1, 1999 through June 30, 2007, the Company will
be obligated  to provide  generation  service to customers  who do not choose an
alternate  energy  supplier  as  well as all  customers  who  seek a new  energy
supplier but are unable to reach a service agreement with another supplier.  The
Company's  rates for these  customers will remain bundled and are capped at 1996
levels through June 30, 2007, subject to certain exceptions.

     The PUC  Restructuring  Order caps all customer  bills at the year-end 1996
system-wide  average of 9.95 cents per kWh. Beginning January 1, 1999,  electric
rates for  customers who choose an alternate  energy  supplier will be unbundled
into a  transmission  and  distribution  component,  the charge for  recovery of
stranded costs and a "shopping credit" for generation.  On a system-wide average
basis, the  transmission and distribution  component will be 2.93 cents per kWh,
the charge for  recovery  of  stranded  costs will be 2.45 cents per kWh and the
"shopping  credit" for generation will be 4.58 cents per kWh.  Bundled rates are
capped through June 30, 2001, subject to certain provisions.

     To encourage  competition,  the PUC established  the "shopping  credit" for
generation in excess of current market prices.  The PUC estimates that customers
who  choose an  alternate  energy  supplier  will save up to 15% of their  total
electric  bill  beginning  in 1999  through  June 30, 2007 and will save 30 % of
their total electric bill thereafter.

     The PUC Restructuring  Order requires the Company to increase enrollment in
its Customer Assistance Program for low-income  customers,  presently limited to
40,000  customers,  to at least 80,000  customers with no limit on the number of
enrollees.  The  Company  has also  been  directed  to  spend  $5.6  million  on
weatherization programs for low-income customers.

     The Company believes that the PUC Restructuring  Order provides  sufficient
details  regarding  the  deregulation  of  the  Company's  electric   generation
operations  to  require  the  Company  to  discontinue  the  use  of  regulatory
accounting  in its  financial  statements  for  those  operations.  The  Company
determined  that at  December  31,  1997,  $5.8  billion of its $7.1  billion of
electric  generation  assets  were  impaired  and it had $2.6  billion  of other
electric generation-related regulatory assets. At December 31, 1997, the Company
recorded an  extraordinary  charge  against income of $3.1 billion ($1.8 billion
net of income taxes) to reflect the amount of electric generation-related assets
that will not be recovered from customers  either prior to the  commencement  of

                                       2

<PAGE>

competition  or  under  the PUC  Restructuring  Order.  See  note 4 of  Notes to
Consolidated  Financial  Statements  included in the Company's  Annual Report to
Shareholders for the year 1997.

     On January 21, 1998,  the Company  filed a complaint  in the U.S.  District
Court for the Eastern District of Pennsylvania  (Eastern District Court) seeking
injunctive and monetary  relief on the grounds that the  Competition Act and the
PUC  Restructuring  Order:  (1) are  preempted by Section  201(b) of the Federal
Power Act; (2) effect a taking of private property without just  compensation in
violation of the Fifth and Fourteenth Amendments to the U.S.  Constitution;  (3)
violate the Due Process  Clause,  the Contract Clause and the First Amendment of
the U.S.  Constitution;  and (4) deprive the Company of certain other  federally
protected rights.

     On January 22,  1998,  the Company  filed two  Petitions  for Review in the
Commonwealth  Court  of  Pennsylvania  (Commonwealth  Court)  appealing  the PUC
Restructuring  Order. The petitions state that the PUC Restructuring  Order must
be set aside  because  it is based  upon  errors  of law,  is not  supported  by
substantial   evidence,   constitutes  an  arbitrary  and  capricious  abuse  of
administrative discretion and deprives the Company of the due process of law, to
which it is entitled under Article I of the Pennsylvania Constitution.

     In addition to the Company's  appeals,  numerous other  parties,  including
various   intervenors,   have  filed  appeals  and  cross  appeals  of  the  PUC
Restructuring Order. There are also two pending actions alleging that the manner
in which the Competition Act was passed by the Pennsylvania legislature violates
the Pennsylvania Constitution.

     The Competition Act authorizes the PUC to approve,  by adopting a Qualified
Rate Order (QRO),  the issuance of  Transition  Bonds as a mechanism to mitigate
stranded costs and reduce customer rates.  The Transition Bonds may be issued by
a utility,  a finance  subsidiary  of a utility or a  third-party  assignee of a
utility. Under the Competition Act, proceeds of Transition Bonds are required to
be  used  principally  to  reduce  qualified  stranded  costs  and  the  related
capitalization of the utility. The Transition Bonds are payable from irrevocable
customer  charges and may have a maximum maturity of the earlier of ten years or
the recovery period of stranded costs.

     On January 22, 1997,  the Company filed an  Application  with the PUC for a
QRO  authorizing  the  issuance  of  Transition  Bonds to fund $3.6  billion  of
stranded costs and related  transaction  and use of proceeds  costs.  On May 22,
1997, the PUC adopted an order  authorizing the Company to securitize up to $1.1
billion of stranded costs. Such authorization, which expires May 22, 1998 unless
extended,  does not preclude the Company from applying for an additional  QRO to
securitize  additional  stranded costs.  Certain parties which intervened in the
Company's   Application  for  a  QRO  have  appealed  the  PUC's  order  to  the
Commonwealth  Court. The Company believes it is unlikely that it will securitize
the  recovery of its stranded  costs until these  appeals and the appeals of the
PUC Restructuring Order are resolved. If the Company does securitize,  it cannot
predict the amount of  stranded  cost  recovery  that it would be  permitted  to
securitize or the impact of such securitization on the Company's capitalization.

     The Competition Act requires each regulated electric utility to implement a
Retail Access Pilot Program (Pilot Program) for customers representing 5% of the
peak load of each  customer  class.  On August 29, 1997,  the PUC issued a final
order outlining the guidelines for Pilot Programs. Among other things, the Pilot
Programs  guidelines  provide for:  residential  and commercial  customers to be
given a 3 cent  per kWh  energy  credit  and a 13%  reduction  in the  regulated
portion  of their  bills;  industrial  customers  to be given a 2.7 cent per kWh
energy  credit and a 10%  reduction  in the  regulated  portion of their  bills.
Approximately  400,000 of the Company's  customers applied to participate in the
Company's  Pilot  Program.  In a lottery  held by an  independent  third  party,
approximately 75,000 customers were chosen to participate in the Company's Pilot
Program.  The Pilot  Programs  began on November  1, 1997 and will last  through
December 31, 1998.

Electric - Wholesale

     During  1996,  the FERC  issued  Order No.  888 which  requires  all public
utilities that own,  control or operate  interstate  transmission  facilities to
file open-access  transmission  tariffs for wholesale  transmission  services in
accordance with non-discriminatory terms and conditions established by the FERC.
The FERC's stated goal in 

                                       3
<PAGE>

promulgating  Order No.  888 and  related  orders is to  remove  impediments  to
competition  in  the  wholesale  bulk  power  market  place  and to  bring  more
efficient, lower cost power to electricity consumers.

     In  response  to Order No.  888,  on July 3,  1996,  the  Company  filed an
individual  compliance tariff with the FERC which became effective July 9, 1996.
In December 1996,  the Company and the other members of the PJM  Interconnection
(PJM) filed a joint  compliance  filing  with the FERC.  The PJM is a power pool
which  integrates  through  central  dispatch the  generation  and  transmission
operations of its member companies across a 50,000 square-mile  territory in the
Mid-Atlantic  region. That filing included a PJM regional  transmission  tariff.
Under the PJM tariff,  which  became  effective  on March 1, 1997,  transmission
service is provided on a  pool-wide,  open-access  basis using the  transmission
facilities  of the PJM members at rates  based on the costs of the  transmission
system at the point of delivery.

     On March 31, 1997, the members of the PJM converted that  organization from
an  unincorporated  association into a limited  liability company and filed with
the FERC a revised PJM Operating Agreement to reflect that change.

     In November 1997, the FERC issued an order authorizing the establishment of
an  independent  system  operator  (ISO)  for the PJM on  January  1,  1998  and
designated the PJM  Interconnection,  L.L.C.'s Office of the  Interconnection as
the ISO.  The ISO is  responsible  for  operation  of the PJM  control  area and
administration of the PJM open-access  transmission tariff and the hourly energy
market in the PJM. In that same  order,  the FERC  directed  the Company and the
other transmission  owners in the PJM to turn over control of their transmission
facilities  to the ISO and put in place a new PJM regional  transmission  tariff
and energy market arrangement. Although the Company cannot predict the long-term
economic effect of the restructured pooling  arrangements  approved by the FERC,
the arrangements,  together with the introduction of retail  competition,  could
adversely affect the Company's ability to fully recover its transmission  costs.
Authority has been  requested  from the FERC to sell energy from  PJM-dispatched
generating  units in the PJM markets,  including  the hourly energy  market,  at
market based rates. The FERC has not yet acted on this request.

     The Company received approval from the FERC to remove the cost-based cap on
prices charged for power in the wholesale  market and certain changes  regarding
the terms of the buy-for-resale  agreements. The new tariff provisions allow the
Company to sell  energy at  market-based  rates  both  within  and  outside  the
geographical boundaries of the PJM.

Gas

     The  Company's  gas  sales  and gas  transportation  revenues  are  derived
pursuant  to  rates  regulated  by the  PUC.  The  PUC has  established  through
regulatory  proceedings the base rates 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 August 1, 1997,  the Company  reached a  settlement  on all  outstanding
issues  regarding  its PGC No.  14 rates  for the  period  December  1,  1997 to
November  30,  1998,  which  reflects a $0.0731  per  thousand  cubic feet (mcf)
decrease in natural gas sales  rates.  PGC No. 14 became  effective  December 1,
1997.

     The gas industry is continuing to undergo structural changes in response to
FERC  policies  designed to increase  competition.  FERC  policies have required
interstate  gas  pipelines  to  unbundle  their gas  sales  service  from  other
regulated tariff services,  such as transportation and storage.  In anticipation
of these changes, the Company modified its gas purchasing arrangements to enable
the  purchase and  transportation  of gas at lower cost.  The  Company,  through
Horizon Energy Company, is participating in pilot programs outside the Company's
gas service territory to market natural gas and other services.

     There is an initiative in the  Pennsylvania  legislature  to deregulate the
gas industry,  which has the support of the Governor. The Company cannot predict
whether the Pennsylvania legislature will enact legislation that 

                                       4
<PAGE>

deregulates  the gas industry or whether the Governor will  ultimately sign into
law any such legislation.  The Company cannot predict the ultimate effect of gas
industry   deregulation  on  its  future  financial  condition  and  results  of
operations.

Competition

     The Company  actively  competes  in the  developing  wholesale  markets for
electricity.  The Company's wholesale  marketing  activities include the sale of
energy from the Company's installed capacity, the purchase of energy to meet the
Company's retail requirements,  the resale of energy purchased from unaffiliated
utilities  and  others  and the  marketing  of energy of other  generators.  The
Company  competes in the wholesale market for electricity on the bases of price,
dependability of service and execution of transactions.

     The Company,  through Horizon Energy and PECO Energy/EnergyOne,  expects to
compete for retail  customers within the Company's  traditional  retail electric
service territory. The Company, through Horizon Energy Company, is participating
in  electric  and  gas  retail  access  pilot  programs  outside  the  Company's
traditional  service  territory.  Over 30  companies,  including  investor-owned
utilities  located in Pennsylvania and elsewhere,  unregulated  energy companies
and  power  marketers,   are  participating  in  the  Company's  Pilot  Program.
Competition  for  retail  customers  in the  Company's  Pilot  Program  has been
extensive.  Certain  companies have targeted specific segments of the market for
retail  generation  services and other  companies are competing in all segments.
The majority of  participating  companies  have targeted  customers in the large
commercial  and industrial  segments of the market.  The bases of competition in
the Pilot  Program are  primarily  price and  reliability.  The  Company  cannot
predict  whether the  competitive  factors in the  Company's  Pilot  Program are
indicative of future competition for retail generation services.

     The Company  anticipates  very  active  competition  for retail  generation
services  within the Company's  traditional  electric  service  territory.  As a
result  of  competitive  pressures,  the  Company  has  continued  to  negotiate
long-term  contracts with many of its  larger-volume  customers.  Although these
agreements have generally  resulted in reduced margins,  they have permitted the
Company  to  retain  these  customers.   For  additional  information  regarding
competition,  see "Management's  Discussion and Analysis of Financial  Condition
and Results of Operations" in the Company's  Annual Report to  Shareholders  for
the year 1997.

Electric Operations

General

     During  1997,  90% of  the  Company's  operating  revenues  and  91% of its
operating income were from electric  operations.  Annual and quarterly operating
results  can be  significantly  affected  by  weather.  Traditionally,  sales of
electricity are higher in the first and third quarters due to colder weather and
warmer weather, respectively.  Electric sales and operating revenues for 1997 by
class of customer are set forth below:
<TABLE>
<CAPTION>
                                                                                                       Operating
                                                                                       Sales           Revenues
                                                                                 (millions of kWh)  (millions of $)
<S>                                                                                    <C>              <C>   
                  Residential...................................................       10,407           $1,357
                  Small commercial and industrial...............................        6,685              779
                  Large commercial and industrial...............................       15,034            1,077
                  Other.........................................................          841              148
                  Change in unbilled............................................           70               19
                                                                                      -------          -------
                      Service territory.........................................       33,037            3,380
                  Interchange sales.............................................        1,927               59
                  Sales to other utilities......................................       28,893              728
                                                                                      -------          -------
                      Total                                                            63,857           $4,167
                                                                                      =======          =======
</TABLE>

     The  Company is engaged in the  wholesale  marketing  of  electricity  on a
national basis. The Company's wholesale marketing activities include the sale of
energy from the Company's installed capacity, the purchase of energy to meet the
Company's retail requirements,  the resale of energy purchased from unaffiliated
utilities  and 

                                       5

<PAGE>

others and the marketing of energy of other generators. During 1997, the Company
purchased  44.6% of its total  requirements  and estimates that for 1998 it will
purchase 39.6% of its total requirements.

     At December 31, 1997,  the Company had  long-term  commitments  to purchase
from  unaffiliated  utilities and others energy  associated with 1,330 megawatts
(MW) of capacity in 1998, energy associated with 2,540 MW of capacity during the
period  1999  through  2002 and  energy  associated  with  2,430 MW of  capacity
thereafter.  Under some of these  contracts,  the Company may  purchase,  at its
option,  additional power as needed.  These purchases will be utilized through a
combination  of  sales to  jurisdictional  customers,  long-term  sales to other
utilities and  open-market  sales. At December 31, 1997, the Company had entered
into long-term agreements with unaffiliated  utilities to sell energy associated
with 540 MW of capacity  in 1998,  energy  associated  with 1,700 MW of capacity
during the period  1999  through  2002 and  energy  associated  with 2,040 MW of
capacity  thereafter.  See note 5 of Notes to Consolidated  Financial Statements
included in the Company's Annual Report to Shareholders for the year 1997.

     The net  installed  electric  generating  capacity  (summer  rating) of the
Company and its subsidiaries at December 31, 1997 was as follows:
<TABLE>
<CAPTION>
                                    Type of Capacity                                     MW                % of Total
<S>                                                                                     <C>                 <C>  
              Nuclear...........................................................        4,090               44.4%
              Mine-mouth, coal-fired............................................          709                7.7
              Service-area, coal-fired..........................................          725                7.9
              Oil-fired.........................................................        1,176               12.8
              Gas-fired.........................................................          267                2.9
              Hydro (includes pumped storage)...................................        1,392               15.1
              Internal combustion                                                         845                9.2
                                                                                        -----              -----
              Total                                                                     9,204(1)           100.0%
                                                                                        =====              =====
<FN>
---------------
(1)  See "Fuel" for sources of fuels used in electric generation.
</FN>
</TABLE>

     The all-time  maximum  hourly demand on the  Company's  system was 7,390 MW
which occurred on July 15, 1997.  The Company's peak service  territory load for
1998 is estimated to be 7,267 MW. The Company  estimates its generating  reserve
margin for 1998 to be 33%.

     The  all-time  maximum PJM demand of 49,406 MW  occurred on July 15,  1997.
PJM's installed  capacity  (summer rating) is more than 56,000 MW. The Company's
installed capacity is expected to be sufficient to meet its obligation to supply
its PJM reserve margin share during the period 1998-2001.  See "Deregulation and
Rate Matters Electric - Retail."

     The  Company's  nuclear-generated   electricity  is  supplied  by  Limerick
Generating  Station  (Limerick) Units No. 1 and No. 2, Peach Bottom Atomic Power
Station (Peach Bottom) Units No. 2 and No. 3, which are operated by the Company,
and Salem  Generating  Station (Salem) Units No. 1 and No. 2, which are operated
by Public  Service  Electric and Gas Company  (PSE&G).  The Company owns 100% of
Limerick,  42.49% of Peach Bottom and 42.59% of Salem.  Limerick Units No. 1 and
No. 2 each has a capacity of 1,110 MW;  Peach  Bottom Units No. 2 and No. 3 each
has a capacity  of 1,093 MW, of which the  Company is entitled to 464 MW of each
unit;  and Salem Units No. 1 and No. 2 each has a capacity of 1,106 MW, of which
the Company is entitled to 471 MW of each unit.

     The Company's nuclear generating facilities represent  approximately 44% of
its installed generating capacity.  In 1997,  approximately 39% of the Company's
electric output was generated from the Company's nuclear generating  facilities.
Changes in regulations by the NRC that require a substantial increase in capital
expenditures for the Company's nuclear  generating  facilities or that result in
increased operating costs of nuclear generating units could adversely affect the
Company.

                                       6
<PAGE>

     The  Price-Anderson  Act currently  limits the liability of nuclear reactor
owners to $8.9 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 $8.7 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 $79
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,  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 $8.9 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 provide funds for  decommissioning  the  facility.  These
proceeds would be paid to the fund to make up any difference  between the amount
of money in the fund at the time of the  early  decommissioning  and the  amount
that would have been in the fund if contributions  had been made over the normal
life of the  facility.  The  Company  is unable to  predict  what  effect  these
requirements may have on the timing of the availability of insurance proceeds to
the Company for the Company's  bondholders and the amount of such proceeds which
would be available.  Under the terms of the various  insurance  agreements,  the
Company  could be assessed  up to $26  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 $13 million per year.

     NRC  regulations  require that licensees of nuclear  generating  facilities
demonstrate  that funds will be available in certain  minimum amounts at the end
of the life of the facility to decommission the facility.  Based on estimates of
decommissioning  costs for each of the nuclear  facilities  in which the Company
has an  ownership  interest,  the PUC permits  the  Company to collect  from its
customers  and deposit in  segregated  accounts  amounts  which,  together  with
earnings  thereon,  will be used to decommission  such nuclear  facilities.  The
Company's current estimate of the cost of decommissioning its nuclear facilities
is $1.5 billion in 1997 dollars which is being collected  through electric rates
over the life of each generating unit. Beginning in 1999,  decommissioning costs
will be recoverable through transmission and distribution rates. At December 31,
1997,  the Company held $320  million in trust  accounts,  representing  amounts
recovered  from customers and net realized and  unrealized  investment  earnings
thereon, to fund future decommissioning costs.

     In an Exposure  Draft issued in 1996,  the Financial  Accounting  Standards
Board (FASB) proposed changes in the accounting for closure and removal costs of
production facilities, including the recognition, measurement and classification
of decommissioning costs for nuclear generating stations.  The FASB has expanded
the scope of the Exposure Draft to include closure or removal  liabilities  that
are  incurred at any time during the  operating  

                                       7

<PAGE>

life of the  related  long-lived  asset.  The FASB has  decided  that it  should
proceed toward either a final Statement or a revised  Exposure Draft. The timing
of this project is still to be determined.  If current electric utility industry
accounting  practices for  decommissioning  are changed,  annual  provisions for
decommissioning  costs could increase and the estimated cost for decommissioning
could be recorded as a liability  rather than as accumulated  depreciation,  and
the increased  cost would be recognized as a regulatory  asset.  For  additional
information  concerning  nuclear  decommissioning,   see  note  5  of  Notes  to
Consolidated  Financial  Statements  included in the Company's  Annual Report to
Shareholders for the year 1997.

     On January 29, 1998, the NRC proposed to issue a generic letter which would
require  all nuclear  plant  operators  to provide  the agency with  information
concerning their programs, planned or implemented, to address Year 2000 computer
and systems issues at their facilities. In particular,  operators would be asked
to provide  confirmation of  implementation  of their programs and certification
that their  facilities are Year 2000 ready and in compliance  with the terms and
conditions of their licenses and NRC regulations. Licensees would be required to
submit a written  response  indicating  the status of their Year 2000  readiness
program,  including scope,  assessment  process and plans for corrective action.
Upon  completion of their Year 2000 readiness  program and no later than July 1,
1999,  licensees  would be required to confirm to the NRC that their  facilities
are Year 2000 ready,  together with a status report of work necessary to be Year
2000  compliant.  Year 2000 ready means computer  systems and  applications  are
suitable for continued use into the year 2000.  Year 2000  compliant  means that
such systems and applications  accurately process date/time data beyond the year
2000.  The Company cannot predict if this or any proposal will be adopted by the
NRC. For additional  information  regarding Year 2000 issues,  see "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Company's Annual Report to Shareholders for the year 1997.

     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.

Limerick Generating Station

     Limerick  Unit No. 1 achieved  a capacity  factor of 85% in 1997 and 84% in
1996.  Limerick Unit No. 2 achieved a capacity  factor of 95% in 1997 and 91% in
1996. 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 1996 and
1997, respectively.

     On May 9, 1997,  the NRC  issued  its  periodic  Systematic  Assessment  of
Licensee  Performance  (SALP) for Limerick for the period April 2, 1995 to March
29,  1997.  Limerick  achieved  ratings  of "1," the  highest  of  three  rating
categories,  in the areas of Operations,  Maintenance and Plant Support.  In the
area of Engineering,  Limerick achieved a rating of "2." The NRC stated that the
overall   performance  of  Limerick   remained   excellent.   Strong  management
involvement  and  conservative  decision  making were  exhibited  in  day-to-day
activities.  Self-assessment  and quality assurance  activities  continued to be
effective.  The  Performance  Enhancement  Process  continued to be an effective
program for  identifying,  evaluating  and  correcting  issues with  appropriate
thresholds  and  priorities.   Oversight  and  independent   review   committees
contributed  to the  corrective  actions  program  effectiveness.  While  noting
strengths  in design,  analysis and  modifications,  the NRC stated that earlier
engineering  intervention could have prevented  equipment problems that resulted
in a number  of plant  trips  and  forced  shutdowns.  The NRC also  noted  that
management has recognized this performance  weakness and has initiated  remedial
actions.  The  Company is  continuing  to take  actions in response to the NRC's
comments.

     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, 

                                       8

<PAGE>

including a review of fabrication  records and visual examinations of accessible
areas of the core shroud seam welds.  Each of the reactors at Limerick and Peach
Bottom is a GE BWR.  Initial  examination  of Limerick  Unit No. 1 was completed
during the February 1996  refueling  outage.  Although  crack  indications  were
identified at one location,  the Company  concluded  that there is a substantial
margin for each core shroud weld to allow for continued  operation of Unit No. 1
for a minimum of the next two  operating  cycles.  In  accordance  with industry
experience  and guidance,  initial  examination  of Limerick Unit No. 2 has been
scheduled for the refueling outage planned for April 1999. Peach Bottom Unit No.
3 was  initially  examined  during  its  refueling  outage  in the fall of 1993.
Although  crack  indications  were  identified  at two  locations,  the  Company
presented its finding 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 until its refueling outage scheduled
for 1999,  at which time it will be  re-examined.  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 last
refueling outage in September 1996. Although the examination revealed additional
minor flaw  indications,  the Company  concluded,  and the NRC  concurred,  that
neither repair nor modification to the core shroud was necessary. The Company is
also  participating  in a GE BWR Owners  Group to develop  long-term  corrective
actions.

     As a result of several BWRs  experiencing  clogging of some  emergency core
cooling system suction strainers,  which are part of the water supply system for
emergency  cooling of the reactor core, the NRC issued a Bulletin in May 1996 to
operators of BWRs  requesting  that  measures be taken to minimize the potential
for  clogging.  The  NRC  proposed  three  resolution  options,   including  the
installation of large capacity passive strainers, with a request that actions be
completed by the end of the unit's first  refueling  outage after  January 1997.
Strainers  were  installed  at Peach  Bottom Unit No. 3 during the October  1997
refueling  outage.  Installation  of  strainers  at Peach  Bottom Unit No. 2 and
Limerick  Unit No. 1 is scheduled  for their next  refueling  outages in October
1998 and April 1998, respectively.  For Limerick Unit No. 2, the NRC granted the
Company's  request to defer the installation of strainers until the end of 1998.
The Company has requested that the deferral period for installation of strainers
at Limerick Unit No. 2 be extended until its scheduled refueling outage in April
1999. No assurance can be given that such  additional  deferral will be granted.
The Company cannot predict what other actions,  if any, the NRC may take in this
matter.

     The NRC has raised  concerns that the Thermo-Lag  330 fire barrier  systems
used to protect cables and equipment at certain  nuclear  facilities,  including
Limerick  and  Peach  Bottom,  may  not  provide  the  necessary  level  of fire
protection  and requested  licensees to describe  short- and long-term  measures
being taken to address  this  concern.  The Company has informed the NRC that it
has taken  short-term  corrective  actions to address  the  inadequacies  of the
Thermo-Lag  barriers installed at Limerick and Peach Bottom and is participating
in an industry-coordinated program to provide long-term corrective solutions. By
letter  dated  December  21,  1992,  the NRC stated that the  Company's  interim
actions were acceptable.  The Company has been in contact with the NRC regarding
the Company's  long-term  measures to address Thermo-Lag fire barrier issues. In
1995, the Company  completed its  engineering  re-analysis for both Limerick and
Peach Bottom. This re-analysis identified proposed modifications to be performed
over the next several  years at both plants in order to implement  the long-term
measures  addressing the concern over  Thermo-Lag  use. The Company met with the
NRC  during  1997  regarding  the  Company's  plans  for the  resolution  of the
Thermo-Lag  issue.  In August  1997,  the NRC  informed  the Company that it was
satisfied with the progress to date on this issue. The Company continues to work
towards  completion  of  activities  to  resolve  this  issue by the  previously
committed dates of April 1999 for Limerick and October 1999 for Peach Bottom.

     Water for the  operation  of  Limerick is drawn from the  Schuylkill  River
adjacent to Limerick and from the Perkiomen Creek, a tributary of the Schuylkill
River.  During  certain  periods of the year,  generally  the summer  months but
possibly for as much as six months or more in some years,  the Company would not
be able to operate Limerick without the use of supplemental cooling water due to
existing  regulatory water withdrawal  constraints  applicable to the Schuylkill
River and the  Perkiomen  Creek.  Supplemental  cooling  water for  Limerick  is
provided  by a  supplemental  cooling  water  system  which draws water from the
Delaware  River at the 

                                       9

<PAGE>

Point Pleasant Pumping Station,  transports it to the Bradshaw  Reservoir (Point
Pleasant Project), then to the east and main branches of the Perkiomen Creek and
finally to Limerick.  The supplemental  cooling water system also provides water
for  public  use to two  Montgomery  County  water  authorities.  Certain of the
permits relating to the operation of the supplemental  cooling water system must
be renewed periodically.

     The Company has entered into an agreement with a  municipality  to secure a
backup source of water for the operation of Limerick  should the amount of water
from the  supplemental  cooling  water  system  not be  sufficient.  Should  the
supplemental cooling water system be completely unavailable,  this backup source
is  capable  of  providing   cooling  water  to  operate  both  Limerick   units
simultaneously at 70% of rated capacity for short periods of time.

Peach Bottom Atomic Power Station

     Peach Bottom Unit No. 2 achieved a capacity  factor of 100% in 1997 and 79%
in 1996.  Peach Bottom Unit No. 3 achieved a capacity  factor of 79% in 1997 and
99% in 1996. 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
1996 and 1997, respectively.

     On July 17, 1997,  the NRC issued its periodic SALP report for Peach Bottom
for the period October 15, 1995 to June 7, 1997.  Peach Bottom achieved  ratings
of "1," in the areas of Plant Operations,  Maintenance and Plant Support. In the
area of  Engineering,  Peach Bottom  achieved a rating of "2." Overall,  the NRC
observed excellent performance at Peach Bottom during the assessment period. The
NRC stated that station management  provided excellent  oversight and control of
engineering  activities throughout the period. The NRC noted that, while overall
engineering  performance was good, there were several  instances where operating
procedures,  surveillances,  and tests were not  consistent  with the design and
licensing  bases.  The Company is  continuing to take actions in response to the
NRC's comments.

     During  the Unit No. 3  refueling  outage  in  October  1997,  cracks  were
identified in three of the ten recirculation  system jet pump riser pipes within
the reactor  vessel.  The Company  developed a plan  allowing for the  continued
operation of the unit for several  months until  permanent  repairs can be made.
The plan limits  operation  of the unit to 94% of its rated power level for most
of this  period.  The  Company  plans to  remove  Unit No.  3 from  service  for
approximately  two weeks during  March 1998 to perform  permanent  repairs.  The
Company  expects  that the  permanent  repairs  will  cost  approximately  $3.25
million.

     The  Company,  Delmarva  Power & Light  Company 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 for Peach  Bottom and will
begin on the date Salem Unit No. 1 returns to  service  for Salem.  The  parties
have also agreed to forego litigation in the future, except for limited cases in
which the operator would be  responsible  for damages of no more than $5 million
per year.

     In  addition to the  matters  discussed  above,  see  "Limerick  Generating
Station" for a discussion of certain  matters which affect both Peach Bottom and
Limerick.

Salem Generating Station

     Salem  Units  No. 1 and No. 2 were  taken  out of  service  by PSE&G in the
second  quarter of 1995.  In June 1995,  the NRC  issued a  Confirmatory  Action
Letter (CAL) which  documented  commitments  of PSE&G to keep each unit off line
until it is satisfied that the unit is ready to return to service and to operate
reliably  over  the  long  term  and  until  the NRC  agrees  that  the  unit is
sufficiently prepared to restart. Salem Unit No. 2 returned to service on August
30, 1997.  The NRC amended the CAL to require a final  assessment  of Salem Unit
No. 2 after  approximately  two months of full  operation.  The Company has been
informed by PSE&G that a meeting was held with the NRC on December 4, 1997 which
satisfied this final CAL requirement for Salem Unit No. 2.

                                       10

<PAGE>

     The Company has been informed by PSE&G that Salem Unit No. 1 is expected to
return to service in the second quarter of 1998.  Restart of Salem Unit No. 1 is
also  subject to  completion  of the  requirements  of the  restart  plan to the
satisfaction  of PSE&G and the NRC. The Company has been  informed by PSE&G that
the NRC's Readiness  Assessment  Team  Inspection  (RATI) of Salem Unit No. 1 (a
requirement for restart) was completed on February 20, 1998. The inspection team
concluded that Salem Unit No. 1 was ready to return to operation.  The inability
to  successfully  return the Salem Unit No. 1 to operation could have a material
adverse effect on the Company's  financial  condition and results of operations.
During 1997,  the Company  incurred and  expensed  $152 million for  replacement
power and  maintenance  costs  related to the  shutdown of Salem.  See note 5 of
Notes to  Consolidated  Financial  Statements  included in the Company's  Annual
Report to  Shareholders  for the year 1997.  See also "Peach Bottom Atomic Power
Station" for a discussion of operating performance standards.

     The Company has been informed by PSE&G that as a part of PSE&G's efforts to
return the Salem units to service,  an  examination  was  performed on the steam
generators,  which are large heat  exchangers used to produce steam to drive the
turbines.  Inspection of Salem Unit No. 1 indicated degradation in a significant
number of tubes.  Inspection  and testing of Salem Unit No. 2 confirmed that the
condition of the steam  generators are well within  current  repair limits.  The
Salem  co-owners  purchased  and  installed  in Salem  Unit  No. 1 unused  steam
generators from the unfinished Seabrook Nuclear Generating Station Unit No. 2 in
New  Hampshire.  The cost of  replacing  the Salem Unit No. 1 steam  generators,
including installation of the new steam generators and disposal of the old steam
generators,  was  approximately  $178 million,  of which the Company's share was
approximately $76 million.

     At the January 1997 semi-annual NRC Senior  Management  Meeting,  the Salem
units were  placed on the NRC Watch List  (Watch  List) and were  designated  as
Category 2  facilities.  In a letter to PSE&G  advising of the  action,  the NRC
noted that its decision to place the Salem units on the Watch List was not based
on any  recent  performance  problems  or  decline  but  was  due  to the  NRC's
determination  that the Salem  units  should  have been placed on the Watch List
previously because of Salem's past safety performance. The NRC also indicated in
its  letter  that  it  had  increased  its  attention  and  resources  at  Salem
commensurate  with  a  Watch  List  plant.  Finally,  the  NRC  concluded  that,
notwithstanding  the  improvements  at Salem  (which  were  noted),  had it been
previously  identified as a Watch List plant,  Salem would not have been removed
from the  Watch  List  since  Salem  had yet to  demonstrate  a  period  of safe
performance at power. The NRC has three  classifications of facility monitoring.
A Category 3 facility is one which is having or has had  significant  weaknesses
that warrant  maintaining  the plant in a shutdown  condition until the licensee
can demonstrate to the NRC that adequate programs have both been established and
implemented to ensure substantial improvement. Full NRC approval is required for
restart  of  plants  in this  category  which the NRC will  monitor  closely.  A
Category 2 facility  is a plant that is  authorized  to operate but that the NRC
will  monitor  closely.  Although  being  operated in a manner  that  adequately
protects  public  health and safety,  plants in this category are having or have
had weaknesses that warrant increased NRC attention. A plant will remain in this
category   until  the  licensee   either   demonstrates  a  period  of  improved
performance,  or until a further  deterioration  of  performance  results in the
plant being placed in Category 3. A Category 1 facility is a plant that has been
removed from the Watch List.

     On July 8, 1997, a predecisional  enforcement  conference was held with the
NRC  to  discuss  apparent  violations  at  Salem.  These  apparent  violations,
identified in May and June 1997,  concerned emergency core cooling system switch
over and  related  residual  heat  removal  system  (RHR)  flow  issues and fire
protection  issues.  In a letter dated October 8, 1997,  the NRC informed  PSE&G
that a Level III violation was cited for the issues  surrounding  the RHR system
and Level IV violations were cited for the two fire protection issues. There was
no civil penalty issued by the NRC for any of these violations.

     The  Company  has been  informed  by PSE&G that  predecisional  enforcement
conferences were held on December 9, 1997 to discuss two allegations  concerning
security  program issues which  occurred at Salem in 1996.  PSE&G cannot predict
what other actions, if any, the NRC may take in these matters.

     In addition to the matters discussed above, see "Environmental  Regulations
-- Water."

                                       11

<PAGE>

Fuel

     The following table shows the Company's sources of electric output for 1997
and as estimated for 1998:
<TABLE>
<CAPTION>
                                                                                      1997          1998 (Est.)
<S>                                                                                    <C>              <C>  
          Nuclear...........................................................           39.0%            43.6%
          Mine-mouth, coal-fired............................................            8.0              7.2
          Service-area, coal-fired..........................................            5.7              6.8
          Oil-fired.........................................................            0.9              1.0
          Hydro (includes pumped storage)...................................            1.6              1.6
          Internal combustion...............................................            0.2              0.2
          Purchased, interchange and nonutility generated...................           44.6             39.6
                                                                                     ------           ------
                                                                                      100.0%           100.0%
                                                                                     ======           ======
</TABLE>

Nuclear

     The cycle of production and utilization of nuclear fuel includes the mining
and milling of uranium ore into uranium  concentrate;  the conversion of uranium
concentrates   to  uranium   hexafluoride;   the   enrichment   of  the  uranium
hexafluoride;  the  fabrication of fuel  assemblies;  and the utilization of the
nuclear fuel in the generating station reactor.  The Company does not anticipate
difficulty  in obtaining  the  necessary  uranium  concentrates  or  conversion,
enrichment  or  fabrication  services  for Limerick or Peach  Bottom.  PSE&G has
informed the Company that it presently has sufficient  contracts for uranium and
services  related to the nuclear fuel cycle to fully meet its current  projected
requirements. The following table summarizes the years through which the Company
has contracts for the segments of the nuclear fuel supply cycle:

<TABLE>
<CAPTION>
                                                         Concentrates (1)    Conversion (2)    Enrichment      Fabrication
<S>                                                          <C>               <C>              <C>             <C> 
Limerick Unit No. 1  ................................           2002              2001             2004            2003
Limerick Unit No. 2  ................................           2002              2001             2004            2004
Peach Bottom Unit No. 2  ........................               2002              2001             2004            2001
Peach Bottom Unit No. 3  ........................               2002              2001             2004            2002
<FN>
---------------
(1)  The Company's contracts for uranium  concentrates are allocated to Limerick
     and Peach Bottom on an as-needed basis.

(2)  The  Company  also  has  commitments  for at  least  60% of the  conversion
     services requirements for Limerick and Peach Bottom through 2002.
</FN>
</TABLE>

     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 to 2007.  Peach Bottom has
on-site  facilities  with capacity to store spent fuel until 2000 for Unit No. 2
and 2001 for Unit No. 3. In 1998, the Company will begin  construction  of a dry
spent-fuel  storage  facility at Peach  Bottom to maintain  full-core  discharge
capacity in the spent-fuel pools. Construction is expected to take approximately
27 months.  The Company  expects  that such a facility  will cost $16 million to
construct and will provide  spent-fuel  storage capacity at Peach Bottom for the
life of the plant.  The Company  expects to purchase  storage  canisters for the
spent fuel 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,  the  spent-fuel  storage  capacity  of  Salem  Units  No. 1 and No. 2 is
estimated to be 2012 and 2016, respectively.

     Under the Nuclear  Waste Policy Act of 1982 (NWPA),  the DOE is required to
begin  taking  possession  of  all  spent  nuclear  fuel  generated  by  nuclear
facilities,  including the  Company's,  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

                                       12

<PAGE>

accept spent fuel in 1998. In accordance with the NWPA, the Company pays the DOE
one mill ($.001) per kWh 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 its
1998 obligations.  In November 1997, the D.C. Court of Appeals issued a decision
in which it held that the DOE had not abided by its prior determination that the
DOE has an  unconditional  obligation to begin disposal of spent nuclear fuel by
January  31,  1998.  The  D.C.  Court of  Appeals  also  precluded  the DOE from
asserting that it was not required to begin receiving spent nuclear fuel because
it had not yet prepared a permanent  repository or an interim storage  facility.
The  DOE  and  one  of  the  utility   companies   have  filed  a  Petition  for
Reconsideration  of the  decision.  In  February  1998,  a group  of  utilities,
including  the  Company,  filed a petition  with the D.C.  Court of Appeals  for
further  orders to enforce the court's  previous  decisions.  The state agencies
have filed a similar petition.  The U.S. House of  Representatives  and the U.S.
Senate passed  separate bills in 1997  authorizing  construction  of a temporary
storage  facility  which could accept spent nuclear fuel from utilities in 2003.
In addition,  the DOE is exploring  other options to address delays in the waste
acceptance  schedule.  The charge collected by the Company from its customers in
1997 for spent-fuel disposal was $24 million.

     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 for disposal. On-site storage facilities have been constructed at
Peach Bottom and Limerick,  each with a five-year  storage  capacity,  which are
currently being used for interim storage.

     The  Company is also  pursuing  alternative  disposal  strategies  for LLRW
generated  at Peach Bottom and  Limerick,  including a LLRW  reduction  program.
Pennsylvania  has agreed to be the host site for a LLRW  disposal  facility  for
generators located in Pennsylvania,  Delaware, Maryland and West Virginia and is
pursuing a permanent  disposal  site  through a volunteer  siting  process.  The
Company  has  contributed  $12  million  towards  the total cost of a  permanent
Pennsylvania disposal site.

     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.  PSE&G has also  advised the Company  that New Jersey plans to
establish a LLRW disposal facility by 2000. Public meetings have been held in an
effort to provide  information to and obtain feedback from the public.  To date,
there have been no voluntary  sites  identified.  Consequently,  on February 10,
1998, the state agency responsible for this program  recommended to the Governor
of New Jersey that this effort be abandoned.  The Company,  as a Salem co-owner,
has paid $857,000 as its share of the New Jersey siting costs.

     The National  Energy Policy Act of 1992 (Energy Act) requires,  among other
things,  that utilities with nuclear  reactors pay for the  decommissioning  and
decontamination of the DOE nuclear fuel enrichment  facilities.  The total costs
to domestic utilities are estimated to be $150 million per year for 15 years, of
which the Company's  share is $5 million per year.  The Energy Act provides that
these costs are to be  recoverable  in the same manner as other fuel costs.  The
Company has recorded the liability and a related regulatory asset of $46 million
for such costs at December 31, 1997. The Company is currently  recovering  these
costs through rates.

     The  Company  is  currently  recovering  in rates  the  costs  for  nuclear
decommissioning and decontamination and spent-fuel storage. The Company believes
that the  ultimate  costs of  decommissioning  and  decontamination,  spent-fuel
disposal and any assessment under the Energy Act will continue to be recoverable
through  rates.  For  additional  information  concerning  decommissioning,  see
"Electric Operations - General."

                                       13

<PAGE>

Coal

     The Company has a 20.99% ownership  interest in Keystone Station (Keystone)
and a 20.72% ownership  interest in Conemaugh Station  (Conemaugh),  coal-fired,
mine-mouth   generating  stations  in  western  Pennsylvania   operated  by  GPU
Generating  Corp. A majority of Keystone's fuel  requirements is supplied by one
coal company under a contract  which expires on December 31, 2004.  The contract
calls for varying amounts of coal purchases as follows:  between 3.0 million and
3.5 million tons for each of the years through 1999;  and a total of 6.5 million
tons for the years 2000 through 2004. Approximately 80% of Conemaugh's 1998 fuel
requirements  are secured by a long-term  contract and the  remainder by several
short-term contracts or spot purchases.

     The Company has entered into  contracts  for a  significant  portion of its
coal  requirements  and makes spot purchases for the balance of coal required by
its  Philadelphia-area,  coal-fired units at Eddystone  Station  (Eddystone) and
Cromby Station (Cromby).  At January 1, 1998, the Company had contracts with two
suppliers for 1.5 million tons per year or approximately  80% of expected annual
requirements. Both contracts expire on December 31, 2000.

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 made on the open market,
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.

Gas Operations

     During  1997,  10%  of  the  Company's  operating  revenues  and  9% of its
operating income were from gas operations.  Gas sales and operating revenues for
1997 by class of customer are set forth below:
<TABLE>
<CAPTION>
                                                                                                       Operating
                                                                                      Sales            Revenues
                                                                                     (mmcf)         (millions of $)
<S>                                                                                    <C>             <C> 
                  House heating.................................................       32,666             $265
                  Residential (other than house heating)........................        1,614               17
                  Commercial and industrial.....................................       19,830              145
                  Other.........................................................          673                3
                  Change in unbilled............................................          212               (1)
                                                                                       ------           ------
                      Total gas sales...........................................       54,995              429
                  Gas transported for customers.................................       30,412               22
                                                                                       ------           ------
                      Total gas sales and gas transported.......................       85,407             $451
                                                                                       ======           ======
</TABLE>

     Annual and quarterly  operating  results can be  significantly  affected by
weather. Traditionally, sales of gas are higher in the first and fourth quarters
due to colder weather.

     The Company's  natural gas supply is provided by purchases from a number of
suppliers for terms of up to five years.  These  purchases  are delivered  under
several long-term firm transportation  contracts with Texas Eastern Transmission
Corporation  (Texas  Eastern)  and  Transcontinental  Gas Pipe Line  Corporation

                                       14

<PAGE>

(Transcontinental).  The Company's aggregate annual entitlement under these firm
transportation contracts is 98.5 million dekatherms. Peak gas is provided by the
Company's  liquefied  natural gas facility and propane-air  plant.  See "ITEM 2.
PROPERTIES."

     Through service agreements with Texas Eastern, Transcontinental, Equitrans,
Inc. and CNG  Transmission  Corporation,  underground  storage  capacity of 21.5
million  dekatherms  is  under  contract  to  the  Company.   Natural  gas  from
underground  storage  represents  approximately  40%  of the  Company's  1997-98
heating season supplies.

     The gas industry is continuing to undergo structural changes in response to
FERC  policies  designed  to  increase  competition.  In  addition,  there is an
initiative in the Pennsylvania legislature to deregulate the gas industry, which
has the support of Governor Ridge. See "Deregulation and Rate Matters."

     Horizon Energy  Company,  a wholly owned  subsidiary of the Company,  is an
unregulated marketing enterprise.  Horizon Energy is engaged in marketing gas to
residential  and  commercial  gas  customers  outside of the  Company's  service
territory.  Horizon Energy is also a member of a natural gas buying  cooperative
created to enhance  reliability  of service  and to access  less  expensive  gas
supplies for its eight gas utility members.

Segment Information

     Segment  information is incorporated herein by reference to note 2 of Notes
to Consolidated  Financial Statements included in the Company's Annual Report to
Shareholders for the year 1997.

Construction

     The Company maintains a construction program designed to meet the projected
requirements of its customers and to provide service reliability,  including the
timely replacement of existing  facilities.  The Company's current  construction
program does not include any new  generating  facilities.  At December 31, 1997,
construction work in progress, excluding nuclear fuel, aggregated $611 million.

     Due to the  expected  adverse  impact  of the PUC  Restructuring  Order and
competition for electric  generating  services on its future capital  resources,
the Company is currently evaluating its capital commitments for 1999 and beyond.
The  following  table  shows the  Company's  most  recent  estimate  of  capital
expenditures for plant additions and improvements for 1998:
<TABLE>
<CAPTION>
                                                                                  (Millions of $)
<S>                                                                                      <C> 
         Electric:
              Production........................................................         $155
              Nuclear fuel......................................................           53
              Transmission and distribution.....................................          126
              Other electric....................................................            3
                                                                                         ----
                  Total electric................................................          337
         Gas....................................................................           40
         Other..................................................................           73
                                                                                         ----
              Total.............................................................         $450
                                                                                         ====
</TABLE>

     Nuclear fuel  requirements  exclude the Company's share of the requirements
for Peach  Bottom and Salem which are  provided by an  independent  fuel company
under a capital lease. See note 16 of Notes to Consolidated Financial Statements
included  in the  Company's  Annual  Report to  Shareholders  for the year 1997.

                                       15

<PAGE>

Capital Requirements and Financing Activities

     The  following  table shows the Company's  most recent  estimate of capital
requirements for 1998:
<TABLE>
<CAPTION>
                                                                                  (Millions of $)
<S>                                                                                      <C> 
                  Construction..................................................         $450
                  New ventures (1)..............................................          150
                  Long-term debt maturities and sinking funds...................          247
                                                                                         ----
                           Total capital requirements...........................         $847
                                                                                         ====
<FN>
---------------
(1)  A portion of these expenditures will be expensed.
</FN>
</TABLE>

     The following table shows the Company's financing activities for 1997:
<TABLE>
<CAPTION>
                                                                                  (Millions of $)
<S>                                                                                    <C>
              Pollution Control
                    Variable Rate due 2027......................................          $23
              Term-Loan Facility
                    Variable Rate due 1998......................................           88
              Trust Preferred Securities
                    8% Series C.................................................           50
                                                                                         ----
                           Total................................................         $161
                                                                                         ====
</TABLE>

     During 1997, the Company  entered into a $900 million  unsecured  revolving
credit facility with a group of banks. The credit facility is composed of a $450
million 364-day credit agreement and a $450 million three-year credit agreement.
The  Company  uses the credit  facility  principally  to support  the  Company's
commercial paper program.

     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 in
accordance  with  the  prescribed  system  of  accounts.  As  a  result  of  the
extraordinary  charge in December  1997,  the Company did not meet the  earnings
test under the Mortgage  required for the issuance of  additional  bonds against
property  additions for the twelve months ended  December 31, 1997. In addition,
the Company does not expect to meet the earnings test under the Mortgage for any
twelve-month  period ending prior to December 31, 1998. Earnings coverages under
the  Mortgage  for the  calendar  years 1996 and 1995 were 4.39 and 4.94  times,
respectively.   At  December  31,  1997,  the  Company  was  entitled  to  issue
approximately  $3.7 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. As a result of the  extraordinary  charge in December 1997,
the Company did not meet the earnings test of the Articles for the twelve months
ended  December 31, 1997.  In addition,  the Company does not expect to meet the
earnings  test under the Articles for any  twelve-month  period  ending prior to
December 31, 1998.  Earnings  coverage under the Articles for the calendar years
1996 and 1995 was 2.50 and 2.34 times, respectively.

                                       16

<PAGE>

     The following  table sets forth the  Company's  ratios of earnings to fixed
charges and the ratios of earnings to combined fixed charges and preferred stock
dividends for the periods indicated:
<TABLE>
<CAPTION>
                                                              1993         1994        1995        1996         1997
<S>                                                         <C>          <C>         <C>         <C>         <C> 
Ratio of Earnings to Fixed Charges.....................       3.15         2.66        3.41        3.29        2.71
Ratio of Earnings to Combined Fixed Charges and
     Preferred Stock Dividends.........................       2.67         2.32        3.12        3.04        2.50
</TABLE>

For purposes of these  ratios,  (i) earnings  consist of income from  continuing
operations  before income taxes and fixed charges and (ii) fixed charges consist
of all interest  deductions  and the  financing  costs  associated  with capital
leases.  For  purposes of  calculating  these  ratios,  income  from  continuing
operations for 1997 does not include the extraordinary  charge against income of
$3.1 billion ($1.8 billion net of income taxes).

     At December 31, 1997, the Company had a total of $87.5 million  outstanding
under an unsecured  term-loan agreement with banks maturing in 1998. Most of the
Company's  unsecured debt  agreements  contain  cross-default  provisions to the
Company's other debt obligations.

     The Company has a $600 million  commercial  paper program.  At December 31,
1997,  there was $314 million of commercial paper  outstanding.  At December 31,
1997, the Company and its  subsidiaries  had formal and informal lines of credit
with banks  aggregating  $75 million  against which there was no short-term debt
outstanding.  As of December 31, 1997, the Company had no  compensating  balance
agreements with any bank.

     For additional  information,  see "Management's  Discussion and Analysis of
Financial Condition and Results of Operations" in the Company's Annual Report to
Shareholders for the year 1997.

Employee Matters

     The Company and its  subsidiaries had 7,359 employees at December 31, 1997.
None of the employees of the Company or its  subsidiaries  are  represented by a
union. Over the past several years, a number of unions have filed petitions with
the National Labor Relations Board to hold  certification  elections with regard
to different segments of employees within the Company. In all cases, the Company
employees  have rejected  union  representation.  The Company  expects that such
petitions will continue to be filed in the future.

Environmental Regulations

     Environmental  controls at the  federal,  state,  regional and local levels
have a  substantial  impact  on the  Company's  operations  due to the  cost  of
installation  and  operation of  equipment  required  for  compliance  with such
controls.  In addition to the matters discussed below, see "Electric  Operations
-- General" and "Electric Operations -- Limerick Generating Station."

     An  environmental  issue with  respect to  construction  and  operation  of
electric  transmission  and  distribution  lines and other facilities is whether
exposure to electro-magnetic fields (EMF) causes adverse human health effects. A
large number of  scientific  studies  have  examined  this  question and certain
studies have indicated an association between exposure to EMF and adverse health
effects,  including certain types of cancer.  However,  the scientific community
still has not reached a consensus on the issue.  Additional research intended to
provide a better  understanding of EMF is continuing.  The Company also 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.

                                       17

<PAGE>

Water

     The Company has been informed by PSE&G that PSE&G is implementing  the 1994
New Jersey Pollutant Discharge  Elimination System permit issued for Salem which
requires,  among other things,  water intake screen  modifications  and wetlands
restoration.  The estimated  capital cost of compliance with the final permit is
approximately  $100 million,  of which  approximately  $10 million remains to be
spent.  The  Company's  share of such  costs is 42.59%  and is  included  in the
Company's  capital  requirements.  In 1999,  PSE&G  must apply to the New Jersey
Department of Environmental Protection and Energy (NJDEPE) and other agencies to
renew such Salem  permit.  Failure to obtain  renewal of this permit on a timely
basis,  which  cannot be assured,  could have a material  adverse  effect on the
Company's financial condition and results of operations.

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  (SO2),  nitrogen  oxides (NOx) 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 SO2 and NOx
from electric power plants.  Flue-gas  desulfurization  systems (scrubbers) have
been  installed  at Conemaugh  Units No. 1 and No. 2 to reduce SO2  emissions to
meet the Phase I requirements of the Amendments.  Keystone Units No. 1 and No. 2
are subject to the Phase II SO2 and NOx limits of the  Amendments  which must be
met by  January  1, 2000.  The  Company  and the other  Keystone  co-owners  are
evaluating the Phase II compliance options for Keystone,  including the purchase
of SO2 emission allowances.

     The Company's  service-area,  coal-fired  generating units at Eddystone and
Cromby are equipped with scrubbers and their SO2 emissions meet the SO2 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 NOx
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 NOx emissions.

     The PDEP has  adopted a NOx  allowance  program  which could  restrict  the
operation  of the  Company's  fossil-fired  units,  require the  purchase of NOx
emission  allowances  from  others or require  the  installation  of  additional
control  equipment to permit  operation  above certain  limits.  The Company has
appealed a portion of the PDEP NOx allowance program.

     Many other provisions of the Amendments affect the Company's business.  The
Amendments  establish stringent control measures for geographical  regions which
have  been  determined  by the EPA to not  meet  National  Ambient  Air  Quality
Standards;  establish limits on the purchase and operation of motor vehicles and
require  increased use of alternative  fuels;  establish  stringent  controls on
emissions of toxic air pollutants and provide for possible future designation of
some  utility   emissions  as  toxic;   establish  new  permit  and   monitoring
requirements  for  sources  of air  emissions;  and  provide  for  significantly
increased enforcement power, and civil and criminal penalties.

Solid and Hazardous Waste

     The Comprehensive Environmental Response,  Compensation,  and Liability Act
of  1980  and  the  Superfund   Amendments  and   Reauthorization  Act  of  1986
(collectively CERCLA) authorize the EPA to cause potentially responsible parties
(PRPs) to  conduct  (or for the EPA to conduct  at the PRPs'  expense)  remedial
action  at waste  disposal  sites  that  pose a hazard  to human  health  or the
environment.  Parties  contributing  hazardous substances to a site or owning or
operating  a site  typically  are viewed as  jointly  and  severally  liable for
conducting or paying for  remediation  and for  reimbursing  the  government for
related costs incurred.  PRPs may agree to allocate  liability among themselves,
or a court may perform that  allocation  according to equitable  factors  deemed

                                       18

<PAGE>

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 comments,  the EPA issued a Record of Decision
in which it selected a natural stabilization remedy for the Maxey Flats disposal
site. The steering  committee has preliminarily  estimated that implementing the
EPA proposed  remedy at the Maxey Flats site would cost $60-$70  million in 1993
dollars.  A settlement  has been reached among the PRPs, the federal and private
PRPs, the Commonwealth of Kentucky and the EPA concerning their respective roles
and  responsibilities  in conducting  remedial activities at the site. Under the
settlement,  the private PRPs will perform the initial remedial work at the site
and the  Commonwealth  of Kentucky  will assume  responsibility  for  long-range
maintenance  and final  remediation of the site.  The Company  estimates that it
will be responsible for $600,000 of the remediation  costs to be incurred by the
private PRPs. On April 18, 1996, a consent  decree,  which included the terms of
the settlement,  was entered by the United States District Court for the Eastern
District of  Kentucky.  The PRPs have entered into a contract for the design and
implementation of the remedial plan and preliminary work has commenced.

     By notice  issued in December  1987,  the EPA  notified  several  entities,
including the Company, that they may be PRPs under CERCLA with respect to wastes
resulting  from the treatment  and disposal of  transformers  and  miscellaneous
electrical equipment at a site located in Philadelphia,  Pennsylvania (the Metal
Bank of America  site).  Several of the PRPs,  including  the Company,  formed a
steering committee to investigate the nature and extent of possible  involvement
in this matter.  On May 29, 1991, a Consent Order was issued by the EPA pursuant
to which the  members of the  steering  committee  agree to perform the RI/FS as
described in the work plan issued with the Consent Order. The Company's share of
the cost of the RI/FS was  approximately  30%.  On October  14,  1994,  the PRPs
submitted  to the EPA the RI/FS which  identified  a range of possible  remedial
alternatives  for the site from taking no action to removal of  essentially  all
contaminated material with an estimated cost range of $2 million to $90 million.
On July 19, 1995,  the EPA issued a proposed  plan for  remediation  of the site
which involves removal of contaminated soil,  sediment and groundwater and which
the EPA estimates would cost approximately $17 million to implement.  On October
18, 1995,  the PRPs  submitted  comments to the EPA on the  proposed  plan which
identified   several   inadequacies   with  the  plan,   including   substantial
underestimates of the costs associated with  remediation.  In December 1997, the
EPA  finalized  its  record  of  decision  (ROD) for the site.  The  Company  is
evaluating  the cost of  implementing  the remedy  described  in the ROD,  which
differs from the remedy previously proposed by the EPA. 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.

     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 require the Company to pay $991,835 in exchange for
the EPA  agreeing  not to sue,  take  administrative  action  under  CERCLA  for
recovery of past or future response costs or seek injunctive relief with respect
to the site. The Company has notified the 

                                       19

<PAGE>

EPA that it wishes to  participate  with other  eligible  PRPs in the de minimis
settlement, and is currently awaiting approval of the settlement.

     In October 1995, the Company, along with over 500 other companies, received
a General  Notice from the EPA advising that the Company had been  identified as
having sent  hazardous  substances  to the  Spectron/Galaxy  Superfund  Site and
requesting  the  companies  to conduct  an RI/FS at the site.  The  Company  had
previously  been  identified  as a de minimis  PRP and paid  $2,100 to settle an
earlier phase. Additionally, the Company had participated in a PRP agreement and
consent order related to further work at the Spectron site. In conjunction  with
the EPA's  General  Notice,  the  existing  PRP group has  proposed a settlement
which, based on the volume of hazardous  substances sent to the Spectron site by
the Company,  would allow the Company to settle the matter as a de minimis party
for less than $10,000.

     On October 16, 1989, the EPA and the NJDEPE 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.

     On November 30, 1995,  the Company was added as a third-party  defendant in
an existing suit alleging that the Company is  responsible  for sending waste to
the  Cinnaminson  Ground  Water  Contamination  Site  located in the Township of
Cinnaminson  in  Burlington  County,  New  Jersey.  The  Company  has reached an
agreement with the plaintiff  resolving the Company's  liabilities  for the site
for an amount  that is not  material to the  Company's  financial  condition  or
results of operations.

     The Company has been named as a defendant in a Superfund  matter  involving
the Greer  Landfill in South  Carolina.  The  plaintiff's  motion to dismiss the
complaint against the Company was granted,  although the third-party defendant's
cross-claims  against the Company remain.  The Company is currently  involved in
settlement discussions with the third-party defendants.

     On November 18, 1996,  the Company  received a notice from the EPA that the
Company  is a PRP at  the  Malvern  TCE  Superfund  Site,  located  in  Malvern,
Pennsylvania.  The  Company  is  currently  unable  to  estimate  the  amount of
liability, if any, it may have with respect to this site.

     On February 3, 1997,  the Company was served with a  third-party  complaint
involving the Pennsauken  Sanitary Landfill.  The Company is currently unable to
estimate the amount of liability it may have with respect to this site.

     In  June  1989,  a  group  of  PRPs  (Metro  PRP  Group)  entered  into  an
Administrative  Order on 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.

                                       20

<PAGE>

     The Company has  identified  27 sites where former  manufactured  gas plant
activities may have resulted in site  contamination.  Past activities at several
sites have  resulted in actual  site  contamination.  The  Company is  presently
engaged in performing  various  levels of  activities at these sites,  including
initial  evaluation to determine the existence and nature of the  contamination,
detailed  evaluation  to  determine  the  extent  of the  contamination  and the
necessity  and  possible   methods  of  remediation,   and   implementation   of
remediation.  The PDEP has approved  the  Company's  clean-up of two sites.  Six
other sites are currently under some degree of active study and/or  remediation.
At December  31,  1997,  the Company had accrued  approximately  $35 million for
investigation  and  remediation  of these  manufactured  gas  plant  sites  that
currently can be reasonably estimated.

     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.

Costs

     At  December  31,  1997,  the  Company  had accrued $63 million for various
investigation and remediation costs that can be reasonably estimated,  including
approximately   $35  million  for   investigation   and  remediation  of  former
manufactured gas plant sites.  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 1998 for compliance with
environmental  requirements total  approximately $14 million.  In addition,  the
Company  may  be  required  to  make  significant  additional  expenditures  not
presently determinable.

Telecommunications and Other 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 525 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.

     On behalf of its  venture  with AT&T  Wireless  Services,  the  Company has
completed   the  initial   build-out   of  a  new  digital   wireless   Personal
Communications  Services  (PCS)  network.   Commercial  launch  of  PCS  in  the
Philadelphia  area  occurred in October  1997.  The  Company  holds a 49% equity
interest in the venture.

     In  1997,  the  Company  and  UtiliCorp  United  formed  EnergyOne,  L.L.C.
(EnergyOne),  a separate  nationwide  marketing  company  designed to  integrate
traditional energy commodities with a portfolio of competitively priced products
and  services.  These  products  and services  will be offered by  participating
distributors  and suppliers under  franchise  arrangements  with EnergyOne.  The
Company and UtiliCorp  each holds a 50% equity  interest in  EnergyOne,  with an
aggregate investment totaling  approximately $22 million. The Company is also an
EnergyOne franchisee.

     In 1997,  the Company  and British  Energy of  Edinburgh,  Scotland  formed
AmerGen  Energy,  LLC (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.

     Due to their  start-up  nature,  these joint ventures and  investments  are
expected to negatively affect earnings in the near future.  See note 19 of Notes
to Consolidated  Financial Statements included in the Company's Annual Report to
Shareholders for the year 1997.

                                       21

<PAGE>

PECO Energy Capital Corp. and Related Entities

     PECO Energy Capital Corp., a wholly owned  subsidiary,  is the sole general
partner  of  PECO  Energy  Capital,   L.P.,  a  Delaware   limited   partnership
(Partnership).  The  Partnership  was created  solely for the purpose of issuing
preferred securities,  representing limited partnership  interests,  and lending
the  proceeds  thereof to the  Company,  and  entering  into  similar  financing
arrangements.  Such  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, 1997, the Partnership  held
$360,175,464 aggregate principal amount of the Subordinated Debentures.

     PECO  Energy  Capital  Trust I (Trust)  was  created in  October  1995 as a
statutory  business trust under the laws of the State of Delaware solely for the
purpose of issuing trust receipts (Trust  Receipts),  each representing an 8.72%
Cumulative  Monthly  Income  Preferred  Security,  Series B (Series B  Preferred
Securities) of the Partnership.  The Partnership is the sponsor of the Trust. As
of December 31, 1997, the Trust had outstanding  3,124,183  Trust  Receipts.  At
December 31, 1997, the assets of the Trust consisted  solely of 3,124,183 Series
B Preferred  Securities  with an  aggregate  stated  liquidation  preference  of
$78,104,575.  Distributions  were made on the Trust Receipts  during 1997 in the
aggregate  amount of  $6,810,719,  or $2.18 per Trust  Receipt.  Expenses of the
Trust for 1997 were approximately $50,000, all of which were paid by PECO Energy
Capital  Corp.  There  were 828  holders of record of the Trust  Receipts  as of
December 31, 1997.

     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,  1997,  the  Trust II had  outstanding  2,000,000  Trust II
Receipts.  At December 31, 1997, the assets of the Trust II consisted  solely of
2,000,000  Series C Preferred  Securities with an aggregate  stated  liquidation
preference  of  $50,000,000.  Distributions  were made on the Trust II  Receipts
during 1997 in the aggregate amount of $2,666,667.  Expenses of the Trust II for
1997 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.

                                       22
<PAGE>

Executive Officers of the Registrant at December 31, 1997
<TABLE>
<CAPTION>
                                 Age at                                                 Effective Date of Election
Name                          Dec. 31, 1997            Position                             to Present Position

<S>                              <C>    <C>                                                    <C> 
C. A. McNeill, Jr..............    58   Chairman of the Board, President and
                                           Chief Executive Officer........................     July 1, 1997
D. M. Smith....................    64   President-- PECO Nuclear and Chief
                                           Nuclear Officer................................     February 1, 1996
G. A. Cucchi...................    48   Senior Vice President-- Ventures..................     June 1, 1997
J. W. Durham...................    60   Senior Vice President-- Legal and
                                           General Counsel................................     October 24, 1988
M. J. Egan.....................    44   Senior Vice President-- Finance and
                                           Chief Financial Officer........................     October 13, 1997
W. J. Kaschub..................    55   Senior Vice President-- Human Resources...........     June 10, 1991
G. S. King.....................    57   Senior Vice President-- Corporate and
                                           Public Affairs.................................     October 1, 1992
K. G. Lawrence.................    50   Senior Vice President-- Local Distribution
                                           Company........................................     October 13, 1997
J. M. Madara, Jr...............    54   Senior Vice President-- Power Generation
                                           Group..........................................     March 1, 1994
W. H. Smith, III...............    49   Senior Vice President-- Business Services
                                           Group..........................................     November 7, 1997
A. J. Weigand..................    59   Senior Vice President.............................     June 1, 1997
G. R. Rainey...................    48   Senior Vice President-- Nuclear Operations........     April 1, 1996
N. J. Bessey...................    44   Vice President-- Power Transactions...............     October 11, 1994
J. B. Cotton...................    53   Vice President-- Station Support..................     April 9, 1997
J. Doering, Jr.................    54   Vice President-- Operations-- Power
                                           Generation Group...............................     October 28, 1996
G. N. Dudkin...................    40   Vice President-- Power Delivery...................     June 1, 1997
D. B. Fetters..................    46   Vice President-- Nuclear Planning and
                                           Development....................................     April 9, 1997
T. P. Hill, Jr.................    49   Vice President and Controller.....................     January 1, 1991
W. G. MacFarland, IV...........    48   Vice President-- Limerick Generating
                                           Station........................................     March 1, 1995
C. A. Matthews.................    47   Vice President-- Information Systems
                                           and Chief Information Officer..................     July 28, 1997
J. P. McElwain.................    47   Vice President-- Nuclear Projects.................     April 9, 1997
J. B. Mitchell.................    49   Vice President-- Finance and Treasurer............     December 1, 1994
T. N. Mitchell.................    42   Vice President-- Peach Bottom Atomic
                                           Power Station..................................     April 1, 1996
W. E. Powell, Jr...............    61   Vice President-- Support Services.................     January 30, 1995
K. K. Combs....................    47   Corporate Secretary...............................     November 1, 1994
</TABLE>

     Each of the above executive officers holds such office at the discretion of
the  Company's  Board of  Directors  until  his or her  replacement  or  earlier
resignation, retirement or death.

     Prior to his election to his current  position,  Mr.  McNeill was President
and Chief Executive Officer, President and Chief Operating Officer and Executive
Vice President - Nuclear.

     Prior to his election to his current  position,  Mr. D. M. Smith was Senior
Vice President - Nuclear Generation Group and Senior Vice President - Nuclear.

                                       23

<PAGE>

     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  - Finance  and  Chief  Financial  Officer  and Vice  President  - Gas
Operations.

     Prior  to his  election  to his  current  position,  Mr.  Madara  was  Vice
President - Production.

     Prior to his  election to his current  position,  Mr. W. H. Smith,  III was
Vice President and Group Executive - Telecommunications  Group, Vice President -
Station  Support,  Vice  President  - Planning  and  Performance,  and Manager -
Corporate Strategy and Performance.

     Prior to his election to his current position,  Mr. Weigand was Senior Vice
President  and Group  Executive  Bulk Power  Enterprises  and Vice  President  -
Transmission and Distribution Services.

     Prior to joining the Company in 1994, Ms. Bessey was Vice President of U.S.
Generating Company, an independent power producer.

     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 joining the Company in 1996, Mr. T. N. Mitchell was Team Manager -
Institute of Nuclear Power  Operations  (INPO),  Director - Site  Engineering at
Peach Bottom (on loan from INPO),  Department  Manager - Engineering  Support at
INPO,  Core Team  Member - Nuclear  Electric,  U.K.  (on loan  from  INPO),  and
Department Manager - Plant Analysis at INPO.

     Prior to joining  the  Company in 1995,  Mr.  Powell was Vice  President  -
Logistics with E. I. DuPont DeNemours & Co.

     Prior to  their  election  to the  positions  shown  above,  the  following
executive  officers held other positions with the Company since January 1, 1993:
Mr.  Cotton was  Director  - Nuclear  Engineering,  Director  - Nuclear  Quality
Assurance  and  Superintendent  -  Operations;  Mr.  Doering was Plant Manager -
Limerick,   Director  -  Nuclear  Strategies  Support,  and  General  Manager  -
Operations;  Mr. Dudkin was Acting General  Manager - Power  Delivery,  Regional
Director - Power  Delivery and Manager - Electric  Operations;  Mr.  Fetters was
Vice  President  -  Nuclear  Planning  and   Development,   Director  -  Nuclear
Engineering,  Director  -  Limerick  Maintenance  and  a  project  manager;  Mr.
MacFarland  was  Outage  Management  Director  -  Limerick,  Manager  -  Nuclear
Maintenance,  and Manager - Peach Bottom Installation Division; Mr. McElwain was
Director of Outage Management - Peach Bottom; Mr. J. B. Mitchell was Director of
Financial  Operations and Assistant  Treasurer;  Mr. Rainey was Vice President -
Peach Bottom Atomic Power Station,  Vice President - Nuclear  Services and Plant
Manager - Eddystone  Generating Station;  and Ms. Combs was an Assistant General
Counsel.

     There are no family  relationships among directors or executive officers of
the Company.

                                       24
<PAGE>

ITEM 2.   PROPERTIES

     The principal  plants and properties of the Company are subject to the lien
of the Mortgage under which the Company's First and Refunding Mortgage Bonds are
issued.

     The  following  table  sets forth the  Company's  net  electric  generating
capacity by station at December 31, 1997:
<TABLE>
<CAPTION>
                                                                                 Net Generating      Estimated
                                                                                  Capacity (1)       Retirement
                 Station                              Location                     (Kilowatts)          Year
<S>                                         <C>                                  <C>             <C>
Nuclear
   Limerick.............................    Limerick Twp., PA ..................    2,220,000     2024(2), 2029(2)
   Peach Bottom.........................    Peach Bottom Twp., PA...............      928,000(3)     2013, 2014
   Salem   .............................    Hancock's Bridge, NJ................      942,000(3)     2016, 2020
Hydro
   Conowingo............................    Harford Co., MD.....................      512,000           2014
Pumped Storage
   Muddy Run............................    Lancaster Co., PA...................      880,000           2014
Fossil (Steam Turbines)
   Cromby  .............................    Phoenixville, PA....................      345,000           2004
   Delaware.............................    Philadelphia, PA ...................      250,000            (4)
   Eddystone............................    Eddystone, PA.......................    1,341,000     2009, 2010, 2011
   Schuylkill...........................    Philadelphia, PA....................      166,000            (4)
   Conemaugh............................    New Florence, PA....................      352,000(3)     2005, 2006
   Keystone.............................    Shelocta, PA .......................      357,000(3)     2002, 2003
Fossil (Gas Turbines)
   Chester .............................    Chester, PA.........................       39,000            (4)
   Croydon .............................    Bristol Twp., PA ...................      373,000            (4)
   Delaware.............................    Philadelphia, PA ...................       60,000            (4)
   Eddystone............................    Eddystone, PA.......................       64,000            (4)
   Fairless Hills.......................    Falls Twp., PA......................       60,000            (4)
   Falls................................    Falls Twp., PA......................       50,000            (4)
   Moser................................    Lower Pottsgrove Twp., PA...........       48,000            (4)
   Pennsbury............................    Falls Twp., PA......................        6,000            (4)
   Richmond.............................    Philadelphia, PA ...................       96,000            (4)
   Schuylkill...........................    Philadelphia, PA....................       32,000            (4)
   Southwark............................    Philadelphia, PA....................       54,000            (4)
   Salem................................    Hancock's Bridge, NJ................       16,000(3)         (4)
Fossil (Internal Combustion)
   Cromby...............................    Phoenixville, PA....................        2,700            (4)
   Delaware.............................    Philadelphia, PA ...................        2,700            (4)
   Schuylkill...........................    Philadelphia, PA....................        2,800            (4)
   Conemaugh............................    New Florence, PA....................        2,300(3)        2006
   Keystone.............................    Shelocta, PA .......................        2,300(3)        2003
                                                                                    ---------
       Total....................................................................    9,203,800
                                                                                    =========
<FN>
---------------
(1)  Summer rating.
(2)  For depreciation accrual purposes only,  retirement dates have been reduced
     by 10 years.
(3)  Company portion.
(4)  Retirement  dates are under on-going  review by the Company.  Current plans
     call for the continued operation of these units beyond 1998.
</FN>
</TABLE>
                                       25
<PAGE>

     The  following  table  sets  forth the  Company's  major  transmission  and
distribution lines in service at December 31, 1997:
<TABLE>
<CAPTION>

              Voltage in Kilovolts (Kv)                                          Conductor Miles
              <S>                                                                 <C>
              Transmission:
                  500 Kv........................................................          891
                  220 Kv........................................................        1,634
                  132 Kv........................................................           15
                  66 Kv.........................................................          570
                  33 Kv and below...............................................           29
              Distribution:
                  33 Kv and below...............................................       46,817
</TABLE>

     At December 31, 1997, 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, 1997:
<TABLE>
<CAPTION>
                                                                                 Pipeline Miles
<S>                                                                                 <C>
              Transmission......................................................           28
              Distribution......................................................        5,679
              Service piping....................................................        4,507
                                                                                       ------
                  Total.........................................................       10,214
                                                                                       ======
</TABLE>

     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 25,000 mcf/day. In addition,  the Company owns 24 natural gas city
gate stations (including one temporary station) at various locations  throughout
its gas service territory.

     At December 31, 1997, the Company had 545 miles of fiber optic cable.

     The Company owns an office building in downtown  Philadelphia,  in which it
maintains  its  headquarters,  and also owns or leases  elsewhere in its service
area a number  of  properties  which  are used for  office,  service  and  other
purposes.  Information  regarding  rental and lease  commitments is incorporated
herein by reference  to note 16 of Notes to  Consolidated  Financial  Statements
included in the Company's Annual Report to Shareholders for the year 1997.

     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
$26 million for property  losses  incurred at any plant insured by the insurance
companies  (see "ITEM 1.  BUSINESS  -- Electric  Operations  --  General").  The
Company is  self-insured  to the extent that any losses may exceed the amount of
insurance  maintained.  Any such losses could have a material  adverse effect on
the Company's financial condition and results of operations.

                                       26
<PAGE>

ITEM 3.   LEGAL PROCEEDINGS

     On July 26, 1993 and August 15, 1995,  attorneys on behalf of  shareholders
filed separate  derivative  actions in the Court of Common Pleas in Philadelphia
County (Court of Common  Pleas)  against  several of the  Company's  present and
former officers alleging mismanagement,  waste of corporate assets and breach of
fiduciary duty. The basis of these suits, which were subsequently  consolidated,
was the findings and conclusions contained in a credit collection section of the
May 1991 PUC management  audit report  prepared by Ernst & Young.  In June 1993,
the Board of Directors of the Company appointed a special committee of directors
to consider  whether  legal action  against the Company  officers and  directors
would be in the best interest of the Company and its shareholders.  On March 14,
1994, upon the recommendation of the special  committee,  the Board of Directors
approved  a  resolution  refusing  the  shareholder  demand  related to the suit
subsequently filed in 1995 and authorizing and directing officers of the Company
to take all steps necessary to terminate the suit filed in 1993. On February 23,
1996,  the  Company  and  the  defendants  filed a  petition  to  terminate  the
consolidated  action  on the  basis of the March  14,  1994  Board of  Directors
resolution,  which petition was denied by the Court of Common Pleas.  On appeal,
the Supreme Court of Pennsylvania  held that the business  judgment rule,  which
permits  the Board of  Directors  of a  Pennsylvania  corporation  to  terminate
derivative   lawsuits   brought  by  minority   shareholders,   is  the  law  in
Pennsylvania;  established a procedure for determining  whether the criteria for
application  of the  business  judgment  rule had been met in a  specific  case;
reversed the order of the Court of Common Pleas;  and remanded the matter to the
Court of Common Pleas for further  proceedings  consistent with its opinion.  On
February  26,  1998,  the  Court of  Common  Pleas  granted  the  motion  of the
defendants and the Company to dismiss the derivative  suits because the decision
of the  Company's  Board  of  Directors  to  terminate  the  suits  based on the
recommendation of its special committee was proper.

     During the shutdown of Salem,  examinations of the steam generator tubes at
Salem Unit No. 1 revealed  significant  cracking.  On  February  27,  1996,  the
Company,  PSE&G, Atlantic Electric Company and Delmarva, the co-owners of Salem,
filed an action in the New Jersey District Court against  Westinghouse  Electric
Corporation,  the designer and manufacturer of the Salem steam  generators.  The
suit alleges that the  significant  cracking of the steam generator tubes is the
result of defects in the design and fabrication of the steam generators and that
Westinghouse knew that the steam generators supplied to Salem were defective and
that  Westinghouse  deliberately  concealed  this from PSE&G.  The suit  alleges
violations of both the federal and New Jersey  Racketeer  Influenced and Corrupt
Organizations  Acts (RICO),  fraud,  negligent  misrepresentation  and breach of
contract.  Westinghouse  has filed a motion for summary  judgment on the grounds
that the claim of the  plaintiffs  is barred by the statute of  limitations.  In
addition,  Westinghouse  has  filed a motion to  dismiss  the RICO  claims.  The
Company  cannot  predict  the  outcome  of  this   proceeding.   For  additional
information concerning the cracking of steam generator tubes at Salem, see "ITEM
1.
BUSINESS - Electric Operations - Salem Generating Station."

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     None.

                                     PART II

ITEM 5.   MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER 
          MATTERS

     The Company's common stock is listed on the New York and Philadelphia Stock
Exchanges.  At January  31,  1998,  there were  163,049  owners of record of the
Company's  common  stock.  The  information  with  respect  to the prices of and
dividends on the Company's  common stock for each  quarterly  period during 1997
and 1996 is  incorporated  herein by reference to "Operating  Statistics" in the
Company's Annual Report to Shareholders for the year 1997.

     The book value of the  Company's  common  stock at  December  31,  1997 was
$12.25 per share.

                                       27

<PAGE>

     Dividends  may be declared on common stock out of funds  legally  available
for  dividends  whenever  full  dividends  on  all  series  of  preferred  stock
outstanding at the time have been paid or declared and set apart for payment for
all past quarter-yearly dividend periods. No dividends may be declared on common
stock,  however,  at any time when the Company has failed to satisfy the sinking
fund  obligations  with  respect to certain  series of the  Company's  preferred
stock. Future dividends on common stock will depend upon earnings, the Company's
financial condition and other factors, including the availability of cash.

     The  Company's  Articles  prohibit  payment  of any  dividend  on, or other
distribution  to the holders of, common stock if, after giving  effect  thereto,
the capital of the Company  represented  by its common stock  together  with its
Other Paid-In Capital and Retained Earnings is, in the aggregate,  less than the
involuntary  liquidating  value  of its then  outstanding  preferred  stock.  At
December 31, 1997, such capital ($2.73  billion)  amounted to about 12 times the
liquidating value of the outstanding preferred stock ($230.2 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  Cumulative  Monthly  Income  Preferred  Securities of the
Partnership;  or (3) an event of default occurs under the Indenture  under which
the Subordinated Debentures are issued.

ITEM 6.   SELECTED FINANCIAL DATA

     Selected financial data for each of the last five years for the Company and
its subsidiaries is incorporated  herein by reference to "Financial  Statistics"
and "Operating  Statistics" in the Company's  Annual Report to Shareholders  for
the year 1997.

ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
          RESULTS OF OPERATIONS

     The  information  with  respect to this caption is  incorporated  herein by
reference to  "Management's  Discussion and Analysis of Financial  Condition and
Results of Operations" in the Company's  Annual Report to  Shareholders  for the
year 1997.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     None.

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The  information  with  respect to this caption is  incorporated  herein by
reference to "Consolidated  Financial Statements" and "Financial  Statistics" in
the Company's Annual Report to Shareholders for the year 1997.

ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND 
          FINANCIAL DISCLOSURE

     None.

                                       28
<PAGE>

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     (a) Identification of Directors.

     The  information  required for Directors is included in the Proxy Statement
of the Company in connection  with its 1998 Annual Meeting of Shareholders to be
held  April  8,  1998,  under  the  heading   "Election  of  Directors"  and  is
incorporated herein by reference.

     (b) Identification of Executive Officers.

     The  information  required for Executive  Officers is set forth in "PART I.
ITEM 1. BUSINESS - Executive Officers of the Registrant" of this Form 10-K.

ITEM 11.  EXECUTIVE COMPENSATION

     The  information  with  respect to this  caption is  included  in the Proxy
Statement  of the  Company  in  connection  with  its  1998  Annual  Meeting  of
Shareholders to be held April 8, 1998, under the heading "Executive Compensation
Disclosure" and is incorporated herein by reference.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The  information  with  respect to this  caption is  included  in the Proxy
Statement  of the  Company  in  connection  with  its  1998  Annual  Meeting  of
Shareholders to be held April 8, 1998, under the heading "Election of Directors"
and is incorporated herein by reference.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The  information  with  respect to this  caption is  included  in the Proxy
Statement  of the  Company  in  connection  with  its  1998  Annual  Meeting  of
Shareholders to be held April 8, 1998, under the heading "Election of Directors"
and is incorporated herein by reference.

                                       29
<PAGE>

                                     PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

Financial Statements and Financial Statement Schedule
<TABLE>
<CAPTION>
                                                                                                Reference (Page)
                                                                                          Form 10-K        Annual Report
                             Index                                                      Annual Report     to Shareholders
<S>                                                                                        <C>                 <C>
Data incorporated by reference from the Annual Report to Shareholders for the
   year 1997:
     Report of Independent Accountants.............................................          --                  21
     Consolidated Statements of Income for the years ended
       December 31, 1997, 1996 and 1995............................................          --                  22
     Consolidated Balance Sheets as of December 31, 1997 and 1996..................          --                  24
     Consolidated Statements of Cash Flows for the years ended
       December 31, 1997, 1996 and 1995............................................          --                  23
     Consolidated Statements of Changes in Common Shareholders'
       Equity and Preferred Stock for the years ended
       December 31, 1997, 1996 and 1995............................................          --                  26
     Notes to Consolidated Financial Statements....................................          --                  27
Data submitted herewith:
     Report of Independent Accountants.............................................          31                  --
     Schedule II--    Valuation and Qualifying Accounts for the years
                      ended December 31, 1997, 1996 and 1995.......................          32                  --
</TABLE>

     All other  schedules  are omitted  since the  required  information  is not
present or is not present in amounts  sufficient  to require  submission  of the
schedule,  or because the information  required is included in the  consolidated
financial statements and notes thereto.

     With  the  exception  of the  consolidated  financial  statements  and  the
independent  accountants'  report listed in the above index and the  information
referred  to in  Items 1, 2, 5, 6, 7 and 8,  all of  which  is  included  in the
Company's  Annual Report to Shareholders  for the year 1997 and  incorporated by
reference  into this Form 10-K, the Annual Report to  Shareholders  for the year
1997 is not to be deemed filed as part of this Form 10-K.

                                       30
<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS

To the Shareholders and Board of Directors
PECO Energy Company:

     Our report on the consolidated  financial statements of PECO Energy Company
has been  incorporated  by  reference in this Form 10-K from page 21 of the 1997
Annual Report to  Shareholders  of PECO Energy  Company.  In connection with our
audits of such financial statements,  we have also audited the related financial
statement schedule listed in the index in Item 14 of this Form 10-K.

     In our opinion,  the financial  statement  schedule referred to above, when
considered  in  relation  to the basic  financial  statements  taken as a whole,
presents  fairly,  in all  material  respects,  the  information  required to be
included therein.



COOPERS & LYBRAND L.L.P.


2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 2, 1998

                                       31
<PAGE>

                  PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES

                  SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS

                             (Thousands of Dollars)

<TABLE>
<CAPTION>
              Column A                       Column B           Column C Additions         Column D       Column E

                                                                            Charged to
                                            Balance at     Charged to          Other                     Balance at
                                           Beginning of     Costs and        Accounts     Deductions       End of
             Description                      Period        Expenses          Describe    Describe(1)      Period
<S>                                         <C>             <C>            <C>            <C>             <C>    
                                        FOR THE YEAR ENDED DECEMBER 31, 1997
ALLOWANCE FOR UNCOLLECTIBLE
   ACCOUNTS.............................      $24,040         $58,367        $  --          $50,593         $31,814
                                              -------         -------        -------        -------         -------
         TOTAL..........................      $24,040         $58,367        $  --          $50,593         $31,814
                                              =======         =======        =======        =======         =======


                                        FOR THE YEAR ENDED DECEMBER 31, 1996

ALLOWANCE FOR UNCOLLECTIBLE
   ACCOUNTS.............................      $20,860         $50,976        $  --          $47,796         $24,040
                                              -------         -------        -------        -------         -------
         TOTAL..........................      $20,860         $50,976        $  --          $47,796         $24,040
                                              =======         =======        =======        =======         =======



                                        FOR THE YEAR ENDED DECEMBER 31, 1995

ALLOWANCE FOR UNCOLLECTIBLE
   ACCOUNTS.............................      $16,500         $39,043        $  --          $34,683         $20,860
                                              -------         -------        -------        -------         -------
         TOTAL..........................      $16,500         $39,043        $  --          $34,683         $20,860
                                              =======         =======        =======        =======         =======
<FN>
---------------
(1)  Write-off of individual accounts receivable.
</FN>
</TABLE>

                                       32
<PAGE>

Exhibits

     Certain of the following  exhibits have been filed with the  Securities and
Exchange  Commission  (Commission)  pursuant  to the  requirements  of the  Acts
administered by the  Commission.  Such exhibits are identified by the references
following  the  listing  of each such  exhibit  and are  incorporated  herein by
reference  under Rule 12b-32 of the  Securities  and  Exchange  Act of 1934,  as
amended.  Certain  other  instruments  which would  otherwise  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

    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.

    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:
<TABLE>
<CAPTION>
                  Dated as of                          File Reference                            Exhibit No.
                  ------------------------------------------------------------------------------------------
                  <S>                                  <C>                                     <C>
                  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
                  January 15, 1992                     Form 8-K dated January 27, 1992           4(e)-78
                  April 1, 1992                        March 31, 1992 Form 10-Q                  4(e)-79
                  April 1, 1992                        March 31, 1992 Form 10-Q                  4(e)-80
                  June 1, 1992                         June 30, 1992 Form 10-Q                   4(e)-81
                  June 1, 1992                         June 30, 1992 Form 10-Q                   4(e)-82
                  July 15, 1992                        June 30, 1992 Form 10-Q                   4(e)-83
                  September 1, 1992                    1992 Form 10-K                            4(e)-84
                  September 1, 1992                    1992 Form 10-K                            4(e)-85
                  March 1, 1993                        1992 Form 10-K                            4(e)-86

                                       33
<PAGE>

                  Dated as of                          File Reference                            Exhibit No.
                  ------------------------------------------------------------------------------------------
                  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
                  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
                  August 15, 1993                      Form 8-A dated August 19, 1993            4(e)-93
                  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
</TABLE>

    4-3           Indenture,  dated as of July 1, 1994,  between the Company and
                  First Union  National  Bank,  as successor  trustee (1994 Form
                  10-K, Exhibit 4-5).

    4-4           First  Supplemental  Indenture,  dated as of December 1, 1995,
                  between  the  Company  and  First  Union   National  Bank,  as
                  successor trustee, to Indenture dated as of July 1, 1994 (1995
                  Form 10-K, Exhibit 4-7).

    4-5           Second  Supplemental  Indenture,  dated  as of June  1,  1997,
                  between  the  Company  and  First  Union   National  Bank,  as
                  successor trustee, to Indenture dated as of July 1, 1994.

    4-6           Payment and Guarantee Agreement, dated July 27, 1994, executed
                  by the Company in favor of the holders of  Cumulative  Monthly
                  Income Preferred Securities,  Series A of PECO Energy Capital,
                  L.P. (1994 Form 10-K, Exhibit 4-7).

    4-7           Payment and  Guarantee  Agreement,  dated as of  December  19,
                  1995,  executed  by the  Company  in favor of the  holders  of
                  Cumulative  Monthly Income Preferred  Securities,  Series B of
                  PECO Energy Capital, L.P (1995 Form 10-K, Exhibit 4-10).


    4-8           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.

    4-9           Revolving Credit Agreement, dated as of October 7, 1997, among
                  the Company, as borrower, and certain banks named therein.

   4-10           364-day Credit  Agreement,  dated as of October 7, 1997, among
                  the Company, as borrower, and certain banks named therein.

   4-11           PECO Energy Company  Dividend  Reinvestment and Stock Purchase
                  Plan, as amended  January 28, 1994  (Post-Effective  Amendment
                  No. 1 to Registration No. 33-42523, Exhibit 28).

   10-1           Amended   and    Restated    Operating    Agreement   of   PJM
                  Interconnection, L.L.C., dated June 2, 1997, (Revised December
                  31, 1997).

   10-2           Agreement,  dated  November 24, 1971,  between  Atlantic  City
                  Electric  Company,  Delmarva  Power  & Light  Company,  Public
                  Service Electric and Gas Company and the Company for ownership
                  of Salem Nuclear  Generating  Station (1988 Form 10-K, Exhibit
                  10-3);   supplemental   agreement  dated  September  1,  1975;
                  supplemental agreement dated January 26, 1977 (1991 Form 10-K,
                  Exhibit 10-3); and supplemental agreement dated May 27, 1997.

                                       34

<PAGE>

   10-3           Agreement,  dated  November 24, 1971,  between  Atlantic  City
                  Electric  Company,  Delmarva  Power  & Light  Company,  Public
                  Service Electric and Gas Company and the Company for ownership
                  of Peach Bottom Atomic Power Station;  supplemental  agreement
                  dated September 1, 1975;  supplemental agreement dated January
                  26,  1977  (1988  Form 10-K,  Exhibit  10-4) and  supplemental
                  agreement dated May 27, 1997.

   10-4           Deferred Compensation and Supplemental Pension Benefit Plan.*

   10-5           Management   Group  Deferred   Compensation  and  Supplemental
                  Pension Benefit Plan.*

   10-6           Unfunded Deferred Compensation Plan for Directors.*

   10-7           Forms of  Agreement  between the Company and certain  officers
                  (1995 Form 10-K, Exhibit 10-5).

   10-8           PECO Energy Company 1989  Long-Term  Incentive  Plan,  amended
                  April 9, 1997 (1997 Proxy Statement, Appendix B).*

   10-9           PECO Energy Company  Management  Incentive  Compensation  Plan
                  (1997 Proxy Statement, Appendix A).*

   10-10          Amended and  Restated  Limited  Partnership  Agreement of PECO
                  Energy  Capital,  L.P.,  dated July 25,  1994 (1994 Form 10-K,
                  Exhibit 10-7).

   10-11          Amendment   No.  1  to  the  Amended  and   Restated   Limited
                  Partnership  Agreement of PECO Energy Capital, L.P. (1995 Form
                  10-K, Exhibit 10-8).

   10-12          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          Amended and Restated  Trust  Agreement of PECO Energy  Capital
                  Trust I,  dated as of  December  19,  1995.  (1995  Form 10-K,
                  Exhibit 10-10).

   12-1           Ratio of Earnings to Fixed Charges.

   12-2           Ratio of  Earnings  to Combined  Fixed  Charges and  Preferred
                  Stock Dividends.

     13           Management's  Discussion  and Analysis of Financial  Condition
                  and Results of Operations,  Consolidated Financial Statements,
                  Notes  to   Consolidated   Financial   Statements,   Financial
                  Statistics,  and Operating  Statistics of the Annual Report to
                  Shareholders for the year 1997.

     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.

                                       35
<PAGE>
Reports on Form 8-K

     During the quarter  ended  December 31,  1997,  the Company  filed  Current
     Reports on Form 8-K, dated:

         November 7, 1997  reporting  information  under "ITEM 5. OTHER  EVENTS"
         regarding  the  Company's  filing of  testimony  with the  Pennsylvania
         Public  Utility   Commission  in  connection  with  its   restructuring
         proceeding.

         December 11, 1997  reporting  information  under "ITEM 5. OTHER EVENTS"
         regarding the Pennsylvania  Public Utility  Commission's  approval of a
         restructuring plan in the Company's restructuring proceeding.

         December 12, 1997  reporting  information  under "ITEM 5. OTHER EVENTS"
         regarding the terms of the  Pennsylvania  Public  Utility  Commission's
         restructuring plan in the Company's restructuring proceeding.

     Subsequent to December 31, 1997, the Company filed Current  Reports on Form
     8-K, dated:

         January 9, 1998  reporting  information  under  "ITEM 5. OTHER  EVENTS"
         regarding   the   Company's   filing  of  a  Petition  for   Rehearing,
         Reconsideration,  Clarification,  and  Amendment  to  the  Pennsylvania
         Public  Utility   Commission's  Opinion  and  Order  in  the  Company's
         restructuring proceeding.

         January 15, 1998  reporting  information  under "ITEM 5. OTHER  EVENTS"
         regarding the Pennsylvania Public Utility Commission's  response to the
         Company's   filing  of  a  Petition  for  Rehearing,   Reconsideration,
         Clarification,  and Amendment to the Opinion and Order in the Company's
         Restructuring Proceeding.

         January 22, 1998  reporting  information  under "ITEM 5. OTHER  EVENTS"
         regarding the Company's filing of complaints appealing the Pennsylvania
         Public Utility Commission's decision in its restructuring proceeding.

         January 23, 1998  reporting  information  under "ITEM 5. OTHER  EVENTS"
         regarding the Company's filing of complaints appealing the Pennsylvania
         Public Utility Commission's decision in its restructuring proceeding.

         January 26, 1998  reporting  information  under "ITEM 5. OTHER  EVENTS"
         regarding  the  Company's  decision to reduce the  Company's  quarterly
         common stock dividend and reporting 1997 financial results.

                                       36

<PAGE>
                                   SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the registrant,  PECO ENERGY COMPANY, has duly caused this
annual  report to be signed on its  behalf by the  undersigned,  thereunto  duly
authorized,  in the City of Philadelphia,  and Commonwealth of Pennsylvania,  on
the 9th day of March 1998.

                                    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,   March 9, 1998
_________________________   Chief Executive Officer and
    C. A. McNeill, Jr.      Director (Principal Executive
                            Officer)

/s/     M. J. Egan          Senior Vice President - Finance     March 9, 1998
_________________________   and Chief Financial Officer
        M. J. Egan          (Principal Financial and
                            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           JAMES A. HAGEN
          DANIEL L. COOPER              KINNAIRD R. MCKEE
          M. WALTER D'ALESSIO           JOSEPH J. MCLAUGHLIN
          G. FRED DIBONA, JR.           JOHN M. PALMS
          R. KEITH ELLIOTT              JOSEPH F. PAQUETTE, JR.
          RICHARD G. GILMORE            RONALD RUBIN
          RICHARD H. GLANTON            ROBERT SUBIN

By   /s/ C. A. McNeill, Jr.                                     March 9, 1998
______________________________________
 C. A. McNeill, Jr., Attorney-in-Fact