-----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, Bwn1PlnZFZNKdgpcsyC1Ej7/WIrVvx8Y5qWukNYRllKWhOrO9PQ5JrqrhX1kzjre iF+ZJCnzeOGXdZaszuoXYA== 0001004440-01-500071.txt : 20020410 0001004440-01-500071.hdr.sgml : 20020410 ACCESSION NUMBER: 0001004440-01-500071 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011114 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-01910 FILM NUMBER: 1787674 BUSINESS ADDRESS: STREET 1: 39 WEST LEXINGTON STREET CITY: BALTIMORE STATE: MD ZIP: 21201 BUSINESS PHONE: 4107833624 MAIL ADDRESS: STREET 1: 39 WEST LEXINGTON STREET CITY: BALTIMORE STATE: MD ZIP: 21201 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-25931 FILM NUMBER: 1787675 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 10-Q 1 f10q3q01.txt 3Q01 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Quarterly Period Ended SEPTEMBER 30, 2001 Commission Exact name of registrant as IRS Employer File Number specified in its charter Identification No. ----------- ------------------------------------- ------------------ 1-12869 CONSTELLATION ENERGY GROUP, INC. 52-1964611 1-1910 BALTIMORE GAS AND ELECTRIC COMPANY 52-0280210 MARYLAND ----------------------------------- (State 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) NOT APPLICABLE ------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) 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 ---------- ------------ Common Stock, without par value 163,707,950 shares outstanding of Constellation Energy Group, Inc. on October 31, 2001.
TABLE OF CONTENTS Page Part I -- Financial Information Item 1 -- Financial Statements Constellation Energy Group, Inc. and Subsidiaries Consolidated Statements of Income...................................................... 3 Consolidated Statements of Comprehensive Income........................................ 3 Consolidated Balance Sheets............................................................ 4 Consolidated Statements of Cash Flows.................................................. 6 Baltimore Gas and Electric Company and Subsidiaries Consolidated Statements of Income...................................................... 7 Consolidated Balance Sheets............................................................ 8 Consolidated Statements of Cash Flows.................................................. 10 Notes to Consolidated Financial Statements............................................. 11 Item 2 -- Management's Discussion and Analysis of Financial Condition and Results of Operations Introduction........................................................................... 20 Recent Events.......................................................................... 21 Strategy............................................................................... 22 Current Issues......................................................................... 22 Results of Operations.................................................................. 27 Financial Condition.................................................................... 35 Capital Resources...................................................................... 35 Other Matters.......................................................................... 37 Item 3 -- Quantitative and Qualitative Disclosures About Market Risk............................. 38 Part II -- Other Information Item 1 -- Legal Proceedings...................................................................... 38 Item 5 -- Other Information...................................................................... 40 Item 6 -- Exhibits and Reports on Form 8-K....................................................... 41 Signature........................................................................................ 42
2 CONSTELLATION ENERGY GROUP, INC. AND SUBSIDIARIES PART 1 - FINANCIAL INFORMATION Item 1 - Financial Statements Consolidated Statements of Income (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------------- Revenues (In millions, except per share amounts) Nonregulated revenues $ 335.1 $ 283.7 $ 873.9 $ 768.4 Regulated electric revenues 634.4 598.2 1,624.0 1,688.0 Regulated gas revenues 66.6 86.7 528.5 372.8 - ------------------------------------------------------------------------------------------------------------------- Total revenues 1,036.1 968.6 3,026.4 2,829.2 Expenses Operating expenses 560.5 497.9 1,824.8 1,666.4 Depreciation and amortization 102.9 107.6 308.5 370.7 Taxes other than income taxes 55.2 49.7 169.6 162.2 - ------------------------------------------------------------------------------------------------------------------- Total expenses 718.6 655.2 2,302.9 2,199.3 - ------------------------------------------------------------------------------------------------------------------- Income from Operations 317.5 313.4 723.5 629.9 Other Income (Expense) 2.3 (0.3) 5.3 5.8 - ------------------------------------------------------------------------------------------------------------------- Income Before Fixed Charges and Income Taxes 319.8 313.1 728.8 635.7 Fixed Charges Interest expense (net) 54.3 66.6 170.7 192.0 BGE preference stock dividends 3.3 3.3 9.9 9.9 - ------------------------------------------------------------------------------------------------------------------- Total fixed charges 57.6 69.9 180.6 201.9 - ------------------------------------------------------------------------------------------------------------------- Income Before Income Taxes 262.2 243.2 548.2 433.8 Income Taxes Current 86.5 105.1 198.9 211.9 Deferred 14.2 (7.3) 12.9 (31.0) Investment tax credit adjustments (2.1) (2.1) (6.1) (6.3) - ------------------------------------------------------------------------------------------------------------------- Total income taxes 98.6 95.7 205.7 174.6 - ------------------------------------------------------------------------------------------------------------------- Income Before Cumulative Effect of Change in Accounting Principle 163.6 147.5 342.5 259.2 Cumulative Effect of Change in Accounting Principle, Net of Income Taxes of $5.6 -- -- 8.5 -- - ------------------------------------------------------------------------------------------------------------------- Net Income $ 163.6 $ 147.5 $ 351.0 $ 259.2 - ------------------------------------------------------------------------------------------------------------------- Earnings Applicable to Common Stock $ 163.6 $ 147.5 $ 351.0 $ 259.2 =================================================================================================================== Average Shares of Common Stock Outstanding 163.7 150.1 159.8 149.8 Earnings Per Common Share and Earnings Per Common Share - Assuming Dilution Before Cumulative Effect of Change in Accounting Principle $ 1.00 $ 0.98 $ 2.14 $ 1.73 Cumulative Effect of Change in Accounting Principle -- -- .06 -- - ------------------------------------------------------------------------------------------------------------------- Earnings Per Common Share and Earnings Per Common Share - Assuming Dilution $ 1.00 $ 0.98 $ 2.20 $ 1.73 Dividends Declared Per Common Share $ 0.12 $ 0.42 $ 0.36 $ 1.26 Consolidated Statements of Comprehensive Income (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------------- (In millions) Net Income $ 163.6 $ 147.5 $ 351.0 $ 259.2 Other comprehensive (loss) income, net of taxes (18.3) 17.7 161.0 41.8 - ------------------------------------------------------------------------------------------------------------------- Comprehensive Income Before Cumulative Effect of Change in Accounting Principle 145.3 165.2 512.0 301.0 Cumulative Effect of Change in Accounting Principle, Net of Income Taxes of $22.6 -- -- (35.5) -- - ------------------------------------------------------------------------------------------------------------------- Comprehensive Income $ 145.3 $ 165.2 $ 476.5 $ 301.0 ===================================================================================================================
See Notes to Consolidated Financial Statements. Certain prior-period amounts have been reclassified to conform with the current period's presentation. 3 CONSTELLATION ENERGY GROUP, INC. AND SUBSIDIARIES PART 1 - FINANCIAL INFORMATION (CONTINUED) Item 1 - Financial Statements Consolidated Balance Sheets
September 30, December 31, 2001* 2000 - ------------------------------------------------------------------------------------------------------------------- (In millions) Assets Current Assets Cash and cash equivalents $ 64.0 $ 182.7 Accounts receivable (net of allowance for uncollectibles of $23.6 and $21.3 respectively) 748.1 738.5 Trading securities 196.6 189.3 Assets from energy trading activities 2,054.6 2,108.5 Fuel stocks 101.2 78.2 Materials and supplies 162.5 151.3 Prepaid taxes other than income taxes 76.5 73.5 Other 41.6 32.7 - ------------------------------------------------------------------------------------------------------------------- Total current assets 3,445.1 3,554.7 - ------------------------------------------------------------------------------------------------------------------- Investments and Other Assets Real estate projects and investments 286.9 290.3 Investments in power projects 514.1 517.5 Financial investments 90.5 161.0 Nuclear decommissioning trust fund 235.4 228.7 Net pension asset 111.9 93.2 Investment in Orion Power Holdings, Inc. 432.6 192.0 Other 137.6 123.0 - ------------------------------------------------------------------------------------------------------------------- Total investments and other assets 1,809.0 1,605.7 - ------------------------------------------------------------------------------------------------------------------- Property, Plant and Equipment Regulated property, plant and equipment 4,907.1 4,860.1 Nonregulated generation property, plant and equipment 6,002.4 5,279.9 Other nonregulated property, plant and equipment 209.7 173.8 Nuclear fuel (net of amortization) 121.8 128.3 Accumulated depreciation (3,923.4) (3,798.1) - ------------------------------------------------------------------------------------------------------------------- Net property, plant and equipment 7,317.6 6,644.0 - ------------------------------------------------------------------------------------------------------------------- Deferred Charges Regulatory assets (net) 430.7 514.9 Other 63.8 117.3 - ------------------------------------------------------------------------------------------------------------------- Total deferred charges 494.5 632.2 - ------------------------------------------------------------------------------------------------------------------- Total Assets $13,066.2 $12,436.6 ===================================================================================================================
* Unaudited See Notes to Consolidated Financial Statements. Certain prior-period amounts have been reclassified to conform with the current period's presentation. 4 CONSTELLATION ENERGY GROUP, INC. AND SUBSIDIARIES PART 1 - FINANCIAL INFORMATION (CONTINUED) Item 1 - Financial Statements Consolidated Balance Sheets
September 30, December 31, 2001* 2000 - ------------------------------------------------------------------------------------------------------------------- (In millions) Liabilities and Capitalization Current Liabilities Short-term borrowings $ 370.9 $ 243.6 Current portions of long-term debt 1,423.6 906.6 Accounts payable 708.8 695.9 Liabilities from energy trading activities 1,519.8 1,580.6 Dividends declared 22.9 66.5 Other 455.9 250.8 - ------------------------------------------------------------------------------------------------------------------- Total current liabilities 4,501.9 3,744.0 - ------------------------------------------------------------------------------------------------------------------- Deferred Credits and Other Liabilities Deferred income taxes 1,440.1 1,339.5 Postretirement and postemployment benefits 288.3 265.2 Deferred investment tax credits 95.4 101.4 Other 217.4 484.2 - ------------------------------------------------------------------------------------------------------------------- Total deferred credits and other liabilities 2,041.2 2,190.3 - ------------------------------------------------------------------------------------------------------------------- Long-term Debt Long-term debt of Constellation Energy 1,135.0 1,000.0 Long-term debt of nonregulated businesses 363.0 670.0 First refunding mortgage bonds of BGE 1,040.6 1,174.7 Other long-term debt of BGE 889.6 976.6 Company obligated mandatorily redeemable trust preferred securities of subsidiary trust holding solely 7.16% debentures of BGE due June 30, 2038 250.0 250.0 Unamortized discount and premium (4.3) (5.4) Current portions of long-term debt (1,423.6) (906.6) - ------------------------------------------------------------------------------------------------------------------- Total long-term debt 2,250.3 3,159.3 - ------------------------------------------------------------------------------------------------------------------- BGE Preference Stock Not Subject to Mandatory Redemption 190.0 190.0 Common Shareholders' Equity Common stock 2,044.3 1,538.7 Retained earnings 1,891.0 1,592.3 Accumulated other comprehensive income 147.5 22.0 - ------------------------------------------------------------------------------------------------------------------- Total common shareholders' equity 4,082.8 3,153.0 - ------------------------------------------------------------------------------------------------------------------- Total capitalization 6,523.1 6,502.3 - ------------------------------------------------------------------------------------------------------------------- Total Liabilities and Capitalization $13,066.2 $12,436.6 ===================================================================================================================
* Unaudited See Notes to Consolidated Financial Statements. Certain prior-period amounts have been reclassified to conform with the current period's presentation. 5 CONSTELLATION ENERGY GROUP, INC. AND SUBSIDIARIES PART 1 - FINANCIAL INFORMATION (CONTINUED) Item 1 - Financial Statements Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30, 2001 2000 - ------------------------------------------------------------------------------------------------------------------- (In millions) Cash Flows From Operating Activities Net income $ 351.0 $ 259.2 Adjustments to reconcile to net cash provided by operating activities Cumulative effect of change in accounting principle (8.5) -- Depreciation and amortization 343.1 411.1 Deferred income taxes 12.9 (31.0) Investment tax credit adjustments (6.1) (6.3) Deferred fuel costs 56.4 11.0 Accrued pension and postemployment benefits 19.5 18.1 Gains on sale of investments and subsidiaries (35.4) (32.6) Deregulation transition cost -- 24.0 Equity in earnings of affiliates and joint ventures (net) (6.9) (6.3) Changes in assets from energy trading activities 54.0 (1,034.8) Changes in liabilities from energy trading activities (60.8) 870.0 Changes in other current assets (67.1) (243.3) Changes in other current liabilities 170.3 270.1 Other (177.6) 79.6 - ------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 644.8 588.8 - ------------------------------------------------------------------------------------------------------------------- Cash Flows From Investing Activities Purchases of property, plant and equipment and other capital expenditures (1,006.5) (636.9) Sale of (investment in) Orion 26.2 (101.5) Contributions to nuclear decommissioning trust fund (17.6) (13.5) Purchases of marketable equity securities (31.4) (36.3) Sales of marketable equity securities 80.8 39.6 Other investments 38.8 20.2 - ------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (909.7) (728.4) - ------------------------------------------------------------------------------------------------------------------- Cash Flows From Financing Activities Net issuance of short-term borrowings 127.3 133.5 Proceeds from issuance of Long-term debt 851.8 803.0 Common stock 504.4 35.9 Repayment of long-term debt (1,244.9) (691.8) Common stock dividends paid (101.0) (188.5) Other 8.6 5.2 - ------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 146.2 97.3 - ------------------------------------------------------------------------------------------------------------------- Net Decrease in Cash and Cash Equivalents (118.7) (42.3) Cash and Cash Equivalents at Beginning of Period 182.7 92.7 - ------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Period $ 64.0 $ 50.4 =================================================================================================================== Other Cash Flow Information - --------------------------- Cash paid during the period for: Interest (net of amounts capitalized) $178.8 $205.0 Income taxes $139.1 $136.1
See Notes to Consolidated Financial Statements. Certain prior-period amounts have been reclassified to conform with the current period's presentation. 6 BALTIMORE GAS AND ELECTRIC COMPANY AND SUBSIDIARIES PART 1 - FINANCIAL INFORMATION Item 1 - Financial Statements Consolidated Statements of Income (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------------- (In millions) Revenues Electric revenues $634.6 $598.4 $1,624.4 $1,688.4 Gas revenues 66.7 90.1 534.0 377.8 - ------------------------------------------------------------------------------------------------------------------- Total revenues 701.3 688.5 2,158.4 2,066.2 Expenses Operating expenses: Electric fuel and purchased energy 418.0 388.3 977.7 632.4 Gas purchased for resale 22.9 48.2 328.0 192.0 Operations and maintenance 83.3 88.0 256.9 457.5 Depreciation and amortization 53.5 63.2 166.8 312.2 Taxes other than income taxes 43.3 35.6 132.6 146.0 - ------------------------------------------------------------------------------------------------------------------- Total expenses 621.0 623.3 1,862.0 1,740.1 - ------------------------------------------------------------------------------------------------------------------- Income from Operations 80.3 65.2 296.4 326.1 Other Income 2.7 3.4 1.7 7.9 - ------------------------------------------------------------------------------------------------------------------- Income Before Fixed Charges and Income Taxes 83.0 68.6 298.1 334.0 Fixed Charges Interest expense (net) 39.1 44.6 120.6 140.7 Allowance for borrowed funds used during construction -- (0.3) (1.4) (2.9) - ------------------------------------------------------------------------------------------------------------------- Total fixed charges 39.1 44.3 119.2 137.8 - ------------------------------------------------------------------------------------------------------------------- Income Before Income Taxes 43.9 24.3 178.9 196.2 Income Taxes Current 17.9 18.0 78.2 119.8 Deferred (0.6) (6.4) (6.3) (38.8) Investment tax credit adjustments (0.5) (0.6) (1.7) (4.7) - ------------------------------------------------------------------------------------------------------------------- Total income taxes 16.8 11.0 70.2 76.3 - ------------------------------------------------------------------------------------------------------------------- Net Income 27.1 13.3 108.7 119.9 Preference Stock Dividends 3.3 3.3 9.9 9.9 - ------------------------------------------------------------------------------------------------------------------- Earnings Applicable to Common Stock $ 23.8 $ 10.0 $ 98.8 $ 110.0 ===================================================================================================================
See Notes to Consolidated Financial Statements. Certain prior-period amounts have been reclassified to conform with the current period's presentation. 7 BALTIMORE GAS AND ELECTRIC COMPANY AND SUBSIDIARIES PART 1 - FINANCIAL INFORMATION (CONTINUED) Item 1 - Financial Statements Consolidated Balance Sheets
September 30, December 31, 2001* 2000 - ------------------------------------------------------------------------------------------------------------------- (In millions) Assets Current Assets Cash and cash equivalents $ 23.8 $ 21.3 Accounts receivable (net of allowance for uncollectibles of $13.4 and $13.4 respectively) 361.0 413.0 Accounts receivable, affiliated companies 66.9 8.2 Note receivable, affiliated company -- 87.0 Fuel stocks 64.4 34.1 Materials and supplies 34.9 37.3 Prepaid taxes other than income taxes 61.1 44.9 Other 11.6 4.7 - ------------------------------------------------------------------------------------------------------------------- Total current assets 623.7 650.5 - ------------------------------------------------------------------------------------------------------------------- Other Assets Net pension asset 111.5 100.2 Receivable, affiliated company 169.0 125.0 Other 73.8 68.7 - ------------------------------------------------------------------------------------------------------------------- Other assets 354.3 293.9 - ------------------------------------------------------------------------------------------------------------------- Utility Plant Plant in service Electric 3,327.1 3,259.0 Gas 1,003.3 988.4 Common 484.7 532.9 - ------------------------------------------------------------------------------------------------------------------- Total plant in service 4,815.1 4,780.3 Accumulated depreciation (1,726.7) (1,700.3) - ------------------------------------------------------------------------------------------------------------------- Net plant in service 3,088.4 3,080.0 Construction work in progress 87.5 75.3 Plant held for future use 4.5 4.5 - ------------------------------------------------------------------------------------------------------------------- Net utility plant 3,180.4 3,159.8 - ------------------------------------------------------------------------------------------------------------------- Deferred Charges Regulatory assets (net) 430.7 514.9 Other 29.2 35.1 - ------------------------------------------------------------------------------------------------------------------- Total deferred charges 459.9 550.0 - ------------------------------------------------------------------------------------------------------------------- Total Assets $4,618.3 $4,654.2 ===================================================================================================================
* Unaudited See Notes to Consolidated Financial Statements. Certain prior-period amounts have been reclassified to conform with the current period's presentation. 8 BALTIMORE GAS AND ELECTRIC COMPANY AND SUBSIDIARIES PART 1 - FINANCIAL INFORMATION (CONTINUED) Item 1 - Financial Statements Consolidated Balance Sheets
September 30, December 31, 2001* 2000 - ------------------------------------------------------------------------------------------------------------------- (In millions) Liabilities and Capitalization Current Liabilities Short-term borrowings $ 107.4 $ 32.1 Current portions of long-term debt 553.2 567.6 Accounts payable 137.5 119.3 Accounts payable, affiliated companies 87.3 103.5 Customer deposits 48.2 44.4 Accrued taxes 35.6 25.0 Accrued interest 40.1 43.4 Accrued vacation costs 19.6 20.8 Other 21.4 29.6 - ------------------------------------------------------------------------------------------------------------------- Total current liabilities 1,050.3 985.7 - ------------------------------------------------------------------------------------------------------------------- Deferred Credits and Other Liabilities Deferred income taxes 494.9 508.7 Postretirement and postemployment benefits 246.4 231.2 Deferred investment tax credits 23.2 25.0 Decommissioning of federal uranium enrichment facilities 23.7 23.7 Other 22.8 23.2 - ------------------------------------------------------------------------------------------------------------------- Total deferred credits and other liabilities 811.0 811.8 - ------------------------------------------------------------------------------------------------------------------- Long-term Debt First refunding mortgage bonds of BGE 1,040.6 1,174.7 Other long-term debt of BGE 889.6 976.6 Company obligated mandatorily redeemable trust preferred securities of subsidiary trust holding solely 7.16% debentures of BGE due June 30, 2038 250.0 250.0 Long-term debt of nonregulated businesses 45.0 34.0 Unamortized discount and premium (2.1) (3.3) Current portions of long-term debt (553.2) (567.6) - ------------------------------------------------------------------------------------------------------------------- Total long-term debt 1,669.9 1,864.4 - ------------------------------------------------------------------------------------------------------------------- Preference Stock Not Subject to Mandatory Redemption 190.0 190.0 Common Shareholder's Equity Common stock 462.9 465.1 Retained earnings 434.2 337.2 - ------------------------------------------------------------------------------------------------------------------- Total common shareholder's equity 897.1 802.3 - ------------------------------------------------------------------------------------------------------------------- Total capitalization 2,757.0 2,856.7 - ------------------------------------------------------------------------------------------------------------------- Total Liabilities and Capitalization $4,618.3 $4,654.2 ===================================================================================================================
* Unaudited See Notes to Consolidated Financial Statements. Certain prior-period amounts have been reclassified to conform with the current period's presentation. 9 BALTIMORE GAS AND ELECTRIC COMPANY AND SUBSIDIARIES PART 1 - FINANCIAL INFORMATION (CONTINUED) Item 1 - Financial Statements Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30, 2001 2000 - ------------------------------------------------------------------------------------------------------------------- (In millions) Cash Flows From Operating Activities Net income $108.7 $119.9 Adjustments to reconcile to net cash provided by operating activities Depreciation and amortization 168.5 338.2 Deferred income taxes (6.3) (38.8) Investment tax credit adjustments (1.7) (4.7) Deferred fuel costs 56.4 11.0 Accrued pension and postemployment benefits 8.1 14.9 Allowance for equity funds used during construction (2.2) (2.1) Changes in other current assets (103.0) (127.0) Changes in other current liabilities 6.7 158.1 Other 8.1 6.4 - ------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 243.3 475.9 - ------------------------------------------------------------------------------------------------------------------- Cash Flows From Investing Activities Utility construction expenditures (excluding AFC) (172.0) (238.9) Nuclear fuel expenditures -- (39.5) Contributions to nuclear decommissioning trust fund -- (8.8) Other (11.0) (6.0) - ------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (183.0) (293.2) - ------------------------------------------------------------------------------------------------------------------- Cash Flows From Financing Activities Net issuance of short-term borrowings 75.3 129.0 Proceeds from issuance of long-term debt 210.9 - Repayment of long-term debt (334.1) (121.7) Preference stock dividends paid (9.9) (9.9) Distributions to Constellation Energy -- (188.5) Other -- 1.8 - ------------------------------------------------------------------------------------------------------------------- Net cash used in financing activities (57.8) (189.3) - ------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Cash and Cash Equivalents 2.5 (6.6) Cash and Cash Equivalents at Beginning of Period 21.3 23.5 - ------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Period $ 23.8 $ 16.9 =================================================================================================================== Other Cash Flow Information - --------------------------- Cash paid during the period for: Interest (net of amounts capitalized) $122.8 $147.0 Income taxes $ 66.9 $111.5
Non-Cash Transactions - --------------------- On July 1, 2000, BGE transferred $1,578.4 million of generation assets, net of associated liabilities, to nonregulated affiliates of Constellation Energy pursuant to the Maryland PSC's Restructuring Order. See Notes to Consolidated Financial Statements. Certain prior-period amounts have been reclassified to conform with the current period's presentation. 10 Notes to Consolidated Financial Statements - ------------------------------------------ Weather conditions can have a great impact on our results for interim periods. This means that results for interim periods do not necessarily represent results to be expected for the year. Our interim financial statements on the previous pages reflect all adjustments that Management believes are necessary for the fair presentation of the financial position and results of operations for the interim periods presented. These adjustments are of a normal recurring nature. Holding Company Formation - ------------------------- On April 30, 1999, Constellation Energy(R) Group, Inc. (Constellation Energy) became the holding company for Baltimore Gas and Electric Company (BGE(R)) and its subsidiaries. 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, or its subsidiaries. Basis of Presentation - --------------------- This Quarterly Report on Form 10-Q 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, LLC and its subsidiaries. The consolidated financial statements of BGE include the accounts of BGE, District Chilled Water General Partnership (ComfortLink), and BGE Capital Trust I. 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. Deregulation of Electric Generation - ----------------------------------- On April 8, 1999, Maryland enacted legislation authorizing customer choice and competition among electric suppliers. In addition, on November 10, 1999, the Maryland Public Service Commission (Maryland PSC) issued a Restructuring Order that resolved the major issues surrounding electric restructuring. Effective July 1, 2000, the state of Maryland implemented customer choice for electric suppliers. We discuss the implications of customer choice and the Restructuring Order further in Management's Discussion and Analysis beginning on page 20. Please also refer to the Legal Proceedings section on page 39 for a discussion regarding an appeal of the Restructuring Order. Subsequent Events - ----------------- Business Separation - ------------------- On October 26, 2001, we announced the decision to remain a single company and canceled prior plans to separate our domestic merchant energy business from our remaining businesses. We also announced the termination of our power advisory relationship with Goldman Sachs. We paid Goldman Sachs a total of $355 million, representing $196 million to terminate the power business services agreement with our power marketing operation and $159 million previously recognized as a payable for services rendered under the agreement. As a result, in the fourth quarter of 2001, we expect to recognize an expense of approximately $200 million pre-tax, or $.79 per share, related to the termination of the contract with Goldman Sachs. In light of this transaction, Goldman Sachs will no longer make the equity investment in our domestic merchant energy business as previously announced. Acquisition of Nine Mile Point - ------------------------------ On November 7, 2001, we completed our purchase of the Nine Mile Point Nuclear Station (Nine Mile Point) located in Scriba, New York. Nine Mile Point consists of two boiling-water reactors. Unit 1 is a 609-megawatt reactor that entered service in 1969. Unit 2 is a 1,148-megawatt reactor that began operation in 1988. Nine Mile Point Nuclear Station, LLC, a subsidiary of Constellation Nuclear, purchased 100 percent of Nine Mile Point Unit 1 and 82 percent of Unit 2 for $762 million, including $87 million for fuel. Approximately one-half of the purchase price, or $380 million, was paid at closing and the remainder is being financed through the sellers in a note to be repaid over five years with an interest rate of 11.0%. This note may be prepaid at any time without penalty. The sellers also transferred to us approximately $442 million in decommissioning funds. As a result of this purchase, we own 1,550 megawatts of Nine Mile Point's 1,757 megawatts of total generating capacity. Niagara Mohawk Power Corporation was the sole owner of Nine Mile Point Unit 1. The co-owners of Unit 2 who sold their interests include: Niagara Mohawk (41 percent), New York State Electric and Gas (18 percent), Rochester Gas & Electric Corporation (14 percent) and Central Hudson Gas & Electric Corporation (9 percent). The Long Island Power Authority will continue to own 18 percent of Unit 2. We will sell 90 percent of our share of Nine Mile Point's output back to the sellers at an average price of nearly $35 per megawatt-hour for approximately 10 years under power purchase agreements. The contracts for the output of the plant are based on operation of the individual units. 11 Sale of Guatemalan Operations - ----------------------------- On November 8, 2001, we sold our Guatemalan power plant operations to an affiliate of Duke Energy International, L.L.C., the international business unit of Duke Energy. Through this sale, Duke Energy acquired Grupo Generador de Guatemala y Cia., S.C.A., which owns two generating plants at Esquintla and Lake Amatitlan in Guatemala. The combined capacity of the plants is 167 megawatts. We decided to sell our Guatemalan operations to focus our efforts on our domestic merchant energy business and our retail energy businesses, including BGE. As a result of this transaction, we are no longer committed to making significant future capital investments in a non-core operation. We will record an after-tax loss of approximately $28 million in the fourth quarter of 2001, resulting from this sale. Early Retirement Programs - ------------------------- We continue to evaluate cost-cutting measures to reduce our workforce. As part of this initiative, our domestic merchant energy business and BGE recently announced Voluntary Special Early Retirement Programs (VSERPs) to provide enhanced retirement benefits to certain eligible participants that elect to retire on February 1, 2002. The programs are being offered to accelerate the pace of our efforts to reduce our operating costs to remain competitive in our business environment. We will reflect the financial impacts of the VSERPs in the fourth quarter of 2001. Bethlehem Steel - --------------- On October 15, 2001, Bethlehem Steel Corporation filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code. Bethlehem Steel is BGE's largest customer, accounting for approximately three percent of electric revenues and one percent of gas revenues. At September 30, 2001, our receivable balance from Bethlehem Steel was approximately $5 million. We discuss other subsequent events in the related sections of these Notes to Consolidated Financial Statements. - -------------------------------------------------------------------------------- Information by Operating Segment - -------------------------------- Our reportable operating segments are - Domestic Merchant Energy, Regulated Electric, and Regulated Gas: o Our nonregulated domestic merchant energy business in North America: - provides power marketing, structured transactions, and risk management services, - develops, owns, and operates domestic power projects, and - provides nuclear consulting services. o Our regulated electric business purchases, distributes and sells electricity in Maryland, and o Our regulated gas business purchases, transports, and sells natural gas in Maryland. Effective July 1, 2000, the financial results of the electric generation portion of our business are included in the domestic merchant energy business segment. Prior to that date, the financial results of electric generation are included in our regulated electric business. Our remaining nonregulated businesses: o provide energy products and services, o sell and service electric and gas appliances, and heating and air conditioning systems, engage in home improvements, and sell electricity and natural gas through mass marketing efforts, o provide cooling services, o engage in financial investments, o develop and own real estate and senior-living facilities, and o own interests in Latin American power generation and distribution projects and investments. These reportable segments are strategic businesses based principally upon regulations, products, and services that require different technology and marketing strategies. We evaluate the performance of these segments based on net income. We account for intersegment revenues using market prices. 12
Domestic Unallocated Merchant Regulated Regulated Other Corporate Energy Electric Gas Nonregulated Items and Business Business Business Businesses Eliminations Consolidated - --------------------------- -------------- -------------- --------------- ------------- -------------- ------------ For the three months ended September 30, (In millions) 2001 Unaffiliated revenues $ 215.9 $ 634.4 $ 66.6 $ 119.2 $ - $ 1,036.1 Intersegment revenues 401.4 0.2 0.1 - (401.7) - - ---------------------------- ------------- -------------- --------------- ------------- ------------ -------------- Total revenues 617.3 634.6 66.7 119.2 (401.7) 1,036.1 Net income (loss) 144.9 27.3 (2.3) (6.3) - 163.6 2000 Unaffiliated revenues $ 119.4 $ 598.2 $ 86.7 $ 164.3 $ - $ 968.6 Intersegment revenues 380.0 0.2 3.4 9.8 (393.4) - - ---------------------------- ------------- -------------- --------------- ------------- ------------ -------------- Total revenues 499.4 598.4 90.1 174.1 (393.4) 968.6 Net income (loss) 129.9 15.4 (4.6) 6.8 - 147.5 For the nine months ended September 30, 2001 Unaffiliated revenues $ 414.9 $1,624.0 $528.5 $ 459.0 $ - $ 3,026.4 Intersegment revenues 933.9 0.4 5.5 1.9 (941.7) - - ---------------------------- ------------- -------------- --------------- ------------- ------------ -------------- Total revenues 1,348.8 1,624.4 534.0 460.9 (941.7) 3,026.4 Cumulative effect of change in accounting principle - - - 8.5 - 8.5 Net income 239.7 73.0 29.4 8.9 - 351.0 2000 Unaffiliated revenues $ 293.1 $1,688.0 $372.8 $ 475.3 $ - $ 2,829.2 Intersegment revenues 380.0 0.4 5.0 15.8 (401.2) - - ---------------------------- ------------- -------------- --------------- ------------- ------------ -------------- Total revenues 673.1 1,688.4 377.8 491.1 (401.2) 2,829.2 Net income (loss) (a) 150.0 93.2 18.1 (2.1) - 259.2 At September 30, 2001 Segment assets $ 7,321.7 $ 3,469.0 $ 1,090.3 $ 1,508.4 $ (323.2) $13,066.2 At December 31, 2000 Segment assets $ 6,786.6 $ 3,392.3 $ 1,089.9 $ 1,491.5 $ (323.7) $12,436.6 (a)
(a) Our regulated electric business recorded an expense of $4.2 million related to employees that elected to participate in a Targeted Voluntary Special Early Retirement Program. In addition, our domestic merchant energy business recorded a $15.0 million deregulation transition cost incurred by our power marketing operation. Certain prior-period amounts have been reclassified to conform with the current period's presentation. 13 Financing Activity - ------------------ Constellation Energy - -------------------- During the period from January 1, 2001 through the date of this report, we issued a total of 13.2 million shares of common stock, without par value for net proceeds of $504.4 million. We issued 12.0 million shares through a secondary offering and the remaining 1.2 million shares were issued under our Continuous Offering Program for Stock and the Shareholder Investment Plan. Constellation Energy issued and redeemed prior to their maturity the following notes during the period from January 1, 2001 through the date of this report: Date Net Issued/ Proceeds/ Principal Redeemed Payments - ------------------------------ -------- --------- -------- (In millions) Issued: Floating Rate Notes due 2002 $400.0 1/01 $399.7 Floating Rate Notes due 2002 235.0 4/01 234.7 Redeemed: Floating Rate Reset Notes due 2002 $200.0 1/01 $200.0 Extendible Notes due 2010 300.0 6/01 300.0 Floating Rate Notes due 2003 200.0 10/01 200.0 In anticipation of separating our domestic merchant energy business from our remaining businesses and to fund working capital requirements and capital expenditures, in June 2001, Constellation Energy arranged a $2.5 billion, 364-day revolving credit facility. However, since we canceled prior plans to separate, we will use this facility primarily to fund capital expenditures, and working capital requirements, including commercial paper support, for the domestic merchant energy business. We do not expect to use the facility to redeem Constellation Energy's outstanding long-term debt and to repay commercial paper borrowings as previously stated. We discuss the cancellation of our plans to separate in the Recent Events section of Management's Discussion and Analysis on page 21. In June 2001, Constellation Energy also arranged a $380 million, 364-day revolving credit facility to be used primarily to support letters of credit and for other short-term financing needs. Constellation Energy also has an existing $188.5 million, multi-year revolving credit facility available for short-term and long-term needs, including letters of credit. As of the date of this report, letters of credit that totaled $269.7 million were issued under all of our facilities. Additionally, since September 30, 2001, we used existing financing sources to fund the $355 million payment to Goldman Sachs for the termination of the power business services agreement and for the $380 million paid for the acquisition of Nine Mile Point. Constellation Energy has issued guarantees in an amount up to $1.5 billion primarily related to credit facilities and contractual performance of our domestic merchant energy business. However, the actual subsidiary liabilities related to these guarantees totaled $253.7 million at September 30, 2001. BGE and Nonregulated Businesses - ------------------------------- BGE issued and redeemed prior to their maturity the following notes during the period from January 1, 2001 through the date of this report: Date Net Issued/ Proceeds/ Principal Redeemed Payments - ------------------------------ -------- --------- -------- (In millions) Issued: Floating Rate Notes due 2002 $200.0 5/01 $200.0 Redeemed: Floating Rate Reset Notes due 2001 $200.0 5/01 $200.0 In conjunction with the July 1, 2000 transfer of generation assets, BGE currently is contingently liable for $276 million of the tax exempt debt that was assigned to nonregulated affiliates of Constellation Energy as discussed further in the Current Issues -Electric Competition section of Management's Discussion and Analysis on page 22. In the future, BGE may purchase some of its long-term debt or preference stock in the market. This will depend on market conditions and BGE's capital structure. Please refer to the Funding for Capital Requirements section of Management's Discussion and Analysis on page 37 for additional information about the debt of BGE and our nonregulated businesses. Commitments - ----------- Our domestic merchant energy business has committed to contribute additional capital and to make additional loans to some affiliates, joint ventures, and partnerships in which we have an interest. At September 30, 2001, the total amount of investment requirements committed to by our domestic merchant energy business was $183.3 million. 14 Environmental Matters - --------------------- Clean Air - --------- The Clean Air Act affects both existing generating facilities and new projects. The Clean Air Act and many state laws require significant reductions in SO2 (sulfur dioxide) and NOx (nitrogen oxide) emissions that result from burning fossil fuels. The Clean Air Act also contains other provisions that could materially affect our facilities and projects. Various provisions may require permits, inspections or installation of additional pollution control technology. Because our portfolio is diverse, both in the mix of fuels used to generate electricity, as well as in the age of various facilities, the Clean Air Act requirements have different impacts in terms of compliance costs for each of our projects. Many of these compliance costs may be substantial, as described in more detail below. On October 27, 1998, the Environmental Protection Agency (EPA), issued a rule requiring 22 Eastern states and the District of Columbia to reduce emissions of NOx. Among other things, the EPA's rule establishes an ozone season, which runs from May through September, and a NOx emission budget for each state, including Maryland and Pennsylvania. The EPA rule requires states to implement controls sufficient to meet their NOx budget by May 30, 2004. Coal-fired power plants are a principal target of NOx reductions under this initiative. Many of our assets are subject to NOx reduction requirements under the EPA rule including those located in Maryland and Pennsylvania. This regulation affects both new and existing facilities causing additional capital investment. At the Brandon Shores facility we have installed, and at our Wagner facility we are installing by May of 2002, emissions reduction equipment in order to meet Maryland regulations issued pursuant to EPA's rule. The Keystone plant in Pennsylvania is installing emissions reduction equipment by 2003 to meet Pennsylvania regulations issued pursuant to EPA's rule. We currently estimate that the controls needed at our generating plants to meet the NOx emission reduction requirements will cost approximately $285 million. Through September 30, 2001, we have spent approximately $180 million to meet these reduction requirements. In July 1997, the EPA published new National Ambient Air Quality Standards for very fine particulates and revised standards for ozone attainment. While these standards may require increased controls at our fossil generating plants in the future, implementation, if required, could be delayed for several years. We cannot estimate the cost of these increased controls at this time because the states, including Maryland, Pennsylvania, and California, still need to determine what reductions in pollutants will be necessary to meet the EPA standards. The EPA decided to control mercury emissions from coal-fired plants. The EPA expects to issue final regulations in 2004 and compliance could be required by approximately 2007. The costs of these controls cannot be estimated at this time since the level of control or systems to implement them have not yet been established, but such costs could be material. Over the past two years, the EPA and several states have filed suits against a number of coal-fired power plants in midwestern and southern states alleging violations of the deterioration prevention and non-attainment provisions of the Clean Air Act's new source review requirements. In 2000, the EPA requested information relating to modifications made to our Brandon Shores, Crane and Wagner plants in Baltimore, Maryland. The EPA also sent similar, but narrower, information requests to two of the Pennsylvania waste-coal burning plants in which we have an ownership interest. We have provided the EPA the requested information. Although there have not been any new source review-related suits filed against our facilities, there can be no assurance that any of them will not be the target of an action in the future. Based on the levels of emissions control that the EPA and/or states are seeking in other suits, we believe that material additional costs and penalties could be incurred, and /or planned capital expenditures could be accelerated, if the EPA was successful in any future actions regarding our facilities. We believe our generating plants have been operated in accordance with the Clean Air Act and the rules implementing the Clean Air Act. 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 15.47% 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 $2.3 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. 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, BGE signed a consent order with the Maryland Department of the Environment (MDE) that requires us to implement remedial action plans for contamination at and around the Spring Gardens site, located in Baltimore, Maryland. BGE submitted the required remedial action plans and they were approved by the MDE. Based on the remedial action plans, the costs we consider to be probable to remedy the 15 contamination are estimated to total $47 million. BGE has recorded these costs as a liability and has deferred these costs, net of accumulated amortization and amounts recovered from insurance companies, as a regulatory asset. 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. We discuss this further in Note 5 of our 2000 Annual Report on Form 10-K. Through September 30, 2001, we have spent approximately $36.6 million for remediation at this site. We do not expect the cleanup costs of the remaining sites to have a material effect on our financial results. Other potential environmental liabilities and pending environmental actions are described further in our 2000 Annual Report on Form 10-K in Item 1. Business - - Environmental Matters. Nuclear Insurance - ----------------- If there was an accident or an extended outage at any unit of the Calvert Cliffs Nuclear Power Plant (Calvert Cliffs) or the Nine Mile Point Nuclear Power Plant, it could have a substantial adverse financial effect on us. The primary contingencies that would result from an incident at Calvert Cliffs or Nine Mile Point could include: o physical damage to the plants, o recoverability of replacement power costs, and o 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, such as ordinary wear and tear, intentional acts, and war. Terrorist acts, while not excluded, are covered as a common occurrence, meaning that if terrorist acts occur against one or more commercial nuclear power plants in the country within a 12 month period, they will be treated as one event and the owners of the plants will share the full limit of the policy (currently $3.24 billion). Furthermore, the costs that could result from a covered major accident or a covered extended outage at either of the Calvert Cliffs or Nine Mile Point units could exceed our insurance coverage limits. Insurance for Nuclear Facilities and Third Party Claims - ------------------------------------------------------- For physical damage to Calvert Cliffs or Nine Mile Point, we have $2.75 billion of property insurance for each plant from an industry mutual insurance company. If an outage at any unit at Calvert Cliffs or Nine Mile Point 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 ($412.6 million for Unit 2 of Nine Mile Point), provided by an industry mutual insurance company. This amount can be reduced by up to $98.0 million per unit ($82.5 million for Unit 2 of Nine Mile Point) if an outage at both units of either 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 $77 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 the date of this report, the limit for third party claims from a nuclear incident is $9.54 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 $352.4 million per incident. That amount would be payable at a rate of $40 million per year. Some of the provisions of the Price Anderson Act expire in August 2002, and it is subject to change if those provisions are extended. While we expect these provisions to be extended, we do not know what impact any changes to the Act may have on us. Insurance for Worker Radiation Claims - ------------------------------------- As an operator of two commercial nuclear power plants 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. o 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. o 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 seven 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 policies exceed the coverage limits, the provisions of the Price Anderson Act (discussed in this section) would apply. The sellers of Nine Mile Point retain the liabilities for existing and potential claims that occurred prior to the closing date of the sale. 16 Recoverability of Electric Fuel Costs - ------------------------------------- Under the terms of the Restructuring Order, BGE's electric fuel rate clause was discontinued effective July 1, 2000. In September 2000, the Maryland PSC approved the collection of the $54.6 million accumulated difference between our actual costs of fuel and energy and the amounts collected from customers that were deferred (included as an asset or liability on the Consolidated Balance Sheets and excluded from the Consolidated Statements of Income) under the electric fuel rate clause through June 30, 2000. We collected this accumulated difference from customers over the twelve-month period ending October 2001. California Power Purchase Agreements - ------------------------------------ Our domestic generation operation has $303.0 million invested in 14 operating projects that sell electricity in California under power purchase agreements called "Interim Standard Offer No. 4 (SO4)" agreements to Southern California Edison (SCE) and Pacific Gas & Electric (PGE). Under these agreements, the electricity rates changed from fixed to variable rates beginning in 1996. In 2000, the last four projects transitioned to variable rates. Due in part to uncertainties in California, prices have been volatile. The projects recently entered into agreements with SCE and PGE that provide for five-year fixed price payments averaging $53.70 per megawatt-hour plus the stated capacity payments in the original SO4 contracts. These agreements also provide conditions for the payment of all past due amounts plus interest which the projects expect to collect in the next two years. We discuss the developments in California in the Current Issues - Other States section on page 23. We also describe these projects and the transition process in Note 3 and Note 10 of our 2000 Annual Report on Form 10-K. Related Party Transactions - BGE - -------------------------------- Income Statement - ---------------- Under the Restructuring Order, BGE is providing standard offer service to customers at fixed rates over various time periods during the transition period from July 1, 2000 to June 30, 2006, for those customers that do not choose an alternate supplier. Constellation Power Source is under contract to provide BGE with the energy and capacity required to meet its standard offer service obligations for the first three years of the transition period, and 90% of the energy and capacity for the final three years (July 1, 2003 to June 30, 2006) of the transition period. The cost of BGE's purchased energy from nonregulated affiliates of Constellation Energy to meet its standard offer service obligation was $402.8 million for the quarter and $935.3 million for the nine months ended September 30, 2001 compared to $387.4 million for the quarter and nine months ended September 30, 2000. In addition, Constellation Energy charges BGE for certain corporate functions. Certain costs are directly charged to BGE. We allocate other corporate function costs based on a total percentage of expected use by BGE. Management believes this method of allocation is reasonable and approximates the cost BGE would have incurred as an unaffiliated entity. These costs were $4.0 million for the quarter ended September 30, 2001 compared to $9.6 million for the same period in 2000 and $14.2 million for the nine months ended September 30, 2001 compared to $16.9 million for the same period in 2000. Balance Sheet - ------------- As a result of the deregulation of electric generation, BGE transferred its generation assets to nonregulated affiliates of Constellation Energy effective July 1, 2000. In conjunction with this transfer, Constellation Power Source Generation, Inc. issued approximately $366.0 million in unsecured promissory notes to BGE. All of these notes have been repaid by Constellation Power Source Generation, Inc. The proceeds were used to service current maturities of certain BGE long-term debt. Amounts related to corporate functions performed at the Constellation Energy holding company, BGE's purchases to meet its standard offer service obligation, and BGE's charges to Constellation Energy and its nonregulated affiliates for certain services it provides them result in the affiliated company balances on BGE's Consolidated Balance Sheets. Management believes its allocation methods are reasonable and approximate the costs that would be charged to unaffiliated entities. Accounting Standard Adopted - --------------------------- On January 1, 2001, we adopted Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities. These statements require that we recognize all derivatives on the balance sheet at fair value. Changes in the value of derivatives that are not hedges must be recorded in earnings. We use derivatives in connection with our power marketing and risk management activities and to hedge the risk of variations in future cash flows from forecasted purchases and sales of electricity and gas in our electric generation operations as more fully described in the Risk Management and Hedging Activities section on page 18. Under SFAS No. 133, changes in the value of derivatives designated as hedges that are effective in offsetting the variability in cash flows of forecasted transactions are recognized in other comprehensive income until the forecasted transactions occur. The ineffective portion of changes in fair value of derivatives used as cash-flow hedges is immediately recognized in earnings. 17 In accordance with the transition provisions of SFAS No. 133, we recorded the following at January 1, 2001: o an $8.5 million after-tax cumulative effect adjustment that increased earnings, and o a $35.5 million after-tax cumulative effect adjustment that reduced other comprehensive income. The cumulative effect adjustment recorded in earnings represents the fair value as of January 1, 2001 of a warrant for 705,900 shares of common stock of Orion Power Holdings, Inc. (Orion). The warrant has an exercise price of $10 per share and expires on April 24, 2010. The warrant was received in conjunction with our investment in Orion. As part of the proposed sale of Orion to Reliant Resources, Inc, we expect to receive cash equal to the difference between the merger consideration of $26.80 per share and the exercise price multiplied by the number of shares subject to the warrant. The cumulative effect adjustment recorded in other comprehensive income represents certain forward sales of electricity that we designated as cash flow hedges of forecasted transactions primarily through our domestic merchant energy business. We discuss our risk management for derivatives and hedging activities below. Risk Management and Hedging Activities - -------------------------------------- Our domestic merchant energy business is exposed to market risk from the power marketing operation of Constellation Power Source and from our electric generation operations. Constellation Power Source manages the commodity price risk inherent in its power marketing activities on a portfolio basis, subject to established trading and risk management policies. Constellation Power Source uses a variety of derivative and non-derivative instruments, including: o forward contracts, which commit us to purchase or sell energy commodities in the future; o futures contracts, which are exchange-traded standardized commitments to purchase or sell a commodity or financial instrument, or to make a cash settlement, at a specific price and future date; o swap agreements, which require payments to or from counterparties based upon the differential between two prices for a predetermined contractual (notional) amount; and o option contracts, which convey the right to buy or sell a commodity, financial instrument, or index at a predetermined price. Our domestic merchant energy business conducts electric generation operations primarily through Constellation Power Source Generation, Calvert Cliffs, Constellation Power, and beginning in November 2001, Nine Mile Point. Presently, we expect to use the majority of the generating capacity controlled by our domestic merchant energy business to provide standard offer service to BGE or to be sold back to the sellers of Nine Mile Point to service their load requirements. However, beginning in July 2002, we expect approximately 1,000 megawatts of industrial customer load will leave BGE's standard offer service. Going forward, our domestic merchant energy business will supply 100% of the standard offer service to BGE through June 30, 2003 and 90% from July 1, 2003 through June 30, 2006. Additionally, we plan to expand our generation operations. As a result, our domestic merchant energy business has a substantial and increasing amount of generating capacity that is subject to future changes in wholesale electricity prices and has fuel requirements that are subject to future changes in coal, natural gas, and oil prices. Constellation Power Source manages the commodity price risk of our electric generation operations as part of its overall portfolio. In order to manage this risk, we may enter into fixed-price derivative or non-derivative contracts to hedge the variability in future cash flows from forecasted sales of electricity and purchases of fuel. Our objectives for entering into such hedges include fixing the price for a portion of anticipated future electricity sales at a level that provides an acceptable return on our electric generation operations and fixing the price of a portion of anticipated fuel purchases for the operation of our power plants. The portion of forecasted transactions hedged may vary based upon management's assessment of market, weather, operational, and other factors. As of September 30, 2001, our domestic merchant energy business had designated certain fixed-price forward electricity sale contracts as a cash-flow hedge of forecasted sales of electricity for the years 2002 through 2010. We record derivatives used for hedging activities in "Other Assets" and in "Other Deferred Credits and Other Liabilities" on the Consolidated Balance Sheets. At September 30, 2001, we recorded net losses of $2.2 million on these hedges in "Accumulated Other Comprehensive Income". We expect to reclassify $2.3 million of net gains on cash flow hedges from "Other Comprehensive Income" into earnings during the next twelve months based on the market prices at September 30, 2001. However, the actual amount reclassified into earnings could vary from the amounts recorded at September 30, 2001 due to future changes in the market prices. For the quarter and nine months ended September 30, 2001, there was no hedge ineffectiveness recognized in earnings. We discuss our market risk in Item 7. Management's Discussion and Analysis - Market Risk of our 2000 Annual Report on Form 10-K. 18 In November 2001, we entered into forward starting interest rate swap contracts to manage a portion of our interest rate exposure for the anticipated borrowings related to the refinancing of our existing $2.5 billion credit facility. The swaps have notional or contract amounts that total $800 million with an average rate of 4.9% and expire in the first quarter of 2002. The notional amounts of the contracts do not represent amounts that are exchanged by the parties and are not a measure of our exposure to market or credit risks. The notional amounts are used in the determination of the cash settlements under the contracts. These swaps are designated as cash-flow hedges under SFAS No. 133, with gains or losses recorded in "Accumulated Other Comprehensive Income" in anticipation of planned financing transactions. Any gain or loss on the hedges will be reclassified into earnings and included in "Interest Expense" from "Other Comprehensive Income" during the periods in which the interest payments being hedged occur. Accounting Standards Issued - --------------------------- In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, that replaces FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. SFAS No. 144 addresses financial reporting for the impairment or disposal of long-lived assets. This statement is effective for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years, with early application encouraged. Currently, we are evaluating this statement and have not determined the impact on our financial results. In July 2001, the FASB issued SFAS No. 141, Business Combinations, SFAS No. 142, Goodwill and Other Intangible Assets, and SFAS No. 143, Accounting for Obligations Associated with the Retirement of Long-Lived Assets. SFAS No. 141 requires that all business combinations be accounted for under the purchase method. Use of the pooling-of-interests method is prohibited for business combinations initiated after June 30, 2001. This statement also establishes criteria for the separate recognition of intangible assets acquired in a business combination. SFAS No. 142 requires that goodwill no longer be amortized to earnings, but instead be subject to periodic testing for impairment. This statement is effective for fiscal years beginning after December 15, 2001, with earlier application permitted only in specified circumstances. We do not expect the adoption of these statements to have a material impact on our financial results. SFAS No. 143 provides the accounting requirements for asset retirement obligations associated with tangible long-lived assets. This statement is effective for fiscal years beginning after June 15, 2002, and early adoption is permitted. Currently, we are evaluating this statement and have not determined the impact on our financial results. Accounting for the Investment in Orion - -------------------------------------- Effective June 1, 2001, we changed our accounting for the investment in Orion from the equity method to the cost method, subject to the fair value requirements of SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. This change resulted from no longer having significant influence as required under equity method accounting due to a reduction in our ownership percentage. Our ownership percentage decreased due to Orion's issuance of 13 million shares of common stock that were sold in a public offering and due to our sale of one million shares as part of the offering. Under SFAS No. 115, we classify our investment in Orion as available-for-sale securities and record any unrealized gains or losses in "Accumulated Other Comprehensive Income" on our Consolidated Balance Sheets. At September 30, 2001, the unrealized gain on our investment in Orion was $141.5 million. 19 Item 2. Management's Discussion - ------------------------------- Management's Discussion and Analysis of Financial Condition and Results of - -------------------------------------------------------------------------- Operations - ---------- Introduction - ------------ Constellation Energy Group, Inc. (Constellation Energy) is a diversified North American energy company. Constellation Energy conducts its business through various subsidiaries that primarily include a domestic merchant energy business and Baltimore Gas and Electric Company (BGE). Our domestic merchant energy business is focused mostly on power marketing and merchant generation in North America. BGE is an electric and gas public utility distribution 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 the Notes to Consolidated Financial Statements on page 12. 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. This Quarterly Report on Form 10-Q is a combined report of Constellation Energy and BGE. Effective July 1, 2000, electric generation was deregulated in Maryland. Also, on July 1, 2000, BGE transferred all of its generation assets and related liabilities at book value to our domestic merchant energy business. We discuss the deregulation of electric generation in the Current Issues section on page 22. As a result of these changes, our domestic merchant energy business includes the: o wholesale power marketing, structured transactions, and risk management activities of Constellation Power Source, Inc., o domestic power projects of Constellation Investments, Inc. and Constellation Power, Inc. and subsidiaries, o fossil and hydroelectric generating assets of Constellation Power Source Generation, Inc., o nuclear generating assets of Calvert Cliffs Nuclear Power Plant, Inc., and effective in November 2001 Nine Mile Point Nuclear Station, LLC, and o nuclear consulting services of Constellation Nuclear Services, Inc. Also, effective July 1, 2000, the financial results of the electric generation portion of our business are included in the domestic merchant energy business. Prior to that date, the financial results of electric generation were included in BGE's regulated electric business. BGE remains a regulated electric and gas public utility company. Our other nonregulated businesses include the: o energy products and services of Constellation Energy Source, Inc., o home products, commercial building systems, and residential and commercial electric and gas retail marketing of BGE Home Products & Services, Inc. and subsidiaries, o ComfortLink general partnership, in which BGE is a partner, that provides cooling services for commercial customers in Baltimore, o financial investments of Constellation Investments, o real estate and senior-living facilities of Constellation Real Estate Group, Inc., and o interests in Latin America power generation and distribution projects and investments of Constellation Power and subsidiaries. In this discussion and analysis, we explain the general financial condition and the results of operations for Constellation Energy and BGE including: o what factors affect our businesses, o what our earnings and costs were in the periods presented, o why earnings and costs changed between periods, o where our earnings came from, o how all of this affects our overall financial condition, o what we expect our expenditures for capital projects to be in the future, and o where we expect to get cash for future capital expenditures. As you read this discussion and analysis, refer to our Consolidated Statements of Income on page 3, which present the results of our operations for the quarters and nine months ended September 30, 2001 and 2000. We analyze and explain the differences between periods in the specific line items of the Consolidated Statements of Income. 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 rate regulation through June 30, 2000. Our regulated electric business changed as we transferred our electric generation assets and related liabilities to our domestic merchant energy business and we entered into retail customer choice for electric generation effective July 1, 2000. Accordingly, the results of operations and financial condition described in this discussion and analysis are not necessarily indicative of future performance. 20 Recent Events - ------------- Business Separation - ------------------- On October 26, 2001, we announced the decision to remain a single company and canceled prior plans to separate our domestic merchant energy business from our remaining businesses. In the past year, the utility industry, energy markets, and general economy have changed and we believe that maintaining our current corporate structure provides a better platform of size, strength, and stability to execute our strategies. We also announced the termination of our power advisory relationship with Goldman Sachs. We paid Goldman Sachs a total of $355 million, representing $196 million to terminate the power business services agreement with our power marketing operation and $159 million previously recognized as a payable for services rendered under the agreement. We used existing financing sources to fund this payment. As a result, in the fourth quarter of 2001, we expect to recognize an expense of approximately $200 million pre-tax, or $.79 per share, related to the termination of the contract with Goldman Sachs. In light of this transaction, Goldman Sachs will no longer make the equity investment in our domestic merchant energy business as previously announced. Acquisition of Nine Mile Point - ------------------------------ On November 7, 2001, we completed our purchase of the Nine Mile Point Nuclear Station (Nine Mile Point) located in Scriba, New York. Nine Mile Point Nuclear Station, LLC, a subsidiary of Constellation Nuclear, purchased 100 percent of Nine Mile Point Unit 1 and 82 percent of Unit 2 for $762 million, including $87 million for fuel. Approximately one-half of the purchase price, or $380 million, was paid at closing and the remainder is being financed through the sellers in a note to be repaid over five years with an interest rate of 11.0%. As a result, we own 1,550 megawatts of Nine Mile Point's 1,757 megawatts of total generating capacity. The sellers transferred approximately $442 million in decommissioning funds. We will sell 90 percent of our share of Nine Mile Point's output back to the sellers at an average price of nearly $35 per megawatt-hour for approximately 10 years under power purchase agreements. We discuss the acquisition of Nine Mile Point further in the Notes to the Financial Statements on page 11. Sale of Guatemalan Operations - ----------------------------- On November 8, 2001, we sold our Guatemalan power plant operations to an affiliate of Duke Energy International, L.L.C., the international business unit of Duke Energy. Through this sale, Duke Energy acquired Grupo Generador de Guatemala y Cia., S.C.A., which owns two generating plants at Esquintla and Lake Amatitlan in Guatemala. The combined capacity of the plants is 167 megawatts. We decided to sell our Guatemalan operations to focus our efforts on our domestic merchant energy business and our retail energy businesses, including BGE. As a result of this transaction, we are no longer committed to making significant future capital investments in a non-core operation. We will record an after-tax loss of approximately $28 million, or $.17 per share, in the fourth quarter of 2001, resulting from this sale. Early Retirement Programs - ------------------------- We continue to evaluate cost-cutting measures to reduce our workforce. As part of this initiative, our domestic merchant energy business and BGE recently announced Voluntary Special Early Retirement Programs (VSERPs) to provide enhanced retirement benefits to certain eligible participants that elect to retire on February 1, 2002. The programs are being offered to accelerate the pace of our efforts to reduce our operating costs to remain competitive in our business environment. We will reflect the financial impacts of the VSERPs in the fourth quarter of 2001. Investment in Orion - ------------------- In September 2001, Orion entered into an agreement with Reliant Resources, Inc., under which Reliant Resources will acquire all of the outstanding shares of Orion for $26.80 per share. The companies have publicly announced that they expect to complete the transaction in early 2002. We have agreed to vote in favor of this transaction. We expect to recognize a gain on the sale of our investment of approximately $154 million at the close of this transaction. Bethlehem Steel - --------------- On October 15, 2001, Bethlehem Steel Corporation filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code. Bethlehem Steel is BGE's largest customer, accounting for approximately three percent of electric revenues and one percent of gas revenues. At September 30, 2001, our receivable balance from Bethlehem Steel was approximately $5 million. However, we cannot determine the ultimate impact of the bankruptcy filing on our financial results at this time with respect to the collectibility of receivables or the continuation of Bethlehem Steel's operations at its Sparrows Point plant, located in Baltimore Maryland. New President and Chief Executive Officer - ----------------------------------------- Effective November 1, 2001, Mayo A. Shattuck, III was elected President and Chief Executive Officer of Constellation Energy. Christian H. Poindexter remains as Chairman of the Board. Mr. Shattuck has been a Director of Constellation Energy for seven years. Prior to joining Constellation Energy, he was Global Head of Investment Banking for Deutsche Bank and Co-Chairman and Co-Chief Executive Officer of DB Alex. Brown and Deutsche Bank Securities. 21 Strategy - -------- Customer choice and regulatory change significantly impact our business. In response, we regularly evaluate our strategies with two goals in mind: to improve our competitive position, and to anticipate and adapt to business environment and regulatory changes. As a result of evaluating our strategies, on October 26, 2001, we announced the decision to remain a single company and canceled prior plans to separate our domestic merchant energy business from our other businesses and terminated our power advisory relationship with Goldman Sachs as previously discussed in the Recent Events section on page 21. The growth of BGE and our retail energy services businesses is expected through focused and disciplined expansion in its service territory. However, our primary growth strategy centers on our domestic merchant energy business. The strategy for our domestic merchant energy business continues to be a leading competitive provider of energy solutions for wholesale customers in North America. To achieve this, our domestic merchant energy business expects to continue to integrate our generation assets with our marketing and risk management operations supported by geographic, fuel, and dispatch diversification. We also expect to accomplish this growth through structured transactions to wholesale customers and by acquiring and developing additional generating facilities when necessary to support our marketing operation. This business will focus on states with strong growth in energy demand and that provide opportunities through ongoing deregulation and the creation of competitive markets. Delays in, or the ultimate form of, deregulation of electric generation in various states (which continues to be impacted by the events in California) may affect our domestic merchant energy business growth initiatives. Currently, our domestic merchant energy business controls over 11,500 megawatts of generation including the recent acquisition of 1,550 megawatts of the generating capacity at Nine Mile Point and 1,100 megawatts of natural gas-fired peaking capacity that commenced operations in the Mid-Atlantic and Mid-West regions during mid-summer 2001. We also have approximately 3,000 megawatts of natural gas-fired peaking and combined cycle production facilities in various regions of North America under construction and several projects in development. We also might consider one or more of the following strategies: o the complete or partial separation of BGE's transmission function, o mergers or acquisitions of utility or non-utility businesses or assets, and o sale of generation assets or one or more businesses. - -------------------------------------------------------------------------------- Current Issues - -------------- With the shift toward customer choice, competition, and the growth of our domestic merchant energy business, various factors affect our financial results. We discuss these various factors in the Forward Looking Statements section on page 40. In this section, we discuss in more detail several issues that affect our businesses. Electric Competition - -------------------- We are facing electric competition on various fronts, including: o the construction of generating units to meet increased demand for electricity, o the sale of electricity in wholesale power markets, o competing with other energy suppliers, and o electric sales to retail customers. Maryland - -------- On April 8, 1999, Maryland enacted the Electric Customer Choice and Competition Act of 1999 (the "Act") and accompanying tax legislation that has significantly restructured Maryland's electric utility industry and modified 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 of our 2000 Annual Report on Form 10-K. On November 10, 1999, the Maryland PSC issued a Restructuring Order that resolved the major issues surrounding electric restructuring, accelerated the timetable for customer choice, and addressed the major provisions of the Act. The Restructuring Order also resolved 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 Note 4 of our 2000 Annual Report on Form 10-K. As a result of the deregulation of electric generation, the following occurred effective July 1, 2000: o All customers can choose their electric energy supplier. 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. o BGE reduced residential base rates by approximately 6.5%, on average, about $54 million a year. These rates will not change before July 2006. 22 o BGE transferred, at book value, its nuclear generating assets, its nuclear decommissioning trust fund, and related liabilities to Calvert Cliffs Nuclear Power Plant, Inc. In addition, BGE transferred, at book value, its fossil generating assets and related liabilities and its partial ownership interest in two coal plants and a hydroelectric plant located in Pennsylvania to Constellation Power Source Generation. In total, these generating assets represent about 6,240 megawatts of generation capacity with a total net book value at June 30, 2000 of approximately $2.4 billion. o BGE assigned approximately $47 million to Calvert Cliffs Nuclear Power Plant, Inc. and $231 million to Constellation Power Source Generation of tax-exempt debt related to the transferred assets. Also, Constellation Power Source Generation issued approximately $366 million in unsecured promissory notes to BGE. All of these notes have been repaid by Constellation Power Source Generation. The proceeds were used to service the current maturities of certain BGE long-term debt. o BGE transferred equity associated with the generating assets to Calvert Cliffs Nuclear Power Plant, Inc. and Constellation Power Source Generation. o The fossil fuel and nuclear fuel inventories, materials and supplies, and certain purchased power contracts of BGE were also assumed by these subsidiaries. Effective July 1, 2000, BGE provides 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. In addition, the electric fuel rate was discontinued effective July 1, 2000. Constellation Power Source provides BGE with the energy and capacity required to meet its standard offer service obligations for the first three years of the transition period. In August 2001, BGE entered into contracts with CPS to supply 90% and Allegheny Energy Supply Company, LLC to supply the remaining 10% of BGE's standard offer service for the final three years (July 1, 2003 to June 30, 2006) of the transition period. Over the transition period, the standard offer service rate that BGE receives from its customers increases. This is offset by a corresponding decrease in the competitive transition charge BGE receives. Constellation Power Source obtains the energy and capacity to supply BGE's standard offer service obligations from affiliates that own Calvert Cliffs Nuclear Power Plant (Calvert Cliffs) and BGE's former fossil plants, supplemented with energy and capacity purchased from the wholesale market as necessary. Other States - ------------ Our domestic merchant energy business has $303.0 million invested in operating power projects that sell 142 megawatts of electricity to Pacific Gas & Electric (PGE) and to Southern California Edison (SCE) in California under power purchase agreements as discussed in the California Power Purchase Agreements section in the Notes to Consolidated Financial Statements on page 17. Our domestic merchant energy business was not paid in full for its sales from these plants to the two utilities from November 2000 through early April 2001. As a result, our current portion of the amount due for unpaid power sales from these utilities is approximately $50 million. On April 6, 2001, California's largest utility, PGE, filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code. California's second largest utility, SCE, has not met its obligations to pay for purchased power and service its debt obligations, putting its creditors in a position to force SCE into bankruptcy. The state of California has considered various legislative, regulatory, financial, and other proposals to assist the utilities in purchasing power and to reform the industry. We also may be required by the Federal Energy Regulatory Commission (FERC) to refund up to approximately $3 million in payments to the California utilities. In addition, while it was operating, the California Power Exchange and Independent System Operator, which provided the market for spot purchases of electricity, required its power suppliers, including our power marketing operation, to continue to sell power to the two utilities despite the fact that they were not being paid. The projects that we have an investment in recently entered into agreements with SCE and PGE that provide for five-year fixed price payments averaging $53.70 per megawatt-hour plus the stated capacity payments in the original SO4 contracts. These agreements also provide conditions for the payment of all past due amounts plus interest, which the projects expect to collect in the next two years. We are currently constructing the 750 MW High Desert facility in California. It is scheduled for completion in the summer of 2003. We signed a contract to sell all of the plant's output to the California Department of Water Resources on a unit contingent basis (i.e. if the output is not available because the plant is not operating, there is no requirement to provide output from other sources.) The contract has a term of eight years and three months. To date, given the small size of our operations in California, these events have not had a material impact on our financial results. However, we cannot provide any assurance that the continuation of the market situation in California will not have a materially adverse impact on our financial results, or that any legislative, regulatory or other solution enacted in California will permit us to recover any past losses or will not have a negative effect on our business opportunities in California. 23 Gas 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 gas customers have the option to purchase gas from other suppliers. Market Risks - ------------ Our earnings are exposed to various risks of the competitive marketplace, including imbalances in supply and demand and changes in future commodity prices, that may impact the financial results of our domestic merchant energy business. For example, our earnings are exposed to the risks of the competitive wholesale electricity market to the extent that our domestic merchant energy business has to purchase energy and/or capacity to meet obligations to supply power or meet other energy-related contractual arrangements at prices which may approach or exceed the applicable fixed sales price obligations. If the price of obtaining energy in the wholesale market exceeds the fixed sales price, our earnings would be adversely affected. In addition, many of our power generation facilities purchase fuel under contracts or on the spot market. Fuel prices may also be volatile, and the price that can be obtained from power sales may not change at the same rate as changes in fuel costs. To lower our financial exposure related to commodity price fluctuations, we may enter into fixed-price derivative or non-derivative contracts to hedge the variability in future cash flows from forecasted sales of electricity and purchases of fuel as discussed further in the Risk Management and Hedging Activities section of the Notes to Consolidated Financial Statements beginning on page 18. We are also affected by operational risk, that is, the risk that a generating plant will not be available to produce energy when the energy is required. Imbalances in demand and supply can occur not only because of plant outages, but also because of transmission constraints, or extreme temperatures (hot or cold) causing demand to exceed available supply. We discuss our market risk further in our 2000 Annual Report on Form 10-K in Item 7. Management Discussion and Analysis -- Market Risk. Regulation by the Maryland PSC - ------------------------------ In addition to electric restructuring which was discussed earlier, regulation by the Maryland PSC influences BGE's businesses. Under traditional rate regulation that continues after July 1, 2000 for BGE's electric transmission and distribution, and gas businesses, the Maryland PSC determines the rates we can charge our customers. Prior to July 1, 2000, BGE's regulated electric rates consisted primarily of a "base rate" and a "fuel rate." Effective July 1, 2000, BGE discontinued its electric fuel rate and unbundled its rates to show separate components for delivery service, competitive transition charges, standard offer services (generation), transmission, universal service, and taxes. The rates for BGE's regulated gas business continue to consist of a "base rate" and a "fuel rate." Base Rate - --------- The base rate is the rate the Maryland PSC allows BGE to charge its customers for the cost of providing them service, plus a profit. BGE has 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. 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. The Maryland PSC authorized a $6.4 million annual increase in our gas base rates effective June 22, 2000. As a result of the Restructuring Order, BGE's residential electric base rates are frozen until 2006. Electric delivery service rates are frozen for a four-year period for commercial and industrial customers. The generation and transmission components of rates are frozen for different time periods depending on the service options selected by those customers. Fuel Rate - --------- Through June 30, 2000, we charged our electric customers separately for the fuel we used to generate electricity (nuclear fuel, coal, gas, or oil) and for the net cost of purchases and sales of electricity. We charged the actual cost of these items to the customer with no profit to us. If these fuel costs went up, the Maryland PSC permitted us to increase the fuel rate. Under the Restructuring Order, BGE's electric fuel rate was frozen until July 1, 2000, at which time the fuel rate clause was discontinued. We deferred the difference between our actual costs of fuel and energy and what we collected from customers under the fuel rate through June 30, 2000. In September 2000, the Maryland PSC approved the collection of the $54.6 million accumulated difference between our actual costs of fuel and energy and the amounts collected from customers that were deferred under the electric fuel rate clause through June 30, 2000. We collected this accumulated difference from customers over the twelve-month period ended October 2001. Effective July 1, 2000, earnings are affected by the changes in the cost of fuel and energy. 24 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 on page 33 and in Note 1 of our 2000 Annual Report on Form 10-K. FERC Regulation--Regional Transmission Organizations - ---------------------------------------------------- In December 1999, FERC issued Order 2000, amending its regulations under the Federal Power Act to advance the formation of Regional Transmission Organizations (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 a RTO. FERC also identified the minimum characteristics and functions that a transmission entity must satisfy in order to be considered a RTO. According to Order 2000, 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 PJM (Pennsylvania-New Jersey-Maryland) Interconnection, was required to make a filing no later than January 15, 2001. PJM and the joint transmission owners, including BGE, made the filing on October 11, 2000. That filing explained the extent to which PJM met the minimum characteristics and functions of a RTO and explained its plans to conform to these characteristics and functions. On July 12, 2001, FERC provisionally granted PJM RTO status and ordered it to engage in mediation with the New York ISO and the New England ISO in regard to creating a business plan to form one Northeast RTO, using PJM as a platform. This mediation ended and the mediator issued his report to FERC on September 17, 2001. A FERC order regarding the mediator's report has not yet been issued. The business plan makes no explicit provision for the continuation of PJM zonal rates through 2004. Absent an order from the FERC, PJM must move to a uniform transmission rate by December 31, 2002. A uniform rate could expose BGE to higher transmission rates. As a member of PJM, an existing RTO/ISO, BGE's RTO/ISO member status will remain unchanged by Order 2000 and the July 12, 2001 order. However, BGE, jointly with other PJM transmission owners, requested rehearing and clarification from FERC on its July 12, 2001 order regarding certain incentive rates, interconnection procedures and allocations of interconnection costs. FERC has not yet issued an order on this request. Also, we are appealing in court two requirements of Order 2000 whereby: o we would be required to go through PJM to make a filing with FERC to change our transmission rates, and o we would be required to transfer operational control of our transmission facilities to PJM. The U.S. Supreme Court heard an appeal by others of FERC Order 888 in October 2001. We cannot predict the outcome of this appeal or the impact on BGE at this time. Weather - ------- Domestic Merchant Energy Business - --------------------------------- Weather conditions in the different regions of North America influence the financial results of our domestic merchant energy business. Typically, demand for electricity and its price are higher in the summer and the winter, when weather is more extreme. However, all regions of North America typically do not experience extreme weather conditions at the same time. Since the majority of our generating plants currently are located in PJM, our financial results are affected by weather conditions in this area. Weather conditions also can affect the forward market price of energy commodity and derivative contracts used by our power marketing operation that are accounted for on a mark-to-market basis. To the extent that our power marketing operation purchases and sells such contracts, our financial results could be influenced by the impact that weather conditions have on the market price of such contracts. BGE - --- Weather affects the demand for electricity and gas for our regulated businesses. Very hot summers and very cold winters increase demand. Mild weather reduces demand. Residential sales for our regulated businesses are impacted more by weather than commercial and industrial sales, which are mostly affected by business needs for electricity and gas. However, the Maryland PSC allows us to record a monthly adjustment to our regulated gas business revenues to eliminate the effect of abnormal weather patterns. We discuss this further in the Weather Normalization section on page 33. 25 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. 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. We show the number of degree days in the quarters and nine months ended September 30, 2001 and 2000, and the percentage change in the number of degree days between these periods in the following table: Quarter Ended Nine Months Ended September 30 September 30 2001 2000 2001 2000 - ------------------------------------------------------- Heating degree days 136 142 3,053 2,959 Percent change from prior period (4.2)% 3.2% Cooling degree days 495 445 756 714 Percent change from prior period 11.2% 5.9% Other Factors - ------------- Other factors, aside from weather, impact the demand for electricity and gas in our regulated businesses. These factors include the "number of customers" and "usage per customer" during a given period. We use these terms later in our discussions of regulated electric and gas operations. In those sections, we discuss how these and other factors affected electric and gas sales during the periods presented. 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. Under the Restructuring Order, BGE's electric customers can become delivery service customers only and can purchase their electricity from other sources. We will collect a delivery service charge to recover the fixed costs for the service we provide. The remaining electric customers will receive standard offer service from BGE at the fixed rates provided by the Restructuring Order. 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. 26 Results of Operations for the Quarter and Nine Months Ended September 30, 2001 - ------------------------------------------------------------------------------ Compared with the Same Periods of 2000 - -------------------------------------- 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. Changes in fixed charges and income taxes are discussed in the aggregate for all segments in the Consolidated Nonoperating Income and Expenses section on page 34. Overview Total Earnings Per Share of Common Stock Quarter Ended Nine Months Ended Ended September 30, September 30, 2001 2000 2001 2000 - ----------------------------------------------------------- Earnings before nonrecurring charges included in operations: Domestic merchant energy $ .89 $ .87 $1.50 $1.10 Regulated electric .17 .10 .46 .65 Regulated gas (.02) (.03) .18 .12 Other nonregulated (.04) .04 -- (.01) - ----------------------------------------------------------- Total earnings per share before nonrecurring charges included in operations 1.00 .98 2.14 1.86 Nonrecurring charges included in operations: Deregulation transition cost -- -- -- (.10) TVSERP -- -- -- (.03) - ----------------------------------------------------------- Earnings per share before cumulative effect of change in accounting principle 1.00 .98 2.14 1.73 Cumulative effect of change in accounting principle, net of income taxes -- -- .06 -- - ----------------------------------------------------------- Total earnings per share $1.00 $ .98 $2.20 $1.73 =========================================================== Earnings for the periods presented reflect a significant shift from the regulated electric business to the domestic merchant energy business as a result of the transfer of BGE's electric generation assets to nonregulated subsidiaries on July 1, 2000 in accordance with the Restructuring Order. We discuss the Restructuring Order in more detail in Current Issues - Electric Competition section on page 22. Quarter Ended September 30, 2001 - -------------------------------- Our total earnings for the quarter ended September 30, 2001 increased $.02 per share compared to the same period of 2000 mostly because: o our regulated electric business had higher earnings due to warmer summer weather and lower expenses, and o our domestic merchant energy business had higher earnings due to favorable market price changes on open trading positions in our power marketing operation. These were partially offset by lower earnings from our financial investments business due to declining equity values and the absence of gains on sales of equity securities that occurred in 2000. In addition, we had lower earnings due to a change in the method of accounting for our investment in Orion as discussed in more detail in the Notes to Consolidated Financial Statements on page 19. Nine Months Ended September 30, 2001 - ------------------------------------ Our total earnings for the nine months ended September 30, 2001 increased $.47 per share compared to the same period of 2000. Our total earnings increased mostly because of the following: o We recorded $75.0 million pre-tax, or approximately $.30 per share, of amortization expense for the reduction of our generating plants associated with the Restructuring Order in 2000 that had a negative impact in that period. o We recorded a nonrecurring expense of $15.0 million, after-tax, for deregulation transition cost to Goldman Sachs incurred by our power marketing business that had a negative impact in 2000. o We recorded a nonrecurring expense of $4.2 million, after-tax, for BGE employees that elected to participate in a Targeted Voluntary Special Early Retirement Program (TVSERP) in 2000 that had a negative impact in that period. o We recorded an $8.5 million after-tax, or $.06 per share, gain for the cumulative effect of adopting Statement of Financial Accounting Standard (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, in the first quarter of 2001. o We had higher earnings from our regulated gas business. These items were partially offset by $17.6 million pre-tax, or $.07 per share, recorded in 2001 related to the impact of a 6.5% annual residential rate reduction that was effective July 1, 2000. Earnings per share contributions from all our business segments were impacted by additional dilution resulting from the issuance of 13.2 million shares of common stock between January 1, 2001 and the date of our report. In the following sections, we discuss our earnings by business segment in greater detail. 27 Domestic Merchant Energy Business - --------------------------------- Our domestic merchant energy business engages primarily in power marketing and domestic power generation in North America. We describe this business in more detail in our 2000 Annual Report on Form 10-K in Item 1. Business -- Domestic Merchant Energy Business. As discussed in the Current Issues -- Electric Competition section on page 22, our domestic merchant energy business was significantly impacted by the July 1, 2000 implementation of customer choice in Maryland. At that time, BGE's generating assets became part of our nonregulated domestic merchant energy business, and Constellation Power Source began selling to BGE the energy and capacity required to meet its standard offer service obligations for the first three years of the transition period. In August 2001, BGE entered into contracts with CPS to supply 90% and Allegheny Energy Supply Company, LLC to supply the remaining 10% of BGE's standard offer service for the final three years (July 1, 2003 to June 30, 2006) of the transition period. Constellation Power Source obtains the energy and capacity to supply BGE's standard offer service obligations from affiliates that own Calvert Cliffs and BGE's former fossil plants, supplemented with energy and capacity purchased from the wholesale energy market as necessary. Constellation Power Source also manages our wholesale market price risk. In addition, effective July 1, 2000, domestic merchant energy business revenues include 90% of the competitive transition charges BGE collects from its customers (CTC revenues) and the portion of BGE's revenues providing for nuclear decommissioning costs. Earnings Quarter Ended Nine Months Ended September 30, September 30, 2001 2000 2001 2000 - ------------------------------------------------------------ (In millions, except per share amounts) Revenues $ 617.3 $499.4 $1,348.8 $ 673.1 Operating expenses 328.0 232.5 809.4 363.3 Depreciation and amortization 42.9 38.6 122.4 41.9 Taxes other than income taxes 10.7 13.1 33.5 13.2 - ------------------------------------------------------------ Income from operations $ 235.7 $215.2 $ 383.5 $ 254.7 ============================================================ Net income $ 144.9 $129.9 $ 239.7 $ 150.0 ============================================================ Total earnings per share before nonrecurring charges included in operations $ .89 $ .87 $ 1.50 $ 1.10 Deregulation transition cost -- -- -- (.10) - ------------------------------------------------------------ Earnings per share $ .89 $ .87 $ 1.50 $ 1.00 ============================================================ Above amounts include intercompany transactions eliminated in our Consolidated Financial Statements. The Information by Operating Segment section within the Notes to Consolidated Financial Statements on page 13 provides a reconciliation of operating results by segment to our Consolidated Financial Statements. Revenues - -------- During the quarter ended September 30, 2001, domestic merchant energy revenues increased $117.9 million compared to the same period of 2000 mostly because of higher revenues from our power marketing and domestic generation operations. These were partially offset by the absence of approximately $8.0 million in CTC lump sum payments that were received in 2000. During the nine months ended September 30, 2001, domestic merchant energy revenues increased $675.7 million compared to the same period of 2000 mostly because of: o a $547.9 million increase related to providing BGE the energy and capacity required to meet its standard offer service obligation effective July 1, 2000, o an $84.1 million increase related to CTC and decommissioning revenues included in the domestic merchant energy business effective July 1, 2000, and o higher revenues from our power marketing and domestic generation operations. We discuss the revenues for our power marketing and domestic generation operations in the following sections. Power Marketing - --------------- During the quarter and nine months ended September 30, 2001, power marketing revenues increased compared to the same periods of 2000 mostly because of the effect of favorable market price changes on open trading positions partially offset by lower revenues from structured transactions. Constellation Power Source uses the mark-to-market method of accounting for its energy trading activities. We discuss the mark-to-market method of accounting and Constellation Power Source's activities in more detail in Note 1 of our 2000 Annual Report on Form 10-K. As a result of the nature of its operations and the use of mark-to-market accounting, Constellation Power Source's revenues 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: o the number and size of new transactions, o the magnitude and volatility of changes in commodity prices and interest rates, and o 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. 28 Domestic Generation - ------------------- During the quarter ended September 30, 2001, domestic generation revenues increased compared to the same period of 2000 mostly because of revenues associated with the new peaking facilities that commenced operations during this summer, partially offset by lower revenues associated with the California power purchase agreements discussed below. During the nine months ended September 30, 2001, domestic generation revenues increased compared to the same period of 2000 mostly because of revenues associated with the new peaking facilities and a $9.5 million gain on the sale of a project under development located in the PJM region recorded in March 2001. These were offset by a $13.3 million gain on the termination of an operating arrangement and sale of certain subsidiaries of Constellation Operating Services Inc. (COSI), a subsidiary of Constellation Power, Inc., to Orion Power Holdings Inc. that occurred in April 2000. In addition, during the nine months ended September 30, 2001, our domestic generation operation had lower revenues from COSI due to the sale of these subsidiaries as well as lower revenues associated with the California power purchase agreements. We discuss the California power purchase agreements below. California Power Purchase Agreements - ------------------------------------ Our domestic generation operation has $303.0 million invested in 14 operating projects that sell electricity in California to SCE and PGE under power purchase agreements called "Interim Standard Offer No. 4 (SO4)" agreements. Under these agreements, the electricity rates changed from fixed rates to variable rates beginning in 1996. In 2000, the last four projects transitioned to variable rates. During the quarter and nine months ended September 30, 2001, revenues from these projects decreased compared to the same periods of 2000 because of lower power prices in California during the third quarter 2001. While energy rates were higher during the first half of 2001, the higher rates were offset by reserves established for our exposure in California during that period. As previously discussed in the Current Issues - Other States section on page 23, the projects recently entered into agreements with SCE and PGE that provide for five-year fixed price payments averaging $53.70 per megawatt-hour plus the stated capacity payments in the original SO4 contracts. We expect the revenues from these projects to be lower in 2002 compared to 2001. We also describe these projects and the transition process in the Notes to Consolidated Financial Statements and Note 10 of our 2000 Annual Report on Form 10-K. Operating Expenses - ------------------ Domestic merchant energy operating expenses increased $95.5 million for the quarter ended September 30, 2001 compared to the same period of 2000 mostly because our power marketing operation recognized higher expenses on new structured transactions and higher operating expenses associated with the growth of this business. In addition, our domestic generation operation recognized operating costs associated with the new peaking facilities that commenced operations during this summer. Domestic merchant energy operating expenses increased $446.1 million for the nine months ended September 30, 2001 compared to the same period of 2000 mostly because of the following: o Increases in fuel costs of $206.4 million and operations and maintenance costs of $194.7 million. These costs were associated with the generation plants that were transferred from BGE effective July 1, 2000. o The operating costs associated with the new peaking facilities. o Higher operating expenses at our power marketing operation associated with the growth of this business. These increased costs were partially offset by lower transaction related expenses on new structured transactions by our power marketing operation, including the absence of a $24.0 million deregulation transition cost incurred to Goldman Sachs in the second quarter of 2000 that had a negative impact in that period. In addition, COSI had lower operating expenses related to the sale of certain subsidiaries to Orion as previously discussed. Operating expenses for the quarters and nine months ended September 30, 2001 and 2000 include fees at our power marketing operation earned by Goldman Sachs that will not be incurred in the future due to the termination of the power business services agreement discussed in the Recent Events section on page 21. The Goldman Sachs fees were $28.9 million for the quarter and $48.9 million for the nine months ended September 30, 2001. In addition, coal prices have increased during this year and we expect to incur additional costs in the future to operate our coal generating facilities due to these higher prices. Based on current price levels, we expect the annual increase in coal costs to be approximately $55 million in 2002. In light of the events of September 11, 2001, we have taken additional security measures at our nuclear facilities. While we anticipate continuing to incur additional security related costs at our nuclear facilities, we do not expect that these costs will be material. However, the Nuclear Regulatory Commission (NRC) currently is evaluating additional security measures that may be required at nuclear facilities. At this time, we cannot determine the impact on our financial results of any additional security measures that may be required by the NRC. 29 Depreciation and Amortization Expense - ------------------------------------- Domestic merchant energy depreciation and amortization expense increased $4.3 million for the quarter ended September 30, 2001 compared to the same period of 2000 mostly due to the expenses associated with the new peaking facilities that commenced operations during this summer. Domestic merchant energy depreciation and amortization expense increased $80.5 million for the nine months ended September 30, 2001 compared to the same period of 2000 mostly because of expenses associated with the generation plants that were transferred from BGE effective July 1, 2000, and with the new peaking facilities. Taxes Other than Income Taxes - ----------------------------- Domestic merchant energy taxes other than income taxes were about the same for the quarter ended September 30, 2001 compared to the same period of 2000. Domestic merchant energy taxes other than income taxes increased $20.3 for the nine months ended September 30, 2001 compared to the same period of 2000 mostly because of taxes other than income taxes associated with the generation plants that were transferred from BGE effective July 1, 2000. - -------------------------------------------------------------------------------- Regulated Electric Business - --------------------------- As previously discussed, our regulated electric business was significantly impacted by the July 1, 2000 implementation of customer choice. These changes include BGE's generating assets and related liabilities becoming part of our nonregulated domestic merchant energy business on that date. Earnings Quarter Ended Nine Months Ended September 30, September 30, 2001 2000 2001 2000 - --------------------------------------------------------- (In millions, except per share amounts) Electric revenues $634.6 $598.4 $1,624.4 $1,688.4 Electric fuel and purchased energy 418.0 388.3 977.7 632.4 Operations and maintenance 60.2 62.0 184.9 384.7 Depreciation and amortization 43.7 52.0 130.5 276.7 Taxes other than income taxes 36.0 30.5 107.0 121.0 - --------------------------------------------------------- Income from operations $ 76.7 $ 65.6 $ 224.3 $ 273.6 ========================================================= Net income $ 27.3 $ 15.4 $ 73.0 $ 93.2 ========================================================= Total earnings per share before nonrecurring charges included in operations: $ .17 $ .10 $ .46 $ .65 TVSERP -- -- -- (.03) - --------------------------------------------------------- Earnings per share $ .17 $ .10 $ .46 $ .62 ========================================================= Above amounts include intercompany transactions eliminated in our Consolidated Financial Statements. The Information by Operating Segment section within the Notes to Consolidated Financial Statements on page13 provides a reconciliation of operating results by segment to our Consolidated Financial Statements. Electric Revenues - ----------------- The changes in electric revenues in 2001 compared to 2000 were caused by: Quarter Nine Months Ended Ended September 30, September 30, 2001 vs. 2000 2001 vs. 2000 - ---------------------------------------------------- (In millions) Electric system sales volumes $ 9.2 $ 18.1 Rates 10.7 (73.6) Fuel rate surcharge 15.4 42.7 - --------------------------------------------------- Total change in electric revenues from electric system 35.3 (12.8) sales Interchange and other sales -- (53.8) Other 0.9 2.6 - --------------------------------------------------- Total change in electric revenues $ 36.2 $ (64.0) =================================================== Electric System Sales Volumes - ----------------------------- "Electric system sales volumes" are sales to customers in our service territory at rates set by the Maryland PSC. As part of the Restructuring Order, the rates received from customers under the standard offer service increase over the transition period as discussed further in the Current Issues--Electric Competition section beginning on page 22. 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 2001 compared to 2000 were: Quarter Nine Months Ended Ended September 30, September 30, 2001 vs. 2000 2001 vs. 2000 - ----------------------------------------------------- Residential 7.8% 4.7% Commercial 1.7 1.6 Industrial (1.0) (0.1) During the quarter ended September 30, 2001, we sold more electricity to residential customers compared to the same period of 2000 due to warmer weather, higher usage per customer, and an increased number of customers. We sold about the same amount of electricity to commercial and industrial customers. 30 During the nine months ended September 30, 2001, we sold more electricity to residential customers compared to the same period of 2000 due to higher usage per customer, an increased number of customers, and warmer summer weather. We sold about the same amount of electricity to commercial and industrial customers. Rates - ----- Prior to July 1, 2000, our rates primarily consisted of an electric base rate and an electric fuel rate. Effective July 1, 2000, BGE discontinued its electric fuel rate and unbundled its rates to show separate components for delivery service, transition charges, standard offer services (generation), transmission, universal service, and taxes. BGE's rates also were frozen in total except for the implementation of a residential base rate reduction totaling approximately $54 million annually. In addition, 90% of the CTC revenues BGE collects and the portion of its revenues providing for decommissioning costs, are included in revenues of the domestic merchant energy business effective July 1, 2000. Rate revenues for the quarter ended September 30, 2001 increased compared to the same period of 2000 due to the increase in the standard offer service rate that BGE charges its customers. This is partially offset by a decrease in the 10% portion of the CTC rate received from customers that is retained by BGE. Rate revenues for the nine months ended September 30, 2001 decreased compared to the same period of 2000 mostly due to the decreases caused by: o the 6.5% annual residential rate reduction of $17.6 million recorded through June 30, 2001, and o the $84.1 million for transfer of revenues to the domestic merchant energy business discussed above. These decreases were partially offset by the other net impacts of the rate restructuring discussed above and the increase in the standard offer service rate that BGE charges its customers. Fuel Rate Surcharge - ------------------- In September 2000, the Maryland PSC approved the collection of the $54.6 million accumulated difference between our actual costs of fuel and energy and the amounts collected from customers that were deferred under the electric fuel rate clause through June 30, 2000. We discuss this further in the Electric Fuel Rate Clause section below. Interchange and Other Sales - --------------------------- "Interchange and other sales" are sales in the PJM energy market and to others. PJM is a RTO/ISO that also operates a regional power pool with members that include many wholesale market participants, as well as BGE, and other utility companies. Prior to the implementation of customer choice, BGE sold energy to PJM members and to others after it had satisfied the demand for electricity in its own system. Effective July 1, 2000, BGE no longer engages in interchange sales and these activities are included in our domestic merchant energy business which resulted in a decrease in interchange and other sales for the nine months ended September 30, 2001 compared to the same period of 2000. Electric Fuel and Purchased Energy Expenses - ------------------------------------------- Quarter Nine Months Ended Ended September 30, September 30, 2001 2000 2001 2000 - --------------------------------------------------------- (In millions) Actual costs $402.9 $388.3 $935.8 $642.1 Net recovery (deferral) of costs under electric fuel rate clause 15.1 -- 41.9 (9.7) - --------------------------------------------------------- Total electric fuel and purchased energy expenses $418.0 $388.3 $977.7 $632.4 ========================================================= Actual Costs - ------------ As discussed in the Current Issues--Electric Competition section on page 22, effective July 1, 2000, BGE transferred its generating assets to, and began purchasing substantially all of the energy and capacity required to provide electricity to standard offer service customers from, the domestic merchant energy business. Our actual costs of fuel and purchased energy for the quarter ended September 30, 2001 compared to the same period of 2000 were higher mostly because BGE purchased more energy from the domestic merchant energy business to meet its increased system sales volumes. This was partially offset by a lower price for the energy. Our actual costs of fuel and purchased energy for the nine months period ended September 30, 2001 compared to the period of 2000 increased mostly because of the deregulation of electric generation. The higher amount paid for purchased energy is offset by the absence of $206.4 million in fuel costs, and lower operations and maintenance, depreciation, taxes, and other costs at BGE as a result of no longer owning and operating the transferred electric generation plants. Prior to July 1, 2000, BGE's purchased fuel and energy costs only included actual costs of fuel to generate electricity (nuclear fuel, coal, gas, or oil) and electricity we bought from others. Electric Fuel Rate Clause - ------------------------- Prior to July 1, 2000, we deferred (included as an asset or liability on the Consolidated Balance Sheets and excluded from the Consolidated Statements of Income) the difference between our actual costs of fuel and energy and what we collected from customers under the fuel rate in a given period. Effective July 1, 2000, the fuel rate clause was discontinued under the terms of the Restructuring Order. In September 2000, the Maryland PSC approved the collection of the $54.6 million accumulated difference between our actual costs of fuel and energy and the amounts collected from customers that were deferred under the electric fuel rate clause through June 30, 2000. We collected this accumulated difference from customers over the twelve-month period ending October 2001. 31 Electric Operations and Maintenance Expenses - -------------------------------------------- Regulated electric operations and maintenance expenses were about the same for the quarter ended September 30, 2001 compared to the same period of 2000. Regulated electric operations and maintenance expenses decreased $199.8 million for the nine months ended September 30, 2001 compared to the same period of 2000 mostly because of the following: o Effective July 1, 2000, costs of $194.7 million were no longer incurred by this business segment. These costs were associated with the electric generation assets that were transferred to the domestic merchant energy business. o BGE recognized expenses of $7.0 million for employees that elected to participate in a Targeted Voluntary Special Early Retirement Program in 2000, that had a negative impact in that period. Electric Depreciation and Amortization Expense - ---------------------------------------------- Regulated electric depreciation and amortization expense decreased $8.3 million for the quarter ended September 30, 2001 compared to the same period of 2000 mostly because of lower amortization expense associated with regulatory assets. Regulated electric depreciation and amortization expense decreased $146.2 million for the nine months ended September 30, 2001 compared to the same period of 2000 mostly because of: o the absence of $75.0 million for the amortization expense recorded in 2000 associated with the $150 million reduction of our generating plants provided for in the Restructuring Order, and o $75.1 million of expenses associated with the transfer of the generation assets to the domestic merchant energy business effective July 1, 2000. These decreases were offset partially by more electric plant in service (as our level of plant in service changes, the amount of depreciation and amortization expense changes). Electric Taxes Other Than Income Taxes - -------------------------------------- Regulated electric taxes other than income taxes increased $5.5 million for the quarter ended September 30, 2001 compared to the same period of 2000 mostly because of higher gross receipts taxes associated with higher revenues and we had less tax credits. Regulated electric taxes other than income taxes decreased $14.0 million for the nine months ended compared to the same period of 2000. This was mostly due to the absence of taxes other than income taxes associated with the generation assets that were transferred to the domestic merchant energy business effective July 1, 2000 partially offset by fewer tax credits. Regulated Gas Business - ---------------------- Earnings Quarter Ended Nine Months Ended September 30, September 30, 2001 2000 2001 2000 - ------------------------------------------------------------ (In millions, except per share amounts) Gas revenues $ 66.7 $ 90.1 $534.0 $377.8 Gas purchased for resale 22.9 48.2 328.0 192.0 Operations and maintenance 23.2 26.2 72.4 73.1 Depreciation and amortization 9.8 11.3 36.3 35.5 Taxes other than income taxes 7.2 5.0 25.6 25.0 - ------------------------------------------------------------ Income (Loss) from operations $ 3.6 $ (0.6) $ 71.7 $ 52.2 ============================================================ Net (loss) income $ (2.3) $ (4.6) $ 29.4 $ 18.1 ============================================================ Earnings per share $ (.02) $ (.03) $ .18 $ .12 ============================================================ Above amounts include intercompany transactions eliminated in our Consolidated Financial Statements. The Information by Operating Segment section within the Notes to Consolidated Financial Statements on page 13 provides a reconciliation of operating results by segment to our Consolidated Financial Statements. Earnings from the regulated gas business improved slightly during the quarter ended September 30, 2001 compared to the same period of 2000, related to lower costs. Earnings this quarter reflect the seasonal pattern of low summer volumes. Earnings from the regulated gas business increased during the nine months ended September 30, 2001 compared to the same period of 2000 mostly due to the sharing mechanism under our gas cost adjustment clauses and the increase in our base rates. All BGE customers have the option to purchase gas from other suppliers. To date, customer choice has not had a material effect on our, and BGE's, financial results. Gas Revenues - ------------ The changes in gas revenues in 2001 compared to 2000 were caused by: Quarter Nine Months Ended Ended September 30, September 30, 2001 vs. 2000 2001 vs. 2000 - -------------------------------------------------------- (In millions) Gas system sales volumes $ (0.9) $ 15.8 Base rates -- 3.3 Weather normalization 0.9 (5.0) Gas cost adjustments (9.4) 106.9 - -------------------------------------------------------- Total change in gas revenues from gas system sales (9.4) 121.0 Off-system sales (13.8) 33.8 Other (0.2) 1.4 - -------------------------------------------------------- Total change in gas revenues $ (23.4) $156.2 ======================================================== 32 Gas System Sales Volumes - ------------------------ The percentage changes in our gas system sales volumes, by type of customer, in 2001 compared to 2000 were: Quarter Ended Nine Months Ended September 30, September 30, 2001 vs. 2000 2001 vs. 2000 - ----------------------------------------------------- Residential (5.7)% 6.6% Commercial 43.2 11.9 Industrial (24.6) (26.5) During the quarter ended September 30, 2001, we sold less gas to residential customers compared to the same period of 2000 mostly due to lower usage per customer partially offset by an increased number of customers. We sold more gas to commercial customers mostly due to higher usage per customer. We sold less gas to industrial customers mostly because of lower usage by Bethlehem Steel and other industrial customers due to their lower business needs related to the general downturn in the economy. During the nine months ended September 30, 2001, we sold more gas to residential customers compared to the same period of 2000 mostly due to colder winter weather, an increased number of customers, and higher usage per customer. We sold more gas to commercial customers mostly due to higher usage per customer and colder winter weather. We sold less gas to industrial customers mostly because of lower usage by Bethlehem Steel and other industrial customers due to their switching to lower cost alternative fuel sources and lower business needs, partially offset by an increased number of customers. Base Rates - ---------- Base rate revenues increased for the nine months ended September 30, 2001 compared to the same period of 2000 mostly because the Maryland PSC authorized a $6.4 million annual increase in our base rates effective June 22, 2000. Weather Normalization - --------------------- The Maryland PSC allows us to record 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 are based on weather that is considered "normal" for the month and, therefore, are not 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 as described in Note 1 of our 2000 Annual Report on Form 10-K. 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. During the quarter ended September 30, 2001, the shareholders' portion increased slightly compared to the same period of 2000. During the nine months ended September 30, 2001, the shareholders' portion increased $3.8 million compared to the same period of 2000. 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. During the quarter ended September 30, 2001, gas cost adjustment revenues decreased compared to the same period of 2000 mostly because the gas we sold was at a lower price. During the nine months ended September 30, 2001, gas cost adjustment revenues increased compared to the same period of 2000 mostly because we sold more gas at a higher price to non-delivery service customers. In the first half of 2001, the revenue increase reflects the significant increase in natural gas prices. 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. During the quarter ended September 30, 2001, revenues from off-system gas sales decreased compared to the same period of 2000 mostly because we sold less gas off-system at a lower price. During the nine months ended September 30, 2001, revenues from off-system gas sales increased compared to the same period of 2000 mostly because the gas we sold off-system was at a higher price partially offset by less gas sold. In the first half of 2001, the revenue increase reflects the significant increase in natural gas prices. Gas Purchased For Resale Expenses - --------------------------------- 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. During the quarter ended September 30, 2001, our gas costs decreased compared to the same period of 2000 mostly because we bought gas at a lower price. During the nine months ended September 30, 2001, our gas costs increased compared to the same period of 2000 mostly because we bought more gas for both system and off-system sales and all of the gas purchased was at a higher price. Other Gas Operating Expenses - ---------------------------- During the quarter and nine months ended September 30, 2001, other gas operating expenses were about the same compared to the same periods of 2000. 33 Other Nonregulated Businesses - ----------------------------- Earnings Quarter Nine Months Ended Ended September 30, September 30, 2001 2000 2001 2000 - ------------------------------------------------------------- (In millions, except per share amounts) Revenues $ 119.2 $ 174.1 $460.9 $ 491.1 Operating expenses 109.8 134.1 394.9 422.1 Depreciation and amortization 6.5 5.7 19.3 16.6 Taxes other than income taxes 1.3 1.1 3.5 3.0 - ------------------------------------------------------------ Income from operations $ 1.6 $ 33.2 $ 43.2 $ 49.4 ============================================================ Net (loss) income before cumulative effect of change in accounting principle $ (6.3) $ 6.8 $ 0.4 $ (2.1) Cumulative effect of change in accounting principle -- -- 8.5 -- - ------------------------------------------------------------ Net (loss) income $ (6.3) $ 6.8 $ 8.9 $ (2.1) ============================================================ Earnings per share before cumulative effect of change in accounting principle $ (.04) $ .04 $ -- $ (.01) Cumulative effect of change in accounting principle -- -- .06 -- - ------------------------------------------------------------ Earnings per share $ (.04) $ .04$ .06 $ (.01) ============================================================ Above amounts include intercompany transactions eliminated in our Consolidated Financial Statements. The Information by Operating Segment section within the Notes to Consolidated Financial Statements on page 13 provides a reconciliation of operating results by segment to our Consolidated Financial Statements. During the quarter ended September 30, 2001, earnings from our other nonregulated businesses decreased compared to the same period of 2000 mostly because of lower earnings from our financial investments business due to declining equity values and the absence of gains on sales of equity securities that occurred in 2000. In addition, we had lower earnings due to a change in the method of accounting for our investment in Orion as discussed in more detail in the Notes to Consolidated Financial Statements on page 19. During the nine months ended September 30, 2001, earnings from our other nonregulated businesses increased compared to the same period of 2000 mostly because: o we recorded a $9.0 million after-tax gain on the sale of one million shares of the Orion investment, and o we recorded an $8.5 million after-tax gain for the cumulative effect of adopting SFAS No. 133 in the first quarter of 2001. These increases were partially offset by lower earnings from our financial investments business as discussed above. Most of Constellation Real Estate Group's real estate and senior-living 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 operation 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 and senior-living 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, or additional borrowings by, other nonregulated subsidiaries. We consider market demand, interest rates, the availability of financing, competing demands for capital, and the strength of the economy in general when making decisions about our real estate and senior-living projects. If we were to decide to sell our projects, we could have write-downs. In addition, if we were to sell our 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 and senior-living strategy is to hold each project until we can realize a reasonable value for it. Under accounting rules, we are required to write down the value of a 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 cash flow from the project is less than the investment in the project. Consolidated Nonoperating Income and Expenses - --------------------------------------------- Fixed Charges - ------------- During the quarter ended September 30, 2001, total fixed charges decreased compared to the same period of 2000 mostly because of lower interest rates. During the nine months ended September 30, 2001, total fixed charges decreased compared to the same period of 2000 mostly because of lower interest rates and increased capitalized interest associated with our construction of new generating facilities. These decreases were offset partially by a higher average level of debt outstanding. Income Taxes - ------------ During the quarter ended September 30, 2001, our total income taxes increased slightly compared to the same period of 2000 mostly because we had higher taxable income from our domestic merchant energy business and the utility business partially offset by lower taxable income from the other nonregulated businesses. During the nine months ended September 30, 2001, our total income taxes increased compared to the same period of 2000 mostly because we had higher taxable income from our domestic merchant energy business partially offset by lower taxable income from the utility business. 34 Financial Condition - ------------------- Cash Flows - ---------- Nine Months Ended September 30, 2001 2000 - ----------------------------------------------------- (In millions) Cash provided by (used in): Operating Activities $ 644.8 $ 588.8 Investing Activities (909.7) (728.4) Financing Activities 146.2 97.3 During the nine months ended September 30, 2001, we generated more cash from operations compared to the same period in 2000 mostly because of changes in working capital requirements. During the nine months ended September 30, 2001, we used more cash for investing activities compared to the same period in 2000 mostly due to an increase in investments in new generation facilities, offset in part by the sales of certain investments. During the nine months ended September 30, 2001, we had more cash from financing activities compared to the same period of 2000 mostly because we issued more common stock and long-term debt. We also decreased our payment of dividends because we changed our dividend policy effective April 1, 2001, reducing our dividend to $.12 per quarter. This was partially offset by the repayment of long-term debt. 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 & Poors Investors Fitch Rating Group Service IBCA - --------------------------------------------------------- Constellation Energy Unsecured Debt A- A3 A- BGE Mortgage Bonds AA- A1 A+ Unsecured Debt A A2 A Trust Originated Preferred Securities and Preference Stock A- Baa1 A- Recently, Moody's Investors Service placed Constellation Energy under review for possible downgrade and confirmed the ratings of BGE. Constellation Energy remained on credit watch negative with Standard & Poors, while BGE was placed on credit watch negative. Fitch IBCA reaffirmed ratings of both Constellation Energy and BGE with stable outlooks. - ------------------------------------------------------------------------------- Capital Resources - ----------------- Our business requires a great deal of capital. Our estimated annual amounts for the years 2001 and 2002, are shown in the table on page 36. We will continue to have cash requirements for: o working capital needs including the payments of interest, distributions, and dividends, o capital expenditures, and o the retirement of debt and redemption of preference stock. Capital requirements for 2001 and 2002 include estimates of funding for existing and anticipated projects. We continuously review and modify those estimates. Actual requirements may vary from the estimates included in the table on page 36 because of a number of factors including: o regulation, legislation, and competition, o BGE load requirements, o environmental protection standards, o the type and number of projects selected for construction or acquisition, o the effect of market conditions on those projects, o the cost and availability of capital, and o the availability of cash from operations. Our estimates are also subject to additional factors. Please see the Forward Looking Statements section on page 40. 35
Calendar Year Estimates 2001 2002 - -------------------------------------------------------------------------------------------- (In millions) Nonregulated Capital Requirements: Investment requirements: Domestic merchant energy $1,345 $ 523 Other 42 67 - -------------------------------------------------------------------------------------------- Total investment requirements 1,387 590 Retirement of long-term debt 1,114 687 - -------------------------------------------------------------------------------------------- Total nonregulated capital requirements 2,501 1,277 Utility Capital Requirements: Construction expenditures: Regulated electric 162 156 Regulated gas 51 49 Common 26 25 - -------------------------------------------------------------------------------------------- Total capital expenditures 239 230 Retirement of long-term debt and redemption of preference stock 394 520 - -------------------------------------------------------------------------------------------- Total utility capital requirements 633 750 - -------------------------------------------------------------------------------------------- Total capital requirements $3,134 $2,027 ============================================================================================
Capital Requirements - -------------------- Domestic Merchant Energy Business - --------------------------------- Our domestic merchant energy business will require additional funding for growing its power marketing operation and developing and acquiring power projects. Our domestic merchant energy business capital requirements include one-half of the total purchase price for the Nine Mile Point plant that we financed in 2001. Capital requirements for 2002 include the principal payments on the sellers-provided financing for the remaining portion of the purchase price and on-going capital requirements relating to the Nine Mile Point plant. Also included are the construction of 1,100 megawatts of peaking capacity in the Mid-Atlantic and Mid-West regions that commenced operations in the summer of 2001 and approximately 3,000 megawatts of natural gas-fired peaking and combined cycle production facilities in various regions of North America under construction and several projects in development. The above table does not include the financing for the High Desert project in California, which is an operating lease. Our domestic merchant energy business investment requirements also include construction expenditures for improvements to generating plants and costs for replacing the steam generators at Calvert Cliffs. In March 2000, we received a license extension from the NRC that extends Calvert Cliffs' operating licenses to 2034 for Unit 1 and 2036 for Unit 2. If we do not replace the steam generators, we will not be able to operate these units through our operating license periods. We expect the steam generator replacement to occur during the 2002 refueling outage for Unit 1 and during the 2003 refueling outage for Unit 2. We estimate these Calvert Cliffs' costs to be: o $ 61 million in 2001, o $ 88 million in 2002, and o $ 60 million in 2003. Additionally, our estimates of future electric generation construction expenditures include the costs of complying with Environmental Protection Agency (EPA), Maryland and Pennsylvania nitrogen oxides emissions (NOx) reduction regulations as follows: o $ 86 million in 2001, o $ 70 million in 2002, and o $ 16 million in 2003. We discuss the NOx regulations and timing of expenditures in the Environmental Matters section of the Notes to Consolidated Financial Statements on page 15. Regulated Electric and Gas - -------------------------- Regulated electric and gas construction expenditures primarily include new business construction needs and improvements to existing facilities. 36 Funding for Capital Requirements - -------------------------------- In June 2001, Constellation Energy arranged two revolving credit facilities that totaled $2.9 billion as discussed in the Financing Activity section of the Notes to Consolidated Financial Statements on page 14. Domestic Merchant Energy Business - --------------------------------- Funding for the expansion of our domestic merchant energy business is expected from internally generated funds, commercial paper, long-term debt, equity, leases, and other financing instruments issued by Constellation Energy and its subsidiaries. Specifically related to the Nine Mile Point acquisition, approximately one-half of the purchase price, or $380 million, was paid in November 2001, and the remainder is being financed through the sellers in a note to be repaid over five years with an interest rate of 11.0%. We closed the transaction using existing credit facilities. Payments on the note over the five years are expected to come from internally generated funds. In addition, we also used existing credit facilities to pay Goldman Sachs a total of $355 million. This represented $196 million to terminate the power business services agreement with our power marketing operation and $159 million previously recognized as a payable for services rendered. Longer term, we expect to fund our growth and operating objectives with a mixture of debt and equity with an overall goal of maintaining an investment grade credit profile. Constellation Energy has a commercial paper program where it can issue short-term notes to fund its nonregulated businesses. To support its commercial paper program, Constellation Energy maintains three revolving credit agreements totaling $3.1 billion, of which two facilities can also issue letters of credit. We entered into two of these agreements during June 2001 as discussed above and in the Financing Activity section of the Notes to Consolidated Financial Statements on page 14. We expect to refinance the $2.5 billion facility during the first half of 2002 with long-term debt. In addition, Constellation Energy has access to interim lines of credit as required from time to time to support its outstanding commercial paper. BGE - --- Funding for utility capital expenditures is expected from internally generated funds, commercial paper issuances, available capacity under credit facilities, the issuance of long-term debt, trust securities, or preference stock, and/or from time to time equity contributions from Constellation Energy. BGE has FERC authority to issue up to $700 million of short-term borrowings, including commercial paper. In addition, BGE maintains $218 million in annual committed bank lines of credit and has $25 million in bank revolving credit agreements to support the commercial paper program. BGE also has access to interim lines of credit as required from time to time to support its outstanding commercial paper. During 2001 and 2002, we expect our regulated utility business to provide at least 140% of the cash needed to meet the capital requirements for its operations, excluding cash needed to retire debt. Other Nonregulated Businesses - ----------------------------- BGE Home Products & Services could fund capital requirements through sales of receivables. 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, senior-living facilities, remaining Latin American operations, and other investments, 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 and senior-living facilities operation and market conditions in the Other Nonregulated Businesses section beginning on page 34. - -------------------------------------------------------------------------------- Other Matters - ------------- Environmental Matters - --------------------- We are subject to federal, state, and local laws and regulations that work to improve or maintain the quality of the environment. If certain substances were disposed of, or released at any of our properties, whether currently operating or not, these laws and regulations require us to remove or remedy the effect on the environment. This includes Environmental Protection Agency Superfund sites. You will find details of our environmental matters in the Environmental Matters section of the Notes to Consolidated Financial Statements beginning on page 15 and in our 2000 Annual Report on Form 10-K in Item 1. Business - Environmental Matters. These details include financial information. Some of the information is about costs that may be material. Accounting Standards Adopted and Issued - --------------------------------------- We discuss recently adopted and issued accounting standards in the Accounting Standard Adopted and Accounting Standards Issued sections of the Notes to Consolidated Financial Statements beginning on page 17. 37 Item 3. Quantitative and Qualitative Disclosures About Market Risk - ------------------------------------------------------------------ We discuss the following information related to our market risk: o risk associated with the purchase and sale of energy in a deregulated environment as discussed in the Current Issues - Electric Competition section of Management's Discussion and Analysis on page 22, o financing activities, accounting standard adopted, and risk management and hedging activities in the Notes to Consolidated Financial Statements beginning on page 14, and o activities of our power marketing business in the Domestic Merchant Energy Business section of Management's Discussion and Analysis beginning on page 28. - -------------------------------------------------------------------------------- PART II. - -------- OTHER INFORMATION - ----------------- Item 1. Legal Proceedings - ------- ----------------- California - ---------- Baldwin Associates, Inc. v. Gray Davis, Governor of California and 22 other defendants (including Constellation Power Development, Inc., a subsidiary of Constellation Power, Inc.) - This class action lawsuit was filed on October 5, 2001 in the Superior Court, County of San Francisco. The action seeks damages of $43 billion, recession and reformation of approximately 38 long-term power purchase contracts, and an injunction against improper spending by the state of California. Constellation Power Development, Inc. is named as a defendant but does not have a power purchase agreement with the State of California. However, our High Desert Power Project does have a power purchase agreement with the California Department of Water Resources. We believe this case is without merit. However, we cannot predict the timing, or outcome, of it or its possible effect on our financial results. Employment Discrimination - ------------------------- Miller, et al. v. Baltimore Gas and Electric Company, et al. - This action was filed on September 20, 2000 in the U.S. District Court for the District of Maryland. Besides BGE, Constellation Energy Group, Constellation Nuclear and Calvert Cliffs Nuclear Power Plant are also named defendants. The action seeks class certification for approximately 150 past and present employees and alleges racial discrimination at Calvert Cliffs Nuclear Power Plant. The amount of damages is unspecified, however the plaintiffs seek back and front pay, along with compensatory and punitive damages. The Court scheduled a briefing process for the motion to certify the case as a class action suit for the beginning of 2003. We believe this case is without merit. However, we cannot predict the timing, or outcome, of it or its possible effect on our, or BGE's, financial results. Moore v. Constellation Energy Group - This action was filed on October 23, 2000 in the U.S. District Court for the District of Maryland by an employee alleging employment discrimination. Besides Constellation Energy, BGE and Constellation Holdings, Inc. were also named defendants. The Equal Employment Opportunity Commission previously concluded that it was unable to establish a violation of law. The plaintiff sought, among other things, unspecified monetary damages and back pay. The court dismissed the case in 2001. 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 BGE's Report on Form 8-K filed August 20, 1993. We are involved in these claims with approximately 70 other defendants. Approximately 545 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 since 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: o the identity of our facilities at which the plaintiffs allegedly worked as contractors, o the names of the plaintiff's employers, and o the date on which the exposure allegedly occurred. To date, 36 of these cases have been resolved for amounts that were not significant. The second type is claims by one manufacturer -- Pittsburgh Corning Corp. (PCC) -- against us and approximately eight others, as third-party defendants. On April 17, 2000, PCC declared bankruptcy and we do not expect PCC to prosecute these claims. 38 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 375 cases have been resolved, all without any payments 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: o the identity of our facilities containing asbestos manufactured by the manufacturer, o the relationship (if any) of each of the individual plaintiffs to us, o the settlement amounts for any individual plaintiffs who are shown to have had a relationship to us, and o 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. Restructuring Order - ------------------- In early December 1999, the Mid-Atlantic Power Supply Association (MAPSA), Trigen-Baltimore Energy Corporation and Sweetheart Cup Company, Inc. filed appeals of the Restructuring Order, which were consolidated in the Baltimore City Circuit Court. MAPSA also filed a motion to delay implementation of the Restructuring Order, pending a decision on the merits of the appeals by the court. On April 21, 2000, the Circuit Court dismissed MAPSA's appeal based on a lack of standing (the right of a party to bring a lawsuit to court) and denied its motion for a delay of the Restructuring Order. However, MAPSA filed an appeal of this decision. On May 24, 2000, the Circuit Court dismissed both the Trigen and Sweetheart Cup appeals. MAPSA subsequently filed several appeals with the Maryland Court of Special Appeals, the Maryland Court of Appeals, and the Baltimore City Circuit Court. The effect of the appeals was to delay the implementation of customer choice in BGE's service territory. However, on August 4, 2000, the delay was rescinded and BGE retroactively adjusted its rates as if customer choice had been implemented July 1, 2000. On September 29, 2000, the Baltimore City Circuit Court issued an order upholding the Restructuring Order. On October 27, 2000, MAPSA filed an appeal with the Maryland Court of Special Appeals challenging the September 29, 2000 order issued by the Circuit Court. The Court of Special Appeals heard oral arguments on the appeal on September 7, 2001. We believe that this petition is without merit. However, we cannot predict the timing, or outcome, of this case, which could have a material adverse effect on our, and BGE's, financial results. Asset Transfer Order - -------------------- On July 6, 2000, MAPSA and Shell Energy LLC filed, in the Circuit Court for Baltimore City, a petition for review and a delay of the Maryland PSC's order approving the transfer of BGE's generation assets issued on June 19, 2000. The Court denied MAPSA's request for a delay on August 4, 2000, and after a hearing on the petition on August 23, 2000 issued an order on September 29, 2000 upholding the Maryland PSC's order on the asset transfer. On October 27, 2000, MAPSA filed an appeal with the Maryland Court of Special Appeals challenging the September 29, 2000 order issued by the Circuit Court. The Court of Special Appeals heard oral arguments on the appeal on September 7, 2001. We also believe that this petition is without merit. However, we cannot predict the timing, or outcome, of this case, which could have a material adverse effect on our, and BGE's, financial results. 39 Item 5. Other Information - ------- ----------------- 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: o The timing and extent of changes in commodity prices for energy including coal, natural gas, oil, and electricity. o The timing and extent of deregulation of, and competition in, the energy markets in North America, and the rules and regulations adopted on a transitional basis in those markets. o The conditions of the capital markets generally, which are affected by interest rates and general economic conditions, as well as Constellation Energy and BGE's ability to maintain their current debt ratings. o The effectiveness of Constellation Energy's risk management policies and procedures and the ability of our counterparties to satisfy their financial commitments. o The liquidity and competitiveness of wholesale trading markets for energy commodities. o Operational factors affecting the start-up or ongoing commercial operations of our generating facilities and BGE's transmission and distribution facilities, including catastrophic weather related damages, unscheduled outages or repairs, unanticipated changes in fuel costs or availability, unavailability of gas transportation or electric transmission services, workforce issues, terrorism and other events beyond our control. o The inability of BGE to recover all its costs associated with providing electric retail customers service during the electric rate freeze period. o The effect of weather and general economic and business conditions on energy supply, demand and prices. Regulatory or legislative developments that affect demand for energy, or increase costs, including costs related to nuclear power plants, safety or environmental compliance. o Cost and other effect of legal and administrative proceedings that may not be covered by insurance, including environmental liabilities or the outcome of pending appeals regarding the Maryland PSC's orders on electric deregulation and the transfer of BGE's generation assets to affiliates. o Operation of our generation assets in a deregulated market without the benefit of a fuel rate adjustment clause. 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 SEC for more information on these factors. These forward looking statements represent our estimates and assumptions only as of the date of this report. Changes may occur after that date, and neither Constellation Energy nor BGE assume responsibility to update these forward looking statements. 40
Item 6. Exhibits and Reports on Form 8-K - ---------------------------------------- (a) Exhibit No. 10(a) Full Requirements Service Agreement Between Baltimore Gas and Electric Company and Constellation Power Source, Inc. (portions of this exhibit have been omitted pursuant to a request for confidential treatment). Exhibit No. 10(b) Full Requirements Service Agreement Between Baltimore Gas and Electric Company and Allegheny Energy Supply Company, L.L.C. (portions of this exhibit have been omitted pursuant to a request for confidential treatment). Exhibit No. 12(a) Constellation Energy Group, Inc. Computation of Ratio of Earnings to Fixed Charges. Exhibit No. 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.
(b) Reports on Form 8-K for the quarter ended September 30, 2001: Date Filed Items Reported ---------- -------------- August 24, 2001 Item 5. Other Events Item 7. Financial Statements and Exhibits 41 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, each registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CONSTELLATION ENERGY GROUP, INC. ----------------------------------------- (Registrant) Date: November 14, 2001 /s/ E. Follin Smith ----------------- ------------------------------------------ E. Follin Smith, Senior Vice President on behalf of Constellation Energy Group, Inc. and as Principal Financial Officer BALTIMORE GAS AND ELECTRIC COMPANY ------------------------------------------ (Registrant) Date: November 14, 2001 /s/ Thomas F. Brady ----------------- ----------------------------------------------- Thomas F. Brady, on behalf of Baltimore Gas and Electric Company as Principal Financial Officer 42 EX-10 4 ex10a.txt EX10A Exhibit 10(a) FULL REQUIREMENTS SERVICE AGREEMENT BETWEEN BALTIMORE GAS AND ELECTRIC COMPANY AND CONSTELLATION POWER SOURCE, INC. DATED AUGUST 23, 2001 The asterisks on pages 12, 24, 25 and A1 denote that confidential portions of this exhibit have been omitted in reliance on Rule 25(b)-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission.
TABLE OF CONTENTS Page ARTICLE 1. Definitions 1 ARTICLE 2. Term 7 ARTICLE 3. Supplier Responsibilities 7 ARTICLE 4. BGE Responsibilities 9 ARTICLE 5. Billing and Payment 10 ARTICLE 6. Price 12 ARTICLE 7. Events of Default; Remedies 13 ARTICLE 8. Credit Support 16 ARTICLE 9. Indemnification 18 ARTICLE 10. Limitation of Liability 19 ARTICLE 11. Force Majeure 19 ARTICLE 12. Representations and Warranties 21 ARTICLE 13. Miscellaneous 21 APPENDIX A SAMPLE PJM BILL APPENDIX B GENERATION SHOPPING CREDITS APPENDIX C LITIGATION DISCLOSURE APPENDIX D CPS GUARANTY APPENDIX E BGE GUARANTY
i FULL REQUIREMENTS SERVICE AGREEMENT THIS FULL REQUIREMENTS SERVICE AGREEMENT ("Agreement"), made and entered into as of this day of August, 2001 by and between Baltimore Gas and Electric Company, a Maryland Corporation ("BGE") and Constellation Power Source, Inc., a Delaware corporation ("Supplier") (each individually a "Party", or collectively, the "Parties"). W I T N E S S E T H WHEREAS, on April 8, 1999, Maryland enacted the Electric Choice and Competition Act authorizing customer choice and competition among electric suppliers; WHEREAS, on November 10, 1999 the Maryland Public Service Commission issued an order approving the terms of a settlement providing for retail choice within BGE's service territory; WHEREAS, the Maryland PSC Order directs BGE to supply electric service for a period of up to six years to those retail customers within BGE's retail service territory that choose not to purchase their power supply from alternative competitive suppliers; WHEREAS, Supplier is authorized to makes sales of energy, capacity and ancillary services at market based rates pursuant to Constellation Power Source, Inc., 79 FERCP. 61,167 (1997) and its market based rates tariff, Constellation Power Source, Inc. Rate Schedule FERC No. 11, Revision No. 2 in accordance with FERC Delegated Letter Order of March 29, 2000 in FERC Docket No. ER00-1598-000 (the "Supplier Tariff"); WHEREAS, Supplier and BGE are entering into this Agreement for the purpose of establishing the terms and conditions under which Supplier will supply such full requirements service to BGE. NOW, THEREFORE, in consideration of the premises and the mutual covenants set forth herein, the Parties hereto agree as follows: ARTICLE 1 DEFINITIONS 1.1 Definitions. For all purposes of this Agreement, the following terms as used in this Agreement shall have the following meanings. Except where the context otherwise requires, definitions and terms expressed in the singular will include the plural and vice versa. 1 "Affiliate" means, with respect to a Person, any other Person that, directly or indirectly through one or more intermediaries, controls, is controlled by or is under common control with such first Person. The term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ownership of voting securities, by contract or otherwise. "Agreement" means this Full Requirements Service Agreement, including the Appendices, as amended, modified or supplemented from time to time. "Alternate SOS Supplier" means a retail supplier that is responsible for supplying former BGE SOS Customers as a result of Retail Bidding. "Alternate SOS Supplier Customers" means former BGE SOS Customers that are provided SOS from Alternate SOS Supplier as a result of Retail Bidding. "Ancillary Services" means those services, or their successors, that are necessary to support the transmission of Energy from generation resources to loads, as set forth in the PJM OATT, including, but not limited to, PJM Scheduling, System Control and Dispatch Service; RTO Scheduling, System Control and Dispatch Service; Reactive Supply and Voltage Control from Generation Sources Service; Regulation and Frequency Response Service; Energy Imbalance Service; Operating Reserve - Spinning Reserve Service; and Operating Reserve - Supplemental Reserve Service. "BGE SOS Customers" means the customers receiving SOS from BGE. "BGE" means Baltimore Gas and Electric Company, a Maryland corporation and its successors and permitted assigns hereunder. "Business Day" means a day on which Federal Reserve member banks in Baltimore Maryland are open for business; and a Business Day shall open at 8:00 a.m. and close at 5:00 p.m. Eastern Standard (or Daylight Savings) time. "Creditworthiness Criteria" with respect to a Party or its guarantor means (i) an unsecured rating of "Baa3" or better from Moody's, "BBB-" or better from S&P or investment grade as determined by another nationally recognized rating service reasonably acceptable to the other Party and (ii) a Net Worth of at least Two Hundred Million Dollars ($200,000,000). "Contract Classes" means those customers that receive SOS from BGE under certain contractual terms that may differ from the schedules found in the Retail Electric Service Tariff. 2 "Customer Classes" means (i) Schedules R, RL-1, RL-2, ES, G Option 1, G Option 2, GS Option 1, GS Option 2, GL Secondary, GL Primary, SL, PL and DS, as defined in the Retail Electric Service Tariff and (ii) Contract Classes. "Delivery Point" means any point on the PJM Transmission System as elected by Supplier. "Delivery Term" means the period commencing July 1, 2003 and ending on June 30, 2006, unless this Agreement is earlier terminated in accordance with its terms. "Effective Date" means the date upon which this Agreement is executed. "Electricity Supplier Coordination Tariff" means the BGE Electricity Supplier Coordination Tariff approved by the Maryland PSC, as amended, modified or supplemented from time to time. "Energy" means the electrical output of electric generation facilities, usually stated in kilowatt-hours or megawatt-hours. "FERC" means the Federal Energy Regulatory Commission and any successor thereto. "Fixed Transmission Rights" shall have the meaning as set forth in the PJM OA. "Full Requirements Service" means all-requirements electric service on a continuous basis, including, but not limited to, the following products: Energy, Unforced Capacity, Ancillary Services, Unaccounted For Energy and associated losses necessary to fulfill all PJM obligations as they may change from time to time associated with providing all-requirements electric service to the SOS Load, as further defined pursuant to Article 3. Such Full Requirements Service shall include changes in customer demand for any reason, including, but not limited to, seasonal factors, daily load fluctuations, increased or decreased usage, transmission and distribution outages, customer decisions regarding whether to take generation service from an alternate supplier, demand side management activities, extremes in weather, and other similar events. "Generation Shopping Credits" means the prices stated in Appendix B, unless altered as provided in Section 6.1.b. "Governmental Authority" means the government of any federal, state, municipal or other political subdivision, including all agencies and instrumentalities of such governments and political subdivisions. "Intermediate-Peak" shall have the meaning set forth in the Retail Electric Service Tariff as of the Effective Date. 3 "Interest Rate" means, for any date, the lesser of (a) two (2) percent over the per annum rate of interest equal to the prime lending rate as may from time to time be published in The Wall Street Journal under "Money Rates" and (b) the maximum rate permitted by applicable law. "Load Serving Entity (LSE)" means an entity, including a load aggregator or power marketer, that: (i) is serving end-users within the PJM Control Area, and (ii) has been granted the authority, or has an obligation pursuant to state or local law, regulation or franchise, to sell electric energy to end-users within the PJM Control Area. "Load Response Resources" means those resources that, under BGE's direction, have the effect of reducing the electric supply for SOS due to a customer's reduction in consumed electricity and/or an increase in customer-owned generation, and includes, but is not limited to (i) BGE Riders 5, 6, 14, 16, 24, as set forth in the Retail Electric Service Tariff, as amended from time to time; and (ii) any individually negotiated load response agreement between BGE and its customers; and (iii) any other load response-type service BGE may offer. "Maryland PSC" means the Maryland Public Service Commission and any successor thereto. "Maryland PSC Order" means the November 10, 1999 Order issued by the Maryland PSC allowing, among other things, retail choice for electricity consumers, requiring that BGE provide electricity supply to retail consumers who do not choose an alternate supplier, and further allowing BGE to enter into a full requirements service agreement for SOS Load. "Moody's" means Moody's Investors Service, Inc. and any successor thereto. "Network Integration Transmission Service" shall have the meaning as set forth in the PJM OATT. "Net Worth" means total assets (exclusive of intangible assets) less total liabilities as reflected on a balance sheet prepared in accordance with generally accepted accounting principles consistently applied. "Non-Summer" shall have the meaning set forth in the Retail Electric Service Tariff as of the Effective Date. "Off-Peak" shall have the meaning set forth in the Retail Electric Service Tariff as of the Effective Date. "Parent" means, with respect to a Person that, directly or indirectly through one or more intermediaries, controls such first Person, where the term "control" means the possession, 4 directly or indirectly, of power to direct or cause the direction of the management or policies of a Person, whether through the ownership of voting securities, by contract or otherwise. "Peak" shall have the meaning set forth in the Retail Electric Service Tariff as of the Effective Date. "Person" means any individual, sole proprietorship, corporation, partnership, joint venture, limited liability partnership, limited liability company, trust, unincorporated association, institution, Governmental Authority or any other entity. "PJM" means PJM Interconnection, L.L.C., the independent system operator for the PJM Control Area organized and operating pursuant to the PJM Operating Agreement and any successor thereto. "PJM Control Area" shall have the meaning as set forth in the PJM OA. "PJM OA" means the Amended and Restated Operating Agreement of PJM Interconnection, LLC dated June 2, 1997 and effective January 1, 1998, as amended, modified or supplemented from time to time. "PJM OATT" means the PJM Open Access Transmission Tariff administered by PJM, as amended, modified or supplemented from time to time. "PJM Transmission System" shall have the meaning as set forth in the PJM OATT. "Reliability Assurance Agreement (RAA)" means the Reliability Assurance Agreement among Load Serving Entities in the PJM Control Area dated June 2, 1997, as amended, modified or supplemented from time to time. "Retail Bidding" means a Maryland PSC approved process where BGE's SOS Customers are auctioned to Alternate SOS Supplier(s). "Retail Electric Service Tariff" means the BGE Retail Electric Service Tariff approved by the Maryland PSC, as amended, modified or supplemented from time to time. "Retail Generation Revenue" means the revenue that BGE reports in its financial statements, which is an approximation of the revenue associated with the consumed electricity in any given calendar month for service to BGE SOS Customers, and is equal to the actual amounts billed to BGE SOS Customers in a calendar month plus a reasonable approximation of the revenue associated with unbilled, but consumed electricity in that month, less a reasonable approximation of the revenue associated with billed, but not consumed electricity in that month. 5 "S&P" means Standard & Poor's Ratings Group, a division of McGraw Hill, Inc. and any successor thereto. "Standard Offer Service (SOS)" means the electric generation service that is provided to retail customers that have not chosen a retail supplier other than BGE or Alternate SOS Supplier. "SOS Load" means the kW and kWh retail load used in BGE's calculation of its monthly Retail Generation Revenue from BGE SOS Customers, plus the kW and kWh retail load, determined in the same manner as load is determined for Retail Generation Revenue, associated with Alternate SOS Supplier Customers. "Summer" shall have the meaning set forth in the Retail Electric Service Tariff as of the Effective Date. "Supplier" means Constellation Power Source, Inc. and its successors and permitted assigns hereunder. "Taxes" means any or all ad valorem, property, severance, generation, first use, conservation, Btu or energy, transportation, utility, gross receipts, privilege, sales, use, consumption, excise, lease, transaction, and other taxes, governmental charges, licenses, fees, permits and assessments, or increases therein, other than taxes based on net income or net worth. "Transmission Owner" shall have the meaning as set forth in the PJM OA. "Unaccounted For Energy" means the difference between the hourly BGE system load and the sum of (i) the estimated hourly customer loads (interval metered and profiled) and (ii) losses. "Unforced Capacity" shall have the meaning set forth in the RAA, and shall include any successor product(s) defined and approved by PJM. 1.2 Additional Defined Terms. Each of the following terms has the meaning specified in the Article, Section or Appendix set forth opposite such term: 6 Term Section/Appendix ---- ---------------- AAA 13.10 Affected Party 7.4(a) Bankruptcy Proceeding 7.1 Claims 9.1 Confidential Information 13.7 Defaulting Party 7.1 Early Termination Date 7.4(a) Event of Default 7.1 Force Majeure 11.1(a) Margin 7.2(c) Non-Defaulting Party 7.2(a) Price 6.1(a) Settlement Amount 7.2(b) Term 2.1 Termination Payment 7.2(c) ARTICLE 2 TERM 2.1 Term. --- ----- Unless earlier terminated in accordance with Article 7, this Agreement shall remain in effect from the Effective Date through and including the end of the Delivery Term ("Term"). At the expiration of the Term, the Parties shall no longer be bound by the terms and conditions of this Agreement, except to the extent necessary to enforce the rights and obligations of the Parties arising under this Agreement prior to the expiration of the Term. ARTICLE 3 SUPPLIER RESPONSIBILITIES 3.1 PJM Member. --- ----------- Supplier shall, prior to the Delivery Term and throughout the entire Delivery Term of this Agreement, be a member, in good standing, of PJM and maintain a settlement account established in accordance with the rules and criteria established by PJM. 7 3.2 Full Requirements Service. --- -------------------------- During the Delivery Term, Supplier shall sell and deliver to the Delivery Point and BGE shall receive and purchase Full Requirements Service sufficient to serve 90 percent share of the SOS Load. As a provider of Full Requirements Service, Supplier is solely responsible for satisfying all requirements and paying all costs incurred or to be incurred to provide such service including, without limitation, all costs, all scheduling or other requirements to furnish Unforced Capacity, Energy, losses, Unaccounted For Energy and Ancillary Services associated with the provision of Full Requirements Service. Supplier is also solely responsible for meeting any other requirements and paying any other costs now or hereafter imposed by PJM or imposed pursuant to the RAA from time to time during the Delivery Term which are attributable to any component of the provision of Full Requirements Service. If PJM allocates any expenses or uplift costs to the Full Requirements Service provided by Supplier (on a load or peak load basis or otherwise), the expenses or costs so allocated will be borne by Supplier alone without recourse to BGE. 3.3 Losses; Unaccounted For Energy. --- ------------------------------- Supplier shall be responsible for supplying sufficient Full Requirements Service to compensate for all transmission, sub-transmission and distribution losses and Unaccounted For Energy associated with the delivery of electricity supplied under this Agreement from the sources of its supply to the meters of those retail customers included in the Supplier's share of the SOS Load. 3.4 Maryland Environmental Disclosure Requirements. --- ----------------------------------------------- Subject to any confidentiality provisions to which it is bound, Supplier will provide to BGE, to the best of its knowledge, the sources of electricity used to supply Full Requirements Service, fuel mix and environmental disclosure information in a timely manner and in an appropriate form to enable BGE to comply with Maryland PSC or other governmental or regulatory agency requirements relating to reporting of such information. 3.5 Renewable Energy Resources. --- --------------------------- During the Delivery Term of this Agreement, Supplier shall provide the renewable resource requirements imposed upon BGE by Article 7-516 of the Maryland Electric Customer Choice and Competition Act of 1999, as of the Effective Date. 8 3.6 Transmission Congestion. --- ------------------------ If the PJM Control Area experiences congestion, Supplier will be responsible for any congestion costs incurred in delivering power from the Delivery Point to BGE's load busses. During the Delivery Term, BGE shall, at no cost to Supplier, assign or transfer its rights to nominate Fixed Transmission Rights associated with Supplier's portion of the SOS Load to Supplier. ARTICLE 4 BGE RESPONSIBILITIES 4.1 Title; Risk of Loss. --- -------------------- Title to and risk of loss related to the Full Requirements Service delivered by Supplier in accordance with this Agreement shall pass to BGE at the Delivery Point. 4.2 Network Integration Transmission Service. --- ----------------------------------------- BGE shall be responsible, at its sole cost and expense, for the provision of Network Integration Transmission Service pursuant to the PJM OATT and distribution service at and from the Delivery Point. 4.3 Load Response Resources. --- ------------------------ During the Delivery Term, BGE will operate its Load Response Resources in accordance with the provisions of the Electricity Supplier Coordination Tariff and the applicable Riders to the Retail Electric Service Tariff, as amended and approved by the Maryland PSC from time to time. BGE shall be responsible for payment of any credits to retail customers and for any penalties assessed in accordance with the RAA for failure to implement its Load Response Resources when so requested by PJM. BGE shall retain all of the benefits associated with its Load Response Resources. BGE shall make the appropriate adjustments and/or transactions in the retail load settlement process in order for BGE to attain such benefits, which may require Supplier's confirmation, which shall not be unreasonably withheld. 4.4 Sales for Resale. --- ----------------- All Full Requirements Service delivered by Supplier to BGE hereunder shall be sales for resale, with BGE reselling such Full Requirements Service. At Supplier's request, BGE shall obtain and provide Supplier with any resale certificates to evidence that the deliveries hereunder are sales for resale. 9 ARTICLE 5 BILLING AND PAYMENT 5.1 Billing. --- -------- On or before the sixth (6th) Business Day of each month, unless otherwise agreed to by the Parties, BGE shall deliver to Supplier electronically or by other means agreed to by the Parties a statement that sets forth: (i) the allocation of the Supplier's 90 percent share of the SOS Load for the preceding month among the Customer Classes; (ii) the amount due and payable by BGE, based upon the Supplier's 90 percent share of the SOS Load for each Customer Class and the Prices applicable thereto as set forth in Section 6.1; and (iii) all other information reasonably requested by Supplier to facilitate Supplier's verification of the foregoing values. Such statement shall constitute an "invoice" or "bill" for purposes of amounts due and payable for Full Requirements Service under this Agreement. 5.2 Payment. --- -------- All invoices pursuant to Section 5.1 shall be due and payable, unless otherwise agreed by the Parties, on the first Business Day after the 19th calendar day of the month in which the invoice is rendered. BGE will make payments by wire transfer, or by other mutually agreeable method(s), to the account of Supplier as designated by Supplier. Any amounts, both principal and interest, remaining unpaid after the due date will be deemed delinquent and will accrue interest at the Interest Rate, such interest to be calculated from the due date to the date the unpaid amount is paid in full. 5.3 Disputed Bills. --- --------------- If either Party, in good faith, disputes an invoice, the disputing Party shall immediately notify the other Party of the basis for the dispute and, in the case of a dispute by BGE, pay the portion of such statement conceded to be correct no later than the due date. Each Party shall have the right to dispute any invoice prior to the lapse of 12 months from the rendition thereof. If any disputed amount is ultimately determined to be due to Supplier, it shall be paid within two (2) Business Days, unless otherwise agreed to by the Parties, of such determination along with interest accrued at the Interest Rate from the due date of the bill to which the dispute relates, to the date the additional charge is paid. If any disputed amount is ultimately determined to be due to BGE, it shall be paid within two (2) Business Days, unless otherwise agreed to by the Parties, of such 10 determination along with interest accrued at the Interest Rate from the date the amount being refunded was received by Supplier, to the date the refund is made. 5.4 Billing Adjustments. --- -------------------- (a) The invoices rendered hereunder may be adjusted by the Party rendering such invoice for any errors in arithmetic, computation, meter readings, estimating, or otherwise no later than twelve (12) months after the date the bill was rendered. Any billing adjustment shall be in writing and shall state the specific basis for the adjustment. A billing adjustment shall constitute a new bill for the purposes of this Section 5.4. An adjusted bill shall be binding on the Parties twelve (12) months after the bill is rendered. (b) Overpayments or underpayments resulting from a billing adjustment shall bear interest calculated at the Interest Rate. In the case of an underpayment, interest shall accrue from the due date of the bill to which the adjustment relates, to the date the additional charge is paid. In the case of an overpayment, interest shall accrue from the date the amount being refunded was received, to the date the refund is made. 5.5 PJM Billing. --- ------------ (a) BGE shall request PJM to invoice Supplier directly for charges and credits relating to Supplier's obligation to deliver Full Requirements Service to BGE under this Agreement. BGE shall also request PJM to invoice BGE separately for charges and credits relating to BGE's rights and obligations as a Network Integration Transmission Service customer and a Transmission Owner and otherwise as the Parties agree. Appendix A attached hereto and made a part hereof allocates between Supplier and BGE the charges and credits currently included on a PJM bill. In the event that either Party is billed by PJM for charges and/or credits identified in Appendix A, but not allocated in accordance with Appendix A, BGE shall rectify such billing in the Full Requirements Service invoice to be in accordance with Appendix A. (b) Any additional charges or credits imposed by PJM that are not identified in Appendix A will be allocated to BGE and Supplier in a manner that is consistent with Supplier's Full Requirements Service obligations and BGE's LSE or transmission-related obligations. For avoidance of doubt, charges associated with entities defaulting to PJM which are then allocated by PJM to BGE as an LSE or Transmission Owner shall not be the responsibility of the Supplier. 11 ARTICLE 6 PRICE 6.1 Price. --- ------ (a) The "Price" payable by BGE to Supplier for the delivery of Full Requirements Service hereunder shall be equal to *** percent of the Generation Shopping Credits stated in Appendix B. (b) The prices stated in Appendix B associated with Schedules G Option 1, G Option 2, GS Option 1, GS Option 2, GL Secondary and GL Primary are subject to change as a result of (i) the competitive transition charge true-up, which is required under the Maryland PSC Order; and (ii) a change to the rate-making treatment of the universal service charge, in accordance with the Maryland PSC Order. Supplier agrees to accept these aforementioned price changes as they may occur. (c) For every MWh of SOS Load served under this Agreement, Supplier agrees to contribute $*** to BGE for BGE's contribution to a charity, program or fund ("Fund") assisting low-income electric and gas customers located in BGE's service territory. Selection of the Fund(s) shall be in BGE's sole discretion. 6.2 Taxes. --- ------ (a) Supplier shall pay all Taxes levied in respect of the Full Requirements Service, its sale, and the handling thereof prior to the Delivery Point. BGE shall pay all such Taxes levied on such Full Requirements Service at, and from, the Delivery Point. (b) For any new Taxes levied with respect to the Full Requirements Service after the Effective Date and to the extent permitted by the settlement and the Maryland PSC Order, BGE will fully support and pursue in good faith the recovery of any such new Tax levied on Supplier from BGE's Full Requirements Service customers. To the extent such new Taxes are recoverable by BGE from its SOS customers, BGE shall reimburse Supplier for such Taxes paid by Supplier. 12 The asterisks on this page denotes that confidential portions of this exhibit have been omitted in reliance on Rule 25(b)-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission. 6.3 Payment Netting. --- ---------------- Payments owing by each Party on any day under this Agreement or any other agreement between the Parties shall be offset so that only the net amount shall be paid by the Party having the greater payment obligation on such day. Such netting shall include but not be limited to, amounts not related to SOS Load, such as the BRESCO, Brighton Dam and Amstar power purchase amounts, certain PJM billing adjustments, and contributions made pursuant to Section 6.1(c) of this Agreement. ARTICLE 7 EVENTS OF DEFAULT; REMEDIES 7.1 Events of Default. An "Event of Default" shall mean, with respect to a Party ("Defaulting Party"), the occurrence of any of the following: (i) the failure to make, when due, any payment required pursuant to this Agreement if such failure is not remedied within five (5) Business Days after written notice of such failure is given by the other Party and provided the payment is not the subject of a good faith dispute as described in Article 5; (ii) any representation or warranty made by the Defaulting Party herein prove to be false or misleading in any material respect; (iii) the failure of the Defaulting Party, in a material respect, to perform or comply with any material covenant or obligation set forth in this Agreement and such failure is not excused by Force Majeure or cured within three (3) Business Days after receipt of written notice thereof from the other Party; (iv) the failure of the Defaulting Party or its guarantor to maintain any of the security requirements set forth in Article 8, and such failure is not cured or rectified within ten (10) days after notice from the other Party; (v) the Defaulting Party shall be subject to a Bankruptcy Proceeding ("Bankruptcy Proceeding" means with respect to a Party, such Party (a) files a petition or otherwise commences a proceeding under any bankruptcy, insolvency, reorganization or similar law, or has any such petition filed or commenced against it, (b) makes an assignment or any general arrangement for the benefit of creditors, (c) otherwise becomes bankrupt or insolvent (however evidenced), (d) has a liquidator, administrator, receiver, trustee, conservator or similar official appointed with respect to it or any substantial portion of its property or assets, or (e) is unable to pay its debts as they fall due). 13 7.2. Remedies upon an Event of Default. ---- ---------------------------------- (a) After the occurrence of an Event of Default with respect to a Defaulting Party, the other Party (the "Non-Defaulting Party") shall have the right, without prior notice, to liquidate and terminate this Agreement at any time and from time to time, with the minimum period of notice required by FERC, if applicable, and shall calculate, in a commercially reasonable manner, a Settlement Amount for this Agreement as of the time of its termination or as soon thereafter as is reasonably practicable and shall net such Settlement Amounts in the manner provided for in Section 7.2(c). (b) "Settlement Amount" shall mean, with respect to this Agreement and the Non-Defaulting Party, the losses and costs (or gains), expressed in U.S. Dollars, which such party incurs as a result of the liquidation, including, but not limited to, losses and costs (or gains) based upon the then current replacement value of this Agreement together with, at the Non-Defaulting Party's option, but without duplication, all losses and costs which such party incurs as a result of maintaining, terminating, obtaining or re-establishing any hedge or related trading positions. The Settlement Amount shall be due to or from the Non-Defaulting Party as appropriate. In calculating a Settlement Amount, the Non-Defaulting Party shall discount to present value (in a commercially reasonable manner based on the Prime Rate as of the date of termination) any amount which would otherwise have been due at a later date and shall add interest at the Prime Rate to any amount due prior to the date of the calculation. "Prime Rate" shall mean the prime rate of interest as published from time to time under "Money Rates" by The Wall Street Journal. (c) If the Settlement Amount (i) is due the Non-Defaulting Party, the Non-Defaulting Party shall set off against the Settlement Amount any Margin then available to the Non-Defaulting Party, plus (at the Non-Defaulting Party's election) any or all other amounts due to the Defaulting Party under this Agreement; or (ii) is due the Defaulting Party, the Non-Defaulting Party shall set off against the Settlement Amount any Margin then available to the Defaulting Party, plus (at the Non-Defaulting Party's election) any or all other amounts due to the Non-Defaulting Party under this Agreement, so that all such amounts shall be netted to a single liquidated amount (the "Termination Payment") payable by one Party to the other. "Margin" shall mean cash, securities or other property held by or due from one Party to guarantee or secure obligations of the other party under the Agreement. (d) Notice that a liquidation pursuant to this Article 7.2 has occurred shall be given by the Non-Defaulting Party to the Defaulting Party before the close of business on the Business Day following such liquidation, provided that failure to give such notice shall not affect the validity or enforceability of the liquidation or give rise to any claim by the Defaulting Party against the Non-Defaulting Party. The notice shall specify the amount of the Termination Payment and whether it is owed by or to the Defaulting Party. The notice shall include a written statement explaining in reasonable detail the calculation of such amount. The Termination Payment shall be made by the Party that owes it on the second Business Day after such notice is given. 14 (e) If the Defaulting Party disputes the Non-Defaulting Party's calculation of the Termination Payment, in whole or in part, the Defaulting Party shall, within two (2) Business Days of receipt of Non-Defaulting Party's calculation of the Termination Payment, provide to the Non-Defaulting Party a detailed written explanation of the basis for such dispute and, if the Termination Payment is due from the Defaulting Party, shall promptly pay to the Non-Defaulting Party such portion thereof as is conceded to be correct. If the Parties cannot resolve such dispute within three (3) Business Days of the Non-Defaulting Party's receipt of the Defaulting Party's written explanation, then the Defaulting Party may submit such dispute to arbitration in accordance with the arbitration procedures set forth in Section 13.10 hereof; provided, however, that if the Termination Payment is due from the Defaulting Party, the Defaulting Party shall first transfer collateral (of a type and in a form acceptable to the Non-Defaulting Party) to the Non-Defaulting Party in an amount equal to the disputed and unpaid portion of the Termination Payment. Any payment that is due as a result of the arbitrator's award shall be paid by the Party that owes it within two (2) Business Days after the award is rendered. (f) While the remedies set forth in Sections 7.2 (a)-(e) and 7.4 shall be the exclusive remedy in the event of the termination of this Agreement pursuant to such sections, the enumeration of the foregoing remedies shall not be deemed a waiver of any other remedies, legal or equitable, to which either Party is entitled for breach of this Agreement in the event this Agreement is not terminated 7.3 Setoffs. --- -------- (a) Without limiting its rights under this Article 7 or otherwise, after an Event of Default, the Non-Defaulting Party may from time to time set off any or all amounts which the Defaulting Party owes to it (whether under the Agreement or otherwise and whether or not then due) against any or all amounts which it owes to the Defaulting Party (whether under the Agreement or otherwise and whether or not then due), provided that any amount not then due which is included in such setoff shall be discounted to present value (in the manner specified in Section 7.2(b)) as at the time of setoff (to take account of the period between the date of setoff and the date on which such amount would have otherwise been due). (b) Notwithstanding any other provision of this Agreement, after the occurrence of an Event of Default, or an event which, with the giving of notice or the passage of time or both, would constitute an Event of Default, with respect to a Party, the other Party shall have the right to suspend performance under this Agreement. 7.4 Other Terminating Events. --- ------------------------- (a) If performance by either Party (an "Affected Party") under this Agreement becomes subject to regulation of any kind whatsoever under any law, rule, regulation, order or the like, including any change by the FERC regarding a Party's authority to sell wholesale power at market-based rates, to a greater or different extent than that existing on the Effective Date and such regulation 15 renders this Agreement illegal or unenforceable then such Party (or either Party if both Parties are Affected Parties) may terminate and liquidate this Agreement ("Early Termination Date") in the manner contemplated by Section 7.2 above, which notice shall specify the basis for declaring such Early Termination Date. (b) If an Early Termination Date is declared under circumstances described in Section 7.4 (a) above, both Parties shall calculate their respective gains, losses or costs in respect of this Agreement as provided in Section 7.2, and endeavor in good faith to agree upon the Termination Payment payable by either Party, and notify the other Party of the Termination Payment, as provided in Section 7.2. 7.5 Duty to Mitigate. --- ----------------- Each Party agrees that it has a duty to mitigate damages and covenants that it will use commercially reasonable efforts to minimize any damages it may incur as a result of the other Party's failure to perform pursuant to this Agreement. ARTICLE 8 CREDIT SUPPORT 8.1 Supplier Credit Support. --- ------------------------ (a) On or before the date when Supplier is no longer an Affiliate of BGE, unless Supplier satisfies the Creditworthiness Criteria at such time, as security for Supplier's obligations hereunder, Supplier shall deliver to BGE a guaranty of payment from either Parent, or another Affiliate of Supplier that satisfies the Creditworthiness Criteria, in an amount equal to the reasonably determined credit exposure of BGE to Supplier taking into account such factors as market risk, settlement risk, the underlying creditworthiness of Supplier, or such other considerations as are commercially reasonable under the circumstances. Such credit support shall be available to be drawn upon by BGE in the event of a default by Supplier of its obligations hereunder, and, subject to Sections 8.1(b) and (c), shall be maintained in effect (by annual renewal or otherwise) by Supplier for the Term of this Agreement. (b) Supplier may, at any time during the Term of this Agreement and at its election, deliver substitute credit support to BGE in any of the following forms: (i) a direct pay irrevocable letter of credit directed to BGE from a commercial bank with long-term debt ratings of "Baa2" or better from Moody's and "BBB" or better from S&P; (ii) a performance bond issued by a surety company with a rating of "B+" or better from A.M. Best Company; or (iii) such other credit support that is acceptable to BGE. The substitute credit support to BGE will be in an amount equal to the reasonably determined credit exposure of BGE to Supplier taking into account such factors as market risk, settlement risk, the underlying creditworthiness of Supplier, or such other considerations as are commercially reasonable under the circumstances. 16 (c) If at any time during the Term of this Agreement Supplier satisfies the Creditworthiness Criteria, its obligation to deliver any credit support pursuant to this Section 8.1 shall be suspended for so long as Supplier continues to satisfy the Creditworthiness Criteria. From and after the date on which Supplier satisfies the Creditworthiness Criteria, Supplier shall certify to BGE within thirty (30) days after the end of every calendar quarter that Supplier satisfies the Creditworthiness Criteria (which certification shall include evidence as BGE shall reasonably request from time to time), and shall deliver financial statements to BGE certified by a firm of certified public accountants of national standing at least annually within one hundred twenty (120) days following the end of Supplier's fiscal year. If at any time thereafter Supplier no longer satisfies the Creditworthiness Criteria, then Supplier shall, within ten (10) Business Days after receipt of a written notice with respect thereto, deliver a guaranty that satisfies the requirements of Section 8.1(a) or other credit support in accordance with Section 8.1(b). 8.2 BGE Credit Support. --- ------------------- (a) Commencing with the Effective Date and thereafter during the Term, within thirty (30) days after the end of every calendar quarter, BGE shall certify to Supplier that it satisfies the Creditworthiness Criteria (which certification shall include evidence as Supplier shall reasonably request from time to time), and shall deliver financial statements to Supplier certified by a firm of certified public accountants of national standing at least annually within one hundred twenty (120) days following the end of BGE's fiscal year. BGE may satisfy its obligation under this paragraph by delivering a copy of its parent company's Annual Report or Form 10K. If at any time during the Term BGE no longer satisfies the Creditworthiness Criteria, then BGE shall, within ten (10) Business Days after receipt of a written notice with respect thereto, deliver to Supplier, in an amount equal to the reasonably determined credit exposure of Supplier to BGE taking into account such factors as market risk, settlement risk, the underlying creditworthiness of BGE, or such other considerations as are commercially reasonable under the circumstances, either: (i) a guaranty of payment from either Parent or another Affiliate of BGE that satisfies the Creditworthiness Criteria; (ii) a letter of credit directed to Supplier from a commercial bank with long-term debt ratings of "Baa2" or better from Moody's and "BBB" or better from S&P; (iii) a performance bond issued by a surety company with a rating of "B+" or better from A.M. Best Company; or (iv) such other credit support that is acceptable to Supplier. (b) If at any time after delivering credit support pursuant to Section 8.2(a), BGE satisfies the Creditworthiness Criteria, then its obligation to deliver any credit support pursuant to this Section 8.2 shall be suspended for so long as BGE continues to satisfy the Creditworthiness Criteria, as provided in Section 8.2(a). 8.3 Guaranty. --- --------- 17 In the event Supplier does not meet the Creditworthiness Criteria and supplies a guaranty as provided for herein, such guaranty shall be in the form of guaranty attached hereto as Appendix D. In the event BGE does not meet the Creditworthiness Criteria and supplies a guaranty as provided for herein, such guaranty shall be in the form of guaranty attached hereto as Appendix E. 18 8.4 Modification or Waiver. --- ----------------------- The Parties may agree in writing to modify or waive the provisions of Article 8. ARTICLE 9 INDEMNIFICATION . 9.1 Indemnification. --- ---------------- Each Party ("Indemnifying Party") shall indemnify, defend and hold harmless the other Party ("Indemnified Party") and its Affiliates, trustees, directors, board members, officers, employees and agents from any and all Claims arising from or out of any event, circumstance, act or incident occurring during the period when control and title to Full Requirements Service is vested, as between the Parties as provided in Section 4.1, in the Indemnifying Party. "Claims" means all claims or actions, threatened or filed and, whether groundless, false or fraudulent, that directly or indirectly relate to the subject matter of an indemnity, and the resulting losses, damages, expenses, attorney's fees and court costs, whether incurred by settlement or otherwise, and whether such claims or actions are threatened or filed prior to or after the termination of the Agreement. Such duty to indemnify shall not apply to any claims which arise or are first asserted more than two (2) years after the termination of this Agreement. 9.2 Indemnification Procedure. --- -------------------------- Each Indemnified Party shall promptly notify the Indemnifying Party of any Claim with respect to which the Indemnified Party is entitled to be indemnified hereunder. Such notice shall be given as soon as is reasonably practicable after the Indemnified Party becomes aware of each Claim; provided, however, that failure to give prompt notice shall not adversely affect any Claim for indemnification hereunder except to the extent the Indemnifying Party's ability to contest any Claim by any third party is materially adversely affected. The Indemnifying Party shall have the right, but not the obligation, at its expense, to contest, defend and litigate, and to control the contest, defense or litigation of, any Claim by any third party alleged or asserted against any Indemnified Party arising out of any matter with respect to which such Indemnified Party is entitled to be indemnified hereunder. The Indemnifying Party shall promptly notify such Indemnified Party of its intention to exercise such right set forth in the immediately preceding sentence and shall reimburse the Indemnified Party for the reasonable costs and expenses paid or incurred by it prior to the assumption of such contest, defense or litigation by the Indemnifying Party. If the Indemnifying Party exercises such right in accordance with the provisions of this Section 9 and any Indemnified Party notifies the Indemnifying Party that it desires to retain separate counsel in order to participate in or proceed independently with such contest, defense or litigation, such Indemnified Party may do so at its own expense. If the Indemnifying Party fails to exercise its rights set forth in the third sentence of this paragraph, then the Indemnifying Party shall reimburse the Indemnified Party for 19 its reasonable costs and expenses incurred in connection with the contest, defense or litigation of such Claim. ARTICLE 10 LIMITATION OF LIABILITY THE PARTIES CONFIRM THAT THE EXPRESS REMEDIES AND MEASURES OF DAMAGES PROVIDED IN THIS AGREEMENT SATISFY THE ESSENTIAL PURPOSES HEREOF. FOR BREACH OF ANY PROVISION FOR WHICH AN EXPRESS REMEDY OR MEASURE OF DAMAGES IS PROVIDED, SUCH EXPRESS REMEDY OR MEASURE OF DAMAGES SHALL BE THE SOLE AND EXCLUSIVE REMEDY, THE OBLIGOR'S LIABILITY SHALL BE LIMITED AS SET FORTH IN SUCH PROVISION AND ALL OTHER REMEDIES OR DAMAGES AT LAW OR IN EQUITY ARE WAIVED. IF NO REMEDY OR MEASURE OF DAMAGES IS EXPRESSLY HEREIN PROVIDED, THE OBLIGOR'S LIABILITY SHALL BE LIMITED TO DIRECT ACTUAL DAMAGES ONLY. SUCH DIRECT ACTUAL DAMAGES SHALL BE THE SOLE AND EXCLUSIVE REMEDY AND ALL OTHER REMEDIES OR DAMAGES AT LAW OR, EXCEPT AS SPECIFICALLY SET FORTH IN SECTION 7.2 (F), IN EQUITY ARE WAIVED. UNLESS EXPRESSLY HEREIN PROVIDED, NEITHER PARTY SHALL BE LIABLE TO THE OTHER PARTY FOR ANY CONSEQUENTIAL, INCIDENTAL, PUNITIVE, EXEMPLARY OR INDIRECT DAMAGES, LOST PROFITS OR OTHER BUSINESS INTERRUPTION DAMAGES, BY STATUTE, IN TORT OR CONTRACT, UNDER ANY INDEMNITY PROVISION OR OTHERWISE. IT IS THE INTENT OF THE PARTIES THAT THE LIMITATIONS HEREIN IMPOSED ON REMEDIES AND THE MEASURE OF DAMAGES BE WITHOUT REGARD TO THE CAUSE OR CAUSES RELATED THERETO, INCLUDING THE NEGLIGENCE OF ANY PARTY, WHETHER SUCH NEGLIGENCE BE SOLE, JOINT OR CONCURRENT, OR ACTIVE OR PASSIVE. TO THE EXTENT ANY DAMAGES REQUIRED TO BE PAID HEREUNDER ARE LIQUIDATED, THE PARTIES ACKNOWLEDGE THAT THE DAMAGES ARE DIFFICULT OR IMPOSSIBLE TO DETERMINE, OTHERWISE OBTAINING AN ADEQUATE REMEDY IS INCONVENIENT AND THE LIQUIDATED DAMAGES CONSTITUTE A REASONABLE APPROXIMATION OF THE HARM OR LOSS. ARTICLE 11 FORCE MAJEURE 11.1 Definition. ---- ----------- (a) As used in this Agreement, "Force Majeure" means any cause beyond the reasonable control of, and without the fault or negligence of, the Party claiming Force Majeure. A Force Majeure shall include, without limitation, sabotage, strikes, riots or civil disturbance, acts of God, acts of a public enemy, drought, earthquake, flood, explosion (unless resulting 20 from the fault or negligence of the Party asserting Force Majeure), fire, lightning, landslide, or any similar cataclysmic occurrence, or appropriation or diversion of electricity by sale or order of any governmental authority having jurisdiction thereof, but only if and to the extent that the event adversely affects the availability of the PJM Transmission System or BGE distribution facilities, and such affected facilities are necessary to deliver Full Requirements Service electricity to the SOS Load. (b) An event that affects the availability or cost of operating any transmission or distribution facilities outside the PJM Control Area, affects the availability or cost of operating a generating facility, or any event that merely causes an economic hardship to either Party shall not be deemed a Force Majeure. 11.2 Performance Excused. ---- -------------------- (a) If either Party is rendered wholly or partly unable to perform its obligations under this Agreement because of Force Majeure as defined above, that Party shall be excused from whatever performance is affected by the Force Majeure, to the extent so affected, provided that: (i) the non-performing Party promptly, but in no case longer than three (3) Business Days after the occurrence of the Force Majeure, gives the other Party written notice describing the particulars of the occurrence; (ii) the suspension of performance shall be of no greater scope and of no longer duration than is reasonably required by the Force Majeure; (iii) the non-performing Party uses due diligence to remedy its inability to perform and expeditiously takes reasonable action to correct or cure the event or condition; and (iv) the non-performing Party exercises all reasonable efforts to mitigate or limit damages to the other Party. With respect to Supplier, this shall mean that Supplier must purchase, at its own expense, electricity from the PJM market to meet its obligations under this Agreement, to the extent such electricity is available and deliverable. (b) Neither Party to this Agreement will be required by the foregoing to settle a strike affecting it except when, according to its judgment, such a settlement is advisable. Nothing in this Article 11 will excuse BGE from making payment for services provided under this Agreement. 21 ARTICLE 12 REPRESENTATIONS AND WARRANTIES Each Party represents and warrants to the other Party, as of the Effective Date, that: (i) it is duly organized, validly existing and in good standing under the laws of the jurisdiction of its formation, (ii) it has all regulatory authorizations necessary for it to legally perform its obligations under this Agreement and any other documentation relating to this Agreement to which it is a party, (iii) the execution, delivery and performance of this Agreement and any other documentation relating to this Agreement to which it is a party are within its powers, have been duly authorized by all necessary action and do not violate any of the terms and conditions in its governing documents, any contracts to which it is a party or any law, rule, regulation, order or the like applicable to it, (iv) this Agreement and each other document executed and delivered in accordance with this Agreement constitutes its legally valid and binding obligation enforceable against it in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency or other laws affecting the enforcement of creditors' rights and by general principles of equity, (v) there are no Bankruptcy Proceedings pending or being contemplated by it or, to its knowledge, threatened against it, (vi) there is not pending or, to its knowledge, threatened against it or any of its Affiliates any legal proceedings that could materially adversely affect its ability to perform its obligations under this Agreement or any other document relating to this Agreement to which it is a party except as disclosed in BGE's or BGE's parent company's Form 10-Q for the quarterly period ended June 30, 2001 or Annual Report for the fiscal year ended December 2000, as well as the proceedings listed on Appendix C hereto, and (vii) no Event of Default or event which, absent a cure, with the giving of notice or lapse of time, or both, would constitute an Event of Default with respect to it has occurred and is continuing and no such event or circumstance would occur as a result of its entering into or performing its obligations under this Agreement or any other document relating to this Agreement. ARTICLE 13 MISCELLANEOUS 13.1 Regulatory Action. ---- ------------------ If, after the Effective Date, any court or agency having jurisdiction over this Agreement finds any term or condition to be unjust, unreasonable or otherwise unlawful, the Parties shall enter into good faith negotiations of such changes as are reasonably required to conform to the requirements of law. 22 13.2 Assignment. ---- ----------- Neither Party shall assign this Agreement or its rights hereunder without the prior written consent of the other Party; provided, however, either Party may, without the consent of the other Party (and without relieving itself from liability hereunder); (i) transfer, sell, pledge, encumber or assign this Agreement or the accounts, revenues or proceeds hereof in connection with any financing or other financial arrangements; (ii) transfer or assign this Agreement to an Affiliate of such Party which Affiliate's creditworthiness is comparable to or higher than that of such Party, or (iii) transfer or assign this Agreement to any Person succeeding to all or substantially all of the assets of such Party; provided, however, that said successor Person possess creditworthiness comparable to or higher than such Party and any such assignee shall agree to in writing be bound by the terms and conditions hereof. 13.3 Compliance With Laws. ---- --------------------- At all times during the term of this Agreement, the Parties shall comply with all laws, rules, requisitions, and codes of all governmental authorities having jurisdiction over each of their respective businesses which are now applicable, or may be applicable hereafter, including without limitation, all special laws, policies, ordinances, or regulations now in force, as amended or hereafter enacted. The Parties hereto shall maintain all licenses, permits and other consents from all governmental authorities having jurisdiction for the necessary use and operation of their respective business. Nothing herein shall be deemed a waiver of the Parties' right to challenge the validity of any such law, rule or regulation. 13.4 Choice of Law and Jurisdiction. ---- ------------------------------- THIS AGREEMENT AND THE RIGHTS AND DUTIES OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY AND CONSTRUED, ENFORCED AND PERFORMED IN ACCORDANCE WITH THE LAWS OF THE STATE OF MARYLAND, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. Except as provided in Section 13.11, all disputes hereunder or relating hereto shall be resolved in the Federal or State courts of Maryland and each Party hereby irrevocably submits to the in personam jurisdiction of such courts. Each Party herein waives its respective right to any jury trial with respect to any litigation arising under or in connection with this Agreement. 13.5 Counterparts to this Agreement. ---- ------------------------------- This Agreement may be executed in any number of counterparts each of which shall be an original, but all of which together shall constitute one and the same instrument. 23 13.6 Notices. ---- -------- All notices, requests, statements or payments shall be made as specified below. Notices required to be in writing shall be delivered by letter, facsimile or other documentary form. Notice by facsimile or hand delivery shall be deemed to have been received by the close of the Business Day on which it was transmitted or hand delivered (unless transmitted or hand delivered after close in which case it shall be deemed received at the close of the next Business Day). Notice by overnight mail or courier shall be deemed to have been received two (2) Business Days after it was sent. A Party may change its addresses by providing notice of same in accordance herewith: To CONSTELLATION POWER SOURCE, INC.: -------------------------------- NOTICES & CORRESPONDENCE: PAYMENTS: - ------------------------ -------- Constellation Power Source, Inc. Federal Wire Transfer General Counsel *** 111 Market Place, Suite 500 ABA Routing *** Baltimore, Maryland 21202 Account: Constellation Power Source, Inc. FAX No.: (410) 468-3540 Account # *** Phone No.: (410) 468-3490 INVOICES: CREDIT AND COLLECTIONS: - -------- ---------------------- Attn: Operations Treasurer 111 Market Place, Suite 500 111 Market Place, Suite 500 Baltimore, Maryland 21202 Baltimore, Maryland 21202 FAX No.: (410) 468-3540 FAX No.: (410) 468-3540 Phone No.: (410) 468-3430 Phone No.: (410) 468-3410 SCHEDULING: - ----------- Attn: Operations 111 Market Place, Suite 500 Baltimore, Maryland 21202 FAX No.: (410) 468-3540 Phone No.: (410) 468-3430 24 The asterisks on this page denotes that confidential portions of this exhibit have been omitted in reliance on Rule 25(b)-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission. To BGE: --- NOTICES & CORRESPONDENCE: PAYMENTS: - ------------------------ -------- Baltimore Gas and Electric Company Federal Wire Transfer General Counsel *** 39 W. Lexington Street ABA Routing *** Baltimore, Maryland 21201 Account: Baltimore Gas & Electric Company Account # *** INVOICES: CREDIT AND COLLECTIONS: - -------- ---------------------- Attn: Electric Supply Manager - Finance & Accounting 7225 Windsor Boulevard 39 West Lexington Street, 11th Floor Baltimore, Maryland 21244 Baltimore, Maryland 21201 FAX No.: (410) 265-4005 FAX No.: (410) 234-5858 Phone No.: (410) 265-4229 Phone No.: (410) 234-6888 SCHEDULING: - ----------- Attn: Electric Supply FAX No.: (410) 265-4005 Phone No.: (410) 265-4229 13.7 Confidentiality. ---- ---------------- Each Party agrees that it will treat in strictest confidence all documents, materials, and other information marked "Confidential" or "Proprietary" by the disclosing Party ("Confidential Information") which it shall have obtained regarding the other Party during the course of the negotiations leading to, and its performance of, this Agreement (whether obtained before or after the date of this Agreement). Confidential Information shall not be communicated to any third person (other than to the receiving Party's counsel, accountants, financial or tax advisors, or in connection with its financings); provided that in the event the receiving Party is required by law, regulation or court order to disclose any Confidential Information, the receiving Party will promptly notify the disclosing Party in writing prior to making any such disclosure in order to facilitate the disclosing Party's seeking a protective order or other appropriate remedy from the proper authority and further provided that the receiving Party further agrees that if the disclosing Party ultimately discloses such Confidential Information to the requesting legal body, it will furnish only that portion of the Confidential Information which is legally required and will exercise all reasonable efforts to obtain reliable assurances that confidential treatment will be accorded the Confidential Information. The Parties shall be entitled to all remedies available at law or in equity to enforce, or seek relief in connection with these confidentiality obligations. 25 The asterisks on this page denotes that confidential portions of this exhibit have been omitted in reliance on Rule 25(b)-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission. 13.8 General. ---- -------- This Agreement (including the Appendices hereto) constitutes the entire agreement between the Parties relating to the subject matter contemplated by this Agreement. The Agreement shall be considered for all purposes as prepared through the joint efforts of the Parties and shall not be construed against one Party or the other as a result of the preparation, substitution, submission or other event of negotiation, drafting or execution hereof. No amendment or modification to this Agreement shall be enforceable unless reduced to writing and executed by both Parties. This Agreement shall not impart any rights enforceable by any third-party (other than a permitted successor or assignee bound to this Agreement). No waiver by a Party of any default by the other Party shall be construed as a waiver of any other default. Any provision declared or rendered unlawful by any applicable court of law or regulatory agency or deemed unlawful because of a statutory change will not otherwise affect the remaining lawful obligations that arise under this Agreement. The term "including" when used in this Agreement shall be by way of example only and shall not be considered in any way to be in limitation. The headings used herein are for convenience and reference purposes only. All indemnity and audit rights shall survive the termination of this Agreement for two years. 13.9 Changes in Rates, Charges, Terms or Conditions. ---- ----------------------------------------------- Each Party hereby waives its rights to seek any change to the rates, charges, terms and conditions contained in this Agreement under Sections 205 or 206 of the Federal Power Act, as either section may be amended or superseded or to support a complaint or other judicial, regulatory or legislative action seeking a change in this Agreement, absent mutual written agreement of the Parties. It is the intent of this Section that, to the maximum extent permitted by law, the rates, charges, terms and conditions of this Agreement shall not be subject to change, regardless of whether such change is sought (a) by the FERC acting sua sponte on behalf of a Party or a third party, (b) by a Party, (c) by a third party, or (d) in any other manner. 13.10 Arbitration Proceedings. ----- ------------------------ (a) In the event that any dispute or need for interpretation concerning this Agreement arises between the Parties hereto, the Parties shall refer the matter to their duly authorized representatives for resolution. Should such representatives of the respective Parties fail to resolve the dispute within ten (10) days from such referral, the Parties agree that any such dispute will not be referred to any court, but will be referred to binding arbitration in the city where BGE's corporate headquarters is located. (b) If any dispute has not been resolved by the duly authorized representatives with ten (10) days from referral to them, either Party may give notice, in writing, to the other Party of its desire to submit the dispute to arbitration and may designate an arbitrator. Within ten (10) days after the receipt of such notice, the other Party may, in writing, serve upon the Party invoking such arbitration, a notice designating an arbitrator on its behalf. The two arbitrators so chosen shall 26 within fifteen (15) days after the appointment of the second arbitrator designate, in writing, a third arbitrator. Upon the failure of the Party notified to appoint the second arbitrator within the permitted time, the Parties shall proceed with arbitration using a single arbitrator. If the first and second arbitrators are unable to agree on a third arbitrator within (15) days of the appointment of the second arbitrator, the first and second arbitrator shall invoke the services of the American Arbitration Association ("AAA") to appoint a third arbitrator. The third arbitrator shall, to the extent practicable, have special competence and experience with respect to the subject matter under consideration. Any arbitrator so appointed under this Section shall have full authority to act pursuant to this Section. No arbitrator so appointed shall have the authority to amend or add to this Agreement. The arbitrator or arbitrators shall, thereupon, proceed promptly to hear and determine the controversy pursuant to the then current rules of the American Arbitration Association for the conduct of commercial arbitration proceedings. Such arbitrator or arbitrators shall fix a time within which the matter shall be submitted to the arbitrator or the panel by either or both of the Parties. The arbitrator or the panel shall make a decision on the dispute within ten (10) days of final submission by the Parties. The decision of the single arbitrator, or two of the three arbitrators, shall be taken as the arbitration decision. Such decision shall be made in writing and in duplicate, and one copy shall be delivered to each of the Parties. The arbitrator(s) shall determine the manner in which the expense of the arbitration shall be borne, except that each Party shall pay the costs of its own counsel. Each Party shall accept and abide by the decision. The award shall be final. Judgment upon such award may be entered by the prevailing Party in any Maryland state circuit court or any federal court within Maryland or application may be made in any such court for judicial acceptance of such award and an order of enforcement. (c) Notwithstanding anything to the contrary herein, a Party may seek immediate equitable relief in an appropriate court if such relief is necessary to prevent such party from suffering irreparable injury as a result of a breach of this Agreement by the other Party. 13.11 Audit. ----- ------ Each Party has the right, at its sole expense and during normal working hours, to examine the records of the other Party to the extent reasonably necessary to verify the accuracy of any statement, charge or computation made pursuant to this Agreement. If requested, a Party shall provide to the other Party statements evidencing the quantities of Full Requirements Service delivered at the Delivery Point. If any such examination reveals any inaccuracy in any statement, the necessary adjustments in such statement and the payments thereof will be made promptly and shall bear interest at the Interest Rate from the date the overpayment or underpayment was made until paid; provided, however, that no adjustment for any statement or payment will be made unless objection to the accuracy thereof was made prior to the lapse of 12 months from the rendition thereof. 27 IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the date set forth at the beginning of this Agreement. BALTIMORE GAS AND ELECTRIC COMPANY By: _______________________________________ Name and Title: Frank O. Heintz President and CEO CONSTELLATION POWER SOURCE, INC. By: _______________________________________ Name and Title: John R. Collins Vice President & Treasurer 28 APPENDIX A TO FULL REQUIREMENTS SERVICE AGREEMENT PAGE 1 of 4 PARTICIPANT: Baltimore Gas and Electric Company FINAL BILLING STATEMENT ISSUED ON: MM/DD/YYYY FOR PERIOD: MM/DD/YYYY TO MM/DD/YYYY - -------------------------------------------------------------------------------- Billing Statement Summary: Total Net Charge/Credit per Operating Agreement of PJM Interconnection, L.L.C. $ Net Charge/Credit per PJM Open Transmission Tariff $ Net Charge/Credit per Reliability Assurance Agreement Among Load Serving Entities in the PJM Control Area $ Total Net Charge/Credit. $ - -------------------------------------------------------------------------------- TERMS: PAYABLE IN FULL BY 01:00 PM EDT ON MM/DD/YYYY WIRE TRANSFER FUNDS TO: PJM INTERCONNECTION, L.L.C. PNC BANK N.A. NEW JERSEY ABA NUMBER **** ACCOUNT NUMBER **** A1 The asterisks on this page denotes that confidential portions of this exhibit have been omitted in reliance on Rule 25(b)-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission. APPENDIX A TO FULL REQUIREMENTS SERVICE AGREEMENT PAGE 2 of 4 PARTICIPANT: Baltimore Gas and Electric Company FINAL BILLING STATEMENT ISSUED ON: MM/DD/YYYY FOR PERIOD: MM/DD/YYYY TO MM/DD/YYYY
- ------------------------------------------------------------------------------------- OPERATING AGREEMENT OF PJM INTERCONNECTION, L.L.C.: Charges: Day-ahead Balancing Total Spot Market Energy $ Supplier $ Supplier $ Supplier Regulation $ Supplier Operating Reserves $ Supplier $ Supplier $ Supplier Transmission Congestion $ Supplier $ Supplier $ Supplier Transmission Losses $ Supplier $ Supplier $ Supplier Emergency Energy $ Supplier Capacity Credit Market $ Supplier FTR Auction $ Supplier Meter Error Correction $ Supplier Unscheduled Transmission Service $ Supplier Ramapo PAR Facilities $ BGE Reconciliation for Spot Market $ Supplier Reconciliation for Regulation $ Supplier Reconciliation for Operating Reserves $ Supplier Credits: Spot Market Energy $ Supplier $ Supplier $ Supplier Regulation $ Supplier Operating Reserves $ Supplier $ Supplier $ Supplier Transmission Congestion Hourly Credits $ Supplier Excess Monthly Congestion Revenue $ BGE Transmission Losses $ Supplier Emergency Energy $ Supplier Capacity Credit Market $ Supplier FTR Auction $ Supplier FTR Auction Revenue Allocations $ BGE Ramapo PAR $ BGE Reconciliation for Transmission Losses $ Supplier Unscheduled Transmission Service $ BGE - -------------------------------------------------------------------------------------
A2 APPENDIX A TO FULL REQUIREMENTS SERVICE AGREEMENT PAGE 3 of 4 PARTICIPANT: Baltimore Gas and Electric Company FINAL BILLING STATEMENT ISSUED ON: MM/DD/YYYY FOR PERIOD: MM/DD/YYYY TO MM/DD/YYYY
- --------------------------------------------------------------------------------------- PJM OPEN ACCESS TRANSMISSION TARIFF: Total Charges: PJM Scheduling, System Control and Dispatch Service Control Area Administration Service $ Supplier Capacity Adequacy Administration Service $ BGE Fixed Transmission Rights Administration Service $ Supplier Market Support Service $ Supplier Regulation and Frequency Response Administration Service $ Supplier Internal Energy Transaction Administration Service $ Supplier Capacity Resource and Obligation Management Service $ Supplier RTO Scheduling, System Control and Dispatch Service $ Supplier Reactive Supply and Voltage Control from Generation Sources Service $ Supplier Network Integration Transmission Service $ BGE Firm Point-to-Point Transmission Service $ Supplier Non-Firm Point-to-Point Transmission Service $ Supplier Firm Point-to-Point - Other Supporting Facilities and Taxes $ Supplier Non-Firm Point-to-Point - Other Supporting Facilities and Taxes $ Supplier Mid-Atlantic Area Council $ BGE Distribution Facilities $ Supplier Reconciliation for PJM Scheduling, System Control and Dispatch Service $ Supplier Reconciliation for RTO Scheduling, System Control and Dispatch Service $ Supplier Special Studies $ Requestor Credits: RTO Scheduling, System Control and Dispatch Service $ BGE Reactive Supply and Voltage Control from Generation Sources Service $ Supplier Network Integration Transmission Service $ BGE Firm Point-to-Point Transmission Service $ BGE Non-Firm Point-to-Point Transmission Service $ BGE Distribution Facilities $ BGE - ---------------------------------------------------------------------------------------
A3 APPENDIX A TO FULL REQUIREMENTS SERVICE AGREEMENT PAGE 4 of 4 PARTICIPANT: Baltimore Gas and Electric Company FINAL BILLING STATEMENT ISSUED ON: MM/DD/YYYY FOR PERIOD: MM/DD/YYYY TO MM/DD/YYYY
- ---------------------------------------------------------------------------------------------------------- Reliability Assurance Agreement Among Load Serving Entities in the PJM Control Area: Total Charges: Capacity Deficiency $ Supplier Credits: Capacity Excess $ Supplier - ----------------------------------------------------------------------------------------------------------
A4 APPENDIX B TO FULL REQUIREMENTS SERVICE AGREEMENT PAGE 1 OF 2 Generation Shopping Credits
Residential Service - Schedule R Jul 2003 - May 2004 Jun 2004 - May 2005 Jun 2005 - May 2006 Jun-06 ------------------- ------------------- ------------------- ------ Energy Charges in (cent)/kWh Summer 5.286 5.396 5.492 5.756 Non-Summer 3.489 3.599 3.695 n/a Residential Large Service - Schedule RL-1 Jul 2003 - May 2004 Jun 2004 Jul 2004 - May 2005 Jun 2005 - May 2006 Jun-06 ------------------- -------- ------------------- ------------------- ------ Energy Charges in (cent)/kWh Summer Peak 7.279 7.389 7.528 7.624 7.888 Intermediate-Peak 5.172 5.282 5.376 5.472 5.736 Off-Peak 2.895 3.005 3.050 3.146 3.410 Non-Summer Peak 3.985 n/a 4.164 4.260 n/a Intermediate-Peak 3.622 n/a 3.793 3.889 n/a Off-Peak 2.689 n/a 2.841 2.937 n/a Residential Optional Time-of-Use Service - Schedule RL-2 Jul 2003 - May 2004 Jun 2004 - May 2005 Jun 2005 - May 2006 Jun-06 ------------------- ------------------- ------------------- ------ Energy Charges in (cent)/kWh Summer Peak 7.921 8.031 8.127 8.391 Intermediate-Peak 5.607 5.717 5.813 6.077 Off-Peak 3.104 3.214 3.310 3.574 Non-Summer Peak 4.301 4.411 4.507 n/a Intermediate-Peak 3.904 4.014 4.110 n/a Off-Peak 2.879 2.989 3.085 n/a Economy Service - Schedule ES Jul 2003 - May 2004 Jun 2004 - May 2005 Jun 2005 - May 2006 Jun-06 ------------------- ------------------- ------------------- ------ Energy Charges in(cent)/kWh 2.627 2.737 2.833 3.097 General Service - Schedule G Jul 2003 - Jun 2004 ------------------- Option 1: Energy Charges in(cent)/kWh Summer 5.368 Non-Summer 3.739 Option 2: Energy Charges in(cent)/kWh Summer 5.270 Non-Summer 3.641 General Service Small - Schedule GS Jul 2003 - Jun 2004 ------------------- Option 1: Energy Charges in(cent)/kWh Summer Peak 7.383 Intermediate-Peak 5.563 Off-Peak 3.177 Non-Summer Peak 4.462 Intermediate-Peak 4.088 Off-Peak 3.070 Option 2: Energy Charges in(cent)/kWh Summer Peak 7.284 Intermediate-Peak 5.464 Off-Peak 3.079 Non-Summer Peak 4.363 Intermediate-Peak 3.990 Off-Peak 2.973
B1 APPENDIX B TO FULL REQUIREMENTS SERVICE AGREEMENT PAGE 2 OF 2 General Service Large - Schedule GL Jul 2003 - Jun 2004 ------------------- Secondary Service: Demand Charges in $/kW Summer 10.44 Non-Summer 4.85 Energy Charges in (cent)/kWh Summer Peak 4.238 Intermediate-Peak 3.049 Off-Peak 1.601 Non-Summer Peak 2.561 Intermediate-Peak 2.219 Off-Peak 1.627 Primary Service: Demand Charges in $/kW Summer 10.15 Non-Summer 4.72 Energy Charges in (cent)/kWh Summer Peak 4.092 Intermediate-Peak 2.944 Off-Peak 1.535 Non-Summer Peak 2.473 Intermediate-Peak 2.141 Off-Peak 1.558 Street Lighting - Schedule SL Jul 2003 - Jun 2004 ------------------- Energy Charges in(cent)/kWh 3.255 Private Area Lighting - Schedule PL Jul 2003 - Jun 2006 ------------------- Energy Charges in(cent)/kWh 3.260 Default Service - Schedule DS market-based price1 Contract Classes Class 1 market-based price1 Class 2 2.73(cent)/kWh2 B2 APPENDIX C TO FULL REQUIREMENTS SERVICE AGREEMENT LITIGATION DISCLOSURE On or about January 19, 2001, Baltimore Refuse Energy Systems Company, Limited Partnership ("BRESCO") filed a complaint in Circuit Court for Baltimore City against BGE alleging breach of contract with respect to a power purchase contract between BGE and BRESCO. Constellation may be impacted by the outcome of such litigation by virtue of a separate power purchase agreement between BGE and Constellation, pursuant to which Constellation effectively acts as agent to BGE for purposes of its contract with BRESCO and has certain liability with respect thereto. C1 APPENDIX D TO FULL REQUIREMENTS SERVICE AGREEMENT THIS GUARANTY AGREEMENT (this "Guaranty") is made and entered into as of this _____ day of [date of separation to be added], by New Constellation Energy Group, Inc. (the "Guarantor"), with an address at 250 W. Pratt St. Baltimore Md. 21201 in favor of Baltimore Gas and Electric Company (the "Creditor"), with an address at 39 W. Lexington Street, Baltimore, MD 21201, in consideration of the Full Requirements Service Agreement (the "Transaction Agreement") between Baltimore Gas and Electric Company and Constellation Power Source, Inc. (the "Supplier") dated August 23, 2001., and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged. Guarantor is the ultimate parent of Supplier. 1. Guaranty of Obligations. - -- ------------------------ (a) The Guarantor hereby guarantees the prompt and complete payment of Supplier's payment obligations evidenced by the Transaction Agreement, as the same may be amended, supplemented or replaced from time to time and all reasonable out-of-pocket costs and expenses of Creditor incurred in the enforcement, or collection under this Guaranty, including reasonable attorney's fees and expenses (collectively, the "Obligations"). Notwithstanding anything to the contrary herein, the liability of the Guarantor under this Guaranty and Creditor's right of recovery hereunder for all Obligations is limited to a total aggregate amount of $____ million. If Supplier meets the creditworthiness criteria or has provided Creditor with substitute credit support that meets the criteria provided in Section 8.1 of the Transaction Agreement, then on such date Guarantor's liability for the Obligations (including Obligations accrued prior to such date) shall terminate only if, in the event that substitute credit support is provided, such substitute credit support clearly applies to all Obligations accrued prior to the termination date. If the substitute credit support does not so apply to all accrued Obligations, then any such termination will not affect Creditor's rights and Guarantor's liability arising under this Guaranty with respect to Obligations which have accrued prior to such termination. (b) This Guaranty is a guarantee of payment. If for any reason whatsoever the Supplier shall fail to pay the Obligations owing by it to the Creditor when due (and after the expiration of any applicable grace period under the Transaction Agreement), Creditor will notify Guarantor in writing, specifying the nature and amount of any such default, and the Guarantor will within fifteen days after receipt of such written notice pay, or cause to be paid such Obligation. Such payment shall be in immediately available funds and free and clear of any setoff, without reduction to the Creditor, other than any set-offs or reductions allowed pursuant to the Transaction Agreement. 2. Nature of Guaranty; Waivers. - - --------------------------- (a) This is a guaranty of payment and not of collection and the Creditor shall not be required, as a condition of the Guarantor's liability, to pursue any rights which may be available to it with respect to any other person who may be liable for the payment of the Obligations. (b) Unless and until terminated as provided in paragraph 1(a) above, this is an absolute, unconditional, irrevocable and continuing guaranty and will remain in full force and effect until all of the Obligations have been indefeasibly paid in full. This Guaranty will not be affected by any surrender, exchange, acceptance, compromise or release by the Creditor of APPENDIX D TO FULL REQUIREMENTS SERVICE AGREEMENT any other party, or any other guaranty or any security held by it for any of the Obligations, by any failure of the Creditor to take any steps to perfect or maintain its lien or security interest in or to preserve its rights to any security or other collateral for any of the Obligations or any guaranty, or by any irregularity, unenforceability or invalidity of any of the Obligations or any part thereof or any security or other guaranty thereof. (c) Except as to any claims, defenses, rights of set-off or to reductions of Supplier pursuant to the Transaction Agreement, (all of which are expressly reserved under this Guaranty), the Guarantor's obligations hereunder shall not be affected, modified or impaired by any counterclaim, set-off, deduction or defense based upon any claim the Guarantor may have against Supplier or the Creditor, including, (i) any change in the corporate existence (including its charter or other governing agreement, laws, rules, regulations or powers), structure or ownership of Supplier or the Guarantor, or (ii) any insolvency, bankruptcy, reorganization or other similar proceeding affecting Supplier or its assets, or (iii) the invalidity or unenforceability in whole or in part of the Transaction Agreement or (iv) any provision of applicable law or regulations purporting to prohibit payment by Supplier of amounts to be paid by it under the Transaction Agreement. (d) Guarantor waives notice of acceptance of this Guaranty, notice of default or nonpayment, diligence, presentment, notice of dishonor, protest and demand for payment (other than as provided in paragraph 1(b), notice of any sale of collateral and any notice not provided for herein, any right of subrogation and any requirement that at any time any person exhaust any right to take any action against Supplier or their assets or any other guarantor or person. The Guarantor waives all defenses based on suretyship or impairment of collateral or any other defenses that would constitute a legal or equitable discharge of Guarantor's obligations, except any claims or defenses of Supplier under the Transaction Agreement, other than those expressly waived in this Guaranty. (e) The Creditor at any time and from time to time, without notice to or the consent of the Guarantor, and without impairing or releasing, discharging or modifying the Guarantor's liabilities hereunder, may (i) as permitted by the Transaction Agreement or this Guaranty, change the manner, place, time or terms of payment or performance of, or other terms relating to, any of the Obligations; (ii) as permitted by the Transaction Agreement or this Guaranty, renew, substitute, modify, amend or alter, or grant consents or waivers relating to any of the Obligations, any other guaranties, or any security for any Obligations or guaranties; (iii) settle, compromise or deal with any other person, including Supplier , with respect to any Obligations in such manner as the Creditor deems appropriate in its sole discretion; (iv) substitute, exchange or release any security or guaranty; or (v) take such actions and exercise such remedies hereunder as Creditor deems appropriate. 3. Representations and Warranties. The Guarantor hereby represents and warrants that: (a) it is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has the corporate power and authority and the legal right to own and operate its property, to lease the property it operates and to conduct the business in which it is currently engaged; D2 APPENDIX D TO FULL REQUIREMENTS SERVICE AGREEMENT (b) it has the corporate power and authority and the legal right to execute and deliver, and to perform its obligations under, this Guaranty, and has taken all necessary corporate action to authorize its execution, delivery and performance of this Guaranty; (c) this Guaranty constitutes a legal, valid and binding obligation of the Guarantor enforceable in accordance with its terms, except as affected by bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting the enforcement of creditors' rights generally, general equitable principles and an implied covenant of good faith and fair dealing; (d) the execution, delivery and performance of this Guaranty will not violate any provision of any requirement of law or contractual obligation of the Guarantor (except to the extent that any such violation would not reasonably be expected to have a material adverse effect on the Guarantor) and will not result in or require the creation or imposition of any lien on any of the properties or revenues of the Guarantor pursuant to any requirement of law or contractual obligation of the Guarantor; (e) no consent or authorization of, filing with, or other act by or in respect of, any arbitrator or governmental authority and no consent of any other person (including, without limitation, any stockholder or creditor of the Guarantor) is required in connection with the execution, delivery, performance, validity or enforceability of this Guaranty, other than any which have been obtained or made prior to the date hereof and remain in full force and effect; and (f) no litigation, investigation or proceeding of or before any arbitrator or governmental authority is pending or, to the knowledge of the Guarantor, threatened by or against the Guarantor or against any of its properties or revenues with respect to this Guaranty or any of the transactions contemplated hereby that would have a material adverse effect on the Guarantor. 4. Repayments or Recovery from the Creditor. If any demand is made at any time upon the Creditor for the repayment or recovery of any amount received by it in payment or on account of any of the Obligations and if the Creditor repays all or any part of such amount by reason of any judgment, decree or order of any court or administrative body or by reason of any settlement or compromise of any such demand, the Guarantor (subject to Sections 2 (c) and (d)) will be and remain liable hereunder for the amount so repaid or recovered to the same extent as if such amount had never been received originally by the Creditor. The provisions of this section will be and remain effective notwithstanding any contrary action which may have been taken by the Guarantor in reliance upon such payment, and any such contrary action so taken will be without prejudice to the Creditor's rights hereunder and will be deemed to have been conditioned upon such payment having become final and irrevocable. 5. Enforceability of Obligations. No modification, limitation or discharge of the Obligations of Supplier arising out of or by virtue of any bankruptcy, reorganization or similar D3 APPENDIX D TO FULL REQUIREMENTS SERVICE AGREEMENT proceeding for relief of debtors under federal or state law will affect, modify, limit or discharge the Guarantor's liability in any manner whatsoever and this Guaranty will remain and continue in full force and effect and will be enforceable against the Guarantor to the same extent and with the same force and effect as if any such proceeding had not been instituted. The Guarantor waives all rights and benefits which might accrue to it by reason of any such proceeding and will be liable to the full extent hereunder, irrespective of any modification, limitation or discharge of the liability of Supplier that may result from any such proceeding. 6. Postponement of Subrogation. Until the Obligations and all other amounts due hereunder are indefeasibly paid in full, the Guarantor postpones and subordinates in favor of the Creditor any and all rights which the Guarantor may have to (a) assert any claim against the Supplier based on subrogation rights with respect to payments made by Guarantor hereunder and (b) any realization on any property of the Supplier, including participation in any marshalling of the Supplier's assets. 7. Notices. All notices, demands, requests, consents, approvals and other communications required or permitted hereunder must be in writing and will be effective upon receipt. Such notices and other communications may be hand-delivered, sent by facsimile transmission with confirmation of delivery and a copy sent by first-class mail, or sent by nationally recognized overnight courier service, to the addresses for the Creditor and the Guarantor set forth below or to such other address as one may give to the other in writing for such purpose: All communications to Creditor shall be directed to: Baltimore Gas and Electric Company 39 W. Lexington Street Baltimore, Maryland 21201 Attn: President Phone: 410-234-5913 Fax: 410-234-5323 With a copy to: General Counsel Baltimore Gas and Electric Company 39 W. Lexington Street Baltimore, Maryland 21201 Phone 410-234-5805 Fax 410-234-5839 or such other address as the Creditor shall from time to time specify to Guarantor. D4 APPENDIX D TO FULL REQUIREMENTS SERVICE AGREEMENT All communications to Guarantor shall be directed to: New Constellation Energy Group, Inc. 250 W. Pratt Street Baltimore, Maryland 21201 Attn: Phone: 410-468-xxxx Fax: 410-468-xxxx 8. Preservation of Rights Except as provided by any applicable statute of limitations, no delay or omission on the Creditor's part to exercise any right or power arising hereunder will impair any such right or power or be considered a waiver of any such right or power, nor will the Creditor's action or inaction impair any such right or power. The Creditor's rights and remedies hereunder are cumulative and not exclusive of any other rights or remedies which the Creditor may have under other agreements, at law or in equity. 9. Illegality. In case any one or more of the provisions contained in this Guaranty should be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. 10. Amendments. No modification, amendment or waiver of any provision of this Guaranty nor consent to any departure by the Guarantor therefrom, will be effective unless made in a writing signed by the Creditor, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice to or demand on the Guarantor in any case will entitle the Guarantor to any other or further notice or demand in the same, similar or other circumstance. 11. Entire Agreement. This Guaranty (including the documents and instruments referred to herein) constitutes the entire agreement and supersedes all other prior agreements and understandings, both written and oral, between the Guarantor and the Creditor with respect to the subject matter hereof. 12. Successors and Assigns. This Guaranty will be binding upon and inure to the benefit of the Guarantor and the Creditor and their respective successors and permitted assigns. Neither party may assign this Guaranty in whole or in part without the other's prior written consent, which consent will not be unreasonably withheld, except that Guarantor may assign this Guaranty to a substitute credit provider as provided in Section 8.1 of the Transaction Agreement, in which event Creditor's consent shall not be necessary, and Creditor may at any time assign this Guaranty without Guarantor's consent, in the same manner, on the same terms and to the same persons as Creditor assigns the Transaction Agreement in accordance with Section 13.2 of that agreement. 13. Interpretation. In this Guaranty, unless the Creditor and the Guarantor otherwise agree in writing, the singular includes the plural and the plural the singular; references to statutes are to be construed as including all statutory provisions consolidating, amending or replacing the D5 APPENDIX D TO FULL REQUIREMENTS SERVICE AGREEMENT statute referred to; the word "or" shall be deemed to include "and/or", the words "including", "includes" and "include" shall be deemed to be followed by the words "without limitation"; and references to sections or exhibits are to those of this Guaranty unless otherwise indicated. Section headings in this Guaranty are included for convenience of reference only and shall not constitute a part of this Guaranty for any other purpose. 14. Governing Law and Jurisdiction. - --- ------------------------------ (a) This Guaranty has been delivered to and accepted by the Creditor and will be deemed to be made in the State of Maryland. IT WILL BE INTERPRETED AND THE RIGHTS AND LIABILITIES OF THE CREDITOR AND THE GUARANTOR DETERMINED IN ACCORDANCE WITH THE LAWS OF THE STATE OF MARYLAND, EXCLUDING ITS CONFLICT OF LAWS RULES. (b) The Guarantor hereby irrevocably consents to the non-exclusive jurisdiction of any state or federal court in the State of Maryland; provided that nothing contained in this Guaranty will prevent the Creditor from bringing any action, enforcing any award or judgment or exercising any rights against the Guarantor individually, against any security or against any property of the Guarantor within any other county, state or other foreign or domestic jurisdiction. The Guarantor acknowledges and agrees that the venue provided above is the most convenient forum for both the Creditor and the Guarantor. The Guarantor waives any objection to venue and any objection based on a more convenient forum in any action instituted under this Guaranty. 15. WAIVER OF JURY TRIAL. THE GUARANTOR IRREVOCABLY WAIVES ANY AND ALL RIGHT THE GUARANTOR MAY HAVE TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR CLAIM OF ANY NATURE RELATING TO THIS GUARANTY, ANY DOCUMENTS EXECUTED IN CONNECTION WITH THIS GUARANTY OR ANY TRANSACTION CONTEMPLATED IN ANY OF SUCH DOCUMENTS. THE GUARANTOR ACKNOWLEDGES THAT THE FOREGOING WAIVER IS KNOWING AND VOLUNTARY. 16. Term. Unless terminated earlier in accordance with Section 1(a) of this Guaranty, this Guaranty shall survive termination of the Transaction Agreement and remain in full force and effect until all amounts due hereunder, including all of the Obligations, have been paid or performed in full. 17. Stay of Acceleration Ineffective with Respect to Guarantor. If acceleration of the time for payment of any amount payable by Supplier under the Transaction Agreement is stayed upon the insolvency, bankruptcy or reorganization of Supplier, all such amounts otherwise subject to acceleration or required to be paid upon an early termination pursuant to the terms of the Transaction Agreement shall nonetheless be payable by the Guarantor hereunder on written demand by Creditor. The Guarantor acknowledges that it has read and understood all the provisions of this Guaranty, and has been advised by counsel as necessary or appropriate. D6 APPENDIX D TO FULL REQUIREMENTS SERVICE AGREEMENT WITNESS the due execution hereof as a document under seal, as of the date first written above, with the intent to be legally bound hereby. New Constellation Energy Group, Inc. By:______________________________ Name: Title: D7 APPENDIX E TO FULL REQUIREMENTS SERVICE AGREEMENT THIS GUARANTY AGREEMENT (this "Guaranty") is made and entered into as of this ____ day of _______________ by (parent of BGE) (the "Guarantor"), with an address at 39 W. Lexington Street, Baltimore, MD 21201in favor of Constellation Power Source, Inc. (the "Creditor"), with an address at 111 Market Place, Suite 500, Baltimore Maryland 21202, in consideration of the Full Requirements Service Agreement (the "Transaction Agreement") between Baltimore Gas and Electric Company and Constellation Power Source, Inc. (the "Supplier") dated August 23, 2001, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged. Guarantor is the ultimate parent of BGE. 1. Guaranty of Obligations. - -- ----------------------- (a) The Guarantor hereby guarantees the prompt and complete payment of BGE's payment obligations evidenced by the Transaction Agreement, as the same may be amended, supplemented or replaced from time to time and all reasonable out-of-pocket costs and expenses of Creditor incurred in the enforcement, or collection under this Guaranty, including reasonable attorney's fees and expenses (collectively, the "Obligations"). Notwithstanding anything to the contrary herein, the liability of the Guarantor under this Guaranty and Creditor's right of recovery hereunder for all Obligations is limited to a total aggregate amount of $____ million. If BGE meets the Creditworthiness Criteria or has provided Creditor with substitute credit support that meets the criteria provided in Section 8.1 of the Transaction Agreement, then on such date Guarantor's liability for the Obligations (including Obligations accrued prior to such date) shall terminate only if, in the event that substitute credit support is provided, such substitute credit support clearly applies to all Obligations accrued prior to the termination date. If the substitute credit support does not so apply to all accrued Obligations, then any such termination will not affect Creditor's rights and Guarantor's liability arising under this Guaranty with respect to Obligations which have accrued prior to such termination. (b) This Guaranty is a guarantee of payment. If for any reason whatsoever BGE shall fail to pay the Obligations owing by it to the Creditor when due (and after the expiration of any applicable grace period under the Transaction Agreement), Creditor will notify Guarantor in writing, specifying the nature and amount of any such default, and the Guarantor will within fifteen days after receipt of such written notice pay, or cause to be paid such Obligation. Such payment shall be in immediately available funds and free and clear of any setoff, without reduction to the Creditor, other than any set-offs or reductions allowed pursuant to the Transaction Agreement. 2. Nature of Guaranty; Waivers. - -- ---------------------------- (a) This is a guaranty of payment and not of collection and the Creditor shall not be required, as a condition of the Guarantor's liability, to pursue any rights which may be available to it with respect to any other person who may be liable for the payment of the Obligations. (b) Unless and until terminated as provided in paragraph 1(a) above, this is an absolute, unconditional, irrevocable and continuing guaranty and will remain in full force and effect until all of the Obligations have been indefeasibly paid in full. This Guaranty will not be affected by any surrender, exchange, acceptance, compromise or release by the Creditor of any other party, or any other guaranty or any security held by it for any of the Obligations, by APPENDIX E TO FULL REQUIREMENTS SERVICE AGREEMENT any failure of the Creditor to take any steps to perfect or maintain its lien or security interest in or to preserve its rights to any security or other collateral for any of the Obligations or any guaranty, or by any irregularity, unenforceability or invalidity of any of the Obligations or any part thereof or any security or other guaranty thereof. (c) Except as to any claims, defenses, rights of set-off or to reductions of BGE pursuant to the Transaction Agreement, (all of which are expressly reserved under this Guaranty), the Guarantor's obligations hereunder shall not be affected, modified or impaired by any counterclaim, set-off, deduction or defense based upon any claim the Guarantor may have against BGE or the Creditor, including, (i) any change in the corporate existence (including its charter or other governing agreement, laws, rules, regulations or powers), structure or ownership of BGE or the Guarantor, or (ii) any insolvency, bankruptcy, reorganization or other similar proceeding affecting BGE or its assets, or (iii) the invalidity or unenforceability in whole or in part of the Transaction Agreement or (iv) any provision of applicable law or regulations purporting to prohibit payment by BGE of amounts to be paid by it under the Transaction Agreement. (d) Guarantor waives notice of acceptance of this Guaranty, notice of default or nonpayment, diligence, presentment, notice of dishonor, protest and demand for payment (other than as provided in paragraph 1(b), notice of any sale of collateral and any notice not provided for herein, any right of subrogation and any requirement that at any time any person exhaust any right to take any action against BGE or their assets or any other guarantor or person. The Guarantor waives all defenses based on suretyship or impairment of collateral or any other defenses that would constitute a legal or equitable discharge of Guarantor's obligations, except any claims or defenses of BGE under the Transaction Agreement, other than those expressly waived in this Guaranty. (e) The Creditor at any time and from time to time, without notice to or the consent of the Guarantor, and without impairing or releasing, discharging or modifying the Guarantor's liabilities hereunder, may (i) as permitted by the Transaction Agreement or this Guaranty, change the manner, place, time or terms of payment or performance of, or other terms relating to, any of the Obligations; (ii) as permitted by the Transaction Agreement or this Guaranty, renew, substitute, modify, amend or alter, or grant consents or waivers relating to any of the Obligations, any other guaranties, or any security for any Obligations or guaranties; (iii) settle, compromise or deal with any other person, including BGE , with respect to any Obligations in such manner as the Creditor deems appropriate in its sole discretion; (iv) substitute, exchange or release any security or guaranty; or (v) take such actions and exercise such remedies hereunder as Creditor deems appropriate. 3. Representations and Warranties. The Guarantor hereby represents and warrants that: (a) it is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has the corporate power and authority and the legal right to own and operate its property, to lease the property it operates and to conduct the business in which it is currently engaged; E2 APPENDIX E TO FULL REQUIREMENTS SERVICE AGREEMENT (b) it has the corporate power and authority and the legal right to execute and deliver, and to perform its obligations under, this Guaranty, and has taken all necessary corporate action to authorize its execution, delivery and performance of this Guaranty; (c) this Guaranty constitutes a legal, valid and binding obligation of the Guarantor enforceable in accordance with its terms, except as affected by bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting the enforcement of creditors' rights generally, general equitable principles and an implied covenant of good faith and fair dealing; (d) the execution, delivery and performance of this Guaranty will not violate any provision of any requirement of law or contractual obligation of the Guarantor (except to the extent that any such violation would not reasonably be expected to have a material adverse effect on the Guarantor) and will not result in or require the creation or imposition of any lien on any of the properties or revenues of the Guarantor pursuant to any requirement of law or contractual obligation of the Guarantor; (e) no consent or authorization of, filing with, or other act by or in respect of, any arbitrator or governmental authority and no consent of any other person (including, without limitation, any stockholder or creditor of the Guarantor) is required in connection with the execution, delivery, performance, validity or enforceability of this Guaranty, other than any which have been obtained or made prior to the date hereof and remain in full force and effect; and (f) no litigation, investigation or proceeding of or before any arbitrator or governmental authority is pending or, to the knowledge of the Guarantor, threatened by or against the Guarantor or against any of its properties or revenues with respect to this Guaranty or any of the transactions contemplated hereby that would have a material adverse effect on the Guarantor. 4. Repayments or Recovery from the Creditor. If any demand is made at any time upon the Creditor for the repayment or recovery of any amount received by it in payment or on account of any of the Obligations and if the Creditor repays all or any part of such amount by reason of any judgment, decree or order of any court or administrative body or by reason of any settlement or compromise of any such demand, the Guarantor (subject to Sections 2 (c) and (d)) will be and remain liable hereunder for the amount so repaid or recovered to the same extent as if such amount had never been received originally by the Creditor. The provisions of this section will be and remain effective notwithstanding any contrary action which may have been taken by the Guarantor in reliance upon such payment, and any such contrary action so taken will be without prejudice to the Creditor's rights hereunder and will be deemed to have been conditioned upon such payment having become final and irrevocable. 5. Enforceability of Obligations. No modification, limitation or discharge of the Obligations of BGE arising out of or by virtue of any bankruptcy, reorganization or similar proceeding for relief of debtors under federal or state law will affect, modify, limit or discharge the Guarantor's liability in any manner whatsoever and this Guaranty will remain and continue in full force and effect and will be enforceable against the Guarantor to the same extent and with E3 APPENDIX E TO FULL REQUIREMENTS SERVICE AGREEMENT the same force and effect as if any such proceeding had not been instituted. The Guarantor waives all rights and benefits which might accrue to it by reason of any such proceeding and will be liable to the full extent hereunder, irrespective of any modification, limitation or discharge of the liability of BGE that may result from any such proceeding. 6. Postponement of Subrogation. Until the Obligations and all other amounts due hereunder are indefeasibly paid in full, the Guarantor postpones and subordinates in favor of the Creditor any and all rights which the Guarantor may have to (a) assert any claim against BGE based on subrogation rights with respect to payments made by Guarantor hereunder and (b) any realization on any property of BGE, including participation in any marshalling of BGE's assets. 7. Notices. All notices, demands, requests, consents, approvals and other communications required or permitted hereunder must be in writing and will be effective upon receipt. Such notices and other communications may be hand-delivered, sent by facsimile transmission with confirmation of delivery and a copy sent by first-class mail, or sent by nationally recognized overnight courier service, to the addresses for the Creditor and the Guarantor set forth below or to such other address as one may give to the other in writing for such purpose: All communications to Creditor shall be directed to: Constellation Power Source, Inc. 111 Market Place, Suite 500 Baltimore, Maryland 21202 Attn: John R. Collins Phone: 410-468-3410 Fax: 410-468-3419 or such other address as the Creditor shall from time to time specify to Guarantor. All communications to Guarantor shall be directed to: (Parent of BGE) 39 W. Lexington Street Baltimore, Maryland 21201 Attn: ________________________ Phone: 410-234-xxxx Fax: 410-234-xxxx or such other address as the Creditor shall from time to time specify to Guarantor. 8. Preservation of Rights. Except as provided by any applicable statute of limitations, no delay or omission on the Creditor's part to exercise any right or power arising hereunder will impair any such right or power or be considered a waiver of any such right or power, nor will the Creditor's action or inaction impair any such right or power. The Creditor's rights and remedies hereunder are cumulative and not exclusive of any other rights or remedies which the Creditor may have under other agreements, at law or in equity. E4 APPENDIX E TO FULL REQUIREMENTS SERVICE AGREEMENT 9. Illegality. In case any one or more of the provisions contained in this Guaranty should be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. 10. Amendments. No modification, amendment or waiver of any provision of this Guaranty nor consent to any departure by the Guarantor therefrom, will be effective unless made in a writing signed by the Creditor, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice to or demand on the Guarantor in any case will entitle the Guarantor to any other or further notice or demand in the same, similar or other circumstance. 11. Entire Agreement. This Guaranty (including the documents and instruments referred to herein) constitutes the entire agreement and supersedes all other prior agreements and understandings, both written and oral, between the Guarantor and the Creditor with respect to the subject matter hereof. 12. Successors and Assigns. This Guaranty will be binding upon and inure to the benefit of the Guarantor and the Creditor and their respective successors and permitted assigns. Neither party may assign this Guaranty in whole or in part without the other's prior written consent, which consent will not be unreasonably withheld, except that Guarantor may assign this Guaranty to a substitute credit provider as provided in Section 8.1 of the Transaction Agreement, in which event Creditor's consent shall not be necessary, and Creditor may at any time assign this Guaranty without Guarantor's consent, in the same manner, on the same terms and to the same persons as Creditor assigns the Transaction Agreement in accordance with Section 13.2 of that agreement. 13. Interpretation. In this Guaranty, unless the Creditor and the Guarantor otherwise agree in writing, the singular includes the plural and the plural the singular; references to statutes are to be construed as including all statutory provisions consolidating, amending or replacing the statute referred to; the word "or" shall be deemed to include "and/or", the words "including", "includes" and "include" shall be deemed to be followed by the words "without limitation"; and references to sections or exhibits are to those of this Guaranty unless otherwise indicated. Section headings in this Guaranty are included for convenience of reference only and shall not constitute a part of this Guaranty for any other purpose. E5 APPENDIX E TO FULL REQUIREMENTS SERVICE AGREEMENT 14. Governing Law and Jurisdiction. - --- ------------------------------- (a) This Guaranty has been delivered to and accepted by the Creditor and will be deemed to be made in the State of Maryland. IT WILL BE INTERPRETED AND THE RIGHTS AND LIABILITIES OF THE CREDITOR AND THE GUARANTOR DETERMINED IN ACCORDANCE WITH THE LAWS OF THE STATE OF MARYLAND, EXCLUDING ITS CONFLICT OF LAWS RULES. (b) The Guarantor hereby irrevocably consents to the non-exclusive jurisdiction of any state or federal court in the State of Maryland; provided that nothing contained in this Guaranty will prevent the Creditor from bringing any action, enforcing any award or judgment or exercising any rights against the Guarantor individually, against any security or against any property of the Guarantor within any other county, state or other foreign or domestic jurisdiction. The Guarantor acknowledges and agrees that the venue provided above is the most convenient forum for both the Creditor and the Guarantor. The Guarantor waives any objection to venue and any objection based on a more convenient forum in any action instituted under this Guaranty. 15. WAIVER OF JURY TRIAL. THE GUARANTOR IRREVOCABLY WAIVES ANY AND ALL RIGHT THE GUARANTOR MAY HAVE TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR CLAIM OF ANY NATURE RELATING TO THIS GUARANTY, ANY DOCUMENTS EXECUTED IN CONNECTION WITH THIS GUARANTY OR ANY TRANSACTION CONTEMPLATED IN ANY OF SUCH DOCUMENTS. THE GUARANTOR ACKNOWLEDGES THAT THE FOREGOING WAIVER IS KNOWING AND VOLUNTARY. 16. Term. Unless terminated earlier in accordance with Section 1(a) of this Guaranty, this Guaranty shall survive termination of the Transaction Agreement and remain in full force and effect until all amounts due hereunder, including all of the Obligations, have been paid or performed in full. 17. Stay of Acceleration Ineffective with Respect to Guarantor. If acceleration of the time for payment of any amount payable by BGE under the Transaction Agreement is stayed upon the insolvency, bankruptcy or reorganization of BGE, all such amounts otherwise subject to acceleration or required to be paid upon an early termination pursuant to the terms of the Transaction Agreement shall nonetheless be payable by the Guarantor hereunder on written demand by Creditor. The Guarantor acknowledges that it has read and understood all the provisions of this Guaranty, and has been advised by counsel as necessary or appropriate. E6 APPENDIX E TO FULL REQUIREMENTS SERVICE AGREEMENT WITNESS the due execution hereof as a document under seal, as of the date first written above, with the intent to be legally bound hereby. (Parent of BGE) By:______________________________ Name: Title: E7 EX-10 5 ex10b.txt EX10B Exhibit 10(b) FULL REQUIREMENTS SERVICE AGREEMENT BETWEEN BALTIMORE GAS AND ELECTRIC COMPANY AND ALLEGHENY ENERGY SUPPLY COMPANY, L.L.C. DATED AUGUST 15, 2001 The asterisks on pages 12, 22, 23 and A1 denote that confidential portions of this exhibit have been omitted in reliance on Rule 25(b)-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission. TABLE OF CONTENTS -----------------
Page ---- ARTICLE 1. Definitions 1 ARTICLE 2. Term 7 ARTICLE 3. Supplier Responsibilities 7 ARTICLE 4. BGE Responsibilities 9 ARTICLE 5. Billing and Payment 10 ARTICLE 6. Price 12 ARTICLE 7. Events of Default; Remedies 12 ARTICLE 8. Credit Support 16 ARTICLE 9. Indemnification 17 ARTICLE 10. Limitation of Liability 18 ARTICLE 11. Force Majeure 19 ARTICLE 12. Representations and Warranties 20 ARTICLE 13. Miscellaneous 21 APPENDIX A SAMPLE PJM BILL APPENDIX B GENERATION SHOPPING CREDITS APPENDIX C LITIGATION DISCLOSURE
i FULL REQUIREMENTS SERVICE AGREEMENT THIS FULL REQUIREMENTS SERVICE AGREEMENT ("Agreement"), made and entered into as of this 15th day of August, 2001 by and between Baltimore Gas and Electric Company, a Maryland Corporation ("BGE") and Allegheny Energy Supply Company, L.L.C., a Delaware corporation ("Supplier") (each individually a "Party", or collectively, the "Parties"). W I T N E S S E T H WHEREAS, on April 8, 1999, Maryland enacted the Electric Choice and Competition Act authorizing customer choice and competition among electric suppliers; WHEREAS, on November 10, 1999 the Maryland Public Service Commission issued an order approving the terms of a settlement providing for retail choice within BGE's service territory; WHEREAS, the Maryland PSC Order directs BGE to supply electric service for a period of up to six years to those retail customers within BGE's retail service territory that choose not to purchase their power supply from alternative competitive suppliers; WHEREAS, Supplier is authorized to makes sales of energy, capacity and ancillary services at market based rates pursuant to FERC Electric Tariff, First Revised Volume No. 1, dated December 28, 2000, Docket # ER01-811-000; WHEREAS, Supplier and BGE are entering into this Agreement for the purpose of establishing the terms and conditions under which Supplier will supply such full requirements service to BGE. NOW, THEREFORE, in consideration of the premises and the mutual covenants set forth herein, the Parties hereto agree as follows: ARTICLE 1 DEFINITIONS 1.1 Definitions. For all purposes of this Agreement, the following terms as used in this Agreement shall have the following meanings. Except where the context otherwise requires, definitions and terms expressed in the singular will include the plural and vice versa. 1 "Affiliate" means, with respect to a Person, any other Person that, directly or indirectly through one or more intermediaries, controls, is controlled by or is under common control with such first Person. The term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ownership of voting securities, by contract or otherwise. "Agreement" means this Full Requirements Service Agreement, including the Appendices, as amended, modified or supplemented from time to time. "Alternate SOS Supplier" means a retail supplier that is responsible for supplying former BGE SOS Customers as a result of Retail Bidding. "Alternate SOS Supplier Customers" means former BGE SOS Customers that are provided SOS from Alternate SOS Supplier as a result of Retail Bidding. "Ancillary Services" means those services, or their successors, that are necessary to support the transmission of Energy from generation resources to loads, as set forth in the PJM OATT, including, but not limited to, PJM Scheduling, System Control and Dispatch Service; RTO Scheduling, System Control and Dispatch Service; Reactive Supply and Voltage Control from Generation Sources Service; Regulation and Frequency Response Service; Energy Imbalance Service; Operating Reserve - Spinning Reserve Service; and Operating Reserve - Supplemental Reserve Service. "BGE SOS Customers" means the customers receiving SOS from BGE. "BGE" means Baltimore Gas and Electric Company, a Maryland corporation and its successors and permitted assigns hereunder. "Business Day" means a day on which Federal Reserve member banks in Baltimore Maryland are open for business; and a Business Day shall open at 8:00 a.m. and close at 5:00 p.m. Eastern Standard (or Daylight Savings) time. "Creditworthiness Criteria" with respect to a Party or its guarantor means (i) an unsecured rating of "Baa3" or better from Moody's, "BBB-" or better from S&P or investment grade as determined by another nationally recognized rating service reasonably acceptable to the other Party and (ii) a Net Worth of at least Two Hundred Million Dollars ($200,000,000). "Contract Classes" means those customers that receive SOS from BGE under certain contractual terms that may differ from the schedules found in the Retail Electric Service Tariff. 2 "Customer Classes" means (i) Schedules R, RL-1, RL-2, ES, G Option 1, G Option 2, GS Option 1, GS Option 2, GL Secondary, GL Primary, SL, PL and DS, as defined in the Retail Electric Service Tariff and (ii) Contract Classes. "Delivery Point" means any point on the PJM Transmission System as elected by Supplier. "Delivery Term" means the period commencing July 1, 2003 and ending on June 30, 2006, unless this Agreement is earlier terminated in accordance with its terms. "Effective Date" means the date upon which this Agreement is executed. "Electricity Supplier Coordination Tariff" means the BGE Electricity Supplier Coordination Tariff approved by the Maryland PSC, as amended, modified or supplemented from time to time. "Energy" means the electrical output of electric generation facilities, usually stated in kilowatt-hours or megawatt-hours. "FERC" means the Federal Energy Regulatory Commission and any successor thereto. "Fixed Transmission Rights" shall have the meaning as set forth by PJM. "Full Requirements Service" means all-requirements electric service on a continuous basis, including, but not limited to, the following products: Energy, Unforced Capacity, Ancillary Services, Unaccounted For Energy and associated losses necessary to fulfill all PJM obligations as they may change from time to time associated with providing all-requirements electric service to the SOS Load, as further defined pursuant to Article 3. Such Full Requirements Service shall include changes in customer demand for any reason, including, but not limited to, seasonal factors, daily load fluctuations, increased or decreased usage, transmission and distribution outages, customer decisions regarding whether to take generation service from an alternate supplier, demand side management activities, extremes in weather, and other similar events. "Generation Shopping Credits" means the prices stated in Appendix B, unless altered as provided in Section 6.1.b. "Governmental Authority" means the government of any federal, state, municipal or other political subdivision, including all agencies and instrumentalities of such governments and political subdivisions. 3 "Intermediate-Peak" shall have the meaning set forth in the Retail Electric Service Tariff as of the Effective Date. "Interest Rate" means, for any date, the lesser of (a) two (2) percent over the per annum rate of interest equal to the prime lending rate as may from time to time be published in The Wall Street Journal under "Money Rates" and (b) the maximum rate permitted by applicable law. "Load Serving Entity (LSE)" means an entity, including a load aggregator or power marketer, that: (i) is serving end-users within the PJM Control Area, and (ii) has been granted the authority, or has an obligation pursuant to state or local law, regulation or franchise, to sell electric energy to end-users within the PJM Control Area. "Load Response Resources" means those resources that have the effect of reducing the electric supply for SOS due to a customer's reduction in consumed electricity and/or an increase in customer-owned generation, and includes, but is not limited to (i) BGE Riders 5, 6, 14, 16, 24, as set forth in the Retail Electric Service Tariff, as amended from time to time; and (ii) any individually negotiated load response agreement between BGE and its customers; and (iii) any other load response-type service BGE may offer. "Maryland PSC" means the Maryland Public Service Commission and any successor thereto. "Maryland PSC Order" means the November 10, 1999 Order issued by the Maryland PSC allowing, among other things, retail choice for electricity consumers, requiring that BGE provide electricity supply to retail consumers who do not choose an alternate supplier, and further allowing BGE to enter into a full requirements service agreement for SOS Load. "Moody's" means Moody's Investors Service, Inc. and any successor thereto. "Network Integration Transmission Service" shall have the meaning as set forth in the PJM OATT. "Net Worth" means total assets (exclusive of intangible assets) less total liabilities as reflected on a balance sheet prepared in accordance with generally accepted accounting principles consistently applied. "Non-Summer" shall have the meaning set forth in the Retail Electric Service Tariff as of the Effective Date. 4 "Off-Peak" shall have the meaning set forth in the Retail Electric Service Tariff as of the Effective Date. "Parent" means, with respect to a Person that, directly or indirectly through one or more intermediaries, controls such first Person, where the term "control" means the possession, directly or indirectly, of power to direct or cause the direction of the management or policies of a Person, whether through the ownership of voting securities, by contract or otherwise. "Peak" shall have the meaning set forth in the Retail Electric Service Tariff as of the Effective Date. "Person" means any individual, sole proprietorship, corporation, partnership, joint venture, limited liability partnership, limited liability company, trust, unincorporated association, institution, Governmental Authority or any other entity. "PJM" means PJM Interconnection, L.L.C., the independent system operator for the PJM Control Area organized and operating pursuant to the PJM Operating Agreement and any successor thereto. "PJM Control Area" shall have the meaning as set forth in the PJM OA. "PJM OA" means the Amended and Restated Operating Agreement of PJM Interconnection, LLC dated June 2, 1997 and effective January 1, 1998, as amended, modified or supplemented from time to time. "PJM OATT" means the PJM Open Access Transmission Tariff administered by PJM, as amended, modified or supplemented from time to time. "PJM Transmission System" shall have the meaning as set forth in the PJM OATT. "Reliability Assurance Agreement (RAA)" means the Reliability Assurance Agreement among Load Serving Entities in the PJM Control Area dated June 2, 1997, as amended, modified or supplemented from time to time. "Retail Bidding" means a Maryland PSC approved process where BGE's SOS Customers are auctioned to Alternate SOS Supplier(s). "Retail Electric Service Tariff" means the BGE Retail Electric Service Tariff approved by the Maryland PSC, as amended, modified or supplemented from time to time. 5 "Retail Generation Revenue" means the revenue that BGE reports in its financial statements, which is an approximation of the revenue associated with the consumed electricity in any given calendar month for BGE SOS Customers, and is equal to the actual billed revenue within a calendar month plus an approximation of the revenue associated with unbilled, but consumed electricity in that month, less an approximation of the revenue associated with billed, but not consumed electricity in that month. "S&P" means Standard & Poor's Ratings Group, a division of McGraw Hill, Inc. and any successor thereto. "Standard Offer Service (SOS)" means the electric generation service that is provided to retail customers that have not chosen a retail supplier other than BGE or Alternate SOS Supplier. "SOS Load" means the kW and kWh retail load used in BGE's calculation of its monthly Retail Generation Revenue from BGE SOS Customers, plus the kW and kWh retail load, determined in the same manner as load is determined for Retail Generation Revenue, associated with Alternate SOS Supplier Customers. "Summer" shall have the meaning set forth in the Retail Electric Service Tariff as of the Effective Date. "Supplier" means Allegheny Energy Supply Company, L.L.C., and its successors and permitted assigns hereunder. "Taxes" means any or all ad valorem, property, severance, generation, first use, conservation, Btu or energy, transportation, utility, gross receipts, privilege, sales, use, consumption, excise, lease, transaction, and other taxes, governmental charges, licenses, fees, permits and assessments, or increases therein, other than taxes based on net income or net worth. "Transmission Owner" shall have the meaning as set forth in the PJM OA. "Unaccounted For Energy" means the difference between the hourly BGE system load and the sum of (i) the estimated hourly customer loads (interval metered and profiled) and (ii) losses. "Unforced Capacity" shall have the meaning set forth in the RAA, and shall include any successor product(s) defined and approved by PJM. 1.2 Additional Defined Terms. Each of the following terms has the meaning specified in the Article, Section or Appendix set forth opposite such term: 6 Term Section/Appendix - ---- ---------------- AAA 13.10 Affected Party 7.4(a) Bankruptcy Proceeding 7.1 Claims 9.1 Confidential Information 13.7 Defaulting Party 7.1 Early Termination Date 7.4(a) Event of Default 7.1 Force Majeure 11.1(a) Margin 7.2(c) Non-Defaulting Party 7.2(a) Price 6.1(a) Settlement Amount 7.2(b) Term 2.1 Termination Payment 7.2(c) ARTICLE 2 TERM 2.1 Term. --- ----- Unless earlier terminated in accordance with Article 7, this Agreement shall remain in effect from the Effective Date through and including the end of the Delivery Term ("Term"). At the expiration of the Term, the Parties shall no longer be bound by the terms and conditions of this Agreement, except to the extent necessary to enforce the rights and obligations of the Parties arising under this Agreement prior to the expiration of the Term. ARTICLE 3 SUPPLIER RESPONSIBILITIES 3.1 PJM Member. --- ----------- Supplier shall, prior to the Delivery Term and throughout the entire Delivery Term of this Agreement, be a member, in good standing, of PJM and maintain a settlement account established in accordance with the rules and criteria established by PJM. 7 3.2 Full Requirements Service. --- -------------------------- During the Delivery Term, Supplier shall sell and deliver to the Delivery Point and BGE shall receive and purchase Full Requirements Service sufficient to serve 10 percent share of the SOS Load. As a provider of Full Requirements Service, Supplier is solely responsible for satisfying all requirements and paying all costs incurred or to be incurred to provide such service including, without limitation, all costs, all scheduling or other requirements to furnish Unforced Capacity, Energy, losses, Unaccounted For Energy and Ancillary Services associated with the provision of Full Requirements Service. Supplier is also solely responsible for meeting any other requirements and paying any other costs now or hereafter imposed by PJM or imposed pursuant to the RAA from time to time during the Delivery Term which are attributable to any component of the provision of Full Requirements Service. If PJM allocates any expenses or uplift costs to the Full Requirements Service provided by Supplier (on a load or peak load basis or otherwise), the expenses or costs so allocated will be borne by Supplier alone without recourse to BGE. 3.3 Losses; Unaccounted For Energy. --- ------------------------------- Supplier shall be responsible for supplying sufficient Full Requirements Service to compensate for all transmission, sub-transmission and distribution losses and Unaccounted For Energy associated with the delivery of electricity supplied under this Agreement from the sources of its supply to the meters of those retail customers included in the Supplier's share of the SOS Load. 3.4 Maryland Environmental Disclosure Requirements. --- ----------------------------------------------- Since Supplier is subject and bound to third-party confidentiality provisions, Supplier will make best efforts to provide to BGE, the sources of electricity used to supply Full Requirements Service, fuel mix and environmental disclosure information in a timely manner and in an appropriate form to enable BGE to comply with Maryland PSC or other governmental or regulatory agency requirements relating to reporting of such information. Under no circumstance will Supplier be forced to provide information that would make it breach on confidentiality or law. 3.5 Renewable Energy Resources. --- --------------------------- During the Delivery Term of this Agreement, Supplier shall provide the renewable resource requirements imposed upon BGE by Article 7-516 of the Maryland Electric Customer Choice and Competition Act of 1999, as of the Effective Date. 8 3.6 Transmission Congestion. --- ------------------------ If the PJM Control Area experiences congestion, Supplier will be responsible for any congestion costs incurred in delivering power from the Delivery Point to BGE's load busses. During the Delivery Term, BGE shall, at no cost to Supplier, assign or transfer, to Supplier Fixed Transmission Rights associated with Supplier's portion of the SOS Load. ARTICLE 4 BGE RESPONSIBILITIES 4.1 Title; Risk of Loss. --- -------------------- Title to and risk of loss related to the Full Requirements Service delivered by Supplier in accordance with this Agreement shall transfer to BGE at the Delivery Point. As between the Parties, Supplier shall be deemed to be in exclusive control (and responsible for any damages or injury caused thereby) of Full Requirements Service prior to the Delivery Point and BGE shall be deemed to be in exclusive control (and responsible for any damages or injury caused thereby) of Full Requirements Service at and after the Delivery Point. 4.2 Network Integration Transmission Service. --- ----------------------------------------- BGE shall be responsible, at its sole cost and expense, for the provision of Network Integration Transmission Service pursuant to the PJM OATT and distribution service at and from the Delivery Point. 4.3 Load Response Resources. --- ------------------------ During the Delivery Term, BGE will operate its Load Response Resources in accordance with the provisions of the Electricity Supplier Coordination Tariff and the applicable Riders to the Retail Electric Service Tariff, as amended and approved by the Maryland PSC from time to time. BGE shall be responsible for payment of any credits to retail customers and for any penalties assessed in accordance with the RAA for failure to implement its Load Response Resources when so requested by PJM. BGE shall retain all of the benefits associated with its Load Response Resources. BGE shall make the appropriate adjustments and/or transactions in the retail load settlement process in order for BGE to attain such benefits, which may require Supplier's confirmation, which shall not be unreasonably withheld. 4.4 Sales for Resale. --- ----------------- All Full Requirements Service delivered by Supplier to BGE hereunder shall be sales for resale, with BGE reselling such Full Requirements Service. At Supplier's request, 9 BGE shall obtain and provide Supplier with any resale certificates to evidence that the deliveries hereunder are sales for resale. ARTICLE 5 BILLING AND PAYMENT 5.1 Billing. --- -------- On or before the sixth (6th) Business Day of each month, unless otherwise agreed to by the Parties, BGE shall deliver to Supplier a statement that sets forth: (i) the allocation of the Supplier's 10 percent share of the SOS Load for the preceding month among the Customer Classes; (ii) the amount due and payable by BGE, based upon the Supplier's 10 percent share of the SOS Load for each Customer Class and the Prices applicable thereto as set forth in Section 6.1; and (iii) all other information reasonably requested by Supplier to facilitate Supplier's verification of the foregoing values. Such statement shall constitute an "invoice" or "bill" for purposes of amounts due and payable for Full Requirements Service under this Agreement. 5.2 Payment. --- -------- All invoices pursuant to Section 5.1 shall be due and payable, unless otherwise agreed by the Parties, on the first Business Day after the 19th calendar day of the month in which the invoice is rendered. Invoices shall be sent electronically or by other means agreed to by the Parties. BGE will make payments by wire transfer, or by other mutually agreeable method(s), to the account of Supplier as designated by Supplier. Any amounts, both principal and interest, remaining unpaid after the due date will be deemed delinquent and will accrue interest at the Interest Rate, such interest to be calculated from the due date to the date the unpaid amount is paid in full. 5.3 Disputed Bills. --- --------------- If either Party, in good faith, disputes an invoice, the disputing Party shall immediately notify the other Party of the basis for the dispute and, in the case of a dispute by BGE, pay the portion of such statement conceded to be correct no later than the due date. Each Party shall have the right to dispute any invoice prior to the lapse of 12 months from the rendition thereof. 10 If any disputed amount is ultimately determined to be due to Supplier, it shall be paid within two (2) Business Days, unless otherwise agreed to by the Parties, of such determination along with interest accrued at the Interest Rate from the due date of the bill to which the dispute relates, to the date the additional charge is paid. If any disputed amount is ultimately determined to be due to BGE, it shall be paid within two (2) Business Days, unless otherwise agreed to by the Parties, of such determination along with interest accrued at the Interest Rate from the date the amount being refunded was received by Supplier, to the date the refund is made. 5.4 Billing Adjustments. --- -------------------- (a) The invoices rendered hereunder may be adjusted by the Party rendering such invoice for any errors in arithmetic, computation, meter readings, estimating, or otherwise no later than twelve (12) months after the date the bill was rendered. Any billing adjustment shall be in writing and shall state the specific basis for the adjustment. A billing adjustment shall constitute a new bill for the purposes of this Section 5.4. An adjusted bill shall be binding on the Parties twelve (12) months after the bill is rendered. (b) Overpayments or underpayments resulting from a billing adjustment shall bear interest calculated at the Interest Rate. In the case of an underpayment, interest shall accrue from the due date of the bill to which the adjustment relates, to the date the additional charge is paid. In the case of an overpayment, interest shall accrue from the date the amount being refunded was received, to the date the refund is made. 5.5 PJM Billing. --- ------------ (a) BGE shall request PJM to invoice Supplier directly for charges and credits relating to Supplier's obligation to deliver Full Requirements Service to BGE under this Agreement. BGE shall also request PJM to invoice BGE separately for charges and credits relating to BGE's rights and obligations as a Network Integration Transmission Service customer and a Transmission Owner and otherwise as the Parties agree. Appendix A attached hereto and made a part hereof allocates between Supplier and BGE the charges and credits currently included on a PJM bill. In the event that either Party is billed by PJM for charges and/or credits identified in Appendix A, but not allocated in accordance with Appendix A, BGE shall rectify such billing in the Full Requirements Service invoice to be in accordance with Appendix A. (b) Any additional charges or credits imposed by PJM that are not identified in Appendix A will be allocated to BGE and Supplier in a manner that is consistent with Supplier's Full Requirements Service obligations and BGE's transmission-related obligations. For avoidance of doubt, charges associated with entities defaulting to PJM which are then allocated by PJM to BGE as an LSE or Transmission Owner shall not be the responsibility of the Supplier. 11 ARTICLE 6 PRICE 6.1 Price. --- ------ (a) The "Price" payable by BGE to Supplier for the delivery of Full Requirements Service hereunder shall be equal to *** percent of the Generation Shopping Credits stated in Appendix B. (b) The prices stated in Appendix B associated with Schedules G Option 1, G Option 2, GS Option 1, GS Option 2, GL Secondary and GL Primary are subject to change as a result of (i) the competitive transition charge true-up, which is required under the Maryland PSC Order; and (ii) a change to the rate-making treatment of the universal service charge, in accordance with the Maryland PSC Order. Supplier agrees to accept these aforementioned price changes as they may occur. 6.2 Taxes. --- ------ (a) Supplier shall pay all Taxes levied in respect of the Full Requirements Service, its sale, and the handling thereof prior to the Delivery Point. BGE shall pay all such Taxes levied on such Full Requirements Service at, and from, the Delivery Point. (b) For any new Taxes levied with respect to the Full Requirements Service after the Effective Date and to the extent permitted by the settlement and the Maryland PSC Order, BGE will fully support and pursue in good faith the recovery of any such new Tax levied on Supplier from BGE's Full Requirements Service customers. To the extent such new Taxes are recoverable by BGE from its SOS customers, BGE shall reimburse Supplier for such Taxes paid by Supplier. 6.3 Payment Netting. --- ---------------- Payments owing by each Party on any day under this Agreement or any other agreement between the Parties shall be offset so that only the net amount shall be paid by the Party having the greater payment obligation on such day. 12 The asterisks on this page denote that confidential portions of this exhibit have been omitted in reliance on Rule 25(b)-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission. ARTICLE 7 EVENTS OF DEFAULT; REMEDIES 7.1 Events of Default. An "Event of Default" shall mean, with respect to a Party ("Defaulting Party"), the occurrence of any of the following: (i) the failure to make, when due, any payment required pursuant to this Agreement if such failure is not remedied within five (5) Business Days after written notice of such failure is given by the other Party and provided the payment is not the subject of a good faith dispute as described in Article 5; (ii) any representation or warranty made by the Defaulting Party herein prove to be false or misleading in any material respect; (iii) the failure of the Defaulting Party, in a material respect, to perform or comply with any covenant or material obligation set forth in this Agreement and such failure is not excused by Force Majeure or cured within three (3) Business Days after receipt of written notice thereof from the other Party; (iv) the failure of the Defaulting Party or its guarantor to maintain any of the security requirements set forth in Article 8, and such failure is not cured or rectified within ten (10) days after notice from the other Party; (v) the Defaulting Party shall be subject to a Bankruptcy Proceeding ("Bankruptcy Proceeding" means with respect to a Party, such Party (a) files a petition or otherwise commences a proceeding under any bankruptcy, insolvency, reorganization or similar law, or has any such petition filed or commenced against it, (b) makes an assignment or any general arrangement for the benefit of creditors, (c) otherwise becomes bankrupt or insolvent (however evidenced), (d) has a liquidator, administrator, receiver, trustee, conservator or similar official appointed with respect to it or any substantial portion of its property or assets, or (e) is unable to pay its debts as they fall due). 7.2. Remedies upon an Event of Default. ---- ---------------------------------- (a) After the occurrence of an Event of Default with respect to a Defaulting Party, the other Party (the "Non-Defaulting Party") shall have the right, without prior notice, to liquidate and terminate this Agreement at any time and from time to time, with the minimum period of notice required by FERC, if applicable, and shall calculate, in a commercially reasonable manner, a Settlement Amount for this Agreement as of the time of its termination or as soon thereafter as is reasonably practicable and shall net such Settlement Amounts in the manner provided for in Section 7.2(c). 13 (b) "Settlement Amount" shall mean, with respect to this Agreement and the Non-Defaulting Party, the losses and costs (or gains), expressed in U.S. Dollars, which such party incurs as a result of the liquidation, including, but not limited to, losses and costs (or gains) based upon the then current replacement value of this Agreement together with, at the Non-Defaulting Party's option, but without duplication, all losses and costs which such party incurs as a result of maintaining, terminating, obtaining or re-establishing any hedge or related trading positions. The Settlement Amount shall be due to or from the Non-Defaulting Party as appropriate. In calculating a Settlement Amount, the Non-Defaulting Party shall discount to present value (in a commercially reasonable manner based on the Prime Rate as of the date of termination) any amount which would otherwise have been due at a later date and shall add interest at the Prime Rate to any amount due prior to the date of the calculation. "Prime Rate" shall mean the prime rate of interest as published from time to time under "Money Rates" by The Wall Street Journal. (c) If the Settlement Amount (i) is due the Non-Defaulting Party, the Non-Defaulting Party shall set off against the Settlement Amount any Margin then available to the Non-Defaulting Party, plus (at the Non-Defaulting Party's election) any or all other amounts due to the Defaulting Party under this Agreement; or (ii) is due the Defaulting Party, the Non-Defaulting Party shall set off against the Settlement Amount any Margin then available to the Defaulting Party, plus (at the Non-Defaulting Party's election) any or all other amounts due to the Non-Defaulting Party under this Agreement, so that all such amounts shall be netted to a single liquidated amount (the "Termination Payment") payable by one Party to the other. "Margin" shall mean cash, securities or other property held by or due from one Party to guarantee or secure obligations of the other party under the Agreement. (d) Notice that a liquidation pursuant to this Article 7.2 has occurred shall be given by the Non-Defaulting Party to the Defaulting Party before the close of business on the Business Day following such liquidation, provided that failure to give such notice shall not affect the validity or enforceability of the liquidation or give rise to any claim by the Defaulting Party against the Non-Defaulting Party. The notice shall specify the amount of the Termination Payment and whether it is owed by or to the Defaulting Party. The notice shall include a written statement explaining in reasonable detail the calculation of such amount. The Termination Payment shall be made by the Party that owes it on the second Business Day after such notice is given. (e) If the Defaulting Party disputes the Non-Defaulting Party's calculation of the Termination Payment, in whole or in part, the Defaulting Party shall, within two (2) Business Days of receipt of Non-Defaulting Party's calculation of the Termination Payment, provide to the Non-Defaulting Party a detailed written explanation of the basis for such dispute and, if the Termination Payment is due from the Defaulting Party, shall promptly pay to the Non-Defaulting Party such portion thereof as is conceded to be correct. If the Parties cannot resolve such dispute within three (3) Business Days of the Non-Defaulting Party's receipt of the Defaulting Party's written explanation, then the Defaulting Party may submit such dispute to arbitration in accordance with the arbitration procedures set forth in Section 13.10 hereof; provided, however, that if the Termination Payment is due from the Defaulting Party, the Defaulting Party shall first transfer 14 collateral (of a type and in a form acceptable to the Non-Defaulting Party) to the Non-Defaulting Party in an amount equal to the disputed and unpaid portion of the Termination Payment. Any payment that is due as a result of the arbitrator's award shall be paid by the Party that owes it within two (2) Business Days after the award is rendered. (f) The enumeration of the foregoing remedies shall not be deemed a waiver of any other remedies, legal or equitable, to which either Party is entitled. 7.3 Setoffs. --- -------- (a) Without limiting its rights under this Article 7 or otherwise, after an Event of Default, the Non-Defaulting Party may from time to time set off any or all amounts which the Defaulting Party owes to it (whether under the Agreement or otherwise and whether or not then due) against any or all amounts which it owes to the Defaulting Party (whether under the Agreement or otherwise and whether or not then due), provided that any amount not then due which is included in such setoff shall be discounted to present value (in the manner specified in Section 7.2(b)) as at the time of setoff (to take account of the period between the date of setoff and the date on which such amount would have otherwise been due). (b) Notwithstanding any other provision of this Agreement, after the occurrence of an Event of Default, or an event which, with the giving of notice or the passage of time or both, would constitute an Event of Default, with respect to a Party, the other Party shall have the right to suspend performance under this Agreement. 7.4 Other Terminating Events. --- ------------------------- (a) If performance by either Party (an "Affected Party") under this Agreement becomes subject to regulation of any kind whatsoever under any law, rule, regulation, order or the like, including any change by the FERC regarding a Party's authority to sell wholesale power at market-based rates, to a greater or different extent than that existing on the Effective Date and such regulation renders this Agreement illegal or unenforceable then such Party (or either Party if both Parties are Affected Parties) may terminate and liquidate this Agreement ("Early Termination Date") in the manner contemplated by Section 7.2 above, which notice shall specify the basis for declaring such Early Termination Date. (b) If an Early Termination Date is declared under circumstances described in Section 7.4 (a) above, both Parties shall calculate their respective gains, losses or costs in respect of this Agreement as provided in Section 7.2, and endeavor in good faith to agree upon the Termination Payment payable by either Party, and notify the other Party of the Termination Payment, as provided in Section 7.2. 15 7.5 Duty to Mitigate. --- ----------------- Each Party agrees that it has a duty to mitigate damages and covenants that it will use commercially reasonable efforts to minimize any damages it may incur as a result of the other Party's failure to perform pursuant to this Agreement. ARTICLE 8 CREDIT SUPPORT 8.1 Supplier Credit Support. --- ------------------------ (a) On or before the Effective Date, unless Supplier satisfies the Creditworthiness Criteria at such time, as security for Supplier's obligations hereunder, Supplier shall deliver to BGE a guaranty of payment from either Parent, or another Affiliate of Supplier that satisfies the Creditworthiness Criteria, in an amount equal to the reasonably determined credit exposure of BGE to Supplier taking into account such factors as market risk, settlement risk, the underlying creditworthiness of Supplier, or such other considerations as are commercially reasonable under the circumstances. Such credit support shall be available to be drawn upon by BGE in the event of a default by Supplier of its obligations hereunder, and, subject to Sections 8.1(b) and (c), shall be maintained in effect (by annual renewal or otherwise) by Supplier for the Term of this Agreement. (b) Supplier may, at any time during the Term of this Agreement and at its election, deliver substitute credit support to BGE in any of the following forms: (i) a direct pay irrevocable letter of credit directed to BGE from a commercial bank with long-term debt ratings of "Baa2" or better from Moody's and "BBB" or better from S&P; (ii) a performance bond issued by a surety company with a rating of "B+" or better from A.M. Best Company; or (iii) such other credit support that is acceptable to BGE. The substitute credit support to BGE will be in an amount equal to the reasonably determined credit exposure of BGE to Supplier taking into account such factors as market risk, settlement risk, the underlying creditworthiness of Supplier, or such other considerations as are commercially reasonable under the circumstances. (c) If at any time during the Term of this Agreement Supplier satisfies the Creditworthiness Criteria, its obligation to deliver any credit support pursuant to this Section 8.1 shall be suspended for so long as Supplier continues to satisfy the Creditworthiness Criteria. From and after the date on which Supplier satisfies the Creditworthiness Criteria, Supplier shall certify to BGE within thirty (30) days after the end of every calendar quarter that Supplier satisfies the Creditworthiness Criteria (which certification shall include evidence as BGE shall reasonably request from time to time), and shall deliver financial statements to BGE certified by a firm of certified public accountants of national standing at least annually within one hundred twenty (120) days following the end of Supplier's fiscal year. If at any time thereafter Supplier no longer satisfies the Creditworthiness Criteria, then Supplier shall, within ten (10) Business 16 Days after receipt of a written notice with respect thereto, deliver a guaranty that satisfies the requirements of Section 8.1(a) or other credit support in accordance with Section 8.1(b). 8.2 BGE Credit Support. - --- ------------------- (a) Commencing with the Effective Date and thereafter during the Term, within thirty (30) days after the end of every calendar quarter, BGE shall certify to Supplier that it satisfies the Creditworthiness Criteria (which certification shall include evidence as Supplier shall reasonably request from time to time), and shall deliver financial statements to Supplier certified by a firm of certified public accountants of national standing at least annually within one hundred twenty (120) days following the end of BGE's fiscal year. BGE may satisfy its obligation under this paragraph by delivering a copy of its parent company's Annual Report or Form 10K. If at any time during the Term BGE no longer satisfies the Creditworthiness Criteria, then BGE shall, within ten (10) Business Days after receipt of a written notice with respect thereto, deliver to Supplier, in an amount equal to the reasonably determined credit exposure of Supplier to BGE taking into account such factors as market risk, settlement risk, the underlying creditworthiness of BGE, or such other considerations as are commercially reasonable under the circumstances, either: (i) a guaranty of payment from either Parent or another Affiliate of BGE that satisfies the Creditworthiness Criteria; (ii) a letter of credit directed to Supplier from a commercial bank with long-term debt ratings of "Baa2" or better from Moody's and "BBB" or better from S&P; (iii) a performance bond issued by a surety company with a rating of "B+" or better from A.M. Best Company; or (iv) such other credit support that is acceptable to Supplier. (b) If at any time after delivering credit support pursuant to Section 8.2(a), BGE satisfies the Creditworthiness Criteria, then its obligation to deliver any credit support pursuant to this Section 8.2 shall be suspended for so long as BGE continues to satisfy the Creditworthiness Criteria, as provided in Section 8.2(a). 8.3 Modification or Waiver. --- ----------------------- The Parties may agree in writing to modify or waive the provisions of Article 8. ARTICLE 9 INDEMNIFICATION 9.1 Indemnification. --- ---------------- Each Party ("Indemnifying Party") shall indemnify, defend and hold harmless the other Party ("Indemnified Party") and its Affiliates, trustees, directors, board members, officers, employees and agents from any and all Claims arising from or out of any event, circumstance, act or incident occurring during the period when control and title to Full Requirements Service is vested, as between the Parties as provided in Section 4.1, in the Indemnifying Party. 17 "Claims" means all claims or actions, threatened or filed and, whether groundless, false or fraudulent, that directly or indirectly relate to the subject matter of an indemnity, and the resulting losses, damages, expenses, attorney's fees and court costs, whether incurred by settlement or otherwise, and whether such claims or actions are threatened or filed prior to or after the termination of the Agreement. In the event injury or damage results from the joint or concurrent negligent or willful misconduct of the Parties, each Party shall be liable under this indemnification in proportion to its relative degree of fault. Such duty to indemnify shall not apply to any claims which arise or are first asserted more than two (2) years after the termination of this Agreement. 9.2 Indemnification Procedure. --- -------------------------- Each Indemnified Party shall promptly notify the Indemnifying Party of any Claim with respect to which the Indemnified Party is entitled to be indemnified hereunder. Such notice shall be given as soon as is reasonably practicable after the Indemnified Party becomes aware of each Claim; provided, however, that failure to give prompt notice shall not adversely affect any Claim for indemnification hereunder except to the extent the Indemnifying Party's ability to contest any Claim by any third party is materially adversely affected. The Indemnifying Party shall have the right, but not the obligation, at its expense, to contest, defend and litigate, and to control the contest, defense or litigation of, any Claim by any third party alleged or asserted against any Indemnified Party arising out of any matter with respect to which such Indemnified Party is entitled to be indemnified hereunder. The Indemnifying Party shall promptly notify such Indemnified Party of its intention to exercise such right set forth in the immediately preceding sentence and shall reimburse the Indemnified Party for the reasonable costs and expenses paid or incurred by it prior to the assumption of such contest, defense or litigation by the Indemnifying Party. If the Indemnifying Party exercises such right in accordance with the provisions of this Section 9 and any Indemnified Party notifies the Indemnifying Party that it desires to retain separate counsel in order to participate in or proceed independently with such contest, defense or litigation, such Indemnified Party may do so at its own expense. If the Indemnifying Party fails to exercise its rights set forth in the third sentence of this paragraph, then the Indemnifying Party shall reimburse the Indemnified Party for its reasonable costs and expenses incurred in connection with the contest, defense or litigation of such Claim. ARTICLE 10 LIMITATION OF LIABILITY UNLESS EXPRESSLY HEREIN PROVIDED, NEITHER PARTY SHALL BE LIABLE TO THE OTHER PARTY FOR ANY CONSEQUENTIAL, INCIDENTAL, PUNITIVE, EXEMPLARY OR INDIRECT DAMAGES, LOST PROFITS OR OTHER BUSINESS INTERRUPTION DAMAGES, BY STATUTE, IN TORT OR CONTRACT, UNDER ANY INDEMNITY PROVISION OR OTHERWISE. IT IS THE INTENT OF THE PARTIES THAT THE LIMITATIONS HEREIN IMPOSED ON REMEDIES AND THE MEASURE OF DAMAGES BE WITHOUT REGARD TO THE CAUSE OR CAUSES RELATED THERETO, INCLUDING 18 THE NEGLIGENCE OF ANY PARTY, WHETHER SUCH NEGLIGENCE BE SOLE, JOINT OR CONCURRENT, OR ACTIVE OR PASSIVE. TO THE EXTENT ANY DAMAGES REQUIRED TO BE PAID HEREUNDER ARE LIQUIDATED, THE PARTIES ACKNOWLEDGE THAT THE DAMAGES ARE DIFFICULT OR IMPOSSIBLE TO DETERMINE, OTHERWISE OBTAINING AN ADEQUATE REMEDY IS INCONVENIENT AND THE LIQUIDATED DAMAGES CONSTITUTE A REASONABLE APPROXIMATION OF THE HARM OR LOSS. ARTICLE 11 FORCE MAJEURE 11.1 Definition. ---- ----------- (a) As used in this Agreement, "Force Majeure" means any cause beyond the reasonable control of, and without the fault or negligence of, the Party claiming Force Majeure. A Force Majeure shall include, without limitation, sabotage, strikes, riots or civil disturbance, acts of God, acts of a public enemy, drought, earthquake, flood, explosion (unless resulting from the fault or negligence of the Party asserting Force Majeure), fire, lightning, landslide, or any similar cataclysmic occurrence, or appropriation or diversion of electricity by sale or order of any governmental authority having jurisdiction thereof, but only if and to the extent that the event adversely affects the availability of the PJM Transmission System or BGE distribution facilities, and such affected facilities are necessary to deliver Full Requirements Service electricity to the SOS Load. (b) An event that affects the availability or cost of operating any transmission or distribution facilities outside the PJM Control Area, affects the availability or cost of operating a generating facility, or any event that merely causes an economic hardship to either Party shall not be deemed a Force Majeure. 11.2 Performance Excused. ---- -------------------- (a) If either Party is rendered wholly or partly unable to perform its obligations under this Agreement because of Force Majeure as defined above, that Party shall be excused from whatever performance is affected by the Force Majeure, to the extent so affected, provided that: (i) the non-performing Party promptly, but in no case longer than three (3) Business Days after the occurrence of the Force Majeure, gives the other Party written notice describing the particulars of the occurrence; (ii) the suspension of performance shall be of no greater scope and of no longer duration than is reasonably required by the Force Majeure; 19 (iii) the non-performing Party uses due diligence to remedy its inability to perform and expeditiously takes reasonable action to correct or cure the event or condition; and (iv) the non-performing Party exercises all reasonable efforts to mitigate or limit damages to the other Party. With respect to Supplier, this shall mean that Supplier must purchase, at its own expense, electricity from the PJM market to meet its obligations under this Agreement, to the extent such electricity is available and deliverable. (b) Neither Party to this Agreement will be required by the foregoing to settle a strike affecting it except when, according to its judgment, such a settlement is advisable. Nothing in this Article 11 will excuse BGE from making payment for services provided under this Agreement. ARTICLE 12 REPRESENTATIONS AND WARRANTIES Each Party represents and warrants to the other Party, as of the Effective Date, that: (i) it is duly organized, validly existing and in good standing under the laws of the jurisdiction of its formation, (ii) it has all regulatory authorizations necessary for it to legally perform its obligations under this Agreement and any other documentation relating to this Agreement to which it is a party, (iii) the execution, delivery and performance of this Agreement and any other documentation relating to this Agreement to which it is a party are within its powers, have been duly authorized by all necessary action and do not violate any of the terms and conditions in its governing documents, any contracts to which it is a party or any law, rule, regulation, order or the like applicable to it, (iv) this Agreement and each other document executed and delivered in accordance with this Agreement constitutes its legally valid and binding obligation enforceable against it in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency or other laws affecting the enforcement of creditors' rights and by general principles of equity, (v) there are no Bankruptcy Proceedings pending or being contemplated by it or, to its knowledge, threatened against it, (vi) there is not pending or, to its knowledge, threatened against it or any of its Affiliates any legal proceedings that could materially adversely affect its ability to perform its obligations under this Agreement or any other document relating to this Agreement to which it is a party except as disclosed in BGE's or BGE's parent company's Form 10-Q for the quarterly period ended June 30, 2001 or Annual Report for the fiscal year ended December 2000, as well as the proceedings listed on Appendix C hereto, and (vii) no Event of Default or event which, absent a cure, with the giving of notice or lapse of time, or both, would constitute an Event of Default with respect to it has occurred and is continuing and no such event or circumstance would occur as a result of its entering into or performing its obligations under this Agreement or any other document relating to this Agreement. 20 ARTICLE 13 MISCELLANEOUS 13.1 Regulatory Action. ---- ------------------ If, after the Effective Date, any court or agency having jurisdiction over this Agreement finds any term or condition to be unjust, unreasonable or otherwise unlawful, the Parties shall enter into good faith negotiations of such changes as are reasonably required to conform to the requirements of law. 13.2 Assignment. ---- ----------- Neither Party shall assign this Agreement or its rights hereunder without the prior written consent of the other Party; provided, however, either Party may, without the consent of the other Party (and without relieving itself from liability hereunder); (i) transfer, sell, pledge, encumber or assign this Agreement or the accounts, revenues or proceeds hereof in connection with any financing or other financial arrangements; (ii) transfer or assign this Agreement to an Affiliate of such Party which Affiliate's creditworthiness is comparable to or higher than that of such Party, or (iii) transfer or assign this Agreement to any Person succeeding to all or substantially all of the assets of such Party; provided, however, that said successor Person possess creditworthiness comparable to or higher than such Party and any such assignee shall agree to in writing be bound by the terms and conditions hereof. 13.3 Compliance With Laws. ---- --------------------- At all times during the term of this Agreement, the Parties shall comply with all laws, rules, requisitions, and codes of all governmental authorities having jurisdiction over each of their respective businesses which are now applicable, or may be applicable hereafter, including without limitation, all special laws, policies, ordinances, or regulations now in force, as amended or hereafter enacted. The Parties hereto shall maintain all licenses, permits and other consents from all governmental authorities having jurisdiction for the necessary use and operation of their respective business. Nothing herein shall be deemed a waiver of the Parties' right to challenge the validity of any such law, rule or regulation. 13.4 Choice of Law and Jurisdiction. ---- ------------------------------- THIS AGREEMENT AND THE RIGHTS AND DUTIES OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY AND CONSTRUED, ENFORCED AND PERFORMED IN ACCORDANCE WITH THE LAWS OF THE STATE OF MARYLAND, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. Except as provided in Section 13.11, all disputes hereunder or relating hereto shall be resolved in the Federal or State courts of Maryland and each Party hereby irrevocably submits to the in personam jurisdiction of 21 such courts. Each Party herein waives its respective right to any jury trial with respect to any litigation arising under or in connection with this Agreement. 13.5 Counterparts to this Agreement. ---- ------------------------------- This Agreement may be executed in any number of counterparts each of which shall be an original, but all of which together shall constitute one and the same instrument. 13.6 Notices. ---- -------- All notices, requests, statements or payments shall be made as specified below. Notices required to be in writing shall be delivered by letter, facsimile or other documentary form. Notice by facsimile or hand delivery shall be deemed to have been received by the close of the Business Day on which it was transmitted or hand delivered (unless transmitted or hand delivered after close in which case it shall be deemed received at the close of the next Business Day). Notice by overnight mail or courier shall be deemed to have been received two (2) Business Days after it was sent. A Party may change its addresses by providing notice of same in accordance herewith: To ALLEGHENY ENERGY SUPPLY COMPANY, LLC: -------------------------------------- NOTICES & CORRESPONDENCE: PAYMENTS: - ------------------------ -------- Joseph P. Limone Federal Wire Transfer 909 Third Avenue, 33rd Floor *** New York, New York 10022 ABA Routing *** FAX No.: (212) 224-8720 Account: Allegheny Energy Supply Co., LLC Phone No.: (212) 224-8690 Account #: *** INVOICES: CREDIT AND COLLECTIONS: - -------- ---------------------- Michael Schubiger Michael Schubiger 909 Third Avenue, 33rd Floor 909 Third Avenue, 33rd Floor New York, New York 10022 New York, New York 10022 FAX No.: (212) 224-8438 FAX No.: (212) 224-8438 Phone No.: (212) 224-7028 Phone No.: (212) 224-7028 SCHEDULING: - ----------- Scheduling Desk 909 Third Avenue, 33rd Floor New York, New York 10022 FAX No.: (212) 224-8720 Phone No.: (212) 224-8750 22 The asterisks on this page denote that confidential portions of this exhibit have been omitted in reliance on Rule 25(b)-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission. To BGE: --- NOTICES & CORRESPONDENCE: PAYMENTS: - ------------------------ -------- Baltimore Gas and Electric Company Federal Wire Transfer General Counsel *** 39 W. Lexington Street ABA Routing *** Baltimore, Maryland 21201 Account: Baltimore Gas & Electric Company FAX No.: (410) 234-7043 Account # *** Phone No.: (410) 234-5805 INVOICES: CREDIT AND COLLECTIONS: - -------- ---------------------- Attn: Electric Supply Manager - Finance & Accounting 7225 Windsor Boulevard 39 West Lexington Street, 11th Floor Baltimore, Maryland 21244 Baltimore, Maryland 21201 FAX No.: (410) 265-4005 FAX No.: (410) 234-5858 Phone No.: (410) 265-4229 Phone No.: (410) 234-6888 SCHEDULING: - ---------- Attn: Electric Supply 7225 Windsor Boulevard Baltimore, Maryland 21244 FAX No.: (410) 265-4005 Phone No.: (410) 265-4229 13.7 Confidentiality. ---- ---------------- Each Party agrees that it will treat in strictest confidence all documents, materials, and other information marked "Confidential" or "Proprietary" by the disclosing Party ("Confidential Information") which it shall have obtained regarding the other Party during the course of the negotiations leading to, and its performance of, this Agreement (whether obtained before or after the date of this Agreement). Confidential Information shall not be communicated to any third person (other than to the receiving Party's counsel, accountants, financial or tax advisors, or in connection with its financings); provided that in the event the receiving Party is required by law, regulation or court order to disclose any Confidential Information, the receiving Party will promptly notify the disclosing Party in writing prior to making any such disclosure in order to facilitate the disclosing Party's seeking a protective order or other appropriate remedy from the proper authority and further provided that the receiving Party further agrees that if the disclosing Party ultimately discloses such Confidential Information to the requesting legal body, it will furnish only that portion of the Confidential Information which is legally required and will 23 The asterisks on this page denote that confidential portions of this exhibit have been omitted in reliance on Rule 25(b)-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission. exercise all reasonable efforts to obtain reliable assurances that confidential treatment will be accorded the Confidential Information. The Parties shall be entitled to all remedies available at law or in equity to enforce, or seek relief in connection with these confidentiality obligations. 13.8 General. ---- -------- This Agreement (including the Appendices hereto) constitutes the entire agreement between the Parties relating to the subject matter contemplated by this Agreement. The Agreement shall be considered for all purposes as prepared through the joint efforts of the Parties and shall not be construed against one Party or the other as a result of the preparation, substitution, submission or other event of negotiation, drafting or execution hereof. No amendment or modification to this Agreement shall be enforceable unless reduced to writing and executed by both Parties. This Agreement shall not impart any rights enforceable by any third-party (other than a permitted successor or assignee bound to this Agreement). No waiver by a Party of any default by the other Party shall be construed as a waiver of any other default. Any provision declared or rendered unlawful by any applicable court of law or regulatory agency or deemed unlawful because of a statutory change will not otherwise affect the remaining lawful obligations that arise under this Agreement. The term "including" when used in this Agreement shall be by way of example only and shall not be considered in any way to be in limitation. The headings used herein are for convenience and reference purposes only. All indemnity and audit rights shall survive the termination of this Agreement for two years. 13.9 Changes in Rates, Charges, Terms or Conditions. ---- ----------------------------------------------- Each Party hereby waives its rights to seek any change to the rates, charges, terms and conditions contained in this Agreement under Sections 205 or 206 of the Federal Power Act, as either section may be amended or superseded or to support a complaint or other judicial, regulatory or legislative action seeking a change in this Agreement, absent mutual written agreement of the Parties. It is the intent of this Section that, to the maximum extent permitted by law, the rates, charges, terms and conditions of this Agreement shall not be subject to change, regardless of whether such change is sought (a) by the FERC acting sua sponte on behalf of a Party or a third party, (b) by a Party, (c) by a third party, or (d) in any other manner. 13.10 Arbitration Proceedings. ----- ------------------------ (a) In the event that any dispute or need for interpretation arises between the Parties hereto pertaining to the calculation of a Termination Payment or a payment otherwise required pursuant to this Agreement, the Parties shall refer the matter to their duly authorized representatives for resolution. Should such representatives of the respective Parties fail to resolve the dispute within ten (10) days from such referral, the Parties agree that any such dispute will not be referred to any court, but will be referred to binding arbitration in the city where BGE's corporate headquarters is located. 24 (b) If any dispute has not been resolved by the duly authorized representatives with ten (10) days from referral to them, either Party may give notice, in writing, to the other Party of its desire to submit the dispute to arbitration and may designate an arbitrator. Within ten (10) days after the receipt of such notice, the other Party may, in writing, serve upon the Party invoking such arbitration, a notice designating an arbitrator on its behalf. The two arbitrators so chosen shall within fifteen (15) days after the appointment of the second arbitrator designate, in writing, a third arbitrator. Upon the failure of the Party notified to appoint the second arbitrator within the permitted time, the Parties shall proceed with arbitration using a single arbitrator. If the first and second arbitrators are unable to agree on a third arbitrator within (15) days of the appointment of the second arbitrator, the first and second arbitrator shall invoke the services of the American Arbitration Association ("AAA") to appoint a third arbitrator. The third arbitrator shall, to the extent practicable, have special competence and experience with respect to the subject matter under consideration. Any arbitrator so appointed under this Section shall have full authority to act pursuant to this Section. No arbitrator so appointed shall have the authority to amend or add to this Agreement. The arbitrator or arbitrators shall, thereupon, proceed promptly to hear and determine the controversy pursuant to the then current rules of the American Arbitration Association for the conduct of commercial arbitration proceedings. Such arbitrator or arbitrators shall fix a time within which the matter shall be submitted to the arbitrator or the panel by either or both of the Parties. The arbitrator or the panel shall make a decision on the dispute within ten (10) days of final submission by the Parties. The decision of the single arbitrator, or two of the three arbitrators, shall be taken as the arbitration decision. Such decision shall be made in writing and in duplicate, and one copy shall be delivered to each of the Parties. The arbitrator(s) shall determine the manner in which the expense of the arbitration shall be borne, except that each Party shall pay the costs of its own counsel. Each Party shall accept and abide by the decision. The award shall be final except as otherwise provided by applicable law. Judgment upon such award may be entered by the prevailing Party in any Maryland state circuit court or any federal court within Maryland or application may be made in any such court for judicial acceptance of such award and an order of enforcement. 13.11 Audit. ----- ------ Each Party has the right, at its sole expense and during normal working hours, to examine the records of the other Party to the extent reasonably necessary to verify the accuracy of any statement, charge or computation made pursuant to this Agreement. If requested, a Party shall provide to the other Party statements evidencing the quantities of Full Requirements Service delivered at the Delivery Point. If any such examination reveals any inaccuracy in any statement, the necessary adjustments in such statement and the payments thereof will be made promptly and shall bear interest at the Interest Rate from the date the overpayment or underpayment was made until paid; provided, however, that no adjustment for any statement or payment will be made unless objection to the accuracy thereof was made prior to the lapse of 12 months from the rendition thereof. 25 IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the date set forth at the beginning of this Agreement. BALTIMORE GAS AND ELECTRIC COMPANY By: _______________________________________ Name and Title: Frank O. Heintz President and CEO ALLEGHENY ENERGY SUPPLY COMPANY, L.L.C. By: _______________________________________ Name and Title: Joseph P. Limone Authorized Signatory for Allegheny Energy Supply Company, L.L.C. 26 APPENDIX A TO FULL REQUIREMENTS SERVICE AGREEMENT PAGE 1 of 4 PARTICIPANT: Baltimore Gas and Electric Company FINAL BILLING STATEMENT ISSUED ON: MM/DD/YYYY FOR PERIOD: MM/DD/YYYY TO MM/DD/YYYY - -------------------------------------------------------------------------------- Billing Statement Summary: Total Net Charge/Credit per Operating Agreement of PJM Interconnection, L.L.C. $ Net Charge/Credit per PJM Open Transmission Tariff $ Net Charge/Credit per Reliability Assurance Agreement Among Load Serving Entities in the PJM Control Area $ Total Net Charge/Credit. $ - -------------------------------------------------------------------------------- TERMS: PAYABLE IN FULL BY 01:00 PM EDT ON MM/DD/YYYY WIRE TRANSFER FUNDS TO: PJM INTERCONNECTION, L.L.C PNC BANK N.A. NEW JERSEY ABA NUMBER **** ACCOUNT NUMBER **** A-1 The asterisks on this page denote that confidential portions of this exhibit have been omitted in reliance on Rule 25(b)-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted separately to the Securities and Exchange Commission. APPENDIX A TO FULL REQUIREMENTS SERVICE AGREEMENT PAGE 2 of 4 PARTICIPANT: Baltimore Gas and Electric Company FINAL BILLING STATEMENT ISSUED ON: MM/DD/YYYY FOR PERIOD: MM/DD/YYYY TO MM/DD/YYYY - -------------------------------------------------------------------------------- OPERATING AGREEMENT OF PJM INTERCONNECTION, L.L.C.: Day-ahead Balancing Total Charges: Spot Market Energy $ Supplier $ Supplier $ Supplier Regulation $ Supplier Operating Reserves $ Supplier $ Supplier $ Supplier Transmission Congestion $ Supplier $ Supplier $ Supplier Transmission Losses $ Supplier $ Supplier $ Supplier Emergency Energy $ Supplier Capacity Credit Market $ Supplier FTR Auction $ Supplier Meter Error Correction $ Supplier Unscheduled Transmission Service $ Supplier Ramapo PAR Facilities $ BGE Reconciliation for Spot Market $ Supplier Reconciliation for Regulation $ Supplier Reconciliation for Operating Reserves $ Supplier Credits: Spot Market Energy $ Supplier $ Supplier $ Supplier Regulation $ Supplier Operating Reserves $ Supplier $ Supplier $ Supplier Transmission Congestion $ BGE Transmission Losses $ Supplier Emergency Energy $ Supplier Capacity Credit Market $ Supplier FTR Auction $ Supplier FTR Auction Revenue Allocations $ BGE Ramapo PAR $ BGE Reconciliation for Transmission Losses $ Supplier Unscheduled Transmission Service $ BGE - -------------------------------------------------------------------------------- A-2 APPENDIX A TO FULL REQUIREMENTS SERVICE AGREEMENT PAGE 3 of 4 PARTICIPANT: Baltimore Gas and Electric Company FINAL BILLING STATEMENT ISSUED ON: MM/DD/YYYY FOR PERIOD: MM/DD/YYYY TO MM/DD/YYYY
- ------------------------------------------------------------------------------------------- PJM OPEN ACCESS TRANSMISSION TARIFF: Total Charges: PJM Scheduling, System Control and Dispatch Service $ Supplier RTO Scheduling, System Control and Dispatch Service $ Supplier Reactive Supply and Voltage Control from Generation Sources Service $ Supplier Network Integration Transmission Service $ BGE Firm Point-to-Point Transmission Service $ Supplier Non-Firm Point-to-Point Transmission Service $ Supplier Firm Point-to-Point - Other Supporting Facilities and Taxes $ Supplier Non-Firm Point-to-Point - Other Supporting Facilities and Taxes $ Supplier Mid-Atlantic Area Council $ BGE Distribution Facilities $ Supplier Reconciliation for PJM Scheduling, System Control and Dispatch Service $ Supplier Reconciliation for RTO Scheduling, System Control and Dispatch Service $ Supplier Special Studies $ Requestor Credits: RTO Scheduling, System Control and Dispatch Service $ BGE Reactive Supply and Voltage Control from Generation Sources Service $ Supplier Network Integration Transmission Service $ BGE Firm Point-to-Point Transmission Service $ BGE Non-Firm Point-to-Point Transmission Service $ BGE Distribution Facilities $ BGE - -------------------------------------------------------------------------------------------
A-3 APPENDIX A TO FULL REQUIREMENTS SERVICE AGREEMENT PAGE 4 of 4 PARTICIPANT: Baltimore Gas and Electric Company FINAL BILLING STATEMENT ISSUED ON: MM/DD/YYYY FOR PERIOD: MM/DD/YYYY TO MM/DD/YYYY - -------------------------------------------------------------------------------- Reliability Assurance Agreement Among Load Serving Entities in the PJM Control Area: Total Charges: Capacity Deficiency $ Supplier Credits: Capacity Excess $ Supplier - -------------------------------------------------------------------------------- A-4 APPENDIX B TO FULL REQUIREMENTS SERVICE AGREEMENT CONFIDENTIAL Generation Shopping Credits
Residential Service - Schedule R Jul 2003 - May 2004 Jun 2004 - May 2005 Jun 2005 - May 2006 Jun-06 ------------------- ------------------- ------------------- ------ Energy Charges in (cent)/kWh Summer 5.286 5.396 5.492 5.756 Non-Summer 3.489 3.599 3.695 n/a Residential Large Service - Schedule RL-1 Jul 2003 - May 2004 Jun 2004 Jul 2004 - May 2005 Jun 2005 - May 2006 Jun-06 ------------------- -------- ------------------- ------------------- ------ Energy Charges in (cent)/kWh Summer Peak 7.279 7.389 7.528 7.624 7.888 Intermediate-Peak 5.172 5.282 5.376 5.472 5.736 Off-Peak 2.895 3.005 3.050 3.146 3.410 Non-Summer Peak 3.985 n/a 4.164 4.260 n/a Intermediate-Peak 3.622 n/a 3.793 3.889 n/a Off-Peak 2.689 n/a 2.841 2.937 n/a Residential Optional Time-of-Use Service - Schedule RL-2 Jul 2003 - May 2004 Jun 2004 - May 2005 Jun 2005 - May 2006 Jun-06 ------------------- ------------------- ------------------- ------ Energy Charges in (cent)/kWh Summer Peak 7.921 8.031 8.127 8.391 Intermediate-Peak 5.607 5.717 5.813 6.077 Off-Peak 3.104 3.214 3.310 3.574 Non-Summer Peak 4.301 4.411 4.507 n/a Intermediate-Peak 3.904 4.014 4.110 n/a Off-Peak 2.879 2.989 3.085 n/a Economy Service - Schedule ES Jul 2003 - May 2004 Jun 2004 - May 2005 Jun 2005 - May 2006 Jun-06 ------------------- ------------------- ------------------- ------ Energy Charges in(cent)/kWh 2.627 2.737 2.833 3.097 General Service - Schedule G Jul 2003 - Jun 2004 ------------------- Option 1: Energy Charges in(cent)/kWh Summer 5.368 Non-Summer 3.739 Option 2: Energy Charges in(cent)/kWh Summer 5.270 Non-Summer 3.641 General Service Small - Schedule GS Jul 2003 - Jun 2004 ------------------- Option 1: Energy Charges in(cent)/kWh Summer Peak 7.383 Intermediate-Peak 5.563 Off-Peak 3.177 Non-Summer Peak 4.462 Intermediate-Peak 4.088 Off-Peak 3.070 Option 2: Energy Charges in(cent)/kWh Summer Peak 7.284 Intermediate-Peak 5.464 Off-Peak 3.079 Non-Summer Peak 4.363 Intermediate-Peak 3.990 Off-Peak 2.973
B-1 APPENDIX B TO FULL REQUIREMENTS SERVICE AGREEMENT General Service Large - Schedule GL Jul 2003 - Jun 2004 ------------------- Secondary Service: Demand Charges in $/kW Summer 10.44 Non-Summer 4.85 Energy Charges in (cent)/kWh Summer Peak 4.238 Intermediate-Peak 3.049 Off-Peak 1.601 Non-Summer Peak 2.561 Intermediate-Peak 2.219 Off-Peak 1.627 Primary Service: Demand Charges in $/kW Summer 10.15 Non-Summer 4.72 Energy Charges in (cent)/kWh Summer Peak 4.092 Intermediate-Peak 2.944 Off-Peak 1.535 Non-Summer Peak 2.473 Intermediate-Peak 2.141 Off-Peak 1.558 Street Lighting - Schedule SL Jul 2003 - Jun 2004 ------------------- Energy Charges in(cent)/kWh 3.255 Private Area Lighting - Schedule PL Jul 2003 - Jun 2006 ------------------- Energy Charges in(cent)/kWh 3.260 Default Service - Schedule DS market-based price1 Contract Classes Class 1 market-based price1 Class 2 2.73(cent)/kWh2 1 "Market-based price" for Default Service and Contract Class 1 includes the market price associated with energy, capacity and ancillary services, as defined under the Default Service Schedule in BGE's Retail Electric Service Tariff. 2 The price of Contract Class 2 varies with the Baltimore Locational Marginal Price. The stated(cent)/kWh price represents the average price for the 12 months ending April 2001. B-2 APPENDIX C TO FULL REQUIREMENTS SERVICE AGREEMENT LITIGATION DISCLOSURE None. C-1 EX-12 6 ex12a.txt EX12A Exhibit 12(a) CONSTELLATION ENERGY GROUP, INC. AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
12 Months Ended ---------------------------------------------------------------------------------------- September December December December December December 2001 2000 1999 1998 1997 1996 ----------- ------------ ------------ ------------ ------------ ------------ (In Millions of Dollars) Income from Continuing Operations (Before Extraordinary Loss and Cumulative Effect of Change in Accounting Principle) $ 428.7 $ 345.3 $ 326.4 $ 305.9 $ 254.1 $ 272.3 Taxes on Income, Including Tax Effect for BGE Preference Stock Dividends 249.2 221.4 182.5 169.3 145.1 148.3 ----------- ------------ ------------ ------------ ------------ ------------ Adjusted Income $ 677.9 $ 566.7 $ 508.9 $ 475.2 $ 399.2 $ 420.6 ----------- ------------ ------------ ------------ ------------ ------------ Fixed Charges: Interest and Amortization of Debt Discount and Expense and Premium on all Indebtedness $ 238.7 $ 261.5 $ 245.7 $ 255.3 $ 234.2 $ 203.9 Earnings required for BGE Preference Stock Dividends 21.9 21.9 21.0 33.8 45.1 59.4 Capitalized Interest 32.8 21.1 2.7 3.6 8.4 15.7 Interest Factor in Rentals 2.0 2.2 1.8 1.9 1.9 1.5 ----------- ------------ ------------ ------------ ------------ ------------ Total Fixed Charges $ 295.4 $ 306.7 $ 271.2 $ 294.6 $ 289.6 $ 280.5 ----------- ------------ ------------ ------------ ------------ ------------ Earnings (1) $ 940.5 $ 852.3 $ 777.4 $ 766.2 $ 680.4 $ 685.4 =========== ============ ============ ============ ============ ============ Ratio of Earnings to Fixed Charges 3.18 2.78 2.87 2.60 2.35 2.44
(1) Earnings are deemed to consist of income from continuing operations (before extraordinary loss and cumulative effect of change in accounting principle) that includes earnings of Constellation Energy's consolidated subsidiaries, equity in the net income of unconsolidated subsidiaries, income taxes (including deferred income taxes, investment tax credit adjustments, and the tax effect of BGE's preference stock dividends), and fixed charges other than capitalized interest. EX-12 7 ex12b.txt EX12B 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 --------------------------------------------------------------------------------------- September December December December December December 2001 2000 1999 1998 1997 1996 ---------- ------------ ------------- ------------ ------------ ------------ (In Millions of Dollars) Income from Continuing Operations (Before Extraordinary Loss) $ 132.3 $ 143.5 $ 328.4 $ 327.7 $ 282.8 $ 310.8 Taxes on Income 86.4 94.2 182.0 181.3 161.5 169.2 ---------- ------------ ------------- ------------ ------------ ------------ Adjusted Income $ 218.7 $ 237.7 $ 510.4 $ 509.0 $ 444.3 $ 480.0 ---------- ------------ ------------- ------------ ------------ ------------ Fixed Charges: Interest and Amortization of Debt Discount and Expense and Premium on all Indebtedness $ 166.0 $ 186.8 $ 206.4 $ 255.3 $ 234.2 $ 203.9 Capitalized Interest - - 0.4 3.6 8.4 15.7 Interest Factor in Rentals 0.7 0.9 1.0 1.9 1.9 1.5 ---------- ------------ ------------- ------------ ------------ ------------ Total Fixed Charges $ 166.7 $ 187.7 $ 207.8 $ 260.8 $ 244.5 $ 221.1 ---------- ------------ ------------- ------------ ------------ ------------ Preferred and Preference Dividend Requirements: (1) Preferred and Preference Dividends $ 13.2 $ 13.2 $ 13.5 $ 21.8 $ 28.7 $ 38.5 Income Tax Required 8.7 8.7 7.5 12.0 16.4 20.9 ---------- ------------ ------------- ------------ ------------ ------------ Total Preferred and Preference Dividend Requirements $ 21.9 $ 21.9 $ 21.0 $ 33.8 $ 45.1 $ 59.4 ---------- ------------ ------------- ------------ ------------ ------------ Total Fixed Charges and Preferred and Preference Dividend Requirements $ 188.6 $ 209.6 $ 228.8 $ 294.6 $ 289.6 $ 280.5 ========== ============ ============= ============ ============ ============ Earnings (2) $ 385.4 $ 425.4 $ 717.8 $ 766.2 $ 680.4 $ 685.4 ========== ============ ============= ============ ============ ============ Ratio of Earnings to Fixed Charges 2.31 2.27 3.45 2.94 2.78 3.10 Ratio of Earnings to Combined Fixed Charges and Preferred and Preference Dividend Requirements 2.04 2.03 3.14 2.60 2.35 2.44
(1)Preferred and preference dividend requirements consist of an amount equal to the pre-tax earnings that would be required to meet dividend requirements on preferred stock and preference stock. (2)Earnings are deemed to consist of income from continuing operations (before extraordinary loss) that includes earnings of BGE's consolidated subsidiaries, income taxes (including deferred income taxes and investment tax credit adjustments), and fixed charges other than capitalized interest. -----END PRIVACY-ENHANCED MESSAGE-----