-----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, MMFPjTHdu0bZgY71AokM0SbSClCngTaq6CJ/QL3tMuYgZ+43R5JG1hx8wgKhwCjm I4g4HkKFDcE3IVKk0FxErA== 0000009466-97-000061.txt : 19971113 0000009466-97-000061.hdr.sgml : 19971113 ACCESSION NUMBER: 0000009466-97-000061 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971113 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: SEC FILE NUMBER: 001-01910 FILM NUMBER: 97715405 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 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q ------------------------ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Quarterly Period Ended September 30, 1997 Commission file number 1-1910 BALTIMORE GAS AND ELECTRIC COMPANY (Exact name of registrant as specified in its charter) Maryland 52-0280210 ------------------------------------------------ (State of (IRS Employer Incorporation) Identification No.) 39 W. Lexington Street Baltimore, Maryland 21201 ---------------------------------------------------------------- (Address of principal executive offices) (Zip Code) 410-783-5920 (Registrant's telephone number, including area code) Not Applicable (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No Common Stock, without par value - 147,667,114 shares outstanding on October 31, 1997. 1 BALTIMORE GAS AND ELECTRIC COMPANY ---------------------------------- PART I. FINANCIAL INFORMATION - ----------------------------- CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Quarter Ended Nine Months Ended September 30, September 30, ------------------------ ------------------------- 1997 1996 1997 1996 --------- --------- ---------- ---------- (In Thousands, Except Per-Share Amounts) Revenues Electric ............................................................... $ 676,338 $ 664,364 $ 1,691,700 $ 1,736,587 Gas .................................................................... 60,902 62,874 366,948 375,653 Diversified businesses ................................................. 123,597 98,722 436,310 306,756 ----------- ----------- ----------- ----------- Total revenues ......................................................... 860,837 825,960 2,494,958 2,418,996 ----------- ----------- ----------- ----------- Expenses Other Than Interest and Income Taxes Electric fuel and purchased energy ..................................... 135,238 134,241 383,245 408,797 Disallowed replacement energy costs .................................... -- -- -- 6,764 Gas purchased for resale ............................................... 25,354 28,099 206,775 206,511 Operations ............................................................. 124,131 131,447 389,163 393,812 Maintenance ............................................................ 36,845 40,310 139,040 135,562 Diversified businesses-selling, general, and administrative ............ 74,939 71,351 323,986 223,175 Write-downs of real estate investments ................................. -- -- 67,596 -- Depreciation and amortization .......................................... 85,350 83,655 256,136 251,385 Taxes other than income taxes .......................................... 58,012 61,190 165,334 167,372 ----------- ----------- ----------- ----------- Total expenses other than interest and income taxes .................... 539,869 550,293 1,931,275 1,793,378 ----------- ----------- ----------- ----------- Income From Operations .................................................. 320,968 275,667 563,683 625,618 ----------- ----------- ----------- ----------- Other Income Allowance for equity funds used during construction .................... 1,353 1,007 3,769 4,979 Equity in earnings of Safe Harbor Water Power Corporation .............. 1,231 1,208 3,693 3,454 Net other income and deductions ........................................ 794 (341) (2,067) (4,439) ----------- ----------- ----------- ----------- Total other income ..................................................... 3,378 1,874 5,395 3,994 ----------- ----------- ----------- ----------- Income Before Interest and Income Taxes ................................. 324,346 277,541 569,078 629,612 ----------- ----------- ----------- ----------- Interest Expense Interest charges ....................................................... 63,421 55,966 179,536 161,737 Capitalized interest ................................................... (1,980) (4,523) (6,005) (11,091) Allowance for borrowed funds used during construction .................. (732) (546) (2,038) (2,692) ----------- ----------- ----------- ----------- Net interest expense ................................................... 60,709 50,897 171,493 147,954 ----------- ----------- ----------- ----------- Income Before Income Taxes .............................................. 263,637 226,644 397,585 481,658 ----------- ----------- ----------- ----------- Income Taxes Current ................................................................ 72,735 66,194 141,573 136,325 Deferred ............................................................... 21,384 15,883 3,176 39,256 Investment tax credit adjustments ...................................... (1,889) (1,915) (5,652) (5,739) ----------- ----------- ----------- ----------- Total income taxes ..................................................... 92,230 80,162 139,097 169,842 ----------- ----------- ----------- ----------- Net Income .............................................................. 171,407 146,482 258,488 311,816 Preferred and Preference Stock Dividends ................................ 6,995 8,620 22,752 30,387 ----------- ----------- ----------- ----------- Earnings Applicable to Common Stock ..................................... $ 164,412 $ 137,862 $ 235,736 $ 281,429 =========== =========== =========== =========== Average Shares of Common Stock Outstanding 147,667 147,565 147,667 147,540 Earnings Per Share of Common Stock $1.11 $0.93 $1.60 $1.91 Dividends Declared Per Share of Common Stock $0.41 $0.40 $1.22 $1.19 See Notes to Consolidated Financial Statements. Certain prior period amounts have been reclassified to conform with the current period presentation.
2 BALTIMORE GAS AND ELECTRIC COMPANY ---------------------------------- PART I. FINANCIAL INFORMATION (Continued) - ----------------------------------------- CONSOLIDATED BALANCE SHEETS
September 30, December 31, 1997* 1996 ------------ ------------ (In Thousands) ASSETS Current Assets Cash and cash equivalents ............................................................ $ 189,758 $ 66,708 Accounts receivable (net of allowance for uncollectibles of $16,738 and $18,028 respectively)................................................. 398,014 419,479 Trading securities ................................................................... 120,059 68,794 Fuel stocks .......................................................................... 89,296 87,073 Materials and supplies ............................................................... 166,516 147,729 Prepaid taxes other than income taxes ................................................ 94,167 64,763 Deferred income taxes ................................................................ -- 2,943 Other ................................................................................ 22,537 44,709 ----------- ----------- Total current assets ................................................................. 1,080,347 902,198 ----------- ----------- Investments and Other Assets Real estate projects ................................................................. 443,922 525,765 Power generation systems ............................................................. 421,762 379,130 Financial investments ................................................................ 186,857 204,443 Nuclear decommissioning trust fund ................................................... 136,894 116,368 Net pension asset .................................................................... 105,987 84,510 Safe Harbor Water Power Corporation .................................................. 34,396 34,363 Senior living facilities ............................................................. 54,676 36,415 Other ................................................................................ 101,356 92,171 ----------- ----------- Total investments and other assets ................................................... 1,485,850 1,473,165 ----------- ----------- Utility Plant Plant in service Electric ............................................................................ 6,698,259 6,514,950 Gas ................................................................................. 832,002 776,973 Common .............................................................................. 546,101 523,485 ----------- ----------- Total plant in service .............................................................. 8,076,362 7,815,408 Accumulated depreciation ............................................................. (2,773,956) (2,613,355) ----------- ----------- Net plant in service ................................................................. 5,302,406 5,202,053 Construction work in progress ........................................................ 165,845 221,857 Nuclear fuel (net of amortization) ................................................... 140,261 132,937 Plant held for future use ............................................................ 25,470 25,503 ----------- ----------- Net utility plant .................................................................... 5,633,982 5,582,350 ----------- ----------- Deferred Charges Regulatory assets (net) .............................................................. 474,598 512,279 Other ................................................................................ 106,823 80,978 ----------- ----------- Total deferred charges ............................................................... 581,421 593,257 ----------- ----------- TOTAL ASSETS .......................................................................... $ 8,781,600 $ 8,550,970 =========== ===========
* Unaudited See Notes to Consolidated Financial Statements. 3 BALTIMORE GAS AND ELECTRIC COMPANY ---------------------------------- PART I. FINANCIAL INFORMATION (Continued) - ----------------------------------------- CONSOLIDATED BALANCE SHEETS
September 30, December 31, 1997* 1996 ----------- ----------- (In Thousands) LIABILITIES AND CAPITALIZATION Current Liabilities Short-term borrowings .............................................................. $ 250,500 $ 333,185 Current portions of long-term debt and preference stock............................. 203,574 280,772 Accounts payable ................................................................... 144,690 172,889 Customer deposits .................................................................. 29,040 27,993 Accrued taxes ...................................................................... 60,456 6,473 Accrued interest ................................................................... 64,491 57,440 Dividends declared ................................................................. 66,591 66,950 Accrued vacation costs ............................................................. 36,033 34,351 Other .............................................................................. 29,692 37,046 ----------- ----------- Total current liabilities .......................................................... 885,067 1,017,099 ----------- ----------- Deferred Credits and Other Liabilities Deferred income taxes .............................................................. 1,298,068 1,300,174 Postretirement and postemployment benefits ......................................... 188,535 169,253 Decommissioning of federal uranium enrichment facilities ........................... 38,599 38,599 Other .............................................................................. 59,263 65,463 ----------- ----------- Total deferred credits and other liabilities ....................................... 1,584,465 1,573,489 ----------- ----------- Capitalization Long-term Debt First refunding mortgage bonds of BGE .............................................. 1,577,507 1,619,357 Other long-term debt of BGE ........................................................ 922,785 732,000 Long-term debt of Constellation Holdings Companies ................................. 756,693 607,727 Long-term debt of other diversified businesses ..................................... 22,000 12,000 Unamortized discount and premium ................................................... (13,928) (14,543) Current portion of long-term debt .................................................. (169,074) (197,772) ----------- ----------- Total long-term debt ............................................................... 3,095,983 2,758,769 ----------- ----------- Redeemable Preference Stock .......................................................... 126,000 217,500 Current portion of redeemable preference stock ..................................... (34,500) (83,000) ----------- ----------- Total redeemable preference stock .................................................. 91,500 134,500 ----------- ----------- Preference Stock Not Subject to Mandatory Redemption ................................. 210,000 210,000 ----------- ----------- Common Shareholders' Equity Common stock ....................................................................... 1,431,157 1,429,942 Retained earnings .................................................................. 1,474,647 1,419,065 Net unrealized gain on available-for-sale securities ............................... 8,781 8,106 ----------- ----------- Total common shareholders' equity .................................................. 2,914,585 2,857,113 ----------- ----------- Total capitalization ............................................................... 6,312,068 5,960,382 ----------- ----------- TOTAL LIABILITIES AND CAPITALIZATION ................................................. $ 8,781,600 $ 8,550,970 =========== ===========
* Unaudited See Notes to Consolidated Financial Statements. 4 BALTIMORE GAS AND ELECTRIC COMPANY ---------------------------------- PART I. FINANCIAL INFORMATION (Continued) - ----------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended September 30, --------------------------------- 1997 1996 ---------- ----------- (In Thousands) Cash Flows From Operating Activities Net income ......................................................................... $ 258,488 $ 311,816 Adjustments to reconcile to net cash provided by operating activities Depreciation and amortization .................................................... 295,758 288,491 Deferred income taxes ............................................................ 3,176 39,256 Investment tax credit adjustments ................................................ (5,652) (5,739) Deferred fuel costs .............................................................. 29,989 14,962 Disallowance of replacement energy costs ......................................... -- 6,764 Accrued pension and postemployment benefits ...................................... (6,260) (11,277) Write-downs of real estate investments ........................................... 67,596 -- Allowance for equity funds used during construction .............................. (3,769) (4,979) Equity in earnings of affiliates and joint ventures (net) ........................ (33,026) (42,130) Changes in current assets, other than sale of accounts receivable ................ (57,871) (61,729) Changes in current liabilities, other than short-term borrowings ................. 29,385 (16,853) Other ............................................................................ (9,876) 28,216 --------- --------- Net cash provided by operating activities .......................................... 567,938 546,798 --------- --------- Cash Flows From Financing Activities Net issuance (maturity) of short-term borrowings ................................... (82,685) 97,855 Proceeds from issuance of long-term debt ........................................... 560,369 217,655 Proceeds from issuance of common stock ............................................. -- 1,142 Reacquisition of long-term debt .................................................... (253,793) (140,046) Redemption of preferred and preference stock ....................................... (91,500) (89,559) Common stock dividends paid ........................................................ (178,677) (174,082) Preferred and preference stock dividends paid ...................................... (23,625) (28,697) Other .............................................................................. (583) (1,261) --------- --------- Net cash used in financing activities .............................................. (70,494) (116,993) --------- --------- Cash Flows From Investing Activities Utility construction expenditures (including AFC) .................................. (260,006) (258,846) Allowance for equity funds used during construction ................................ 3,769 4,979 Nuclear fuel expenditures .......................................................... (42,341) (45,695) Deferred energy conservation expenditures .......................................... (21,521) (21,731) Contributions to nuclear decommissioning trust fund ................................ (13,224) (21,075) Costs to achieve the proposed merger ............................................... (25,313) (19,310) Purchases of marketable equity securities .......................................... (16,113) (28,196) Sales of marketable equity securities .............................................. 34,837 32,152 Other financial investments ........................................................ 9,914 10,390 Real estate projects ............................................................... 25,861 (37,127) Power generation systems ........................................................... (19,254) (11,341) Other .............................................................................. (51,003) (15,204) --------- --------- Net cash used in investing activities .............................................. (374,394) (411,004) --------- --------- Net Increase in Cash and Cash Equivalents ............................................ 123,050 18,801 Cash and Cash Equivalents at Beginning of Period ..................................... 66,708 23,443 --------- --------- Cash and Cash Equivalents at End of Period ........................................... $ 189,758 $ 42,244 ========= ========= Other Cash Flow Information Cash paid during the period for: Interest (net of amounts capitalized) ............................................ $ 160,067 $ 149,579 Income taxes ..................................................................... $ 63,753 $ 90,901 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 Weather conditions can have a great impact on our results for interim periods. This means that results for interim periods do not necessarily represent results to be expected for the year. Our interim financial statements on the previous pages reflect all adjustments which Management believes are necessary for the fair presentation of the financial position and results of operations for the interim periods presented. These adjustments are of a normal recurring nature. Accounting Standards Issued - --------------------------- In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128 regarding earnings per share which requires us to present basic and diluted earnings per share in our financial statements. We must adopt the requirements of this standard in our financial statements for the year ended December 31, 1997. In June 1997, the Financial Accounting Standards Board issued SFAS No. 130 about reporting comprehensive income and SFAS No. 131 regarding disclosures about operating segments. We must adopt the requirements of SFAS No. 130 in our financial statements for the quarter ended March 31, 1998 and adopt the requirements of SFAS No. 131 in our financial statements for the year ended December 31, 1998. We do not expect the adoption of these standards to have a material impact on our financial results or financial statement disclosures. BGE Financing Activity - ----------------------- Issuances - --------- We issued the following long-term debt during the period from January 1, 1997 through the date of this report: Date Net Principal Issued Proceeds Put Option Dates ---------- ------ --------- ------------------- Medium-Term Notes, Series D Floating Rate, Due 1999 $87,000,000 3/97 $86,826,000 -- Medium-Term Notes, Series E 6.75%, Due 2012 $60,000,000 6/97 $59,700,000 June 2002 and June 2007 6.75%, Due 2012 $25,000,000 6/97 $24,862,500 June 2004 and June 2007 6.73%, Due 2012 $25,000,000 6/97 $24,862,500 June 2004 and June 2007 6.66%, Due 2006 $25,000,000 7/97 $24,862,500 -- 6.56%, Due 2009 $11,500,000 10/97 $11,431,000 -- 6.65%, Due 2008 $15,000,000 11/97 $14,910,000 -- Pollution Control Loan Variable Rate, Due 2027 $8,785,000 6/97 $8,756,449 -- As noted above, some of the medium-term notes include a "put option." These put options allow the holders to sell their notes back to BGE on the put option dates at a price equal to 100% of the principal amount. 6 Early Redemptions - ----------------- We redeemed some of our long-term debt and preference stock prior to their maturity dates or required redemption dates during the period from January 1, 1997 through the date of this report. We redeemed the following bonds: Date of Price Principal Redemption Paid ----------- ----------- ---------- Various Bond Series $250,000 8/1/97 Various 7-1/8% Series, Due 1/1/2002 $16,060,000 8/28/97 100.00% 7-1/8% Series, Due 1/1/2002 $6,659,000 10/1/97 100.99% In addition to mandatory preference stock redemptions, we made the following optional sinking fund redemptions. Date Price Shares Redeemed Per Share ----------- ----------- ---------- 8.625%, 1990 Series 130,000 7/1/97 $100 7.85%, 1991 Series 70,000 7/1/97 $100 7.50%, 1986 Series 15,000 10/1/97 $100 In the future, we may purchase some of our long-term debt or preference stock in the market. This will depend on market conditions and our capital structure, including our mix of secured and unsecured debt. Diversified Business Financing Matters - -------------------------------------- Please refer to the "Diversified Business Debt and Liquidity" section of Management's Discussion and Analysis on page 33 for additional information about the debt of our diversified businesses. Update On Pending Merger With Potomac Electric Power Company (Pepco) - Two - ------------------------------------------------------------------------------ Regulatory Approvals Contain Unacceptable Conditions - ------------------------------------------------------ Background - ---------- As previously disclosed, in September 1995, we agreed with a neighboring utility, Pepco, to merge together into a new company, Constellation Energy(TM) Corporation, after all necessary regulatory approvals were received. We have received all necessary regulatory approvals for the merger. On April 16, 1997, we received two of the necessary approvals -- those from the Federal Energy Regulatory Commission and the Maryland Public Service Commission (Maryland PSC) - -- but the Maryland PSC order contains unacceptable conditions. On October 20, 1997, we received an order from the District of Columbia Public Service Commission (D.C. PSC) approving the merger, but that order also contains unacceptable conditions. We have requested reconsideration of the Maryland PSC order and plan to ask for reconsideration of the D.C. PSC order. Management of both companies made a preliminary estimate of the net savings that could be achieved from combining their utility operations. The net cost savings are estimated to be up to $1.3 billion over the 10 years following the merger. These savings would come from: o reduced labor costs (about two-thirds of estimated savings), o reduced purchasing costs of items other than fuel, and o elimination of duplication in corporate and administrative programs. 7 The estimated savings are net of costs to achieve the merger, currently estimated at $150 million. BGE and Pepco had proposed that the savings be shared between the shareholders and customers of Constellation Energy Corporation. The sharing of these costs will depend upon results of regulatory proceedings in the various jurisdictions in which BGE and Pepco operate utility businesses. However, the orders from the Maryland PSC and the D.C. PSC deny the shareholders a reasonable opportunity to receive savings associated with the merger. We discuss these orders further below. The estimate of the net cost savings from the merger was necessarily based on various assumptions which involve judgments. The assumptions included, among other items: o future national and regional economic and competitive conditions, o inflation rates, o regulatory treatments, o weather conditions, o financial market conditions, o interest rates, and o future business decisions. All of these items and other uncertainties are difficult to predict and many of them are beyond our or Pepco's control. Accordingly, while we believe the assumptions are reasonable for developing the estimate of net cost savings, we cannot provide any assurance that the assumptions will approximate actual results if the merger is closed or that all of the estimated savings will be realized. A Registration Statement on Form S-4 (Registration No. 33-64799) discusses in detail: o the reasons for the merger, o the terms and conditions contained in the merger agreement (which can be terminated by BGE or Pepco on March 31, 1998), o the regulatory approvals required prior to closing the merger, and o other related matters. That document is included as an exhibit to this Report on Form 10-Q by incorporation by reference. We provide regular updates about the status of regulatory approvals in our Reports on Forms 10-K, 10-Q, and 8-K. We have also provided information about these approvals on the following pages. An Important Condition to Our Obligation to Close the Merger - ------------------------------------------------------------------- The merger agreement includes conditions to BGE's and Pepco's obligations to close the merger. One condition is that no necessary regulatory approval, like the Maryland PSC order: would have, or 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 Constellation Energy Corporation. D.C. PSC Order Approving the Merger Contains Unacceptable Financial Terms - ------------------------------------------------------------------------- Although the D.C. PSC approved the merger, its order imposed conditions that, in BGE's opinion, would produce an unacceptable financial result. BGE and Pepco sponsored testimony in the D.C. PSC proceeding based on studies conducted by the companies and Deloitte & Touche that the net cost savings of the merger over 10 years were estimated to be $1.3 billion. The D.C. PSC order increased the amount of the estimated savings to $1.8 billion. The order also amortized the estimated costs to achieve the merger over 10 years. Apportioning 19.1% of the higher savings to D.C. customers and allocating the savings 75% to customers and 25% to shareholders, the D.C. PSC ordered that 8 D.C. customers' rates be reduced by $99 million over the first four years of the merger. This rate reduction returns more savings to customers than can be realized over the four-year period. Therefore, the companies will ask the D.C. PSC to reconsider its decision and allocate the appropriate savings equally between customers and shareholders. Maryland PSC Order Approving the Merger Contains Unacceptable Financial Terms - ----------------------------------------------------------------------------- Although the Maryland PSC approved the merger, its April 16, 1997 order imposed a number of conditions that, together, in BGE's opinion would produce an unacceptable financial result for Constellation Energy Corporation. BGE and Pepco had proposed a regulatory plan to the Maryland and District of Columbia Public Service Commissions that was designed to share the merger benefits equitably between the shareholders and customers. The Maryland PSC order included a number of conditions that, together, deny the shareholders a reasonable opportunity to receive savings associated with the merger. Absent a change in the order's negative financial implications to Constellation Energy Corporation and its shareholders, the merger could not proceed. BGE believes the Maryland PSC order would have a material adverse effect on Constellation Energy Corporation and thus would not satisfy the condition to closing mentioned above. On May 2, 1997, BGE and Pepco asked the Maryland PSC to reconsider its decision. The companies detailed areas of the order that need to be revised for the merger to proceed. BGE and Pepco proposed a modified plan to address these concerns. The highlights of our original regulatory plan, the Maryland PSC order, and our modified plan are as follows: BGE/Pepco BGE/Pepco Maryland PSC Original Application Order Filing for Rehearing ------------------------------------------------------ (all dollars in millions) Up-Front Rate $56 $0 $26 Reduction (75% of (synergy (50/50 savings) sharing sharing) giveback at year-end) Base Rate Freeze 3 years January 1, 2000 4 years (from merger (approximately (from merger date) 2.5 years) date) Purchased Capacity None for Panda Surcharge for Surcharge for Surcharge and Ohio all Maryland all Maryland (Approx. $100 million Edison PSC approved PSC approved combined annual contracts contracts contracts increase by 1999 in (subject to (no earnings (no earnings Maryland and the earnings test) tests) tests) District of Columbia in purchased capacity costs) Return on Equity 11.4% 13% 11.9% Threshold for Synergy Sharing Costs to Achieve the 5 years for 3 years 4 years Merger Reflected in employee (rate freeze (rate freeze Calculation for termination period) period) Synergy Sharing costs, 10 Purposes years for other costs Accounting Treatment Same as for Same as for Write off in for Costs to Achieve synergy synergy year merger the Merger* sharing sharing occurs purposes purposes * As of September 30, 1997, BGE had deferred approximately $61 million of costs to achieve the merger. If the merger does not occur, BGE will write off all or a portion of these costs. The total costs expected to be incurred by BGE and Pepco are estimated to be $150 million. 9 IBEW Appeal of Maryland PSC Order Clouds Jurisdiction for Rehearing - ------------------------------------------------------------------- A union, The International Brotherhood of Electrical Workers (IBEW), represents many of Pepco's employees who are paid by the hour. The IBEW had attempted to organize BGE workers several times in the past. Their most recent attempt ended in an election held in December 1996 where BGE workers voted 70% against the union. The IBEW will have no standing to represent Constellation Energy Corporation workers after the merger under Federal labor law, unless the IBEW were to win an election at Constellation Energy Corporation. The IBEW has intervened in many of the regulatory proceedings about the merger, including the Maryland PSC proceeding. On May 1, 1997, the IBEW appealed the Maryland PSC's order to the Circuit Court of Baltimore County. The union asked the Court to reverse the PSC's approval of the merger. In past proceedings, the Maryland PSC has taken the position that once an appeal is filed with the Circuit Court following the PSC's issuance of an order, the Maryland PSC loses its jurisdiction to reconsider or modify the order. BGE believes the Maryland PSC retains jurisdiction and that the most appropriate forum for consideration of its modified rate plan is the Maryland PSC. Also, the Maryland PSC order contains certain mathematical errors in calculating the rate reduction which as a matter of law should require that the order be remanded. For these reasons, BGE and Pepco filed with the Circuit Court on May 9, 1997 a motion to have the order remanded to the Maryland PSC for further consideration. On July 28, 1997 the Circuit Court accepted a correction to the PSC order that reduced the up-front rate reduction to $47 million. The court then denied the motion to remand the order, scheduled dates for filing memoranda, and scheduled the appeal for hearing on October 20, 1997. On October 27, 1997, the Circuit Court issued an opinion and order affirming the Maryland PSC merger order. The Court concluded that the IBEW failed to show that the Maryland PSC order in any way violated Maryland law. The IBEW could continue to delay reconsideration by the Maryland PSC of the conditions imposed in the order by filing a notice of appeal to the Maryland Court of Special Appeals within 30 days from the date of the order. Where to Find the Maryland PSC and D.C. PSC Orders - -------------------------------------------------- You may get copies of the Maryland PSC and D.C. PSC orders by calling us at (410)783-5920 or by writing to Baltimore Gas and Electric Company, Shareholder Services, P.O. Box 1642, Baltimore, Maryland 21203-1642. The Maryland PSC order is also available at the Maryland PSC web site at http://www.psc.state.md.us/psc/. Federal Energy Regulatory Commission (FERC) - ------------------------------------------- On April 16, 1997, the FERC unanimously approved the merger without any conditions. Environmental Matters - ---------------------- The Clean Air Act of 1990 contains two titles designed to reduce emissions of sulfur dioxide and nitrogen oxide (NOx) from electric generating stations - Title IV and Title I. Title IV addresses emissions of sulfur dioxide. Compliance is required in two separate phases: o Phase I became effective January 1, 1995. We met the requirements of this phase by installing flue gas desulfurization systems (scrubbers), switching fuels, and retiring some units. o Phase II must be implemented by 2000. We are currently examining what actions we should take to comply with this phase. We expect to meet the compliance requirements through some combination of installing flue gas desulfurization systems (scrubbers), switching fuels, retiring some units, or allowance trading. Title I addresses emissions of NOx, but the regulations of this title have not been finalized by the government. As a result, our plans for complying with this title are less certain. By 1999 the regulations require more NOx controls for ozone attainment at our generating plants. The additional controls will result in more expenditures, but it is difficult to estimate the level of those expenditures since the regulations have not been 10 finalized. However, based on existing and proposed regulations, we currently estimate that the additional controls at our generating plants will cost approximately $90 million. We do not expect to add controls at our facilities other than generating plants under the regulations. In July 1997, the government published new National Ambient Air Quality Standards for very fine particulates and revised standards for ozone attainment. These standards may require increased controls at our fossil generating plants in the future. We cannot estimate the cost of these increased controls at this time because the states, including Maryland, still need to determine what reductions in pollutants will be necessary to meet the federal standards. We have been notified by the Environmental Protection Agency and several state agencies that we are considered a potentially responsible party (PRP) with respect to the cleanup of certain environmentally contaminated sites. Those sites are owned and operated by others. We cannot estimate the cleanup costs for these sites. However, we can estimate that our 15.79% share of the possible cleanup costs at one of these sites, Metal Bank of America (a metal reclaimer in Philadelphia) could be approximately $7 million higher than amounts we have recorded. This estimate is based on the highest estimate of costs in the range of reasonably possible alternatives. The cleanup costs for some of the remaining sites could be significant, but we do not expect them to have a material effect on our financial position or results of operations. Also, we are coordinating investigation of several sites where gas was manufactured in the past. The investigation of these sites includes reviewing possible actions to remove coal tar. In late December 1996, we signed a consent order with the Maryland Department of the Environment that requires us to implement remedial action plans for contamination at and around the Spring Gardens site. We have submitted the required remedial action plans and the Maryland Department of the Environment is in the process of approving them. Based on several remedial action options, the costs we consider to be probable to remedy the contamination are estimated to total $50 million in nominal dollars (including inflation). We have recorded these costs as a liability on our Consolidated Balance Sheet and have deferred these costs, net of accumulated amortization, as a regulatory asset (we discuss this further in Note 5 of our 1996 Annual Report on Form 10-K). We are also required by accounting rules to disclose additional costs we consider to be less likely than probable costs, but still "reasonably possible" of being incurred at these sites. Because of the results of studies at these sites, it is reasonably possible that these additional costs could exceed the amount we recognized by approximately $48 million in nominal dollars ($11 million in current dollars, plus the impact of inflation at 3.1% over a period of up to 60 years). Nuclear Insurance - ------------------ If there were an accident or an extended outage at either unit of the Calvert Cliffs Nuclear Power Plant, it could have a substantial adverse effect on BGE. The primary contingencies that would result from an incident at the Calvert Cliffs plant could include: o the physical damage to the plant, o the recoverability of replacement power costs, and o our liability to third parties for property damage and bodily injury. We have various insurance policies for these contingencies. However, the costs that could result from a major accident or an extended outage at either of the Calvert Cliffs units could exceed our insurance coverage limits. In addition, we could be charged for a portion of any third party claims associated with an incident at any commercial nuclear power plant in the country. 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 exceed $200 million (the amount of primary insurance), our share of the total liability for third party claims could be up to $159 million per incident. That amount would be payable at a rate of $20 million per year. As an operator of a commercial nuclear power plant in the United States, we are required to purchase insurance to cover claims of certain nuclear workers. We have primary coverage of up to $400 million for claims 11 against us, or against other operators who are insured by these policies, for radiation injuries. If certain claims were made under these policies, we could be assessed along with the other policyholders. Our share could be up to $6.02 million in any one year. In addition, if these claims exceed the $400 million limit of the primary coverage, the provisions of the Price Anderson Act (discussed above) would apply. For physical damage to our Calvert Cliffs Nuclear Power Plant, we have $2.75 billion of property insurance from industry mutual insurance companies. If an outage at either of the two units at Calvert Cliffs is caused by an insured physical damage loss and lasts more than 17 weeks, we have insurance coverage up to $487.2 million per unit, 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 single insured physical damage loss. If accidents at any insured plants cause a shortfall of funds at the industry mutuals, all policyholders could be assessed with our share being up to $31 million. Recoverability of Electric Fuel Costs - ------------------------------------- By law, we are allowed to recover our cost of electric fuel as long as the Maryland PSC finds that, among other things, we have kept the productive capacity of our generating plants at a reasonable level. To do this, the Maryland PSC will perform an evaluation of each outage (other than regular maintenance outages) at our generating plants. The evaluation will determine if we used all reasonable and cost-effective maintenance and operating control procedures to try to prevent the outage. Effective January 1, 1987, the Maryland PSC established a Generating Unit Performance Program to measure, annually, whether we, and other utilities, have maintained the productive capacity of our generating plants at reasonable levels. To do this, the program uses a system-wide generating performance target or an individual performance target for each base load generating unit. In fuel rate hearings, actual generating performance will be compared first to the system-wide target. If that target is met, it should mean that the requirements of Maryland law have been met. If the system-wide target is not met, each unit's adjusted actual generating performance will be compared to its individual performance target to determine if the requirements of Maryland law have been met and, if not, to determine the basis for possibly imposing a penalty on BGE. Even if we meet these targets, other parties to fuel rate hearings may still question whether we used all reasonable and cost-effective procedures to try to prevent an outage. If the Maryland PSC decides we were deficient in some way, the Maryland PSC may not allow us to recover the cost of replacement energy. The two units at our Calvert Cliffs Nuclear Power Plant (Calvert Cliffs) use the cheapest fuel. As a result, the costs of replacement energy associated with outages at these units can be significant. We cannot estimate the amount of replacement energy costs that could be challenged or disallowed in future fuel rate proceedings, but such amounts could be material. We discuss significant disallowances in prior years related to an extended outage at Calvert Cliffs in our 1996 Annual Report on Form 10-K. California Power Purchase Agreements - ------------------------------------- Constellation(TM) Holdings, Inc. and Subsidiaries, together known as the Constellation Holdings Companies, has ownership interests in 16 projects that sell electricity in California under power purchase agreements called "Interim Standard Offer No. 4" agreements. Under these agreements, the projects supply electricity to utility companies at: o a fixed rate for capacity and energy the first 10 years of the agreements, and o a fixed rate for capacity plus a variable rate for energy based on the utilities' avoided cost for the remaining term of the agreements. Generally, a "capacity rate" is paid to a power plant for its availability to supply electricity, and an "energy rate" is paid for the electricity actually generated. "Avoided cost" generally is the cost of a utility's cheapest next-available source of generation to service the demands on its system. 12 We use the term transition period to describe the timeframe when the 10-year periods for fixed energy rates expire for these 16 power generation projects and they begin supplying electricity at variable rates. The transition period began in 1996 and will continue through 2000. At the date of this report, five projects had already transitioned to variable rates and four other projects will transition in 1998. The remaining seven projects will transition in 1999 or 2000. The projects that have already transitioned to variable rates have had lower revenues under variable rates than they did under fixed rates. However, we have not yet experienced lower earnings from the California projects because the combined revenues from the remaining projects, which continued to supply electricity at fixed rates, were high enough to offset the lower revenues from the variable-rate projects. When the remaining projects transition to variable rates, we expect the revenues from those projects to also be lower than they are under fixed rates. It is difficult to estimate how much lower the revenues may be, but the Constellation Holdings Companies' earnings could be affected significantly. However, the California projects that make the highest revenues will transition to variable rates in 1999 and 2000. As a result, we do not expect the Constellation Holdings Companies to have significantly lower earnings due to the transition to variable rates before 2000. The Constellation Holdings Companies are pursuing alternatives for some of these power generation projects including: o repowering the projects to reduce operating costs, o changing fuels to reduce operating costs, o renegotiating the power purchase agreements to improve the terms, o restructuring financings to improve the financing terms, and o selling its ownership interests in the projects. We cannot predict the financial effects of the transition from fixed to variable rates on the Constellation Holdings Companies or on BGE, but the effects could be material. Constellation Real Estate - ------------------------- We consider market demand, interest rates, the availability of financing, and the strength of the economy in general when making decisions about our real estate investments. We believe that until the economy shows sustained growth and there is more demand for new development, our real estate values will not improve much. If we were to sell our real estate projects in the current market, we would have losses, although the amount of the losses is hard to predict. Management's current real estate strategy is to hold each real estate project until we can realize a reasonable value for it. Management evaluates strategies for all its businesses, including real estate, on an ongoing basis. We anticipate that competing demands for our financial resources, changes in the utility industry, and the proposed merger with Pepco, will cause us to evaluate thoroughly all diversified business strategies on a regular basis so we use capital and other resources in a manner that is most beneficial. Depending on market conditions in the future, we could also have losses on any future sales. It may be helpful for you to understand when we are required, by accounting rules, to write down the value of a real estate investment to market value. A write-down is required in either of two cases. The first is if we change our intent about a project from an intent to hold to an intent to sell and the market value of that project is below book value. The second is if the expected cash flow from the project is less than the investment in the project. In mid-March we received an unsolicited offer to buy Church Street Station, which is an entertainment, dining, and retail complex in Orlando, Florida. Because of the unique character of Church Street Station and the geographic distance of this project from our other real estate holdings in the Baltimore-Washington corridor, we decided that considering a sale was the appropriate strategy. Based on the accounting rules mentioned above, our decision was a change of intent which required us to write down our investment to the market value. In the first quarter of 1997, the Constellation Holdings Companies recorded a $12 million after-tax write-down of the investment in the project based on the unsolicited offer. The Constellation Holdings Companies recently negotiated 13 an agreement of sale for Church Street Station at substantially the same price offered earlier in the year. The buyer is in the process of performing due diligence on the facility. In the second quarter of 1997, the Constellation Holdings Companies recorded a $31.9 million after-tax write-down of the investment in a mixed-use, planned-unit development named Piney Orchard. The development, located in the Baltimore-Washington corridor, has been economically hurt by a prolonged period of low economic growth in the corridor. While the project is successful operationally, delays in the rebound of the real estate market caused delays in completion of phases of the development and sales which drove up project costs, specifically carrying costs which include interest expenses. Under applicable accounting rules we are required to write down the value of a real estate investment if expected cash flow from the project is less than the investment in the project. The write-down discussed above was recorded because the expected cash flow from the Piney Orchard project was less than the Constellation Holdings Companies' investment in the project. This was due primarily to carrying costs which include interest expenses. 14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Introduction - ------------ In Management's Discussion and Analysis we explain the general financial condition and the results of operations for BGE and its diversified business subsidiaries including: o what factors affect our business, o what our earnings and costs were in the periods presented, o why those earnings and costs were different between periods, o where our earnings came from, o how all of this affects our overall financial condition, o what our actual expenditures for capital projects were in the current period and what we expect them to be in the future, and o where cash will come from to pay for future capital expenditures. As you read Management's Discussion and Analysis, it may be helpful to refer to our Consolidated Statements of Income on page 2, which present the results of our operations for the quarters and the nine month periods ended September 30, 1997 and 1996. In Management's Discussion and Analysis, we analyze and explain the differences between periods in the specific line items of the Consolidated Statements of Income. Our analysis may be important to you in making decisions about your investments in BGE. BGE and Potomac Electric Power Company (Pepco) have agreed to merge into a new company named Constellation Energy Corporation. We have obtained all regulatory approvals, but two of the approvals -- from the Maryland and D.C. Public Service Commissions -- contain unacceptable conditions. We have requested reconsideration of the Maryland PSC order and plan to ask for reconsideration of the D.C. PSC order. The merger will not occur unless the conditions to these orders are modified. We discuss these matters in more detail in the "Update on Pending Merger With Potomac Electric Power Company" section of the Notes to Consolidated Financial Statements beginning on page 7 and in a Registration Statement on Form S-4 (Registration No. 33-64799). If the merger occurs, it will impact many of the matters discussed in Management's Discussion and Analysis including earnings, results of electric operations, expenses, liquidity, and capital resources. The electric utility industry is undergoing rapid and substantial change. Competition is increasing. The regulatory environment (federal and state) is shifting. These matters are discussed briefly in the "Competition and Response to Regulatory Change" section on page 18. They are discussed in detail in our 1996 Annual Report on Form 10-K. We continuously evaluate these changes. Based on the evaluations, we refine short and long term business plans with the primary goal of protecting our security holders' investments and providing them with superior returns on their investment in BGE. In order to support this primary goal, we also focus on other groups who impact our primary goal. For example, we stress providing low cost, reliable power to our electric customers. As you read Management's Discussion and Analysis, many of our initiatives to support our primary goal are mentioned. These include the proposed merger with Pepco, designed to position us to remain competitive as the industry changes (assuming it is possible to obtain reasonable regulatory approvals), and our diversification effort. We enter new businesses which we believe will support our primary goal. For example, new businesses may be opportunities to: o provide customers of our core energy business additional services, or o attract new customers for our core energy business, or o expand our diversified stream of revenues. We believe our newest subsidiary, Constellation Power Source(TM), Inc., will provide an opportunity to satisfy all three criteria. Its proposed power marketing business is described in detail in the "Constellation Power Source, Inc." section on page 29. 15 Results of Operations for the Quarter and Nine Months Ended September 30, 1997 - ------------------------------------------------------------------------------ Compared With the Corresponding Periods of 1996 - ------------------------------------------------- In this section, we discuss our earnings and the factors affecting them. We begin with a general overview, then separately discuss earnings for the utility business and for diversified businesses. Overview - -------- Total Earnings per Share of Common Stock - ---------------------------------------- Quarter Ended Nine Months Ended September 30 September 30 ----------------- ------------------- 1997 1996 1997 1996 -------- ------- -------- --------- Earnings per share from current-year operations: Utility business.................. $ .99 $ .86 $1.62 $1.73 Diversified businesses............ .12 .07 (.02) .21 --- --- ---- --- Total earnings per share from current-year operations......... 1.11 .93 1.60 1.94 Disallowed replacement energy costs. .00 .00 .00 (.03) --- --- --- ---- Total earnings per share............ $1.11 $ .93 $1.60 $1.91 ===== ===== ===== ===== Quarter Ended September 30, 1997 - -------------------------------- Our total earnings for the quarter ended September 30, 1997 increased $26.5 million, or $.18 per share, compared to the same period of 1996. In the third quarter of 1997, we had higher utility earnings due mostly to two factors: we sold more electricity due to warmer summer weather (people use more electricity to cool their homes in warmer weather) and we had lower operations and maintenance expenses. We discuss our utility earnings in more detail in the "Utility Business" section beginning on page 17. In the third quarter of 1997, we had higher earnings from our diversified business subsidiaries mostly because the Constellation Holdings Companies had higher earnings from power generation projects and financial investments. We discuss our diversified business earnings in more detail in the "Diversified Businesses" section beginning on page 25. Nine Months Ended September 30, 1997 - ------------------------------------ Our total earnings for the nine months ended September 30, 1997 decreased $45.7 million, or $.31 per share, compared to the same period of 1996. In the nine months ended September 30, 1997, we had lower utility earnings mostly because we sold less electricity and gas due to milder weather (people use less electricity and gas to heat or cool their homes in milder weather), mostly in the first six months of the year. In addition, we wrote off certain fuel costs in 1996 that were disallowed by the Maryland PSC. We did not have any similar costs disallowed in 1997. This helped our earnings slightly. We discuss our utility earnings in more detail in the "Utility Business" section beginning on beginning on page 17. In the nine months ended September 30, 1997, we had lower earnings from our diversified business subsidiaries mostly because the Constellation Holdings Companies had lower earnings from real estate projects. The Constellation Holdings Companies had lower earnings from real estate projects because they wrote down their 16 investments in two projects in the first half of 1997. The total after-tax amount of these write-downs was $43.9 million, or $.30 per share. We discuss these write-downs and our diversified business earnings in more detail in the "Diversified Businesses" section beginning on beginning on page 25. Utility Business - ---------------- Before we go into the details of our electric and gas operations, we believe it is important to discuss four factors that have a strong influence on our utility business performance: regulation, the weather, other factors including the condition of the economy in our service territory, and competition. Regulation by the Maryland Public Service Commission - ---------------------------------------------------- The Maryland PSC determines the rates we can charge our customers. Our rates consist of a "base rate" and a "fuel rate". The base rate is the rate the Maryland PSC allows us to charge our customers for the cost of providing them service, plus a profit. We have both an electric base rate and a gas base rate. Higher electric base rates apply during the summer when the demand for electricity is the greatest. Gas base rates are not affected by seasonal changes. The Maryland PSC allows us to include in base rates a component to recover money spent on conservation programs. This component is called an "energy conservation surcharge." However, under this surcharge the Maryland PSC limits what our profit can be. If, at the end of the year, we have exceeded our allowed profit, we lower the amount of future surcharges to our customers to correct the amount of overage, plus interest. In addition, we charge our electric customers separately for the fuel (nuclear fuel, coal, gas, or oil) we use to generate electricity. The actual cost of the fuel is passed on to the customer with no profit. We also charge our gas customers separately for the natural gas they consume. The price we charge for the natural gas is based on a Market Based Rates incentive mechanism approved by the Maryland PSC. We discuss Market Based Rates in more detail in the "Gas Cost Adjustments" section on page 23. From time to time, when necessary to cover increased costs, we ask the Maryland PSC for base rate increases. The Maryland PSC holds hearings to determine whether to grant us all or a portion of the amount requested. However, the Maryland PSC has historically allowed us to increase base rates to recover costs for replacing utility plant assets, plus a profit, beginning at the time of replacement. Generally, rate increases improve our utility earnings because they allow us to collect more revenue. However, rate increases are normally granted based on historical data and those increases may not always keep pace with increasing costs. Weather - ------- Weather affects the demand for electricity and gas, especially among our residential customers. Very hot summers and very cold winters increase demand. Milder weather reduces demand. We measure the weather's effect using "degree days." A degree day is the difference between the average daily actual temperature and a baseline temperature of 65 degrees. Cooling degree days result when the daily actual temperature exceeds the 65 degree baseline. Heating degree days result when the daily actual temperature is less than the baseline. During the cooling season, hotter weather is measured by more cooling degree days and results in greater demand for electricity to operate cooling systems. During the heating season, colder weather is measured by more heating degree days and results in greater demand for electricity and gas to operate heating systems. The following chart shows the number of heating and cooling degree-days in 1997 and 1996, and shows the percentage change in the number of degree days from the prior period. 17 Quarter Ended Nine Months Ended September 30 September 30 ----------------- ------------------- 1997 1996 1997 1996 -------- ------- -------- --------- Heating degree days................. 116 102 3,040 3,324 Percent change compared to prior period 13.7% (8.5)% Cooling degree days................. 529 491 711 770 Percent change compared to prior period 7.7% (7.7)% Other Factors - ------------- Other factors, aside from weather, impact the demand for electricity and gas. These factors include the "number of customers" and "usage per customer" during a given period. The number of customers in a given period is affected by new home and apartment construction and by the number of businesses in our service territory. Usage per customer refers to all other items impacting customer sales which cannot be separately measured. These factors include the strength of the economy in our service territory. When the economy is healthy and expanding, customers tend to consume more electricity and gas. Conversely, during an economic downtrend, our customers tend to consume less electricity and gas. We use these terms later in our discussions of electric and gas operations. In those sections, we discuss how these and other factors affected electric and gas sales during the periods presented. Competition and Response to Regulatory Change - --------------------------------------------- Our business is also affected by competition. Electric utilities are facing this challenge on various fronts, including: o in the construction of generating units to meet increased demand for electricity, o in the sale of their electricity in the bulk power markets, o in competing with alternative energy suppliers, and o in the future, for electric sales to retail customers which utilities now serve exclusively. We regularly reevaluate our strategies with two goals in mind: to improve our competitive position, and to anticipate and adapt to regulatory changes. In September 1995, we decided that a merger with Pepco would help us compete by maintaining low-cost production and increasing our size. The merger is more thoroughly discussed in the "Update on Pending Merger With Potomac Electric Power Company" section of the Notes to Consolidated Financial Statements beginning on page 7. Although we believe the merger will improve our competitive position in the future, no one can predict the ultimate effect competition or regulatory change will have on our earnings or on the earnings of the merged company. We will continue to develop strategies to keep us competitive. These strategies might include one or more of the following: o the complete or partial separation of our generation, transmission, and distribution functions, o other internal restructuring, o mergers or acquisitions of utility or non-utility businesses, o addition or disposition of portions of our service territories, o spin-off or distribution of one or more businesses. 18 We cannot predict whether any transactions of the types described above may actually occur, nor can we predict what their effect on our financial condition or competitive position might be. We discuss competition in our electric and gas businesses in more detail in our 1996 Annual Report on Form 10-K under the headings "Electric Regulatory Matters and Competition" and "Gas Regulatory Matters and Competition." Utility Business Earnings per Share of Common Stock - --------------------------------------------------- Quarter Ended Nine Months Ended September 30 September 30 ----------------- ------------------- 1997 1996 1997 1996 -------- ------- -------- --------- Utility earnings per share from current-year operations: Electric business................. $1.02 $ .88 $ 1.53 $1.59 Gas business...................... (.03) (.02) .09 .14 ---- ---- --- --- Total utility earnings per share from current-year operations... .99 .86 1.62 1.73 Disallowed replacement energy costs. .00 .00 .00 (.03) --- --- --- ---- Total utility earnings per share.... $ .99 $ .86 $ 1.62 $1.70 ===== ===== ====== ===== Our utility earnings for the quarter ended September 30, 1997 increased $19.7 million, or $.13 per share compared to the same quarter of 1996. Our utility earnings for the nine months ended September 30, 1997 decreased $10.4 million, or $.08 per share compared to the same nine months of 1996. We discuss the factors affecting utility earnings below. Electric Operations - ------------------- Electric Revenues - ----------------- The changes in electric revenues in 1997 compared to 1996 were caused by: Quarter Ended Nine Months Ended September 30 September 30 1997 vs. 1996 1997 vs. 1996 ---------------- ------------------- (In millions) Electric system sales volumes....... $15.2 $(25.1) Base rates.......................... (5.6) 5.5 Fuel rates.......................... 1.4 (6.5) --- ---- Total change in electric revenues from electric system sales........ 11.0 (26.1) Interchange and other sales......... (0.2) (19.7) Other............................... 1.2 0.9 --- --- Total change in electric revenues... $12.0 $(44.9) ===== ====== Electric System Sales Volumes - ----------------------------- "Electric system sales" are sales to customers in our service territory at rates set by the Maryland PSC. These sales do not include interchange sales and sales to others. 19 The percentage changes in our electric system sales volumes, by type of customer, in 1997 compared to 1996 were: Quarter Ended Nine Months Ended September 30 September 30 1997 vs. 1996 1997 vs. 1996 ---------------- ------------------- Residential......................... 4.6% (5.5)% Commercial.......................... 1.8 0.1 Industrial.......................... (1.7) (1.5) During the quarter ended September 30, 1997, we sold more electricity to residential and commercial customers mostly due to warmer summer weather. We sold less electricity to industrial customers mostly because usage per customer decreased. We would have sold even less electricity to industrial customers, except the number of customers increased and we had warmer summer weather. During the nine months ended September 30, 1997, we sold less electricity to residential customers mostly for two reasons: lower electricity usage per customer and milder weather. We sold about the same amount of electricity to commercial customers as we did in the same period last year. We sold less electricity to industrial customers mostly because usage per customer decreased. We would have sold even less electricity to industrial customers, except the number of customers increased. Base Rates - ---------- During the quarter ended September 30, 1997, base rate revenues were lower than they were in the same period of 1996. Although we sold more electricity during the quarter, our base rate revenues decreased because of a lower energy conservation surcharge effective July 1, 1997. During the nine months ended September 30, 1997, base rate revenues were higher than they were in the same period of 1996. Although we sold less electricity during the nine months, our base rate revenues increased because of a higher energy conservation surcharge in the first six months of the year. Fuel Rates - ---------- The fuel rate is the rate the Maryland PSC allows us to charge our customers for our actual cost of fuel with no profit to us. If the cost of fuel goes up, the Maryland PSC permits us to increase the fuel rate. If the cost of fuel goes down, our customers benefit from a reduction in the fuel rate. The fuel rate is impacted most by the amount of electricity generated at the Calvert Cliffs Nuclear Power Plant because the cost of nuclear fuel is cheaper than coal, gas, or oil. Changes in the fuel rate normally do not affect earnings. However, if the Maryland PSC disallows recovery of any part of the fuel costs, our earnings are reduced. (We discuss this more thoroughly in the "Electric Fuel and Purchased Energy Expenses" section below and in the "Recoverability of Electric Fuel Costs" section of the Notes to Consolidated Financial Statements on page 12.) During the quarter ended September 30, 1997, fuel rate revenues increased because we sold more electricity. During the nine months ended September 30, 1997, fuel rate revenues decreased because we sold less electricity. 20 Interchange and Other Sales - --------------------------- "Interchange and other sales" are sales of energy in the Pennsylvania-New Jersey-Maryland Interconnection (PJM) and to others. The PJM is a regional power pool of eight utility member companies, including BGE. We sell energy to PJM members and to others after we have satisfied the demand for electricity in our own system. During the quarter ended September 30, 1997, we had about the same amount of interchange and other sales as we did in the same period of 1996. During the nine months ended September 30, 1997, we had lower interchange and other sales mostly because of lower sales volumes due to reduced demand. Electric Fuel and Purchased Energy Expenses - ------------------------------------------- Quarter Ended Nine Months Ended September 30 September 30 ----------------- ------------------- 1997 1996 1997 1996 -------- ------- -------- --------- (In millions) Actual costs........................ $135.7 $140.4 $381.7 $419.6 Net recovery (deferral) of costs under electric fuel rate clause (see Note 1 of the Form 10-K)..... (0.5) (6.2) 1.5 (10.8) Disallowed replacement energy costs. 0.0 0.0 0.0 6.8 --- --- --- --- Total electric fuel and purchased energy expenses......... $135.2 $134.2 $383.2 $415.6 ====== ====== ====== ====== Actual Costs - ------------ During the quarter and nine months ended September 30, 1997, our actual cost of fuel to generate electricity (nuclear fuel, coal, gas, or oil) and electricity we bought from other utilities was lower than in the same periods of 1996 mostly for two reasons: we bought less electricity from other utilities because we were able to meet demand using the electricity we generated, and we were able to use a less-costly mix of generating plants mostly because of shorter refueling and maintenance downtime at our Calvert Cliffs Nuclear Power Plant. Electric Fuel Rate Clause - ------------------------- Under the electric fuel rate clause, we defer (include as an asset or liability on the balance sheet and exclude from income and expense) the difference between what we spend for fuel and what we collect from customers under the fuel rate in a given period. We either bill our customers (if we spend more than we collect) or we refund our customers (if we collect more than we spend) the amount of the difference. During the quarter ended September 30, 1997, we spent more for fuel than we collected from our customers. During the nine months ended September 30, 1997, we collected more revenues from our customers than we spent for fuel. Disallowed Replacement Energy Costs - ----------------------------------- During the nine months ended September 30, 1996, we wrote off $6.8 million of fuel costs that were disallowed by the Maryland PSC. We did not have any similar costs disallowed in 1997. 21 Gas Operations - -------------- Gas Revenues - ------------ The changes in gas revenues in 1997 compared to 1996 were caused by: Quarter Ended Nine Months Ended September 30 September 30 1997 vs. 1996 1997 vs. 1996 ---------------- ------------------- (In millions) Gas system sales volumes............ $(0.3) $(8.5) Base rates.......................... 0.6 (1.7) Gas cost adjustments................ (1.5) (2.9) ---- ---- Total change in gas revenues from gas system sales............. (1.2) (13.1) Off-system sales.................... (1.0) 4.4 Other............................... 0.2 0.0 --- --- Total change in gas revenues........ $(2.0) $(8.7) ===== ===== Gas System Sales Volumes - ------------------------ The percentage changes in our gas system sales volumes, by type of customer, in 1997 compared to 1996 were: Quarter Ended Nine Months Ended September 30 September 30 1997 vs. 1996 1997 vs. 1996 ---------------- ------------------- Residential........................... (4.9)% (11.0)% Commercial............................ (5.6) (2.0) Industrial............................ (3.8) 3.8 During the quarter ended September 30, 1997, we sold less gas to residential, commercial, and industrial customers mostly because usage per customer decreased. During the nine months ended September 30, 1997, we sold less gas to residential and commercial customers due mostly to lower usage per customer and milder weather. We would have sold even less gas to these customers except the number of residential and commercial customers increased. We sold more gas to industrial customers mostly because the milder weather caused fewer service interruptions and Bethlehem Steel used more gas. We would have sold even more gas to industrial customers except gas usage by industrial customers other than Bethlehem Steel decreased. Base Rates - ---------- During the quarter ended September 30, 1997, base rate revenues were higher than they were in the same period of 1996. Although we sold less gas this year, our base rate revenues increased because of a higher energy conservation surcharge effective July 1, 1997. During the nine months ended September 30, 1997, base rate revenues were lower than they were in the same period of 1996. Our base rate revenues decreased mostly because of lower sales volumes due to reduced demand and because of a lower energy conservation surcharge in the first six months of the year. 22 Gas Cost Adjustments - -------------------- Prior to October 1996, the Maryland PSC allowed us to recover the actual cost of the gas sold to our customers through "gas cost adjustment clauses" that require us to defer the difference between our actual cost of gas and the gas revenues we collect from customers. We bill or refund that difference to customers in the future. Effective October 1996, the Maryland PSC approved a modification of the gas cost adjustment clauses to provide a "Market Based Rates" incentive mechanism. In general terms, under Market Based Rates our actual cost of gas is compared to a market index (a measure of the market price of gas in a given period), and half of the difference belongs to shareholders. Delivery service customers, including Bethlehem Steel, are not subject to the gas cost adjustment clauses because we are not selling them gas (we are selling them the service of delivering their gas). During the quarter and nine months ended September 30, 1997, gas adjustment revenues decreased because of the operation of the Market Based Rates incentive mechanism. Off-System Sales - ---------------- Off-system gas sales, which are direct sales to wholesale suppliers of natural gas outside our service territory, also are not subject to gas cost adjustments. The Maryland PSC approved an arrangement for part of the earnings from off-system sales to benefit customers (through reduced costs) and the remainder to be retained by BGE (which benefits shareholders). The price of this gas changes based on market conditions. During the quarter ended September 30, 1997, revenues from off-system gas sales decreased because we sold gas off-system at a lower price. During the nine months ended September 30, 1997, off-system gas sales increased mostly because we first began off-system sales of gas in February of 1996. These changes in off-system sales did not significantly impact earnings. Gas Purchased For Resale Expenses - --------------------------------- Quarter Ended Nine Months Ended September 30 September 30 ----------------- ------------------- 1997 1996 1997 1996 -------- ------- -------- --------- (In millions) Actual costs........................ $ 23.4 $28.6 $196.9 $203.8 Net recovery (deferral) of costs under gas adjustment clauses (see Note 1 of the Form 10-K)..... 2.0 (0.5) 9.9 2.7 --- ---- --- --- Total gas purchased for resale expenses................... $ 25.4 $28.1 $206.8 $206.5 ====== ===== ====== ====== Actual Costs - ------------ Actual costs include the cost of gas purchased for resale to our customers and for sale off-system. These costs do not include the cost of gas purchased by delivery service customers, including Bethlehem Steel. During the quarter ended September 30, 1997, actual gas costs decreased mostly because the market price of gas was lower. During the nine months ended September 30, 1997, actual gas costs decreased mostly because we sold less gas. 23 Gas Adjustment Clauses - ---------------------- We charge customers for the cost of gas sold through gas adjustment clauses (determined by the Maryland PSC), as discussed under "Gas Cost Adjustments" earlier in this section. During the quarter and nine months ended September 30, 1997, the portion of our actual gas costs subject to these clauses was lower than the revenues we collected from our customers. As a result, we recovered costs which we had deferred in prior years. Other Operating Expenses - ------------------------ Operations and Maintenance Expenses - ----------------------------------- During the quarter ended September 30, 1997, our operations and maintenance expenses decreased $10.8 million due mostly to three factors: lower benefit costs, lower costs associated with a regular maintenance outage at our Calvert Cliffs Nuclear Power Plant, and lower administrative and general expenses. During the nine months ended September 30, 1997, our operations and maintenance expenses were about the same as they were in the same period of 1996. Other Income and Expenses - ------------------------- Interest Charges - ---------------- Interest charges represent the interest we paid on outstanding debt. During the quarter ended September 30, 1997, we had $7.5 million of higher interest charges. During the nine months ended September 30, 1997, we had $17.8 million of higher interest charges. Our interest charges increased during these periods because we had more debt outstanding and interest rates were higher. Income Taxes - ------------ During the quarter ended September 30, 1997, our total income taxes increased $12.1 million because we had higher taxable income from both our utility operations and our diversified businesses. During the nine months ended September 30, 1997, our total income taxes decreased $30.7 million because we had lower taxable income from both our utility operations and our diversified businesses. Environmental Matters - --------------------- We are subject to increasingly stringent federal, state, and local laws and regulations that work to improve or maintain the quality of the environment. If certain substances were disposed of or released at any of our properties, whether currently operating or not, these laws and regulations require us to remove or remedy the effect on the environment. This includes Environmental Protection Agency Superfund sites. You will find details of our environmental matters in the "Environmental Matters" section of the Notes to Consolidated Financial Statements beginning on page 10 and in our 1996 Annual Report on Form 10-K under Item 1. Business - Environmental Matters. These details include financial information. Some of the information is about costs that may be material. 24 Diversified Businesses - ---------------------- In the 1980's, we began to diversify our business in response to limited growth in gas and electric sales. Today, we continue to diversify our business in response to regulatory changes in the utility industry. Some of our diversified businesses are related to our core utility business and others are not. Our diversified businesses are in three groups: o Constellation Holdings, Inc. and Subsidiaries, together known as the Constellation Holdings Companies, o Constellation Energy Solutions(TM), Inc. and Subsidiaries, and o BGE Home Products & Services, Inc. and Subsidiary. Diversified Business Earnings per Share of Common Stock - ------------------------------------------------------- Quarter Ended Nine Months Ended September 30 September 30 ----------------- ------------------- 1997 1996 1997 1996 -------- ------- -------- --------- Constellation Holdings Companies.... $ .13 $ .06 $ .00 $ .19 Constellation Energy Solutions...... (.02) .00 (.04) .00 BGE Home Products & Services........ .01 .01 .02 .02 --- --- --- --- Total diversified business earnings per share............... $ .12 $ .07 $ (.02) $ .21 ===== ===== ====== ===== Our diversified business earnings for the quarter ended September 30, 1997 increased $6.8 million, or $.05 per share compared to the same quarter of 1996. Our diversified business earnings for the nine months ended September 30, 1997 decreased $35.2 million, or $.23 per share compared to the same nine months of 1996. These changes came mostly from the Constellation Holdings Companies. We discuss the factors affecting the earnings of our diversified businesses below. The Constellation Holdings Companies -- Power Generation, Financial - ------------------------------------------------------------------- Investments, and Real Estate - ---------------------------- The Constellation Holdings Companies engage in the following: o development, ownership, and operation of power generation projects, o financial investments, and o development, ownership, and management of real estate and senior-living facilities. Earnings per share from the Constellation Holdings Companies were: Quarter Ended Nine Months Ended September 30 September 30 ----------------- ------------------- 1997 1996 1997 1996 -------- ------- -------- --------- Power generation systems.............. $ .08 $ .03 $ .20 $ .14 Financial investments................. .08 .04 .14 .08 Real estate development and senior-living facilities.......... (.02) (.01) (.32) (.02) Other................................. (.01) .00 (.02) (.01) ---- --- ---- ---- Total Constellation Holdings Companies' earnings per share.................. $ .13 $ .06 $ .00 $ .19 ===== ====== ===== ===== 25 Power Generation - ---------------- The Constellation Holdings Companies' power generation business develops, owns, and operates power generation facilities. Earnings from these projects fluctuate based on their operating performance. Earnings may also fluctuate in the future based on the pricing provisions of certain agreements. This is discussed further in the "California Power Purchase Agreements" section that follows. During the quarter and nine months ended September 30, 1997, earnings increased mostly for two reasons. The Constellation Holdings Companies wrote off a $6.2 million investment in a solar power project in the third quarter of 1996. They did not have a similar write-off in 1997. In addition, earnings from energy projects were higher because operating performance improved. California Power Purchase Agreements - ------------------------------------ The Constellation Holdings Companies have $248 million invested in 16 projects that sell electricity in California under power purchase agreements called "Interim Standard Offer No. 4" agreements. Under these agreements, the projects supply electricity to utility companies at: o a fixed rate for capacity and energy the first 10 years of the agreements, and o a fixed rate for capacity plus a variable rate for energy based on the utilities' avoided cost for the remaining term of the agreements. Generally, a "capacity rate" is paid to a power plant for its availability to supply electricity, and an "energy rate" is paid for the electricity actually generated. "Avoided cost" generally is the cost of a utility's cheapest next-available source of generation to service the demands on its system. We use the term transition period to describe the timeframe when the 10-year periods for fixed energy rates expire for these 16 power generation projects and they begin supplying electricity at variable rates. The transition period began in 1996 and will continue through 2000. At the date of this report, five projects had already transitioned to variable rates and four other projects will transition in 1998. The remaining seven projects will transition in 1999 or 2000. The projects that have already transitioned to variable rates have had lower revenues under variable rates than they did under fixed rates. However, we have not yet experienced lower earnings from the California projects because the combined revenues from the remaining projects, which continued to supply electricity at fixed rates, were high enough to offset the lower revenues from the variable-rate projects. When the remaining projects transition to variable rates, we expect the revenues from those projects to also be lower than they are under fixed rates. It is difficult to estimate how much lower the revenues may be, but the Constellation Holdings Companies' earnings could be affected significantly. However, the California projects that make the highest revenues will transition to variable rates in 1999 and 2000. As a result, we do not expect the Constellation Holdings Companies to have significantly lower earnings due to the transition to variable rates before 2000. The Constellation Holdings Companies are pursuing alternatives for some of these power generation projects including: o repowering the projects to reduce operating costs, o changing fuels to reduce operating costs, o renegotiating the power purchase agreements to improve the terms, o restructuring financings to improve the financing terms, and o selling its ownership interests in the projects. We cannot predict the financial effects of the transition from fixed to variable rates on the Constellation Holdings Companies or on BGE, but the effects could be material. 26 International - ------------- Historically, the Constellation Holdings Companies' power generation projects have been in the United States. Over the last two years, however, the Constellation Holdings Companies have sought projects in Latin America. As of September 30, 1997, the Constellation Holdings Companies had invested about $18.8 million and committed another $7.7 million in power projects in Latin America. In the future, the Constellation Holdings Companies' power generation business may be expanding further in both domestic and international projects. Financial Investments - --------------------- Earnings from the Constellation Holdings Companies' portfolio of financial investments include income from: o marketable securities, o financial limited partnerships, and o financial guaranty insurance companies. During the quarter ended September 30, 1997, earnings were higher than in 1996 mostly due to a $6 million after-tax gain on a sale of stock held by a financial limited partnership. Earnings would have been even higher, except the Constellation Holdings Companies recorded a $2.2 million after-tax gain on a sale of stock in the third quarter of 1996 that they did not have in the same period of 1997. During the nine months ended September 30, 1997, earnings were higher than in 1996 due to the $6 million after-tax gain described above, better earnings from marketable securities, and increased gains from financial limited partnerships. Earnings would have been even higher, except the Constellation Holdings Companies recorded: o the $2.2 million after-tax gain on a sale of stock in the third quarter of 1996, described above, that they did not have in the same period of 1997, o a $1.9 million after-tax gain on a sale of stock in the second quarter of 1996 that they did not have in the same period of 1997, and o a $1.3 million after-tax write-down of an investment in the second quarter of 1997. Real Estate Development and Senior-Living Facilities - ---------------------------------------------------- The Constellation Holdings Companies' real estate development business includes: o land under development, o office buildings, o retail projects, o distribution facility projects, o an entertainment, dining, and retail complex in Orlando, Florida, o a mixed-use planned-unit development, and o senior-living facilities. Most of these projects are in the Baltimore-Washington corridor. The area has had a surplus of available land and office space in recent years, during a time of low economic growth and corporate downsizings. Our projects have been economically hurt by these conditions. During the quarter ended September 30, 1997, earnings from real estate development and senior-living facilities were about the same as they were in the same period of 1996. During the nine months ended September 30, 1997, earnings from real estate development and senior-living facilities were lower mostly due to: 27 o a $31.9 million, or $.22 per share, after-tax write-down of the investment in one project during the second quarter of 1997, and o a $12 million, or $.08 per share, after-tax write-down of the investment in another project during the first quarter of 1997. We discuss these write-downs later in this section. The Constellation Holdings Companies' real estate portfolio has continued to incur carrying costs and depreciation over the years. Additionally, the Constellation Holdings Companies have been charging interest payments to expense rather than capitalizing them for some undeveloped land where development activities have stopped. These carrying costs, depreciation, and interest expenses have decreased earnings and are expected to continue to do so. Cash flow from real estate operations has not been enough to make the monthly loan payments on some of these projects. Cash shortfalls have been covered by cash from Constellation Holdings. Constellation Holdings obtained those funds from the cash flow from other Constellation Holdings Companies and through additional borrowing. We consider market demand, interest rates, the availability of financing, and the strength of the economy in general when making decisions about our real estate investments. We believe that until the economy shows sustained growth and there is more demand for new development, our real estate values will not improve much. If we were to sell our real estate projects in the current market, we would have losses, although the amount of the losses is hard to predict. Management's current real estate strategy is to hold each real estate project until we can realize a reasonable value for it. Management evaluates strategies for all its businesses, including real estate, on an ongoing basis. We anticipate that competing demands for our financial resources, changes in the utility industry, and the proposed merger with Pepco, will cause us to evaluate thoroughly all diversified business strategies on a regular basis so we use capital and other resources in a manner that is most beneficial. Depending on market conditions in the future, we could also have losses on any future sales. It may be helpful for you to understand when we are required, by accounting rules, to write down the value of a real estate investment to market value. A write-down is required in either of two cases. The first is if we change our intent about a project from an intent to hold to an intent to sell and the market value of that project is below book value. The second is if the expected cash flow from the project is less than the investment in the project. In mid-March we received an unsolicited offer to buy Church Street Station, which is an entertainment, dining, and retail complex in Orlando, Florida. Because of the unique character of Church Street Station and the geographic distance of this project from our other real estate holdings in the Baltimore-Washington corridor, we decided that considering a sale was the appropriate strategy. Based on the accounting rules mentioned above, our decision was a change of intent which required us to write down our investment to the market value. In the first quarter of 1997, the Constellation Holdings Companies recorded a $12 million after-tax write-down of the investment in the project based on the unsolicited offer. The Constellation Holdings Companies recently negotiated an agreement of sale for Church Street Station at substantially the same price offered earlier in the year. The buyer is in the process of performing due diligence on the facility. In the second quarter of 1997, the Constellation Holdings Companies recorded a $31.9 million after-tax write-down of the investment in a mixed-use, planned-unit development named Piney Orchard. The development, located in the Baltimore-Washington corridor, has been economically hurt by a prolonged period of low economic growth in the corridor. While the project is successful operationally, delays in the rebound of the real estate market caused delays in completion of phases of the development and sales which drove up project costs, specifically carrying costs which includes interest expenses. Under applicable accounting rules we are required to write down the value of a real estate investment if expected cash flow from the project is less than the investment in the project. The write-down discussed above was 28 recorded because the expected cash flow from the Piney Orchard project was less than the Constellation Holdings Companies' investment in the project. This was due primarily to carrying costs which include interest expenses. Constellation Energy Solutions, Inc. and Subsidiaries -- Our Energy Marketing - ----------------------------------------------------------------------------- Companies - --------- Constellation Energy Solutions is a wholly owned subsidiary of BGE and serves as the holding company for our three energy marketing businesses: o Constellation Power Source, Inc. -- our power marketing business, o Constellation Energy Source(TM), Inc. -- our natural gas brokering business, and o Constellation Energy Projects & Services(TM), Inc. and Subsidiaries -- our energy services business. Earnings per share from these businesses were: Quarter Ended Nine Months Ended September 30 September 30 ----------------- ------------------- 1997 1996 1997 1996 -------- ------- -------- --------- Constellation Power Source............ $ .00 $ .00 $(.01) $ .00 Constellation Energy Source........... (.01) .00 (.02) .00 Constellation Energy Projects & Services (.01) .00 (.01) .00 ---- --- ---- --- Total Constellation Energy Solutions earnings per share.................. $(.02) $ .00 $(.04) $ .00 ===== ====== ===== ===== Constellation Power Source, Inc. - -------------------------------- Constellation Power Source was formed in February 1997 to enter the power marketing business. This new business purchases and sells electric power and electric power derivatives, and engages in related activities including: o power brokering, o power marketing, o risk management activities, and o derivative trading. Goldman Sachs Power, LLC, an affiliate of Goldman, Sachs & Co., the investment banking firm, is the exclusive advisor to Constellation Power Source for risk management and power marketing. During the quarter and nine months ended September 30, 1997, earnings per share from this subsidiary were not significant. Constellation Energy Source, Inc. - --------------------------------- Constellation Energy Source provides natural gas brokering and related services for wholesale and retail customers. During the quarter ended September 30, 1997, earnings were about the same as they were in the same period of 1996. During the nine months ended September 30, 1997, earnings were lower than in 1996 mostly because of lower margins on gas sales. 29 Constellation Energy Projects & Services, Inc. and Subsidiaries - --------------------------------------------------------------- Constellation Energy Projects & Services provides a broad range of customized energy services, including: o private electric and gas distribution systems, o energy consulting, o power quality services, and o campus and multi-building energy systems. Constellation Energy Projects & Services also provides district energy systems through ComfortLink(R) (a partnership with the Poole & Kent Company). During the quarter and nine months ended September 30, 1997, earnings were about the same as they were in the same periods of 1996. BGE Home Products & Services, Inc. and its Subsidiary -- Our Home Products - -------------------------------------------------------------------------- and Commercial Building Systems Businesses - ------------------------------------------ BGE Home Products & Services: o sells and services electric and gas appliances, o engages in home improvements, and o sells and services heating and air conditioning systems. During the quarter and nine months ended September 30, 1997, earnings were about the same as they were in the same periods of 1996. 30 Liquidity and Capital Resources - ------------------------------- Overview - -------- Our business requires a great deal of capital. Our actual capital requirements for the nine months ended September 30, 1997, along with estimated annual amounts for the years 1997 through 1999, are shown below. For the twelve months ended September 30, 1997, our ratio of earnings to fixed charges was 2.62 and our ratio of earnings to combined fixed charges and preferred and preference dividend requirements was 2.18. Nine Months Ended September 30 Calendar Year Estimate 1997 1997 1998 1999 -------- ------------------------ (In millions) Utility Business Capital Requirements: - -------------------------------------- Construction expenditures (excluding AFC) Electric............................... $ 171 $ 241 $ 224 $222 Gas.................................... 66 85 72 76 Common................................. 17 28 29 27 -- -- -- -- Total construction expenditures........ 254 354 325 325 AFC...................................... 6 8 7 7 Nuclear fuel (uranium purchases and processing charges)................ 42 45 50 50 Deferred energy conservation expenditures........................... 22 29 9 9 Retirement of long-term debt and redemption of preference stock ........ 173 193 117 344 --- --- --- --- Total utility business capital requirements................... 497 629 508 735 --- --- --- --- Diversified Business Capital Requirements: - ------------------------------------------ Investment requirements.................. 103 177 167 168 Retirement of long-term debt............. 156 188 165 120 --- --- --- --- Total diversified business capital requirements................... 259 365 332 288 --- --- --- --- Total capital requirements............... $ 756 $ 994 $ 840 $1,023 ====== ======= ===== ====== Capital Requirements of Our Utility Business - -------------------------------------------- Capital requirements for our utility business do not include: o costs to complete the pending merger with Pepco, or o costs for increased controls at our fossil generating plants to meet the new standards for very fine particulates and the revised standards for ozone attainment. The costs to complete the pending merger with Pepco, which are expected to be $150 million, are discussed in the "Update on Pending Merger With Potomac Electric Power Company" section of the Notes to Consolidated Financial Statements beginning on page 7. The costs for increased controls at our fossil generating plants to meet the new standards for very fine particulates and the revised standards for ozone attainment are discussed in the "Environmental Matters" section of the Notes to Consolidated Financial Statements beginning on page 10. 31 We continuously review and change our construction program, so actual expenditures may vary from the estimates for the years 1997 through 1999 in the capital requirements chart. Additionally, actual capital requirements may be different than the estimates for 1997 through 1999 because adjustments which may result from the pending merger with Pepco have not been considered in those estimates. Electric construction expenditures include improvements to generating plants and to our transmission and distribution facilities. Our projections of future electric construction expenditures do not include costs to build more generating units. During the twelve months ended September 30, 1997, our utility operations provided about 81% of the cash needed to meet our capital requirements, excluding cash needed to retire debt and redeem preference stock. During the three years from 1997 through 1999, we expect utility operations to provide 115% of the cash needed to meet our capital requirements, excluding cash needed to retire debt and redeem preference stock. This estimate does not consider the pending merger with Pepco. When we cannot meet utility capital requirements internally, we sell debt and equity securities. The amount of cash we need and market conditions determine when and how much we sell. From January 1, 1997 through the date of this report, we issued $257 million of long-term debt and we redeemed $89 million of long-term debt and $104 million of preference stock. Security Ratings - ---------------- Independent credit-rating agencies rate our fixed-income securities. The ratings indicate the agencies' assessment of our ability to pay interest, dividends, and principal on these securities. These ratings affect how much it will cost us to sell these securities. The better the rating, the cheaper it is for us to sell. Our securities ratings at the date of this report are shown in the following table. On October 14, 1997, Standard & Poors upgraded our mortgage bonds from A+ to AA-. All other ratings remained the same. Standard Moody's & Poors Investors Duff & Phelps Rating Group Service Credit Rating Co. -------------- ------------ -------------------- Mortgage Bonds AA- A1 AA- Unsecured Debt A A2 A+ Preference Stock A "a2" A Capital Requirements of Our Diversified Businesses - -------------------------------------------------- In the past, capital requirements of our diversified businesses only included the Constellation Holdings Companies because they had the only significant capital requirements. From time to time, however, our other diversified businesses may develop significant capital requirements. As that occurs, we will include the capital requirements of those businesses in the capital requirements table on page 31. As discussed below under "Diversified Business Investment Requirements," capital requirements for Constellation Power Source and ComfortLink are also included this year. Our diversified businesses expect to expand their businesses. This may include expansion in the energy marketing, power generation, financial investments, real estate, and senior-living facility businesses. Such expansion could mean more investments in and acquisition of new projects. Our diversified businesses have met their capital requirements in the past through borrowing, cash from their operations, and from time to time, loans or equity contributions from BGE. Our diversified businesses plan to raise the cash needed to meet capital requirements in the future through these same methods. 32 Diversified Business Investment Requirements - -------------------------------------------- The investment requirements of our diversified businesses include: o the Constellation Holdings Companies' investments in financial limited partnerships and funding for the development and acquisition of projects, as well as loans made to project partnerships, o ComfortLink's funding for construction of district energy projects, and o funding for growing Constellation Power Source's power marketing business. Investment requirements for 1997 through 1999 include estimates of funding for ongoing and anticipated projects. We continuously review and modify those estimates. Actual investment requirements could vary a great deal from the estimates on page 31 due to: o the type and number of projects selected for development, o the effect of market conditions on those projects, o the ability to obtain financing, and o the availability of cash from operations. Diversified Business Debt and Liquidity - --------------------------------------- Our diversified businesses plan to meet capital requirements by refinancing debt as it comes due, by additional borrowing, and with cash generated by the businesses. This includes cash from operations, sale of assets, and earned tax benefits. BGE Home Products & Services may also meet capital requirements through sales of receivables. If the Constellation Holdings Companies can get a reasonable value for real estate, additional cash may be obtained by selling real estate projects. The Constellation Holdings Companies' ability to sell or liquidate assets will depend on market conditions, and we cannot give assurances that these sales or liquidations could be made. For more information, see the discussion of the real estate business and market in the "Real Estate Development and Senior-Living Facilities" section beginning on page 27. On May 5, 1997, the Constellation Holdings Companies issued $274 million of three and four-year notes. The three-year notes have an interest rate of 7.50% and the four-year notes have an interest rate of 7.66%. The notes were issued to several institutional investors in a private placement offering. In addition, our diversified businesses have the following revolving credit agreements to provide additional cash for short-term financial needs: Amount of Revolving Credit Agreement ------------------------ o Constellation Holdings Companies $75 million o ComfortLink $50 million o Constellation Energy Solutions, Inc. $10 million and Subsidiaries 33 PART II. OTHER INFORMATION - --------------------------- Item 1. Legal Proceedings - -------------------------- Asbestos - ------- Since 1993, we have been involved in several actions concerning asbestos. All of the actions together are titled In re Baltimore City Personal Injuries Asbestos Cases in the Circuit Court for Baltimore City, Maryland. The actions are based upon the theory of "premises liability," alleging that we knew of and exposed individuals to an asbestos hazard. The actions relate to two types of claims. The first type are direct claims by individuals exposed to asbestos. We described these claims in a Report on Form 8-K filed August 20, 1993. We are involved in these claims with approximately 70 other defendants. Approximately 520 individuals that were never employees of the Company each claim $6 million in damages ($2 million compensatory and $4 million punitive). We do not know the specific facts necessary to estimate our potential liability for these claims. The specific facts we do not know include: o the identity of our facilities at which the plaintiffs allegedly worked as contractors, o the names of the individuals' employers, and o the date on which the exposure allegedly occurred. The second type are claims by one manufacturer - Pittsburgh Corning Corp. - against us and approximately eight others, as third-party defendants. These claims relate to approximately 1,500 individual plaintiffs. We do not know the specific facts necessary to estimate our potential liability for these claims. The specific facts we do not know include: o the identity of our facilities containing asbestos manufactured by the manufacturer, o the relationship (if any) of each of the individual plaintiffs to us, o the settlement amounts for any individual plaintiffs who are shown to have had a relationship to us, and o the dates on which/places at which the exposure allegedly occurred. Until the relevant facts for both type claims are determined, we are unable to estimate what our liability, if any, might be. Although insurance and hold harmless agreements from contractors who employed the plaintiffs may cover a portion of any awards in the actions, our potential liability could be material. Environmental Matters - --------------------- Our potential environmental liabilities and pending environmental actions are listed in Item 1. Business-Environmental Matters of our 1996 Annual Report on Form 10-K. In April, 1997, we received an information request from the Environmental Protection Agency (EPA) concerning the 68th Street Dump Site, also known as the Robb Tyler Dump, located in Baltimore, Maryland. This site is not currently listed as a federal Superfund site. We understand that the EPA has sent information requests to over 70 other parties. Our response to the EPA is that our records do not show that we sent waste to the site. This response is based on reviewing all relevant documents and interviewing employees involved in waste disposal for the Company from 1950 to 1975, which is the period covered by the EPA's inquiry. Our potential liability cannot be estimated at this time. 34 PART II. OTHER INFORMATION (Continued) - --------------------------------------- Item 4. Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------ On October 30, 1997, we held our 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 124,175,997 556,434 2,031,909 Beverly B. Byron 124,158,577 573,854 2,031,909 J. Owen Cole 124,334,574 397,857 2,031,909 Dan A. Colussy 124,405,491 326,940 2,031,909 Edward A. Crooke 124,123,864 608,567 2,031,909 James R. Curtiss 124,158,786 573,645 2,031,909 Jerome W. Geckle 124,294,352 438,079 2,031,909 Freeman A. Hrabowski 124,075,973 656,458 2,031,909 Nancy Lampton 124,412,930 319,501 2,031,909 George V. McGowan 124,196,534 535,897 2,031,909 Christian H. Poindexter 123,544,821 1,187,610 2,031,909 George L. Russell, Jr. 124,139,222 593,209 2,031,909 Michael D. Sullivan 124,024,920 707,511 2,031,909 2. The appointment of Coopers & Lybrand, L.L.P. as independent accountants was ratified, and with respect to holders of common stock, the number of affirmative votes cast were 125,105,289. The number of negative votes cast were 878,806, and the number of abstentions were 1,260,278. 35 PART II. OTHER INFORMATION (Continued) - --------------------------------------- Item 5. Other Information - ------------------------- Unaudited Pro Forma Combined Condensed Financial Information - ------------------------------------------------------------ The following unaudited pro forma condensed financial information combines our historical consolidated balance sheets and statements of income with those of Potomac Electric Power Company (Pepco) and presents the effect of our proposed merger into Constellation Energy Corporation. As previously disclosed, we plan to complete the merger as soon as we obtain all regulatory approvals, assuming any conditions to the approvals are acceptable. The unaudited pro forma combined condensed balance sheet at September 30, 1997 gives effect to the merger as if it had occurred at September 30, 1997. The unaudited pro forma combined condensed statement of income for the nine months ended September 30, 1997, gives effect to the merger as if it had occurred at January 1, 1997. These statements are prepared on the basis of accounting for the merger as a pooling of interests and are based on the assumptions included in the notes following the financial statements. Constellation Energy Corporation was formed September 22, 1995 and has no assets or operations. Therefore, Constellation Energy Corporation has no financial statements so there has been no audit of such statements. The following pro forma financial information was prepared using our consolidated financial statements and related notes that are included in this document and the consolidated financial statements and related notes that are included in Pepco's quarterly filing under the Securities Exchange Act of 1934 (1934 Act). The pro forma information should be read in conjunction with those consolidated financial statements. The pro forma financial information does not necessarily indicate the financial position or operating results that would have occurred if the merger was consummated on the dates for which the merger is being given effect nor is it necessarily indicative of future financial position or operating results. The following unaudited pro forma combined condensed financial information of Constellation Energy Corporation is set forth in this Form 10-Q: o Balance Sheet as of September 30, 1997 o Income Statement for the Nine Months Ended September 30, 1997 o Notes to Consolidated Financial Statements The following financial information of Pepco is also set forth in this Form 10-Q: o Reclassifying Balance Sheet as of September 30, 1997 o Reclassifying Income Statement for the Nine Months Ended September 30, 1997 Other Information - ----------------- Both BGE and Pepco file annual and quarterly reports with the Securities and Exchange Commission (SEC) under the 1934 Act. These are available at the SEC's public reference rooms in Washington, D.C. and New York, New York (call 1-800-SEC-0330 for more information); and at the SEC's web site at http://www.sec.gov. BGE's reports are also available at BGE's web site at http://www.bge.com. 36 CONSTELLATION ENERGY CORPORATION UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET SEPTEMBER 30, 1997 (IN THOUSANDS)
BGE PEPCO Pro Forma Pro Forma (As Reported) (As Reclassified) Adjustments Combined ------------ ------------ ------------ ------------ ASSETS (See Note 5) Current Assets Cash and cash equivalents ........................ $ 189,758 $ 13,003 $ -- $ 202,761 Accounts receivable - net ........................ 398,014 311,370 -- 709,384 Materials and supplies ........................... 166,516 129,627 -- 296,143 Prepayments and other ............................ 326,059 45,471 -- 371,530 ------------ ------------ ------------ ------------ Total current assets .......................... 1,080,347 499,471 -- 1,579,818 ------------ ------------ ------------ ------------ Investments and Other Assets Notes receivable ................................. -- 23,438 -- 23,438 Real estate projects ............................. 443,922 72,956 -- 516,878 Power generation systems ......................... 421,762 979 -- 422,741 Financial investments ............................ 130,235 -- -- 130,235 Marketable securities ............................ 27,752 303,905 -- 331,657 Investment in finance leases ..................... 28,870 460,021 -- 488,891 Operating lease equipment - net .................. -- 170,747 -- 170,747 Other investments ................................ 433,309 108,646 -- 541,955 ------------ ------------ ------------ ------------ Total investments and other assets ............ 1,485,850 1,140,692 -- 2,626,542 ------------ ------------ ------------ ------------ Utility Plant Plant in service Electric ...................................... 6,698,259 6,335,130 -- 13,033,389 Gas ........................................... 832,002 -- -- 832,002 Common ........................................ 546,101 -- -- 546,101 ------------ ------------ ------------ ------------ Total plant in service ........................ 8,076,362 6,335,130 -- 14,411,492 Accumulated depreciation ......................... (2,773,956) (1,999,638) -- (4,773,594) ------------ ------------ ------------ ------------ Net plant in service ............................. 5,302,406 4,335,492 -- 9,637,898 Construction work in progress .................... 165,845 84,901 -- 250,746 Nuclear fuel - net ............................... 140,261 -- -- 140,261 Other plant - net ................................ 25,470 26,222 -- 51,692 ------------ ------------ ------------ ------------ Net utility plant ............................. 5,633,982 4,446,615 -- 10,080,597 ------------ ------------ ------------ ------------ Deferred charges Regulatory assets ................................ 474,598 461,337 -- 935,935 Other ............................................ 106,823 207,824 -- 314,647 ------------ ------------ ------------ ------------ Total deferred charges ........................ 581,421 669,161 -- 1,250,582 ------------ ------------ ------------ ------------ ============ ============ ============ ============ Total Assets ........................................ $ 8,781,600 $ 6,755,939 $ -- $ 15,537,539 ============ ============ ============ ============ See Accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Statements.
37 CONSTELLATION ENERGY CORPORATION UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET SEPTEMER 30, 1997 (IN THOUSANDS)
BGE PEPCO Pro Forma Pro Forma (As Reported) (As Reclassified) Adjustments Combined ------------ ----------- ------------ ------------ LIABILITIES AND CAPITALIZATION (See Note 5) Current Liabilities Short-term borrowings .................................. $ 250,500 $ 286,275 $ -- $ 536,775 Current portion of long-term debt, preferred stock, and preference stock ............... 203,574 369,735 -- 573,309 Accounts payable ....................................... 144,690 275,956 -- 420,646 Other .................................................. 286,303 104,546 -- 390,849 ----------- ----------- ------------ ----------- Total current liabilities ........................... 885,067 1,036,512 -- 1,921,579 ----------- ----------- ------------ ----------- Deferred Credits and Other Liabilities Deferred income taxes .................................. 1,298,068 1,032,131 -- 2,330,199 Capital lease obligations .............................. -- 161,057 -- 161,057 Pension and postemployment benefits .................... 188,535 -- -- 188,535 Other .................................................. 97,862 43,623 -- 141,485 ----------- ----------- ------------ ----------- Total deferred credits and other liabi1ities ........ 1,584,465 1,236,811 -- 2,821,276 ----------- ----------- ------------ ----------- Capitalization Long-term debt ......................................... 3,095,983 2,272,124 -- 5,368,107 Preferred stock ........................................ -- 266,291 -- 266,291 Preference stock ....................................... 301,500 -- -- 301,500 Common shareholders' equity ............................ 2,914,585 1,944,201 -- 4,858,786 ----------- ----------- ------------ ----------- Total capitalization ................................ 6,312,068 4,482,616 -- 10,794,684 ----------- ----------- ------------ ----------- =========== =========== ============ =========== Total Liabilities and Capitalization ...................... $ 8,781,600 $ 6,755,939 $ -- $15,537,539 =========== =========== ============ =========== See Accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Statements.
38 CONSTELLATION ENERGY CORPORATION UNAUDITED PRO FORMA COMBINED CONDENSED INCOME STATEMENT NINE MONTHS ENDED SEPTEMBER 30, 1997 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
BGE PEPCO Pro Forma Pro Forma (As Reported)(As Reclassified) Adjustments Combined ---------- ----------- ---------- ---------- (See Note 5) Revenues Electric ...................................................... $1,691,700 $1,473,073 $ -- $3,164,773 Gas ........................................................... 366,948 -- -- 366,948 Diversified businesses ........................................ 436,310 101,370 -- 537,680 ---------- ----------- ---------- ---------- Total revenues ............................................. 2,494,958 1,574,443 -- 4,069,401 ---------- ----------- ---------- ---------- Operating Expenses Electric fuel and purchased energy ............................ 383,245 512,134 -- 895,379 Gas purchased for resale ...................................... 206,775 -- -- 206,775 Operations .................................................... 389,163 160,319 -- 549,482 Maintenance ................................................... 139,040 67,797 -- 206,837 Diversified businesses expenses ............................... 391,582 54,827 -- 446,409 Loss on assets held for disposal .............................. -- 2,022 -- 2,022 Depreciation and amortization ................................. 256,136 173,982 -- 430,118 Taxes other than income taxes ................................. 165,334 154,219 -- 319,553 ---------- ----------- ---------- ---------- Total operating expenses ................................... 1,931,275 1,125,300 -- 3,056,575 ---------- ----------- ---------- ---------- Income From Operations ........................................... 563,683 449,143 -- 1,012,826 Total Other Income ............................................... 5,395 8,685 -- 14,080 ---------- ----------- ---------- ---------- Income Before Interest and Income Taxes .......................... 569,078 457,828 -- 1,026,906 ---------- ----------- ---------- ---------- Net Interest Expense ............................................. 171,493 157,765 -- 329,258 ---------- ----------- ---------- ---------- Income Before Income Taxes ....................................... 397,585 300,063 -- 697,648 ---------- ----------- ---------- ---------- Income Taxes ..................................................... 139,097 90,972 -- 230,069 ---------- ----------- ---------- ---------- Net Income ....................................................... 258,488 209,091 -- 467,579 ---------- ----------- ---------- ---------- Preferred and Preference Stock Dividends ......................... 22,752 12,439 -- 35,191 ========== =========== ========== ========== Earnings Applicable to Common Stock .............................. $ 235,736 $ 196,652 $ -- $ 432,388 ========== =========== ========== ========== Average Shares of Common Stock Outstanding (Note 2) 147,667 118,500 -- 265,812 Earnings Per Share of Common Stock $1.60 $1.66 $1.63 See Accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Statements.
39 PEPCO RECLASSIFYING BALANCE SHEET SEPTEMBER 30, 1997 (IN THOUSANDS)
PEPCO PEPCO PEPCO (As Reported) (Reclasses)(As Reclassified) ---------- ---------- -------------- ASSETS Current Assets Cash and cash equivalents ..................................................... $ 2,916 $ 10,087 $ 13,003 Accounts receivable - net ..................................................... -- 311,370 311,370 Customer accounts receivable - net ............................................ 186,623 (186,623) -- Other accounts receivable - net ............................................... 25,117 (25,117) -- Accrued unbilled revenue ...................................................... 88,071 (88,071) -- Materials and supplies ........................................................ -- 129,627 129,627 Fuel ....................................................................... 60,432 (60,432) -- Construction and maintenance ............................................... 69,195 (69,195) -- Prepayments and other ......................................................... -- 45,471 45,471 Prepaid taxes ................................................................. 41,554 (41,554) -- Other prepaid expenses ........................................................ 3,917 (3,917) -- ---------- ---------- ---------- Total current assets ....................................................... 477,825 21,646 499,471 ---------- ---------- ---------- Investments and Other Assets Notes receivable .............................................................. -- 23,438 23,438 Real estate projects .......................................................... -- 72,956 72,956 Power generation systems ...................................................... -- 979 979 Marketable securities ......................................................... -- 303,905 303,905 Investment in finance leases .................................................. -- 460,021 460,021 Operating lease equipment - net ............................................... -- 170,747 170,747 Other investments ............................................................. -- 108,646 108,646 ---------- ---------- ---------- Total investments and other assets ......................................... -- 1,140,692 1,140,692 ---------- ---------- ---------- Utility Plant Plant in service Electric ................................................................... 6,335,130 -- 6,335,130 Construction work in progress .............................................. 84,901 (84,901) -- Electric plant held for future use ......................................... 4,210 (4,210) -- Nonoperating property ...................................................... 22,750 (22,750) -- ---------- ---------- ---------- Total plant in service ..................................................... 6,446,991 (111,861) 6,335,130 Accumulated depreciation ...................................................... (2,000,376) 738 (1,999,638) ---------- ---------- ---------- Net plant in service .......................................................... 4,446,615 (111,123) 4,335,492 Construction work in progress ................................................. -- 84,901 84,901 Other plant - net ............................................................. -- 26,222 26,222 ---------- ---------- ---------- Net utility plant .......................................................... 4,446,615 -- 4,446,615 ---------- ---------- ---------- Deferred Charges Regulatory assets ............................................................. -- 461,337 461,337 Income taxes recoverable through future rates, net ............................ 238,711 (238,711) -- Conservation costs, net ....................................................... 224,464 (224,464) -- Unamortized debt reacquisition costs .......................................... 53,447 (53,447) -- Other ......................................................................... 196,614 11,210 207,824 ---------- ---------- ---------- Total deferred charges ..................................................... 713,236 (44,075) 669,161 ---------- ---------- ---------- Nonutility Subsidiary Assets Cash and cash equivalents ..................................................... 10,087 (10,087) -- Marketable securities ......................................................... 303,905 (303,905) -- Investment in finance leases .................................................. 460,021 (460,021) -- Operating lease equipment - net ............................................... 170,747 (170,747) -- Assets held for disposal ...................................................... 34,997 (34,997) -- Receivables - net ............................................................. 182,581 (182,581) -- Other investments ............................................................. 14,146 (14,146) -- ---------- ---------- ---------- Total nonutility subsidiary assets ......................................... 1,176,484 (1,176,484) -- ---------- ---------- ---------- ========== ========== ========== Total Assets ..................................................................... $6,814,160 $ (58,221) $6,755,939 ========== ========== ==========
40 PEPCO RECLASSIFYING BALANCE SHEET SEPTEMBER 30, 1997 (IN THOUSANDS)
PEPCO PEPCO PEPCO (As Reported) (Reclasses)(As Reclassified) ----------- ---------- ---------- LIABILITIES AND CAPITALIZATION Current Liabilities Short-term borrowings ......................................................... $ 277,075 $ 9,200 $ 286,275 Current portion of long-term debt and preferred stock ......................... 50,985 318,750 369,735 Accounts payable and accrued expenses ......................................... 247,359 28,597 275,956 Capital lease obligation due within one year .................................. 20,772 (20,772) -- Other ......................................................................... 83,774 20,772 104,546 ---------- ---------- ---------- Total current liabilities .................................................. 679,965 356,547 1,036,512 ---------- ---------- ---------- Deferred Credits and Other Liabilities Deferred income taxes ......................................................... 1,014,472 17,659 1,032,131 Deferred investment tax credits ............................................... 58,221 (58,221) -- Capital lease obligations ..................................................... -- 161,057 161,057 Other ......................................................................... 30,842 12,781 43,623 ---------- ---------- ---------- Total deferred credits and other liabilities ............................... 1,103,535 133,276 1,236,811 ---------- ---------- ---------- Other Noncurrent Liabilities Capital lease obligations ..................................................... 161,057 (161,057) -- ---------- ---------- ---------- Total other noncurrent liabilities ......................................... 161,057 (161,057) -- ---------- ---------- ---------- Capitalization Long-term debt ................................................................ 1,727,707 544,417 2,272,124 Preferred stock ............................................................... -- 266,291 266,291 Serial preferred stock ........................................................ 125,291 (125,291) -- Redeemable serial preferred stock ............................................. 141,000 (141,000) -- Common shareholders' equity ................................................... -- 1,944,201 1,944,201 Common stock .................................................................. 118,501 (118,501) -- Other common equity ........................................................... 1,825,700 (1,825,700) -- ---------- ---------- ---------- Total capitalization ....................................................... 3,938,199 544,417 4,482,616 ---------- ---------- ---------- Nonutility Subsidiary Liabilities Long-term debt ................................................................ 863,167 (863,167) -- Short-term notes payable ...................................................... 9,200 (9,200) -- Deferred taxes and other ...................................................... 59,037 (59,037) -- ---------- ---------- ---------- Total nonutility subsidiary liabilities .................................... 931,404 (931,404) -- ---------- ---------- ---------- ========== ========== ========== Total Liabilities and Capitalization ............................................. $6,814,160 $ (58,221) $6,755,939 ========== ========== ==========
41 PEPCO RECLASSIFYING STATEMENT OF INCOME NINE MONTHS ENDED SEPTEMBER 30, 1997 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PEPCO PEPCO PEPCO (As Reported) (Reclasses)(As Reclassified) ---------- ---------- ---------- Revenues Electric ...................................................................... $1,473,073 $ -- $1,473,073 Diversified businesses ........................................................ -- 101,370 101,370 ---------- ---------- ---------- Total revenues ............................................................. 1,473,073 101,370 1,574,443 ---------- ---------- ---------- Operating Expenses Electric fuel and purchased energy ............................................ -- 512,134 512,134 Fuel .......................................................................... 249,655 (249,655) -- Purchased energy .............................................................. 154,314 (154,314) -- Capacity purchase payments .................................................... 108,165 (108,165) -- Operations .................................................................... 160,319 -- 160,319 Maintenance ................................................................... 67,797 -- 67,797 Diversified businesses expenses ............................................... -- 54,827 54,827 Loss on assets held for disposal .............................................. -- 2,022 2,022 Depreciation and amortization ................................................. 173,982 -- 173,982 Income taxes .................................................................. 115,280 (115,280) -- Taxes other than income taxes ................................................. 154,219 -- 154,219 ---------- ---------- ---------- Total operating expenses ................................................... 1,183,731 (58,431) 1,125,300 ---------- ---------- ---------- Income From Operations ........................................................... 289,342 159,801 449,143 Other Income Nonutility subsidiary income .................................................. 101,370 (101,370) -- Loss on assets held for disposal .............................................. (2,022) 2,022 -- Expenses, including interest and income taxes ................................. (83,567) 83,567 -- ---------- ---------- ---------- Net earnings from nonutility subsidiary .................................... 15,781 (15,781) -- Allowance for other funds used during construction and capital cost recovery factor ........................................... 4,949 -- 4,949 Other, net .................................................................... 3,753 (17) 3,736 ---------- ---------- ---------- Total Other Income ......................................................... 24,483 (15,798) 8,685 ---------- ---------- ---------- Income Before Interest and Income Taxes .......................................... 313,825 144,003 457,828 Interest Expense Interest on debt .............................................................. 101,036 -- 101,036 Other ......................................................................... 9,557 -- 9,557 Subsidiary interest expense ................................................... -- 53,031 53,031 Allowance for borrowed funds used during construction and capital cost recovery factor ........................................... (5,859) -- (5,859) ---------- ---------- ---------- Net Interest Expense ....................................................... 104,734 53,031 157,765 ---------- ---------- ---------- Income Before Income Taxes ....................................................... 209,091 90,972 300,063 Income Taxes Income taxes-utility .......................................................... -- 115,280 115,280 Income taxes-nonoperating ..................................................... -- (17) (17) Income taxes-subsidiary ....................................................... -- (24,291) (24,291) ---------- ---------- ---------- Total Income Taxes ......................................................... -- 90,972 90,972 ---------- ---------- ---------- Net Income ....................................................................... 209,091 -- 209,091 Preferred Dividends .............................................................. 12,439 -- 12,439 ========== ========== ========== Earnings Applicable to Common Stock .............................................. $ 196,652 $ -- $ 196,652 ========== ========== ========== Average Shares of Common Stock Outstanding 118,500 118,500 Earnings Per Share of Common Stock $1.66 $1.66
42 Notes to Unaudited Pro Forma Combined Condensed Financial Statements - -------------------------------------------------------------------- 1. The revenues, expenses, assets, and liabilities of Pepco's nonregulated subsidiaries have been reclassified to conform with the presentation used by BGE. The effect of accounting policy differences are immaterial and have not been adjusted in the pro forma combined condensed financial statements. 2. Pro forma per common share amounts give effect to the conversion of each share of BGE and Pepco Common Stock into 1 share and .997 share, respectively of Constellation Energy Corporation Common Stock. The pro forma combined condensed financial statements are presented as if the companies were combined during all periods included therein. 3. The allocation between BGE and Pepco and their customers of the estimated cost savings resulting from the merger, net of the costs incurred to achieve such savings, will be subject to regulatory review and approval. None of these estimated cost savings, the costs to achieve such savings, or transaction costs have been reflected in the pro forma combined condensed financial statements. 4. Intercompany transactions between BGE and Pepco during the periods presented were not material and, accordingly, no pro forma adjustments were made to eliminate such transactions. 5. The Pepco reclassifying information reflects the reclassifying entries necessary to adjust Pepco's consolidated balance sheet and statement of income presentation to be consistent with the presentation expected to be used by Constellation Energy Corporation. 43 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. 10 Amended and Restated Baltimore Gas and Electric Company Deferred Compensation Plan for Non-Employee Directors. 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) Reports on Form 8-K for the quarter ended September 30, 1997: Date Filed Items Reported ---------------------- ----------------------------------------- July 24, 1997 Item 5. Other Events Item 7. Financial Statements and Exhibits SIGNATURE ------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BALTIMORE GAS AND ELECTRIC COMPANY ------------------------------------------ (Registrant) Date: November 13, 1997 /s/ D. A. Brune ------------------ ------------------------------------------ D. A. Brune, Vice President on behalf of the Registrant and as Principal Financial Officer 44 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. 10 Amended and Restated Baltimore Gas and Electric Company Deferred Compensation Plan for Non-Employee Directors. 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. 45 EX-10 2 AMENDED AND RESTATED DEFERRED COMPENSATION PLAN Exhibit 10 ---------- Baltimore Gas and Electric Company Deferred Compensation Plan For Non-Employee Directors 1. Objective. The objective of this Plan is to provide a portion of the Compensation of non-employee Directors of BGE in the form of Stock Units, thereby promoting a greater identity of interest between BGE's non-employee Directors and its stockholders, and to enable such Directors to defer receipt of the portion of their Compensation that is payable in cash. 2. Definitions. As used herein, the following terms will have the meaning specified below: "Annual Retainer" means the amount payable by BGE to a Director as annual compensation for performance of services as a Director, and includes Committee Chair retainers. All other amounts (including without limitation Board/committee meeting fees, and expense reimbursements) shall be excluded in calculating the amount of the Annual Retainer. "BGE" means Baltimore Gas and Electric Company, a Maryland corporation, or its successor. "Board" means the Board of Directors of BGE. "Cash Account" means an account by that name established pursuant to Section 7. The maintenance of Cash Accounts is for bookkeeping purposes only. "Change in Control" means (i) the purchase or acquisition by any person, entity or group of persons (within the meaning of section 13(d) or 14(d) of the 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 (ii) 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 (iii) a liquidation or dissolution of BGE or the sale of 1 substantially all of its assets, or (iv) a change of more than one-half of the members of the Board within a 90-day period for reasons other than the death, disability, or retirement of such members. "Committee" means the Committee on Management of the Board. "Common Stock" means the common stock, without par value, of BGE. "Compensation" means any Annual Retainer and meeting fees payable by BGE to a participant in his/her capacity as a Director. Compensation excludes expense reimbursements paid by BGE to a participant in his/her capacity as a Director. "Deferred Cash Compensation" means any cash Compensation that is voluntarily deferred by a participant pursuant to Section 6. "Director" means a member of the Board who is not an employee of BGE or any of its subsidiaries/ affiliates. "Disability" or "Disabled" means that the Plan Administrator has determined that the participant is unable to fulfill his/her responsibilities of Board membership because of illness or injury. For purposes of this Plan, a participant's eligibility to participate shall be deemed to have terminated on the date he/she is determined by the Plan Administrator to be Disabled. "Earnings" means, with respect to the Cash Account, hypothetical interest credited to the Cash Account. "Earnings" means, with respect to the Stock Account, hypothetical dividends credited to the Stock Account. "Fair Market Value" means, as of any specified date, the average closing price of a share of Common Stock, reported in "New York Stock Exchange Composite Transactions" as published in the Eastern Edition of The Wall Street Journal for the most recent 30 days during which Common Stock was traded on the New York Stock Exchange (including such valuation date if a trading date). "Plan Accounts" means a participant's Cash Account and/or Stock Account. The maintenance of Plan Accounts is for bookkeeping purposes only. "Plan Administrator" means, as set forth in Section 3, the Board. 2 "Stock Account" means an account by that name established pursuant to Section 8. The maintenance of Stock Accounts is for bookkeeping purposes only. "Stock Unit(s)" means the share equivalents credited to a Participant's Stock Account pursuant to Section 8. The use of Stock Units is for bookkeeping purposes only; the Stock Units are not actual shares of Common Stock. BGE will not reserve or otherwise set aside any Common Stock for or to any Stock Account. 3. Plan Administration. (i) Plan Administrator - The Plan is administered by the Board, who has sole authority to interpret the Plan, and, in general, to make all other determinations advisable for the administration of the Plan to achieve its stated objective. Decisions by the Plan Administrator shall be final and binding upon all persons for all purposes. The Plan Administrator shall have the power to delegate all or any part of its non-discretionary duties to one or more designees, and to withdraw such authority, by written designation. (ii) Amendment - This Plan may be amended from time to time or suspended or terminated at any time, at the written direction of the Plan Administrator. However, amendments required to keep the Plan in compliance with applicable laws and regulations may be made by the Vice President Management Services of BGE (or other vice president succeeding to that function) on advice of counsel. Nothing herein creates a vested right. (iii) Indemnification - The Plan Administrator (and its designees), Chairman of the Board, Chief Executive Officer, President, and Vice President-Management Services of BGE and all other employees of BGE or its subsidiaries/affiliates whose assigned duties include matters under the Plan, shall be indemnified by BGE or its subsidiaries /affiliates or from proceeds under insurance policies purchased by BGE or its subsidiaries/affiliates, against any and all liabilities arising by reason of any act or failure to act made in good faith pursuant to the provisions of the Plan, including expenses reasonably incurred in the defense of any related claim. 4. Eligibility and Participation. (i) Mandatory participation - A Director is required to participate in this Plan with respect to the receipt of fifty 3 percent (50%) of his/her Annual Retainer in the form of Stock Units under Section 5 of the Plan, while so classified. (ii) Voluntary participation - A Director is eligible to participate in the Plan by electing to defer all or certain portions of the participant's Compensation, that is payable in cash, under Section 6 of the Plan, while so classified. (iii) Termination of participation - Eligibility to participate shall terminate on the date the participant ceases to be a Director. Notwithstanding termination of eligibility, such person with Plan Accounts will remain a participant of the Plan, solely for purposes of the administration of existing Plan Accounts, and no additional Stock Units will be granted and no further deferrals of cash Compensation under the Plan will be permitted. 5. Mandatory Stock Units. The Stock Account of a participant will be credited on January 1 of each calendar year with Stock Units equal to the number of shares of Common Stock (including fractions of a share) that could have been purchased, with fifty percent (50%) of the participant's Annual Retainer for such calendar year, at Fair Market Value on such January 1. If a participant initially becomes eligible to participate in the Plan during a calendar year, the Stock Account of the participant for such calendar year will be credited, on the date that is the first day of the calendar month after the participant initially becomes eligible to participate in the Plan, with Stock Units equal to the number of shares of Common Stock (including fractions of a share) that could have been purchased at Fair Market Value on such date, with an amount equal to (i) fifty percent (50%) of the participant's Annual Retainer multiplied by (ii) a fraction the numerator of which is the number of full calendar months in the calendar year on and after such date, and the denominator of which is 12. The Stock Account will be maintained pursuant to Section 8. 6. Cash Compensation Deferral Election. A participant may elect to defer none, all or fifty percent (50%) of his/her Annual Retainer that is payable in cash (i.e., fifty percent (50%) of the Annual Retainer) and/or may elect to defer none, all, fifty percent (50%), or seventy-five percent (75%) of his/her other Compensation that is payable in cash (i.e., one hundred percent (100%) of all other Compensation). A participant's cash Compensation deferral election with respect to the Annual Retainer shall specify whether the deferred Annual 4 Retainer is to be credited to the Cash Account or to the Stock Account. All other Cash Compensation that a participant elects to defer will be credited to the Cash Account. Such election shall be made by written notification to the Vice President-Management Services of BGE (or other vice president succeeding to that function). Such election shall be made prior to the calendar year during which the applicable cash Compensation is payable, and shall be effective as of the first day of such calendar year. If a participant initially becomes eligible to participate in the Plan during a calendar year, the election for such calendar year must be made within thirty (30) calendar days after the date the participant initially becomes eligible to participate in the Plan, and shall be effective with respect to Compensation earned after the date the election is received by the Vice President-Management Services of BGE (or other vice president succeeding to that function). Elections under this Section shall remain in effect for all succeeding calendar years until revoked. Elections may be revoked by written notification to the Vice President-Management Services of BGE (or other vice president succeeding to that function), and shall be effective as of the first day of the calendar year following the calendar year during which the revocation is received by such Vice President. Notwithstanding anything herein contained to the contrary, the Plan Administrator shall have the right in its sole discretion to permit a participant to defer other percentages of his/her Annual Retainer and/or other Compensation that is payable in cash. 7. Cash Accounts. Cash Compensation that consists of the Annual Retainer that a participant has elected to defer into the Cash Account is credited to the participant's Cash Account on January 1 (or if later, the date the participant's initial election to participate in the Plan becomes effective). All other cash Compensation that a participant has elected to defer is credited to the participant's Cash Account on each date such cash Compensation would otherwise have been paid to the Director. A participant's Cash Account shall be credited with earnings at the rate earned by the Interest Income Fund under the Baltimore Gas and Electric Company Employee Savings Plan, and computed in the same manner as under such plan. Earnings are credited to the Cash Account commencing on the date the applicable Deferred Cash Compensation is credited to the Cash Account. 5 8. Stock Accounts. Cash Compensation that consists of the Annual Retainer that a participant has elected to defer into the Stock Account is credited to the participant's Stock Account on January 1 (or if later, the date the participant's initial election to participate in the Plan becomes effective). A participant's Stock Account shall be credited with Stock Units equal to the number of shares of Common Stock (including fractions of a share) that could have been purchased with such Deferred Cash Compensation, at Fair Market Value on such date. Grants of mandatory Stock Units are credited to the Stock Account as set forth in Section 5. As of any dividend distribution date for the Common Stock, the participant's Stock Account shall be credited with additional Stock Units equal to the number of shares of Common Stock (including fractions of a share) that could have been purchased, at the closing price of a share of Common Stock on such date as reported in "New York Stock Exchange Composite Transactions" as published in the Eastern Edition of the The Wall Street Journal, with the amount which would have been paid as dividends on that number of shares (including fractions of a share) of Common Stock which is equal to the number of Stock Units then credited to the participant's Stock Account. In the event of any change in the outstanding shares of Common Stock by reason of any stock dividend or split, recapitalization, combination or exchange of shares or other similar changes in the Common Stock, then appropriate adjustments shall be made in the number of Stock Units in each participant's Stock Account. Such adjustments shall be made effective on the date of the change related to the Common Stock. 9. Distributions of Plan Accounts. Distributions of Plan Accounts shall be made in cash only, from the general assets of BGE. A participant may elect (by notification in the form and manner established by the Vice President-Management Services of BGE (or other vice President succeeding to that function) from time to time) to begin distributions (i) in the calendar year following the calendar year that eligibility to participate terminates, (ii) in the calendar year following the calendar year in which a participant attains age 70, if later, or (iii) any calendar year between (i) and (ii). Such election must be made prior to the end of the calendar year in which eligibility to participate terminates. Alternatively, a participant who reaches age 70 while still 6 eligible to participate may elect to begin distributions, in the calendar year following the calendar year that the participant reaches age 70, of amounts in his/her Plan Accounts as of the end of the calendar year the participant reaches age 70. Such election must be made prior to the end of the calendar year in which the participant reaches age 70, and a distribution election to receive any subsequently deferred amounts beginning in the calendar year following the calendar year that eligibility to participate terminates, must be made prior to the end of the calendar year in which eligibility to participate terminates. A participant may elect (by notification in the form and manner established by the Vice President-Management Services of BGE (or other vice President succeeding to that function) 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) calendar days of the calendar year elected for distribution. Subsequent installments, if any, shall be made within the first sixty (60) calendar days of each succeeding calendar year until the participant's Cash Account has been paid out. In the event applicable elections are not timely made, a participant shall receive a distribution in a single payment within the first sixty (60) calendar days of the calendar year following the calendar year that eligibility to participate terminates. The value of the Stock Account, which is equal to the number of Stock Units in the Stock Account multiplied by the Fair Market Value on the date on which the participant's eligibility to participate terminates (or, the date that is the last day of the calendar year during which the participant reaches age 70, for a participant who elects to begin distributions while still eligible to participate), is transferred to the Cash Account on such date. Earnings are credited to the Cash Account through the date of distribution, and amounts held for installment payments shall continue to be credited with Earnings. The value of the Cash Account that is payable in cash on the date of the single payment distribution is equal to the balance in the Cash Account on the date that is no earlier than five (5) calendar days prior to the day of such distribution ("Distribution Valuation Date"). The amount of any cash distribution to be made in installments from the Cash Account will be determined by multiplying (i) the balance in such Cash Account on the Distribution Valuation Date by (ii) a fraction, the 7 numerator of which is one and the denominator of which is the number of installments in which distributions remain to be made (including the current distribution). If a participant dies or becomes Disabled, the entire unpaid balance of his/her Plan Accounts shall be paid to the beneficiary(ies) designated by the participant by notification in the form and manner established by the Vice President-Management Services of BGE (or other vice president succeeding to that function) from time to time or, if no designation was made, in the event of death, to the estate of the participant, and in the event of Disability, to the participant. Payment shall be made within sixty (60) calendar days after notice of death or Disability is received by such Vice President, unless prior to the participant's death or Disability, the participant elected (in the form and manner established by the Vice President-Management Services of BGE (or other vice president succeeding to that function) from time to time) a delayed and/or installment distribution option for such beneficiary(ies); provided, however that (i) such a distribution option election shall be effective only if the value of the participant's Plan Accounts is more than $50,000 on the date of the participant's death or Disability; and (ii) the final distribution must be made to such beneficiary(ies) no later than 15 years after the participant's death or Disability. After the end of the calendar year that a participant's eligibility to participate terminates, a distribution option election for a particular beneficiary is irrevocable; provided, however, that the participant may make a distribution option election for a new beneficiary who is initially designated after the participant's eligibility to participate terminates, and such election is irrevocable with respect to the new beneficiary. The value of the Stock Account, which is equal to the number of Stock Units in the Stock Account multiplied by the Fair Market Value on the date of the participant's death or Disability, is transferred to the Cash Account on such date. Earnings are credited to the Cash Account through the date of distribution, and amounts held for installment payments shall continue to be credited with Earnings. The value of the Cash Account that is payable in cash on the date of the single payment distribution is equal to the balance in the Cash Account on the date that is no earlier than five (5) calendar days prior to the day of such distribution ("Beneficiary Distribution Valuation Date"). The amount of any cash distribution to be made in installments from the Cash Account will be determined by multiplying (i) the balance in such Cash Account on the Beneficiary Distribution Valuation Date by (ii) a fraction, the numerator of which is one and the 8 denominator of which is the number of installments in which distributions remain to be made (including the current distribution). Upon the death of a participant's beneficiary for whom a delayed and/or installment distribution option was elected, the entire unpaid balance of the participant's Cash Account shall be paid to the beneficiary(ies) designated by the participant's beneficiary by notification in the form and manner established by the Vice President-Management Services of BGE (or other vice president succeeding to that function) from time to time or, if no designation was made, to the estate of the participant's beneficiary. Payment shall be made within sixty (60) calendar days after notice of death is received by such Vice President. The value of the Cash Account that is payable in cash is equal to the balance in the Cash Account on the date that is no earlier than five (5) calendar days prior to the day of such distribution. Notwithstanding anything herein contained to the contrary, the Plan Administrator shall have the right in its sole discretion to (i) vary the manner and timing of distributions of a participant or beneficiary entitled to a distribution under this Section 9, and may make such distributions in a single payment or over a shorter or longer period of time than that elected by a participant; and (ii) vary the period during which the closing price of Common Stock is referenced to determine the value of the Stock Account that is transferred to the Cash Account on the date on which the participant's eligibility to participate terminates. Any affected participants will not participate in exercising such discretion. 10. Beneficiaries. A participant shall have the right to designate, change or rescind a beneficiary(ies) who is to receive a distribution(s) pursuant to Section 9 in the event of the death or Disability of the participant. A participant's beneficiary(ies) for whom a delayed and/or installment distribution option was elected shall have the right to designate a beneficiary(ies) who is to receive a distribution pursuant to Section 9 in the event of the death of the participant's beneficiary(ies). Any designation, change or recision of the designation of beneficiary shall be made by notification in the form and manner established by the Vice President-Management Services of BGE (or other vice president succeeding to that function) from time to time. The last designation of beneficiary received by such Vice President shall be controlling over any testamentary or purported disposition by the participant (or, 9 if applicable, the participant's beneficiary(ies)), provided that no designation, recision or change thereof shall be effective unless received by such Vice President prior to the death or Disability (whichever is applicable) of the participant (or, if applicable, the death of the participant's beneficiary(ies)). If the designated beneficiary is the estate, or the executor or administrator of the estate, of the participant (or, if applicable, the participant's beneficiary(ies)), a distribution pursuant to Section 9 may be made to the person(s) or entity (including a trust) entitled thereto under the will of the participant (or, if applicable, the participant's beneficiary(ies)), or, in the case of intestacy, under the laws relating to intestacy. 11. Valuation of Plan Accounts. The Plan Administrator shall cause the value of a participant's Plan Accounts to be determined and reported to BGE and the participant at least once per year as of the last business day of the calendar year. The value of the Stock Account will equal the number of Stock Units in the Stock Account multiplied by the closing price of a share of Common Stock on the last business day of the calendar year as reported in "New York Stock Exchange Composite Transactions" as published in the Eastern Edition of the The Wall Street Journal. The value of the Cash Account will equal the balance in the Cash Account on the last business day of the calendar year. 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 financial emergency. An unforeseeable financial 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 10 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. The value of the Stock Account for purposes of processing a hardship cash withdrawal is equal to the number of Stock Units in the Stock Account multiplied by the Fair Market Value on the date on which the hardship withdrawal is processed. The value of the Cash Account for purposes of processing a hardship cash withdrawal is equal to the balance in the Cash Account on the date on which the hardship withdrawal is processed. 13. Change in Control. The terms of this Section 13 shall immediately become operative, without further action or consent by any person or entity, upon a Change in Control, and once operative shall supersede and control over any other provisions of this Plan. Upon the occurrence of a Change in Control followed within one year of the date of such Change in Control by the participant's cessation of Board membership for any reason, such participant shall be paid the value of his/her Plan Accounts in a single, lump sum cash payment. The value of the Stock Account, which is equal to the number of Stock Units in the Stock Account multiplied by the Fair Market Value on the date of the participant's cessation of Board membership, is transferred to the Cash Account on such date. Earnings are credited to the Cash Account through the date of distribution. The value of the Cash Account that is payable in cash on the date of the single lump sum cash payment is equal to the balance in the Cash Account on the date that is no earlier than five (5) calendar days prior to the day of such distribution. Such payment shall be made as soon as practicable, but in no event later than thirty (30) calendar days after the date of the participant's cessation of Board membership. On or after a Change in Control, no action, including, but not by way of limitation, the amendment, suspension or termination of the Plan, shall be taken which would affect the rights of any participant or the 11 operation of this Plan with respect to the balance in the participant's Plan Accounts. 14. Withholding. BGE may withhold to the extent required by law all applicable income and other taxes from amounts deferred or distributed under the Plan. 15. Copies of Plan Available. Copies of the Plan and any and all amendments thereto shall be made available to all participants during normal business hours at the office of the Plan Administrator. 16. Miscellaneous. (i) Inalienability of benefits - Except as may otherwise be required by law or court order, the interest of each participant or beneficiary under the Plan cannot be sold, pledged, assigned, alienated or transferred in any manner or be subject to attachment or other legal process of whatever nature; provided, however, that any applicable taxes may be withheld from any cash benefit payment made under this Plan. (ii) Controlling law - The Plan and its administration shall be governed by the laws of the State of Maryland, except to the extent preempted by federal law. (iii) Gender and number - A masculine pronoun when used herein refers to both men and women and words used in the singular are intended to include the plural, and vice versa, whenever appropriate. (iv) Titles and headings - Titles and headings to articles and sections in the Plan are placed herein solely for convenience of reference and in any case of conflict, the text of the Plan rather than such titles and headings shall control. (v) References to law - All references to specific provisions of any federal or state law, rule or regulation shall be deemed to also include references to any successor provisions or amendments. (vi) Funding and expenses - Benefits under the Plan are not vested or funded, and shall be paid out of the general assets of BGE. 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. The expenses of administering the Plan will be borne by BGE. 12 (vii) Not a contract - Participation in this Plan shall not constitute a contract of employment or Board membership between BGE and any person and shall not be deemed to be consideration for, or a condition of, continued employment or Board membership of any person. (viii) Successors - In the event BGE becomes a party to a merger, consolidation, sale of substantially all of its assets or any other corporate reorganization in which BGE will not be the surviving corporation or in which the holders of the common stock of BGE will receive securities of another corporation (in any such case, the "New Company"), then the New Company shall assume the rights and obligations of BGE under this Plan. 13 EX-12 3 COMPUTATION OF RATIOS COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED AND PREFERENCE DIVIDEND REQUIREMENTS
12 Months Ended --------------------------------------------------------------- September December December December December December 1997 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- -------- (In Thousands of Dollars) Net Income ................................. $257,496 $310,824 $338,007 $323,617 $309,866 $264,347 Taxes on Income ............................ 138,546 169,202 172,388 156,702 140,833 105,994 -------- -------- -------- -------- -------- -------- Adjusted Net Income ........................ $396,042 $480,026 $510,395 $480,319 $450,699 $370,341 -------- -------- -------- -------- -------- -------- Fixed Charges: Interest and Amortization of Debt Discount and Expense and Premium on all Indebtedness ............ $226,387 $203,923 $206,666 $204,206 $199,415 $200,848 Capitalized Interest .................... 10,578 15,664 15,050 12,427 16,167 13,800 Interest Factor in Rentals .............. 1,600 1,548 2,099 2,010 2,144 2,033 -------- -------- -------- -------- -------- -------- Total Fixed Charges ..................... $238,565 $221,135 $223,815 $218,643 $217,726 $216,681 -------- -------- -------- -------- -------- -------- Preferred and Preference Dividend Requirements: (1) Preferred and Preference ................ $ 30,901 $ 38,536 $ 40,578 $ 39,922 $ 41,839 $ 42,247 Dividends Income Tax Required ..................... 16,624 20,849 20,434 19,074 18,763 16,729 -------- -------- -------- -------- -------- -------- Total Preferred and Preference Dividend Requirements .................. $ 47,525 $ 59,385 $ 61,012 $ 58,996 $ 60,602 $ 58,976 -------- -------- -------- -------- -------- -------- Total Fixed Charges and Preferred and Preference Dividend Requirements ................... $286,090 $280,520 $284,827 $277,639 $278,328 $275,657 ======== ======== ======== ======== ======== ======== Earnings (2) ............................... $624,029 $685,497 $719,160 $686,535 $652,258 $573,222 ======== ======== ======== ======== ======== ======== Ratio of Earnings to Fixed Charges 2.62 3.10 3.21 3.14 3.00 2.65 Ratio of Earnings to Combined Fixed Charges and Preferred and Preference Dividend Requirements 2.18 2.44 2.52 2.47 2.34 2.08
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. Earnings are deemed to consist of net income that includes earnings of BGE's consolidated subsidiaries, equity in the net income of BGE's unconsolidated subsidiary, income taxes (including deferred income taxes and investment tax credit adjustments), and fixed charges other than capitalized interest. EX-27 4 FINANCIAL DATA SCHEDULE
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BGE'S SEPTEMBER 30, 1997 INTERIM CONSOLIDATED INCOME STATEMENT, BALANCE SHEET AND STATEMENT OF CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS. 1,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 PER-BOOK 5,633,982 1,485,850 1,080,347 581,421 0 8,781,600 1,431,157 0 1,474,647 2,914,585 91,500 210,000 3,095,983 0 0 250,500 169,074 34,500 0 0 2,015,458 8,781,600 2,494,958 139,097 1,931,275 2,070,372 424,586 5,395 429,981 171,493 258,488 22,752 235,736 178,677 179,536 567,938 1.60 1.60
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