-----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, QKWjvmgWt5XAOmbB0D4SsWBw6C9PZB9N57iJ3LK41Q/De9DlYuDV7turvsujZf5T QDPoRg0IUgrRr7a92Hkf5A== 0000009466-98-000068.txt : 19981116 0000009466-98-000068.hdr.sgml : 19981116 ACCESSION NUMBER: 0000009466-98-000068 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 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: SEC FILE NUMBER: 001-01910 FILM NUMBER: 98747872 BUSINESS ADDRESS: STREET 1: 39 W LEXINGTON ST STREET 2: CHARLES CTR CITY: BALTIMORE STATE: MD ZIP: 21201 BUSINESS PHONE: 4102345511 10-Q 1 QUARTERLY REPORT 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, 1998 Commission file number 1-1910 BALTIMORE GAS AND ELECTRIC COMPANY (Exact name of registrant as specified in its charter) Maryland 52-0280210 ----------------------------- --- ------------------------------------- (State of Incorporation) (IRS Employer Identification No.) 39 W. Lexington Street Baltimore, Maryland 21201 ------------------------------- ----------------------- ----------------- (Address of principal executive offices) (Zip Code) 410-783-5920 (Registrant's 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 registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No Common Stock, without par value - 149,245,641 shares outstanding on October 31, 1998. 1 BALTIMORE GAS AND ELECTRIC COMPANY PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Income (Unaudited) - ---------------------------------------------
Three Months Ended Nine Months Ended September 30, September 30, 1998 1997 1998 1997 ---------- ---------- ----------- ----------- (In Millions, Except Per-Share Amounts) Revenues Electric $ 722.5 $ 676.3 $ 1,746.8 $ 1,691.7 Gas 62.1 60.9 324.7 367.0 Diversified businesses 149.4 123.6 496.2 436.3 ---------- ---------- ----------- ----------- Total revenues 934.0 860.8 2,567.7 2,495.0 ---------- ---------- ----------- ----------- Expenses Other Than Interest and Income Taxes Electric fuel and purchased energy 149.4 135.2 391.5 383.3 Gas purchased for resale 21.6 25.4 152.0 206.8 Operations 129.4 124.1 395.3 389.2 Maintenance 38.7 36.8 130.8 139.0 Diversified businesses - selling, general, and administrative 122.9 74.9 393.8 324.0 Write-downs of real estate investments - - - 67.6 Depreciation and amortization 89.6 85.4 275.6 256.1 Taxes other than income taxes 62.0 58.0 168.6 165.3 ---------- ---------- ----------- ----------- Total expenses other than interest and income taxes 613.6 539.8 1,907.6 1,931.3 ---------- ---------- ----------- ----------- Income From Operations 320.4 321.0 660.1 563.7 ---------- ---------- ----------- ----------- Other Income Allowance for equity funds used during construction 1.8 1.3 5.0 3.8 Equity in earnings of Safe Harbor Water Power Corporation 1.2 1.2 3.7 3.7 Net other income and (deductions) 0.5 0.8 (2.5) (2.1) ---------- ---------- ----------- ----------- Total other income 3.5 3.3 6.2 5.4 ---------- ---------- ----------- ----------- Income Before Interest and Income Taxes 323.9 324.3 666.3 569.1 ---------- ---------- ----------- ----------- Interest Expense Interest charges 59.6 63.4 181.0 179.5 Distributions on company obligated mandatorily redeemable trust preferred securities 4.5 - 5.3 - Capitalized interest (0.7) (2.0) (2.7) (6.0) Allowance for borrowed funds used during construction (1.0) (0.7) (2.7) (2.0) ---------- ---------- ----------- ----------- Net interest expense 62.4 60.7 180.9 171.5 ---------- ---------- ----------- ----------- Income Before Income Taxes 261.5 263.6 485.4 397.6 ---------- ---------- ----------- ----------- Income Taxes Current 72.4 72.7 160.5 141.6 Deferred 23.2 21.4 19.4 3.2 Investment tax credit adjustments (1.8) (1.9) (5.5) (5.7) ---------- ---------- ----------- ----------- Total income taxes 93.8 92.2 174.4 139.1 ---------- ---------- ----------- ----------- Net Income 167.7 171.4 311.0 258.5 Preference Stock Dividends 6.8 7.0 18.3 22.8 ---------- ---------- ----------- ----------- Earnings Applicable to Common Stock $ 160.9 $ 164.4 $ 292.7 $ 235.7 ========== ========== =========== =========== Average Shares of Common Stock Outstanding 148.7 147.7 148.3 147.7 Earnings Per Common Share and Earnings Per Common Share - Assuming Dilution $1.08 $1.11 $1.97 $1.60 Dividends Declared Per Common Share $0.42 $0.41 $1.25 $1.22 Consolidated Statements of Comprehensive Income (Unaudited) Net Income $ 167.7 $ 171.4 $ 311.0 $ 258.5 Other comprehensive (loss)/gain, net of taxes (0.5) 0.3 (0.6) (1.5) ---------- ---------- ----------- ----------- Comprehensive Income $ 167.2 $ 171.7 $ 310.4 $ 257.0 ========== ========== =========== ===========
See Notes to Consolidated Financial Statements. Certain prior period amounts have been reclassified to conform with the current period's presentation. 2 BALTIMORE GAS AND ELECTRIC COMPANY PART I. FINANCIAL INFORMATION (Continued) Item 1. Financial Statements Consolidated Balance Sheets - ---------------------------
September 30 December 31, 1998* 1997 ------------ ------------- (In Millions) ASSETS Current Assets Cash and cash equivalents $ 215.1 $ 162.6 Accounts receivable (net of allowance for uncollectibles of $25.4 at September 30, 1998 and $24.1 at December 31, 1997) 462.9 419.8 Trading securities 111.3 119.7 Fuel stocks 84.9 87.6 Materials and supplies 152.2 164.2 Prepaid taxes other than income taxes 99.4 65.2 Assets from energy trading activities 60.6 9.4 Other 20.8 27.4 ------------ ------------- Total current assets 1,207.2 1,055.9 ------------ ------------- Investments and Other Assets Real estate projects and investments 394.8 446.8 Power generation systems 574.3 451.7 Financial investments 192.8 196.5 Nuclear decommissioning trust fund 162.2 145.3 Net pension asset 114.3 113.0 Safe Harbor Water Power Corporation 34.4 34.4 Senior living facilities 83.3 62.2 Other 109.8 98.7 ------------ ------------- Total investments and other assets 1,665.9 1,548.6 ------------ ------------- Utility Plant Plant in service Electric 6,839.0 6,725.6 Gas 904.8 846.9 Common 545.4 554.1 ------------ ------------- Total plant in service 8,289.2 8,126.6 Accumulated depreciation (3,002.5) (2,843.4) ------------ ------------- Net plant in service 5,286.7 5,283.2 Construction work in progress 196.7 215.2 Nuclear fuel (net of amortization) 144.4 127.9 Plant held for future use 25.2 25.2 ------------ ------------- Net utility plant 5,653.0 5,651.5 ------------ ------------- Deferred Charges Regulatory assets (net) 443.8 470.7 Other 52.8 46.7 ------------ ------------- Total deferred charges 496.6 517.4 ------------ ------------- TOTAL ASSETS $ 9,022.7 $ 8,773.4 ============ =============
* Unaudited See Notes to Consolidated Financial Statements. Certain prior period amounts have been reclassified to conform with the current period's presentation. 3 BALTIMORE GAS AND ELECTRIC COMPANY PART I. FINANCIAL INFORMATION (Continued) Item 1. Financial Statements Consolidated Balance Sheets - ---------------------------
September 30, December 31, 1998* 1997 ------------ ------------- (In Millions) LIABILITIES AND CAPITALIZATION Current Liabilities Short-term borrowings $ 123.8 $ 316.1 Current portions of long-term debt and preference stock 448.5 271.9 Accounts payable 278.4 203.0 Customer deposits 34.3 30.1 Accrued taxes 47.9 5.5 Accrued interest 65.6 58.4 Dividends declared 65.8 66.3 Accrued vacation costs 35.3 36.2 Liabilities from energy trading activities 57.8 8.6 Other 35.9 44.3 ------------ ------------- Total current liabilities 1,193.3 1,040.4 ------------ ------------- Deferred Credits and Other Liabilities Deferred income taxes 1,306.6 1,294.9 Postretirement and postemployment benefits 201.3 185.5 Decommissioning of federal uranium enrichment facilities 34.9 34.9 Other 54.7 58.4 ------------ ------------- Total deferred credits and other liabilities 1,597.5 1,573.7 ------------ ------------- Capitalization Long-term Debt First refunding mortgage bonds of BGE 1,554.2 1,570.8 Other long-term debt of BGE 974.8 921.3 Long-term debt of diversified businesses 703.2 759.4 Unamortized discount and premium (12.6) (13.7) Current portion of long-term debt (438.5) (248.9) ------------ ------------- Total long-term debt 2,781.1 2,988.9 ------------ ------------- Company obligated mandatorily redeemable trust preferred securities 250.0 - ------------ ------------- Redeemable Preference Stock 10.0 113.0 Current portion of redeemable preference stock (10.0) (23.0) ------------ ------------- Total redeemable preference stock - 90.0 ------------ ------------- Preference Stock Not Subject to Mandatory Redemption 190.0 210.0 ------------ ------------- Common Shareholders' Equity Common stock 1,466.6 1,433.0 Retained earnings 1,539.9 1,432.5 Accumulated other comprehensive income 4.3 4.9 ------------ ------------- Total common shareholders' equity 3,010.8 2,870.4 ------------ ------------- Total capitalization 6,231.9 6,159.3 ------------ ------------- TOTAL LIABILITIES AND CAPITALIZATION $ 9,022.7 $ 8,773.4 ============ =============
* Unaudited See Notes to Consolidated Financial Statements. Certain prior period amounts have been reclassified to conform with the current period's presentation. 4 BALTIMORE GAS AND ELECTRIC COMPANY PART I. FINANCIAL INFORMATION (Continued) Item 1. Financial Statements Consolidated Statements of Cash Flows (Unaudited) - -------------------------------------------------
Nine Months Ended September 30, ------------------------------- 1998 1997 ------------- ----------- (In Millions) Cash Flows From Operating Activities Net income $ 311.0 $ 258.5 Adjustments to reconcile to net cash provided by operating activities Depreciation and amortization 312.8 295.8 Deferred income taxes 19.4 3.2 Investment tax credit adjustments (5.5) (5.7) Deferred fuel costs 1.9 30.0 Accrued pension and postemployment benefits 18.4 (6.3) Write-downs of real estate investments - 67.6 Allowance for equity funds used during construction (5.0) (3.8) Equity in earnings of affiliates and joint ventures (net) (47.7) (33.0) Changes in assets from energy trading activities (51.2) (0.2) Changes in liabilities from energy trading activities 49.2 0.2 Changes in other current assets (47.8) (57.7) Changes in other current liabilities 115.4 29.2 Other 1.5 (9.9) ------------- ----------- Net cash provided by operating activities 672.4 567.9 ------------- ----------- Cash Flows From Financing Activities Proceeds from issuance of Short-term borrowings 1,962.2 2,059.1 Long-term debt 205.6 560.4 Common stock 32.5 - Company obligated mandatorily redeemable trust preferred securities 241.8 - Repayment of short-term borrowings (2,154.5) (2,141.8) Reacquisition of long-term debt (166.0) (253.8) Redemption of preference stock (124.9) (91.5) Common stock dividends paid (183.5) (178.7) Preference stock dividends paid (17.6) (23.6) Other (0.4) (0.6) ------------- ----------- Net cash used in financing activities (204.8) (70.5) ------------- ----------- Cash Flows From Investing Activities Utility construction expenditures (including AFC) (215.7) (260.0) Allowance for equity funds used during construction 5.0 3.8 Nuclear fuel expenditures (49.0) (42.3) Deferred energy conservation expenditures (15.2) (21.5) Contributions to nuclear decommissioning trust fund (13.2) (13.2) Merger costs - (25.3) Purchases of marketable equity securities (26.8) (16.1) Sales of marketable equity securities 26.2 34.8 Other financial investments 14.1 9.9 Real estate projects and investments 7.8 25.9 Power generation systems (87.6) (19.3) Other (60.7) (51.0) ------------- ----------- Net cash used in investing activities (415.1) (374.3) ------------- ----------- Net Increase in Cash and Cash Equivalents 52.5 123.1 Cash and Cash Equivalents at Beginning of Period 162.6 66.7 ------------- ----------- Cash and Cash Equivalents at End of Period $ 215.1 $ 189.8 ============= =========== Other Cash Flow Information: Interest paid (net of amounts capitalized) $ 170.7 $ 160.1 Income taxes paid $ 108.5 $ 63.8
Noncash Investing and Financing Activites: In September 1998, Corporate Office Properties Trust assumed approximately $60 million of Constellation Real Estate Group's (CREG) debt and issued to CREG 6.2 million common shares and 866,000 convertible preferred shares. In exchange, COPT received 12 operating properties from CREG. See Notes to Consolidated Financial Statements. Certain prior period amounts have been reclassified to conform with the current period's presentation. 5 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 which 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. Comprehensive Income - -------------------- We adopted Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income, effective January 1, 1998. Comprehensive income includes net income plus all changes in shareholders' equity for the period, excluding shareholder transactions (some examples are stock issuances and dividend payments). Our comprehensive income includes net income plus the effect of unrealized gains or losses on available-for-sale securities. We have presented comprehensive income in the Consolidated Statements of Comprehensive Income on page 2, and accumulated other comprehensive income in the Consolidated Balance Sheets on page 4. BGE Financing Activity - ---------------------- Issuances - --------- On June 15, 1998 BGE Capital Trust I (Trust), a Delaware business trust established by BGE, issued 10,000,000 Trust Originated Preferred Securities (TOPrS) for $250 million ($25 liquidation amount per preferred security) with a distribution rate of 7.16%. The TOPrS are included as "Company obligated mandatorily redeemable trust preferred securities" in the Consolidated Balance Sheets on page 4. The Trust used the net proceeds from the issuance of the preferred securities to purchase a series of 7.16% Deferrable Interest Subordinated Debentures due June 30, 2038 (Debentures) from BGE with the same terms as the TOPrS. The Trust must redeem the TOPrS at $25 per preferred security plus accrued but unpaid distributions when the Debentures are paid at maturity or upon any earlier redemption. BGE has the option to redeem the Debentures at any time on or after June 15, 2003 or at any time when certain tax or other events occur. The interest paid on the Debentures, which the Trust will use to make distributions on the TOPrS, is included in Interest Expense in the Consolidated Statements of Income on page 2 and is deductible for income tax purposes. BGE fully and unconditionally guarantees the TOPrS based on its various obligations relating to the Debentures and the TOPrS. The Debentures are the only assets of the Trust. The Trust is wholly owned by BGE because we own all the securities of the Trust that have general voting power. We issued the following medium-term notes during the period from January 1, 1998 through the date of this report: Date Net Principal Issued Proceeds --------- ------ -------- (In millions) Series E - -------- 6.21%, due 2008 $16.5 4/98 $16.4 Series G - -------- 6.36%, due 2008 $25.0 3/98 $24.9 6.21%, due 2008 $25.0 4/98 $24.9 6.20%, due 2008 $40.0 4/98 $39.8 5.78%, due 2008 $50.0 10/98 $49.7 During the period from January 1, 1998 through the date of this report, we issued a total of 1,578,527 shares of common stock, without par value, under our Common Stock Continuous Offering Program and our Dividend Reinvestment and Stock Purchase Plan. Our net proceeds were about $51.8 million. Early Redemptions - ----------------- During the period from January 1, 1998 through the date of this report, we redeemed or announced the partial or full redemption of several series of long-term debt and preference stock prior to their maturity dates or required redemption dates as follows: Principal Date Price Series or Par Redeemed Paid ------ ------ -------- ---- (In millions) 7 1/2% First Refunding Mortgage Bonds due 4/15/2023 $15.9 8/98 $100.00 7.78% 1973 Preference Stock $20.0 7/98 $101.00 7.50% 1986 Preference Stock $33.5 7/98 $102.50 6.75% 1987 Preference Stock $39.5 7/98 $102.25 6 In addition, we made the following optional sinking fund redemptions: Principal Date Price Series or Par Redeemed Paid ------ ------ -------- ---- (In millions) 6.75% 1987 Preference Stock $1.5 4/98 $100.00 7.85% 1991 Preference Stock $7.0 7/98 $100.00 7.50% 1986 Preference Stock $1.5 10/98 $100.00 The above referenced early redemptions of preference stock are in addition to mandatory redemptions of preference stock also made during this period. In the future, we may purchase some of our long-term debt or preference stock in the market. This will depend on market conditions and our capital structure, including our mix of secured and unsecured debt. Diversified Business Financing Activity - --------------------------------------- We describe our diversified businesses in the "Diversified Businesses" section of Management's Discussion and Analysis beginning on page 19. In the first quarter of 1998, affiliates of our power generation business, Constellation Power, Inc., entered into a $92.5 million credit facility to finance the acquisition of existing generating facilities and the development and construction of new generating facilities in Guatemala. At the date of this report, the affiliates' obligation under the facility was approximately $85 million. In August 1998, Constellation Enterprises(TM), Inc. , the holding company for our diversified businesses, entered into a $75 million credit facility to provide for the issuance of letters of credit for its subsidiaries. The facility expires November 30, 1998. At the date of this report, letters of credit totaling approximately $2.3 million were outstanding under this credit facility. In October 1998, a subsidiary of Constellation Enterprises, Inc. issued $157 million of notes to several institutional investors in a private placement offering. The notes were issued in two series consisting of $5 million with an interest rate of 5.43% due October 15, 2000 and $152 million with an interest rate of 5.67% due May 5, 2001. The subsidiary used the net proceeds to refinance outstanding debt and for other general purposes. In October 1998, a subsidiary of Constellation Power, Inc., entered into a $30 million credit facility to finance its' acquisition of an ownership interest in a electric distribution company in Panama. At the date of this report, $30 million is outstanding under this credit facility. Please refer to the "Diversified Business Debt and Liquidity" section of Management's Discussion and Analysis on page 24 for additional information about the debt of our diversified businesses. Commitments - ----------- In March 1998, Constellation Power Source(TM), Inc., our power marketing business, and Goldman, Sachs Capital Partners II L.P., an affiliate of Goldman, Sachs & Co., formed Orion Power Holdings, Inc. to acquire electric generating plants in the United States and Canada. Constellation Power Source owns a minority interest in Orion, and BGE has committed to contribute up to $115 million in equity to Constellation Power Source to fund its investment in Orion. In September 1998, we reached a settlement with PECO Energy Company (PECO) to pay for our termination of an electric capacity contract. The contract provided for PECO to supply us 140 MW of firm electric capacity and associated energy for 25 years. Environmental Matters - --------------------- The Clean Air Act of 1990 contains two titles designed to reduce emissions of sulfur dioxide and nitrogen oxide (NOx) from electric generating stations - Title IV and Title I. Title IV addresses emissions of sulfur dioxide. Compliance is required in two phases: o Phase I became effective January 1, 1995. We met the requirements of this phase by installing flue gas desulfurization systems (scrubbers), switching fuels, and retiring some units. o Phase II must be implemented by January 1, 2000. We are currently examining what actions we should take to comply with this phase. We expect to meet the compliance requirements through some combination of installing scrubbers, switching fuels, retiring some units, or allowance trading. Title I addresses emissions of NOx. The Environmental Protection Agency (EPA) issued a final rule in September, 1998 which requires 22 states (including Maryland) to submit plans to the EPA by September 1999 showing how they will meet its new NOx emissions reduction requirements. The Maryland Department of the Environment (MDE) issued NOx regulations which took effect June 1, 1998. The MDE regulations require major NOx sources to reduce NOx emissions up to 65% by May, 1999. Based on the EPA and MDE regulations, we currently estimate that the additional controls needed at our generating plants will cost approximately $125 million. 7 While we are already taking steps to control NOx emissions at our generating plants, we communicated to MDE that we cannot install the required technology at our Brandon Shores plant in time to meet the MDE's May 1999 deadline. We discuss this further in "Part II Other Information - Legal Proceedings" on page 27. In July 1997, the EPA published new National Ambient Air Quality Standards for very fine particulates and revised standards for ozone attainment. These standards may require increased controls at our fossil generating plants in the future. We cannot estimate the cost of these increased controls at this time because the states, including Maryland, still need to determine what reductions in pollutants will be necessary to meet the federal standards. 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 15.79% 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 $6 million higher than amounts we have recorded as a liability on our Consolidated Balance Sheets. This estimate is based on a Record of Decision recently issued by the EPA. The cleanup costs for some of the remaining sites could be significant, but we do not expect them to have a material effect on our financial position or results of operations. Also, we are coordinating investigation of several sites where gas was manufactured in the past. The investigation of these sites includes reviewing possible actions to remove coal tar. In late December 1996, we signed a consent order with the MDE that requires us to implement remedial action plans for contamination at and around the Spring Gardens site. We submitted the required remedial action plans and they have been approved by MDE. Based on several remedial action options for all sites, the costs we consider to be probable to remedy the contamination are estimated to total $50 million in nominal dollars (including inflation). We have recorded these costs as a liability on our Consolidated Balance Sheets and have deferred these costs, net of accumulated amortization and amounts recovered from insurance companies, as a regulatory asset. We discuss this further in Note 5 of our 1997 Annual Report on Form 10-K. We are also required by accounting rules to disclose additional costs we consider to be less likely than probable costs, but still "reasonably possible" of being incurred at these sites. Because of the results of studies at these sites, it is reasonably possible that these additional costs could exceed the amount we recognized by approximately $48 million in nominal dollars ($11 million in current dollars, plus the impact of inflation at 3.1% over a period of up to 60 years). Our potential environmental liabilities and pending environmental actions are described in our 1997 Annual Report on Form 10-K under "Item 1. Business - Environmental Matters." Nuclear Insurance - ----------------- If there were an accident or an extended outage at either unit of the Calvert Cliffs Nuclear Power Plant (Calvert Cliffs), it could have a substantial adverse financial effect on BGE. The primary contingencies that would result from an incident at Calvert Cliffs could include: o physical damage to the plant, 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 exclusions. Furthermore, the costs that could result from a covered major accident or a covered extended outage at either of the Calvert Cliffs units could exceed our insurance coverage limits. For physical damage to Calvert Cliffs, we have $2.75 billion of property insurance from an industry mutual insurance company. If an outage at either of the two units at Calvert Cliffs is caused by an insured physical damage loss and lasts more than 17 weeks, we have insurance coverage for replacement power costs up to $494.2 million per unit, provided by an industry mutual insurance company. This amount can be reduced by up to $98.8 million per unit if an outage at both units of the plant is caused by a single insured physical damage loss. If accidents at any insured plants cause a shortfall of funds at the industry mutual insurance company, all policyholders could be assessed, with our share being up to $23.2 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 $9.89 billion under the provisions of the Price Anderson Act. If third party claims exceed $200 million (the amount of primary insurance), our share of the total liability for third party claims could be up to $176.2 million per incident. That amount would be payable at a rate of $20 million per year. 8 As an operator of a commercial nuclear power plant in the United States, we are required to purchase insurance to cover radiation injury claims of certain nuclear workers. On January 1, 1998, a new insurance policy became effective for all operators requiring coverage for current operations. Waiving the right to make additional claims under the old policy was a condition for acceptance under the new policy. We describe both the old and new policies below. o BGE 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 10 years. If radiation injury claims under these old policies exceed the policy reserves, all policyholders could be assessed, with our share being up to $6.3 million. If claims under these polices exceed the coverage limits, the provisions of the Price Anderson Act (discussed above) would apply. Recoverability of Electric Fuel Costs - ------------------------------------- By law, we are allowed to recover our cost of electric fuel if the Maryland Public Service Commission (Maryland PSC) finds that, among other things, we have kept the productive capacity of our generating plants at a reasonable level. To do this, the Maryland PSC will evaluate the performance of our generating plants, and will determine if we used all reasonable and cost-effective maintenance and operating control procedures. The Maryland PSC, under the Generating Unit Performance Program, measures annually whether we have maintained the productive capacity of our generating plants at reasonable levels. To do this, the program uses a system-wide generating performance target and an individual performance target for each base load generating unit. In fuel rate hearings, actual generating performance adjusted for planned outages will be compared first to the system-wide target. If that target is met, it should mean that the requirements of Maryland law have been met. If the system-wide target is not met, each unit's adjusted actual generating performance will be compared to its individual performance target to determine if the requirements of Maryland law have been met and, if not, to determine the basis for possibly imposing a penalty on BGE. Even if we meet these targets, parties to fuel rate hearings may still question whether we used all reasonable and cost-effective procedures to try to prevent an outage. If the Maryland PSC decides we were deficient in some way, the Maryland PSC may not allow us to recover the cost of replacement energy. The two units at Calvert Cliffs use the cheapest fuel. As a result, the costs of replacement energy associated with outages at these units can be significant. We cannot estimate the amount of replacement energy costs that could be challenged or disallowed in future fuel rate proceedings, but such amounts could be material. We discuss significant disallowances in prior years related to past outages at Calvert Cliffs in our 1997 Annual Report on Form 10-K. California Power Purchase Agreements - ------------------------------------ Constellation Power, Inc. and subsidiaries and Constellation Investments, Inc. (whose power projects are managed by Constellation Power) have $308 million invested in 15 projects that sell electricity in California under power purchase agreements called "Interim Standard Offer No. 4" agreements. Earnings from these projects were $24 million, or $.16 per share, for the quarter ended September 30, 1998 and $41 million, or $.28 per share, for the nine months ended September 30, 1998. Under these agreements, the projects supply electricity to utility companies at: o a fixed rate for capacity and energy for the first 10 years of the agreements, and o a fixed rate for capacity plus a variable rate for energy based on the utilities' avoided cost for the remaining term of the agreements. Generally, a "capacity rate" is paid to a power plant for its availability to supply electricity, and an "energy rate" is paid for the electricity actually generated. "Avoided cost" generally is the cost of a utility's cheapest next-available source of generation to service the demands on its system. We use the term transition period to describe the time frame when the 10-year periods for fixed energy rates expire for these 15 power generation projects and they begin supplying electricity at variable rates. The transition period for some of the projects began in 1996 and will continue for the remaining projects through 2000. At the date of this report, seven projects had already transitioned to variable rates and one other project will transition later in 1998. The remaining seven projects will transition in 1999 or 2000. 9 The projects that have already transitioned to variable rates have had lower revenues under variable rates than they did under fixed rates. However, we have not yet experienced total lower earnings from the California projects because the combined revenues from the remaining projects, which continue to supply electricity at fixed rates, are high enough to offset the lower revenues from the variable-rate projects. When the remaining projects transition to variable rates, we expect the revenues from those projects also to be lower than they are under fixed rates. It is difficult to estimate how much lower the revenues may be, but our power generation business earnings could be affected significantly. However, the California projects that make the highest revenues will transition to variable rates in 1999 and 2000. As a result, we do not expect our power generation business to have significantly lower earnings due to the transition to variable rates before the year 2000. Our power generation business is pursuing alternatives for some of these power generation projects including: o repowering the projects to reduce operating costs, o changing fuels to reduce operating costs, o renegotiating the power purchase agreements to improve the terms, o restructuring financings to improve the financing terms, and o selling its ownership interests in the projects. We cannot predict the financial effects of the transition from fixed to variable rates on our power generation business or on BGE, but the effects could be material. Constellation Real Estate - ------------------------- In May 1998, Constellation Real Estate Group (CREG), announced that it had entered into an agreement with Corporate Office Properties Trust (COPT), a real estate investment trust based in Philadelphia. The agreement called for: o COPT to pay CREG approximately $108 million in either cash or debt assumption, and securities comprised of approximately 7.0 million common shares and 985,000 convertible preferred shares, o CREG to contribute up to 16 operating properties and 2 properties under development totaling 1.8 million square feet of office and retail space as well as certain other assets, o COPT to receive certain options and first refusal rights to approximately 91 acres of identified properties which are next to office properties being acquired by them. These options and first refusal rights have terms that range from 2-5 years, and o CREG to become COPT's single largest investor, with approximately a 41.5% ownership interest. COPT and CREG mutually agreed to eliminate from the original agreement one operating property valued at approximately $22.1 million. The COPT transaction is closing in several stages. The first, and most significant closing occurred on September 28, 1998. On that date, COPT assumed approximately $60.0 million of CREG's outstanding debt and issued to CREG approximately 6.2 million common shares and approximately 866,000 convertible preferred shares. Each convertible preferred share yields 5.5% per year, and is convertible after two years into 1.8748 common shares. In exchange, COPT received 12 operating properties from CREG as well as certain other assets and the options and first refusal rights noted above. A second closing occurred on October 22, 1998. On that date, COPT received one operating property from CREG for approximately $9.6 million in cash, approximately 518,000 common shares, and approximately 72,500 convertible preferred shares. COPT also assumed responsibility for completion of construction on the project. A third closing is expected to occur on or about November 16, 1998. On the closing date, COPT is to receive two properties under development from CREG for approximately $5.0 million in cash. Additional closings are expected to occur as follows: o COPT will acquire one operating property from CREG when the construction and leasing of that property is completed. In exchange, COPT will pay approximately $7.5 million in cash, approximately 332,000 common shares, and approximately 46,500 convertible preferred shares. This closing is anticipated to occur in the fourth quarter of 1998, and o COPT will acquire one retail property from CREG by July 1999 for approximately $3.5 million in cash, unless that property is sold to another party prior to that time. 10 Upon completion of the COPT transaction, the remaining real estate projects held by our real estate business, will consist of: o land under development in the Baltimore-Washington corridor, o an entertainment, dining, and retail complex in Orlando, Florida, o a mixed-use planned-unit development, and o senior-living facilities. CREG's real estate projects have continued to incur carrying costs and depreciation over the years. Additionally, CREG has been charging interest payments to expense rather than capitalizing them for some undeveloped land where development activities have stopped. These carrying costs, depreciation, and interest expenses have decreased earnings and are expected to continue to do so. Cash flow from real estate operations has not been enough to make the monthly loan payments on some of these projects. Cash shortfalls have been covered by cash obtained from the cash flows of, or additional borrowings by, other BGE subsidiaries. We consider market demand, interest rates, the availability of financing, and the strength of the economy in general when making decisions about our real estate projects. If we were to sell our remaining real estate projects in the current market, we would have losses, although the amount of the losses is hard to predict. Management's current real estate strategy is to hold each real estate project until we can realize a reasonable value for it except for our entertainment, dining, and retail complex in Orlando, Florida which we intend to sell as discussed in our 1997 Annual Report on the Form 10-K. Management evaluates strategies for all its businesses, including real estate, on an ongoing basis. We anticipate that competing demands for our financial resources and changes in the utility industry will cause us to evaluate thoroughly all diversified business strategies on a regular basis so we use capital and other resources in a manner that is most beneficial. Depending on market conditions in the future, we could also have losses on any future sales. It may be helpful for you to understand when we are required, by accounting rules, to write down the value of a real estate project to market value. A write-down is required 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. 11 Item 2. Management's Discussion - ------------------------------- Management's Discussion and Analysis of Financial Condition and Results of Operations - -------------------------------------------------------------------------------- Introduction - ------------ In Management's Discussion and Analysis, we explain the general financial condition and the results of operations for BGE and its diversified business subsidiaries including: o what factors affect our business, 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 our expenditures for capital projects were in the current period and what we expect them to be in the future, and o where we will get cash for future capital expenditures. As you read Management's Discussion and Analysis, it may be helpful to refer to our Consolidated Statements of Income on page 2, which present the results of our operations for the quarters and nine month periods ended September 30, 1998 and 1997. In Management's Discussion and Analysis, we analyze and explain the differences between periods in the specific line items of the Consolidated Statements of Income. Our analysis may be important to you in making decisions about your investments in BGE. The electric utility industry is undergoing rapid and substantial change. Competition in the generation part of our business is increasing. The regulatory environment (federal and state) is shifting toward customer choice. These matters are discussed briefly in the "Competition and Response to Regulatory Change" section on page 14. They are discussed in detail in our 1997 Annual Report on Form 10-K. Results of Operations for the Quarter and Nine Months Ended September 30, 1998 Compared With the Same Periods of 1997 - -------------------------------------------------------------------------------- In this section, we discuss our earnings and the factors affecting them. We begin with a general overview, then separately discuss earnings for the utility business and for diversified businesses. Overview - -------- Total Earnings per Share of Common Stock - ---------------------------------------- Quarter Ended Nine Months Ended September 30 September 30 -------------- ----------------- 1998 1997 1998 1997 ---- ---- ---- ---- Utility business...... $1.03 $.99 $1.78 $.61 Diversified businesses .05 .12 .19 .29 --- --- --- --- Total earnings per share from operations..... 1.08 1.11 1.97 1.90 ---- ---- ---- ---- Write-downs of real estate investments.. - - - (.30) ---- ---- ---- ---- Total earnings per share $1.08 $1.11 $1.97 $1.60 ==== ==== ==== ==== Quarter Ended September 30, 1998 - -------------------------------- Our total earnings for the quarter ended September 30, 1998 decreased $3.5 million, or $.03 per share, compared to the same period of 1997. In the third quarter of 1998, we had higher utility earnings from operations than we did in the same period of 1997 mostly because we sold more electricity. We discuss our utility earnings in more detail in the "Utility Business" section beginning on page 13. In the third quarter of 1998, diversified business earnings from operations decreased compared to the same period of 1997 mostly because of lower earnings from our financial investments and real estate businesses. Earnings would have been lower except we had higher earnings from our power generation business. We discuss our diversified business earnings in more detail in the "Diversified Businesses" section beginning on page 19. 12 Nine Months Ended September 30, 1998 - ------------------------------------ Our total earnings for the nine months ended September 30, 1998 increased $57.0 million, or $.37 per share, compared to the same period of 1997 mostly because in 1997, our real estate and senior-living facilities business wrote down their investments in two real estate projects by a total of $43.9 million after-tax, or $.30 per share. We discuss these write-downs further in the "Real Estate Development and Senior-Living Facilities" section of our 1997 Annual Report on Form 10-K. In the nine months ended September 30, 1998, we had higher utility earnings from operations than we did in the same period of 1997 mostly because we sold more electricity. We discuss our utility earnings in more detail in the "Utility Business" section below. In the nine months ended September 30, 1998, diversified business earnings from operations decreased compared to the same period of 1997 mostly because of lower earnings from our financial investments and real estate businesses. Earnings would have been lower except we had higher earnings from our power generation business. We discuss our diversified business earnings in more detail in the "Diversified Businesses" section beginning on page 19. Utility Business - ---------------- Before we go into the details of our electric and gas operations, we believe it is important to discuss four factors that have a strong influence on our utility business performance: regulation, the weather, other factors including the condition of the economy in our service territory, and competition. Regulation by the Maryland Public Service Commission (Maryland PSC) - ------------------------------------------------------------------- The Maryland PSC determines the rates we can charge our customers. Our rates consist of a "base rate" and a "fuel rate." The base rate is the rate the Maryland PSC allows us to charge our customers for the cost of providing them service, plus a profit. We have both an electric base rate and a gas base rate. Higher electric base rates apply during the summer when the demand for electricity is the highest. Gas base rates are not affected by seasonal changes. The Maryland PSC allows us to include in base rates a component to recover money spent on conservation programs. This component is called a "conservation surcharge." However, under this surcharge the Maryland PSC limits what our profit can be. If, at the end of the year, we have exceeded our allowed profit, we lower the amount of future surcharges to our customers to correct the amount of overage, plus interest. In addition, we charge our electric customers separately for the fuel we use to generate electricity (nuclear fuel, coal, gas, or oil) and for the net cost of purchases and sales of electricity (primarily with other utilities). We charge the actual cost of these items to the customer with no profit to us. We discuss this in more detail in the "Electric Fuel Rate Clause" section on page 17. We also 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 18. From time to time, when necessary to cover increased costs, we ask the Maryland PSC for base rate increases. The Maryland PSC holds hearings to determine whether to grant us all or a portion of the amount requested. The Maryland PSC has historically allowed us to increase base rates to recover costs for replacing utility plant assets, 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. Weather - ------- Weather affects the demand for electricity and gas, especially among our residential customers. Very hot summers and very cold winters increase demand. Milder weather reduces demand. 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 daily actual temperature exceeds the 65 degree baseline. Heating degree days result when the 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. 13 Effective March 1, 1998, the Maryland PSC allowed us to implement a monthly adjustment to our gas business revenues to eliminate the effect of seasonal weather patterns. This means our monthly gas revenues will be based on weather that is considered "normal" for the month and, therefore, will not be affected by actual weather conditions. The following chart shows the number of heating and cooling degree days in 1998 and 1997, and shows the percentage change in the number of degree days from the prior period. Quarter Ended Nine Months Ended September 30 September 30 -------------- ----------------- 1998 1997 1998 1997 ---- ---- ---- ---- Heating degree days... 74 116 2,559 3,040 Percent change compared to prior (36.2)% (15.8)% period.............. Cooling degree days... 625 529 904 711 Percent change compared to prior 18.1% 27.1% period.............. Other Factors - ------------- Other factors, aside from weather, impact the demand for electricity and gas. These factors include the "number of customers" and "usage per customer" during a given period. We use these terms later in our discussions of electric and gas operations. In those sections, we discuss how these and other factors affected electric and gas sales during 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. Usage per customer refers to all other items impacting customer sales which cannot be separately measured. 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. Competition and Response to Regulatory Change - --------------------------------------------- Our electric and gas businesses are also affected by competition. We discuss competition in each business below. Electric Business - ----------------- Electric utilities are facing competition on various fronts, including: o in the construction of generating units to meet increased demand for electricity, o in the sale of electricity in bulk power markets, o in competing with alternative energy suppliers, and o in the future, for electric sales to retail customers which utilities now serve exclusively. On July 1, 1998, BGE and all other Maryland investor-owned electric utilities filed with the Maryland PSC their individual proposals for the transition from a regulated electric supply system to one where generation is priced based on a competitive retail electric market. In our plan, we proposed that: o All customers would be able to choose other suppliers or our service, o We would guarantee our service at rates frozen until July 2002. Prices would then be adjusted for inflation until the transition is complete, but not beyond 2008, o Customers who choose an alternate supplier would receive a shopping credit. This credit would reduce their BGE bill by the market value of capacity, energy, and other services that we no longer provide those customers, o We would attempt to reduce potentially stranded investments by lowering operating costs and applying all earnings in excess of our authorized rate of return to accelerate the depreciation of generation assets. This would lower the generation asset book values to their competitive market value thereby reducing any potentially stranded investment, o Market value of generation assets would be determined by annual independent appraisals beginning in 2002 and continuing through the transition period, o When the difference between the book value and market value of generation assets is within 10%, the transition period ends and a non-bypassable surcharge would be applied to customers' bills to recover the remaining stranded investments over a two to three year period, and o Net regulatory assets and the nuclear decommissioning costs would continue to be collected from customers through the regulated transmission and distribution business. 14 The Maryland PSC will hold hearings to individually examine our electric restructuring transition proposal and those of the other Maryland investor-owned utilities. The current schedule calls for settlement conferences to occur prior to December 1, 1998. Other parties participating in the proceeding must file their positions by December 22, 1998. Absent a settlement, the Maryland PSC is to issue an order to each utility by October 1, 1999. On September 3, 1998, the Office of People's Counsel filed a petition requesting the Maryland PSC to lower our electric rates by approximately $110 million. At our request, the Maryland PSC agreed to consolidate any review of our electric base rates with its review of our electric restructuring transition proposal discussed above. As a condition of the Maryland PSC's consolidation of these matters, we agreed to make our rates subject to refund effective July 1, 1999 should the Maryland PSC issue a rate reduction order after that date. We regularly reevaluate our strategies with two goals in mind: to improve our competitive position, and to anticipate and adapt to regulatory changes. However, we cannot predict the ultimate effect competition or regulatory change will have on our earnings. We discuss competition in our electric business in more detail in our 1997 Annual Report on Form 10-K under the heading "Electric Regulatory Matters and Competition." Gas Business - ------------ Regulatory change in the natural gas industry is well under way. We discuss competition in our gas business in more detail in our 1997 Annual Report on Form 10-K under the heading "Gas Regulatory Matters and Competition." Effective November 1, 1998, the Maryland PSC has allowed us to begin collecting a Delivery Service Realignment Charge in order to recover certain costs associated with the introduction of competition in our gas business. This is not expected to significantly impact our earnings. Strategies - ---------- We will continue to develop strategies to keep us competitive. These strategies might include one or more of the following: o the complete or partial separation of our generation, transmission and distribution functions, o purchase or sale of generation assets, o mergers or acquisitions of utility or non-utility businesses, o spin-off or sale of one or more businesses, and o growth of revenues from diversified businesses. We discuss our diversified businesses in the "Diversified Businesses" section beginning on page 19. We cannot predict whether any transactions of the types described above may actually occur, nor can we predict what their effect on our financial condition or competitive position might be. Utility Business Earnings per Share of Common Stock - --------------------------------------------------- Quarter Ended Nine Months Ended September 30 September 30 ---------------- ----------------- 1998 1997 1998 1997 ---- ---- ---- ---- Electric business..... $1.04 $1.02 $1.67 $1.52 Gas business.......... (.01) (.03) .11 .09 ----- ----- --- --- Total utility earnings per share........... $1.03 $.99 $1.78 $1.61 ==== ==== ==== ===== Our utility earnings for the quarter ended September 30, 1998 increased $7.7 million, or $.04 per share compared to the same quarter of 1997. Our utility earnings for the nine months ended September 30, 1998 increased $26.3 million, or $.17 per share compared to the same nine months of 1997. We discuss the factors affecting utility earnings below. Electric Operations - ------------------- Electric Revenues - ----------------- The changes in electric revenues in 1998 compared to 1997 were caused by: Quarter Ended Nine Months Ended September 30 September 30 1998 vs. 1997 1998 vs. 1997 ---------------- ------------------ (In millions) Electric system sales volumes................. $47.4 $65.1 Base rates................ (10.3) (16.1) Fuel rates................ 3.8 (0.6) ----- ----- Total change in electric revenues from electric systems sales............. 40.9 48.4 Interchange and other sales 3.3 2.8 Other............... 2.0 3.9 ----- ----- Total change in electric revenues... $46.2 $55.1 ===== ===== 15 Electric System Sales Volumes - ----------------------------- "Electric system sales volumes" are sales to customers in our service territory at rates set by the Maryland PSC. These sales do not include interchange sales and sales to others. The percentage changes in our electric system sales volumes, by type of customer, in 1998 compared to 1997 were: Quarter Ended Nine Months Ended September 30 September 30 1998 vs. 1997 1998 vs. 1997 ---------------- ------------------ Residential............. 10.7% 3.6% Commercial................ 9.3 5.9 Industrial................ 2.9 2.3 During the quarter ended September 30, 1998, we sold more electricity to residential and commercial customers mostly due to higher usage per customer and hotter summer weather. We sold more electricity to industrial customers due to higher usage per customer and an increased number of customers. During the nine months ended September 30, 1998, we sold more electricity to residential customers due to increased usage per customer, hotter summer weather, and an increased number of customers. We would have sold more electricity to residential customers except we had milder winter weather this year. We sold more electricity to commercial customers mostly due to higher usage per customer and hotter summer weather. We sold more electricity to industrial customers due to an increased number of customers and higher usage per customer other than Bethlehem Steel (our largest customer). Base Rates - ---------- During the quarter and nine months ended September 30, 1998, base rate revenues were lower than they were in the same periods of 1997. Although we sold more electricity this year, our base rate revenues decreased because of lower conservation surcharge revenues. Fuel Rates - ---------- The fuel rate is the rate the Maryland PSC allows us to charge our customers, with no profit to us, for: o our actual cost of fuel used to generate electricity, and o the net cost of purchases and sales of electricity (primarily with other utilities). If these costs go up, the Maryland PSC permits us to increase the fuel rate. If these costs go down, our customers benefit from a reduction in the fuel rate. The fuel rate is impacted most by the amount of electricity generated at the Calvert Cliffs Nuclear Power Plant (Calvert Cliffs) because the cost of nuclear fuel is cheaper than coal, gas, or oil. We discuss the fuel rate in detail in Note 1 of our 1997 Annual Report on Form 10-K. Changes in the fuel rate normally do not affect earnings. However, if the Maryland PSC disallows recovery of any part of the fuel costs, our earnings are reduced. We discuss this in the "Recoverability of Electric Fuel Costs" section of the Notes to Consolidated Financial Statements on page 9. During the quarter ended September 30, 1998, fuel rate revenues increased compared to the same period of 1997, because we sold more electricity. Fuel rate revenues would have been higher except the fuel rate was lower, due to a less-costly mix of generating plants and electricity purchases. During the nine months ended September 30, 1998, fuel rate revenues decreased compared to the same period of 1997. Even though we sold more electricity, the fuel rate was lower, reflecting a less-costly mix of generating plants and electricity purchases. Interchange and Other Sales - --------------------------- "Interchange and other sales" are sales of energy in the Pennsylvania-New Jersey-Maryland (PJM) Interconnection energy market and to others. The PJM is a regional power pool with members that include many wholesale market participants, as well as BGE and seven other utility companies. We sell energy to PJM members and to others after we have satisfied the demand for electricity in our own system. During the quarter and nine months ended September 30, 1998, we had higher interchange and other sales, compared to the same periods of 1997, mostly because the price per megawatt of electricity we sold was higher due to market conditions. 16 Electric Fuel and Purchased Energy Expenses - ------------------------------------------- Quarter Ended Nine Months Ended September 30 September 30 -------------- ------------------ 1998 1997 1998 1997 -------- ------- -------- -------- (In millions) Actual costs.......... $169.9 $135.7 $408.6 $381.8 Net recovery (deferral) of costs under electric fuel rate clause (see Note 1 of our 1997 Form 10-K). (20.5) (0.5) (17.1) 1.5 ----- ----- ------ ---- Total electric fuel and purchased energy expenses............ $149.4 $135.2 $391.5 $383.3 ====== ====== ======= ====== Actual Costs - ------------ During the quarter ended September 30, 1998, our actual costs of fuel to generate electricity (nuclear fuel, coal, gas, or oil) and electricity we bought from others was higher than in the same period of 1997 mostly for three reasons: the price of purchased electricity was higher, we generated more electricity due to increased demand, and we settled a capacity contract with PECO. The price of electricity purchased for interchange sales changes based on market conditions, complex pricing formulas for PJM transactions, and contract terms. During the nine months ended September 30, 1998, our actual costs of fuel to generate electricity (nuclear fuel, coal, gas, or oil) and electricity we bought from others was higher than in the same period of 1997 mostly for three reasons: the price of purchased electricity was higher, we purchased more electricity from other utilities to meet increased demands, and we settled a capacity contract with PECO. Electric Fuel Rate Clause - ------------------------- Under the electric fuel rate clause, we defer (include as an asset or liability on the Consolidated Balance Sheets and exclude from the Consolidated Statements of Income) the difference between our actual costs of fuel and energy and what we collect from customers under the fuel rate in a given period. We either bill or refund our customers that difference in the future. During the quarter and nine months ended September 30, 1998, our actual costs of fuel and energy were higher than the fuel rate revenues we collected from our customers. Gas Operations - -------------- Gas Revenues - ------------ The changes in gas revenues in 1998 compared to 1997 were caused by: Quarter Ended Nine Months Ended September 30 September 30 1998 vs. 1997 1998 vs. 1997 ---------------- ------------------ (In millions) Gas system sales volumes... $(0.6) $(6.2) Base rates............ 3.8 13.1 Weather normalization. 0.8 4.3 Gas cost adjustments.. (4.1) (61.5) ------ ------- Total change in gas revenues from gas system sales......... (0.1) (50.3) Off-system sales.... 0.8 7.7 Other................. 0.5 0.3 ------ ------- Total change in gas revenues...... $1.2 $(42.3) ====== ======= Gas System Sales Volumes - ------------------------ The percentage changes in our gas system sales volumes, by type of customer, in 1998 compared to 1997 were: Quarter Ended Nine Months Ended September 30 September 30 1998 vs. 1997 1998 vs. 1997 --------------- ----------------- Residential........... (5.1)% (9.8)% Commercial............ 5.5 (6.4) Industrial............ (12.7) (11.7) During the quarter ended September 30, 1998, we sold less gas to residential customers mostly due to lower usage per customer. We sold more gas to commercial customers mostly because usage per customer increased. We sold less gas to industrial customers mostly because usage by Bethlehem Steel and other industrial customers decreased. During the nine months ended September 30, 1998, we sold less gas to residential and commercial customers mostly due to milder winter weather and lower usage per customer. We would have sold less gas to residential and commercial customers except the number of customers increased. We sold less gas to industrial customers mostly because usage per customer (including Bethlehem Steel) decreased. We would have sold less gas to industrial customers except the mild weather caused fewer service interruptions. Sometimes we need to interrupt service during periods with the highest demand. Some industrial customers pay reduced rates in 17 exchange for our right to interrupt their service during these periods. Base Rates - ---------- During the quarter and nine months ended September 30, 1998, base rate revenues were higher than they were during the same periods of 1997. Although we sold less gas during 1998, our base rate revenues increased because of two factors. Effective March 1, 1998, the Maryland PSC allowed us to increase our base rates -- which will increase our base rate revenues over the twelve-month period March 1998 through February 1999 by $16 million, and we had higher conservation surcharge revenues. Weather Normalization - --------------------- Effective March 1, 1998, the Maryland PSC allowed us to implement a monthly adjustment to our gas revenues to eliminate the effect of seasonal weather patterns on our gas system sales volumes. This means our monthly gas revenues will be based on weather that is considered "normal" for the month and, therefore, will not be affected by actual weather conditions. Gas Cost Adjustments - -------------------- We charge our gas customers for the natural gas they purchase from us using gas cost adjustment clauses set by the Maryland PSC. These clauses operate similar to the electric fuel rate clause described in the "Electric Fuel Rate Clause" section on page 17. However, effective October 1996, the Maryland PSC approved a modification of these clauses to provide a market based rates incentive mechanism. Under market based rates, our actual cost of gas is compared to a market index (a measure of the market price of gas in a given period). The difference between our actual cost and the market index is shared equally between BGE (which benefits shareholders) and customers, and does not significantly impact earnings. Delivery service customers, including Bethlehem Steel, are not subject to the gas cost adjustment clauses because we are not selling them gas. We charge these customers a fee for the transportation service we provide. This per unit charge assures that fixed costs are spread over the maximum number of DTH. During the quarter and nine months ended September 30, 1998, gas adjustment revenues decreased mostly because we sold less gas. Off-System Sales - ---------------- Off-system gas sales, which are low-margin direct sales to wholesale suppliers of natural gas outside our service territory, also are not subject to gas cost adjustments. The Maryland PSC approved an arrangement for part of the earnings from off-system sales to benefit customers (through reduced costs) and the remainder to be retained by BGE (which benefits shareholders). During the quarter ended September 30, 1998, revenues from off-system gas sales increased compared to the same period of 1997 mostly because we sold more gas off-system. During the nine months ended September 30, 1998, revenues from off-system gas sales increased mostly because we sold more gas off-system, and we sold it at a higher price. These changes in off-system sales did not significantly impact earnings. Gas Purchased For Resale Expenses - --------------------------------- Quarter Ended Nine Months Ended September 30 September 30 -------------- ----------------- 1998 1997 1998 1997 ------- ------- ------- -------- (In millions) Actual costs.......... $19.4 $23.4 $148.5 $196.9 Net recovery of costs under gas adjustment clauses (see Note 1 of our 1997 Form 10-K)........ 2.2 2.0 3.5 9.9 ---- ---- ---- ---- Total gas purchased for resale expenses. $21.6 $25.4 $152.0 $206.8 ====== ===== ====== ====== Actual Costs - ------------ Actual costs include the cost of gas purchased for resale to our customers and for off-system sales. Actual costs do not include the cost of gas purchased by delivery service customers, including Bethlehem Steel. During the quarter and nine months ended September 30, 1998, actual gas costs decreased mostly because we sold less gas. Gas Adjustment Clauses - ---------------------- We charge customers for the cost of gas sold through gas adjustment clauses (determined by the Maryland PSC), as discussed under "Gas Cost Adjustments" earlier in this section. 18 During the quarter and nine months ended September 30, 1998, our actual gas costs were lower than the fuel rate revenues we collected from our customers. Other Operating Expenses - ------------------------ Operations and Maintenance Expenses - ----------------------------------- During the quarter ended September 30, 1998, our operations and maintenance expenses increased $7.2 million mostly due to the timing of expenses associated with a regular maintenance outage at Calvert Cliffs compared with the same period last year. During the nine months ended September 30, 1998, our operations and maintenance expenses decreased $2.1 million. These expenses decreased mostly because of lower labor costs. Operations and maintenance costs would have been even lower except for a $6.0 million write-off of contributions to a third party for a low-level radiation waste facility that was never completed. Depreciation and Amortization Expenses - -------------------------------------- During the quarter ended September 30, 1998, depreciation and amortization increased $4.2 million. These expenses increased mostly because we had more plant in service (as our level of plant in service changes, the amount of our depreciation and amortization expense changes). During the nine months ended September 30, 1998, depreciation and amortization increased $19.5 million. These expenses increased mostly for two reasons: we had more plant in service, and we reduced the amortization period for certain computer software beginning in the first quarter of 1998 from five years to three years. On October 21, 1998, the Maryland PSC authorized BGE to implement revised electric depreciation rates retroactive to January 1, 1998. This will increase annual depreciation expense by approximately $13 million and will be recorded for 1998 in the fourth quarter. Other Income and Expenses - ------------------------- Interest Charges - ---------------- Interest charges represent the interest on our outstanding debt. During the quarter ended September 30, 1998, interest charges decreased $3.8 million compared to the same period of 1997 mostly because we had less debt outstanding. During the nine months ended September 30, 1998, we had $1.5 million of higher interest charges compared to the same period of 1997 mostly because we had more debt outstanding. Distributions on Company Obligated Mandatorily Redeemable Trust Preferred Securities - -------------------------------------------------------------------------------- During the quarter and nine months ended September 30, 1998, distributions on company obligated mandatorily redeemable trust preferred securities increased, compared to the same periods of 1997, because this type of security was first issued in June 1998. We discuss the company obligated mandatorily redeemable trust preferred securities further in the Notes to Consolidated Financial Statements on page 6. Income Taxes - ------------ During the quarter ended September 30, 1998, our total income taxes increased $1.6 million mostly because we had higher taxable income from our utility operations. During the nine months ended September 30, 1998, our total income taxes increased $35.3 million because we had higher taxable income from both our utility operations and our diversified businesses. Diversified Businesses - ---------------------- In the 1980s, we began to diversify our business in response to limited growth in gas and electric sales. Today, we continue to diversify our business in response to regulatory changes in the utility industry, but we are focusing our subsidiary operations on energy-related businesses. We have combined our diversified businesses under Constellation Enterprises, Inc. They are as follows: o Constellation Power Source, Inc. -- our power marketing business, o Constellation Power, Inc. and Subsidiaries -- our power generation business, o Constellation Energy Source(TM), Inc. -- our energy products and services business, o BGE Home Products & Services, Inc. and Subsidiaries -- our home products, commercial building systems, and residential and small commercial natural gas retail marketing business, o Constellation Investments, Inc. -- our financial investments business, and o Constellation Real Estate Group, Inc. -- our real estate and senior-living facilities business. 19 Diversified Business Earnings per Share of Common Stock - ------------------------------------------------------- Quarter Ended Nine Months Ended September 30 September 30 --------------- ----------------- 1998 1997 1998 1997 ---- ---- ---- ---- Power marketing....... $(.01) $(.01) $.00 $(.01) Power generation...... .13 .08 .25 .20 Energy products and services............ (.01) (.01) (.02) (.02) Home products and commercial building systems............. .01 .01 .02 .02 Financial investments. (.02) .08 .04 .14 Real estate and senior-living.. (.05) (.02) (.10) (.02) Other................. .00 (.01) .00 (.02) --- ----- --- ----- Total diversified business earnings per share from operations .05 .12 .19 .29 --- --- --- --- Write-down of real estate investments - - - (.30) --- --- --- --- Total earnings per share $.05 $.12 $.19 $(.01) === === === === Quarter Ended September 30, 1998 - -------------------------------- Our total diversified business earnings for the quarter ended September 30, 1998 decreased $11.2 million, or $.07 per share, compared to the same period of 1997. In the third quarter of 1998, diversified business earnings from operations decreased compared to the same period of 1997, mostly because of lower earnings from our financial investments and real estate businesses. Earnings would have been lower except that we had higher earnings from our power generation business. Nine Months Ended September 30, 1998 - ------------------------------------ Our total diversified business earnings for the nine months ended September 30, 1998 increased $30.7 million, or $.20 per share, compared to the same period of 1997 mostly because in 1997, our real estate and senior-living facilities business wrote down their investments in two real estate projects by a total of $43.9 million after-tax, or $.30 per share. We discuss these write-downs further in the "Real Estate Development and Senior-Living Facilities" section of our 1997 Annual Report on Form 10-K. In the nine months ended September 30, 1998, diversified business earnings from operations decreased compared to the same period of 1997 mostly because of lower earnings from our financial investments and real estate businesses. Earnings would have been lower except that we had higher earnings from our power generation business. We discuss the earnings of each of our diversified businesses separately below. Power Marketing - --------------- Constellation Power Source, Inc. provides power marketing and risk management services to wholesale customers in North America by purchasing and selling electric power, other energy commodities, and related derivatives. In addition, in March, 1998, Constellation Power Source and Goldman, Sachs Capital Partners II L.P., an affiliate of Goldman, Sachs & Co., formed Orion Power Holdings, Inc. to acquire electric generating plants in the United States and Canada. Constellation Power Source's business activities include trading: o electricity, o other energy commodities, and o related derivative contracts. Constellation Power Source reports its trading activities using the mark-to-market method of accounting. Under the mark-to-market method of accounting, we report: o commodity positions and derivatives at fair value as "Assets from energy trading activities"on page 3 and "Liabilities from energy trading activities" on page 4 in the Consolidated Balance Sheets, and o changes in the fair value of these assets and liabilities as components of "Diversified businesses revenues" in the Consolidated Statements of Income on page 2. As a result of the nature of its trading activities, Constellation Power Source's revenue and earnings will fluctuate. 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. 20 Constellation Power Source management uses its best estimates to determine the fair value of the commodities and derivatives 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 trading activities, and such variations could be material. Assets and liabilities from energy trading activities increased at September 30, 1998 compared to December 31, 1997 because of greater trading activity during the period. During the quarter and nine months ended September 30, 1998, earnings from our power marketing business were about the same as they were during the same periods of 1997. Power Generation - ---------------- Overview - -------- Constellation Power, Inc. and subsidiaries develop, own, and operate domestic and international power generation projects and manage power generation projects owned by Constellation Investments, Inc. During the quarter and nine months ended September 30, 1998, earnings from our power generation business increased mostly because in the third quarter of 1998, Constellation Power, Inc. recorded $10.4 million for its proportionate share of earnings in a partnership. During the period, the partnership recognized a gain on the sale of its ownership interest in a power sales contract. California Power Purchase Agreements - ------------------------------------ Constellation Power and subsidiaries and Constellation Investments have $308 million invested in 15 projects that sell electricity in California under power purchase agreements called "Interim Standard Offer No. 4" agreements. Earnings from these projects were $24 million, or $.16 per share, for the quarter ended September 30, 1998 and $41 million, or $.28 per share for the nine months ended September 30, 1998. Under these agreements, the electricity rates change from fixed rates to variable rates during 1996 through 2000. The projects which already have had rate changes have lower revenues under variable rates than they did under fixed rates. When the remaining projects transition to variable rates, we expect their revenues also to be lower than they are under fixed rates. However, the California projects that make the highest revenues will transition in 1999 and 2000. As a result, we do not expect our power generation business to have significantly lower earnings before 2000 due to the transition to variable rates. We cannot predict the financial effects of the transition from fixed to variable rates on our power generation business or on BGE, but the effects could be material. We describe these projects and the transition process in detail in the Notes to Consolidated Financial Statements on page 9. International - ------------- Constellation Power's business in Latin America: o develops, acquires, owns, and operates power generation projects, and o acquires and owns distribution systems. At September 30, 1998, Constellation Power had invested about $104.4 million and committed another $16.0 million in 10 power projects in Latin America. On October 30, 1998, an investment group in which subsidiaries of Constellation Power hold an 80% interest, purchased 51% of the stock of a Panamanian electric distribution company for approximately $90 million. In the future, Constellation Power expects to expand its power generation business further in both domestic and international projects. Energy Products and Services - ---------------------------- Constellation Energy Source, Inc. offers energy products and services designed primarily to provide solutions to the energy needs of mid-sized commercial and industrial customers. These energy products and services include: o wholesale and retail natural gas marketing services, o a full range of heating, ventilation, air conditioning, and energy services, o energy consulting and power-quality services, o services to enhance the reliability of individual electric supply systems, o customized financing alternatives, and o retail electricity as available. During the quarter and nine months ended September 30, 1998, earnings from our energy products and services business were about the same as they were in the same periods of 1997. 21 Home Products and Commercial Building Systems - --------------------------------------------- BGE Home Products & Services, Inc. and subsidiaries offer services to residential and small commercial customers. These services include: o the sale and service of electric and gas appliances, o home improvements, o the sale and service of heating, air conditioning, plumbing, electrical, and indoor air quality systems, and o effective July 1, 1998 natural gas retail marketing. During the quarter and nine months ended September 30, 1998, earnings from our home products and commercial building systems business were about the same as they were in the same periods of 1997. Financial Investments - --------------------- Constellation Investments, Inc. engages in financial investments, including: o marketable securities, o financial limited partnerships, and o financial guaranty insurance companies. During the quarter and nine months ended September 30, 1998, earnings from financial investments were lower compared to the same periods of 1997 mostly due to two factors. We recorded a $6 million after-tax gain on a sale of stock held by a financial limited partnership during the third quarter of 1997. We did not have a similar gain in the same period of 1998. We also had lower earnings from financial investments during both periods of 1998 due to a broad decline in financial market conditions during the quarter. Real Estate and Senior-Living - ----------------------------- Constellation Real Estate Group, Inc. (CREG) develops, owns, and manages real estate and senior-living facilities, including: o land development projects, o an entertainment, dining, and retail complex in Orlando, Florida, o a mixed-use planned-unit development, and o senior-living facilities. During the quarter and nine months ended September 30, 1998, real estate and senior-living facilities earnings from operations decreased compared to the same periods of 1997 due to lower earnings from various real estate and senior-living facilities projects. In May 1998, CREG entered into an agreement with Corporate Office Properties Trust (COPT), a real estate investment trust based in Philadelphia. The COPT transaction is closing in several stages, the most significant of which occurred on September 28, 1998. Upon completion of the transaction, CREG will have contributed certain properties and other assets for a combination of cash, debt assumption, and COPT securities. We discuss the COPT transaction further in the Notes to Consolidated Financial Statements on page 10. We consider market demand, interest rates, the availability of financing, and the strength of the economy in general when making decisions about our real estate projects. If we were to sell our real estate projects in the current market, we would have losses, although the amount of the losses is hard to predict. Depending on market conditions in the future, we could also have losses on any future sales. We discuss CREG's real estate business further in the Notes to Consolidated Financial Statements on page 10. 22 Liquidity and Capital Resources - ------------------------------- Overview - -------- Our business requires a great deal of capital. Our actual capital requirements for the nine months ended September 30, 1998, along with estimated annual amounts for the years 1998 through 2000, are shown below. For the twelve months ended September 30, 1998, our ratio of earnings to fixed charges was 3.10 and our ratio of earnings to combined fixed charges and preferred and preference dividend requirements was 2.61.
Nine Months Ended September 30, Calendar Year Estimate 1998 1998 1999 2000 --------- ------- -------- -------- (In millions) Utility Business Capital Requirements: - -------------------------------------- Construction expenditures (excluding AFC) Electric $157 $250 $272 $ 273 Gas 39 60 76 72 Common 12 20 27 24 -------- ------- ------- ------- Total construction expenditures 208 330 375 369 AFC 8 9 11 13 Nuclear fuel (uranium purchases and processing charges) 49 50 50 48 Deferred energy conservation expenditures 15 15 1 - Retirement of long-term debt and redemption of preference stock 195 222 341 253 -------- ------- ------- ------- Total utility business capital requirements 475 626 778 683 -------- ------- ------- ------- Diversified Business Capital Requirements: - ------------------------------------------ Investment requirements 92 195 144 162 Retirement of long-term debt 141 291 172 231 -------- ------- ------- ------- Total diversified business capital requirements 233 486 316 393 -------- ------- ------- ------- Total capital requirements $708 $1,112 $1,094 $1,076 ======== ======= ======= =======
Capital Requirements of Our Utility Business - -------------------------------------------- We continuously review and change our construction program, so actual expenditures may vary from the estimates for the years 1998 through 2000 in the capital requirements chart. Our projections of future electric construction expenditures do not include costs to build more generating units. Electric construction expenditures include improvements to generating plants and to our transmission and distribution facilities. They also include estimated costs for replacing the steam generators and extending the operating licenses at Calvert Cliffs. The operating licenses expire in 2014 for Unit 1 and in 2016 for Unit 2. We estimate these Calvert Cliffs costs to be: o $24 million in 1998, o $34 million in 1999, and o $45 million in 2000. We estimate that during the three-year period 2001 through 2003, we will spend an additional $210 million to complete the replacement of the steam generators and extend the operating licenses at Calvert Cliffs. If we do not replace the steam generators, we estimate that Calvert Cliffs could not operate beyond the 2004-2006 time period. We expect the steam generator replacements to occur during the 2002 refueling outage for Unit 1 and during the 2003 outage for Unit 2. 23 During the twelve months ended September 30, 1998, our utility operations provided about 120% of the cash needed to meet our capital requirements, excluding cash needed to retire debt and redeem preference stock. During the three years from 1998 through 2000, we expect utility operations to provide about 115% of the cash needed to meet our capital requirements, excluding cash needed to retire debt and redeem preference stock. When we cannot meet utility capital requirements internally, we sell debt and equity securities. We also sell securities when market conditions permit us to refinance existing debt or preference stock at a lower cost. The amount of cash we need and market conditions determine when and how much we sell. From January 1, 1998 through the date of this report, we issued $156.5 million of long-term debt, $250 million of trust originated preferred securities, and 1,578,527 shares of common stock. The net proceeds from the issuances of common stock were about $51.8 million. During the same period, $70 million of debt either matured or was redeemed early, and we redeemed $126 million of preference stock. Security Ratings - ---------------- Independent credit-rating agencies rate our fixed-income securities. The ratings indicate the agencies' assessment of our ability to pay interest, distributions, dividends, and principal on these securities. These ratings affect how much it will cost us to sell these securities. The better the rating, the lower the cost of the securities to us when we sell them. Our securities ratings at the date of this report are shown in the following table. Standard Moody's Duff & Phelps & Poors Investors Credit Rating Group Service Rating Co. ------------- --------- ----------- Mortgage Bonds AA- A1 AA- Unsecured Debt A A2 A+ Trust Originated Preferred Securities and Preference Stock A "a2" A Capital Requirements of Our Diversified Businesses - -------------------------------------------------- We describe the investment requirements and debt and liquidity of our diversified businesses below. Diversified Business Investment Requirements - -------------------------------------------- The investment requirements of our diversified businesses include funding for: o growing our power marketing business, o the development and acquisition of power projects, as well as loans made to project entities, o investments in financial limited partnerships, and o construction of district energy projects by ComfortLink(R) -- a general partnership in which BGE is a partner. Investment requirements for 1998 through 2000 include estimates of funding for existing and anticipated projects. We continuously review and modify those estimates. Actual investment requirements could vary a great deal from the estimates on page 23 because they would be subject to several variables, including: o the type and number of projects selected for development, o the effect of market conditions on those projects, o the ability to obtain financing, and o the availability of cash from operations. The investment requirements exclude BGE's commitment to contribute up to $115 million in equity to Constellation Power Source, Inc. to fund its investment in Orion Power Holdings, Inc. Diversified Business Debt and Liquidity - --------------------------------------- Our diversified businesses expect to expand their businesses. This would include expansion in the energy marketing and power generation businesses. Such expansion could mean more investments in and acquisition of new projects. Our diversified businesses have met their capital requirements in the past through borrowing, cash from their operations, and from time to time, loans or equity contributions from BGE. BGE Home Products & Services may also meet capital requirements through sales of receivables. Our diversified businesses plan to raise the cash needed to meet capital requirements in the future through these same methods. If CREG can get a reasonable value for real estate, additional cash may be obtained by selling real estate projects. Their ability to sell or liquidate assets will depend on market conditions, and we cannot give assurances that these sales or liquidations could be made. We discuss the real estate business and market in the "Real Estate and Senior-Living" section on page 22 and in the Notes to Consolidated Financial Statements on page 10. 24 Our diversified businesses have revolving credit agreements totaling $135 million to provide additional cash for short-term financial needs and a $75 million letter of credit facility as discussed further in the Notes to Consolidated Financial Statements on page 7. In October 1998, a subsidiary of Constellation Enterprises, Inc. issued $157 million of notes to several institutional investors in a private placement offering. This private placement is discussed further in the Notes to Consolidated Financial Statements on page 7. In October 1998, a subsidiary of Constellation Power entered into a $30 million credit facility. This credit facility is discussed further in the Notes to Consolidated Financial Statements on page 7. 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 7 and in our 1997 Annual Report on Form 10-K under "Item 1. Business - Environmental Matters." These details include financial information. Some of the information is about costs that may be material. The Year 2000 Issue - ------------------- We have not experienced any significant year 2000 problems to date and we do not expect any significant problems to impair our operations as we transition to the new century. However, due to the magnitude and complexity of the year 2000 issue, even the most conscientious efforts cannot guarantee that every problem will be found and corrected prior to January 1, 2000. We are focusing on critical operating and business systems and expect to have contingency plans in place by September 1999, to deal with any problems if they should occur. We estimate our total year 2000 costs to be between $38 million and $42 million. To date, we have spent approximately $15 million. About one-third of the total costs are for normal system replacements and will be capitalized (included in our Consolidated Balance Sheets). The remaining costs will be expensed (included in our Consolidated Statements of Income). Only about one-third of our total costs are incremental (not previously included in our information technology budget). Utility Business - ---------------- The reasonably likely worst case scenario faced by our utility business is any interruption in providing electric and gas service to our customers. We cannot predict the impact of any interruption on our results of operations, but the impact could be material. To address this and other concerns, we established a year 2000 task force. Based on a work plan developed by the task force, we have targeted six key areas. Of these areas, digital systems have the most impact on our ability to provide electric and gas service. Telecommunications, suppliers, and certain information technology applications also impact our ability to provide electric and gas service. The six key areas are: o digital systems (devices with embedded microprocessors such as power instrumentation, controls, and meters), o telecommunications systems, o major suppliers, o information technology applications (our customer, business, and human resources information systems), o computer hardware and software infrastructure, and o contingency plans. We have completed our assessment of the year 2000 impact on our business, which involved inventorying all systems and identifying appropriate resources. We have also developed action plans to ensure that the key areas identified above are year 2000 ready. We are currently converting and testing all of our systems. Each system will be tested by selected users following formal guidelines developed by BGE. Each system will then be certified by a tester and the year 2000 task force. We have inventoried our major suppliers and are currently assessing their year 2000 readiness through surveys. We will follow-up with our major suppliers via interviews in early 1999. 25 Through the date of this report, we estimate that we have completed approximately 45% of our year 2000 project and we expect to certify our systems for year 2000 readiness on the dates below: Date to be Certified --------- Digital systems June 1999 Telecommunications systems March 1999 Major suppliers June 1999 Information technology applications March 1999 Computer hardware and software infrastructure March 1999 Year 2000 operational contingency planning is underway. Staffing and initial planning is expected to be completed by the end of 1998. Contingency plans are expected to be completed, including company-wide training, by September 1999. Our contingency plans will include the contingency guidelines issued by the Nuclear Energy Institute, which are endorsed by the Nuclear Regulatory Commission and pertain to Calvert Cliffs. They will also include contingency guidelines issued by the North American Electric Reliability Council (NERC) and will be coordinated with regional electric and gas activities. The NERC has scheduled two industry wide tests for 1999. Another issue we are addressing is the impact of electric power grid problems that may occur outside of our own electric system. We have started year 2000 electric power grid impact planning through our various electric interconnection affiliations. The PJM interconnection has drafted year 2000 operational preparedness plans and restoration scenarios and will continue to develop these plans during the first half of 1999 in cooperation with NERC. The NERC has started monthly assessments of the electric utility industry to communicate the readiness of the national electric grid for year 2000. Through the Electric Power Research Institute (EPRI), an industry-wide effort has been established to deal with year 2000 problems affecting digital systems and equipment used by the nation's electric power companies. Under this effort, participating utilities are working together to assess specific vendors' system problems and test plans. The assessment will be shared by the industry as a whole to facilitate year 2000 problem solving. BGE has joined the American Gas Association (AGA) in an initiative similar to the one with EPRI to facilitate year 2000 problem solving among gas utilities. The AGA has initiated quarterly assessments of the gas utility industry to communicate the readiness of its' members for the year 2000. Diversified Businesses - ---------------------- Our diversified businesses continue to move forward with action plans developed to prepare their systems for the year 2000. Outside consultants have been retained to help complete assessments and to assist us in the remediation and testing efforts. The work plans developed are similar to those used by our utility business, including a defined test certification process. All systems are expected to be certified by December 1999. Our diversified businesses will also develop contingency plans, which are expected to be completed by December 1999. Accounting Standards Issued - --------------------------- In February 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 132 regarding disclosures about pensions and other postretirement benefits. We must adopt the requirements of this standard in our financial statements for the year ended December 31, 1998. In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1 about accounting for the costs of computer software developed or obtained for internal use. We must adopt the requirements of this statement in our financial statements for year ended December 31, 1999. In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5 about reporting the costs of start-up activities. We must adopt the requirements of this statement in our financial statements for the year ended December 31, 1999. We do not expect the adoption of these statements to have a material impact on our financial results. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 regarding derivative financial instruments and hedging activities. We must adopt the requirements of this standard in our financial statements for the quarter ended March 31, 2000. We have not determined the effects of Statement No. 133 on our financial results. 26 Item 3. Quantitative and Qualitative Disclosures About Market Risk - ------------------------------------------------------------------ Not applicable. However, we disclose information about our risk management policies in Note 1 of our 1997 Annual Report on Form 10-K, and we discuss the trading activities of our power marketing business in the "Power Marketing" section of Management's Discussion and Analysis on page 20. PART II. OTHER INFORMATION - -------- ----------------- Item 1. Legal Proceedings - ------- ----------------- Asbestos - -------- Since 1993, we have been involved in several actions concerning asbestos. All of the actions together are titled In re Baltimore City Personal Injuries Asbestos Cases in the Circuit Court for Baltimore City, Maryland. 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 are direct claims by individuals exposed to asbestos. We described these claims in a Report on Form 8-K filed August 20, 1993. We are involved in these claims with approximately 70 other defendants. Approximately 520 individuals that were never employees of the Company each claim $6 million in damages ($2 million compensatory and $4 million punitive). 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, seven of these cases were settled before trial for amounts that were immaterial. One trial is currently scheduled for August, 1999. The second type are claims by one manufacturer -- Pittsburgh Corning Corp. - -- against us and approximately eight others, as third-party defendants. These claims relate to approximately 1,500 individual plaintiffs and were filed in the Circuit Court for Baltimore City, Maryland in the fall of 1993. 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. NOx Emissions Litigation - ------------------------ On June 19, 1998, we filed a lawsuit against the Maryland Department of the Environment (MDE) in Baltimore City Circuit Court challenging regulations that require reduction of nitrogen oxide (NOx) emissions. The regulations took effect June 1, 1998, and require major NOx sources to reduce NOx emissions up to 65% by May, 1999. While we are already taking steps to control NOx emissions at our generating plants, we communicated to MDE that we cannot install the required technology at our Brandon Shores plant in time to meet the 1999 deadline. Non-compliance with the regulations potentially could expose us to significant penalties. We also discuss this litigation under the heading "Environmental Matters" in the Notes to Consolidated Financial Statements on page 7. 27 PART II. OTHER INFORMATION (Continued) - -------- ----------------------------- 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 general economic, business and regulatory conditions, o energy supply and demand, o competition, o federal and state regulations, o availability, terms, and use of capital, o nuclear and environmental issues, o weather, o industry restructuring and cost recovery (including the potential effect of stranded investments), and o year 2000 readiness. 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. 28 PART II. OTHER INFORMATION (Continued) - -------- ----------------------------- Item 6. Exhibits and Reports on Form 8-K - ----------------------------------------
(a) Exhibit No. 3 Bylaws of Baltimore Gas and Electric Company, amended as of October 16, 1998. Exhibit No. 12 Computation of Ratio of Earnings to Fixed Charges and Computation of Ratio of Earnings to Combined Fixed Charges and Preferred and Preference Dividend Requirements. Exhibit No. 27 Financial Data Schedule.
(b) Reports on Form 8-K for the quarter ended September 30, 1998: None SIGNATURE --------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BALTIMORE GAS AND ELECTRIC COMPANY ----------------------------------------------------------------- (Registrant) Date: November 13, 1998 /s/ D. A. Brune - ------------------------- ----------------------------------------------------- D. A. Brune, Vice President on behalf of the Registrant and as Principal Financial Officer 29
EXHIBIT INDEX Exhibit Number 3 Bylaws of Baltimore Gas and Electric Company, amended as of October 16, 1998. 12 Computation of Ratio of Earnings to Fixed Charges and Computation of Ratio of Earnings to Combined Fixed Charges and Preferred and Preference Dividend Requirements. 27 Financial Data Schedule.
30 EX-3.(II) 2 BGE BY-LAWS AMENDED AS OF 10/16/98 BY-LAWS OF Baltimore Gas and Electric Company Amended as of October 16, 1998 By-Laws of Baltimore Gas and Electric Company ARTICLE I MEETINGS OF STOCKHOLDERS Section 1. - Annual Meeting. The annual meeting of the stockholders for the election of Directors and for the transaction of general business shall be held on any date during the period of April 14 through May 13, as determined year to year by the Board of Directors. The time and location of the meeting shall be determined by the Board of Directors. The Chief Executive Officer of the Company shall prepare, or cause to be prepared, an annual report containing a full and correct statement of the affairs of the Company, including a balance sheet and a financial statement of operations for the preceding fiscal year, which shall be submitted to the stockholders at the annual meeting. Section 2. - Special Meeting. Special meetings of the stockholders may be held in the City of Baltimore or in any county in which the Company provides service or owns property upon call by the Chairman of the Board, the President, or a majority of the Board of Directors whenever they deem expedient, or upon the written request of the holders of shares entitled to not less than twenty-five percent of all the votes entitled to be cast at such a meeting. Such request of the stockholders shall state the purpose or purposes of the meeting and the matters proposed to be acted on the threat and shall be delivered to the Secretary, who shall inform such stockholders of the reasonably estimated cost of preparing and mailing such notice of the meeting, and upon payment to the company of such costs the Secretary shall give notice stating the purpose or purposes of the meeting to all stockholders entitled to vote at such meeting. No special meeting need be called upon the request of the holders of the shares entitled to cast less than a majority of all votes entitled to be cast to such meeting, to consider any matter which is substantially the same as a matter voted upon at any special meeting of the stockholders held during the preceding twelve months. The business at all special meetings shall be confined to that specially named in the notice thereof. Section 3. - Notice of Meetings. Written or printed notice of every meeting of the stockholders, whether annual or special, stating the place, day, and hour of such meeting and (in case of special meetings) the business proposed to be transacted shall be given by the Secretary to each stockholder entitled to vote at such meeting not less than ten days but no more than ninety days before the date fixed for such meeting, by depositing such notice in the United States mail addressed to him at his post office address as it appears on the records of the Company, with postage thereon prepaid. 1 Section 4. - Organization of Meeting. All meetings of the stockholders shall be called to order by the Chairman of the Board, or in his absence by the President, or in his absence by a Vice President; or in the case of the absence of such officers, then by any stockholder, whereupon the meeting shall organize by electing a chairman. The Secretary of the Company, if present, shall act as Secretary of the meeting, unless some other person shall be elected by the meeting to act. An accurate record of the meeting shall be kept by the secretary thereof, and placed in the record books of the Company. Section 5. - Quorum. At any meeting of the stockholders the presence in person or by proxy of stockholders entitled to cast a majority of the votes thereat shall constitute a quorum for the transaction of business. If a quorum be not present at any meeting, holders of a majority of the shares of stock so present or represented may adjourn the meeting either sine die or to a date certain. Section 6. - Voting. At all meetings of the stockholders each stockholder shall be entitled to one vote for each share of common stock standing in his name and, when the preferred or preference stock is entitled to vote, such number of votes as shall be provided in the Charter of the Company for each share of preferred and preference stock standing in his name, and the votes shall be cast by stockholders in person or by lawful proxy. Section 7. - Judge of Election and Tellers. The Directors shall, at a regular or special meeting, appoint a Judge of Election and two Tellers to serve at each meeting of stockholders. If the Directors fail to make such appointments, or if the Judge of Election and/or Tellers, or any of them, fail to appear at the meeting, the Chairman of the meeting shall appoint a Judge of Election and/or a Teller or Tellers to serve at that meeting. It shall be the duty of the Tellers to receive the ballots of all the holders of stock entitled to vote and present at a meeting either in person or by proxy, and to count and tally said ballots by the official record of stockholders of the Company, or by a summary prepared therefrom and certified by the Stock Transfer Agent or the Secretary of the Company showing the number of shares of common and, if entitled to vote, preferred and preference stock owned of record by each stockholder, who may be designated therein by name, code number, or otherwise, and certify them to the Judge of Election, and the said Judge shall communicate in writing the result of the balloting so certified by the Tellers to the Chairman who shall at once announce the same to the meeting. This certificate, signed by the Tellers and countersigned by the Judge, shall be duly recorded as part of the minutes of the meeting and filed among the records of the Company. 2 Section 8. - Record Date for Stockholders and Closing of Transfer Books. The Board of Directors may fix, in advance, a date as the record for the determination of the stockholders entitled to notice of, or to vote at, any meeting of stockholders, or entitled to receive payment of any dividend, or entitled to the allotment of any rights, or for any other proper purpose. Such date in any case shall not be more than ninety days (and in the case of a meeting of stockholders not less than ten days) prior to the date on which the particular action requiring such determination of stockholders is to be taken. Only stockholders of record on such date shall be entitled to notice of or to vote at such meeting or to receive such dividends or rights, as the case may be. In lieu of fixing a record date the Board of Directors may close the stock transfer books of the Company for a period not exceeding twenty nor less than ten days preceding the date of any meeting of stockholders or not exceeding twenty days preceding any other of the above mentioned events. ARTICLE II BOARD OF DIRECTORS AND COMMITTEES Section 1. - Powers of Directors The business and affairs of the Company shall be managed by a Board of Directors which shall have and may exercise all the powers of the Company, except such as are expressly conferred upon or reserved by the stockholders by law, by Charter, or by these by-laws. Except as otherwise provided herein, the Board of Directors shall appoint the officers for the conduct of the business of the Company, determine their duties and responsibilities and fix their compensation. The Board of Directors may remove any officer. Section 2. - Number and Election of Directors. The number of Directors shall be fifteen (15), all of whom shall own at least 300 shares of the Company's common stock. The Directors shall be elected at each Annual Meeting of the Stockholders except as otherwise provided in these by-laws. They shall hold their offices for one year and until their successors are elected and qualified. Section 3. - Removals and Vacancies. The stockholders, at any meeting duly called and at which a quorum is present, may remove any Director or Directors from Office by the affirmative vote of the holders of a majority of the outstanding shares entitled to the vote thereon, and may elect a successor or successors to fill any resulting vacancies for the unexpired terms of the removed Directors. Any vacancy occurring in the Board of Directors from any cause other than by reason of a removal or an increase in the number of Directors, may be filled by a majority of the remaining Directors although such majority is less than a quorum. Any vacancy occurring by reason of an increase in the number of Directors may be filled by action of a majority of Directors. A Director elected to fill a vacancy shall hold office until the next annual meeting of stockholders or until his successor is elected and qualified. 3 Section 4. - Meetings of the Board. A regular meeting of the Board of Directors shall be held immediately after the annual meeting of stockholders or any special meeting of the stockholders at which the Board of Directors is elected, and thereafter regular meetings of the Board of Directors shall be held on such dates during the year as may be designated from time to time by the Board. All meetings of the Board of Directors shall be held at the general offices of the Company in the City of Baltimore or elsewhere, as ordered by the Board. Of all such meetings (except the regular meeting held immediately after the election of Directors) the Secretary shall give notice to each Director personally or by telephone, by telegram directed to, or by written notice deposited in the mails addressed to, his residence or business address at lease 48 hours before such meeting. Special meetings may be held at any time or place upon the call of the Chairman of the Board, or, the Chief Executive Officer, or in their absence, on order of the Executive Committee by notices as above, unless the meetings be called during the months of July and August, in which case five days' notice shall be given. In the event three-fourths of the Directors in office waive notice of any meeting in writing at or before the meeting, the meeting may be held without the aforesaid advance notices. The Chairman shall preside at all meetings of the Board, or, in his absence, the President, or one of the Vice Presidents (if a member of the Board) shall preside. If at any meeting none of the foregoing persons is present, the Directors present shall designate one of their number to preside at such meeting. Section 5. - Quorum. A majority of the Directors in office, but in no event less than five, shall constitute a quorum of the Board for the transaction of business. If a quorum be not present at any meeting, a majority of the Directors present may adjourn to any time and place they may see fit. Section 6. - Executive Committee. The Directors shall annually, at their first meeting succeeding the stockholders' meeting at which they are elected, elect from among their number an Executive Committee of five or more (but no more than nine), as the Board may determine. The Executive Committee may exercise, in the intervals between meetings of the Board of Directors, all of the powers of the Board of Directors in the management of the business and affairs of the Company, except the power to declare dividends, to issue stock other than as hereinafter stated, to recommend to stockholders any action requiring stockholder approval, amend the by-laws, or approve any merger or share exchange which does not require stockholder approval. If the Board of Directors has given general authorization for the issuance of stock, the Executive Committee, in accordance with a general formula or method specified by the Board by resolution or by adoption of a stock option or other plan, may fix the terms of stock subject to classification or reclassification and the terms on which any stock may be issued, including all terms and conditions required or permitted to be established or authorized by the Board of Directors. The members of the Executive Committee shall hold their offices as such for one year or until their successors are elected and qualified; all vacancies in said Committee shall be filled by the Board of Directors, but in the absence of a member or members of the Executive 4 Committee, the members thereof present at any meeting (whether or not they constitute a quorum) may appoint a member of the Board of Directors to act in the place of such absent member. They shall designate one of their number as Chairman of the Committee, and shall keep a separate book of minutes of their proceedings and actions. They shall elect a Secretary to the Committee who shall give notice personally or by mail, telephone, or telegraph to each member of the Committee of all meetings, not later than 12 noon of the day before the meeting, unless a majority of the members of the Executive Committee in office waive notice thereof in writing at or before the meeting in which case the meeting may be held without the aforesaid advance notice. Meetings may be called by the Chairman of the Committee or by the Chief Executive Officer, or, in the event of their death, absence, or disability, by one of the other officers among the Chairman of the Board, the President, or the Vice Presidents. A majority of the members of the Executive Committee in office, but in no event less than three, shall constitute a quorum for the transaction of business. Section 7. - Audit Committee. The Directors shall annually, at their first meeting succeeding the stockholders' meeting at which they are elected, elect from among their number an Audit Committee which shall consist of at least three Directors who shall be independent of Management and free from any relationship that, in the opinion of the Board, would interfere with the exercise of independent judgment as a Committee member, and provided further that no Director who was formerly an Officer of the Company shall be a member of the said Audit Committee. One such member of the Committee shall be designated by the Board of Directors to be Chairman of the Audit Committee. The tenure of the office of the members of the Audit Committee shall; be one year or until their successors shall have been duly appointed or elected. Any vacancy shall be filled by the Board of Directors. Two members of the Audit Committee shall constitute a quorum. In order to provide for direct communication between representatives of the Board and the Independent Auditors for this corporation, the Audit Committee, in furtherance of this charge, shall have the following duties and responsibilities: (1) To recommend to the Board of Directors the public accounting firm to be engaged to conduct the annual financial audit of the corporation. (2) To discuss with such Auditors the scope of their examination which shall be in accordance with generally accepted auditing standards with appropriate reports thereon to be submitted to the Board of Directors. (3) To review with the Auditors and appropriate financial Officers and Management of the corporation the annual financial statements and the Auditors' report thereon. (4) To invite comments and recommendations from the Auditors regarding the need for and/or results of the reviews of those financial statements and other documents and data reviewed or certified by the public accounting firm thus engaged. (5) To invite comments and recommendations from the Auditors regarding the system of internal controls, accounting policies and practices, and any other related matters employed by the corporation. 5 (6) To meet with the corporation's Internal Auditor in order to ensure, as a part of the system of internal controls, that an adequate program of internal auditing is being continuously carried out, to determine that the corporation's Internal Audit Staff is adequate and to review the findings of such Staff's investigations. (7) To report periodically regarding its activities to the Board of Directors of the corporation and to make such recommendations and findings concerning any audit or audit-related matter as the Audit Committee deems appropriate. Section 8. - Committee on Management. The Directors shall annually, at their first meeting succeeding the stockholders' meeting at which they are elected, elect from among their number a Committee on Management consisting of four members. One such member shall be designated by the Board of Directors to be the Chairman of the Committee on Management. The tenure of office of the members of the Committee on Management shall be one year or until their successors shall have been duly appointed or elected. Any vacancy shall be filled by the Board of Directors. Two members shall constitute a quorum. The Committee on Management shall recommend to the Board of Directors nominees for election as Directors and shall consider the performance of incumbent Directors in determining whether to nominate them to stand for reelection; the Committee shall, among other things, consider any major changes in the organization of the corporation; it shall recommend to the Board of Directors the remuneration arrangements for Officers and Directors of the corporation. The Committee shall recommend to the full Board of Directors nominees for Officers of the corporation. The Committee on Management shall have such additional powers to perform such duties as shall be prescribed by resolution of the Board of Directors. Section 9. - Other Committees. The Board of Directors is authorized to appoint from among its members such other committees as it may, from time to time, deem advisable and to delegate to such committee or committees any of the powers of the Board of Directors which it may lawfully delegate. Each such committee shall consist of at least two Directors. Section 10. - Fees and Expenses. Each member of the Board of Directors, other than salaried Officers and employees, shall be paid an annual retainer fee, payable in quarterly installments, in such amount as shall be specified from time to time by the Board. Each member of the Board of Directors, other than salaried Officers and employees, shall be paid such fee as shall be specified from time to time by the Board for attending each regular or special meeting of the Board and for attending, as a committee member, each meeting of the Executive Committee, Audit Committee, Committee on Management and any other committee appointed by the Board. Each member shall be paid reasonable traveling expenses incident to attendance at meetings. 6 ARTICLE III OFFICERS Section 1. - Officers. The Company shall have a Chairman of the Board, a President, one or more Vice Presidents, a Treasurer, and a Secretary who shall be elected by, and hold office at the will of, the Board of Directors. The Chairman of the Board and the President shall be chosen from among the Directors, and the Board of Directors shall designate either the Chairman of the Board or the President to be the Chief Executive Officer of the Company. The Board of Directors shall also elect such other officers as they may deem necessary for the conduct of the business and affairs of the Company. Any two offices, except those of President and Vice President, may be held by the same person, but no person shall sign checks, drafts and promissory notes, or execute, acknowledge or verify any other instrument in more than one capacity, if such instrument is required by law, the charter, these by-laws, a resolution of the Board of Directors or order of the Chief Executive Officer to be signed, executed, acknowledged or verified by two or more officers. The Chairman of the Board, President and Vice Presidents shall receive such compensation as shall be fixed by the Board of Directors. Compensation for officers other than the Chairman of the Board, President and Vice Presidents shall be fixed by the Chief Executive Officer. The Board of Directors shall require a fidelity bond to be given by each officer, or, in its discretion, the Board may substitute a general blanket fidelity bond or insurance contract to cover all officers and employees. Section 2. - Duties of the Officers. (a) Chairman of the Board The Chairman of the Board shall preside at all meetings of the Board of Directors and of stockholders. He shall also have such other powers and duties as from time to time may be assigned to him by the Board of Directors. (b) President The President shall have general executive powers, as well as specific powers conferred by these by-laws. He, any Vice President, or such other persons as may be designated by the Board of Directors, shall sign all special contracts of the Company, countersign checks, drafts and promissory notes, and such other papers as may be directed by the Board of Directors. He, or any Vice President, together with the Treasurer or an Assistant Treasurer, shall have authority to sell, assign or transfer and deliver any bonds, stocks or other securities owned by the Company. He shall also have such other powers and duties as from time to time may be assigned to him by the Board of Directors. In the absence of the Chairman of the Board, the President shall perform all the duties of the Chairman of the Board. (c) Vice Presidents Each Vice President shall have such powers and duties as may be assigned to him by the Board of Directors, or the Chief Executive Officer, as well as the 7 specific powers assigned by these by-laws. A Vice President may be designated by the Board of Directors or the Chief Executive Officer to perform, in the absence of the President, all the duties of the President. (d) Treasurer The Treasurer shall have the care and the custody of the funds and valuable papers of the Company, and shall receive and disburse all moneys in such a manner as may be prescribed by the Board of Directors or the Chief Executive Officer. He shall have such other powers and duties as may be assigned to him by the Board of Directors, or the Chief Executive Officer, as well as specific powers assigned by these by-laws. (e) Secretary The Secretary shall attend all meetings of the stockholders and Directors and shall notify the stockholders and Directors of such meetings in the manner provided in these by-laws. He shall record the proceedings of all such meetings in books kept for that purpose. He shall have such other powers and duties as may be assigned to him by the Board of Directors or the Chief Executive Officer, as well as the specific powers assigned by these by-laws. Section 3. - Removals and Vacancies. Any officer may be removed by the Board of Directors whenever, in its judgment, the best interest of the Company will be served thereby. In case of removal, the salary of such officer shall cease. Removal shall be without prejudice to the contractual rights, if any, of the person so removed, but election of an officer shall not of itself create contractual rights. Any vacancy occurring in any office of the Company shall be filled by the Board of Directors and the officer so elected shall hold office for the unexpired term in respect of which the vacancy occurred or until its successor shall be duly elected and qualified. In any event of absence or temporary disability of any officer of the Company, the Board of Directors may authorize some other person to perform the duties of that office. ARTICLE IV INDEMNIFICATION OF DIRECTORS AND OFFICERS Each person made or threatened to be made party to an action, suit or proceeding, whether, civil, criminal, administrative or investigative, by reason of the fact that such person is or was a director or officer of the Company, or, at its request, is or was a director or officer of another corporation, shall be indemnified by the Company (to the extent indemnification is not otherwise provided by insurance) against the liabilities, costs and expenses of every kind actually and reasonable incurred by him as a result of such action, suit or proceeding, or any threat thereof or any appeal thereon, but in each case only if and to the extent permissible under applicable common or statutory law, state or federal. The foregoing indemnity shall not be inclusive of other rights to which such person may be entitled. 8 ARTICLE V CAPITAL STOCK Section 1. - Evidence of Stock Ownership. Evidence of ownership of stock in the Company may be either pursuant to a certificate(s) or a statement in compliance with Maryland law, each of which shall represent the number of shares of stock owned by a stockholder in the Company. Stockholders may request that their stock ownership be represented by a certificate(s). Each certificate shall be signed on behalf of the Company by the President or a Vice President and countersigned by the Secretary, and shall be sealed with the corporate seal. The signatures may be either manual or facsimile. In case any officer who signed any certificate, in facsimile or otherwise, ceases to be such officer of the Company before the certificate is issued, the certificate may nevertheless be issued by the Company with the same effect as if the officer had not ceased to be such officer as of the date of its issue. For stock ownership evidenced by a statement, such statement shall be in such form, and executed, as required from time to time by Maryland law. Section 2. - Transfer of Shares. Stock shall be transferable only on the books of the Company by assignment in writing by the registered holder thereof, his legally constituted attorney, or his legal representative, either upon surrender and cancellation of the certificate(s) therefor, if such stock is represented by a certificate, or upon receipt of such other documentation for stock not represented by a certificate as the Board of Directors and Maryland law may, from time to time, require. Section 3. - Lost, Stolen or Destroyed Certificates. No certificate for shares of stock of the Company shall be issued in place of any other certificate alleged to have been lost, stolen, or destroyed, except upon production of such evidence of the loss, theft or destruction and upon indemnification of the Company to such extent and in such manner as the Board of Directors may prescribe. Section 4. - Transfer Agents and Registrars. The Board of Directors shall appoint a person or persons, or any incorporated trust company or companies or both, as transfer agents and registrars and, if stock is represented by a certificate, may require that such certificate bear the signatures or the counter-signatures of such transfer agents and registrars, or either of them. Section 5. - Stock Ledger. The Company shall maintain at its principal office in Baltimore, Maryland, a stock record containing the names and addresses of all stockholders and the numbers of shares of each class held by each stockholder. 9 ARTICLE VI SEAL The Board of Directors shall provide, subject to change, a suitable corporate seal which may be used by causing it, or facsimile thereof, to be impressed or affixed or reproduced one the Company's stock certificates, bonds, or any other documents on which the seal may be appropriate. ARTICLE VII AMENDMENTS These by-laws, or any of them, may be amended or repealed, and new by-laws may be made or adopted at any meeting of the Board of Directors, by vote of a majority of the Directors, or by the stockholders at any annual meeting, or at any special meeting called for that purpose. I HEREBY CERTIFY that the foregoing is a true copy of the by-laws of Baltimore Gas and Electric Company in effect at the date hereof. IN WITNESS WHEREOF I have hereunto set my hand as Secretary of said Company and affixed its corporate seal this 19th day of October, 1998. /s/ D. A. Brune Secretary 10 EX-12 3 RATIO OF EARNINGS TO FIXED CHARGES 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 1998 1997 1996 1995 1994 1993 ----------- ----------- ------------ ------------ ----------- ----------- (In Millions of Dollars) Net Income $ 335.3 $ 282.8 $ 310.8 $ 338.0 $ 323.6 $ 309.8 Taxes on Income 197.1 161.5 169.2 172.4 156.7 140.8 ----------- ----------- ------------ ------------ ----------- ----------- $ 532.4 $ 444.3 $ 480.0 $ 510.4 $ 480.3 $ 450.6 ----------- ----------- ------------ ------------ ----------- ----------- Fixed Charges: Interest and Amortization of Debt Discount and Expense and Premium on all Indebtedness $ 244.0 $ 234.2 $ 203.9 $ 206.7 $ 204.2 $ 199.4 Capitalized Interest 5.1 8.4 15.7 15.0 12.4 16.2 Interest Factor in Rentals 1.9 1.9 1.5 2.1 2.0 2.1 ----------- ----------- ------------ ------------ ----------- ----------- Total Fixed Charges $ 251.0 $ 244.5 $ 221.1 $ 223.8 $ 218.6 $ 217.7 ----------- ----------- ------------ ------------ ----------- ----------- Preferred and Preference Dividend Requirements: (1) Preferred and Preference $ 29.6 $ 28.7 $ 38.5 $ 40.6 $ 39.9 $ 41.8 Dividends Income Tax Required 17.5 16.4 20.9 20.4 19.1 18.8 ----------- ----------- ------------ ------------ ----------- ----------- Total Preferred and Preference Dividend Requirements $ 47.1 $ 45.1 $ 59.4 $ 61.0 $ 59.0 $ 60.6 ----------- ----------- ------------ ------------ ----------- ----------- Total Fixed Charges and Preferred and Preference Dividend Requirements $ 298.1 $ 289.6 $ 280.5 $ 284.8 $ 277.6 $ 278.3 =========== =========== ============ ============ =========== =========== Earnings (2) $ 778.3 $ 680.4 $ 685.4 $ 719.2 $ 686.5 $ 652.1 =========== =========== ============ ============ =========== =========== Ratio of Earnings to Fixed Charges 3.10 2.78 3.10 3.21 3.14 3.00 Ratio of Earnings to Combined Fixed Charges and Preferred and Preference Dividend Requirements 2.61 2.35 2.44 2.52 2.47 2.34
(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 net income that includes earnings of BGE's consolidated subsidiaries, equity in the net income of BGE's unconsolidated subsidiary, income taxes (including deferred income taxes and investment tax credit adjustments), and fixed charges other than capitalized interest. EX-27 4 FINANCIAL DATA SCHEDULE
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BGE'S SEPTEMBER 30, 1998 INTERIM CONSOLIDATED INCOME STATEMENT, BALANCE SHEET AND STATEMENT OF CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS. 1,000,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 PER-BOOK 5,653 1,666 1,207 497 0 9,023 1,467 0 1,540 3,011 0 190 2,781 73 0 51 439 10 0 0 2,468 9,023 2,568 174 1,908 2,082 486 6 492 181 311 18 293 184 181 672 1.97 1.97
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