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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, 1996
                                       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
     incorporation or organization)                     Identification No.)

                P.O. Box 8699
    2301 Market Street, Philadelphia, PA                 (215) 841-4000
  (Address of principal executive offices)      (Registrant's telephone number,
                              including area code)
                                      19101
                                   (Zip Code)
                      -----------------------------------


           Securities registered pursuant to Section 12(b) of the Act:
   First and Refunding Mortgage Bonds (Listed on the New York Stock Exchange):
<TABLE>
<S>                            <C>                          <C>                           <C>
6 1/8% Series due 1997 (*)        7 3/8% Series due 2001      6 1/2% Series due 2003           7 1/8% Series due 2023
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 1/4% Series due 2024
------------------
(*) Also listed on the Philadelphia Stock Exchange
</TABLE>

     Cumulative Preferred Stock -- without par value (Listed on the New York and
Philadelphia Stock Exchanges):
  $7.96 Series    $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 a 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)

           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  $4,941,367,295 at February
28, 1997.

     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:  222,542,087  shares  outstanding  at
February 28, 1997.

                      -----------------------------------

                  DOCUMENTS INCORPORATED BY REFERENCE (In Part) Annual Report of
              PECO Energy Company to Shareholders for the year 1996
   is incorporated in part in Parts I, II and IV hereof, as specified herein.
       Proxy Statement of PECO Energy Company in connection with its 1997
       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................................................ 2
            Electric - Wholesale............................................. 5
            Gas.............................................................. 5
           Electric Operations............................................... 6
            General.......................................................... 6
            Limerick Generating Station...................................... 8
            Peach Bottom Atomic Power Station................................10
            Salem Generating Station.........................................10
           Fuel..............................................................12
            Nuclear..........................................................12
            Coal.............................................................14
            Oil..............................................................15
            Natural Gas......................................................15
           Gas Operations....................................................15
           Segment Information...............................................16
           Construction......................................................16
           Capital Requirements and Financing Activities.....................17
           Employee Matters..................................................18
           Environmental Regulations.........................................19
            Water............................................................19
            Air..............................................................19
            Solid and Hazardous Waste........................................20
            Costs............................................................23
           Telecommunications................................................23
           PECO Energy Capital Corp. and Related Entities....................24
           Executive Officers of the Registrant..............................25
  ITEM 2.  PROPERTIES........................................................27
  ITEM 3.  LEGAL PROCEEDINGS.................................................29
  ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............30
PART II
  ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
            RELATED STOCKHOLDER MATTERS......................................30
  ITEM 6.  SELECTED FINANCIAL DATA...........................................31
  ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
            CONDITION AND RESULTS OF OPERATIONS..............................31
  ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................31
  ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
            ON ACCOUNTING AND FINANCIAL DISCLOSURE...........................31
PART III
  ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................31
  ITEM 11. EXECUTIVE COMPENSATION............................................32
  ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
            MANAGEMENT.......................................................32
  ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................32
PART IV
  ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
            FORM 8-K.........................................................33
           Financial Statements and Financial Statement Schedule.............33
           REPORT OF INDEPENDENT ACCOUNTANTS.................................34
           SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS..................35
           Exhibits..........................................................36
           Reports on Form 8-K...............................................39
  SIGNATURES

                                        i


<PAGE>

                                     PART I
ITEM 1.   BUSINESS

The Company

     PECO Energy Company (Company),  incorporated in Pennsylvania in 1929, is an
operating  utility  which  provides  electric  and gas  service to the public in
southeastern  Pennsylvania and buys and sells power in the wholesale  generation
market  throughout  North  America.  The total retail area served by the Company
covers 2,107 square  miles.  Retail  electric  service is supplied in an area of
1,972 square miles with a population of about 3.6 million, including 1.6 million
in the City of Philadelphia.  Approximately 94% of the electric service area and
64% of retail  kilowatthour (kWh) sales are in the suburbs around  Philadelphia,
and  6% of the  service  area  and  36%  of  such  sales  are  in  the  City  of
Philadelphia.  Natural gas service is  supplied in a  1,475-square-mile  area of
southeastern  Pennsylvania  adjacent to  Philadelphia  with a population  of 1.9
million.

     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 Federal Energy
Regulatory  Commission (FERC) as to transmission  rates.  Specific operations of
the Company  are also  subject to the  jurisdiction  of various  other  federal,
state,  regional  and  local  agencies,  including  the  United  States  Nuclear
Regulatory  Commission (NRC), the United States Environmental  Protection Agency
(EPA),  the United States  Department of Energy (DOE),  the Delaware River Basin
Commission 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.

     The electric and gas utility  industries  are both  undergoing  fundamental
restructurings. In 1996, the 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  Tom 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. For additional  information,  see
"Deregulation and Rate Matters."


Deregulation and Rate Matters

     In 1996, approximately 86% of the Company's electric sales revenue and 100%
of its gas sales revenue were derived pursuant to rates regulated by the PUC and
approximately  13% of the Company's  electric sales revenue was derived pursuant
to rates  regulated  by the FERC.  The PUC has  established  through  regulatory
proceedings  the base rates which the Company  may charge for  electric  and gas
service in Pennsylvania. In addition, the PUC has regulated various fuel and tax
adjustment clauses applicable to customers' bills.

     In  response  to  competitive  pressures,  the  Company  has  continued  to
negotiate   long-term  contracts  with  many  of  its  large  volume  industrial
customers. Although these agreements have resulted in reduced margins, they have
permitted the Company to retain these customers. During 1996, energy sales under
long-term contracts were 8% of total electric sales. With the development of the
wholesale  generation market, the Company has increased both its wholesale power
purchases and sales.

     As a result  of the  adoption  of the  Competition  Act,  and  deregulation
initiatives by FERC, as described below, the Company  anticipates the unbundling
of electric  services into separate  generation,  transmission  and distribution
services  with  open  competition  for  both  wholesale  and  retail  generation
services.  The Company  believes that the Competition  Act and other  regulatory
initiatives that provide for competition for generation services will

                                        1

<PAGE>

significantly  affect the Company's  future  financial  condition and results of
operations.  Because  of the  substantial  capital  costs of its  investment  in
nuclear generation, the Company is a high-cost producer. However, because of the
fuel and other economies of nuclear generation,  the Company is a relatively low
marginal cost  producer.  At this time the Company  cannot  predict  whether the
changes  resulting  from  deregulation  of generation  services will  materially
affect the market  prices of its  publicly  traded  securities.  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 1996.

Electric - Retail

     The  Competition  Act was  enacted  in  December  1996,  providing  for the
restructuring of the electric utility industry in Pennsylvania.  The Competition
Act requires the  unbundling  of electric  services  into  separate  generation,
transmission  and  distribution   services  with  open  retail  competition  for
generation.  Electric distribution and transmission services remain regulated by
the  PUC.  The  Competition  Act  requires   utilities  to  submit  to  the  PUC
restructuring  plans,  including  their  stranded  costs  which will result from
competition.  Stranded costs include regulatory assets, nuclear  decommissioning
costs and  long-term  purchased  power  commitments,  for which full recovery is
allowed, and other costs, including investment in generating plants,  spent-fuel
disposal,  retirement costs and  reorganization  costs, for which an opportunity
for  recovery  is  allowed  in an  amount  determined  by the  PUC as  just  and
reasonable.  These costs,  after mitigation by the utility,  are to be recovered
through  the  Competitive  Transition  Charge  (CTC)  approved  by the  PUC  and
collected  from  distribution  customers  for  up  to  nine  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 the rates in place as of December 31, 1996,  subject
to certain exceptions.  To the extent the Company is not ultimately permitted by
the PUC to recover its retail electric  stranded costs, this amount could result
in a charge against earnings and a subsequent reduction in revenues.

     Full  electric  generation  competition  will be phased in for one-third of
each customer class by January 1, 1999,  for an additional  one-third by January
1, 2000 and for all remaining customers by January 1, 2001.

     The  Competition  Act also  authorizes  the PUC to  approve,  by adopting a
qualified rate order (QRO), the issuance by a utility, a finance subsidiary of a
utility  or a third  party  assignee  of a  utility  of  Transition  Bonds  as a
mechanism to mitigate stranded  investment and reduce customer rates.  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 repayable from  irrevocable  Intangible
Transition  Charges (ITC).  The maximum  maturity of the Transition Bonds is ten
years.

     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.  The Company
requested  expedited review of its Application  under the Competition Act, which
requires  the PUC to complete  its review of the  Application  and issue a final
determination within 120 days.

     The  Application,  which was filed in  advance  of the  Company's  required
restructuring  filing, seeks recovery of $3.6 billion of the Company's estimated
$7.1 billion (at December 31, 1998) total stranded costs through the issuance of
the  Transition  Bonds  covered  by the  Application.  As a result of an updated
market valuation of the Company's  generating plant, the Company has reduced its
total  stranded  cost claim from $7.1 to $6.7  billion.  The  Company's  current
estimate of total  stranded  costs  includes $3.5 billion of generation  assets,
$560 million of unfunded and as yet unrecorded decommissioning expenses and $2.6
billion of regulatory assets.  Recovery of the portion of the Company's stranded
costs not recovered by the  Application  will be requested by the Company in its
restructuring  filing,  which is  presently  anticipated  to be made on April 1,
1997.

                                        2

<PAGE>

     The  Application  sets forth the  Company's  proposal  for  issuance of the
Transition Bonds through an unrelated special purpose entity in order to achieve
off-balance  sheet  treatment  of  the  transaction.  In  proposed  transactions
involving other utilities,  the Securities and Exchange Commission has indicated
that  off-balance  sheet  treatment  would not be permitted.  The Company cannot
predict whether  off-balance  sheet treatment will be permitted for the issuance
of the Transition  Bonds. If off-balance  sheet treatment is not permitted,  the
Company  proposes that the Transition  Bonds be issued through a limited purpose
finance  subsidiary.  The finance  subsidiary would acquire from the Company the
intangible  transition  property  authorized  under  the  Competition  Act which
represents  the right to recover  through  the ITC  stranded  costs and  related
transaction and use of proceed costs.  The finance  subsidiary  would pledge the
intangible  transition  property and related ITC to secure the Transition Bonds.
Thus,  amounts  received  from the ITC  would be  dedicated  exclusively  to the
payment of the Transition Bonds.

     The Company  proposes  using the  proceeds it receives  resulting  from the
issuance of the Transition  Bonds, to pay transaction and use of proceeds costs,
currently  estimated at $173 million,  to settle  deferred fuel balances of $240
million  and  to  reduce  capitalization  by  approximately  $3.4  billion.  The
capitalization  reduction would be approximately  proportionate to the Company's
current  capitalization.  Specific  securities  to be retired  and the manner in
which they are to be retired have not been  determined and will depend on market
conditions at the time of issuance of the Transition Bonds.

     Adoption by the PUC of the requested  QRO and issuance of Transition  Bonds
to fund $3.6 billion of the Company's  stranded  costs and related  issuance and
use of proceeds  costs at current  interest  rates would  result in an estimated
average 3.4%  reduction in the  Company's  retail  electric  rates.  The Company
estimates  that  the   consummation  of  the  transaction  as  proposed  in  the
Application  and assuming the Company is permitted off- balance sheet  treatment
would reduce the Company's annual revenues by approximately $650 million and the
Company's annual operating  expenses by $501 million,  resulting in an estimated
reduction in annual net income of $149 million. The reduction in revenue results
from the  elimination of the revenue  requirements  of stranded  costs,  and the
reduction in operating expenses results from decreases in depreciation, interest
expense and associated  income taxes.  The impact on the Company's  earnings per
share will depend on the price at which shares of the Company's Common Stock are
purchased.  If Common Stock is purchased at a price above book value  ($20.88 at
December 31, 1996), earnings per share will be reduced.

     The PUC assigned the requested QRO to an administrative law judge (ALJ) who
has held  hearings  on the  matter.  A number  of  parties  have  intervened.  A
recommended  decision  by the ALJ is  expected  by April 15, 1997 and the PUC is
expected to issue a decision  with respect to the requested QRO by May 22, 1997.
The Company  cannot  predict  whether the PUC will issue the requested  QRO, the
level  of  stranded  cost  recovery  authorized  by any  QRO or  the  amount  of
Transition Bonds, if any, ultimately issued pursuant to any QRO.

     On March 18, 1997, certain  intervenors in the Company's  application for a
QRO petitioned the  Commonwealth  Court of  Pennsylvania  to enjoin the PUC from
taking any action or rendering any decision pursuant to the Competition Act. The
Company cannot predict the outcome of this matter.

     Under  the  Competition  Act,  the  Company's  rates for  transmission  and
distribution services will be capped at January 1, 1997 levels for 4.5 years and
the generation  portion of rates for up to nine years from the effective date of
the  Competition  Act. In recognition of the capping of rates at current levels,
at December 31, 1996,  the PUC  approved  the  Company's  request to roll-in and
eliminate  the Energy  Cost  Adjustment  (ECA),  a billing  surcharge  mechanism
previously used to recover a portion of the Company's energy costs. In addition,
the PUC  recognized  the  Company's  right to defer  and,  in the  future,  seek
recovery of (1) an estimated $102 million attributable to its undercollection of
$80  million  in energy  costs  through  1996 and the  anticipated  $22  million
performance  bonus with respect to the 1996  operation of the Company's  nuclear
generating facilities,  and (2) approximately $198 millon of future energy costs
that  would  not  have  otherwise  been  recoverable.  Subject  to the  rate cap
limitations imposed by the Competition Act, the PUC provided that these deferred
amounts may be recovered  either  through the stranded cost recovery  mechanisms
provided in the  Competition Act or an automatic  adjustment  clause provided in
the Public  Utility  Code.  On February 26,  1997, a coalition of the  Company's
large industrial  customers petitioned the PUC to reconsider and amend its order
regarding the ECA.

     On February 27, 1997, in compliance with the  Competition  Act, the Company
filed  with  the  PUC a  comprehensive  pilot  program  to  enable  some  90,000
residential, commercial and industrial customers to choose

                                        3

<PAGE>



their  electric  generation  suppliers  beginning as early as October 1997.  The
cross  section  of  eligible   customers  will  include  5%  from  the  City  of
Philadelphia and 5% from suburban counties across all major rate classes.  Also,
residential  customers  in one  randomly  selected  township  or  borough in the
suburbs  and  one  randomly  selected  political  subdivision  in  the  City  of
Philadelphia will be eligible.  In addition,  randomly  selected  commercial and
industrial customers located in state-created enterprise zones will be eligible.
Power would be delivered to the pilot customers as early as October 1997, and no
later than January 1998.  The pilot would  conclude in December  1998. All pilot
participants  would be among the one-third of electric  utility  customers to be
offered choice by January 1, 1999.

     If  approved by the PUC,  the pilot  would  begin in April  1997,  with the
random  selection  by a neutral  third party of some 90,000  customers  from the
Company's service territory. Under the pilot, the 90,000 customers will have the
opportunity  to buy their  electricity  from other power  companies,  brokers or
marketers through 1998. Cumulatively, about 480 MW of electric load will be open
to  competition.  The power from other  suppliers would continue to be delivered
over the Company's  transmission and  distribution  lines, and the Company would
continue to supply customer  services such as meter reading,  billing and outage
restoration.

     The Company's last electric base rate case,  intended  primarily to recover
costs associated with Limerick Unit No. 2 and associated common facilities,  was
filed in 1989.  The Company  voluntarily  excluded 400 MW of capacity  from base
rates,  and the PUC denied a return on common equity on an additional  399 MW of
capacity.  Under its  electric  tariffs,  the  Company  is allowed to retain for
shareholders any proceeds above the average energy cost for sales of this 399 MW
of capacity and/or  associated  energy.  In addition,  beginning April 1994, the
Company became entitled to share in the benefits which result from the operation
of both  Limerick  Units No. 1 and No. 2 through the  retention  of 16.5% of the
energy  savings,  subject to certain  limits.  During 1996,  1995 and 1994,  the
Company recorded as revenue net of fuel $82, $79 and $68 million,  respectively,
as a result of the sale of the 399 MW of capacity and/or  associated  energy and
the Company's share of Limerick energy savings.

     On February  22,  1996,  the PUC  approved  the  Company's  petition  for a
declaratory  accounting  order to  change  the  estimated  depreciable  lives of
certain of the Company's electric plant. The order approved the reduction of the
terminal dates by ten years, for depreciation accrual purposes only, of Limerick
Units No. 1 and No. 2 and associated common  facilities,  the utilization of new
life spans for various  categories of electric  production  plant and changes in
the remaining life estimates for transmission,  distribution, general and common
plant. The order also approved the amortization  over a nine-year period of $331
million of deferred Limerick costs representing $240 million of carrying charges
and  depreciation  associated  with 50% of Limerick  common  facilities  and $91
million of operating and maintenance expenses, depreciation and accrued carrying
charges on the  Company's  capital  investment in Limerick Unit No. 2 and 50% of
Limerick  common  facilities  during  the  period  from  January  8,  1990,  the
commercial  operation  date of Limerick  Unit No. 2, until April 20,  1990,  the
effective  date of the  inclusion  of  Limerick  Unit No. 2 in base  rates.  The
changes,  which  were  effective  October  1, 1996,  increase  depreciation  and
amortization on assets  associated with Limerick by  approximately  $100 million
per year and decrease  depreciation  and amortization on other Company assets by
approximately  $10 million per year,  for a net  increase  in  depreciation  and
amortization of  approximately  $90 million per year. The order did not increase
rates charged to customers.

     Effective  January  1995,  in  accordance  with a PUC Joint  Petition,  the
Company  increased  electric  base rates by $25  million per year to recover the
increased costs,  including the annual amortization of the transition obligation
(over 18 years) deferred in 1994 and 1993, associated with the implementation of
Statement  of  Financial   Accounting  Standards  (SFAS)  No.  106,  "Employers'
Accounting for Postretirement Benefits Other Than Pensions." See note 6 of Notes
to Consolidated  Financial Statements included in the Company's Annual Report to
Shareholders for the year 1996.  Subsequent to January 1, 1995,  retail electric
non-pension  postretirement  benefits expense in excess of the amount allowed to
be  recovered  under the Joint  Petition  may not be  deferred  for future  rate
recovery. In accordance with the Joint Petition, any of the parties to the Joint
Petition may elect to void the  settlement in the event current rate recovery of
non-pension postretirement benefits expense is ultimately disallowed as a result
of the Office of Consumer Advocate's appeal to the Supreme Court of

                                        4

<PAGE>



Pennsylvania of cases involving other Pennsylvania utilities. In such event, the
Company  would refund to  customers,  with  interest,  any  increased  base rate
amounts collected.

     The Company is  authorized  under a general order of the PUC to add a State
Tax Adjustment Surcharge to customers' bills to reflect the cost of increases or
decreases in certain state tax rates not recovered in base rates.

Electric - Wholesale

     During 1996, the FERC issued Order No. 888 which required public  utilities
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 new rules  provide for the  recovery  of  legitimate  and  verifiable
wholesale stranded costs.

     In  response to Order No.  888,  the  Company and the other  members of the
Pennsylvania-New Jersey- Maryland Interconnection Association (PJM) submitted to
the FERC separate filings proposing to restructure the PJM. The Company proposed
five major  initiatives to reduce the costs of electricity  while preserving the
reliability and universal service that is essential to Pennsylvania citizens. In
November 1996, the FERC issued an order rejecting both of the PJM  restructuring
filings. The FERC identified two issues that remain to be resolved: independence
of the independent system operator; and open access transmission pricing tariffs
that are  nondiscriminatory.  The FERC  directed  the  parties  to refile  their
proposals,  preferably as one proposal,  resolving  these issues by December 31,
1996,  with tariffs to be effective March 1, 1997. On December 31, 1996, the PJM
member companies,  including the Company,  filed a joint compliance  open-access
transmission  tariff with the FERC. The filing was not a complete  consensus but
included  competing  proposals  in  certain  areas  such  as  transmission  rate
structure  and  transmission   constraint/congestion  control.  The  PJM  member
companies  requested the FERC to choose  between the options for  implementation
during the  interim  period.  On  February  28,  1997,  the FERC issued an order
advising the PJM companies of which options to implement and making the PJM pool
compliance  filing, as revised by the FERC,  effective March 1, 1997, subject to
refund.  In doing so,  the FERC  adopted,  at least for an interim  period,  the
congestion  pricing model which had been proposed by the Company.  Further,  the
FERC advised the PJM companies and other intervenors that it intended to convene
a technical conference to address pricing issues related to PJM pool operations.

     The Company received approval for its transmission  service tariff covering
network and point-to-point  services and a market-based rate energy sales tariff
that allows the Company to sell wholesale  energy at market- based rates outside
the PJM control area. During the latter part of 1996, the Company also requested
approval from the FERC of certain modifications to the Company's  buy-for-resale
tariff. The requested  modifications would remove the existing cost-based cap on
prices  charged  for power  purchased  by the Company in  anticipation  of later
resale in the wholesale market and change certain of its terms. The transactions
covered  under the  original  market-based  rate tariff would be rolled into the
amended buy-for-resale tariff.  Approval of the new tariff provisions will allow
the Company to purchase and re-sell energy at market-based rates both within the
PJM and outside the PJM.

Gas

     The gas industry is continuing to undergo structural changes in response to
the  FERC  policies  designed  to  increase   competition.   This  has  included
requirements that interstate gas pipelines unbundle their gas sales service from
other  regulated  tariff  services,  such  as  transportation  and  storage.  In
anticipation  of these  changes,  the Company has  modified  its gas  purchasing
arrangements to enable the purchase of gas and transportation at lower cost.

     On March 1, 1997,  the Company filed its quarterly  update of Purchased Gas
Cost (PGC) No. 13 rates for the period March 1, 1997 through May 31, 1997, which
reflects a $0.42 per  thousand  cubic feet (mcf)  increase  in natural gas sales
rates.


                                        5

<PAGE>



     The Company is  authorized  under a general order of the PUC to add a State
Tax Adjustment Surcharge to customers' bills to reflect the cost of increases or
decreases in certain state tax rates not recovered in base rates.


Electric Operations

General

     During 1996,  90.0% of the  Company's  operating  revenues and 91.9% 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 1996 by
class of customer are set forth below:
                                                                 Operating
                                                 Sales            Revenues
                                           (millions of kWh)   (millions of $)
          Residential .......................    10,671          $1,370
          Small commercial and industrial....     6,491             749
          Large commercial and industrial....    15,208           1,098
          Other .............................       902             140
          Decrease in unbilled ..............      (327)            (26)
                                                 ------          ------
              Service territory .............    32,945           3,331
          Interchange sales .................       935              26
          Sales to other utilities ..........    20,243             498
                                                 ------          ------
              Total .........................    54,123          $3,855
                                                 ======          ======


     Energy from the Company's installed generating capacity together with power
purchases are utilized to satisfy the requirements of jurisdictional  customers,
to meet sales  commitments to other utilities and to make sales in the wholesale
generation  market. In the ordinary course of business,  the Company enters into
long-term and short-term  commitments to buy and sell power.  As of December 31,
1996,  the Company  had  long-term  agreements  to  purchase  from  unaffiliated
utilities, primarily in 1997, energy associated with 2,200 MW of capacity. These
purchases will be utilized through a combination of open market sales,  sales to
jurisdictional  customers and long-term sales to other utilities. As of December
31, 1996, the Company had entered into long-term  agreements  with  unaffiliated
utilities to sell energy  associated with 1,460 MW of capacity,  of which 725 MW
are for  1997  and the  remainder  run  through  2022.  See  note 4 of  Notes to
Consolidated  Financial  Statements  included in the Company's  Annual Report to
Shareholders for the year 1996.

     The net  installed  electric  generating  capacity  (summer  rating) of the
Company and its subsidiaries at December 31, 1996 was as follows:
                  Type of Capacity             Megawatts (MW)     % of Total
   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........................       842              9.2
                                                  ------           ------
   Total......................................     9,201(1)(2)      100.0%
                                                  ======           ======

---------------
(1)  Includes capacity available for sale to other utilities.
(2)  See "Fuel" for sources of fuels used in electric generation.

     The all-time  maximum  hourly demand on the  Company's  system was 7,244 MW
which occurred on August 4, 1995. The Company  estimates its generating  reserve
margin for 1997 to be 26%. This is based on the

                                        6

<PAGE>

most  recent  annual  peak-load  forecast  which  assumes  normal  peak  weather
conditions and the sale to other utilities of 400 MW of capacity.

     The Company is a member of the PJM, which fully integrates, on the basis of
relative  cost  of  generation,   the  bulk-power  generating  and  transmission
operations  of eleven  investor-owned  electric  utilities  serving more than 22
million people in a  50,000-square-mile  territory.  In addition,  PJM companies
coordinate  planning and install  facilities to obtain the greatest  practicable
degree of reliability,  compatible economy and other advantages from the pooling
of  their  respective  electric  system  loads,   transmission   facilities  and
generating  capacity.  The all-time  maximum PJM demand of 48,524 MW occurred on
August 2, 1995 when PJM's installed  capacity (summer rating) was 55,962 MW. The
Company's  installed capacity for 1997-2000 is expected to be sufficient for the
Company to meet its  obligation  to supply its PJM reserve  margin  share during
that period. 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 and Peach  Bottom  Atomic
Power  Station  (Peach  Bottom) Units No. 2 and No. 3, which are operated by the
Company,  and by 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 and 67% of its investment in electric plant.
In 1996,  approximately 43% of the Company's  electric output was generated from
nuclear  sources.  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.

     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.

     The Company  maintains  property  insurance on nuclear  power plants in the
amount of its $2.75 billion  proportionate share for each station. 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

                                        7

<PAGE>



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 $31  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.  The PUC,  based on
estimates of  decommissioning  costs for each of the nuclear facilities in which
the Company has an ownership  interest,  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 1990 estimate of its nuclear facilities'  decommissioning cost of $643
million is being  collected  through  electric  base rates over the life of each
generating  unit.  Under  current  rates,  the  Company  collects  and  expenses
approximately  $21 million  annually  from  customers  for  decommissioning  the
Company's  ownership  portion of its nuclear  units.  At December 31, 1996,  the
Company held $266 million in trust accounts, representing amounts recovered from
customers and net realized and unrealized  investment  earnings thereon, to fund
future decommissioning costs. The Company's most recent estimate,  made in 1995,
of its share of the cost to  decommission  its nuclear  units is $1.4 billion in
1995  dollars.  The Company has  included  the  unfunded  and as yet  unrecorded
portion of its estimated decommissioning costs in its estimate of stranded costs
included in the January 22, 1997  application  with the PUC for a QRO,  although
such   recovery  is  not   assured.   See   "Deregulation   and  Rate   Matters-
Electric-Retail."

     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 is currently
considering  expanding  the scope of the  Exposure  Draft to include  closure or
removal  liabilities  that are incurred at any time in the operating life of the
long-lived  asset. The FASB plans to issue either a final Statement or a revised
Exposure  Draft in the second  quarter  of 1997.  If  current  electric  utility
industry accounting practices for decommissioning are changed, annual provisions
for  decommissioning  could increase and the estimated cost for  decommissioning
could be recorded as a liability  rather than as accumulated  depreciation  with
recognition  of an  increase in the cost of the related  asset.  For  additional
information  concerning  nuclear  decommissioning,   see  note  4  of  Notes  to
Consolidated  Financial  Statements  included in the Company's  Annual Report to
Shareholders for the year 1996.

Limerick Generating Station

     Limerick  Unit No. 1 achieved  a capacity  factor of 84% in 1996 and 88% in
1995.  Limerick Unit No. 2 achieved a capacity  factor of 91% in 1996 and 85% in
1995. 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 1996  and  1997,
respectively.

     On May 24,  1995,  the NRC issued its  periodic  Systematic  Assessment  of
Licensee  Performance  (SALP)  Report for Limerick for the period  September 26,
1993 through April 1, 1995. Limerick achieved ratings of "1," the highest of the
three rating categories, in all four functional areas - Operations, Maintenance,
Engineering  and Plant  Support.  The NRC stated that,  overall,  it observed an
excellent  level of  performance  at Limerick.  The NRC noted  continued  strong
performance in the Operations and Engineering  areas during this SALP period and
improved  performance was noted in the Maintenance and Plant Support areas.  The
NRC stated  that  factors  contributing  to this level of  performance  included
excellent management oversight, along with excellent

                                        8

<PAGE>



interdepartmental  communication  and coordination of activities.  Particularly,
the  NRC  noted  the  Company's  excellent  planning  and  execution  of the two
refueling outages during the SALP period and the aggressive use of probabilistic
safety  assessment in scheduling outage and non-outage  maintenance  activities.
The NRC also stated that, in recognition of Limerick's superior performance, the
next SALP period for Limerick has been extended to 24 months and both the number
of resident NRC inspectors and planned total inspection hours have been reduced.

     In  October  1990,  General  Electric  Company  (GE)  reported  that  crack
indications were discovered near the seam welds of the core shroud assembly in a
GE Boiling Water Reactor (BWR) located  outside the United States.  As a result,
GE issued a letter requesting that the owners of GE BWRs take interim corrective
actions,  including a review of fabrication  records and visual  examinations of
accessible areas of the core shroud seam welds. Each of the reactors at Limerick
and Peach Bottom is a GE BWR.  Initial  examination  of Limerick  Unit No. 1 was
completed during the February 1996 refueling outage.  Although crack indications
were  identified  at  one  location,  the  Company  concluded  that  there  is a
substantial margin for each core shroud weld to allow for continued operation of
Unit No. 1 for a minimum of the next two operating  cycles.  In accordance  with
industry  experience  and guidance,  initial  examination of Unit No. 2 has been
scheduled for the refueling  outage planned for January 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 last refueling
outage in the fall of 1995 and the extent of cracking  identified was determined
to be  within  industry-established  guidelines.  In a letter  to the NRC  dated
November 3, 1995, the Company  concluded that there is a substantial  margin for
each core shroud weld to allow for  continued  operation of Unit No. 3 until its
next refueling outage, scheduled for 1997, 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,  with a request that
actions be  completed  by the end of the unit's  first  refueling  outage  after
January 1997. Large capacity  passive  strainers will be installed at both units
at Peach Bottom and Limerick.  Installations at Peach Bottom Units No. 2 and No.
3 and Limerick  Unit No. 1 are  scheduled  for their next  refueling  outages in
September  1998,  September 1997 and April 1998,  respectively.  During Limerick
Unit No. 2's most recent refueling outage, the NRC granted the Company's request
to defer the  installation of strainers until the end of 1998. The Company plans
to request an additional  deferral for the installation of strainers at Limerick
Unit No. 2 until its next 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 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

                                        9

<PAGE>



will meet with the NRC  during the first half of 1997  regarding  the  Company's
plans for the resolution of the Thermo-Lag issue.

     Water for the  operation  of  Limerick is drawn from the  Schuylkill  River
adjacent to Limerick and from the Perkiomen Creek, a tributary of the Schuylkill
River.  During  certain  periods of the year,  generally  the summer  months but
possibly for as much as six months or more in some years,  the Company would not
be able to operate Limerick without the use of supplemental cooling water due to
existing  regulatory water withdrawal  constraints  applicable to the Schuylkill
River and the  Perkiomen  Creek.  Supplemental  cooling  water for  Limerick  is
provided  by a  supplemental  cooling  water  system  which draws water from the
Delaware  River at the Point  Pleasant  Pumping  Station,  transports  it to the
Bradshaw Reservoir (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.  The Company has  obtained  all  permits for the  construction  and
operation  of the  supplemental  cooling  water  system.  Certain of the permits
relating to the operation of the system must be renewed periodically.

     The Company has also  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 79% in 1996 and 98%
in 1995.  Peach Bottom Unit No. 3 achieved a capacity  factor of 99% in 1996 and
78% in 1995. 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 1996 and
1995, respectively.

     On  December  5, 1995,  the NRC issued its  periodic  SALP Report for Peach
Bottom for the period May 1, 1994 to October 15,  1995.  Peach  Bottom  achieved
ratings of "1" in the areas of Operations,  Maintenance  and Plant Support.  The
area of  Engineering  achieved  a  rating  of  "2."  Overall,  the NRC  observed
excellent  performance  at Peach Bottom during the  assessment  period.  Station
management oversight,  effective use of performance enhancement at all levels of
the  organization  and other  measures  in  identifying  and  evaluating  issues
contributed to the strong performance. The NRC noted performance improvements in
all of the assessment  areas,  particularly  in  Maintenance  and Plant Support.
Although the NRC noted that  excellent  performance  was often  displayed in the
Engineering area, errors in modification work, in addition to some other lapses,
indicated inconsistent engineering performance. The Company is taking actions to
further improve Peach Bottom performance.

     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 have not operated  since the second  quarter of
1995, when they were removed from service by PSE&G. At that time, PSE&G informed
the NRC that it had  determined to keep the Salem units shut down pending review
and resolution of certain equipment and management issues and NRC agreement that
each unit is  sufficiently  prepared to restart.  PSE&G  estimates the projected
restart of Unit No. 2 to occur in the  second  quarter of 1997 and of Unit No. 1
to occur in the fall of 1997.  Because the timing of restart for the Salem units
is subject to satisfactory  completion of the  requirements of the restart plan,
as determined by PSE&G and the NRC, no assurance can be given that the projected
restart  date will be met.  As of December  31,  1996 and 1995,  the Company had
incurred and expensed $149 and $50 million,  respectively, for replacement power
and maintenance costs related to the shutdown of Salem. The Company continues to
incur  replacement  power costs of  approximately  $5 million per month per unit
associated with the outage of the Salem units. The inability to

                                       10

<PAGE>



successfully  return the Salem  units to service  could have a material  adverse
effect on the  Company's  financial  position  or  results  of  operations.  For
information  concerning additional costs associated with the Salem shutdown, see
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations" and notes 3 and 4 of Notes to Consolidated  Financial  Statements to
the Company's  Annual Report to Shareholders  for the year 1996; for information
concerning litigation relating to Salem, see "ITEM 3. LEGAL PROCEEDINGS."

     The Company has been informed by PSE&G that as a part of PSE&G's efforts to
return the Salem units to service,  during 1996, 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 have purchased and installed in Salem Unit
No. 1 unused steam generators from the unfinished  Seabrook  Nuclear  Generating
Station Unit No. 2 in New Hampshire.  PSE&G's estimate of the cost of replacing,
including installing the Salem Unit No. 1 steam generators is approximately $150
to $170  million,  of which  the  Company's  share is  approximately  $64 to $72
million.  In  addition,  the cost of disposal  of the four old steam  generators
could be as much as $20 million,  of which the Company's share is  approximately
$9 million.

     A recent  generic  letter from the NRC identified an issue that may further
impact the Salem Unit No. 2 startup  schedule.  The generic letter requested all
nuclear   utilities  to  review   systems  for  potential   waterhammer   events
(hydrodynamic  stress  caused by steam  formation  in a piping  system)  and the
impact that these events could have on the system's safety  function.  PSE&G has
determined  that,  in order to  address  the  concerns  of the  generic  letter,
modifications are necessary to the containment fan coil units of Salem Units No.
1 and No. 2, which provide  containment air cooling. As a result of installation
of these  modifications  and the time  required  for NRC  acceptance  of PSE&G's
proposed  resolution  of these  issues,  the  restart of Salem Unit No. 2 may be
delayed.

     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 January 14, 1997, a United States Senator from Delaware wrote to the NRC
to request the full NRC vote on the decision to restart the Salem units,  rather
than permit the NRC staff to authorize the restart under  applicable  NRC rules.
By letter dated  February 20, 1997,  the NRC advised that it would not require a
full NRC vote on the decision to restart Salem.

     The  Company  has been  informed  by PSE&G  that in  August  1996,  the NRC
conducted  an  inspection  of the Physical  Security  Program for Salem and Hope
Creek Generating  Station (of which the Company has no ownership  interest).  On
December 11, 1996,  PSE&G received a $100,000 civil penalty for two  violations.
Three

                                       11

<PAGE>



other  violations  were received with no civil  penalty.  PSE&G will not dispute
these  violations.  PSE&G has not yet allocated the civil penalty  between Salem
and Hope Creek.

     The Company has been  informed by PSE&G that on December  11,  1996,  PSE&G
received  notice of a violation  and an $80,000  civil  penalty from the NRC for
events  at Salem  which  occurred  in 1993 and  early  1994,  involving  alleged
discrimination   against  two  employees  for  their   engagement  in  protected
activities in accordance with federal  regulations.  PSE&G will not dispute this
violation.

     In addition to the matters discussed above, see "ITEM 3. LEGAL PROCEEDINGS"
and "Environmental Regulations -- Water."

     In 1996, the Company and PSE&G  announced the  commissioning  of a study to
identify and evaluate  alternatives to their separate nuclear plant  operations.
In particular,  the study evaluated  strategies to reduce nuclear  operation and
maintenance costs for both companies and increase efficiencies of operations. In
March 1997, both companies agreed to defer any further  evaluation of a combined
nuclear operating company.

Fuel

     The following table shows the Company's sources of electric output for 1996
and as estimated for 1997:

                                                          1996       1997 (Est.)
    Nuclear .......................................       43.0%         49.4%
    Mine-mouth, coal-fired ........................        8.8           6.2
    Service-area, coal-fired ......................        8.1           6.5
    Oil-fired .....................................        2.0           3.4
    Gas-fired .....................................        0.3           3.7
    Hydro (includes pumped storage) ...............        3.0           2.6
    Internal combustion ...........................        0.3           0.0
    Purchased, interchange and nonutility generated       34.5          28.2
                                                         -----         -----
                                                         100.0%        100.0%
                                                         =====         =====


Nuclear

     The cycle of production and utilization of nuclear fuel includes the mining
and milling of uranium ore; 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  has  contracts  for  the  supply  of  uranium
concentrates  for  Limerick and Peach Bottom  which  extend  through  2002.  The
Company does not  anticipate any  difficulty in obtaining its  requirements  for
uranium  concentrates.  The  Company's  contracts for uranium  concentrates  are
allocated to Limerick and Peach Bottom on an as-needed basis. PSE&G has informed
the Company that it presently has under contract sufficient uranium concentrates
to fully meet the current projected  requirements for Salem through 2001 and 50%
of the  requirements  through 2003.  PSE&G has informed the Company that it does
not  anticipate  any  difficulty  in  obtaining  its  requirements  for  uranium
concentrates. The following table summarizes the years through which the Company
and PSE&G have  contracted  for the other  segments of the  nuclear  fuel supply
cycle:

                                       12

<PAGE>


                                             Conversion  Enrichment  Fabrication
 Limerick Unit No. 1.........................     (1)        (2)          2003
 Limerick Unit No. 2.........................     (1)        (2)          2004
 Peach Bottom Unit No. 2.....................     (1)        (2)          1999
 Peach Bottom Unit No. 3.....................     (1)        (2)          2000
 Salem Unit No. 1............................    2001        (3)          2004
 Salem Unit No. 2............................    2001        (3)          2005
---------------
(1)  The  Company  has  commitments  for  100% of its  conversion  services  for
     Limerick and Peach Bottom  through 2001 and at least 60% of the  conversion
     services  requirements  are covered  through  2002.  The  Company  does not
     anticipate any difficulty in obtaining  necessary  conversion  services for
     Limerick and Peach Bottom.

(2)  The  Company  has  contractual  commitments  for  enrichment  services  for
     Limerick and Peach Bottom with the United  States  Enrichment  Corporation.
     These  commitments  represent 100% of the enrichment  requirements  through
     2004. The Company does not anticipate any difficulty in obtaining necessary
     enrichment services for Limerick and Peach Bottom.

(3)  PSE&G  has  contractual  commitments  for 100% of  enrichment  requirements
     through 1998; approximately 50% through 2002; and approximately 30% through
     2004. The Company has been informed by PSE&G that PSE&G does not anticipate
     any difficulty in obtaining necessary enrichment services for Salem.

     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. By letter
dated November 29, 1994,  the NRC approved the Company's  request to install new
high-density,  spent-fuel  storage  racks at  Limerick,  which will  provide for
storage  capacity to 2007. The new  configuration is designed to accommodate rod
consolidation. Spent-fuel racks at Peach Bottom have storage capacity until 2000
for  Unit  No. 2 and 2001 for  Unit  No.  3.  The  Company  is  considering  the
construction  of a dry spent-fuel  storage  facility at Peach Bottom to maintain
full-core  discharge  capacity in the spent-fuel pools.  Construction would take
approximately 27 months. The Company expects that such a facility would cost $10
million to construct and would provide storage  capacity at Peach Bottom for the
life of the plant. The Company would have to purchase storage  canisters for the
spent fuel at an estimated  cost of $2.7 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  capability  of Salem  Units No. 1 and No. 2 is
estimated to be 2008 and 2012, 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 the Company's
nuclear  units for  long-term  storage by no later  than  1998.  Based on recent
public  pronouncements,  it is not likely that a permanent disposal site will be
available  for the  industry  before  2015,  at the  earliest.  In  reaction  to
statements  from the DOE that it was not  legally  obligated  to begin to accept
spent fuel in 1998, a group of utilities and state  government  agencies filed a
lawsuit  against the DOE which resulted in a decision by the United States Court
of Appeals for the  District of  Columbia  (D.C.  Court of Appeals) in July 1996
that the DOE has an  unequivocal  obligation  to begin  accepting  spent fuel in
1998. In accordance with the NWPA, the Company pays the DOE one mill ($.001) per
kilowatthour  of net nuclear  generation  for the cost of nuclear fuel disposal.
This fee may be adjusted  prospectively  in order to ensure full cost  recovery.
Because of inaction by the DOE in response to the D.C. Court of Appeals  finding
of the  DOE's  obligation  to begin  receiving  spent  fuel in 1998,  a group of
thirty-six  utility  companies,  including  the  Company,  and  forty-six  state
agencies,  filed suit against the DOE on January 31, 1997 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.  Legislation  introduced  in  Congress  in
January 1997 would authorize  construction of a temporary storage facility which
could accept spent nuclear fuel from utilities soon after 1998. In addition, the
DOE is exploring other options to address delays in the waste

                                       13

<PAGE>



acceptance schedule. The 1996 charge collected by the Company from its customers
for spent-fuel disposal was $22 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 five-year storage capacities.

     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 also plans
to host a LLRW  disposal  site.  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 $50 million
for such costs at December 31, 1996. The Company is currently  recovering  these
costs through rates.

     The  Company  is  currently  recovering  in rates  the  costs  for  nuclear
decommissioning  and   decontamination   (based  on  1990  cost  estimates)  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,  although
such   recovery  is  not  assured.   For   additional   information   concerning
decommissioning, see "Electric Operations - General."

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  3,000,000 and
3,500,000 tons for each of the years 1997 through 1999; and a total of 6,500,000
tons for the years 2000 through 2004. At December 31, 1996, approximately 20% of
Conemaugh's  fuel  requirements  were  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, 1997, 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.


                                       14

<PAGE>

Oil

     The Company  purchases fuel oil through a combination of 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  1996,  10.0% of the  Company's  operating  revenues and 8.1% of its
operating income were from gas operations.  Gas sales and operating revenues for
1996 by class of customer are set forth below:
                                                            Operating
                                                  Sales      Revenues
                                                 (mmcf)   (millions of $)

     House heating ............................  35,471         $249
     Residential (other than house heating)....   1,681           16
     Commercial and industrial ................  20,999          133
     Other ....................................   2,571           11
     Decrease in unbilled .....................  (1,306)          (4)
                                                 ------         ----
         Total gas sales ......................  59,416          405
     Gas transported for customers ............  27,891           24
                                                 ------         ----
         Total gas sales and gas transported...  87,307         $429
                                                 ======         ====


     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
(Transcontinental).  The Company's aggregate annual entitlement under these firm
transportation contracts is 98.1 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  1996-97
heating season supplies.

     As a result of FERC Order No. 636 and the subsequent  restructuring  of the
interstate  pipeline  industry,  unbundling  at  the  local  distribution  level
continues in the form of pilot programs which allow smaller retail gas customers
to purchase  non-utility gas supplies and acquire  transportation  services from
local  distribution  companies.  Significant  issues regarding the obligation to
serve by the utility,  the erosion of tax base, the potential for stranded costs
associated with long-term  contracts,  the  implications for social programs now
supported by utilities and overall  system  reliability  have yet to be formally
addressed. See "Deregulation and Rate Matters."


                                       15

<PAGE>



     Horizon Energy Company,  formerly PECO Gas Supply  Company,  a wholly owned
subsidiary, 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 access less
expensive gas supplies for its eight gas utility members.

     Eastern Pennsylvania Exploration Company (EPEC), a wholly owned subsidiary,
was a party to several joint ventures formed to develop natural gas resources in
the Gulf Coast area.  These joint  ventures did not  contribute to the Company's
natural gas supply.  The Company has sold its  interest in these joint  ventures
and is in the process of dissolving EPEC.


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 1996.


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  includes no new generating  facilities.  During the five years 1992-96,
gross property additions (excluding capital leases) amounted to $2.6 billion and
retirements   amounted  to  $249  million,   resulting  in  a  net  increase  of
approximately 17% in the Company's gross utility plant.  Investment in new plant
and  equipment  in  1996  amounted  to  $534  million.  At  December  31,  1996,
construction work in progress, excluding nuclear fuel, aggregated $662 million.

     The following  table shows the Company's  most recent  estimates of capital
expenditures for plant additions and improvements for 1997 and for 1998-2000:

                                             (Millions of $)
                                             1997    1998-2000
     Electric:
          Production ....................    $151       $210
          Nuclear fuel ..................      12        176
          Transmission and distribution..     153        427
          Other electric ................       5         15
                                             ----     ------
              Total electric ............     321        828
     Gas ................................      65        210
     Other ..............................     174        187
                                             ----     ------
          Total .........................    $560     $1,225
                                             ====     ======


     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 15 of Notes to Consolidated Financial Statements
included in the Company's Annual Report to Shareholders for the year 1996.



                                       16

<PAGE>



Capital Requirements and Financing Activities

     The following  table shows the Company's  most recent  estimates of capital
requirements for 1997 and for 1998-2000:

                                                      (Millions of $)
                                                      1997    1998-2000
     Construction .................................   $560     $1,225
     New ventures (1) .............................    111        173
     Long-term debt maturities and sinking funds...    283        642
                                                      ----     ------
              Total capital requirements ..........   $954     $2,040
                                                      ====     ======
---------------
(1)  A portion of these expenditures will be expensed.

     The following table shows the Company's financing activities for 1996:
                                   (Millions of $)
     Pollution Control:
         Floating Rate due 1997         17.24
         Floating Rate due 2034         34.00
                                       ------
                                       $51.24
                                       ======


     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.  The  coverage  under the
earnings test of the Mortgage for the 12 months ended December 31, 1996 was 4.39
times.  Earnings  coverages  under the Mortgage for the calendar  years 1995 and
1994 were 4.94 and 3.48 times,  respectively.  At December  31,  1996,  the most
restrictive  issuance  test  of  the  Mortgage  related  to  available  property
additions.  At December  31,  1996,  the  Company had at least $1.62  billion of
available  property additions against which $970 million of mortgage bonds could
have been issued. In addition, at December 31, 1996, the Company was entitled to
issue  approximately  $3.6  billion  of  mortgage  bonds  without  regard to the
earnings and property additions tests against previously retired mortgage bonds.

     Under  the  Company's   Amended  and  Restated  Articles  of  Incorporation
(Articles),  the issuance of additional  preferred stock requires an affirmative
vote of the holders of  two-thirds of all preferred  shares  outstanding  unless
certain tests are met.  Under the most  restrictive  of these tests,  additional
preferred  stock may not be issued  without  such a vote unless  earnings  after
income taxes but before  interest on debt during 12 consecutive  calendar months
of the  preceding  15  calendar  months  from the month in which the  additional
shares of stock are issued are at least 1.5 times the aggregate of the pro forma
annual  interest and preferred stock dividend  requirements on all  indebtedness
and preferred  stock.  Coverage under this earnings test of the Articles for the
12 months ended  December 31, 1996 was 2.50 times.  Earnings  coverage under the
Articles  for the  calendar  years  1995 and  1994  was  2.34  and  2.05  times,
respectively.

     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>
                                                            1992     1993     1994     1995     1996
<S>                                                         <C>      <C>      <C>      <C>      <C>
     Ratio of Earnings to Fixed Charges ............        2.43     3.15     2.66     3.41     3.29
     Ratio of Earnings to Combined Fixed Charges and
          Preferred Stock Dividends ................        2.06     2.67     2.32     3.12     3.04
</TABLE>

                                       17
<PAGE>

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.

     At December 31, 1996, the Company had a total of $262.5 million outstanding
under unsecured  term-loan  agreements  with banks with maturities  extending to
1997.  Most of the Company's  unsecured debt  agreements  contain  cross-default
provisions to the Company's other debt obligations.

     The Company has a $300 million commercial paper program supported by a $400
million revolving credit agreement. At December 31, 1996, there was $200 million
of  commercial  paper  outstanding.  At December 31,  1996,  the Company and its
subsidiaries had formal and informal lines of credit with banks aggregating $221
million  against which there was no short-term debt  outstanding.  The Company's
bank lines are comprised of both committed and uncommitted  lines of credit.  As
of December 31, 1996, 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 1996.


Employee Matters

     On March 7, 1995, a New Jersey local of the  International  Brotherhood  of
Electrical Workers,  AFL-CIO, (IBEW) filed two petitions with the National Labor
Relations Board (NLRB) to hold  certification  elections to determine  whether a
group of production and maintenance employees from Eddystone and Cromby want the
IBEW to serve as  their  collective  bargaining  representative.  The  petitions
sought to establish  separate  bargaining units for 229 employees from Eddystone
and 74  employees  from  Cromby.  The  petitions  covered  craft  and  technical
employees,  including  operators,  but excluded office  clerical,  professional,
supervisory and management employees.

     On March 22, 1995, the Utility Workers of America,  AFL-CIO, (UWUA) filed a
petition  with the NLRB to hold a  certification  election to determine  whether
certain production and maintenance  employees from Peach Bottom and Limerick, as
well as the maintenance  employees  headquartered in the Company's  Chesterbrook
facility, want the UWUA to serve as their collective bargaining  representative.
The UWUA petition  sought to establish a bargaining  unit of  approximately  840
employees composed of all maintenance  employees and all control room operators,
auxiliary  operators,   instrument  and  control  technicians,   health  physics
technicians,  chemistry  technicians,  material  handlers and  technicians,  and
radioactive waste technicians.  The petition excluded security guards,  clerical
and supervisory employees.

     On October 2, 1995, the UWUA filed another petition  seeking  certification
of a bargaining unit  consisting of all production and maintenance  employees of
the Consumer Energy  Services Group - the Company's  customer  service  business
unit.

     On February  14,  1997,  the NLRB issued its  decision  ruling that a union
representation election does not require all hourly employees within the Company
to vote as one unit.  On the  petitions  filed by the IBEW,  the NLRB ruled that
while  Eddystone  and Cromby  would not be  appropriate  bargaining  units,  the
Company's Power Generation Group (PGG), which encompasses  employees not only at
Eddystone and Cromby but also eight smaller  fossil-fuel  plants  located in the
City of Philadelphia and its suburbs,  the Conowingo  Hydroelectric  Station and
Muddy Run Pumped Storage  Project would be an appropriate  bargaining  unit. The
NLRB ruled similarly that a separate  bargaining unit comprised of the Company's
Nuclear Generating Group (PECO Nuclear) would be appropriate.

     On February 24, 1997, the NLRB  established  March 24, 1997 as the date for
the UWUA/PECO Nuclear election.  On March 25, 1997, the NLRB announced that PECO
Nuclear employees voted not to be

                                       18
<PAGE>

represented  by a union.  Employees cast 659 votes for `no union,' and 228 votes
for the  UWUA.  The  results  are not  official  until  the NLRB  certifies  the
election.  All parties  involved in the election  have seven days to contest the
results.

     On March 26, 1997, the NLRB established  April 24, 1997 as the date for the
IBEW/PGG election.

      In 1993,  in an NLRB  certified  election,  a majority  of  non-management
employees  rejected  representation  by  the  IBEW  and  the  Independent  Group
Association in company-wide elections.

     The Company and its subsidiaries had 7,186 employees at December 31, 1996.


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 electric and  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.  In
October  1996,  the  National  Research  Council,  which is comprised of several
organizations,  including the National Academy of Sciences, the National Academy
of  Engineering,  and the Institute of Medicine,  released a report on EMF which
states that the  current  body of  evidence  does not show that  exposure to EMF
presents a human health hazard.  The National Research Council report recommends
additional research. 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,
and are  expected  in the  future  to,  adversely  affect the costs of, and time
required  to, site new  distribution  and  transmission  facilities  and upgrade
existing  facilities.  The Company cannot  predict at this time what effect,  if
any, this issue will have on other future operations.

Water

     The Company has been informed by PSE&G that PSE&G is implementing  the 1994
New Jersey Pollutant Discharge  Elimination System permit issued for Salem which
requires,  among other things,  water intake screen  modifications  and wetlands
restoration.  In addition,  PSE&G is seeking final  permits and  approvals  from
various agencies needed to fully implement the special conditions of the permit.
No  assurances  can be given as to  receipt  of any such  additional  permits or
approvals.  The estimated  capital cost of  compliance  with the final permit is
approximately  $100  million,  of which the  Company's  share is  42.59%  and is
included in the Company's capital requirements for 1997 and 1998-2000.  In 1999,
PSE&G must apply to the New Jersey  Department of  Environmental  Protection and
Energy (NJDEPE) and other agencies to renew such Salem permits.

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

                                       19

<PAGE>



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  and the  installation  of
scrubbers.

     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.  As a result of its prior  investments in scrubbers for
Eddystone and Cromby and its investment in nuclear and hydroelectric  generating
capacity, however, the Company believes that compliance with the Amendments will
have less impact on the Company's electric operations than on other Pennsylvania
utilities which are more dependent on coal-fired generation.

     Many other provisions of the Amendments affect the Company's business.  The
Amendments  establish  stringent new 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
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

                                       20

<PAGE>



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.  Until the Record of
Decision  has been issued by the EPA, the Company  cannot  estimate its share of
the cost to implement the selected 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/Douglasville  site) where waste oils  generated  from Company
operations were transported,  treated,  stored and disposed. In August 1991, the
EPA filed suit in the United States  District Court for the Eastern  District of
Pennsylvania  (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 EPA that it wishes to participate with
other  eligible  PRPs in the de minimus  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 minimus  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 minimus party
for less than $10,000.

     In April 1990, the Company  received a notice from the NJDEPE which alleges
that  the  Company  is  potentially  liable  for  certain  cleanup  costs at the
Gloucester  Environmental  Management Services,  Inc. (GEMS) site located in New
Jersey because  wastes  generated by the Company were deposited at the site by a
third  party.  The Company was added as a defendant  in a suit  commenced by the
NJDEPE several years ago, which now names several hundred defendants,  and which
relates to the GEMS site.  The Company has joined a  pre-existing  group of PRPs
which is dealing with the NJDEPE on these matters.  On July 9, 1996, the Company
executed  a  consent  decree  in which  the  Company  agreed  to pay the  NJDEPE
approximately $240,000 in exchange for a

                                       21

<PAGE>



release from  liability  at the GEMS site.  The parties are  currently  awaiting
approval  of the  consent  decree by the United  States  District  Court for the
District of New Jersey (New Jersey District Court).

     On October 16, 1989, the EPA and the NJDEPE commenced a civil action in the
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.

     In November 1992, the Company  received a subpoena from the  non-government
parties (party participants) in a consolidated action relating to the Bridgeport
Rental and Oil  Services  (BROS)  site which  requested  information  on various
haulers who  transported  hazardous and solid waste  materials to the BROS site.
Information  gathered pursuant to the subpoena indicates that one of the haulers
associated with the BROS site picked up and  transported  waste generated by the
Company.  In April 1993, the Company received a Request for Information from the
EPA regarding the Company's  potential  involvement at the BROS site. On May 27,
1993, the Company provided the EPA with the same documents  gathered in response
to the subpoena  served by the party  participants.  On September 25, 1996,  the
Company agreed to a settlement  with the party  participants  which provides for
the Company to pay $375,000 to settle its potential  liability at the site.  Not
covered by the settlement are possible natural resource damage and private party
claims.

     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  joined with other
third party  defendants  in filing a motion to dismiss the complaint for failure
to state a claim,  which was  denied;  however  all claims  against  third-party
defendants  have been stayed.  The Company is  currently  unable to estimate the
cost of any potential corrective action.

     The Company has been named as a defendant in a Superfund  matter  involving
the Greer  Landfill  in South  Carolina.  The Company is  currently  involved in
settlement  discussions  with the plaintiff.  The Company is currently unable to
estimate the cost of any potential corrective action.

     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.

                                       22

<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.  Eight of the  sites  are under  some  degree  of  active  study or
remediation.  At December 31, 1996,  the Company had accrued  approximately  $16
million for investigation and remediation of these manufactured gas plant sites.
The Company expects that it will incur  additional  liabilities  with respect to
these sites, which cannot be reasonably estimated at this time.

     The  Company  has  also   responded  to  various   governmental   requests,
principally those of the EPA pursuant to CERCLA, for information with respect to
the possible deposit of Company waste materials at various disposal,  processing
and other sites.

     On June 4, 1993, the Company entered into a Corrective Action Consent Order
(CACO)  from the EPA  under  RCRA.  The  CACO  order  requires  the  Company  to
investigate the extent of alleged  releases of hazardous  wastes and to evaluate
corrective measures,  if necessary,  for a site located along the Delaware River
in Chester,  Pennsylvania,  which had previously been leased to Chem Clear, Inc.
Chem Clear operated an industrial waste water pretreatment facility on the site.
In October 1994, the Company  entered into an agreement with Clean Harbors,  the
successor to Chem Clear,  pursuant to which the Company will be responsible  for
approximately 25% of the costs incurred under the CACO and Clean Harbors will be
responsible  for 75% of the costs.  The Company  estimates that its share of the
costs to comply with the CACO will be approximately $2 million.  At December 31,
1996, the Company had spent  approximately $1.7 million to comply with the CACO.
Until completion of the required investigation, the Company is unable to predict
the nature and cost of any potential corrective action.

Costs

     At  December  31,  1996,  the  Company  had accrued $28 million for various
investigation and remediation costs that can be reasonably estimated,  including
approximately   $16  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 1997 and its most recent
estimate of capital requirements for 1998-2000 for compliance with environmental
requirements  total  approximately  $26  million.  This  estimate  includes  the
Company's share of the costs to comply with the revised NJDEPE permit for Salem,
but does not include any amounts that may be required for its share of scrubbers
or other  systems at Keystone to comply with the  Amendments.  In addition,  the
Company  may  be  required  to  make  significant  additional  expenditures  not
presently determinable.


Telecommunications

     In a joint venture with  Hyperion,  a subsidiary of Adelphia Cable Company,
the deployment of a large-scale  fiber optic,  cable-based  telephone service in
the Philadelphia region is approximately 80% complete. The Company's fiber optic
cable currently  extends over 400 miles and is connected to major  long-distance
carriers.

     The Company is also aggressively  completing the initial build-out of a new
digital wireless Personal  Communications  Services (PCS) network in partnership
with AT&T Wireless  Services.  Commercial launch of PCS in the Philadelphia area
is scheduled for mid-1997.  Due to the start-up  nature of these joint ventures,
investments in  telecommunications  will negatively  affect earnings in the near
future and are not expected to produce positive results for several years.

                                       23

<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, 1996, the Partnership  held
$308,612,964 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, 1996, the Trust had outstanding  3,124,183  Trust  Receipts.  At
December 31, 1996, 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 1996 in the
aggregate  amount of  $6,810,719,  or $2.18 per Trust  Receipt.  Expenses of the
Trust  for 1996  were  approximately  $200,000,  all of which  were paid by PECO
Energy  Capital  Corp.  or the  Company.  The number of holders of record of the
Trust Receipts as of December 31, 1996 was 874.

                                       24

<PAGE>



Executive Officers of the Registrant
<TABLE>
<CAPTION>

                                  Age at                                                     Effective Date of Election
Name                           Dec. 31, 1996                Position                             to Present Position

<S>                                 <C>    <C>                                                   <C>
J. F. Paquette, Jr.............     62     Chairman of the Board...............................  April 12, 1995
C. A. McNeill, Jr..............     57     President and Chief Executive Officer...............  April 12, 1995
D. M. Smith....................     63     President-- PECO Nuclear and Chief
                                               Nuclear Officer.................................  February 1, 1996
W. L. Bardeen..................     58     Senior Vice President and Group Executive--
                                               Consumer Energy Services Group..................  March 1, 1994
J. W. Durham...................     59     Senior Vice President and General Counsel...........  October 24, 1988
W. J. Kaschub..................     54     Senior Vice President-- Human Resources.............  June 10, 1991
G. S. King.....................     56     Senior Vice President-- Corporate and
                                               Public Affairs..................................  October 1, 1992
K. G. Lawrence.................     49     Senior Vice President-- Finance and Chief
                                               Financial Officer...............................  March 1, 1994
J. M. Madara, Jr...............     53     Senior Vice President and Group
                                               Executive-- Power Generation Group..............  March 1, 1994
R. J. Patrylo..................     50     Senior Vice President and Group
                                               Executive-- Gas Services Group..................  August 1, 1994
A. J. Weigand..................     58     Senior Vice President and Group
                                               Executive-- Bulk Power Enterprises .............  March 1, 1994
G. R. Rainey...................     47     Senior Vice President-- PECO Nuclear................  April 1, 1996
J. M. Bauer....................     50     Vice President-- Customer Services..................  April 13, 1994
G. A. Cucchi...................     47     Vice President-- Corporate Planning
                                               and Development.................................  March 1, 1994
J. Doering, Jr.................     53     Vice President-- Operations - Power
                                               Generation Group................................  October 28, 1996
D. B. Fetters..................     45     Vice President-- Station Support....................  September 25, 1995
T. P. Hill, Jr.................     48     Vice President and Controller.......................  January 1, 1991
K. C. Holland..................     44     Vice President-- Information Systems
                                               and Chief Information Officer...................  March 21, 1994
W. G. MacFarland, IV...........     47     Vice President-- Limerick Generating
                                               Station.........................................  March 1, 1995
J. B. Mitchell.................     48     Vice President-- Finance and Treasurer..............  December 1, 1994
T. N. Mitchell.................     41     Vice President-- Peach Bottom Atomic
                                               Power Station...................................  April 1, 1996
W. E. Powell, Jr...............     60     Vice President-- Support Services...................  January 30, 1995
W. H. Smith, III...............     48     Vice President and Group Executive--
                                               Telecommunications Group........................  September 25, 1995
D. A. Thomas...................     50     Vice President-- Marketing and Sales................  January 30, 1995
N. J. Zausner..................     43     Vice President-- Power Transactions.................  October 11, 1994
K. K. Combs....................     46     Corporate Secretary.................................  November 1, 1994
</TABLE>

     The present term of office of each of the above executive  officers extends
to the first meeting of the Company's  Board of Directors  after the next annual
election of Directors (scheduled to be held April 9, 1997).

     Prior to his election to his current  position,  Mr.  Paquette was Chairman
and Chief Executive Officer.

     Prior to his election to his current  position,  Mr.  McNeill was 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,  Senior Vice President - Nuclear and
Vice President - Peach Bottom Atomic Power Station.


                                       25

<PAGE>



     Prior to his election to his current position,  Mr. Bardeen was Senior Vice
President - Finance and Chief Financial Officer. Prior to joining the Company in
1992,  Mr. Bardeen was Vice President - Finance and Controller for Bell Atlantic
Corporation.

     Prior to joining the Company in 1992,  Mrs. King served as  Commissioner of
the United States Social Security Administration.

     Prior to his  election  to his  current  position,  Mr.  Lawrence  was Vice
President - Gas Operations.

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

     Prior to joining the Company in 1994, Mr. Patrylo was Senior Vice President
- Gas Services Business Unit at Niagara Mohawk Power Corporation.

     Prior  to his  election  to his  current  position,  Mr.  Weigand  was Vice
President - Transmission and Distribution Services.

     Prior to joining the Company in March 1994,  Mrs.  Holland was  Director of
Technology  Services  and  Director  of  Business  Services  and  Operations  at
SmithKline Beecham, Inc.

     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 joining the  Company in 1995,  Mr.  Thomas was  General  Manager -
American  Parts and Services,  Manager - Utility Parts Sales,  Manager - Gateway
Region - Utility  Sales,  and  Manager - Product  Services  at General  Electric
Company.

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

     Prior to  their  election  to the  positions  shown  above,  the  following
executive  officers held other positions with the Company since January 1, 1992:
Ms.  Bauer was  Operations  Manager - Montgomery  County  Division and Manager -
Nuclear Operations;  Mr. Cucchi was Director of System Planning and Performance,
and  Manager  - System  Planning;  Mr.  Doering  was Plant  Manager -  Limerick,
Director - Nuclear  Strategies  Support,  and General Manager - Operations;  Mr.
Fetters was 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. 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;
Mr. W. H. Smith,  III was Vice  President - Station  Support,  Vice  President -
Planning and Performance,  and Manager - Corporate Strategy and Performance; and
Ms. Combs was an Assistant General Counsel.

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

                                       26

<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, 1996:
<TABLE>
<CAPTION>
                                                                                     Net Generating     Estimated
                                                                                      Capacity (1)      Retirement
               Station                                  Location                     (Kilowatts)           Year
Nuclear
<S>                                             <C>                                   <C>            <C>
   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...............        370,000             (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....................................................................      9,200,800
                                                                                      =========
<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 1997.
</FN>
</TABLE>

                                       27
<PAGE>

       The  following  table sets forth the  Company's  major  transmission  and
distribution lines in service at December 31, 1996:

 Voltage in Kilovolts (Kv)                                     Conductor Miles
 Transmission:
   500 Kv....................................................          825
   220 Kv....................................................        1,503
   132 Kv....................................................          677
    66 Kv....................................................          607
    33 Kv and below..........................................           29
 Distribution:
    33 Kv and below..........................................       49,140

     At December 31, 1996, the Company's principal electric  distribution system
included  13,405  pole-line  miles of overhead  lines and 20,673  cable miles of
underground cables.

     The following table sets forth the Company's gas pipeline miles at December
31, 1996:

                                                      Pipeline Miles
  Transmission.......................................        28
  Distribution.......................................     5,642
  Service piping.....................................     4,507
                                                         ------
  Total..............................................    10,177
                                                         ======


     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 200,000 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 30,000 mcf/day. In addition,  the Company owns 23 natural gas city
gate stations (including one temporary station) at various locations  throughout
its gas service territory.

     At December 31, 1996, the Company had 362 miles of underground  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 15 of Notes to  Consolidated  Financial  Statements
included in the Company's Annual Report to Shareholders for the year 1996.

     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
$31 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.

                                       28

<PAGE>

ITEM 3.   LEGAL PROCEEDINGS

     On April 11,  1991,  33 former  employees  of the Company  filed an amended
class action suit against the Company in the Eastern District Court on behalf of
approximately 141 persons who retired from the Company between January and April
1990.  The lawsuit,  filed under the  Employee  Retirement  Income  Security Act
(ERISA), alleged that the Company fraudulently and/or negligently misrepresented
or concealed facts  concerning the Company's 1990 Early Retirement Plan and thus
induced the plaintiffs to retire or not to defer retirement  immediately  before
the  initiation  of the  1990  Early  Retirement  Plan,  thereby  depriving  the
plaintiffs  of  substantial  pension  and salary  benefits.  In June  1991,  the
plaintiffs filed amended  complaints adding additional  plaintiffs.  The lawsuit
named the  Company,  the  Company's  Service  Annuity Plan (SAP) and two Company
officers as  defendants.  On May 13, 1994,  the Eastern  District Court issued a
decision,  finding the Company liable to all plaintiffs who made inquiries about
any early  retirement plan after March 12, 1990 and retired prior to April 1990.
In an order dated  August 23,  1995,  the  Eastern  District  Court  awarded the
plaintiffs $1.5 million.  On October 1, 1996, the United States Court of Appeals
for the Third  Circuit  (Third  Circuit  Court of Appeals)  reversed the Eastern
District  Court  decision and held for the Company.  The  plaintiffs  have since
appealed to the United States Supreme Court (Supreme Court).  Pending resolution
of this  matter,  the  Company  has  accrued  the amount  awarded by the Eastern
District Court.

     On May 2, 1991,  37 former  employees of the Company filed an amended class
action suit against the Company,  the SAP and three former  Company  officers in
the Eastern  District Court, on behalf of 147 former  employees who retired from
the Company between January and June 1987. The lawsuit was filed under ERISA and
concerned the August 1, 1987 amendment to the SAP. The  plaintiffs  claimed that
the Company concealed or  misrepresented  the fact that the amendment to the SAP
was planned to increase retirement benefits and, as a consequence,  they retired
prior to the  amendment to the SAP and were deprived of  significant  retirement
benefits. On May 13, 1994, the Eastern District Court issued a decision, finding
the  Company  liable to all  plaintiffs  who made  inquiries  about any  pension
improvement  after  March 1, 1987 and  retired  prior to June 1987.  In an order
dated August 23, 1995, the Eastern  District  Court awarded the plaintiffs  $1.8
million.  On October 1, 1996,  the Third Circuit  Court of Appeals  reversed the
Eastern  District Court decision and held for the Company.  Three plaintiffs who
were members of the class  certified by the Eastern  District Court have filed a
motion for reconsideration  with the Third Circuit Court of Appeals. The Company
has opposed the motion for  reconsideration.  If their  request is denied by the
Third Circuit Court of Appeals,  the Company expects that the class members will
appeal to the Supreme Court.  Pending resolution of this matter, the Company has
accrued the amount awarded by the Eastern District Court.

     On May 25, 1993, the Company  received a letter from attorneys on behalf of
a shareholder  demanding  that the Company's  Board of Directors  commence legal
action  against  certain  Company  officers  and  directors  with respect to the
Company's  credit  and  collections  practices.  The basis of the demand was the
findings and conclusions  contained in the Credit and Collection  section of the
May 1991 PUC Management  Audit Report (Audit Report)  prepared by Ernst & Young.
At its June 28,  1993  meeting,  the  Board of  Directors  appointed  a  special
committee  of  directors  to consider  whether such legal action would be in the
best interests 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 set forth in the May 25, 1993 demand
letter,  and authorizing and directing officers of the Company to take all steps
necessary to terminate the derivative suit discussed  below. On August 15, 1995,
attorneys on behalf of the shareholders  filed a derivative  action in the Court
of Common Pleas of  Philadelphia  County (Court of Common  Pleas)  asserting the
same claims against  several  present and former  officers which are asserted in
the July 26, 1993  shareholder  derivative suit discussed below. On February 20,
1996, the Court of Common Pleas ordered that the suit be  consolidated  with the
July 26, 1993  shareholder  derivative  suit. Any monetary  damages which may be
recovered,  net of expenses, would be paid to the Company because the lawsuit is
brought derivatively by shareholders on behalf of the Company.

     On  July  26,  1993,  attorneys  on  behalf  of two  shareholders  filed  a
shareholder  derivative  action in the 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 in connection  with the Company's
credit and collections

                                       29

<PAGE>



practices.  The  derivative  suit  is  based  on the  findings  and  conclusions
contained  in the  Credit  and  Collections  section  of the Audit  Report.  The
plaintiffs  seek, among other things,  an unspecified  amount of damages and the
awarding  to the  plaintiffs  of the  costs  and  disbursements  of the  action,
including  attorneys' fees. 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  refusing the shareholders'  demand. On
May 15, 1996,  the Court of Common Pleas denied the petition.  On June 20, 1996,
the  Company  filed a  petition  with  the  Supreme  Court of  Pennsylvania  for
extraordinary  relief.  On October 15, 1996,  the Supreme Court of  Pennsylvania
granted the  Company's  petition and oral argument was held on January 27, 1997.
Pending  resolution  of this issue by the  Supreme  Court of  Pennsylvania,  all
matters in the lower  courts  related to the suits are  suspended.  Any monetary
damages  which may be recovered,  net of expenses,  would be paid to the Company
because the lawsuit is brought  derivatively  by  shareholders  on behalf of the
Company.

     On March 5, 1996, the Company and Delmarva Power & Light Company (Delmarva)
filed an action in the Eastern District Court against Public Service  Enterprise
Group  Incorporated and its subsidiary PSE&G  (Enterprise  Group) concerning the
shutdown  of  Salem.  The  suit  alleges  that  Enterprise  Group  breached  the
provisions of the Owners  Agreement  pursuant to which Enterprise Group operates
Salem. The suit also alleges negligence, gross negligence, reckless, and willful
and wanton misconduct.  The plaintiffs seek compensation for certain replacement
power costs they incurred as a result of the shutdown of Salem and for increased
operating  and  maintenance  costs and lost  profits.  Discovery  in the case is
scheduled  to  conclude  in April  1997.  The case is expected to go to trial in
1997.

     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.  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,  1997,  there were  176,590  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 1996
and 1995 is  incorporated  herein by reference to "Operating  Statistics" in the
Company's Annual Report to Shareholders for the year 1996.

     The book value of the  Company's  common  stock at  December  31,  1996 was
$20.88 per share.

     Dividends  may be declared on common stock out of funds  legally  available
for  dividends  whenever  full  dividends  on  all  series  of  preferred  stock
outstanding at the time have been paid or declared and set apart for payment for
all past quarter-yearly dividend periods. No dividends may be declared on common
stock,  however,  at any time when the Company has failed to satisfy the sinking
fund obligations with respect to certain series

                                       30

<PAGE>



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, 1996, such capital ($4.65  billion)  amounted to about 12 times the
liquidating value of the outstanding preferred stock ($292.1 million).

     The Company may not declare dividends on any shares of its capital stock in
the event  that:  (1) the  Company  exercises  its right to extend the  interest
payment  periods  on  the  Company's   subordinated   debentures   (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 1996.


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 1996.


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 1996.


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

     None.


                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     (a) Identification of Directors.

     The  information  required for Directors is included in the Proxy Statement
of the Company in connection  with its 1997 Annual Meeting of Shareholders to be
held April 9, 1997, under the heading "Proposal 1. Election of Directors" and is
incorporated herein by reference.

     (b) Identification of Executive Officers.


                                       31

<PAGE>



     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  1997  Annual  Meeting  of
Shareholders to be held April 9, 1997, 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  1997  Annual  Meeting  of
Shareholders to be held April 9, 1997,  under the heading  "Proposal 1. 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  1997  Annual  Meeting  of
Shareholders to be held April 9, 1997,  under the heading  "Proposal 1. Election
of Directors" and is incorporated herein by reference.

                                       32

<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 1996:
          Report of Independent Accountants ..........................          --                  20
          Consolidated Statements of Income for the years ended
            December 31, 1996, 1995 and 1994 .........................          --                  21
          Consolidated Balance Sheets as of December 31, 1996 and 1995          --                  22
          Consolidated Statements of Cash Flows for the years ended
            December 31, 1996, 1995 and 1994 .........................          --                  24
          Consolidated Statements of Changes in Common Shareholders'
            Equity and Preferred Stock for the years ended
            December 31, 1996, 1995 and 1994 .........................          --                  25
          Notes to Consolidated Financial Statements .................          --                  26
     Data submitted herewith:
          Report of Independent Accountants ..........................          34                  --
          Schedule II--  Valuation and Qualifying Accounts for the years
                           ended December 31, 1996, 1995 and 1994 ....          35                  --
</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 1996 and  incorporated by
reference into this Form 10-K Annual Report,  the Annual Report to  Shareholders
for the year 1996 is not to be deemed "filed" as part of this Form 10-K.

                                       33

<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 20 of the 1996
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 3, 1997

                                       34

<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

                                        FOR THE YEAR ENDED DECEMBER 31, 1996
<S>                                       <C>              <C>              <C>            <C>              <C>
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
                                              =======         =======          =====           =======         =======

                                        FOR THE YEAR ENDED DECEMBER 31, 1994

ALLOWANCE FOR UNCOLLECTIBLE
   ACCOUNTS.............................      $15,086         $44,186          $  --           $42,772         $16,500
                                              -------         -------          -----           -------         -------

         TOTAL..........................      $15,086         $44,186          $  --           $42,772         $16,500
                                              =======         =======          =====           =======         =======
</TABLE>
---------------
(1)  Write-off of individual accounts receivable.

                                       35
<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 24 of the  Commission's  Rules of Practice.  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 24, 1994 (1993 Form 10-K, Exhibit 3-2).

    4-1           First and  Refunding  Mortgage  dated May 1, 1923  between The
                  Counties Gas and Electric Company (predecessor to the Company)
                  and Fidelity  Trust  Company,  Trustee  (First Union  National
                  Bank, successor), (Registration No. 2-2881, Exhibit B-1).

    4-2           Supplemental  Indentures to the Company's  First and Refunding
                  Mortgage:
<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
                  May 1, 1964                          2-25628                                   4(b)-21
                  October 1, 1967                      2-28242                                   2(b)-23
                  March 1, 1968                        2-34051                                   2(b)-24
                  May 1, 1970                          2-38849                                   2(b)-28
                  December 15, 1970                    2-41081                                   2(b)-29
                  December 15, 1971                    2-44195                                   2(b)-31
                  January 15, 1973                     2-49842                                   2(b)-33
                  March 1, 1981                        2-72802                                   4-46
                  March 1, 1981                        2-72802                                   4-47
                  November 15, 1984                    1984 Form 10-K                            4-2(a)
                  December 1, 1984                     1984 Form 10-K                            4-2(b)
                  May 15, 1985                         1985 Form 10-K                            4-2(a)
                  October 1, 1985                      1985 Form 10-K                            4-2(b)
                  November 1, 1986                     1986 Form 10-K                            4-2(c)
                  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
                  August 1, 1987                       33-17438                                  4(c)-65
                  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

                                       36

<PAGE>

                  Dated as of                          File Reference                            Exhibit No.

                  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
                  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           Deposit  Agreement with respect to $7.96 Cumulative  Preferred
                  Stock (Form 8-K dated October 20, 1992, Exhibit 4-5).

    4-4           PECO Energy Company  Dividend  Reinvestment and Stock Purchase
                  Plan, as amended  January 28, 1994  (Post-Effective  Amendment
                  No. 1 to Registration No. 33-43523, Exhibit 28).

    4-5           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).

    4-6           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).

    4-7           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).

    4-8           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).

                                       37

<PAGE>

   10-1           Pennsylvania-New   Jersey-Maryland  Interconnection  Agreement
                  dated September 26, 1956  (Registration  No. 2-13340,  Exhibit
                  13-40) and agreements supplemental thereto:
<TABLE>
<CAPTION>
                  Dated as of                          File Reference                            Exhibit No.
                <S>                                    <C>                                       <C>
                  March 1, 1965                        2-38342                                   5-1(a)
                  January 1, 1971                      2-40368                                   5-1(b)
                  June 1, 1974                         2-51887                                   5-1(c)
                  September 1, 1977                    1989 Form 10-K                            10-1(a)
                  October 1, 1980                      1989 Form 10-K                            10-1(b)
                  June 1, 1981                         1989 Form 10-K                            10-1(c)
</TABLE>

   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; and
                  supplemental agreement dated January 26, 1977 (1991 Form 10-K,
                  Exhibit 10-3).

   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;  and  supplemental  agreement  dated
                  January 26, 1977 (1988 Form 10-K, Exhibit 10-4).

   10-4           Deferred  Compensation and  Supplemental  Pension Benefit Plan
                  (1981 Form 10-K, Exhibit 10-16).*

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

   10-6           PECO Energy Company Long-Term Incentive Plan (Registration No.
                  333-451, Exhibit 99).*

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

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

   10-9           Amendment   No.  2  to  the  Amended  and   Restated   Limited
                  Partnership  Agreement of PECO Energy Capital, L.P. (1995 Form
                  10-K, Exhibit 10-9).

  10-10           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 1996.

                                       38
<PAGE>

     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.


Reports on Form 8-K

     During the quarter  ended  December 31,  1996,  the Company  filed  Current
     Reports on Form 8-K, dated:

         December 3, 1996  reporting  information  under "ITEM 5. OTHER  EVENTS"
         relating  to  Pennsylvania  Governor  Ridge  signing  the  Pennsylvania
         Electricity Generation Customer Choice and Competition Act into law.

         December 20, 1996  reporting  information  under "ITEM 5. OTHER EVENTS"
         relating to the elimination of the Energy Cost Adjustment.

     Subsequent to December 31, 1996, the Company filed Current  Reports on Form
     8-K, dated:

         January 23, 1997  reporting  information  under "ITEM 5. OTHER  EVENTS"
         relating to the Company's filing with the  Pennsylvania  Public Utility
         Commission  for the  issuance  of a  Qualified  Rate Order  authorizing
         recovery of stranded and other costs through the issuance of Transition
         Bonds.

         January 24, 1997  reporting  information  under "ITEM 5. OTHER  EVENTS"
         relating  to  Salem  Generating  Station  operated  by  Public  Service
         Electric and Gas Company.

         January 30, 1997  reporting  information  under "ITEM 5. OTHER  EVENTS"
         relating  to  Salem  Generating  Station  operated  by  Public  Service
         Electric and Gas Company.

         February 21, 1997  reporting  information  under "ITEM 5. OTHER EVENTS"
         relating to the National Labor  Relations  Board's  decision  regarding
         certification elections.

         February 27, 1997  reporting  information  under "ITEM 5. OTHER EVENTS"
         relating to the Company filing its electric  competition pilot program,
         the  National  Labor  Relations  Board's  order  setting the date for a
         certification  election and the Company's offer to purchase an interest
         in a nuclear operating facility.

         March 25,  1997  reporting  information  under  "ITEM 5. OTHER  EVENTS"
         relating  to  the  results  of the  National  Labor  Relations  Board's
         certification election.

                                       39

<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 31st day of March 1997.

                            PECO ENERGY COMPANY

                            By /s/ C.A. MCNEILL, JR.
                               -----------------------------------
                                   C.A. McNeill, Jr., 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/ J. F. PAQUETTE, JR.       Chairman of the Board and          March 31, 1997
-------------------------     Director
    J. F. Paquette, Jr.

/s/ C. A. MCNEILL, JR.        President,   Chief  Executive     March 31, 1997
-------------------------     Officer     and      Director
    C. A. McNeill, Jr.        (Principal Executive Officer)

/s/ K. G. LAWRENCE             Senior   Vice   President   -     March 31, 1997
-------------------------      Finance  and Chief  Financial
    K. G. Lawrence             Officer (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                     JOSEPH C. LADD
          M. WALTER D'ALESSIO                     EDITHE J. LEVIT
          G. FRED DIBONA                          KINNAIRD R. MCKEE
          R. KEITH ELLIOTT                        JOSEPH J. MCLAUGHLIN
          RICHARD G. GILMORE                      JOHN M. PALMS
          RICHARD H. GLANTON                      RONALD RUBIN
          JAMES A. HAGEN                          ROBERT SUBIN
          NELSON G. HARRIS


By /s/ C. A. MCNEILL, JR.                                        March 31, 1997
---------------------------
C. A. McNeill, Jr., Attorney-in-Fact