-----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, RP1ZKaZ3UjvmhS2l/rpZxjPwRWcBiuLaSXdWZNT/6q2YEleo4FLRdl6NVwfzihj4 6XlyRd6/SKnh71fp817xJA== 0000009466-96-000012.txt : 19960814 0000009466-96-000012.hdr.sgml : 19960814 ACCESSION NUMBER: 0000009466-96-000012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960813 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BALTIMORE GAS & ELECTRIC CO CENTRAL INDEX KEY: 0000009466 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 520280210 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-01910 FILM NUMBER: 96610477 BUSINESS ADDRESS: STREET 1: GAS & ELECTRIC BLDG STREET 2: CHARLES CTR CITY: BALTIMORE STATE: MD ZIP: 21201 BUSINESS PHONE: 4107835920 10-Q 1 QUARTERLY REPORT FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Quarterly Period Ended June 30, 1996 Commission file number 1-1910 BALTIMORE GAS AND ELECTRIC COMPANY ----------------------------------------------------------------- (Exact name of registrant as specified in its charter) Maryland 52-0280210 ----------------------------------------------------------------- (State of incorporation) (IRS Employer Identification No.) 39 W. Lexington Street Baltimore, Maryland 21201 ----------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 410-783-5920 Not Applicable ----------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No Common Stock, without par value - 147,567,114 shares outstanding on July 31, 1996. 1
BALTIMORE GAS AND ELECTRIC COMPANY PART I. FINANCIAL INFORMATION ----------------------------- CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Quarter Ended June 30, Six Months Ended June 30, ---------------------- ------------------------- 1996 1995 1996 1995 ----------- ----------- ----------- ----------- (In Thousands, Except Per-Share Amounts) Revenues Electric $ 517,780 $ 504,627 $ 1,072,224 $ 1,012,451 Gas 93,515 67,968 312,779 220,753 Diversified businesses 120,412 69,905 208,034 127,102 ----------- ----------- ----------- ----------- Total revenues 731,707 642,500 1,593,037 1,360,306 ----------- ----------- ----------- ----------- Expenses Other Than Interest and Income Taxes Electric fuel and purchased energy 127,468 133,128 281,320 280,582 Gas purchased for resale 49,384 29,188 178,412 110,991 Operations 130,196 134,593 262,364 266,128 Maintenance 60,811 51,362 95,252 88,243 Diversified businesses - selling, general, and administrative 84,251 52,638 151,824 93,746 Depreciation and amortization 82,332 75,337 167,730 152,015 Taxes other than income taxes 48,628 45,334 106,183 99,459 ----------- ----------- ----------- ----------- Total expenses other than interest and income taxes 583,070 521,580 1,243,085 1,091,164 ----------- ----------- ----------- ----------- Income From Operations 148,637 120,920 349,952 269,142 ----------- ----------- ----------- ----------- Other Income Allowance for equity funds used during construction 2,006 4,832 3,971 10,201 Equity in earnings of Safe Harbor Water Power Corporation 1,123 1,108 2,247 2,215 Net other income and deductions (1,950) (3,328) (4,098) (5,938) ----------- ----------- ----------- ----------- Total other income 1,179 2,612 2,120 6,478 ----------- ----------- ----------- ----------- Income Before Interest and Income Taxes 149,816 123,532 352,072 275,620 ----------- ----------- ----------- ----------- Interest Expense Interest charges 53,054 55,333 105,772 110,310 Capitalized interest (3,416) (3,683) (6,568) (7,167) Allowance for borrowed funds used during construction (1,083) (2,614) (2,146) (5,519) ----------- ----------- ----------- ----------- Net interest expense 48,555 49,036 97,058 97,624 ----------- ----------- ----------- ----------- Income Before Income Taxes 101,261 74,496 255,014 177,996 ----------- ----------- ----------- ----------- Income Taxes Current 23,232 7,946 70,131 4,913 Deferred 15,387 17,689 23,372 55,395 Investment tax credit adjustments (1,911) (2,028) (3,823) (4,055) ----------- ----------- ----------- ----------- Total income taxes 36,708 23,607 89,680 56,253 ----------- ----------- ----------- ----------- Net Income 64,553 50,889 165,334 121,743 Preferred and Preference Stock Dividends 12,104 9,952 21,768 19,904 ----------- ----------- ----------- ----------- Earnings Applicable to Common Stock $ 52,449 $ 40,937 $ 143,566 $ 101,839 =========== =========== =========== =========== Average Shares of Common Stock Outstanding 147,527 147,527 147,527 147,527 Earnings Per Share of Common Stock $ 0.36 $ 0.28 $ 0.97 $ 0.69 Dividends Declared Per Share of Common Stock $ 0.40 $ 0.39 $ 0.79 $ 0.77
See Notes to Consolidated Financial Statements. 2
PART I. FINANCIAL INFORMATION (Continued) ----------------------------------------- CONSOLIDATED BALANCE SHEETS June 30, December 31, 1996* 1995 ----------- ----------- (in Thousands) ASSETS Current Assets Cash and cash equivalents ........................................................ $ 38,034 $ 23,443 Accounts receivable (net of allowance for uncollectibles ......................... 418,823 400,005 of $17,673 and $16,390 respectively) Fuel stocks ...................................................................... 59,240 59,614 Materials and supplies ........................................................... 147,866 145,900 Prepaid taxes other than income taxes ............................................ 1,953 60,508 Deferred income taxes ............................................................ 12,810 36,831 Trading securities ............................................................... 64,175 47,990 Other ............................................................................ 29,380 31,487 ----------- ----------- Total current assets ............................................................. 772,281 805,778 ----------- ----------- Investments and Other Assets Real estate projects ............................................................. 496,591 479,344 Power generation systems ......................................................... 364,447 358,629 Financial investments ............................................................ 201,490 205,841 Nuclear decommissioning trust fund ............................................... 101,871 85,811 Net pension asset ................................................................ 76,108 60,077 Safe Harbor Water Power Corporation .............................................. 34,334 34,327 Senior living facilities ......................................................... 29,086 16,045 Other ............................................................................ 75,550 71,894 ----------- ----------- Total investments and other assets ............................................... 1,379,477 1,311,968 ----------- ----------- Utility Plant Plant in service Electric ....................................................................... 6,474,765 6,360,624 Gas ............................................................................ 731,364 692,693 Common ......................................................................... 530,415 522,450 ----------- ----------- Total plant in service ......................................................... 7,736,544 7,575,767 Accumulated depreciation ......................................................... (2,577,104) (2,481,801) ----------- ----------- Net plant in service ............................................................. 5,159,440 5,093,966 Construction work in progress .................................................... 205,580 247,296 Nuclear fuel (net of amortization) ............................................... 125,807 130,782 Plant held for future use ........................................................ 25,890 25,552 ----------- ----------- Net utility plant ................................................................ 5,516,717 5,497,596 ----------- ----------- Deferred Charges Regulatory assets (net) .......................................................... 610,170 637,915 Other deferred charges ........................................................... 67,293 63,406 ----------- ----------- Total deferred charges ........................................................... 677,463 701,321 ----------- ----------- TOTAL ASSETS ....................................................................... $ 8,345,938 $ 8,316,663 =========== ===========
* Unaudited See Notes to Consolidated Financial Statements. 3
PART I. FINANCIAL INFORMATION (Continued) ----------------------------------------- CONSOLIDATED BALANCE SHEETS June 30, December 31, 1996* 1995 ----------- ----------- (In Thousands) LIABILITIES AND CAPITALIZATION Current Liabilities Short-term borrowings ............................................................ $ 274,845 $ 279,305 Current portions of long-term debt and preference stock .......................... 133,953 146,969 Accounts payable ................................................................. 147,859 177,092 Customer deposits ................................................................ 27,447 26,857 Accrued taxes .................................................................... 2,404 8,244 Accrued interest ................................................................. 56,724 56,670 Dividends declared ............................................................... 67,924 67,198 Accrued vacation costs ........................................................... 35,621 33,403 Other ............................................................................ 21,645 39,417 ----------- ----------- Total current liabilities ........................................................ 768,422 835,155 ----------- ----------- Deferred Credits and Other Liabilities Deferred income taxes ............................................................ 1,307,231 1,311,530 Pension and postemployment benefits .............................................. 155,269 148,594 Decommissioning of federal uranium enrichment facilities ......................... 43,694 43,695 Other ............................................................................ 70,005 55,568 ----------- ----------- Total deferred credits and other liabilities ..................................... 1,576,199 1,559,387 ----------- ----------- Capitalization Long-term Debt First refunding mortgage bonds of BGE ............................................ 1,637,341 1,538,528 Other long-term debt of BGE ...................................................... 637,000 649,500 Long-term debt of Constellation Companies ........................................ 561,374 546,903 Unamortized discount and premium ................................................. (14,911) (15,708) Current portion of long-term debt ................................................ (94,953) (120,969) ----------- ----------- Total long-term debt ............................................................. 2,725,851 2,598,254 ----------- ----------- Preferred Stock .................................................................... -- 59,185 ----------- ----------- Redeemable Preference Stock ........................................................ 266,500 268,000 Current portion of redeemable preference stock ................................... (39,000) (26,000) ----------- ----------- Total redeemable preference stock ................................................ 227,500 242,000 ----------- ----------- Preference Stock Not Subject to Mandatory Redemption ............................... 210,000 210,000 ----------- ----------- Common Shareholders' Equity Common stock ..................................................................... 1,425,641 1,425,805 Retained earnings ................................................................ 1,408,437 1,381,417 Net unrealized gain on available-for-sale securities ............................. 3,888 5,460 ----------- ----------- Total common shareholders' equity ................................................ 2,837,966 2,812,682 ----------- ----------- Total capitalization ............................................................. 6,001,317 5,922,121 ----------- ----------- TOTAL LIABILITIES AND CAPITALIZATION ............................................... $ 8,345,938 $ 8,316,663 =========== ===========
* Unaudited See Notes to Consolidated Financial Statements. 4
PART I. FINANCIAL INFORMATION (Continued) ----------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Six Months Ended June 30, ------------------------- 1996 1995 --------- --------- (In Thousands) Cash Flows From Operating Activities Net income ............................................................................... $ 165,334 $ 121,743 Adjustments to reconcile to net cash provided by operating activities Depreciation and amortization .......................................................... 191,549 180,168 Deferred income taxes .................................................................. 23,372 55,395 Investment tax credit adjustments ...................................................... (3,823) (4,055) Deferred fuel costs .................................................................... 20,060 19,978 Disallowance of replacement energy costs ............................................... 6,764 -- Accrued pension and postemployment benefits ............................................ (9,999) (11,504) Allowance for equity funds used during construction .................................... (3,971) (10,201) Equity in earnings of affiliates and joint ventures (net) .............................. (22,944) (5,579) Changes in current assets, other than sale of accounts receivable ...................... 26,530 23,776 Changes in current liabilities, other than short-term borrowings ....................... (49,651) (80,720) Other .................................................................................. 18,455 711 --------- --------- Net cash provided by operating activities ................................................ 361,676 289,712 --------- --------- Cash Flows From Financing Activities Proceeds from issuance of Short-term borrowings (net) ............................................................ (4,460) 49,800 Long-term debt ......................................................................... 161,346 10,694 Common stock ........................................................................... (22) 83 Reacquisition of long-term debt .......................................................... (70,615) (20,451) Reacquisition of preferred and preference stock .......................................... (63,559) -- Common stock dividends paid .............................................................. (115,071) (112,120) Preferred and preference stock dividends paid ............................................ (19,785) (19,904) Other .................................................................................... (414) (810) --------- --------- Net cash used in financing activities .................................................... (112,580) (92,708) --------- --------- Cash Flows From Investing Activities Utility construction expenditures ........................................................ (164,747) (177,331) Allowance for equity funds used during construction ...................................... 3,971 10,201 Nuclear fuel expenditures ................................................................ (15,125) (16,310) Deferred energy conservation expenditures ................................................ (14,735) (18,869) Contributions to nuclear decommissioning trust fund ...................................... (16,667) (4,890) Purchases of marketable equity securities ................................................ (22,709) (6,759) Sales of marketable equity securities .................................................... 24,223 32,169 Other financial investments .............................................................. 5,938 3,869 Real estate projects ..................................................................... (19,913) (4,473) Power generation systems ................................................................. (9,798) (16,458) Other .................................................................................... (4,943) (9,509) --------- --------- Net cash used in investing activities .................................................... (234,505) (208,360) --------- --------- Net Increase (Decrease) in Cash and Cash Equivalents ....................................... 14,591 (11,356) Cash and Cash Equivalents at Beginning of Period ........................................... 23,443 38,590 --------- --------- Cash and Cash Equivalents at End of Period ................................................. $ 38,034 $ 27,234 ========= ========= Other Cash Flow Information Cash paid during the period for: Interest (net of amounts capitalized) .................................................. $ 96,790 $ 95,233 Income taxes ........................................................................... $ 74,759 $ 35,771
See Notes to Consolidated Financial Statements. Certain prior period amounts have been reclassified to conform with the current period presentation. 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------ Results for interim periods, which can be largely influenced by weather conditions, are not necessarily indicative of results to be expected for the year. The preceding interim financial statements of Baltimore Gas and Electric Company (BGE) and Subsidiaries (collectively, the Company) reflect all adjustments which are, in the opinion of Management, necessary for the fair presentation of the Company's financial position and results of operations for such interim periods. These adjustments are of a normal recurring nature. BGE Financing Activity - ---------------------- The following reflects issuances and redemptions of long-term debt and equity securities during the period from January 1, 1996 through the date of this report: Long-Term Debt -------------- On June 24, 1996, BGE issued $125,000,000 principal amount of Remarketed Floating Rate Series Due September 1, 2006 First Refunding Mortgage Bonds at a price of 99.90%. The bonds include a provision that allows the bondholders the option to tender their bonds back to BGE on an annual basis. BGE is required to repurchase and retire any bonds tendered that are not remarketed or purchased by the remarketing agent. In addition, BGE has the option to call the bonds annually at par on each remarketing date. On August 1, 1996, BGE redeemed $5,541,000 principal amount of the 7-1/8% Series Due January 1, 2002 and $418,000 from several other series of First Refunding Mortgage Bonds at various prices tendered in connection with the annual sinking fund required by BGE's mortgage. In addition, on August 29, 1996, BGE will redeem $11,420,000 principal amount of the 7-1/8% Series Due January 1, 2002 at par to complete the sinking fund for 1996. BGE may purchase First Refunding Mortgage Bonds of various series in open market transactions, from time to time in the future, depending upon market conditions and BGE's assessment of optimal capital structure, including the mix of secured and unsecured debt. Preferred Stock --------------- On May 28, 1996, BGE redeemed its entire class of Preferred Stock. The following is a summary of the series redeemed: Cumulative Preferred Stock, Price $100 Par Value Shares Per Share -------------- ------ --------- Series B, 4-1/2% 222,921 $110 Series C, 4% 68,928 $105 Series D, 5.40% 300,000 $101 6 Also, on July 1, 1996, BGE exercised its option to double-up the required sinking fund for the 8.625% Cumulative Preference Stock 1990 Series ($100 par value) by redeeming a total of 260,000 shares at par. Common Stock ------------ In July 1996, BGE issued a total of 40,000 shares of Common Stock, without par value, through its Common Stock Continuous Offering Program with net proceeds to BGE of approximately $1,142,000. Diversified Business Financing Matters - -------------------------------------- See Management's Discussion and Analysis of Financial Condition and Results of Operations - Diversified Businesses Capital Requirements for additional information about the debt of Constellation Holdings, Inc. and its subsidiaries. Pending Merger with Potomac Electric Power Company - -------------------------------------------------- BGE, Potomac Electric Power Company (PEPCO), and Constellation Energy Corporation (formerly named "RH Acquisition Corp.") (CEC), have entered into an Agreement and Plan of Merger, dated as of September 22, 1995 (the Merger Agreement). CEC was formed to accomplish the merger and its outstanding capital stock is owned 50% by BGE and 50% by PEPCO. The Merger Agreement provides for a strategic business combination that will be accomplished by merging both BGE and PEPCO into CEC (the Merger). The Merger, which was unanimously approved by the Boards of Directors of BGE and PEPCO and approved by the shareholders of both companies, is expected to close during 1997 after all other conditions to the consummation of the Merger, including obtaining applicable regulatory approvals (described below), are met or waived. In connection with the Merger, BGE common shareholders will receive one share of CEC common stock for each BGE share and PEPCO common shareholders will receive 0.997 of a share of CEC common stock for each PEPCO share. Preliminary estimates by the managements of PEPCO and BGE indicate that the synergies resulting from the combination of their utility operations could generate net cost savings of up to $1.3 billion over a period of 10 years following the Merger. These estimates indicate that about two-thirds of the savings will come from reduced labor costs, with the remaining savings split between nonfuel purchasing and corporate and administrative programs. These savings are net of costs to achieve, presently estimated to be approximately $150 million, and are expected to be allocated among shareholders and customers. This allocation will depend upon the results of regulatory proceedings in the various jurisdictions in which BGE and PEPCO operate their utility businesses (see discussion of the issues raised in regulatory proceedings regarding the allocation and other matters). The analyses employed in order to develop estimates of the potential savings as a result of the Merger were necessarily 7 based upon various assumptions which involve judgments with respect to, among other things, future national and regional economic and competitive conditions, inflation rates, regulatory treatment, weather conditions, financial market conditions, interest rates, future business decisions and other uncertainties, all of which are difficult to predict and many of which are beyond the control of BGE and PEPCO. Accordingly, while BGE believes that such assumptions are reasonable for purposes of the development of estimates of potential savings, there can be no assurance that such assumption will approximate actual experience or that all such savings will be realized. Major regulatory proceedings, together with an indication of the current status of the proceeding, which must be concluded in order to proceed with the merger are listed below. The Merger Agreement provides that a condition to closing is that no such approvals shall impose terms and conditions that would have, or would be reasonably likely to have, a material adverse effect on the business, operations, properties, assets, condition (financial or otherwise), prospects, or results of operations of the new company. Federal Energy Regulatory Commission - The merger has been set for hearing to explore the merged company's generation market power, including the appropriate geographic markets, and to consider appropriate remedies if the merged company is found to possess generation market power. Public Service Commission of Maryland (PSC) - Hearings are in progress and testimony has been filed by all parties to the proceeding. Office of People's Counsel (the advocates for residential customers) recommended that the Commission not approve the Merger until the Applicants demonstrate that Maryland customers will not be harmed by potential restrictions on competition due to the market power of the new company. If, however, the PSC decides to approve the Merger, People's Counsel is recommending a rate decrease of approximately $86 million ($60 million to BGE customers, $26 million to PEPCO customers), with Merger savings being reflected in further reduced rates of approximately $71 million ($50 million to BGE customers, $21 million to PEPCO customers) contemporaneous with the date of the Merger. A number of other recommendations are also included in People's Counsel's testimony. The Maryland Energy Administration (MEA) disagreed with the regulatory plan for the new company. MEA has recommended that the PSC adopt an alternative regulatory plan which includes an approximately $72 million rate decrease for the new company and a 5-year rate freeze. MEA stated that if the PSC found that a current rate decrease was appropriate, the $72 million was based on synergy savings and thus would be in addition to any current rate decrease. PSC Staff testimony recommends an immediate rate decrease (BGE's rates reduced by $68.5 million and PEPCO's by $21.2 million at the time of the 8 Merger) and that a further 5.18 percent decrease (essentially all future savings) be imposed on the new company one year after the Merger. District of Columbia Public Service Commission - Recently announced its procedural schedule, and parties in that proceeding are scheduled to file testimony by September 12, 1996. The reasons for the Merger, the terms and conditions contained in the Merger Agreement, the regulatory approvals required prior to closing the Merger, and other matters concerning the Merger, PEPCO, and CEC are discussed in more detail in the Registration Statement on Form S-4 (Registration No. 33-64799) which is included as an exhibit to this Report on Form 10-Q by incorporation by reference. Environmental Matters - --------------------- The Clean Air Act of 1990 (the Act) contains two titles designed to reduce emissions of sulfur dioxide and nitrogen oxide (NOx) from electric generating stations. Title IV contains provisions for compliance in two separate phases. Phase I of Title IV became effective January 1, 1995, and Phase II of Title IV must be implemented by 2000. BGE met the requirements of Phase I by installing flue gas desulfurization systems and fuel switching and through unit retirements. BGE is currently examining what actions will be required in order to comply with Phase II of the Act. However, BGE anticipates that compliance will be attained by some combination of fuel switching, flue gas desulfurization, unit retirements, or allowance trading. At this time, plans for complying with NOx control requirements under Title I of the Act are less certain because all implementation regulations have not yet been finalized by the government. It is expected that by the year 1999 these regulations will require additional NOx controls for ozone attainment at BGE's generating plants and at other BGE facilities. The controls will result in additional expenditures that are difficult to predict prior to the issuance of such regulations. Based on existing and proposed ozone nonattainment regulations, BGE currently estimates that the NOx controls at BGE's generating plants will cost approximately $90 million. BGE is currently unable to predict the cost of compliance with the additional requirements at other BGE facilities. BGE has been notified by the Environmental Protection Agency and several state agencies that it is being considered a potentially responsible party with respect to the cleanup of certain environmentally contaminated sites owned and operated by third parties. In addition, a subsidiary of Constellation Holdings, Inc. has been named as a defendant in a case concerning an alleged environmentally contaminated site owned and operated by a third party. Cleanup costs for these sites cannot be 9 estimated, except that BGE's 15.79% share of the possible cleanup costs at one of these sites, Metal Bank of America, a metal reclaimer in Philadelphia, could exceed amounts BGE has recognized by up to approximately $7 million based on the highest estimate of costs in the range of reasonably possible alternatives. Although the cleanup costs for certain of the remaining sites could be significant, BGE believes that the resolution of these matters will not have a material effect on its financial position or results of operations. Also, BGE is coordinating investigation of several former gas manufacturing plant sites, including exploration of corrective action options to remove tar. However, no formal legal proceedings have been instituted against BGE. The technology for cleaning up such sites is still developing, and remedies for these sites have not been determined. BGE has recognized estimated environmental costs at these sites which are considered probable totaling $50 million in nominal dollars as of June 30, 1996. These costs, net of accumulated amortization, have been deferred as a regulatory asset (see Note 5 of the Form 10-K for the year ended December 31, 1995). Accounting rules also require BGE to disclose additional costs deemed by BGE to be less likely than probable costs, but still "reasonably possible" of being incurred at these sites. Because of the results of recent studies at these sites, it is reasonably possible that these additional costs could exceed the amount recognized by approximately $48 million in nominal dollars ($11 million in current dollars, plus the impact of inflation at 3.1% over a period of up to 60 years). Nuclear Insurance - ----------------- An accident or an extended outage at either unit of the Calvert Cliffs Nuclear Power Plant could have a substantial adverse effect on BGE. The primary contingencies resulting from an incident at the Calvert Cliffs plant would involve the physical damage to the plant, the recoverability of replacement power costs, and BGE's liability to third parties for property damage and bodily injury. BGE maintains various insurance policies for these contingencies. The costs that could result from a major accident or an extended outage at either of the Calvert Cliffs units could exceed the coverage limits. In addition, in the event of an incident at any commercial nuclear power plant in the country, BGE could be assessed for a portion of any third party claims associated with the incident. Under the provisions of the Price Anderson Act, the limit for third party claims from a nuclear incident is $8.92 billion. If third party claims relating to such an incident exceed $200 million (the amount of primary insurance), BGE's share of the total liability for third party claims could be up to $159 million per incident, that would be payable at a rate of $20 million per year. 10 BGE and other operators of commercial nuclear power plants in the United States are required to purchase insurance to cover claims of certain nuclear workers. Other non-governmental commercial nuclear facilities may also purchase such insurance. Coverage of up to $400 million is provided for claims against BGE or others insured by these policies for radiation injuries. If certain claims were made under these policies, BGE and all policyholders could be assessed, with BGE's share being up to $6.02 million in any one year. For physical damage to Calvert Cliffs, BGE has $2.75 billion of property insurance from industry mutual insurance companies. If an outage at Calvert Cliffs is caused by an insured physical damage loss and lasts more than 21 weeks, BGE has up to $473.2 million per unit of insurance, provided by an industry mutual insurance company, for replacement power costs. This amount can be reduced by up to $94.6 million per unit if an outage to both units at Calvert Cliffs is caused by a singular insured physical damage loss. If accidents at any insured plants cause a shortfall of funds at the industry mutuals, BGE and all policyholders could be assessed, with BGE's share being up to $44.1 million. Recoverability of Electric Fuel Costs - ------------------------------------- By statute, actual electric fuel costs are recoverable so long as the Public Service Commission of Maryland (PSC) finds that BGE demonstrates that, among other things, it has maintained the productive capacity of its generating plants at a reasonable level. The PSC and Maryland's highest appellate court have interpreted this as permitting a subjective evaluation of each unplanned outage at BGE's generating plants to determine whether or not BGE had implemented all reasonable and cost-effective maintenance and operating control procedures appropriate for preventing the outage. Effective January 1, 1987, the PSC authorized the establishment of a Generating Unit Performance Program (GUPP) to measure, annually, utility compliance with maintaining the productive capacity of generating plants at reasonable levels by establishing a system-wide generating performance target and individual performance targets for each base load generating unit. In fuel rate hearings, actual generating performance after adjustment for planned outages will be compared to the system-wide target and, if met, should signify that BGE has complied with the requirements of Maryland law. Failure to meet the system-wide target will result in review of each unit's adjusted actual generating performance versus its performance target in determining compliance with the law and the basis for possibly imposing a penalty on BGE. Parties to fuel rate hearings may still question the prudence of BGE's actions or inactions with respect to any given generating plant outage, which could result in the disallowance of replacement energy costs by the PSC. 11 Since the two units at BGE's Calvert Cliffs Nuclear Power Plant utilize BGE's lowest cost fuel, replacement energy costs associated with outages at these units can be significant. BGE 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. In October 1988, BGE filed its first fuel rate application for a change in its electric fuel rate under GUPP. The resultant case before the PSC covers BGE's operating performance in calendar year 1987, and BGE's filing demonstrated that it met the system-wide and individual nuclear plant performance targets for 1987. In November 1989, testimony was filed on behalf of the Maryland People's Counsel (People's Counsel) alleging that seven outages at the Calvert Cliffs plant in 1987 were due to management imprudence and that the replacement energy costs associated with those outages should be disallowed by the Commission. Total replacement energy costs associated with the 1987 outages were approximately $33 million. On January 23, 1995, the Hearing Examiner issued his decision in the 1987 fuel rate proceeding and found that the Company had met the GUPP standard which establishes a presumption that BGE had operated the plant at a reasonably productive capacity level. However, the Order found that the presumption of reasonableness would be overcome by a showing of mismanagement and that such a showing was made with respect to the environmental qualifications outage time. The Hearing Examiner had mitigated the disallowance of replacement energy costs due to the fact the GUPP standard was met. The Hearing Examiner's Order was appealed to the PSC by both BGE and People's Counsel. The PSC upheld the Hearing Examiner's findings with respect to the environmental qualification related outage time, but disagreed with certain methodologies applied by the Hearing Examiner. The impact of the PSC's decision on the Company's earnings was approximately $4.5 million which equaled BGE's previous estimate reported in the Form 10-Q for the quarter ended March 31, 1996. People's Counsel has filed a motion for rehearing. In May 1989, BGE filed its fuel rate case in which 1988 performance was examined. BGE met the system-wide and nuclear plant performance targets in 1988. People's Counsel alleged that BGE imprudently managed several outages at Calvert Cliffs, and BGE estimates that the total replacement energy costs associated with these 1988 outages were approximately $2 million. On November 14, 1991, a Hearing Examiner at the PSC issued a proposed Order, which became final on December 17, 1991 and concluded that no disallowance was warranted. The Hearing Examiner found that BGE maintained the productive capacity of the Plant at a reasonable level, noting that it produced a near record amount of power and exceeded the GUPP standard. Based on this record, the Order concluded there was sufficient cause to excuse any avoidable failures to maintain productive capacity at higher levels. 12 During 1989, 1990, and 1991, BGE experienced extended outages at its Calvert Cliffs Nuclear Power Plant. In the Spring of 1989, a leak was discovered around the Unit 2 pressurizer heater sleeves during a refueling outage. BGE shut down Unit 1 as a precautionary measure on May 6, 1989, to inspect for similar leaks and none were found. However, Unit 1 was out of service for the remainder of 1989 and 285 days of 1990 to undergo maintenance and modification work to enhance the reliability of various safety systems, to repair equipment, and to perform required periodic surveillance tests. Unit 2, which returned to service on May 4, 1991, remained out of service for the remainder of 1989, 1990, and the first part of 1991 to repair the pressurizer, perform maintenance and modification work, and complete the refueling. The replacement energy costs associated with these extended outages for both units at Calvert Cliffs, concluding with the return to service of Unit 2, are estimated to be $458 million. In a December 1990 Order issued by the PSC in a BGE base rate proceeding, the PSC found that certain operations and maintenance expenses incurred at Calvert Cliffs during the test year should not be recovered from ratepayers. The PSC found that this work, which was performed during the 1989-1990 Unit 1 outage and fell within the test year, was avoidable and caused by BGE actions which were deficient. The PSC noted in the Order that its review and findings on these issues pertain to the reasonableness of BGE's test-year operations and maintenance expenses for purposes of setting base rates and not to the responsibility for replacement power costs associated with the outages at Calvert Cliffs. The PSC stated that its decision in the base rate case will have no res judicata (binding) effect in the fuel rate proceeding examining the 1989- 1991 outages. The work characterized as avoidable significantly increased the duration of the Unit 1 outage. Despite the PSC's statement regarding no binding effect, BGE recognizes that the views expressed by the PSC make the full recovery of all of the replacement energy costs associated with the Unit 1 outage doubtful. Therefore, in December 1990, BGE recorded a provision of $35 million against the possible disallowance of such costs. BGE cannot determine whether replacement energy costs may be disallowed in the present fuel rate proceeding in excess of the provision, but such amounts could be material. Hearings are scheduled in this proceeding for August 1996, although an initial decision is not expected until some time in 1997. 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATIONS --------------------- The financial condition and results of operations of Baltimore Gas and Electric Company (BGE) and its subsidiaries (collectively, the Company) are set forth in the Consolidated Financial Statements and Notes to Consolidated Financial Statements (Notes) sections of this Report. Factors significantly affecting results of operations, liquidity, and capital resources are discussed below. RESULTS OF OPERATIONS FOR THE QUARTER AND SIX MONTHS ENDED JUNE 30, 1996 COMPARED WITH THE CORRESPONDING PERIODS OF 1995 Earnings per Share of Common Stock - ---------------------------------- Consolidated earnings per share for the quarter and six months ended June 30, 1996 were $.36 and $.97, respectively, which represent increases of $.08 and $.28 compared to the earnings for the corresponding periods of 1995. These increases in earnings per share reflect a higher level of earnings applicable to common stock. The earnings per share are summarized as follows: Quarter Ended Six Months Ended June 30 June 30 ------- ------- 1996 1995 1996 1995 ---- ---- ---- ---- Utility operations $.26 $.25 $.83 $.63 Diversified businesses .10 .03 .14 .06 --- --- --- --- Total $.36 $.28 $.97 $.69 ==== ==== ==== ==== Earnings Applicable to Common Stock - ----------------------------------- Earnings applicable to common stock increased $11.5 million during the quarter and $41.7 million during the six months ended June 30, 1996. These increases reflect higher earnings from both utility operations and diversified businesses. Earnings from utility operations increased slightly during the quarter ended June 30, 1996 as compared to the corresponding period last year primarily due to higher electric system sales resulting from the hotter spring weather, offset partially by a $4.5 million net-of-tax charge for the disallowance of certain replacement power costs related to 1987 outages at both units of the Calvert Cliffs Nuclear Power Plant. In addition to the factors noted above, earnings from utility operations increased during the six months ended June 30, 1996 primarily due to higher electric and gas system sales resulting from the colder winter weather in 1996 as compared to last year. The effect of weather on utility sales is discussed on pages 15 and 16. 14 The following factors influence BGE's utility operations earnings: regulation by the Public Service Commission of Maryland (PSC), the effect of weather and economic conditions on sales, and competition in the generation and sale of electricity. The gas base rate increase authorized by the PSC in November 1995 favorably affected utility earnings during the quarter and six months ended June 30, 1996. The electric fuel rate cases now pending before the PSC discussed on pages 11 through 13 could also affect future years' earnings. Future competition may also affect earnings in ways that are not possible to predict (see the discussion of "Response to Regulatory Change" in the Form 10-K). Earnings from diversified businesses, which primarily represent the operations of Constellation Holdings, Inc. and its subsidiaries (collectively, the Constellation Companies), BGE Home Products & Services, Inc. and Subsidiary (HP&S), BGE Energy Projects & Services, Inc. (EP&S) and BNG, Inc., increased during the quarter and six months ended June 30, 1996 compared to the corresponding periods of 1995. Diversified businesses' earnings are discussed on pages 21 through 24. Effect of Weather on Utility Sales - ---------------------------------- Weather conditions affect BGE's utility sales. BGE measures weather conditions using degree days. A degree day is the difference between the average daily actual temperature and the baseline temperature of 65 degrees. Colder weather during the winter, as measured by greater heating degree days, results in greater demand for electricity and gas to operate heating systems. Conversely, warmer weather during the winter, measured by fewer heating degree days, results in less demand for electricity and gas to operate heating systems. Hotter weather during the summer, measured by more cooling degree days, results in greater demand for electricity to operate cooling systems. Conversely, cooler weather during the summer, measured by fewer cooling degree days, results in less demand for electricity to operate cooling systems. The degree-days chart below presents information regarding heating and cooling degree days for the quarter and six months ended June 30, 1996 and 1995. 15 Quarter Ended Six Months Ended June 30 June 30 ------- ------- 1996 1995 1996 1995 ---- ---- ---- ---- Heating degree days............ 597 479 3,222 2,719 Percent change compared to prior period.................. 24.6% 18.5% Cooling degree days............ 279 252 279 252 Percent change compared to prior period.................. 10.7% 10.7% BGE Utility Revenues and Sales - ------------------------------ Electric revenues changed for the quarter and six months ended June 30, 1996 because of the following factors: Quarter Ended Six Months Ended June 30 June 30 1996 vs. 1995 1996 vs. 1995 ------------- ------------- (In millions) System sales volumes $19.7 $49.7 Base rates 4.0 9.2 Fuel rates (2.0) (0.8) ---- ---- Revenues from system sales 21.7 58.1 Interchange and other sales (7.7) 1.7 Other revenues (0.8) 0.0 ---- --- Total $13.2 $59.8 ===== ===== Electric system sales represent volumes sold to customers within BGE's service territory at rates determined by the PSC. These amounts exclude interchange sales and sales to other utilities, which are discussed separately. Following is a comparison of the changes in electric system sales volumes: Quarter Ended Six Months Ended June 30 June 30 1996 vs. 1995 1996 vs. 1995 ------------- ------------- Residential 10.2% 13.1% Commercial 0.9 2.3 Industrial 1.9 3.1 Total 4.4 6.6 Sales to residential and commercial customers increased during the quarter ended June 30, 1996 compared to last year due to periods of hotter spring weather. Sales to residential customers also increased due to greater usage per customer. Sales to commercial customers also increased due to a greater number of 16 customers, offset partially by lower usage per customer. In addition to the factors noted above, sales to residential and commercial customers increased during the six months ended June 30, 1996 due to colder winter weather compared to last year. Sales to industrial customers increased during the quarter and six months ended June 30, 1996 primarily due to an increase in the number of customers and higher usage per customer. Base rates are affected by two principal items: rate orders by the PSC and recovery of eligible electric conservation program costs through the energy conservation surcharge. Base rates increased for the quarter and six months ended June 30, 1996 compared to last year due to recovery of a higher level of eligible electric conservation program costs. Under the energy conservation surcharge, if the PSC determines that BGE is earning in excess of its authorized rate of return, BGE will have to refund (by means of lowering future surcharges) a portion of energy conservation surcharge revenues to its customers. This determination is now made on an annual basis at the end of each year. The portion subject to the refund is compensation for foregone sales from conservation programs and incentives for achieving conservation goals and will be refunded to customers with interest beginning in the ensuing July when the annual resetting of the conservation surcharge rates occurs. Changes in fuel rate revenues result from the operation of the electric fuel rate formula. The fuel rate formula is designed to recover the actual cost of fuel, net of revenues from interchange sales and sales to other utilities. (See Notes 1 and 12 of the Form 10-K.) Changes in fuel rate revenues and interchange and other sales normally do not affect earnings. However, if the PSC were to disallow recovery of any part of these costs, earnings would be reduced as discussed in Note 12 of the Form 10-K. Fuel rate revenues were lower for the quarter and six months ended June 30, 1996 as compared to the same period in 1995 as a result of a lower fuel rate, offset partially by increased electric system sales volumes. The fuel rate was lower for the quarter and six months ended June 30, 1996 as compared to the same period last year because of a less costly twenty-four month generation mix at the Company's generating plants. BGE expects electric fuel rate revenues to remain relatively constant through 1996. Interchange and other sales represent sales of BGE's energy to the Pen nsylvania - New Jersey - Maryland Interconnection (PJM), a regional power pool of eight member companies including BGE, and sales to other non-PJM utilities. These sales occur after BGE has satisfied the demand for its own system sales of electricity, if BGE's available generation is the least costly 17 available. Interchange and other sales decreased for the quarter ended June 30, 1996 compared to last year because of lower generation from the Calvert Cliffs Nuclear Power Plant. Interchange and other sales increased for the six months ended June 30, 1996 because of a higher price per megawatt of electricity sold, offset partially by lower sales volumes as compared to last year. Gas revenues changed for the quarter and six months ended June 30, 1996 because of the following factors: Quarter Ended Six Months Ended June 30 June 30 1996 vs. 1995 1996 vs. 1995 ------------- ------------- (In millions) Sales volumes $(0.3) $ 9.1 Base rates 4.6 12.9 Gas cost adjustment revenues 10.9 55.6 ---- ---- Revenues from system sales 15.2 77.6 Off-system Sales 9.6 13.3 Other revenues 0.7 1.1 --- --- Total $25.5 $92.0 ===== ===== Below is a comparison of the changes in gas sales volumes: Quarter Ended Six Months Ended June 30 June 30 1996 vs. 1995 1996 vs. 1995 ------------- ------------- Residential 4.7% 17.3% Commercial 4.8 6.8 Industrial (6.7) (6.6) Total (0.6) 6.5 Gas sales to residential and commercial customers increased during the quarter ended June 30, 1996 as compared to the same period last year due primarily to cooler early spring weather and an increase in the number of customers, offset partially by lower usage per customer. Sales to industrial customers decreased during the quarter ended June 30, 1996 compared to last year due primarily to decreased usage by Bethlehem Steel, offset partially by increased usage by other industrial customers. Gas sales to residential customers increased during the six months ended June 30, 1996 as compared to the same period last year primarily due to colder winter and early spring weather, an increase in the number of customers, and an increase in usage per customer. Sales to commercial customers also increased compared to last year due to colder winter weather and an increase in the number of customers, but this was offset partially by lower usage per customer. Sales to industrial customers decreased compared to last year due to decreased usage by Bethlehem Steel and a greater 18 number of interruptions caused by the colder winter weather this year, offset partially by increased usage by other industrial customers and by an increase in the number of customers. Base rates increased during the quarter and six months ended June 30, 1996 compared to the same period last year primarily as a result of the PSC's November 1995 rate order, which increased annual base rate revenues by $19.3 million, including $2.4 million to recover higher depreciation expense. Changes in gas cost adjustment revenues result primarily from the operation of the purchased gas adjustment clause, commodity charge adjustment clause, and the actual cost adjustment clause which are designed to recover actual gas costs. (See Note 1 of the Form 10-K.) Changes in gas cost adjustment revenues normally do not affect earnings. Gas cost adjustment revenues increased for the quarter and six months ended June 30, 1996 because of higher prices for purchased gas and higher sales volumes subject to gas cost adjustment clauses. Delivery service sales volumes are not subject to gas cost adjustment clauses because these customers purchase their gas directly from third parties. Off-system gas sales volumes represent direct sales to end users of natural gas outside of BGE's service territory and are not subject to gas cost adjustment clauses. BGE began sales of off-system gas during the first quarter of 1996. Pursuant to a sharing arrangement approved by the PSC, the gross margin earned on these sales reduces gas cost adjustment charges to customers and increases income available to common shareholders. BGE Utility Fuel and Energy Expenses - ------------------------------------ Electric fuel and purchased energy expenses were as follows: Quarter Ended Six Months Ended June 30 June 30 ------- ------- 1996 1995 1996 1995 ---- ---- ---- ---- (In millions) Actual costs $131.6 $124.9 $279.1 $263.5 Net (deferral) recovery of costs under electric fuel rate clause (see Note 1 of the Form 10-K) (10.9) 8.2 (4.6) 17.1 Disallowed deferred fuel costs 6.8 0.0 6.8 0.0 --- --- --- --- Total $127.5 $133.1 $281.3 $280.6 ====== ====== ====== ====== Total electric fuel and purchased energy expenses decreased during the quarter ended June 30, 1996 as a result of the operation of the electric fuel rate clause, offset partially by 19 increased actual costs and by the write-off of previously deferred fuel costs ($4.5 million net of taxes) which were disallowed by the PSC in a May 1996 Order. Total electric fuel and purchased energy expenses remained relatively constant during the six months ended June 30, 1996 as a result of increased actual costs and the write-off of previously deferred fuel costs discussed above, offset by the operation of the electric fuel rate clause. Actual electric fuel and purchased energy costs increased for the quarter and six months ended June 30, 1996 as a result of a higher net output of electricity generated and higher purchased energy costs. Purchased gas expenses were as follows: Quarter Ended Six Months Ended June 30 June 30 ------- ------- 1996 1995 1996 1995 ---- ---- ---- ---- (In millions) Actual costs $48.3 $31.4 $175.2 $118.7 Net (deferral) recovery of costs under purchased gas adjustment clause (see Note 1 of the Form 10-K) 1.1 (2.2) 3.2 (7.7) --- ---- --- ---- Total $49.4 $29.2 $178.4 $111.0 ===== ===== ====== ====== Total purchased gas expenses increased for the quarter and six months ended June 30, 1996 compared to last year due to an increase in actual gas costs and the operation of the purchased gas adjustment clause. The increase in actual gas costs reflects substantially higher gas prices for the quarter and six months ended June 30, 1996 and higher sales volumes for the six months ended June 30, 1996. Purchased gas costs exclude gas purchased by delivery service customers, including Bethlehem Steel, who obtain gas directly from third parties. Other Operating Expenses - ------------------------ Operations and maintenance expense increased $5.1 million and $3.2 million, respectively, during the quarter and six months ended June 30, 1996 compared to the same periods last year, primarily due to higher nuclear outage maintenance costs and labor costs. Depreciation and amortization expense increased $7.0 million and $15.7 million, respectively, during the quarter and six months ended June 30, 1996 compared to the same periods last year 20 because of a higher level of depreciable plant in service and higher amortization of deferred energy conservation surcharge expenditures. Taxes other than income taxes increased $3.3 million and $6.7 million, respectively, during the quarter and six months ended June 30, 1996 due to an increase in property taxes resulting from plant additions during 1995 and higher gross receipts taxes in 1996 due to increased revenues. In addition, payroll taxes increased during 1996 due to greater incentive- based payouts and a 3% general wage increase granted March 1, 1996. Other Income and Expenses - ------------------------- The Allowance for Funds Used During Construction (AFC) decreased $4.4 million and $9.6 million, respectively, for the quarter and six months ended June 30, 1996 due primarily to a significant reduction in construction work in progress and a lower gas AFC rate. The reduction in construction work in progress resulted from both a lower level of new construction activity and the placement of several projects in service during the past year. Interest charges decreased $2.3 million and $4.5 million, respectively, for the quarter and six months ended June 30, 1996 due primarily to the maturity of long-term debt as well as lower interest rates as compared to last year, offset partially by a higher overall level of debt outstanding. Income tax expense increased $13.1 million and $33.4 million, respectively, for the quarter and six months ended June 30, 1996 due primarily to higher taxable income from utility operations and diversified businesses. Diversified Businesses Earnings - ------------------------------- Earnings per share from diversified businesses were as follows: Quarter Ended Six Months Ended June 30 June 30 ------- ------- 1996 1995 1996 1995 ---- ---- ---- ---- Constellation Holdings, Inc. Power generation systems $.07 $.01 $.11 $.03 Financial investments .04 .02 .05 .04 Real estate development and senior living facilities (.01) .00 (.02) (.01) Other (.01) .00 (.01) .00 ---- --- ---- --- Total Constellation Holdings, Inc. .09 .03 .13 .06 Other Subsidiaries .01 .00 .01 .00 --- --- --- --- Total diversified businesses $.10 $.03 $.14 $.06 ==== ==== ==== ==== 21 The Constellation Companies' power generation systems business includes the development, ownership, management, and operation of wholesale power generating projects in which the Constellation Companies hold ownership interests, as well as the provision of services to power generation projects under operation and maintenance contracts. Power generation systems earnings increased for the quarter and six months ended June 30, 1996 due primarily to higher equity earnings from the Constellation Companies' energy projects and a $14.6 million after-tax gain on the sale by a Constellation partnership of a power purchase agreement with Jersey Central Power & Light back to that utility. These increases were partially offset by the $7.0 million after-tax write-off of the investment in two geothermal wholesale power generating plants, discussed below, and the $3.0 million after-tax write-off of development costs of a proposed coal-fired power project that will not be built. The Constellation Companies' investment in wholesale power generating projects includes $202 million representing ownership interests in 16 projects, including the two projects which were written-off discussed below, that sell electricity in California under Interim Standard Offer No. 4 (SO4) power purchase agreements. Under these agreements, the projects supply electricity to purchasing utilities at a fixed rate for the first ten years of the agreements and thereafter at fixed capacity payments plus variable energy rates based on the utilities' avoided cost for the remaining term of the agreements. Avoided cost generally represents a utility's next lowest cost generation to service the demands on its system. These power generation projects are scheduled to convert to supplying electricity at avoided cost rates in various years beginning in 1996 through the end of 2000. As a result of declines in purchasing utilities' avoided costs subsequent to the inception of these agreements, revenues at these projects based on current avoided cost levels would be substantially lower than revenues presently being realized under the fixed price terms of the agreements. At current avoided cost levels, the Constellation Companies could experience reduced earnings or incur losses associated with these projects, which could be significant. While nine projects (including the two that have been written-off) transition from fixed to variable energy rates in the 1996 through 1998 timeframe, revenues from the other projects having SO4 contracts are expected to continue to increase during this period tending to offset revenue declines on the nine projects. Six of the seven largest revenue producing projects will not make the transition to variable energy rates until the 1999-2000 timeframe such that any material reductions in revenues would not be anticipated until the years 2000 and 2001. The Constellation Companies are investigating and pursuing alternatives for certain of these power generation projects including, but not limited to, repowering the projects to reduce operating costs, changing fuels, renegotiating the power purchase agreements, restructuring financings, and selling its ownership 22 interests in the projects. During the second quarter of 1996, the Constellation Companies determined that successful mitigation measures for two geothermal power plants are now unlikely and that the investment in these plants was impaired. Accordingly, the Constellation Companies recorded a $7.0 million after-tax write off of the investment in these plants. Two of the other wholesale power generating projects, in which the Constellation Companies' investment totals $34 million, have executed agreements with Pacific Gas & Electric (PG&E) providing for the curtailment of output through the end of the fixed price period in return for payments from PG&E. The payments from PG&E during the curtailment period will be sufficient to fully amortize the existing project finance debt. However, following the curtailment period, the projects remain contractually obligated to commence production of electricity at the avoided cost rates, which could result in reduced earnings or losses for the reasons described above. The Company cannot predict the impact that these matters regarding any of these projects may have on the Constellation Companies or the Company, but the impact could be material. Earnings from the Constellation Companies' portfolio of financial investments include capital gains and losses, dividends, income from financial limited partnerships, and income from financial guaranty insurance companies. Financial investment earnings were higher for the quarter and six months ended June 30, 1996 because of higher earnings realized from various financial limited partnerships. The Constellation Companies' real estate development business includes land under development; office buildings; retail projects; commercial projects; an entertainment, dining and retail complex in Orlando, Florida; a mixed-use planned-unit- development; and senior living facilities. The majority of these projects are in the Baltimore-Washington corridor. They have been affected adversely by the oversupply of and limited demand for land and office space due to modest economic growth and corporate downsizings. Earnings from real estate development and senior living facilities for the quarter and six months ended June 30, 1996 are essentially unchanged from the prior year. The Constellation Companies' real estate portfolio has experienced continuing carrying costs and depreciation. Additionally, the Constellation Companies have been expensing rather than capitalizing interest on certain undeveloped land for which substantially all development activities have been suspended. These factors have affected earnings negatively and are expected to continue to do so until the levels of undeveloped land are reduced. Cash flow from real estate operations has been insufficient to cover the debt service requirements of certain of these projects. Resulting cash shortfalls have been satisfied through cash infusions from Constellation Holdings, Inc., which obtained the funds through a combination of cash flow generated by other Constellation Companies and its corporate borrowings. 23 To the extent the real estate market continues to improve, earnings from real estate activities are expected to improve also. The Constellation Companies' continued investment in real estate projects is a function of market demand, interest rates, credit availability, and the strength of the economy in general. The Constellation Companies' Management believes that although the real estate market has improved, until the economy reflects sustained growth and the excess inventory in the market in the Baltimore-Washington corridor goes down, real estate values will not improve significantly. If the Constellation Companies were to sell their real estate projects in the current depressed market, losses would occur in amounts difficult to determine. Depending upon market conditions, future sales could also result in losses. In addition, were the Constellation Companies to change their intent about any project from an intent to hold to an intent to sell, applicable accounting rules would require a write-down of the project to market value at the time of such change in intent if market value is below book value. The earnings of other subsidiaries, which include HP&S, EP&S, and BNG, Inc., were essentially unchanged during the quarter and six months ended June 30, 1996 compared to the same periods last year. Environmental Matters - --------------------- The Company is subject to increasingly stringent federal, state, and local laws and regulations relating to improving or maintaining the quality of the environment. These laws and regulations require the Company to remove or remedy the effect on the environment of the disposal or release of specified substances at ongoing and former operating sites, including Environmental Protection Agency Superfund sites. Details regarding these matters, including financial information, are presented in the Environmental Matters section on pages 9 and 10 of this Report. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- Liquidity - --------- For the twelve months ended June 30, 1996, the Company's ratio of earnings to fixed charges and ratio of earnings to combined fixed charges and preferred and preference dividend requirements were 3.62 and 2.79, respectively. Capital Requirements - -------------------- The Company's capital requirements reflect the capital-intensive nature of the utility business. Actual capital requirements for the six months ended June 30, 1996, along with estimated annual amounts for the years 1996 through 1998, are reflected below. 24 Six Months Ended June 30 Calendar Year Estimate 1996 1996 1997 1998 ---- ---- ---- ---- (In millions) Utility Business: - ----------------- Construction expenditures (excluding AFC) Electric $ 97 $ 229 $211 $212 Gas 34 71 75 67 Common 27 40 49 46 -- -- -- -- Total construction expenditures 158 340 335 325 AFC 6 10 10 10 Nuclear fuel (uranium purchases and processing charges) 15 50 45 44 Deferred energy conservation expenditures 15 34 25 27 Retirement of long-term debt and redemption of preferred and preference stock 102 173 165 127 --- --- --- --- Total utility business 296 607 580 533 --- --- --- --- Diversified Businesses: - ----------------------- Retirement of long-term debt 11 54 137 147 Investment requirements 35 101 71 82 -- --- -- -- Total diversified businesses 46 155 208 229 -- --- --- --- Total $342 $ 762 $788 $762 ==== ===== ==== ==== BGE Utility Capital Requirements - -------------------------------- BGE's construction program is subject to continuous review and modification, and actual expenditures may vary from the estimates above. Electric construction expenditures include the installation of the second of two 5,000 kilowatt diesel generators at Calvert Cliffs Nuclear Power Plant which was placed in service during June 1996 and improvements in BGE's existing generating plants and its transmission and distribution facilities. Future electric construction expenditures do not include additional generating units. During the twelve months ended June 30, 1996, the internal generation of cash from utility operations provided 107% of the funds required for BGE's capital requirements exclusive of retirements and redemptions of debt and preference stock. During the three-year period 1996 through 1998, the Company expects to provide through utility operations 115% of the funds required for BGE's capital requirements, exclusive of retirements and redemptions. Utility capital requirements not met through the internal generation of cash are met through the issuance of debt and equity securities. The amount and timing of issuances and redemptions depends upon market conditions and BGE's actual capital requirements. From January 1, 1996 through the date of this Report, BGE's issuances of long-term debt and common equity were $125 million and $1 million, respectively. During the same 25 period, BGE redeemed, or announced the redemption of, $72 million principal amount of debt and $87 million par value of preferred and preference stock outstanding. All outstanding preferred stock was redeemed as described on page 6 under the heading "BGE Financing Activity". At the date of this Report, BGE's securities ratings are as follows: Standard Moody's & Poors Investors Duff & Phelps Rating Group Service Credit Rating Co. ------------ ------- ----------------- Senior Secured Debt A+ A1 AA- (First Mortgage Bonds) Unsecured Debt A A2 A+ Preference Stock A "a2" A The Constellation Companies' capital requirements are discussed below in the section titled "Diversified Businesses Capital Requirements - Debt and Liquidity." The Constellation Companies are exploring expansion of their energy, real estate service, and senior living facility businesses. Expansion may be achieved in a variety of ways, including without limitation increased investment activity and acquisitions. The Constellation Companies plan to meet their capital requirements with a combination of debt and internal generation of cash from their operations. Additionally, from time to time, BGE may make loans to Constellation Holdings, Inc., or contribute equity to enhance the capital structure of Constellation Holdings, Inc. Historically, Constellation's energy projects have been in the United States. Over the last year, Constellation has pursued energy projects in Latin America. As of June 30, 1996, one of the Constellation Companies had invested about $17.5 million and committed another $6.4 million in power projects in Latin America. Constellation's future energy business expansion may include domestic and international projects. Diversified Businesses Capital Requirements - ------------------------------------------- Debt and Liquidity - ------------------ The Constellation Companies intend to meet capital requirements by refinancing debt as it comes due and through internally generated cash. These internal sources include cash that may be generated from operations, sale of assets, and cash generated by tax benefits earned by the Constellation Companies. In the event the Constellation Companies can obtain reasonable value for real estate properties, additional cash may become available through the sale of projects (for additional information see the discussion of the real estate business and market on pages 23 and 24 under the heading "Diversified 26 Businesses Earnings"). The ability of the Constellation Companies to sell or liquidate assets described above will depend on market conditions, and no assurances can be given that such sales or liquidations can be made. Also, to provide additional liquidity to meet interim financial needs, CHI has a $75 million revolving credit agreement of which $10 million was outstanding at the date of this Report. Investment Requirements - ----------------------- The investment requirements of the Constellation Companies include its portion of equity funding to committed projects under development, as well as net loans made to project partnerships. Investment requirements for the years 1996 through 1998 reflect the Constellation Companies' estimate of funding for ongoing and anticipated projects and are subject to continuous review and modification. Actual investment requirements may vary significantly from the estimates on page 25 because of the type and number of projects selected for development, the impact of market conditions on those projects, the ability to obtain financing, and the availability of internally generated cash. The Constellation Companies have met their investment requirements in the past through the internal generation of cash and through borrowings from institutional lenders. 27 PART II. OTHER INFORMATION -------------------------- ITEM 1. Legal Proceedings - -------------------------- Asbestos - -------- Since 1993, BGE has been served in several actions concerning asbestos. The actions are collectively titled In re Baltimore City Personal Injuries Asbestos Cases in the Circuit Court for Baltimore City, Maryland. The actions are based upon the theory of "premises liability," alleging that BGE knew of and exposed individuals to an asbestos hazard. The actions relate to two types of claims. The first type, direct claims by individuals exposed to asbestos, were described in a Report on Form 8-K filed August 20, 1993. BGE and approximately 70 other defendants are involved. Approximately 516 non-employee plaintiffs each claim $6 million in damages ($2 million compensatory and $4 million punitive). BGE does not know the specific facts necessary for BGE to assess its potential liability for these type claims, such as the identity of the BGE facilities at which the plaintiffs allegedly worked as contractors, the names of the plaintiffs' employers, and the date on which the exposure allegedly occurred. The second type are claims by one manufacturer - Pittsburgh Corning Corp. - against BGE and approximately eight others, as third-party defendants. These claims relate to approximately 1,500 individual plaintiffs. BGE does not know the specific facts necessary for BGE to assess its potential liability for these type claims, such as the identity of BGE facilities containing asbestos manufactured by the manufacturer, the relationship (if any) of each of the individual plaintiffs to BGE, the settlement amounts for any individual plaintiffs who are shown to have had a relationship to BGE, and the dates on which/places at which the exposure allegedly occurred. Until the relevant facts for both type claims are determined, BGE is unable to estimate what its liability, if any, might be. Although insurance and hold harmless agreements from contractors who employed the plaintiffs may cover a portion of any ultimate awards in the actions, BGE's potential liability could be material. Environmental Matters - --------------------- The Company's potential environmental liabilities and pending environmental actions are listed in Item 1. Business Environmental Matters of the Form 10-K. 28 PART II. OTHER INFORMATION (Continued) -------------------------------------- ITEM 4. Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------ On April 23, 1996, BGE held its annual meeting of shareholders. At that meeting, the following matters were voted upon: 1. All of the Directors nominated by BGE were selected as follows: COMMON SHARES CAST: ------------------- For Against Abstain --- ------- ------- H. Furlong Baldwin 117,922,276 1,666,403 1,920,304 Beverly B. Byron 118,935,404 653,274 1,920,304 J. Owen Cole 119,013,587 575,091 1,920,304 Dan A. Colussy 119,269,742 318,937 1,920,304 Edward A. Crooke 119,044,212 544,466 1,920,304 James R. Curtiss 119,082,342 506,337 1,920,304 Jerome W. Geckle 119,106,791 481,887 1,920,304 Martin L. Grass 113,244,519 6,344,160 1,920,304 Freeman A. Hrabowski 118,922,415 666,263 1,920,304 Nancy Lampton 119,249,626 339,052 1,920,304 George V. McGowan 118,931,006 657,672 1,920,304 Christian H. Poindexter 118,527,115 1,061,563 1,920,304 George L. Russell, Jr. 117,639,936 1,948,743 1,920,304 Michael D. Sullivan 118,677,449 911,229 1,920,304 2. Coopers & Lybrand, L.L.P. was reelected as independent accountants, and with respect to holders of common stock, the number of affirmative votes cast were 119,603,070. The number of negative votes cast were 1,195,725, and the number of abstentions were 1,229,082. 3. The shareholder proposal requesting that the Board of Directors refrain from providing retirement benefits to non- employee directors, unless the benefits are submitted for shareholder approval, was defeated. With respect to holders of common stock, the number of affirmative votes cast for the proposal was 43,028,042, the number of negative votes cast for the proposal was 57,056,382 and the number of abstentions was 4,767,559. 29 PART II. OTHER INFORMATION (Continued) -------------------------------------- ITEM 6. Exhibits and Reports on Form 8-K - ---------------------------------------- (a) Exhibit No. 2* Registration Statement on Form S-4 of Constellation Energy Corporation, as amended, which became effective February 9, 1996, Registration No 33-64799 Exhibit No. 4 Supplemental Indenture between Baltimore Gas and Electric Company and Bankers Trust Company, as Trustee, dated as of June 15, 1996. Exhibit No. 10(a) Baltimore Gas and Electric Company Nonqualified Deferred Compensation Plan which became effective June 1, 1996. Exhibit No. 10(b) Grantor Trust Agreement dated as of June 1, 1996 between Baltimore Gas and Electric Company and T. Rowe Price Trust Company. Exhibit No. 12 Computation of Ratio of Earnings to Fixed Charges and Computation of Ratio of Earnings to Combined Fixed Charges and Preferred and Preference Dividend Requirements. Exhibit No. 27 Financial Data Schedule. *Incorporated by Reference. (b) Form 8-K None SIGNATURE --------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BALTIMORE GAS AND ELECTRIC COMPANY ---------------------------------- (Registrant) Date August 13, 1996 /s/ C.W. Shivery --------------- ---------------- C. W. Shivery, Vice President on behalf of the Registrant and as Principal Financial Officer 30 EXHIBIT INDEX Exhibit Number 2* Registration Statement on Form S-4 of Constellation Energy Corporation, as amended, which became effective February 9, 1996, Registration No. 33-64799. 4 Supplemental Indenture between Baltimore Gas and Electric Company and Bankers Trust Company, as Trustee, dated as of June 15, 1996. 10(a) Baltimore Gas and Electric Company Nonqualified Deferred Compensation Plan which became effective June 1, 1996. 10(b) Grantor Trust Agreement dated as of June 1, 1996 between Baltimore Gas and Electric Company and T. Rowe Price Trust Company. 12 Computation of Ratio of Earnings to Fixed Charges and Computation of Ratio of Earnings to Combined Fixed Charges and Preferred and Preference Dividend Requirements. 27 Financial Data Schedule. *Incorporated by Reference. 31 EX-4 2 SUPPLEMENTAL INDENTURE EXHIBIT 4 Counterpart No. 29 of 40 ============================================================ BALTIMORE GAS AND ELECTRIC COMPANY TO BANKERS TRUST COMPANY, Trustee --------------- SUPPLEMENTAL INDENTURE Supplementing Deed of Trust dated February 1, 1919 as subsequently supplemented, amended and restated --------------- TO SECURE $125,000,000 Remarketed Floating Rate Series due September 1, 2006 First Refunding Mortgage Bonds ============================================================ SUPPLEMENTAL INDENTURE, made as of the fifteenth day of June in the year nineteen hundred and ninety-six, for convenience of reference, and effective from the time of execution and delivery hereof, by and between BALTIMORE GAS AND ELECTRIC COMPANY (name changed from CONSOLIDATED GAS ELECTRIC LIGHT AND POWER COMPANY OF BALTIMORE on April 4, 1955), a corporation duly created and organized under the law of the State of Maryland, hereinafter called the "Company," party of the first part, and BANKERS TRUST COMPANY, a corporation duly created and organized under the law of the State of New York, having its principal office and place of business at Four Albany Street, Borough of Manhattan, The City of New York, hereinafter called the "Trustee," party of the second part. WHEREAS, The Company heretofore duly executed, acknowledged and delivered to the Trustee an indenture of mortgage or deed of trust dated February 1, 1919 (which as subsequently amended, supplemented and/or restated is hereinafter called the "Refunding Mortgage") which Refunding Mortgage is hereby referred to and made a part hereof as fully as if herein recited at length, and the several corporations, mortgages or deeds of trust, indentures, bonds, notes, securities and stocks referred to in the Refunding Mortgage are, when hereinafter referred to, sometimes referred to by the short names by which they are referred to in the Refunding Mortgage, and the several words, terms and expressions particularly defined or construed in the Refunding Mortgage, in Section 4 or Section 5 of Article XI thereof or elsewhere, when used in this supplemental indenture are used as so defined or construed in the Refunding Mortgage; and WHEREAS, By the Refunding Mortgage it is among other things provided, in Section 9 of Article III thereof, that from time to time the Company, when authorized by a resolution of its Board of Directors, and the Trustee may, subject to the provisions of the Refunding Mortgage, execute, acknowledge and deliver indentures supplemental thereto, which thereafter shall form a part thereof, for the purpose (among others) of conveying, assuring or confirming to, or vesting in, the Trustee additional property now owned or hereafter acquired pursuant to Section 7 of Article I or Section 2 of Article III of the Refunding Mortgage, adding to the covenants of the Company in the Refunding Mortgage for the protection of the holders of the Securities, making provisions for the redemption before maturity of any bonds thereafter to be issued thereunder, or making such provision, not inconsistent with the Refunding Mortgage, as may be necessary or desirable with respect to matters or questions arising thereunder; and WHEREAS, The Company has determined to issue additional bonds under and pursuant to the provisions of the Refunding Mortgage and has determined to execute, acknowledge and deliver this indenture, supplemental to the Refunding Mortgage and hereafter to form a part thereof, for the purpose of conveying, 1 assuring or confirming to, or vesting in, the Trustee additional property now owned or hereafter acquired pursuant to Section 7 of Article I or Section 2 of Article III of the Refunding Mortgage, adding to the covenants of the Company in the Refunding Mortgage for the protection of the holders of the Securities, making provisions for the redemption before maturity of bonds hereafter to be issued under the Refunding Mortgage, and making such other provision, not inconsistent with the Refunding Mortgage, as may be necessary or desirable with respect to matters or questions arising thereunder, and the Company and the Trustee are willing so to execute, acknowledge and deliver this supplemental indenture for the purposes aforesaid; and WHEREAS, Resolutions of the Board of Directors of the Company authorizing the execution, acknowledgment and delivery of this supplemental indenture and the issuance, certification and delivery of First Refunding Mortgage Bonds under and pursuant to the provisions of the Refunding Mortgage, as so supplemented by this supplemental indenture, were duly adopted. NOW, THEREFORE, THIS SUPPLEMENTAL INDENTURE WITNESSETH: That, in order to secure the payment of the principal of and interest on all such bonds at any time issued and outstanding under the Refunding Mortgage, according to their tenor and effect, and to secure the performance of all the covenants and conditions contained in the Refunding Mortgage as supplemented by this supplemental indenture, and to declare the terms and conditions upon which said bonds are issued, or to be issued, and secured under the Refunding Mortgage, Baltimore Gas and Electric Company, the party of the first part, in consideration of the premises and of the purchase of such bonds by the holders thereof, and of the sum of one dollar, lawful money of the United States of America, to it duly paid by the Trustee at or before the ensealing and delivery of these presents, the receipt whereof is hereby acknowledged, has executed and delivered these presents and hereby ratifies, approves and confirms the Refunding Mortgage in all respects as fully as if all the terms, provisions, covenants and conditions thereof were herein again set forth at length, as supplemented hereby, and has granted, bargained, sold, released, conveyed, assigned, transferred, mortgaged, pledged, set over and confirmed, and granted a security interest therein, and by these presents does grant, bargain, sell, release, convey, assign, transfer, mortgage, pledge, set over and confirm, and grant a security interest therein unto Bankers Trust Company, party of the second part, and unto its successors and assigns forever, all and singular the premises, property and franchises of the Company other than as excepted in the Refunding Mortgage, now owned or hereafter acquired in Maryland or Pennsylvania. TOGETHER with all the rights, privileges and appurtenances to any of said premises, property and franchises belonging or in anywise appertaining, and the reversion and reversions, remainder and remainders, rents, issues, income and profits thereof, and all the estate, right, title and interest which the Company now 2 has or may hereafter acquire therein or thereto or in or to any part thereof. TO HAVE AND TO HOLD, All and singular the said premises, property and franchises, appurtenances, rents, issues, income and profits hereby conveyed, transferred, assigned and confirmed, or intended so to be, unto the Trustee, its successors and assigns, forever. IN TRUST, NEVERTHELESS, For the equal and proportionate benefit and security of all holders of the bonds and interest obligations issued or to be issued under the Refunding Mortgage, and for the enforcement of the payment of said bonds and interest obligations when payable and the performance of and compliance with the covenants and conditions of the Refunding Mortgage as supplemented by this supplemental indenture, without preference, priority or distinction, as to lien or otherwise of any series of bonds over any other series of bonds, or of any one bond over any other bonds, by reason of priority in the issue or negotiation thereof or otherwise, so that each and every bond issued or to be issued under the Refunding Mortgage or secured thereby shall have the same right, lien and privilege under the Refunding Mortgage as supplemented by this supplemental indenture, and so that the principal and interest of every such bond, subject to the terms of the Refunding Mortgage as so supplemented, be equally and proportionately secured thereby as if all had been duly made, executed, delivered, sold and negotiated simultaneously with the execution and delivery of the Refunding Mortgage, it being intended that the lien and security of the Refunding Mortgage shall take effect from the date of the execution and delivery thereof without regard to the time of such actual issue, sale or disposition of said bonds, and as though upon said date all of said bonds had been actually issued, sold and delivered to, and were in the hands of, holders thereof for value. AND IT IS HEREBY FURTHER COVENANTED AND DECLARED, That all such bonds are issued and certified and delivered, or to be issued and certified and delivered, and the mortgaged premises and property are to be held by the Trustee, subject to the further covenants, conditions, uses and trusts in the Refunding Mortgage, as supplemented by this supplemental indenture, set forth, and it is agreed and covenanted by the Company with the Trustee and the respective holders from time to time of bonds issued under the Refunding Mortgage as follows, viz: 1. As supplemented hereby, each and all of the terms, provisions, covenants, conditions, uses and trusts set forth in that portion of the Refunding Mortgage beginning with and including the words "Article I. Issue and Appropriation of Bonds," and continuing to the end of the Refunding Mortgage, are hereby expressly ratified, approved and confirmed, as fully and with the same force and effect as if the same were herein again set forth at length, provided, however, that no provision of this Supplemental Indenture is intended to reinstate any provisions in 3 the Refunding Mortgage which were amended and superseded by the amendments to the Trust Indenture Act of 1939 effective as of November 15, 1990. 2. One series of bonds to be issued under and secured by the Refunding Mortgage shall be designated as Remarketed Floating Rate Series due September 1, 2006, First Refunding Mortgage Bonds (hereinafter called "bonds of the Designated Series" or "Remarketed New Bonds"). Bonds of the Designated Series shall be issued only as registered bonds in denominations of one thousand dollars and multiples thereof. Bonds of the Designated Series may be exchanged for a like aggregate principal amount of bonds of the Designated Series of other denominations. Each bond of the Designated Series shall be dated the date of its authentication, shall mature September 1, 2006, shall be payable as to principal and interest in lawful money of the United States of America which shall be legal tender at the time such payment becomes due, at the principal office of Bankers Trust Company (or its successor in trust), in the Borough of Manhattan, in The City of New York, or at such other institutions as designated by the Company, provided, however, that each installment of interest may be paid by mailing checks, or by wire transfers, for such interest payable to the order of the person entitled thereto to the registered address of such person as it appears on the books of the Company. Interest on the Remarketed New Bonds shall accrue from and include June 24, 1996 (the "Issue Date"), and shall initially be payable quarterly in arrears beginning September 3, 1996, and on December 1, 1996, March 1, 1997, June 1, 1997, and September 1, 1997. The initial interest period will be from and include the Issue Date to but excluding September 1, 1997 (the "Initial Interest Period"). The interest rate on the Remarketed New Bonds during the Initial Interest Period will be: (i) a fixed rate established on June 24, 1996 for the period from and including June 24, 1996, to but excluding September 3, 1996, equal to LIBOR determined in accordance with the following formula: a + ((x/y)*(b-a)) where: a = LIBOR with an Index Maturity of 2 months b = LIBOR with an Index Maturity of 3 months x = the actual number of days from and including June 24, 1996 to but excluding September 3, 1996 minus 60 days y = thirty days and (ii) from September 3, 1996, to but excluding September 1, 1997, the interest rate will reset quarterly on September 3, 1996, December 1, 1996, March 1, 1997 and June 1, 1997 based on LIBOR with an Index Maturity of 3 months as described below. For each Interest Period thereafter (which is the annual period from and including September 1 to but excluding the following September 1 in each year following the Initial Interest Period), the remarketing agent will reset the Base Rate (which will be 4 either LIBOR or the Federal Funds Rate), the Spread, the Interest Reset Dates, Index Maturity (each as defined herein), and the interest payment dates for such Remarketed New Bonds all in accordance with the Remarketing Procedures described herein. Each Remarketed New Bond will bear interest from its Issue Date, pursuant to the interest rate formula determined in accordance with the Remarketing Procedures, until the principal thereof is paid or duly made available for payment. Interest payments on Remarketed New Bonds will equal the amount of interest accrued from and including the immediately preceding interest payment date in respect of which interest has been paid or duly made available for payment (from and including the Issue Date, if no interest has been paid or duly made available for payment) to but excluding the applicable interest payment date or the Maturity Date, as the case may be. Each Remarketed New Bond will bear interest at the rate determined by reference to the applicable Base Rate plus or minus the applicable Spread. The "Spread" is the number of basis points to be added to or subtracted from the related Base Rate applicable to such Remarketed New Bond. The "Index Maturity" is the period to maturity of the instrument or obligation with respect to which the related Base Rate will be calculated. The interest rate with respect to each Base Rate will be determined in accordance with the applicable provisions below. The interest rate in effect on each day shall be (i) if such day is an Interest Reset Date (as defined herein), the interest rate determined as of the Interest Determination Date (as defined herein) immediately preceding such Interest Reset Date or (ii) if such day is not an Interest Reset Date, the interest rate determined as of the Interest Determination Date immediately preceding the most recent Interest Reset Date. Interest on Remarketed New Bonds will be determined by reference to the applicable Base Rate, which will, as described below, be either (i) the Federal Funds Rate, or (ii) LIBOR. As specified in the Remarketing Procedures described herein, the remarketing agent will specify whether the rate of interest for a subsequent Interest Period will be reset daily, weekly, monthly, quarterly, semi-annually or annually on a date set by the remarketing agent (each, an "Interest Reset Date"). If any Interest Reset Date for any Remarketed New Bond would otherwise be a day that is not a business day, such Interest Reset Date will be postponed to the next succeeding business day, except that in the case of a Remarketed New Bond as to which LIBOR is the Base Rate and such business day falls in the next succeeding calendar month, such Interest Reset Date will be the immediately preceding business day. The interest rate applicable to each Interest Reset Date will be the rate determined as of the applicable Interest Determination Date on or prior to the Calculation Date (as hereinafter defined). Unless otherwise specified by the 5 remarketing agent during the Base Rate and Spread Adjustment Period (as hereinafter defined), the "Interest Determination Date" with respect to the Federal Funds Rate will be the business day immediately preceding the applicable Interest Reset Date; and the "Interest Determination Date" with respect to LIBOR will be the second London business day immediately preceding the applicable Interest Reset Date. The interest rate on the Remarketed New Bonds will in no event be higher than the maximum rate permitted by applicable law. The interest payment date for the applicable Interest Period will be specified in accordance with the Remarketing Procedures. If any interest payment date other than the Maturity Date for any Remarketed New Bond would otherwise be a day that is not a business day, such interest payment date will be postponed to the next succeeding business day, except that in the case of a Remarketed New Bond as to which LIBOR is an applicable Base Rate and such business day falls in the next succeeding calendar month, such interest payment date will be the immediately preceding business day. If the Maturity Date of a Remarketed New Bond falls on a day that is not a business day, the required payment of principal, premium, if any, and interest will be made on the next succeeding business day as if made on the date such payment was due, and no interest will accrue on such payment for the period from and after the Maturity Date to the date of such payment on the next succeeding business day. All percentages resulting from any calculation on Remarketed New Bonds will be rounded to the nearest one hundred-thousandth of a percentage point, with five-one millionths of a percentage point rounded upwards (e.g., 9.876545% (or .09876545) would be rounded to 9.87655% (or .0987655)), and all amounts used in or resulting from such calculation on Remarketed New Bonds will be rounded to the nearest cent. With respect to each Remarketed New Bond, accrued interest is calculated by multiplying its principal amount by an accrued interest factor. Such accrued interest factor is computed by adding the interest factor calculated for each day in the applicable Interest Payment Period. The interest factor for each such day will be computed by dividing the interest rate applicable to such day by 360. Bankers Trust Company has been appointed the "Calculation Agent. " Upon request of the holder of any Remarketed New Bond, the Calculation Agent will disclose the interest rate then in effect and, if determined, the interest rate that will become effective as a result of a determination made for the next succeeding Interest Reset Date with respect to such Remarketed New Bond. The "Calculation Date, " if applicable, pertaining to any Interest Determination Date will be the earlier of (i) the tenth calendar day after such Interest Determination Date, or, if 6 such day is not a business day, the next succeeding business day or (ii) the business day immediately preceding the applicable interest payment date or the Maturity Date, as the case may be. Each Base Rate shall be calculated in accordance with the following provisions: Federal Funds Rate. "Federal Funds Rate" means, with respect to any Interest Determination Date relating to a Remarketed New Bond for which the interest rate is determined with reference to the Federal Funds Rate (a "Federal Funds Rate Interest Determination Date"), the rate on such date for United States dollar federal funds as published in H.15(519) under the heading "Federal Funds (Effective)" or, if not published by 3:00 p.m., New York time, on the related Calculation Date, the rate on such Federal Funds Rate Interest Determination Date as published in Composite Quotations under the heading "Federal Funds/Effective Rate." If such rate is not published in either H.15(519) or Composite Quotations by 3:00 p.m., New York City time, on the related Calculation Date, then the Federal Funds Rate on such Federal Funds Rate Interest Determination Date will be calculated by the Calculation Agent and will be the arithmetic mean of the rates for the last transaction in overnight United States dollar federal funds arranged by three leading brokers of federal funds transactions in The City of New York (which may include the Calculation Agent or its affiliates) selected by the Calculation Agent prior to 9:00 a.m., New York City time, on such Federal Funds Rate Interest Determination Date; provided, however, that if the brokers so selected by the Calculation Agent are not quoting as mentioned in this sentence, the Federal Funds Rate determined as of such Federal Funds Rate Interest Determination Date will be the Federal Funds Rate in effect on such Federal Funds Rate Interest Determination Date. LIBOR. "LIBOR" means the rate determined in accordance with the following provisions: (i) With respect to any Interest Determination Date relating to a Remarketed New Bond for which the interest rate is determined with reference to LIBOR (a "LIBOR Interest Determination Date"), LIBOR will be the rate for deposits in U.S. dollars having the applicable Index Maturity, commencing on such Interest Reset Date, that appears on the Telerate Page 3750 as of 11:00 a.m., London time, on such LIBOR Interest Determination Date. If no such rate appears, as applicable, LIBOR on such LIBOR Interest Determination Date will be determined in accordance with the provisions described in clause (ii) below. (ii) With respect to a LIBOR Interest Determination Date on which no rate appears on Telerate Page 3750 as specified in clause (i) above, the Calculation Agent will request the principal London offices of each of four major reference banks in the London interbank market, as selected by the Calculation Agent, to provide the Calculation Agent with its offered 7 quotation for deposits in U.S. dollars for the period of the applicable Index Maturity, commencing on the applicable Interest Reset Date, to prime banks in the London interbank market at approximately 11:00 a.m., London time, on such LIBOR Interest Determination Date and in a principal amount that is representative for a single transaction in such market at such time. If at least two such quotations are so provided, then LIBOR on such LIBOR Interest Determination Date will be the arithmetic mean of such quotations. If fewer than two such quotations are so provided, then LIBOR on such LIBOR Interest Determination Date will be the arithmetic mean of the rates quoted at approximately 11:00 a.m., in The City of New York, on such LIBOR Interest Determination Date by three major banks selected by the Calculation Agent for loans in U.S. dollars to leading European banks, having the applicable Index Maturity and in a principal amount that is representative for a single transaction in such market at such time; provided, however, that if the banks so selected by the Calculation Agent are not quoting as mentioned in this sentence, LIBOR determined as of such LIBOR Interest Determination Date will be LIBOR in effect on such LIBOR Interest Determination Date. "Telerate Page 3750" means the display on the Dow Jones Telerate Service designated as Page 3750 (or any successor service) for the purpose of displaying the London interbank rates of major banks for U.S. dollar deposits. REMARKETING PROVISIONS The Remarketed New Bonds will be remarketed annually until maturity or redemption on September 1 of each year beginning September 1, 1997 (the "Annual Remarketing Date") in accordance with the following remarketing procedures (the "Remarketing Procedures"). Each remarketing will take place over a 45-day period consisting of a Base Rate and Spread Adjustment Period (30-45 calendar days prior to each Annual Remarketing Date), Tender Period (15-30 calendar days prior to each Annual Remarketing Date) and a Remarketing Period (10-15 calendar days prior to each Annual Remarketing Date). Base Rate And Spread Adjustment Period -------------------------------------- During the Base Rate and Spread Adjustment Period, the remarketing agent, will, after canvassing the market and considering prevailing market conditions, establish the Base Rate and Spread (the "Applicable Interest Rate") and the reset and payment frequency for the subsequent Interest Period. By 10:00 a.m. on the 30th day prior to the Annual Remarketing Date (or if such day is not a business day in The City of New York and the City of Baltimore, the business day immediately preceding such day), the remarketing agent shall deliver to the Trustee and the Company an officer's certificate establishing the Applicable Interest Rate, interest payment dates, Interest Reset Dates and other relevant terms for such subsequent Interest Period. If the remarketing agent fails to deliver timely such officer's 8 certificate, the Applicable Interest Rate in effect for the subsequent Interest Period will be that in effect during the immediately preceding Interest Period. Tender Period ------------- During the Tender Period, the recordholder of such Remarketed New Bonds must notify the remarketing agent of its election either (i) to tender some or all of the principal amount thereof or (ii) to hold some or all of the principal amount of such Remarketed New Bonds for the next Interest Period, provided that such election may be made only with respect to a principal amount of $1,000 or a greater integral multiple thereof. Recordholders who fail to elect to tender some or all of the principal amount of their Remarketed New Bonds or fail to elect to hold such principal amount for a new Interest Period shall, if a remarketing has occurred, be deemed to have elected to continue to hold all of such untendered principal amount for the succeeding Interest Period and the interest rate thereon will automatically be reset to the new Applicable Interest Rate. ANY NOTICE GIVEN TO THE REMARKETING AGENT TO TENDER OR HOLD REMARKETED NEW BONDS IS IRREVOCABLE. Remarketing Period ------------------ During the Remarketing Period, the remarketing agent will attempt, on a best efforts basis, to remarket the tendered Remarketed New Bonds at a price of 100% of the aggregate principal amount so tendered. There is no assurance that the remarketing agent will be able to remarket the entire principal amount of Remarketed New Bonds tendered in a remarketing. In the event that the remarketing agent is unable to remarket some or all of the tendered Remarketed New Bonds and opts not to purchase the tendered Remarketed New Bonds, the Company will unconditionally repurchase and retire the remaining unsold tendered Remarketed New Bonds at a price of 100% of the principal amount, plus accrued interest, if any, to the Annual Remarketing Date. The interest payable on any interest payment date shall be paid to the persons in whose names bonds of the Designated Series were registered at the close of business on the record date (as defined below) for such payment of interest notwithstanding any cancellation of bonds of the Designated Series on any transfer or exchange thereof between such record date and such interest payment date; except that if the Company shall default in the payment of any interest due on such interest payment date such defaulted interest shall be paid to the persons in whose names bonds of the Designated Series are registered either at the close of business on the subsequent record date fixed for payment of such defaulted interest, or (if no such subsequent record date shall have been fixed) at the close of business on the day preceding the date of payment of such defaulted interest. A subsequent record date for payment of defaulted interest may be 9 established by or on behalf of the Company by notice to holders of bonds of the Designated Series not less than ten days preceding such record date, which record date shall be not more than thirty days prior to the subsequent interest payment date. The term "record date" as used herein shall mean, with respect to any interest payment date, the close of business on the fifteenth day of the calendar month next preceding such interest payment date. The bonds may also be represented by a permanent global bond or bonds, registered in the name of The Depository Trust Company, as depositary (the "Depositary"), or a nominee of the Depositary (each such bond represented by a permanent global bond being referred to herein as a "Book-Entry Bond"). Beneficial interests in Book-Entry Bonds will only be evidenced by, and transfers thereof will only be effected through, records maintained by the Depositary's participants. The Company shall not be required to make transfers or exchanges of bonds of the Designated Series during a period of fifteen days preceding the mailing of notice of a partial redemption of bonds of such Series, or to transfer or exchange bonds of the Designated Series, or the portion thereof, which shall have been designated for redemption. Upon thirty days' notice in the manner set forth in Article X, Section 2 of the Refunding Mortgage, bonds of the Designated Series shall be redeemable prior to maturity, as a whole, or in part, at the option of the Company, on any Annual Remarketing Date at 100% of principal amount, if redeemed otherwise than by operation of the sinking fund, and, at any time after July 31, 1999, by operation of the sinking fund provided for by Article X, Section 3 of the Refunding Mortgage, at 100% of principal amount, together, in each case, with accrued interest to the date of redemption. 3. The recitals of fact contained herein, in the Refunding Mortgage as hereby supplemented, and in the bonds (other than the certificate of authentication of the Trustee on the bonds), shall be taken as the statements of the Company, and the Trustee assumes no responsibility for the correctness of the same. The Trustee makes no representations to the value of the mortgaged property or any part thereof, or as to the title of the Company thereto, or as to the value or validity of the security afforded thereby and by the Refunding Mortgage, or as to the value or validity of any securities at any time held under the Refunding Mortgage, or as to the validity of this supplemental indenture or the Refunding Mortgage or of the bonds issued thereunder, and the Trustee shall incur no responsibility, except as otherwise provided in the Refunding Mortgage, in respect of such matters. 4. If and to the extent that any provision of this supplemental indenture limits, qualifies, or conflicts with another provision of the Refunding Mortgage required to be included therein by any of Sections 310 to 317, inclusive, of the Trust Indenture Act of 1939, as amended, such required provision shall control; provided, however that nothing in this supplemental indenture contained shall be so construed as to relieve the Company or the Trustee of any duty or obligation 10 which it would otherwise have to any holder of any bond or bonds heretofore issued under the Refunding Mortgage, or so construed as to grant to the Trustee any rights as against any holder of any bond or bonds heretofore issued under the Refunding Mortgage not granted under said Refunding Mortgage, and no provision in this supplemental indenture contained shall impair any of the rights of any holder of any bond or bonds heretofore issued under the Refunding Mortgage. 5. All the provisions of this supplemental indenture shall become effective immediately. This supplemental indenture and all the provisions thereof shall form a part of the Refunding Mortgage and all references or mention in the Refunding Mortgage to the Refunding Mortgage or to any of the terms, provisions, covenants, conditions, uses or trusts thereof or the recitals or statements therein or to the recording, filing or refiling thereof, shall be applicable to the terms, provisions, covenants, conditions, uses and trusts of, and the recitals and statements in, this supplemental indenture and the Refunding Mortgage as hereby supplemented, and to the recording, filing and refiling thereof, as fully and with the same force and effect as if all the terms, provisions, covenants, conditions, uses and trusts of, and all the recitals and statements in, the Refunding Mortgage were herein again set forth at length and the entire Refunding Mortgage as hereby supplemented were herein set forth at length as one new instrument. 11 IN TESTIMONY WHEREOF, on this seventeenth day of June, 1996, Baltimore Gas and Electric Company has caused these presents to be signed in its corporate name by its President or a Vice President, and its corporate seal to be hereunto affixed, duly attested by its Secretary or an Assistant Secretary; and Bankers Trust Company has also caused these presents to be signed in its corporate name by its President or a Vice President or an Assistant Vice President, and its corporate seal to be hereunto affixed, duly attested by one of its Assistant Secretaries. BALTIMORE GAS AND ELECTRIC COMPANY, /s/ C. W. Shivery By___________________________ Vice President /s/ T. E. Ruszin, Jr. Attest____________________________ (Seal) Assistant Secretary STATE OF MARYLAND: } SS: County of Baltimore: I HEREBY CERTIFY, that on this seventeenth day of June, 1996, before me, the subscriber, a Notary Public of the State of Maryland, in and for the County aforesaid, personally appeared C. W. Shivery, Vice President of Baltimore Gas and Electric Company, and on behalf of the said corporation did acknowledge the foregoing instrument to be the act and deed of Baltimore Gas and Electric Company. IN TESTIMONY WHEREOF, I have hereunto set my hand and Notarial Seal on the day and year aforesaid. /s/ Ann M. Patek ------------------------- Notary Public My Commission expires 1/1/00 [BANKERS TRUST COMPANY signature on next page] 12 BANKERS TRUST COMPANY, /s/ Robert Caporale By__________________________ Vice President /s/ Shafiq Jadavji Attest____________________________ (Seal) Assistant Treasurer STATE OF NEW YORK: } SS: COUNTY OF NEW YORK: I HEREBY CERTIFY, that on this 17th day of June, 1996, before me, the subscriber, a Notary Public of the State of New York, in and for the County of New York aforesaid, personally appeared Robert Caporale, Vice President of Bankers Trust Company, and on behalf of the said corporation did acknowledge the foregoing instrument to be the act and deed of Bankers Trust Company; and at the same time such Vice President, for and on behalf of said corporation, made oath in due form of law that the consideration stated in the foregoing deed of trust is true and bona fide as therein set forth, and also that he is a Vice President and agent of the said Bankers Trust Company, Trustee, grantee in the foregoing instrument and duly authorized to make this affidavit. IN TESTIMONY WHEREOF, I have hereunto set my hand and Notarial Seal on the day and year aforesaid. /s/ Carol Allen ------------------------- Notary Public My Commission expires _____________ CAROL ALLEN Notary Public, State of New York No. 24-492C187 Qualified in Kings County Commission Expires 2-16-98 13 CERTIFICATE OF RESIDENCE Bankers Trust Company, Mortgagee and Trustee within named, hereby certifies that its precise residence is Four Albany Street, in the Borough of Manhattan, in The City of New York, in the State of New York. BANKERS TRUST COMPANY, /s/ Robert Caporale By_________________________ Vice President 14 EX-10 3 (A) NONQUALIFIED DEFERRED COMPENSATION PLAN EXHIBIT 10(a) BALTIMORE GAS AND ELECTRIC COMPANY NONQUALIFIED DEFERRED COMPENSATION PLAN (PLAN) 1. Objective The objective of this Plan is to enable certain management employees of BGE 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. "BGE" means Baltimore Gas and Electric Company, a Maryland corporation, or its successor. "Committee" means the Committee on Management of the Board of Directors of BGE. "Deferred Compensation" means any compensation payable by BGE to a participant that is deferred under the provisions of this Plan. "Employee Savings Plan" means the Baltimore Gas and Electric Company Employee Savings Plan as may be amended from time to time, or any successor plan. "Executive Incentive Plan" means the Executive Incentive Plan of Baltimore Gas and Electric Company 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 Incentive Plan or the Managers' Incentive Plan. "Managers' Incentive Plan" means the Managers' Incentive Plan of Baltimore Gas and Electric Company as may be amended from time to time, or any successor 1 plan, and/or any other incentive plan designated in writing by the Plan Administrator. "Matching Contributions" means the matching contributions described in Section 7. "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 -Management Services, (or the Vice-President succeeding to that function). "Rabbi Trust" means the trust established by BGE pursuant to Grantor Trust Agreement dated as of June 1, 1996 between BGE and T. Rowe Price Trust Company. "Termination From Employment with BGE" means a participant's separation from service with BGE or a subsidiary of BGE; however, a participant's transfer of employment to or from a subsidiary of BGE shall not constitute a Termination From Employment with BGE. 3. Plan Administration. The Vice President - Management Services of BGE, (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 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 BGE or its subsidiaries, or employees of BGE or its subsidiaries who hold manager 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, and 7 of the Plan, which designation will also indicate whether all or part of such participant's Plan Accounts 2 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 Section 5, 6, or 7 of the Plan, 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 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 3 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. Matching Contributions. Matching Contributions are made by BGE 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. 8. 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 (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 Account. 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. 4 Such elections shall be made by notification in the form and manner established by the Plan Administrator from time to time. 9. 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 calendar year of a participant's Termination From Employment with BGE, 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 BGE, (ii) in the year following the year in which a participant attains 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 year of a participant's Termination From Employment with BGE, 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 8. If a participant dies, the entire unpaid balance of his/her Plan Accounts shall be paid to the beneficiary or beneficiaries 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. 5 In the event a participant's deferred Incentive Award is subsequently credited to the Plan, such Incentive Award shall be paid immediately to such beneficiary or beneficiaries. 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. 10. Beneficiaries. A participant shall have the right to designate a beneficiary or beneficiaries who are to receive a distribution pursuant to Section 9 in the event of the death of the participant. Any designation, change or recision of the designation shall be made by notification in the form and manner established by the Plan Administrator 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, provided that no designation, recision or change thereof shall be effective unless received by the Plan Administrator prior to the death of the participant. If the designated beneficiary is the estate, or the executor or administrator of the estate, of the participant, a distribution pursuant to Section 9 may be made to the person(s) or entity (including a trust) entitled thereto under the will of the participant or, in the case of intestacy, under the laws relating to intestacy. Beneficiaries shall have no right to make any investment election or change in investment election pursuant to Section 8 with respect to a participant's Plan Accounts. 11. 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 BGE and the participant. Valuation of a participant's Plan Accounts shall be determined in accordance with the procedures contained in the Employee Savings Plan. 6 12. 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 emergency. An unforeseeable emergency is 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. 13. 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. 7 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 BGE, 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. No amendment to or termination of this Plan shall prejudice the rights of any participant or beneficiary entitled to receive payment hereunder at the time of such action. Participation in this Plan shall not constitute a contract of employment between BGE 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. BGE 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 BGE and no person other than BGE 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 BGE under this Plan, such rights shall be no greater than the right of any unsecured general creditor of BGE. This Plan shall be governed in all respects by Maryland law. 8 EX-10 4 (B) GRANTOR TRUST AGREEMENT EXHIBIT 10(b) GRANTOR TRUST AGREEMENT DATED AS OF JUNE 1,1996 BETWEEN BALTIMORE GAS AND ELECTRIC COMPANY AND T. ROWE PRICE TRUST COMPANY This Agreement made this 5th day of June, 1996, by and between Baltimore Gas and Electric Company, a Maryland Corporation, or its successor ("BGE") and T. Rowe Price Trust Company ("Trustee"); WITNESSETH THAT: WHEREAS, BGE has adopted the Baltimore Gas and Electric Company Nonqualified Deferred Compensation Plan ("Plan"); and WHEREAS, BGE has incurred or expects to incur liability under the terms of such Plan with respect to the individuals participating in such Plan; WHEREAS, BGE wishes to establish a trust ("Trust") and to contribute to the Trust assets that shall be held therein, subject to the claims of BGE's creditors in the event of BGE's Insolvency, as defined in Section 3(a) hereof, until paid to Plan participants and their beneficiaries in such manner and at such times as specified in the Plan; WHEREAS, it is the intention of the parties that this Trust shall constitute an unfunded arrangement and shall not affect the status of the Plan as an unfunded plan maintained for the purpose of providing deferred compensation for a select group of management or highly compensated employees for purposes of Title I of the Employee Retirement Income Security Act of 1974; WHEREAS, it is the intention of BGE to make contributions to the Trust to provide a source of funds to assist it in the meeting of its liabilities under the Plan; NOW, THEREFORE, the parties do hereby establish the Trust and agree that the Trust shall be comprised, held and disposed of as follows: Section 1. Establishment of Trust. ----------------------- (a) BGE hereby establishes with Trustee the Trust consisting of such sums of cash (the "principal") as from time to time shall be paid to Trustee to be held, administered, and disposed of by Trustee as provided in this Trust Agreement. The principal of the Trust and any earnings thereon (the "Trust assets") shall be held by Trustee and shall be dealt with in accordance with the provisions of this Trust Agreement until all payments required by this Trust Agreement have been made. (b) The Trust hereby established shall be irrevocable. 1 (c) The Trust is intended to be a grantor trust, of which BGE is the grantor, within the meaning of subpart E, part I, subchapter J, chapter 1, subtitle A of the Internal Revenue Code of 1986, as amended, and shall be construed accordingly. (d) The Trust assets shall be held separate and apart from other funds of BGE and shall be used exclusively for the uses and purposes of Plan participants and general creditors as herein set forth. Plan participants and their beneficiaries shall have no preferred claim on, or any beneficial ownership interest in, any Trust assets. Any rights created under the Plan and this Trust Agreement shall be mere unsecured contractual rights of Plan participants and their beneficiaries against BGE. Any Trust assets will be subject to the claims of BGE's general creditors under federal and state law in the event of Insolvency, as defined in Section 3(a) herein. (e) By June 5, 1996, BGE shall irrevocably contribute cash to the Trust in an amount equal to the aggregate Plan Accounts as of June 4, 1996. Trustee shall have no obligation to compel such contribution. (f) As soon as practicable, but no later than the last business day, which for purposes of this Trust Agreement shall be defined as any day the New York Stock Exchange is open for business ("Business Day"), of the month following the month in which a payment of compensation subject to a deferral election under the Plan would otherwise have been paid, BGE shall be required to irrevocably contribute cash to the Trust in an amount equal to such Deferred Compensation, plus any Matching Contributions related thereto, to the extent the Plan requires such funding. Trustee shall have no obligation to compute or compel such contribution(s). (g) The Board of Directors of BGE may at anytime by resolution amend the contribution requirements of Section 1(f) hereof such that BGE will not be required to make additional contributions of cash to the Trust or will be required to make only a stated percentage of the contributions otherwise required under Section 1(f) hereof. If Section 1(f) is so amended, contributions of cash to the Trust over and above the amounts required under Section 1(f) if amended, will be in the sole discretion of BGE pursuant to Section 1(h) hereof. Trustee shall have no obligation to compute or compel such contribution(s). (h) BGE, in its sole discretion, may at any time or from time to time, make additional deposits of cash in trust with Trustee to augment the Trust assets to be held, administered and disposed of by Trustee as provided in this Trust Agreement. Neither Trustee nor any Plan participant or beneficiary shall have any right or obligation to compel such additional deposits. Section 2. Payments to Plan Participants and Their Beneficiaries. ---------------------------------------------------------- (a) BGE shall deliver or cause to be delivered to Trustee a schedule (the "Payment Schedule") that indicates the amounts payable in respect of each Plan participant (or his or her beneficiaries), that provides a formula or other instructions acceptable to Trustee for determining the amounts so payable, the form in which such amount is to be paid (as provided for or available under the Plan), and the time of commencement for payment of such amounts. Except as otherwise provided herein, Trustee shall make payments to the Plan participants and their beneficiaries in accordance with such Payment Schedule. If so instructed by BGE, the Trustee shall withhold federal and state taxes from each payment under this 2 agreement at the rate(s) designated by BGE and shall report and pay such amounts to the appropriate federal and state taxing authorities. (b) The entitlement of a Plan participant or his or her beneficiaries to benefits under the Plan shall be determined by BGE or such party as it shall designate under the Plan and any claim for such benefits shall be considered and reviewed under the procedures set out in the Plan. Trustee shall have no right or duty to inquire into BGE's decisions with respect to entitlement to benefits. (c) BGE may make payment of benefits directly to Plan participants or their beneficiaries as they become due under the terms of the Plan. BGE shall notify Trustee in writing of its decision to make payment of benefits directly prior to the time amounts are payable to participants or their beneficiaries. BGE shall provide to the Trustee documentation substantiating that such payments were made under the terms of the Plan. If such documentation is not provided, Trustee shall make such payments in accordance with the Payment Schedule directly to Plan participants and their beneficiaries. In addition, if the Trust assets are not sufficient to make such payments of benefits in accordance with the terms of the Plan, BGE shall make the balance of each such payment as it falls due. Trustee shall notify BGE where Trust assets are not sufficient to make benefit payments; however, Trustee shall have no duty to require any contributions to be made, or to determine that any of the contributions received comply with the conditions and limitations of the Plan. (d) In the event there is a final judicial determination or a final determination by the Internal Revenue Service that the Plan participants or their beneficiaries are subject to any tax with respect to any amounts held under the terms of the Trust, then Trustee solely at the direction of BGE shall make payments from the Trust to such Plan participants or their beneficiaries in such amounts as set forth in such final determination for the purpose of paying all applicable taxes and interest and any penalties thereon which such Plan participants or their beneficiaries incur arising out of such determination. BGE's decision as to whether a final determination has occurred shall be binding and conclusive on all Plan participants and their beneficiaries. Section 3. Trustee Responsibility Regarding Payments to Trust --------------------------------------------------- Beneficiary When BGE is Insolvent. ---------------------------------- (a) Upon receipt of notification issued in accordance with Section 3(b)(1) hereof, Trustee shall cease payment of benefits to Plan participants and their beneficiaries if BGE is Insolvent. BGE shall be considered "Insolvent" for purposes of this Trust Agreement if (1) BGE makes a voluntary filing under the United States Bankruptcy Code, or (2) BGE is subject to a pending proceeding as a debtor under the United States Bankruptcy Code. (b) At all times during the continuance of this Trust, as provided in Section 1(d) hereof, the Trust assets shall be subject to claims of general creditors of BGE under federal and state law as set forth below. (1) The Board of Directors of BGE and the Chief Executive Officer of BGE shall have the duty to inform Trustee in writing of BGE's Insolvency. When so informed or when the Trustee is in receipt of a copy of a bankruptcy petition relating to BGE or a court order determining BGE to be Insolvent, Trustee shall discontinue payment of benefits to Plan participants or their beneficiaries. 3 (2) Unless Trustee has received written notification in accordance with Section 3(b)(1) of this Trust Agreement, Trustee may in all events rely on such evidence concerning BGE's solvency as may be furnished by BGE to Trustee. (3) If at any time Trustee has received written notification in accordance with Section 3(b)(1), Trustee shall discontinue payments to Plan participants or their beneficiaries and shall hold the Trust assets for the benefit of BGE's general creditors. Nothing in this Trust Agreement shall in any way diminish any rights of Plan participants or their beneficiaries to pursue their rights as general creditors of BGE with respect to benefits due under the Plan or otherwise. (4) Trustee shall resume the payment of benefits to Plan participants or their beneficiaries in accordance with Section 2 of this Trust Agreement only after Trustee has received a copy of a court order determining BGE to be no longer Insolvent or evidencing that such bankruptcy proceeding is dismissed in connection with any notification made in accordance with Section 3(b)(1). (c) Provided that there are sufficient assets, if Trustee discontinues the payment of benefits from the Trust pursuant to Section 3(b) hereof and subsequently resumes such payments, the first payment following such discontinuance shall include the aggregate amount of all payments due to Plan participants or their beneficiaries under the terms of the Plan for the period of such discontinuance, less the aggregate amount of any payments made to Plan participants or their beneficiaries by BGE in lieu of the payments provided for hereunder during any period of discontinuance. Section 4. Payments to BGE. ---------------- (a) Except as provided in Section 3 and Section 4(b) hereof, BGE shall have no right or power to direct Trustee to return to BGE or to divert to others any of the Trust assets before all payment of benefits have been made to Plan participants and their beneficiaries pursuant to the terms of the Plan and of this Trust Agreement. (b) In the event (1) BGE makes payment of benefits directly to Plan participants or their beneficiaries in accordance with Section 2(c) hereof, or (2) if for any other reason Trust assets exceed the market value of the aggregate balances of Plan participant accounts, then BGE may in its sole discretion, direct Trustee in writing to distribute the amount of such payment or excess, in whole or in part, to BGE provided such distribution does not contravene any provision of law. (c) Notwithstanding Section 4(b)(2) hereof, BGE may not direct Trustee to distribute such excess Trust assets for 2 years from the date a Change of Control is deemed to occur under Section 13(e) hereof except to reimburse BGE for any payment it makes directly to participants in accordance with Section 2(c) hereof. Section 5. Investment Authority. --------------------- (a) In no event may Trustee invest in securities (including stock or rights to acquire stock) or obligations issued by BGE, other than a de minimis amount held in common investment vehicles in which Trustee invests. All rights associated with assets of the Trust shall be exercised solely upon the direction of BGE by Trustee or the person designated by Trustee and shall in no event be exercisable by or rest with Plan participants and their beneficiaries. 4 (b) Trustee shall invest and reinvest the Trust assets and keep the Trust invested, without distinction between principal and income, in such investments as directed in writing by BGE or its designee, which instruction may be modified from time to time by BGE or its designee. Trustee shall have no duty to question any action or direction of BGE or its designee or any failure to give directions, or to make any suggestion to BGE as to the investment, reinvestment, disposition or distribution of, such assets. (c) BGE shall have the right, at any time, and from time to time in its sole discretion, and with Trustee's approval, to substitute assets of equal fair market value for any asset held by the Trust. Section 6. Disposition of Income. ---------------------- During the term of this Trust, all income received by the Trust, net of expenses and taxes, shall be accumulated and reinvested, until otherwise required for disbursement under the terms of this Trust Agreement. Section 7. Accounting by Trustee. ---------------------- (a) Trustee shall keep accurate, and detailed records of all investments, receipts, disbursements and all other transactions required to be made, including such specific records as shall be agreed upon in writing between BGE and Trustee. Within 60 days following the close of each calendar year and within 60 days after the removal or resignation of Trustee, Trustee shall deliver to BGE a written account of its administration of the Trust during such year or during the period from the close of the last preceding year to the date of such removal or resignation, setting forth all investments, receipts, disbursements and other transactions effected by it, including a description of all securities and investments purchased and sold with the cost or net proceeds of such purchases or sales (accrued interest paid or receivables being shown separately), and showing all cash, cost and market value of all securities and other property held in the Trust at the end of such year or as of the date of such removal or resignation, as the case may be. (b) BGE shall prepare and file such tax returns and other reports as may be required for the Trust, with any taxing authority or any other government authority except for IRS Form 1041 which shall be prepared and filed by the Trustee. Section 8. Responsibility of Trustee. -------------------------- (a) Trustee shall act with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims, provided, however, that Trustee shall incur no liability, cost or expense to any person, for any action taken pursuant to a direction, request or approval given by BGE which is contemplated by, and in conformity with, this Trust Agreement and is given in writing by BGE. Trustee shall also be reimbursed by BGE for reasonable expenses or fees incurred in connection with governmental or regulatory inquiries related to this Trust. (b) If Trustee undertakes or defends any litigation arising in connection with this Trust, unless such litigation results in a determination that Trustee breached its duties undertaken pursuant to this Trust Agreement, BGE agrees to indemnify Trustee against Trustee's reasonable costs, expenses and liabilities (including, without limitation, reasonable attorneys' fees and expenses) relating thereto and to be primarily 5 liable for such payments. If BGE does not pay such costs, expenses and liabilities in a reasonably timely manner, Trustee may obtain payment from the Trust. (c) Trustee may consult with legal counsel (who may also be counsel for BGE generally) with respect to any of its duties or obligations hereunder. In the event that Trustee anticipates charging legal fees to the Trust, Trustee must obtain BGE's prior written consent for such legal counsel, which consent will not be unreasonably withheld. (d) Trustee may hire agents, accountants, actuaries, investment advisors, financial consultants or other professionals to assist it in performing any of its duties or obligations hereunder. In the event that Trustee anticipates charging fees for such services to the Trust, Trustee must obtain BGE's prior written consent for such legal counsel, which consent will not be unreasonably withheld. (e) Notwithstanding any powers granted to Trustee pursuant to this Trust Agreement or to applicable law, Trustee shall not have any power that could give this Trust the objective of carrying on a business and dividing the gains therefrom, within the meaning of section 301.7701-2 of the Procedure and Administrative Regulations promulgated pursuant to the Internal Revenue Code. Section 9. Compensation and Expenses of Trustee. ------------------------------------- BGE shall pay all reasonable administrative and Trustee's fees and expenses. If not so paid, the fees and expenses shall be paid from the Trust. Section 10. Resignation and Removal of Trustee. ----------------------------------- (a) Trustee may resign at any time by written notice to BGE, which shall be effective 30 days after receipt of such notice unless BGE and Trustee agree otherwise. (b) Except as provided in Section 10(c), Trustee may be removed by BGE on 30 days written notice unless BGE and Trustee agree otherwise. (c) Upon written notification by BGE that a Change of Control, as defined in Section 13(e) hereof has occurred, Trustee may not be removed by BGE for 2 years from the date a Change of Control is deemed to occur under Section 13(e) hereof. (d) If Trustee resigns within 2 years after a Change of Control, as defined herein, BGE shall apply to a court of competent jurisdiction for the appointment of successor Trustee or for instructions. (e) Upon resignation or removal of Trustee and appointment of a successor Trustee, all Trust assets shall subsequently be transferred to the successor Trustee. The transfer shall be completed at the later of (1) 30 days after receipt of notice of resignation or removal of Trustee or (2) appointment of successor Trustee. (f) If Trustee resigns or is removed, a successor shall be appointed, in accordance with Section 11 hereof, by the effective date of resignation or removal under paragraphs (a) or (b) of this section. If no such appointment has been made, Trustee may apply to a court of competent jurisdiction for appointment 6 of a successor or for instructions. All reasonable expenses of Trustee in connection with the proceeding shall be allowed as administrative expenses of the Trust. Section 11. Appointment of Successor. ------------------------- (a) If Trustee resigns or is removed in accordance with Section 10(a) or (b) hereof, BGE may appoint any third party, such as a bank trust department or other party that may be granted corporate trustee powers under state law, as a successor to replace Trustee upon resignation or removal. The appointment shall be effective when accepted in writing by the successor Trustee, who shall have all of the rights and powers of the former Trustee, including ownership rights in the Trust assets. The former Trustee shall execute any instrument necessary or reasonably requested by BGE or the successor Trustee (in which case former Trustee shall have received a copy of successor Trustee's acceptance) to evidence the transfer of the Trust assets. (b) If Trustee resigns pursuant to the provisions of Section 10(d) hereof, the appointment of a successor Trustee shall be effective when accepted in writing by the successor Trustee. The successor Trustee shall have all the rights and powers of the former Trustee, including ownership rights in Trust assets. The former Trustee shall execute any instrument necessary or reasonably requested by the successor Trustee to evidence the transfer of the Trust assets. (c) The successor Trustee need not examine the records and acts of any prior Trustee and may retain or dispose of existing Trust assets, subject to Sections 7 and 8 hereof. The successor Trustee shall not be responsible for and BGE shall indemnify and defend the successor Trustee from any claim or liability resulting from any action or inaction of any prior Trustee or from any other past event, or any condition existing at the time it becomes successor Trustee. (d) In the event of such removal or resignation, Trustee shall duly file with BGE a written account as provided in Section 7(a) hereof. Section 12. Amendment or Termination. ------------------------- (a) Except as provided in Section 12(d), this Trust Agreement may be amended by a written instrument executed by Trustee and BGE. Notwithstanding the foregoing, no such amendment shall conflict with the terms of the Plan or shall make the Trust revocable. (b) The Trust shall not terminate until the date on which Plan participants and their beneficiaries are no longer entitled to benefits pursuant to the terms of the Plan or have received payment of all benefits to which they are entitled under the terms of this Trust Agreement. Upon termination of the Trust any assets remaining in the Trust shall be returned to BGE. (c) Upon written approval of all Plan participants or beneficiaries entitled to payment of benefits pursuant to the terms of the Plan and this Trust Agreement, BGE may terminate this Trust prior to the time all benefit payments under the Plan and this Trust Agreement have been made. All Trust assets at termination shall be returned to BGE. (d) This Trust Agreement may not be amended by BGE for 2 years following a Change of Control, unless BGE determines that such amendment does not adversely affect the rights of the Plan 7 participants and their beneficiaries entitled to payment of benefits pursuant to terms of the Plan on the date a Change of Control is deemed to occur. Section 13. Miscellaneous. ----------------------------- (a) Any provision of this Trust Agreement prohibited by law shall be ineffective to the extent of any such prohibition, without invalidating the remaining provisions hereof. (b) Benefits payable to Plan participants and their beneficiaries under this Trust Agreement may not be anticipated, assigned (either at law or in equity), alienated, pledged, encumbered or subjected to attachment, garnishment, levy, execution or other legal or equitable process, and any attempt to so alienate, sell, transfer, assign, pledge, attach, charge or otherwise encumber any such amount, whether presently or thereafter payable, shall be void. The Trust shall be in no manner liable for or subject to the debts or liabilities of any participant. (c) This Trust Agreement shall be governed by and construed in accordance with the laws of the State of Maryland and applicable federal law. (d) All words beginning with an initial capital letter and not otherwise defined herein shall have the meaning set forth in the Plan. All singular terms defined in this Trust will include the plural and vice versa. (e) For a Change of Control to be effective with respect to this Trust Agreement, BGE must issue written notification of Change of Control to Trustee. Trustee has no obligation to make any independent determination or verification that a Change of Control has occurred. For purposes of this Trust Agreement, Change of Control shall mean (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 BGE or the combined voting power of BGE's then outstanding shares of voting securities entitled to a vote generally, or (b) the approval by the stockholders of BGE of a reorganization, merger, or consolidation, in each case, with respect to which persons who were stockholders of BGE 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 BGE 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 BGE within a 90-day period for reasons other than death, disability, or retirement of such members. (f) BGE shall certify to Trustee the name or names of any person or persons authorized to act for BGE under this Trust Agreement. Such certification shall be signed by a Vice President of BGE. Until BGE notifies Trustee, in a similarly signed notice or certification, that any such person is no longer authorized to act for BGE, Trustee may continue to rely upon the authority of such person. Trustee may rely upon any certificate, schedule, notice or direction of BGE which Trustee in good faith believes to be genuine, executed and delivered by a duly authorized officer or agent of BGE. 8 Communications to Trustee shall be sent in writing to Trustee at the address specified in Section 13(h) hereof or to such other address as the Trustee may specify in writing. No communication shall be binding upon the Trust or Trustee until it is received by Trustee and unless it is in writing and signed by an authorized person. Communications to BGE shall be sent in writing to BGE's principal offices at the address specified in Section 13(h) hereof or to such other address as BGE may specify in writing. No communication shall be binding upon BGE until it is received by BGE and unless it is in writing and signed by Trustee. (g) In the event of any conflict between the provisions of the Plan document and this Trust Agreement, the provisions of this Trust Agreement shall prevail. This Trust Agreement sets forth the entire understanding of the parties with respect to the subject matter hereof and supersedes any and all prior agreements, arrangements and understandings relating thereto. (h) Any notice, report, demand, waiver or communication required or permitted hereunder shall be in writing and shall be given personally or by prepaid registered or certified mail, return receipt requested, addressed as follows: If to BGE: Baltimore Gas and Electric Company 39 W. Lexington Street 16th Floor Baltimore, Maryland, 21201 Attention: Paul J. Moeller Director, Compensation If to Trustee: T. Rowe Price Trust Company 100 East Pratt Street Baltimore, MD 21202 Attention: BGE Client Manager If to a participant or beneficiary: To the address shown on the most recent Payment Schedule provided by BGE to Trustee. (i) In the event of insufficiency of Trust assets and to the extent BGE does not make payments directly to Plan participants or their beneficiaries, as provided in Section 2(c) hereof, or if BGE as provided in Section 1(f) hereof fails to contribute cash to the Trust to restore such insufficiency, such insufficiency shall be allocated by the recordkeeper among all Plan Accounts subject to funding on a proportionate basis according to the market value of the Plan Account subject to funding. Trustee shall have no obligation to determine or calculate such insufficiency, the amount of timing of any additional funding or the allocation of any insufficiency among Plan Accounts. 9 Section 14. Effective Date. --------------- The effective date of this Trust Agreement shall be June 5, 1996. IN WITNESS WHEREOF, the parties hereto have caused this Trust Agreement to be executed by their respective officers thereunto duly authorized as of the Effective Date indicated above. WITNESS: T. ROWE PRICE TRUST COMPANY /s/ Mary Ann Baumer By: /s/ P. A. McCauley, V.P. - -------------------- ------------------------------ (Seal) Name: Title: WITNESS: BALTIMORE GAS AND ELECTRIC COMPANY /s/ Jeanette D. Owings By: /s/ Jon M. Files - --------------------------- ------------------------- (Seal) Name: Jon M. Files Title: Vice President, Management Services 10 EX-12 5 RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 12 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED AND PREFERENCE DIVIDEND REQUIREMENTS
12 Months Ended June December December December December December 1996 1995 1994 1993 1992 1991 ------- ------- ------- ------- ------- ------ (In Thousands of Dollars) Net Income $381,598 $338,007 $323,617 $309,866 $264,347 $233,681 Taxes on Income 206,033 172,388 156,702 140,833 105,994 88,041 ------- ------- ------- ------- ------- ------ Adjusted Net Income $587,631 $510,395 $480,319 $450,699 $370,341 $321,722 -------- -------- -------- -------- -------- -------- Fixed Charges: Interest and Amortization of Debt Discount and Expense and Premium on all Indebtedness $202,712 $206,666 $204,206 $ 199,415 $200,848 $213,616 Capitalized Interest 14,451 15,050 12,427 16,167 13,800 20,953 Interest Factor in Rentals 1,812 2,099 2,010 2,144 2,033 1,801 ----- ----- ----- ----- ----- ----- Total Fixed Charges $218,975 $223,815 $218,643 $217,726 $216,681 $236,370 -------- -------- -------- -------- -------- -------- Preferred and Preference Dividend Requirements: (1) Preferred and Preference Dividends $ 42,442 $ 40,578 $ 39,922 $ 41,839 $ 42,247 $ 42,746 Income Tax Required 22,646 20,434 19,074 18,763 16,729 15,916 ------ ------ ------ ------ ------ ------ Total Preferred and Preference Dividend Requirements $ 65,088 $61,012 $ 58,996 $ 60,602 $ 58,976 $ 58,662 -------- ------- -------- -------- -------- -------- Total Fixed Charges and Preferred and Preference Dividend Requirements $284,063 $284,827 $277,639 $278,328 $275,657 $295,032 ======== ======== ======== ======== ======== ======== Earnings (2) $792,155 $719,160 $686,535 $652,258 $573,222 $537,139 ======== ======== ======== ======== ======== ======== Ratio of Earnings to Fixed Charges 3.62 3.21 3.14 3.00 2.65 2.27 Ratio of Earnings to Combined Fixed Charges and Preferred and Preference Dividend Requirements 2.79 2.52 2.47 2.34 2.08 1.82
(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 6 FINANCIAL DATA SCHEDULE
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BGE'S JUNE 30, 1996 INTERIM CONSOLIDATED INCOME STATEMENT, BALANCE SHEET AND STATEMENT OF CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS. 1,000 6-MOS DEC-31-1996 JAN-01-1996 JUN-30-1996 PER-BOOK 5,516,717 1,379,477 772,281 677,463 0 8,345,938 1,425,641 0 1,408,437 2,837,966 227,500 210,000 2,725,851 0 0 274,845 94,953 39,000 0 0 1,935,823 8,345,938 1,593,037 89,680 1,243,085 1,332,765 260,272 2,120 262,392 97,058 165,334 21,768 143,566 115,071 105,772 361,676 0.97 0.97
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