-----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, AXiNDBEDPQTZkvaOJ98GiSFYdZuHlkCzWI7h2rv4NCIWv4eIUagnIzmO6EIy8fVC z579EUdLcFQn4AS3Wjhjlw== 0000009466-00-000008.txt : 20000414 0000009466-00-000008.hdr.sgml : 20000414 ACCESSION NUMBER: 0000009466-00-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 20000413 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: 600525 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, 1999 Commission file Exact name of registrant IRS Employer number as specified in its charter Identification No. ------ --------------------------- ------------------ 1-12869 CONSTELLATION ENERGY GROUP, INC. 52-1964611 1-1910 BALTIMORE GAS AND ELECTRIC COMPANY 52-0280210 Maryland ----------------------------------- (State of Incorporation) 39 W. Lexington Street Baltimore, Maryland 21201 ---------------------- ------------------- ----- (Address of principal executive offices) (Zip Code) 410-783-5920 (Registrants' telephone number, including area code) Not Applicable (Former name,former address and former fiscal year,if changed since last report) Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) have been subject to such filing requirements for the past 90 days. Yes X No Common Stock, without par value 149,556,416 shares outstanding of Constellation Energy Group, Inc. on October 31, 1999. 1 Table of Contents
Part I. Financial Information Page Item 1. Financial Statements Constellation Energy Group, Inc. and Subsidiaries Consolidated Statements of Income...................................................... 3 Consolidated Statements of Comprehensive Income........................................ 3 Consolidated Balance Sheets............................................................ 4 Consolidated Statements of Cash Flows.................................................. 6 Baltimore Gas and Electric Company and Subsidiaries Consolidated Statements of Income...................................................... 7 Consolidated Statements of Comprehensive Income........................................ 7 Consolidated Balance Sheets............................................................ 8 Consolidated Statements of Cash Flows.................................................. 10 Notes to Consolidated Financial Statements.................................................. 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Introduction........................................................................... 16 Deregulation and Strategy.............................................................. 16 Results of Operations.................................................................. 17 Financial Condition.................................................................... 29 Capital Resources...................................................................... 29 Other Matters.......................................................................... 32 Item 3. Quantitative and Qualitative Disclosures About Market Risk.................................. 36 Part II. Other Information Item 1. Legal Proceedings........................................................................... 37 Item 5. Other Information........................................................................... 38 Item 6. Exhibits and Reports on Form 8-K............................................................ 38 Signature............................................................................................ 39 Exhibit Index........................................................................................ 40 Constellation Energy Group, Inc. and Subsidiaries Computation of Ratio of Earnings to Fixed Charges.. 41 Baltimore Gas and Electric Company and Subsidiaries Computation of Ratio of Earnings to Fixed Charges and Computation of Ratio of Earnings to Combined Fixed Charges and Preferred and Preference Dividend Requirements................................................................. 42
2 CONSTELLATION ENERGY GROUP, INC. AND SUBSIDIARIES PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Income (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, 1999 1998 1999 1998 ---------- ---------- ----------- ---------- (In Millions, Except Per-Share Amounts) Revenues Electric $ 691.2 $ 722.5 $ 1,737.2 $ 1,746.8 Gas 60.1 62.1 332.7 324.7 Diversified businesses 219.1 149.4 652.7 496.2 ---------- ---------- ----------- ---------- Total revenues 970.4 934.0 2,722.6 2,567.7 Expenses Other Than Fixed Charges and Income Taxes Electric fuel and purchased energy 115.8 149.4 356.9 391.5 Gas purchased for resale 21.3 21.6 156.4 152.0 Operations 127.1 129.4 397.5 395.3 Maintenance 40.9 38.7 143.4 130.8 Diversified businesses - selling, general, and administrative 229.6 122.9 577.6 393.8 Depreciation and amortization 92.9 89.6 274.0 275.6 Taxes other than income taxes 65.1 62.0 177.2 168.6 ---------- ---------- ----------- ---------- Total expenses other than fixed charges and income taxes 692.7 613.6 2,083.0 1,907.6 ---------- ---------- ----------- ---------- Income From Operations 277.7 320.4 639.6 660.1 Other Income 1.2 3.5 5.7 6.2 ---------- ---------- ----------- ---------- Income Before Fixed Charges and Income Taxes 278.9 323.9 645.3 666.3 Fixed Charges Interest expense (net) 61.7 62.4 181.1 180.9 BGE preference stock dividends 3.4 6.8 10.2 18.3 ---------- ---------- ----------- ---------- Total fixed charges 65.1 69.2 191.3 199.2 ---------- ---------- ----------- ---------- Income Before Income Taxes 213.8 254.7 454.0 467.1 Income Taxes Current 76.7 72.4 152.6 160.5 Deferred 3.2 23.2 20.9 19.4 Investment tax credit adjustments (2.2) (1.8) (6.4) (5.5) ---------- ---------- ----------- ---------- Total income taxes 77.7 93.8 167.1 174.4 ---------- ---------- ----------- ---------- Net Income $ 136.1 $ 160.9 $ 286.9 $ 292.7 ========== ========== =========== ========== Earnings Applicable to Common Stock $ 136.1 $ 160.9 $ 286.9 $ 292.7 ========== ========== =========== ========== Average Shares of Common Stock Outstanding 149.6 148.7 149.6 148.3 Earnings Per Common Share and Earnings Per Common Share - Assuming Dilution $0.91 $1.08 $1.92 $1.97 Dividends Declared Per Common Share $0.42 $0.42 $1.26 $1.25 Consolidated Statements of Comprehensive Income (Unaudited) Net Income $ 136.1 $ 160.9 $ 286.9 $ 292.7 Other comprehensive income (loss), net of taxes 5.0 (0.5) (6.5) (0.6) ---------- ---------- ----------- ---------- Comprehensive Income $ 141.1 $ 160.4 $ 280.4 $ 292.1 ========== ========== =========== ==========
See Notes to Consolidated Financial Statements. Certain prior period amounts have been reclassified to conform with the current period's presentation. 3 CONSTELLATION ENERGY GROUP, INC. AND SUBSIDIARIES PART I. FINANCIAL INFORMATION (Continued) Item 1. Financial Statements Consolidated Balance Sheets
September 30, December 31, 1999* 1998 -------------- -------------- (In Millions) ASSETS Current Assets Cash and cash equivalents $ 56.4 $ 173.7 Accounts receivable (net of allowance for uncollectibles of $20.6 and $20.3 respectively) 675.0 401.8 Trading securities 128.4 119.7 Fuel stocks 86.3 85.4 Materials and supplies 149.1 145.1 Prepaid taxes other than income taxes 101.7 68.8 Assets from energy trading activities 431.3 160.2 Other 24.6 21.4 -------------- -------------- Total current assets 1,652.8 1,176.1 -------------- -------------- Investments and Other Assets Real estate projects and investments 313.3 353.9 Power projects 686.0 656.8 Financial investments 148.8 198.0 Nuclear decommissioning trust fund 205.5 181.4 Net pension asset 97.2 108.0 Other 381.7 243.3 -------------- -------------- Total investments and other assets 1,832.5 1,741.4 -------------- -------------- Utility Plant Plant in service Electric 7,053.1 6,890.3 Gas 958.7 921.3 Common 567.7 552.8 -------------- -------------- Total plant in service 8,579.5 8,364.4 Accumulated depreciation (3,256.4) (3,087.5) -------------- -------------- Net plant in service 5,323.1 5,276.9 Construction work in progress 177.8 223.0 Nuclear fuel (net of amortization) 143.1 132.5 Plant held for future use 12.9 24.3 -------------- -------------- Net utility plant 5,656.9 5,656.7 -------------- -------------- Deferred Charges Regulatory assets (net) 572.2 565.7 Other 57.3 55.1 -------------- -------------- Total deferred charges 629.5 620.8 -------------- -------------- TOTAL ASSETS $ 9,771.7 $ 9,195.0 ============== ==============
* Unaudited See Notes to Consolidated Financial Statements. Certain prior period amounts have been reclassified to conform with the current period's presentation. 4 CONSTELLATION ENERGY GROUP, INC. AND SUBSIDIARIES PART I. FINANCIAL INFORMATION (Continued) Item 1. Financial Statements Consolidated Balance Sheets
September 30, December 31, 1999* 1998 -------------- -------------- (In Millions) LIABILITIES AND CAPITALIZATION Current Liabilities Short-term borrowings $ 143.1 $ - Current portions of long-term debt and preference stock 964.5 541.7 Accounts payable 364.5 249.6 Customer deposits 39.8 35.5 Accrued taxes 52.0 6.5 Accrued interest 62.7 58.6 Dividends declared 66.1 66.1 Accrued vacation costs 34.6 34.7 Liabilities from energy trading activities 310.9 126.2 Other 48.9 45.3 -------------- -------------- Total current liabilities 2,087.1 1,164.2 -------------- -------------- Deferred Credits and Other Liabilities Deferred income taxes 1,318.1 1,309.1 Postretirement and postemployment benefits 238.0 217.0 Deferred investment tax credits 111.6 118.0 Decommissioning of federal uranium enrichment facilities 30.8 30.8 Other 125.8 56.3 -------------- -------------- Total deferred credits and other liabilities 1,824.3 1,731.2 -------------- -------------- Long-term Debt BGE first refunding mortgage bonds 1,412.8 1,554.2 BGE other long-term debt 1,135.8 1,000.8 BGE obligated mandatorily redeemable trust preferred securities 250.0 250.0 Diversified businesses long-term debt 765.5 870.2 Unamortized discount and premium (11.2) (12.4) Current portion of long-term debt (964.5) (534.7) -------------- -------------- Total long-term debt 2,588.4 3,128.1 -------------- -------------- BGE Redeemable Preference Stock - 7.0 Current portion of BGE redeemable preference stock - (7.0) -------------- -------------- Total BGE redeemable preference stock - - -------------- -------------- BGE Preference Stock Not Subject to Mandatory Redemption 190.0 190.0 -------------- -------------- Common Shareholders' Equity Common stock 1,493.6 1,485.1 Retained earnings 1,588.7 1,490.3 Accumulated other comprehensive (loss) income (0.4) 6.1 -------------- -------------- Total common shareholders' equity 3,081.9 2,981.5 -------------- -------------- Total capitalization 5,860.3 6,299.6 -------------- -------------- TOTAL LIABILITIES AND CAPITALIZATION $ 9,771.7 $ 9,195.0 ============== ==============
* Unaudited See Notes to Consolidated Financial Statements. Certain prior period amounts have been reclassified to conform with the current period's presentation. 5 CONSTELLATION ENERGY GROUP, INC. AND SUBSIDIARIES PART I. FINANCIAL INFORMATION (Continued) Item 1. Financial Statements Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30, ------------------------------- 1999 1998 ------------- -------------- (In Millions) Cash Flows From Operating Activities Net income $ 286.9 $ 292.7 Adjustments to reconcile to net cash provided by operating activities Depreciation and amortization 316.2 312.8 Deferred income taxes 20.9 19.4 Investment tax credit adjustments (6.4) (5.5) Deferred fuel costs (51.2) 1.9 Accrued pension and postemployment benefits 35.5 18.4 Write-down of real estate investment 7.0 - Write-down of financial investment 26.3 - Write-off of power project 10.2 - Equity in earnings of affiliates and joint ventures (net) 22.4 (47.7) Changes in assets from energy trading activities (271.1) (51.2) Changes in liabilities from energy trading activities 184.7 49.2 Changes in other current assets (334.6) (47.8) Changes in other current liabilities 213.9 115.4 Other 22.8 (2.8) ------------- -------------- Net cash provided by operating activities 483.5 654.8 ------------- -------------- Cash Flows From Investing Activities Utility capital expenditures (286.8) (274.9) Contributions to nuclear decommissioning trust fund (13.2) (13.2) Purchases of marketable equity securities (17.2) (26.8) Sales of marketable equity securities 12.5 26.2 Other financial investments 15.1 14.1 Real estate projects and investments 46.2 7.8 Power projects (150.3) (87.6) Other (48.1) (60.7) ------------- -------------- Net cash used in investing activities (441.8) (415.1) ------------- -------------- Cash Flows From Financing Activities Proceeds from issuance of Short-term borrowings 1,761.8 1,962.2 Long-term debt 289.7 447.4 Common stock 9.5 32.5 Repayments of short-term borrowings (1,618.7) (2,154.5) Reacquisition of long-term debt (399.6) (166.0) Redemption of preference stock (7.0) (124.9) Common stock dividends paid (188.3) (183.5) Other (6.4) (0.4) ------------- -------------- Net cash used in financing activities (159.0) (187.2) ------------- -------------- Net (Decrease) Increase in Cash and Cash Equivalents (117.3) 52.5 Cash and Cash Equivalents at Beginning of Period 173.7 162.6 ------------- -------------- Cash and Cash Equivalents at End of Period $ 56.4 $ 215.1 ============= ============== Other Cash Flow Information: Interest paid (net of amounts capitalized) $ 174.9 $ 170.7 Income taxes paid $ 102.2 $ 108.5
See Notes to Consolidated Financial Statements. Certain prior period amounts have been reclassified to conform with the current period's presentation. 6 BALTIMORE GAS AND ELECTRIC COMPANY AND SUBSIDIARIES PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Income (Unaudited)
Three Months Ended September 30, Nine Months Ended September 30, 1999 1998 1999 1998 ----------- ----------- ---------- ----------- (In Millions, Except Per-Share Amounts) Revenues Electric $ 691.4 $ 722.5 $ 1,737.5 $ 1,746.8 Gas 62.9 62.1 337.3 324.7 Diversified businesses 1.7 149.4 282.7 496.2 ----------- ----------- ---------- ----------- Total revenues 756.0 934.0 2,357.5 2,567.7 Expenses Other Than Interest and Income Taxes Electric fuel and purchased energy 129.9 149.4 375.3 391.5 Gas purchased for resale 21.3 21.6 156.4 152.0 Operations 126.4 129.4 396.7 395.3 Maintenance 40.7 38.7 142.5 130.8 Diversified businesses - selling, general, and administrative 1.2 122.9 221.3 393.8 Depreciation and amortization 89.0 89.6 267.5 275.6 Taxes other than income taxes 64.2 62.0 175.6 168.6 ----------- ----------- ---------- ----------- Total expenses other than interest and income taxes 472.7 613.6 1,735.3 1,907.6 ----------- ----------- ---------- ----------- Income From Operations 283.3 320.4 622.2 660.1 Other Income Allowance for equity funds used during construction 1.5 1.8 5.2 5.0 Equity in earnings of Safe Harbor Water Power Corporation 1.2 1.2 3.8 3.7 Net other income and (deductions) (0.5) 0.5 (3.6) (2.5) ----------- ----------- ---------- ----------- Total other income 2.2 3.5 5.4 6.2 ----------- ----------- ---------- ----------- Income Before Interest and Income Taxes 285.5 323.9 627.6 666.3 Interest Expense Interest charges 48.1 64.1 162.3 186.3 Capitalized interest - (0.7) (0.4) (2.7) Allowance for borrowed funds used during construction (0.8) (1.0) (2.8) (2.7) ----------- ----------- ---------- ----------- Net interest expense 47.3 62.4 159.1 180.9 ------------- ----------- ---------- ----------- Income Before Income Taxes 238.2 261.5 468.5 485.4 Income Taxes Current 80.5 72.4 169.1 160.5 Deferred 4.9 23.2 3.5 19.4 Investment tax credit adjustments (2.1) (1.8) (6.4) (5.5) ----------- ----------- ---------- ----------- Total income taxes 83.3 93.8 166.2 174.4 ----------- ----------- ---------- ----------- Net Income 154.9 167.7 302.3 311.0 Preference Stock Dividends 3.4 6.8 10.2 18.3 ----------- ----------- ---------- ----------- Earnings Applicable to Common Stock $ 151.5 $ 160.9 $ 292.1 $ 292.7 =========== =========== ========== =========== Consolidated Statements of Comprehensive Income (Unaudited) Net Income $ 154.9 $ 167.7 $ 302.3 $ 311.0 Other comprehensive loss, net of taxes - (0.5) (3.4) (0.6) ----------- ----------- ---------- ----------- Comprehensive Income $ 154.9 $ 167.2 $ 298.9 $ 310.4 =========== =========== ========== ===========
See Notes to Consolidated Financial Statements. Certain prior period amounts have been reclassified to conform with the current period's presentation. 7 BALTIMORE GAS AND ELECTRIC COMPANY AND SUBSIDIARIES PART I. FINANCIAL INFORMATION (Continued) Item 1. Financial Statements Consolidated Balance Sheets
September 30 December 31, 1999* 1998 -------------- -------------- (In Millions) ASSETS Current Assets Cash and cash equivalents $ 15.5 $ 173.7 Accounts receivable (net of allowance for uncollectibles of $13.0 and $20.3 respectively) 352.8 401.8 Trading securities - 119.7 Fuel stocks 86.3 85.4 Materials and supplies 141.0 145.1 Prepaid taxes other than income taxes 101.7 68.8 Assets from energy trading activities - 160.2 Other 10.1 21.4 -------------- -------------- Total current assets 707.4 1,176.1 -------------- -------------- Investments and Other Assets Real estate projects and investments - 353.9 Power projects - 656.8 Financial investments - 198.0 Nuclear decommissioning trust fund 205.5 181.4 Net pension asset 97.3 108.0 Safe Harbor Water Power Corporation 34.5 34.4 Senior living facilities - 93.5 Other 59.7 115.4 -------------- -------------- Total investments and other assets 397.0 1,741.4 -------------- -------------- Utility Plant Plant in service Electric 7,053.1 6,890.3 Gas 958.7 921.3 Common 567.7 552.8 -------------- -------------- Total plant in service 8,579.5 8,364.4 Accumulated depreciation (3,256.4) (3,087.5) -------------- -------------- Net plant in service 5,323.1 5,276.9 Construction work in progress 177.8 223.0 Nuclear fuel (net of amortization) 143.1 132.5 Plant held for future use 12.9 24.3 -------------- -------------- Net utility plant 5,656.9 5,656.7 -------------- -------------- Deferred Charges Regulatory assets (net) 572.2 565.7 Other 47.0 55.1 -------------- -------------- Total deferred charges 619.2 620.8 -------------- -------------- TOTAL ASSETS $ 7,380.5 $ 9,195.0 ============== ==============
* Unaudited See Notes to Consolidated Financial Statements. 8 BALTIMORE GAS AND ELECTRIC COMPANY AND SUBSIDIARIES PART I. FINANCIAL INFORMATION (Continued) Item 1. Financial Statements Consolidated Balance Sheets
September 30, December 31, 1999* 1998 -------------- -------------- (In Millions) LIABILITIES AND CAPITALIZATION Current Liabilities Short-term borrowings $ 22.5 $ - Current portions of long-term debt and preference stock 615.0 541.7 Accounts payable 189.8 249.6 Customer deposits 39.8 35.5 Accrued taxes 54.5 6.5 Accrued interest 47.9 58.6 Dividends declared 3.3 66.1 Accrued vacation costs 34.9 34.7 Liabilities from energy trading activities - 126.2 Other 23.3 45.3 -------------- -------------- Total current liabilities 1,031.0 1,164.2 -------------- -------------- Deferred Credits and Other Liabilities Deferred income taxes 1,062.7 1,309.1 Postretirement and postemployment benefits 229.2 217.0 Deferred investment tax credits 111.6 118.0 Decommissioning of federal uranium enrichment facilities 30.8 30.8 Other 57.6 56.3 -------------- -------------- Total deferred credits and other liabilities 1,491.9 1,731.2 -------------- -------------- Long-term Debt First refunding mortgage bonds of BGE 1,412.8 1,554.2 Other long-term debt of BGE 1,135.8 1,000.8 Company obligated mandatorily redeemable trust preferred securities 250.0 250.0 Long-term debt of diversified businesses 33.0 870.2 Unamortized discount and premium (11.2) (12.4) Current portion of long-term debt (614.9) (534.7) -------------- -------------- Total long-term debt 2,205.5 3,128.1 -------------- -------------- Redeemable Preference Stock - 7.0 Current portion of redeemable preference stock - (7.0) -------------- -------------- Total redeemable preference stock - - -------------- -------------- Preference Stock Not Subject to Mandatory Redemption 190.0 190.0 -------------- -------------- Common Shareholder's Equity Common stock 1,493.6 1,485.1 Retained earnings 968.5 1,490.3 Accumulated other comprehensive income - 6.1 -------------- -------------- Total common shareholder's equity 2,462.1 2,981.5 -------------- -------------- Total capitalization 4,857.6 6,299.6 -------------- -------------- TOTAL LIABILITIES AND CAPITALIZATION $ 7,380.5 $ 9,195.0 ============== ==============
* Unaudited See Notes to Consolidated Financial Statements. 9 BALTIMORE GAS AND ELECTRIC COMPANY AND SUBSIDIARIES PART I. FINANCIAL INFORMATION (Continued) Item 1. Financial Statements Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30, ------------------------------- 1999 1998 ------------ ------------ (In Millions) Cash Flows From Operating Activities Net income $ 302.3 $ 311.0 Adjustments to reconcile to net cash provided by operating activities Depreciation and amortization 307.6 312.8 Deferred income taxes 3.6 19.4 Investment tax credit adjustments (6.4) (5.5) Deferred fuel costs (51.2) 1.9 Accrued pension and postemployment benefits 35.0 18.4 Allowance for equity funds used during construction (5.2) (5.0) Equity in earnings of affiliates and joint ventures (net) 29.0 (47.7) Changes in assets from energy trading activities (120.1) (51.2) Changes in liabilities from energy trading activities 76.3 49.2 Changes in other current assets (73.2) (47.8) Changes in other current liabilities 41.9 115.4 Other 32.5 1.5 ------------ ------------ Net cash provided by operating activities 572.1 672.4 ------------ ------------ Cash Flows From Investing Activities Utility construction expenditures (including AFC) (246.1) (215.7) Allowance for equity funds used during construction 5.2 5.0 Nuclear fuel expenditures (45.0) (49.0) Deferred energy conservation expenditures (0.9) (15.2) Contributions to nuclear decommissioning trust fund (13.2) (13.2) Purchases of marketable equity securities (9.2) (26.8) Sales of marketable equity securities 6.0 26.2 Other financial investments 6.7 14.1 Real estate projects and investments 22.0 7.8 Power projects (17.9) (87.6) Other (16.7) (60.7) ------------ ------------ Net cash used in investing activities (309.1) (415.1) ------------ ------------ Cash Flows From Financing Activities Proceeds from issuance of Short-term borrowings 1,608.3 1,962.2 Long-term debt 257.2 447.4 Common stock 9.5 32.5 Repayments of short-term borrowings (1,585.8) (2,154.5) Reacquisition of long-term debt (375.3) (166.0) Redemption of preference stock (7.0) (124.9) Common stock dividends paid (188.3) (183.5) Preference stock dividends paid (10.3) (17.6) Distribution of cash to Constellation Energy (128.2) - Other (1.3) (0.4) ------------ ------------ Net cash used in financing activities (421.2) (204.8) ------------ ------------ Net (Decrease) Increase in Cash and Cash Equivalents (158.2) 52.5 Cash and Cash Equivalents at Beginning of Period 173.7 162.6 ------------ ------------ Cash and Cash Equivalents at End of Period $ 15.5 $ 215.1 ============ ============ Other Cash Flow Information: Interest paid (net of amounts capitalized) $ 155.0 $ 170.7 Income taxes paid $ 99.4 $ 108.5
See Notes to Consolidated Financial Statements. Certain prior period amounts have been reclassified to conform with the current period's presentation. 10 Notes to Consolidated Financial Statements - ------------------------------------------ Weather conditions can have a great impact on our results for interim periods. This means that results for interim periods do not necessarily represent results to be expected for the year. Our interim financial statements on the previous pages reflect all adjustments 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. Holding Company Formation - ------------------------- On April 30, 1999, Constellation Energy Group, Inc. (Constellation Energy) became the holding company for Baltimore Gas and Electric Company (BGE) and BGE's former subsidiary Constellation Enterprises, Inc. BGE's outstanding common stock automatically became shares of common stock of Constellation Energy. BGE's debt securities, BGE obligated mandatorily redeemable trust preferred securities, and preference stock remain securities of BGE. Basis of Presentation - --------------------- This Quarterly Report on Form 10-Q is a combined report of Constellation Energy and BGE. The consolidated financial statements of Constellation Energy include the accounts of Constellation Energy, BGE and its subsidiaries, Constellation Enterprises, Inc. and its subsidiaries, and Constellation Nuclear Services, Inc. The consolidated financial statements of BGE include the accounts of BGE, District Chilled Water General Partnership (ComfortLink), and BGE Capital Trust I. As Constellation Enterprises and its subsidiaries were subsidiaries of BGE prior to April 30, 1999, they are included in the consolidated financial statements of BGE through that date. References in this report to "we" and "our" are to Constellation Energy and its subsidiaries, collectively. Reference in this report to the "utility business" is to BGE. Deregulation of Electric Generation - ----------------------------------- On November 10, 1999, the Maryland PSC issued a Restructuring Order that resolves the major issues surrounding electric restructuring. See the "Competition and Response to Regulatory Change" section on page 20 for a detailed discussion of the Restructuring Order. Information by Operating Segment - --------------------------------
Energy Other Unallocated Electric Gas Services Diversified Corporate Business Business Businesses Businesses Items (a) Eliminations Consolidated ------------ ------------ ------------- --------------- -------------- ------------- --------------- For the three months ended September 30, (in millions) 1999 Unaffiliated revenues $ 691.2 $ 60.1 $ 222.6 $ (3.5) $ - $ - $ 970.4 Intersegment revenues 0.2 2.8 14.7 (0.2) - (17.5) - ----------- ------------ ------------- --------------- -------------- ------------- --------------- Total revenues 691.4 62.9 237.3 (3.7) - (17.5) 970.4 Net income (loss) 152.3 (0.7) 7.2 (22.2) (0.5) - 136.1 Segment assets 6,409.0 928.5 1,720.6 736.9 (16.5) (6.8) 9,771.7 1998 Unaffiliated revenues $ 722.5 $ 62.1 $ 130.9 $ 18.5 $ - $ - $ 934.0 Intersegment revenues 1.2 - 10.3 (0.9) - (10.6) - ----------- ------------ ------------- --------------- -------------- ------------- --------------- Total revenues 723.7 62.1 141.2 17.6 - (10.6) 934.0 Net income (loss) 155.6 (1.8) 18.1 (11.1) 0.1 - 160.9 Segment assets 6,467.0 932.7 1,057.0 827.7 (29.2) (111.2) 9,144.0
11
Energy Other Unallocated Electric Gas Services Diversified Corporate Business Business Businesses Businesses Items (a) Eliminations Consolidated ------------ ------------ ------------- --------------- -------------- ------------- --------------- For the nine months ended September 30, (in millions) 1999 Unaffiliated revenues $ 1,737.2 $ 332.7 $ 581.3 $ 71.4 $ - $ - $ 2,722.6 Intersegment revenues 0.7 7.4 27.0 (0.4) - (34.7) - ----------- ------------ ------------- --------------- -------------- ------------- --------------- Total revenues 1,737.9 340.1 608.3 71.0 - (34.7) 2,722.6 Net income (loss) 253.4 21.5 42.2 (28.9) (1.3) - 286.9 Segment assets 6,409.0 928.5 1,720.6 736.9 (16.5) (6.8) 9,771.7 1998 Unaffiliated revenues $ 1,746.8 $ 324.7 $ 365.8 $ 130.4 $ - $ - $ 2,567.7 Intersegment revenues 1.3 - 10.8 (0.6) - (11.5) - ----------- ------------ ------------- --------------- -------------- ------------- --------------- Total revenues 1,748.1 324.7 376.6 129.8 - (11.5) 2,567.7 Net income (loss) 249.0 15.6 36.6 (8.6) 0.1 - 292.7 Segment assets 6,467.0 932.7 1,057.0 827.7 (29.2) (111.2) 9,144.0
(a) A holding company for our diversified businesses does not allocate the items presented in the table to our Energy Services and Other Diversified businesses. - -------------------------------------------------------------------------------- Financing Activity - ------------------ Constellation Energy - -------------------- As discussed on page 11, effective April 30, 1999, BGE's outstanding common stock automatically became shares of common stock of Constellation Energy. During the period from January 1, 1999 through the date of this report, we issued a total of 310,775 shares of common stock, without par value, under the Shareholder Investment Plan. Net proceeds were about $9.5 million. In June 1999, Constellation Energy arranged a $135 million revolving credit agreement for short-term financial needs, including letters of credit. This facility replaced a similar facility at one of Constellation Energy's diversified businesses. As of the date of this report, letters of credit totaling $23.7 million were issued under this facility. As of the date of this report, Constellation Energy has issued guarantees in an amount up to $49.7 million to support the contractual performance of certain of its diversified subsidiaries. BGE - --- BGE issued the following medium-term notes during the period from January 1, 1999 through the date of this report: Date Net Principal Issued Proceeds --------- ------ -------- (In millions) Series G - -------- Floating rate, due 2001 $60.0 3/99 $59.9 Series H - -------- Floating rate, due 2001 27.0 3/99 26.9 Floating rate, due 2000 150.0 9/99 149.8 In the future, BGE may purchase some of its long-term debt or preference stock in the market. This will depend on market conditions and BGE's capital structure, including the mix of secured and unsecured debt. Diversified Businesses - ---------------------- Please refer to the "Capital Requirements of our Diversified Businesses" section of Management's Discussion and Analysis on page 31 for information about the debt of our diversified businesses. 12 Commitments - ----------- In 1998, Constellation Power Source, Inc., our power marketing and trading 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 has committed to contribute up to $175 million in equity to fund its investment in Orion. To date, Constellation Power Source has funded $104 million of this commitment. 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, switching fuels, and retiring some units. o Phase II must be implemented by January 1, 2000. We will meet the compliance requirements through a combination of switching fuels and allowance trading. Title I addresses NOx emissions. The Maryland Department of the Environment (MDE) issued NOx regulations effective June 1, 1998. The MDE regulations require major NOx sources to reduce NOx emissions up to 65% by May 1, 2000. We are currently negotiating with the MDE to settle issues regarding the May 1, 2000 compliance date. In the meantime, we are taking steps to control NOx emissions at our generating plants. The Environmental Protection Agency (EPA) issued a final rule in September 1998 that requires the reduction of NOx emissions up to 85% by 22 states including Maryland and Pennsylvania. This rule was appealed by several groups including utilities and states. A final decision on the appeal is expected in early 2000. Based on the MDE and EPA regulations, we currently estimate that the additional controls needed at our generating plants to meet MDE's 65% NOx emission reduction requirements will cost approximately $135 million. Through the date of this report, we have spent approximately $38 million to meet MDE's 65% reduction requirements. We estimate the additional cost for EPA's 85% reduction requirements to be approximately $35 million. 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 15.43% share of the reasonably possible cleanup costs at one of these sites, Metal Bank of America (a metal reclaimer in Philadelphia), could be as much as $4.9 million higher than amounts we have recorded as a liability on our Consolidated Balance Sheets. This estimate is based on a Record of Decision issued by the EPA. On July 12, 1999, the EPA notified us, along with nineteen other entities, that we may be a potentially responsible party at the 68th Street Dump Site, also known as the Robb Tyler Dump located in Baltimore, Maryland. The EPA indicated that it is proceeding with plans to conduct a remedial investigation and feasibility study. This site was proposed for listing on the federal Superfund list in January 1999, but the list has not been finalized. Although our potential liability cannot be estimated, we do not expect such liability to be material based on our records showing that we did not send waste to the site. We discuss this site further in BGE's 1998 Annual Report on Form 10-K. We do not expect the cleanup costs of the remaining sites 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, located in Baltimore, Maryland. We submitted the required remedial action plans and they were approved by MDE. Based on the remedial action plans, the costs we consider to be probable to remedy the contamination are estimated to total $47 million in nominal dollars (including inflation). We have recorded these costs as a liability on our Consolidated Balance Sheets and have 13 deferred these costs, net of accumulated amortization and amounts recovered from insurance companies, as a regulatory asset. We discuss this further in Note 4 of BGE's 1998 Annual Report on Form 10-K. Through the date of this report, we have spent approximately $33 million for remediation at this site. We are also required by accounting rules to disclose additional costs we consider to be less likely than probable costs, but still "reasonably possible" of being incurred at these sites. Because of the results of studies at these sites, it is reasonably possible that these additional costs could exceed the amount we recognized by approximately $14 million in nominal dollars ($7 million in current dollars, plus the impact of inflation at 3.1% over a period of up to 36 years). Our potential environmental liabilities and pending environmental actions are described further in BGE's 1998 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 us. 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 industry standard exclusions. Furthermore, the costs that could result from a covered major accident or a covered extended outage at either of the Calvert Cliffs units could exceed our insurance coverage limits. Insurance for Calvert Cliffs and Third Party Claims - --------------------------------------------------- For physical damage to Calvert Cliffs, we have $2.75 billion of property insurance from an industry mutual insurance company. If an outage at either of the two units at Calvert Cliffs is caused by an insured physical damage loss and lasts more than 12 weeks, we have insurance coverage for replacement power costs up to $490.0 million per unit, provided by an industry mutual insurance company. This amount can be reduced by up to $98.0 million per unit if an outage at both units of the plant is caused by a single insured physical damage loss. If accidents at any insured plants cause a shortfall of funds at the industry mutual insurance company, all policyholders could be assessed, with our share being up to $21.7 million. In addition we, as well as others, could be charged for a portion of any third party claims associated with a nuclear incident at any commercial nuclear power plant in the country. At the date of this report, the limit for third party claims from a nuclear incident is $9.71 billion under the provisions of the Price Anderson Act. If third party claims exceed $200 million (the amount of primary insurance), our share of the total liability for third party claims could be up to $176.2 million per incident. That amount would be payable at a rate of $20 million per year. Insurance for Worker Radiation Claims - ------------------------------------- As an operator of a commercial nuclear power plant in the United States, we are required to purchase insurance to cover radiation injury claims of certain nuclear workers. On January 1, 1998, a new insurance policy became effective for all operators requiring coverage for current operations. Waiving the right to make additional claims under the old policy was a condition for acceptance under the new policy. We describe both the old and new policies below. 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 nine years. If radiation injury claims under these old policies exceed the policy reserves, all policyholders could be assessed, with our share being up to $6.3 million. If claims under these polices exceed the coverage limits, the provisions of the Price Anderson Act (discussed in this section) would apply. 14 Recoverability of Electric Fuel Costs - ------------------------------------- Historically and until July 1, 2000, 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 BGE's 1998 Annual Report on Form 10-K. Under the terms of the Restructuring Order, BGE's electric fuel rate clause will be discontinued effective July 1, 2000. After that date, earnings will be affected by changes in the cost of fuel and energy. We discuss competition and its impact on BGE's generation business further in the "Competition and Response to Regulatory Change" section of Management's Discussion and Analysis on page 20. The discontinuance of BGE's electric fuel rate clause is discussed further in the "Regulation by the Maryland PSC" section in Management's Discussion and Analysis on page 18. California Power Purchase Agreements - ------------------------------------ Constellation Power, Inc. and subsidiaries and Constellation Investments, Inc. (whose power projects are managed by Constellation Power) have $308.2 million invested in 14 projects that sell electricity in California under power purchase agreements called "Interim Standard Offer No. 4" agreements. Under these agreements, the projects supply electricity to utility companies at: 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 14 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. The projects that have already transitioned to variable rates have had lower revenues under variable rates than they did under fixed rates. 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. We discuss the earnings for these projects in the "Diversified Businesses" section beginning on page 26. Other Diversified Businesses - ---------------------------- We discuss our other diversified businesses' activities further in the "Diversified Businesses" section beginning on page 26. 15 Item 2. Management's Discussion Management's Discussion and Analysis of Financial Condition and Results of Operations - -------------------------------------------------------------------------------- Introduction - ------------ On April 30, 1999, Constellation Energy(R) Group, Inc. (Constellation Energy) became the holding company for Baltimore Gas and Electric Company (BGE(R)) and Constellation(R) Enterprises, Inc. Constellation Enterprises was previously owned by BGE. BGE is an electric and gas public utility company with a service territory in the City of Baltimore and in all or part of ten counties in Central Maryland. Constellation Enterprises is a holding company for several diversified businesses engaged primarily in energy services. Our energy services businesses are: o Constellation Power Source,(TM) Inc. -- our wholesale power marketing and trading business, o Constellation Power, Inc.,(TM) and Subsidiaries -- our power projects business, o Constellation Energy Source,(TM) Inc. -- our energy products and services business, o Constellation Nuclear Services, (TM) Inc. -- our nuclear consulting services business, o BGE Home Products & Services,(TM) Inc. and Subsidiaries -- our home products, commercial building systems, and residential and small commercial gas retail marketing business, and o District Chilled Water General Partnership (ComfortLink(R)) -- a general partnership in which BGE is a partner that provides cooling services for commercial customers in Baltimore. Constellation Enterprises, Inc. also has two other subsidiaries: o Constellation Investments,(TM) Inc. -- our financial investments business, and o Constellation Real Estate Group,(TM) Inc. -- our real estate and senior-living facilities business. This Quarterly Report on Form 10-Q is a combined report of Constellation Energy and BGE. The consolidated financial statements of Constellation Energy include the accounts of Constellation Energy, BGE and its subsidiaries, Constellation Enterprises, Inc. and its subsidiaries, and Constellation Nuclear Services, Inc. The consolidated financial statements of BGE include the accounts of BGE, ComfortLink, and BGE Capital Trust I. As Constellation Enterprises and its subsidiaries were subsidiaries of BGE prior to April 30, 1999, they are included in the consolidated financial statements of BGE through that date. References in this report to "we" and "our" are to Constellation Energy and its subsidiaries, collectively. Reference in this report to the "utility business" is to BGE. Deregulation and Strategy - ------------------------- The electric utility industry is undergoing rapid and substantial change. On April 8, 1999, Maryland enacted legislation authorizing customer choice and competition among electric suppliers. In addition, on June 29, 1999, BGE and a majority of the active parties involved in the electric restructuring proceeding filed a proposed settlement agreement with the Maryland Public Service Commission (Maryland PSC) that addresses the major issues surrounding electric restructuring. On November 10, 1999, the Maryland PSC issued a Restructuring Order that approved the proposed settlement agreement. All electric customers, except a few commercial and industrial companies that have signed contracts with BGE, will be able to choose suppliers on July 1, 2000. Also, upon receipt of all regulatory approvals, on July 1, 2000, all of BGE's generation assets will be moved to nonregulated subsidiaries of Constellation Energy. These assets represent about 6,240 megawatts of generation capacity. These matters are discussed further in the "Competition and Response to Regulatory Change" section on page 20. In Maryland, all gas customers were able to choose suppliers beginning November 1, 1999. This change toward customer choice will significantly impact our business going forward. In response to this change, we regularly evaluate our strategies with two goals in mind: to improve our competitive position, and to anticipate and adapt to regulatory change. We will continue to invest in the growth of our nonregulated businesses, especially our power projects and power marketing and trading businesses, with the objective of providing new sources of earnings in anticipation of lower electric utility revenues. In addition, we might consider one or more of the following strategies: 16 o the complete or partial separation of our transmission and distribution functions, o the construction, 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 earnings from other nonregulated businesses. We cannot predict whether any of the strategies described above may actually occur, or what their effect on our financial condition or competitive position might be. However, with the shift toward customer choice, competition, and the growth of our nonregulated subsidiaries, various factors will affect our results of operations and financial condition in the future. These factors include, but are not limited to, the loss of customers, higher volatility of earnings and cash flows, and increased financial requirements of our nonregulated subsidiaries. Please refer to the "Forward Looking Statements" section on page 38. Additional detail on competition is included in BGE's 1998 Annual Report on Form 10-K under the heading "Electric Regulatory Matters and Competition." In this discussion and analysis, we explain the general financial condition and the results of operations for Constellation Energy 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 expect to get cash for future capital expenditures. As you read this discussion and analysis, refer to our Consolidated Statements of Income on page 3, which present the results of our operations for the quarters and nine months ended September 30, 1999 and 1998. We analyze and explain the differences between periods in the specific line items of the Consolidated Statements of Income. Our analysis is important in making decisions about your investments in Constellation Energy. Also, this discussion and analysis is based on the operation of the electric generation portion of our utility business under current rate regulation. Our electric business will change significantly beginning July 1, 2000 as we enter into the transition to full retail customer choice for electric generation. Accordingly, the results of operations and financial condition described in this discussion and analysis are not necessarily indicative of future performance. - ------------------------------------------------------------------------------- Results of Operations for the Quarter and Nine Months Ended September 30, 1999 Compared With the Same Periods of 1998 - ------------------------------------------------------------------------------- In this section, we discuss our earnings and the factors affecting them. We begin with a general overview, then separately discuss earnings for our utility business and for our diversified businesses. Overview - -------- Total Earnings per Share of Common Stock - ---------------------------------------- Quarter Ended Nine Months Ended September 30 September 30 --------------- ---------------- 1999 1998 1999 1998 ------- ------- -------- ------- Utility business...... $1.02 $1.03 $1.84 $1.78 Diversified businesses (.11) .05 .08 .19 ---- --- --- --- Total earnings per share.......... $ .91 $1.08 $1.92 $1.97 ====== ===== ===== ===== Quarter Ended September 30, 1999 - -------------------------------- Our total earnings for the quarter ended September 30, 1999 decreased $24.8 million, or $.17 per share, compared to the same period of 1998. In the third quarter of 1999, we had lower utility earnings compared to the same period of 1998 mostly because we deferred $37.5 million of electric revenues to reflect certain terms of the proposed settlement agreement with the Maryland PSC, and we incurred costs associated with Hurricane Floyd. This decrease in utility earnings compared to 1998 was partially offset by the settlement of a capacity contract with PECO Energy Company (PECO) in the third quarter of 1998. We discuss our utility earnings in more detail in the "Utility Business" section on page 18. 17 In the third quarter of 1999, diversified business earnings decreased compared to the same period of 1998 mostly because of lower earnings from our power projects and financial investments businesses. This decline was partially offset by higher earnings from our power marketing and trading business. We discuss our diversified business earnings further in the "Diversified Businesses" section beginning on page 26. Nine Months Ended September 30, 1999 - ------------------------------------ Our total earnings for the nine months ended September 30, 1999 decreased $5.8 million, or $.05 per share, compared to the same period of 1998. In the nine months ended September 30, 1999, we had higher utility earnings compared to the same period of 1998 mostly because we sold more electricity and gas this year and we settled a capacity contract with PECO in 1998. The increase in utility earnings was partially offset by the deferral of $37.5 million of electric revenues as discussed above, and higher operations and maintenance expenses mostly due to Hurricane Floyd and a major winter ice storm. We discuss our utility earnings in more detail in the "Utility Business" section below. In the nine months ended September 30, 1999, diversified business earnings decreased compared to the same period of 1998 mostly because of lower earnings from our power projects and financial investments businesses. This decline was partially offset by higher earnings from our power marketing and trading business. We discuss our diversified business earnings further in the "Diversified Businesses" section beginning on page 26. 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 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. From time to time, when necessary to cover increased costs, we ask the Maryland PSC for base rate increases. Similarly, other parties may petition the Maryland PSC to lower BGE's base rates. The Maryland PSC holds hearings to determine what changes, if any, should be made to base rates. The Maryland PSC has historically allowed us to increase base rates to recover increased utility plant asset costs, plus a profit, beginning at the time of replacement. Generally, rate increases improve our utility earnings because they allow us to collect more revenue. However, rate increases are normally granted based on historical data and those increases may not always keep pace with increasing costs. Under the Restructuring Order, BGE's electric base rates are frozen at the current levels until July 1, 2000. At that time, electric residential customer choice begins and residential base rates will decrease by about $54 million per year. Those reduced rates will be frozen until June 30, 2006. 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 defer (include as a liability in our Consolidated Balance Sheets and exclude from our Consolidated Statements of Income) the excess in that year and we lower the amount of future surcharges to our customers to correct the amount of overage, plus interest. Under the Restructuring Order, the electric conservation surcharge and associated profit limitation will be discontinued effective July 1, 2000. 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. If these fuel 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 our Calvert Cliffs Nuclear Power Plant (Calvert Cliffs) because the cost of nuclear fuel is cheaper than coal, gas, or oil. 18 We discuss this in more detail in Note 1 of BGE's 1998 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 15. Under the Restructuring Order, BGE's electric fuel rate clause will be discontinued effective July 1, 2000. After that date, earnings will be affected by the changes in the cost of fuel and energy. In addition, any accumulated difference between our actual costs of fuel and energy and the amounts collected from customers under the electric fuel rate clause will be refunded to or collected from our customers over a period to be determined by the Maryland PSC. At September 30, 1999, BGE's actual costs of fuel and energy were $66.1 million higher than the electric fuel rate revenues collected from customers. 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 24. Please refer to the "Competition and Response to Regulatory Change" section on page 20 for a detailed discussion of the Restructuring Order. Weather - ------- Weather affects the demand for electricity and gas. Very hot summers and very cold winters increase demand. Mild weather reduces demand. Weather impacts residential sales more than commercial and industrial sales, which are mostly affected by business needs for electricity and gas. We measure the weather's effect using "degree days." A degree day is the difference between the average daily actual temperature and a baseline temperature of 65 degrees. Cooling degree days result when the average daily actual temperature exceeds the 65 degree baseline. Heating degree days result when the average daily actual temperature is less than the baseline. During the cooling season, hotter weather is measured by more cooling degree days and results in greater demand for electricity to operate cooling systems. During the heating season, colder weather is measured by more heating degree days and results in greater demand for electricity and gas to operate heating systems. Effective March 1, 1998, the Maryland PSC allowed us to implement a monthly adjustment to our gas business revenues to eliminate the effect of abnormal weather patterns. We discuss this further in the "Weather Normalization" section on page 24. We show the number of heating and cooling degree days in the quarters and nine months ended September 30, 1999 and 1998 and the percentage change in the number of degree days between these periods in the following table: Quarter Ended Nine Months Ended September 30 September 30 --------------- ------------------ 1999 1998 1999 1998 -------- ------ -------- -------- Heating degree days... 75 74 2,981 2,559 Percent change compared to prior period 1.4% 16.5% Cooling degree days... 629 625 832 904 Percent change compared to prior period 0.6% (8.0)% 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 that 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. 19 Competition and Response to Regulatory Change - --------------------------------------------- Our electric and gas businesses are also affected by competition as discussed below. Electric Business - ----------------- Electric utilities are facing competition on various fronts, including: o the construction of generating units to meet increased demand for electricity, o the sale of electricity in bulk power markets, o competing with alternative energy suppliers, and o electric sales to retail customers. On April 8, 1999, Maryland enacted the Electric Customer Choice and Competition Act of 1999 (the "Act") and accompanying tax legislation that will significantly restructure Maryland's electric utility industry and modify the industry's tax structure. Major elements of the Act and the accompanying tax legislation are discussed in detail in our June 30, 1999 Quarterly Report on Form 10-Q. On June 29, 1999, BGE and a majority of the active parties involved in the electric restructuring proceeding filed a proposed settlement agreement with the Maryland PSC. On November 10, 1999, the Maryland PSC issued a Restructuring Order that approved the proposed settlement agreement. The Restructuring Order resolves the electric restructuring proceeding (transition costs, customer price protections, and unbundled rates for electric services) and the petition filed in September 1998 by the Office of People's Counsel (OPC) to lower our electric base rates. In addition, the Restructuring Order accelerates the timetable for customer choice and addresses certain other provisions of the Act. There is a 30-day period to file an appeal to the Restructuring Order. We cannot predict whether an appeal will be filed. The electric restructuring proceeding and the petition filed by the OPC are discussed in BGE's 1998 Annual Report on Form 10-K. The major provisions of the Restructuring Order are: o All customers, except a few commercial and industrial companies that have signed contracts with BGE, will be able to choose their electric energy supplier beginning July 1, 2000. BGE will provide a standard offer service for customers that do not select an alternative supplier. In either case, BGE will continue to deliver electricity to all customers in areas traditionally served by BGE. o BGE will reduce residential base rates by approximately 6.5%, on average about $54 million a year, beginning July 1, 2000. These rates will not change before July 2006. o Commercial and industrial customers will have up to four service options that will fix electric energy rates and transition charges for a period that generally ranges from four to six years. o Electric delivery service rates will be frozen for a four-year period for commercial and industrial customers. The generation and transmission components of rates will be frozen for different time periods depending on the service options selected by those customers. o BGE will be allowed to recover $528 million of its potentially stranded investments and utility restructuring costs through a competitive transition charge on customers' bills. Residential customers will pay this charge for six years. Commercial and industrial customers will pay in a lump sum or over the four to six-year period, depending on the service option selected by each customer. o Generation-related regulatory assets and nuclear decommissioning costs will be included in delivery service rates effective July 1, 2000 and will be recovered on a basis approximating their existing amortization schedules. o Starting July 1, 2000, BGE will unbundle rates to show separate components for delivery service, transition charges, standard offer services (generation), transmission, universal service, and taxes. o On July 1, 2000, BGE will transfer, at book value, its ten Maryland-based fossil and nuclear power plants and its partial ownership interest in two coal plants and a hydroelectric plant in Pennsylvania to nonregulated subsidiaries of Constellation Energy. o BGE will reduce its generation assets, as described later in this section, by $150 million (pre-tax) during the period July 1, 1999 - June 30, 2000 to mitigate a portion of BGE's potentially stranded investments. o Universal service is provided for low-income customers without increasing their bills. BGE will provide its share of a statewide fund totaling $34 million. We believe that the Restructuring Order provides sufficient details of the transition plan to competition for BGE's electric generation business to require BGE to discontinue the application of Statement of Financial Accounting Standards (SFAS) No. 71, Accounting for the Effects of Certain Types of Regulation for that portion of our business. Accordingly, in the fourth quarter of 1999, we will adopt the provisions of SFAS No. 101, Regulated 20 Enterprises - Accounting for the Discontinuation of FASB Statement No. 71 and Emerging Issues Task Force Consensus (EITF) No. 97-4, Deregulation of the Pricing of Electricity - Issues Related to the Application of FASB Statements No. 71 and 101 for BGE's electric generation business. BGE's transmission and distribution business continues to meet the requirements of SFAS No. 71 as that business remains regulated. We describe the effect of applying these accounting requirements in the following discussion. SFAS No. 101 requires the elimination of the effects of rate regulation that have been recognized as regulatory assets and liabilities pursuant to SFAS No. 71. Under the Restructuring Order, BGE's generation-related net regulatory assets will be effectively recovered through BGE's regulated transmission and distribution business. We expect that there will be no net impact on BGE's or Constellation Energy's earnings associated with the recovery of the generation-related net regulatory assets. Pursuant to SFAS No. 101, the book value of property, plant, and equipment may not be adjusted unless those assets are impaired under the provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of. The process of evaluating and measuring impairment under the provisions of SFAS No. 121 involves two steps. First, we must compare the net book value of each generating plant to the estimated undiscounted future net operating cash flows from that plant. An electric generating plant is considered impaired when its undiscounted future net operating cash flows are less than its net book value. Second, we compute the fair value of each plant that is determined to be impaired based on the present value of that plant's estimated future net operating cash flows discounted using an interest rate that considers the risk of operating that facility in a competitive environment. To the extent that the net book value of each impaired electric generation plant exceeds its fair value, we must record a write-down. Under the Restructuring Order, BGE will recover $528 million of its potentially stranded investments and utility restructuring costs through the competitive transition charge component of its customer rates beginning July 1, 2000. This recovery mostly relates to the stranded costs associated with BGE's Calvert Cliffs Nuclear Power Plant, whose book value is substantially higher than its estimated fair value. However, Calvert Cliffs is not considered impaired under the provisions of SFAS No. 121 since its estimated future undiscounted cash flows exceed its book value. Accordingly, BGE will not record any impairment write-down related to Calvert Cliffs. We will, however, recognize impairment losses associated with certain of our fossil plants under the provisions of SFAS No. 121. BGE has contracts to purchase electric capacity and energy that are expected to be uneconomic upon the deregulation of electric generation. Therefore, we must record a charge based on the net present value of the excess of estimated contract costs over the market-based revenues to recover these costs over the remaining terms of the contracts. In addition, BGE has deferred certain energy conservation expenditures that will not be recovered through its transmission and distribution business under the Restructuring Order. Accordingly, we must record a charge to eliminate the regulatory asset previously established for these deferred expenditures. At the date of this report, we estimate that the total charge for BGE's electric generating plants that are impaired, losses on uneconomic purchased capacity and energy contracts, and deferred energy conservation expenditures is approximately $150 million to $175 million (after-tax). The actual charge will be recorded in the fourth quarter of 1999. BGE will record approximately $95 million of this charge on its balance sheet. This will consist of establishing a $150 million regulatory asset of its regulated transmission and distribution business, net of approximately $55 million of associated deferred income taxes. The regulatory asset will be amortized as it is recovered from ratepayers through June 30, 2000. This will accomplish the $150 million reduction of its generation plants required by the Restructuring Order. We will record an after-tax, extraordinary charge against earnings for the approximately $55 million to $80 million remaining portion of the $150 million to $175 million described above that will not be recovered under the Restructuring Order. As a condition of the Maryland PSC's consolidation of the September 3, 1998 Office of People's Counsel petition to lower electric base rates with BGE's electric restructuring transition proposal, we agreed to make our rates subject to refund effective July 1, 1999. Therefore, BGE deferred $37.5 million of revenues it collected during the third quarter pending the Maryland PSC's approval of the proposed settlement. However, with the issuance of the Restructuring Order, these deferred revenues will be reversed in the fourth quarter, as our current rates will be frozen through June 30, 2000. In the fourth quarter, BGE will also record $75 million in amortization expense or one-half of the $150 million reduction of generation plants provided for in the Restructuring Order as discussed above. 21 Gas Business - ------------ Currently, no regulation exists for the wholesale price of natural gas as a commodity, and the regulation of interstate transmission at the federal level has been reduced. All BGE industrial and commercial gas customers, and effective November 1, 1999, all BGE residential customers, have the option to purchase gas from other suppliers. Utility Business Earnings per Share of Common Stock - --------------------------------------------------- Quarter Ended Nine Months Ended September 30 September 30 --------------- ------------------ 1999 1998 1999 1998 -------- ------- -------- ------- Electric business... $1.02 $1.04 $1.70 $1.67 Gas business........ - (.01) .14 .11 ---- ---- --- --- Total utility earnings per share $1.02 $1.03 $1.84 $1.78 ===== ===== ===== ===== Our utility earnings for the quarter ended September 30, 1999 decreased $2.0 million, or $.01 per share compared to the same period of 1998. Our utility earnings for the nine months ended September 30, 1999, increased $10.3 million, or $.06 per share compared to the same period of 1998. We discuss the factors affecting utility earnings below. The discussion below reflects the operations of the electric generation portion of our utility business under current rate regulation by the Maryland PSC. Our electric business will change significantly beginning July 1, 2000 as we enter into the transition to full retail customer choice for electric generation. Also, upon receipt of all regulatory approvals, on July 1, 2000, all of BGE's generation assets will be moved to nonregulated subsidiaries of Constellation Energy. These assets represent about 6,240 megawatts of generation capacity. We have not determined the impact of transferring all of BGE's generation assets to nonregulated subsidiaries on BGE's assets, revenues and net income. However, such amounts could be material. We discuss this further in the "Deregulation and Strategy" section on page 16. Electric Operations - ------------------- Electric Revenues - ----------------- The changes in electric revenues in 1999 compared to 1998 were caused by: Quarter Ended Nine Months Ended September 30 September 30 1999 vs. 1998 1999 vs. 1998 --------------- ------------------ (In millions) Electric system sales volumes....... $ 7.7 $ 25.7 Base rates............ 10.8 10.3 Fuel rates............ (1.0) 0.9 ---- --- Total change in electric revenues from electric system sales........ 17.5 36.9 Interchange and other sales......... (11.7) (10.6) Other................. (37.1) (35.9) ----- ----- Total change in electric revenues... $(31.3) $ (9.6) ====== ====== Electric System Sales Volumes - ----------------------------- "Electric system sales volumes" are sales to customers in our service territory at rates set by the Maryland PSC. These sales do not include interchange sales and sales to others. The percentage changes in our electric system sales volumes, by type of customer, in 1999 compared to 1998 were: Quarter Ended Nine Months Ended September 30 September 30 1999 vs. 1998 1999 vs. 1998 --------------- -------------------- Residential.......... 3.5% 4.3% Commercial........... 0.2 1.4 Industrial........... (11.9) (7.3) During the quarter ended September 30, 1999, we sold more electricity to residential customers due to higher usage per customer and warmer weather. We sold about the same amount of electricity to commercial customers as we did during the same period of 1998. We sold less electricity to industrial customers mostly because usage by Bethlehem Steel (our largest customer) and other industrial customers decreased. Usage decreased at Bethlehem Steel as a result of a shut down from June to August for a planned upgrade to their facilities that temporarily reduced their electricity consumption. 22 During the nine months ended September 30, 1999, we sold more electricity to residential customers due to higher usage per customer, colder winter weather, and an increased number of customers. The increase in sales to residential customers was partially offset by milder spring and early summer weather. We sold more electricity to commercial customers mostly due to colder winter weather and an increased number of customers. We sold less electricity to industrial customers mostly because usage by Bethlehem Steel and other industrial customers decreased. Base Rates - ---------- During the quarter and nine months ended September 30, 1999, base rate revenues increased compared to the same periods of 1998 mostly because we had higher conservation surcharge revenues. Fuel Rates - ---------- During the quarter and nine months ended September 30, 1999, fuel rate revenues were about the same compared to the same periods of 1998. Interchange and Other Sales - --------------------------- "Interchange and other sales" are sales in the PJM (Pennsylvania-New Jersey-Maryland) Interconnection energy market and to others. The PJM is a regional power pool with members that include many wholesale market participants, as well as BGE and six 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, 1999, we had lower interchange and other sales compared to the same periods of 1998 mostly because the increased demand for system sales reduced the amount of energy we had available for off-system sales. Other - ----- During the quarter and nine months ended September 30, 1999, other revenues decreased compared to the same periods of 1998 mostly because BGE deferred $37.5 million of electric revenues that it collected during the third quarter of 1999 on the basis that as of September 30, 1999 this amount was subject to refund pending the Maryland PSC's approval of the proposed settlement agreement. We discuss the revenue deferral further in the "Competition and Response to Regulatory Change" section on page 20. Electric Fuel and Purchased Energy Expenses - ------------------------------------------- Quarter Ended Nine Months Ended September 30 September 30 ----------------- ------------------ 1999 1998 1999 1998 -------- ------- ------- --------- (In millions) Actual costs......... $177.6 $169.9 $435.4 $408.6 Net deferral of costs under electric fuel rate clause (see Note 1 of BGE's 1998 Form 10-K).... (61.8) (20.5) (78.5) (17.1) ----- ----- ----- ----- Total electric fuel and purchased energy expenses........... $115.8 $149.4 $356.9 $391.5 ====== ====== ====== ====== Actual Costs - ------------ During the quarter and nine months ended September 30, 1999, our actual costs of fuel to generate electricity (nuclear fuel, coal, gas, or oil) and electricity we bought from others was higher compared to the same periods of 1998 mostly because the price of electricity we bought from others was higher. The price of electricity changes based on market conditions, complex pricing formulas for PJM transactions, and contract terms. The increase in actual costs was partially offset by our settlement of a capacity contract with PECO in 1998. 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, 1999, our actual costs of fuel and energy were higher than the fuel rate revenues we collected from our customers. 23 Gas Operations - -------------- Gas Revenues - ------------ The changes in gas revenues in 1999 compared to 1998 were caused by: Quarter Ended Nine Months Ended September 30 September 30 1999 vs. 1998 1999 vs. 1998 --------------- ------------------ (In millions) Gas system sales volumes....... $ 1.0 $ 7.3 Base rates............ (0.3) 2.0 Weather normalization. 0.6 4.1 Gas cost adjustments.. 2.2 15.0 --- ---- Total change in gas revenues from gas system sales........ 3.5 28.4 Off-system sales...... (5.8) (20.9) Other................. 0.3 0.5 --- --- Total change in gas revenues........ $(2.0) $ 8.0 ===== ===== Gas System Sales Volumes - ------------------------ The percentage changes in our gas system sales volumes, by type of customer, in 1999 compared to 1998 were: Quarter Ended Nine Months Ended September 30 September 30 1999 vs. 1998 1999 vs. 1998 --------------- ------------------ Residential........ 0.7% 9.1% Commercial......... 8.5 12.7 Industrial......... (10.6) (6.3) During the quarter ended September 30, 1999, we sold about the same amount of gas to residential customers as we did during the same period of 1998. We sold more gas to commercial customers due to higher usage per customer and an increased number of customers. We sold less gas to industrial customers mostly because usage by Bethlehem Steel and other industrial customers decreased. Usage by Bethlehem Steel decreased due to a shut down from June to August for a planned upgrade to their facilities. During the nine months ended September 30, 1999, we sold more gas to residential customers mostly because of two factors: colder winter weather and the number of customers increased. This was partially offset by lower usage per customer. We sold more gas to commercial customers mostly because of colder winter weather, increased usage per customer, and an increased number of customers. We sold less gas to industrial customers mostly because usage by Bethlehem Steel and other industrial customers decreased. Base Rates - ---------- During the quarter ended September 30, 1999, base rate revenues were about the same compared to the same period of 1998. During the nine months ended September 30, 1999, base rate revenues were higher than they were during the same period of 1998. Effective March 1, 1998, the Maryland PSC allowed us to increase our base rates which increased our base rate revenues over the twelve-month period March 1998 through February 1999 by approximately $16 million. Weather Normalization - --------------------- Effective March 1, 1998, the Maryland PSC allowed us to implement a monthly adjustment to our gas revenues to eliminate the effect of abnormal weather patterns on our gas system sales volumes. This means our monthly gas revenues will be based on weather that is considered "normal" for the month and, therefore, will not be affected by actual weather conditions. Gas Cost Adjustments - -------------------- We charge our gas customers for the natural gas they purchase from us using gas cost adjustment clauses set by the Maryland PSC which include a market based rate incentive mechanism. These clauses operate similar to the electric fuel rate clause described in the "Electric Fuel Rate Clause" section on page 23. However, under market based rates, our actual cost of gas is compared to a market index (a measure of the market price of gas in a given period). The difference between our actual cost and the market index is shared equally between shareholders and customers, and does not significantly impact earnings. Delivery service customers, including Bethlehem Steel, are not subject to the gas cost adjustment clauses because we are not selling gas to them. We charge these customers fees to recover the fixed costs for the transportation service we provide. These fees are the same as the base rate charged for gas sales and are included in gas system sales volumes. During the quarter ended September 30, 1999, gas cost adjustment revenues increased compared to the same period of 1998 mostly because we sold gas at a higher price. 24 During the nine months ended September 30, 1999, gas cost adjustment revenues increased compared to the same period of 1998 mostly because we sold more gas at a higher price. Off-System Sales - ---------------- Off-system gas sales are low-margin direct sales of gas to wholesale suppliers of natural gas outside our service territory. Off-system gas sales, which occur after we have satisfied our customers' demand, are not subject to gas cost adjustments. The Maryland PSC approved an arrangement for part of the margin from off-system sales to benefit customers (through reduced costs) and the remainder to be retained by BGE (which benefits shareholders). During the quarter and nine months ended September 30, 1999, revenues from off-system gas sales decreased compared to the same periods of 1998 mostly because we sold less gas off-system. Gas Purchased For Resale Expenses - --------------------------------- Quarter Ended Nine Months Ended September 30 September 30 ------------------ ------------------ 1999 1998 1999 1998 -------- -------- ------- -------- (In millions) Actual costs........ $ 19.1 $ 19.4 $142.1 $148.5 Net recovery of costs under gas adjustment clauses 2.2 2.2 14.3 3.5 -------- -------- -------- --------- Total gas purchased for resale expenses.. $ 21.3 $ 21.6 $156.4 $152.0 ======== ======== ======= ======== 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. During the quarter and nine months ended September 30, 1999, actual gas costs decreased compared to the same periods of 1998 mostly because we bought less gas for off-system sales. 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. During the quarter and nine months ended September 30, 1999, 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, 1999, operations and maintenance expenses were about the same compared to the same period of 1998. In 1999, operations and maintenance expenses include approximately $7.5 million of costs associated with Hurricane Floyd. This was offset by higher operations and maintenance expenses in the third quarter of 1998 associated with the annual refueling outage at Calvert Cliffs. During the nine months ended September 30, 1999, operations and maintenance expenses increased $14.8 million compared to the same period of 1998 mostly because of costs related to Hurricane Floyd and a major winter ice storm during 1999. This increase was partially offset by the $6.5 million write-off of contributions to a third party for a low-level radiation waste facility that was never completed, which we recorded in 1998. Depreciation and Amortization Expenses - -------------------------------------- During the quarter and nine months ended September 30, 1999, depreciation and amortization expenses were about the same compared to the same periods of 1998. Taxes Other Than Income Taxes - ----------------------------- During the quarter ended September 30, 1999, taxes other than income taxes increased $3.1 million compared to the same period of 1998 mostly because of higher property taxes. During the nine months ended September 30, 1999, taxes other than income taxes increased $8.6 million compared to the same period of 1998 mostly because of two factors: higher property taxes and higher payroll taxes associated with increased labor costs. Interest Expense - ---------------- During the quarter and nine months ended September 30, 1999, interest expense was about the same compared to the same periods of 1998. 25 Income Taxes - ------------ During the quarter ended September 30, 1999, our total income taxes decreased $16.1 million compared to the same period of 1998 mostly because we had lower taxable income from our diversified businesses. During the nine months ended September 30, 1999, our total income taxes decreased $7.3 million compared to the same period of 1998 mostly because we had lower taxable income from our diversified businesses partially offset by higher taxable income from our utility operations. Diversified Businesses - ---------------------- Our diversified businesses engage primarily in energy services. We list each of our diversified businesses in the "Introduction" section on page 16. We describe our diversified businesses in more detail in BGE's 1998 Annual Report on Form 10-K under "Item 1. Business -- Diversified Businesses." Constellation Enterprises and its subsidiaries were subsidiaries of BGE prior to April 30, 1999 and are included in the consolidated financial statements of BGE through that date. Diversified Business Earnings per Share of Common Stock - ------------------------------------------------------- Quarter Ended Nine Months Ended September 30 September 30 ----------------- ----------------- 1999 1998 1999 1998 -------- ------- ------- ------- Energy services Power marketing and trading... $ .06 $ (.01) $ .19 $ - Power projects. .03 .13 .13 .25 Other.......... (.04) - (.04) - -------- -------- -------- -------- Total energy services earnings per share..... .05 .12 .28 .25 Other diversified businesses earnings per share.......... (.16) (.07) (.20) (.06) ---- ---- ---- ---- Total earnings per share...... $(.11) $.05 $.08 $.19 ======== ======== ======== ======== Our total diversified business earnings for the quarter ended September 30, 1999 decreased $22.8 million, or $.16 per share, compared to the same period of 1998. Our total diversified business earnings for the nine months ended September 30, 1999 decreased $16.1 million, or $.11 per share, compared to the same period of 1998. We discuss the factors affecting the earnings of our diversified businesses below. Energy Services - --------------- Power Marketing and Trading - --------------------------- During the quarter and nine months ended September 30, 1999, earnings from our power marketing and trading business increased compared to the same periods of 1998 mostly because of increased transaction margins and volume. Constellation Power Source uses the mark-to-market method of accounting for its trading activities. We discuss the mark-to-market method of accounting and Constellation Power Source's trading activities in more detail in BGE's 1998 Annual Report on Form 10-K. As a result of the nature of its trading activities, Constellation Power Source's revenue and earnings will fluctuate. We cannot predict these fluctuations, but the effect on our revenues and earnings could be material. The primary factors that cause these fluctuations are: o the number and size of new transactions, o the magnitude and volatility of changes in commodity prices and interest rates, and o the number and size of open commodity and derivative positions Constellation Power Source holds or sells. Constellation Power Source's management uses its best estimates to determine the fair value of commodity and derivative positions it holds and sells. These estimates consider various factors including closing exchange and over-the-counter price quotations, time value, volatility factors, and credit exposure. However, it is possible that future market prices could vary from those used in recording assets and liabilities from trading activities, and such variations could be material. Assets and liabilities from energy trading activities (as shown in our Consolidated Balance Sheets beginning on page 4) increased at September 30, 1999 compared to December 31, 1998 because of greater business activity during the period. 26 Power Projects - -------------- During the quarter and nine months ended September 30, 1999, earnings from our power projects business decreased compared to the same periods of 1998 mostly because of two factors: o In August 1999, our power projects business recorded a $6.7 million after-tax, or $.05 per share write-off of a geothermal power project. The write-off occurred because the expected future cash flow from the project is less than the investment in the project as a result of declining water temperature of the geothermal resource used by the plant for production. o In July 1998, our power projects business recorded a $10.4 million after-tax, or $.07 per share, gain for its share of earnings in a partnership. The partnership recognized a gain on the sale of a power purchase agreement. California Power Purchase Agreements - ------------------------------------ Constellation Power and subsidiaries and Constellation Investments have $308.2 million invested in 14 projects that sell electricity in California under power purchase agreements called "Interim Standard Offer No. 4" agreements. Earnings from these projects were $12.4 million, or $.08 per share, for the quarter ended September 30, 1999 compared to $24.0 million, or $.16 per share for the same period of 1998. Earnings from these projects were $26.3 million, or $.18 per share, for the nine months ended September 30, 1999 compared to $41.0 million, or $.28 per share for the same period of 1998. Under these agreements, the electricity rates change from fixed rates to variable rates beginning in 1996 and continue 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. Our power projects 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 financing to improve existing terms, and o selling its ownership interests in the projects. At the date of this report, ten projects had already transitioned to variable rates. The remaining four projects that have the highest revenues will transition between February and December 2000. The projects which transitioned in 1999 contributed $2.1 million, or $.01 per share to the quarter ended September 30, 1999 earnings and $5.4 million, or $.04 per share for the nine months ended September 30, 1999 earnings. Those changing over in 2000 contributed $9.9 million, or $.07 per share to the quarter ended September 30, 1999 earnings and $20.4 million, or $.14 per share for the nine months ended September 30, 1999 earnings. We expect earnings ultimately to decrease by similar amounts as these projects transition. We also describe these projects and the transition process in the Notes to Consolidated Financial Statements on page 15. International - ------------- At September 30, 1999, Constellation Power had invested about $182.0 million in 10 power projects in Latin America compared to $104.4 million invested in Latin America at September 30, 1998. These investments include: o the purchase of a 51% interest in a Panamanian electric distribution company for approximately $90 million in 1998 by an investment group in which subsidiaries of Constellation Power hold an 80% interest, and o approximately $98 million for the purchase of existing electric generation facilities and the construction of an electric generation facility in Guatemala. In the future, Constellation Power expects to expand its power projects business further in both domestic and international projects. Other Energy Services - --------------------- During the quarter and nine months ended September 30, 1999, earnings from our other energy services businesses decreased compared to the same periods of 1998 mostly because of lower gross margins from energy trading at our energy products and services business. 27 Other Diversified Businesses - ---------------------------- During the quarter and nine months ended September 30, 1999, earnings from our other diversified businesses were lower compared to the same periods of 1998 mostly because our financial investments business had lower earnings from its investment in Capital Re Corporation (Capital Re). In May 1999, our financial investments business announced that it will exchange its shares of common stock in Capital Re for common stock of ACE Limited (ACE) as part of a business combination whereby ACE would acquire all of the outstanding capital stock of Capital Re. In June 1999, our financial investments business wrote-down its $94.2 million investment in Capital Re stock by $3.6 million after-tax, or $.02 per share to reflect the valuation of this pending business combination. In September 1999, our financial investments business wrote-down its investment in Capital Re stock by an additional $17.3 million after-tax, or $.12 per share to reflect the market value of $12.50 per share for this investment. The initial close was scheduled for early in the fourth quarter of 1999. However, in October 1999, another insurance company, XL Capital, Inc., submitted a competing bid to acquire the shares of common stock in Capital Re. Subsequently, ACE matched the competing bid with an offer composed of cash and stock, whose exchange rate was increased from their initial offer. As of the date of this report, the market value of the current offer is approximately $14.40 per share and is partially dependent on the market value of ACE stock. Upon closing, which is expected to occur in the first quarter of 2000, final valuation will occur, and our financial investments business will record any change in the market value of this investment to the income statement. Earnings from our real estate and senior-living facilities business were about the same compared to the same periods of 1998. In September 1999, earnings include a $3.4 million after-tax, or $.02 per share write-down of certain senior-living facilities related to the sale of these facilities as discussed below. This write-down was offset by higher earnings from various other real estate projects in 1999. In August 1999, our senior-living facilities business announced that it entered into an agreement to sell all but one of its senior-living facilities to Sunrise Assisted Living, Inc. Under the terms of the agreement, Sunrise was to acquire twelve of our existing senior-living facilities, three facilities under construction, and several sites under development for $72.2 million in cash and $16.0 million in debt assumption. We have been unable to reach agreement on financing issues that subsequently arose, and the agreement was terminated in November 1999. As a result, our real estate and senior-living facilities business will now engage a third-party management company to assist in managing its senior-living facilities portfolio including the three facilities now under construction, which will be completed by our real estate and senior-living facilities business in the first half of 2000. In April 1999, Constellation Real Estate Group, Inc. (CREG) sold Church Street Station, our entertainment, dining, and retail complex in Orlando, Florida for $11.5 million, the approximate book value of the complex. Most of CREG's remaining real estate projects are in the Baltimore-Washington corridor. The area has had a surplus of available land in recent years and as a result these projects have been economically hurt. Constellation Real Estate's projects have continued to incur carrying costs and depreciation over the years. Additionally, this business has been charging interest payments to expense rather than capitalizing them for some undeveloped land where development activities have stopped. These carrying costs, depreciation, and interest expenses have decreased earnings and are expected to continue to do so. Cash flow from real estate operations has not been enough to make the monthly loan payments on some of these projects. Cash shortfalls have been covered by cash obtained from the cash flows of, or additional borrowings by, other diversified subsidiaries. Our current real estate strategy is to hold each real estate project until we can realize a reasonable value for it. We evaluate strategies for all our businesses, including real estate, on an ongoing basis. We anticipate that competing demands for our financial resources and changes in the utility industry will cause us to evaluate thoroughly all diversified business strategies on a regular basis so we use capital and other resources in a manner that is most beneficial. 28 We consider market demand, interest rates, the availability of financing, and the strength of the economy in general when making decisions about our real estate projects. If we were to decide to sell our real estate projects, we could have write-downs. In addition, if we were to sell our real estate projects in the current market, we would have losses which could be material, although the amount of the losses is hard to predict. Depending on market conditions, we could also have material losses on any future sales. Under accounting rules, we are required to write down the value of a real estate project to market value in either of two cases. The first is if we change our intent about a project from an intent to hold to an intent to sell and the market value of that project is below book value. The second is if the expected cash flow from the project is less than the investment in the project. - -------------------------------------------------------------------------------- Financial Condition - ------------------- Cash Flows - ---------- For the nine months ended September 30: - --------------------------------------- 1999 1998 ---- ---- (In millions) Cash provided by (used in): Operating Activities $ 483.5 $ 654.8 Investing Activities (441.8) (415.1) Financing Activities (159.0) (187.2) During the nine months ended September 30, 1999, we generated less cash from operations compared to the same period in 1998 mostly because of changes in working capital requirements. During the nine months ended September 30, 1999, we used more cash for investing activities compared to the same period in 1998 mostly because of the following factors: our power marketing and trading business increased its investment in Orion Power Holdings, Inc. by $97.7 million, our power projects business increased its investment in power projects by $25.7 million, and BGE increased its capital expenditures by $11.9 million. These increases are partially offset by a $60.7 million investment for the purchase of a power generation facility in Guatemala in 1998 by our power projects business. In addition, our real estate and senior-living facilities business invested less in 1999 compared to the same period of 1998. During the nine months ended September 30, 1999, we used less cash for financing activities compared to the same period of 1998 mostly because we redeemed less BGE preference stock and our net short-term borrowings were higher. This was partially offset by an increase in the repayments of long-term debt and a decrease in the issuances of long-term debt. Security Ratings - ---------------- Independent credit-rating agencies rate Constellation Energy and BGE's fixed-income securities. The ratings indicate the agencies' assessment of each company's ability to pay interest, distributions, dividends, and principal on these securities. These ratings affect how much it will cost each company to sell these securities. The better the rating, the lower the cost of the securities to each company when they sell them. Constellation Energy and BGE's securities ratings at the date of this report are: Standard Moody's Duff & Phelps' & Poors Investors Credit Rating Group Service Rating Co. ------------- ---------- -------------- Constellation Energy - -------------------- Unsecured Debt A- A3 A BGE - --- Mortgage Bonds AA- A1 AA- Unsecured Debt A A2 A+ Trust Originated Preferred Securities and Preference Stock A- "a2" A Capital Resources - ----------------- Our business requires a great deal of capital. Our actual consolidated capital requirements for the nine months ended September 30, 1999, along with estimated annual amounts for the years 1999 through 2001, are shown on page 30. For the twelve months ended September 30, 1999, the ratio of earnings to fixed charges for Constellation Energy was 2.68. The ratio of earnings to fixed charges for BGE was 3.32 and the ratio of earnings to combined fixed charges and preferred and preference dividend requirements for BGE was 3.00. 29 Investment requirements for 1999 through 2001 include estimates of funding for existing and anticipated projects. We continuously review and modify those estimates. Actual investment requirements may vary from the estimates included in the table below because of a number of factors including: o regulation, legislation, and competition, o load growth, o environmental protection standards, o the type and number of projects selected for development, o the effect of market conditions on those projects, o the cost and availability of capital, and o the availability of cash from operations. Our estimates are also subject to additional factors. Please see "Forward Looking Statements" on page 38. Upon receipt of all regulatory approvals, on July 1, 2000, all of BGE's generation assets will be moved to nonregulated subsidiaries of Constellation Energy. The discussion and table for capital requirements below include these generation assets as part of the utility business.
Nine Months Ended September 30, Calendar Year Estimates 1999 1999 2000 2001 --------- ------- -- -------- -- -------- (In millions) Utility Business Capital Requirements: - -------------------------------------- Construction expenditures (excluding AFC) Electric $ 176 $ 290 $327 $330 Gas 42 64 64 63 Common 20 27 25 24 -------- ------- ------- ------- Total construction expenditures 238 381 416 417 AFC 8 11 7 4 Nuclear fuel (uranium purchases and processing charges) 45 46 50 48 Deferred energy conservation expenditures 1 1 - - Retirement of long-term debt and redemption of preference stock 250 342 403 282 -------- ------- ------- ------- Total utility business capital requirements 542 781 876 751 -------- ------- ------- ------- Diversified Business Capital Requirements: - ------------------------------------------ Investment requirements 140 140 766 697 Retirement of long-term debt 116 201 273 367 -------- ------- ------- ------- Total diversified business capital requirements 256 341 1,039 1,064 -------- ------- ------- ------- Total capital requirements $ 798 $1,122 $1,915 $1,815 ======== ======= ======= =======
Capital Requirements of Our Utility Business - -------------------------------------------- Our estimates 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. Future electric construction expenditures include estimated costs for replacing the steam generators and renewing the operating licenses at Calvert Cliffs. The operating licenses expire in 2014 for Unit 1 and in 2016 for Unit 2. We estimate these Calvert Cliffs costs to be: o $34 million in 1999, o $40 million in 2000, and o $66 million in 2001. We estimate that during the two-year period 2002 through 2003, we will spend an additional $150 million to complete the replacement of the steam generators and extend the operating licenses at Calvert Cliffs. We discuss the license extension process further in the "Other Matters - Calvert Cliffs License Extension" section of BGE's 1998 Annual Report on Form 10-K. If we do not replace the steam generators, we estimate that Calvert Cliffs could not operate for the full term of its current operating licenses. We expect the steam generator replacements to occur during the 2002 refueling outage for Unit 1 and during the 2003 outage for Unit 2. 30 Additionally, our estimates of future electric construction expenditures include the costs of complying with Environmental Protection Agency (EPA) and State of Maryland nitrogen oxides emissions (NOx) reduction regulations as follows: o $33 million in 1999, o $60 million in 2000, and o $52 million in 2001. We discuss the NOx regulations in the "Environmental Matters" section of the Notes to Consolidated Financial Statements on page 13. During the twelve months ended September 30, 1999, our utility operations provided about 92% of the cash needed to meet its capital requirements, excluding cash needed to retire debt and redeem preference stock. We will continue to have cash requirements for: o working capital needs including the payments of interest, distributions, and dividends, o capital expenditures, and o the retirement of debt. During the three years from 1999 through 2001, we expect utility operations to provide about 115% of the cash needed to meet its capital requirements, excluding cash needed to retire debt and redeem preference stock. When BGE cannot meet utility capital requirements internally, BGE sells debt and preference stock. BGE also sells securities when market conditions permit it to refinance existing debt or preference stock at a lower cost. The amount of cash BGE needs and market conditions determine when and how much BGE sells. Future funding for capital expenditures, the retirement of debt, and payments of interest and dividends is expected from internally generated funds, commercial paper issuances, available capacity under credit facilities, and/or the issuance of long-term debt, trust securities, or preference stock. At September 30, 1999 the Federal Energy Regulatory Commission has authorized BGE to issue up to $700 million of short-term borrowings, including commercial paper. To support its commercial paper program, BGE maintains $83 million in annual committed bank lines of credit and has $100 million in bank revolving credit agreements. In addition, BGE has access to interim lines of credit as required from time to time to support its outstanding commercial paper. Capital Requirements of Our Diversified Businesses - -------------------------------------------------- We expect to expand certain of our energy services businesses. This will require additional funding for: o growing our power marketing and trading business, o the development and acquisition of power projects, as well as loans made to project entities, and o funding for construction of cooling system projects. The investment requirements exclude Constellation Power Source, Inc.'s commitment to contribute up to $175 million in equity to fund its investment in Orion Power Holdings, Inc. Orion acquires electric generating plants in the United States and Canada. To date, Constellation Power Source has funded $104 million of this commitment. Our diversified businesses have met their capital requirements in the past through borrowing, cash from their operations, sales of receivables, and from time to time, equity contributions from BGE. Future funding for the expansion of our energy services businesses is expected from internally generated funds, commercial paper issuances and long-term debt financing by Constellation Energy and from time to time equity contributions from Constellation Energy. BGE Home Products & Services may also meet capital requirements through sales of receivables. At September 30, 1999, Constellation Energy has a commercial paper program where it can issue up to $500 million in short-term notes to fund its diversified businesses. To support its commercial paper program, Constellation Energy maintains a $25 million committed bank line of credit and has a $135 million revolving credit agreement, under which it can also issue letters of credit. In addition, Constellation Energy has access to interim lines of credit as required from time to time to support its outstanding commercial paper. Our diversified businesses also have revolving credit agreements totaling $135 million to provide additional liquidity for short-term financial needs. If we can get a reasonable value for our real estate projects, additional cash may be obtained by selling them. Our ability to sell or liquidate assets will depend on market conditions, and we cannot give assurances that these sales or liquidations could be made. 31 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 13 and in BGE's 1998 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. Year 2000 Readiness Disclosure - ------------------------------ 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 believe that all of BGE's "mission critical" systems for electric and gas production and delivery are year 2000 ready. Mission critical systems include BGE's: o electric generating plants, including Calvert Cliffs Nuclear Power Plant, o energy distribution systems, o natural gas delivery system, and o mission critical applications supporting these systems. Please refer to "Forward Looking Statements" on page 38. Utility Business - ---------------- We established a year 2000 Program Management Office (PMO). Based on a work plan developed by the PMO, we targeted the following six key areas: 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. Of these areas, digital systems have the most impact on our ability to provide electric and gas service. Telecommunications, major suppliers, and certain information technology applications also impact our ability to provide electric and gas service. Year 2000 Project Phases - ------------------------ Our year 2000 project is divided into two phases: o Phase I - initial assessment and detailed analysis, and o Phase II - testing, remediation, certification, and contingency planning. Phase I involved conducting an inventory of all systems and identifying appropriate resources. We identified the following appropriate resources for each system or piece of equipment: o BGE employees familiar with each system or piece of equipment, o specialized contractors, and o specific vendors. Phase I also included developing action plans to ensure that the key areas identified above are year 2000 ready. The action plans for each system or piece of equipment included: o our budget, o schedules for Phase I and II, and o our remediation approach - repair, upgrade, replace or retire. 32 In evaluating our risks and estimating our costs, we utilized employees with expertise in each line of business to perform the activities under Phase I. We believe our employees are the most familiar with their systems or equipment and, therefore, provided a reliable estimate of our risks and costs. Phase II included converting and testing all of our systems. Each system was tested by those employees used in Phase I following formal guidelines developed by the PMO. Each system or piece of equipment was then certified by a tester and the PMO, following testing guidelines developed with the help of outside consultants. We received an independent Year 2000 readiness review of our processes and systems. Phase II also included identifying our major suppliers and developing contingency plans. We have identified our mission critical suppliers and have assessed their year 2000 readiness through surveys and interviews. We believe that our mission critical suppliers (for example, coal suppliers and natural gas pipeline suppliers) are year 2000 ready. We are completing the readiness review of our non-mission critical suppliers through surveys. Contingency Planning - -------------------- Year 2000 operational contingency plans have been developed utilizing employees familiar with the operations in each area of our business. The individual plans are integrated into a corporate-wide Year 2000 Contingency Plan. Associated staffing plans have been completed identifying all essential personnel needed on-site for the rollover weekend (December 31, 1999 - January 1, 2000) to deal with any problems, if they should occur. BGE will have a corporate command center staffed during the rollover weekend to serve as the communication hub for year 2000 status information for BGE and all diversified businesses. The center will have two-way communications with the electric, gas, retail services, nuclear, and information technology operations command centers for the purpose of collecting information and coordinating responses. The center will also have two-way communications with the Maryland Emergency Management Agency and local emergency operation centers in BGE's service territory. Detailed coordination of the plans will continue, and personnel will be trained in order to provide for a smooth transition. The year 2000 contingency plans were developed using the contingency guidelines issued by the Nuclear Energy Institute (which are endorsed by the Nuclear Regulatory Commission), the contingency guidelines issued by the North American Electric Reliability Council (NERC), and guidance from consultants. We have addressed the impact of electric power grid problems that may occur outside of our own electric system. We developed year 2000 electric power grid impact contingency plans through our various electric interconnection affiliations and continue to refine them. The PJM interconnection drafted year 2000 operational preparedness plans and restoration scenarios and continues to coordinate and develop these plans during the fourth quarter of 1999 in cooperation with NERC. The NERC continues to perform monthly assessments of the electric utility industry to communicate the readiness of the national electric grid for year 2000. On April 9, 1999, we participated in a NERC sponsored drill, along with other North American electric bulk operating utilities. The drill focused on testing backup voice and data communications and protocols. The drill was successful as it demonstrated our ability to operate the bulk power and gas distribution systems reliably during a partial loss of telephone and data communications. On June 2, 1999, we conducted a successful test on our energy control system and its interface with the PJM. This system monitors and controls the flow of electricity on BGE's electric grid. On September 8-9, 1999, we participated in the second NERC sponsored drill. The focus of this drill was a simulation of the rollover to the year 2000 for the electric utility industry. BGE expanded the drill to include all of its business areas. The drill was successful as it demonstrated our understanding of our Year 2000 Operational Contingency Plan and our ability to operate gas and electric systems with limited voice and data communications. Through the Electric Power Research Institute (EPRI), an industry-wide effort was 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 assessed specific vendors' system problems and test plans. These assessments have been shared by the industry as a whole to facilitate year 2000 problem solving. BGE joined the American Gas Association (AGA) in an initiative similar to the one with NERC to facilitate year 2000 problem solving among gas utilities. The AGA and its affiliates performed quarterly assessments of the gas utility industry to communicate the readiness of its members for the year 2000. 33 Current Status - -------------- The most reasonably likely worst case scenario faced by our utility business is a localized 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. For all systems and equipment, both mission critical and non-mission critical, we have completed Phase I and II. Costs - ----- In the following table, we show the breakdown of our total costs between normal system replacements that will be capitalized (included in the Consolidated Balance Sheets) and the costs that will be expensed (included in our Consolidated Statements of Income) through operations and maintenance (O&M) cost. We also show the breakdown of non-incremental (previously included in our information technology budget) and incremental O&M cost: Estimated Total Actual Costs Costs Costs ------------ ----- ----- Through 1996- September Remainder of 1997 1998 30, 1999 1999 2000 ------ ---- -------- ------- ---- (In millions) Total Cost $1.8 $18.9 $14.0 $7.7 $3.6 $46.0 Less: Capital cost - 7.3 4.2 2.8 0.2 14.5 ----- ------ ----- -------- ---- ------- O&M cost 1.8 11.6 9.8 4.9 3.4 31.5 Less: non-incremental O&M cost 1.8 4.6 4.1 2.9 1.9 15.3 ----- ------ ----- -------- ---- ------- Incremental O&M cost $ - $7.0 $5.7 $ 2.0 $1.5 $16.2 ===== ====== ====== ======== ==== ======= The costs incurred in 1996 and 1997 were for Phase I. The costs incurred in 1998 were for Phases I and II. Cost incurred in 1999 and 2000 will be for Phase II. In 1998, we had the equivalent of approximately 110 full-time employees assigned to our year 2000 project. We have had a similar level of commitment of resources during 1999. Diversified Businesses - ---------------------- Overview - -------- Our diversified businesses have established year 2000 task forces to address their year 2000 issues. As the assessments were completed, the businesses developed action plans to prepare their systems for the year 2000. Outside consultants have been retained by several of our diversified businesses to help complete the initial assessment and detailed analysis phase, and to assist in the testing, remediation, and certification phase of their year 2000 projects. The action plans developed are similar to those used by our utility business, including a test certification process. All systems are expected to be certified by December 1999. In evaluating their risks and estimating their costs, our diversified businesses utilized employees with expertise in each line of business to perform initial assessments. We believe our diversified businesses' employees are the most familiar with their systems or equipment and therefore will provide a reliable estimate of our risks and costs. The progress of our diversified businesses' year 2000 projects are reviewed by their year 2000 project task forces in monthly status meetings with the personnel responsible for each project and their supervision. Monthly progress is also monitored by senior management for each business and monthly updates are provided to Constellation Energy senior management. Contingency Planning - -------------------- Each of our diversified businesses are developing contingency plans, which are expected to be completed by December 1999. Current Status - -------------- The most reasonably likely worst case scenarios faced by our energy services businesses and our other diversified businesses are discussed on page 35. However, if any of these scenarios actually occurred, the impact is not expected to be material to our consolidated financial results. 34 Energy Services - --------------- The most reasonably likely worst case scenarios for any one of our power projects would be: o a shutdown of the plant's systems (most of which can be manually overridden), o inability of the purchasing utility to take the plant's power, or o failure of critical suppliers. Personnel at each plant have completed their assessment of their particular year 2000 issues and have substantially completed the testing, remediation, and certification phase of their year 2000 project. In Latin America, personnel are focused on assessing the year 2000 readiness of suppliers and are preparing contingency plans where necessary. For our power marketing and trading business and our energy products and services business, the most reasonably likely worst case scenario would be encountering any Internet access problems with trading partners, transmission service providers, independent system operators, power exchanges, or various electronic bulletin boards. Each of these businesses has three Internet service providers for alternate routing to critical Internet sites necessary to perform day-to-day business functions. Both have completed all phases of their year 2000 projects. For our home products and commercial building systems business, the most reasonably likely worst case scenarios would be any interruption in billing customers or renewing maintenance contracts. This business completed the assessment and detailed analysis phase and has substantially completed the testing, remediation, and certification phase of its year 2000 project. Other Diversified Businesses - ---------------------------- The most reasonably likely worst case scenarios for our financial investments business would be a breakdown in the systems of the brokers or safekeeping banks which it uses to trade, or the failure of its investment managers' computer programs that set investment strategy. This business is monitoring the year 2000 readiness of its banks, brokers, and investment managers. For our real estate and senior-living facilities business, the most reasonably likely worst case scenario is a failure of the systems that support the health, safety, and welfare of residents in the senior-living facilities. Personnel at each senior-living facility are involved in assessing its particular year 2000 issues and have a consultant coordinating the overall year 2000 activity. This business completed the assessment and detailed analysis phase and has substantially completed the testing, remediation, and certification phase of its Year 2000 project. Costs - ----- We estimate our total year 2000 costs for our power projects business to be approximately $4.2 million, of which $1.2 million is related to our year 2000 efforts for our Panamanian electric distribution company. The total estimated year 2000 costs for our remaining diversified businesses are approximately $2.8 million. Accounting Standards Issued - --------------------------- In July 1999, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 137 regarding the delay of the effective date for SFAS No. 133 on derivatives and hedging. This standard delays the effective date by one year and therefore, we must adopt the provisions of SFAS No. 133 in our financial statements for the quarter ended March 31, 2001. 35 Item 3. Quantitative and Qualitative Disclosures About Market Risk We discuss the following information related to our market risk: o quarterly financing activities in the Notes to Consolidated Financial Statements on page 12, and o trading activities of our power marketing and trading business in the "Power Marketing and Trading" section of Management's Discussion and Analysis on page 26. Under the Restructuring Order, BGE will provide standard offer service to customers at fixed rates over various time periods during the transition period, and the electric fuel rate will be discontinued effective July 1, 2000. Additionally, upon receipt of all regulatory approvals, BGE will transfer all of its generating assets to nonregulated subsidiaries of Constellation Energy at that time. As a result of these provisions of the Restructuring Order, BGE will be subject to market risk associated with acquiring energy to provide standard offer service, and Constellation Energy's nonregulated subsidiaries will be subject to market risk associated with the sale of energy from their generating assets. At this time, we cannot estimate the financial risks associated with this transition. However, these financial risks could have a material impact on our financial position or our results of operations. 36 PART II. OTHER INFORMATION Item 1. Legal Proceedings Asbestos - -------- Since 1993, we have been involved in several actions concerning asbestos. The actions are based upon the theory of "premises liability," alleging that we knew of and exposed individuals to an asbestos hazard. The actions relate to two types of claims. The first type is direct claims by individuals exposed to asbestos. We described these claims in BGE's Report on Form 8-K filed August 20, 1993. We are involved in these claims with approximately 70 other defendants. Approximately 530 individuals that were never employees of BGE each claim $6 million in damages ($2 million compensatory and $4 million punitive). These claims were filed in the Circuit Court for Baltimore City, Maryland in the summer of 1993. We do not know the specific facts necessary to estimate our potential liability for these claims. The specific facts we do not know include: 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, 22 of these cases were settled for amounts that were immaterial. The second type is claims by one manufacturer -- Pittsburgh Corning Corp. -- against us and approximately eight others, as third-party defendants. These claims relate to approximately 1,500 individual plaintiffs and were filed in the Circuit Court for Baltimore City, Maryland in the fall of 1993. To date, about 140 cases have been resolved, all without any payments by BGE. We do not know the specific facts necessary to estimate our potential liability for these claims. The specific facts we do not know include: o the identity of our facilities containing asbestos manufactured by the manufacturer, o the relationship (if any) of each of the individual plaintiffs to us, o the settlement amounts for any individual plaintiffs who are shown to have had a relationship to us, and o the dates on which/places at which the exposure allegedly occurred. Until the relevant facts for both types of claims are determined, we are unable to estimate what our liability, if any, might be. Although insurance and hold harmless agreements from contractors who employed the plaintiffs may cover a portion of any awards in the actions, our potential liability could be material. Waste Disposal - -------------- As previously reported in our 1998 Annual Report on Form 10-K in United States v. Keystone Sanitation Company, et al., BGE and other defendants entered into a settlement with the Environmental Protection Agency for an immaterial amount in regard to contamination of the Keystone Sanitation Company landfill Superfund site in Adams County, Pennsylvania in 1997. On September 10, 1999, the U.S. District Court for the Middle District of PA approved the settlement, ending BGE's involvement with the site. 37 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 implications of the Restructuring Order issued by the Maryland PSC, o commodity price risk, 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. - -------------------------------------------------------------------------------- Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit No. 10(a) Constellation Energy Group, Inc. 1995 Long-Term Incentive Plan, as amended and restated. Exhibit No. 10(b) Constellation Energy Group, Inc. Nonqualified Deferred Compensation Plan, as amended and restated. Exhibit No. 10(c) Constellation Energy Group, Inc. Executive Benefits Plan, as amended and restated. Exhibit No. 10(d) Executive Annual Incentive Plan of Constellation Energy Group, Inc. as amended and restated. Exhibit No. 10(e) Summary of Severance Arrangement for a Named Executive Officer. Exhibit No. 12(a) Constellation Energy Group, Inc. Computation of Ratio of Earnings to Fixed Charges. Exhibit No. 12(b) Baltimore Gas and Electric Company Computation of Ratio of Earnings to Fixed Charges and Computation of Ratio of Earnings to Combined Fixed Charges and Preferred and Preference Dividend Requirements. Exhibit No. 27(a) Constellation Energy Group, Inc. Financial Data Schedule. Exhibit No. 27(b) Baltimore Gas and Electric Company Financial Data Schedule.
(b) Reports on Form 8-K for the quarter ended September 30, 1999: Date Filed Items Reported ---------- -------------- July 19, 1999 Item 5. Other Events Item 7. Exhibits 38 SIGNATURE --------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, each registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CONSTELLATION ENERGY GROUP, INC. ----------------------------------------------------------------- (Registrant) BALTIMORE GAS AND ELECTRIC COMPANY ----------------------------------------------------------------- (Registrant) Date: November 12, 1999 /s/ D. A. Brune ------------------------- -------------------------------------------- D. A. Brune, Vice President on behalf of each Registrant and as Principal Financial Officer of each Registrant 39 EXHIBIT INDEX Exhibit Number ------ 10(a) Constellation Energy Group, Inc. 1995 Long-Term Incentive Plan, as amended and restated. 10(b) Constellation Energy Group, Inc. Nonqualified Deferred Compensation Plan, as amended and restated. 10(c) Constellation Energy Group, Inc. Executive Benefits Plan, as amended and restated. 10(d) Executive Annual Incentive Plan of Constellation Energy Group, Inc. as amended and restated. 10(e) Summary of Severance Arrangement for a Named Executive Officer. 12(a) Constellation Energy Group, Inc. Computation of Ratio of Earnings to Fixed Charges. 12(b) Baltimore Gas and Electric Company Computation of Ratio of Earnings to Fixed Charges and Computation of Ratio of Earnings to Combined Fixed Charges and Preferred and Preference Dividend Requirements. 27(a) Constellation Energy Group, Inc. Financial Data Schedule. 27(b) Baltimore Gas and Electric Company Financial Data Schedule. 40 EX-10 2 EXHIBIT 10(A) Exhibit 10(a) Constellation Energy Group, Inc. 1995 Long-Term Incentive Plan (Plan) 1. Objective. The objective of this Plan is to increase shareholder value by providing a long-term incentive to reward officers and key employees of CEG and its Subsidiaries, who are mainly responsible for the continued growth, development, and financial success of CEG and its Subsidiaries, for the continued profitable performance of CEG and its subsidiaries. The Plan is also designed to permit CEG and its Subsidiaries to retain talented and motivated officers and key employees and to increase their ownership of CEG common stock. 2. Definitions. All singular terms defined in this Plan will include the plural and vice versa. As used herein, the following terms will have the meaning specified below: "Award" means individually or collectively, Restricted Stock, Options, Performance Units, Stock Appreciation Rights, or Dividend Equivalents granted under this Plan. "Board" means the Board of Directors of CEG. "Book Value" means the book value of a share of Stock determined in accordance with CEG's regular accounting practices as of the last business day of the month immediately preceding the month in which a Stock Appreciation Right is exercised as provided in Section 10. "CEG" means Constellation Energy Group, Inc., a Maryland corporation, or its successor, including any "New Company" as provided in Section 14I. "Code" means the Internal Revenue Code of 1986, as amended. Reference in the Plan to any section of the Code will be deemed to include any amendments or successor provisions to such section and any regulations promulgated thereunder. "Committee" means the Committee on Management of the Board, provided, however, that if such Committee fails to satisfy the disinterested administration provisions of Section 16b-3 of the 1934 Act, "Committee" shall mean a committee of directors of CEG who satisfy the disinterested person requirements of such Section. "Date of Grant" means the date on which the granting of an Award is authorized by the Committee or such later date as may be specified by the Committee in such authorization. "Date of Retirement" means the date of Retirement or Early Retirement. 1 "Disability" means the determination that a Participant is "disabled" under the CEG disability plan in effect at that time. "Dividend Equivalent" means an award granted under Section 11. "Early Retirement" means retirement prior to the Normal Retirement Date. "Earned Performance Award" means an actual award of a specified number of Performance Units (or shares of Restricted Stock, as the context requires) which the Committee has determined have been earned and are payable (or, in the case of Restricted Stock, earned and with respect to which restrictions will lapse) for a particular Performance Period. "Eligible Employee" means any person employed by CEG or a Subsidiary on a regularly scheduled basis who satisfies all of the requirements of Section 5. "Exercise Period" means the period or periods during which a Stock Appreciation Right is exercisable as described in Section 10. "Fair Market Value" means the average of the highest and lowest price at which the Stock was sold regular way on the New York Stock Exchange-Composite Transactions on a specified date. "Incentive Stock Option" means an incentive stock option within the meaning of Section 422 of the Code. "1934 Act" means the Securities Exchange Act of 1934, as amended. "Normal Retirement Date" is the retirement date as described in the Pension Plan or a Subsidiary's retirement or pension plan. "Option" or "Stock Option" means either a nonqualified stock option or an incentive stock option granted under Section 8. "Option Period" or "Option Periods" means the period or periods during which an Option is exercisable as described in Section 8. "Participant" means an employee of CEG or a Subsidiary who has been granted an Award under this Plan. "Pension Plan" means the Pension Plan of Constellation Energy Group, Inc. as may be amended from time to time. "Performance-Based" means that in determining the amount of a Restricted Stock Award payout, the Committee will take into account the performance of the Participant, CEG, one or more Subsidiaries, or any combination thereof. "Performance Period" means a period of time, established by the Committee at the time an Award is granted, during which corporate and/or individual performance is measured. 2 "Performance Unit" means a unit of measurement equivalent to such amount or measure as defined by the Committee which may include, but is not limited to, dollars, market value shares, or book value shares. "Plan Administrator" means, as set forth in Section 4, the Committee. "Restricted Stock" means an Award granted under Section 7. "Retirement" means retirement on or after the "Normal Retirement Date" (as such term is defined in the Pension Plan or a Subsidiary's retirement or pension plan). "Service-Based" means that in determining the amount of a Restricted Stock Award payout, the Committee will take into account only the period of time that the Participant performed services for CEG or its Subsidiaries since the Date of Grant. "Stock" means the common stock, without par value, of CEG. "Stock Appreciation Right" means an Award granted under Section 10. "Subsidiary(ies)" means any corporation of which 20% or more of its outstanding voting stock or voting power is beneficially owned, directly or indirectly, by CEG. "Target Performance Award" means a targeted award of a specified number of Performance Units (or shares of Restricted Stock, as the context requires) which may be earned and payable (or, in the case of Restricted Stock, earned and with respect to which restrictions will lapse) based upon the performance objectives for a particular Performance Period, all as determined by the Committee. The Target Performance Award will be a factor in the Committee's ultimate determination of the Earned Performance Award. "Termination" means resignation or discharge from employment with CEG or any of its Subsidiaries except in the event of death, Disability, Retirement or Early Retirement. 3. Effective Date, Duration and Stockholder Approval. A. Effective Date and Stockholder Approval. This Plan has been transferred from Baltimore Gas and Electric Company (BGE) to CEG effective April 30, 1999 in connection with a share exchange between CEG and the common stockholders of BGE. The Plan was approved by a majority of the outstanding shares of common stock of BGE voted at its 1995 Annual Meeting of Stockholders, and became effective as of January 1, 1995. B. Period for Grants of Awards. Awards may be made as provided herein for a period of 10 years after January 1, 1995. C. Termination. The Plan will continue in effect until all matters relating to the payment of outstanding Awards and administration of the Plan have been settled. 3 D. Grants Outstanding. Grants outstanding at the effective time of the share exchange between CEG and the common stockholders of Baltimore Gas and Electric Company (BGE) will be converted from BGE common stock-based grants to CEG common stock-based grants. 4. Plan Administration. The Committee is the Plan Administrator and has sole authority (except as specified otherwise herein) to determine all questions of interpretation and application of the Plan, or of the terms and conditions pursuant to which Awards are granted, exercised or forfeited under the Plan provisions, and, in general, to make all determinations advisable for the administration of the Plan to achieve its stated objective. Such determinations shall be final and not subject to further appeal. 5. Eligibility. Each officer or key employee of CEG and its Subsidiaries (including officers or employees who are members of the Board, but excluding directors who are not officers or employees) may be designated by the Committee as a Participant, from time to time, with respect to one or more Awards. No officer or employee of CEG or its Subsidiaries shall have any right to be granted an Award under this Plan. 6. Grant of Awards and Limitation of Number of Shares Awarded. The Committee may, from time to time, grant Awards to one or more Eligible Employees, provided that (i) subject to any adjustment pursuant to Section 14H, the aggregate number of shares of Stock subject to Awards under this Plan may not exceed three million (3,000,000) shares; (ii) to the extent that an Award lapses or the rights of the Participant to whom it was granted terminate, any shares of Stock subject to such Award shall again be available for the grant of an Award under the Plan; and (iii) shares delivered by CEG under the Plan may be authorized and unissued Stock, Stock held in the treasury of CEG, or Stock purchased on the open market (including private purchases) in accordance with applicable securities laws. 7. Restricted Stock Awards. A. Grants of Restricted Shares. One or more shares of Restricted Stock may be granted to any Eligible Employee. The Restricted Stock will be issued to the Participant on the Date of Grant without the payment of consideration by the Participant. The Restricted Stock will be issued in the name of the Participant and will bear a restrictive legend prohibiting sale, transfer, pledge or hypothecation of the Restricted Stock until the expiration of the restriction period. The Committee may also impose such other restrictions and conditions on the Restricted Stock as it deems appropriate, and will designate the grant as either a Service-Based or Performance-Based Award. Upon issuance to the Participant of the Restricted Stock, the Participant will have the right to vote the Restricted Stock, and subject to the Committee's discretion, to receive the cash dividends distributable with respect to such shares, with such dividends treated as compensation to the Participant. The Committee, in its sole 4 discretion, may direct the accumulation and payment of distributable dividends to the Participant at such times, and in such form and manner, as determined by the Committee. B. Service-Based Award. i. Restriction Period. At the time a Service-Based Restricted Stock Award is granted, the Committee will establish a restriction period applicable to such Award which will be not less than one year and not more than ten years. Each Restricted Stock Award may have a different restriction period, at the discretion of the Committee. ii. Forfeiture or Payout of Award. In the event a Participant ceases employment during a restriction period, a Restricted Stock Award is subject to forfeiture or payout (i.e., removal of restrictions) as follows: (a) Termination - the Restricted Stock Award is completely forfeited; (b) Retirement, Disability or death - payout of the Restricted Stock Award is prorated for service during the period; or (c) Early Retirement - if at the Participant's request, the payout or forfeiture of the Restricted Stock Award is determined at the discretion of the Committee, or if at CEG's request, payout of the Restricted Stock Award is prorated for service during the period; provided, however, that the Committee may modify the above if it determines at its sole discretion that special circumstances warrant such modification. Any shares of Restricted Stock which are forfeited will be transferred to CEG. Upon completion of the restriction period, all Award restrictions will expire and new certificates representing the Award will be issued (the payout) without the restrictive legend described in Section 7A. C. Performance-Based Award. i. Restriction Period. At the time a Performance-Based Restricted Stock Award is granted, the Committee will establish a restriction period applicable to such Award which will be not less than one year and not more than ten years. Each Restricted Stock Award may have a different restriction period, at the discretion of the Committee. The Committee will also establish a Performance Period. ii. Performance Objectives. The Committee will determine, no later than 90 days after the beginning of each Performance Period, the performance objectives for each Participant's Target Performance Award and the number of shares of Restricted Stock for each Target Performance Award that will be issued on the Date of Grant. Performance objectives may vary from Participant to Participant and will be based upon such performance criteria or combination of factors as the Committee deems appropriate, which may include, but not be limited to, the performance of the Participant, CEG, one or more Subsidiaries, or any combination thereof. Performance Periods may overlap and Participants 5 may participate simultaneously with respect to Performance-Based Restricted Stock Awards for which different Performance Periods are prescribed. If, during the course of a Performance Period significant events occur as determined in the sole discretion of the Committee, which the Committee expects to have a substantial effect on a performance objective during such period, the Committee may revise such objective. iii. Forfeiture or Payout of Award. As soon as practicable after the end of each Performance Period, the Committee will determine whether the performance objectives and other material terms of the Award were satisfied. The Committee's determination of all such matters will be final and conclusive. As soon as practicable after the later of (i) the date the Committee makes the above determination, or (ii) the completion of the restriction period, the Committee will determine the Earned Performance Award for each Participant. Such determination may result in forfeiture of all or some shares of Restricted Stock (if Target Performance Award performance objectives were not attained), or the issuance of additional shares of Stock (if Target Performance Award performance objectives were exceeded), and will be based upon such factors as the Committee determines at its sole discretion, but including the Target Performance Award performance objectives. In the event a Participant ceases employment during a restriction period, the Restricted Stock Award is subject to forfeiture or payout (i.e., removal of restrictions) as follows: (a) Termination - the Restricted Stock Award is completely forfeited; (b) Retirement, Disability or death - payout of the Restricted Stock Award is prorated taking into account factors including, but not limited to, service during the period; and the performance of the Participant during the portion of the Performance Period before employment ceased; or (c) Early Retirement - if at the Participant's request, the payout or forfeiture of the Restricted Stock Award is determined at the discretion of the Committee, or if at CEG's request, payout of the Restricted Stock Award is prorated taking into account factors including, but not limited to, service during the period and the performance of the Participant during the portion of the Performance Period before employment ceased; provided, however, that the Committee may modify the above if it determines at its sole discretion that special circumstances warrant such modification. Any shares of Restricted Stock which are forfeited will be transferred to CEG. With respect to shares of Restricted Stock for which restrictions lapse, new certificates will be issued (the payout) without the restrictive legend described in Section 7A. New certificates will also be issued for additional Stock, if any, awarded to the Participant because Target Performance Award performance objectives were exceeded. D. Waiver of Section 83(b) Election. Unless otherwise directed by the Committee, as a condition of receiving an Award of Restricted Stock, a 6 Participant must waive in writing the right to make an election under Section 83(b) of the Code to report the value of the Restricted Stock as income on the Date of Grant. 8. Stock Options. A. Grants of Options. One or more Options may be granted to any Eligible Employee on the Date of Grant without the payment of consideration by the Participant. B. Stock Option Agreement. Each Option granted under the Plan will be evidenced by a "Stock Option Agreement" between CEG and the Participant containing provisions determined by the Committee, including, without limitation, provisions to qualify Incentive Stock Options as such under Section 422 of the Code if directed by the Committee at the Date of Grant; provided, however, that each Incentive Stock Option Agreement must include the following terms and conditions: (i) that the Options are exercisable, either in total or in part, with a partial exercise not affecting the exercisability of the balance of the Option; (ii) every share of Stock purchased through the exercise of an Option will be paid for in full at the time of the exercise; (iii) each Option will cease to be exercisable, as to any share of Stock, at the earliest of (a) the Participant's purchase of the Stock to which the Option relates, (b) the Participant's exercise of a related Stock Appreciation Right, or (c) the lapse of the Option; (iv) Options will not be transferable by the Participant except by Will or the laws of descent and distribution and will be exercisable during the Participant's lifetime only by the Participant or by the Participant's guardian or legal representative; and (v) notwithstanding any other provision, in the event of a public tender for all or any portion of the Stock or in the event that any proposal to merge or consolidate CEG with another company is submitted to the stockholders of CEG for a vote, the Committee, in its sole discretion, may declare any previously granted Option to be immediately exercisable. C. Option Price. The Option price per share of Stock will be set by the grant, but will be not less than 100% of the Fair Market Value at the Date of Grant. D. Form of Payment. At the time of the exercise of the Option, the Option price will be payable in cash or in other shares of Stock or in a combination of cash and other shares of Stock, in a form and manner as required by the Committee in its sole discretion. When Stock is used in full or partial payment of the Option price, it will be valued at the Fair Market Value on the date the Option is exercised. E. Other Terms and Conditions. The Option will become exercisable in such manner and within such Option Period or Periods, not to exceed 10 years from its Date of Grant, as set forth in the Stock Option Agreement upon payment in full. Except as otherwise provided in this Plan or in the Stock Option Agreement, any Option may be exercised in whole or in part at any time. 7 F. Lapse of Option. An Option will lapse upon the earlier of: (i) 10 years from the Date of Grant, or (ii) at the expiration of the Option Period set by the grant. If the Participant ceases employment within the Option Period and prior to the lapse of the Option, the Option will lapse as follows: (a) Termination - the Option will lapse on the effective date of the Termination; or (b) Retirement, Early Retirement, or Disability - the Option will lapse at the expiration of the Option Period set by the grant; provided, however, that the Committee may modify the above if it determines in its sole discretion that special circumstances warrant such modification. If the Participant dies within the Option Period and prior to the lapse of the Option, the Option will lapse at the expiration of the Option Period set by the grant unless it is exercised before such time by the Participant's legal representative(s) or by the person(s) entitled to do so under the Participant's Will or, if the Participant fails to make testamentary disposition of the Option or dies intestate, by the person(s) entitled to receive the Option under the applicable laws of descent and distribution. G. Individual Limitation. In the case of an Incentive Stock Option, the aggregate Fair Market Value of the Stock for which Incentive Stock Options (whether under this Plan or another arrangement) in any calendar year are first exercisable will not exceed $100,000 with respect to such calendar year (or such other individual limit as may be in effect under the Code on the Date of Grant) plus any unused portion of such limit as the Code may permit to be carried over. 9. Performance Units. A. Performance Units. One or more Performance Units may be earned by an Eligible Employee based on the achievement of preestablished performance objectives during a Performance Period. B. Performance Period and Performance Objectives. The Committee will determine a Performance Period and will determine, no later than 90 days after the beginning of each Performance Period, the performance objectives for each Participant's Target Performance Award and the number of Performance Units subject to each Target Performance Award. Performance objectives may vary from Participant to Participant and will be based upon such performance criteria or combination of factors as the Committee deems appropriate, which may include, but not be limited to, the performance of the Participant, CEG, one or more Subsidiaries, or any combination thereof. Performance Periods may overlap and Participants may participate simultaneously with respect to Performance Units for which different Performance Periods are prescribed. If during the course of a Performance Period significant events occur as determined in the sole discretion of the Committee which the Committee expects to have a substantial effect on a performance objective during such period, the Committee may revise such objective. C. Forfeiture or Payout of Award. As soon as practicable after the end of each Performance Period, the Committee will determine whether the 8 performance objectives and other material terms of the Award were satisfied. The Committee's determination of all such matters will be final and conclusive. As soon as practicable after the date the Committee makes the above determination, the Committee will determine the Earned Performance Award for each Participant. Such determination may result in an increase or decrease in the number of Performance Units payable based upon such Participant's Target Performance Award, and will be based upon such factors as the Committee determines in its sole discretion, but including the Target Performance Award performance objectives. In the event a Participant ceases employment during a Performance Period, the Performance Unit Award is subject to forfeiture or payout as follows: (a) Termination - the Performance Unit Award is completely forfeited; (b) Retirement, Disability or death - payout of the Performance Unit Award is prorated taking into account factors including, but not limited to, service and the performance of the Participant during the portion of the Performance Period before employment ceased; or (c) Early Retirement - if at the Participant's request, the payout or forfeiture of the Performance Unit Award is determined at the discretion of the Committee, or if at CEG's request, payout of the Performance Unit Award is prorated taking into account factors including, but not limited to, service and the performance of the Participant during the portion of the Performance Period before employment ceased; provided, however, that the Committee may modify the above if it determines in its sole discretion that special circumstances warrant such modification. D. Form and Timing of Payment. Each Performance Unit is payable in cash or shares of Stock or in a combination of cash and Stock, as determined by the Committee in its sole discretion. Such payment will be made as soon as practicable after the Earned Performance Award is determined. 10. Stock Appreciation Rights. A. Grants of Stock Appreciation Rights. Stock Appreciation Rights may be granted under the Plan in conjunction with an Option either at the Date of Grant or by amendment or may be separately granted. Stock Appreciation Rights will be subject to such terms and conditions not inconsistent with the Plan as the Committee may impose. B. Right to Exercise; Exercise Period. A Stock Appreciation Right issued pursuant to an Option will be exercisable to the extent the Option is exercisable; both such Stock Appreciation Right and the Option to which it relates will not be exercisable during the six months following their respective Dates of Grant except in the event of the Participant's Disability or death. A Stock Appreciation Right issued independent of an Option will be exercisable pursuant to such terms and conditions established in the grant. Notwithstanding such terms and conditions, in the event of a public tender for all or any portion of the Stock or in the event that any proposal to merge or consolidate CEG with another company is submitted to the stockholders of CEG for a vote, the Committee, in its sole 9 discretion, may declare any previously granted Stock Appreciation Right immediately exercisable. C. Failure to Exercise. If on the last day of the Option Period, in the case of a Stock Appreciation Right granted pursuant to an Option, or the specified Exercise Period, in the case of a Stock Appreciation Right issued independent of an Option, the Participant has not exercised a Stock Appreciation Right, then such Stock Appreciation Right will be deemed to have been exercised by the Participant on the last day of the Option Period or Exercise Period. D. Payment. An exercisable Stock Appreciation Right granted pursuant to an Option will entitle the Participant to surrender unexercised the Option or any portion thereof to which the Stock Appreciation Right is attached, and to receive in exchange for the Stock Appreciation Right payment (in cash or Stock or a combination thereof as described below) equal to either of the following amounts, determined in the sole discretion of the Committee at the Date of Grant: (1) the excess of the Fair Market Value of one share of Stock at the date of exercise over the Option price, times the number of shares called for by the Stock Appreciation Right (or portion thereof) which is so surrendered, or (2) the excess of the Book Value of one share of Stock at the date of exercise over the Book Value of one share of Stock at the Date of Grant of the related Option, times the number of shares called for by the Stock Appreciation Right. Upon exercise of a Stock Appreciation Right not granted pursuant to an Option, the Participant will receive for each Stock Appreciation Right payment (in cash or Stock or a combination thereof as described below) equal to either of the following amounts, determined in the sole discretion of the Committee at the Date of Grant: (1) the excess of the Fair Market Value of one share of Stock at the date of exercise over the Fair Market Value of one share of Stock at the Date of Grant of the Stock Appreciation Right, times the number of shares called for by the Stock Appreciation Right, or (2) the excess of the Book Value of one share of Stock at the date of exercise of the Stock Appreciation Right over the Book Value of one share of Stock at the Date of Grant of the Stock Appreciation Right, times the number of shares called for by the Stock Appreciation Right. The Committee may direct the payment in settlement of the Stock Appreciation Right to be in cash or Stock or a combination thereof. Alternatively, the Committee may permit the Participant to elect to receive cash in full or partial settlement of the Stock Appreciation Right, provided that (i) the Committee must consent to or disapprove such election and (ii) unless the Committee directs otherwise, the election and the exercise must be made during the period beginning on the 3rd business day following the date of public release of quarterly or year-end earnings and ending on the 12th business day following the date of public release of quarterly or year-end earnings. The value of the Stock to be received upon exercise of a Stock Appreciation Right shall be the Fair Market Value of the Stock on the trading day preceding the date on which the Stock Appreciation Right is exercised. To the extent that a Stock Appreciation Right issued pursuant to an Option is exercised, such Option shall be deemed to have been exercised, and shall not be deemed to have lapsed. 10 E. Nontransferable. A Stock Appreciation Right will not be transferable by the Participant except by Will or the laws of descent and distribution and will be exercisable during the Participant's lifetime only by the Participant or by the Participant's guardian or legal representative. F. Lapse of a Stock Appreciation Right. A Stock Appreciation Right will lapse upon the earlier of: (i) 10 years from the Date of Grant; or (ii) at the expiration of the Exercise Period as set by the grant. If the Participant ceases employment within the Exercise Period and prior to the lapse of the Stock Appreciation Right, the Stock Appreciation Right will lapse as follows: (a) Termination - the Stock Appreciation Right will lapse on the effective date of the Termination; or (b) Retirement, Early Retirement, or Disability - the Stock Appreciation Right will lapse at the expiration of the Exercise Period set by the grant; provided, however, that the Committee may modify the above if it determines in its sole discretion that special circumstances warrant such modification. If the Participant dies within the Exercise Period and prior to the lapse of the Stock Appreciation Right, the Stock Appreciation Right will lapse at the expiration of the Exercise Period set by the grant unless it is exercised before such time by the Participant's legal representative(s) or by the person(s) entitled to do so under the Participant's Will or, if the Participant fails to make testamentary disposition of the Stock Appreciation Right or dies intestate, by the person(s) entitled to receive the Stock Appreciation Right under the applicable laws of descent and distribution. 11. Dividend Equivalents. A. Grants of Dividend Equivalents. Dividend Equivalents may be granted under the Plan in conjunction with an Option or a separately awarded Stock Appreciation Right, at the Date of Grant or by amendment, without consideration by the Participant. Dividend Equivalents may also be granted under the Plan in conjunction with Performance Units, at any time during the Performance Period, without consideration by the Participant. Dividend Equivalents will be granted under a Performance-Based Restricted Stock Award in conjunction with additional shares of Stock issued if Target Performance Award performance objectives are exceeded. B. Payment. Each Dividend Equivalent will entitle the Participant to receive an amount equal to the dividend actually paid with respect to a share of Stock on each dividend payment date from the Date of Grant to the date the Dividend Equivalent lapses as set forth in Section 11D. The Committee, in its sole discretion, may direct the payment of such amount at such times and in such form and manner as determined by the Committee. C. Nontransferable. A Dividend Equivalent will not be transferable by the Participant. D. Lapse of a Dividend Equivalent. Each Dividend Equivalent will lapse on the earlier of (i) the date of the lapse of the related Option or Stock Appreciation Right; (ii) the date of the exercise of the related Option or Stock Appreciation 11 Right; (iii) the end of the Performance Period (or if earlier, the date the Participant ceases employment) of the related Performance Units or Performance-Based Restricted Stock Award; or (iv) the lapse date established by the Committee on the Date of Grant of the Dividend Equivalent. 12. Accelerated Award Payout/Exercise. A. Change in Control. Notwithstanding anything in this Plan document to the contrary, a Participant is entitled to an accelerated payout or accelerated Option or Exercise Period (as set forth in Section 12B) with respect to any previously granted Award, upon the happening of a change in control. A change in control for purposes of this Section 12 means (i) the purchase or acquisition by any person, entity or group of persons, (within the meaning of section 13(d) or 14(d) of the 1934 Act, or any comparable successor provisions), of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the 1934 Act) of 20 percent or more of either the outstanding shares of common stock of CEG or the combined voting power of CEG's then outstanding shares of voting securities entitled to a vote generally, or (ii) the consummation of, following the approval by the stockholders of CEG of a reorganization, merger, or consolidation, in each case, with respect to which persons who were stockholders of CEG immediately prior to such reorganization, merger or consolidation do not, immediately thereafter, own more than 50 percent of the combined voting power entitled to vote generally in the election of directors of the reorganized, merged or consolidated entity's then outstanding securities, or (iii) a liquidation or dissolution of CEG or the sale of substantially all of its assets, or (iv) a change of more than one-half of the members of the Board within a 90-day period for reasons other than the death, disability, or retirement of such members. B. Amount of Award Subject to Accelerated Payout/Option Period/Exercise Period. The amount of a Participant's previously granted Award that will be paid or exercisable upon the happening of a change in control will be determined as follows: Restricted Stock Awards. The Participant will be entitled to an accelerated Award payout, and the amount of the payout will be based on the number of shares of Restricted Stock that were issued on the Date of Grant, prorated based on the number of months of the restriction period that have elapsed as of the payout date. Also, with respect to Performance-Based Restricted Stock Awards, in determining the amount of the payout, maximum performance achievement will be assumed. Stock Option Awards and Stock Appreciation Rights. Any previously granted Stock Option Awards or Stock Appreciation Rights will be immediately exercisable. Performance Units. The Participant will be entitled to an accelerated Award payout, and the amount of the payout will be based on the number of 12 Performance Units subject to the Target Performance Award as established on the Date of Grant, prorated based on the number of months of the Performance Period that have elapsed as of the payout date, and assuming that maximum performance was achieved. C. Timing of Accelerated Payout/Option Period/Exercise Period. The accelerated payout set forth in Section 12B will be made in cash within 30 days after the date of the change in control. The accelerated Option Period/Exercise Period set forth in Section 12B will begin on the date of the change in control, and applicable payments will be in cash. When Stock is related to the Award, the amount of cash will be determined based on the Fair Market Value of Stock on the payout or exercise date, whichever is applicable. 13. Amendment of Plan. The Committee may at any time and from time to time alter, amend, suspend or terminate the Plan in whole or in part, except (i) no such action may be taken without stockholder approval which materially increases the benefits accruing to Participants pursuant to the Plan, materially increases the number of securities which may be issued pursuant to the Plan (except as provided in Section 14H), extends the period for granting Options under the Plan or materially modifies the requirements as to eligibility for participation in the Plan; and (ii) no such action may be taken without the consent of the Participant to whom any Award was previously granted, which adversely affects the rights of such Participant concerning such Award, except as such termination or amendment of the Plan is required by statute, or rules and regulations promulgated thereunder. Notwithstanding the foregoing, the Committee may amend the Plan as desirable at the discretion of the Committee to address any issues concerning (i) Section 162(m) of the Code, or (ii) maintaining an exemption under rule 16b-3 of the 1934 Act. 14. Miscellaneous Provisions. A. Nontransferability. No benefit provided under this Plan shall be subject to alienation or assignment by a Participant (or by any person entitled to such benefit pursuant to the terms of this Plan), nor shall it be subject to attachment or other legal process except (i) to the extent specifically mandated and directed by applicable state or federal statute, and (ii) as requested by the Participant (or by any person entitled to such benefit pursuant to the terms of this Plan), and approved by the Committee, to satisfy income tax withholding. B. No Employment Right. Participation in this Plan shall not constitute a contract of employment between CEG or any Subsidiary and any person and shall not be deemed to be consideration for, or a condition of, continued employment of any person. C. Tax Withholding. CEG or a Subsidiary may withhold any applicable federal, state or local taxes at such time and upon such terms and conditions as required by law or determined by CEG or a Subsidiary. Subject to compliance 13 with any requirements of applicable law, the Committee may permit or require a Participant to have any portion of any withholding or other taxes payable in respect to a distribution of Stock satisfied through the payment of cash by the Participant to CEG or a Subsidiary, the retention by CEG or a Subsidiary of shares of Stock, or delivery of previously owned shares of the Participant's Stock, having a Fair Market Value equal to the withholding amount. D. Fractional Shares. Any fractional shares concerning Awards shall be eliminated at the time of payment or payout by rounding down for fractions of less than one-half and rounding up for fractions of equal to or more than one-half. No cash settlements shall be made with respect to fractional shares eliminated by rounding. E. Government and Other Regulations. The obligation of CEG to make payment of Awards in Stock or otherwise shall be subject to all applicable laws, rules, and regulations, and to such approvals by any government agencies as may be required. CEG shall be under no obligation to register under the Securities Act of 1933, as amended ("Act"), any of the shares of Stock issued, delivered or paid in settlement under the Plan. If Stock awarded under the Plan may in certain circumstances be exempt from registration under the Act, CEG may restrict its transfer in such manner as it deems advisable to ensure such exempt status. F. Indemnification. Each person who is or at any time serves as a member of the Committee (and each person or Committee to whom the Committee or any member thereof has delegated any of its authority or power under this Plan) shall be indemnified and held harmless by CEG against and from (i) any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by such person in connection with or resulting from any claim, action, suit, or proceeding to which such person may be a party or in which such person may be involved by reason of any action or failure to act under the Plan; and (ii) any and all amounts paid by such person in satisfaction of judgment in any such action, suit, or proceeding relating to the Plan. Each person covered by this indemnification shall give CEG an opportunity, at its own expense, to handle and defend the same before such person undertakes to handle and defend it on such person's own behalf. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled under the Charter or By-Laws of CEG or any of its Subsidiaries, as a matter of law, or otherwise, or any power that CEG may have to indemnify such person or hold such person harmless. G. Reliance on Reports. Each member of the Committee (and each person or Committee to whom the Committee or any member thereof has delegated any of its authority or power under this Plan) shall be fully justified in relying or acting in good faith upon any report made by the independent public accountants of CEG and its Subsidiaries and upon any other information furnished in connection with the Plan. In no event shall any person who is or shall have been a member of the Committee be liable for any determination made or other action taken or any omission to act in reliance upon any such report or information or for any 14 action taken, including the furnishing of information, or failure to act, if in good faith. H. Changes in Capital Structure. In the event of any change in the outstanding shares of Stock by reason of any stock dividend or split, recapitalization, combination or exchange of shares or other similar changes in the Stock, then appropriate adjustments shall be made in the shares of Stock theretofore awarded to the Participants and in the aggregate number of shares of Stock which may be awarded pursuant to the Plan. Such adjustments shall be conclusive and binding for all purposes. Additional shares of Stock issued to a Participant as the result of any such change shall bear the same restrictions as the shares of Stock to which they relate. I. CEG Successors. In the event CEG becomes a party to a merger, consolidation, sale of substantially all of its assets or any other corporate reorganization in which CEG will not be the surviving corporation or in which the holders of the Stock will receive securities of another corporation (in any such case, the "New Company"), then the New Company shall assume the rights and obligations of CEG under this Plan. J. Governing Law. All matters relating to the Plan or to Awards granted hereunder shall be governed by the laws of the State of Maryland, without regard to the principles of conflict of laws. K. Relationship to Other Benefits. Any Awards under this Plan are not considered compensation for purposes of determining benefits under any pension, profit sharing, or other retirement or welfare plan, or for any other general employee benefit program. L. Expenses. The expenses of administering the Plan shall be borne by CEG and its Subsidiaries. M. Titles and Headings. The titles and headings of the sections in the Plan are for convenience of reference only, and in the event of any conflict, the text of the Plan, rather than such titles or headings, shall control. 15 EX-10 3 EXHIBIT 10 (B) Exhibit 10(b) CONSTELLATION ENERGY GROUP, INC. NONQUALIFIED DEFERRED COMPENSATION PLAN (PLAN) 1. Objective The objective of this Plan is to enable certain management employees of Constellation Energy Group and its subsidiaries to defer compensation. 2. Definitions. All words beginning with an initial capital letter and not otherwise defined herein shall have the meaning set forth in the Employee Savings Plan. All singular terms defined in this Plan will include the plural and vice versa. As used herein, the following terms will have the meaning specified below: "Basic Compensation" means such compensation as set forth in the Employee Savings Plan, without regard to the Internal Revenue Code Section 401(a)(17) annual compensation limitation. "Committee" means the Committee on Management of the Board of Directors of Constellation Energy Group. "Constellation Energy Group" means Constellation Energy Group, Inc., a Maryland corporation, or its successor. "Deferred Compensation" means any compensation payable by Constellation Energy Group or its subsidiaries to a participant that is deferred under the provisions of this Plan. "Employee Savings Plan" means the Constellation Energy Group, Inc. Employee Savings Plan as may be amended from time to time, or any successor plan. "Executive Annual Incentive Plan" means the Executive Annual Incentive Plan of Constellation Energy Group, Inc. as may be amended from time to time, or any successor plan, and/or any other incentive plan designated in writing by the Plan Administrator. "Incentive Award" means an award granted under the Executive Annual Incentive Plan or the Senior Management Annual Incentive Plan. 1 "Matching Contributions" means the matching contributions described in Section 8. "Plan Accounts" means amounts of a participant's Deferred Compensation, Matching Contributions, and earnings under the Plan. "Plan Administrator" means, as set forth in Section 3, the Vice President - Human Resources of Constellation Energy Group, (or the Vice-President succeeding to that function). "Rabbi Trust" means the trust established by Constellation Energy Group pursuant to Grantor Trust Agreement dated as of April 30, 1999 between Constellation Energy Group and T. Rowe Price Trust Company. "Senior Management Annual Incentive Plan" means the Senior Management Annual Incentive Plan of Constellation Energy Group, Inc. as may be amended from time to time, or any successor plan, and/or any other incentive plan designated in writing by the Plan Administrator. "Termination From Employment with Constellation Energy Group" means a participant's separation from service with Constellation Energy Group or a subsidiary of Constellation Energy Group; however, a participant's transfer of employment to or from a subsidiary of Constellation Energy Group shall not constitute a Termination From Employment with Constellation Energy Group. 3. Plan Administration. The Vice President - Human Resources of Constellation Energy Group, (or the Vice-President succeeding to that function) is the Plan Administrator and has the sole authority (except as specified otherwise herein) to interpret the Plan, and, in general, to make all other determinations advisable for the administration of the Plan to achieve its stated objective. Appeals of written decisions by the Plan Administrator may be made to the Committee. Decisions by the Committee shall be final and not subject to further appeal. The Plan Administrator shall have the power to 2 delegate all or any part of his/her duties to one or more designees, and to withdraw such authority, by written designation. 4. Eligibility and Participation. Each officer or key employee of Constellation Energy Group or its subsidiaries, or employees of Constellation Energy Group or its subsidiaries who hold senior management level positions, may be designated in writing by the Plan Administrator as eligible to participate with respect to one or more of the provisions of Sections 5, 6, 7 and 8, which designation will also indicate whether all or part of such participant's Plan Accounts will be held in the Rabbi Trust. Once designated, eligibility shall continue until such designation is withdrawn at the discretion and by written order of the Plan Administrator. Notwithstanding subsequent withdrawal of eligibility of an employee, such an employee with Plan Accounts will remain a participant of the Plan, except that no further deferrals of compensation under the Plan are permitted. While designated as eligible with respect to one or more of the provisions of Sections 5, 6, 7 or 8, an employee may participate in the Plan to the extent set forth in such designation. 5. Basic Compensation Deferral Election. Unless otherwise designated in writing by the Plan Administrator, a participant may defer Basic Compensation as set forth in this Section 5. A participant may elect to defer up to 15% of monthly Basic Compensation. A participant may also elect to defer up to 100% of Basic Compensation, if any, in excess of the dollar limitation set forth in Internal Revenue Code Section 401(a)(17) (as adjusted by the Commissioner for increases in the cost of living in accordance with Internal Revenue Code Section 401(a)(17)(B)). Any deferrals shall be in 1% multiples, subject to adjustment as necessary to provide for any required withholding taxes. Such election shall be made by notification in the form and manner established by the Plan Administrator from time to time, and shall be effective as of the beginning of the month following the month during which the election is received by the Plan Administrator. Such election may be revoked by notification in the form and manner established by the Plan Administrator from time to time, and shall be 3 effective as of the beginning of the month following the month during which the revocation is received by the Plan Administrator. 6. Incentive Award Deferral Election. A participant may elect to defer Incentive Award compensation in 1% multiples, subject to adjustment as necessary to provide for any required withholding taxes. Such election shall be made annually by notification in the form and manner established by the Plan Administrator from time to time. Such annual election shall be made prior to the Incentive Award performance year, and shall be effective as of the first day of such performance year. If a participant initially becomes eligible to participate in the Plan during a performance year, the election for such performance year must be made prior to the date the participant initially becomes eligible to participate in the Plan, and shall be effective on such date. Elections under this Section are irrevocable once effective. 7. Other Deferral Election. A participant may elect to defer, in 1% multiples, other forms of compensation that are designated in writing by the Plan Administrator. Such election must be made prior to the date the compensation is earned by the participant, by notification in the form and manner established by the Plan Administrator from time to time. Such election is effective as of the date the compensation is earned. Elections under this Section are irrevocable once effective. 8. Matching Contributions. Matching Contributions are made by Constellation Energy Group to the Plan in an amount equal to (i) up to the rate of Company Matching Contributions under the Employee Savings Plan multiplied by a participant's monthly Basic Compensation deferral, less (ii) the amount of Company Matching Contributions made to the Employee Savings Plan on behalf of such participant with respect to such month. 9. Plan Accounts. Deferred Compensation and Matching Contributions shall be (i) credited to participant Plan Accounts as soon as practicable; (ii) to the extent designated by the Plan Administrator, held for the benefit of the participant in the Rabbi Trust; and 4 (iii) credited with earnings at the T. Rowe Price Prime Reserve Fund rate. However, a participant may elect (by notification in the form and manner established by the Plan Administrator from time to time) to have all or a portion of his/her Plan Accounts credited with earnings at a rate equal to the T. Rowe Price Prime Reserve Fund rate, the T. Rowe Price New Income Fund rate, or one or more of the rates earned by investment options available under the Employee Savings Plan, except the Common Stock Fund and the Interest Income Fund. Earnings are credited to Plan Accounts commencing on the day the Deferred Compensation and Matching Contributions are credited to the Plan Accounts. Plan Accounts will be valued daily in the same manner as for Investment Funds under the Employee Savings Plan. A participant may elect to change the investment option of future Deferred Compensation and Matching Contributions, which election shall be effective when the next Deferred Compensation contributions and/or Matching Contributions are credited to the participant's Plan Accounts. A participant may elect to reallocate to other investment options current Plan Accounts, which election shall be effective at the same time as, and valued in accordance with, the interfund transfer provisions under the Employee Savings Plan. Such elections shall be made by notification in the form and manner established by the Plan Administrator from time to time. 10. Distributions of Plan Accounts. Distributions of Plan Accounts shall be made in cash only, and to the extent designated by the Plan Administrator, from the Rabbi Trust. Prior to the end of the thirtieth (30th) calendar day after the date of a participant's Termination From Employment with Constellation Energy Group, such participant must elect the timing of distributions of his/her Plan Accounts. The participant may elect (by notification in the form and manner established by the Plan Administrator from time to time) to begin distributions (i) in the calendar year following the calendar year of the participant's Termination From Employment with Constellation Energy Group, (ii) in the year following the year in which a participant attains 5 age 70-1/2, if later, or (iii) any calendar year between (i) and (ii). A participant may elect (by notification in the form and manner established by the Plan Administrator from time to time) to receive distributions in a single payment or in annual installments during a period not to exceed fifteen years. The single payment or the first installment payment, whichever is applicable, shall be made within the first sixty (60) days of the calendar year elected for distribution. Subsequent installments, if any, shall be made within the first sixty (60) days of each succeeding calendar year until the participant's Plan Accounts have been paid. In the event no election is made prior to the end of the thirtieth (30th) calendar day after the date of a participant's Termination From Employment with Constellation Energy Group, a participant shall receive a distribution in a single payment within the first sixty (60) days of the following year. Earnings are credited to Plan Accounts through the date of distribution, and amounts held for installment payments shall continue to be credited with earnings, as specified in Section 9. If a participant dies, the entire unpaid balance of his/her Plan Accounts shall be paid to the beneficiary(ies) designated by the participant by notification in the form and manner established by the Plan Administrator from time to time or, if no designation was made, to the estate of the participant. Payment shall be made within sixty (60) days after notice of death is received by the Plan Administrator, unless prior to the end of the thirtieth (30th) calendar day after the date of the participant's Termination From Employment with Constellation Energy Group, the participant elected (in the form and manner established by the Plan Administrator from time to time) a delayed and/or installment distribution option for such beneficiary(ies); provided, however that (i) such a distribution option election shall be effective only if the value of the participant's Plan Accounts is more than $50,000 on the date of the participant's death; and (ii) the final distribution must be made to such beneficiary(ies) no later than 15 years after the participant's death. After the end of the thirtieth (30th) calendar day after the date of a participant's Termination From Employment with Constellation Energy Group, a distribution option election for a particular 6 beneficiary is irrevocable; provided, however, that the participant may make a distribution option election for a new beneficiary who is initially designated after the participant's Termination From Employment with Constellation Energy Group, and such election is irrevocable with respect to the new beneficiary. In the event a participant's deferred Incentive Award is credited to the Plan after the participant's death, such Incentive Award shall be either paid to his/her beneficiary(ies), or if a delayed and/or installment distribution option was elected for such beneficiary(ies), paid as part of the aggregate Plan Accounts in accordance with such election. Upon the death of a participant's beneficiary for whom a delayed and/or installment distribution option was elected, the entire unpaid balance of the participant's Plan Accounts shall be paid to the beneficiary(ies) designated by the participant's beneficiary by notification in the form and manner established by the Plan Administrator from time to time or, if no designation was made, to the estate of the participant's beneficiary. Payment shall be made within sixty (60) days after notice of death is received by the Plan Administrator. Notwithstanding anything herein contained to the contrary, the Committee shall have the right in its sole discretion to vary the manner and timing of distributions, and may make such distributions in a single payment or over a shorter or longer period of time than that elected by a participant. 11. Beneficiaries. A participant shall have the right to designate a beneficiary(ies) who is to receive a distribution(s) pursuant to Section 10 in the event of the death of the participant. A participant's beneficiary(ies) for whom a delayed and/or installment distribution option was elected shall have the right to designate a beneficiary(ies) who is to receive a distribution pursuant to Section 10 in the event of the death of the participant's beneficiary(ies). Any designation, change or recision of the designation of beneficiary shall be made by notification in the form and manner established by the Plan Administrator 7 from time to time. The last designation of beneficiary received by the Plan Administrator shall be controlling over any testamentary or purported disposition by the participant (or, if applicable, the participant's beneficiary(ies)), provided that no designation, recision or change thereof shall be effective unless received by the Plan Administrator prior to the death of the participant (or, if applicable, the participant's beneficiary(ies)). If the designated beneficiary is the estate, or the executor or administrator of the estate, of the participant (or, if applicable, the participant's beneficiary(ies)), a distribution pursuant to Section 10 may be made to the person(s) or entity (including a trust) entitled thereto under the will of the participant (or, if applicable, the participant's beneficiary(ies)), or, in the case of intestacy, under the laws relating to intestacy. A participant's beneficiary(ies) for whom a delayed and/or installment distribution option was elected shall have the right, after the death of the participant, to make investment elections or changes in investment elections with respect to a participant's Plan Accounts to the same extent available to the participant pursuant to Section 9. A beneficiary(ies) of the participant's beneficiary(ies) shall have no right to make any investment election or change in investment election pursuant to Section 9 with respect to a participant's Plan Accounts. 12. Valuation of Interest. The Plan Administrator shall cause the value of a participant's Plan Accounts, at least once per year as of December 31, to be determined separately and be reported to Constellation Energy Group and the participant (or, if applicable, the participant's beneficiary(ies)). Valuation of a participant's Plan Accounts shall be determined in accordance with the procedures contained in the Employee Savings Plan. 13. Withdrawals. No withdrawals of Plan Accounts may be made, except a participant may at any time request a hardship withdrawal from his/her Plan Accounts if he/she has incurred an unforeseeable financial emergency. An unforeseeable financial emergency is 8 defined as severe financial hardship to the participant resulting from a sudden and unexpected illness or accident of the participant (or of his/her dependents), loss of the participant's property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the participant. The need to send a child to college or the desire to purchase a home are not considered to be unforeseeable emergencies. The circumstance that will constitute an unforeseeable emergency will depend upon the facts of each case. A hardship withdrawal will be permitted by the Plan Administrator only as necessary to satisfy an immediate and heavy financial need. A hardship withdrawal may be permitted only to the extent reasonably necessary to satisfy the financial need. Payment may not be made to the extent that such hardship is or may be relieved (i) through reimbursement or compensation by insurance or otherwise, (ii) by liquidation of the participant's assets, to the extent the liquidation of such assets would not itself cause severe financial hardship, or (iii) by cessation of deferrals under the Plan. The request for hardship withdrawal shall be made by notification in the form and manner established by the Plan Administrator from time to time. Such hardship withdrawal will be permitted only with approval of the Plan Administrator. The participant will receive a lump sum payment after the Plan Administrator has had reasonable time to consider and then approve the request. 14. Miscellaneous. A participant's Plan Accounts shall not be subject to alienation or assignment by any participant or beneficiary nor shall any of them be subject to attachment or garnishment or other legal process except (i) to the extent specially mandated and directed by applicable State or Federal statute; and (ii) as requested by the participant or beneficiary to satisfy income tax withholding or liability. This Plan may be amended from time to time or suspended or terminated at any time. All amendments to this Plan which would increase or decrease the compensation of any senior management officer or key employee of Constellation Energy Group, either directly or 9 indirectly, must be approved by the Board of Directors. All other permissible amendments may be made at the written direction of the Committee. No amendment to or termination of this Plan shall impair the rights of any participant or beneficiary with respect to amounts in his/her Plan Accounts before the date of such amendment or termination. Participation in this Plan shall not constitute a contract of employment between Constellation Energy Group and any person and shall not be deemed to be consideration for, or a condition of, continued employment of any person. The Plan, notwithstanding the creation of the Rabbi Trust, is intended to be unfunded for purposes of Title I of the Employee Retirement Income Security Act of 1974. Constellation Energy Group shall make contributions to the Rabbi Trust in accordance with the terms of the Rabbi Trust. Any funds which may be invested and any assets which may be held to provide benefits under this Plan shall continue for all purposes to be a part of the general funds and assets of Constellation Energy Group and no person other than Constellation Energy Group shall by virtue of the provisions of this Plan have any interest in such funds and assets. To the extent that any person acquires a right to receive payments from Constellation Energy Group under this Plan, such rights shall be no greater than the right of any unsecured general creditor of Constellation Energy Group. In the event Constellation Energy Group becomes a party to a merger, consolidation, sale of substantially all of its assets or any other corporate reorganization in which Constellation Energy Group will not be the surviving corporation or in which the holders of the common stock of Constellation Energy Group will receive securities of another corporation (in any such case, the "New Company"), then the New Company shall assume the rights and obligations of Constellation Energy Group under this Plan. This Plan shall be governed in all respects by Maryland law. 10 EX-10 4 EXHIBIT 10 (C) Exhibit 10(c) CONSTELLATION ENERGY GROUP, INC. EXECUTIVE BENEFITS PLAN Restated October, 1999 TABLE OF CONTENTS Page No. 1. Objective 1 2. Definitions 1 3. Plan Administration 4 4. Eligibility 4 5. Supplemental Pension Benefit 4 (a) Retirement benefits 4 (i) Eligibility for retirement benefits 4 (ii) Computation of retirement benefits 5 (iii) Form of payout of retirement benefits 6 (iv) Amount, timing, and source of monthly retirement benefit payout 7 (v) Amount, timing, and source of lump sum retirement benefit payout 7 (vi) Death of participant entitled to lump sum payout 7 (vii) Health and dental benefits 7 (b) Accrued benefit 8 (i) Computation of gross accrued benefit 8 (ii) Computation of net accrued benefit 8 (c) Entitlement to benefit upon happening of certain events 9 (i) Satisfaction of requirements 9 (ii) Other events 9 (1) Change in control 9 (2) Plan amendment 9 (3) Involuntary Demotion, Termination From Employment With Constellation Energy Group, or eligibility withdrawal without Cause 10 (iii) Form of benefit payout 10 (iv) Amount, timing and source of benefit payout 10 (v) Death of participant entitled to lump sum payout 11 (d) Other benefits 12 (i) Eligibility for other benefits 12 (ii) Computation of other benefits 12 (iii) Form of payout of other benefits 13 (iv) Amount, timing, and source of monthly other benefit payout 13 6. Supplemental Long-Term Disability Benefit 13 (i) Eligibility for disability benefits 13 (ii) Computation of disability benefits 14 (iii) Form of payment of disability benefits 14 (iv) Amount, timing, and source of monthly disability benefit payout 14 (v) Bonus 15 7. Supplemental Survivor Annuity Benefit 15 (a) Survivor annuity benefit 15 (i) Eligibility for survivor annuity benefit 15 (ii) Computation of survivor annuity benefit 15 (iii) Form of payout of survivor annuity benefits 17 (iv) Amount, timing, and source of monthly survivor annuity benefit payout 17 (b) Other survivor benefit 17 (i) Eligibility for other survivor benefit 17 (ii) Computation of other survivor benefit 18 (iii) Form of payout of other survivor benefit 18 (iv) Amount, timing, and source of monthly other survivor benefit payout 18 8. Death Benefit 19 9. Dependent Death Benefit 19 10. Sickness Benefit 19 11. Vacation Benefit 20 12. Planning Benefit 20 13. Miscellaneous 21 CONSTELLATION ENERGY GROUP, INC. EXECUTIVE BENEFITS PLAN 1. Objective. The objective of this Plan is to enhance the benefits provided to officers and key employees of Constellation Energy Group and its subsidiaries in order to attract and retain talented executive personnel. 2. Definitions. All words beginning with an initial capital letter and not otherwise defined herein shall have the meaning set forth in the Pension Plan. All singular terms defined in this Plan will include the plural and vice versa. As used herein, the following terms will have the meaning specified below: "Annual Base Salary" means an amount determined by adding the monthly base rate of pay amounts (i.e., the types of such pay that are includable in the computation of Pension Plan benefits)earned over the twelve calendar months immediately preceding the month that includes the date of the computation. "Average Incentive Award" (or "Average Award") means generally the product of the percentage equal to an average of the two highest of the participant's five immediately prior year award percentages earned under Constellation Energy Group's Executive Annual Incentive Plan, Constellation Energy Group's Senior Management Annual Incentive Plan and/or the Results Incentive Awards Program multiplied by the participant's annualized base rate of pay amount (i.e., the types of such pay that are includable in the computation of Pension Plan benefits) in effect at the end of the prior year. "Cause" means the participant's (a) failure to comply with Constellation Energy Group policy, (b) deliberate and continual refusal to satisfactorily perform employment duties on substantially a full-time basis, (c) deliberate and continual refusal to act in accordance with any specific instructions of a majority of Constellation Energy Group's Board of Directors, (d) disclosure, without the consent of a majority of Constellation Energy Group's Board of Directors, of confidential information or trade secrets concerning Constellation Energy Group which could be materially 1 damaging to Constellation Energy Group, or (e) deliberate misconduct which could be materially damaging to Constellation Energy Group without reasonable good faith belief by the participant that such conduct was in the best interest of Constellation Energy Group. "Change in Control" means (a) the purchase or acquisition by any person, entity or group of persons, (within the meaning of Section 13(d) or 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act"), or any comparable successor provisions), of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20 percent or more of either the outstanding shares of common stock of Constellation Energy Group or the combined voting power of Constellation Energy Group's then outstanding shares of voting securities entitled to a vote generally, or (b) the consummation of, following the approval by the stockholders of Constellation Energy Group of a reorganization, merger, or consolidation of Constellation Energy Group, in each case, with respect to which persons who were stockholders of Constellation Energy Group immediately prior to such reorganization, merger or consolidation do not, immediately thereafter, own more than 50 percent of the combined voting power entitled to vote generally in the election of directors of the reorganized, merged or consolidated entity's then outstanding securities, or (c) a liquidation or dissolution of Constellation Energy Group or the sale of substantially all of its assets, or (d) a change of more than one-half of the members of the Board of Directors of Constellation Energy Group within a 90-day period for reasons other than the death, disability, or retirement of such members. "Committee" means the Committee on Management of the Board of Directors of Constellation Energy Group. "Constellation Energy Group" means Constellation Energy Group, Inc., a Maryland corporation, or its successor. "Constellation Energy Group's Executive Annual Incentive Plan" means such plan or other incentive plan or arrangement designated in writing by the Plan Administrator. "Constellation Energy Group's Senior Management Annual Incentive Plan" means such plan or other incentive plan or arrangement designated in writing by the Plan Administrator. 2 "Demotion" means a transfer to a position with Constellation Energy Group or a subsidiary of Constellation Energy Group that either (a) is below the substantially equivalent position in which the participant was employed on the date of transfer, or (b) results in a substantial reduction in pay when compared to the participant's pay on the date of the transfer. Whether a position is a substantially equivalent position shall be determined in the reasonable discretion of the Committee, with reference to factors including whether the participant retains principal responsibility for a department or division, and whether the participant remains eligible for the perquisites enjoyed by the participant before the position change. "Income Replacement Percentage" means the percentage under the LTD Plan that is used to calculate the participant's actual LTD Plan benefit. "Interest Rate" means the rate equal to 3.5% plus 65% of yield on the Lehman Brothers Government/Corporate Bond Index. "LTD Plan" means the Constellation Energy Group, Inc. Disability Insurance Plan as may be amended from time to time, or any successor plan. "Mortality Table" means the mortality table used to value liabilities for Pension Plan funding purposes. "Pension Plan" means the Pension Plan of Constellation Energy Group, Inc. as may be amended from time to time, or any successor plan. "Plan Administrator" means, as set forth in Section 3, the Committee. "Rabbi Trust" means the trust adopted by Constellation Energy Group pursuant to the Grantor Trust Agreement Dated as of April 30, 1999, between Constellation Energy Group and Citibank, N.A. "Results Incentive Awards Program" means the program applicable to certain employees that provides awards; but includes only the types of awards that are includable in the computation of Pension Plan benefits. 3 "Termination From Employment With Constellation Energy Group" means a participant's separation from service with Constellation Energy Group or a subsidiary of Constellation Energy Group; however, a participant's retirement, disability, or transfer of employment to or from a subsidiary of Constellation Energy Group shall not constitute a Termination From Employment With Constellation Energy Group. 3. Plan Administration. The Committee is the Plan Administrator and has sole authority (except as specified otherwise herein) to interpret the Plan and, in general, to make all other determinations advisable for the administration of the Plan to achieve its stated objective. Appeals of written decisions by the Plan Administrator may be made to the Board of Directors of Constellation Energy Group. Decisions by the Board shall be final and not subject to further appeal. The Plan Administrator shall have the power to delegate all or any part of its duties to one or more designees, and to withdraw such authority, by written designation. 4. Eligibility. Each officer or key employee of Constellation Energy Group or its subsidiaries may be designated in writing by the Plan Administrator as a participant with respect to one or more benefits under the Plan. Once designated, participation shall continue until such designation is withdrawn at the discretion and by written order of the Plan Administrator, provided, however, that such withdrawal may not be made for benefits provided pursuant to Sections 5 and 7 with respect to a participant who has satisfied the eligibility requirements to retire (as set forth in Section 5(a)(i)). Notwithstanding the foregoing, any participant who is disabled under the LTD Plan shall continue to participate in this Plan while classified as disabled and, for purposes of the supplemental pension benefit provided by this Plan, while classified as disabled, shall be deemed to continue to accrue Credited Service until no later than his/her Normal Retirement Date. 5. Supplemental Pension Benefit. (a) Retirement benefits. (i) Eligibility for retirement benefits. A participant shall be eligible to retire under this Plan on or after the participant's Normal Retirement Date, or 4 on the first day of any month preceding his/her Normal Retirement Date, if the participant has attained (1) age 55 and has accumulated at least 20 years of Credited Service; or (2) age 60 and has accumulated at least one year of Credited Service. (ii) Computation of retirement benefits. A participant who is eligible to retire under this Plan will be entitled to supplemental pension retirement benefits under this Plan, which will be calculated as set forth below on the participant's Retirement Date: (1) add the Annual Base Salary and the Average Incentive Award, (2) divide the sum by 12, (3) multiply this dollar amount by the appropriate percentage, determined as follows: Chairman of the Board and President of Constellation Energy Group, and President of Constellation Enterprises, Inc. - 60%; all other participants (by completed years of Credited Service) 1 through 9 - 3% per year; 10 through 19 - 40%; 20 through 24 - 45%; 25 through 29 - 50%; and 30 or more - 55%, (4) multiply this dollar amount by the Early Retirement Adjustment Factor set forth under the Pension Plan; provided, however, if the participant is age 62 or older and is an officer or key employee of Constellation Energy Group or its subsidiaries, other than the Chairman of the Board and President of Constellation Energy Group or the President of Constellation Enterprises, Inc., such factor shall be one (1), (5) subtract from this dollar amount the charges relating to coverage for a preretirement survivor annuity in excess of 50%, and for a post-retirement survivor annuity in excess of 50%, and 5 (6) subtract from the remainder the net amount payable to the participant under the Pension Plan. (iii) Form of payout of retirement benefits. Each participant entitled to supplemental pension retirement benefits will receive his/her supplemental pension retirement benefits payout in the form of a monthly payment, unless the participant makes a valid election to receive his/her supplemental pension retirement benefits payout in the form of a lump sum. A participant may elect to receive his/her supplemental pension retirement benefits payout in the form of a lump sum by submitting to the Plan Administrator a signed Lump Sum Election Form. The Form must be received by the Plan Administrator before the beginning of the calendar year during which the participant's Retirement Date occurs. The election may be revoked at any time before the beginning of the calendar year during which the participant's Retirement Date occurs, by submitting to the Plan Administrator a signed Lump Sum Revocation Form. (iv) Amount, timing, and source of monthly retirement benefit payout. A participant entitled to monthly supplemental pension retirement benefits will receive monthly payments equal to the amount determined under paragraph (a)(ii). Such payments shall commence effective with the participant's Retirement Date. If such participant receives (or would have received but for the Internal Revenue Code limitations) cost of living adjustment(s) under the Pension Plan, the monthly payments hereunder will be automatically increased based on the percentage of, and at the same time as, such adjustment(s). Monthly payments hereunder shall permanently cease upon the death of the participant, effective with the monthly payment for the month following the month of the participant's death. Monthly payments hereunder shall be made in accordance with the provisions of the Rabbi Trust and, to the extent not paid under the terms of the Rabbi Trust, from general corporate assets. 6 (v) Amount, timing, and source of lump sum retirement benefit payout. A participant entitled to a lump sum supplemental pension retirement benefit will receive a lump sum payment. This lump sum payment will be calculated by a certified actuary and will be equal to the present value of an immediate annuity including the estimated present value of post-retirement supplemental survivor annuity benefits described in Section 7, using (1) the supplemental pension retirement benefit amount calculated under paragraph (a)(ii), which is expressed as a monthly amount, (2) the Interest Rate computed on the participant's Retirement Date, and (3) the Mortality Table. Such lump sum payment shall be made within 60 days after the participant's Retirement Date. The lump sum payment shall be made in accordance with the provisions of the Rabbi Trust and, to the extent not paid under the terms of the Rabbi Trust, from general corporate assets. A participant who receives a lump sum payment shall not be entitled to any cost of living or other pension payment adjustments or to post-retirement survivor annuity coverage under the Plan. (vi) Death of participant entitled to lump sum payout. In the event of the death of a participant after his/her Retirement Date and before the participant receives the lump sum payment under paragraph (a)(v), such lump sum payment shall be made to the participant's surviving spouse (as defined in Section 7(i)). The lump sum payment shall be the same amount and made at the same time and from the same sources as set forth in paragraph (a)(v). If there is no surviving spouse at the date of the participant's death, no payments shall be made pursuant to Sections 5 or 7. A surviving spouse who receives a lump sum benefit under this paragraph (a)(vi) shall not be entitled to any cost of living or other pension payment adjustments or to post-retirement survivor annuity coverage under the Plan. (vii) Health and dental benefits. A participant who receives supplemental pension retirement benefits under this Plan, but who is not eligible for 7 benefits under the Constellation Energy Group Retiree Flexible Benefits Program, is entitled to health and dental benefits under this Plan that in the sole discretion of the Plan Administrator, are reasonably similar to health and dental benefits provided for participants under the Constellation Energy Group Retiree Flexible Benefits Program, taking into account employer cost, age and service. (b) Accrued benefit. (i) Computation of gross accrued benefit. The computation of the gross accrued supplemental pension benefit for a participant as of the date of the computation will be made as follows: (1) add the Annual Base Salary and the Average Incentive Award, (2) divide the sum by 12, and (3) multiply this dollar amount by the appropriate percentage, determined as follows: Chairman of the Board and President of Constellation Energy Group and President of Constellation Enterprises, Inc. - 60%; all other participants (by completed years of Credited Service as of the date of the computation) 1 through 9 - 3% per year; 10 through 19 - 40%; 20 through 24 - 45%; 25 through 29 - 50%; and 30 or more - 55%. (ii) Computation of net accrued benefit. The computation of the net accrued supplemental pension benefit for a participant as of the date of the computation will be made by subtracting from the gross accrued benefit determined under paragraph (b)(i) the amount, computed on the date a benefit is payable under paragraph (c)(iv), of (1) the participant's Accrued Gross Pension under the Pension Plan, expressed as a monthly amount if the participant is not eligible for Normal Retirement, Early Retirement or Disability Retirement benefits under the Pension Plan, otherwise (2) the gross amount payable to the participant under the Pension Plan. 8 (c) Entitlement to benefit upon happening of certain events. (i) Satisfaction of requirements. A participant who has satisfied the age and Credited Service requirements set forth in Section 5(a)(i) while eligible as set forth in Section 4, but who does not retire under the Plan due to Demotion, Termination From Employment With Constellation Energy Group, or the withdrawal of a participant's eligibility to participate under Section 5, shall be entitled to his/her net accrued supplemental pension benefit. The effective date of the Demotion, Termination From Employment With Constellation Energy Group, or eligibility withdrawal event shall be the date of such Demotion, Termination From Employment With Constellation Energy Group, or eligibility withdrawal. (ii) Other events. A participant, regardless of his/her age and years of Credited Service, shall be entitled to his/her net accrued supplemental pension benefit upon the happening of any of the following entitlement events, but only if such entitlement event occurs before a participant retires under this Plan: (1) Change in Control. A Change in Control, followed within two years by the participant's Demotion, a participant's Termination From Employment With Constellation Energy Group, or the withdrawal of the participant's eligibility to participate under the Plan, is an entitlement event. The effective date of the entitlement event shall be the date of the Demotion, Termination From Employment With Constellation Energy Group, or eligibility withdrawal. (2) Plan amendment. A Plan amendment that has the effect of reducing a participant's gross accrued supplemental pension benefit is an entitlement event. In determining whether such a reduction has occurred, the 9 participant's gross accrued supplemental pension benefit calculated on the day immediately preceding the effective date of the amendment shall be compared to the participant's gross accrued supplemental pension benefit calculated on the effective date of the amendment. An amendment that has the effect of reducing future benefit accruals is not an entitlement event. It is intended that an entitlement event under this paragraph (c)(i)(2) will occur only with respect to those amendments that are substantially similar to amendments that are prohibited by Internal Revenue Code section 411(d)(6) with respect to qualified pension plans. The effective date of the entitlement event shall be the effective date of the Plan amendment. (3) Involuntary Demotion, Termination From Employment With Constellation Energy Group, or eligibility withdrawal without Cause. A participant's involuntary Demotion or involuntary Termination From Employment With Constellation Energy Group without Cause, or the withdrawal of a participant's eligibility to participate under Sections 5 or 7 of the Plan without Cause, is an entitlement event. The effective date of the entitlement event shall be the effective date of the participant's involuntary Demotion or involuntary Termination From Employment With Constellation Energy Group without Cause, or the eligibility withdrawal without Cause. (iii) Form of benefit payout. Each participant entitled to a payout under this paragraph (c) will receive such payout in the form of a lump sum payment. (iv) Amount, timing, and source of benefit payout. A participant entitled to a payout of his/her net accrued benefit, as a result of the occurrence of an event described in paragraphs (c)(i), (c)(ii)(1), (2), or (3) will be entitled to a lump sum benefit. This lump sum benefit will be calculated by a certified actuary as the present value of an annuity beginning at age 62 (unless 10 the participant is the Chairman of the Board or President of Constellation Energy Group, or the President of Constellation Enterprises, Inc. in which case age 65) (or the participant's actual age, if the participant is older than age 62 (unless the participant is the Chairman of the Board or President of Constellation Energy Group, or the President of Constellation Enterprises, Inc. in which case age 65) on the date the lump sum benefit is payable), including the estimated present value of post-retirement survivor annuity benefits described in Section 7, using (1) the net accrued benefit amount calculated under paragraph (b)(ii) on the effective date of the event, which is expressed as a monthly amount, (2) the Early Retirement Adjustment Factor (using the method set forth in (a)(ii)(4)) computed by substituting the date the lump sum benefit is payable for the Retirement Date, (3) the Interest Rate computed on the date the lump sum benefit is payable, and (4) the Mortality Table. The lump sum benefit shall be payable on the date that is the later of the date of the participant's Termination From Employment With Constellation Energy Group or the date the participant reaches age 55. The lump sum payment shall be made within 60 days after such date and shall be made in accordance with the provisions of the Rabbi Trust and, to the extent not paid under the terms of the Rabbi Trust, from general corporate assets. A participant who receives a lump sum benefit under this paragraph (c)(iv) shall not be entitled to any cost of living or other pension payment adjustments or to preretirement or post-retirement survivor annuity coverage. (v) Death of participant entitled to lump sum payout. In the event of the death of a participant after the occurrence of an event described in paragraphs (c)(i), (c)(ii)(1), (2), or (3) and before the participant receives the lump sum payment under paragraph (c)(iv), such lump sum payment shall be made to the participant's surviving spouse (as defined in Section 7(i)). The lump sum payment will be calculated by a certified actuary and will be equal to 50% of the present value of an immediate annuity using (1) the monthly amount 11 under paragraph (c)(iv), (2) the Early Retirement Adjustment Factor computed using the participant's age at the date of the participant's death, or if the participant was younger than age 60 on the date of death, using age 60, (3) the Interest Rate computed on the date the lump sum benefit is payable, and (4) the Mortality Table. However, if the participant's death occurred during the 60 day period described in paragraph (c)(iv), 100% shall be used instead of 50% in the preceding sentence. The lump sum benefit shall be payable on the date that is the later of the date that the participant would have reached age 55 or the date of the participant's death. The lump sum payment shall be made within 60 days after such date, and shall be made in accordance with the provisions of the Rabbi Trust and, to the extent not paid under the terms of the Rabbi Trust, from general corporate assets. If there is no surviving spouse at the date of the participant's death, no payments shall be made pursuant to Sections 5 or 7. A surviving spouse who receives a lump sum benefit under this paragraph (c) (v) shall not be entitled to any cost of living or other pension payment adjustments or to preretirement or post-retirement survivor annuity coverage under the Plan. (d) Other benefits. (i) Eligibility for other benefits. Upon a participant's Termination From Employment With Constellation Energy Group, if such participant (1) does not satisfy the requirements of Sections 5(a)(i), 5(c)(i), and/or 5(c)(ii), and (2) is a vested participant under the Pension Plan, such participant shall be entitled to the benefits in this Section 5(d). (ii) Computation of other benefits. A participant who is eligible for other benefits will be entitled to benefits under this Plan, which will be calculated as set forth below on the date the participant begins receipt of benefit payments under the Pension Plan: (1) compute the participant's adjusted monthly benefit payment under the terms of the 12 Pension Plan, by also treating awards, if any, paid to the participant under Constellation Energy Group's Executive Annual Incentive Plan and/or Constellation Energy Group's Senior Management Annual Incentive Plan during the immediately preceding twenty-four consecutive months as bonuses and/or incentives included in the computation of the participant's Average Pay (as defined under the Pension Plan), and (2) subtract from the amount in (1) above the participant's actual monthly benefit payment under the Pension Plan. For purposes of the computation in (1), the participant will bear the cost of any post-retirement survivor annuity coverage provided under Section 7(b). (iii) Form of payout of other benefits. Each participant entitled to other benefits will receive his/her other benefits payout in the form of a monthly payment. (iv) Amount, timing, and source of monthly other benefit payout. A participant entitled to monthly other benefits will receive monthly payments equal to the amount determined under paragraph (d)(ii). Such payments shall commence effective with the date the participant commences receipt of benefit payments under the Pension Plan. Monthly payments hereunder shall permanently cease upon the death of the participant, effective with the monthly payment for the month following the month of the participant's death. Monthly payments hereunder shall be made from general corporate assets. 6. Supplemental Long-Term Disability Benefit. (i) Eligibility for disability benefits. Any participant who has completed at least one full calendar month of service with Constellation Energy Group or its subsidiaries, who has elected coverage under the LTD Plan, and who is disabled (as determined under the LTD Plan) will be entitled to supplemental disability benefits under this Plan. 13 (ii) Computation of disability benefits. The amount of such supplemental disability benefits shall be determined as follows: (1) multiply the monthly base rate of pay amount in effect immediately prior to becoming entitled to benefits under the LTD Plan by twelve, (2) add the Average Incentive Award to the product, (3) add certain bonuses and incentives that are included in the computation of Average Pay under the Pension Plan (except that awards under the Results Incentive Awards Program shall be excluded), earned over the last 12 months to the product, (4) divide the sum by 12, (5) multiply this monthly dollar amount by the Income Replacement Percentage, and (6) subtract from the product the gross monthly amount provided for the participant under the LTD Plan before such amount is reduced for other benefits as set forth under the LTD Plan. (iii) Form of payment of disability benefits. Each participant entitled to supplemental disability benefits will receive his/her supplemental disability benefit payout in the form of a monthly payment. (iv) Amount, timing, and source of monthly disability benefit payout. A participant entitled to supplemental disability benefits will receive a monthly payment equal to the amount determined under (ii) above. Such payments shall commence effective with the commencement of the participant's LTD Plan benefit payments. Monthly payments shall permanently cease when benefit payments under the LTD Plan cease. Monthly payments shall be made from Constellation Energy Group's general corporate assets. If a participant receiving payments pursuant to this Section 6 receives cost of living or other inflation/indexing adjustment(s) under the LTD Plan, 14 the payments hereunder will be automatically increased based on the same percentage of, and at the same time as, such adjustment(s). (v) Bonus. Any participant who has less than ten years of Credited Service shall be entitled to a monthly taxable cash bonus, equal to an amount based on the cost of LTD Plan coverage, using the formula for computing Constellation Energy Group-provided Flexible Benefits Plan credits for LTD Plan coverage and taking into account the Participant's Credited Service and covered compensation. Such cash bonus shall be made from general corporate assets. 7. Supplemental Survivor Annuity Benefit. (a) Survivor annuity benefit. (i) Eligibility for survivor annuity benefit. Following the death of a participant (other than a participant who satisfied the requirements of Section 5(d)(i) upon such participant's Termination From Employment With Constellation Energy Group), a supplemental survivor annuity may be paid to the participant's surviving spouse until the death of that spouse, using the same percentage to compute such supplemental benefit that is actually used to compute any survivor annuity provided on behalf of the participant under the Pension Plan. The participant will not bear the cost of up to a 50% survivor annuity benefit, but will bear the cost of a survivor annuity benefit in excess of 50%. For purposes of this Section 7(a), a participant's surviving spouse is the individual married to the participant on the date of the participant's death. If there is no surviving spouse, or if the participant or the participant's spouse previously received or is entitled to receive a lump sum payment under Section 5, no supplemental survivor annuity will be payable. (ii) Computation of survivor annuity benefit. The amount of the supplemental survivor annuity will be determined as follows: 15 (1) if the participant had retired prior to the date of death: (a) begin with the monthly pension benefit (under Section 5(a) of this Plan) that the participant was receiving prior to the date of death, and (b) multiply this dollar amount by the percentage used to compute the survivor annuity provided on behalf of the participant under the Pension Plan. (2) otherwise: (a) begin with the larger of the Early Retirement pension benefit (under both the Pension Plan and Section 5(a) of this Plan) to which the participant would have been entitled to receive if the: (A) participant had been retired at age 60 on the date of death for purposes of computing the Early Retirement Adjustment Factor, or (B) participant had retired on the date of death for purposes of computing the Early Retirement Adjustment Factor, (b) multiply this dollar amount by the percentage used to compute the survivor annuity provided on behalf of the participant under the Pension Plan, (c) subtract from the product the net amount, if any, of the survivor annuity provided on behalf of the participant under the Pension Plan, and (d) subtract from this dollar amount the charges relating to coverage (under both the Pension Plan and this Plan) for a preretirement survivor annuity in excess 16 of 50%, and for a post-retirement survivor annuity in excess of 50%. (iii) Form of payout of survivor annuity benefits. Each surviving spouse entitled to a supplemental survivor annuity benefit will receive his/her survivor annuity benefit payout in the form of a monthly payment. (iv) Amount, timing, and source of monthly survivor annuity benefit payout. A surviving spouse entitled to monthly supplemental survivor annuity benefits will receive a monthly payment equal to the amount determined under (ii) above. Such payments shall commence effective with the first day of the month following the month of the participant's death. If such surviving spouse receives (or would have received but for the Internal Revenue Code limitations) cost of living adjustment(s) under the Pension Plan, the monthly payments hereunder will be automatically increased based on the percentage of, and at the same time as, such adjustment(s). Monthly payments hereunder shall permanently cease upon the death of the surviving spouse, effective with the monthly payment for the month following the month of the surviving spouse's death. Monthly payments hereunder shall be made in accordance with the provisions of the Rabbi Trust and, to the extent not paid under the terms of the Rabbi Trust, from general corporate assets. (b) Other survivor benefit. (i) Eligibility for other survivor benefit. Following the death of a participant who satisfied the requirements of Section 5(d)(i) upon such participant's Termination From Employment With Constellation Energy Group, a survivor benefit may be paid to the participant's surviving spouse until the death of that spouse. For purposes of this Section 7(b), a participant's surviving spouse is the individual who is the Surviving Spouse under the Pension Plan. If there is no surviving spouse, no survivor benefit will be payable. 17 (ii) Computation of other survivor benefit. The amount of the survivor benefit will be calculated as set forth below on the date the surviving spouse begins receipt of benefit payments under the Pension Plan: (1) compute the surviving spouse's adjusted monthly benefit payment under the terms of the Pension Plan, by also treating awards, if any, paid to the participant under Constellation Energy Group's Executive Annual Incentive Plan and/or Constellation Energy Group's Manager Annual Incentive Plan during the immediately preceding twenty-four consecutive months as bonuses and/or incentives included in the computation of the participant's Average Pay (as defined under the Pension Plan), and (2) subtract from the amount in (1) above the surviving spouse's actual monthly benefit payment under the Pension Plan. For purposes of the computation in (1), the surviving spouse will bear the cost of the survivor benefit. (iii) Form of payout of other survivor benefit. Each surviving spouse entitled to a survivor benefit will receive his/her survivor benefit payout in the form of a monthly payment. (iv) Amount, timing, and source of monthly other survivor benefit payout. A surviving spouse entitled to monthly survivor benefits will receive monthly payments equal to the amount determined under paragraph (b)(ii). Such payments shall commence effective with the date the surviving spouse commences receipt of benefit payments under the Pension Plan. Monthly payments hereunder shall permanently cease upon the death of the surviving spouse, effective with the monthly payment for the month following the month of the surviving spouse's death. Monthly payments hereunder shall be made from general corporate assets. 18 8. Death Benefit. Constellation Energy Group shall make arrangements, through its split-dollar life insurance program or otherwise, for life insurance coverage for each participant providing that the participant's beneficiary shall receive, as a pre-rollout death benefit, an amount which is approximately equal to three times the participant's compensation, and as a post-rollout benefit, an amount which is approximately equal to two times the participant's compensation, as set forth in a separate agreement between Constellation Energy Group and the participant. As determined in the sole discretion of the Plan Administrator, in the event that either (i) a participant is ineligible to receive the type of life insurance coverage provided to other participants under this Plan, or (ii) such coverage is not available on reasonably cost-effective terms as a result of any penalty for smoking or other factors that are reflected in the insurance carrier's rates, then Constellation Energy Group shall provide a benefit that, in the discretion of the Plan Administrator, is substantially equivalent to the cost of the benefit provided to other participants under this Plan. 9. Dependent Death Benefit. In the event of the death of a participant's qualified dependent while the participant is an active employee of Constellation Energy Group or a subsidiary of Constellation Energy Group, Constellation Energy Group shall make a death benefit payment to the participant, from general corporate assets. For purposes of this Section 9, qualified dependent shall have the same meaning as set forth in Constellation Energy Group's Family Life Insurance Plan. For purposes of this Section 9, the amount of the death benefit payment shall be the highest amount of insurance that would have been payable with respect to such qualified dependent if coverage had been provided under Constellation Energy Group's Family Life Insurance Plan. The dependent death benefit payment under this Plan shall be grossed-up for income tax withholding. 10. Sickness Benefit. Each participant, without regard to length of service, shall be entitled to the greater of the benefits stipulated under the Constellation Energy Group sick benefit policy for employees or twenty-six (26) weeks of paid sick benefits within a rolling 52-week period. 19 11. Vacation Benefit. Each participant, without regard to length of service, shall be entitled to the greater of the benefits stipulated under the Constellation Energy Group vacation benefit policy for employees or five weeks of paid vacation during a calendar year. 12. Planning Benefit. Each participant shall be entitled to certain personal financial, tax, and estate planning services paid for by Constellation Energy Group but provided through designated professional firms. This entitlement shall be subject to any dollar limitation established by the Plan Administrator with respect to all such fees. The services shall be provided to each participant by the chosen firm(s) on a personalized and confidential basis; and each firm shall have sole responsibility for quality of the services which it may render. The services to be provided shall be on an on-going and continuous basis, but shall be limited to (i) the development and legal documentation of both career-oriented financial plans and personal estate plans, and (ii) tax counseling regarding personal tax return preparation and the most advantageous structuring, tax-wise, of proposed personal transactions. Such planning benefit shall continue during the year of retirement plus the next two calendar years and include the completion of the federal and state personal tax returns for the second calendar year following retirement. However, if a retired member of senior management continues to serve as a member of the Board of Directors of Constellation Energy Group, his/her planning benefit period shall be extended until he/she no longer serves as a member of the Board of Directors. Upon the death of a participant entitled to the planning benefit provided hereunder, his/her surviving spouse shall be entitled to receive the following planning benefit: (i) if the deceased was not retired at the time of death, the surviving spouse shall be entitled to the planning benefit for the year in which the death occurred plus the next two calendar years, including completion of the federal and state personal tax returns for the second calendar year after the year in which the death occurred; or (ii) if the deceased was retired at the time of death, then the surviving spouse shall receive a planning benefit equal to that the deceased would have received if he/she had not died 20 prior to expiration of the planning benefit. The surviving spouse of a retired member of senior management whose death occurs while serving as a member of the Board of Directors of Constellation Energy Group, shall be entitled to a planning benefit as set forth in (i) above. The planning benefit provided under this Plan shall be grossed-up for income tax withholding. 13. Miscellaneous. None of the benefits provided under this Plan shall be subject to alienation or assignment by any participant or beneficiary nor shall any of them be subject to attachment or garnishment or other legal process except (i) to the extent specially mandated and directed by applicable State or Federal statute; (ii) as requested by the participant or beneficiary to satisfy income tax withholding or liability; and (iii) any policy of insurance written by a commercial carrier on a split-dollar basis shall be assignable. This Plan may be amended from time to time, or suspended or terminated at any time, provided, however, that no amendment or termination shall reduce any previously accrued supplemental pension benefit under this Plan or impair the rights of any participant or beneficiary entitled to receive current or future payment hereunder at the time of such action. All amendments to this Plan which would increase or decrease the compensation of any Officer of Constellation Energy Group, either directly or indirectly, must be approved by the Board of Directors. All other permissible amendments may be made at the written direction of the Committee. Participation in this Plan shall not constitute a contract of employment between Constellation Energy Group and any person and shall not be deemed to be consideration for, or a condition of, continued employment of any person. The Plan, notwithstanding the creation of the Rabbi Trust, is intended to be unfunded for purposes of Title I of the Employee Retirement Income Security Act of 1974. Constellation Energy Group shall make contributions to the Rabbi Trust in accordance with the terms of the Rabbi Trust. Any funds which may be invested and any assets which may be held to provide benefits under this Plan shall continue for all purposes to be a part of the general funds and assets of Constellation Energy Group and no person other than 21 Constellation Energy Group shall by virtue of the provisions of this Plan have any interest in such funds and assets. To the extent that any person acquires a right to receive payments from Constellation Energy Group under this Plan, such rights shall be no greater than the right of any unsecured general creditor of Constellation Energy Group. In the event Constellation Energy Group becomes a party to a merger, consolidation, sale of substantially all of its assets or any other corporate reorganization in which Constellation Energy Group will not be the surviving corporation or in which the holders of the common stock of Constellation Energy Group will receive securities of another corporation (in any such case, the "New Company"), then the New Company shall assume the rights and obligations of Constellation Energy Group under this Plan. This Plan shall be governed in all respects by Maryland law. 22 EX-10 5 EXHIBIT 10 (D) Exhibit 10(d) Executive Annual Incentive Plan Of Constellation Energy Group, Inc. 1. Plan Objective. The objective of this Plan is to allow Constellation Energy Group, Inc. (Constellation Energy Group or Company) to attract, retain and motivate highly competent officers and key employees of the Company and its subsidiaries by focusing incentive compensation toward the achievement of performance results that primarily support the interests of shareholders and customers of the Company. 2. Plan Administration. The Plan is administered by the Constellation Energy Group Board of Directors' (Board) Committee on Management (Committee on Management) which has sole authority (unless otherwise specified herein) to interpret the Plan; to refine its provisions from time to time subject to Board approval, particularly those relating to factors, targets and procedures used in connection with calculating the awards (which refinements shall be reflected in guidelines for the performance year); to suspend the Plan at any time; and in general, to make all other determinations necessary or advisable for the administration of the Plan to achieve its stated objective. The Committee on Management shall have the power to delegate all or any part of their duties to one or more designees, and to withdraw such authority, by written designation. 3. Eligibility. Each officer or key employee of Constellation Energy Group or its subsidiaries may be designated in writing by the Committee on Management as a participant under the Plan. Once designated, participation shall continue until such designation is withdrawn at the discretion and by written order of the Committee on Management. Participation is subject to the following conditions: Participant must have been an eligible participant for some portion of the performance year and at the time of distribution be actively employed by the Company or elsewhere with the approval of the Company unless employment was terminated by death, disability or retirement. Except as otherwise provided herein, where an individual is not an eligible participant for the entire performance year, the amount of the award, whether full, partial or none, will be at the Committee on Management's discretion, subject to Board approval. 1 Where, prior to the end of a performance year, a participant's active employment is terminated as a result of death, disability or retirement, the award is calculated based on the participant's position at the time of termination. Unless otherwise stated, any such award will be made on a pro-rata basis for the period of active employment, or, in total, at the discretion of the Committee on Management. Where active employment is terminated as a result of death of participant, distribution is made in accordance with Section 9. (Designation of Beneficiary) of this Plan. 4. Performance Goals A. Performance Targets. The Committee on Management shall establish for each plan year Performance Targets designed to accomplish the purpose set forth in Section 1 of this Plan. The Committee on Management will ensure that each plan year's Performance Targets meet the following general criteria: (1) The interests of the Company's shareholders will be balanced with the interests of the Company's customers. (2) The targets should be set at levels which are attainable, but which, in the Committee on Management's judgment, are attainable only with a high degree of competence and diligence. The Committee on Management shall have sole authority to amend Performance Targets at any time when, in the Committee's judgment, unforeseen circumstances exist which require modification in order to ensure that the purpose of the Plan is properly served. The Committee on Management shall have authority to establish appropriate Performance Targets, differing to the degree necessary from those established for the Company, for each of the Company's subsidiaries employing one or more participants in this Plan; and shall have authority to adjust such targets subsequently should unforeseen circumstances arise. B. Individual Performance. A participant's individual per- formance will be evaluated by the Chairman of the Board. 5. Award Opportunity. The Committee on Management shall establish for each plan year the Award Opportunity (minimum, target, 2 and maximum, as appropriate) applicable to participants in the Plan. The Award Opportunity may be allocated among the various Performance Targets and Individual Performance and may vary among classes of participants. 6. Award Determination. The Committee on Management, with the concurrence of the Board, shall determine the Awards, if any, to be made for each plan year as soon after the end of the plan year as is practical. In the case of participants in this Plan employed by a subsidiary of the Company, the Award, if any, will be recommended by the non-employee members of the board of directors of that subsidiary and subsequently approved by the Committee on Management. Awards are calculated taking into account the degree of attainment of performance targets, individual performance, and the percent of participation during the performance year. The dollar amount of the participants' award is determined by multiplying the participant's prior December 31 annualized base salary by the award percentage. All amounts awarded to participants are subject to the approval of the Board. 7. Payment of Awards. Awards approved by the Board for each plan year shall be paid as soon as practicable after such determination has been made. Payment may be made in a lump cash sum or, at the participants' election, may be deferred in whole or in part. When required by applicable law, Federal, State and FICA taxes will be withheld from awards at applicable rates. Awards will not be paid for any performance year in which Company earnings are less than the amount necessary to fund the annual dividend. Additionally, awards will not be paid for any plan year in which the dividend is suspended or effectively reduced from its prior amount. 8. Deferred Payment of Award. A participant may elect to defer the receipt of all or a portion of the award for the plan year. Any such deferral and investment of any such amounts deferred pursuant to this Plan shall be made in accordance with the provisions of the Constellation Energy Group Nonqualified Deferred Compensation Plan. 9. Designation of Beneficiary. A participant shall have the right to designate a beneficiary or beneficiaries who are to receive in a lump sum any undistributed incentive compensation award to the extent a participant has chosen not to defer all or a portion of his incentive award pursuant to Section 8 hereof, should the participant 3 die during the plan year and be entitled to an incentive award for that plan year. Such designation shall apply only to the portion of the undistributed incentive award not subject to a deferral election. Any designation, change or rescission of the designation shall be made in writing by completing and furnishing to the Vice President - Human Resources of the Company a notice on an appropriate form designated by the Vice President - Human Resources of the Company. The last designation of beneficiary received by the Vice President - Human Resources of the Company shall be controlling over any testamentary or purported disposition by the participant, provided that no designation, rescission or change thereof shall be effective unless received prior to death of the participant. Distribution of any incentive awards previously deferred pursuant to Section 8 of the Plan shall be paid to the beneficiary or beneficiaries designated under the Constellation Energy Group Nonqualified Deferred Compensation Plan. 10. Change in Control. Notwithstanding any other provisions of this Plan to the contrary, if a participant separates from service with Constellation Energy Group or a subsidiary of Constellation Energy Group (except due to a participant's transfer of employment to or from a subsidiary of Constellation Energy Group), within 2 years following a change in control, such participant is eligible for an award for the performance year during which the separation from service occurs. The award is calculated assuming maximum performance achievement and based on the participant's position at the time of termination and is pro-rated for the period of active employment during the performance year. The Committee on Management, in its discretion, may grant a total, rather than pro-rated award. Payment of the award will be made in a lump cash sum within 60 days after the participant's separation from service. Payment may not be deferred. A change in control for purposes of this Section 10 shall mean (i) the purchase or acquisition by any person, entity or group of persons (within the meaning of Section 13(d) or 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act"), or any comparable successor provisions), of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20 percent or more of either the outstanding shares of common stock of Constellation Energy Group or the combined voting power of Constellation Energy Group's then outstanding shares of voting securities entitled to a vote generally, or (ii) the consummation of, following the approval by the stockholders of Constellation Energy Group of a reorganization, merger, or consolidation of Constellation Energy Group, in each case, with respect to which persons who were stockholders of Constellation Energy Group immediately prior to such reorganization, merger 4 or consolidation do not, immediately thereafter, own more than 50 percent of the combined voting power entitled to vote generally in the election of directors of the reorganized, merged or consolidated entity's then outstanding securities, or (iii) a liquidation or dissolution of Constellation Energy Group or the sale of substantially all of its assets, or (iv) a change of more than one-half of the members of the Board of Directors of Constellation Energy Group within a 90-day period for reasons other than the death, disability, or retirement of such members. 11. Miscellaneous. The plan year and the performance year shall be the same and shall be the calendar year. Any payments made under this Plan are not considered as earnings for purpose of the Company's qualified pension or Employee Saving Plan, or for any other general employee benefit program. However, all payments made under this Plan will be included in the determination of benefits provided under the Company's Executive Benefits Plan. None of the payments provided under this Plan which are deferred shall be subject to alienation or assignment by any participant or beneficiary nor shall any of them be subject to attachment or garnishment or other legal process except to the extent specifically mandated and directed by applicable State or Federal statute. Payment shall be made only into the hands of the participant or beneficiary entitled to receive the same or into the hands of his or her authorized legal representative. Deposit of any sum into any financial institution to the credit of the participant or beneficiary entitled thereto shall constitute payment into his or her hands. Notwithstanding the foregoing, at the request of the participant or beneficiary or as required by law, such sums as may be requisite for payment of any estimated or currently accrued income tax liability may be withheld and paid over to the governmental entity entitled to receive the same. Participation in this Plan shall not constitute a contract of employment between the Company and any employee and shall not be deemed to be consideration for, inducement to, or a condition of employment of any person. The deferral of any incentive compensation amounts pursuant to the provisions of the Plan shall not be construed to give any employee the right to be retained in the employ of the Company or to interfere with the right of the company to terminate such employment at any time. The Board intends to continue the Plan indefinitely but reserves the right to amend the Plan from time to time or to permanently 5 discontinue it provided none of these, nor any suspension, may deprive the participants of any payment of amounts which were previously awarded at the time thereof. In the event Constellation Energy Group becomes a party to a merger, consolidation, sale of substantially all of its assets or any other corporate reorganization in which Constellation Energy Group will not be the surviving corporation or in which the holders of the common stock of Constellation Energy Group will receive securities of another corporation (in any such case, the "New Company"), then the New Company shall assume the rights and obligations of Constellation Energy Group under this Plan. 6 EX-10 6 EXHIBIT 10 (E) Exhibit 10 (e) Summary Severance Arrangement For A Named Executive Officer Edward A. Crooke will take an early retirement in connection with the displacement from his position as Chairman, President and Chief Executive Officer of Constellation Enterprises, Inc. (CEI) because of the corporate restructuring and elimination of CEI. As a result of his displacement and in recognition of the significant contributions he has made to the success of the company during his 31 plus years of service, the Board of Directors of Constellation Energy Group, Inc. approved a severance package that will be effective when he retires on January 1, 2000. His severance benefits will include a lump sum severance payment equal to two times the total of (1) final annual base salary, and (2) the average of the two highest annual bonus percentages earned during the preceding five years multiplied by the prior year's final annual salary, which lump sum payment based on prior year bonus percentages is estimated to total approximately $1.3 million. Mr. Crooke will also be entitled to a pension benefit computed without reduction for early receipt and a prorata payout of any earned performance-based restricted stock award for the 1998-2000 and 1999-2001 performance periods. He will also receive an $8,817 lump sum payment to use toward the cost of health coverage. EX-12 7 EXHIBIT 12 (A) CONSTELLATION ENERGY GROUP, INC. AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
12 Months Ended ----------------------------------------------------------------------------------------- September December December December December December 1999 1998 1997 1996 1995 1994 ------------ ------------- ------------ ------------ ------------ ----------- (In Millions of Dollars) Net Income $ 300.1 $ 305.9 $ 254.1 $ 272.3 $ 297.4 $ 283.7 Taxes on Income, Including Tax Effect for BGE Preference Stock Dividends 166.8 169.3 145.1 148.3 152.0 137.6 ------------ ------------- ------------ ------------ ------------ ------------ Adjusted Net Income $ 466.9 $ 475.2 $ 399.2 $ 420.6 $ 449.4 $ 421.3 ------------ ------------- ------------ ------------ ------------ ------------ Fixed Charges: Interest and Amortization of Debt Discount and Expense and Premium on all Indebtedness $ 252.1 $ 255.3 $ 234.2 $ 203.9 $ 206.7 $ 204.2 Earnings required for BGE Preference Stock Dividends 21.0 33.8 45.1 59.4 61.0 59.0 Capitalized Interest 2.3 3.6 8.4 15.7 15.0 12.4 Interest Factor in Rentals 1.8 1.9 1.9 1.5 2.1 2.0 ------------ ------------- ------------ ------------ ------------ ------------ Total Fixed Charges $ 277.2 $ 294.6 $ 289.6 $ 280.5 $ 284.8 $ 277.6 ------------ ------------- ------------ ------------ ------------ ------------ Earnings (1) $ 741.8 $ 766.2 $ 680.4 $ 685.4 $ 719.2 $ 686.5 ============ ============= ============ ============ ============ ============ Ratio of Earnings to Fixed Charges 2.68 2.60 2.35 2.44 2.52 2.47
(1) Earnings are deemed to consist of net income that includes earnings of Constellation Energy's consolidated subsidiaries, equity in the net income of BGE's unconsolidated subsidiary, income taxes (including deferred income taxes, investment tax credit adjustments, and the tax effect of BGE's preference stock dividends), and fixed charges other than capitalized interest. EX-12 8 EXHIBIT 12 (B) BALTIMORE GAS AND ELECTRIC COMPANY AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED AND PREFERENCE DIVIDEND REQUIREMENTS
12 Months Ended ----------------------------------------------------------------------------------------- September December December December December December 1999 1998 1997 1996 1995 1994 ------------ ------------- ------------ ------------ ------------ ------------ (In Millions of Dollars) Net Income $ 305.7 $ 327.7 $ 282.8 $ 310.8 $ 338.0 $ 323.6 Taxes on Income 163.3 181.3 161.5 169.2 172.4 156.7 ------------ ------------- ------------ ------------ ------------ ------------ Adjusted Net Income $ 469.0 $ 509.0 $ 444.3 $ 480.0 $ 510.4 $ 480.3 ------------ ------------- ------------ ------------ ------------ ------------ Fixed Charges: Interest and Amortization of Debt Discount and Expense and Premium on all Indebtedness $ 199.8 $ 255.3 $ 234.2 $ 203.9 $ 206.7 $ 204.2 Capitalized Interest 1.3 3.6 8.4 15.7 15.0 12.4 Interest Factor in Rentals 0.9 1.9 1.9 1.5 2.1 2.0 ------------ ------------- ------------ ------------ ------------ ------------ Total Fixed Charges $ 202.0 $ 260.8 $ 244.5 $ 221.1 $ 223.8 $ 218.6 ------------ ------------- ------------ ------------ ------------ ------------ Preferred and Preference Dividend Requirements: (1) Preferred and Preference Dividends $ 13.7 $ 21.8 $ 28.7 $ 38.5 $ 40.6 $ 39.9 Income Tax Required 7.3 12.0 16.4 20.9 20.4 19.1 ------------ ------------- ------------ ------------ ------------ ------------ Total Preferred and Preference Dividend Requirements $ 21.0 $ 33.8 $ 45.1 $ 59.4 $ 61.0 $ 59.0 ------------ ------------- ------------ ------------ ------------ ------------ Total Fixed Charges and Preferred and Preference Dividend Requirements$ 223.0 $ 294.6 $ 289.6 $ 280.5 $ 284.8 $ 277.6 ============ ============= ============ ============ ============ =========== Earnings (2) $ 669.7 $ 766.2 $ 680.4 $ 685.4 $ 719.2 $ 686.5 ============ ============= ============ ============ ============ =========== Ratio of Earnings to Fixed Charges 3.32 2.94 2.78 3.10 3.21 3.14 Ratio of Earnings to Combined Fixed Charges and Preferred and Preference Dividend Requirements 3.00 2.60 2.35 2.44 2.52 2.47
(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 9 EXHIBIT 27 (A) WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSTELLATION ENERGY'S SEPTEMBER 30, 1999 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-31-1999 JAN-01-1999 SEP-30-1999 PER-BOOK 5,657 1,833 1,653 629 0 9,772 1,494 0 1,589 3,082 0 190 2,588 0 0 143 965 0 0 0 2,804 9,772 2,723 167 2,083 2,250 473 5 478 191 287 0 287 188 172 484 1.92 1.92
EX-27 10 EXHIBIT 27 (B)
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALTIMORE GAS AND ELECTRIC COMPANY'S SEPTEMBER 30, 1999 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-31-1999 JAN-01-1999 SEP-30-1999 PER-BOOK 5,657 397 708 619 0 7,381 1,494 0 969 2,462 0 190 2,206 0 0 23 615 0 0 0 1,885 7,381 2,357 166 1,735 1,901 456 5 461 159 302 10 292 188 130 572 0 0
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