-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VDawzPlnDG9vwYxq8cVJztAe+u3GvoXEBoo3kFo4so0gJZO0GmkT1MnKsDXQqSJ+ fCyI0NwMm7yFh4/4er5Zhg== 0000950169-00-000211.txt : 20000321 0000950169-00-000211.hdr.sgml : 20000321 ACCESSION NUMBER: 0000950169-00-000211 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000320 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONSTELLATION ENERGY GROUP INC CENTRAL INDEX KEY: 0001004440 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 521964611 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-25931 FILM NUMBER: 574031 BUSINESS ADDRESS: STREET 1: 250 W PRATT STREET CITY: BALTIMORE STATE: MD ZIP: 21201 BUSINESS PHONE: 4102345685 MAIL ADDRESS: STREET 1: 250 W PRATT STREET CITY: BALTIMORE STATE: MD ZIP: 21201 FORMER COMPANY: FORMER CONFORMED NAME: CONSTELLATION ENERGY CORP DATE OF NAME CHANGE: 19951220 FORMER COMPANY: FORMER CONFORMED NAME: RH ACQUISITION CORP DATE OF NAME CHANGE: 19951205 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BALTIMORE GAS & ELECTRIC CO CENTRAL INDEX KEY: 0000009466 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 520280210 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-01910 FILM NUMBER: 574032 BUSINESS ADDRESS: STREET 1: 39 W LEXINGTON ST STREET 2: CHARLES CTR CITY: BALTIMORE STATE: MD ZIP: 21201 BUSINESS PHONE: 4102345511 10-K 1 CONSTELLATION ENERGY GROUP, INC. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K --------------- ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended DECEMBER 31, 1999
Commission Exact name of registrant as specified in IRS Employer File Number its charter Identification No. ------------------------------------------------------------------------- 1-12869 CONSTELLATION ENERGY GROUP, INC. 52-1964611 1-1910 BALTIMORE GAS AND ELECTRIC COMPANY 52-0280210
MARYLAND (States of incorporation) 250 W. PRATT STREET, BALTIMORE, MARYLAND 21201 -------------------------------------------------- (Address of principal executive offices) (Zip Code) 410-234-5000 (Registrants' telephone number, including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Name of each exchange Title of each class on which registered ------------------- ----------------------------- New York Stock Exchange, Inc. Constellation Energy Group, Inc. Common } Chicago Stock Exchange, Inc. Stock--Without Par Value Pacific Stock Exchange, Inc. 7.16% Trust Originated Preferred Securities ($25 liquidation amount per preferred secu- rity) issued by BGE Capital Trust I, fully } New York Stock Exchange, Inc. and unconditionally guaranteed, based on several obligations, by Baltimore Gas and Electric Company
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: Not Applicable Indicate by check mark whether the registrants (1) have 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) have 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 registrants' 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] Aggregate market value of Constellation Energy Group, Inc. Common Stock, without par value, held by non-affiliates as of February 29, 2000 was approximately $4,439,562,000 based upon New York Stock Exchange composite transaction closing price. CONSTELLATION ENERGY GROUP, INC. COMMON STOCK, WITHOUT PAR VALUE 149,602,816 SHARES OUTSTANDING ON FEBRUARY 29, 2000. DOCUMENTS INCORPORATED BY REFERENCE
Part of Form 10-K Document Incorporated by Reference ----------------- ---------------------------------- III Certain sections of the Proxy Statement for Constellation Energy Group, Inc. for the Annual Meeting of Shareholders to be held on April 28, 2000.
Baltimore Gas and Electric Company meets the conditions set forth in General Instruction I(1)(a) and (b) of Form 10-K and is therefore filing this Form in the reduced disclosure format. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- TABLE OF CONTENTS
Page ---- Forward Looking Statements................................. 1 PART I Item 1 -- Business Overview................................................... 1 Electric Business.......................................... 4 Electric Operating Statistics.............................. 10 Gas Business............................................... 11 Gas Operating Statistics................................... 13 Franchises................................................. 14 Diversified Businesses..................................... 14 Consolidated Capital Requirements.......................... 17 Environmental Matters...................................... 17 Employees.................................................. 21 Item 2 -- Properties Electric................................................... 21 Gas........................................................ 22 General.................................................... 22 Item 3 -- Legal Proceedings Asbestos................................................... 22 Restructuring Order........................................ 23 Item 4 -- Submission of Matters to a Vote of Security Holders........ 24 Executive Officers of the Registrant (Instruction 3 to Item 401(b) of Regulation S-K).................................. 24 PART II Item 5 -- Market for Registrant's Common Equity and Related Shareholder Matters Stock Trading...................................... 25 Dividend Policy............................................ 25 Common Stock Dividends and Price Ranges.................... 25 Item 6 -- Selected Financial Data.................................... 26 Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operations.................................. 28 Item 7A-- Quantitative and Qualitative Disclosures About Market Risk....................................................... 47 Item 8 -- Financial Statements and Supplementary Data................ 48 Item 9 -- Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................................... 86 PART III Item 10 -- Directors and Executive Officers of the Registrant......... 86 Item 11 -- Executive Compensation..................................... 86 Item 12 -- Security Ownership of Certain Beneficial Owners and Management................................................. 86 Item 13 -- Certain Relationships and Related Transactions............. 86 PART IV Item 14 -- Exhibits, Financial Statement Schedules and Reports on Form 8-K.................................................... 87 Signatures............................................................. 91
Forward Looking Statements We make statements in this report that are considered forward looking statements within the meaning of the Securities Exchange Act of 1934. Sometimes these statements will contain words such as "believes," "expects," "intends," "plans," and other similar words. These statements are not guarantees of our future performance and are subject to risks, uncertainties, and other important factors that could cause our actual performance or achievements to be materially different from those we project. These risks, uncertainties, and factors include, but are not limited to: . general economic, business, and regulatory conditions, . energy supply and demand, . competition, . federal and state regulations, . availability, terms, and use of capital, . nuclear and environmental issues, . weather, . implications of the Restructuring Order by the Maryland PSC, . commodity price risk, . operating our currently regulated generation assets in a deregulated market beginning July 1, 2000 without the benefit of a fuel rate adjustment clause, . loss of revenues due to customers choosing alternative suppliers, . higher volatility of earnings and cash flows, . increased financial requirements of our nonregulated subsidiaries, . inability to recover all costs associated with providing electric retail customers service during the electric rate freeze period, and . implications from the transfer of BGE's generation assets to nonregulated subsidiaries of Constellation Energy. Given these uncertainties, you should not place undue reliance on these forward looking statements. Please see the other sections of this report and our other periodic reports filed with the Securities and Exchange Commission for more information on these factors. These forward looking statements represent our estimates and assumptions only as of the date of this report. - -------------------------------------------------------------------------------- PART I Item 1. Business Overview On April 30, 1999, Constellation Energy(R) Group, Inc. (Constellation Energy) became the holding company for Baltimore Gas and Electric Company (BGE(R)) and Constellation(R) Enterprises, Inc. Constellation Enterprises was previously owned by BGE. Constellation Energy was incorporated in Maryland on September 25, 1995. References in this report to "we" and "our" are to Constellation Energy and its subsidiaries, collectively. References in this report to the "utility business" are to BGE. Constellation Energy's subsidiaries primarily include BGE and a group of energy services businesses focused mostly on power marketing and merchant generation in North America. BGE is an electric and gas public utility company with a service territory that covers the City of Baltimore and all or part of ten counties in Central Maryland. BGE was incorporated in Maryland in 1906. BGE's electric service territory includes an area of approximately 2,300 square miles with an estimated population of 2.7 million. BGE's gas service territory includes an area of more than 600 square miles with an estimated population of 2.0 million. There are no municipal or cooperative wholesale customers within BGE's service territory. The electric utility industry is undergoing rapid and substantial change. On April 8, 1999, Maryland enacted legislation authorizing customer choice and competition among electric suppliers. On November 10, 1999, the Maryland Public Service Commission (Maryland PSC) issued Order No. 75757 (Restructuring Order) approving a Stipulation and Settlement Agreement between BGE and a majority of the active parties involved in the electric restructuring proceeding that resolves the major issues surrounding electric restructuring. Our electric business will change significantly beginning July 1, 2000 as we enter into retail customer choice for electric generation and our generation assets are transferred from BGE to nonregulated subsidiaries of Constellation Energy. Please refer to the Electric Regulatory Matters and Competition section for more information. 1 As discussed throughout this report, the two units at the Calvert Cliffs Nuclear Power Plant (Calvert Cliffs) are our principal generating facilities and use the cheapest fuel in our system. An extended outage of either of these units could have a substantial adverse effect on our business and financial results. We describe our utility business further in five other sections of this report - -- Electric Business, Electric Operating Statistics, Gas Business, Gas Operating Statistics, and Franchises. Our energy services businesses are: . Constellation Power Source,(TM) Inc. -- wholesale power marketing, . Constellation Power,(TM) Inc. and Subsidiaries -- power projects, . Constellation Energy Source,(TM) Inc. -- energy products and services, . Constellation Nuclear Group,(TM) LLC -- nuclear generation and consulting services, . BGE Home Products & Services,(TM) Inc. and Subsidiaries -- home products, commercial building systems, and residential and small commercial gas retail marketing, and . District Chilled Water General Partnership (ComfortLink(R)) -- a general partnership, in which BGE is a partner, that provides cooling services for commercial customers in Baltimore. Our other businesses are: . Constellation Investments,(TM) Inc. -- financial investments, and . Constellation Real Estate Group,(TM) Inc. -- real estate and senior-living facilities. We describe our diversified businesses further in the Diversified Businesses section. Strategy The change toward customer choice will significantly impact our business going forward. In response to this change, we regularly evaluate our strategies with two goals in mind: to improve our competitive position, and to anticipate and adapt to regulatory change. We are realigning our organization combining all of our domestic merchant energy businesses. We will continue to invest in the growth of these businesses with the objective of providing new sources of earnings. In addition, we might consider one or more of the following strategies: . the complete or partial separation of our transmission and distribution functions, . the construction, purchase or sale of generation assets, . mergers or acquisitions of utility or non-utility businesses, . spin-off or sale of one or more businesses, and . growth of earnings from other nonregulated businesses. We cannot predict whether any of the strategies described above may actually occur, or what their effect on our financial results or competitive position might be. However, with the shift toward customer choice, competition, and the growth of our nonregulated subsidiaries, various factors will affect our financial results in the future. These factors include, but are not limited to, operating our currently regulated generation assets in a deregulated market beginning July 1, 2000 without the benefit of a fuel rate adjustment clause, the loss of revenues due to customers choosing alternate suppliers, higher volatility of earnings and cash flows, and increased financial requirements of our nonregulated subsidiaries. Please refer to the Forward Looking Statements section for additional factors. In addition, our Board of Directors has a Long-Range Strategy Committee to oversee the development of our long-range strategic goals, and to consider strategic initiatives presented by management. We also have a Corporate Strategy and Development Group, led by a Vice President, that is responsible for evaluating strategic objectives and developing strategy implementation. We discuss competition in our electric and gas businesses in more detail in the Electric Regulatory Matters and Competition and Gas Regulatory Matters and Competition sections. 2 Revenues and Net Income by Operating Segment The percentages of revenues and net income attributable to our electric, gas, and diversified businesses are shown in the tables below. We present information about our operating segments, including certain nonrecurring items, in Note 2 to Consolidated Financial Statements. We are realigning our organization combining all of our domestic merchant energy businesses. We have not determined the impact of this reorganization on our operating segments, but such change will impact our operating segments in the future.
Revenues* ----------------------------------- Electric Gas Diversified -------- --- --------------------- Energy Services Other --------------- ----- 1999 60% 12% 25% 3% 1998 66 13 16 5 1997 66 16 12 6 1996 70 16 10 4 1995 76 14 6 4
Net income*/(1)/ --------------------------------------- Electric Gas Diversified -------- --- --------------------- Energy Services Other --------------- ----- 1999 81%/(1)/ 10% 15% (6)% 1998 85 9 13 (7) 1997 88 10 10 (8) 1996 74 11 10 5 1995 85 7 6 2
*Reflects the elimination of intercompany transactions. /(1)/ Excludes an extraordinary charge of $66.3 million related to electric restructuring as discussed in Note 4 to Consolidated Financial Statements. The differences in percentages of revenues and net income for our electric and gas businesses are due to two factors: . our level of investment in each business, and . our fuel costs in each business. Our electric and gas revenues reflect amounts collected for fuel and other operating expenses plus a return on our investment. Our investment for ratemaking purposes in the electric business is $4.7 billion and our investment for ratemaking purposes in the gas business is approximately $719 million. As a result, our electric revenues include a much higher return component than our gas revenues. Also, as shown in our Consolidated Statements of Income in Item 8. Financial Statements and Supplementary Data, our electric fuel costs ("Electric fuel and purchased energy") were 22% of electric revenues in 1999, and our purchased gas costs ("Gas purchased for resale") were 48% of gas revenues in 1999. This means our cost of fuel in relation to our revenues is lower in the electric business than in the gas business. Currently and until July 1, 2000, we charge the actual cost of the fuel we use to generate electricity and the net cost of purchases and sales of electricity to customers with no profit to us. We discuss the elimination of the electric fuel rate clause on July 1, 2000 further in the Electric Regulatory Matters and Competition section. The price we charge for natural gas is based on a market based rates incentive mechanism approved by the Maryland PSC. The difference between our actual cost and the price we charge under market based rates does not significantly impact earnings. We discuss market based rates further in the Gas Regulatory Matters and Competition section. Our electric and gas revenues come from many customers -- residential, commercial, and industrial. In 1999, our largest electric customer provided 2.0% of our total electric revenues. In 1999, our largest gas customer provided 1.4% of our total gas revenues. As shown in the tables above, the percentages for revenues and net income differ for our diversified businesses due primarily to nonrecurring items included in operations that are discussed in Note 2 to Consolidated Financial Statements. 3 Electric Business We get most of our revenues and net income from our electric utility business. Our electric business will change significantly beginning July 1, 2000 as we enter into retail customer choice for electric generation. No earlier than July 1, 2000, and after all regulatory approvals are received, BGE will transfer all of its generation assets to nonregulated subsidiaries of Constellation Energy. The impact of this transfer on BGE's financial results will be material. BGE's transmission and distribution business will continue to be regulated by the Maryland PSC. We describe this business and these changes in the sections below. Electric Regulatory Matters and Competition On April 8, 1999, Maryland enacted the Electric Customer Choice and Competition Act of 1999 (the "Act") and accompanying tax legislation that will significantly restructure Maryland's electric utility industry and modify the industry's tax structure. In the Restructuring Order discussed below, the Maryland PSC addressed the major provisions of the Act. The accompanying tax legislation is discussed in detail in Note 4 to Consolidated Financial Statements. On November 10, 1999, the Maryland PSC issued a Restructuring Order that resolves the major issues surrounding electric restructuring, accelerates the timetable for customer choice, and addresses the major provisions of the Act. The Restructuring Order also resolves the electric restructuring proceeding (transition costs, customer price protections, and unbundled rates for electric services) and a petition filed in September 1998 by the Office of People's Counsel (OPC) to lower our electric base rates. The major provisions of the Restructuring Order are discussed in Item 7. Management's Discussion and Analysis--Electric Restructuring and Note 4 to Consolidated Financial Statements. In early December, the Mid-Atlantic Power Supply Association (MAPSA), Trigen- Baltimore Energy Corporation, and Sweetheart Cup Company, Inc. filed appeals of the Restructuring Order. MAPSA also filed a motion seeking to delay the implementation of the Restructuring Order pending a decision on the merits by the court. While we believe that the appeals are without merit, no assurances can be given as to the timing or outcome of these cases, and whether the outcome will have a material adverse effect on our and BGE's financial results. We discuss these appeals further in Item 3. Legal Proceedings. Electric utilities are facing competition on various fronts, including: . construction of generating units to meet increased demand for electricity, . sale of electricity in bulk power markets, . competing with alternative energy suppliers, and . electric sales to retail customers. As a result of the deregulation of BGE's electric generation, no earlier than July 1, 2000, and upon receipt of all regulatory approvals, we expect that BGE will transfer, at book value, its nuclear generating assets and its nuclear decommissioning trust fund to a subsidiary of Constellation Nuclear Group, LLC. In addition, we expect that BGE will transfer, at book value, its fossil generating assets and its partial ownership interest in two coal plants and a hydroelectric plant located in Pennsylvania to a nonregulated subsidiary of Constellation Energy. In total, these generating assets represent about 6,240 megawatts of generation capacity with a total projected net book value at June 30, 2000 of approximately $2.4 billion. We estimate that the electric generation portion of our business currently represents about one-half of BGE's operating income. We expect BGE to transfer approximately $278 million of tax exempt debt to our nonregulated subsidiaries related to the transferred assets and that BGE will receive approximately $1.1 billion in unsecured promissory notes. Repayments of the notes by our nonregulated subsidiaries will be used exclusively to service certain long-term debt of BGE. BGE will also transfer equity associated with the generation assets to nonregulated subsidiaries of Constellation Energy. Under the Restructuring Order, BGE will provide standard offer service to customers at fixed rates over various time periods during the transition period for those customers that do not choose an alternate supplier once customer choice begins July 1, 2000. In addition, the electric fuel rate will be discontinued effective July 1, 2000. Nonregulated subsidiaries of Constellation Energy will provide BGE with the energy and capacity required to meet 4 its standard offer service obligations for the first three years of the transition period. Standard offer service will be competitively bid thereafter. Nonregulated subsidiaries of Constellation Energy will obtain the energy and capacity to supply BGE's standard offer service obligations from Calvert Cliffs and BGE's former fossil plants, supplemented with energy purchased from the wholesale energy market as necessary. Our earnings will be exposed to the risks of the competitive wholesale electricity market to the extent that our nonregulated subsidiaries have to purchase energy and/or capacity or generate energy to meet obligations to supply power to BGE at market prices or costs, respectively, which may approach or exceed BGE's standard offer service rates. We will also be affected by operational risk, that is, the risk that a generating plant is not available to produce energy when the energy is required. Until July 1, 2000, we will continue to recover our cost of fuel and purchased energy through the electric fuel rate as long as the Maryland PSC finds that, among other things, we have kept the productive capacity of our generating plants at a reasonable level. To do this, the Maryland PSC will evaluate the performance of our generating plants, and will determine if we used all reasonable and cost-effective maintenance and operating control procedures under the Generating Unit Performance Program. We discuss the Generating Unit Performance Program further in Note 10 to Consolidated Financial Statements. We have been able to recover all of our costs of fuel and purchased energy from 1992 through 1996. Under the Restructuring Order, BGE's electric fuel rate is frozen at its current level until July 1, 2000, at which time the fuel rate clause will be discontinued. We will continue to defer the difference between our actual costs of fuel and energy and what we collect from customers under the fuel rate through June 30, 2000. Any accumulated difference between our actual costs of fuel and energy and the amounts collected from customers under the electric fuel rate clause will be collected from our customers over a period to be determined by the Maryland PSC. After July 1, 2000, any energy purchased to meet BGE's load commitments will become a cost of doing business in the newly competitive marketplace. Therefore, if BGE provides standard offer service at fixed rates to its customers that do not select an alternative provider as required under the terms of the Restructuring Order, and the load demand exceeds our capacity to supply energy due to a plant outage, we would be required to purchase additional power in the wholesale energy market. If the price of obtaining energy in the wholesale market exceeds the fixed standard offer service price, our earnings would be adversely affected. Imbalances in demand and supply can occur not only because of plant outages, but also because of transmission constraints or due to extreme temperatures (hot or cold) causing demand to exceed available supply. We cannot estimate the impact of the increased financial risks associated with this transition. However, these financial risks could have a material impact on our, and BGE's, financial results. Nuclear Operations The two units at Calvert Cliffs use the cheapest fuel. As a result, the costs of replacement energy associated with outages at these units can be significant. If any unplanned outage were to occur during the summer or winter when demand was at a high level, the replacement power costs could have a material adverse impact on our financial results.
Generation Megawatt- Capacity Hours (MWH) Factor ----------- -------- 1999....................................................... 13,309,306 91% 1998....................................................... 13,326,633 91 1997....................................................... 13,133,441 90 1996....................................................... 12,069,937 82 1995....................................................... 12,940,496 88
In 1998, we filed an application with the NRC for 20-year license renewals for both units at Calvert Cliffs. The current operating licenses expire in 2014 for Unit 1 and in 2016 for Unit 2. This is discussed further in Item 7. Management's Discussion and Analysis -- Current Issues. 5 Electric Load Management, Energy and Capacity Purchases We have implemented various programs for use when system operating conditions require a reduction in load. We refer to these programs as active load management programs. These programs include: . customer-owned generation and curtailable service for large commercial and industrial customers, . air conditioning control which is available to residential and commercial customers, and . residential water heater control. We have generally activated these programs on peak summer days. The potential reduction in the summer 2000 peak load from active load management is approximately 440 megawatts (MW). We have an agreement with Pennsylvania Power & Light Company (PP&L) to purchase electricity and capacity (availability to supply electricity) from June 1, 1990 through May 31, 2001. This agreement, which has been accepted by the FERC, is designed to help maintain adequate reserve margins and provide flexibility in meeting capacity obligations. The PP&L agreement: . entitles us to 5.94% of the electricity output, and net capacity (currently 130 MW), of PP&L's nuclear Susquehanna Steam Electric Station from October 1, 1991 to May 31, 2001, and . enables us to treat a portion of PP&L's capacity as our capacity for purposes of satisfying our installed capacity requirements as a member of the PJM (Pennsylvania-New Jersey-Maryland) Interconnection energy market. The PJM is the operator of a regional transmission organization (RTO) as well as a regional power pool with members that include many wholesale market participants, as well as BGE and six other utility companies. We are not acquiring an ownership interest in any of PP&L's generating units. PP&L will continue to control, manage, operate, and maintain that station and all other PP&L-owned generating facilities. Our firm capacity purchases at December 31, 1999 represented: . 150 MW of rated capacity of Bethlehem Steel Corporation's Sparrows Point complex, . 57 MW of rated capacity of the Baltimore Refuse Energy Systems Company, and . 130 MW of Susquehanna capacity from PP&L. On or about July 1, 2000, BGE will transfer certain purchase power contracts to our nonregulated subsidiaries. Our generation and transmission facilities are connected to those of neighboring utility systems to form the PJM. Under the PJM agreement, we use the interconnected facilities for substantial energy interchange and capacity transactions as well as emergency assistance. In addition, sometimes we enter into short-term capacity transactions to meet PJM obligations. On December 20, 1999, the Federal Energy Regulatory Commission (FERC) issued Order 2000, amending its regulations under the Federal Power Act to advance the formation of RTOs. The regulations require that each public utility that owns, operates, or controls facilities for the transmission of electric energy in interstate commerce make certain filings with respect to forming and participating in an RTO. FERC also identified the minimum characteristics and functions that a transmission entity must satisfy in order to be considered an RTO. According to the Order, a public utility that is a member of an existing transmission entity that has been approved by FERC as in conformance with the Independent System Operator (ISO) principles set forth in the FERC Order No. 888 (such as BGE, through its membership in the PJM) must make a filing no later than January 15, 2001. That filing must explain the extent to which the transmission entity in which it participates meets the minimum characteristics and functions of an RTO, and either propose to modify the existing institution to the extent necessary to become an RTO, or explain the efforts, obstacles and plans with respect to conforming to these characteristics and functions. As a member of the PJM, an existing ISO, BGE does not expect to be significantly impacted by the Order. However, the full impact has not yet been determined. 6 Fuel for Electric Generation Our electric generation by type of fuel and the cost of each fuel in the five- year period 1995-1999 is shown below. No earlier than July 1, 2000, the electric generation fuel contracts as discussed below will be included with the generation assets transferred to nonregulated subsidiaries of Constellation Energy.
Average Cost of Fuel Consumed Generation by Fuel Type ((cent) per million BTU) ---------------------------- ---------------------------------- 1999 1998 1997 1996 1995 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- ------ ------ ------ ------ ------ Nuclear(a)....... 43% 44% 44% 40% 43% 45.07 45.45 46.51 47.29 47.22 Coal............. 57 58 59 58 57 140.09 137.17 140.52 143.80 148.64 Oil.............. 4 3 1 1 1 226.95 243.18 283.61 313.33 267.59 Hydro & Gas...... 3 4 3 4 3 -- -- -- -- -- --- --- --- --- --- 107 109 107 103 104 Net Interchange Sales........... (7) (9) (7) (3) (4) --- --- --- --- --- 100% 100% 100% 100% 100% === === === === ===
(a) Nuclear fuel costs include disposal costs associated with long-term off- site spent fuel storage and shipping, which is currently set by law at one mill per kilowatt-hour of nuclear generation (approximately 10 cents per million Btu), and contributions to a fund for decommissioning and decontaminating the Department of Energy's uranium enrichment facilities. We discuss this further below. Nuclear The supply of fuel for nuclear generating stations includes the: . purchase of uranium concentrates, . conversion to uranium hexafluoride, . enrichment of uranium hexafluoride, and . fabrication of nuclear fuel assemblies. Information is shown below about fuel requirements for Calvert Cliffs Units 1 and 2: Uranium We have, either in inventory or Concentrates: under contract, sufficient quantities of uranium to meet 70% to 80% of our requirements through 2004. Conversion: We have contractual commitments providing for the conversion of uranium concentrates into uranium hexafluoride which will meet approximately 75% of our requirements through 2004. Enrichment: We have a contract with the U.S. Enrichment Corporation that provides approximately 75% of our enrichment requirements, which will decline to approximately 50% by 2004. Fuel We have contracted for the fabrication of fuel assemblies for reloads required through 2013. Assembly Fabrication: Any remaining nuclear fuel requirements will be purchased on the spot market. The nuclear fuel market is very competitive and we do not anticipate any problem in meeting our requirements beyond these periods. We discuss our expenditures for nuclear fuel in Item 7. Management's Discussion and Analysis - -- Capital Resources. Storage of Spent Nuclear Fuel -- Federal Facilities: Under the Nuclear Waste Policy Act of 1982 (the 1982 Act), we contracted with the United States Department of Energy (DOE) to place spent fuel discharged from Calvert Cliffs into a federal repository. Such facilities do not currently exist, and, consequently, must be developed and licensed. We cannot predict when such facilities will be available. However, the 1982 Act required the DOE to accept spent fuel starting in 1998. We cannot predict what the ultimate cost to dispose of the spent fuel will be. However, the 1982 Act assesses a one mill per kilowatt-hour fee on nuclear electricity generated and sold. We estimate this fee to be approximately $13 million for Calvert Cliffs each year based on expected operating levels. Fees are deposited into the Nuclear Waste Fund. In December 1996, the DOE notified us and other nuclear utilities that it would not be able to meet the 1998 deadline for accepting spent fuel. We participated in litigation, along with 36 other utilities, against the DOE. The litigation, titled Northern States Power, et al. v. DOE, was filed January 31, 1997 in the United States Court of 7 Appeals for the D.C. Circuit. That court has original jurisdiction under the 1982 Act. The utilities asked the court to allow them to pay fees that formerly went directly to the DOE for deposit into the Nuclear Waste Fund, into escrow instead. Among other remedies, the utilities also asked the court to force the DOE to submit a program with milestones illustrating how it would meet the deadline for accepting spent nuclear fuel, and a monthly report to allow the utilities to monitor the DOE's progress. On November 14, 1997, the court ordered the DOE to comply with its unconditional obligation under the 1982 Act to dispose of spent fuel. The court did not grant the utilities the remedies sought, stating that adequate contractual and statutory remedies already existed. The DOE and several utilities filed separate motions for reconsideration with the court, which were denied. The DOE's request for review to the U.S. Supreme Court was also denied. We are currently evaluating our contractual options in light of the court's decision. We cannot currently estimate the total amount of the costs we will incur as a result of the DOE's failure to meet the 1998 deadline. Storage of Spent Nuclear Fuel -- BGE Facility: We have a license from the NRC to operate an on-site independent spent fuel storage facility. We have storage capacity at Calvert Cliffs that will accommodate spent fuel from operations through the year 2006. In addition, we can expand our temporary storage capacity to meet future requirements until federal storage is available. Costs for Decommissioning Uranium Enrichment Facilities: The Energy Policy Act of 1992 (the 1992 Act) contains provisions requiring domestic nuclear utilities to contribute to a fund for decommissioning and decontaminating the DOE's uranium enrichment facilities. These contributions are generally payable over a fifteen-year period with escalation for inflation and are based upon the amount of uranium enriched by the DOE for each utility through 1992. The 1992 Act provides that these costs are recoverable through utility service rates. Information about the cost of decommissioning is discussed in Note 1 to Consolidated Financial Statements -- Fuel And Purchased Energy Costs. Restructuring Order Impacts: When BGE transfers its nuclear generation assets to a nonregulated subsidiary of Constellation Energy, that subsidiary will also become liable for the decommissioning costs of Calvert Cliffs and costs associated with the on-site independent spent fuel storage facilities. BGE will transfer the trust fund established to decommission Calvert Cliffs and the spent fuel storage facilities, as well as future amounts collected from customers for decommissioning under the Restructuring Order, to the nonregulated subsidiary. In addition, the responsibility for quarterly fees to the DOE for the future disposal of spent nuclear fuel and the liability for decommissioning uranium enrichment facilities will also be transferred to a nonregulated subsidiary of Constellation Energy. The cost for decommissioning uranium enrichment facilities will be recovered through BGE's service rates. Coal We get most of our coal under supply contracts with mining operators, and we get the rest through spot purchases. We believe that we will be able to renew supply contracts as they expire or enter into similar contracts with other coal suppliers. Our coal-burning facilities have the following requirements:
Annual Coal Requirement (tons) ----------- Brandon Shores (a) Units 1 and 2 (combined)........................................... 3,500,000 Crane (b) Units 1 and 2 (combined)........................................... 800,000 Wagner (c) Units 2 and 3 (combined)........................................... 1,000,000
Special Coal Restrictions: (a) Sulfur content less than 0.8% (b) Low ash melting temperature (c) Sulfur content no more than 1% Coal deliveries to our coal burning facilities are made by rail and barge. The coal we use is produced from mines located in central and northern Appalachia. We have a 20.99% undivided interest in the Keystone coal-fired generating plant and a 10.56% undivided interest in the Conemaugh coal-fired generating plant. Both of these plants are located in Pennsylvania. The majority of the annual coal requirements for the Keystone plant are under contract from Rochester and Pittsburgh Coal Company. The remainder of the Keystone plant and all of the Conemaugh plant annual coal requirements are purchased from local suppliers on the open market. 8 Oil Under normal burn practices, our requirements for residual fuel oil amount to approximately 1,500,000 to 2,000,000 barrels of low-sulfur oil per year. Deliveries of residual fuel oil are made directly into our barges from the suppliers' Baltimore Harbor marine terminal for distribution to the various generating plant locations. We have contacts with various suppliers to purchase oil at spot prices to meet our requirements. Gas We purchase firm natural gas transportation entitlements, as necessary, to provide ignition and banking at certain power plants. We purchase gas for electric generation, as needed using interruptible transportation arrangements. Some of our gas-fired units can use residual fuel oil instead of gas. 9 Electric Operating Statistics
Year Ended December 31, -------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- Electric Output (In Thousands) -- MWH: Generated........................ 32,684 32,372 31,289 30,107 30,548 Purchased (A).................... 3,232 3,496 4,737 7,560 7,403 -------- -------- -------- -------- -------- Subtotal........................ 35,916 35,868 36,026 37,667 37,951 Less Interchange and Other Sales.. 4,785 5,454 6,224 7,580 8,149 -------- -------- -------- -------- -------- Total Output.................... 31,131 30,414 29,802 30,087 29,802 ======== ======== ======== ======== ======== Power Generated and Purchased at Times of Peak Load (MW) (one hour): Generated by Company............. 5,366 5,565 5,472 4,789 5,162 Net Purchased (A)................ 1,017 480 508 1,166 785 -------- -------- -------- -------- -------- Peak Load (B)..................... 6,383 6,045 5,980 5,955 5,947 ======== ======== ======== ======== ======== Annual System Load Factor (%)..... 55.7 57.4 56.9 57.5 57.2 Revenues (In Millions) Residential...................... $ 975.2 $ 948.6 $ 932.5 $ 958.7 $ 955.2 Commercial....................... 939.3 912.9 892.6 861.3 879.4 Industrial....................... 204.3 211.5 211.9 207.6 208.5 -------- -------- -------- -------- -------- System Sales..................... 2,118.8 2,073.0 2,037.0 2,027.6 2,043.1 Interchange and Other Sales...... 112.1 120.8 132.7 155.9 167.0 Other............................ 29.1 27.0 22.3 25.5 21.0 -------- -------- -------- -------- -------- Total........................... $2,260.0 $2,220.8 $2,192.0 $2,209.0 $2,231.1 ======== ======== ======== ======== ======== Sales (In Thousands) -- MWH: Residential...................... 11,349 10,965 10,806 11,243 10,966 Commercial....................... 13,565 13,219 12,718 12,591 12,635 Industrial....................... 4,350 4,583 4,575 4,596 4,591 -------- -------- -------- -------- -------- System Sales..................... 29,264 28,767 28,099 28,430 28,192 Interchange and Other Sales...... 4,785 5,454 6,224 7,580 8,149 -------- -------- -------- -------- -------- Total........................... 34,049 34,221 34,323 36,010 36,341 ======== ======== ======== ======== ======== Customers (In Thousands) Residential...................... 1,021.4 1,009.1 1,001.0 995.2 988.2 Commercial....................... 107.7 106.5 105.9 104.5 103.4 Industrial....................... 4.7 4.6 4.5 4.3 4.1 -------- -------- -------- -------- -------- Total........................... 1,133.8 1,120.2 1,111.4 1,104.0 1,095.7 ======== ======== ======== ======== ======== Average Cost of Fuel Consumed (cents per million BTU).......... 107.27 104.05 105.76 108.05 104.78 ======== ======== ======== ======== ========
We achieved an all-time peak load of 6,383 megawatts on July 6, 1999. (A) Includes purchases from Safe Harbor Water Power Corporation, a hydroelectric company, of which we own two-thirds of the capital stock. (B) We discuss active load management programs that may be activated at times of peak load in Electric Load Management, Energy, and Capacity Purchases. 10 Gas Business We describe our gas utility business in the sections below. Gas Regulatory Matters and Competition Currently, no regulation exists for the wholesale price of natural gas as a commodity, and the regulation of interstate transmission at the federal level has been reduced. All BGE industrial and commercial gas customers and, effective November 1, 1999, all BGE residential customers have the option to purchase gas from other suppliers. However, the delivery of gas continues to be regulated by the Maryland PSC. We buy all gas that we resell directly from various suppliers (rather than pipeline companies) and arrange separately for transportation and storage. Alternatively, we can transport gas for our customers. We also participate in the interstate markets, by releasing pipeline capacity or bundling pipeline capacity with gas for off-system sales. We provide all of our customers with the option for delivery service across our distribution system so that they may make direct purchase and transportation arrangements with suppliers and pipelines. In addition to the delivery service, we also provide these customers with meter readings, billing, emergency response, regular maintenance, and balancing. Approximately 55% of the gas on our distribution system is for customers using delivery service. We charge all our delivery service customers fees to recover the fixed costs for the transportation service we provide. These fees are the same as the base rate charged for gas sales. Delivery service customers may choose to purchase gas from several different suppliers, including two of our diversified businesses. The basis of competition for delivery service customers is primarily commodity price. As part of our response to the increase in competition in the natural gas business, earnings from off-system gas sales and capacity release revenues are shared between shareholders and customers. Off-system gas sales are low-margin direct sales of gas to wholesale suppliers of natural gas outside our service territory. We make these sales as part of a program to balance our supply of, and cost of, natural gas. In addition, we have a market based rates incentive mechanism for gas we sell on our system. Under market based rates, our actual cost of gas is compared to a market index (a measure of the market price of gas in a given period). The difference between our actual cost and the market index is shared equally between shareholders and customers. On November 17, 1999, we applied for a $36.3 million annual increase in our gas base rates. The Maryland PSC is currently reviewing our application, and is expected to issue an order by June 2000. Gas Operations We distribute natural gas purchased directly from many producers and marketers. We have transportation and storage agreements as shown below. These agreements are on file with the FERC. The gas is transported to our city gates, under various transportation agreements, by: . Columbia Gas Transmission Corporation, . CNG Transmission Corporation, and . Transcontinental Gas Pipe Line Corporation. To transport gas from the pipelines that supply gas to the pipelines that are connected to our city gates as mentioned above, we also have transportation capacity under contract with: . Texas Eastern Transmission Corporation, . Texas Gas, . Columbia Gulf Transmission Company, and . ANR Pipeline Company. We have storage service agreements with: . Columbia Gas Transmission Corporation, . CNG Transmission Corporation, and . ANR Pipeline Company. 11 Our current pipeline firm transportation entitlements to serve our firm loads are 280,553 DTH per day during the winter period and 255,533 DTH per day during the summer period. We use the firm transportation capacity to move gas from the Gulf of Mexico, Louisiana, south central regions of Texas, and Canada to our city gates. We can arrange short-term contracts or exchange agreements with other gas companies in the event of short-term emergencies. We have three market area storage contracts to manage weather sensitive gas demand during the winter period. Our current maximum storage entitlements are 235,080 DTH per day. To supplement our gas supply at times of heavy winter demands and to be available in temporary emergencies affecting gas supply, we have: . a liquefied natural gas facility for the liquefaction and storage of natural gas with a total storage capacity of 1,000,000 DTH and a planned daily capacity of 287,988 DTH, and . a propane air facility with a mined cavern with a total storage capacity equivalent to 500,000 DTH and a planned daily capacity of 85,000 DTH. We have under contract sufficient volumes of propane for the operation of the propane air facility and are capable of liquefying sufficient volumes of natural gas during the summer months for operation of our liquefied natural gas facility during winter emergencies. 12 Gas Operating Statistics
Year Ended December 31, --------------------------------------- 1999 1998 1997 1996 1995 ------- ------- ------- ------- ------- Gas Output (In Thousands)-- DTH: Purchased............................. 49,082 47,972 62,988 70,260 70,391 LNG Withdrawn from Storage............ 463 268 484 904 815 Produced.............................. 486 46 541 784 528 ------- ------- ------- ------- ------- Total Output........................ 50,031 48,286 64,013 71,948 71,734 Delivery service gas (A)............... 59,494 55,608 52,629 45,964 43,854 Off-system sales (B)................... 15,543 16,724 14,759 9,968 -- ------- ------- ------- ------- ------- Total............................... 125,068 120,618 131,401 127,880 115,588 ======= ======= ======= ======= ======= Peak Day Sendout (DTH)................. 727,800 658,359 765,011 708,966 706,287 ======= ======= ======= ======= ======= Capability on Peak Day (DTH)........... 836,600 833,000 870,000 870,000 847,000 Revenues (In Millions) Residential Excluding Delivery Service........... $ 298.1 $ 279.2 $ 321.7 $ 320.1 $ 248.3 Delivery Service..................... 11.5 4.9 0.5 -- -- Commercial Excluding Delivery Service........... 79.3 75.6 113.5 125.1 109.9 Delivery Service..................... 24.4 19.4 12.9 7.2 3.7 Industrial Excluding Delivery Service........... 8.2 8.0 11.4 17.1 16.7 Delivery Service..................... 16.1 16.0 17.2 14.6 16.3 ------- ------- ------- ------- ------- System sales.......................... 437.6 403.1 477.2 484.1 394.9 Off-system sales...................... 42.9 40.9 37.5 26.6 -- Other................................. 7.7 7.2 6.9 6.6 5.6 ------- ------- ------- ------- ------- Total............................... $ 488.2 $ 451.2 $ 521.6 $ 517.3 $ 400.5 ======= ======= ======= ======= ======= Sales (In Thousands) -- DTH: Residential Excluding Delivery Service........... 34,272 33,595 39,958 43,784 40,211 Delivery Service..................... 4,468 1,890 205 -- -- Commercial Excluding Delivery Service........... 11,733 11,775 18,435 22,698 23,612 Delivery Service..................... 20,288 16,633 12,964 8,755 6,982 Industrial Excluding Delivery Service........... 1,367 1,412 2,016 2,887 4,102 Delivery Service..................... 33,118 34,798 38,791 36,201 35,925 ------- ------- ------- ------- ------- System sales.......................... 105,246 100,103 112,369 114,325 110,832 Off-system sales...................... 15,543 16,724 14,759 9,968 -- ------- ------- ------- ------- ------- Total............................... 120,789 116,827 127,128 124,293 110,832 ======= ======= ======= ======= ======= Customers (In Thousands) Residential........................... 543.5 532.5 524.5 516.5 506.8 Commercial............................ 39.9 39.6 39.3 38.9 38.4 Industrial............................ 1.3 1.3 1.3 1.3 1.3 ------- ------- ------- ------- ------- Total............................... 584.7 573.4 565.1 556.7 546.5 ======= ======= ======= ======= =======
For the periods presented, we achieved an all-time peak day sendout of 765,011 DTH on January 18, 1997. Subsequently, on January 17, 2000, we achieved a new all-time peak day sendout of 795,700 DTH. (A) Delivery service gas is gas purchased by customers directly from suppliers for which we receive a fee for transportation through our system. (B) Off-system sales are low-margin sales to wholesale suppliers of natural gas outside our service territory (beginning first quarter 1996). We discuss these programs further in the Gas Regulatory Matters and Competition section. 13 Franchises We have nonexclusive electric and gas franchises to use streets and other highways that are adequate and sufficient to permit us to engage in our present business. All such franchises, other than the gas franchises in Manchester, Hampstead, Perryville, Sykesville, Havre de Grace, Mt. Airy, and Montgomery and Frederick Counties, are unlimited as to time. The gas franchises for these jurisdictions expire at various times from 2015 to 2087, except for Havre de Grace which has the right, exercisable at twenty-year intervals from 1907, to purchase all of our gas properties in that municipality. Conditions of the franchises are satisfactory. - -------------------------------------------------------------------------------- Diversified Businesses Our diversified businesses engage primarily in energy services that focus mostly on power marketing and merchant generation in North America. We also have other diversified businesses that engage in financial investments and develop, own, and manage real estate and senior-living facilities. Our diversified businesses are presented below. We present operating segment information in Note 2 to Consolidated Financial Statements. In anticipation of the deregulation of Maryland's electric industry on July 1, 2000, we are realigning our organization. We are combining the existing power marketing functions of Constellation Power Source with domestic plant operations, development, and generation functions of Constellation Power and no earlier than July 1, 2000, certain portions of BGE's business. Together these functions will form an integrated domestic merchant energy organization that will strategically develop, own, and operate power plants, market power, and manage risk in the wholesale energy market. Energy Services Our energy services businesses experience substantial competition from utilities and their affiliates, independent power producers and other power marketers. Competition is based on the price of the commodities, services delivered, and the quality and reliability of services provided. Power Marketing Constellation Power Source, Inc. (CPS), formed in 1997, provides power marketing and risk management services to wholesale customers in North America through the purchase and sale of electric power, other energy commodities and related derivative contracts. CPS has an exclusive agreement with a subsidiary of Goldman, Sachs and Co. to serve as an advisory for power marketing and related risk management services. CPS purchases electric power by several methods, including: . from regional power pools, or . through bilateral agreements with third parties. Upon the transfer of BGE's fossil and nuclear plants to nonregulated subsidiaries of Constellation Energy, which is expected to occur no earlier than July 1, 2000, CPS will also manage the output of those plants (combined capacity of approximately 6,200 megawatts) including sales of power to BGE that will allow BGE to meet its standard offer service obligations under the Maryland PSC's Restructuring Order. CPS sells the electric power it purchases to customers such as utilities, cooperatives and other resellers, structuring the transactions to meet each customer's diverse needs. CPS supplies standard offer electric supply service to several distribution utilities in New England and is currently focusing efforts in high-energy growth areas such as Texas and the mid-west. CPS sold 69,787,986 megawatt hours of electric power in 1999 and 27,608,080 megawatt hours in 1998, its first full year of operation. CPS engages in trading activities in order to manage its portfolio of energy purchases and sales to customers through structured transactions. These activities involve the use of a variety of instruments, including: . forward contracts (which commit it to purchase or sell energy commodities in the future), . swap agreements (which require payments to or from counterparties based upon the differential between two prices for a predetermined contractual (notional) quantity), . options contracts (which convey the right to buy or sell a commodity, financial instrument or index at a predetermined price), and . futures contracts (which are exchange traded standardized commitments to purchase or sell a commodity or financial instrument, or make a cash settlement, at a specified price and future date). 14 Active portfolio management allows CPS to manage and hedge its fixed price purchase and sale commitments; provide fixed-price commitments to customers and suppliers; reduce exposure to the volatility of cash market prices; and hedge fuel requirements at third-party power generation facilities. CPS' trading activities expose it to market and credit risk. CPS monitors and controls its risk exposure through separate but complementary financial, operational, and credit reporting systems. Our Board of Directors establishes parameters for the risks that CPS undertakes, which management monitors. In addition, CPS maintains a segregation of duties, with credit review and risk monitoring functions performed by groups that are independent from revenue producing groups. CPS is exposed to the risk that fluctuating market prices may adversely affect its, or our, financial results. For additional information on market risk, see Item 7. Management's Discussion And Analysis--Market Risk. CPS' credit risk is the loss that may result from a counterparty's non- performance. CPS uses credit policies to control its credit risk, including utilizing an established credit approval process, monitoring counterparty limits, employing credit mitigation measures such as margin, collateral or prepayment arrangements, and using master netting agreements. However, due to the possibility of extreme short term volatility in the prices of electricity commodities and derivatives, the market value of contractual positions with individual counterparties could exceed established credit limits or collateral provided by those counterparties. If such a counterparty were then to fail to perform its obligations under its contract (for example fail to deliver the electricity CPS had contracted for), CPS could sustain a loss that could have a material impact on its, or our, financial results. CPS is affected by weather conditions in the different regions of North America. Typically, demand for electricity, and its price, is higher in the summer and the winter, when weather is more extreme. However, not all regions of North America typically experience extreme weather conditions at the same time. CPS uses forward contracts, swap agreements, options contracts, and futures contracts to monitor its risk on a regional basis and to manage its exposure to changing weather conditions and the underlying impact on customer usage and power availability regionally. In March 1998, we formed Orion Power Holdings, Inc. (Orion) with Goldman, Sachs Capital Partners II L.P., an affiliate of Goldman, Sachs & Co., to acquire electric generating plants in the United States and Canada. Our energy services businesses own a minority interest in Orion. To date, our energy services businesses have funded $104 million in equity and have a commitment to contribute an additional $121 million to Orion. Orion has entered into strategic relationships with Constellation Power Source and Constellation Operating Services, Inc., a subsidiary of Constellation Power, Inc. Constellation Power Source has the exclusive right to provide power marketing and risk management services to Orion. Currently, Constellation Operating Services has the exclusive right to provide operating and maintenance services to Orion's plants. Power Projects Constellation Power, Inc. and Subsidiaries primarily develop, own, and operate domestic and international power projects and manage power projects owned by Constellation Investments, Inc. Our power projects business has operated in the nonregulated power markets since 1985. Domestic Projects Our power projects business holds up to a 50% ownership interest in 28 domestic energy projects in operation or under construction that account for $531.3 million of assets. These projects consist of electric generation, fuel processing, or fuel handling and are either qualifying facilities under the Public Utility Regulatory Policies Act of 1978 or otherwise exempt from the Public Utility Holding Company Act of 1935. Projects totaling approximately $55.7 million of assets are located in the East and $475.6 million of assets are located in the West. The electric generation projects, with a combined capacity of 731.5 megawatts, are either biomass, coal, geothermal, hydroelectric, solar, waste coal or municipal solid waste. Some are also cogeneration plants. Each plant sells its output to its local utility. Our power projects business has 17 power project sites under active development. Construction of 800 megawatts of peaking capacity in the Mid- Atlantic/Mid-West region is planned by the summer of 2001 and an additional 4,300 megawatts of peaking and combined cycle production facilities are 15 scheduled for completion in 2002 and beyond throughout the United States. All of these plants will be gas fired, with some having duel fuel capability. They are expected to sell their output under tolling arrangements or in the market to third parties. Our power projects business also invests in international power projects. These are discussed later in this section. California Power Purchase Agreements Our Domestic-West power projects include $301.8 million invested in 14 projects that sell electricity in California under power purchase agreements called "Interim Standard Offer No. 4" agreements. Under these agreements, the electricity rates change from fixed rates to variable rates beginning in 1996 and continuing through 2000. The projects that already have had rate changes have lower revenues under variable rates than they did under fixed rates. When the remaining projects transition to variable rates, we expect their revenues also to be lower than they are under fixed rates. We discuss these projects further in Note 10 to Consolidated Financial Statements. Our power projects business continues to pursue alternatives for some of these projects including: . repowering the projects to reduce operating costs, . changing fuels to reduce operating costs, . renegotiating the power purchase agreements to improve the terms, . restructuring financing to improve existing terms, and . selling its ownership interests in the projects. Constellation Operating Services, Inc. Constellation Power, Inc., through its subsidiary, Constellation Operating Services, Inc., provides operation and maintenance services, including testing and start up, to owners of electric generating plants, including plants owned by our power projects business and Orion Power Holdings, Inc. International Projects Constellation Power's business in Latin America: . develops, acquires, owns, and operates power generation projects, and . acquires and owns distribution systems. At December 31, 1999, Constellation Power had invested about $254.1 million in 10 power projects in Latin America. These investments include: . the purchase of a 51% interest in a Panamanian electric distribution company for approximately $90 million in 1998 by an investment group in which subsidiaries of Constellation Power hold an 80% interest, and . approximately $98 million for the purchase of existing electric generation facilities and the construction of an electric generation facility in Guatemala. In December 1999, we decided to exit the international portion of our power projects business as part of our strategy to improve our competitive position. We expect to complete our exit strategy by the end of 2000. We discuss this further in Item 7. Management's Discussion And Analysis--Power Projects section. Energy Products and Services Constellation Energy Source, Inc. offers energy products and services designed primarily to provide solutions to the energy needs of mid-sized commercial and industrial customers. These energy products and services include: . wholesale gas marketing services, . a full range of heating, ventilation, air conditioning, and energy services, . energy consulting and power-quality services, . services to enhance the reliability of individual electric supply systems, and . customized financing alternatives. Constellation Nuclear Group Constellation Nuclear Group, LLC offers nuclear consulting services to nuclear power plant owners and operators. Upon transfer by BGE no earlier than July 1, 2000, it will also own Calvert Cliffs. Home Products, Commercial Building Systems, and Gas Retail Marketing BGE Home Products & Services, Inc. and Subsidiaries offer services to residential and small commercial customers. These services include: . the sale and service of electric and gas appliances, . home improvements, . the sale and service of heating, air conditioning, plumbing, electrical, and indoor air quality systems, and . natural gas retail marketing. 16 ComfortLink ComfortLink provides cooling services using a central chilled water distribution system to commercial customers in Baltimore. Other Diversified Businesses Financial Investments Constellation Investments, Inc. engages in financial investments, including: . marketable securities, and . financial limited partnerships. Real Estate and Senior-Living Facilities Constellation Real Estate Group, Inc. develops, owns, and manages real estate and senior-living facilities, including: . land under development in the Baltimore-Washington corridor, . a mixed-use planned-unit development, . senior-living facilities, and . an equity interest in Corporate Office Properties Trust (COPT), a real estate investment trust. We describe the real estate business and the COPT transaction further in Item 7. Management's Discussion and Analysis and Note 3 to Consolidated Financial Statements. We consider market demand, interest rates, the availability of financing, and the strength of the economy in general when making decisions about our real estate projects. If we were to decide to sell our real estate projects, we could have write-downs. In addition, if we were to sell our real estate projects in the current market, we would have losses which could be material, although the amount of the losses is hard to predict. Depending on market conditions, we could also have material losses on any future sales. - -------------------------------------------------------------------------------- Consolidated Capital Requirements Our business requires a great deal of capital. Our total capital requirements for 1999 were $1,245 million. Of this amount, $778 million was used in our utility operations and $467 million was used in our diversified businesses. We estimate our total capital requirements for the years 2000 through 2002 to be: . $1,920 million in 2000, . $2,117 million in 2001, and . $1,356 million in 2002. We continuously review and change our capital expenditure programs, so actual expenditures may vary from the estimates for the years 2000 through 2002. We discuss our capital requirements further in Item 7. Management's Discussion and Analysis-- Capital Resources. - -------------------------------------------------------------------------------- Environmental Matters We are subject to regulation by various federal, state, and local authorities with regard to: . air quality, . water quality, . waste disposal, and . other environmental matters. Some of the regulations require substantial expenditures for additions to our utility plant and the use of more expensive low-sulfur fuels. We cannot precisely estimate the total effect on our facilities and operations of current and future environmental regulations and standards. However, our capital expenditures (excluding allowance for funds used during construction) were approximately $85 million during the five-year period 1995-1999 to comply with existing environmental standards and regulations, and we estimate that the future capital expenditures (excluding allowance for funds used during construction) necessary to comply with environmental standards and regulations will be approximately: . $66 million in 2000, . $53 million in 2001, and . $ 4 million in 2002. Clean Air The Federal Clean Air Act (the Act) regulates health and welfare standards for concentrations of air 17 pollutants. Under the Act, the State of Maryland must set limits on all major sources of these pollutants in the State so that the standards are not exceeded. We have certain limits on our generating units that put us in compliance with existing air quality regulations, as follows: . All of our generating units, except Crane Units 1 and 2, are limited to burning fuel (coal or oil) with a sulfur content of 1% or below. . The Crane Units 1 and 2 are limited to 3.5 pounds of sulfur dioxide per million Btu, which is equivalent to a coal sulfur content of approximately 2.4%. . All units are limited to releasing particulate matter at or below 0.02 grains per standard cubic foot of exhaust gas for oil fired units and 0.03 grains per standard cubic foot for coal-fired units. . Brandon Shores, a newer plant, is subject to more stringent standards for sulfur dioxides (1.2 pounds per million Btu), and nitrogen oxides (0.7 pounds per million Btu). The Clean Air Act of 1990 contains two titles designed to reduce emissions of sulfur dioxides and nitrogen oxides (NOx) from electric generating stations -- Title IV and Title I. Title IV addresses emissions of sulfur dioxides. Compliance is required in two separate phases: . Phase I became effective January 1, 1995. We met the requirements of this phase by installing flue gas desulfurization systems, switching fuels, and retiring some units. . Phase II became effective January 1, 2000. We met the compliance requirements through a combination of switching fuels and allowance trading. Title I addresses emissions of NOx. The Maryland Department of the Environment (MDE) has issued regulations, effective October 18, 1999, which require up to 65% NOx emissions reductions by May 1, 2000. We have entered into a settlement agreement with the MDE since we cannot meet this deadline. Under the terms of the settlement agreement, BGE will install emissions reduction equipment at two sites by May 2002. In the meantime, we are taking steps to control NOx emissions at our generating plants. The Environmental Protection Agency (EPA) issued a final rule in September 1998 that requires up to 85% NOx emissions reduction by 22 states including Maryland and Pennsylvania. Maryland will meet the requirements of the rule by 2003. Based on the MDE and EPA regulations, we currently estimate that the additional controls needed at our generating plants to meet the 65% NOx emission reduction requirements will cost approximately $135 million. Through December 31, 1999, we have spent approximately $51 million to meet the MDE's 65% reduction requirements. We estimate the additional cost for the EPA's 85% reduction requirements to be approximately $35 million by 2003. In July 1997, the EPA published new National Ambient Air Quality Standards for very fine particulates and revised standards for ozone attainment. In 1999, these new standards were successfully challenged in court. The EPA is expected to appeal the 1999 court rulings to the Supreme Court. While these standards may require increased controls at our fossil generating plants in the future, implementation will be delayed for several years. We cannot estimate the cost of these increased controls at this time because the states, including Maryland and Pennsylvania, still need to determine what reductions in pollutants will be necessary to meet the federal standards. Water The MDE regulates the discharge of waste materials into the waters of the State of Maryland under the National Pollutant Discharge Elimination System permit program. This program was established as part of the Federal Clean Water Act. At the present time, we have the required permits under the program for all of our steam electric generating plants. The MDE water quality regulations require us to, among other things, define procedures to determine compliance with State water quality standards. These procedures require extensive studies involving sampling and monitoring of the waters around affected generating plants. The State of Maryland may require changes in plant operations. We continually perform studies to determine whether any changes will be necessary to comply with these regulations. Waste Disposal The EPA has regulations for implementing the portions of the Resource Conservation and Recovery 18 Act that deal with the management of hazardous wastes. These regulations, and the Hazardous and Solid Waste Amendments of 1984, identify certain spent materials as hazardous wastes and establish standards and permit requirements for those who generate, transport, store, or dispose of such wastes. The State of Maryland has adopted regulations governing the management of hazardous wastes that are similar to the EPA regulations. We have procedures in place to comply with all applicable EPA and State of Maryland regulations governing the management of hazardous wastes. Some high volume utility wastes, such as coal fly ash and bottom ash, are exempt from these regulations. We mostly use our coal fly ash and bottom ash as structural fill material in a manner approved by the State of Maryland. Beginning in 1999, we provided some of our coal fly ash to a processing facility that is designed to recycle it into a new material that can be sold to the construction industry. We sell the remainder of the coal ash to the construction industry for a number of other approved uses. The Federal Comprehensive Environmental Response, Compensation and Liability Act (Superfund statute) establishes liability for the cleanup of hazardous wastes that contaminate the soil, water, or air. Those who generated, transported, or deposited the waste at the contaminated site are each jointly and severally liable for the cost of the cleanup, as are the current property owner and the owner when the contamination occurred. Many states have implemented laws similar to the Superfund statute. The EPA and several state agencies have notified us that we are considered a potentially responsible party with respect to the cleanup of certain environmentally contaminated sites owned and operated by others. We cannot estimate the cleanup costs for all of these sites. In the early 1970s, we shipped an unknown number of scrapped transformers to Metal Bank of America, a metal reclaimer in Philadelphia. Metal Bank's scrap and storage yard has been found to be contaminated with oil containing high levels of PCBs (hazardous chemicals frequently used as a fire-resistant coolant in electrical equipment). On December 7, 1987, the EPA notified us and nine other utilities that we are considered potentially responsible parties (PRPs) with respect to the cleanup of the site. We, along with the other PRPs, submitted a remedial investigation and feasibility study (RI/FS) to the EPA on October 14, 1994, and the EPA issued its Record of Decision (ROD) on December 31, 1997. On June 26, 1998, the EPA ordered us, the other utility PRPs, and the owner/ operator to implement the requirements of the ROD. The utility PRPs are currently conducting the remedial design. Based on the ROD, our share of the reasonably possible cleanup costs, estimated to be approximately 15.43%, could be as much as $4.9 million higher than amounts we have recorded as a liability on our Consolidated Balance Sheets. On October 16, 1989, the EPA filed a complaint in the U.S. District Court for the District of Maryland under the Superfund statute against us and seven other defendants to recover past and future expenditures associated with the cleanup of a site located at Kane and Lombard Streets in Baltimore. The State of Maryland filed a similar complaint in the same case and court on February 12, 1990. The complaints alleged that we arranged for our coal fly ash to be deposited on the site. The Court dismissed these complaints in November 1995. The MDE began additional investigation on the remainder of the site for the EPA, but never completed the investigation. We, along with three other defendants, agreed to complete the RI/FS of groundwater contamination around the site in a July 1993 consent order. The remedial action, if any, for the remainder of the site will not be selected until these investigations are concluded. Therefore, we cannot estimate the total amount, or our share of the site cleanup costs. From 1985 until 1989, we shipped waste oil and other materials to the Industrial Solvents and Chemical Company in York County, Pennsylvania for disposal. The Pennsylvania Department of Environmental Protection (PADEP) subsequently investigated this site and found it to be heavily contaminated by hazardous wastes. The PADEP notified us on August 15, 1990, that approximately 1,000 other entities and we are PRPs with respect to the cost of all remedial activities to be conducted at the site. The PRPs have performed waste characterization, removed and disposed of all tanks and drums of waste, completed a RI/FS at the site, and installed public water lines. In 1998, PADEP notified BGE and other PRPs of the final remedy and requested the installation of additional public water lines. In 1999, the PRPs installed the water 19 lines and once PADEP approves the final report, we will have no further obligations under the consent orders at the site. In December 1995, the EPA notified us that we are one of approximately 650 parties that may have incurred liability under the Superfund statute for shipments of hazardous wastes to a site in Denver, Colorado known as the RAMP Industries site. We, through our disposal vendor, shipped a small amount of low level radioactive waste to the site between 1989 and 1992. The site, which was found to have been operated improperly, was closed in 1994. That same year, the EPA began cleaning up the site by removing drums of radioactive and hazardous mixed wastes. BGE accepted a settlement offer from EPA in August 1999, whereby BGE will pay an immaterial amount to resolve its liability at this site. The consent order will be finalized in 2000. In September 1996, we received an information request from the EPA about the Drumco Drum Dump Site, located in the Curtis Bay area of Maryland. This site was the subject of an emergency drum removal action in 1991, due to a concern about hazardous substances leaking from drums and posing a threat to human health and the environment. According to EPA documents, approximately $2 million dollars were spent on the drum removal action. To our knowledge, no long-term remediation is planned for this site. In addition, we understand that the EPA has sent information requests to approximately 17 other parties. Our records indicate that we sold empty drums to Drumco, Inc. from approximately 1983-1990. Although our potential liability cannot be estimated, we do not expect such liability to be material based on our records showing that we sold only empty storage drums to Drumco, Inc. On July 12, 1999, the EPA notified us, along with nineteen other entities, that we may be a potentially responsible party at the 68th Street Dump/Industrial Enterprises Site, also known as the Robb Tyler Dump located in Baltimore, Maryland. The EPA indicated that it is proceeding with plans to conduct a remedial investigation and feasibility study. This site was proposed for listing as a federal Superfund site in January 1999, but the listing has not been finalized. Although our potential liability cannot be estimated, we do not expect such liability to be material based on our records showing that we did not send waste to the site. In the early part of the century, predecessor gas companies (which were later merged into BGE) manufactured coal gas for residential and industrial use. The residue from this manufacturing process was coal tar, previously thought to be harmless but now found to contain a number of chemicals designated by the EPA as hazardous substances. We are coordinating an investigation of some of these former manufacturing sites, and determining what, if any, remedial action may be required by MDE. In late December 1996, we signed a consent order with the MDE that requires us to implement remedial action plans for contamination at and around the Spring Gardens site, located in Baltimore, Maryland. We submitted the required remedial action plans and they have been approved by the MDE. Based on the remedial action plans, the costs we consider to be probable to remedy the contamination are estimated to total $47 million in nominal dollars (including inflation). We have recorded these costs as a liability on our Consolidated Balance Sheets and have deferred these costs, net of accumulated amortization and amounts we recovered from insurance companies, as a regulatory asset. We discuss this further in Note 5 to Consolidated Financial Statements. Through December 31, 1999, we have spent approximately $34 million for remediation at this site. We are also required by accounting rules to disclose additional costs we consider to be less likely than probable, but still "reasonably possible" of being incurred at these sites. Because of the results of studies at these sites, it is reasonably possible that these additional costs could exceed the amount we recognized by approximately $14 million in nominal dollars ($7 million in current dollars, plus the impact of inflation at 3.1% over a period of up to 36 years). 20 Employees As of December 31, 1999, we employed about 9,000 people. Item 2. Properties We describe our electric and gas business properties separately below. We lease several properties in our service area which are used for Constellation Energy's headquarters, various offices, and services. We own our principal plants and other important units that are located in Maryland including BGE's principal headquarters building in downtown Baltimore. None of the properties used in connection with the operation of our diversified businesses are considered material to Constellation Energy. Electric Our principal electric properties are discussed below:
Generation (MWH) Installed --------------------- Generating Plant Location Capacity (MW) Primary Fuel 1999 1998 - ---------------- -------- ---------------------- ------------ ---------- ---------- (at December 31, 1999) ---------------------- Steam Calvert Cliffs Calvert County, MD 1,685 Nuclear 13,309,306 13,326,633 Brandon Shores Anne Arundel County, MD 1,300 Coal 9,116,356 8,259,725 Herbert A. Wagner Anne Arundel County, MD 1,006 Coal/Oil/Gas 3,529,019 4,108,074 Charles P. Crane Baltimore County, MD 385 Coal 2,314,076 1,995,318 Gould Street Baltimore City, MD 104 Oil 112,327 137,560 Riverside Baltimore County, MD 78 Oil/Gas 42,039 46,322 Jointly Owned -- Steam Keystone Armstrong and Indiana Counties, PA 359(A) Coal 2,755,946 2,800,921 Conemaugh Indiana County, PA 181(A) Coal 1,335,411 1,387,837 Combustion Turbine Perryman Harford County, MD 350 Oil/Gas 92,464 234,990 Notch Cliff Baltimore County, MD 128 Gas 28,954 29,644 Westport Baltimore City, MD 121 Gas 16,460 20,814 Riverside Baltimore County, MD 173 Oil/Gas 19,639 11,989 Philadelphia Road Baltimore City, MD 64 Oil 8,026 8,021 Charles P. Crane Baltimore County, MD 14 Oil 1,919 2,247 Herbert A. Wagner Anne Arundel County, MD 14 Oil 1,713 1,665 ----- ---------- ---------- Totals 5,962 32,683,655 32,371,760 ===== ========== ==========
- -------- (A) These totals reflect BGE's proportionate interest and entitlement to capacity from Keystone and Conemaugh, which include 2 megawatts of diesel capacity for Keystone and 1 megawatt of diesel capacity for Conemaugh. We share the ownership of the properties for the Keystone and Conemaugh plants in Pennsylvania. There are minor liens and easements on the Keystone and Conemaugh properties, but these encumbrances do not materially interfere with our use of the properties. We also own two-thirds of the outstanding capital stock of Safe Harbor Water Power Corporation, and are currently entitled to 277 megawatts of the rated capacity of the Safe Harbor Hydroelectric Project. Safe Harbor is operated under a Federal Energy Regulatory Commission license which expires in 2030. 21 Gas We own the following propane air and liquefied natural gas facilities: . a liquefied natural gas facility for the liquefication and storage of natural gas with a total storage capacity of 1,000,000 DTH and a planned daily capacity of 287,988 DTH, and . a propane air facility with a mined cavern with a total storage capacity of 500,000 DTH and a planned daily capacity of 85,000 DTH. We also have rights-of-way to maintain 26-inch natural gas mains across certain Baltimore City owned property (principally parks) which expire in 2004. These rights-of-way can be renewed during their last year for an additional period of 25 years based on a fair revaluation. General We have electric transmission and electric and gas distribution lines located: . in public streets and highways pursuant to franchises, and . on permanent rights-of-way secured for the most part by grants from owners of the property and for a relatively small part by condemnation. Conditions of the grants are satisfactory. All of BGE's property, including the generation assets that will be transferred as part of deregulation, is subject to the lien of BGE's mortgage securing its mortgage bonds. - -------------------------------------------------------------------------------- Item 3. Legal Proceedings Asbestos Since 1993, we have been involved in several actions concerning asbestos. The actions are based upon the theory of "premises liability," alleging that we knew of and exposed individuals to an asbestos hazard. The actions relate to two types of claims. The first type is direct claims by individuals exposed to asbestos. We described these claims in a Report on Form 8-K filed August 20, 1993. We are involved in these claims with approximately 70 other defendants. Approximately 530 individuals that were never employees of BGE each claim $6 million in damages ($2 million compensatory and $4 million punitive). These claims were filed in the Circuit Court for Baltimore City, Maryland in the summer of 1993. We do not know the specific facts necessary to estimate our potential liability for these claims. The specific facts we do not know include: . the identity of our facilities at which the plaintiffs allegedly worked as contractors, . the names of the plaintiff's employers, and . the date on which the exposure allegedly occurred. To date, 23 of these cases were settled for amounts that were not significant. The second type is claims by one manufacturer -- Pittsburgh Corning Corp. -- against us and approximately eight others, as third-party defendants. These claims relate to approximately 1,500 individual plaintiffs and were filed in the Circuit Court for Baltimore City, Maryland in the fall of 1993. To date, about 140 cases have been resolved, all without any payment by BGE. We do not know the specific facts necessary to estimate our potential liability for these claims. The specific facts we do not know include: . the identity of our facilities containing asbestos manufactured by the manufacturer, . the relationship (if any) of each of the individual plaintiffs to us, . the settlement amounts for any individual plaintiffs who are shown to have had a relationship to us, and . the dates on which/places at which the exposure allegedly occurred. Until the relevant facts for both types of claims are determined, we are unable to estimate what our liability, if any, might be. Although insurance and hold harmless agreements from contractors who employed the plaintiffs may cover a portion of any awards in the actions, our potential liability could be material. 22 Restructuring Order Three separate appeals of the Restructuring Order issued by the Maryland PSC have been filed. Two appeals, one by Trigen--Baltimore Energy Corporation and the other by Sweetheart Cup Company were filed on December 9, 1999 in the Circuit Court for Baltimore City. The third appeal was filed by the Mid- Atlantic Power Supply Association (MAPSA) on December 10, 1999 in the Circuit Court for Prince Georges County. MAPSA's appeal has been transferred to the Circuit Court for Baltimore City. Each appeal asks for a review of the Restructuring Order. MAPSA also seeks to delay the implementation of the Restructuring Order until a decision on the merits of the appeals by the court. We believe that the appeals are without merit. However, if a delay in implementation is granted or the appeals are successful, it could have a material adverse effect on our and BGE's financial results. See Item 1. Business -- Electric Regulatory Matters and Competition, Nuclear Operations, Fuel for Electric Generation, Gas Regulatory Matters and Competition, Environmental Matters, and Item 7. Management's Discussion and Analysis and Note 10 to Consolidated Financial Statements for other information about our legal or regulatory proceedings. 23 Item 4. Submission of Matters to Vote of Security Holders Not applicable. Executive Officers of the Registrant BGE meets the conditions set forth in General Instruction I(1)(a) and (b) of Form 10-K for a reduced disclosure format. Accordingly, the executive officers of BGE are not presented below. Executive Officers of Constellation Energy Group at the date of this report are:
Other BGE Offices or Positions Name Age Present Office Held During Past Five Years ---- --- -------------- --------------------------- Christian H. Poindexter 61 Chairman of the Board, President Chairman of the Board, and Chief Executive Officer (A) President, and Chief (Since formation of Executive Officer Constellation Energy Group as the holding company on April 30, 1999; since March 1, 1998 for BGE) Thomas F. Brady 50 Vice President Corporate Strategy Vice President, Corporate and Development (Since April 30, Strategy and Development, 1999) Vice President, Retail Services Vice President, Customer Service and Distribution David A. Brune 59 Vice President Finance and General Counsel Accounting, Chief Financial Officer and Secretary (Since formation of Constellation Energy Group as the holding company on April 30, 1999; since February 25, 1997 for BGE) Robert S. Fleishman 46 Vice President Corporate Affairs General Counsel and General Counsel (Since Associate General Counsel-- formation of Constellation Regulatory Energy Group as the holding company on April 30, 1999; since May 1, 1998 for BGE) Linda D. Miller 49 Vice President Human Resources Vice President, Management (Since formation of Services Manager, Employee Constellation Energy Group as Services the holding company on April 30, 1999; since May 1, 1998 for BGE)
- -------- (A) Chief Executive Officer, Director, and member of the Executive Committee. Officers of Constellation Energy Group are elected by, and hold office at the will of, the Board of Directors and do not serve a "term of office" as such. There is no arrangement or understanding between any director or officer and any other person pursuant to which the director or officer was selected. 24 PART II Item 5. Market for Registrant's Common Equity and Related Shareholder Matters Stock Trading Constellation Energy's common stock is traded under the ticker symbol CEG. It is listed on the New York, Chicago, and Pacific stock exchanges. It has unlisted trading privileges on the Boston, Cincinnati, and Philadelphia exchanges. As of February 29, 2000, there were 65,226 common shareholders of record. Dividend Policy Constellation Energy pays dividends on its common stock after its Board of Directors declares them. There is no limitation on Constellation Energy paying common stock dividends. BGE pays dividends on its common stock after its Board of Directors declares them. There is no limitation on BGE paying common stock dividends unless: . BGE elects to defer interest payments on the 7.16% Deferrable Interest Subordinated Debentures due June 30, 2038, and any deferred interest remains unpaid; or . all dividends (and any redemption payments) due on BGE's preference stock have not been paid. Dividends have been paid on the common stock continuously since 1910. Future dividends depend upon future earnings, our financial condition, and other factors. Quarterly dividends were declared on the common stock during 1999 and 1998 in the amounts set forth below. Dividends paid prior to April 30, 1999 were on BGE common stock. As a result of the share exchange Constellation Energy is the successor of BGE. Common Stock Dividends and Price Ranges
1999 1998 --------------------- ----------------------- Price* Price* ------------ -------------- Dividend Dividend Declared High Low Declared High Low -------- ---- ---- -------- ---- ---- First Quarter............ $ .42 $31 1/8 $24 11/16 $ .41 $34 1/8 $29 3/4 Second Quarter........... .42 31 3/8 25 1/8 .42 32 15/16 29 1/4 Third Quarter............ .42 30 7/8 27 3/16 .42 33 5/8 29 5/16 Fourth Quarter........... .42 31 1/2 27 1/2 .42 35 1/4 30 1/8 ----- ----- Total................... $1.68 $1.67 ===== =====
- -------- * Based on New York Stock Exchange Composite Transactions as reported in THE WALL STREET JOURNAL. 25 Item 6. Selected Financial Data Constellation Energy Group, Inc. and Subsidiaries
1999 1998 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------- (Dollar amounts in millions, except per share amounts) Summary of Operations Total Revenues $3,786.2 $3,358.1 $3,307.6 $3,153.2 $2,934.8 Operating Expenses 3,026.3 2,617.0 2,584.0 2,483.7 2,239.1 - -------------------------------------------------------------------------------------------------------------- Income From Operations 759.9 741.1 723.6 669.5 695.7 Other Income (Expense) 7.9 5.7 (52.8) 6.1 8.8 - -------------------------------------------------------------------------------------------------------------- Income Before Fixed Charges and Income Taxes 767.8 746.8 670.8 675.6 704.5 Fixed Charges 255.0 262.7 258.7 237.0 237.6 - -------------------------------------------------------------------------------------------------------------- Income Before Income Taxes 512.8 484.1 412.1 438.6 466.9 Income Taxes 186.4 178.2 158.0 166.3 169.5 - -------------------------------------------------------------------------------------------------------------- Income Before Extraordinary Item 326.4 305.9 254.1 272.3 297.4 Extraordinary Loss, Net of Income Taxes (66.3) - - - - - -------------------------------------------------------------------------------------------------------------- Net Income $ 260.1 $ 305.9 $ 254.1 $ 272.3 $ 297.4 ============================================================================================================== Earnings Per Share of Common Stock and Earnings Per Share of Common Stock-- Assuming Dilution Before Extraordinary Item $ 2.18 $ 2.06 $ 1.72 $ 1.85 $ 2.02 Extraordinary Loss, Net of Income Taxes (.44) - - - - - -------------------------------------------------------------------------------------------------------------- Earnings Per Share of Common Stock and Earnings Per Share of Common Stock-- Assuming Dilution $ 1.74 $ 2.06 $ 1.72 $ 1.85 $ 2.02 ============================================================================================================== Dividends Declared Per Share of Common Stock $ 1.68 $ 1.67 $ 1.63 $ 1.59 $ 1.55 ============================================================================================================== Summary of Financial Condition Total Assets $9,683.8 $9,275.0 $8,900.0 $8,678.2 $8,419.1 ============================================================================================================== Capitalization Long-term debt $2,575.4 $3,128.1 $2,988.9 $2,758.8 $2,598.2 Preferred stock - - - - 59.2 Redeemable preference stock - - 90.0 134.5 242.0 Preference stock not subject to mandatory redemption 190.0 190.0 210.0 210.0 210.0 Common shareholders' equity 2,993.0 2,981.5 2,870.4 2,854.7 2,811.2 - -------------------------------------------------------------------------------------------------------------- Total Capitalization $5,758.4 $6,299.6 $6,159.3 $5,958.0 $5,920.6 ============================================================================================================== Financial Statistics at Year End Ratio of Earnings to Fixed Charges 2.87 2.60 2.35 2.44 2.52 Book Value Per Share of Common Stock $ 20.01 $ 19.98 $ 19.44 $ 19.33 $ 19.06 Number of Common Shareholders (In Thousands) 66.1 69.9 73.7 77.6 79.8
Certain prior-year amounts have been reclassified to conform with the current year's presentation. 26 Baltimore Gas and Electric Company and Subsidiaries
1999 1998 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------- (Dollar amounts in millions, except per share amounts) Summary of Operations Total Revenues $3,028.3 $3,358.1 $3,307.6 $3,153.2 $2,934.8 Operating Expenses 2,324.0 2,617.0 2,584.0 2,483.7 2,239.1 - -------------------------------------------------------------------------------------------------------------- Income From Operations 704.3 741.1 723.6 669.5 695.7 Other Income (Expense) 8.4 5.7 (52.8) 6.1 8.8 - -------------------------------------------------------------------------------------------------------------- Income Before Fixed Charges and Income Taxes 712.7 746.8 670.8 675.6 704.5 Fixed Charges 205.9 240.9 230.0 198.5 197.0 - -------------------------------------------------------------------------------------------------------------- Income Before Income Taxes 506.8 505.9 440.8 477.1 507.5 Income Taxes 178.4 178.2 158.0 166.3 169.5 - -------------------------------------------------------------------------------------------------------------- Income Before Extraordinary Item 328.4 327.7 282.8 310.8 338.0 Extraordinary Loss, Net of Income Taxes (66.3) - - - - - -------------------------------------------------------------------------------------------------------------- Net Income 262.1 327.7 282.8 310.8 338.0 Preferred and Preference Stock Dividends 13.5 21.8 28.7 38.5 40.6 - -------------------------------------------------------------------------------------------------------------- Earnings Applicable to Common Stock $ 248.6 $ 305.9 $ 254.1 $ 272.3 $ 297.4 ============================================================================================================== Summary of Financial Condition Total Assets $7,272.6 $9,275.0 $8,900.0 $8,678.2 $8,419.1 ============================================================================================================== Capitalization Long-term debt $2,206.0 $3,128.1 $2,988.9 $2,758.8 $2,598.2 Preferred stock - - - - 59.2 Redeemable preference stock - - 90.0 134.5 242.0 Preference stock not subject to mandatory redemption 190.0 190.0 210.0 210.0 210.0 Common shareholder's equity 2,355.4 2,981.5 2,870.4 2,854.7 2,811.2 - -------------------------------------------------------------------------------------------------------------- Total Capitalization $4,751.4 $6,299.6 $6,159.3 $5,958.0 $5,920.6 ============================================================================================================== Financial Statistics at Year End Ratio of Earnings to Fixed Charges 3.45 2.94 2.78 3.10 3.21 Ratio of Earnings to Combined Fixed Charges and Preferred and Preference Stock Dividends 3.14 2.60 2.35 2.44 2.52
Certain prior-year amounts have been reclassified to conform with the current year's presentation. 27 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Introduction On April 30, 1999, Constellation Energy(R) Group, Inc. (Constellation Energy) became the holding company for Baltimore Gas and Electric Company (BGE(R)) and Constellation(R) Enterprises, Inc. Constellation Enterprises was previously owned by BGE. Constellation Energy's subsidiaries primarily include BGE and a group of energy services businesses focused mostly on power marketing and merchant generation in North America. BGE is an electric and gas public utility company with a service territory that covers the City of Baltimore and all or part of ten counties in Central Maryland. Our energy services businesses are: . Constellation Power Source,(TM) Inc.--wholesale power marketing, . Constellation Power,(TM) Inc. and Subsidiaries--power projects, . Constellation Energy Source,(TM) Inc.--energy products and services, . Constellation Nuclear Group,(TM) LLC--nuclear generation and consulting services, . BGE Home Products & Services,(TM) Inc. and Subsidiaries--home products, commercial building systems, and residential and small commercial gas retail marketing, and . District Chilled Water General Partnership (ComfortLink(R)) --a general partnership, in which BGE is a partner, that provides cooling services for commercial customers in Baltimore. Our other businesses are: . Constellation Investments,(TM) Inc.--financial investments, and . Constellation Real Estate Group,(TM) Inc.--real estate and senior-living facilities. This report is a combined report of Constellation Energy and BGE. The consolidated financial statements of Constellation Energy include the accounts of Constellation Energy, BGE and its subsidiaries, Constellation Enterprises, Inc. and its subsidiaries, and Constellation Nuclear Group, LLC and its subsidiaries. The consolidated financial statements of BGE include the accounts of BGE, ComfortLink, and BGE Capital Trust I. As Constellation Enterprises and its subsidiaries were subsidiaries of BGE prior to April 30, 1999, they are included in the consolidated financial statements of BGE through that date. References in this report to "we" and "our" are to Constellation Energy and its subsidiaries, collectively. References in this report to the "utility business" are to BGE. In this discussion and analysis, we explain the general financial condition and the results of operations for Constellation Energy and BGE including: . what factors affect our business, . what our earnings and costs were in 1999 and 1998, . why earnings and costs changed from the year before, . where our earnings came from, . how all of this affects our overall financial condition, . what our expenditures for capital projects were in 1997 through 1999, and what we expect them to be in 2000 through 2002, and . where we expect to get cash for future capital expenditures. As you read this discussion and analysis, refer to our Consolidated Statements of Income, which present the results of our operations for 1999, 1998, and 1997. We analyze and explain the differences between periods by operating segment. Our analysis is important in making decisions about your investments in Constellation Energy and/or BGE. Also, this discussion and analysis is based on the operation of the electric generation portion of our utility business under current rate regulation. The electric utility industry is undergoing rapid and substantial change. On April 8, 1999, Maryland enacted legislation authorizing customer choice and competition among electric suppliers. On November 10, 1999, the Maryland Public Service Commission (Maryland PSC) issued Order No. 75757 (Restructuring Order) approving a Stipulation and Settlement Agreement between BGE and a majority of the active parties involved in the electric restructuring proceeding that resolves the major issues surrounding electric restructuring. See the "Electric Restructuring" section and Note 4 for a detailed discussion of the Restructuring Order. Our electric business will change significantly beginning July 1, 2000 as we enter into retail customer choice for electric generation and our generation assets are transferred to nonregulated subsidiaries of Constellation Energy. Accordingly, the results of operations and financial condition described in this discussion and analysis are not necessarily indicative of future performance. 28 Strategy The change toward customer choice will significantly impact our business going forward. In response to this change, we regularly evaluate our strategies with two goals in mind: to improve our competitive position, and to anticipate and adapt to regulatory change. We are realigning our organization combining all of our domestic merchant energy businesses. We will continue to invest in the growth of these businesses, with the objective of providing new sources of earnings. In addition, we might consider one or more of the following strategies: . the complete or partial separation of our transmission and distribution functions, . the construction, purchase or sale of generation assets, . mergers or acquisitions of utility or non-utility businesses, . spin-off or sale of one or more businesses, and . growth of earnings from other nonregulated businesses. We cannot predict whether any of the strategies described above may actually occur, or what their effect on our financial results or competitive position might be. However, with the shift toward customer choice, competition, and the growth of our nonregulated subsidiaries, various factors will affect our financial results in the future. These factors include, but are not limited to, operating our currently regulated generation assets in a deregulated market beginning July 1, 2000 without the benefit of a fuel rate adjustment clause, the loss of revenues due to customers choosing alternate suppliers, higher volatility of earnings and cash flows, and increased financial requirements of our nonregulated subsidiaries. Please refer to the "Forward Looking Statements" section for additional factors. - -------------------------------------------------------------------------------- Current Issues Competition--Electric Electric utilities are facing competition on various fronts, including: . construction of generating units to meet increased demand for electricity, . sale of electricity in bulk power markets, . competing with alternative energy suppliers, and . electric sales to retail customers. On April 8, 1999, Maryland enacted legislation authorizing customer choice and competition among electric suppliers. In addition, on November 10, 1999, the Maryland PSC issued a Restructuring Order that resolved the major issues surrounding electric restructuring. These matters are discussed further in the "Electric Restructuring" section and Note 4. As a result of the deregulation of BGE's electric generation, no earlier than July 1, 2000, and upon receipt of all regulatory approvals, we expect that BGE will transfer, at book value, its nuclear generating assets and its nuclear decommissioning trust fund to a subsidiary of Constellation Nuclear Group, LLC. In addition, we expect that BGE will transfer, at book value, its fossil generating assets and its partial ownership interest in two coal plants and a hydroelectric plant located in Pennsylvania to a nonregulated subsidiary of Constellation Energy. In total, these generating assets represent about 6,240 megawatts of generation capacity with a total projected net book value at June 30, 2000 of approximately $2.4 billion. We expect BGE to transfer approximately $278 million of tax exempt debt to our nonregulated subsidiaries related to the transferred assets and that BGE will receive approximately $1.1 billion in unsecured promissory notes. Repayments of the notes by our nonregulated subsidiaries will be used exclusively to service certain long-term debt of BGE. BGE will also transfer equity associated with the generating assets to nonregulated subsidiaries of Constellation Energy. Under the Restructuring Order, BGE will provide standard offer service to customers at fixed rates over various time periods during the transition period for those customers that do not choose an alternate supplier once customer choice begins July 1, 2000. In addition, the electric fuel rate will be discontinued effective July 1, 2000. Nonregulated subsidiaries of Constellation Energy will provide BGE with the energy and capacity required to meet its standard offer service obligations for the first three years of the transition period. Standard offer service will be competitively bid thereafter. Nonregulated subsidiaries of Constellation Energy will obtain the energy and capacity to supply BGE's standard offer service obligations from the Calvert Cliffs Nuclear Power Plant (Calvert Cliffs) and BGE's former fossil plants, supplemented with energy purchased from the wholesale energy market as necessary. Our earnings will be exposed to the risks of the competitive wholesale electricity market to the extent that our nonregulated subsidiaries have to purchase energy and/or capacity or generate energy to meet obligations to supply power to BGE at market prices or costs, respectively, which may approach or exceed 29 BGE's standard offer service rates. We will also be affected by operational risk, that is, the risk that a generating plant is not available to produce energy when the energy is required. Until July 1, 2000, we will continue to recover our cost of fuel and purchased energy through the electric fuel rate as long as the Maryland PSC finds that, among other things, we have kept the productive capacity of our generating plants at a reasonable level. After July 1, 2000, any energy purchased to meet BGE's load commitments will become a cost of doing business in the newly competitive marketplace. Therefore, if BGE provides standard offer service at fixed rates to its customers that do not select an alternative provider as required under the terms of the Restructuring Order, and the load demand exceeds our capacity to supply energy due to a plant outage, nonregulated subsidiaries of Constellation Energy would be required to purchase additional power in the wholesale energy market. If the price of obtaining energy in the wholesale market exceeds the fixed standard offer service price, our earnings would be adversely affected. Imbalances in demand and supply can occur not only because of plant outages, but also because of transmission constraints or due to extreme temperatures (hot or cold) causing demand to exceed available supply. We will use appropriate risk management techniques consistent with our business plan and policies to address these issues. We cannot estimate the impact of the increased financial risks associated with this transition. However, these financial risks could have a material impact on our, and BGE's, financial results. Competition--Gas Currently, no regulation exists for the wholesale price of natural gas as a commodity, and the regulation of interstate transmission at the federal level has been reduced. All BGE industrial and commercial gas customers, and effective November 1, 1999, all BGE residential customers have the option to purchase gas from other suppliers. Early Retirement Program In recognition of the changing business environment, in 1999, our Board of Directors approved a Targeted Voluntary Special Early Retirement Program (TVSERP) to provide enhanced early retirement benefits to certain eligible participants in targeted jobs that elect to retire on June 1, 2000. The financial impacts of the TVSERP will be reflected in the second quarter of 2000. Calvert Cliffs License Extension In 1998, we filed an application with the Nuclear Regulatory Commission (NRC) for a 20-year license extension for Calvert Cliffs to extend its license beyond 2014 for Unit 1 and 2016 for Unit 2. License renewal evaluations focus on age-related issues in long-lived passive components (passive components include buildings, the reactor vessel, piping, ventilation ducts, electric cables, etc.). We must demonstrate that we can ensure that these passive components will continue to perform their intended functions through the renewal period. The NRC will also consider the impact of the 20-year license extension on the environment. According to the NRC's timetable, approval of BGE's application is expected in April 2000. However, we cannot predict the actual timing of the NRC's decision, or the impact, if any, on our financial results. If we do not receive the license extension, we may not be able to operate the Calvert Cliffs units beyond 2014 and 2016. BGE is currently involved in a lawsuit titled National Whistleblower Center v. Nuclear Regulatory Commission and Baltimore Gas and Electric Company regarding its license extension process. The matter involves an appeal of the NRC's dismissal of Whistleblower's petition to intervene in the license renewal proceeding. At issue was the NRC's adoption of a streamlined procedure for the proceeding, including the requirement that any requests for extensions of time be justified by a showing of "unavoidable and extreme circumstances" rather than the "good cause" standard previously applied. Applying the new standard, the NRC ultimately dismissed Whistleblower's petition to intervene. Oral arguments have been held and a decision from the court is pending. Environmental and Legal Matters You will find details of our environmental matters in Note 10 and under Item 1. Business--Environmental Matters. You will find details of our legal matters under Item 3. Legal Proceedings. Some of the information is about costs that may be material to our financial results. Year 2000 We did not experience any significant problems associated with the year 2000 issue. Accounting Standards Issued We discuss recently issued accounting standards in Note 1. 30 Results of Operations In this section, we discuss our earnings and the factors affecting them. We begin with a general overview, then separately discuss earnings for our operating segments. Overview Total Earnings Per Share of Common Stock 1999 1998 1997 - -------------------------------------------------------------------------------- Utility business $2.03 $1.93 $1.94 Diversified businesses .45 .27 .34 - -------------------------------------------------------------------------------- Total earnings per share before nonrecurring charges included in operations 2.48 2.20 2.28 Nonrecurring charges included in operations: Hurricane Floyd (see Note 2) (.03) - - Write-off of merger costs (see Note 2) - - (.25) Write-downs of power projects (see Note 3) (.12) - - Write-off of energy services investment (see Note 2) - (.04) - Write-down of financial investment (see Note 3) (.11) - - Write-downs of real estate and senior-living investments (see Note 2 and Note 3) (.04) (.10) (.31) - -------------------------------------------------------------------------------- Total earnings per share before extraordinary item 2.18 2.06 1.72 - -------------------------------------------------------------------------------- Extraordinary loss (see Note 4) (.44) - - - -------------------------------------------------------------------------------- Total earnings per share $1.74 $2.06 $1.72 ================================================================================ 1999 Our 1999 total earnings decreased $45.8 million, or $.32 per share, compared to 1998. Our total earnings decreased mostly because we recorded an extraordinary charge of $66.3 million, or $.44 per share, associated with the deregulation of the electric generation portion of our business. Our 1999 total earnings also include nonrecurring write-downs recorded in our power projects, financial investments, and real estate and senior-living businesses. These decreases were partially offset by higher earnings from utility and diversified business operations excluding nonrecurring charges. We discuss the extraordinary charge in Note 4. In 1999, we had higher utility earnings before the extraordinary charge compared to 1998 mostly because we sold more electricity and gas this year, and we settled a capacity contract with PECO Energy Company in 1998 that had a negative impact on earnings in that year. This increase was partially offset by storm restoration activities related to Hurricane Floyd and higher depreciation and amortization expense mostly due to the $75.0 million, or $48.8 million after-tax, amortization of the regulatory asset recorded in 1999 for the reduction of our generation plant under the Restructuring Order. We discuss our utility earnings and the Restructuring Order in more detail in the "Utility Business" section. In 1999, diversified business earnings before nonrecurring charges increased compared to 1998 mostly because of higher earnings from our power marketing business. We discuss our diversified business earnings, including the write-downs, further in the "Diversified Businesses" section. 1998 Our 1998 total earnings increased $51.8 million, or $.34 per share, compared to 1997. Our total earnings increased mostly because 1997 results reflect our write-off of costs associated with the terminated merger with Potomac Electric Power Company, and our real estate and senior-living facilities business' write- down of its investments in two real estate projects. This increase was partially offset by: . our real estate and senior-living facilities business' write-down of its investment in a real estate project in 1998, and . the write-off of an energy services investment in 1998. In 1998, utility earnings were about the same compared to 1997. In 1998, diversified business earnings before nonrecurring charges decreased compared to 1997 mostly because of lower earnings from our real estate and senior-living facilities and financial investments businesses. This decrease was partially offset by higher earnings from our power projects and power marketing businesses. 31 Utility Business Before we go into the details of our electric and gas operations, we believe it is important to discuss factors that have a strong influence on our utility business performance: electric restructuring, regulation by the Maryland PSC, the weather, and other factors, including the condition of the economy in our service territory. Electric Restructuring On April 8, 1999, Maryland enacted the Electric Customer Choice and Competition Act of 1999 (the "Act") and accompanying tax legislation that will significantly restructure Maryland's electric utility industry and modify the industry's tax structure. In the Restructuring Order discussed below, the Maryland PSC addressed the major provisions of the Act. The accompanying tax legislation is discussed in detail in Note 4. On November 10, 1999, the Maryland PSC issued a Restructuring Order that resolves the major issues surrounding electric restructuring, accelerates the timetable for customer choice, and addresses the major provisions of the Act. The Restructuring Order also resolves the electric restructuring proceeding (transition costs, customer price protections, and unbundled rates for electric services) and a petition filed in September 1998 by the Office of People's Counsel (OPC) to lower our electric base rates. The major provisions of the Restructuring Order are: . All customers, except a few commercial and industrial companies that have signed contracts with BGE, will be able to choose their electric energy supplier beginning July 1, 2000. BGE will provide a standard offer service for customers that do not select an alternative supplier. In either case, BGE will continue to deliver electricity to all customers in areas traditionally served by BGE. . BGE's current electric base rates are frozen at their current levels until July 1, 2000. . BGE will reduce residential base rates by approximately 6.5% on average, about $54 million a year, beginning July 1, 2000. These rates will not change before July 2006. . Commercial and industrial customers will have up to four service options that will fix electric energy rates and transition charges for a period that generally ranges from four to six years. . Electric delivery service rates will be frozen for a four-year period for commercial and industrial customers. The generation and transmission components of rates will be frozen for different time periods depending on the service options selected by those customers. . BGE will be allowed to recover $528 million after-tax of its potentially stranded investments and utility restructuring costs through a competitive transition charge on customers' bills. Residential customers will pay this charge for six years. Commercial and industrial customers will pay in a lump sum or over the four to six-year period, depending on the service option selected by each customer. . Generation-related regulatory assets and nuclear decommissioning costs will be included in delivery service rates effective July 1, 2000 and will be recovered on a basis approximating their existing amortization schedules. . Starting July 1, 2000, BGE will unbundle rates to show separate components for delivery service, transition charges, standard offer service (generation), transmission, universal service, and taxes. . On July 1, 2000, BGE will transfer, at book value, its ten Maryland-based fossil and nuclear power plants and its partial ownership interest in two coal plants and a hydroelectric plant in Pennsylvania to nonregulated subsidiaries of Constellation Energy. . BGE will reduce its generation assets, as discussed in Note 4, by $150 million pre-tax during the period July 1, 1999 - June 30, 2000 to mitigate a portion of its potentially stranded investments. . Universal service will be provided for low-income customers without increasing their bills. BGE will provide its share of a statewide fund totaling $34 million annually. We believe that the Restructuring Order provided sufficient details of the transition plan to competition for BGE's electric generation business to require BGE to discontinue the application of Statement of Financial Accounting Standards (SFAS) No. 71, Accounting for the Effects of Certain Types of Regulation for that portion of its business. Accordingly, in the fourth quarter of 1999, we adopted the provisions of SFAS No. 101, Regulated Enterprises--Accounting for the Discontinuation of FASB Statement No. 71 and Emerging Issues Task Force Consensus (EITF) No. 97-4, Deregulation of the Pricing of Electricity--Issues Related to the Application of FASB Statements No. 71 and 101 for BGE's electric generation business. BGE's transmission and distribution business continues to meet the requirements of SFAS No. 71 as that business remains regulated. We describe the effect of applying these accounting requirements in Note 4. In early December, the Mid-Atlantic Power Supply Association (MAPSA), Trigen- Baltimore Energy Corporation, and Sweetheart Cup Company, Inc. filed appeals of the Restructuring Order. MAPSA also filed a motion seeking to delay the implementation of the Restructuring Order pending 32 a decision on the merits by the court. While we believe that the appeals are without merit, no assurances can be given as to the timing or outcome of these cases, and whether the outcome will have a material adverse effect on our and BGE's financial results. Regulation by the Maryland PSC Under traditional rate regulation that will continue for all BGE's businesses except electric generation beginning July 1, 2000, the Maryland PSC determines the rate we can charge our customers. Our rates consist of a "base rate," a "conservation surcharge," and a "fuel rate." Base Rate The base rate is the rate the Maryland PSC allows us to charge our customers for the cost of providing them service, plus a profit. We have both an electric base rate and a gas base rate. Higher electric base rates apply during the summer when the demand for electricity is higher. Gas base rates are not affected by seasonal changes. Except as provided under the terms of the electric Restructuring Order discussed earlier, BGE may ask the Maryland PSC to increase base rates from time to time. The Maryland PSC historically has allowed BGE to increase base rates to recover increased utility plant asset costs, plus a profit, beginning at the time of replacement. Generally, rate increases improve our utility earnings because they allow us to collect more revenue. However, rate increases are normally granted based on historical data and those increases may not always keep pace with increasing costs. Other parties may petition the Maryland PSC to decrease base rates. On November 17, 1999, BGE filed an application with the Maryland PSC to increase its gas base rates. We discuss this filing in the gas "Base Rates" section. Conservation Surcharge The Maryland PSC allows us to include in electric and gas rates a component to recover money spent on conservation programs. This component is called a "conservation surcharge." However, under this surcharge the Maryland PSC limits what our profit can be. If at the end of the year we have exceeded our allowed profit, we defer (include as a liability on our Consolidated Balance Sheets and exclude from our Consolidated Statements of Income) the excess in that year and we lower the amount of future surcharges to our customers to correct the amount of overage, plus interest. As a result of the Restructuring Order, the electric conservation surcharge was frozen at its current level and the associated profit limitation is no longer applicable. Fuel Rate Currently, we charge our electric customers separately for the fuel we use to generate electricity (nuclear fuel, coal, gas, or oil) and for the net cost of purchases and sales of electricity. We charge the actual cost of these items to the customer with no profit to us. If these costs go up, the Maryland PSC permits us to increase the fuel rate. If these costs go down, our customers benefit from a reduction in the fuel rate. The fuel rate is mostly impacted by the amount of electricity generated at Calvert Cliffs because the cost of nuclear fuel is cheaper than coal, gas, or oil. Under the Restructuring Order, BGE's electric fuel rate is frozen at its current level until July 1, 2000, at which time the fuel rate clause will be discontinued. We will continue to defer the difference between our actual costs of fuel and energy and what we collect from customers under the fuel rate through June 30, 2000. After that date, earnings will be affected by the changes in the cost of fuel and energy. We discuss our exposure to market risk further in the "Current Issues" section. In addition, any accumulated difference between our actual costs of fuel and energy and the amounts collected from customers under the electric fuel rate clause will be collected from our customers over a period to be determined by the Maryland PSC. At December 31, 1999, the amount to be collected from customers was $60.0 million. We charge our gas customers separately for the natural gas they purchase from us. The price we charge for the natural gas is based on a market based rates incentive mechanism approved by the Maryland PSC. We discuss market based rates in more detail in the "Gas Cost Adjustments" section and in Note 1. Weather Weather affects the demand for electricity and gas. Very hot summers and very cold winters increase demand. Mild weather reduces demand. Weather impacts residential sales more than commercial and industrial sales, which are mostly affected by business needs for electricity and gas. We measure the weather's effect using "degree days." A degree day is the difference between the average daily actual temperature and a baseline temperature of 65 degrees. Cooling degree days result when the average daily actual temperature exceeds the 65 degree baseline. Heating degree days result when the average daily actual temperature is less than the baseline. 33 During the cooling season, hotter weather is measured by more cooling degree days and results in greater demand for electricity to operate cooling systems. During the heating season, colder weather is measured by more heating degree days and results in greater demand for electricity and gas to operate heating systems. Effective March 1, 1998, the Maryland PSC allowed us to implement a monthly adjustment to our gas business revenues to eliminate the effect of abnormal weather patterns. We discuss this further in the "Weather Normalization" section. We show the number of cooling and heating degree days in 1999 and 1998, the percentage change in the number of degree days from the prior year, and the number of degree days in a "normal" year as represented by the 30-year average in the following table. 30-year 1999 1998 average - -------------------------------------------------------------------------------- Cooling degree days 845 915 843 Percentage change from prior year (7.7)% 22.7% Heating degree days 4,585 4,119 4,755 Percentage change from prior year 11.3% (14.6)% Other Factors Other factors, aside from weather, impact the demand for electricity and gas. These factors include the "number of customers" and "usage per customer" during a given period. We use these terms later in our discussions of electric and gas operations. In those sections, we discuss how these and other factors affected electric and gas sales during 1999 and 1998. The number of customers in a given period is affected by new home and apartment construction and by the number of businesses in our service territory. When customer choice for electric generation begins on July 1, 2000, a portion of BGE's electric customers will become delivery service customers only and will purchase their electricity from other sources. Other electric customers will receive standard offer service from BGE at the fixed rates provided by the Restructuring Order. To the extent our electricity generation exceeds or is less than the electricity demanded by customers utilizing our standard offer service, the incremental electricity will be sold or purchased in the wholesale market at prevailing market prices. We discuss our exposure to market risk further in the "Current Issues" section. Usage per customer refers to all other items impacting customer sales that cannot be measured separately. These factors include the strength of the economy in our service territory. When the economy is healthy and expanding, customers tend to consume more electricity and gas. Conversely, during an economic downtrend, our customers tend to consume less electricity and gas. Utility Business Earnings Per Share of Common Stock 1999 1998 1997 - -------------------------------------------------------------------------------- Electric business $1.81 $1.75 $1.77 Gas business .22 .18 .17 - -------------------------------------------------------------------------------- Total utility earnings per share before nonrecurring charge included in operations 2.03 1.93 1.94 Nonrecurring charge included in operations: Hurricane Floyd (see Note 2) (.03) - - Write-off of merger costs (see Note 2) - - (.25) - -------------------------------------------------------------------------------- Total utility earnings per share before extraordinary item 2.00 1.93 1.69 - -------------------------------------------------------------------------------- Extraordinary loss (see Note 4) (.44) - - - -------------------------------------------------------------------------------- Total utility earnings per share $1.56 $1.93 $1.69 ================================================================================ Our 1999 total utility earnings decreased $53.9 million, or $.37 per share, compared to 1998. Our 1998 total utility earnings increased $36.1 million, or $.24 per share, compared to 1997. We discuss the factors affecting utility earnings below. Electric Operations The discussion below reflects the operations of the electric generation portion of our utility business under current rate regulation by the Maryland PSC. Our electric business will change significantly beginning July 1, 2000 as we enter into retail customer choice for electric generation. Also, no earlier than July 1, 2000, and upon receipt of all regulatory approvals, all of BGE's generation assets will be transferred, at book value, to nonregulated subsidiaries of Constellation Energy. These assets represent about 6,240 megawatts of generation capacity with a total projected net book value at June 30, 2000 of approximately $2.4 billion. 34 We estimate that the electric generation portion of our business currently represents about one-half of BGE's operating income. We expect BGE to transfer approximately $278 million of tax exempt debt to our nonregulated subsidiaries related to the transferred assets and that BGE will receive approximately $1.1 billion in unsecured promissory notes. Repayments of the notes by our nonregulated subsidiaries will be used exclusively to service certain long-term debt of BGE. BGE will also transfer equity associated with the generating assets to nonregulated subsidiaries of Constellation Energy. Given the uncertainties surrounding electric deregulation as discussed in the "Strategy" and "Current Issues" sections, the results discussed in this section may not be indicative of the future performance of our generation business. Also, these results will not be indicative of the future performance of BGE once BGE transfers all of its generation assets to nonregulated subsidiaries of Constellation Energy. The impact of this transfer on BGE's financial results will be material. The total assets, liabilities, and common shareholders' equity of Constellation Energy will not change as a result of the transfer. Electric Revenues The changes in electric revenues in 1999 and 1998 compared to the respective prior year were caused by: 1999 1998 - -------------------------------------------------------------------------------- (In millions) Electric system sales volumes $41.2 $50.8 Base rates 0.8 (6.6) Fuel rates 3.7 (8.1) - -------------------------------------------------------------------------------- Total change in electric revenues from electric system sales 45.7 36.1 Interchange and other sales (8.2) (13.2) Other 2.1 4.6 - -------------------------------------------------------------------------------- Total change in electric revenues $39.6 $27.5 ================================================================================ Electric System Sales Volumes "Electric system sales volumes" are sales to customers in our service territory at rates set by the Maryland PSC. These sales do not include interchange sales and sales to others. The percentage changes in our electric system sales volumes, by type of customer, in 1999 and 1998 compared to the respective prior year were: 1999 1998 - -------------------------------------------------------------------------------- Residential 3.5% 1.5% Commercial 2.6 3.9 Industrial (5.1) 0.2 In 1999, we sold more electricity to residential customers due to higher usage per customer, colder winter weather, and an increased number of customers. This increase was partially offset by milder spring and early summer weather. We sold more electricity to commercial customers mostly due to higher usage per customer, an increased number of customers, and colder winter weather. We sold less electricity to industrial customers mostly because usage by Bethlehem Steel and other industrial customers decreased. Usage decreased at Bethlehem Steel as a result of a shut-down from June to August for an upgrade to their facilities that temporarily reduced their electricity consumption. This decrease was partially offset by an increase in the number of industrial customers. In 1998, we sold more electricity to residential customers mostly because of an increased number of customers, hotter summer weather, and higher usage per customer. The increase in sales to residential customers was partially offset by milder winter weather. We sold more electricity to commercial customers mostly because of higher usage per customer. We sold about the same amount of electricity to industrial customers as we did in 1997. Base Rates In 1999, base rate revenues were about the same compared to 1998. In 1998, base rate revenues decreased compared to 1997. Although we sold more electricity in 1998, our base rate revenues decreased because of lower conservation surcharge revenues. Fuel Rates In 1999, fuel rate revenues increased compared to 1998 mostly because we sold more electricity. In 1998, fuel rate revenues decreased compared to 1997. Although we sold more electricity, the fuel rate was lower mostly because we were able to use a less- costly mix of generating plants and electricity purchases. Interchange and Other Sales "Interchange and other sales" are sales in the PJM (Pennsylvania-New Jersey- Maryland) Interconnection energy market and to others. The PJM is the operator of a regional transmission organization as well as a regional power pool with members that include many wholesale market participants, as well as BGE and other utility companies. We sell energy to PJM members and to others after we have satisfied the demand for electricity in our own system. 35 In 1999 and 1998, interchange and other sales revenues decreased compared to the respective prior year mostly because higher demand for system sales reduced the amount of energy we had available for off-system sales. Electric Fuel and Purchased Energy Expenses 1999 1998 1997 - -------------------------------------------------------------------------------- (In millions) Actual costs $538.0 $514.7 $504.5 Net (deferral) recovery of costs under electric fuel rate clause (see Note 1) (70.3) (9.0) 15.2 - -------------------------------------------------------------------------------- Total electric fuel and purchased energy expenses $467.7 $505.7 $519.7 ================================================================================ Actual Costs In 1999, our actual costs of fuel to generate electricity (nuclear fuel, coal, gas, or oil) and electricity we bought from others were higher compared to 1998 mostly because the price of electricity we bought from others was higher. The price of electricity changes based on market conditions and contract terms. This increase was partially offset by our settlement of a capacity contract with PECO in 1998. In 1998, our actual costs increased compared to 1997 mostly because we settled a capacity contract with PECO. Electric Fuel Rate Clause Under the electric fuel rate clause, we defer (include as an asset or liability in our Consolidated Balance Sheets and exclude from our Consolidated Statements of Income) the difference between our actual costs of fuel and energy and what we collect from customers under the fuel rate in a given period. We either bill or refund our customers that difference in the future. We discuss the calculation of the fuel rate and its future discontinuance in Note 1. In 1999 and 1998, our actual costs of fuel and energy were higher than the fuel rate revenues we collected from our customers. The increase in the 1999 deferral reflects higher purchased power costs, especially during record-setting summer peak loads. Electric Operations and Maintenance Expenses In 1999, electric operations and maintenance expenses were about the same compared to 1998. In 1999, operations and maintenance expenses include the costs for system restoration activities related to Hurricane Floyd of $7.5 million and a major winter ice storm. This was offset by lower employee benefit costs in 1999 and a 1998 $6.0 million write-off of contributions to a third party for a low-level radiation waste facility that was never completed. In 1998, electric operations and maintenance expenses increased $28.7 million compared to 1997 mostly because of: . higher nuclear costs, . higher employee benefit costs, and . the $6.0 million write-off for the low-level radiation waste facility discussed above. Electric Depreciation and Amortization Expense In 1999, electric depreciation and amortization expense increased $63.4 million compared to 1998 mostly because of the $75.0 million amortization of the regulatory asset for the reduction in generation plant provided for in the Restructuring Order. This increase was partially offset by lower amortization of deferred electric conservation expenditures due to the write-off of a portion of these expenditures that will not be recovered under the Restructuring Order. We discuss the accounting implications of the Restructuring Order further in Note 4. In 1998, electric depreciation and amortization expense increased $26.5 million compared to 1997 mostly because: . in October 1998, the Maryland PSC authorized us to implement new electric depreciation rates retroactive to January 1, 1998, which increased depreciation expense by approximately $13.9 million, . we had more electric plant in service (as our level of plant in service changes, the amount of our depreciation and amortization expense changes), and . we reduced the amortization period for certain computer software beginning in the first quarter of 1998 from five years to three years. 36 Gas Operations All BGE industrial and commercial gas customers, and effective November 1, 1999, all BGE residential customers have the option to purchase gas from other suppliers. We do not expect the impact of customer choice to have a material effect on our, and BGE's, financial results. Gas Revenues The changes in gas revenues in 1999 and 1998 compared to the respective prior year were caused by: 1999 1998 - -------------------------------------------------------------------------------- (In millions) Gas system sales volumes $ 8.0 $(10.8) Base rates 2.2 14.2 Weather normalization 4.5 10.1 Gas cost adjustments 19.8 (87.6) - -------------------------------------------------------------------------------- Total change in gas revenues from gas system sales 34.5 (74.1) Off-system sales (7.9) 1.8 Other 0.5 0.1 - -------------------------------------------------------------------------------- Total change in gas revenues $27.1 $(72.2) ================================================================================ Gas System Sales Volumes The percentage changes in our gas system sales volumes, by type of customer, in 1999 and 1998 compared to the respective prior year were: 1999 1998 - -------------------------------------------------------------------------------- Residential 9.2% (11.6)% Commercial 12.7 (9.5) Industrial (4.8) (11.3) In 1999, we sold more gas to residential customers mostly for two reasons: colder winter weather and an increased number of customers. This was partially offset by lower usage per customer. We sold more gas to commercial customers mostly because of higher usage per customer, colder winter weather, and an increased number of customers. We sold less gas to industrial customers mostly because of lower usage by Bethlehem Steel and other industrial customers. Usage by Bethlehem Steel decreased due to a shut-down from June to August for an upgrade to their facilities. In 1998, we sold less gas to residential and commercial customers mostly for two reasons: milder weather and lower usage per customer. This was partially offset by the increase in the number of customers. We sold less gas to industrial customers mostly because of lower usage by Bethlehem Steel and other industrial customers. Base Rates In 1999, base rate revenues increased compared to 1998 mostly due to the increase in our base rates effective March 1, 1998 as discussed below. In 1998, base rate revenues increased compared to 1997. Although we sold less gas during 1998, our base rate revenues increased mostly because the Maryland PSC authorized an increase in our base rates effective March 1, 1998. The change in rates increased our base rate revenues over the twelve-month period from March 1998 through February 1999 by approximately $16 million. On November 17, 1999, we applied for a $36.3 million annual increase in our gas base rates. The Maryland PSC is currently reviewing our application and is expected to issue an order by June 2000. Weather Normalization Effective March 1, 1998, the Maryland PSC allowed us to implement a monthly adjustment to our gas revenues to eliminate the effect of abnormal weather patterns on our gas system sales volumes. This means our monthly gas revenues will be based on weather that is considered "normal" for the month and, therefore, will not be affected by actual weather conditions. Gas Cost Adjustments We charge our gas customers for the natural gas they purchase from us using gas cost adjustment clauses set by the Maryland PSC. These clauses operate similarly to the electric fuel rate clause described in the "Electric Fuel Rate Clause" section. However, under market based rates, our actual cost of gas is compared to a market index (a measure of the market price of gas in a given period). The difference between our actual cost and the market index is shared equally between shareholders and customers, and does not significantly impact earnings. We also discuss this in Note 1. Delivery service customers, including Bethlehem Steel, are not subject to the gas cost adjustment clauses because we are not selling gas to them. We charge these customers fees to recover the fixed costs for the transportation service we provide. These fees are the same as the base rate charged for gas sales and are included in gas system sales volumes. In 1999, gas cost adjustment revenues increased compared to the same period of 1998 mostly because we sold more gas at a higher price. In 1998, gas cost adjustment revenues decreased compared to 1997 mostly because we sold less gas. 37 Off-System Sales Off-system gas sales are low-margin direct sales of gas to wholesale suppliers of natural gas outside our service territory. Off-system gas sales, which occur after we have satisfied our customers' demand, are not subject to gas cost adjustments. The Maryland PSC approved an arrangement for part of the margin from off-system sales to benefit customers (through reduced costs) and the remainder to be retained by BGE (which benefits shareholders). Changes in off- system sales do not significantly impact earnings. In 1999, revenues from off-system gas sales decreased compared to 1998 mostly because we sold less gas off-system. In 1998, revenues from off-system gas sales increased compared to 1997 mostly because we sold more gas off-system. Gas Purchased For Resale Expenses 1999 1998 1997 - -------------------------------------------------------------------------------- (In millions) Actual costs $221.8 $212.2 $291.6 Net recovery (deferral) of costs under gas adjustment clauses (see Note 1) 8.8 (3.6) 0.5 - -------------------------------------------------------------------------------- Total gas purchased for resale expenses $230.6 $208.6 $292.1 ================================================================================ Actual Costs Actual costs include the cost of gas purchased for resale to our customers and for off-system sales. Actual costs do not include the cost of gas purchased by delivery service customers. In 1999, actual gas costs increased compared to 1998 mostly because we sold more gas. In 1998, actual gas costs decreased compared to 1997 mostly because we sold less gas. Gas Adjustment Clauses We charge customers for the cost of gas sold through gas adjustment clauses (determined by the Maryland PSC), as discussed under "Gas Cost Adjustments" earlier in this section. In 1999, actual gas costs were lower than the fuel rate revenues we collected from our customers. In 1998, actual gas costs were higher than the fuel rate revenues we collected from our customers. Gas Operations and Maintenance Expenses In 1999, gas operations and maintenance expenses were about the same compared to 1998. In 1998, gas operations and maintenance expenses increased $3.9 million compared to 1997 mostly because of higher employee benefit costs. Gas Depreciation and Amortization Expense In 1999, gas depreciation and amortization expense was about the same compared to 1998. In 1998, gas depreciation and amortization expense increased $6.1 million compared to 1997 mostly because: . we had more gas plant in service, and . we reduced the amortization period for certain computer software beginning in the first quarter of 1998 from five years to three years. 38 Diversified Businesses Our diversified businesses engage primarily in energy services. We list each of our diversified businesses in the "Introduction" section. We describe our diversified businesses in more detail under "Item 1. Business - Diversified Businesses." Diversified Business Earnings Per Share of Common Stock 1999 1998 1997 - -------------------------------------------------------------------------------- Energy services Power marketing $ .23 $ .05 $ - Power projects .26 .30 .25 Other (.05) (.01) (.05) - -------------------------------------------------------------------------------- Total energy services earnings per share before nonrecurring charges included in operations .44 .34 .20 Other diversified businesses earnings (losses) per share before nonrecurring charges included in operations .01 (.07) .14 - -------------------------------------------------------------------------------- Total diversified business earnings per share before nonrecurring charges included in operations .45 .27 .34 Nonrecurring charges included in operations: Write-downs of power projects (see Note 3) (.12) - - Write-off of energy services investment (see Note 2) - (.04) - Write-down of financial investment (see Note 3) (.11) - - Write-downs of real estate and senior-living investments (see Note 2 and Note 3) (.04) (.10) (.31) - -------------------------------------------------------------------------------- Total earnings per share $ .18 $ .13 $ .03 ================================================================================ Our 1999 diversified business earnings increased $8.1 million, or $.05 per share, compared to 1998. Our 1998 diversified business earnings increased $15.7 million, or $.10 per share, compared to 1997. We discuss factors affecting the earnings of our diversified businesses below. Energy Services Power Marketing In 1999, earnings from our power marketing business increased compared to 1998 because of increased transaction margins and volume. In 1998, earnings from our power marketing business increased compared to 1997 because of increased power marketing activities in 1998, which was Constellation Power Source's first full year of operations. Constellation Power Source uses the mark-to-market method of accounting. We discuss the mark-to-market method of accounting and Constellation Power Source's activities in Note 1. As a result of the nature of its business activities, Constellation Power Source's revenue and earnings will fluctuate. We cannot predict these fluctuations, but the effect on our revenues and earnings could be material. The primary factors that cause these fluctuations are: . the number and size of new transactions, . the magnitude and volatility of changes in commodity prices and interest rates, and . the number and size of open commodity and derivative positions Constellation Power Source holds or sells. Constellation Power Source's management uses its best estimates to determine the fair value of commodity and derivative positions it holds and sells. These estimates consider various factors including closing exchange and over-the-counter price quotations, time value, volatility factors, and credit exposure. However, it is possible that future market prices could vary from those used in recording assets and liabilities from power marketing and trading activities, and such variations could be material. In 1999, assets and liabilities from energy trading activities (as shown in our Consolidated Balance Sheets) increased because of greater business activity during the period. In March 1998, we formed Orion Power Holdings, Inc. (Orion) with Goldman, Sachs Capital Partners II L.P., an affiliate of Goldman, Sachs & Co., to acquire electric generating plants in the United States and Canada. Our energy services businesses own a minority interest in Orion. To date, our energy services businesses have funded $104 million in equity and have a commitment to contribute an additional $121 million to Orion. 39 Power Projects In 1999, earnings from our power projects business decreased compared to 1998 mostly because of three factors: . In 1999, our power projects business recorded a $14.2 million after-tax, or $.09 per share, write-off of two geothermal power projects. These write-offs occurred because the expected future cash flows from the projects are less than the investment in the projects. For the first project, this resulted from the inability to restructure certain project agreements. For the second project, we experienced a declining water temperature of the geothermal resource used by one of the plants for production. . In 1999, our power projects business recorded a $4.5 million after-tax, or $.03 per share, write-down to reflect the fair value of our investment in a power project as a result of our international exit strategy as discussed later in this section. . In 1998, our power projects business recorded a $10.4 million after-tax, or $.07 per share, gain for its share of earnings in a partnership. The partnership recognized a gain on the sale of its ownership interest in a power purchase agreement. In 1998, earnings from our power projects business increased compared to 1997 mostly because Constellation Power recorded a $10.4 million after-tax gain for its share of earnings in a partnership as discussed above. California Power Purchase Agreements Constellation Power and subsidiaries and Constellation Investments have $301.8 million invested in 14 projects that sell electricity in California under power purchase agreements called "Interim Standard Offer No. 4" agreements. In 1999, earnings from these projects, excluding any write-offs, were $34.4 million, or $.23 per share, compared to $41.3 million, or $.28 per share in 1998. Under these agreements, the electricity rates change from fixed rates to variable rates beginning in 1996 and continuing through 2000. The projects which already have had rate changes have lower revenues under variable rates than they did under fixed rates. When the remaining projects transition to variable rates, we expect their revenues also to be lower than they are under fixed rates. As of December 31, 1999, ten projects had already transitioned to variable rates. The remaining four projects will transition between February and December 2000. The projects which transitioned in 1999 contributed $6.2 million, or $.04 per share to 1999 earnings. Those changing over in 2000 contributed $28.0 million, or $.19 per share to 1999 earnings. We expect earnings from the projects changing over in 2000 to contribute $17.4 million, or $.12 per share to 2000 earnings. Our power projects business continues to pursue alternatives for some of these projects including: . repowering the projects to reduce operating costs, . changing fuels to reduce operating costs, . renegotiating the power purchase agreements to improve the terms, . restructuring financing to improve existing terms, and . selling its ownership interests in the projects. We evaluate the carrying amount of our investment in these projects for impairment using the methodology discussed in Note 1. Constellation Power's management uses its best estimates to determine if there has been an impairment of these investments and considers various factors including forward price curves for energy, fuel costs, and operating costs. However, it is possible that future estimates of market prices and project costs could vary from those used in evaluating these assets, and the impact of such variations could be material. We also describe these projects and the transition process in Note 10. International Projects At December 31, 1999, Constellation Power had invested about $254.1 million in 10 power projects in Latin America compared to $269.7 million invested in Latin America in 1998. These investments include: . the purchase of a 51% interest in a Panamanian electric distribution company for approximately $90 million in 1998 by an investment group in which subsidiaries of Constellation Power hold an 80% interest, and . approximately $98 million for the purchase of existing electric generation facilities and the construction of an electric generation facility in Guatemala. 40 In December 1999, we decided to exit the international portion of our power projects business as part of our strategy to improve our competitive position. As a result, we recorded a $4.5 million after-tax write-down of our investment in a generating company in Bolivia to reflect the current fair value of this investment. We expect to complete our exit strategy by the end of 2000. We discuss our strategy further in the "Strategy" section. Other Energy Services In 1999, earnings from our other energy services businesses decreased compared to 1998 mostly because of lower gross margins at our energy products and services business. In 1998, earnings from our other energy services businesses increased compared to 1997 due to improved results from our energy products and services business. Earnings would have been higher except we recorded a $5.5 million after-tax, or $.04 per share, write-off of our investment in, and certain of our product inventory from, an automated electric distribution equipment company. We recorded this write-off because of that company's inability to raise capital and sell its products. Other Diversified Businesses In 1999, earnings from our other diversified businesses increased compared to 1998 mostly because of higher earnings from our real estate and senior-living facilities business. This increase was partially offset by lower earnings from our financial investments business. In 1999, earnings from our real estate and senior-living facilities business increased compared to 1998 mostly because of: . a $15.4 million after-tax write-down of its investment in Church Street Station, an entertainment, dining, and retail complex in Orlando, Florida in 1998, and . an increase in earnings from its investment in Corporate Office Properties Trust (COPT) in 1999. We discuss the investment in COPT below. This increase was partially offset by a $5.8 million after-tax, or $.04 per share, write-down of certain senior-living facilities related to the proposed sale of these facilities in 1999 as discussed below. In 1999, our senior-living facilities business entered into an agreement to sell all but one of its senior-living facilities to Sunrise Assisted Living, Inc. Under the terms of the agreement, Sunrise was to acquire 12 of our existing senior-living facilities, three facilities under construction, and several sites under development for $72.2 million in cash and $16.0 million in debt assumption. We could not reach an agreement on financing issues that subsequently arose, and the agreement was terminated in November 1999. As a result, our senior-living facilities business engaged a third-party management company to manage its senior-living facilities portfolio including the three facilities now under construction, scheduled to be completed in the first half of 2000. In 1999, Constellation Real Estate Group, Inc. (CREG) sold Church Street Station, for $11.5 million, the approximate book value of the complex. In 1999, our financial investments business announced that it would exchange its shares of common stock in Capital Re, an insurance company, for common stock of ACE Limited (ACE), another insurance company, as part of a business combination whereby ACE would acquire all of the outstanding capital stock of Capital Re. Through September 30, 1999, our financial investments business wrote down its $94.2 million investment in Capital Re stock by $20.9 million after-tax, or $.14 per share, to reflect the market value of this investment. The agreement between ACE and Capital Re was subsequently revised on a more favorable basis for Capital Re to include both cash and ACE stock. In December 1999, the transaction was finalized and our financial investments business recorded a $4.9 million after-tax, or $.03 per share, gain on this investment to reflect the closing price of the business combination. This net write-down of Capital Re was partially offset by better market performance of other financial investments in 1999 compared to 1998. In 1998, earnings from our other diversified businesses decreased compared to 1997 mostly due to lower earnings from our real estate and senior-living facilities and financial investments businesses. Earnings from our real estate and senior-living facilities business decreased mostly due to: . a $15.4 million after-tax write-down of its investment in Church Street Station, . lower earnings from various real estate and senior-living facilities projects, and . a $4.0 million after-tax gain on the sale of two senior- living facilities projects reflected in 1997 results. 41 In addition, in 1998, our real estate and senior-living facilities business exchanged certain assets and liabilities in return for a 41.9% equity interest in COPT, a real estate investment trust. In 1998, earnings from our financial investments business decreased compared to 1997 mostly because of: . better market performance for its investments in 1997, and . a $6.0 million after-tax gain on the sale of stock held by a financial limited partnership reflected in 1997 results. We discuss our real estate projects, the write-downs of our real estate projects, the COPT transaction, and our financial investments further in Note 3. Most of CREG's remaining real estate projects are in the Baltimore-Washington corridor. The area has had a surplus of available land in recent years and as a result these projects have been economically hurt. Constellation Real Estate's projects have continued to incur carrying costs and depreciation over the years. Additionally, this business has been charging interest payments to expense rather than capitalizing them for some undeveloped land where development activities have stopped. These carrying costs, depreciation, and interest expenses have decreased earnings and are expected to continue to do so. Cash flow from real estate operations has not been enough to make the monthly loan payments on some of these projects. Cash shortfalls have been covered by cash obtained from the cash flows of other diversified subsidiaries. We consider market demand, interest rates, the availability of financing, and the strength of the economy in general when making decisions about our real estate projects. If we were to decide to sell our real estate projects, we could have write-downs. In addition, if we were to sell our real estate projects in the current market, we would have losses which could be material, although the amount of the losses is hard to predict. Depending on market conditions, we could also have material losses on any future sales. Our current real estate strategy is to hold each real estate project until we can realize a reasonable value for it. We evaluate strategies for all our businesses, including real estate, on an ongoing basis. We anticipate that competing demands for our financial resources and changes in the utility industry will cause us to evaluate thoroughly all business strategies on a regular basis so we use capital and other resources in a manner that is most beneficial. Under accounting rules, we are required to write down the value of a real estate project to market value in either of two cases. The first is if we change our intent about a project from an intent to hold to an intent to sell and the market value of that project is below book value. The second is if the expected future cash flow from the project is less than the investment in the project. Consolidated Nonoperating Income and Expenses Other Income and Expenses In September 1995, we signed an agreement to merge with Potomac Electric Power Company after all necessary regulatory approvals were received. In December 1997, both companies mutually terminated the merger agreement. Accordingly, in 1997, we wrote off $57.9 million of costs related to the merger. This write-off reduced after-tax earnings by $37.5 million, or $.25 per share. Fixed Charges In 1999, fixed charges decreased $7.7 million compared to 1998 mostly because we had less BGE preference stock outstanding. In 1998, fixed charges increased $4.0 million compared to 1997 mostly because we had more debt outstanding. Our fixed charges would have been higher except we had less BGE preference stock outstanding and lower interest rates in 1998 compared to 1997. Income Taxes In 1999, income taxes increased $8.2 million compared to 1998 because we had higher taxable income from both our utility operations and our diversified businesses. In 1998, income taxes increased $20.2 million compared to 1997 because we had higher taxable income from both our utility operations and our diversified businesses. Please refer to Note 4 for a discussion of tax law changes. These changes are designed, in part, to tax Maryland electric generating facilities on a more comparable basis with electric generation in other states. 42 Financial Condition Cash Flows 1999 1998 1997 - -------------------------------------------------------------------------------- (In millions) Cash provided by (used in): Operating Activities $679.0 $799.8 $696.3 Investing Activities (615.1) (711.3) (520.8) Financing Activities (144.9) (77.4) (79.6) In 1999 and 1998, cash provided by operations changed compared to the respective prior year mostly because of changes in working capital requirements. In 1999, we used less cash for investing activities compared to 1998 mostly due to lower investments in international power projects and in the real estate and senior-living facilities business. This was partially offset by: . our energy services businesses increased the investment in Orion Power Holdings, Inc. by $97.7 million, . our power projects business increased its investment in domestic power projects, primarily related to the 800 megawatts of peaking capacity as discussed in the "Capital Requirements of our Diversified Businesses" section, and . BGE increased its construction expenditures by $46.5 million. In 1998, net cash used in investing activities increased compared to 1997 mostly because of the additional investments in international power projects. This was partially offset by a $33.8 million decrease in utility construction expenditures. Total utility construction expenditures, including the allowance for funds used during construction, were $385.9 million in 1999 as compared to $339.4 million in 1998 and $373.2 million in 1997. In 1999, we used more cash for financing activities compared to 1998 mostly because we repaid more long-term debt and issued less long-term debt and common stock. This was partially offset by a decrease in the redemption of BGE preference stock and higher net short-term borrowings in 1999 compared to 1998. In 1998, cash used in financing activities was about the same compared to 1997. In 1998, we issued more long-term debt and common stock, and had contributions from minority interests of approximately $86 million related to the acquisition of a distribution company in Panama. This was offset by the repayment of short- term borrowings that matured, sinking fund requirements, and early redemption of higher cost securities. Security Ratings Independent credit-rating agencies rate Constellation Energy and BGE's fixed- income securities. The ratings indicate the agencies' assessment of each company's ability to pay interest, distributions, dividends, and principal on these securities. These ratings affect how much it will cost each company to sell these securities. The better the rating, the lower the cost of the securities to each company when they sell them. Constellation Energy and BGE's securities ratings at the date of this report are: Standard Moody's Duff & Phelps' & Poors Investors Credit Rating Group Service Rating Co. - -------------------------------------------------------------------------------- Constellation Energy Unsecured Debt A- A3 A BGE Mortgage Bonds AA- A1 AA- Unsecured Debt A A2 A+ Trust Originated Preferred Securities and Preference Stock A- "a2" A 43 Capital Resources Our business requires a great deal of capital. Our actual consolidated capital requirements for the years 1997 through 1999, along with estimated annual amounts for the years 2000 through 2002, are shown in the table below. For the year ended December 31, 1999, the ratio of earnings to fixed charges for Constellation Energy was 2.87. The ratio of earnings to fixed charges for BGE was 3.45 and the ratio of earnings to combined fixed charges and preferred and preference dividend requirements for BGE was 3.14. Investment requirements for 2000 through 2002 include estimates of funding for existing and anticipated projects. We continuously review and modify those estimates. Actual investment requirements may vary from the estimates included in the table below because of a number of factors including: . regulation, legislation, and competition, . BGE load requirements, . environmental protection standards, . the type and number of projects selected for development, . the effect of market conditions on those projects, . the cost and availability of capital, and . the availability of cash from operations. Our estimates are also subject to additional factors. Please see the "Forward Looking Statements" section. No earlier than July 1, 2000, and upon receipt of all regulatory approvals, all of BGE's generation assets will be transferred to nonregulated subsidiaries of Constellation Energy. The discussion and table for capital requirements below include these generation assets as part of the utility business.
1997 1998 1999 2000 2001 2002 - ----------------------------------------------------------------------------------------------------------------------------- (In millions) Utility Business Capital Requirements: Construction expenditures (excluding AFC) Electric $ 238 $ 239 $ 283 $ 329 $ 332 $ 312 Gas 89 55 59 63 61 61 Common 38 35 34 25 23 23 - ----------------------------------------------------------------------------------------------------------------------------- Total construction expenditures 365 329 376 417 416 396 AFC 8 10 10 4 4 4 Nuclear fuel (uranium purchases and processing charges) 44 50 49 50 48 48 Deferred conservation expenditures 27 16 1 - - - Retirement of long-term debt and redemption of preference stock 243 222 342 401 281 151 - ----------------------------------------------------------------------------------------------------------------------------- Total utility business capital requirements 687 627 778 872 749 599 - ----------------------------------------------------------------------------------------------------------------------------- Diversified Business Capital Requirements: Investment requirements 156 325 278 764 1,001 755 Retirement of long-term debt 188 232 189 284 367 2 - ----------------------------------------------------------------------------------------------------------------------------- Total diversified business capital requirements 344 557 467 1,048 1,368 757 - ----------------------------------------------------------------------------------------------------------------------------- Total capital requirements $1,031 $1,184 $1,245 $1,920 $2,117 $1,356 =============================================================================================================================
Capital Requirements of Our Utility Business Our estimates of future electric construction expenditures do not include costs to build more generating units to meet load requirements for BGE customers. Electric construction expenditures include improvements to generating plants and to our transmission and distribution facilities, and costs for replacing the steam generators and renewing the operating licenses at Calvert Cliffs. The operating licenses expire in 2014 for Unit 1 and in 2016 for Unit 2. If we do not replace the steam generators, we may not be able to operate the Calvert Cliffs units beyond 2014 and 2016. We expect the steam generator replacements to occur during the 2002 refueling outage for Unit 1 and during the 2003 refueling outage for Unit 2. We discuss the license extension process further in the "Current Issues" section. We estimate these Calvert Cliffs costs to be: . $40 million in 2000, . $66 million in 2001, . $88 million in 2002, and . $60 million in 2003. 44 Additionally, our estimates of future electric construction expenditures include the costs of complying with Environmental Protection Agency (EPA) and State of Maryland nitrogen oxides emissions (NOx) reduction regulations as follows: . $63 million in 2000, . $52 million in 2001, and . $4 million in 2002. We discuss the NOx regulations and timing of expenses further in Note 10. Our utility operations provided about 99% in 1999, 108% in 1998, and 105% in 1997 of the cash needed to meet its capital requirements, excluding cash needed to retire debt and redeem preference stock. During the three years from 2000 through 2002, we expect our existing utility business to provide about 115% of the cash needed to meet the capital requirements for these operations, excluding cash needed to retire debt. The table for capital requirements includes the requirements for BGE fossil and nuclear generation under "Utility Business Capital Requirements-Electric" through 2002 even though these assets are to be transferred to nonregulated subsidiaries on or about July 1, 2000. We will continue to have cash requirements for: . working capital needs including the payments of interest, distributions, and dividends, . capital expenditures, and . the retirement of debt and redemption of preference stock. When BGE cannot meet utility capital requirements internally, BGE sells debt and preference stock. BGE also sells securities when market conditions permit it to refinance existing debt or preference stock at a lower cost. The amount of cash BGE needs and market conditions determine when and how much BGE sells. Future funding for capital expenditures, the retirement of debt, and payments of interest and dividends is expected from internally generated funds, commercial paper issuances, available capacity under credit facilities, and/or the issuance of long-term debt, trust securities, or preference stock. At December 31, 1999, the Federal Energy Regulatory Commission has authorized BGE to issue up to $700 million of short-term borrowings, including commercial paper. In addition, BGE maintains $123 million in annual committed bank lines of credit and has $60 million in bank revolving credit agreements to support the commercial paper program as discussed in Note 7. In addition, BGE has access to interim lines of credit as required from time to time to support its outstanding commercial paper. Capital Requirements of Our Diversified Businesses Our energy services businesses will require additional funding for: . growing its power marketing business, . developing and acquiring power projects, and . constructing cooling system projects. Our energy services businesses' investment requirements include the planned construction of 800 megawatts of peaking capacity in the Mid-Atlantic/Mid-West region by the summer of 2001 and an additional 4,300 megawatts of peaking and combined cycle production facilities scheduled for completion in 2002 and beyond. Our investment requirements also include our energy services businesses' commitment to contribute up to an additional $121 million in equity to Orion. To date, our energy services businesses have funded $104 million in equity to Orion. Our energy services businesses have met their capital requirements in the past through borrowing, cash from their operations, and from time to time equity contributions from BGE. Future funding for the expansion of our energy services businesses is expected from internally generated funds, commercial paper issuances and long-term debt financing by Constellation Energy, and from time to time equity contributions from Constellation Energy. BGE Home Products & Services may also meet capital requirements through sales of receivables. At December 31, 1999, Constellation Energy has a commercial paper program where it can issue up to $500 million in short-term notes to fund its diversified businesses. To support its commercial paper program, Constellation Energy maintains $35 million in annual committed bank lines of credit and has a $135 million revolving credit agreement, under which it can also issue letters of credit. In addition, Constellation Energy has access to interim lines of credit as required from time to time to support its outstanding commercial paper. ComfortLink has a revolving credit agreement totaling $50 million to provide liquidity for short-term financial needs. If we can get a reasonable value for our real estate projects, additional cash may be obtained by selling them. Our ability to sell or liquidate assets will depend on market conditions, and we cannot give assurances that these sales or liquidations could be made. We discuss the real estate business and market in the "Other Diversified Businesses" section. We discuss our short-term borrowings in Note 7 and long-term debt in Note 8. 45 Market Risk We are exposed to market risk, including changes in interest rates, certain commodity prices, equity prices, and foreign currency. To manage our market risk, we may enter into various derivative instruments including swaps, forward contracts, futures contracts, and options. Effective July 1, 2000, we will be subject to additional market risk associated with the purchase and sale of energy as discussed in the "Current Issues" section. In this section, we discuss our current market risk and the related use of derivative instruments. Interest Rate Risk We are exposed to changes in interest rates as a result of financing through our issuance of variable-rate and fixed-rate debt. The following table provides information about our obligations that are sensitive to interest rate changes:
Principal Payments and Interest Rate Detail by Contractual Maturity Date Fair value at 2000 2001 2002 2003 2004 Thereafter Total Dec. 31, 1999 - ---------------------------------------------------------------------------------------------------------------------- (In millions) Long-term debt Variable-rate debt $201.9 $166.0 $ 0.9 $ 7.8 $ 5.4 $ 272.8 $ 654.8 $ 654.8 Average interest rate 6.68% 6.39% 8.32% 7.42% 7.41% 4.80% 5.84% Fixed-rate debt $484.4 $482.8 $154.6 $289.4 $154.6 $1,173.7 $2,739.5 $2,637.3 Average interest rate 7.16% 7.08% 7.31% 6.52% 5.78% 6.83% 6.87%
Commodity Price Risk We are exposed to the impact of market fluctuations in the price and transportation costs of natural gas, electricity, and other trading commodities. Currently, our gas business and energy services businesses use derivative instruments to manage changes in their respective commodity prices. Gas Business Our gas business may enter into gas futures, options, and swaps to hedge its price risk under our market based rate incentive mechanism and our off-system gas sales program. We discuss this further in Note 1. At December 31, 1999 and 1998, our exposure to commodity price risk for our gas business was not material. Energy Services Businesses With respect to our energy services businesses, Constellation Power Source manages its commodity price risk inherent in its power marketing activities on a portfolio basis, subject to established trading and risk management policies. Commodity price risk arises from the potential for changes in the value of energy commodities and related derivatives due to: changes in commodity prices, volatility of commodity prices, and fluctuations in interest rates. A number of factors associated with the structure and operation of the electricity market significantly influence the level and volatility of prices for electricity and related derivative products. These factors include: . seasonal changes in the demand for electricity, . hourly fluctuations in demand due to weather conditions, . available generation resources, . transmission availability and reliability within and between regions, and . procedures used to maintain the integrity of the physical electricity system during extreme conditions. These factors can affect energy commodity and derivative prices in different ways and to different degrees. These effects may vary throughout the country and result from regional differences in: . weather conditions, . market liquidity, . capability and reliability of the physical electricity system, and . the nature and extent of electricity deregulation. Constellation Power Source uses various methods, including a value at risk model, to measure its exposure to market risk. Value at risk is a statistical model that attempts to predict risk of loss based on historical market price and volatility data. Constellation Power Source calculates value at risk using a variance/covariance technique that models option positions using a linear approximation of their value. Additionally, Constellation Power Source estimates variances and correlation using historical market movements over the most recent rolling three-month period. 46 The value at risk amount represents the potential loss in the fair value of assets and liabilities from trading activities over a one-day holding period with a 99.6% confidence level. Using this confidence level, Constellation Power Source would expect a one-day change in fair value greater than or equal to the daily value at risk at least once per year. Constellation Power Source's value at risk was $7.2 million as of December 31, 1999 compared to $6.0 million as of December 31, 1998. The average, high, and low value at risk for the year ended December 31, 1999 was $4.8 million, $7.2 million and $1.8 million, respectively. Constellation Power Source's calculation includes all assets and liabilities from its power marketing and trading activities, including energy commodities and derivatives that do not require cash settlements. We believe that this represents a more complete calculation of our value at risk. Due to the inherent limitations of statistical measures such as value at risk, the relative immaturity of the competitive market for electricity and related derivatives, and the seasonality of changes in market prices, the value at risk calculation may not reflect the full extent of our commodity price risk exposure. Additionally, actual changes in the value of options may differ from the value at risk calculated using a linear approximation inherent in our calculation method. As a result, actual changes in the fair value of assets and liabilities from power marketing and trading activities could differ from the calculated value at risk and such changes could have a material impact on our financial results. Please refer to the "Forward Looking Statements" section below. We discuss Constellation Power Source's business in the "Power Marketing" section and in Note 1. The commodity price risk for our remaining energy services businesses was not material at December 31, 1999 and 1998. Equity Price Risk We are exposed to price fluctuations in equity markets primarily through our financial investments business and our nuclear decommissioning trust fund. We are required by the NRC to maintain a trust to fund the costs of decommissioning Calvert Cliffs. At December 31, 1999 and 1998, equity price risk was not material. We discuss our nuclear decommissioning trust fund in more detail in Note 1. We also describe our financial investments in more detail in Note 3. Foreign Currency Risk We are exposed to foreign currency risk primarily through our power projects business. Our power projects business has $254.1 million invested in 10 international power generation and distribution projects as of December 31, 1999. To manage our exposure to foreign currency risk, the majority of our contracts are denominated in or indexed to the U.S. dollar. At December 31, 1999 and 1998, foreign currency risk was not material. We discuss our international projects in the "Power Projects" section. - -------------------------------------------------------------------------------- Item 7A. Quantitative and Qualitative Disclosures about Market Risk The information required by this item with respect to market risk is set forth in Item 7 of Part II of this Form 10-K under the heading "Market Risk". 47 Item 8. Financial Statements and Supplementary Data Report of Management The management of the Companies is responsible for the information and representations in the Companies' financial statements. The Companies prepare the financial statements in accordance with generally accepted accounting principles based upon available facts and circumstances and management's best estimates and judgments of known conditions. The Companies maintain accounting systems and related systems of internal controls designed to provide reasonable assurance that the financial records are accurate and that the Companies' assets are protected. The Companies' staff of internal auditors, which reports directly to the Chairman of the Board, conducts periodic reviews to maintain the effectiveness of internal control procedures. PricewaterhouseCoopers LLP, independent accountants, audit the financial statements and express their opinion on them. They perform their audit in accordance with generally accepted auditing standards. The Audit Committee of the Board of Directors, which consists of four outside Directors, meets periodically with management, internal auditors, and PricewaterhouseCoopers LLP to review the activities of each in discharging their responsibilities. The internal audit staff and PricewaterhouseCoopers LLP have free access to the Audit Committee. /s/ Christian H. Poindexter /s/ David A. Brune - --------------------------- ----------------------- Christian H. Poindexter David A. Brune Chairman of the Board Chief Financial Officer and Chief Executive Officer Report of Independent Accountants To the Shareholders of Constellation Energy Group, Inc. and Baltimore Gas and Electric Company: In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a) 1. present fairly, in all material respects, the financial position of Constellation Energy Group, Inc. and Subsidiaries and of Baltimore Gas and Electric Company and Subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 14(a) 2. of this Form 10-K present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and the financial statement schedule are the responsibility of the Companies' management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. We have also previously audited, in accordance with auditing standards generally accepted in the United States, the consolidated balance sheets and statement of capitalization of Baltimore Gas and Electric Company and Subsidiaries as of December 31, 1997, 1996 and 1995, and the related consolidated statements of income, comprehensive income, cash flows, common shareholders' equity and income taxes for the years ended December 31, 1996 and 1995 (none of which are presented herein); and we expressed unqualified opinions on those consolidated financial statements. In our opinion, the information set forth in the Summary of Operations and Summary of Financial Condition of Constellation Energy Group, Inc. included in the Selected Financial Data for each of the five years in the period ended December 31, 1999, and the information set forth in the Summary of Operations and Summary of Financial Condition of Baltimore Gas and Electric Company included in the Selected Financial Data for each of the five years in the period ended December 31, 1999, is fairly stated, in all material respects, in relation to the consolidated financial statements from which it has been derived. /s/ PricewaterhouseCoopers LLP - ------------------------------ PricewaterhouseCoopers LLP Baltimore, Maryland January 19, 2000 48 Consolidated Statements of Income Constellation Energy Group, Inc. and Subsidiaries
Year Ended December 31, 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------- (In millions, except per share amounts) Revenues Electric $2,258.8 $2,219.2 $2,191.7 Gas 476.5 449.4 521.6 Diversified businesses 1,050.9 689.5 594.3 - --------------------------------------------------------------------------------------------------------------- Total revenues 3,786.2 3,358.1 3,307.6 Operating Expenses Electric fuel and purchased energy 467.7 505.7 519.7 Gas purchased for resale 230.6 208.6 292.1 Operations 546.0 554.1 518.3 Maintenance 186.2 177.5 178.5 Diversified businesses--selling, general, and administrative 918.7 574.6 515.7 Depreciation and amortization 449.8 377.1 342.9 Taxes other than income taxes 227.3 219.4 216.8 - ----------------------------------------------------------------------------------------------------------------- Total operating expenses 3,026.3 2,617.0 2,584.0 - ----------------------------------------------------------------------------------------------------------------- Income from Operations 759.9 741.1 723.6 Other Income (Expense) Write-off of merger costs (see Note 2) - - (57.9) Other 7.9 5.7 5.1 - ----------------------------------------------------------------------------------------------------------------- Total other income (expense) 7.9 5.7 (52.8) - ----------------------------------------------------------------------------------------------------------------- Income Before Fixed Charges and Income Taxes 767.8 746.8 670.8 Fixed Charges Interest expense (net) 241.5 240.9 230.0 BGE preference stock dividends 13.5 21.8 28.7 - ----------------------------------------------------------------------------------------------------------------- Total fixed charges 255.0 262.7 258.7 - ----------------------------------------------------------------------------------------------------------------- Income Before Income Taxes 512.8 484.1 412.1 Income Taxes 186.4 178.2 158.0 - ----------------------------------------------------------------------------------------------------------------- Income Before Extraordinary Item 326.4 305.9 254.1 Extraordinary Loss, Net of Income Taxes of $30.4 (see Note 4) (66.3) - - - ----------------------------------------------------------------------------------------------------------------- Net Income $ 260.1 $ 305.9 $ 254.1 ================================================================================================================= Earnings Applicable to Common Stock $ 260.1 $ 305.9 $ 254.1 ================================================================================================================= Average Shares of Common Stock Outstanding 149.6 148.5 147.7 Earnings Per Common Share and Earnings Per Common Share --Assuming Dilution Before Extraordinary Item $ 2.18 $ 2.06 $ 1.72 Extraordinary Loss (.44) - - - ----------------------------------------------------------------------------------------------------------------- Earnings Per Common Share and Earnings Per Common Share --Assuming Dilution $ 1.74 $ 2.06 $ 1.72 =================================================================================================================
Consolidated Statements of Comprehensive Income Constellation Energy Group, Inc. and Subsidiaries
Year Ended December 31, 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------- (In millions) Net Income $ 260.1 $ 305.9 $ 254.1 Other comprehensive income/(loss), net of taxes (6.2) 1.2 (0.8) - ----------------------------------------------------------------------------------------------------------------- Comprehensive Income $ 253.9 $ 307.1 $ 253.3 =================================================================================================================
See Notes to Consolidated Financial Statements. Certain prior-year amounts have been reclassified to conform with the current year's presentation. 49 Consolidated Balance Sheets Constellation Energy Group, Inc. and Subsidiaries At December 31, 1999 1998 - -------------------------------------------------------------------------------- (In millions) Assets Current Assets Cash and cash equivalents $ 92.7 $ 173.7 Accounts receivable (net of allowance for uncollectibles of $34.8 and $35.4 respectively) 578.5 422.7 Trading securities 136.5 119.7 Assets from energy trading activities 312.1 133.0 Fuel stocks 94.9 85.4 Materials and supplies 149.1 145.1 Prepaid taxes other than income taxes 72.4 68.8 Other 54.0 21.4 - -------------------------------------------------------------------------------- Total current assets 1,490.2 1,169.8 - -------------------------------------------------------------------------------- Investments and Other Assets Real estate projects and investments 310.1 353.9 Power projects 785.4 743.1 Financial investments 145.4 198.0 Nuclear decommissioning trust fund 217.9 181.4 Net pension asset 99.5 108.0 Other 422.9 243.3 - -------------------------------------------------------------------------------- Total investments and other assets 1,981.2 1,827.7 - -------------------------------------------------------------------------------- Utility Plant Plant in service Electric 7,088.6 6,890.3 Gas 962.0 921.3 Common 569.5 552.8 - -------------------------------------------------------------------------------- Total plant in service 8,620.1 8,364.4 Accumulated depreciation (3,466.1) (3,087.5) - -------------------------------------------------------------------------------- Net plant in service 5,154.0 5,276.9 Construction work in progress 222.3 223.0 Nuclear fuel (net of amortization) 133.8 132.5 Plant held for future use 13.0 24.3 - -------------------------------------------------------------------------------- Net utility plant 5,523.1 5,656.7 - -------------------------------------------------------------------------------- Deferred Charges Regulatory assets (net) 637.4 565.7 Other 51.9 55.1 - -------------------------------------------------------------------------------- Total deferred charges 689.3 620.8 - -------------------------------------------------------------------------------- Total Assets $9,683.8 $9,275.0 ================================================================================ See Notes to Consolidated Financial Statements. Certain prior-year amounts have been reclassified to conform with the current year's presentation. 50 Consolidated Balance Sheets Constellation Energy Group, Inc. and Subsidiaries At December 31, 1999 1998 - -------------------------------------------------------------------------------- (In millions) Liabilities and Capitalization Current Liabilities Short-term borrowings $ 371.5 $ - Current portions of long-term debt and preference stock 808.3 541.7 Accounts payable 365.1 270.5 Customer deposits 40.6 35.5 Liabilities from energy trading activities 163.8 99.0 Dividends declared 66.1 66.1 Accrued taxes 19.2 6.5 Accrued interest 55.3 58.6 Accrued vacation costs 35.3 34.7 Other 78.2 45.3 - -------------------------------------------------------------------------------- Total current liabilities 2,003.4 1,157.9 - -------------------------------------------------------------------------------- Deferred Credits and Other Liabilities Deferred income taxes 1,288.8 1,309.1 Postretirement and postemployment benefits 269.8 217.0 Deferred investment tax credits 109.6 118.0 Decommissioning of federal uranium enrichment facilities 27.2 30.8 Other 226.6 142.6 - -------------------------------------------------------------------------------- Total deferred credits and other liabilities 1,922.0 1,817.5 - -------------------------------------------------------------------------------- Capitalization Long-term debt 2,575.4 3,128.1 BGE preference stock not subject to mandatory redemption 190.0 190.0 Common shareholders' equity 2,993.0 2,981.5 - -------------------------------------------------------------------------------- Total capitalization 5,758.4 6,299.6 - -------------------------------------------------------------------------------- Commitments, Guarantees, and Contingencies (see Note 10) Total Liabilities and Capitalization $9,683.8 $9,275.0 ================================================================================ See Notes to Consolidated Financial Statements. Certain prior-year amounts have been reclassified to conform with the current year's presentation. 51 Consolidated Statements of Cash Flows Constellation Energy Group, Inc. and Subsidiaries
Year Ended December 31, 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------- (In millions) Cash Flows From Operating Activities Net income $ 260.1 $ 305.9 $ 254.1 Adjustments to reconcile to net cash provided by operating activities Extraordinary loss 66.3 - - Depreciation and amortization 505.9 429.4 396.8 Deferred income taxes 13.0 17.5 7.4 Investment tax credit adjustments (8.6) (8.8) (7.5) Deferred fuel costs (61.1) (8.3) 18.3 Accrued pension and postemployment benefits 36.1 41.6 (18.0) Write-off of merger costs - - 57.9 Write-downs of real estate investments 8.3 23.7 70.8 Write-down of financial investment 26.2 - - Write-downs of power projects 28.5 - - Equity in earnings of affiliates and joint ventures (net) (7.6) (54.5) (42.5) Changes in assets from energy trading activities (179.1) (123.6) (9.4) Changes in liabilities from energy trading activities 64.8 90.4 8.6 Changes in other current assets (216.4) 18.3 (54.7) Changes in other current liabilities 121.0 77.0 42.6 Other 21.6 (8.8) (28.1) - ----------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 679.0 799.8 696.3 - ----------------------------------------------------------------------------------------------------------------- Cash Flows From Investing Activities Utility construction and other capital expenditures (436.2) (406.1) (443.9) Contributions to nuclear decommissioning trust fund (17.6) (17.6) (17.6) Merger costs - - (20.9) Purchases of marketable equity securities (27.3) (33.3) (23.0) Sales of marketable equity securities 34.9 32.8 46.5 Other financial investments 13.7 14.6 (0.4) Real estate projects and investments 49.3 21.5 24.2 Power projects (171.1) (252.5) (44.3) Other (60.8) (70.7) (41.4) - ----------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (615.1) (711.3) (520.8) - ----------------------------------------------------------------------------------------------------------------- Cash Flows From Financing Activities Proceeds from issuance of Short-term borrowings 2,801.9 1,962.2 2,719.0 Long-term debt 302.8 831.3 622.0 Common stock 9.6 51.8 - Repayment of short-term borrowings (2,430.4) (2,278.3) (2,736.1) Reacquisition of long-term debt (584.4) (355.2) (343.3) Redemption of preference stock (7.0) (127.9) (104.5) Common stock dividends paid (251.1) (246.0) (239.2) Other 13.7 84.7 2.5 - ----------------------------------------------------------------------------------------------------------------- Net cash used in financing activities (144.9) (77.4) (79.6) - ----------------------------------------------------------------------------------------------------------------- Net (Decrease) Increase in Cash and Cash Equivalents (81.0) 11.1 95.9 Cash and Cash Equivalents at Beginning of Year 173.7 162.6 66.7 - ----------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Year $ 92.7 $ 173.7 $ 162.6 ================================================================================================================= Other Cash Flow Information Cash paid during the year for: Interest (net of amounts capitalized) $ 245.3 $ 236.7 $ 224.2 Income taxes $ 165.6 $ 164.3 $ 171.2
Noncash Investing and Financing Activities: In 1998, Corporate Office Properties Trust (COPT) assumed approximately $62 million of Constellation Real Estate Group's (CREG) debt and issued to CREG 7.0 million common shares and 985,000 convertible preferred shares. In exchange, COPT received 14 operating properties and two properties under development from CREG. See Notes to Consolidated Financial Statements. Certain prior-year amounts have been reclassified to conform with the current year's presentation. 52 Consolidated Statements of Common Shareholders' Equity Constellation Energy Group, Inc. and Subsidiaries
Accumulated Other Common Stock Retained Comprehensive Total Years Ended December 31, 1999, 1998, and 1997 Shares Amount Earnings (Loss) Income Amount - ------------------------------------------------------------------------------------------------------------------------------------ (Dollar amounts in millions, number of shares in thousands) Balance at December 31, 1996 147,667 $1,429.9 $1,419.1 $5.7 $2,854.7 Net income 254.1 254.1 Common stock dividends declared ($1.63 per share) (240.7) (240.7) Other 3.1 3.1 Net unrealized loss on securities (1.2) (1.2) Deferred taxes on net unrealized loss on securities 0.4 0.4 - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1997 147,667 1,433.0 1,432.5 4.9 2,870.4 Net income 305.9 305.9 Common stock dividend declared ($1.67 per share) (248.1) (248.1) Common stock issued 1,579 51.8 51.8 Other 0.3 0.3 Net unrealized gain on securities 1.8 1.8 Deferred taxes on net unrealized gain on securities (0.6) (0.6) - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1998 149,246 1,485.1 1,490.3 6.1 2,981.5 Net income 260.1 260.1 Common stock dividend declared ($1.68 per share) (251.3) (251.3) Common stock issued 310 9.6 9.6 Other (0.7) (0.7) Net unrealized loss on securities (9.6) (9.6) Deferred taxes on net unrealized loss on securities 3.4 3.4 - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1999 149,556 $1,494.0 $1,499.1 $(0.1) $2,993.0 ====================================================================================================================================
See Notes to Consolidated Financial Statements. Certain prior-year amounts have been reclassified to conform with the current year's presentation. 53 Consolidated Statements of Capitalization Constellation Energy Group, Inc. and Subsidiaries
At December 31, 1999 1998 - -------------------------------------------------------------------------------------------------------------------------- (In millions) Long-Term Debt First Refunding Mortgage Bonds of BGE Floating rate series, due April 15, 1999 $ - $ 125.0 8.40% Series, due October 15, 1999 - 91.1 5 1/2% Series, due July 15, 2000 124.3 125.0 8 3/8% Series, due August 15, 2001 122.3 122.3 7 1/4% Series, due July 1, 2002 124.5 124.5 5 1/2% Installment Series, due July 15, 2002 8.5 9.1 6 1/2% Series, due February 15, 2003 124.8 124.8 6 1/8% Series, due July 1, 2003 124.9 124.9 5 1/2% Series, due April 15, 2004 125.0 125.0 Remarketed floating rate series, due September 1, 2006 125.0 125.0 7 1/2% Series, due January 15, 2007 123.5 123.5 6 5/8% Series, due March 15, 2008 124.9 124.9 7 1/2% Series, due March 1, 2023 109.9 125.0 7 1/2% Series, due April 15, 2023 84.1 84.1 - -------------------------------------------------------------------------------------------------------------------------- Total First Refunding Mortgage Bonds of BGE 1,321.7 1,554.2 - -------------------------------------------------------------------------------------------------------------------------- Other long-term debt of BGE Medium-term notes, Series B 60.0 60.0 Medium-term notes, Series C 101.0 116.0 Medium-term notes, Series D 128.0 215.0 Medium-term notes, Series E 200.0 200.0 Medium-term notes, Series G 200.0 140.0 Medium-term notes, Series H 177.0 - Pollution control loan, due July 1, 2011 36.0 36.0 Port facilities loan, due June 1, 2013 48.0 48.0 Adjustable rate pollution control loan, due July 1, 2014 20.0 20.0 5.55% Pollution control revenue refunding loan, due July 15, 2014 47.0 47.0 Economic development loan, due December 1, 2018 35.0 35.0 6.00% Pollution control revenue refunding loan, due April 1, 2024 75.0 75.0 Variable rate pollution control loan, due June 1, 2027 8.8 8.8 - -------------------------------------------------------------------------------------------------------------------------- Total other long-term debt of BGE 1,135.8 1,000.8 - -------------------------------------------------------------------------------------------------------------------------- BGE obligated mandatorily redeemable trust preferred securities of subsidiary trust holding solely 7.16% debentures of BGE 250.0 250.0 - -------------------------------------------------------------------------------------------------------------------------- Long-term debt of diversified businesses Loans under revolving credit agreements 33.0 74.0 Mortgage and construction loans 7.90% mortgage note, due September 12, 2000 8.0 8.3 8.00% mortgage note, due July 31, 2001 0.1 0.1 8.00% mortgage note, due October 30, 2003 1.9 1.8 Variable rate mortgage notes and construction loans, due through 2004 112.0 149.5 4.25% mortgage note, due March 15, 2009 4.6 5.1 9.65% mortgage note, due February 1, 2028 9.6 9.6 8.00% mortgage note, due November 1, 2033 6.6 5.8 Unsecured notes 511.0 616.0 - -------------------------------------------------------------------------------------------------------------------------- Total long-term debt of diversified businesses 686.8 870.2 - -------------------------------------------------------------------------------------------------------------------------- Unamortized discount and premium (10.6) (12.4) Current portion of long-term debt (808.3) (534.7) - -------------------------------------------------------------------------------------------------------------------------- Total long-term debt $2,575.4 $3,128.1 - -------------------------------------------------------------------------------------------------------------------------- continued on next page
See Notes to Consolidated Financial Statements. 54 Consolidated Statements of Capitalization Constellation Energy Group, Inc. and Subsidiaries
At December 31, 1999 1998 - -------------------------------------------------------------------------------------------------------------------------- (In millions) BGE Preference Stock Cumulative, $100 par value, 6,500,000 shares authorized Redeemable preference stock 7.85%, 1991 Series $ - $ 7.0 Current portion of redeemable preference stock - (7.0) - -------------------------------------------------------------------------------------------------------------------------- Total redeemable preference stock - - - -------------------------------------------------------------------------------------------------------------------------- Preference stock not subject to mandatory redemption 7.125%, 1993 Series, 400,000 shares outstanding, not callable prior to July 1, 2003 40.0 40.0 6.97%, 1993 Series, 500,000 shares outstanding, not callable prior to October 1, 2003 50.0 50.0 6.70%, 1993 Series, 400,000 shares outstanding, not callable prior to January 1, 2004 40.0 40.0 6.99%, 1995 Series, 600,000 shares outstanding, not callable prior to October 1, 2005 60.0 60.0 - -------------------------------------------------------------------------------------------------------------------------- Total preference stock not subject to mandatory redemption 190.0 190.0 - -------------------------------------------------------------------------------------------------------------------------- Common Shareholders' Equity Common stock without par value, 250,000,000 shares authorized; 149,556,416 and 149,245,641 shares issued and outstanding at December 31, 1999 and 1998, respectively. (At December 31, 1999 166,893 shares were reserved for the Employee Savings Plan and 12,061,756 shares were reserved for the Shareholder Investment Plan.) 1,494.0 1,485.1 Retained earnings 1,499.1 1,490.3 Accumulated other comprehensive (loss) income (0.1) 6.1 - -------------------------------------------------------------------------------------------------------------------------- Total common shareholders' equity 2,993.0 2,981.5 - -------------------------------------------------------------------------------------------------------------------------- Total Capitalization $5,758.4 $6,299.6 ==========================================================================================================================
See Notes to Consolidated Financial Statements. 55 Consolidated Statements of Income Taxes Constellation Energy Group, Inc. and Subsidiaries
Year Ended December 31, 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------- (Dollar amounts in millions) Income Taxes Current $182.0 $169.5 $158.1 - ----------------------------------------------------------------------------------------------------------------- Deferred Change in tax effect of temporary differences 9.6 14.2 (1.0) Change in income taxes recoverable through future rates - 3.9 8.0 Deferred taxes credited (charged) to shareholders' equity 3.4 (0.6) 0.4 - ----------------------------------------------------------------------------------------------------------------- Deferred taxes charged to expense 13.0 ` 17.5 7.4 Investment tax credit adjustments (8.6) (8.8) (7.5) - ----------------------------------------------------------------------------------------------------------------- Income taxes per Consolidated Statements of Income $186.4 $178.2 $158.0 ================================================================================================================= Reconciliation of Income Taxes Computed at Statutory Federal Rate to Total Income Taxes Income before income taxes (excluding BGE preference stock dividends) $526.3 $505.9 $440.8 Statutory federal income tax rate 35% 35% 35% - ----------------------------------------------------------------------------------------------------------------- Income taxes computed at statutory federal rate 184.2 177.1 154.3 Increases (decreases) in income taxes due to Depreciation differences not normalized on regulated activities 15.3 13.6 13.9 Allowance for equity funds used during construction (2.2) (2.2) (1.9) Amortization of deferred investment tax credits (8.6) (8.8) (7.5) Tax credits flowed through to income (3.2) (0.3) (0.5) Amortization of deferred tax rate differential on regulated activities (3.0) (2.3) (2.3) State income taxes 8.9 9.8 6.2 Other (5.0) (8.7) (4.2) - ----------------------------------------------------------------------------------------------------------------- Total income taxes $186.4 $178.2 $158.0 ================================================================================================================= Effective federal income tax rate 35.4% 35.2% 35.8%
At December 31, 1999 1998 - -------------------------------------------------------------------------------- (Dollar amounts in millions) Deferred Income Taxes Deferred tax liabilities Accelerated depreciation $ 962.7 $1,009.9 Allowance for funds used during construction 202.3 204.5 Income taxes recoverable through future rates 35.7 88.4 Deferred termination and postemployment costs 14.7 32.3 Deferred fuel costs 25.8 4.5 Leveraged leases 19.9 22.6 Percentage repair allowance 35.0 36.8 Conservation expenditures 4.7 18.9 Energy trading activities 71.4 33.4 Deferred electric generation-related regulatory assets 100.3 - Other 187.9 182.6 - -------------------------------------------------------------------------------- Total deferred tax liabilities 1,660.4 1,633.9 - -------------------------------------------------------------------------------- Deferred tax assets Accrued pension and postemployment benefit costs 63.6 54.3 Deferred investment tax credits 38.3 41.3 Capitalized interest and overhead 48.3 46.6 Contributions in aid of construction 49.1 45.6 Nuclear decommissioning liability 25.4 22.8 Energy trading activities 15.1 20.3 Other 131.8 93.9 - -------------------------------------------------------------------------------- Total deferred tax assets 371.6 324.8 - -------------------------------------------------------------------------------- Deferred tax liability, net $1,288.8 $1,309.1 ================================================================================ See Notes to Consolidated Financial Statements. Certain prior-year amounts have been reclassified to conform with the current year's presentation. 56 Consolidated Statements of Income Baltimore Gas and Electric Company and Subsidiaries
Year Ended December 31, 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------- (In millions) Revenues Electric $2,259.5 $2,219.2 $2,191.7 Gas 485.3 449.4 521.6 Diversified businesses 283.5 689.5 594.3 - ----------------------------------------------------------------------------------------------------------------- Total revenues 3,028.3 3,358.1 3,307.6 Operating Expenses Electric fuel and purchased energy 486.8 505.7 519.7 Gas purchased for resale 233.7 208.6 292.1 Operations 543.9 554.1 518.3 Maintenance 184.9 177.5 178.5 Diversified businesses--selling, general, and administrative 222.1 574.6 515.7 Depreciation and amortization 427.9 377.1 342.9 Taxes other than income taxes 224.7 219.4 216.8 - ----------------------------------------------------------------------------------------------------------------- Total operating expenses 2,324.0 2,617.0 2,584.0 - ----------------------------------------------------------------------------------------------------------------- Income from Operations 704.3 741.1 723.6 Other Income (Expense) Write-off of merger costs (see Note 2) - - (57.9) Allowance for equity funds used during construction 6.2 6.3 5.3 Equity in earnings of Safe Harbor Water Power Corporation 5.1 5.0 5.0 Net other expense (2.9) (5.6) (5.2) - ----------------------------------------------------------------------------------------------------------------- Total other income (expense) 8.4 5.7 (52.8) - ----------------------------------------------------------------------------------------------------------------- Income Before Fixed Charges and Income Taxes 712.7 746.8 670.8 Fixed Charges Interest expense (net) 210.1 247.9 241.2 Capitalized interest (0.4) (3.6) (8.4) Allowance for borrowed funds used during construction (3.8) (3.4) (2.8) - ----------------------------------------------------------------------------------------------------------------- Total fixed charges 205.9 240.9 230.0 - ----------------------------------------------------------------------------------------------------------------- Income Before Income Taxes 506.8 505.9 440.8 Income Taxes Current 192.1 169.5 158.1 Deferred (5.2) 17.5 7.4 Investment tax credit adjustments (8.5) (8.8) (7.5) - ----------------------------------------------------------------------------------------------------------------- Total income taxes 178.4 178.2 158.0 - ----------------------------------------------------------------------------------------------------------------- Income Before Extraordinary Item 328.4 327.7 282.8 Extraordinary Loss, Net of Income Taxes of $30.4 (see Note 4) (66.3) - - - ----------------------------------------------------------------------------------------------------------------- Net Income 262.1 327.7 282.8 Preference Stock Dividends 13.5 21.8 28.7 - ----------------------------------------------------------------------------------------------------------------- Earnings Applicable to Common Stock $ 248.6 $ 305.9 $ 254.1 =================================================================================================================
Consolidated Statements of Comprehensive Income Baltimore Gas and Electric Company and Subsidiaries
Year Ended December 31, 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------- (In millions) Net Income $ 262.1 $ 327.7 $ 282.8 Other comprehensive income/(loss), net of taxes (3.4) 1.2 (0.8) - ----------------------------------------------------------------------------------------------------------------- Comprehensive Income $ 258.7 $ 328.9 $ 282.0 =================================================================================================================
See Notes to Consolidated Financial Statements. Certain prior-year amounts have been reclassified to conform with the current year's presentation. 57 Consolidated Balance Sheets Baltimore Gas and Electric Company and Subsidiaries At December 31, 1999 1998 - -------------------------------------------------------------------------------- (In millions) Assets Current Assets Cash and cash equivalents $ 23.5 $ 173.7 Accounts receivable (net of allowance for uncollectibles of $13.0 and $35.4 respectively) 316.1 422.7 Trading securities - 119.7 Assets from energy trading activities - 133.0 Fuel stocks 94.9 85.4 Materials and supplies 139.1 145.1 Prepaid taxes other than income taxes 72.4 68.8 Other 9.0 21.4 - -------------------------------------------------------------------------------- Total current assets 655.0 1,169.8 - -------------------------------------------------------------------------------- Investments and Other Assets Real estate projects and investments - 353.9 Power projects - 743.1 Financial investments - 198.0 Nuclear decommissioning trust fund 217.9 181.4 Net pension asset 99.8 108.0 Safe Harbor Water Power Corporation 34.5 34.4 Senior living facilities - 93.5 Other 61.6 115.4 - -------------------------------------------------------------------------------- Total investments and other assets 413.8 1,827.7 - -------------------------------------------------------------------------------- Utility Plant Plant in service Electric 7,088.6 6,890.3 Gas 962.0 921.3 Common 569.5 552.8 - -------------------------------------------------------------------------------- Total plant in service 8,620.1 8,364.4 Accumulated depreciation (3,466.1) (3,087.5) - -------------------------------------------------------------------------------- Net plant in service 5,154.0 5,276.9 Construction work in progress 222.3 223.0 Nuclear fuel (net of amortization) 133.8 132.5 Plant held for future use 13.0 24.3 - -------------------------------------------------------------------------------- Net utility plant 5,523.1 5,656.7 - -------------------------------------------------------------------------------- Deferred Charges Regulatory assets (net) 637.4 565.7 Other 43.3 55.1 - -------------------------------------------------------------------------------- Total deferred charges 680.7 620.8 - -------------------------------------------------------------------------------- Total Assets $7,272.6 $9,275.0 ================================================================================ See Notes to Consolidated Financial Statements. Certain prior-year amounts have been reclassified to conform with the current year's presentation. 58 Consolidated Balance Sheets Baltimore Gas and Electric Company and Subsidiaries
At December 31, 1999 1998 - -------------------------------------------------------------------------------------------------------------------------- (In millions) Liabilities and Capitalization Current Liabilities Short-term borrowings $ 129.0 $ - Current portions of long-term debt and preference stock 523.9 541.7 Accounts payable 222.8 270.5 Customer deposits 40.6 35.5 Liabilities from energy trading activities - 99.0 Dividends declared 3.3 66.1 Accrued taxes 9.2 6.5 Accrued interest 48.2 58.6 Accrued vacation costs 35.7 34.7 Other 65.8 45.3 - -------------------------------------------------------------------------------------------------------------------------- Total current liabilities 1,078.5 1,157.9 - -------------------------------------------------------------------------------------------------------------------------- Deferred Credits and Other Liabilities Deferred income taxes 1,032.0 1,309.1 Postretirement and postemployment benefits 231.0 217.0 Deferred investment tax credits 109.6 118.0 Decommissioning of federal uranium enrichment facilities 27.2 30.8 Other 42.9 142.6 - -------------------------------------------------------------------------------------------------------------------------- Total deferred credits and other liabilities 1,442.7 1,817.5 - -------------------------------------------------------------------------------------------------------------------------- Long-term Debt First refunding mortgage bonds of BGE 1,321.7 1,554.2 Other long-term debt of BGE 1,135.8 1,000.8 Company obligated mandatorily redeemable trust preferred securities of subsidiary trust holding solely 7.16% debentures of BGE 250.0 250.0 Long-term debt of diversified businesses 33.0 870.2 Unamortized discount and premium (10.6) (12.4) Current portion of long-term debt (523.9) (534.7) - -------------------------------------------------------------------------------------------------------------------------- Total long-term debt 2,206.0 3,128.1 - -------------------------------------------------------------------------------------------------------------------------- Redeemable Preference Stock - 7.0 Current portion of redeemable preference stock - (7.0) - -------------------------------------------------------------------------------------------------------------------------- Total redeemable preference stock - - - -------------------------------------------------------------------------------------------------------------------------- Preference Stock Not Subject to Mandatory Redemption 190.0 190.0 Common Shareholder's Equity Common stock 1,494.0 1,485.1 Retained earnings 861.4 1,490.3 Accumulated other comprehensive income - 6.1 - -------------------------------------------------------------------------------------------------------------------------- Total common shareholder's equity 2,355.4 2,981.5 - -------------------------------------------------------------------------------------------------------------------------- Total capitalization 4,751.4 6,299.6 - -------------------------------------------------------------------------------------------------------------------------- Commitments, Guarantees, and Contingencies (see Note 10) Total Liabilities and Capitalization $7,272.6 $9,275.0 ==========================================================================================================================
See Notes to Consolidated Financial Statements. Certain prior-year amounts have been reclassified to conform with the current year's presentation. 59 Consolidated Statements of Cash Flows Baltimore Gas and Electric Company and Subsidiaries
Year Ended December 31, 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------------- (In millions) Cash Flows From Operating Activities Net income $ 262.1 $ 327.7 $ 282.8 Adjustments to reconcile to net cash provided by operating activities Extraordinary loss 66.3 - - Depreciation and amortization 480.4 429.4 396.8 Deferred income taxes (5.2) 17.5 7.4 Investment tax credit adjustments (8.5) (8.8) (7.5) Deferred fuel costs (61.1) (8.3) 18.3 Accrued pension and postemployment benefits 35.5 41.6 (18.0) Write-off of merger costs - - 57.9 Write-downs of real estate investments - 23.7 70.8 Allowance for equity funds used during construction (6.2) (6.3) (5.3) Equity in earnings of affiliates and joint ventures (net) 29.1 (54.5) (42.5) Changes in assets from energy trading activities (133.0) (123.6) (9.4) Changes in liabilities from energy trading activities 99.0 90.4 8.6 Changes in other current assets (15.1) 18.3 (54.7) Changes in other current liabilities 22.7 77.0 42.6 Other 16.7 (3.3) (21.8) - ----------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 782.7 820.8 726.0 - ----------------------------------------------------------------------------------------------------------------------- Cash Flows From Investing Activities Utility construction expenditures (including AFC) (385.9) (339.4) (373.2) Allowance for equity funds used during construction 6.2 6.3 5.3 Nuclear fuel expenditures (49.2) (50.5) (43.6) Deferred conservation expenditures (1.1) (16.2) (27.1) Contributions to nuclear decommissioning trust fund (17.6) (17.6) (17.6) Merger costs - - (20.9) Purchases of marketable equity securities (9.2) (33.3) (23.0) Sales of marketable equity securities 6.0 32.8 46.5 Other financial investments 6.7 14.6 (0.4) Real estate projects and investments 22.0 21.5 24.2 Power projects (17.9) (252.5) (44.3) Other (20.7) (77.0) (46.7) - ----------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (460.7) (711.3) (520.8) - ----------------------------------------------------------------------------------------------------------------------- Cash Flows From Financing Activities Proceeds from issuance of Short-term borrowings 2,504.1 1,962.2 2,719.0 Long-term debt 257.2 831.3 622.0 Common stock 9.6 51.8 - Repayment of short-term borrowings (2,375.1) (2,278.3) (2,736.1) Reacquisition of long-term debt (466.3) (355.2) (343.3) Redemption of preference stock (7.0) (127.9) (104.5) Common stock dividends paid (251.1) (246.0) (239.2) Preferred and preference stock dividends paid (13.6) (21.0) (29.7) Distribution of cash to Constellation Energy (128.2) - - Other (1.8) 84.7 2.5 - ----------------------------------------------------------------------------------------------------------------------- Net cash used in financing activities (472.2) (98.4) (109.3) - ----------------------------------------------------------------------------------------------------------------------- Net (Decrease) Increase in Cash and Cash Equivalents (150.2) 11.1 95.9 Cash and Cash Equivalents at Beginning of Year 173.7 162.6 66.7 - ----------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Year $ 23.5 $ 173.7 $ 162.6 ======================================================================================================================= Other Cash Flow Information Cash paid during the year for: Interest (net of amounts capitalized) $ 200.2 $ 236.7 $ 224.2 Income taxes $ 178.8 $ 164.3 $ 171.2
Noncash Investing and Financing Activities: In 1998, Corporate Office Properties Trust (COPT) assumed approximately $62 million of Constellation Real Estate Group's (CREG) debt and issued to CREG 7.0 million common shares and 985,000 convertible preferred shares. In exchange, COPT received 14 operating properties and two properties under development from CREG. See Notes to Consolidated Financial Statements. Certain prior-year amounts have been reclassified to conform with the current year's presentation. 60 Notes to Consolidated Financial Statements Note 1. Significant Accounting Policies Nature of Our Business On April 30, 1999, Constellation Energy Group, Inc. (Constellation Energy) became the holding company for Baltimore Gas and Electric Company (BGE) and BGE's former subsidiary Constellation Enterprises, Inc. BGE's outstanding common stock automatically became shares of common stock of Constellation Energy. BGE's debt securities, obligated mandatorily redeemable trust preferred securities, and preference stock remain securities of BGE. Constellation Energy's subsidiaries primarily include BGE and a group of energy services businesses mostly focused on power marketing and merchant generation in North America. BGE is an electric and gas public utility company with a service territory that covers the City of Baltimore and all or part of ten counties in Central Maryland. We describe our operating segments in Note 2. References in this report to "we" and "our" are to Constellation Energy and its subsidiaries, collectively. Reference in this report to the "utility business" is to BGE. Consolidation Policy We use three different accounting methods to report our investments in our subsidiaries or other companies: consolidation, the equity method, and the cost method. Consolidation We use consolidation when we own a majority of the voting stock of the subsidiary. This means the accounts of our subsidiaries are combined with our accounts. We eliminate intercompany balances and transactions when we consolidate these accounts. This report is a combined report of Constellation Energy and BGE. The consolidated financial statements of Constellation Energy include the accounts of Constellation Energy, BGE and its subsidiaries, Constellation Enterprises, Inc. and its subsidiaries, and Constellation Nuclear Group, LLC and its subsidiaries. The consolidated financial statements of BGE include the accounts of BGE, ComfortLink, and BGE Capital Trust I. As Constellation Enterprises and its subsidiaries were subsidiaries of BGE prior to April 30, 1999, they are included in the consolidated financial statements of BGE through that date. The Equity Method We usually use the equity method to report investments, corporate joint ventures, partnerships, and affiliated companies (including power projects) where we hold a 20% to 50% voting interest. Under the equity method, we report: . our interest in the entity as an investment in our Consolidated Balance Sheets, and . our percentage share of the earnings from the entity in our Consolidated Statements of Income. The only time we do not use this method is if we can exercise control over the operations and policies of the company. If we have control, accounting rules require us to use consolidation. BGE reports its investment in Safe Harbor Water Power Corporation (Safe Harbor) under the equity method. Safe Harbor is a producer of hydroelectric power. BGE owns two-thirds of Safe Harbor's total capital stock, including one-half of the voting stock, and a two-thirds interest in its retained earnings. This investment is included in "Investments and Other Assets - Other" in our Consolidated Balance Sheets. The Cost Method We usually use the cost method if we hold less than a 20% voting interest in an investment. Under the cost method, we report our investment at cost in our Consolidated Balance Sheets. The only time we do not use this method is when we can exercise significant influence over the operations and policies of the company. If we have significant influence, accounting rules require us to use the equity method. Regulation of Utility Business The Maryland Public Service Commission (Maryland PSC) provides the final determination of the rates we charge our customers for our regulated businesses. Generally, we use the same accounting policies and practices used by nonregulated companies for financial reporting under generally accepted accounting principles. However, sometimes the Maryland PSC orders an accounting treatment different from that used by nonregulated companies to determine the rates we charge our customers. When this happens, we must defer certain utility expenses and income in our Consolidated Balance Sheets as regulatory assets and liabilities. We have recorded these regulatory assets and liabilities in our Consolidated Balance Sheets in accordance with Statement of Financial Accounting Standards (SFAS) No. 71, Accounting for the Effects of Certain Types of Regulation. We summarize and discuss our regulatory assets and liabilities further in Note 5. In 1997, the Financial Accounting Standards Board (FASB) through its Emerging Issues Task Force (EITF) issued EITF 97-4, Deregulation of the Pricing of Electricity -Issues Related to the Application of FASB Statements No. 71 and 101. The EITF concluded that a company should cease to apply SFAS No. 71 when either legislation is passed or a regulatory body issues an order that contains sufficient detail 61 to determine how the transition plan will affect the deregulated portion of the business. Additionally, a company would continue to recognize regulatory assets and liabilities in the Consolidated Balance Sheets to the extent that the transition plan provides for their recovery. On November 10, 1999, the Maryland PSC issued a Restructuring Order that we believe provided sufficient details of the transition plan to competition for BGE's electric generation business to require BGE to discontinue the application of SFAS No. 71 for that portion of its business. Accordingly, in the fourth quarter of 1999, we adopted the provisions of SFAS No. 101, Regulated Enterprises - Accounting for the Discontinuation of FASB Statement No. 71 and EITF No. 97-4 for BGE's electric generation business. BGE's transmission and distribution business continues to meet the requirements of SFAS No. 71 as that business remains regulated. We discuss this further in Note 4. Utility Revenues We record utility revenues in our Consolidated Statements of Income when we provide service to customers. Fuel and Purchased Energy Costs We incur costs for: . the fuel we use to generate electricity, . purchases of electricity from others, and . natural gas that we resell. These costs are shown in our Consolidated Statements of Income as "Electric fuel and purchased energy" and "Gas purchased for resale." We discuss each of these separately below. Fuel Used to Generate Electricity and Purchases of Electricity From Others Until July 1, 2000, we will continue to recover our costs of electric fuel under the electric fuel rate clause set by the Maryland PSC. Under the electric fuel rate clause, we charge our electric customers for: . the fuel we use to generate electricity (nuclear fuel, coal, gas, or oil), and . the net cost of purchases and sales of electricity. We charge the actual costs of these items to customers with no profit to us. To do this, we must keep track of what we spend and what we collect from customers under the fuel rate in a given period. Usually these two amounts are not the same because there is a difference between the time we spend the money and the time we collect it from our customers. Under the electric fuel rate clause, we currently defer (include as an asset or liability in our Consolidated Balance Sheets and exclude from our Consolidated Statements of Income) the difference between our actual costs of fuel and energy and what we collect from customers under the fuel rate in a given period. We either bill or refund our customers that difference in the future. We discuss this and the impact of the Restructuring Order on BGE's electric fuel rate clause further in Note 5. We calculate the electric fuel rate using three factors: . the mix of generating plants we used over the last 24 months, . the latest three-month average fuel cost for each generating unit, and . the net cost of purchases and sales of electricity over the last 24 months. Historically, we were able to change the fuel rate only if the calculated rate was more than 5% above or below the rate in effect. The fuel rate was affected most by the amount of electricity generated at our Calvert Cliffs Nuclear Power Plant (Calvert Cliffs) because the cost of nuclear fuel is cheaper than coal, gas, or oil. As a result of the Restructuring Order, the fuel rate is frozen at its current level until July 1, 2000, at which time it will be discontinued. We will continue to defer the difference between our actual costs of fuel and energy and what we collect from customers under the fuel rate through June 30, 2000. After that date, earnings will be affected by the changes in the cost of fuel and energy. In addition, any accumulated difference between our actual costs of fuel and energy and the amounts collected from customers under the electric fuel rate clause will be collected from our customers over a period to be determined by the Maryland PSC. Extended outages at Calvert Cliffs increase fuel costs. Any increase in fuel costs, including extended outages at Calvert Cliffs through June 30, 2000, may result in fuel rate proceedings before the Maryland PSC. In these proceedings, the Maryland PSC would consider whether any portion of the extra fuel costs should be paid by BGE instead of passed on to customers. We also report two other items as "Electric fuel and purchased energy" in our Consolidated Statements of Income: . amortization of nuclear fuel (described under "Utility Plant" later in this note). We amortize nuclear fuel based on the energy produced over the life of the fuel. We pay quarterly fees to the Department of Energy for the future disposal of spent nuclear fuel, and accrue these fees based on the kilowatt- hours of electricity sold. We bill our customers for nuclear fuel as described earlier in this note, and . amortization of deferred costs of decommissioning and decontaminating the Department of Energy's uranium enrichment facilities. We discuss these costs further in Note 5. 62 Natural Gas We charge our gas customers for the natural gas they purchase from us using "gas cost adjustment clauses" set by the Maryland PSC. These clauses operate similarly to the electric fuel rate clause described earlier in this Note. However, the Maryland PSC approved a modification of the gas cost adjustment clauses to provide a market based rates incentive mechanism. Under market based rates our actual cost of gas is compared to a market index (a measure of the market price of gas in a given period). The difference between our actual cost and the market index is shared equally between shareholders and customers. Risk Management We engage in risk management activities in our gas business and in our diversified businesses. We separately describe these activities for each business below. Gas Business We use basis swaps in the winter months (November through March) to hedge our price risk associated with natural gas purchases under our market based rates incentive mechanism. We also use fixed-to-floating and floating-to-fixed swaps to hedge our price risk associated with our off-system gas sales. The fixed portion represents a specific dollar amount that we will pay or receive and the floating portion represents a fluctuating amount based on a published index that we will receive or pay. Our gas business internal guidelines do not permit the use of swap agreements for any purpose other than to hedge price risk. BGE's off-system gas activities represent trading activities under EITF 98-10, Accounting for Contracts Involved in Energy Trading and Risk Management Activities. Accordingly, we use mark-to-market accounting to record these transactions. We defer, as unrealized gains or losses, the changes in fair value of the swap agreements under the market based rates incentive mechanism and the customers' portion of off-system gas sales in our Consolidated Balance Sheets. When amounts are paid under the agreements, we report the payments as gas costs in our Consolidated Statements of Income. We report the changes in fair value for the shareholders' portion of off-system gas sales in earnings as a component of gas costs. Diversified Businesses Our subsidiary, Constellation Power Source, engages in power marketing activities, which include trading electricity, other energy commodities, and related derivatives (such as futures, forwards, options, and swaps). Constellation Power Source uses the mark-to-market method of accounting for its trading activities. Under the mark-to-market method of accounting, we report: . commodity positions and derivatives at fair value as "Assets from energy trading activities" or "Liabilities from energy trading activities" in our Consolidated Balance Sheets, and . changes in fair value as components of "Diversified business revenues" in our Consolidated Statements of Income. Taxes We summarize our income taxes in our Consolidated Statements of Income Taxes. As you read this section, it may be helpful to refer to those statements. Income Tax Expense We have two categories of income taxes in our Consolidated Statements of Income--current and deferred. We describe each of these below. Our current income tax expense consists solely of regular tax less applicable tax credits. Our deferred income tax expense is equal to the changes in the net deferred income tax liability, excluding amounts charged or credited to common shareholders' equity. Our deferred income tax expense is increased or reduced for changes to the "Income taxes recoverable through future rates (net)" regulatory asset (described later in this Note) during the year. Investment Tax Credits We have deferred the investment tax credit associated with our regulated utility business in our Consolidated Balance Sheets. The investment tax credit is amortized evenly to income over the life of each property. We reduce income tax expense in our Consolidated Statements of Income for the investment tax credit and other tax credits associated with our nonregulated diversified businesses, other than leveraged leases. 63 Deferred Income Tax Assets and Liabilities We must report some of our revenues and expenses differently for our financial statements than we do for income tax purposes. The tax effects of the differences in these items are reported as deferred income tax assets or liabilities in our Consolidated Balance Sheets. We measure the assets and liabilities using income tax rates that are currently in effect. A portion of our total deferred income tax liability relates to our utility business, but has not been reflected in the rates we charge our customers. We refer to this portion of the liability as "Income taxes recoverable through future rates (net)." We have recorded that portion of the net liability as a regulatory asset in our Consolidated Balance Sheets. We discuss this further in Note 5. State and Local Taxes Through December 31, 1999, we paid Maryland public service company franchise tax instead of state income tax on our utility revenue from sales in Maryland. We include the franchise tax in "Taxes other than income taxes" in our Consolidated Statements of Income. As discussed in Note 4, the tax legislation made comprehensive changes to the state and local taxation of electric and gas utilities. Inventory We report the majority of our fuel stocks and materials and supplies at average cost. Real Estate Projects and Investments In Note 3, we summarize the real estate projects and investments that are in our Consolidated Balance Sheets. The projects and investments consist of: . land under development in the Baltimore-Washington corridor, . a mixed-use planned-unit development, and . an equity interest in Corporate Office Properties Trust, a real estate investment trust. The costs incurred to acquire and develop properties are included as part of the cost of the properties. Financial Investments and Trading Securities In Note 3, we summarize the financial investments that are in our Consolidated Balance Sheets. SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, applies particular requirements to some of our investments in debt and equity securities. We report those investments at fair value, and we use specific identification to determine their cost for computing realized gains or losses. We classify these investments as either trading securities or available-for-sale securities, which we describe separately below. We report investments that are not covered by SFAS No. 115 at their cost. Trading Securities Our diversified businesses classify some of their investments in marketable equity securities and financial limited partnerships as trading securities. We include any unrealized gains or losses on these securities in "Diversified business revenues" in our Consolidated Statements of Income. Available-for-Sale Securities We classify our investments in the nuclear decommissioning trust fund as available-for-sale securities. We include any unrealized gains or losses on the trust assets as a change in the decommissioning reserve. We describe the nuclear decommissioning trust and the reserve under the heading "Decommissioning Costs" later in this note. In addition, our diversified businesses classify some of their investments in marketable equity securities as available-for-sale securities. We include any unrealized gains or losses on these securities in "Accumulated other comprehensive (loss) income" in our Consolidated Statements of Common Shareholders' Equity and in the Consolidated Statements of Capitalization. We also include our diversified businesses' portion of unrealized gains or losses on securities of equity-method (described earlier in this note) investees in our Consolidated Statements of Common Shareholders' Equity. Evaluation of Assets for Impairment SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, applies particular requirements to some of our assets that have long lives (some examples are utility property and equipment and real estate). We determine if those assets are impaired by comparing their undiscounted expected future cash flows to their carrying amount in our accounting records. We recognize an impairment loss if the undiscounted expected future cash flows are less than the carrying amount of the asset. See Note 4 for further discussion. 64 Utility Plant, Depreciation, Amortization, and Decommissioning Utility Plant Utility plant is the term we use to describe our utility business property and equipment that is in use, being held for future use, or under construction. We summarize utility plant in our Consolidated Balance Sheets. We report our utility plant at its original cost, unless impaired under the provisions of SFAS No. 121. Our original cost includes: . material and labor, . contractor costs, . construction overhead costs (where applicable), and . an allowance for funds used during construction (described later in this note). We charge retired or otherwise-disposed-of utility plant to accumulated depreciation. We own an undivided interest in the Keystone and Conemaugh electric generating plants in Western Pennsylvania, as well as in the transmission line that transports the plants' output to the joint owners' service territories. Our ownership interests in these plants are 20.99% in Keystone and 10.56% in Conemaugh. These ownership interests represented a net investment of $156 million at December 31, 1999 and $152 million at December 31, 1998. We report these properties in the same accounts we use for our other utility plant (described above). Depreciation Expense Generally, we compute depreciation by applying composite, straight-line rates (approved by the Maryland PSC) to the average investment in classes of depreciable property. We depreciate vehicles based on their estimated useful lives. Amortization Expense Amortization is an accounting process of reducing an amount in our Consolidated Balance Sheets evenly over a period of time. When we reduce amounts in our Consolidated Balance Sheets, we increase amortization expense in our Consolidated Statements of Income. An amount is considered fully amortized when it has been reduced to zero. Decommissioning Costs We must accumulate a reserve for the costs that we expect to incur in the future to decommission the radioactive portion of Calvert Cliffs. We do this based on a sinking fund methodology. The Maryland PSC authorized us to record decommissioning expense based on a facility-specific cost estimate so we can accumulate a decommissioning reserve of $521 million in 1993 dollars by the end of Calvert Cliffs' service life in 2016, adjusted to reflect expected inflation. We have reported the decommissioning reserve in "Accumulated depreciation" in our Consolidated Balance Sheets. The total reserve was $287.5 million at December 31, 1999 and $244.0 million at December 31, 1998. To fund the costs we expect to incur to decommission the plant, we established an external decommissioning trust in accordance with Nuclear Regulatory Commission (NRC) regulations. We report the assets in the trust in "Nuclear decommissioning trust fund" in our Consolidated Balance Sheets. The NRC requires utilities to provide financial assurance that they will accumulate sufficient funds to pay for the cost of nuclear decommissioning based upon either a generic NRC formula or a facility-specific decommissioning cost estimate. We use the facility-specific cost estimate for funding these costs and providing the required financial assurance. Allowance for Funds Used During Construction and Capitalized Interest Allowance for Funds Used During Construction (AFC) We finance utility construction projects with borrowed funds and equity funds. We are allowed by the Maryland PSC to record the costs of these funds as part of the cost of construction projects in our Consolidated Balance Sheets. We do this through the AFC, which we calculate using a rate authorized by the Maryland PSC. We bill our customers for the AFC plus a return after the utility plant is placed in service. The AFC rates are 9.04% for gas plant, 9.35% for common plant, and 9.40% for electric plant. We compound AFC annually. Capitalized Interest With the issuance of the Restructuring Order, we ceased accruing AFC for electric generation-related construction projects and began using SFAS No. 34, Capitalizing Interest Costs, to calculate the cost during construction of debt funds used to finance our electric generation-related construction projects. Our diversified businesses capitalize interest costs incurred to finance real estate developed for internal use and certain power projects. 65 Long-Term Debt We defer (include as an asset or liability in our Consolidated Balance Sheets and exclude from our Consolidated Statements of Income) all costs related to the issuance of long-term debt. These costs include underwriters' commissions, discounts or premiums, and other costs such as legal, accounting, and regulatory fees, and printing costs. We amortize these costs over the life of the debt. When we incur gains or losses on debt that we retire prior to maturity in our regulated utility business, we amortize those gains or losses over the remaining original life of the debt. Cash Flows For the purpose of reporting our cash flows, we define cash equivalents as highly liquid investments that mature in three months or less. Use of Accounting Estimates Management makes estimates and assumptions when preparing financial statements under generally accepted accounting principles. These estimates and assumptions affect various matters, including: . our reported amounts of assets and liabilities in our Consolidated Balance Sheets at the dates of the financial statements, . our disclosure of contingent assets and liabilities at the dates of the financial statements, and . our reported amounts of revenues and expenses in our Consolidated Statements of Income during the reporting periods. These estimates involve judgments with respect to, among other things, future economic factors that are difficult to predict and are beyond management's control. As a result, actual amounts could differ from these estimates. Reclassifications We have reclassified certain prior-year amounts for comparative purposes. These reclassifications did not affect consolidated net income for the years presented. Accounting Standards Issued In July 1999, the FASB issued SFAS No. 137 that delays the effective date for SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, by one year. Therefore, we must adopt the provisions of SFAS No. 133 in our financial statements for the quarter ended March 31, 2001. We have not determined the effects of SFAS No. 133 on our financial results. - -------------------------------------------------------------------------------- Note 2. Information by Operating Segment We have three reportable operating segments--Electric, Gas, and Energy Services: . Our Electric business generates, purchases, and sells electricity, . Our Gas business purchases, transports, and sells natural gas, and . Our Energy Services businesses consist of certain diversified businesses that: - develop, own, and operate power projects, - provide power marketing and risk management services, - provide nuclear consulting services, - sell natural gas through mass marketing efforts, - sell and service electric and gas appliances, heating and air conditioning systems, and engage in home improvements, and - provide cooling services to commercial customers in Baltimore. Our remaining diversified businesses: . engage in financial investments, and . develop, own, and manage real estate and senior-living facilities. These reportable segments are strategic businesses based principally upon regulations, products, and services that require different technology and marketing strategies. The segments have the same accounting policies as those described in the summary of significant accounting policies in Note 1. The Company evaluates the performance of these segments based on net income. We account for intersegment revenues using market prices. A summary of information by operating segment is shown later in this note. We are realigning our organization combining all of our domestic merchant energy businesses. We have not determined the impact of this reorganization on our operating segments, but such changes will impact our operating segments in the future. 66
Energy Other Unallocated Electric Gas Services Diversified Corporate Business Business Businesses Businesses Items (a) Eliminations Consolidated - ----------------------------------------------------------------------------------------------------------------------------------- (In millions) 1999 Unaffiliated revenues $2,258.8 $476.5 $ 937.0 $113.9 $ - $ - $3,786.2 Intersegment revenues 1.2 11.6 30.4 (0.4) - (42.8) - - ----------------------------------------------------------------------------------------------------------------------------------- Total revenues 2,260.0 488.1 967.4 113.5 - (42.8) 3,786.2 Depreciation and amortization 376.4 44.9 23.1 5.2 0.2 - 449.8 Equity in income of equity- method investees (b) 5.1 - - - - - 5.1 Net interest expense 162.4 24.4 24.6 31.1 0.4 (1.4) 241.5 Income tax expense (benefit) 149.2 18.1 34.8 (12.1) (0.9) (2.7) 186.4 Extraordinary loss 66.3 - - - - - 66.3 Net income (loss) (c) 198.8 33.0 50.6 (19.3) (1.7) (1.3) 260.1 Segment assets 6,312.6 915.3 1,681.2 743.2 129.2 (97.7) 9,683.8 Utility construction expenditures 322.1 63.8 - - - - 385.9 1998 Unaffiliated revenues $2,219.2 $449.4 $ 524.1 $165.4 $ - $ - $3,358.1 Intersegment revenues 1.6 1.7 12.0 0.5 - (15.8) - - ----------------------------------------------------------------------------------------------------------------------------------- Total revenues 2,220.8 451.1 536.1 165.9 - (15.8) 3,358.1 Depreciation and amortization 313.0 45.4 9.2 9.3 0.2 - 377.1 Equity in income of equity- method investees (b) 5.0 - - - - - 5.0 Net interest expense 164.9 23.6 16.0 38.6 (1.9) (0.3) 240.9 Income tax expense (benefit) 146.6 13.4 34.1 (15.8) (0.1) - 178.2 Net income (loss) (d) 259.6 26.1 43.4 (24.2) (0.1) 1.1 305.9 Segment assets 6,342.8 934.6 1,315.0 811.6 (14.0) (115.0) 9,275.0 Utility construction expenditures 279.0 60.4 - - - - 339.4 1997 Unaffiliated revenues $2,191.7 $521.6 $ 399.4 $194.9 $ - $ - $3,307.6 Intersegment revenues 0.3 - 0.6 9.7 - (10.6) - - ----------------------------------------------------------------------------------------------------------------------------------- Total revenues 2,192.0 521.6 400.0 204.6 - (10.6) 3,307.6 Depreciation and amortization 286.5 39.3 6.9 9.9 0.3 - 342.9 Equity in income of equity- method investees (b) 5.0 - - - - - 5.0 Net interest expense 160.7 20.3 10.1 32.5 6.4 - 230.0 Income tax expense (benefit) 135.7 13.9 23.8 (13.5) (1.9) - 158.0 Net income (loss) (e) 224.0 25.6 27.5 (21.1) (3.6) 1.7 254.1 Segment assets 6,404.4 907.7 700.9 885.4 10.7 (9.1) 8,900.0 Utility construction expenditures 278.7 94.5 - - - - 373.2
(a) We do not allocate certain items presented in the table for Constellation Energy Group and a holding company for our diversified businesses. (b) Our Energy Services and our Other Diversified businesses record their equity in the income of equity method investees in their unaffiliated revenues. (c) Our Electric business recorded costs of $4.9 million after-tax related to Hurricane Floyd as discussed in the "Electric Operations and Maintenance Expenses" section of Management's Discussion and Analysis. Our Other Diversified businesses recorded a $16.0 million write-down of its investment in Capital Re stock to reflect the market value of this investment as discussed in Note 3 and a $5.8 million write-down of certain senior-living facilities as discussed in the "Other Diversified Businesses" section of Management's Discussion and Analysis. In addition, our Energy Services businesses recorded $18.7 million in write-downs of certain power projects as discussed in Note 3. (d) Our Energy Services businesses recorded $10.4 million for its share of earnings in a partnership as discussed in Note 3 and a $5.5 million write-off of an energy services investment as discussed in the "Other Energy Services" section of Management's Discussion and Analysis. In addition, our Other Diversified businesses recorded a $15.4 million write-down of a real estate project as discussed in Note 3. (e) Our Electric business recorded a $37.5 million write-off related to the terminated merger with Potomac Electric Power Company as discussed in the "Other Income and Expenses" section of Management's Discussion and Analysis. In addition, our Other Diversified businesses recorded a $46.0 million write-down of two real estate projects as discussed in Note 3. 67 Note 3. Investments Real Estate Projects and Investments Real estate projects and investments held by Constellation Real Estate Group (CREG), consist of the following: At December 31, 1999 1998 - -------------------------------------------------------------------------------- (In millions) Properties under development $197.8 $210.6 Rental and operating properties (net of accumulated depreciation) 9.2 38.9 Equity interest in real estate investment trust 103.1 104.0 Other real estate ventures - 0.4 - -------------------------------------------------------------------------------- Total real estate projects and investments $310.1 $353.9 ================================================================================ In 1999, CREG sold Church Street Station --an entertainment, dining, and retail complex in Orlando, Florida --for $11.5 million, the approximate book value of the complex. In 1998, CREG recorded a $15.4 million after-tax write-down of the investment in Church Street Station that occurred because the fair value of the project declined based upon competitive bids. In 1998, CREG entered into an agreement with Corporate Office Properties Trust (COPT), a real estate investment trust based in Philadelphia, under which COPT assumed approximately $62 million of CREG's outstanding debt, paid CREG approximately $22.8 million in cash, and issued to CREG approximately 7.0 million common shares representing a 41.9% equity interest in COPT and 985,000 convertible preferred shares. Each convertible preferred share yields 5.5% per year, and is convertible after two years from the date of the agreement into 1.8748 common shares. In exchange, COPT received 14 operating properties and two properties under development from CREG as well as certain other assets, options, and first refusal rights. These options and first refusal rights are related to approximately 91 acres of identified properties which are adjacent to operating properties acquired by COPT. At December 31, 1999, 48 acres remain under these options and first refusal rights and have terms that range from 1 to 4 years. In 1997, CREG recorded the following write-downs of real estate projects: . a $14.1 million after-tax write-down of the investment in Church Street Station that occurred because CREG decided to sell rather than keep the project, and . a $31.9 million after-tax write-down of the investment in Piney Orchard--a mixed-use, planned-unit development-- that occurred because the expected future cash flow from the project was less than CREG's investment in the project. Power Projects Power projects held by our diversified businesses consist of the following: At December 31, 1999 1998 - -------------------------------------------------------------------------------- (In millions) Domestic East $ 55.7 $ 46.0 West 475.6 427.4 International South America 12.3 21.6 Central America 241.8 248.1 - -------------------------------------------------------------------------------- Total power projects $785.4 $743.1 ================================================================================ Our Domestic-West power projects include investments of $301.8 million in 1999 and $310.6 in 1998 that sell electricity in California under power purchase agreements called "Interim Standard Offer No. 4" agreements. We discuss these projects further in Note 10. In 1999, our power projects business recorded a $14.2 million after-tax write-off of two geothermal power projects. These write-offs occurred because the expected future cash flows from the projects are less than the investment in the projects. For the first project, this resulted from the inability to restructure certain project agreements. For the second project, we experienced a declining water temperature of the geothermal resource used by one of the plants for production. In 1999, we recorded a $4.5 million after-tax write-down to reflect the fair value of our investment in a generating company in Bolivia as a result of our international exit strategy. In 1998, our power projects business recorded $10.4 million after-tax gain for its share of earnings in a partnership. The partnership recognized a gain on the sale of its ownership interest in a power sales contract. 68 Financial Investments Financial investments held by Constellation Investments, Inc. consist of the following: At December 31, 1999 1998 - -------------------------------------------------------------------------------- (In millions) Insurance company $ - $102.5 Marketable equity securities 84.2 25.3 Financial limited partnerships 35.8 41.9 Leveraged leases 25.4 28.3 - -------------------------------------------------------------------------------- Total financial investments $145.4 $198.0 ================================================================================ In 1999, our financial investments business announced that it would exchange its shares of common stock in Capital Re, an insurance company, for common stock of ACE Limited (ACE), another insurance company, as part of a business combination whereby ACE would acquire all of the outstanding capital stock of Capital Re. Through September 30, 1999, our financial investments business wrote-down its $94.2 million investment in Capital Re stock by $20.9 million after-tax to reflect the market value of this investment. The agreement between ACE and Capital Re was subsequently revised on a more favorable basis for Capital Re to include both cash and ACE stock. In December 1999, the transaction was finalized and our financial investments business recorded a $4.9 million after-tax gain on this investment to reflect the closing price of the business combination. As a result of this business combination, this investment no longer qualifies as an equity-method investment. Accordingly, in 1999, we have included this investment in the marketable equity securities amount above. Investments Classified as Available-for-Sale We classify our investments in the nuclear decommissioning trust fund as available-for-sale. In addition, we classify some of our diversified businesses' marketable equity securities (shown above) as available-for-sale. This means we do not expect to hold them to maturity and we do not consider them trading securities. We show the fair values, gross unrealized gains and losses, and amortized cost bases for all of our available-for-sale securities, exclusive of $6.2 million in 1998 of unrealized net gains on securities held by Capital Re as an equity method investee, in the following tables. Amortized Unrealized Unrealized Fair At December 31, 1999 Cost Basis Gains Losses Value - -------------------------------------------------------------------------------- (In millions) Marketable equity securities $167.1 $42.8 $(2.1) $207.8 Corporate debt and U.S. Government agency 14.4 - - 14.4 State municipal bonds 74.2 - (0.8) 73.4 - -------------------------------------------------------------------------------- Totals $255.7 $42.8 $(2.9) $295.6 ================================================================================ Amortized Unrealized Unrealized Fair At December 31, 1998 Cost Basis Gains Losses Value - -------------------------------------------------------------------------------- (In millions) Marketable equity securities $ 82.9 $24.2 $(0.4) $106.7 Corporate debt and U.S. Government agency 12.7 0.4 - 13.1 State municipal bonds 64.8 2.7 - 67.5 - -------------------------------------------------------------------------------- Totals $160.4 $27.3 $(0.4) $187.3 ================================================================================ The above tables include $40.5 million in 1999 and $23.9 million in 1998 of unrealized net gains associated with the nuclear decommissioning trust fund which are reflected as a change in the nuclear decommissioning trust fund on the Consolidated Balance Sheets. Gross and net realized gains and losses on available-for-sale securities were as follows: Year Ended December 31, 1999 1998 1997 - -------------------------------------------------------------------------------- (In millions) Gross realized gains $11.7 $ 4.2 $ 9.3 Gross realized losses (38.8) (0.7) (0.6) - -------------------------------------------------------------------------------- Net realized (losses) gains $(27.1) $ 3.5 $ 8.7 - -------------------------------------------------------------------------------- The Corporate debt securities, U.S. Government agency obligations, and state municipal bonds mature on the following schedule: At December 31, 1999 Amount - -------------------------------------------------------------------------------- (In millions) Less than 1 year $ 1.0 1-5 years 46.4 5-10 years 21.8 More than 10 years 18.6 - -------------------------------------------------------------------------------- Total maturities of debt securities $ 87.8 - -------------------------------------------------------------------------------- 69 Note 4. Rate Matters and Accounting Impacts of Deregulation On April 8, 1999, Maryland enacted the Electric Customer Choice and Competition Act of 1999 (the "Act") and accompanying tax legislation that will significantly restructure Maryland's electric utility industry and modify the industry's tax structure. In the Restructuring Order discussed below, the Maryland PSC addressed the major provisions of the Act. The tax legislation made comprehensive changes to the state and local taxation of electric and gas utilities. Effective January 1, 2000, the Maryland public service franchise tax will be altered to generally include a tax equal to .062 cents on each kilowatt-hour of electricity and .402 cents on each therm of natural gas delivered for final consumption in Maryland. The Maryland 2% franchise tax on electric and natural gas utilities will continue to apply to transmission and distribution revenue. Additionally, all electric and natural gas utility results will become subject to the Maryland corporate income tax. Beginning July 1, 2000, the tax legislation also provides for a two-year phase-in of a 50% reduction in the local personal property taxes on machinery and equipment used to generate electricity for resale and a 60% corporate income tax credit for real property taxes paid on those facilities. On November 10, 1999, the Maryland PSC issued a Restructuring Order that resolves the major issues surrounding electric restructuring, accelerates the timetable for customer choice, and addresses the major provisions of the Act. The Restructuring Order also resolves the electric restructuring proceeding (transition costs, customer price protections, and unbundled rates for electric services) and a petition filed in September 1998 by the Office of People's Counsel (OPC) to lower our electric base rates. The major provisions of the Restructuring Order are: . All customers, except a few commercial and industrial companies that have signed contracts with BGE, will be able to choose their electric energy supplier beginning July 1, 2000. BGE will provide a standard offer service for customers that do not select an alternative supplier. In either case, BGE will continue to deliver electricity to all customers in areas traditionally served by BGE. . BGE's current electric base rates are frozen at their current levels until July 1, 2000. . BGE will reduce residential base rates by approximately 6.5% on average, about $54 million a year, beginning July 1, 2000. These rates will not change before July 2006. . Commercial and industrial customers will have up to four service options that will fix electric energy rates and transition charges for a period that generally ranges from four to six years. . Electric delivery service rates will be frozen for a four year period for commercial and industrial customers. The generation and transmission components of rates will be frozen for different time periods depending on the service options selected by those customers. . BGE will be allowed to recover $528 million after-tax of its potentially stranded investments and utility restructuring costs through a competitive transition charge on customers' bills. Residential customers will pay this charge for six years. Commercial and industrial customers will pay in a lump sum or over the four to six-year period, depending on the service option selected by each customer. . Generation-related regulatory assets and nuclear decommissioning costs will be included in delivery service rates effective July 1, 2000 and will be recovered on a basis approximating their existing amortization schedules. . Starting July 1, 2000, BGE will unbundle rates to show separate components for delivery service, transition charges, standard offer services (generation), transmission, universal service, and taxes. . On July 1, 2000, BGE will transfer, at book value, its ten Maryland-based fossil and nuclear power plants and its partial ownership interest in two coal plants and a hydroelectric plant in Pennsylvania to nonregulated subsidiaries of Constellation Energy. . BGE will reduce its generation assets, as described later in this section, by $150 million pre-tax during the period July 1, 1999 - June 30, 2000 to mitigate a portion of its potentially stranded investments. . Universal service will be provided for low-income customers without increasing their bills. BGE will provide its share of a statewide fund totaling $34 million annually. 70 As discussed in Note 1, EITF 97-4 requires that a company should cease applying SFAS No. 71 when either legislation is passed or a regulatory body issues an order that contains sufficient detail to determine how the transition plan will affect the deregulated portion of the business. Additionally, a company would continue to recognize regulatory assets and liabilities in the Consolidated Balance Sheets to the extent that the transition plan provides for their recovery. We believe that the Restructuring Order provided sufficient details of the transition plan to competition for BGE's electric generation business to require BGE to discontinue the application of SFAS No. 71 for that portion of its business. Accordingly, in the fourth quarter of 1999, we adopted the provisions of SFAS No. 101 and EITF 97-4 for BGE's electric generation business. SFAS No. 101 requires the elimination of the effects of rate regulation that have been recognized as regulatory assets and liabilities pursuant to SFAS No. 71. However, EITF 97-4 requires that regulatory assets and liabilities that will be recovered in the regulated portion of the business continue to be classified as regulatory assets and liabilities. The Restructuring Order provides for the creation of a single, new generation-related regulatory asset to be recovered through BGE's regulated transmission and distribution business. We discuss this further in Note 5. Pursuant to SFAS No. 101, the book value of property, plant, and equipment may not be adjusted unless those assets are impaired under the provisions of SFAS No. 121. The process of evaluating and measuring impairment under the provisions of SFAS No. 121 involves two steps. First, we must compare the net book value of each generating plant to the estimated undiscounted future net operating cash flows from that plant. An electric generating plant is considered impaired when its undiscounted future net operating cash flows are less than its net book value. Second, we compute the fair value of each plant that is determined to be impaired based on the present value of that plant's estimated future net operating cash flows discounted using an interest rate that considers the risk of operating that facility in a competitive environment. To the extent that the net book value of each impaired electric generation plant exceeds its fair value, we must record a write-down. Under the Restructuring Order, BGE will recover $528 million after-tax of its potentially stranded investments and utility restructuring costs through the competitive transition charge component of its customer rates beginning July 1, 2000. This recovery mostly relates to the stranded costs associated with Calvert Cliffs, whose book value is substantially higher than its estimated fair value. However, Calvert Cliffs is not considered impaired under the provisions of SFAS No. 121 since its estimated future undiscounted cash flows exceed its book value. Accordingly, BGE did not record any impairment write-down related to Calvert Cliffs. However, we recognized after-tax impairment losses totaling $115.8 million associated with certain of our fossil plants under the provisions of SFAS No. 121. BGE has contracts to purchase electric capacity and energy that are expected to be uneconomic upon the deregulation of electric generation. Therefore, we recorded a $34.2 million after-tax charge based on the net present value of the excess of estimated contract costs over the market-based revenues to recover these costs over the remaining terms of the contracts. In addition, BGE has deferred certain energy conservation expenditures that will not be recovered through its transmission and distribution business under the Restructuring Order. Accordingly, we recorded a $10.3 million after-tax charge to eliminate the regulatory asset previously established for these deferred expenditures. At December 31, 1999, the total charge for BGE's electric generating plants that are impaired, losses on uneconomic purchased capacity and energy contracts, and deferred energy conservation expenditures was approximately $160.3 million after tax. BGE recorded approximately $94.0 million of the $160.3 million on its balance sheet. This consisted of a $150.0 million regulatory asset of its regulated transmission and distribution business, net of approximately $56.0 million of associated deferred income taxes. The regulatory asset will be amortized as it is recovered from ratepayers through June 30, 2000. This will accomplish the $150 million reduction of its generation plants required by the Restructuring Order. We recorded an after-tax, extraordinary charge against earnings for approximately $66.3 million related to the remaining portion of the $160.3 million described above that will not be recovered under the Restructuring Order. 71 Note 5. Regulatory Assets (net) As discussed in Note 1, the Maryland PSC provides the final determination of the rates we charge our customers for our regulated businesses. Generally, we use the same accounting policies and practices used by nonregulated companies for financial reporting under generally accepted accounting principles. However, sometimes the Maryland PSC orders an accounting treatment different from that used by nonregulated companies to determine the rates we charge our customers. When this happens, we must defer certain utility expenses and income in our Consolidated Balance Sheets as regulatory assets and liabilities. We then record them in our Consolidated Statements of Income (using amortization) when we include them in the rates we charge our customers. We summarize regulatory assets and liabilities in the following table, and we discuss each of them separately below. At December 31, 1999 1998 - -------------------------------------------------------------------------------- (In millions) Generation plant reduction recoverable in current rates $ 75.0 $ - Electric generation-related regulatory asset 286.6 - Income taxes recoverable through future rates (net) 110.4 252.6 Deferred postretirement and postemployment benefit costs 41.9 90.0 Deferred nuclear expenditures - 73.3 Deferred conservation expenditures 12.9 53.4 Deferred costs of decommissioning federal uranium enrichment facilities - 38.5 Deferred environmental costs 31.3 33.4 Deferred fuel costs (net) 73.8 12.7 Other (net) 5.5 11.8 - -------------------------------------------------------------------------------- Total regulatory assets (net) $637.4 $565.7 ================================================================================ Generation Plant Reduction Recoverable in Current Rates As a condition of the Maryland PSC's consolidation of the September 3, 1998 Office of People's Counsel petition to lower electric base rates with BGE's electric restructuring transition proposal, we agreed to make our rates subject to refund effective July 1, 1999. Under the Restructuring Order, BGE's rates are frozen through June 30, 2000. However, BGE was required to record a reduction to its generation plant of $150 million which it will recover through its current rates between July 1, 1999 and June 30, 2000. BGE recorded a $150 million regulatory asset for the required generation plant reduction that will be amortized as it is recovered from ratepayers through June 30, 2000. Electric Generation-Related Regulatory Asset With the issuance of the Restructuring Order, BGE no longer met the requirements for the application of SFAS No. 71 for the electric generation portion of its business. In accordance with SFAS No. 101 and EITF 97-4, all individual generation-related regulatory assets and liabilities must be eliminated from our balance sheet unless these regulatory assets and liabilities will be recovered in the regulated portion of the business. Pursuant to the Restructuring Order, BGE wrote-off all of its individual, generation-related regulatory assets and liabilities. A single, new generation-related regulatory asset was established for amounts to be collected through BGE's regulated transmission and distribution business. The new regulatory asset will be amortized on a basis that approximates the pre-existing individual regulatory asset amortization schedules. Income Taxes Recoverable Through Future Rates (net) As described in Note 1, income taxes recoverable through future rates is the portion of our net deferred income tax liability that is applicable to our utility business, but has not been reflected in the rates we charge our customers. These income taxes represent the tax effect of temporary differences in depreciation and the allowance for equity funds used during construction, offset by differences in deferred tax rates and deferred taxes on deferred investment tax credits. We amortize these amounts as the temporary differences reverse. In 1999, the electric generation-related portion of this regulatory asset is included in the electric generation-related regulatory asset discussed earlier in this note. 72 Deferred Postretirement and Postemployment Benefit Costs Deferred postretirement and postemployment benefit costs are the costs we recorded under SFAS No. 106 (for postretirement benefits) and No. 112 (for postemployment benefits) in excess of the costs we included in the rates we charge our customers. We began amortizing these costs over a 15-year period in 1998. We discuss these costs further in Note 6. In 1999, we reclassified the electric generation-related portion of this regulatory asset to the electric generation-related regulatory asset discussed earlier in this note. Deferred Nuclear Expenditures Deferred nuclear expenditures are the net unamortized balance of certain operations and maintenance costs at Calvert Cliffs. These expenditures consist of: . costs incurred from 1979 through 1982 for inspecting and repairing seismic pipe supports, . expenditures incurred from 1989 through 1994 associated with nonrecurring phases of certain nuclear operations projects, and . expenditures incurred during 1990 for investigating leaks in the pressurizer heater sleeves. In 1999, these expenditures were reclassified to the electric generation-related regulatory asset discussed earlier in this note. Deferred Conservation Expenditures Deferred conservation expenditures include two components: . operations costs (labor, materials, and indirect costs) associated with conservation programs approved by the Maryland PSC, which we are amortizing over periods of four to five years in accordance with the Maryland PSC's orders, and . revenues we collected from customers in 1996 in excess of our profit limit under the conservation surcharge. In 1999, we wrote-off a portion of the unamortized electric conservation expenditures that will not be recovered under the Restructuring Order as discussed in Note 4. Deferred Costs of Decommissioning Federal Uranium Enrichment Facilities Deferred costs of decommissioning federal uranium enrichment facilities are the unamortized portion of our required contributions to a fund for decommissioning and decontaminating the Department of Energy's uranium enrichment facilities. We are required, along with other domestic utilities, by the Energy Policy Act of 1992 to make contributions to the fund. The contributions are generally payable over 15 years with escalation for inflation and are based upon the proportionate amount of uranium enriched by the Department of Energy for each utility. We are amortizing these costs over the contribution period as a cost of fuel. We also discuss this in Note 1. In 1999, these expenditures were reclassified to the electric generation-related regulatory asset discussed earlier in this note. Deferred Environmental Costs Deferred environmental costs are the estimated costs of investigating and cleaning up contaminated sites we own. We discuss this further in Note 10. We are amortizing $21.6 million of these costs (the amount we had incurred through October 1995) over a 10-year period in accordance with the Maryland PSC's November 1995 order. Deferred Fuel Costs As described in Note 1, deferred fuel costs are the difference between our actual costs of electric fuel, net purchases and sales of electricity, and natural gas and our fuel rate revenues collected from customers. We reduce deferred fuel costs as we collect them from or refund them to our customers. We show our deferred fuel costs in the following table. At December 31, 1999 1998 - -------------------------------------------------------------------------------- (In millions) Electric $60.0 $(11.5) Gas 13.8 24.2 - -------------------------------------------------------------------------------- Deferred fuel costs (net) $73.8 $ 12.7 ================================================================================ Under the Restructuring Order, BGE's electric fuel rate clause will be discontinued effective July 1, 2000. After that date, earnings will be affected by the changes in the cost of fuel and energy. In addition, any accumulated difference between our actual costs of fuel and energy and the amounts collected from customers under the electric fuel rate clause will be collected from our customers over a period to be determined by the Maryland PSC. 73 Note 6. Pension, Postretirement, Other Postemployment, and Employee Savings Plan Benefits We offer pension, postretirement, other postemployment, and employee savings plan benefits. We describe each of these separately below. Pension Benefits We sponsor several defined benefit pension plans for our employees. A defined benefit plan specifies the amount of benefits a plan participant is to receive using information about the participant. Our employees do not contribute to these plans. Generally, we calculate the benefits under these plans based on age, years of service, and pay. Sometimes we amend the plans retroactively. These retroactive plan amendments require us to recalculate benefits related to participants' past service. We amortize the change in the benefit costs from these plan amendments on a straight-line basis over the average remaining service period of active employees. In 1999, our Board of Directors approved the following amendments: . eligible participants will be allowed to choose between an enhanced version of the current benefit formula and a new pension equity plan (PEP) formula. Pension benefits for eligible employees hired after December 31, 1999 will be based on a PEP formula, and . pension and survivor benefits were increased for participants who retired prior to January 1, 1994 and for their surviving spouses. The financial impacts of the amendments are included in the tables in this section. Also during 1999, our Board of Directors approved a Targeted Voluntary Special Early Retirement Program (TVSERP) to provide enhanced early retirement benefits to certain eligible participants in targeted jobs that elect to retire on June 1, 2000. The financial impacts of the TVSERP will be reflected in the second quarter of 2000. We fund the plans by contributing at least the minimum amount required under Internal Revenue Service regulations. We calculate the amount of funding using an actuarial method called the projected unit credit cost method. The assets in all of the plans at December 31, 1999 were mostly marketable equity and fixed income securities, and group annuity contracts. Postretirement Benefits We sponsor defined benefit postretirement health care and life insurance plans which cover nearly all Constellation Energy and BGE employees, and certain employees of our subsidiaries. Generally, we calculate the benefits under these plans based on age, years of service, and pension benefit levels. We do not fund these plans. For nearly all of the health care plans, retirees make contributions to cover a portion of the plan costs. Contributions for employees who retire after June 30, 1992 are calculated based on age and years of service. The amount of retiree contributions increases based on expected increases in medical costs. For the life insurance plan, retirees do not make contributions to cover a portion of the plan costs. Effective January 1, 1993, we adopted SFAS No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions. The adoption of that statement caused: . a transition obligation, which we are amortizing over 20 years, and . an increase in annual postretirement benefit costs. For our diversified businesses, we expense all postretirement benefit costs. For our utility business, we accounted for the increase in annual postretirement benefit costs under two Maryland PSC rate orders: . in an April 1993 rate order, the Maryland PSC allowed us to expense one-half and defer, as a regulatory asset (see Note 5), the other half of the increase in annual postretirement benefit costs related to our electric and gas businesses, and . in a November 1995 rate order, the Maryland PSC allowed us to expense all of the increase in annual postretirement benefit costs related to our gas business. Beginning in 1998, the Maryland PSC authorized us to: . expense all of the increase in annual postretirement benefit costs related to our electric business, and . amortize the regulatory asset for postretirement benefit costs related to our electric and gas businesses over 15 years. 74 Obligations, Assets, and Funded Status We show the change in the benefit obligations, plan assets, and funded status of the pension and postretirement benefit plans in the following table: Pension Postretirement Benefits Benefits 1999 1998 1999 1998 - -------------------------------------------------------------------------------- (In millions) Change in benefit obligation Benefit obligation at January 1 $1,031.3 $ 902.0 $383.1 $320.3 Service cost 26.1 21.6 8.6 6.6 Interest cost 65.3 63.0 24.4 23.4 Plan participants' contributions - - 2.0 2.0 Actuarial (gain) loss (93.0) 102.9 (34.2) 48.9 Plan amendments 44.6 - (5.0) - Benefits paid (57.6) (58.2) (20.2) (18.1) - -------------------------------------------------------------------------------- Benefit obligation at December 31 $1,016.7 $1,031.3 $358.7 $383.1 ================================================================================ Pension Postretirement Benefits Benefits 1999 1998 1999 1998 - -------------------------------------------------------------------------------- (In millions) Change in plan assets Fair value of plan assets at January 1 $ 985.5 $912.3 $ - $ - Actual return on plan assets 139.4 116.9 - - Employer contribution 17.6 14.5 18.2 16.1 Plan participants' contributions - - 2.0 2.0 Benefits paid (57.6) (58.2) (20.2) (18.1) - -------------------------------------------------------------------------------- Fair value of plan assets at December 31 $1,084.9 $985.5 $ - $ - ================================================================================ Pension Postretirement Benefits Benefits 1999 1998 1999 1998 - -------------------------------------------------------------------------------- (In millions) Funded Status Funded status at December 31 $ 68.2 $(45.8) $(358.7) $(383.1) Unrecognized net actuarial (gain) loss (27.2) 137.6 23.6 59.7 Unrecognized prior service cost 59.0 16.9 (0.1) - Unrecognized transition obligation - - 143.4 159.3 Unamortized net asset from adoption of SFAS No. 87 (0.5) (0.7) - - - -------------------------------------------------------------------------------- Prepaid (accrued) benefit cost $ 99.5 $108.0 $(191.8) $(164.1) ================================================================================ Net Periodic Benefit Cost We show the components of net periodic pension benefit cost in the following table: Year Ended December 31, 1999 1998 1997 - -------------------------------------------------------------------------------- (In millions) Components of net periodic pension benefit cost Service cost $ 26.1 $ 21.6 $ 16.8 Interest cost 65.3 63.0 61.3 Expected return on plan assets (76.6) (72.1) (66.9) Amortization of transition obligation (0.2) (0.2) (0.2) Amortization of prior service cost 2.5 2.5 2.5 Recognized net actuarial loss 10.1 5.6 4.6 Amount capitalized as construction cost (4.2) (3.8) (2.5) - -------------------------------------------------------------------------------- Net periodic pension benefit cost $ 23.0 $ 16.6 $ 15.6 ================================================================================ 75 We show the components of net periodic postretirement benefit cost in the following table: Year Ended December 31, 1999 1998 1997 - -------------------------------------------------------------------------------- (In millions) Components of net periodic postretirement benefit cost Service cost $ 8.6 $ 6.6 $ 5.4 Interest cost 24.4 23.4 21.8 Amortization of transition obligation 11.0 11.4 11.4 Recognized net actuarial loss 1.9 0.2 0.1 Amount capitalized as construction cost (9.4) (8.1) (7.6) Amount deferred - - (7.2) - -------------------------------------------------------------------------------- Net periodic postretirement benefit cost $36.5 $33.5 $23.9 ================================================================================ Assumptions We made the assumptions below to calculate our pension and postretirement benefit obligations. Pension Postretirement Benefits Benefits At December 31, 1999 1998 1999 1998 - -------------------------------------------------------------------------------- Discount rate 7.25% 6.50% 7.25% 6.50% Expected return on plan assets 9.00 9.00 N/A N/A Rate of compensation increase 4.00 4.00 4.00 4.00 We assumed the health care inflation rates to be: . in 1999, 6.0% for both Medicare-eligible retirees and retirees not covered by Medicare, and . in 2000, 7.0% for Medicare-eligible retirees and 8.5% for retirees not covered by Medicare. After 2000, we assumed both inflation rates will decrease by 0.5% annually to a rate of 5.5% in the years 2003 and 2006, respectively. After these dates, the inflation rate will remain at 5.5%. A one-percent increase in the health care inflation rate from the assumed rates would increase the accumulated postretirement benefit obligation by approximately $46.7 million as of December 31, 1999 and would increase the combined service and interest costs of the postretirement benefit cost by approximately $5.4 million annually. A one-percent decrease in the health care inflation rate from the assumed rates would decrease the accumulated postretirement benefit obligation by approximately $37.4 million as of December 31, 1999 and would decrease the combined service and interest costs of the postretirement benefit cost by approximately $4.2 million annually. Other Postemployment Benefits We provide the following postemployment benefits: . health and life insurance benefits to our employees and certain employees of our subsidiaries who are found to be disabled under our Disability Insurance Plan, and . income replacement payments for employees found to be disabled before November 1995 (payments for employees found to be disabled after that date are paid by an insurance company, and the cost is paid by employees). The liability for these benefits totaled $46.5 million as of December 31, 1999 and $52.9 million as of December 31, 1998. Effective December 31, 1993, we adopted SFAS No. 112, Employers' Accounting for Postemployment Benefits. We deferred, as a regulatory asset (see Note 5), the postemployment benefit liability attributable to our utility business as of December 31, 1993, consistent with the Maryland PSC's orders for postretirement benefits (described earlier in this note). We began to amortize the regulatory asset over 15 years beginning in 1998. The Maryland PSC authorized us to reflect this change in our current electric and gas base rates to recover the higher costs in 1998. We assumed the discount rate for other postemployment benefits to be 5.5% in 1999 and 4.5% in 1998. Employee Savings Plan Benefits We also sponsor a defined contribution savings plan that is offered to all eligible Constellation Energy and BGE employees, and certain employees of our subsidiaries. In a defined contribution plan, the benefits a participant is to receive result from regular contributions to a participant account. Under this plan, we make matching contributions to participant accounts. We made matching contributions to this plan of: . $10.4 million in 1999, . $10.1 million in 1998, and . $8.5 million in 1997. 76 Note 7. Short-Term Borrowings Our short-term borrowings may include bank loans, commercial paper notes, and bank lines of credit. Short-term borrowings mature within one year from the date of issuance. We pay commitment fees to banks for providing us lines of credit. When we borrow under the lines of credit, we pay market interest rates. Constellation Energy At December 31, 1999, Constellation Energy had $242.5 million outstanding consisting entirely of commercial paper notes. At December 31, 1998, no short-term borrowings were outstanding since Constellation Energy was not established until April 30, 1999 as discussed in Note 1. In 1999, Constellation Energy arranged a $135 million revolving credit agreement for short-term financial needs, including letters of credit. This agreement also supports Constellation Energy's commercial paper notes. This facility replaced a similar facility at one of Constellation Energy's diversified businesses. At December 31, 1999, letters of credit totaling $23.1 million were issued under this facility. In addition, Constellation Energy had unused committed bank lines of credit totaling $35 million and interim lines totaling $125 million supporting its commercial paper notes at December 31, 1999. The weighted average effective interest rate for Constellation Energy's commercial paper notes was 5.68% for the year ended December 31, 1999. BGE At December 31, 1999, BGE had $129.0 million outstanding consisting entirely of commercial paper notes. At December 31, 1998, BGE had no short-term borrowings outstanding. At December 31, 1999, BGE had unused committed bank lines of credit totaling $123 million supporting the commercial paper notes compared to $113 million at December 31, 1998. These amounts do not include unused revolving credit agreements of $60 million at December 31, 1999 and $100 million at December 31, 1998 that are discussed in Note 8. The weighted average effective interest rates for BGE's commercial paper notes were 5.25% for the year ended December 31, 1999 and 5.65% for 1998. - -------------------------------------------------------------------------------- Note 8. Long-Term Debt Long-term debt matures in one year or more from the date of issuance. We summarize our long-term debt in the Consolidated Statements of Capitalization. As you read this section, it may be helpful to refer to those statements. BGE BGE's First Refunding Mortgage Bonds BGE's first refunding mortgage bonds are secured by a mortgage lien on nearly all of its assets, including all utility properties and franchises and its subsidiary capital stock. Capital stock pledged under the mortgage is that of Safe Harbor Water Power Corporation and Constellation Enterprises, Inc. When BGE transfers its generating assets to subsidiaries of Constellation Energy, these assets will remain subject to the lien of BGE's mortgage. However, BGE will remain liable for this debt after the assets are transferred. BGE is required to make an annual sinking fund payment each August 1 to the mortgage trustee. The amount of the payment is equal to 1% of the highest principal amount of bonds outstanding during the preceding 12 months. The trustee uses these funds to retire bonds from any series through repurchases or calls for early redemption. However, the trustee cannot call the following bonds for early redemption: . 5 1/2% Installment Series, due 2002 . 6 1/8% Series, due 2003 . 5 1/2% Series, due 2000 . 5 1/2% Series, due 2004 . 8 3/8% Series, due 2001 . 7 1/2% Series, due 2007 . 7 1/4% Series, due 2002 . 6 5/8% Series, due 2008 . 6 1/2% Series, due 2003 Holders of the Remarketed Floating Rate Series Due September 1, 2006 have the option to require BGE to repurchase their bonds at face value on September 1 of each year. BGE is required to repurchase and retire at par any bonds that are not remarketed or purchased by the remarketing agent. BGE also has the option to redeem all or some of these bonds at face value each September 1. 77 BGE's Other Long-Term Debt We show the weighted-average interest rates and maturity dates for BGE's fixed- rate medium-term notes outstanding at December 31, 1999 in the following table. Weighted-Average Series Interest Rate Maturity Dates - -------------------------------------------------------------------------------- B 8.10% 2000-2006 C 7.33 2000-2003 D 6.66 2001-2006 E 6.66 2006-2012 G 6.08 2001-2008 Some of the medium-term notes include a "put option." These put options allow the holders to sell their notes back to BGE on the put option dates at a price equal to 100% of the principal amount. The following is a summary of medium-term notes with put options. Series E Notes Principal Put Option Dates - -------------------------------------------------------------------------------- (In millions) 6.75%, due 2012 $60.0 June 2002 and 2007 6.75%, due 2012 25.0 June 2004 and 2007 6.73%, due 2012 25.0 June 2004 and 2007 BGE has $60 million of revolving credit agreements with several banks that are available through 2000. At December 31, 1999, BGE had no outstanding borrowings under these agreements. These banks charge us commitment fees based on the daily average of the unborrowed amount, and we pay market interest rates on any borrowings. These agreements also support BGE's commercial paper notes, as described in Note 7. BGE Obligated Mandatorily Redeemable Trust Preferred Securities On June 15, 1998, BGE Capital Trust I (Trust), a Delaware business trust established by BGE, issued 10,000,000 Trust Originated Preferred Securities (TOPrS) for $250 million ($25 liquidation amount per preferred security) with a distribution rate of 7.16%. The Trust used the net proceeds from the issuance of the common securities and the preferred securities to purchase a series of 7.16% Deferrable Interest Subordinated Debentures due June 30, 2038 (debentures) from BGE in the aggregate principal amount of $257.7 million with the same terms as the TOPrS. The Trust must redeem the TOPrS at $25 per preferred security plus accrued but unpaid distributions when the debentures are paid at maturity or upon any earlier redemption. BGE has the option to redeem the debentures at any time on or after June 15, 2003 or at any time when certain tax or other events occur. The interest paid on the debentures, which the Trust will use to make distributions on the TOPrS, is included in "Interest Expense" in the Consolidated Statements of Income and is deductible for income tax purposes. BGE fully and unconditionally guarantees the TOPrS based on its various obligations relating to the trust agreement, indentures, debentures, and the preferred security guarantee agreement. The debentures are the only assets of the Trust. The Trust is wholly owned by BGE because it owns all the common securities of the Trust that have general voting power. For the payment of dividends and in the event of liquidation of BGE, the debentures are ranked prior to preference stock and common stock. Diversified Businesses Revolving Credit Agreements ComfortLink has a $50 million unsecured revolving credit agreement that matures September 26, 2001. Under the terms of the agreement, ComfortLink has the option to obtain loans at various rates for terms up to nine months. ComfortLink pays a facility fee on the total amount of the commitment. At December 31, 1999, ComfortLink had $33 million outstanding under this agreement. Mortgage and Construction Loans Our diversified businesses' mortgage and construction loans have varying terms. The following mortgage notes require monthly principal and interest payments: . 7.90%, due in 2000 . 9.65%, due in 2028 . 8.00%, due in 2001 . 8.00%, due in 2033 . 4.25%, due in 2009 The 8.00% mortgage note due in 2003 requires interest payments until maturity. The variable rate mortgage notes and construction loans require periodic payment of principal and interest. Unsecured Notes The unsecured notes mature on the following schedule: Amount - -------------------------------------------------------------------------------- (In millions) 7.125%, due March 13, 2000 $ 15.0 7.55%, due April 22, 2000 35.0 7.50%, due May 5, 2000 139.0 7.43%, due September 9, 2000 30.0 5.43% due October 15, 2000 5.0 7.66%, due May 5, 2001 135.0 5.67%, due May 5, 2001 152.0 - -------------------------------------------------------------------------------- Total unsecured notes at December 31, 1999 $511.0 ================================================================================ 78 Maturities of Long-Term Debt All of our long-term borrowings mature on the following schedule (includes sinking fund requirements): Diversified Year BGE Businesses - -------------------------------------------------------------------------------- (In millions) 2000 $ 401.9 $284.4 2001 282.2 366.6 2002 154.0 1.5 2003 286.8 10.4 2004 154.0 6.0 Thereafter 1,428.6 17.9 - -------------------------------------------------------------------------------- Total long-term debt at December 31, 1999 $2,707.5 $686.8 ================================================================================ At December 31, 1999, BGE had long-term loans totaling $255.0 million that mature after 2002 (including $110.0 million of medium-term notes discussed in this Note under "BGE's Other Long-Term Debt") that lenders could potentially require us to repay early. Of this amount, $145.0 million could be repaid in 2000, $60.0 million in 2002, and $50.0 million thereafter. At December 31, 1999, $122.0 million is classified as current portion of long-term debt as a result of these provisions. Weighted Average Interest Rates for Variable Rate Debt Our weighted average interest rates for variable rate debt were: Year Ended December 31, 1999 1998 - -------------------------------------------------------------------------------- BGE Floating rate series mortgage bonds 5.41% 5.90% Remarketed floating rate series mortgage bonds 5.19 5.70 Medium-term notes, Series D 5.29 5.74 Medium-term notes, Series G 5.38 .- Medium-term notes, Series H 5.64 .- Pollution control loan 3.22 3.48 Port facilities loan 3.24 3.61 Adjustable rate pollution control loan 3.59 3.75 Economic development loan 3.26 3.59 Variable rate pollution control loan 3.30 3.45 Diversified Businesses Loans under credit agreement 5.68 6.02 Mortgage and construction loans 6.65 8.17 - -------------------------------------------------------------------------------- Note 9. Leases There are two types of leases--operating and capital. Capital leases qualify as sales or purchases of property and are reported in the Consolidated Balance Sheets. Capital leases are not material in amount. All other leases are operating leases and are reported in the Consolidated Statements of Income. We present information about our operating leases below. Outgoing Lease Payments We, as lessee, lease some facilities and equipment used in our businesses. The lease agreements expire on various dates and have various renewal options. We expense all lease payments associated with our regulated utility operations. Lease expense was: . $12.2 million in 1999, . $10.5 million in 1998, and . $9.5 million in 1997. At December 31, 1999, we owed future minimum payments for long-term, noncancelable, operating leases as follows: Year (In millions) - -------------------------------------------------------------------------------- 2000 $ 8.2 2001 6.1 2002 4.5 2003 3.2 2004 2.4 Thereafter 9.7 - -------------------------------------------------------------------------------- Total future minimum lease payments $34.1 ================================================================================ 79 Note 10. Commitments, Guarantees, and Contingencies Commitments We have made substantial commitments in connection with our utility construction program for future years. In addition, our electric business has entered into two long-term contracts for the purchase of electric generating capacity and energy. The contracts expire in 2001 and 2013. We made payments under these contracts of: . $67.8 million in 1999, . $70.7 million in 1998, and . $65.6 million in 1997. At December 31, 1999, we estimate our future payments for capacity and energy that we are obligated to buy under these contracts to be: Year (In millions) - -------------------------------------------------------------------------------- 2000 $ 69.7 2001 37.1 2002 13.9 2003 13.8 2004 13.6 Thereafter 113.4 - -------------------------------------------------------------------------------- Total estimated future payments for capacity and energy under long-term contracts $261.5 ================================================================================ Portions of these contracts are expected to be uneconomic upon the deregulation of electric generation. Therefore, we recorded a charge and accrued a corresponding liability based on the net present value of the excess of estimated contract costs over the market based revenues to recover these costs over the remaining terms of the contracts as discussed in Note 4. At December 31, 1999, the accrued portion of these contracts was $47.5 million. Some of our diversified businesses have committed to contribute additional capital and to make additional loans to some affiliates, joint ventures, and partnerships in which they have an interest. At December 31, 1999, the total amount of investment requirements committed to by our diversified businesses was $174.2 million. This amount includes $121 million for our energy services businesses commitment to Orion Power Holdings, Inc. BGE and BGE Home Products & Services have agreements to sell on an ongoing basis an undivided interest in a designated pool of customer receivables. Under the agreements, BGE can sell up to a total of $40 million, and BGE Home Products & Services can sell up to a total of $50 million. Under the terms of the agreements, the buyer of the receivables has limited recourse against BGE and has no recourse against BGE Home Products & Services. BGE and BGE Home Products & Services have recorded reserves for credit losses. At December 31, 1999, BGE had sold $28.2 million and BGE Home Products & Services had sold $43.3 million of receivables under these agreements. Guarantees Constellation Energy has issued guarantees in an amount up to $69.2 million related to credit facilities and contractual performance of certain of its diversified subsidiaries. However, the actual subsidiary liabilities related to these guarantees totaled $21.7 million at December 31, 1999. BGE guarantees two-thirds of certain debt of Safe Harbor Water Power Corporation. The maximum amount of our guarantee is $23 million. At December 31, 1999, Safe Harbor Water Power Corporation had outstanding debt of $20.4 million, of which $13.6 million is guaranteed by BGE. At December 31, 1999, our remaining diversified businesses had guaranteed outstanding loans and letters of credit of certain power projects and real estate projects totaling $48.8 million. Our diversified businesses also guarantee certain other borrowings of various power projects and real estate projects. We assess the risk of loss from these guarantees to be minimal. 80 Environmental Matters Clean Air The Clean Air Act of 1990 contains two titles designed to reduce emissions of sulfur dioxides and nitrogen oxides (NOx) from electric generating stations--Title IV and Title I. Title IV primarily addresses emissions of sulfur dioxides. Compliance is required in two phases: . Phase I became effective January 1, 1995. We met the requirements of this phase by installing flue gas desulfurization systems, switching fuels, and retiring some units. . Phase II became effective January 1, 2000. We met the compliance requirements through a combination of switching fuels and allowance trading. Title I addresses emissions of NOx. The Maryland Department of the Environment (MDE) has issued regulations, effective October 18, 1999, which require up to 65% NOx emissions reductions by May 1, 2000. We have entered into a settlement agreement with the MDE since we cannot meet this deadline. Under the terms of the settlement agreement, BGE will install emissions reduction equipment at two sites by May 2002. In the meantime, we are taking steps to control NOx emissions at our generating plants. The Environmental Protection Agency (EPA) issued a final rule in September 1998 that requires up to 85% NOx emissions reduction by 22 states including Maryland and Pennsylvania. Maryland will meet the requirements of the rule by 2003. Based on the MDE and EPA regulations, we currently estimate that the additional controls needed at our generating plants to meet the MDE's 65% NOx emission reduction requirements will cost approximately $135 million. Through December 31, 1999, we have spent approximately $51 million to meet the MDE's 65% reduction requirements. We estimate the additional cost for EPA's 85% reduction requirements to be approximately $35 million by 2003. In July 1997, the EPA published new National Ambient Air Quality Standards for very fine particulates and revised standards for ozone attainment. In 1999, these new standards were successfully challenged in court. The EPA is expected to appeal the 1999 court rulings to the Supreme Court. While these standards may require increased controls at our fossil generating plants in the future, implementation will be delayed for several years. We cannot estimate the cost of these increased controls at this time because the states, including Maryland and Pennsylvania, still need to determine what reductions in pollutants will be necessary to meet the new federal standards. Waste Disposal The EPA and several state agencies have notified us that we are considered a potentially responsible party with respect to the cleanup of certain environmentally contaminated sites owned and operated by others. We cannot estimate the cleanup costs for all of these sites. We can, however, estimate that our current 15.43% share of the reasonably possible cleanup costs at one of these sites, Metal Bank of America (a metal reclaimer in Philadelphia), could be as much as $4.9 million higher than amounts we have recorded as a liability on our Consolidated Balance Sheets. This estimate is based on a Record of Decision issued by the EPA. On July 12, 1999, the EPA notified us, along with nineteen other entities, that we may be a potentially responsible party at the 68th Street Dump/Industrial Enterprises Site, also known as the Robb Tyler Dump located in Baltimore, Maryland. The EPA indicated that it is proceeding with plans to conduct a remedial investigation and feasibility study. This site was proposed for listing as a federal Superfund site in January 1999, but the listing has not been finalized. Although our potential liability cannot be estimated, we do not expect such liability to be material based on our records showing that we did not send waste to the site. Also, we are coordinating investigation of several sites where gas was manufactured in the past. The investigation of these sites includes reviewing possible actions to remove coal tar. In late December 1996, we signed a consent order with the MDE that requires us to implement remedial action plans for contamination at and around the Spring Gardens site, located in Baltimore, Maryland. We submitted the required remedial action plans and they have been approved by the MDE. Based on the remedial action plans, the costs we consider to be probable to remedy the contamination are estimated to total $47 million in nominal dollars (including inflation). We have recorded these costs as a liability on our Consolidated Balance Sheets and have deferred these costs, net of accumulated amortization and amounts we recovered from insurance companies, as a regulatory asset. We discuss this further in Note 5. Through December 31, 1999, we have spent approximately $34 million for remediation at this site. 81 We are also required by accounting rules to disclose additional costs we consider to be less likely than probable costs, but still "reasonably possible" of being incurred at these sites. Because of the results of studies at these sites, it is reasonably possible that these additional costs could exceed the amount we recognized by approximately $14 million in nominal dollars ($7 million in current dollars, plus the impact of inflation at 3.1% over a period of up to 36 years). We do not expect the cleanup costs of the remaining sites to have a material effect on our financial results. Nuclear Insurance If there were an accident or an extended outage at either unit of Calvert Cliffs, it could have a substantial adverse financial effect on us. The primary contingencies that would result from an incident at Calvert Cliffs could include: . physical damage to the plant, . recoverability of replacement power costs, and . our liability to third parties for property damage and bodily injury. We have insurance policies that cover these contingencies, but the policies have certain industry standard exclusions. Furthermore, the costs that could result from a covered major accident or a covered extended outage at either of the Calvert Cliffs units could exceed our insurance coverage limits. Insurance for Calvert Cliffs and Third Party Claims For physical damage to Calvert Cliffs, we have $2.75 billion of property insurance from an industry mutual insurance company. If an outage at either of the two units at Calvert Cliffs is caused by an insured physical damage loss and lasts more than 12 weeks, we have insurance coverage for replacement power costs up to $490.0 million per unit, provided by an industry mutual insurance company. This amount can be reduced by up to $98.0 million per unit if an outage at both units of the plant is caused by a single insured physical damage loss. If accidents at any insured plants cause a shortfall of funds at the industry mutual insurance company, all policyholders could be assessed, with our share being up to $21.7 million. In addition we, as well as others, could be charged for a portion of any third party claims associated with a nuclear incident at any commercial nuclear power plant in the country. At December 31, 1999, the limit for third party claims from a nuclear incident is $9.34 billion under the provisions of the Price Anderson Act. If third party claims exceed $200 million (the amount of primary insurance), our share of the total liability for third party claims could be up to $176.2 million per incident. That amount would be payable at a rate of $20 million per year. Insurance for Worker Radiation Claims As an operator of a commercial nuclear power plant in the United States, we are required to purchase insurance to cover radiation injury claims of certain nuclear workers. On January 1, 1998, a new insurance policy became effective for all operators requiring coverage for current operations. Waiving the right to make additional claims under the old policy was a condition for acceptance under the new policy. We describe both the old and new policies below. . Nuclear worker claims reported on or after January 1, 1998 are covered by a new insurance policy with an annual industry aggregate limit of $200 million for radiation injury claims against all those insured by this policy. . All nuclear worker claims reported prior to January 1, 1998 are still covered by the old insurance policies. Insureds under the old policies, with no current operations, are not required to purchase the new policy described above, and may still make claims against the old policies for the next eight years. If radiation injury claims under these old policies exceed the policy reserves, all policyholders could be assessed, with our share being up to $6.3 million. If claims under these polices exceed the coverage limits, the provisions of the Price Anderson Act (discussed in this section) would apply. 82 Recoverability of Electric Fuel Costs Until July 1, 2000, we will continue to recover our cost of fuel and purchased energy through the electric fuel rate as long as the Maryland PSC finds that, among other things, we have kept the productive capacity of our generating plants at a reasonable level. To do this, the Maryland PSC will evaluate the performance of our generating plants, and will determine if we used all reasonable and cost-effective maintenance and operating control procedures. The Maryland PSC, under the Generating Unit Performance Program, measures annually whether we have maintained the productive capacity of our generating plants at reasonable levels. To do this, the program uses a system-wide generating performance target and an individual performance target for each base load generating unit. In fuel rate hearings, actual generating performance adjusted for planned outages will be compared first to the system-wide target. If that target is met, it should mean that the requirements of Maryland law have been met. If the system-wide target is not met, each unit's adjusted actual generating performance will be compared to its individual performance target to determine if the requirements of Maryland law have been met and, if not, to determine the basis for possibly imposing a penalty on BGE. Even if we meet these targets, parties to fuel rate hearings may still question whether we used all reasonable and cost-effective procedures to try to prevent an outage. If the Maryland PSC decides we were deficient in some way, the Maryland PSC may not allow us to recover the cost of replacement energy. The two units at Calvert Cliffs use the cheapest fuel. As a result, the costs of replacement energy associated with outages at these units can be significant. We cannot estimate the amount of replacement energy costs that could be challenged or disallowed in future fuel rate proceedings, but such amounts could be material. Under the terms of the Restructuring Order, BGE's electric fuel rate clause will be discontinued effective July 1, 2000. We discuss competition and its impact on BGE's generation business further in Note 4. The discontinuance of BGE's electric fuel rate clause is discussed further in Note 1. California Power Purchase Agreements Constellation Power, Inc. and subsidiaries and Constellation Investments, Inc. (whose power projects are managed by Constellation Power) have $301.8 million invested in 14 projects that sell electricity in California under power purchase agreements called "Interim Standard Offer No. 4" agreements. Under these agreements, the projects supply electricity to utility companies at: . a fixed rate for capacity and energy for the first 10 years of the agreements, and . a fixed rate for capacity plus a variable rate for energy based on the utilities' avoided cost for the remaining term of the agreements. Generally, a "capacity rate" is paid to a power plant for its availability to supply electricity, and an "energy rate" is paid for the electricity actually generated. "Avoided cost" generally is the cost of a utility's cheapest next-available source of generation to service the demands on its system. We use the term "transitioned" to describe when the 10-year periods for fixed energy rates have expired for these power generation projects and they began supplying electricity at variable rates. The four remaining projects that have not transitioned will do so by December 2000. The projects that have already transitioned to variable rates have had lower revenues under variable rates than they did under fixed rates. Once the remaining projects have transitioned to variable rates, we expect the revenues from those projects also to be lower than they are under fixed rates. We discuss the earnings for these projects in the "Diversified Businesses" section of Management's Discussion and Analysis. 83 Note 11. Fair Market Value of Financial Instruments The fair value of a financial instrument represents the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation. Significant differences can occur between the fair value and carrying amount of financial instruments that are recorded at historical amounts. We used the following methods and assumptions in estimating fair value disclosures for financial instruments: . Cash and cash equivalents, net accounts receivable, other current assets, certain current liabilities, short-term borrowings, current portions of long-term debt and preference stock, and certain deferred credits and other liabilities: The amounts reported in the Consolidated Balance Sheets approximate fair value. . Investments and other assets where it was practicable to estimate fair value: The fair value is based on quoted market prices where available. . Fixed-rate long-term debt, and redeemable preference stock: The fair value is based on quoted market prices where available or by discounting remaining cash flows at current market rates. The carrying amount of variable-rate long-term debt approximates fair value. We show the carrying amounts and fair values of financial instruments included in our Consolidated Balance Sheets in the following table, and we describe some of the items separately below: At December 31, 1999 1998 - -------------------------------------------------------------------------------- Carrying Fair Carrying Fair Amount Value Amount Value - -------------------------------------------------------------------------------- (In millions) Investments and other assets for which it is: Practicable to estimate fair value $ 313.3 $ 313.3 $ 213.0 $ 213.0 Not practicable to estimate fair value 46.7 N/A 56.5 N/A Fixed-rate long-term debt 2,728.9 2,637.3 2,954.7 3,076.6 Redeemable preference stock - - 7.0 7.2 It was not practicable to estimate the fair value of investments held by our diversified businesses in: . several financial partnerships that invest in nonpublic debt and equity securities, and . several partnerships that own solar powered energy production facilities. This is because the timing and amount of cash flows from these investments are difficult to predict. We report these investments at their original cost in our Consolidated Balance Sheets. The investments in financial partnerships totaled $35.8 million at December 31, 1999 and $41.9 million at December 31, 1998, representing ownership interests up to 10%. The total assets of all of these partnerships totaled $5.9 billion at December 31, 1998 (which is the latest information available). The investments in solar powered energy production facility partnerships totaled $10.9 million at December 31, 1999 and 1998, representing ownership interests up to 13%. The total assets of all of these partnerships totaled $31.3 million at December 31, 1998 (which is the latest information available). Guarantees It was not practicable to determine the fair value of certain loan guarantees of Constellation Energy and its subsidiaries. Constellation Energy guaranteed outstanding debt of $16.5 million at December 31, 1999. BGE guaranteed outstanding debt of $13.6 million at December 31, 1999 and $18.0 million at December 31, 1998. Our diversified businesses guaranteed outstanding debt totaling $48.8 million at December 31, 1999 and $59.7 million at December 31, 1998. We do not anticipate that we will need to fund these guarantees. 84 Note 12. Quarterly Financial Data (Unaudited) Our quarterly financial information has not been audited but, in management's opinion, includes all adjustments necessary for a fair presentation. Our utility business is seasonal in nature with the peak sales periods generally occurring during the summer and winter months. Accordingly, comparisons among quarters of a year may not represent overall trends and changes in operations. 1999 Quarterly Data - Constellation Energy Earnings Earnings Income Applicable Per Share From to Common of Common Revenues Operations Stock Stock - -------------------------------------------------------------------------------- (In millions, except per-share amounts) Quarter Ended March 31 $ 932.3 $198.1 $ 82.8 $0.55 June 30 820.0 163.9 68.0 0.45 September 30 970.4 277.7 136.1 0.91 December 31 1,063.5 120.2 (26.8) (0.18) - -------------------------------------------------------------------------------- Year Ended December 31 $3,786.2 $759.9 $260.1 $1.74 ================================================================================ 1999 Quarterly Data - BGE Earnings Income Applicable From to Common Revenues Operations Stock - -------------------------------------------------------------------------------- (In millions) Quarter Ended March 31 $ 932.3 $ 198.1 $ 82.8 June 30 669.2 140.9 57.8 September 30 756.0 283.3 151.5 December 31 670.8 82.0 (43.5) - -------------------------------------------------------------------------------- Year Ended December 31 $3,028.3 $704.3 $248.6 ================================================================================ Constellation Energy's second quarter results include a $3.6 million after-tax write-down of a financial investment (see Note 3). Third quarter results include: Constellation Energy and BGE . $7.5 million associated with Hurricane Floyd (see the "Electric Operations and Maintenance Expenses" section of Management's Discussion and Analysis), . a $37.5 million deferral of revenues collected associated with the deregulation of our electric generation business (see Note 5), Constellation Energy . a $17.3 million after-tax write-down of a financial investment (see Note 3), . a $6.7 million after-tax write-off of a power project (see Note 3), and . a $3.4 million after-tax write-down of certain senior-living facilities (see Note 2). Fourth quarter results include: Constellation Energy and BGE . a $66.3 million extraordinary charge associated with the Restructuring Order (see Note 4), . the recognition of the $37.5 million of revenues that were deferred in the third quarter (see above), . $75 million in amortization expense for the reduction of our generation plants associated with the Restructuring Order (see the "Electric Depreciation and Amortization Expense" section of Management's Discussion and Analysis), Constellation Energy . a $4.9 million after-tax gain on a financial investment (see Note 3), . $12.0 million after-tax write-downs of certain power projects (see Note 3), and . a $2.4 million after-tax write-down of certain senior-living facilities (see Note 2). 1998 Quarterly Data - Constellation Energy and BGE Earnings Earnings Income Applicable Per Share From to Common of Common Revenues Operations Stock Stock - -------------------------------------------------------------------------------- (In millions, except per-share amounts) Quarter Ended March 31 $ 866.1 $ 183.4 $ 74.4 $0.50 June 30 767.6 156.2 57.4 0.39 September 30 934.0 320.4 160.9 1.08 December 31 790.4 81.1 13.2 0.09 - -------------------------------------------------------------------------------- Year Ended December 31 $3,358.1 $741.1 $305.9 $2.06 - -------------------------------------------------------------------------------- Third quarter results include a $10.4 million after-tax gain for earnings in a partnership (see Note 3). Fourth quarter results include: . a $15.4 million after-tax write-off of a real estate investment (see Note 3), and . a $5.5 million after-tax write-off of an energy services investment (see the "Other Energy Services" section of Management's Discussion and Analysis). The sum of the quarterly earnings per share amounts may not equal the total for the year due to the effects of rounding. 85 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. - -------------------------------------------------------------------------------- PART III BGE meets the conditions set forth in General Instruction I(1)(a) and (b) of Form 10-K for a reduced disclosure format. Accordingly, all items in this section related to BGE are not presented. Item 10. Directors and Executive Officers of the Registrant The information required by this item with respect to directors is set forth on pages 4 through 8 under "Election of Constellation Energy Directors" in the Proxy Statement and is incorporated herein by reference. The information required by this item with respect to executive officers of Constellation Energy Group, pursuant to instruction 3 of paragraph (b) of Item 401 of Regulation S-K, is set forth in Item 4 of Part I of this Form 10-K under "Executive Officers of the Registrant". Item 11. Executive Compensation The information required by this item is set forth on page 7 under "Directors' Compensation," on pages 7 though 8 under "Compensation Committee Interlocks and Insider Participation," on pages 10 through 13 under "Executive Compensation," on page 14 under "Common Stock Performance Graph," and on pages 14 through 17 under "Report of Committee on Management on Executive Compensation" in the Proxy Statement and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management The information required by this item regarding security ownership of certain beneficial owners and management is set forth on page 9 under "Security Ownership" in the Proxy Statement and is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions The information required by this item is set forth on pages 7 and 8 under "Certain Relationships and Transactions", and "Compensation Committee Interlocks and Insider Participation" in the Proxy Statement and is incorporated herein by reference. 86 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) The following documents are filed as a part of this Report: 1. Financial Statements: Report of Independent Accountants dated January 19, 2000 of PricewaterhouseCoopers LLP Consolidated Statements of Income--Constellation Energy Group for three years ended December 31, 1999 Consolidated Statements of Comprehensive Income--Constellation Energy Group for three years ended December 31, 1999 Consolidated Balance Sheets--Constellation Energy Group at December 31, 1999 and December 31, 1998 Consolidated Statements of Cash Flows--Constellation Energy Group for three years ended December 31, 1999 Consolidated Statements of Common Shareholders' Equity--Constellation Energy Group for three years ended December 31, 1999 Consolidated Statements of Capitalization--Constellation Energy Group at December 31, 1999 and December 31, 1998 Consolidated Statements of Income Taxes--Constellation Energy Group for three years ended December 31, 1999 Consolidated Statements of Income--Baltimore Gas and Electric Company for three years ended December 31, 1999 Consolidated Statements of Comprehensive Income--Baltimore Gas and Electric Company for three years ended December 31, 1999 Consolidated Balance Sheets--Baltimore Gas and Electric Company at December 31, 1999 and December 31, 1998 Consolidated Statements of Cash Flows--Baltimore Gas and Electric Company for three years ended December 31, 1999 Notes to Consolidated Financial Statements 2. Financial Statement Schedules: Schedule II--Valuation and Qualifying Accounts Schedules other than Schedule II are omitted as not applicable or not required. 3. Exhibits Required by Item 601 of Regulation S-K. Exhibit Number - ------- *2 -- Agreement and Plan of Share Exchange between Baltimore Gas and Electric Company and Constellation Energy Group, Inc. dated as of February 19, 1999. (Designated as Exhibit No. 2 in Form S-4 dated March 3, 1999, File No. 33-64799.) *3(a) -- Articles of Amendment and Restatement of the Charter of Constellation Energy Group, Inc. as of April 30, 1999. (Designated as Exhibit No. 99.2 in Form 8-K dated April 30, 1999, File No. 1-1910.) *3(b) -- Articles Supplementary to the Charter of Constellation Energy Group, Inc., as of July 19, 1999. (Designated as Exhibit No. 3(a) in Form 10-Q dated August 13, 1999, File No. 1-12869 and 1-1910.) 3(c) -- Certificate of Correction to the Charter of Constellation Energy Group, Inc. as of September 13, 1999. *3(d) -- Bylaws of Constellation Energy Group, Inc. amended to July 16, 1999. (Designated as Exhibit No. 3(b) in Form 10-Q dated August 13, 1999, File No. 1-12869 and 1-1910.) *3(e) -- Charter of BGE, restated as of August 16, 1996. (Designated as Exhibit No. 3 in Form 10-Q dated November 14, 1996, File No. 1-1910.) 3(f) -- By-Laws of BGE, as amended to April 30, 1999. 87 *4(a) -- Indenture between Constellation Energy Group, Inc. and the Bank of New York, Trustee dated as of March 24, 1999. (Designated as Exhibit No. 4(a) in Form S-3 dated March 29, 1999, File No. 333-75217.) *4(b) -- Supplemental Indenture between BGE and Bankers Trust Company, as Trustee, dated as of June 20, 1995, supplementing, amending and restating Deed of Trust dated February 1, 1919. (Designated as Exhibit No. 4 in Form 10-Q dated August 11, 1995, File No. 1-1910.); and the following Supplemental Indentures between BGE and Bankers Trust Company, Trustee:
Designated In ------------------------------- Exhibit Dated File No. Number ----- -------- ------- *July 15, 1977 2-59772 2-3 (3 Indentures) *August 15, 1991 33-45259 (Form S-3 Registration) 4(a)(i) *January 15, 1992 33-45259 (Form S-3 Registration) 4(a)(ii) *July 1, 1992 1-1910 (Form 8-K Report for January 29, 1993) 4(a) *February 15, 1993 1-1910 (Form 10-K Annual Report for 1992) 4(a)(i) *March 1, 1993 1-1910 (Form 10-K Annual Report for 1992) 4(a)(ii) *March 15, 1993 1-1910 (Form 10-K Annual Report for 1992) 4(a)(iii) *April 15, 1993 1-1910 (Form 10-Q dated May 13, 1993) 4 *July 1, 1993 1-1910 (Form 10-Q dated August 13, 1993) 4(a) *July 15, 1993 1-1910 (Form 10-Q dated August 13, 1993) 4(b) *October 15, 1993 1-1910 (Form 10-Q dated November 12, 1993) 4 *June 15, 1996 1-1910 (Form 10-Q dated August 13, 1996) 4
*4(c) -- Indenture dated July 1, 1985, between BGE and The Bank of New York (Successor to Mercantile-Safe Deposit and Trust Company), Trustee. (Designated in Registration File No. 2-98443 as Exhibit 4(a)); as supplemented by Supplemental Indentures dated as of October 1, 1987 (Designated in Form 8-K, dated November 13, 1987, File No. 1-1910 as Exhibit 4(a)) and as of January 26, 1993 (Designated in Form 8-K, dated January 29, 1993, File No. 1-1910 as Exhibit 4(b).) *4(d) -- Form of Subordinated Indenture between the Company and The Bank of New York, as Trustee in connection with the issuance of the Junior Subordinated Debentures (Designated as Exhibit 4(d) in Form S-3 dated May 28, 1998, File No. 333-53767). *4(e) -- Form of Supplemental Indenture between the Company and The Bank of New York, as Trustee in connection with the issuances of the Junior Subordinated Debentures (Designated as Exhibit 4(e) in Form S-3 dated May 28, 1998, File No. 333-53767). *4(f) -- Form of Preferred Securities Guarantee (Designated as Exhibit 4(f) in Form S-3 dated May 28, 1998, File No. 333-53767). *4(g) -- Form of Junior Subordinated Debenture (Designated as Exhibit 4(h) in Form S-3 dated May 28, 1998, File No. 333-53767). *4(h) -- Form of Amended and Restated Declaration of Trust (including Form of Preferred Security) (Designated as Exhibit 4(c) in Form S-3 dated May 28, 1998, File No. 333-53767). 10(a) -- Constellation Energy Group, Inc. Executive Benefits Plan, as amended and restated, with Summary of New Executive Pension Provision. 10(b) -- Executive Annual Incentive Plan of Constellation Energy Group, Inc., as amended and restated. *10(c) -- Constellation Energy Group, Inc. 1995 Long-Term Incentive Plan, as amended and restated. (Designated as Exhibit No. 10(a) in Form 10-Q dated November 12, 1999, File Nos. 1-12869 and 1-1910.) 88 *10(d) -- Constellation Energy Group, Inc. Nonqualified Deferred Compensation Plan, as amended and restated. (Designated as Exhibit No. 10(b) in Form 10-Q dated November 12, 1999, File Nos. 1-12869 and 1-1910.) *10(e) -- Constellation Energy Group, Inc. Deferred Compensation Plan for Non- Employee Directors. (Designated as Exhibit No. 10(a) in Form 10-Q dated May 14, 1999, File Nos. 1-12869 and 1-1910.) *10(f) -- Baltimore Gas and Electric Company Retirement Plan for Non-Employee Directors, as amended and restated. (Designated as Exhibit No. 10(m) in Form 10-Q dated May 14, 1999, File Nos. 1-12869 and 1-1910.) (Terminated effective August 1, 1997.) 10(g) -- Summary of severance arrangement for a Named Executive Officer. *10(h) -- Grantor Trust Agreement Dated as of April 30, 1999 between Constellation Energy Group, Inc. and Citibank, N.A. (Designated as Exhibit No. 10(g) in Form 10-Q dated May 14, 1999, File Nos. 1-12869 and 1-1910.) *10(i) -- Form of Severance Agreement between Constellation Energy Group, Inc. and seven key employees. (Designated as Exhibit No. 10(j) in Form 10- Q dated May 14, 1999, File Nos. 1-12869 and 1-1910.) *10(j) -- Summary of enhanced retirement benefits for a named executive officer. (Designated as Exhibit No. 10(l) in Form 10-Q dated May 14, 1999, File Nos. 1-12869 and 1-1910.) *10(k) -- Grantor Trust Agreement dated as of April 30, 1999 between Constellation Energy Group, Inc. and T. Rowe Price Trust Company. (Designated as Exhibit No. 10(e) in Form 10-Q dated May 14, 1999, File Nos. 1-12869 and 1-1910.) *10(l) -- Constellation Energy Group, Inc. Long-Term Incentive Plan. (Designated as Exhibit No. 10(b) in Form 10-Q dated May 14, 1999, File Nos. 1-12869 and 1-1910.) 12(a) -- Constellation Energy Group, Inc. Computation of Ratio of Earnings to Fixed Charges. 12(b) -- Baltimore Gas and Electric Company Computation of Ratio of Earnings to Fixed Charges and Computation of Ratio of Earnings to Combined Fixed Charges and Preferred and Preference Dividend Requirements. 21 -- Subsidiaries of the Registrant. 23 -- Consent of PricewaterhouseCoopers LLP, Independent Accountants. 27(a) -- Constellation Energy Group, Inc. Financial Data Schedule. 27(b) -- Baltimore Gas and Electric Company Financial Data Schedule. *99(a) -- BGE 1999 Pro Forma Financial Statement for Generation Asset Transfer. (Designated as Exhibit No. 99 in Form 8-K dated March 17, 2000 File No. 1-12869 and 1-1910.) - -------- * Incorporated by Reference. (b) Reports on Form 8-K:
Date Filed Item Reported ---------- ------------- November 18, 1999 Item 5. Other Events
89 CONSTELLATION ENERGY GROUP, INC. AND SUBSIDIARIES AND BALTIMORE GAS AND ELECTRIC COMPANY AND SUBSIDIARIES SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E -------- --------- ------------------- -------------- -------- Additions ------------------- Balance Charged Charged to Balance at to costs other at end beginning and accounts-- (Deductions)-- of Description of period expenses describe describe period - ----------- --------- -------- ---------- -------------- -------- (in millions) Reserves deducted in the Balance Sheet from the assets to which they apply: Constellation Energy Accumulated Provision for Uncollectibles 1999.................. $35.4 $21.5 $ -- $(22.1)(A) $ 34.8 1998.................. 24.1 28.0 -- (16.7)(A) 35.4 1997.................. 18.0 34.4 -- (28.3)(A) 24.1 Valuation Allowance -- Net unrealized (gain) loss on available for sale securities 1999.................. (9.4) -- 9.6 (B) -- 0.2 1998.................. (7.6) -- (1.8)(B) -- (9.4) 1997.................. (8.8) -- 1.2 (B) -- (7.6) Assets from trading activities reserves 1999.................. (0.6) -- (26.9)(C) -- (27.5) 1998.................. -- -- (0.6)(C) -- (0.6) BGE Accumulated Provision for Uncollectibles 1999.................. 35.4 17.6 -- (40.0)(D) 13.0 1998.................. 24.1 28.0 -- (16.7)(A) 35.4 1997.................. 18.0 34.4 -- (28.3)(A) 24.1 Valuation Allowance -- Net unrealized (gain) loss on available for sale securities 1999.................. (9.4) -- (5.3)(B) 14.7(E) -- 1998.................. (7.6) -- (1.8)(B) -- (9.4) 1997.................. (8.8) -- 1.2 (B) -- (7.6) Constellation Energy and BGE Valuation Allowance -- Net unrealized (gain) loss on nuclear decommissioning trust fund 1999.................. (23.9) -- (16.6)(F) -- (40.5) 1998.................. (10.0) -- (13.9)(F) -- (23.9) 1997.................. (3.7) -- (6.3)(F) -- (10.0) Provision for possible disallowance of replacement energy costs 1999.................. -- -- -- -- -- 1998.................. -- -- -- -- -- 1997.................. 118.0 -- -- (118.0)(G) --
- -------- (A) Represents principally net amounts charged off as uncollectible. (B) Represents net unrealized (gains)/losses (credited)/charged to accumulated other comprehensive income. (C) Represents a reserve from assets for energy trading activities charged to revenues. (D) Represents approximately $17 million charged off as uncollectible and approximately $23 million transferred from BGE to Constellation Energy as a result of the formation of the holding company. (E) Represents amount transferred from BGE to Constellation Energy as a result of the formation of the holding company. (F) Represents net unrealized gains credited to accumulated depreciation. (G) Represents removal of a reserve based on actual disallowance of replacement energy costs. Certain prior-year amounts have been reclassified to conform with the current year's presentation. 90 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Constellation Energy Group, Inc., the Registrant, has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. CONSTELLATION ENERGY GROUP, INC. (Registrant) Date: March 20, 2000 By /s/ C. H. Poindexter ------------------------------------- C. H. Poindexter Chairman of the Board, President, and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of Constellation Energy Group, Inc., the Registrant, and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- Principal executive officer and director: By /s/ C. H. Poindexter Chairman of the Board, March 20, 2000 ----------------------------------- C. H. Poindexter President, Chief Executive Officer, and Director Principal financial and accounting officer: By /s/ D. A. Brune Vice President, Chief March 20, 2000 ----------------------------------- D. A. Brune Financial Officer and Secretary Directors: /s/ H. F. Baldwin Director March 20, 2000 ----------------------------------- H. F. Baldwin /s/ D. L. Becker Director March 20, 2000 ----------------------------------- D. L. Becker /s/ J. T. Brady Director March 20, 2000 ----------------------------------- J. T. Brady /s/ B. B. Byron Director March 20, 2000 ----------------------------------- B. B. Byron /s/ J. O. Cole Director March 20, 2000 ----------------------------------- J. O. Cole /s/ D. A. Colussy Director March 20, 2000 ----------------------------------- D. A. Colussy /s/ E. A. Crooke Director March 20, 2000 ----------------------------------- E. A. Crooke /s/ J. R. Curtiss Director March 20, 2000 ----------------------------------- J. R. Curtiss /s/ R. W. Gale Director March 20, 2000 ----------------------------------- R. W. Gale /s/ J. W. Geckle Director March 20, 2000 ----------------------------------- J. W. Geckle
91
Signature Title Date --------- ----- ---- /s/ F. A. Hrabowski III Director March 20, 2000 - --------------------------------------- F. A. Hrabowski III /s/ N. Lampton Director March 20, 2000 - --------------------------------------- N. Lampton /s/ C. R. Larson Director March 20, 2000 - --------------------------------------- C. R. Larson /s/ G. V. McGowan Director March 20, 2000 - --------------------------------------- G. V. McGowan /s/ G. L. Russell, Jr. Director March 20, 2000 - --------------------------------------- G. L. Russell, Jr. /s/ M. A. Shattuck, III Director March 20, 2000 - --------------------------------------- M. A. Shattuck, III /s/ M. D. Sullivan Director March 20, 2000 - --------------------------------------- M. D. Sullivan
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Baltimore Gas and Electric Company, the Registrant, has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. BALTIMORE GAS AND ELECTRIC COMPANY (Registrant) Date: March 20, 2000 By /s/ C. H. Poindexter ------------------------------------- C. H. Poindexter Chairman of the Board, President, and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of Baltimore Gas and Electric Company, the Registrant, and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- Principal executive officer and director: By /s/ C. H. Poindexter Chairman of the Board, March 20, 2000 ----------------------------------- C. H. Poindexter President, Chief Executive Officer, and Director Principal financial and accounting officer and director: By /s/ D. A. Brune Vice President, Chief March 20, 2000 ----------------------------------- D. A. Brune Financial Officer, Secretary and Director Directors: /s/ F. O. Heintz Director March 20, 2000 ----------------------------------- F. O. Heintz /s/ R. E. Denton Director March 20, 2000 ----------------------------------- R. E. Denton /s/ T. F. Brady Director March 20, 2000 ----------------------------------- T. F. Brady
92 EXHIBIT INDEX Exhibit Number - ------- *2 -- Agreement and Plan of Share Exchange between Baltimore Gas and Electric Company and Constellation Energy Group, Inc. dated as of February 19, 1999. (Designated as Exhibit No. 2 in Form S-4 dated March 3, 1999, File No. 33-64799.) *3(a) -- Articles of Amendment and Restatement of the Charter of Constellation Energy Group, Inc. as of April 30, 1999. (Designated as Exhibit No. 99.2 in Form 8-K dated April 30, 1999, File No. 1-1910.) *3(b) -- Articles Supplementary to the Charter of Constellation Energy Group, Inc., as of July 19, 1999. 3(c)--Certificate of Correction to the Charter of Constellation Energy Group, Inc. as of September 13, 1999. (Designated as Exhibit No. 3(a) in Form 10-Q dated August 13, 1999, File No. 1-12869 and 1-1910.) 3(c) -- Certificate of Correction to the Charter of Constellation Energy Group, Inc. as of September 13, 1999. *3(d) -- Bylaws of Constellation Energy Group, Inc. amended to July 16, 1999. (Designated as Exhibit No. 3(b) in Form 10-Q dated August 13, 1999, File No. 1-12869 and 1-1910.) *3(e) -- Charter of BGE, restated as of August 16, 1996. (Designated as Exhibit No. 3 in Form 10-Q dated November 14, 1996, File No. 1-1910.) 3(f) -- By-Laws of BGE, as amended to April 30, 1999. *4(a) -- Indenture between Constellation Energy Group, Inc. and the Bank of New York, Trustee dated as of March 24, 1999. (Designated as Exhibit No. 4(a) in Form S-3 dated March 29, 1999, File No. 333-75217.) *4(b) -- Supplemental Indenture between BGE and Bankers Trust Company, as Trustee, dated as of June 20, 1995, supplementing, amending and restating Deed of Trust dated February 1, 1919. (Designated as Exhibit No. 4 in Form 10-Q dated August 11, 1995, File No. 1-1910.); and the following Supplemental Indentures between BGE and Bankers Trust Company, Trustee:
Designated In ------------------------------- Exhibit Dated File No. Number ----- -------- ------- *July 15, 1977 2-59772 2-3 (3 Indentures) *August 15, 1991 33-45259 (Form S-3 Registration) 4(a)(i) *January 15, 1992 33-45259 (Form S-3 Registration) 4(a)(ii) *July 1, 1992 1-1910 (Form 8-K Report for January 29, 1993) 4(a) *February 15, 1993 1-1910 (Form 10-K Annual Report for 1992) 4(a)(i) *March 1, 1993 1-1910 (Form 10-K Annual Report for 1992) 4(a)(ii) *March 15, 1993 1-1910 (Form 10-K Annual Report for 1992) 4(a)(iii) *April 15, 1993 1-1910 (Form 10-Q dated May 13, 1993) 4 *July 1, 1993 1-1910 (Form 10-Q dated August 13, 1993) 4(a) *July 15, 1993 1-1910 (Form 10-Q dated August 13, 1993) 4(b) *October 15, 1993 1-1910 (Form 10-Q dated November 12, 1993) 4 *June 15, 1996 1-1910 (Form 10-Q dated August 13, 1996) 4
*4(c) -- Indenture dated July 1, 1985, between BGE and The Bank of New York (Successor to Mercantile-Safe Deposit and Trust Company), Trustee. (Designated in Registration File No. 2-98443 as Exhibit 4(a)); as supplemented by Supplemental Indentures dated as of October 1, 1987 (Designated in Form 8-K, dated November 13, 1987, File No. 1-1910 as Exhibit 4(a)) and as of January 26, 1993 (Designated in Form 8-K, dated January 29, 1993, File No. 1-1910 as Exhibit 4(b).) 93 *4(d) -- Form of Subordinated Indenture between the Company and The Bank of New York, as Trustee in connection with the issuance of the Junior Subordinated Debentures (Designated as Exhibit 4(d) in Form S-3 dated May 28, 1998, File No. 333-53767). *4(e) -- Form of Supplemental Indenture between the Company and The Bank of New York, as Trustee in connection with the issuances of the Junior Subordinated Debentures (Designated as Exhibit 4(e) in Form S-3 dated May 28, 1998, File No. 333-53767). *4(f) -- Form of Preferred Securities Guarantee (Designated as Exhibit 4(f) in Form S-3 dated May 28, 1998, File No. 333-53767). *4(g) -- Form of Junior Subordinated Debenture (Designated as Exhibit 4(h) in Form S-3 dated May 28, 1998, File No. 333-53767). *4(h) -- Form of Amended and Restated Declaration of Trust (including Form of Preferred Security) (Designated as Exhibit 4(c) in Form S-3 dated May 28, 1998, File No. 333-53767). 10(a) -- Constellation Energy Group, Inc. Executive Benefits Plan, as amended and restated, with Summary of New Executive Pension Provision. 10(b) -- Executive Annual Incentive Plan of Constellation Energy Group, Inc., as amended and restated. *10(c) -- Constellation Energy Group, Inc. 1995 Long-Term Incentive Plan, as amended and restated. (Designated as Exhibit No. 10(a) in Form 10-Q dated November 12, 1999, File Nos. 1-12869 and 1-1910.) *10(d) -- Constellation Energy Group, Inc. Nonqualified Deferred Compensation Plan, as amended and restated. (Designated as Exhibit No. 10(b) in Form 10-Q dated November 12, 1999, File Nos. 1-12869 and 1-1910.) *10(e) -- Constellation Energy Group, Inc. Deferred Compensation Plan for Non- Employee Directors. (Designated as Exhibit No. 10(a) in Form 10-Q dated May 14, 1999, File Nos. 1-12869 and 1-1910.) *10(f) -- Baltimore Gas and Electric Company Retirement Plan for Non-Employee Directors, as amended and restated. (Designated as Exhibit No. 10(m) in Form 10-Q dated May 14, 1999, File Nos. 1-12869 and 1-1910.) (Terminated effective August 1, 1997.) 10(g) -- Summary of severance arrangement for a Named Executive Officer. *10(h) -- Grantor Trust Agreement Dated as of April 30, 1999 between Constellation Energy Group, Inc. and Citibank, N.A. (Designated as Exhibit No. 10(g) in Form 10-Q dated May 14, 1999, File Nos. 1-12869 and 1-1910.) *10(i) -- Form of Severance Agreement between Constellation Energy Group, Inc. and seven key employees. (Designated as Exhibit No. 10(j) in Form 10- Q dated May 14, 1999, File Nos. 1-12869 and 1-1910.) *10(j) -- Summary of enhanced retirement benefits for a named executive officer. (Designated as Exhibit No. 10(l) in Form 10-Q dated May 14, 1999, File Nos. 1-12869 and 1-1910.) *10(k) -- Grantor Trust Agreement dated as of April 30, 1999 between Constellation Energy Group, Inc. and T. Rowe Price Trust Company. (Designated as Exhibit No. 10(e) in Form 10-Q dated May 14, 1999, File Nos. 1-12869 and 1-1910.) *10(l) -- Constellation Energy Group, Inc. Long-Term Incentive Plan. (Designated as Exhibit No. 10(b) in Form 10-Q dated May 14, 1999, File Nos. 1-12869 and 1-1910.) 12(a) -- Constellation Energy Group, Inc. Computation of Ratio of Earnings to Fixed Charges. 12(b) -- Baltimore Gas and Electric Company Computation of Ratio of Earnings to Fixed Charges and Computation of Ratio of Earnings to Combined Fixed Charges and Preferred and Preference Dividend Requirements. 94 21 -- Subsidiaries of the Registrant. 23 -- Consent of PricewaterhouseCoopers LLP, Independent Accountants. 27(a) -- Constellation Energy Group, Inc. Financial Data Schedule. 27(b) -- Baltimore Gas and Electric Company Financial Data Schedule. *99(a) -- BGE 1999 Pro Forma Financial Statement for Generation Asset Transfer. (Designated as Exhibit No. 99 in Form 8-K dated March 17, 2000 File No. 1-12869 and 1-1910.) - -------- * Incorporated by Reference. (b) Reports on Form 8-K:
Date Filed Item Reported ---------- ------------- November 18, 1999 Item 5. Other Events
95 EX-3.C 2 EXHIBIT 3C Exhibit 3(c) CONSTELLATION ENERGY GROUP, INC. CERTIFICATE OF CORRECTION CONSTELLATION ENERGY GROUP, INC., a Maryland corporation, having its principal office in Baltimore, Maryland (which is hereinafter called the "Corporation"), hereby certifies to the State Department of Assessments and Taxation of Maryland that: FIRST: This Certificate of Correction corrects the Articles of Amendment and Restatement of the Corporation (hereinafter referred to as the "Articles"). SECOND: The name of the party to the Articles being corrected is Constellation Energy Group, Inc. THIRD: The Articles were filed for record with the State Department of Assessments and Taxation of Maryland on April 30, 1999. FOURTH: As previously filed, Article Sixth, Paragraph (a)(ii), of the Articles stated: "the balance, two hundred fifty million (250,000,000) shares without par value, is Common Stock of which one hundred fifty-one million, eleven thousand, six hundred and sixty-three (151,011,663) shares have either been issued and are now outstanding or have been reserved for issuance and forty-eight million, nine hundred eighty-eight thousand, three hundred thirty- seven (48,988,337) shares are authorized but unissued and unreserved." FIFTH: Article Sixth, Paragraph (a)(ii), of the Articles, is hereby corrected to state: "the balance, two hundred fifty million (250,000,000) shares without par value, is Common Stock of which one hundred fifty-one million, eleven thousand, six hundred and sixty-three (151,011,663) shares have either been issued and are now outstanding or have been reserved for issuance and ninety-eight million, nine hundred eighty-eight thousand, three hundred thirty-seven (98,988,337) shares are authorized but unissued and unreserved." SIXTH: This Certificate of Correction does not: (1) Alter the wording of any resolution which was adopted by the Board of Directors or the stockholders of any party to the Articles; or (2) Make any other change or amendment which would not have complied in all respects with the requirements of the Corporations and Associations Article of the Annotated Code of Maryland at the time the Articles were filed; or (3) Change the effective date of the Articles; or (4) Affect any right or liability accrued prior to the filing hereof, except that any right or liability accrued or incurred by reason of the error or defect being corrected shall be extinguished by the filing of this Certificate of Correction if the person having the right has not detrimentally relied on the articles before said correction. -2- IN WITNESS WHEREOF, Constellation Energy Group, Inc. has caused these presents to be signed in its name and on its behalf by its Vice President, Finance and Accounting, Chief Financial Officer and Secretary, and its corporate seal to be hereto affixed, duly attested by its Treasurer on _________, 1999, who each hereby (i) acknowledge that the execution of this Certificate of Correction is the act of Constellation Energy Group, Inc., and (ii) state that to the best of their respective knowledge, information and belief, the matters and facts set forth herein are true in all material respects, such statement being made under the penalties of perjury. CONSTELLATION ENERGY GROUP, INC. By:______________________________________ David A. Brune Vice President, Finance and Accounting, Chieft Financial Officer, and Secretary SEAL: CONSTELLATION ENERGY GROUP, INC. INCORPORATED September 22, 1995 Attest:_______________________________ Thomas E. Ruszin, Jr. Treasurer -3- EX-3.F 3 EXHIBIT 3F Exhibit 3(f) BY-LAWS OF Baltimore Gas and Electric Company Amended as of April 30, 1999 Exhibit 3(f) By-Laws of Baltimore Gas and Electric Company ARTICLE I MEETINGS OF STOCKHOLDERS Section 1. - Annual Meeting. The annual meeting of the stockholders for the election of Directors and for the transaction of general business shall be held on any date during the period of April 14 through May 13, as determined year to year by the Board of Directors. The time and location of the meeting shall be determined by the Board of Directors. The Chief Executive Officer of the Company shall prepare, or cause to be prepared, an annual report containing a full and correct statement of the affairs of the Company, including a balance sheet and a financial statement of operations for the preceding fiscal year, which shall be submitted to the stockholders at the annual meeting. Section 2. - Special Meeting. Special meetings of the stockholders may be held in the City of Baltimore or in any county in which the Company provides service or owns property upon call by the Chairman of the Board, the President, or a majority of the Board of Directors whenever they deem expedient, or upon the written request of the holders of shares entitled to not less than twenty-five percent of all the votes entitled to be cast at such a meeting. Such request of the stockholders shall state the purpose or purposes of the meeting and the matters proposed to be acted on the threat and shall be delivered to the Secretary, who shall inform such stockholders of the reasonably estimated cost of preparing and mailing such notice of the meeting, and upon payment to the company of such costs the Secretary shall give notice stating the purpose or purposes of the meeting to all stockholders entitled to vote at such meeting. No special meeting need be called upon the request of the holders of the shares entitled to cast less than a majority of all votes entitled to be cast to such meeting, to consider any matter which is substantially the same as a matter voted upon at any special meeting of the stockholders held during the preceding twelve months. The business at all special meetings shall be confined to that specially named in the notice thereof. Section 3. - Notice of Meetings. Written or printed notice of every meeting of the stockholders, whether annual or special, stating the place, day, and hour of such meeting and (in case of special meetings) the business proposed to be transacted shall be given by the Secretary to each stockholder entitled to vote at such meeting not less than ten days but no more than ninety days before the date fixed for such meeting, by depositing such notice in the United States mail addressed to him at his post office address as it appears on the records of the Company, with postage thereon prepaid. 1 Section 4. - Organization of Meeting. All meetings of the stockholders shall be called to order by the Chairman of the Board, or in his absence by the President, or in his absence by a Vice President; or in the case of the absence of such officers, then by any stockholder, whereupon the meeting shall organize by electing a chairman. The Secretary of the Company, if present, shall act as Secretary of the meeting, unless some other person shall be elected by the meeting to act. An accurate record of the meeting shall be kept by the secretary thereof, and placed in the record books of the Company. Section 5. - Quorum. At any meeting of the stockholders the presence in person or by proxy of stockholders entitled to cast a majority of the votes thereat shall constitute a quorum for the transaction of business. If a quorum be not present at any meeting, holders of a majority of the shares of stock so present or represented may adjourn the meeting either sine die or to a date certain. Section 6. - Voting. At all meetings of the stockholders each stockholder shall be entitled to one vote for each share of common stock standing in his name and, when the preferred or preference stock is entitled to vote, such number of votes as shall be provided in the Charter of the Company for each share of preferred and preference stock standing in his name, and the votes shall be cast by stockholders in person or by lawful proxy. Section 7. - Judge of Election and Tellers. The Directors shall, at a regular or special meeting, appoint a Judge of Election and two Tellers to serve at each meeting of stockholders. If the Directors fail to make such appointments, or if the Judge of Election and/or Tellers, or any of them, fail to appear at the meeting, the Chairman of the meeting shall appoint a Judge of Election and/or a Teller or Tellers to serve at that meeting. It shall be the duty of the Tellers to receive the ballots of all the holders of stock entitled to vote and present at a meeting either in person or by proxy, and to count and tally said ballots by the official record of stockholders of the Company, or by a summary prepared therefrom and certified by the Stock Transfer Agent or the Secretary of the Company showing the number of shares of common and, if entitled to vote, preferred and preference stock owned of record by each stockholder, who may be designated therein by name, code number, or otherwise, and certify them to the Judge of Election, and the said Judge shall communicate in writing the result of the balloting so certified by the Tellers to the Chairman who shall at once announce the same to the meeting. This certificate, signed by the Tellers and countersigned by the Judge, shall be duly recorded as part of the minutes of the meeting and filed among the records of the Company. 2 Section 8. - Record Date for Stockholders and Closing of Transfer Books. The Board of Directors may fix, in advance, a date as the record for the determination of the stockholders entitled to notice of, or to vote at, any meeting of stockholders, or entitled to receive payment of any dividend, or entitled to the allotment of any rights, or for any other proper purpose. Such date in any case shall not be more than ninety days (and in the case of a meeting of stockholders not less than ten days) prior to the date on which the particular action requiring such determination of stockholders is to be taken. Only stockholders of record on such date shall be entitled to notice of or to vote at such meeting or to receive such dividends or rights, as the case may be. In lieu of fixing a record date the Board of Directors may close the stock transfer books of the Company for a period not exceeding twenty nor less than ten days preceding the date of any meeting of stockholders or not exceeding twenty days preceding any other of the above mentioned events. ARTICLE II BOARD OF DIRECTORS AND COMMITTEES Section 1. - Powers of Directors The business and affairs of the Company shall be managed by a Board of Directors which shall have and may exercise all the powers of the Company, except such as are expressly conferred upon or reserved by the stockholders by law, by Charter, or by these by-laws. Except as otherwise provided herein, the Board of Directors shall appoint the officers for the conduct of the business of the Company, determine their duties and responsibilities and fix their compensation. The Board of Directors may remove any officer. Section 2. - Number and Election of Directors. The number of Directors shall be set at six (6); provided, however, that the number of Directors may be increased or decreased by the Board of Directors without an amendment to these by-laws but in no event will be less than three (3) Directors or more than fifteen (15) Directors; provided further, that so long as there are less than three (3) stockholders, the number of Directors may be less than three (3) but not less than the number of stockholders. The Directors shall be elected at each Annual Meeting of the Stockholders except as otherwise provided in these by-laws. They shall hold their offices for one year and until their successors are elected and qualified. Section 3. - Removals and Vacancies. The stockholders, at any meeting duly called and at which a quorum is present, may remove any Director or Directors from Office by the affirmative vote of the holders of a majority of the outstanding shares entitled to the vote thereon, and may elect a successor or successors to fill any resulting vacancies for the unexpired terms of the removed Directors. Any vacancy occurring in the Board of Directors from any cause other than by reason of a removal or an increase in the number of Directors, may be filled by a majority of the remaining Directors although such majority is less than a quorum. Any vacancy occurring by reason of an 3 increase in the number of Directors may be filled by action of a majority of Directors. A Director elected to fill a vacancy shall hold office until the next annual meeting of stockholders or until his successor is elected and qualified. Section 4. - Meetings of the Board. A regular meeting of the Board of Directors shall be held immediately after the annual meeting of stockholders or any special meeting of the stockholders at which the Board of Directors is elected, and thereafter regular meetings of the Board of Directors shall be held on such dates during the year as may be designated from time to time by the Board. All meetings of the Board of Directors shall be held at the general offices of the Company in the City of Baltimore or elsewhere, as ordered by the Board. Of all such meetings (except the regular meeting held immediately after the election of Directors) the Secretary shall give notice to each Director personally or by telephone, by telegram directed to, or by written notice deposited in the mails addressed to, his residence or business address at lease 48 hours before such meeting. Special meetings may be held at any time or place upon the call of the Chairman of the Board, or, the Chief Executive Officer, or in their absence, on order of the Executive Committee by notices as above, unless the meetings be called during the months of July and August, in which case five days' notice shall be given. In the event three-fourths of the Directors in office waive notice of any meeting in writing at or before the meeting, the meeting may be held without the aforesaid advance notices. The Chairman shall preside at all meetings of the Board, or, in his absence, the President, or one of the Vice Presidents (if a member of the Board) shall preside. If at any meeting none of the foregoing persons is present, the Directors present shall designate one of their number to preside at such meeting. Section 5. - Quorum. A majority of the Directors in office shall constitute a quorum of the Board for the transaction of business. If a quorum be not present at any meeting, a majority of the Directors present may adjourn to any time and place they may see fit. Section 6. - Committees. The Board of Directors is authorized to appoint from among its members such committees as it may, from time to time, deem advisable and to delegate to such committee or committees any of the powers of the Board of Directors which it may lawfully delegate. Each such committee shall consist of at least two Directors. Section 7. - Fees and Expenses. Each member of the Board of Directors, other than salaried Officers and employees, shall be paid an annual retainer fee, payable in quarterly installments, in such amount as shall be specified from time to time by the Board. Each member of the Board of Directors, other than salaried Officers and employees, shall be paid such fee as shall be specified from time to time by the Board for attending each regular or special meeting of the Board and for attending, as a committee member, each meeting 4 of the Executive Committee, Audit Committee, Committee on Management and any other committee appointed by the Board. Each member shall be paid reasonable traveling expenses incident to attendance at meetings. ARTICLE III OFFICERS Section 1. - Officers. The Company shall have a Chairman of the Board, a President, one or more Vice Presidents, a Treasurer, and a Secretary who shall be elected by, and hold office at the will of, the Board of Directors. The Chairman of the Board and the President shall be chosen from among the Directors, and the Board of Directors shall designate either the Chairman of the Board or the President to be the Chief Executive Officer of the Company. The Board of Directors shall also elect such other officers as they may deem necessary for the conduct of the business and affairs of the Company. Any two offices, except those of President and Vice President, may be held by the same person, but no person shall sign checks, drafts and promissory notes, or execute, acknowledge or verify any other instrument in more than one capacity, if such instrument is required by law, the charter, these by-laws, a resolution of the Board of Directors or order of the Chief Executive Officer to be signed, executed, acknowledged or verified by two or more officers. The Chairman of the Board, President and Vice Presidents shall receive such compensation as shall be fixed by the Board of Directors. Compensation for officers other than the Chairman of the Board, President and Vice Presidents shall be fixed by the Chief Executive Officer. The Board of Directors shall require a fidelity bond to be given by each officer, or, in its discretion, the Board may substitute a general blanket fidelity bond or insurance contract to cover all officers and employees. Section 2. - Duties of the Officers. (a) Chairman of the Board The Chairman of the Board shall preside at all meetings of the Board of Directors and of stockholders. He shall also have such other powers and duties as from time to time may be assigned to him by the Board of Directors. (b) President The President shall have general executive powers, as well as specific powers conferred by these by-laws. He, any Vice President, or such other persons as may be designated by the Board of Directors, shall sign all special contracts of the Company, countersign checks, drafts and promissory notes, and such other papers as may be directed by the Board of Directors. He, or any Vice President, together with the Treasurer or an Assistant Treasurer, shall have authority to sell, assign or transfer and deliver any bonds, stocks or other securities owned by the Company. He shall also have such other powers and duties as from time to time may be assigned to him by the Board of Directors. In the absence of the Chairman of the Board, the President shall perform all the duties of the Chairman of the Board. 5 (c) Vice Presidents Each Vice President shall have such powers and duties as may be assigned to him by the Board of Directors, or the Chief Executive Officer, as well as the specific powers assigned by these by-laws. A Vice President may be designated by the Board of Directors or the Chief Executive Officer to perform, in the absence of the President, all the duties of the President. (d) Treasurer The Treasurer shall have the care and the custody of the funds and valuable papers of the Company, and shall receive and disburse all moneys in such a manner as may be prescribed by the Board of Directors or the Chief Executive Officer. He shall have such other powers and duties as may be assigned to him by the Board of Directors, or the Chief Executive Officer, as well as specific powers assigned by these by-laws. (e) Secretary The Secretary shall attend all meetings of the stockholders and Directors and shall notify the stockholders and Directors of such meetings in the manner provided in these by-laws. He shall record the proceedings of all such meetings in books kept for that purpose. He shall have such other powers and duties as may be assigned to him by the Board of Directors or the Chief Executive Officer, as well as the specific powers assigned by these by-laws. Section 3. - Removals and Vacancies. Any officer may be removed by the Board of Directors whenever, in its judgment, the best interest of the Company will be served thereby. In case of removal, the salary of such officer shall cease. Removal shall be without prejudice to the contractual rights, if any, of the person so removed, but election of an officer shall not of itself create contractual rights. Any vacancy occurring in any office of the Company shall be filled by the Board of Directors and the officer so elected shall hold office for the unexpired term in respect of which the vacancy occurred or until its successor shall be duly elected and qualified. In any event of absence or temporary disability of any officer of the Company, the Board of Directors may authorize some other person to perform the duties of that office. ARTICLE IV INDEMNIFICATION OF DIRECTORS AND OFFICERS Each person made or threatened to be made party to an action, suit or proceeding, whether, civil, criminal, administrative or investigative, by reason of the fact that such person is or was a director or officer of the Company, or, at its request, is or was a director or officer of another corporation, shall be indemnified by the Company (to the extent indemnification is not otherwise provided by insurance) against the liabilities, costs and expenses of every kind actually and reasonable incurred by him as a result of such action, suit or proceeding, or any threat thereof or any appeal thereon, but in each case only if and to the extent permissible under 6 applicable common or statutory law, state or federal. The foregoing indemnity shall not be inclusive of other rights to which such person may be entitled. ARTICLE V CAPITAL STOCK Section 1. - Evidence of Stock Ownership. Evidence of ownership of stock in the Company may be either pursuant to a certificate(s) or a statement in compliance with Maryland law, each of which shall represent the number of shares of stock owned by a stockholder in the Company. Stockholders may request that their stock ownership be represented by a certificate(s). Each certificate shall be signed on behalf of the Company by the President or a Vice President and countersigned by the Secretary, and shall be sealed with the corporate seal. The signatures may be either manual or facsimile. In case any officer who signed any certificate, in facsimile or otherwise, ceases to be such officer of the Company before the certificate is issued, the certificate may nevertheless be issued by the Company with the same effect as if the officer had not ceased to be such officer as of the date of its issue. For stock ownership evidenced by a statement, such statement shall be in such form, and executed, as required from time to time by Maryland law. Section 2. - Transfer of Shares. Stock shall be transferable only on the books of the Company by assignment in writing by the registered holder thereof, his legally constituted attorney, or his legal representative, either upon surrender and cancellation of the certificate(s) therefor, if such stock is represented by a certificate, or upon receipt of such other documentation for stock not represented by a certificate as the Board of Directors and Maryland law may, from time to time, require. Section 3. - Lost, Stolen or Destroyed Certificates. No certificate for shares of stock of the Company shall be issued in place of any other certificate alleged to have been lost, stolen, or destroyed, except upon production of such evidence of the loss, theft or destruction and upon indemnification of the Company to such extent and in such manner as the Board of Directors may prescribe. Section 4. - Transfer Agents and Registrars. The Board of Directors shall appoint a person or persons, or any incorporated trust company or companies or both, as transfer agents and registrars and, if stock is represented by a certificate, may require that such certificate bear the signatures or the counter-signatures of such transfer agents and registrars, or either of them. 7 Section 5. - Stock Ledger. The Company shall maintain at its principal office in Baltimore, Maryland, a stock record containing the names and addresses of all stockholders and the numbers of shares of each class held by each stockholder. ARTICLE VI SEAL The Board of Directors shall provide, subject to change, a suitable corporate seal which may be used by causing it, or facsimile thereof, to be impressed or affixed or reproduced one the Company's stock certificates, bonds, or any other documents on which the seal may be appropriate. ARTICLE VII AMENDMENTS These by-laws, or any of them, may be amended or repealed, and new by-laws may be made or adopted at any meeting of the Board of Directors, by vote of a majority of the Directors, or by the stockholders at any annual meeting, or at any special meeting called for that purpose. 8 EX-10.A 4 EXHIBIT 10A Exhibit 10(a) CONSTELLATION ENERGY GROUP, INC. -------------------------------- EXECUTIVE BENEFITS PLAN ----------------------- NOTE - SEE ATTACHED SUMMARY OF NEW EXECUTIVE PENSION PROVISIONS FOR A DESCRIPTION OF CHANGES AFFECTING THIS PLAN THAT HAVE NOT YET BEEN INCORPORATED INTO FINAL WRITTEN PLAN DOCUMENTS Restated October, 1999 TABLE OF CONTENTS Page No. 1. Objective 1 2. Definitions 1 3. Plan Administration 4 4. Eligibility 4 5. Supplemental Pension Benefit 4 (a) Retirement benefits 4 (i) Eligibility for retirement benefits (ii) Computation of retirement benefits 5 (iii) Form of payout of retirement benefits 6 (iv) Amount, timing, and source of monthly retirement benefit payout 7 (v) Amount, timing, and source of lump sum retirement benefit payout 7 (vi) Death of participant entitled to lump sum payout 7 (vii) Health and dental benefits 7 (b) Accrued benefit 8 (i) Computation of gross accrued benefit 8 (ii) Computation of net accrued benefit 8 (c) Entitlement to benefit upon happening of certain events 9 (i) Satisfaction of requirements 9 (ii) Other events 9 (1) Change in control 9 (2) Plan amendment 9 (3) Involuntary Demotion, Termination From Employment With Constellation Energy Group, or eligibility withdrawal without Cause 10 (iii) Form of benefit payout 10 (iv) Amount, timing and source of benefit payout 10 (v) Death of participant entitled to lump sum payout 11 (d) Other benefits 12 (i) Eligibility for other benefits 12 (ii) Computation of other benefits 12 (iii) Form of payout of other benefits 13 (iv) Amount, timing, and source of monthly -2- other benefit payout 13 6. Supplemental Long-Term Disability Benefit 13 (i) Eligibility for disability benefits 13 (ii) Computation of disability benefits 14 (iii) Form of payment of disability benefits 14 (iv) Amount, timing, and source of monthly disability benefit payout 14 (v) Bonus 15 7. Supplemental Survivor Annuity Benefit 15 (a) Survivor annuity benefit 15 (i) Eligibility for survivor annuity benefit 15 (ii) Computation of survivor annuity benefit 15 (iii) Form of payout of survivor annuity benefits 17 (iv) Amount, timing, and source of monthly survivor annuity benefit payout 17 (b) Other survivor benefit 17 (i) Eligibility for other survivor benefit 17 (ii) Computation of other survivor benefit 18 (iii) Form of payout of other survivor benefit 18 (iv) Amount, timing, and source of monthly other survivor benefit payout 18 8. Death Benefit 19 9. Dependent Death Benefit 19 10. Sickness Benefit 19 11. Vacation Benefit 20 12. Planning Benefit 20 13. Miscellaneous 21 CONSTELLATION ENERGY GROUP, INC. -------------------------------- EXECUTIVE BENEFITS PLAN -------------------------------- 1. Objective. The objective of this Plan is to enhance the benefits provided --------- to officers and key employees of Constellation Energy Group and its subsidiaries in order to attract and retain talented executive personnel. 2. Definitions. All words beginning with an initial capital letter and not ----------- otherwise defined herein shall have the meaning set forth in the Pension Plan. All singular terms defined in this Plan will include the plural and vice versa. As used herein, the following terms will have the meaning ---------- specified below: "Annual Base Salary" means an amount determined by adding the monthly base rate of pay amounts (i.e., the types of such pay that are includable in the computation of Pension Plan benefits)earned over the twelve calendar months immediately preceding the month that includes the date of the computation. "Average Incentive Award" (or "Average Award") means generally the product of the percentage equal to an average of the two highest of the participant's five immediately prior year award percentages earned under Constellation Energy Group's Executive Annual Incentive Plan, Constellation Energy Group's Senior Management Annual Incentive Plan and/or the Results Incentive Awards Program multiplied by the participant's annualized base rate of pay amount (i.e., the types of such pay that are includable in the computation of Pension Plan benefits) in effect at the end of the prior year. "Cause" means the participant's (a) failure to comply with Constellation Energy Group policy, (b) deliberate and continual refusal to satisfactorily perform employment duties on substantially a full-time basis, (c) deliberate and continual refusal to act in accordance with any specific instructions of a majority of Constellation Energy Group's Board of Directors, (d) disclosure, without the consent of a majority of Constellation Energy Group's Board of Directors, of confidential information or trade secrets concerning Constellation Energy Group which could be materially -2- damaging to Constellation Energy Group, or (e) deliberate misconduct which could be materially damaging to Constellation Energy Group without reasonable good faith belief by the participant that such conduct was in the best interest of Constellation Energy Group. "Change in Control" means (a) the purchase or acquisition by any person, entity or group of persons, (within the meaning of Section 13(d) or 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act"), or any comparable successor provisions), of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20 percent or more of either the outstanding shares of common stock of Constellation Energy Group or the combined voting power of Constellation Energy Group's then outstanding shares of voting securities entitled to a vote generally, or (b) the consummation of, following the approval by the stockholders of Constellation Energy Group of a reorganization, merger, or consolidation of Constellation Energy Group, in each case, with respect to which persons who were stockholders of Constellation Energy Group immediately prior to such reorganization, merger or consolidation do not, immediately thereafter, own more than 50 percent of the combined voting power entitled to vote generally in the election of directors of the reorganized, merged or consolidated entity's then outstanding securities, or (c) a liquidation or dissolution of Constellation Energy Group or the sale of substantially all of its assets, or (d) a change of more than one-half of the members of the Board of Directors of Constellation Energy Group within a 90-day period for reasons other than the death, disability, or retirement of such members. "Committee" means the Committee on Management of the Board of Directors of Constellation Energy Group. "Constellation Energy Group" means Constellation Energy Group, Inc., a Maryland corporation, or its successor. "Constellation Energy Group's Executive Annual Incentive Plan" means such plan or other incentive plan or arrangement designated in writing by the Plan Administrator. "Constellation Energy Group's Senior Management Annual Incentive Plan" means such plan or other incentive plan or arrangement designated in writing by the Plan Administrator. -3- "Demotion" means a transfer to a position with Constellation Energy Group or a subsidiary of Constellation Energy Group that either (a) is below the substantially equivalent position in which the participant was employed on the date of transfer, or (b) results in a substantial reduction in pay when compared to the participant's pay on the date of the transfer. Whether a position is a substantially equivalent position shall be determined in the reasonable discretion of the Committee, with reference to factors including whether the participant retains principal responsibility for a department or division, and whether the participant remains eligible for the perquisites enjoyed by the participant before the position change. "Income Replacement Percentage" means the percentage under the LTD Plan that is used to calculate the participant's actual LTD Plan benefit. "Interest Rate" means the rate equal to 3.5% plus 65% of yield on the Lehman Brothers Government/Corporate Bond Index. "LTD Plan" means the Constellation Energy Group, Inc. Disability Insurance Plan as may be amended from time to time, or any successor plan. "Mortality Table" means the mortality table used to value liabilities for Pension Plan funding purposes. "Pension Plan" means the Pension Plan of Constellation Energy Group, Inc. as may be amended from time to time, or any successor plan. "Plan Administrator" means, as set forth in Section 3, the Committee. "Rabbi Trust" means the trust adopted by Constellation Energy Group pursuant to the Grantor Trust Agreement Dated as of April 30, 1999, between Constellation Energy Group and Citibank, N.A. "Results Incentive Awards Program" means the program applicable to certain employees that provides awards; but includes only the types of awards that are includable in the computation of Pension Plan benefits. "Termination From Employment With Constellation Energy Group" means a participant's separation from service with -4- Constellation Energy Group or a subsidiary of Constellation Energy Group; however, a participant's retirement, disability, or transfer of employment to or from a subsidiary of Constellation Energy Group shall not constitute a Termination From Employment With Constellation Energy Group. 3. Plan Administration. The Committee is the Plan Administrator and has sole ------------------- authority (except as specified otherwise herein) to interpret the Plan and, in general, to make all other determinations advisable for the administration of the Plan to achieve its stated objective. Appeals of written decisions by the Plan Administrator may be made to the Board of Directors of Constellation Energy Group. Decisions by the Board shall be final and not subject to further appeal. The Plan Administrator shall have the power to delegate all or any part of its duties to one or more designees, and to withdraw such authority, by written designation. 4. Eligibility. Each officer or key employee of Constellation Energy Group or ----------- its subsidiaries may be designated in writing by the Plan Administrator as a participant with respect to one or more benefits under the Plan. Once designated, participation shall continue until such designation is withdrawn at the discretion and by written order of the Plan Administrator, provided, however, that such withdrawal may not be made for benefits provided pursuant to Sections 5 and 7 with respect to a participant who has satisfied the eligibility requirements to retire (as set forth in Section 5(a)(i)). Notwithstanding the foregoing, any participant who is disabled under the LTD Plan shall continue to participate in this Plan while classified as disabled and, for purposes of the supplemental pension benefit provided by this Plan, while classified as disabled, shall be deemed to continue to accrue Credited Service until no later than his/her Normal Retirement Date. 5. Supplemental Pension Benefit. ----------------------------- (a) Retirement benefits. ------------------- (i) Eligibility for retirement benefits. A participant shall be ----------------------------------- eligible to retire under this Plan on or after the participant's Normal Retirement Date, or on the first day of any month preceding his/her Normal Retirement Date, if the participant has -5- attained (1) age 55 and has accumulated at least 20 years of Credited Service; or (2) age 60 and has accumulated at least one year of Credited Service. (ii) Computation of retirement benefits. A participant who is eligible ---------------------------------- to retire under this Plan will be entitled to supplemental pension retirement benefits under this Plan, which will be calculated as set forth below on the participant's Retirement Date: (1) add the Annual Base Salary and the Average Incentive Award, (2) divide the sum by 12, (3) multiply this dollar amount by the appropriate percentage, determined as follows: Chairman of the Board and President of Constellation Energy Group, and President of Constellation Enterprises, Inc. - 60%; all other participants (by completed years of Credited Service) 1 through 9 - 3% per year; 10 through 19 - 40%; 20 through 24 - 45%; 25 through 29 - 50%; and 30 or more - 55%, (4) multiply this dollar amount by the Early Retirement Adjustment Factor set forth under the Pension Plan; provided, however, if the participant is age 62 or older and is an officer or key employee of Constellation Energy Group or its subsidiaries, other than the Chairman of the Board and President of Constellation Energy Group or the President of Constellation Enterprises, Inc., such factor shall be one (1), (5) subtract from this dollar amount the charges relating to coverage for a preretirement survivor annuity in excess of 50%, and for a post-retirement survivor annuity in excess of 50%, and (6) subtract from the remainder the net amount payable to the participant under the Pension Plan. -6- (iii) Form of payout of retirement benefits. Each participant entitled ------------------------------------- to supplemental pension retirement benefits will receive his/her supplemental pension retirement benefits payout in the form of a monthly payment, unless the participant makes a valid election to receive his/her supplemental pension retirement benefits payout in the form of a lump sum. A participant may elect to receive his/her supplemental pension retirement benefits payout in the form of a lump sum by submitting to the Plan Administrator a signed Lump Sum Election Form. The Form must be received by the Plan Administrator before the beginning of the calendar year during which the participant's Retirement Date occurs. The election may be revoked at any time before the beginning of the calendar year during which the participant's Retirement Date occurs, by submitting to the Plan Administrator a signed Lump Sum Revocation Form. (iv) Amount, timing, and source of monthly retirement benefit payout. --------------------------------------------------------------- A participant entitled to monthly supplemental pension retirement benefits will receive monthly payments equal to the amount determined under paragraph (a)(ii). Such payments shall commence effective with the participant's Retirement Date. If such participant receives (or would have received but for the Internal Revenue Code limitations) cost of living adjustment(s) under the Pension Plan, the monthly payments hereunder will be automatically increased based on the percentage of, and at the same time as, such adjustment(s). Monthly payments hereunder shall permanently cease upon the death of the participant, effective with the monthly payment for the month following the month of the participant's death. Monthly payments hereunder shall be made in accordance with the provisions of the Rabbi Trust and, to the extent not paid under the terms of the Rabbi Trust, from general corporate assets. (v) Amount, timing, and source of lump sum retirement benefit payout. ---------------------------------------------------------------- A participant entitled to a lump sum supplemental pension retirement benefit will -7- receive a lump sum payment. This lump sum payment will be calculated by a certified actuary and will be equal to the present value of an immediate annuity including the estimated present value of post-retirement supplemental survivor annuity benefits described in Section 7, using (1) the supplemental pension retirement benefit amount calculated under paragraph (a)(ii), which is expressed as a monthly amount, (2) the Interest Rate computed on the participant's Retirement Date, and (3) the Mortality Table. Such lump sum payment shall be made within 60 days after the participant's Retirement Date. The lump sum payment shall be made in accordance with the provisions of the Rabbi Trust and, to the extent not paid under the terms of the Rabbi Trust, from general corporate assets. A participant who receives a lump sum payment shall not be entitled to any cost of living or other pension payment adjustments or to post- retirement survivor annuity coverage under the Plan. (vi) Death of participant entitled to lump sum payout. In the event ------------------------------------------------ of the death of a participant after his/her Retirement Date and before the participant receives the lump sum payment under paragraph (a)(v), such lump sum payment shall be made to the participant's surviving spouse (as defined in Section 7(i)). The lump sum payment shall be the same amount and made at the same time and from the same sources as set forth in paragraph (a)(v). If there is no surviving spouse at the date of the participant's death, no payments shall be made pursuant to Sections 5 or 7. A surviving spouse who receives a lump sum benefit under this paragraph (a)(vi) shall not be entitled to any cost of living or other pension payment adjustments or to post-retirement survivor annuity coverage under the Plan. (vii) Health and dental benefits. A participant who receives -------------------------- supplemental pension retirement benefits under this Plan, but who is not eligible for benefits under the Constellation Energy Group Retiree Flexible Benefits Program, is entitled to health and dental benefits under this Plan that in the sole discretion of the Plan Administrator, are reasonably similar to health and dental benefits -8- provided for participants under the Constellation Energy Group Retiree Flexible Benefits Program, taking into account employer cost, age and service. (b) Accrued benefit. --------------- (i) Computation of gross accrued benefit. The computation of the ------------------------------------ gross accrued supplemental pension benefit for a participant as of the date of the computation will be made as follows: (1) add the Annual Base Salary and the Average Incentive Award, (2) divide the sum by 12, and (3) multiply this dollar amount by the appropriate percentage, determined as follows: Chairman of the Board and President of Constellation Energy Group and President of Constellation Enterprises, Inc. - 60%; all other participants (by completed years of Credited Service as of the date of the computation) 1 through 9 - 3% per year; 10 through 19 - 40%; 20 through 24 - 45%; 25 through 29 - 50%; and 30 or more - 55%. (ii) Computation of net accrued benefit. The computation of the net ---------------------------------- accrued supplemental pension benefit for a participant as of the date of the computation will be made by subtracting from the gross accrued benefit determined under paragraph (b)(i) the amount, computed on the date a benefit is payable under paragraph (c)(iv), of (1) the participant's Accrued Gross Pension under the Pension Plan, expressed as a monthly amount if the participant is not eligible for Normal Retirement, Early Retirement or Disability Retirement benefits under the Pension Plan, otherwise (2) the gross amount payable to the participant under the Pension Plan. (c) Entitlement to benefit upon happening of certain events. ------------------------------------------------------- -9- (i) Satisfaction of requirements. A participant who has satisfied the ---------------------------- age and Credited Service requirements set forth in Section 5(a)(i) while eligible as set forth in Section 4, but who does not retire under the Plan due to Demotion, Termination From Employment With Constellation Energy Group, or the withdrawal of a participant's eligibility to participate under Section 5, shall be entitled to his/her net accrued supplemental pension benefit. The effective date of the Demotion, Termination From Employment With Constellation Energy Group, or eligibility withdrawal event shall be the date of such Demotion, Termination From Employment With Constellation Energy Group, or eligibility withdrawal. (ii) Other events. A participant, regardless of his/her age and years ------------ of Credited Service, shall be entitled to his/her net accrued supplemental pension benefit upon the happening of any of the following entitlement events, but only if such entitlement event occurs before a participant retires under this Plan: (1) Change in Control. A Change in Control, followed within two ----------------- years by the participant's Demotion, a participant's Termination From Employment With Constellation Energy Group, or the withdrawal of the participant's eligibility to participate under the Plan, is an entitlement event. The effective date of the entitlement event shall be the date of the Demotion, Termination From Employment With Constellation Energy Group, or eligibility withdrawal. (2) Plan amendment. A Plan amendment that has the effect of -------------- reducing a participant's gross accrued supplemental pension benefit is an entitlement event. In determining whether such a reduction has occurred, the participant's gross accrued supplemental pension benefit calculated on the day immediately preceding the effective date of the amendment shall be compared to the -10- participant's gross accrued supplemental pension benefit calculated on the effective date of the amendment. An amendment that has the effect of reducing future benefit accruals is not an entitlement event. It is intended that an entitlement event under this paragraph (c)(i)(2) will occur only with respect to those amendments that are substantially similar to amendments that are prohibited by Internal Revenue Code section 411(d)(6) with respect to qualified pension plans. The effective date of the entitlement event shall be the effective date of the Plan amendment. (3) Involuntary Demotion, Termination From Employment With ------------------------------------------------------ Constellation Energy Group, or eligibility withdrawal ----------------------------------------------------- without Cause. A participant's involuntary Demotion or ------------- involuntary Termination From Employment With Constellation Energy Group without Cause, or the withdrawal of a participant's eligibility to participate under Sections 5 or 7 of the Plan without Cause, is an entitlement event. The effective date of the entitlement event shall be the effective date of the participant's involuntary Demotion or involuntary Termination From Employment With Constellation Energy Group without Cause, or the eligibility withdrawal without Cause. (iii) Form of benefit payout. Each participant entitled to a payout ---------------------- under this paragraph (c) will receive such payout in the form of a lump sum payment. (iv) Amount, timing, and source of benefit payout. A participant -------------------------------------------- entitled to a payout of his/her net accrued benefit, as a result of the occurrence of an event described in paragraphs (c)(i), (c)(ii)(1), (2), or (3) will be entitled to a lump sum benefit. This lump sum benefit will be calculated by a certified actuary as the present value of an annuity beginning at age 62 (unless the participant is the Chairman of the Board or President of Constellation Energy Group, or the President of Constellation Enterprises, Inc. in which case age 65) (or the participant's actual -11- age, if the participant is older than age 62 (unless the participant is the Chairman of the Board or President of Constellation Energy Group, or the President of Constellation Enterprises, Inc. in which case age 65) on the date the lump sum benefit is payable), including the estimated present value of post-retirement survivor annuity benefits described in Section 7, using (1) the net accrued benefit amount calculated under paragraph (b)(ii) on the effective date of the event, which is expressed as a monthly amount, (2) the Early Retirement Adjustment Factor (using the method set forth in (a)(ii)(4)) computed by substituting the date the lump sum benefit is payable for the Retirement Date, (3) the Interest Rate computed on the date the lump sum benefit is payable, and (4) the Mortality Table. The lump sum benefit shall be payable on the date that is the later of the date of the participant's Termination From Employment With Constellation Energy Group or the date the participant reaches age 55. The lump sum payment shall be made within 60 days after such date and shall be made in accordance with the provisions of the Rabbi Trust and, to the extent not paid under the terms of the Rabbi Trust, from general corporate assets. A participant who receives a lump sum benefit under this paragraph (c)(iv) shall not be entitled to any cost of living or other pension payment adjustments or to preretirement or post- retirement survivor annuity coverage. (v) Death of participant entitled to lump sum payout. In the event of ------------------------------------------------ the death of a participant after the occurrence of an event described in paragraphs (c)(i), (c)(ii)(1), (2), or (3) and before the participant receives the lump sum payment under paragraph (c)(iv), such lump sum payment shall be made to the participant's surviving spouse (as defined in Section 7(i)). The lump sum payment will be calculated by a certified actuary and will be equal to 50% of the present value of an immediate annuity using (1) the monthly amount under paragraph (c)(iv), (2) the Early Retirement Adjustment Factor computed using the participant's age at the date of the participant's death, or if the participant was younger than age 60 on the date of death, using age 60, (3) the Interest Rate -12- computed on the date the lump sum benefit is payable, and (4) the Mortality Table. However, if the participant's death occurred during the 60 day period described in paragraph (c)(iv), 100% shall be used instead of 50% in the preceding sentence. The lump sum benefit shall be payable on the date that is the later of the date that the participant would have reached age 55 or the date of the participant's death. The lump sum payment shall be made within 60 days after such date, and shall be made in accordance with the provisions of the Rabbi Trust and, to the extent not paid under the terms of the Rabbi Trust, from general corporate assets. If there is no surviving spouse at the date of the participant's death, no payments shall be made pursuant to Sections 5 or 7. A surviving spouse who receives a lump sum benefit under this paragraph (c) (v) shall not be entitled to any cost of living or other pension payment adjustments or to preretirement or post-retirement survivor annuity coverage under the Plan. (d) Other benefits. -------------- (i) Eligibility for other benefits. Upon a participant's Termination ------------------------------ From Employment With Constellation Energy Group, if such participant (1) does not satisfy the requirements of Sections 5(a)(i), 5(c)(i), and/or 5(c)(ii), and (2) is a vested participant under the Pension Plan, such participant shall be entitled to the benefits in this Section 5(d). (ii) Computation of other benefits. A participant who is eligible for ----------------------------- other benefits will be entitled to benefits under this Plan, which will be calculated as set forth below on the date the participant begins receipt of benefit payments under the Pension Plan: (1) compute the participant's adjusted monthly benefit payment under the terms of the Pension Plan, by also treating awards, if any, paid to the participant under Constellation Energy Group's Executive Annual Incentive Plan and/or Constellation Energy Group's Senior Management Annual Incentive Plan during the immediately preceding twenty- -13- four consecutive months as bonuses and/or incentives included in the computation of the participant's Average Pay (as defined under the Pension Plan), and (2) subtract from the amount in (1) above the participant's actual monthly benefit payment under the Pension Plan. For purposes of the computation in (1), the participant will bear the cost of any post-retirement survivor annuity coverage provided under Section 7(b). (iii) Form of payout of other benefits. Each participant entitled to -------------------------------- other benefits will receive his/her other benefits payout in the form of a monthly payment. (iv) Amount, timing, and source of monthly other benefit payout. A ---------------------------------------------------------- participant entitled to monthly other benefits will receive monthly payments equal to the amount determined under paragraph (d)(ii). Such payments shall commence effective with the date the participant commences receipt of benefit payments under the Pension Plan. Monthly payments hereunder shall permanently cease upon the death of the participant, effective with the monthly payment for the month following the month of the participant's death. Monthly payments hereunder shall be made from general corporate assets. 6. Supplemental Long-Term Disability Benefit. ----------------------------------------- (i) Eligibility for disability benefits. Any participant who has completed ----------------------------------- at least one full calendar month of service with Constellation Energy Group or its subsidiaries, who has elected coverage under the LTD Plan, and who is disabled (as determined under the LTD Plan) will be entitled to supplemental disability benefits under this Plan. (ii) Computation of disability benefits. The amount of such supplemental ---------------------------------- disability benefits shall be determined as follows: -14- (1) multiply the monthly base rate of pay amount in effect immediately prior to becoming entitled to benefits under the LTD Plan by twelve, (2) add the Average Incentive Award to the product, (3) add certain bonuses and incentives that are included in the computation of Average Pay under the Pension Plan (except that awards under the Results Incentive Awards Program shall be excluded), earned over the last 12 months to the product, (4) divide the sum by 12, (5) multiply this monthly dollar amount by the Income Replacement Percentage, and (6) subtract from the product the gross monthly amount provided for the participant under the LTD Plan before such amount is reduced for other benefits as set forth under the LTD Plan. (iii) Form of payment of disability benefits. Each participant entitled to -------------------------------------- supplemental disability benefits will receive his/her supplemental disability benefit payout in the form of a monthly payment. (iv) Amount, timing, and source of monthly disability benefit payout. A --------------------------------------------------------------- participant entitled to supplemental disability benefits will receive a monthly payment equal to the amount determined under (ii) above. Such payments shall commence effective with the commencement of the participant's LTD Plan benefit payments. Monthly payments shall permanently cease when benefit payments under the LTD Plan cease. Monthly payments shall be made from Constellation Energy Group's general corporate assets. If a participant receiving payments pursuant to this Section 6 receives cost of living or other inflation/indexing adjustment(s) under the LTD Plan, the payments hereunder will be automatically increased based on the same percentage of, and at the same time as, such adjustment(s). -15- (v) Bonus. Any participant who has less than ten years of Credited Service ----- shall be entitled to a monthly taxable cash bonus, equal to an amount based on the cost of LTD Plan coverage, using the formula for computing Constellation Energy Group-provided Flexible Benefits Plan credits for LTD Plan coverage and taking into account the Participant's Credited Service and covered compensation. Such cash bonus shall be made from general corporate assets. 7. Supplemental Survivor Annuity Benefit. ------------------------------------- (a) Survivor annuity benefit. ------------------------ (i) Eligibility for survivor annuity benefit. Following the death of ---------------------------------------- a participant (other than a participant who satisfied the requirements of Section 5(d)(i) upon such participant's Termination From Employment With Constellation Energy Group), a supplemental survivor annuity may be paid to the participant's surviving spouse until the death of that spouse, using the same percentage to compute such supplemental benefit that is actually used to compute any survivor annuity provided on behalf of the participant under the Pension Plan. The participant will not bear the cost of up to a 50% survivor annuity benefit, but will bear the cost of a survivor annuity benefit in excess of 50%. For purposes of this Section 7(a), a participant's surviving spouse is the individual married to the participant on the date of the participant's death. If there is no surviving spouse, or if the participant or the participant's spouse previously received or is entitled to receive a lump sum payment under Section 5, no supplemental survivor annuity will be payable. (ii) Computation of survivor annuity benefit. The amount of the --------------------------------------- supplemental survivor annuity will be determined as follows: (1) if the participant had retired prior to the date of death: (a) begin with the monthly pension benefit (under Section 5(a) of this Plan) that -16- the participant was receiving prior to the date of death, and (b) multiply this dollar amount by the percentage used to compute the survivor annuity provided on behalf of the participant under the Pension Plan. (2) otherwise: (a) begin with the larger of the Early Retirement pension benefit (under both the Pension Plan and Section 5(a) of this Plan) to which the participant would have been entitled to receive if the: (A) participant had been retired at age 60 on the date of death for purposes of computing the Early Retirement Adjustment Factor, or (B) participant had retired on the date of death for purposes of computing the Early Retirement Adjustment Factor, (b) multiply this dollar amount by the percentage used to compute the survivor annuity provided on behalf of the participant under the Pension Plan, (c) subtract from the product the net amount, if any, of the survivor annuity provided on behalf of the participant under the Pension Plan, and (d) subtract from this dollar amount the charges relating to coverage (under both the Pension Plan and this Plan) for a preretirement survivor annuity in excess of 50%, and for a post-retirement survivor annuity in excess of 50%. (iii) Form of payout of survivor annuity benefits. Each surviving ------------------------------------------- spouse entitled to a supplemental survivor annuity benefit will receive his/her -17- survivor annuity benefit payout in the form of a monthly payment. (iv) Amount, timing, and source of monthly survivor annuity benefit -------------------------------------------------------------- payout. A surviving spouse entitled to monthly supplemental ------ survivor annuity benefits will receive a monthly payment equal to the amount determined under (ii) above. Such payments shall commence effective with the first day of the month following the month of the participant's death. If such surviving spouse receives (or would have received but for the Internal Revenue Code limitations) cost of living adjustment(s) under the Pension Plan, the monthly payments hereunder will be automatically increased based on the percentage of, and at the same time as, such adjustment(s). Monthly payments hereunder shall permanently cease upon the death of the surviving spouse, effective with the monthly payment for the month following the month of the surviving spouse's death. Monthly payments hereunder shall be made in accordance with the provisions of the Rabbi Trust and, to the extent not paid under the terms of the Rabbi Trust, from general corporate assets. (b) Other survivor benefit. ---------------------- (i) Eligibility for other survivor benefit. Following the death of a -------------------------------------- participant who satisfied the requirements of Section 5(d)(i) upon such participant's Termination From Employment With Constellation Energy Group, a survivor benefit may be paid to the participant's surviving spouse until the death of that spouse. For purposes of this Section 7(b), a participant's surviving spouse is the individual who is the Surviving Spouse under the Pension Plan. If there is no surviving spouse, no survivor benefit will be payable. (ii) Computation of other survivor benefit. The amount of the survivor ------------------------------------- benefit will be calculated as set forth below on the date the surviving spouse begins receipt of benefit payments under the Pension Plan: -18- (1) compute the surviving spouse's adjusted monthly benefit payment under the terms of the Pension Plan, by also treating awards, if any, paid to the participant under Constellation Energy Group's Executive Annual Incentive Plan and/or Constellation Energy Group's Manager Annual Incentive Plan during the immediately preceding twenty-four consecutive months as bonuses and/or incentives included in the computation of the participant's Average Pay (as defined under the Pension Plan), and (2) subtract from the amount in (1) above the surviving spouse's actual monthly benefit payment under the Pension Plan. For purposes of the computation in (1), the surviving spouse will bear the cost of the survivor benefit. (iii) Form of payout of other survivor benefit. Each surviving spouse ---------------------------------------- entitled to a survivor benefit will receive his/her survivor benefit payout in the form of a monthly payment. (iv) Amount, timing, and source of monthly other survivor benefit ------------------------------------------------------------ payout. A surviving spouse entitled to monthly survivor benefits ------ will receive monthly payments equal to the amount determined under paragraph (b)(ii). Such payments shall commence effective with the date the surviving spouse commences receipt of benefit payments under the Pension Plan. Monthly payments hereunder shall permanently cease upon the death of the surviving spouse, effective with the monthly payment for the month following the month of the surviving spouse's death. Monthly payments hereunder shall be made from general corporate assets. 8. Death Benefit. Constellation Energy Group shall make arrangements, through ------------- its split-dollar life insurance program or otherwise, for life insurance coverage for each participant providing that the participant's beneficiary shall receive, as a pre-rollout death benefit, an amount which is approximately equal to three times the -19- participant's compensation, and as a post-rollout benefit, an amount which is approximately equal to two times the participant's compensation, as set forth in a separate agreement between Constellation Energy Group and the participant. As determined in the sole discretion of the Plan Administrator, in the event that either (i) a participant is ineligible to receive the type of life insurance coverage provided to other participants under this Plan, or (ii) such coverage is not available on reasonably cost-effective terms as a result of any penalty for smoking or other factors that are reflected in the insurance carrier's rates, then Constellation Energy Group shall provide a benefit that, in the discretion of the Plan Administrator, is substantially equivalent to the cost of the benefit provided to other participants under this Plan. 9. Dependent Death Benefit. In the event of the death of a participant's ----------------------- qualified dependent while the participant is an active employee of Constellation Energy Group or a subsidiary of Constellation Energy Group, Constellation Energy Group shall make a death benefit payment to the participant, from general corporate assets. For purposes of this Section 9, qualified dependent shall have the same meaning as set forth in Constellation Energy Group's Family Life Insurance Plan. For purposes of this Section 9, the amount of the death benefit payment shall be the highest amount of insurance that would have been payable with respect to such qualified dependent if coverage had been provided under Constellation Energy Group's Family Life Insurance Plan. The dependent death benefit payment under this Plan shall be grossed-up for income tax withholding. 10. Sickness Benefit. Each participant, without regard to length of service, ---------------- shall be entitled to the greater of the benefits stipulated under the Constellation Energy Group sick benefit policy for employees or twenty-six (26) weeks of paid sick benefits within a rolling 52-week period. 11. Vacation Benefit. Each participant, without regard to length of service, ---------------- shall be entitled to the greater of the benefits stipulated under the Constellation Energy Group vacation benefit policy for employees or five weeks of paid vacation during a calendar year. -20- 12. Planning Benefit. Each participant shall be entitled to certain personal ---------------- financial, tax, and estate planning services paid for by Constellation Energy Group but provided through designated professional firms. This entitlement shall be subject to any dollar limitation established by the Plan Administrator with respect to all such fees. The services shall be provided to each participant by the chosen firm(s) on a personalized and confidential basis; and each firm shall have sole responsibility for quality of the services which it may render. The services to be provided shall be on an on-going and continuous basis, but shall be limited to (i) the development and legal documentation of both career-oriented financial plans and personal estate plans, and (ii) tax counseling regarding personal tax return preparation and the most advantageous structuring, tax-wise, of proposed personal transactions. Such planning benefit shall continue during the year of retirement plus the next two calendar years and include the completion of the federal and state personal tax returns for the second calendar year following retirement. However, if a retired member of senior management continues to serve as a member of the Board of Directors of Constellation Energy Group, his/her planning benefit period shall be extended until he/she no longer serves as a member of the Board of Directors. Upon the death of a participant entitled to the planning benefit provided hereunder, his/her surviving spouse shall be entitled to receive the following planning benefit: (i) if the deceased was not retired at the time of death, the surviving spouse shall be entitled to the planning benefit for the year in which the death occurred plus the next two calendar years, including completion of the federal and state personal tax returns for the second calendar year after the year in which the death occurred; or (ii) if the deceased was retired at the time of death, then the surviving spouse shall receive a planning benefit equal to that the deceased would have received if he/she had not died prior to expiration of the planning benefit. The surviving spouse of a retired member of senior management whose death occurs while serving as a member of the Board of Directors of Constellation Energy Group, shall be entitled to a planning benefit as set forth in (i) above. -21- The planning benefit provided under this Plan shall be grossed-up for income tax withholding. 13. Miscellaneous. None of the benefits provided under this Plan shall be ------------- subject to alienation or assignment by any participant or beneficiary nor shall any of them be subject to attachment or garnishment or other legal process except (i) to the extent specially mandated and directed by applicable State or Federal statute; (ii) as requested by the participant or beneficiary to satisfy income tax withholding or liability; and (iii) any policy of insurance written by a commercial carrier on a split-dollar basis shall be assignable. This Plan may be amended from time to time, or suspended or terminated at any time, provided, however, that no amendment or termination shall reduce any previously accrued supplemental pension benefit under this Plan or impair the rights of any participant or beneficiary entitled to receive current or future payment hereunder at the time of such action. All amendments to this Plan which would increase or decrease the compensation of any Officer of Constellation Energy Group, either directly or indirectly, must be approved by the Board of Directors. All other permissible amendments may be made at the written direction of the Committee. Participation in this Plan shall not constitute a contract of employment between Constellation Energy Group and any person and shall not be deemed to be consideration for, or a condition of, continued employment of any person. The Plan, notwithstanding the creation of the Rabbi Trust, is intended to be unfunded for purposes of Title I of the Employee Retirement Income Security Act of 1974. Constellation Energy Group shall make contributions to the Rabbi Trust in accordance with the terms of the Rabbi Trust. Any funds which may be invested and any assets which may be held to provide benefits under this Plan shall continue for all purposes to be a part of the general funds and assets of Constellation Energy Group and no person other than Constellation Energy Group shall by virtue of the provisions of this Plan have any interest in such funds and assets. To the extent that any person acquires a right to receive payments from Constellation Energy Group under this Plan, such rights shall be no greater than the right of any unsecured general creditor of Constellation Energy Group. -22- In the event Constellation Energy Group becomes a party to a merger, consolidation, sale of substantially all of its assets or any other corporate reorganization in which Constellation Energy Group will not be the surviving corporation or in which the holders of the common stock of Constellation Energy Group will receive securities of another corporation (in any such case, the "New Company"), then the New Company shall assume the rights and obligations of Constellation Energy Group under this Plan. This Plan shall be governed in all respects by Maryland law. Summary of New Executive Pension Provisions ------------------------------------------- Effective January 1, 2000, the Constellation Energy Group, Inc. Board of Directors authorized the company to make changes to the Executive Benefits Plan, and to adopt new plans, to provide supplemental pension and other benefits to executives of the company and certain subsidiaries. The following is a summary of the amended and new plans, formal documents for which have not yet been finalized: Constellation Energy Group, Inc. Senior Executive Supplemental Pension Plan --------------------------------------------------------------------------- - Senior officers of Constellation Energy Group, Inc. and presidents of the primary business units are eligible for a supplemental pension at age 55 or older with 10 or more years of service or age 62 or older with 5 or more years of service. The benefit formula is 5.5% per year of supplemental pension plan eligibility (and for each 4 years of service while not a supplemental pension plan participant, the participant accrues an additional 5.5%), with a maximum gross benefit of 55% for all participants except the Chief Executive Officer of Constellation Energy Group, Inc. who is entitled to a gross 60% benefit regardless of service. Pay under the Plan for purposes of computing benefits is based on the sum of the average of the highest two base salaries and the average of the highest two annual incentive awards earned in the past five 12-month periods. A 4% per year early retirement reduction factor is applied for each year retirement is earlier than age 62. Any lump sum payment under the Plan will be computed with reference to the 30-year Treasury rate, less 50 basis points. The Plan also provides a free 50% survivor annuity benefit. Benefits will be secured under the rabbi trust that currently secures benefits under the Executive Benefits Plan. For participants in the Plan as of January 1, 2000, if benefits under the Supplemental Pension Plan (described below) are greater than benefits -23- under this Plan, the participant will receive benefits only under the Supplemental Pension Plan. Constellation Energy Group, Inc. Supplemental Pension Plan - Participants ---------------------------------------------------------- under the Executive Benefits Plan as of December 31, 1999 became participants under the Supplemental Pension Plan effective January 1, 2000. The Supplemental Pension Plan replaces the supplemental pension benefit provisions under the Executive Benefits Plan. The Supplemental Pension Plan benefits are the same as the supplemental pension benefit provisions under the Executive Benefits Plan, with the following modifications: (a) retirement eligibility requirements are reduced to age 55 or older with 10 or more years of service; (b) the early retirement reduction factor is reduced from 6% to 3% for retirements between age 55 and 60, with no reduction for retirements at or after age 62; and (c) any lump sum payment under the Plan will be computed with reference to the 30-year Treasury rate, less 50 basis points. The Plan also provides certain health and dental benefits, and a free 50% survivor annuity benefit. Benefits will be secured under the rabbi trust that currently secures benefits under the Executive Benefits Plan. Constellation Energy Group, Inc. Supplemental Benefits Plan - The ----------------------------------------------------------- Supplemental Benefits Plan replaces the supplemental welfare benefit and other non-pension benefit provisions under the Executive Benefits Plan. The Supplemental Benefits Plan benefits are the same as the supplemental welfare and other non-pension benefit provisions under the Executive Benefits Plan. Senior executives and executives of Constellation Energy Group, Inc. and certain of its subsidiaries are eligible to participate in the plan. Constellation Energy Group, Inc. Restoration Plan - The Restoration Plan ------------------------------------------------- will provide supplemental pension benefits to employees of Constellation Energy Group, Inc. and certain of its subsidiaries to the extent their pension benefits are impacted by Internal Revenue Service limitations under the Pension Plan of Constellation Energy Group, Inc. Employees who are entitled to benefits under the Senior Executive Supplemental Pension Plan or the Supplemental Pension Plan are not eligible to participate in the Restoration Plan. EX-10.B 5 EXHIBIT 10B Exhibit 10(b) Executive Annual Incentive Plan Of Constellation Energy Group, Inc. 1. Plan Objective. The objective of this Plan is to allow Constellation Energy -------------- Group, Inc. (Constellation Energy Group or Company) to attract, retain and motivate highly competent officers and key employees of the Company and its subsidiaries by focusing incentive compensation toward the achievement of performance results that primarily support the interests of shareholders and customers of the Company. 2. Plan Administration. The Plan is administered by the Constellation Energy ------------------- Group Board of Directors' (Board) Committee on Management (Committee on Management) which has sole authority (unless otherwise specified herein) to interpret the Plan; to refine its provisions from time to time subject to Board approval, particularly those relating to factors, targets and procedures used in connection with calculating the awards (which refinements shall be reflected in guidelines for the performance year); to suspend the Plan at any time; and in general, to make all other determinations necessary or advisable for the administration of the Plan to achieve its stated objective. The Committee on Management shall have the power to delegate all or any part of their duties to one or more designees, and to withdraw such authority, by written designation. 3. Eligibility. Each officer or key employee of Constellation Energy Group or ----------- its subsidiaries may be designated in writing by the Committee on Management as a participant under the Plan. Once designated, participation shall continue until such designation is withdrawn at the discretion and by written order of the Committee on Management. Participation is subject to the following conditions: Participant must have been an eligible participant for some portion of the performance year and at the time of distribution be actively employed by the Company or elsewhere with the approval of the Company unless employment was terminated by death, disability or retirement. Except as otherwise provided herein, where an individual is not an eligible participant for the entire performance year, the amount of the award, whether full, partial or none, will be at the Committee on Management's discretion, subject to Board approval. Where, prior to the end of a performance year, a participant's active employment is terminated as a result of death, disability or retirement, the award is calculated based on the participant's position at the time of termination. Unless otherwise stated, any such award will be made on a pro-rata basis for the period of active employment, or, in total, at the discretion of the Committee on Management. Where active employment is terminated as a result of death of participant, distribution is made in accordance with Section 9. (Designation of Beneficiary) of this Plan. 4. Performance Goals ----------------- A. Performance Targets. The Committee on Management shall establish for ------------------- each plan year Performance Targets designed to accomplish the purpose set forth in Section 1 of this Plan. The Committee on Management will ensure that each plan year's Performance Targets meet the following general criteria: (1) The interests of the Company's shareholders will be balanced with the interests of the Company's customers. (2) The targets should be set at levels which are attainable, but which, in the Committee on Management's judgment, are attainable only with a high degree of competence and diligence. The Committee on Management shall have sole authority to amend Performance Targets at any time when, in the Committee's judgment, unforeseen circumstances exist which require modification in order to ensure that the purpose of the Plan is properly served. The Committee on Management shall have authority to establish appropriate Performance Targets, differing to the degree necessary from those established for the Company, for each of the Company's subsidiaries employing one or more participants in this Plan; and shall have authority to adjust such targets subsequently should unforeseen circumstances arise. B. Individual Performance. A participant's individual performance will ---------------------- be evaluated by the Chairman of the Board. 2 5. Award Opportunity. The Committee on Management shall establish for each ----------------- plan year the Award Opportunity (minimum, target, and maximum, as appropriate) applicable to participants in the Plan. The Award Opportunity may be allocated among the various Performance Targets and Individual Performance and may vary among classes of participants. 6. Award Determination. The Committee on Management, with the concurrence of ------------------- the Board, shall determine the Awards, if any, to be made for each plan year as soon after the end of the plan year as is practical. In the case of participants in this Plan employed by a subsidiary of the Company, the Award, if any, will be recommended by the non-employee members of the board of directors of that subsidiary and subsequently approved by the Committee on Management. Awards are calculated taking into account the degree of attainment of performance targets, individual performance, and the percent of participation during the performance year. The dollar amount of the participants' award is determined by multiplying the participant's prior December 31 annualized base salary by the award percentage. All amounts awarded to participants are subject to the approval of the Board. 7. Payment of Awards. Awards approved by the Board for each plan year shall be ----------------- paid as soon as practicable after such determination has been made. Payment may be made in a lump cash sum or, at the participants' election, may be deferred in whole or in part. When required by applicable law, Federal, State and FICA taxes will be withheld from awards at applicable rates. Awards will not be paid for any performance year in which Company earnings are less than the amount necessary to fund the annual dividend. Additionally, awards will not be paid for any plan year in which the dividend is suspended or effectively reduced from its prior amount. 8. Deferred Payment of Award. A participant may elect to defer the receipt of ------------------------- all or a portion of the award for the plan year. Any such deferral and investment of any such amounts deferred pursuant to this Plan shall be made in accordance with the provisions of the Constellation Energy Group Nonqualified Deferred Compensation Plan. 9. Designation of Beneficiary. A participant shall have the right to designate -------------------------- a beneficiary or beneficiaries who are to receive in a 3 lump sum any undistributed incentive compensation award to the extent a participant has chosen not to defer all or a portion of his incentive award pursuant to Section 8 hereof, should the participant die during the plan year and be entitled to an incentive award for that plan year. Such designation shall apply only to the portion of the undistributed incentive award not subject to a deferral election. Any designation, change or rescission of the designation shall be made in writing by completing and furnishing to the Vice President - Human Resources of the Company a notice on an appropriate form designated by the Vice President - Human Resources of the Company. The last designation of beneficiary received by the Vice President - Human Resources of the Company shall be controlling over any testamentary or purported disposition by the participant, provided that no designation, rescission or change thereof shall be effective unless received prior to death of the participant. Distribution of any incentive awards previously deferred pursuant to Section 8 of the Plan shall be paid to the beneficiary or beneficiaries designated under the Constellation Energy Group Nonqualified Deferred Compensation Plan. 10. Change in Control. Notwithstanding any other provisions of this Plan to the ----------------- contrary, if a participant separates from service with Constellation Energy Group or a subsidiary of Constellation Energy Group (except due to a participant's transfer of employment to or from a subsidiary of Constellation Energy Group), within 2 years following a change in control, such participant is eligible for an award for the performance year during which the separation from service occurs. The award is calculated assuming maximum performance achievement and based on the participant's position at the time of termination and is pro-rated for the period of active employment during the performance year. The Committee on Management, in its discretion, may grant a total, rather than pro-rated award. Payment of the award will be made in a lump cash sum within 60 days after the participant's separation from service. Payment may not be deferred. A change in control for purposes of this Section 10 shall mean (i) the purchase or acquisition by any person, entity or group of persons (within the meaning of Section 13(d) or 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act"), or any comparable successor provisions), of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20 percent or more of either the outstanding shares of common stock of Constellation Energy Group or the combined voting power of Constellation Energy Group's then outstanding shares of voting securities entitled to a vote generally, or (ii) the consummation of, following the approval by the stockholders of Constellation Energy Group of a reorganization, 4 merger, or consolidation of Constellation Energy Group, in each case, with respect to which persons who were stockholders of Constellation Energy Group immediately prior to such reorganization, merger or consolidation do not, immediately thereafter, own more than 50 percent of the combined voting power entitled to vote generally in the election of directors of the reorganized, merged or consolidated entity's then outstanding securities, or (iii) a liquidation or dissolution of Constellation Energy Group or the sale of substantially all of its assets, or (iv) a change of more than one-half of the members of the Board of Directors of Constellation Energy Group within a 90-day period for reasons other than the death, disability, or retirement of such members. Notwithstanding any provision in the Plan to the contrary, on or within 2 years after a Change in Control, no action, including, but not by way of limitation, the amendment, suspension or termination of the Plan, shall be taken which would adversely affect the rights of any participant without such participant's prior written consent. 11. Miscellaneous. The plan year and the performance year shall be the same and ------------- shall be the calendar year. Any payments made under this Plan are not considered as earnings for purpose of the Company's qualified pension or Employee Saving Plan, or for any other general employee benefit program. However, all payments made under this Plan will be included in the determination of benefits provided under the Company's Executive Benefits Plan. None of the payments provided under this Plan which are deferred shall be subject to alienation or assignment by any participant or beneficiary nor shall any of them be subject to attachment or garnishment or other legal process except to the extent specifically mandated and directed by applicable State or Federal statute. Payment shall be made only into the hands of the participant or beneficiary entitled to receive the same or into the hands of his or her authorized legal representative. Deposit of any sum into any financial institution to the credit of the participant or beneficiary entitled thereto shall constitute payment into his or her hands. Notwithstanding the foregoing, at the request of the participant or beneficiary or as required by law, such sums as may be requisite for payment of any estimated or currently accrued income tax liability may be withheld and paid over to the governmental entity entitled to receive the same. Participation in this Plan shall not constitute a contract of employment between the Company and any employee and shall not be deemed to be 5 consideration for, inducement to, or a condition of employment of any person. The deferral of any incentive compensation amounts pursuant to the provisions of the Plan shall not be construed to give any employee the right to be retained in the employ of the Company or to interfere with the right of the company to terminate such employment at any time. The Board intends to continue the Plan indefinitely but reserves the right to amend the Plan from time to time or to permanently discontinue it provided none of these, nor any suspension, may deprive the participants of any payment of amounts which were previously awarded at the time thereof. In the event Constellation Energy Group becomes a party to a merger, consolidation, sale of substantially all of its assets or any other corporate reorganization in which Constellation Energy Group will not be the surviving corporation or in which the holders of the common stock of Constellation Energy Group will receive securities of another corporation (in any such case, the "New Company"), then the New Company shall assume the rights and obligations of Constellation Energy Group under this Plan. 6 EX-10.G 6 EXHIBIT 10G Exhibit 10(g) Summary Severance Arrangement For a Named Executive Officer Edward A. Crooke has taken an early retirement in connection with the displacement from his position as Chairman, President and Chief Executive Officer of Constellation Enterprises, Inc. (CEI) because of the corporate restructuring of CEI. As a result of his displacement and in recognition of the significant contributions he has made to the success of the company during his 31 plus years of service, the Board of Directors of Constellation Energy Group, Inc. approved a severance package that became effective when he retired on January 1, 2000. His severance benefits will include a $1,476,417 lump sum severance payment equal to the total of (a) two times the sum of (1) annual base salary, plus (2) the average of the two highest annual bonus percentages earned during the preceding five years multiplied by the prior year's final annual salary, and (b) payment toward the cost of health coverage computed assuming retirement at age 65 with 35 years of service. Mr. Crooke is also entitled to a 60% pension benefit computed without reduction for early receipt and a prorata payout of any earned performance-based restricted stock award for the 1998-2000 and 1999-2001 performance periods. EX-12.A 7 EXHIBIT 12A EXHIBIT 12(a) CONSTELLATION ENERGY GROUP, INC. AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
12 Months Ended -------------------------------------------- December December December December December 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- (In Millions of Dollars) Income from Continuing Operations (Before Extraordinary Loss)...... $326.4 $305.9 $254.1 $272.3 $297.4 Taxes on Income, Including Tax Effect for BGE Preference Stock Dividends........................ 182.5 169.3 145.1 148.3 152.0 ------ ------ ------ ------ ------ Adjusted Income................... $508.9 $475.2 $399.2 $420.6 $449.4 ------ ------ ------ ------ ------ Fixed Charges: Interest and Amortization of Debt Discount and Expense and Premium on all Indebtedness............. $245.7 $255.3 $234.2 $203.9 $206.7 Earnings required for BGE Preference Stock Dividends...... 21.0 33.8 45.1 59.4 61.0 Capitalized Interest............. 2.7 3.6 8.4 15.7 15.0 Interest Factor in Rentals....... 1.8 1.9 1.9 1.5 2.1 ------ ------ ------ ------ ------ Total Fixed Charges.............. $271.2 $294.6 $289.6 $280.5 $284.8 ------ ------ ------ ------ ------ Earnings (1)...................... $777.4 $766.2 $680.4 $685.4 $719.2 ====== ====== ====== ====== ====== Ratio of Earnings to Fixed Charges.......................... 2.87 2.60 2.35 2.44 2.52
- -------- (1) Earnings are deemed to consist of income from continuing operations (be- fore extraordinary loss) that includes earnings of Constellation Energy's consolidated subsidiaries, equity in the net income of BGE's unconsoli- dated subsidiary, income taxes (including deferred income taxes, invest- ment tax credit adjustments, and the tax effect of BGE's preference stock dividends), and fixed charges other than capitalized interest. 96 EX-12.B 8 EXHIBIT 12B EXHIBIT 12(b) BALTIMORE GAS AND ELECTRIC COMPANY AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED AND PREFERENCE DIVIDEND REQUIREMENTS
12 Months Ended -------------------------------------------- December December December December December 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- (In Millions of Dollars) Income from Continuing Operations (Before Extraordinary Loss)...... $328.4 $327.7 $282.8 $310.8 $338.0 Taxes on Income................... 182.0 181.3 161.5 169.2 172.4 ------ ------ ------ ------ ------ Adjusted Income................... $510.4 $509.0 $444.3 $480.0 $510.4 ------ ------ ------ ------ ------ Fixed Charges: Interest and Amortization of Debt Discount and Expense and Premium on all Indebtedness............. $206.4 $255.3 $234.2 $203.9 $206.7 Capitalized Interest............. 0.4 3.6 8.4 15.7 15.0 Interest Factor in Rentals....... 1.0 1.9 1.9 1.5 2.1 ------ ------ ------ ------ ------ Total Fixed Charges.............. $207.8 $260.8 $244.5 $221.1 $223.8 ------ ------ ------ ------ ------ Preferred and Preference Dividend Requirements: (1) Preferred and Preference Dividends...................... $ 13.5 $ 21.8 $ 28.7 $ 38.5 $ 40.6 Income Tax Required............. 7.5 12.0 16.4 20.9 20.4 ------ ------ ------ ------ ------ Total Preferred and Preference Dividend Requirements.......... $ 21.0 $ 33.8 $ 45.1 $ 59.4 $ 61.0 ------ ------ ------ ------ ------ Total Fixed Charges and Preferred and Preference Dividend Requirements..................... $228.8 $294.6 $289.6 $280.5 $284.8 ====== ====== ====== ====== ====== Earnings (2)...................... $717.8 $766.2 $680.4 $685.4 $719.2 ====== ====== ====== ====== ====== Ratio of Earnings to Fixed Charges.......................... 3.45 2.94 2.78 3.10 3.21 Ratio of Earnings to Combined Fixed Charges and Preferred and Preference Dividend Requirements..................... 3.14 2.60 2.35 2.44 2.52
- -------- (1) Preferred and preference dividend requirements consist of an amount equal to the pre-tax earnings that would be required to meet dividend require- ments on preferred stock and preference stock. (2) Earnings are deemed to consist of income from continuing operations (be- fore extraordinary loss) that includes earnings of BGE's consolidated sub- sidiaries, equity in the net income of BGE's unconsolidated subsidiary, income taxes (including deferred income taxes and investment tax credit adjustments), and fixed charges other than capitalized interest. 97 EX-21 9 EXHIBIT 21 Exhibit 21 SUBSIDIARIES OF CONSTELLATION ENERGY GROUP, INC.*
Jurisdiction of incorporation ------------- Baltimore Gas and Electric Company................................ Maryland Constellation Holdings, Inc. ..................................... Maryland Constellation Investments, Inc. .................................. Maryland Constellation Power, Inc. ........................................ Maryland Constellation Real Estate Group, Inc. ............................ Maryland Constellation Enterprises, Inc. .................................. Maryland Constellation Power Source, Inc. ................................. Delaware Constellation Energy Source, Inc. ................................ Delaware Safe Harbor Water Power Corporation............................... Pennsylvania BGE Home Products & Services, Inc. ............................... Maryland BGE Capital Trust I............................................... Delaware
* The names of certain indirectly owned subsidiaries have been omitted because, considered in the aggregate as a single subsidiary, they would not constitute a significant subsidiary pursuant to Rule 1-02(w) of Regulation S-X. 98 EX-23 10 EXHIBIT 23 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 and Form S-8 (File Nos. 333-75217, 333-59601, 33-57658, 333-24705, and 33-49801 and 333-45051, 33-59545, and 33-56084, respectively) of Constellation Energy Group, Inc. and Form S-3 (File No. 333-66015) of Baltimore Gas and Electric Company of our report dated January 19, 2000 relating to the financial statements and financial statement schedule which appear in this Form 10-K. /s/ PricewaterhouseCoopers LLP ------------------------------ PRICEWATERHOUSECOOPERS LLP Baltimore, Maryland March 20, 2000 99 EX-27.A 11 EXHIBIT 27A
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSTELLATION ENERGY'S DECEMBER 31, 1999 CONSOLIDATED INCOME STATEMENT, BALANCE SHEET AND STATEMENT OF CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS. 0001004440 CONSTELLATION ENERGY GROUP INC. 1,000,000 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 PER-BOOK 5,523 1,981 1,491 689 0 9,684 1,494 0 1,499 2,993 0 190 2,575 0 0 372 808 0 0 0 2,746 9,684 3,786 186 3,026 3,212 574 7 581 255 260 0 260 251 230 679 1.74 1.74
EX-27.B 12 EXHIBIT 27B
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALTIMORE GAS AND ELECTRIC COMPANY'S DECEMBER 31, 1999 CONSOLIDATED INCOME STATEMENT, BALANCE SHEET AND STATEMENT OF CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS. 0000009466 BALTIMORE GAS & ELECTRIC CO. 1,000,000 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 PER-BOOK 5,523 414 655 681 0 7,273 1,494 0 861 2,355 0 190 2,206 0 0 129 524 0 0 0 1,869 7,273 3,028 178 2,324 2,502 526 8 534 206 262 13 249 251 174 783 0 0
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