-----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, ULpxb3xqudlwqc4SC8Etl5vIsb1Nost42RtquHDlVF0Mr0YjAbenRqqwFUGWnpS/ 6+Hje74ehLUc0UYXJmNyyA== 0000950169-96-000063.txt : 19960401 0000950169-96-000063.hdr.sgml : 19960401 ACCESSION NUMBER: 0000950169-96-000063 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960329 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-01910 FILM NUMBER: 96540548 BUSINESS ADDRESS: STREET 1: GAS & ELECTRIC BLDG STREET 2: CHARLES CTR CITY: BALTIMORE STATE: MD ZIP: 21201 BUSINESS PHONE: 4107835920 10-K 1 BALTIMORE GAS & ELECTRIC COMPANY SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the fiscal year ended 1-1910 December 31, 1995 Commission file number BALTIMORE GAS AND ELECTRIC COMPANY (Exact name of registrant as specified in its charter) MARYLAND 52-0280210 (State of incorporation) (I.R.S. Employer Identification No.) 39 W. LEXINGTON STREET, BALTIMORE, MARYLAND 21201 (Address of principal executive offices) (Zip Code) 410-783-5920 (Registrant's telephone number, including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED New York Stock Exchange, Inc. Common Stock -- Without Par Value (brace) Chicago Stock Exchange, Inc. Pacific Stock Exchange, Inc. Preferred Stock, Series B 4 1/2%, Cumulative, $100 Par Value (brace) New York Stock Exchange, Inc. Preferred Stock, Cumulative, $100 Par Value: Series C 4% Series D 5.40% Preference Stock, Cumulative, $100 Par Value: (brace) Philadelphia Stock Exchange, Inc. 7.78%, 1973 Series 7.50%, 1986 Series 6.75%, 1987 Series
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Not Applicable 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 . Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [x] Aggregate market value of Common Stock, without par value, held by non-affiliates as of February 29, 1996 was approximately $4,171,501,536 based upon New York Stock Exchange composite transaction closing price. COMMON STOCK, WITHOUT PAR VALUE -- 147,527,114 SHARES OUTSTANDING ON FEBRUARY 29, 1996. DOCUMENTS INCORPORATED BY REFERENCE
PART OF FORM 10-K DOCUMENT INCORPORATED BY REFERENCE III Definitive Proxy Statement for the Annual Meeting of Shareholders of Baltimore Gas and Electric Company to be held on April 23, 1996 (Proxy Statement).
TABLE OF CONTENTS
PAGE PART I Item 1 -- Business General..................................................................................... 1 Capital Requirements........................................................................ 2 Electric Business Electric Regulatory Matters and Competition............................................... 3 Electric Rate Matters..................................................................... 4 Nuclear Operations........................................................................ 5 Electric Load Management, Energy, and Capacity Purchases.................................. 7 Fuel for Electric Generation.............................................................. 8 Gas Business Gas Regulatory Matters and Competition.................................................... 9 Gas Operations............................................................................ 10 Gas Rate Matters.......................................................................... 10 Electric Operating Statistics............................................................... 11 Gas Operating Statistics.................................................................... 12 Franchises.................................................................................. 13 Diversified Businesses...................................................................... 13 Environmental Matters....................................................................... 15 Employees................................................................................... 17 Item 2 -- Properties.................................................................................. 18 Item 3 -- Legal Proceedings........................................................................... 18 Item 4 -- Submission of Matters to a Vote of Security Holders......................................... 19 Item 10 -- Executive Officers of the Registrant (Instruction 3 to Item 401(b) of Regulation S-K)....... 20 PART II Item 5 -- Market for Registrant's Common Equity and Related Stockholder Matters....................... 22 Item 6 -- Selected Financial Data..................................................................... 23 Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................................................. 24 Item 8 -- Financial Statements and Supplementary Data................................................. 32 Item 9 -- Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................................................................. 56 PART III Item 10 -- Directors and Executive Officers of the Registrant.......................................... 56 Item 11 -- Executive Compensation...................................................................... 56 Item 12 -- Security Ownership of Certain Beneficial Owners and Management.............................. 56 Item 13 -- Certain Relationships and Related Transactions.............................................. 56 PART IV Item 14 -- Exhibits, Financial Statement Schedules and Reports on Form 8-K............................. 56 Signatures................................................................................................. 60
PART I ITEM 1. BUSINESS Baltimore Gas and Electric Company and Subsidiaries are herein collectively referred to as the Company. The Company is engaged in utility operations and related businesses through Baltimore Gas and Electric Company (BGE). The Company is engaged in diversified businesses primarily through four wholly owned subsidiaries of BGE, Constellation Holdings, Inc. and its subsidiaries (collectively, the Constellation Companies), BGE Home Products & Services, Inc. (HP&S) and its subsidiary Maryland Environmental Systems, Inc. (MES), BGE Energy Projects & Services, Inc. (EP&S), and BNG, Inc. For financial information by segment of operation see NOTE 2 TO CONSOLIDATED FINANCIAL STATEMENTS. BGE was incorporated under the laws of the State of Maryland on June 20, 1906, and is primarily engaged in the business of producing, purchasing, and selling electricity, and purchasing, transporting, and selling natural gas within the State of Maryland. BGE is qualified to do business in the District of Columbia where its federal affairs office is located. BGE is qualified to do business in the Commonwealth of Pennsylvania where it is participating in the ownership and operation of two electric generating plants as described under ITEM 2. PROPERTIES -- ELECTRIC. BGE also owns two-thirds of the outstanding capital stock, including one-half of the voting securities, of Safe Harbor Water Power Corporation (Safe Harbor), a hydroelectric producer on the Susquehanna River at Safe Harbor, Pennsylvania. (SEE ITEM 2. PROPERTIES -- ELECTRIC.) BGE furnishes electric and gas retail services in the City of Baltimore and in all or part of ten counties in Central Maryland. The electric service territory includes an area of approximately 2,300 square miles with an estimated population of 2,650,000. The gas service territory includes an area of more than 600 square miles with an estimated population of 2,000,000. There are no municipal or cooperative bulk power markets within BGE's service territory. As discussed throughout this report, the two units at BGE's Calvert Cliffs Nuclear Power Plant are its principal generating facilities and have the lowest fuel cost in BGE's system. An extended shutdown of either of these Units could have a substantial adverse effect on the Company's business and financial condition. (SEE NUCLEAR OPERATIONS AND NOTE 12 TO CONSOLIDATED FINANCIAL STATEMENTS for information regarding prior outages at the Plant.) Also, the utility industry is facing potentially substantial regulatory change designed to foster competition in the provision of gas and electric services. It is not possible to predict the ultimate effect competition will have on BGE's earnings in future years. These matters are discussed under ELECTRIC REGULATORY MATTERS AND COMPETITION on page 3 and GAS REGULATORY MATTERS AND COMPETITION on page 9. Diversified businesses conducted by the Constellation Companies, HP&S, MES, EP&S, and BNG, Inc. are discussed under DIVERSIFIED BUSINESSES on page 13 and ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A). The percentages of Operating Revenues and Operating Income attributable to electric, gas, and diversified operations are set forth below:
OPERATING REVENUES OPERATING INCOME* ELECTRIC GAS DIVERSIFIED ELECTRIC GAS DIVERSIFIED 1995.......................................... 76% 14 % 10% 83% 7 % 10% 1994.......................................... 76 15 9 85 4 11 1993.......................................... 77 16 7 87 6 7 1992.......................................... 77 16 7 82 8 10 1991.......................................... 79 14 7 90 6 4
Certain prior-year amounts have been reclassified to conform with the current year's presentation. *Net of income taxes. BGE currently derives approximately 22% of electric revenues and 42% of gas revenues from customers located in the City of Baltimore and 78% and 58%, respectively, from outside the City of Baltimore. No single customer's electric revenues exceed 4% of total electric revenues and no single customer's gas revenues exceed 4% of total gas revenues. The disparity between the percentage of gas operating revenues in relation to the percentage of gas operating income as compared to the same percentages for electric operations is due to BGE's level of investment and its 1 fuel costs in each of these segments. BGE's operating revenue amounts represent recovery of all fuel and operating expenses plus a return on its investment in the business. BGE's net investment for ratemaking purposes in the electric business is $4.8 billion while the comparable investment in its gas business is approximately $540 million. Thus, operating revenues include a much greater return component for electric operations than gas operations. Also, as can be seen by referring to ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA, CONSOLIDATED STATEMENTS OF INCOME on page 33, gas purchased for resale as a percentage of gas revenues (49%) is greater than electric fuel and purchased energy as a percentage of electric revenues (26%). It should be noted that both purchased gas costs and electric fuel costs are passed through to the customer with no mark-up for profit. The combined effects of these factors yield the observed relationship between operating revenues and income for electric and gas operations. BGE and Potomac Electric Power Company (PEPCO) have agreed to merge. PEPCO is a neighboring electric utility serving Washington, D.C. and major portions of Montgomery and Prince George's Counties in Maryland. It is currently anticipated that the merger will be completed in March 1997. The reasons for the merger and other information about the merger are discussed in more detail under ELECTRIC REGULATORY MATTERS AND COMPETITION on pages 3 and 4 and in the Registration Statement on Form S-4 (Registration No. 33-64799) which is included as an exhibit to this report by incorporation by reference. In response to the competitive forces and regulatory changes in the utility industry, as discussed in ELECTRIC REGULATORY MATTERS AND COMPETITION on pages 3 and 4 and GAS REGULATORY MATTERS AND COMPETITION on page 9, BGE (and after the merger the new company to be named Constellation Energy Corporation) from time to time will consider various strategies designed to enhance its competitive position and to increase its ability to adapt to and anticipate regulatory changes in its utility business. These strategies may include internal restructurings involving the complete or partial separation of its generation, transmission and distribution businesses, acquisitions of related or unrelated businesses, business combinations, and additions to or dispositions of portions of its franchised service territories. BGE and its subsidiaries may from time to time be engaged in preliminary discussions, either internally or with third parties, regarding one or more of these potential strategies. CAPITAL REQUIREMENTS The Company's actual capital requirements for 1993 through 1995, along with estimated amounts for 1996 through 1998, are set forth below. Certain prior-year amounts have been restated to conform with the current year's presentation.
1993 1994 1995 1996 1997 1998 (IN MILLIONS) Utility Business Construction expenditures (excluding AFC) Electric.................................................... $ 365 $ 345 $ 223 $ 231 $ 205 $ 212 Gas......................................................... 52 68 70 68 73 67 Common...................................................... 41 42 51 41 47 46 Total construction expenditures........................... 458 455 344 340 325 325 AFC (a)........................................................ 23 34 22 11 10 10 Nuclear fuel (uranium purchases and processing charges)........ 47 42 46 45 45 44 Deferred energy conservation expenditures (b).................. 33 41 46 34 25 27 Deferred nuclear expenditures (b).............................. 14 8 -- -- -- -- Retirement of long-term debt and redemption of preference stock....................................................... 907 203 279 98 164 125 Total utility business.................................... 1,482 783 737 528 569 531 Diversified Businesses........................................... 300 88 173 141 206 220 Total..................................................... $ 1,782 $ 871 $ 910 $ 669 $ 775 $ 751
(a) Allowance for Funds Used During Construction (AFC) is accrued for all construction projects with a construction period of more than one month. (SEE NOTE 1 TO CONSOLIDATED FINANCIAL STATEMENTS for a discussion of AFC.) (b) See NOTE 5 TO CONSOLIDATED FINANCIAL STATEMENTS for a discussion of deferred nuclear expenditures and deferred energy conservation expenditures. 2 BGE's actual capital requirements may vary from the estimates set forth above because of a number of factors such as inflation, economic conditions, regulation, legislation, load growth, environmental protection standards, and the cost and availability of capital. The Constellation Companies' capital requirements for diversified businesses may vary from the estimates set forth above due to a number of factors including market and economic conditions and are discussed in detail under MD&A -- DIVERSIFIED BUSINESSES CAPITAL REQUIREMENTS on page 30. BGE's estimated construction, nuclear fuel, and deferred energy conservation expenditures are expected to amount to approximately $1.6 billion, $220 million, and $145 million, respectively, for the five-year period 1996-2000. Electric construction expenditures reflect the installation of a 5,000-kilowatt diesel generator at the Calvert Cliffs Nuclear Power Plant which is scheduled to be placed in service in 1996 and improvements in BGE's existing generating plants and its transmission and distribution facilities. Future electric construction expenditures do not include additional generating units. During the period January 1, 1991 through December 31, 1995, BGE expended $2,156 million for gross additions to utility plant or approximately 27% of its total utility plant (exclusive of nuclear fuel) at December 31, 1995. During the same period, a total of $376 million of utility plant was retired. Nuclear fuel expenditures include uranium purchases and processing charges. BGE presently estimates that approximately $930 million will be required for retirements and redemptions of long-term debt (including sinking fund payments) and BGE preference stock during the five-year period 1996-2000. For further information with respect to capital requirements and for a discussion of internal generation of cash, see ITEM 7. MD&A -- LIQUIDITY AND CAPITAL RESOURCES. ELECTRIC BUSINESS ELECTRIC REGULATORY MATTERS AND COMPETITION In recent years BGE focused strategic attention to developments in federal regulatory policy which are designed to increase competition in the wholesale market for bulk power and expand competition in the market for generation. In 1993, the BGE Board of Directors formed the Long Range Strategy Committee to provide an oversight role in the development of BGE's long range strategic goals and to consider strategic initiatives which Management wished to present to the BGE Board. Many of these developments were prompted by the Energy Policy Act of 1992 (the 1992 Act), which granted the FERC the authority to order electric utilities to provide transmission service to other utilities and to other buyers and sellers of electricity in the wholesale market. The 1992 Act also created a new class of power producers, exempt wholesale generators, which are exempt from regulation under the Public Utility Holding Company Act of 1935, as amended (the 1935 Act). This exemption has increased the number of entrants into the wholesale electric generation market and so increased competition in the wholesale segment of the electric utility industry. Pursuant to its authority under the 1992 Act, the FERC issued a number of orders in specific cases commencing in December 1993 directing utilities to provide transmission services. The FERC's actions have increased the availability of transmission services, thus creating significant competition in the wholesale power market. Other developments resulted from policies at the SEC, which has liberalized its interpretation and administration of the 1935 Act in ways that have made mergers between utility companies less burdensome, thereby facilitating the creation of larger industry competitors. Moreover, state regulatory bodies in certain states had initiated proceedings to review the basic structure of the industry. Against this background, BGE and PEPCO agreed to merge. Each company independently reached the conclusion that key factors contributing to success in this more competitive environment will be maintaining low-cost production and achieving a size that will enable it to continue to provide high quality customer service, enhancing its competitive position and attaining a greater level of financial strength. The accelerating pace of electric utility mergers attests to the appropriateness of business combinations between electric utility companies to address such needs. During 1993, one electric utility company merger was announced. In 1994, the number was increased to two, and during 1995, including those following the announcement of the Merger on September 25, 1995, six such transactions were announced. At the date of this report, there had been one electric utility company merger announced in 1996. 3 BGE, PEPCO, and Constellation Energy Corporation (formerly named R.H. Acquisition Corp.) entered into the Agreement and Plan of Merger dated as of September 22, 1995 (the Merger Agreement). The Merger Agreement provides that upon the receipt of all necessary approvals (including shareholder approval and a number of regulatory approvals) BGE and PEPCO will be merged into Constellation Energy Corporation (the Merger). Constellation Energy Corporation is a shell corporation formed for the sole purpose of accomplishing the Merger. It is currently anticipated that all such approvals will be obtained by March 1997. Preliminary estimates by the managements of PEPCO and BGE indicate that the synergies resulting from the combination of their utility operations could generate net cost savings of up to $1.3 billion over a period of 10 years following the Merger. These estimates indicate that about two-thirds of the savings will come from reduced labor costs, with the remaining savings split between nonfuel purchasing and corporate and administrative programs. These savings are expected to be allocated among shareholders and customers. This allocation will depend upon the results of regulatory proceedings in the various jurisdictions in which BGE and PEPCO operate their utility businesses. The reasons for the Merger, the terms and conditions contained in the Merger Agreement, and other matters concerning the Merger, PEPCO, and Constellation Energy Corporation are discussed in more detail in the Registration Statement on Form S-4 (Registration No. 33-64799) which is included as an exhibit to this Report on Form 10-K by incorporation by reference. The analyses employed in order to develop estimates of potential savings as a result of the Merger were necessarily based upon various assumptions which involve judgments with respect to, among other things, future national and regional economic and competitive conditions, inflation rates, regulatory treatment, weather conditions, financial market conditions, interest rates, future business decisions and other uncertainties, all of which are difficult to predict and many of which are beyond the control of BGE and PEPCO. Accordingly, while BGE believes that such assumptions are reasonable for purposes of the development of estimates of potential savings, there can be no assurance that such assumptions will approximate actual experience or that all such savings will be realized. State regulators around the United States are also redefining the regulatory scheme for the electric utility industry. The Maryland Public Service Commission (PSC) held hearings in 1995 to consider electric utility restructuring, the impact of competition, and regulatory reform and considered possible scenarios ranging from limited to full competition. The PSC issued a general policy statement in June, 1995 on changes recommended for Maryland's electric industry. It concluded that wholesale competition remains in the best interests of the state's energy consumers, but that in view of the availability of efficient, reliable, comparatively low-cost power, Maryland energy consumers do not currently need retail competition to capture the benefits of the competitive energy market. In addition, the PSC mandated competitive bidding for all new generation and agreed that utilities need flexibility to offer their customers terms and conditions that meet unique customer needs. It is not possible to predict the ultimate effect competition will have on BGE's earnings in the future. In April 1993, the PSC directed that an independent study be performed regarding the distribution of costs between BGE's regulated utility operations and unregulated merchandise and appliance services activities. A coalition of HVAC contractors had alleged that the unregulated operations were being subsidized by the utility. A cost allocation proceeding was held to examine the Company's allocation procedures as well as to deal with the demand by the coalition that the unregulated activities be required to pay a royalty based on unregulated revenues to compensate ratepayers for the use of the BGE name and its goodwill. In August, 1995, the PSC issued an order denying the imposition of royalty payments and requiring BGE to file a cost allocation manual based upon the principle of fully distributed cost allocation. BGE filed the manual in February, 1996. ELECTRIC RATE MATTERS ENERGY CONSERVATION SURCHARGE The PSC approved a base rate surcharge effective July 1, 1992 which provides for the recovery of deferred energy conservation expenditures, a return thereon, lost revenues, and incentives for achievement of predetermined goals for certain conservation programs subject to an earnings test. The compensation for foregone sales due to conservation programs and the incentives for achieving conservation goals must be refunded to customers if BGE is earning in excess of its authorized rate of return, as determined by the PSC. (See discussion in ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS.) The surcharge is reset on July 1 of each year. 4 ELECTRIC FUEL RATE PROCEEDINGS By statute, electric fuel costs are recoverable if the PSC finds that BGE demonstrates that, among other things, it has maintained the productive capacity of its generating plants at a reasonable level. The PSC and Maryland's highest appellate court have interpreted this as permitting a subjective evaluation of each unplanned outage at BGE's generating plants to determine whether or not BGE had implemented all reasonable and cost effective maintenance and operating control procedures appropriate for preventing the outage. The PSC has established a Generating Unit Performance Program (GUPP) to measure annual utility compliance with maintaining the productive capacity of generating plants at reasonable levels by establishing a system-wide generating performance target and individual performance targets for each base load generating unit. As a result, actual generating performance, after adjustment for planned outages, is compared to the system-wide target and, if met, should signify compliance with the requirements of Maryland law. Failure to meet the system-wide target will result in review of each unit's adjusted actual generating performance versus its performance target in determining compliance with the law, and the basis for possibly imposing a penalty on BGE. Failure to meet these targets requires BGE to demonstrate that the outages causing the failure are not the result of mismanagement. Parties to fuel rate hearings may still question the prudence of BGE's actions or inactions with respect to any given generating plant outage, which could result in a disallowance of replacement energy costs. BGE is involved in fuel rate proceedings annually where issues concerning individual plant outages can be raised. Recovery of a portion of replacement energy costs has been denied in past proceedings and BGE cannot estimate the amount that could be denied in future fuel rate proceedings, but such amounts could be material. (See NUCLEAR OPERATIONS.) BGE is required to submit to the PSC the actual generating performance data for each calendar year 45 days after year end. The PSC reviews BGE's performance for each calendar year in the first fuel rate proceeding initiated following the submission of the actual generating performance data for that year. BGE must initiate fuel rate proceedings in any month following a month during which the calculated fuel rate decreased by more than 5% and may initiate fuel rate proceedings in any month following a month during which the calculated fuel rate increased by more than 5%. NUCLEAR OPERATIONS Discussed below are certain events relating to the operations of the Calvert Cliffs Nuclear Power Plant (the Plant) during the period 1987 to the present, including issues involving the possible disallowance of replacement energy costs incurred during unplanned outages at the Plant. All outstanding issues will be resolved in fuel rate proceedings before the PSC which are conducted in accordance with the procedures outlined above under RATE MATTERS -- ELECTRIC FUEL RATE PROCEEDINGS. OPERATIONS IN 1987 The Plant generated 10,069,576 megawatt hours (MWH) in 1987 which resulted in a capacity factor of 70%. In October 1988, BGE filed a fuel rate application for a change in its electric fuel rate under GUPP, which covered BGE's operating performance in 1987. This was the first proceeding filed under this program and BGE's filing demonstrated that it met the system-wide and individual plant performance targets for 1987, including the performance target for the Plant. BGE believes, therefore, it is entitled to recover all fuel costs incurred in 1987 without any disallowances. However, People's Counsel alleged that a number of the outages at the Plant, including the 66-day outage to document compliance with NRC mandated environmental qualification requirements, were due to management imprudence and requested that the PSC disallow recovery of the associated replacement energy costs which BGE estimated to be approximately $33 million. On January 23, 1995, the Hearing Examiner issued his decision in the 1987 fuel rate proceeding and found that the Company had met the GUPP standard which establishes a presumption that BGE had operated the Plant at a reasonably productive capacity level. However, the Order found that the presumption of reasonableness would be overcome by a showing of mismanagement and that such a showing was made with respect to the environmental qualifications outage time. In mitigation for meeting the GUPP standard, the Hearing Examiner disallowed replacement energy costs recovery for 15.5 days of the 66-day outage time. The Hearing Examiner's Order was appealed to the PSC by both BGE and People's Counsel. If the PSC upholds the Hearing Examiner, the Company's earnings would be impacted by approximately $4.5 million. 5 OPERATIONS IN 1988 The Plant generated 11,733,900 MWH in 1988 which resulted in a capacity factor of 81%. BGE filed a fuel rate application under GUPP in May, 1989 in which it demonstrated that it met the system-wide and individual plant performance targets for 1988. People's Counsel alleged that BGE imprudently managed several outages at the Plant and requested that the PSC disallow recovery of $2 million of replacement energy costs. On November 14, 1991, a Hearing Examiner at the PSC issued a proposed Order, which became final on December 17, 1991 and concluded that no disallowance was warranted. The Hearing Examiner found that BGE maintained the productive capacity of the Plant at a reasonable level, noting that it produced a near record amount of power and exceeded the GUPP standard. Based on this record, the Order concluded there was sufficient cause to excuse any avoidable failures to maintain productive capacity at higher levels. OPERATIONS IN 1989 TO 1991 -- EXTENDED OUTAGE The Plant generated 2,719,197 MWH in 1989 and 1,251,416 MWH in 1990. In the Spring of 1989, a leak was discovered around the Unit 2 pressurizer heater sleeves during a refueling outage. BGE shut down Unit 1 as a precautionary measure on May 6, 1989 to inspect for similar leaks and none were found at that time. However, Unit 1 was out of service for the remainder of 1989 and 285 days of 1990 to undergo maintenance and modification work to enhance the reliability of various safety systems, to repair equipment, and to perform required periodic surveillance tests. Unit 2 remained out of service until May 4, 1991 to complete repair of the pressurizer, perform maintenance and modification work, and complete the refueling. The replacement energy costs associated with these extended outages for both Units at Calvert Cliffs, concluding with the return to service of Unit 2, are estimated to be $458 million. This estimate is based on a computer simulation comparing the actual operating conditions during the extended outages with operating conditions assuming the Plant ran at its targeted capacity factor. The extended outages experienced at the Plant are being reviewed by the PSC in the 1989-1991 fuel rate proceeding, and People's Counsel and others have challenged recovery of some part of the associated replacement energy costs. In the PSC's Rate Order issued in BGE's 1990 Base Rate Case, it found that $4 million of operations and maintenance expenses incurred by BGE during the 1989-1990 outages at the Plant should not be recoverable from customers. The PSC concluded that the related work, which was performed at Unit 1 during the 1989-1990 outage, was avoidable and caused by Company actions which were deficient. The work characterized as avoidable had a significant impact on the duration of the Unit 1 outage. The PSC's Order stated that its conclusions in this proceeding did not have a binding effect in the fuel rate proceeding on the recoverability of Calvert Cliffs' replacement energy costs. However, BGE believes that it is doubtful that the PSC will authorize recovery of the full amount of replacement energy costs presently under investigation. Based on a review of the circumstances surrounding the extended outages by BGE personnel as well as independent consultants, in 1990 BGE recorded a provision of $35 million against the possible disallowance of such costs. However, BGE cannot determine whether replacement energy costs may be disallowed in the 1989-1991 fuel rate proceeding in excess of the provision, but such amounts could be material. On March 15, 1994, the PSC Staff and the Office of People's Counsel filed testimony in the 1989-1991 fuel rate proceedings. The PSC Staff concluded that approximately 46% of the outage time was unreasonably incurred and that approximately $200 million of replacement energy costs should be disallowed. People's Counsel concluded that approximately $400 million of the replacement energy costs should be disallowed. BGE filed rebuttal testimony in January 1995 in which it vigorously contested the findings of Staff and People's Counsel. Additional testimony was filed by the PSC Staff and People's Counsel in October 1995 and BGE will file its final testimony in May 1996. Further hearings in this matter are expected to occur in 1996. As previously reported, in December 1988, the NRC categorized the Plant as one requiring close monitoring and increased NRC attention. The NRC did so following certain events that the NRC indicated raised questions about the effectiveness of past corrective action regarding engineering and technical areas and the overall approach to safety at the Plant. Details of such events were described in the Report on Form 10-K for the year ended December 31, 1990 in the section titled "Nuclear Operations" on pages 4 through 7. In February 1992, the NRC removed the Plant from its list of nuclear plants categorized as requiring close monitoring as a result of improved performance in previously identified problem areas and the demonstration of a sustained period of safe operation. 6 OPERATIONS IN 1991 AFTER THE EXTENDED OUTAGE The Plant generated 9,036,100 MWH in 1991, which resulted in a capacity factor of 63%. BGE filed a fuel rate application under GUPP in June 1992, however, the Hearing Examiner has determined that the 1991 case will not be addressed until the case covering the extended outage has been resolved. OPERATIONS SUBSEQUENT TO THE EXTENDED OUTAGE The Plant generated 10,663,950 MWH in 1992, which resulted in a capacity factor of 74%. There were no contested performance issues based on 1992 performance. The Plant generated 12,300,816 MWH in 1993, which resulted in a capacity factor of 85%. In 1994, the Plant generated 11,225,977 MWH achieving a capacity factor of 77%. Review of the GUPP filings in 1993 and 1994 have been completed. There were no significant performance issues in either of these years and BGE's GUPP filings were approved as filed. The plant generated 12,940,496 MWH in 1995, which resulted in a capacity factor of 88%. A review of 1995 performance will be initiated with BGE's next fuel rate application. ELECTRIC LOAD MANAGEMENT, ENERGY, AND CAPACITY PURCHASES BGE has implemented various active load management programs designed to be used when system operating conditions require a reduction in load. These programs include customer-owned generation and curtailable service for large commercial and industrial customers, air conditioning control which is available to residential and commercial customers, and residential water heater control. The load reductions typically have been invoked on peak summer days; the summer peak capacity impact for 1996 from active load management is expected to be approximately 474 megawatts (MW). Cost recovery for these load management programs is attainable through the inclusion in rate base of capital investments and the appropriate expenses (including credits on customer bills) for recovery in base rate proceedings. The generating and transmission facilities of BGE are interconnected with those of neighboring utility systems to form the Pennsylvania-New Jersey-Maryland Interconnection (PJM). Under the PJM agreement, the interconnected facilities are used for substantial energy interchange and capacity transactions as well as emergency assistance. In addition, BGE enters into short-term capacity transactions at various times to meet PJM obligations. BGE has an agreement with Pennsylvania Power & Light Company (PP&L) to purchase a mix of energy and capacity from June 1, 1990 through May 31, 2001. This agreement, which has been accepted by the FERC, is designed to help maintain adequate reserve margins through this decade and provide flexibility in meeting capacity obligations. The PP&L agreement entitles BGE to 5.94% of the energy output, and net capacity (currently 130 MW), of PP&L's nuclear Susquehanna Steam Electric Station from October 1, 1991 to May 31, 2001 and also enables BGE to treat a portion of PP&L's capacity as BGE's capacity for purposes of satisfying BGE's installed capacity requirements as a member of the PJM. BGE is not acquiring an ownership interest in any of PP&L's generating units. PP&L will continue to control, manage, operate, and maintain that station and all other PP&L-owned generating facilities. BGE's firm capacity purchases at December 31, 1995 represented 170 MW of rated capacity of Bethlehem Steel Corporation's Sparrows Point complex, 57 MW of rated capacity of the Baltimore Refuse Energy Systems Company, and the 130 MW of Susquehanna capacity from PP&L. In 1994 PECO Energy won a competitive bidding program to supply 140 MW for firm electric capacity and associated energy for 25 years beginning June 1, 1998. This contract has been accepted by both FERC and the PSC. 7 FUEL FOR ELECTRIC GENERATION Information regarding BGE's electric generation by fuel type and the cost of fuels in the five-year period 1991-1995 is set forth in the following tables:
AVERAGE COST OF FUEL CONSUMED GENERATION BY FUEL TYPE ((CENTS) PER MILLION BTU) 1995 1994 1993 1992 1991 1995 1994 1993 1992 1991 Nuclear (a)................... 43 % 39 % 43 % 40 % 33 % 47.22 52.06 53.01 45.54 48.64 Coal.......................... 57 56 55 54 44 148.64 148.64 151.85 154.76 160.74 Oil........................... 1 3 3 1 5 267.59 245.28 253.36 254.19 284.87 Hydro & Gas................... 3 3 3 3 4 -- -- -- -- -- 104 101 104 98 86 Interchange/Purchases (b)..... ( 4 ) ( 1 ) ( 4 ) 2 14 100 % 100 % 100 % 100 % 100 %
(a) Nuclear fuel costs provide for disposal costs associated with long-term off-site spent fuel storage and shipping, currently set by law at one mill per kilowatt-hour of nuclear generation (approximately 10 cents per million Btu) and for contributions to a fund for decommissioning and decontaminating the Department of Energy's uranium enrichment facility. (SEE FUEL FOR ELECTRIC GENERATION -- NUCLEAR.) (b) Net purchases from (sales to) others. COAL: BGE obtains a large amount of its coal under supply contracts with mining operators. The remainder of its coal requirements are obtained through spot purchases. BGE believes that it will be able to renew such contracts as they expire or enter into similar contractual arrangements with other coal suppliers. BGE's Brandon Shores Units 1 and 2 have a total annual requirement of approximately 3,500,000 tons of coal (combined) with a sulfur content of less than approximately 0.8%. The average delivered costs per ton paid by BGE for Brandon Shores coal for the years 1991 through 1995 were $39.80, $39.98, $39.49, $37.55 and $37.36, respectively. BGE's Crane Units 1 and 2 have a total annual requirement of about 700,000 tons of coal (combined) with a low ash melting temperature. Coal purchased in 1995 had a sulfur content of less than 1% compared to approximately 2.4% in prior years to meet the requirements of the Clean Air Act. The average delivered costs per ton paid by BGE for coal at Crane for the years 1991 through 1995 were $38.88, $38.37, $37.25, $37.42 and $46.50, respectively. BGE's Wagner Units 2 and 3 have a total annual requirement of approximately 900,000 tons of coal (combined) with a sulfur content of no more than 1%. The average delivered costs per ton paid by BGE for coal at Wagner for the years 1991 through 1995 were $44.49, $43.19, $40.62, $37.54 and $37.73, respectively. Coal deliveries to BGE's coal burning facilities are made by rail and barge. The coal used by BGE is produced from mines located in central and northern Appalachia. BGE has a 20.99% undivided interest in the Keystone coal-fired generating plant and a 10.56% undivided interest in the Conemaugh coal-fired generating plant. The bulk of the annual coal requirements for the Keystone plant is under contract from Rochester and Pittsburgh Coal Company. The Conemaugh plant purchases coal from local suppliers on the open market. The average delivered costs per ton for coal for these plants for the years 1991 through 1995 were $33.07, $31.53, $32.42, $33.22 and $32.49, respectively. OIL: Under normal burn practices, BGE's requirements for residual fuel oil amount to approximately 1,000,000 barrels of low-sulfur oil per year. Deliveries of residual fuel oil are made directly into BGE barges from the suppliers' Baltimore Harbor marine terminal for distribution to the various generating plant locations. The average delivered prices per barrel paid by BGE for residual fuel oil for the years 1991 through 1995 were $15.53, $17.25, $15.69, $16.30 and $17.41, respectively. NUCLEAR: The supply of fuel for nuclear generating stations involves the acquisition of uranium concentrates, its conversion to uranium hexafluoride, enrichment of uranium hexafluoride, and the fabrication of nuclear fuel assemblies. Information is set forth below with respect to fuel for Calvert Cliffs Units 1 and 2: Uranium Concentrates: BGE has, either in inventory or under contract, sufficient quantities of uranium concentrates to meet approximately 80% of its requirements through 1997 and approximately 50% of its requirements for 1998.
8 Conversion: BGE has contractual commitments providing for the conversion of uranium concentrates into uranium hexafluoride which will meet approximately 40% of its requirements through 1998. Enrichment: BGE has a contract with the U.S. Energy Corporation for the enrichment of 70% of BGE's enrichment requirements through 1998. Fuel Assembly Fabrication: BGE has contracted for the fabrication of fuel assemblies for reloads it requires through 1996.
The nuclear fuel market is very competitive and BGE does not anticipate any problem in meeting its requirements beyond the periods noted above. Expenditures for nuclear fuel are discussed in MD&A -- LIQUIDITY AND CAPITAL RESOURCES on page 29. Under the Nuclear Waste Policy Act of 1982 (the 1982 Act), spent fuel discharged from nuclear power plants, including Calvert Cliffs, is required to be placed into a federal repository. Such facilities do not currently exist, and, consequently, must be developed and licensed. BGE cannot now predict when such facilities will be available, although the 1982 Act obligates the federal government to accept spent fuel starting in 1998. While BGE cannot now predict what the ultimate cost will be, the 1982 Act assesses a one mill per kilowatt-hour fee on nuclear electricity generated and sold. At anticipated operating levels, it is expected that this fee will be approximately $12 million for Calvert Cliffs each year. Maryland law makes it unlawful to establish within the State a facility for the permanent storage of high-level nuclear waste, unless otherwise expressly required by federal law. BGE has received a license from the NRC to operate its on-site independent spent fuel storage facility. BGE now has storage capacity at Calvert Cliffs that will accommodate spent fuel from operations through the year 2006. In addition, BGE can expand its temporary storage capacity to meet future requirements until federal storage is available. The Energy Policy Act of 1992 (the 1992 Act) contains provisions requiring domestic utilities to contribute to a fund for decommissioning and decontaminating the Department of Energy's (DOE) uranium enrichment facilities. These contributions are generally payable over a fifteen-year period with escalation for inflation and are based upon the amount of uranium enriched by DOE for each utility through 1992. The 1992 Act provides that these costs are recoverable through utility service rates as a cost of fuel. Information about the cost of decommissioning is discussed in NOTE 1 TO THE CONSOLIDATED FINANCIAL STATEMENTS on page 42 under the heading "UTILITY PLANT, DEPRECIATION AND AMORTIZATION, AND DECOMMISSIONING." GAS: BGE has a firm natural gas transportation entitlement of 3,500 dekatherms a day to provide ignition and banking at certain power plants. Gas for electric generation is purchased as needed in the spot market using interruptible transportation arrangements. Certain gas fired units can use residual fuel oil as an alternative. GAS BUSINESS GAS REGULATORY MATTERS AND COMPETITION Regulatory changes in the natural gas business are well under way. In 1992, the Federal Energy Regulatory Commission (FERC) issued Order 636, which unbundled gas-service elements. This gave gas users the ability to choose various gas purchasing, transportation, brokering, and storage options. Prior to Order 636, BGE purchased gas, transportation and storage services primarily from pipeline companies. Now, BGE and other local distribution companies buy gas directly from various suppliers and arrange separately for transportation and storage. BGE's large gas customers are arranging for their own gas supplies and are contracting with BGE for transportation. The PSC continues to encourage BGE and other utilities to offer options for unbundling the gas services offered by local distribution companies and allowing smaller customers to arrange for their own gas supplies. Currently as part of its response to the increase in competition in the natural gas business, BGE has proposals before the PSC for profit sharing for capacity release revenues and savings from gas purchases which are less than a predefined city gate index (called Market Based Rates) for sales in BGE's gas territory. 9 GAS OPERATIONS BGE distributes natural gas purchased directly from several producers and marketers. Transportation to BGE's city gate for these purchases is provided by Columbia Gas Transmission Corporation (Columbia), CNG Transmission Corporation (CNG), and Transcontinental Gas Pipe Line Corporation under various transportation agreements. BGE has upstream transportation capacity under contract on Tennessee Gas Pipeline Company, Texas Eastern Transmission Corporation, Columbia Gulf Transmission Company and ANR Pipeline Company (ANR). BGE has storage service agreements with Columbia, CNG and ANR. The transportation and storage agreements are on file with the Federal Energy Regulatory Commission (FERC). BGE's current pipeline firm transportation entitlements to serve its firm loads are 473,597 dekatherms (DTH) per day during the winter period and 291,731 DTH per day during the summer period. BGE uses the firm transportation capacity to move gas from the Gulf of Mexico, Louisiana, south central regions of Texas and Canada to BGE's city gate. The gas is subject to a mix of long and short-term contracts that are managed to provide economic, reliable and flexible service. Additional short-term contracts or exchange agreements with other gas companies can be arranged in the event of short-term emergencies. To supplement BGE's gas supply at times of heavy winter demands and to be available in temporary emergencies affecting gas supply, BGE has propane air and liquefied natural gas facilities. The liquefied natural gas facility consists of a plant for the liquefaction and storage of natural gas with a storage capacity of 1,000,000 DTH and a planned daily capacity of 287,988 DTH. The propane air facility consists of a plant with a mined cavern and refrigerated storage facilities having a total storage capacity equivalent to 1,000,000 DTH and a daily capacity of 85,000 DTH. BGE has under contract sufficient volumes of propane for the operation of the propane air facility and is capable of liquefying sufficient volumes of natural gas during the summer months for operation of its liquefied natural gas facility during winter periods. BGE offers gas for sale to its residential, commercial and industrial customers on a firm and interruptible basis. BGE also provides its commercial and industrial customers with a transportation service across its distribution system so that these customers may make direct purchase and transportation arrangements with suppliers and pipelines. BGE also plans to conduct a pilot transportation program for residential customers. A transportation fee is charged by BGE that is equivalent to its operating margin on gas it sells to similar customers for the service from the city gate to the customer's facility. This program enables BGE to maintain throughput at a level which assures that fixed costs are spread over the maximum number of DTH. BGE is authorized by the PSC to provide balancing and gas brokering services for its transportation customers and to bundle pipeline capacity with gas for off-system sales. GAS RATE MATTERS On November 20, 1995, the PSC issued an Order (the 1995 Rate Order) authorizing BGE an annualized gas base rate increase of $19.3 million, including $2.4 million to recover higher depreciation expense. The increase is equivalent to approximately 4.8% of total gas revenues. In granting the increase, the Commission provided a return on BGE's higher level of gas rate base associated with system expansion and improvement and recognized increases in gas operating expenses associated with maintaining the expanded gas distribution system. This was partially offset by a reduction in the authorized gas rate of return to 9.04% from the 9.40% gas rate of return previously authorized. The 1995 Rate Order also provided for the recognition of the remaining portion of postretirement benefits costs not currently included in gas rates and authorized the Company, effective January 1, 1998, to begin amortizing over a fifteen-year period the gas portion of postretirement and postemployment benefit costs deferred prior to December 1995. In addition, the PSC authorized the Company to amortize certain environmental costs incurred through October 1995 over a ten-year period and to defer for future recovery additional environmental costs incurred after that date. 10 ELECTRIC OPERATING STATISTICS
YEAR ENDED DECEMBER 31, 1995 1994 1993 1992 1991 Electric Output (In Thousands) -- MWH: Generated................................ 30,548 28,413 28,907 25,626 22,767 Purchased (A)............................ 7,403 6,270 3,643 4,323 5,522 Subtotal............................ 37,951 34,683 32,550 29,949 28,289 Less Interchange and Other Sales......... 8,149 5,684 4,149 3,180 1,167 Total Output........................ 29,802 28,999 28,401 26,769 27,122 Power Generated and Purchased at Times of Peak Load (MW) (one hour): Generated by Company..................... 5,162 3,384 5,245 3,679 4,948 Net Purchased (A)........................ 785 2,654 631 1,879 962 Peak Load (B)............................ 5,947 6,038 5,876 5,558 5,910 Annual System Load Factor (%).............. 57.2 54.7 55.2 54.8 52.4 Revenues (In Thousands) Residential.............................. $ 955,239 $ 931,711 $ 931,643 $ 839,954 $ 882,591 Commercial............................... 879,438 852,989 869,829 842,694 850,038 Industrial............................... 208,441 205,611 199,042 201,950 212,864 System Sales............................. 2,043,118 1,990,311 2,000,514 1,884,598 1,945,493 Interchange and Other Sales.............. 166,964 118,027 91,543 64,323 23,845 Other.................................... 21,029 19,083 20,090 16,611 21,531 Total............................... $2,231,111 $2,127,421 $2,112,147 $1,965,532 $1,990,869 Sales (In Thousands) -- MWH: Residential.............................. 10,966 10,670 10,614 9,735 10,097 Commercial............................... 12,635 12,351 12,395 11,909 11,707 Industrial............................... 4,591 4,433 3,763 3,663 3,708 System Sales............................. 28,192 27,454 26,772 25,307 25,512 Interchange and Other Sales.............. 8,149 5,684 4,149 3,180 1,166 Total............................... 36,341 33,138 30,921 28,487 26,678 Customers Residential.............................. 988,179 978,591 968,212 956,570 939,734 Commercial............................... 103,399 101,957 100,820 99,673 98,254 Industrial............................... 4,161 3,967 3,800 3,761 3,584 Total............................... 1,095,739 1,084,515 1,072,832 1,060,004 1,041,572 Average Cost of Fuel Consumed ((cents) per million Btu)............................. 104.78 112.44 112.77 110.20 127.89
BGE achieved an all-time peak load of 6,038 megawatts on January 19, 1994. (A) Includes purchases from Safe Harbor Water Power Corporation, a hydroelectric company, of which the Company owns two-thirds of the capital stock. (B) See page 7 for a discussion of active load management programs which may be activated at times of peak load. Certain prior-year amounts have been reclassified to conform with the current year's presentation. 11 GAS OPERATING STATISTICS
YEAR ENDED DECEMBER 31, 1995 1994 1993 1992 1991 Gas Output (In Thousands) -- DTH: Purchased.......................................... 70,391 68,541 71,221 70,211 63,160 LNG Withdrawn from Storage......................... 815 698 725 742 551 Produced........................................... 528 828 259 92 17 Total Output.................................. 71,734 70,067 72,205 71,045 63,728 Delivery Service Gas Delivered (A)...................................... 44,177 41,897 38,521 41,048 40,503 Total......................................... 115,911 111,964 110,726 112,093 104,231 Peak Day Sendout (DTH)............................... 706,287 761,900 657,700 609,200 610,200 Capability on Peak Day (DTH)......................... 847,000 847,000 847,000 847,000 817,000 Revenues (In Thousands) Residential........................................ $248,283 $262,736 $265,601 $242,737 $220,653 Commercial Excluding Delivery Service...................... 109,859 121,005 121,832 112,147 96,189 Delivery Service................................ 3,696 2,285 3,287 3,591 3,031 Industrial Excluding Delivery Service...................... 16,730 20,140 22,250 21,123 14,855 Delivery Service................................ 16,332 9,635 12,920 14,290 14,288 Other.............................................. 5,604 5,448 7,273 6,511 6,777 Total......................................... $400,504 $421,249 $433,163 $400,399 $355,793 Sales (In Thousands) -- DTH: Residential........................................ 40,211 40,279 40,029 39,042 36,519 Commercial Excluding Delivery Service...................... 23,612 23,712 23,830 23,478 20,687 Delivery Service................................ 6,982 6,490 7,428 7,102 6,433 Industrial Excluding Delivery Service...................... 4,102 4,410 5,298 5,314 3,605 Delivery Service................................ 35,925 33,837 31,390 33,638 34,240 Total......................................... 110,832 108,728 107,975 108,574 101,484 Customers Residential........................................ 506,739 498,152 491,165 486,863 482,085 Commercial......................................... 38,422 37,891 37,518 37,000 36,561 Industrial......................................... 1,334 1,354 1,353 1,412 1,385 Total......................................... 546,495 537,397 530,036 525,275 520,031
BGE achieved an all-time peak day sendout of 761,900 DTH on January 19, 1994. (A) Represents gas purchased by alternate fuel customers directly from suppliers for which BGE receives a fee for transportation through its system ("delivery service"). (SEE MD&A -- RESULTS OF OPERATIONS.) Certain prior-year amounts have been reclassified to conform with the current year's presentation. 12 FRANCHISES BGE has nonexclusive electric and gas franchises to use streets and other highways which are adequate and sufficient to permit BGE to engage in its present business. All such franchises, other than the gas franchises in Manchester, Hampstead, Perryville, Sykesville, Havre de Grace, Mt. Airy, and Montgomery and Frederick Counties, are unlimited as to time. The gas franchises for these jurisdictions expire at various times from 2015 to 2087, except for Havre de Grace which has the right, exercisable at twenty-year intervals from 1907, to purchase all of BGE's gas properties in that municipality. Conditions of the franchises are satisfactory. BGE also has rights-of-way to maintain 26-inch natural gas mains across certain Baltimore City owned property (principally parks) which expire in 1998 and 2004, each subject to renewal during the last year thereof for an additional period of 25 years on a fair revaluation of the rights so granted. Conditions of the grants are satisfactory. Franchise provisions relating to rates have been superseded by the Public Service Commission Law of Maryland. DIVERSIFIED BUSINESSES GENERAL Diversified businesses consist of the operations of the Constellation Companies, HP&S and its subsidiary MES, EP&S, and BNG, Inc. The Constellation Companies' businesses are concentrated in three major areas -- power generation projects, financial investments, and real estate projects (including senior living facilities). A significant portion of the Constellation Companies' activities are conducted through joint ventures in which they hold varying ownership interests. The Constellation Companies hold up to a 50% ownership interest in 25 power generating projects in operation or under construction accounting for $345 million of the Constellation Companies' assets. These projects, all of which either are qualifying facilities under the Public Utility Regulatory Policies Act of 1978 or are otherwise exempt from the Public Utility Holding Company Act of 1935, are of the following types and aggregate generation capacities: coal 160 MW, solar 170 MW, geothermal 121 MW, waste coal 182 MW, wood burning 70 MW, hydro 30 MW, and natural gas 182 MW. In addition, another $12 million has been spent on projects in development. The Constellation Companies also participate in the operation and maintenance of 14 power generation projects existing or under construction, 10 of which are projects in which the Constellation Companies hold an ownership interest. Financial investments account for $206 million of the Constellation Companies' assets. These assets include $92 million in internally and externally managed securities portfolios, $78 million in a monoline financial guaranty (credit enhancement) company, and $36 million in tax-oriented transactions. Real estate and senior living projects account for $495 million of the Constellation Companies' assets. These projects include raw land, office buildings, retail, and commercial projects, an entertainment, dining, and retail complex in Orlando, Florida, a mixed-use planned unit development, and senior living facilities. The majority of the real estate projects are in the Baltimore-Washington area and have been adversely affected by the depressed real estate and economic market. The Constellation Companies' investment in wholesale power generating projects includes $197 million representing ownership interests in 16 projects which sell electricity in California under Interim Standard Offer No. 4 (SO4) power purchase agreements. Under these agreements, the projects supply electricity to purchasing utilities at a fixed rate for the first ten years of the agreements and thereafter at fixed capacity payments plus variable energy rates based on the utilities' avoided cost for the remaining term of the agreements. Avoided cost generally represents a utility's next lowest cost generation to service the demands on its system. These power generation projects are scheduled to convert to supplying electricity at avoided cost rates in various years beginning in late 1996 through the end of 2000. As a result of declines in purchasing utilities' avoided costs subsequent to the inception of these agreements, revenues at these projects based on current avoided cost levels would be substantially lower than revenues presently being realized under the fixed price terms of the agreements. At current avoided cost levels, the Constellation Companies could experience reduced earnings or incur losses associated with these projects, which could be significant. While nine projects transition from fixed to variable energy rates in the 1996 through 1998 timeframe, revenues from the other projects having SO4 contracts are expected to continue to increase during this period tending to offset revenue declines on the nine projects. Six of the seven largest revenue producing projects will not make the transition to variable energy rates until the 1999-2000 13 timeframe such that any material reductions in revenues would not be anticipated until the years 2000 and 2001. The Constellation Companies are investigating and pursuing alternatives for certain of these power generation projects including, but not limited to, repowering the projects to reduce operating costs, changing fuels, renegotiating the power purchase agreements, restructuring financings, and selling its ownership interests in the projects. Two of these wholesale power generating projects, in which the Constellation Companies' investment totals $30 million, have executed agreements with Pacific Gas & Electric (PG&E) providing for the curtailment of output through the end of the fixed-price period in return for payments from PG&E. The payments from PG&E during the curtailment period will be sufficient to fully amortize the existing project finance debt. However, following the curtailment period, the projects remain contractually obligated to commence production of electricity at the avoided cost rates, which could result in reduced earnings or losses for the reasons described above. The Company cannot predict the impact that these matters regarding any of the 16 projects may have on the Constellation Companies or the Company, but the impact could be material. HP&S was formed in mid 1994. HP&S is engaged in the sales and service of gas and electric appliances. This business recently was expanded to include kitchen remodeling and servicing of heating and air conditioning systems. In December 1994, HP&S acquired MES, a company specializing in installation of commercial and residential heating, air conditioning, and plumbing. EP&S was formed in late 1995. EP&S provides a broad range of customized energy services to major customers including industrial, institutional, and government customers in commercial office buildings, warehouses, educational, healthcare, and retail facilities. These energy services include customer electrical system improvements, lighting and mechanical engineering services, campus and multi-building systems, brokering and associated financial contracts, and district chilled water systems. BNG, Inc. is a wholly owned subsidiary of BGE which engages in natural gas brokering. CAPITAL REQUIREMENTS Capital requirements for diversified businesses for 1993 through 1995, along with estimated amounts for 1996 through 1998, are set forth below:
1993 1994 1995 1996 1997 1998 (IN MILLIONS) Retirement of long-term debt............................ $222 $37 $ 55 $ 49 $135 $138 Investment requirements................................. 78 51 118 92 71 82 Total diversified businesses.......................... $300 $88 $173 $141 $206 $220
The investment requirements shown above include the Constellation Companies' portion of equity funding to committed projects under development as well as net loans made to project partnerships. The investment requirements for past periods reflect actual funding of projects, whereas investment requirements for the years 1996-1998 reflect the Constellation Companies' estimate of funding during such periods for ongoing and anticipated projects. Also, guarantees of $35 million may be called which are not included above. Estimates of the Constellation Companies' investment requirements are subject to continuous review and modification. Actual investment requirements may vary significantly from the amounts above due to the type and number of projects selected for development, the impact of market conditions on those projects, the ability to obtain financing, and the availability of internally generated cash. The Constellation Companies' investment requirements have been met in the past through the internal generation of cash and through borrowings from institutional lenders. The investment requirements shown above do not include amounts for the Company's other diversified businesses because to date the investment requirements of those businesses have been minimal. See NOTES 3 AND 4 TO CONSOLIDATED FINANCIAL STATEMENTS AND MD&A -- LIQUIDITY AND CAPITAL RESOURCES -- DIVERSIFIED BUSINESSES CAPITAL REQUIREMENTS for additional information about diversified activities. 14 ENVIRONMENTAL MATTERS The Company is subject to regulation with regard to air and water quality, waste disposal, and other environmental matters by various federal, state, and local authorities. Certain of these regulations require substantial expenditures for additions to utility plant and the use of more expensive low-sulfur fuels. While the Company cannot now precisely estimate the total effect of existing and future environmental regulations and standards upon its existing and proposed facilities and operations, the necessity for compliance with existing standards and regulations has caused BGE to increase capital expenditures by approximately $174 million during the five-year period 1991-1995. It is estimated that the capital expenditures necessary to comply with such standards and regulations will be approximately $9 million, $20 million, and $39 million for 1996, 1997, and 1998, respectively. AIR: The Federal Clean Air Act (the Act) mandates health and welfare standards for concentrations of air pollutants. The State of Maryland is charged by the Act with the responsibility for setting limits on all major sources of these pollutants in the State so that these standards are not exceeded. Except for Crane Units 1 and 2, BGE's generating units are limited to burning fuel (coal or oil) with sulfur content of 1% or below. All units are limited to emitting particulate matter at or below 0.02 grains per standard cubic foot of exhaust gas for oil fired units and 0.03 grains per standard cubic foot for coal-fired units. Brandon Shores, a newer plant, is subject to more stringent standards for sulfur dioxide (1.2 pounds per million Btu), and nitrogen dioxide (0.7 pounds per million Btu). The Crane Units must meet limits of 3.5 pounds per million Btu for sulfur dioxide, which is equivalent to a coal sulfur content of approximately 2.4%. BGE is in compliance with existing air quality regulations. The Clean Air Act Amendments of 1990 contain two titles designed to reduce emissions of sulfur dioxide and nitrogen oxide (NOx) from electric generating stations. Title IV contains provisions for compliance in two phases. Phase I of Title IV became effective January 1, 1995, and Phase II of Title IV must be implemented by 2000. BGE met the requirements of Phase I by installing flue gas desulfurization systems and through fuel switching and unit retirements. BGE is currently examining what actions will be required in order to comply with Phase II. However, BGE anticipates that compliance will be attained by some combination of fuel switching, flue gas desulfurization, unit retirements, or allowance trading. At this time, plans for complying with NOx control requirements under Title I of the Act are less certain because all implementation regulations have not yet been finalized by the government. It is expected that by the year 1999 these regulations will require additional NOx controls for ozone attainment at BGE's generating plants and other BGE facilities. The controls will result in additional expenditures that are difficult to predict prior to the issuance of such regulations. Based on existing and proposed ozone nonattainment regulations, BGE currently estimates that the NOx controls at BGE's generating plants will cost approximately $90 million. BGE is currently unable to predict the cost of compliance with the additional requirements at other BGE facilities. WATER: The discharge of effluents into the waters of the State of Maryland is regulated by the Maryland Department of the Environment (MDE), in accordance with the National Pollutant Discharge Elimination System (NPDES) permit program, established pursuant to the Federal Clean Water Act. At the present time, all of BGE's steam electric generating plants have the required NPDES permits. MDE water quality regulations require, among other things, specifying procedures for determining compliance with State water quality standards. These procedures require extensive studies involving sampling and monitoring of the waters around affected generating plants. The State of Maryland may require changes in plant operations. At this time BGE continually performs studies to determine whether any modifications will be required to comply with these regulations. WASTE DISPOSAL: The United States Environmental Protection Agency (EPA) has promulgated regulations implementing those portions of the Resource Conservation and Recovery Act which deal with management of hazardous wastes. These regulations, and the Hazardous and Solid Waste Amendments of 1984, designate certain spent materials as hazardous wastes and establish standards and permit requirements for those who generate, transport, store, or dispose of such wastes. The State of Maryland has adopted similar regulations governing the management of hazardous wastes, which closely parallel the federal regulations. BGE has implemented procedures for compliance with all applicable federal and state regulations governing the management of hazardous wastes. Certain high volume utility wastes such as fly ash and bottom ash have been exempted from these regulations. The Company currently utilizes almost all of its coal fly ash and bottom ash as structural fill material in a 15 manner approved by the State of Maryland. The remainder of the coal ash is sold to the construction industry for a number of approved applications. The Federal Comprehensive Environmental Response, Compensation and Liability Act (Superfund statute) establishes liability for the cleanup of hazardous wastes found contaminating the soil, water, or air. Those who generated, transported or deposited the waste at the contaminated site are each jointly and severally liable for the cost of the cleanup, as are the current property owner and their predecessors in title at the time of the contamination. In addition, many states have enacted laws similar to the Superfund statute. On October 16, 1989, the EPA filed a complaint in the U.S. District Court for the District of Maryland under the Superfund statute against BGE and seven other defendants to recover past and future expenditures associated with cleanup of a site located at Kane and Lombard Streets in Baltimore. The State of Maryland intervened by filing a similar complaint in the same case and court on February 12, 1990. The complaints allege that BGE arranged for its fly ash to be deposited on the site. Settlement discussions continue among all parties. Additional investigation was initiated on the remainder of the site by the MDE for the EPA but was never completed. BGE and three other defendants agreed to complete the remedial investigation and feasibility study of groundwater contamination around the site in a July 1993 consent order. The remedial action, if any, for the remainder of the site will not be selected until these investigations are concluded. Therefore, neither the total site cleanup costs, nor BGE's share, can presently be estimated. In the early 1970's, BGE shipped an unknown number of scrapped transformers to Metal Bank of America, a metal reclaimer in Philadelphia. Metal Bank's scrap and storage yard has been found to be contaminated with oil containing high levels of PCBs (PCBs are hazardous chemicals frequently used as a fire-resistant coolant in electrical equipment). On December 7, 1987, the EPA notified BGE and nine other utilities that they are considered potentially responsible parties (PRPs) with respect to the cleanup of the site. A remedial investigation and feasibility study (RI/FS) by BGE and the other PRPs was submitted to the EPA on October 14, 1994. Estimated costs for the various remedies included in the RI/FS range greatly (from $15 million to $45 million). Until a specific remedy is chosen, BGE is not able to predict the actual cleanup costs. BGE's share of the cleanup costs, estimated to be approximately 15.79%, could be material. From 1985 until 1989, BGE shipped waste oil and other materials to the Industrial Solvents and Chemical Company in York County, Pennsylvania for disposal. The Pennsylvania Department of Environmental Resources (Pennsylvania Department) subsequently investigated this site and found it to be heavily contaminated by hazardous wastes. The Pennsylvania Department notified BGE on August 15, 1990, that it and approximately 1,000 other entities were PRPs with respect to the cost of all remedial activities to be conducted at the site. The PRPs have agreed to perform waste characterization, remove and dispose of all tanks and drums of waste, and perform a remedial investigation at the site. BGE's share of the liability at this site currently is estimated to be approximately 2.39%, but this may change as additional information about the site is obtained. The actual cost of remedial activities has not been determined. As a result of these factors, BGE's potential liability cannot presently be estimated. However, such liability is not expected to be material. On August 30, 1994, BGE was named as a defendant in UNITED STATES V. KEYSTONE SANITATION COMPANY, ET AL. The litigation was instituted by EPA in the United States District Court for the Middle District of Pennsylvania involving contamination of the Keystone Sanitation Company landfill Superfund site located in Adams County, Pennsylvania. BGE was named as a third party defendant based upon allegations that BGE had drums of asbestos shipped to the site. There are eleven original defendants, approximately 150 other third party defendants, and approximately 570 fourth party defendants. Neither the costs of future site remediation, nor the extent of BGE's potential liability can be estimated at this time. However, such liability is not expected to be material. In December 1995, BGE was notified by the EPA that it is one of approximately 650 parties that may have incurred liability under the Superfund statute for shipments of hazardous wastes to a site in Denver, Colorado known as the RAMP Industries site. BGE, through its disposal vendor, shipped a small amount of low level radioactive waste to the site between 1989 and 1992. The site, which was found to have been operated improperly, was closed in 1994. That same year, the EPA began a clean up of the site which will consist of removal of drums of radioactive and hazardous mixed wastes. To date the EPA has processed approximately one third of the drums and incurred expenses of about $2.2 million. After the EPA completes its drum removal phase of the clean up it will investigate potential soil and groundwater contamination. Although BGE's potential liability cannot be estimated, it is believed that such liability is not likely to be substantial based on the limited amount of waste shipped to the site from BGE facilities. 16 In the early part of the century, predecessor gas companies (which were later merged into BGE) manufactured coal gas for residential and industrial use. The residue from this manufacturing process was coal tar, previously thought to be harmless but now found to contain a number of chemicals designated by the EPA as hazardous substances. BGE is coordinating an investigation of these former coal gas plant sites, including exploration of corrective action options to remove coal tar, with the MDE. No formal legal proceedings have been instituted against BGE with respect to these sites. The technology for cleaning up such sites is still developing, and potential remedies for these sites have not been determined. As explained in NOTE 12 TO THE CONSOLIDATED FINANCIAL STATEMENTS on page 52, BGE has recognized estimated environmental costs at these sites totaling $38.6 million as of December 31, 1995. Any cleanup costs for these sites in excess of the amount accrued, which could be significant in total, cannot presently be estimated. On May 3, 1994 Constellation Power, Inc. (formerly "Constellation Energy, Inc.") (CPI) was named as a defendant in REPUBLIC IMPERIAL ACQUISITION V. STOCKMAR ENERGY, INC., ET AL. Civil No. 940120R(LSP) (Dist. Ct., So. Dist. California). The plaintiffs are owners of a non-hazardous waste landfill located in Imperial County, California. The plaintiffs allege that defendants delivered hazardous materials consisting of spent geothermal filters containing certain metals used in the operation of four geothermal projects. The claims are made under the Superfund statute and state and common law against the operators, project owners and others. Certain CPI subsidiaries have ownership interests in three of the projects. These Constellation Companies have indemnification rights from project lessees and operators. Approximately 45 other defendants, in addition to CPI, have been named to date. The Constellation Companies are currently evaluating the claims and site investigation is at a preliminary stage. As a result, total investigation and clean up costs, as well as the Constellation Companies' share of such costs, cannot presently be estimated. EMPLOYEES As of December 31, 1995, BGE employed 7,275 people for its utility operations and 729 people for its subsidiaries, excluding the Constellation companies. Five hundred seventy-five people were employed by Constellation Holdings, Inc., including its subsidiaries involved in the operation of power projects and senior living facilities. In addition, the Constellation Companies employ approximately 800 employees at an entertainment, dining, and retail complex in Orlando, Florida. 17 ITEM 2. PROPERTIES ELECTRIC: The principal electric generating plants of BGE are as follows:
INSTALLED GENERATION (MWH) PLANT LOCATION CAPACITY (MW) PRIMARY FUEL 1995 1994 (AT DECEMBER 31, 1995) Steam Calvert Cliffs Calvert County, MD 1,675 Nuclear 12,937,965 11,219,516 Brandon Shores Anne Arundel County, MD 1,291 Coal 9,091,443 8,857,557 Herbert A. Wagner Anne Arundel County, MD 1,006 Coal/Oil/Gas 3,002,183 2,940,978 Charles P. Crane Baltimore County, MD 380 Coal 1,631,798 1,847,851 Gould Street Baltimore City, MD 104 Oil 66,851 124,323 Riverside Baltimore County, MD 78 Oil/Gas 40,229 9,146 Jointly Owned -- Steam Keystone Armstrong and 359(A) Coal 2,429,568 2,188,760 Indiana Counties, PA Conemaugh Indiana County, PA 181(A) Coal 1,244,060 1,156,109 Combustion Turbine Notch Cliff Baltimore County, MD 128 Gas 27,702 11,472 Perryman Harford County, MD 350 Oil/Gas 42,875 26,960 Westport Baltimore City, MD 121 Gas 19,133 10,266 Riverside Baltimore County, MD 173 Oil/Gas 7,118 8,711 Philadelphia Road Baltimore City, MD 64 Oil 4,813 8,250 Charles P. Crane Baltimore County, MD 14 Oil 1,237 1,804 Herbert A. Wagner Anne Arundel County, MD 14 Oil 971 1,300 Totals 5,938 30,547,946 28,413,003
(A) BGE-owned proportionate interest and entitlement. These totals include diesel capacity of 2 megawatts and 1 megawatt for Keystone and Conemaugh, respectively. BGE also owns two-thirds of the outstanding capital stock of Safe Harbor Water Power Corporation, and is currently entitled to 277 megawatts of the rated capacity of the Safe Harbor Hydroelectric Project. Safe Harbor is operated under a FERC license which expires in the year 2030. GAS: BGE has propane air and liquefied natural gas facilities as described in Gas Operations on page 10. GENERAL: All of the principal plants and other important units of BGE located in Maryland are held in fee except that several properties (not including any principal electric or gas generating plant or the principal headquarters building owned by BGE in downtown Baltimore) in BGE's service area are held under lease arrangements. The leased spaces are used for various offices and service. Electric transmission and electric and gas distribution lines are constructed principally (a) in public streets and highways pursuant to franchises or (b) on permanent fee simple or easement rights-of-way secured for the most part by grants from record owners and as to a relatively small part by condemnation. BGE's undivided interests as a tenant-in-common in the properties acquired for the Keystone and Conemaugh Plants located in Pennsylvania are held in fee by BGE, subject to minor defects and encumbrances which do not materially interfere with the use of the properties by BGE. All of BGE's property referred to above is subject to the lien of the Mortgage securing BGE's First Refunding Mortgage Bonds. ITEM 3. LEGAL PROCEEDINGS ASBESTOS Since 1993, BGE was served in several actions concerning asbestos. The actions are collectively titled IN RE BALTIMORE CITY PERSONAL INJURIES ASBESTOS CASES in the Circuit Court for Baltimore City, Maryland. The actions are based upon the theory of "premises liability," alleging that BGE knew of and exposed individuals to an asbestos hazard. The actions relate to two types of claims. The first type, direct claims by individuals exposed to asbestos, were described in a Report on Form 8-K filed August 20, 1993. BGE and approximately 70 other defendants are involved. The 516 non-employee plaintiffs each claim $6 million in damages ($2 million compensatory and $4 million punitive). BGE does not know 18 the specific facts necessary for BGE to assess its potential liability for these type claims, such as the identity of the BGE facilities at which the plaintiffs allegedly worked as contractors, the names of the plaintiffs' employers, and the date on which the exposure allegedly occurred. The second type are claims made by two manufacturers -- Owens Corning Fiberglass and Pittsburgh Corning Corp. -- against BGE and approximately eight others, as third-party defendants. Owens Corning Fiberglass has dismissed its claims against BGE. The second type claims relate to approximately 1,500 individual plaintiffs. BGE does not know the specific facts necessary for BGE to assess its potential liability for these type claims, such as the identity of BGE facilities containing asbestos manufactured by the two manufacturers, the relationship (if any) of each of the individual plaintiffs to BGE, the settlement amounts for any individual plaintiffs who are shown to have had a relationship to BGE, and the dates on which/places at which the exposure allegedly occurred. Until the relevant facts for both type claims are determined, BGE is unable to estimate what its liability, if any, might be. Although insurance and hold harmless agreements from contractors who employed the plaintiffs may cover a portion of any ultimate awards in the actions, BGE's potential liability could be material. SEE ITEM 1. BUSINESS -- ELECTRIC RATE MATTERS, NUCLEAR OPERATIONS, ENVIRONMENTAL MATTERS, and NOTE 12 TO CONSOLIDATED FINANCIAL STATEMENTS. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable. 19 ITEM 10. EXECUTIVE OFFICERS OF THE REGISTRANT Executive Officers of the Registrant are:
OTHER OFFICES OR POSITIONS NAME AGE PRESENT OFFICE HELD DURING PAST FIVE YEARS Christian H. Poindexter 57 Chairman of the Board (A) Vice Chairman of the Board (Since January 1, 1993) Edward A. Crooke 57 Chairman of the Board - President, Utility Operations Subsidiaries and President (B) (Since January 1, 1996) Bruce M. Ambler 56 President and Chief Executive Officer Constellation Holdings, Inc. (Since August 1, 1989) George C. Creel 62 Executive Vice President Senior Vice President, Generation and acting Chief Operating Senior Vice President Officer Vice President, Nuclear Energy (Since January 1, 1996) Robert E. Denton 53 Senior Vice President Vice President, Nuclear Energy Generation Plant General Manager, Calvert (Since January 1, 1996) Cliffs Nuclear Power Plant Thomas F. Brady 46 Vice President Vice President, Customer Service Customer Service and and Accounting Distribution Vice President, Accounting and (Since July 1, 1993) Economics Herbert D. Coss, Jr. 61 Vice President Vice President, Marketing and Gas Gas Operations (Since October 1, 1994) Vice President, Electric Intercon- nection and Transmission Vice President, Interconnection and Operations Charles H. Cruse 51 Vice President Plant General Manager, Calvert Nuclear Energy Cliffs Nuclear Power Plant (Since January 1, 1996) Manager, Nuclear Engineering Carserlo Doyle 53 Vice President Manager, Telecommunications Electric Interconnection Principal Engineer -- Electric and Transmission Interconnection (Since January 1, 1994) Jon M. Files 60 Vice President Management Services (Since September 1, 1981) Sharon S. Hostetter 51 Vice President Manager, Marketing Marketing and Sales Division Manager, Resource (Since November 1, 1995) Application and Customer Development Group, Rochester Gas and Electric Corporation Ronald W. Lowman 51 Vice President Manager, Fossil Engineering Fossil Energy Manager, Fossil Engineering (Since January 1, 1993) Services G. Dowell Schwartz, Jr. 59 Vice President General Services (Since April 1, 1990) Charles W. Shivery 50 Vice President Vice President, Corporate Finance and Accounting, Finance Group Chief Financial Officer and Treasurer and Secretary Secretary (Since July 1, 1993) Joseph A. Tiernan 57 Vice President Vice President, Corporate Corporate Affairs Administration (Since February 1, 1993)
20 Stephen F. Wood 43 President and Vice President, Marketing and Sales Chief Executive Officer Manager, Major Customer Projects BGE Energy Projects & Manager, System Engineering Services, Inc. and Construction (Since November 1, 1995) Manager, Distribution Engineering Manager, Transportation
(A) Chief Executive Officer, Director, and member of the Executive Committee. (B) Chief Operating Officer, Director, and member of the Executive Committee. 21 Officers of the Registrant are elected by, and hold office at the will of, the Board of Directors and do not serve a "term of office" as such. There is no arrangement or understanding between any officer and any other person pursuant to which the officer was selected. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS STOCK TRADING BGE's Common Stock, which is traded under the ticker symbol BGE, is listed on the New York, Chicago, and Pacific stock exchanges, and has unlisted trading privileges on the Boston, Cincinnati, and Philadelphia exchanges. As of February 29, 1996, there were 79,507 common shareholders of record. DIVIDEND POLICY The Common Stock is entitled to dividends when and as declared by the Board of Directors. There are no limitations in any indenture or other agreements on payment of dividends; however, holders of Preferred Stock (first) and holders of Preference Stock (next) are entitled to receive, when and as declared, from the surplus or net profits, cumulative yearly dividends at the fixed preferential rate specified for each series and no more, payable, quarterly, and to receive when due the applicable Preference Stock redemption payments, before any dividend on the Common Stock shall be paid or set apart. Dividends have been paid on the Common Stock continuously since 1910. Future dividends depend upon future earnings, the financial condition of the Company and other factors. Quarterly dividends were declared on the Common Stock during 1996, 1995 and 1994 in the amounts set forth below. COMMON STOCK DIVIDENDS AND PRICE RANGES
1996 (THROUGH MARCH 12, 1996) DIVIDEND PRICE* DECLARED HIGH LOW First Quarter............. $ .39 $29-1/2 $26-3/8 Second Quarter............ Third Quarter............. Fourth Quarter............ Total...................
1995 DIVIDEND PRICE* DECLARED HIGH LOW First Quarter............. $ .38 $25 $22 Second Quarter............ .39 26-1/2 23-1/8 Third Quarter............. .39 26-5/8 24-3/8 Fourth Quarter............ .39 29 25-1/2 Total................... $1.55
1994 DIVIDEND PRICE* DECLARED HIGH LOW First Quarter............. $ .37 $25-1/2 $22-3/8 Second Quarter............ .38 24-3/8 20-1/2 Third Quarter............. .38 23-3/4 20-3/4 Fourth Quarter............ .38 23-5/8 21-1/4 Total................... $1.51
*Based on New York Stock Exchange Composite Transactions as reported in the eastern edition of THE WALL STREET JOURNAL. 22 Item 6. Selected Financial Data
Compound 1995 1994 1993 1992 1991 Growth - --------------------------------------------------------------------------------------------------------------------------- (Dollar amounts in thousands, except per share amounts) 5-year 10-Year Summary of Operations Total Revenues $2,934,799 $2,782,985 $2,741,385 $2,559,536 $2,514,631 5.47% 4.56% Expenses Other Than Interest and Income Taxes 2,239,107 2,147,726 2,124,993 2,024,227 2,026,910 3.10 4.93 - ---------------------------------------------------------------------------------------------------------------------------- Income From Operations 695,692 635,259 616,392 535,309 487,721 16.36 3.46 Other Income 8,819 32,365 20,310 22,132 28,095 (23.87) (4.60) - --------------------------------------------------------------------------------------------------------------------------- Income Before Interest and Income Taxes 704,511 667,624 636,702 557,441 515,816 14.33 3.30 Net Interest Expense 196,977 190,154 188,764 189,747 196,588 3.58 5.98 - ---------------------------------------------------------------------------------------------------------------------------- Income Before Income Taxes 507,534 477,470 447,938 367,694 319,228 21.03 2.43 Income Taxes 169,527 153,853 138,072 103,347 85,547 53.41 1.11 - ---------------------------------------------------------------------------------------------------------------------------- Income Before Cumulative Effect of Change in Accounting Method 338,007 323,617 309,866 264,347 233,681 14.01 3.17 Cumulative Effect of Change in the Method of Accounting for Income Taxes --- --- --- --- 19,745 --- --- - ---------------------------------------------------------------------------------------------------------------------------- Net Income 338,007 323,617 309,866 264,347 253,426 9.65 3.17 Preferred and Preference Stock Dividends 40,578 39,922 41,839 42,247 42,746 0.16 4.02 - ---------------------------------------------------------------------------------------------------------------------------- Earnings Applicable to Common Stock $ 297,429 $ 283,695 $ 268,027 $ 222,100 $ 210,680 11.45 3.06 ============================================================================================================================ Earnings Per Share of Common Stock Before Cumulative Effect of Change in Accounting Method $2.02 $1.93 $1.85 $1.63 $1.511 3.13 0.77 Cumulative Effect of Change in the Method of Accounting for Income Taxes --- --- --- --- .16 --- --- - ---------------------------------------------------------------------------------------------------------------------------- Total Earnings Per Share of Common Stock $2.02 $1.93 $1.85 $1.63 $1.67 7.61 0.77 ============================================================================================================================ Dividends Declared Per Share of Common Stock $1.55 $1.51 $1.47 $1.43 $1.40 2.06 3.40 Ratio of Earnings to Fixed Charges 3.21 3.14 3.00 2.65 2.27 12.52 (2.51) Ratio of Earnings to Fixed Charges and Preferred and Preference Stock Dividends Combined 2.52 2.47 2.34 2.08 1.82 11.38 (1.99) Financial Statistics at Year End Total Assets $8,316,663 $8,037,502 $7,829,613 $7,208,660 $6,963,547 4.39 6.88 ============================================================================================================================ Capitalization Long-term debt $2,598,254 $2,584,932 $2,823,144 $2,376,950 $2,390,115 3.44 5.69 Preferred stock 59,185 59,185 59,185 59,185 59,185 --- --- Redeemable preference stock 242,000 279,500 342,500 395,500 398,500 (7.89) 11.70 Preference stock not subject to mandatory redemption 210,000 150,000 150,000 110,000 110,000 13.81 1.84 Common shareholders' equity 2,812,682 2,717,866 2,620,511 2,534,639 2,153,306 6.29 6.33 - ---------------------------------------------------------------------------------------------------------------------------- Total Capitalization $5,922,121 $5,791,483 $5,995,340 $5,476,274 $5,111,106 4.29 5.92 ============================================================================================================================ Book Value Per Share of Common Stock $19.07 $18.42 $17.94 $17.63 $17.00 2.84 3.98 Number of Common Shareholders 79,811 81,505 82,287 80,371 71,131 1.79 0.04
Certain prior-year amounts have been reclassified to conform with the current year's presentation. 23 Baltimore Gas and Electric Company and Subsidiaries Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This annual report presents the financial condition and results of operations of Baltimore Gas and Electric Company (BGE) and its subsidiaries (collectively, the Company). Among other information, it provides Consolidated Financial Statements, Notes to Consolidated Financial Statements (Notes), Utility Operating Statistics, and Selected Financial Data. The following discussion explains factors that significantly affect the Company's results of operations, liquidity, and capital resources. Effective November 1, 1995, BGE formed a wholly owned subsidiary, BGE Energy Projects & Services, Inc. (EP&S). EP&S' revenues and expenses are included in diversified businesses revenues and diversified businesses selling, general, and administrative expenses, respectively. Results of Operations Earnings per Share of Common Stock Consolidated earnings per share were $2.02 for 1995 and $1.93 for 1994, an increase of $.09 and $.08 from prior-year amounts, respectively. The changes in earnings per share reflect a higher level of earnings applicable to common stock, offset partially by a larger number of outstanding common shares. The summary below presents the earnings-per-share amounts.
1995 1994 1993 - -------------------------------------------------------------------- Utility business $1.84 $1.81 $1.77 Diversified businesses .18 .12 .08 - -------------------------------------------------------------------- Total $2.02 $1.93 $1.85 ====================================================================
Earnings Applicable to Common Stock Earnings applicable to common stock increased $13.7 million in 1995 and $15.7 million in 1994. The increases reflect higher utility and diversified businesses earnings. Utility earnings increased in 1995 compared to the prior year due to higher electric system sales resulting from the extremely hot summer weather in 1995, and higher electric and gas sales resulting from the colder fall weather experienced in 1995. These factors were partially offset by lower electric and gas system sales resulting from the milder weather experienced during the first half of the year as compared to last year; lower net other income and deductions in 1995; and a decrease in the allowance for funds used during construction. Utility earnings increased in 1994 compared to the prior year due to three principal factors: lower operations and maintenance expenses; an increase in the allowance for funds used during construction; and greater sales of electricity. The higher sales of electricity were primarily due to an increased number of customers compared to 1993. Both 1995 and 1994 earnings increases were offset partially by higher depreciation and amortization expense, which includes the write-off of certain Perryman costs in both years (see discussion on page 27). The effect of weather on utility sales is discussed below. The following factors influence BGE's utility operations earnings: regulation by the Maryland Public Service Commission (PSC); the effect of weather and economic conditions on sales; and competition in the generation and sale of electricity. The gas base rate increase authorized by the PSC in November 1995 favorably affected utility earnings beginning in December 1995. The electric and gas base rate increases authorized by the PSC in April 1993 favorably affected utility earnings through April 1994. The electric fuel rate cases now pending before the PSC discussed in Notes 1 and 12 could affect future years' earnings. Future competition may also affect earnings in ways that are not possible to predict (see discussion on page 31). Earnings from diversified businesses, which primarily represent the operations of Constellation Holdings, Inc. (CHI) and its subsidiaries (collectively, the Constellation Companies), BGE Home Products & Services, Inc. and Subsidiary (HP&S), and EP&S, increased during both 1995 and 1994. The reasons for these changes are discussed in the "Diversified Businesses Earnings" section on pages 28 and 29. Effect of Weather on Utility Sales Weather conditions affect BGE's utility sales. BGE measures weather conditions using degree days. A degree day is the difference between the average daily actual temperature and the baseline temperature of 65 degrees. Hotter weather during the summer, measured by more cooling degree days, results in greater demand for electricity to operate cooling systems. Conversely, cooler weather during the summer, measured by fewer cooling degree days, results in less demand for electricity to operate cooling systems. Colder weather during the winter, as measured by greater heating degree days, results in greater demand for electricity and gas to operate heating systems. Conversely, warmer weather during the winter, measured by fewer heating degree days, results in less demand for electricity and gas to operate heating systems. The degree-days chart below presents information regarding cooling and heating degree days for 1995 and 1994. 24 Baltimore Gas and Electric Company and Subsidiaries
30-Year 1995 1994 Average - -------------------------------------------------------------------- Cooling degree days 1,056 949 804 Percentage change compared to prior year 11.3% 9.7% Heating degree days 4,601 4,670 4,901 Percentage change compared to prior year (1.5)% (5.8)%
BGE Utility Revenues and Sales Electric revenues changed during 1995 and 1994 because of the following factors:
1995 1994 - -------------------------------------------------------------------- (In millions) System sales volumes $43.4 $ 9.9 Base rates 23.2 1.4 Fuel rates (13.8) (21.5) - -------------------------------------------------------------------- Revenues from system sales 52.8 (10.2) Interchange and other sales 49.0 26.5 Other revenues 1.4 (1.9) - -------------------------------------------------------------------- Total electric revenues $103.2 $ 14.4 ====================================================================
Electric system sales represent volumes sold to customers within BGE's service territory at rates determined by the PSC. These amounts exclude interchange sales and sales to other utilities, discussed separately later. Following is a comparison of the changes in electric system sales volumes:
1995 1994 - -------------------------------------------------------------------- Residential 2.8% 0.5% Commercial 2.3 (0.4) Industrial 3.6 17.8 Total 2.7 2.5
The increase in sales to residential and commercial customers during 1995 reflects the extremely hot summer and colder fall weather during 1995 and an increase in the number of customers, offset partially by milder weather experienced during the first half of the year as compared to last year. Sales to industrial customers increased primarily due to an increase in the number of customers and the increased sale of electricity to Bethlehem Steel, offset partially by lower usage by other industrial customers. Bethlehem Steel has been purchasing its full electricity requirements from BGE since March of 1994 and is selling power produced with its own generating facilities to BGE rather than using the power to reduce its requirements. In 1994, sales to residential and commercial customers were essentially unchanged from the prior year due to three factors: the number of customers increased; higher sales from extreme weather conditions early in the year slightly exceeded lower sales from milder weather in the second half of the year; and usage-per-customer decreased. Sales to industrial customers reflect primarily an increase in the sale of electricity to Bethlehem Steel, which purchased more electricity from BGE due to increased steel production and the fact that Bethlehem Steel has been purchasing its full electricity requirements from BGE since March of 1994. Base rates are affected by two principal items: rate orders by the PSC and recovery of eligible electric conservation program costs through the energy conservation surcharge. Base rates increased in 1995 compared to 1994 due to recovery of a higher level of eligible electric conservation program costs and the ability to collect the full amount of energy conservation surcharge revenues, portions of which had been deferred subject to refund in 1994 as discussed below. Base rates increased slightly during 1994 due to the remaining effect of the PSC's April 1993 rate order, offset partially by the deferral of the portion of energy conservation surcharge billings subject to refund. Under the energy conservation surcharge, if the PSC determines that BGE is earning in excess of its authorized rate of return, BGE will have to refund (by means of lowering future surcharges) a portion of energy conservation surcharge revenues to its customers. The portion subject to the refund is compensation for foregone sales from conservation programs and incentives for achieving conservation goals and will be refunded to customers with interest beginning in the ensuing July when the annual resetting of the conservation surcharge rates occurs. BGE earned in excess of its authorized rate of return on electric operations for the period July 1, 1993 through June 30, 1994. As a result, BGE deferred the portion of electric energy conservation revenues subject to refund for the period December 1993 through November 1994. The deferral of these billings totaled $20.1 million. Changes in fuel rate revenues result from the operation of the electric fuel rate formula. The fuel rate formula is designed to recover the actual cost of fuel, net of revenues from interchange sales and sales to other utilities (see Notes 1 and 12). Changes in fuel rate revenues and interchange and other sales normally do not affect earnings. However, if the PSC were to disallow recovery of any part of these costs, earnings would be reduced as discussed in Note 12. Fuel rate revenues decreased during both 1995 and 1994 due to a lower fuel rate, offset partially by increased electric system sales volumes. The rate was lower in both years because of a less-costly twenty-four month generation mix resulting from greater generation at the Calvert Cliffs Nuclear Power Plant and Brandon Shores Power Plant compared to the previous year, as well as lower fuel costs. BGE expects electric fuel rate revenues to remain relatively constant through 1996. Interchange and other sales represent sales of BGE's energy to the Pennsylvania-New Jersey-Maryland Interconnection (PJM) and other utilities. The PJM is a regional power pool of eight member companies including BGE. These sales occur after BGE has satisfied the demand for its own system sales of electricity, if BGE's available generation is the least costly available. Interchange and other sales increased during 1995 and 1994 because BGE had a less-costly generation mix than the other utilities. The less-costly mix reflects greater generation from the Brandon Shores Power Plant and the continued operation of the Calvert Cliffs Nuclear Power Plant, which generated a record level of electricity during 1995. 25 Baltimore Gas and Electric Company and Subsidiaries Gas revenues changed during 1995 and 1994 because of the following factors:
1995 1994 - -------------------------------------------------------------------- (In millions) Sales volumes $ 0.2 $ 3.6 Base rates 6.4 2.4 Gas cost adjustment revenues (27.4) (16.1) Other revenues 0.1 (1.8) - -------------------------------------------------------------------- Total gas revenues $(20.7) $(11.9) ====================================================================
The changes in gas sales volumes compared to the year before were:
1995 1994 - -------------------------------------------------------------------- Residential (0.2)% 0.6% Commercial 1.3 (3.4) Industrial 4.7 4.2 Total 1.9 0.7
Total gas sales increased during 1995 as a result of higher sales to commercial and industrial customers, while sales to residential customers were essentially the same as last year. Sales to commercial customers increased compared to last year due to an increase in the number of customers, increased usage per customer, and the colder fall weather in 1995, offset partially by milder weather during the first half of the year. Sales to industrial customers increased compared to last year due to greater usage of gas per customer. Total gas sales increased during 1994 because of higher sales to residential and industrial customers, offset partially by lower sales to commercial customers. Sales to industrial customers reflect primarily greater usage of natural gas by Bethlehem Steel. Sales to commercial and industrial customers were negatively impacted because delivery service customers either voluntarily switched their fuel source from natural gas to alternate fuels, or were involuntarily interrupted by BGE as a result of extreme winter weather conditions in the first quarter of 1994. Interruptible customers maintain alternate fuel sources and pay reduced rates in exchange for BGE's right to interrupt service during periods of peak demand. Base rates increased slightly during 1995 and 1994 due to an increased recovery of eligible gas conservation program costs through the energy conservation surcharge. In addition, base rates increased slightly during 1995 as a result of the PSC's November 1995 rate order, which increased annual base rate revenues by $19.3 million, including $2.4 million to recover higher depreciation expense. Future gas base rate revenues are expected to be impacted favorably as a result of this order. Changes in gas cost adjustment revenues result primarily from the operation of the purchased gas adjustment clause, commodity charge adjustment clause, and the actual cost adjustment clause, which are designed to recover actual gas costs (see Note 1). Changes in gas cost adjustment revenues normally do not affect earnings. Gas cost adjustment revenues decreased during 1995 and 1994 because of lower gas prices for purchased gas and lower sales volumes subject to gas cost adjustment clauses. Delivery service sales volumes are not subject to gas cost adjustment clauses because delivery service customers purchase their gas directly from third parties. BGE Utility Fuel and Energy Expenses Electric fuel and purchased energy expenses were as follows:
1995 1994 1993 - -------------------------------------------------------------------- (In millions) Actual costs $554.5 $541.2 $483.9 Net recovery of costs under electric fuel rate clause (see Note 1) 24.3 1.1 50.7 - -------------------------------------------------------------------- Total expense $578.8 $542.3 $534.6 ====================================================================
Total electric fuel and purchased energy expenses increased in 1995 as a result of the operation of the electric fuel rate clause and increased actual electric costs. Actual electric fuel and purchased energy costs increased during 1995 primarily due to a higher net output of electricity and higher purchased energy and capacity costs, offset partially by a less costly generation mix resulting primarily from a shorter refueling and maintenance outage at the Calvert Cliffs Nuclear Power Plant as compared to the prior year. Total electric fuel and purchased energy expenses increased in 1994 as a result of increased actual electric costs and the operation of the electric fuel rate clause. Actual electric fuel and purchased energy costs increased during 1994 as a result of a more costly generation mix and an increase in the net output of electricity generated to meet the demand of BGE's system and the PJM system. The cost of the generation mix increased due to higher purchased energy costs and scheduled outages at the Calvert Cliffs Nuclear Power Plant in 1994. Purchased gas expenses were as follows:
1995 1994 1993 - -------------------------------------------------------------------- (In millions) Actual costs $205.9 $222.7 $246.4 Net (deferral) recovery of costs under purchased gas adjustment clause (see Note 1) (7.8) 1.9 (3.7) - -------------------------------------------------------------------- Total expense $198.1 $224.6 $242.7 ====================================================================
Total purchased gas expenses decreased in 1995 due to significantly lower actual purchased gas costs and the operation of the purchased gas adjustment clause. Actual purchased gas costs 26 Baltimore Gas and Electric Company and Subsidiaries decreased in 1995 due to lower gas prices which reflect market conditions. This decrease would have been greater except for a take-or-pay refund which reduced actual costs in 1994. Total purchased gas expenses decreased in 1994 due to significantly lower actual purchased gas costs, offset partially by the operation of the purchased gas adjustment clause. Actual purchased gas costs decreased during 1994 for two reasons: lower gas prices and lower output associated with the decreased demand for BGE gas. The lower gas prices reflect market conditions and take-or-pay and other supplier refunds, offset by higher costs related to the implementation of Federal Energy Regulatory Commission (FERC) Order 636 and higher demand charges. Purchased gas costs exclude gas purchased by delivery service customers, including Bethlehem Steel, who obtain gas directly from third parties. Other Operating Expenses Operations and maintenance expenses were essentially unchanged in 1995 as compared to the prior year. Operations expense decreased during 1994 primarily due to labor savings achieved as a result of the Company's employee reduction programs discussed in Note 7 and continuing cost control efforts. These savings offset $18.1 million of expense from the amortization of the cost of the 1993 and 1992 Voluntary Special Early Retirement Programs (VSERP) and a $10.0 million charge for a bonus paid to employees in lieu of a general wage increase. In addition, operations expense for 1994 decreased because operations expense for 1993 included a $17.2 million charge for certain employee reduction programs, offset partially by a credit to expense equivalent to the $9.8 million cost of termination benefits associated with the Company's 1992 VSERP. Operations and maintenance expenses are expected to decline in 1996 due to ongoing cost control efforts of the Company. Maintenance expense decreased during 1994 due primarily to lower costs at the Calvert Cliffs Nuclear Power Plant. Depreciation and amortization expense increased during 1995 because of higher levels of depreciable plant in service and energy conservation program costs, and the completion of a facility-specific study of the cost to decommission the Calvert Cliffs Nuclear Power Plant. The higher level of depreciable plant in service, which is primarily due to certain capital additions at the Calvert Cliffs Nuclear Power Plant, resulted in an increase of approximately $12.9 million in depreciation and amortization expense during 1995. The facility-specific study resulted in a $9 million increase in depreciation expense. Depreciation and amortization expense increased during 1994 because of higher levels of depreciable plant in service and energy conservation program costs. The increase in depreciable plant in service resulted from the addition of electric transmission and distribution plant and certain capital additions at the Calvert Cliffs Nuclear Power Plant during 1994. Additionally, as discussed below, depreciation and amortization expense during 1995 and 1994 reflected the write-off of certain Perryman costs. Initially, BGE had planned to build two combined cycle generating units at its Perryman site with each unit consisting of two combustion turbines and a heat recovery steam generator. However, due to significant changes in the environment in which utilities operate, BGE decided in 1994 not to construct the second combined cycle unit and wrote off the construction work in progress costs associated with that unit. This write-off reduced after-tax earnings during 1994 by $11.0 million or 7 cents per share. As a result of the PSC's August 1995 Order requiring all new generation capacity needs to be competitively bid and BGE's September 1995 announcement that it will merge with Potomac Electric Power Company (PEPCO) which has some available generating capacity, BGE determined that it will not build the second combustion turbine for the first combined cycle unit. Therefore, during the third quarter of 1995, BGE wrote off the remaining work in progress costs associated with the first combined cycle unit. This write-off reduced after-tax earnings during 1995 by $9.7 million, or 7 cents per share. The construction of the first 140-megawatt combustion turbine at Perryman was completed, and the unit was placed in service, during June 1995. Taxes other than income taxes increased slightly during 1995 and 1994 due primarily to higher property taxes resulting from higher levels of utility plant in service. Inflation affects the Company through increased operating expenses and higher replacement costs for utility plant assets. Although timely rate increases can lessen the effects of inflation, the regulatory process imposes a time lag which can delay BGE's recovery of increased costs. There is a regulatory lag primarily because rate increases are based on historical costs rather than projected costs. The PSC has historically allowed recovery of the cost of replacing plant assets, together with the opportunity to earn a fair return on BGE's investment, beginning at the time of replacement. Other Income and Expenses The allowance for equity funds used during construction (AFC) decreased during 1995 because of a lower level of construction work in progress resulting from a decrease in new construction activity and the placement of several projects in service. AFC increased during 1994 because of a higher level of construction work in progress which was offset partially by the lower AFC rate established by the PSC in the April 1993 rate order. 27 Baltimore Gas and Electric Company and Subsidiaries Net other income and deductions decreased in 1995 primarily due to approximately $12.1 million in lower other interest and finance charge income, and a decrease of $3.8 million in the gain on the sale of receivables and property. Net other income and deductions increased in 1994 primarily due to a lower level of charitable contributions and $3.9 million of gains on the sale of receivables. Interest expense increased during 1995 due to a combination of higher levels of debt outstanding and higher short-term interest rates compared to 1994, offset partially by increased capitalized interest on the Constellation Companies' projects. Interest expense increased slightly during 1994 due primarily to lower capitalized interest on the Constellation Companies' power generation systems, offset partially by the accrual by BGE of carrying charges on electric deferred fuel costs excluded from rate base (see Note 5). Income tax expense increased during 1995 and 1994 due to higher taxable income from utility operations and the Constellation Companies. Diversified Businesses Earnings Earnings per share from diversified businesses were:
1995 1994 1993 - -------------------------------------------------------------------- Constellation Companies Power generation systems $ .13 $ .10 $ .07 Financial investments .08 .03 .10 Real estate development and senior living facilities (.02) (.03) (.04) Effect of 1993 Tax Act - - (.04) Other (.01) (.01) (.01) - -------------------------------------------------------------------- Total Constellation Companies .18 .09 .08 BGE Home Products & Services, Inc. and Subsidiary .00 .03 - BGE Energy Projects & Services, Inc. .00 - - - -------------------------------------------------------------------- Total diversified businesses $ .18 $ .12 $ .08 ====================================================================
The Constellation Companies' power generation systems business includes the development, ownership, management, and operation of wholesale power generating projects in which the Constellation Companies hold ownership interests, as well as the provision of services to power generation projects under operation and maintenance contracts. Power generation systems earnings increased during 1995 due primarily to higher equity earnings on the Constellation Companies' energy projects and a gain on the sale of certain operating and maintenance contracts. Power generation systems earnings increased in 1994 primarily due to payments for the curtailment of output at two wholesale power generating projects as discussed below. The Constellation Companies' investment in wholesale power generating projects includes $197 million representing ownership interests in 16 projects which sell electricity in California under Interim Standard Offer No. 4 power purchase agreements. Under these agreements, the projects supply electricity to purchasing utilities at a fixed rate for the first ten years of the agreements and thereafter at fixed capacity payments plus variable energy rates based on the utilities' avoided cost for the remaining term of the agreements. Avoided cost generally represents a utility's next lowest cost generation to service the demands on its system. These power generation projects are scheduled to convert to supplying electricity at avoided cost rates in various years beginning in late 1996 through the end of 2000. As a result of declines in purchasing utilities' avoided costs subsequent to the inception of these agreements, revenues at these projects based on current avoided cost levels would be substantially lower than revenues presently being realized under the fixed price terms of the agreements. If current avoided cost levels were to continue into 1996 and beyond, the Constellation Companies could experience reduced earnings or incur losses associated with these projects, which could be significant. The Constellation Companies are investigating and pursuing alternatives for certain of these power generation projects including, but not limited to, repowering the projects to reduce operating costs, changing fuels, renegotiating the power purchase agreements, restructuring financings, and selling its ownership interests in the projects. Two of these wholesale power generating projects, in which the Constellation Companies' investment totals $30 million, have executed agreements with Pacific Gas & Electric (PG&E) providing for the curtailment of output through the end of the fixed price period in return for payments from PG&E. The payments from PG&E during the curtailment period will be sufficient to fully amortize the existing project finance debt. However, following the curtailment period, the projects remain contractually obligated to commence production of electricity at the avoided cost rates, which could result in reduced earnings or losses for the reasons described above. The Company cannot predict the impact that these matters regarding any of the 16 projects may have on the Constellation Companies or the Company, but the impact could be material. See the section titled "Diversified Businesses" on page 13 for a more recent update of these matters. Earnings from the Constellation Companies' portfolio of financial investments include capital gains and losses, dividends, income from financial limited partnerships, and income from financial guaranty insurance companies. Financial investment earnings were higher in 1995 due to favorable earnings on the Companies' marketable securities, increased gains from financial partnerships, and higher earnings from financial guaranty insurance companies. Financial investment earnings decreased during 1994 due to reduced earnings from the investment portfolio. Additionally, 1993 results reflected a $6.1 million gain from the sale of a portion of an investment in a financial guaranty insurance company. The Constellation Companies' real estate development business includes land under development; office buildings; retail pro-jects; commercial projects; an entertainment, dining and retail complex in Orlando, Florida; a mixed-use planned-unit-development; and senior living facilities. The majority of these projects are in the Baltimore-Washington corridor. They have been affected adversely by the oversupply of and limited demand for land and office space due to modest economic growth and corporate downsizings. 28 Baltimore Gas and Electric Company and Subsidiaries Earnings from real estate development and senior living facilities in 1995 were essentially unchanged from the prior year. Earnings from real estate development increased slightly during 1994 due to gains recognized from the sale of two retail centers, an office building, and interests in two senior living facilities. The increases in diversified businesses' revenues and in selling, general, and administrative expenses during 1994 reflect the proceeds of these sales and the cost of the facilities sold, respectively. The Constellation Companies' real estate portfolio has experienced continuing carrying costs and depreciation. Additionally, the Constellation Companies have been expensing rather than capitalizing interest on certain undeveloped land for which substantially all development activities have been suspended. These factors have affected earnings negatively and are expected to continue to do so until the levels of undeveloped land are reduced. Cash flow from real estate operations has been insufficient to cover the debt service requirements of certain of these projects. Resulting cash shortfalls have been satisfied through cash infusions from Constellation Holdings, Inc., which obtained the funds through a combination of cash flow generated by other Constellation Companies and its corporate borrowings. To the extent the real estate market continues to improve, earnings from real estate activities are expected to improve also. The Constellation Companies' continued investment in real estate projects is a function of market demand, interest rates, credit availability, and the strength of the economy in general. The Constellation Companies' Management believes that although the real estate market has improved, until the economy reflects sustained growth and the excess inventory in the market in the Baltimore-Washington corridor goes down, real estate values will not improve significantly. If the Constellation Companies were to sell their real estate projects in the current depressed market, losses would occur in amounts difficult to determine. Depending upon market conditions, future sales could also result in losses. In addition, were the Constellation Companies to change their intent about any project from an intent to hold to an intent to sell, applicable accounting rules would require a write-down of the project to market value at the time of such change in intent if market value is below book value. BGE Home Products & Services' earnings decreased during 1995 and increased during 1994 primarily due to higher gains from receivables sales in 1994. Environmental Matters The Company is subject to increasingly stringent federal, state, and local laws and regulations relating to improving or maintaining the quality of the environment. These laws and regulations require the Company to remove or remedy the effect on the environment of the disposal or release of specified substances at ongoing and former operating sites, including Environmental Protection Agency Superfund sites. Details regarding these matters, including financial information, are presented in Note 12 and in this Annual Report on Form 10-K under Item 1. Business - Environmental Matters. Liquidity and Capital Resources Capital Requirements The Company's capital requirements reflect the capital-intensive nature of the utility business. Actual capital requirements for the years 1993 through 1995, along with estimated amounts for the years 1996 through 1998, are reflected below. Certain prior-year amounts have been restated to conform with the current year's presentation.
1993 1994 1995 1996 1997 1998 (In millions) Utility Business: Construction expenditures (excluding AFC) Electric $ 365 $345 $223 $231 $205 $212 Gas 52 68 70 68 73 67 Common 41 42 51 41 47 46 - --------------------------------------------------------------------------------------------------------------------------- Total construction expenditures 458 455 344 340 325 325 AFC 23 34 22 11 10 10 Nuclear fuel (uranium purchases and processing charges) 47 42 46 45 45 44 Deferred energy conservation expenditures 33 41 46 34 25 27 Deferred nuclear expenditures 14 8 -- -- -- -- Retirement of long-term debt and redemption of preference stock 907 203 279 98 164 125 - --------------------------------------------------------------------------------------------------------------------------- Total utility business 1,482 783 737 528 569 531 Diversified Businesses: Retirement of long-term debt 222 37 55 49 135 138 Investment requirements 78 51 118 92 71 82 - --------------------------------------------------------------------------------------------------------------------------- Total diversified businesses 300 88 173 141 206 220 Total $1,782 $871 $910 $669 $775 $751 ===========================================================================================================================
29 Baltimore Gas and Electric Company and Subsidiaries BGE Utility Capital Requirements BGE's construction program is subject to continuous review and modification, and actual expenditures may vary from the estimates above. Electric construction expenditures include the installation of a 5,000 kilowatt diesel generator at the Calvert Cliffs Nuclear Power Plant which is scheduled to be placed in service in 1996, and improvements in BGE's existing generating plants and its transmission and distribution facilities. Future electric construction expenditures do not include additional generating units. During 1995, 1994, and 1993, the internal generation of cash from utility operations provided 100%, 72%, and 71% respectively, of the funds required for BGE's capital requirements exclusive of retirements and redemptions of debt and preference stock. In addition, in 1994, $70 million of cash was provided by the sale of certain BGE and HP&S receivables (see Note 12). During the three-year period 1996 through 1998, the Company expects to provide through utility operations 115% of the funds required for BGE's capital requirements, exclusive of retirements and redemptions. Utility capital requirements not met through the internal generation of cash are met through the issuance of debt and equity securities. During the three-year period ended December 31, 1995, BGE's issuances of long-term debt, preference stock, and common stock were $1,237 million, $190 million, and $92 million, respectively. During the same period, retirements and redemptions of BGE's long-term debt and preference stock totaled $1,148 million and $219 million, respectively, exclusive of any redemption premiums or discounts. The amount and timing of future issuances and redemptions will depend upon market conditions and BGE's actual capital requirements. BGE's fixed income securities are rated by various independent credit rating agencies. The ratings assigned reflect the rating agencies' current assessment of BGE's ability to pay interest, dividends, and principal on these securities. The ratings impact BGE's cost of raising fixed income capital in the public markets. At the date of this Report, BGE's securities ratings were as follows: Securities Ratings Table
- --------------------------------------------------------------------------- Standard Moody's & Poors Investors Duff & Phelps Rating Group Service Credit Rating Co. - --------------------------------------------------------------------------- Senior Secured Debt A+ A1 AA- (First Mortgage Bonds) Unsecured Debt A A2 A+ Preferred Stock A "a1" A+ Preference Stock A "a2" A
The Constellation Companies' capital requirements are discussed below in the section titled "Diversified Businesses Capital Requirements-Debt and Liquidity." The Constellation Companies are exploring expansion of their energy, real estate service, and senior living facility businesses. Expansion may be achieved in a variety of ways, including, without limitation, increased investment activity and acquisitions. The Constellation Companies plan to meet their capital requirements with a combination of debt and internal generation of cash from their operations. Additionally, from time to time, BGE may make loans to Constellation Holdings, Inc., or contribute equity to enhance the capital structure of Constellation Holdings, Inc. Historically, Constellation's energy projects have been in the United States. As of December 31, 1995, one of the Constellation Companies had invested approximately $10 million in a Bolivian power generation company. In addition, $10 million has been committed, of which $1.2 million has been funded, to a fund that will invest in and develop power projects in Latin America. Constellation's energy business expansion may include domestic and international projects. Diversified Businesses Capital Requirements Debt and Liquidity The Constellation Companies intend to meet capital requirements by refinancing debt as it comes due and through internally generated cash. These internal sources include cash that may be generated from operations, sale of assets, and cash generated by tax benefits earned by the Constellation Companies. In the event the Constellation Companies can obtain reasonable value for real estate properties, additional cash may become available through the sale of projects (for additional information see the discussion of the real estate business and market on pages 28 and 29). The ability of the Constellation Companies to sell or liquidate assets described above will depend on market conditions, and no assurances can be given that such sales or liquidations can be made. Also, to provide additional liquidity to meet interim financial needs, CHI has a $50 million revolving credit agreement. Investment Requirements The investment requirements of the Constellation Companies include its portion of equity funding to committed projects under development, as well as net loans made to project partnerships. Investment requirements for the years 1996 through 1998 reflect the Constellation Companies' estimate of funding for ongoing and anticipated projects and are subject to continuous review and modification. Actual investment requirements may vary significantly from the estimates on page 29 because of the type and number of projects selected for development, the impact of market conditions on those projects, the ability to obtain financing, and the availability of internally generated cash. The Constellation Companies have met their investment requirements in the past through the internal generation of cash and through borrowings from institutional lenders. 30 Baltimore Gas and Electric Company and Subsidiaries Response to Regulatory Change Electric utilities presently face competition in the construction of generating units to meet future load growth and in the sale of electricity in the bulk power markets. Electric utilities also face the future prospect of competition for electric sales to retail customers. As previously disclosed, BGE regularly considered various strategies designed to enhance its competitive position and to increase its ability to adapt to and anticipate regulatory changes in its utility business. In September 1995, BGE concluded that a merger with PEPCO would enhance two key factors regarding its competitive position--maintaining low-cost production and increasing in size. The merger is discussed in Note 12. Although BGE believes the merger will have a positive effect on its competitive position in future years, it is not possible to predict currently the ultimate effect competition will have on BGE's earnings in future years, or after the merger, on the earnings of the new company. In response to the competitive forces and regulatory changes, as discussed in Part 1 of BGE's Reports on Form 10-K under the headings Electric Regulatory Matters and Competition and Gas Regulatory Matters and Competition, BGE (and after the merger the new company) from time to time will consider various strategies designed to enhance its competitive position and to increase its ability to adapt to and anticipate regulatory changes in its utility business. These strategies may include internal restructurings involving the complete or partial separation of its generation, transmission and distribution businesses, acquisitions of related or unrelated businesses, business combinations, and additions to or dispositions of portions of its franchised service territories. BGE may from time to time be engaged in preliminary discussions, either internally or with third parties, regarding one or more of these potential strategies. No assurances can be given as to whether any potential transaction of the type described above may actually occur, or as to the ultimate effect thereof on the financial condition or competitive position of BGE. 31 Baltimore Gas and Electric Company and Subsidiaries ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders of Baltimore Gas and Electric Company We have audited the accompanying consolidated balance sheets and statements of capitalization of Baltimore Gas and Electric Company and Subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, cash flows, common shareholders' equity, and income taxes for each of the three years in the period ended December 31, 1995, and the consolidated financial statement schedule listed in Item 14(a)(1) and (2) of this Form 10-K. These financial statements and the financial statement schedule are the responsibility of the Company's Management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by Management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Baltimore Gas and Electric Company and Subsidiaries as of December 31, 1995 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. In addition, the consolidated financial statement schedule referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. We have also previously audited, in accordance with generally accepted standards, the consolidated balance sheets and statements of capitalization at December 31, 1993, 1992, and 1991, and the related consolidated statements of income, cash flows, common shareholders' equity, and income taxes for each of the two years in the period ended December 31, 1992 (none of which are presented herein); and we expressed unqualified opinions on those consolidated financial statements. In our opinion, the information set forth in the Summary of Operations included in the Selected Financial Data for each of the five years in the period ended December 31, 1995, appearing on page 23 is fairly stated in all material respects in relation to the financial statements from which it has been derived. /s/ COOPERS & LYBRAND L.L.P. COOPERS & LYBRAND L.L.P. Baltimore, Maryland January 19, 1996 32 Baltimore Gas and Electric Company and Subsidiaries Consolidated Statements of Income
Year Ended December 31, 1995 1994 1993 - -------------------------------------------------------------------------------------------------------------------- (In thousands, except per share amounts) Revenues Electric $2,229,774 $2,126,581 $2,112,147 Gas 400,504 421,249 433,163 Diversified businesses 304,521 235,155 196,075 - -------------------------------------------------------------------------------------------------------------------- Total revenues 2,934,799 2,782,985 2,741,385 Expenses Other Than Interest and Income Taxes Electric fuel and purchased energy 578,801 542,314 534,628 Gas purchased for resale 198,069 224,590 242,685 Operations 550,811 552,817 574,073 Maintenance 168,269 164,892 181,208 Diversified businesses - selling, general, and administrative 220,573 167,430 143,654 Depreciation and amortization 317,417 295,950 253,913 Taxes other than income taxes 205,167 199,733 194,832 - -------------------------------------------------------------------------------------------------------------------- Total expenses other than interest and income taxes 2,239,107 2,147,726 2,124,993 Income from Operations 695,692 635,259 616,392 - -------------------------------------------------------------------------------------------------------------------- Other Income Allowance for equity funds used during construction 14,162 21,746 14,492 Equity in earnings of Safe Harbor Water Power Corporation 4,559 4,349 4,243 Net other income and deductions (9,902) 6,270 1,575 - -------------------------------------------------------------------------------------------------------------------- Total other income 8,819 32,365 20,310 Income Before Interest and Income Taxes 704,511 667,624 636,702 - -------------------------------------------------------------------------------------------------------------------- Interest Expense Interest charges 219,689 214,347 212,971 Capitalized interest (15,050) (12,427) (16,167) Allowance for borrowed funds used during construction (7,662) (11,766) (8,040) - -------------------------------------------------------------------------------------------------------------------- Net interest expense 196,977 190,154 188,764 Income Before Income Taxes 507,534 477,470 447,938 Income Taxes 169,527 153,853 138,072 - -------------------------------------------------------------------------------------------------------------------- Net Income 338,007 323,617 309,866 Preferred and Preference Stock Dividends 40,578 39,922 41,839 - -------------------------------------------------------------------------------------------------------------------- Earnings Applicable to Common Stock $ 297,429 $ 283,695 $ 268,027 ==================================================================================================================== Average Shares of Common Stock Outstanding 147,527 147,100 145,072 Earnings Per Share of Common Stock $2.02 $1.93 $1.85 ====================================================================================================================
See Notes to Consolidated Financial Statements. Certain prior-year amounts have been reclassified to conform with the current year's presentation. 33 Baltimore Gas and Electric Company and Subsidiaries Consolidated Balance Sheets
At December 31, 1995 1994 - -------------------------------------------------------------------------------------------------------- (In thousands) Assets Current Assets Cash and cash equivalents $ 23,443 $ 38,590 Accounts receivable (net of allowance for uncollectibles of $16,390 and $14,960, respectively) 400,005 314,842 Fuel stocks 59,614 70,627 Materials and supplies 145,900 149,614 Prepaid taxes other than income taxes 60,508 57,740 Deferred income taxes 36,831 43,358 Trading securities 47,990 24,337 Other 31,487 22,686 - -------------------------------------------------------------------------------------------------------- Total current assets 805,778 721,794 Investments and Other Assets Real estate projects 479,344 471,435 Power generation systems 358,629 311,960 Financial investments 205,841 224,340 Nuclear decommissioning trust fund 85,811 66,891 Safe Harbor Water Power Corporation 34,327 34,168 Senior living facilities 16,045 11,540 Net pension asset 60,077 --- Other 71,894 58,824 - -------------------------------------------------------------------------------------------------------- Total investments and other assets 1,311,968 1,179,158 Utility Plant Plant in service Electric 6,360,624 5,929,996 Gas 692,693 616,823 Common 522,450 511,016 - -------------------------------------------------------------------------------------------------------- Total plant in service 7,575,767 7,057,835 Accumulated depreciation (2,481,801) (2,305,372) - -------------------------------------------------------------------------------------------------------- Net plant in service 5,093,966 4,752,463 Construction work in progress 247,296 506,030 Nuclear fuel (net of amortization) 130,782 134,012 Plant held for future use 25,552 24,320 - -------------------------------------------------------------------------------------------------------- Net utility plant 5,497,596 5,416,825 Deferred Charges Regulatory assets (net) 637,915 623,639 Other 63,406 96,086 - -------------------------------------------------------------------------------------------------------- Total deferred charges 701,321 719,725 Total Assets $8,316,663 $8,037,502 ========================================================================================================
See Notes to Consolidated Financial Statements. Certain prior-year amounts have been reclassified to conform with the current year's presentation. 34 Baltimore Gas and Electric Company and Subsidiaries Consolidated Balance Sheets
At December 31, 1995 1994 - ------------------------------------------------------------------------------------------------------- (In thousands) Liabilities and Capitalization Current Liabilities Short-term borrowings $ 279,305 $ 63,700 Current portions of long-term debt and preference stock 146,969 323,675 Accounts payable 177,092 181,931 Customer deposits 26,857 24,891 Accrued taxes 8,244 19,585 Accrued interest 56,670 60,348 Dividends declared 67,198 66,012 Accrued vacation costs 33,403 30,917 Other 39,417 30,857 - ------------------------------------------------------------------------------------------------------- Total current liabilities 835,155 801,916 Deferred Credits and Other Liabilities Deferred income taxes 1,311,530 1,199,787 Pension and postemployment benefits 148,594 138,835 Decommissioning of federal uranium enrichment facilities 43,695 45,836 Other 55,568 59,645 - ------------------------------------------------------------------------------------------------------- Total deferred credits and other liabilities 1,559,387 1,444,103 Capitalization Long-term debt 2,598,254 2,584,932 Preferred stock 59,185 59,185 Redeemable preference stock 242,000 279,500 Preference stock not subject to mandatory redemption 210,000 150,000 Common shareholders' equity 2,812,682 2,717,866 - ------------------------------------------------------------------------------------------------------- Total capitalization 5,922,121 5,791,483 Commitments, Guarantees, and Contingencies - See Note 12 Total Liabilities and Capitalization $8,316,663 $8,037,502 =======================================================================================================
See Notes to Consolidated Financial Statements. Certain prior-year amounts have been reclassified to conform with the current year's presentation. 35 Baltimore Gas and Electric Company and Subsidiaries Consolidated Statements of Cash Flows
Year Ended December 31, 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------------------- (In thousands) Cash Flows From Operating Activities Net income $ 338,007 $ 323,617 $ 309,866 Adjustments to reconcile to net cash provided by operating activities Depreciation and amortization 378,977 351,064 314,027 Deferred income taxes 103,494 79,278 53,057 Investment tax credit adjustments (8,088) (8,192) (8,444) Deferred fuel costs 5,565 11,461 51,445 Accrued pension and postemployment benefits (7,641) (41,113) (25,276) Allowance for equity funds used during construction (14,162) (21,746) (14,492) Equity in earnings of affiliates and joint ventures (net) (21,259) (20,225) (4,655) Changes in current assets other than sale of accounts receivable (107,392) (10,536) (37,252) Changes in current liabilities, other than short-term borrowings (7,293) (24,447) 71,153 Other 2,837 13,070 (4,020) - --------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 663,045 652,231 705,409 Cash Flows From Financing Activities Proceeds from issuance of Short-term borrowings (net) 215,605 63,700 (11,900) Long-term debt 184,422 207,169 1,206,350 Preference stock 59,329 --- 128,776 Common stock 318 33,869 57,379 Proceeds from sale of receivables 2,000 70,000 --- Reacquisition of long-term debt (315,105) (240,853) (1,012,514) Redemption of preference stock (73,000) (4,406) (144,310) Common stock dividends paid (227,192) (220,152) (211,137) Preferred and preference stock dividends paid (40,087) (39,950) (42,425) Other 13 (437) (7,094) - --------------------------------------------------------------------------------------------------------------------------- Net cash used in financing activities (193,697) (131,060) (36,875) Cash Flows From Investing Activities Utility construction expenditures (including AFC) (366,037) (488,976) (480,501) Allowance for equity funds used during construction 14,162 21,746 14,492 Nuclear fuel expenditures (46,330) (42,089) (47,329) Deferred nuclear expenditures --- (8,393) (13,791) Deferred energy conservation expenditures (45,503) (40,440) (32,909) Contributions to nuclear decommissioning trust fund (9,780) (9,780) (9,699) Purchases of marketable equity securities (18,447) (52,099) (46,820) Proceeds from sales of marketable equity securities 49,788 40,585 33,754 Other financial investments 9,423 2,469 19,589 Real estate projects (15,599) 14,926 (30,330) Power generation systems (37,446) (1,116) (26,841) Other (18,726) (3,650) 8,965 - --------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (484,495) (566,817) (611,420) Net Increase (Decrease) in Cash and Cash Equivalents (15,147) (45,646) 57,114 Cash and Cash Equivalents at Beginning of Year 38,590 84,236 27,122 - --------------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Year $ 23,443 $ 38,590 $ 84,236 =========================================================================================================================== Other Cash Flow Information Cash paid during the year for: Interest (net of amounts capitalized) $ 198,001 $ 184,441 $ 183,266 Income taxes $ 132,274 $ 112,923 $ 126,034
See Notes to Consolidated Financial Statements. Certain prior-year amounts have been reclassified to conform with the current year's presentation. 36 Baltimore Gas and Electric Company and Subsidiaries Consolidated Statements of Common Shareholders' Equity
Unrealized Gain (Loss) on Available Pension Common Stock Retained For Sale Liability Total Years Ended December 31, 1995, 1994, and 1993 Shares Amount Earnings Securities Adjustment Amount - --------------------------------------------------------------------------------------------------------------------------- (In thousands) Balance at December 31, 1992 143,784 $1,335,002 $1,199,637 $ --- $ --- $2,534,639 Net income 309,866 309,866 Dividends declared Preferred and preference stock (41,839) (41,839) Common stock ($1.47 per share) (213,407) (213,407) Common stock issued 2,250 57,379 57,379 Other (917) (3,117) (4,034) Pension liability adjustment (33,990) (33,990) Deferred taxes on pension liability adjustment 11,897 11,897 - --------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1993 146,034 1,391,464 1,251,140 --- (22,093) 2,620,511 Net income 323,617 323,617 Dividends declared Preferred and preference stock (39,922) (39,922) Common stock ($1.51 per share) (222,180) (222,180) Common stock issued 1,493 33,869 33,869 Other 45 45 Net unrealized loss on securities (5,609) (5,609) Deferred taxes on net unrealized loss on securities 1,963 1,963 Pension liability adjustment 8,573 8,573 Deferred taxes on pension liability adjustment (3,001) (3,001) - --------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1994 147,527 1,425,378 1,312,655 (3,646) (16,521) 2,717,866 Net income 338,007 338,007 Dividends declared Preferred and preference stock (40,578) (40,578) Common stock ($1.55 per share) (228,667) (228,667) Common stock issued 318 318 Other 109 109 Net unrealized gain on securities 14,010 14,010 Deferred taxes on net unrealized gain on securities (4,904) (4,904) Pension liability adjustment 25,417 25,417 Deferred taxes on pension liability adjustment (8,896) (8,896) - --------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1995 147,527 $1,425,805 $1,381,417 $ 5,460 $ --- $2,812,682 ===========================================================================================================================
See Notes to Consolidated Financial Statements. 37 Baltimore Gas and Electric Company and Subsidiaries Consolidated Statements of Capitalization
At December 31, 1995 1994 - ----------------------------------------------------------------------------------------------------- (In thousands) Long-Term Debt First Refunding Mortgage Bonds of BGE 9-1/8% Series, due October l5, 1995 $ --- $ 188,014 5-1/8% Series, due April 15, 1996 26,187 26,454 6-1/8% Series, due August 1, 1997 24,935 24,935 Floating rate series, due April 15, 1999 125,000 125,000 8.40% Series, due October 15, 1999 91,200 96,225 5-1/2% Series, due July 15, 2000 125,000 125,000 8-3/8% Series, due August 15, 2001 122,427 122,430 7-1/8% Series, due January 1, 2002 39,698 49,957 7-1/4% Series, due July 1, 2002 124,609 124,850 5-1/2% Installment Series, due July 15, 2002 11,045 11,650 6-1/2% Series, due February 15, 2003 124,882 124,947 6-1/8% Series, due July 1, 2003 124,925 124,925 5-1/2% Series, due April 15, 2004 124,995 125,000 7-1/2% Series, due January 15, 2007 123,667 125,000 6-5/8% Series, due March 15, 2008 124,985 125,000 7-1/2% Series, due March 1, 2023 124,973 124,998 7-1/2% Series, due April 15, 2023 100,000 100,000 - ----------------------------------------------------------------------------------------------------- Total First Refunding Mortgage Bonds of BGE 1,538,528 1,744,385 Other long-term debt of BGE Term bank loan due March 29, 2001 50,000 --- Medium-term notes, Series A 10,500 10,500 Medium-term notes, Series B 100,000 100,000 Medium-term notes, Series C 200,000 173,050 Medium-term notes, Series D 28,000 --- Pollution control loan, due July 1, 2011 36,000 36,000 Port facilities loan, due June 1, 2013 48,000 48,000 Adjustable rate pollution control loan, due July 1, 2014 20,000 20,000 5.55% Pollution control revenue refunding loan, due July 15, 2014 47,000 47,000 Economic development loan, due December 1, 2018 35,000 35,000 6.00% Pollution control revenue refunding loan, due April 1, 2024 75,000 75,000 - ----------------------------------------------------------------------------------------------------- Total other long-term debt of BGE 649,500 544,550 Long-term debt of Constellation Companies Revolving credit agreement Variable rates based on LIBOR, due December 9, 1998 1,000 --- Mortgage and construction loans and other collateralized notes 7.6675%, due October 1, 1995 --- 13,000 7.50%, due October 9, 2005 9,989 --- Variable rates, due through 2009 110,018 116,613 7.357%, due March 15, 2009 5,896 6,152 Unsecured notes 420,000 440,000 - ----------------------------------------------------------------------------------------------------- Total long-term debt of Constellation Companies 546,903 575,765 Unamortized discount and premium (15,708) (17,593) Current portion of long-term debt (120,969) (262,175) - ----------------------------------------------------------------------------------------------------- Total long-term debt $2,598,254 $2,584,932
continued on page 39 See Notes to Consolidated Financial Statements. 38 Baltimore Gas and Electric Company and Subsidiaries Consolidated Statements of Capitalization
At December 31, 1995 1994 - ----------------------------------------------------------------------------------------------------------------------- (In thousands) Preferred Stock Cumulative, $100 par value, 1,000,000 shares authorized Series B, 41/2%, 222,921 shares outstanding, callable at $110 per share $ 22,292 $ 22,292 Series C, 4%, 68,928 shares outstanding, callable at $105 per share 6,893 6,893 Series D, 5.40%, 300,000 shares outstanding, callable at $101 per share 30,000 30,000 - ----------------------------------------------------------------------------------------------------------------------- Total preferred stock 59,185 59,185 Preference Stock Cumulative, $100 par value, 6,500,000 shares authorized Redeemable preference stock 7.50%, 1986 Series, 425,000 and 455,000 shares outstanding. Callable at $105 per share prior to October 1, 1996 and at lesser amounts thereafter 42,500 45,500 6.75%, 1987 Series, 455,000 shares outstanding. Callable at $104.50 per share prior to April 1, 1997 and at lesser amounts thereafter 45,500 45,500 6.95%, 1987 Series, 500,000 shares redeemed at par on October 1, 1995 --- 50,000 7.80%, 1989 Series, 500,000 shares outstanding 50,000 50,000 8.25%, 1989 Series, 300,000 and 500,000 shares outstanding 30,000 50,000 8.625%, 1990 Series, 650,000 shares outstanding 65,000 65,000 7.85%, 1991 Series, 350,000 shares outstanding 35,000 35,000 Current portion of redeemable preference stock (26,000) (61,500) - ----------------------------------------------------------------------------------------------------------------------- Total redeemable preference stock 242,000 279,500 Preference stock not subject to mandatory redemption 7.78%, 1973 Series, 200,000 shares outstanding, callable at $101 per share 20,000 20,000 7.125%, 1993 Series, 400,000 shares outstanding, not callable prior to July 1, 2003 40,000 40,000 6.97%, 1993 Series, 500,000 shares outstanding, not callable prior to October 1, 2003 50,000 50,000 6.70%, 1993 Series, 400,000 shares outstanding, not callable prior to January 1, 2004 40,000 40,000 6.99%, 1995 Series, 600,000 shares outstanding, not callable prior to October 1, 2005 60,000 --- - ----------------------------------------------------------------------------------------------------------------------- Total preference stock not subject to mandatory redemption 210,000 150,000 Common Shareholders' Equity Common stock without par value, 175,000,000 shares authorized; 147,527,114 shares issued and outstanding at December 31, 1995 and 1994. (At December 31, 1995, 166,893 shares were reserved for the Employee Savings Plan and 3,277,656 shares were reserved for the Dividend Reinvestment and Stock Purchase Plan.) 1,425,805 1,425,378 Retained earnings 1,381,417 1,312,655 Unrealized gain (loss) on available for sale securities 5,460 (3,646) Pension liability adjustment --- (16,521) - ----------------------------------------------------------------------------------------------------------------------- Total common shareholders' equity 2,812,682 2,717,866 Total Capitalization $5,922,121 $5,791,483 =======================================================================================================================
See Notes to Consolidated Financial Statements. 39 Baltimore Gas and Electric Company and Subsidiaries Consolidated Statements of Income Taxes
Year Ended December 31, 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------- (Dollar amounts in thousands) Income Taxes Current $ 74,121 $ 82,767 $ 93,459 - ------------------------------------------------------------------------------------------------------------------------- Deferred Change in tax effect of temporary differences 118,300 88,896 63,972 Change in income taxes recoverable through future rates (1,006) (8,580) (30,086) Deferred taxes credited (charged) to shareholders' equity (13,800) (1,038) 11,897 - ------------------------------------------------------------------------------------------------------------------------- Deferred taxes charged to expense 103,494 79,278 45,783 Effect on deferred taxes of enacted change in federal corporate income tax rate Increase in deferred tax liability --- --- 20,105 Income taxes recoverable through future rates --- --- (12,831) - ------------------------------------------------------------------------------------------------------------------------- Deferred taxes charged to expense --- --- 7,274 Investment tax credit adjustments (8,088) (8,192) (8,444) Income taxes per Consolidated Statements of Income $169,527 $153,853 $138,072 ========================================================================================================================= Reconciliation of Income Taxes Computed at Statutory Federal Rate to Total Income Taxes Income before income taxes $507,534 $477,470 $447,938 Statutory federal income tax rate 35% 35% 35% - --------------------------------------------------------------------------------------------------------------------------- Income taxes computed at statutory federal rate 177,637 167,115 156,778 Increases (decreases) in income taxes due to Depreciation differences not normalized on regulated activities 10,953 9,791 9,253 Allowance for equity funds used during construction (4,957) (7,611) (5,072) Amortization of deferred investment tax credits (8,088) (8,164) (8,444) Tax credits flowed through to income (521) (1,754) (9,736) Change in federal corporate income tax rate charged to expense --- --- 7,274 Amortization of deferred tax rate differential on regulated activities (2,013) (1,885) (5,789) Other (3,484) (3,639) (6,192) - --------------------------------------------------------------------------------------------------------------------------- Total income taxes $169,527 $153,853 $138,072 =========================================================================================================================== Effective federal income tax rate 33.4% 32.2% 30.8%
At December 31, 1995 1994 - -------------------------------------------------------------------------------------------------------------------------- Deferred Income Taxes (Dollar amounts in thousands) Deferred tax liabilities Accelerated depreciation $ 878,470 $ 840,376 Allowance for funds used during construction 210,928 208,726 Income taxes recoverable through future rates 94,305 93,952 Deferred termination and postemployment costs 49,591 53,749 Deferred fuel costs 39,559 41,507 Leveraged leases 29,842 31,948 Percentage repair allowance 38,295 36,630 Energy conservation expenditures 28,121 --- Other 151,231 148,064 - -------------------------------------------------------------------------------------------------------------------------- Total deferred tax liabilities 1,520,342 1,454,952 Deferred tax assets Alternative minimum tax 32,626 71,074 Accrued pension and postemployment benefit costs 31,707 51,163 Deferred investment tax credits 49,512 52,288 Capitalized interest and overhead 39,439 34,071 Contributions in aid of construction 34,404 32,707 Nuclear decommissioning liability 16,708 14,870 Other 41,247 42,350 - -------------------------------------------------------------------------------------------------------------------------- Total deferred tax assets 245,643 298,523 Deferred tax liability, net $1,274,699 $1,156,429 ==========================================================================================================================
See Notes to Consolidated Financial Statements. 40 Baltimore Gas and Electric Company and Subsidiaries Notes to Consolidated Financial Statements Note 1. Significant Accounting Policies Nature of the Business Baltimore Gas and Electric Company (BGE) and Subsidiaries (collectively, the Company) is primarily an electric and gas utility serving a territory which encompasses Baltimore City and all or part of ten Central Maryland counties. The Company is also engaged in diversified businesses as described further in Note 3. Principles of Consolidation The consolidated financial statements include the accounts of BGE and all subsidiaries in which BGE owns directly or indirectly a majority of the voting stock. Intercompany balances and transactions have been eliminated in consolidation. Under this policy, the accounts of Constellation Holdings, Inc. and its subsidiaries (collectively, the Constellation Companies), BGE Home Products & Services, Inc. and Subsidiary (HP&S), BGE Energy Projects & Services, Inc. (EP&S), and BNG, Inc. are consolidated in the financial statements, and Safe Harbor Water Power Corporation is reported under the equity method. Corporate joint ventures, partnerships, and affiliated companies in which a 20% to 50% voting interest is held are accounted for under the equity method, unless control is evident, in which case the entity is consolidated. Investments in which less than a 20% voting interest is held are accounted for under the cost method, unless significant influence is exercised over the entity, in which case the investment is accounted for under the equity method. Regulation of Utility Operations BGE's utility operations are subject to regulation by the Maryland Public Service Commission (PSC). The accounting policies and practices used in the determination of service rates are also generally used for financial reporting purposes in accordance with generally accepted accounting principles for regulated industries. See Note 5. Utility Revenues BGE recognizes utility revenues as service is rendered to customers. Fuel and Purchased Energy Costs Subject to the approval of the PSC, the cost of fuel used in generating electricity, net of revenues from interchange sales, and the cost of gas sold may be recovered through zero-based electric fuel rate (see Note 12) and purchased gas adjustment clauses, respectively. The difference between actual fuel costs and fuel revenues is deferred on the balance sheet to be recovered from or refunded to customers in future periods. The electric fuel rate formula is based upon the latest twenty-four-month generation mix and the latest three-month average fuel cost for each generating unit. The fuel rate does not change unless the calculated rate is more than 5% above or below the rate then in effect. The purchased gas adjustment is based on recent annual volumes of gas and the related current prices charged by BGE's gas suppliers. Any deferred underrecoveries or overrecoveries of purchased gas costs for the twelve months ended November 30 each year are charged or credited to customers over the ensuing calendar year. Income Taxes The deferred tax liability represents the tax effect of temporary differences between the financial statement and tax bases of assets and liabilities. It is measured using presently enacted tax rates. The portion of BGE's deferred tax liability applicable to utility operations which has not been reflected in current service rates represents income taxes recoverable through future rates. It has been recorded as a regulatory asset on the balance sheet. Deferred income tax expense represents the net change in the deferred tax liability and regulatory asset during the year, exclusive of amounts charged or credited to common shareholders' equity. Current tax expense consists solely of regular tax less applicable tax credits. In certain prior years, tax expense included an alternative minimum tax (AMT) that can be carried forward indefinitely as tax credits to future years in which the regular tax liability exceeds the AMT liability. Current income tax for the year ended December 31, 1995 reflects utilization of AMT credits of $40 million. Deferred income taxes related to the remaining AMT credit carryforward of $33 million have been classified as current assets at December 31, 1995. Prior-year amounts have been reclassified to conform with the current year's presentation. The investment tax credit (ITC) associated with BGE's regulated utility operations has been deferred (see Note 5) and is amortized to income ratably over the lives of the subject property. ITC and other tax credits associated with nonregulated diversified businesses other than leveraged leases are flowed through to income. BGE's utility revenue from system sales is subject to the Maryland public service company franchise tax in lieu of a state income tax. The franchise tax is included in taxes other than income taxes in the Consolidated Statements of Income. Inventory Valuation Fuel stocks and materials and supplies are generally stated at average cost. Real Estate Projects Real estate projects consist of the Constellation Companies' investment in rental and operating properties and properties under development. Rental and operating properties are held for investment. Properties under development are held for future development and sale. Costs incurred in the acquisition and active development of such properties are capitalized. Rental and operating properties and properties under development are stated at cost unless the amount invested exceeds the amounts expected to be recovered through operations and sales. In these cases, the projects are written down to the amount estimated to be recoverable. 41 Baltimore Gas and Electric Company and Subsidiaries Investments and Other Assets Investments in debt and equity securities subject to the requirements of Statement of Financial Accounting Standards No. 115 (Statement No. 115) are reported at fair value. Certain of Constellation Companies' marketable equity securities and financial partnerships are classified as trading securities. Unrealized gains and losses on these securities are included in diversified businesses revenues. The investments comprising the nuclear decommissioning trust fund and certain marketable equity securities of CHI are classified as available for sale. Unrealized gains and losses on these securities, as well as CHI's portion of unrealized gains and losses on securities of equity-method investees, are recorded in shareholders' equity. The Company utilizes specific identification to determine the cost of these securities in computing realized gains or losses. Utility Plant, Depreciation and Amortization, and Decommissioning Utility plant is stated at original cost, which includes material, labor, and, where applicable, construction overhead costs and an allowance for funds used during construction. Additions to utility plant and replacements of units of property are capitalized to utility plant accounts. Utility plant retired or otherwise disposed of is charged to accumulated depreciation. Maintenance and repairs of property and replacements of items of property determined to be less than a unit of property are charged to maintenance expense. Depreciation is generally computed using composite straight-line rates applied to the average investment in classes of depreciable property. Vehicles are depreciated based on their estimated useful lives. As a result of the PSC's November 1995 gas rate order, BGE revised its gas utility plant depreciation rates to reflect the results of a detailed depreciation study. The new rates are expected to result in an increase in depreciation accruals of approximately $2.4 million annually. Depreciation expense for 1995 and 1994 includes the write-off of certain costs at BGE's Perryman site. Initially, BGE had planned to build two combined cycle generating units at its Perryman site with each unit consisting of two combustion turbines. However, due to significant changes in the environment in which utilities operate, BGE decided in 1994 not to construct the second combined cycle generating unit and wrote off the construction work in progress costs associated with that unit. This write-off reduced after-tax earnings during 1994 by $11.0 million or 7 cents per share. As a result of the PSC's August 1995 Order requiring all new generation capacity needs to be competitively bid and BGE's September 1995 announcement that it will merge with Potomac Electric Power Company (PEPCO), BGE determined that it will not build the second combustion turbine for the first combined cycle unit. Therefore, during the third quarter of 1995, BGE wrote off the remaining construction work in progress costs associated with the first combined cycle unit. This write-off reduced after-tax earnings during 1995 by $9.7 million, or 7 cents per share. The construction of the first 140-megawatt combustion turbine at Perryman was completed, and the unit was placed in service, during June 1995. BGE owns an undivided interest in the Keystone and Conemaugh electric generating plants located in western Pennsylvania, as well as in the transmission line which transports the plants' output to the joint owners' service territories. BGE's ownership interest in these plants is 20.99% and 10.56%, respectively, and represents a net investment of $150 million as of December 31, 1995. Financing and accounting for these properties are the same as for wholly owned utility plant. Nuclear fuel expenditures are amortized as a component of actual fuel costs based on the energy produced over the life of the fuel. Fees for the future disposal of spent fuel are paid quarterly to the Department of Energy and are accrued based on the kilowatt-hours of electricity sold. Nuclear fuel expenses are subject to recovery through the electric fuel rate. Nuclear decommissioning costs are accrued by and recovered through a sinking fund methodology. In a 1995 order, the PSC authorized BGE to record decommissioning expense based on a facility-specific cost estimate in order to accumulate a decommissioning reserve of $521 million in 1993 dollars by the end of Calvert Cliffs' service life in 2016, adjusted to reflect expected inflation, to decommission the radioactive portion of the plant. The total decommissioning reserve of $136.7 million and $109.8 million at December 31, 1995 and 1994, respectively, is included in accumulated depreciation in the Consolidated Balance Sheets. In accordance with Nuclear Regulatory Commission (NRC) regulations, BGE has established an external decommissioning trust to which a portion of accrued decommissioning costs have been contributed. The NRC requires utilities to provide financial assurance that they will accumulate sufficient funds to pay for the cost of nuclear decommissioning based upon either a generic NRC formula or a facility-specific decommissioning cost estimate. The Company plans to use the facility-specific cost estimate for funding these costs and providing the requisite financial assurance. Allowance for Funds Used During Construction and Capitalized Interest The allowance for funds used during construction (AFC) is an accounting procedure which capitalizes the cost of funds used to finance utility construction projects as part of utility plant on the balance sheet, crediting the cost as a noncash item on the income statement. The cost of borrowed and equity funds is segregated between interest expense and other income, respectively. BGE recovers the capitalized AFC and a return thereon after the related utility plant is placed in service and included in depreciable assets and rate base. Prior to April 23, 1993, the Company accrued AFC at a pre-tax rate of 9.94%. Effective April 24, 1993, a rate order of the PSC reduced the pre-tax AFC rate to 9.40%. Effective November 20, 1995, a rate order of the PSC reduced the pre-tax gas plant and common plant AFC rates to 9.04% and 9.36%, respectively. AFC is compounded annually. The Constellation Companies capitalize interest on qualifying real estate and power generation development projects. BGE capitalizes interest on carrying charges accrued on certain deferred fuel costs as discussed in Note 5. 42 Baltimore Gas and Electric Company and Subsidiaries Long-Term Debt The discount or premium and expense of issuance associated with long-term debt are deferred and amortized over the original lives of the respective debt issues. Gains and losses on the reacquisition of debt are amortized over the remaining original lives of the issuances. Cash Flows For the purpose of reporting cash flows, highly liquid investments purchased with a maturity of three months or less are considered to be cash equivalents. Use of Accounting Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates involve judgments with respect to, among other things, various future economic factors which are difficult to predict and are beyond the control of the Company. Therefore, actual amounts could differ from these estimates. Accounting Standards Issued The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards No. 121, regarding accounting for asset impairments, effective January 1, 1996. Adoption of this statement is not expected to have a material impact on the Company's financial statements. Note 2. Segment Information
1995 1994 1993 - -------------------------------------------------------------------------------------------------------- (In thousands) Electric Nonaffiliated revenues $2,229,774 $2,126,581 $2,112,147 Affiliated revenues 1,337 840 --- - -------------------------------------------------------------------------------------------------------- Total revenues 2,231,111 2,127,421 2,112,147 Income from operations 574,299 539,739 534,185 Depreciation and amortization 276,285 252,273 219,735 Construction expenditures (including AFC) 288,509 412,885 421,923 Identifiable assets at December 31 6,195,722 5,981,634 5,867,725 Gas Total revenues (nonaffiliated) $ 400,504 $ 421,249 $ 433,163 Income from operations 48,104 27,801 34,738 Depreciation and amortization 29,637 32,478 23,875 Construction expenditures (including AFC) 77,528 76,091 58,578 Identifiable assets at December 31 748,462 726,759 677,857 Diversified Businesses Nonaffiliated revenues $ 304,521 $ 235,155 $ 196,075 Affiliated revenues 6,609 8,245 6,825 - -------------------------------------------------------------------------------------------------------- Total revenues 311,130 243,400 202,900 Income from operations 73,289 67,719 47,469 Depreciation and amortization 11,495 11,199 10,303 Identifiable assets at December 31 1,266,049 1,200,551 1,166,997 Total Nonaffiliated revenues $2,934,799 $2,782,985 $2,741,385 Affiliated revenues 7,946 9,085 6,825 Intercompany eliminations (7,946) (9,085) (6,825) - -------------------------------------------------------------------------------------------------------- Total revenues 2,934,799 2,782,985 2,741,385 Income from operations 695,692 635,259 616,392 Depreciation and amortization 317,417 295,950 253,913 Construction expenditures (including AFC) 366,037 488,976 480,501 Identifiable assets at December 31 8,210,233 7,908,944 7,712,579 Other assets at December 31 106,430 128,558 117,034 - -------------------------------------------------------------------------------------------------------- Total assets at December 31 8,316,663 8,037,502 7,829,613
Certain prior-year amounts have been reclassified to conform with the current year's presentation. 43 Baltimore Gas and Electric Company and Subsidiaries Note 3. Subsidiary Information Diversified businesses consist of the operations of the Constellation Companies, HP&S, EP&S, and BNG, Inc. The Constellation Companies include Constellation Holdings, Inc., a wholly owned subsidiary which holds all of the stock of three other subsidiaries, Constellation Real Estate Group, Inc., Constellation Power, Inc. (formerly "Constellation Energy, Inc."), and Constellation Investments, Inc. These companies are engaged in real estate development and ownership of senior living facilities; development, ownership, and operation of power generation systems; and financial investments, respectively. HP&S is a wholly owned subsidiary which engages predominantly in the businesses of appliance and consumer electronics sales and service; heating, ventilation, and air conditioning system sales, installation and service; as well as, home improvements and services, primarily in Central Maryland. Effective November 1, 1995, BGE formed a wholly owned subsidiary, EP&S, which provides a broad range of customized energy services to major customers, including industrial, institutional, and government customers in commercial office buildings, warehouses, educational, healthcare, and retail facilities. These energy services include customer electrical system improvements, lighting and mechanical engineering services, campus and multi-building systems, brokering and associated financial contracts, and district chilled water systems. BNG, Inc. is a wholly owned subsidiary which engages in natural gas brokering. BGE's investment in Safe Harbor Water Power Corporation, a producer of hydroelectric power, represents two-thirds of Safe Harbor's total capital stock, including one-half of the voting stock, and a two-thirds interest in its retained earnings. The following is condensed financial information for Constellation Holdings, Inc. and its subsidiaries. The condensed financial information does not reflect the elimination of intercompany balances or transactions which are eliminated in the Company's consolidated financial statements.
1995 1994 1993 (In thousands, except per share amounts) Income Statements Revenues Real estate projects $ 108,414 $ 106,915 $ 77,598 Power generation systems 57,734 41,301 24,971 Financial investments 25,201 12,126 21,195 - ------------------------------------------------------------------------------------------------------------ Total revenues 191,349 160,342 123,764 Expenses other than interest and income taxes 114,479 107,267 80,427 - ------------------------------------------------------------------------------------------------------------ Income from operations 76,870 53,075 43,337 Minority interest (2,348) --- (280) Interest expense (46,673) (45,782) (47,845) Capitalized interest 13,582 10,776 14,702 Income tax benefit (expense) (14,355) (4,305) 1,984 - ------------------------------------------------------------------------------------------------------------ Net income $ 27,076 $ 13,764 $ 11,898 ============================================================================================================ Contribution to the Company's earnings per share of common stock $ .18 $ .09 $ .08 ============================================================================================================ Balance Sheets Current assets $ 98,526 $ 92,814 $ 54,039 Noncurrent assets 1,102,528 1,055,056 1,036,507 - ------------------------------------------------------------------------------------------------------------ Total assets $1,201,054 $1,147,870 $1,090,546 Current liabilities $ 70,393 $ 70,670 $ 24,201 Noncurrent liabilities 778,505 758,626 759,048 Shareholder's equity 352,156 318,574 307,297 - ------------------------------------------------------------------------------------------------------------ Total liabilities and shareholder's equity $1,201,054 $1,147,870 $1,090,546 ============================================================================================================
44 Baltimore Gas and Electric Company and Subsidiaries Note 4. Real Estate Projects and Financial Investments Real estate projects consist of the following investments held by the Constellation Companies:
At December 31, 1995 1994 - -------------------------------------------------------------------- (In thousands) Properties under development $270,678 $267,483 Rental and operating properties (net of accumulated depreciation) 207,666 203,000 Other real estate ventures 1,000 952 - -------------------------------------------------------------------- Total $479,344 $471,435 ====================================================================
Financial investments consist of the following investments held by the Constellation Companies:
At December 31, 1995 1994 - -------------------------------------------------------------------- (In thousands) Insurance companies $ 77,792 $ 87,700 Marketable equity securities 41,475 51,175 Financial limited partnerships 51,023 48,014 Leveraged leases 35,551 37,451 - -------------------------------------------------------------------- Total $205,841 $224,340 ====================================================================
The Constellation Companies' marketable equity securities and BGE's investments comprising the nuclear decommissioning trust fund are classified as available for sale. The fair values, gross unrealized gains and losses, and amortized cost bases for available for sale securities, exclusive of $3.2 million of unrealized net gains on securities of equity-method investees, are as follows:
Amortized Unrealized Unrealized Fair At December 31, 1995 Cost Basis Gains Losses Value - --------------------------------------------------------------------------- (In thousands) Marketable equity securities $ 38,520 $2,998 $ (43) $ 41,475 U.S. government agency 14,177 141 --- 14,318 State municipal bonds 50,411 2,056 (74) 52,393 - --------------------------------------------------------------------------- Total $103,108 $5,195 $ (117) $108,186 ===========================================================================
Amortized Unrealized Unrealized Fair At December 31, 1994 Cost Basis Gains Losses Value - --------------------------------------------------------------------------- (In thousands) Marketable equity securities $ 51,758 $1,276 $(1,859) $ 51,175 U.S. government agency 5,215 --- (113) 5,102 State municipal bonds 59,704 929 (2,599) 58,034 - --------------------------------------------------------------------------- Total $116,677 $2,205 $(4,571) $114,311 ===========================================================================
Gross and net realized gains and losses on available for sale securities were as follows:
1995 1994 1993 - --------------------------------------------------------------------------- (In thousands) Gross realized gains $5,470 $ 1,108 $2,437 Gross realized losses (2,446) (3,150) (1,389) - --------------------------------------------------------------------------- Net realized gains (losses) $3,024 $(2,042) $1,048 ===========================================================================
Contractual maturities of debt securities:
Amount - --------------------------------------------------------------------------- (In thousands) Less than 1 year $ --- 1-5 years 10,975 5-10 years 52,920 More than 10 years 4,850 - --------------------------------------------------------------------------- Total $68,745 ===========================================================================
Note 5. Regulatory Assets (net) As discussed in Note 1, BGE's utility operations are subject to regulation by the PSC. Except for differences in the timing of the recognition of certain utility expenses and credits, the ratemaking process utilized by the PSC generally is based upon the same accounting principles applied by nonregulated entities. Under the PSC's ratemaking process, these utility expenses and credits are deferred on the balance sheet as regulatory assets and liabilities and are recognized in income as the related amounts are included in service rates and recovered from or refunded to customers in utility revenues. The following table sets forth BGE's regulatory assets and liabilities:
At December 31, 1995 1994 - -------------------------------------------------------------------- (In thousands) Income taxes recoverable through future rates $269,442 $268,436 Deferred fuel costs 113,026 118,591 Deferred nuclear expenditures 86,519 90,937 Deferred postemployment benefit costs 81,616 73,591 Deferred energy conservation expenditures 73,297 45,534 Deferred termination benefit costs 60,073 79,979 Deferred cost of decommissioning federal uranium enrichment facilities 51,104 52,748 Deferred environmental costs 38,371 35,015 Deferred investment tax credits (141,463) (149,394) Other 5,930 8,202 - -------------------------------------------------------------------- Total $637,915 $623,639 ====================================================================
45 Baltimore Gas and Electric Company and Subsidiaries Income taxes recoverable through future rates represent principally the tax effect of depreciation differences not normalized and the allowance for equity funds used during construction, offset by unamortized deferred tax rate differentials and deferred taxes on deferred ITC. These amounts are amortized as the related temporary differences reverse. See Note 1 for a further discussion of income taxes. Deferred fuel costs represent the difference between actual fuel costs and the fuel rate revenues under BGE's fuel clauses (see Note 1). Deferred fuel costs are reduced as they are collected from customers. The underrecovered costs deferred under the fuel clauses were as follows:
At December 31, 1995 1994 - -------------------------------------------------------------------- (In thousands) Electric Costs deferred $130,399 $152,815 Reserve for possible disallowance of replacement energy costs (see Note 12) (35,000) (35,000) - -------------------------------------------------------------------- Net electric 95,399 117,815 Gas 17,627 776 - -------------------------------------------------------------------- Total $113,026 $118,591 ====================================================================
Deferred nuclear expenditures represent the net unamortized balance of certain operations and maintenance costs which are being amortized over the remaining life of the Calvert Cliffs Nuclear Power Plant in accordance with orders of the PSC. These expenditures consist of costs incurred from 1979 through 1982 for inspecting and repairing seismic pipe supports, expenditures incurred from 1989 through 1994 associated with nonrecurring phases of certain nuclear operations projects, and expenditures incurred during 1990 for investigating leaks in the pressurizer heater sleeves. Deferred postemployment benefit costs represent the excess of such costs recognized in accordance with Statements of Financial Accounting Standards No. 106 and No. 112 over the amounts reflected in utility rates. These costs will be amortized over a 15-year period beginning in 1998 (see Note 6). Deferred energy conservation expenditures represent the net unamortized balance of certain operations costs which are being amortized over five years in accordance with orders of the PSC. These expenditures consist of labor, materials, and indirect costs associated with the conservation programs approved by the PSC. Deferred termination benefit costs represent the net unamortized balance of the cost of certain termination benefits (see Note 7) applicable to BGE's regulated operations. These costs are being amortized over a five-year period in accordance with rate actions of the PSC. Deferred cost of decommissioning federal uranium enrichment facilities represents the unamortized portion of BGE's required contributions to a fund for decommissioning and decontaminating the Department of Energy's (DOE) uranium enrichment facilities. The Energy Policy Act of 1992 requires domestic utilities to make such contributions, which are generally payable over a 15-year period with escalation for inflation and are based upon the amount of uranium enriched by DOE for each utility. These costs are being amortized over the contribution period as a cost of fuel. Deferred environmental costs represent the estimated costs of investigating contamination and performing certain remediation activities at contaminated Company-owned sites (see Note 12). In November 1995, the PSC issued a rate order in the Company's gas base rate proceeding which authorized the Company to amortize over a 10-year period $21.6 million of these costs, the amount which had been incurred through October 1995. Deferred investment tax credits represents investment tax credits associated with BGE's regulated utility operations as discussed in Note 1. Previously, the Company reported deferred investment tax credits on the Consolidated Balance Sheets as Deferred Credits and Other Liabilities. In 1995, the Company reclassified those credits as a reduction of Regulatory Assets because they are deferred solely because of the regulatory treatment. Prior year amounts have been reclassified to conform with the current year's presentation. Electric deferred fuel costs in excess of $72.8 million are excluded from rate base by the PSC for ratemaking purposes. Effective April 24, 1993, BGE has been authorized by the PSC to accrue carrying charges on deferred fuel costs in excess of $72.8 million, net of related deferred income taxes. These carrying charges are accrued prospectively at the 9.40% authorized rate of return. The income effect of the equity funds portion of the carrying charges is being deferred until such amounts are recovered in utility service rates subsequent to the completion of the fuel rate proceeding examining the 1989-1991 outages at Calvert Cliffs Nuclear Power Plant as discussed in Note 12. Deferred investment tax credits are not deducted from rate base in accordance with federal income tax normalization requirements. The foregoing regulatory assets and liabilities are recorded on BGE's Consolidated Balance Sheets in accordance with Statement of Financial Accounting Standards (SFAS) No. 71. If BGE were required to terminate application of SFAS No. 71 for all of its regulated operations, all such amounts deferred would be recognized in the income statement at that time, resulting in a charge to earnings, net of applicable income taxes. 46 Baltimore Gas and Electric Company and Subsidiaries Note 6. Pension and Postemployment Benefits Pension Benefits The Company sponsors several noncontributory defined benefit pension plans, the largest of which (the Pension Plan) covers substantially all BGE employees and certain employees of its subsidiaries. The other plans, which are not material in amount, provide supplemental benefits to certain non-employee directors and key employees. Benefits under the plans are generally based on age, years of service, and compensation levels. Prior service cost associated with retroactive plan amendments is amortized on a straight-line basis over the average remaining service period of active employees. The Company's funding policy is to contribute at least the minimum amount required under Internal Revenue Service regulations using the projected unit credit cost method. Plan assets at December 31, 1995 consisted primarily of marketable equity and fixed income securities, and group annuity contracts. The following tables set forth the combined funded status of the plans and the composition of total net pension cost. At December 31, 1994, the accumulated benefit obligation was greater than the fair value of the Pension Plan's assets. As a result, the Company recorded an additional pension liability, a portion of which was charged to shareholders' equity. Net pension cost shown below does not include the cost of termination benefits described in Note 7.
At December 31, 1995 1994 (In thousands) Vested benefit obligation $688,084 $622,445 Nonvested benefit obligation 15,668 8,838 - ---------------------------------------------------------------------------------------------------- Accumulated benefit obligation 703,752 631,283 Projected benefits related to increase in future compensation levels 122,539 82,815 - ---------------------------------------------------------------------------------------------------- Projected benefit obligation 826,291 714,098 Plan assets at fair value (744,645) (614,284) - ---------------------------------------------------------------------------------------------------- Projected benefit obligation less plan assets 81,646 99,814 Unrecognized prior service cost (24,357) (23,863) Unrecognized net loss (118,361) (112,546) Pension liability adjustment --- 52,177 Unamortized net asset from adoption of FASB Statement No. 87 995 1,586 - ---------------------------------------------------------------------------------------------------- Accrued pension (asset) liability $ (60,077) $ 17,168 ====================================================================================================
Year Ended December 31, 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------- (In thousands) Components of net pension cost Service cost-benefits earned during the period $11,407 $15,015 $11,645 Interest cost on projected benefit obligation 58,433 58,723 51,183 Actual return on plan assets (150,510) 7,932 (56,225) Net amortization and deferral 94,674 (60,071) 6,591 - ------------------------------------------------------------------------------------------------------------------- Total net pension cost 14,004 21,599 13,194 Amount capitalized as construction cost (1,422) (2,578) (1,800) - ------------------------------------------------------------------------------------------------------------------- Amount charged to expense $12,582 $19,021 $11,394 ===================================================================================================================
The Company also sponsors a defined contribution savings plan covering all eligible BGE employees and certain employees of its subsidiaries. Under this plan, the Company makes contributions on behalf of participants. Company contributions to this plan totaled $8.5 million, $8.7 million, and $9.0 million in 1995, 1994, and 1993, respectively. Postretirement Benefits The Company sponsors defined benefit postretirement health care and life insurance plans which cover substantially all BGE employees and certain employees of its subsidiaries. Benefits under the plans are generally based on age, years of service, and pension benefit levels. The postretirement benefit (PRB) plans are unfunded. Substantially all of the health care plans are contributory, and participant contributions for employees who retire after June 30, 1992 are based on age and years of service. Retiree contributions increase commensurate with the expected increase in medical costs. The postretirement life insurance plan is noncontributory. Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 106, which requires a change in the method of accounting for postretirement benefits other than pensions from the pay-as-you-go method used prior to 1993 to the accrual method. The transition obligation existing at the beginning of 1993 is being amortized over a 20-year period. 47 Baltimore Gas and Electric Company and Subsidiaries In April 1993, the PSC issued a rate order authorizing BGE to recognize in operating expense one-half of the annual increase in PRB costs applicable to regulated operations as a result of the adoption of Statement No. 106 and to defer the remainder of the annual increase in these costs for inclusion in BGE's next base rate proceeding. In accordance with the April 1993 Order, the increase in annual PRB costs applicable to regulated operations for the period January through April 1993, net of amounts capitalized as construction cost, has been deferred. This amount, which totaled $5.7 million, as well as all amounts to be deferred prior to completion of BGE's next base rate proceeding, will be amortized over a 15-year period beginning in 1998 in accordance with the PSC's Order. In November 1995, the PSC issued a rate order in BGE's gas base rate proceeding providing for full recognition in operating expense of PRB and other postemployment benefits (discussed below) costs attributable to gas operations, and affirming its previous decision on amortization of deferred PRB costs. This phase-in approach meets the guidelines established by the Emerging Issues Task Force of the Financial Accounting Standards Board for deferring PRB costs as a regulatory asset. Accrual-basis PRB costs applicable to nonregulated operations are charged to expense. The following table sets forth the components of the accumulated PRB obligation and a reconciliation of these amounts to the accrued PRB liability.
At December 31, 1995 1994 Life Life Health Care Insurance Health Care Insurance (In thousands) Accumulated postretirement benefit obligation: Retirees $157,804 $44,769 $161,134 $45,146 Fully eligible active employees 20,942 84 15,777 101 Other active employees 63,782 18,515 44,371 12,597 - --------------------------------------------------------------------------------------------------------------------------- Total accumulated postretirement benefit obligation 242,528 63,368 221,282 57,844 Unrecognized transition obligation (149,907) (43,521) (158,725) (46,081) Unrecognized net gain (loss) (12,767) (5,764) 1,238 (2,141) - --------------------------------------------------------------------------------------------------------------------------- Accrued postretirement benefit liability $ 79,854 $ 14,083 $ 63,795 $ 9,622 ===========================================================================================================================
The following table sets forth the composition of net PRB cost. Such cost does not include the cost of termination benefits described in Note 7.
Year ended December 31, 1995 1994 - ------------------------------------------------------------------------ (In thousands) Net postretirement benefit cost: Service cost--benefits earned during the period $ 3,918 $ 5,035 Interest cost on accumulated post- retirement benefit obligation 21,203 23,037 Amortization of transition obligation 11,378 11,700 Net amortization and deferral (86) 646 - ------------------------------------------------------------------------ Total net postretirement benefit cost 36,413 40,418 Amount capitalized as construction cost (5,299) (5,773) Amount deferred (8,025) (10,213) - ------------------------------------------------------------------------ Amount charged to expense $23,089 $24,432 ========================================================================
Other Postemployment Benefits The Company provides health and life insurance benefits to employees of BGE and certain employees of its subsidiaries who are determined to be disabled under BGE's Disability Insurance Plan. The Company also provides pay continuation payments for employees determined to be disabled before November 1995. Such payments for employees determined to be disabled after that date are paid by an insurance company, and the cost of such insurance is paid by employees. The Company adopted Statement of Financial Accounting Standards No. 112, which requires a change in the method of accounting for these benefits from the pay-as-you-go method to an accrual method, as of December 31, 1993. The liability for these benefits totaled $52 million and $48 million as of December 31, 1995 and 1994, respectively. The portion of the December 31, 1993 liability attributable to regulated activities was deferred. Consistent with the PSC's November 1995 order, the amounts deferred will be amortized over a 15-year period beginning in 1998. The adoption of Statement No. 112 did not have a material impact on net income. Assumptions The pension, postretirement, and other postemployment benefit liabilities were determined using the following assumptions.
At December 31, 1995 1994 - -------------------------------------------------------------- Assumptions: Discount rate Pension and postretirement benefits 7.5% 8.5% Other postemployment benefits 6.0% 8.5% Average increase in future compensation levels 4.0% 4.0% Expected long-term rate of return on assets 9.0% 9.0%
The health care inflation rates for 1995 are assumed to be 8.7% for Medicare-eligible retirees and 11.8% for retirees not covered by Medicare. The health care inflation rates for 1996 are assumed to be 8.0% for Medicare-eligible retirees and 10.5% for retirees not covered by Medicare. After 1996, both rates are assumed to decrease by 0.5% annually to an ultimate rate of 5.5% in the years 2001 and 2006, respectively. A one percentage point increase in the health care inflation rate from the assumed rates would increase the accumulated postretirement benefit obligation by approximately $40 million as of December 31, 1995 and would increase the aggregate of the service cost and interest cost components of postretirement benefit cost by approximately $4 million annually. 48 Baltimore Gas and Electric Company and Subsidiaries Note 7. Termination Benefits BGE offered a Voluntary Special Early Retirement Program (the 1992 VSERP) to eligible employees who retired during the period February 1, 1992 through April 1, 1992. In accordance with Statement of Financial Accounting Standards No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," the one-time cost of termination benefits associated with the 1992 VSERP, which consisted principally of an enhanced pension benefit, was recognized in 1992 and reduced net income by $6.6 million, or 5 cents per common share. In April 1993, the PSC authorized BGE to amortize this charge over a five-year period for ratemaking purposes. Accordingly, BGE established a regulatory asset and recorded a corresponding credit to operating expense for this amount. The reversal of the 1992 VSERP in April 1993 increased net income by $6.6 million, or 5 cents per common share. BGE offered a second Voluntary Special Early Retirement Program (the 1993 VSERP) to eligible employees who retired as of February 1, 1994. The one-time cost of the 1993 VSERP consisted of enhanced pension and postretirement benefits. In addition to the 1993 VSERP, further employee reductions have been accomplished through the elimination of certain positions, and various programs have been offered to employees impacted by the eliminations. In accordance with Statement No. 88, the one-time cost of termination benefits associated with the 1993 VSERP and various programs, which totaled $105.5 million, was recognized in 1993. The $88.3 million portion of 1993 VSERP attributable to regulated activities was deferred and is being amortized over a five-year period for ratemaking purposes, beginning in February 1994, consistent with previous rate actions of the PSC. The $17.2 million remaining cost of termination benefits was charged to expense in 1993. Note 8. Short-Term Borrowings Information concerning short-term borrowings is set forth below. Short-term borrowings include bank loans, commercial paper notes, and bank lines of credit. The Company pays commitment fees in support of lines of credit. Borrowings under the lines are at the banks' prime rates, base interest rates, or at various money market rates.
1995 1994 1993 (Dollar amounts in thousands) BGE's Bank Loans Borrowings outstanding at December 31 $ 3,845 $ - $ - Weighted average interest rate of borrowings outstanding at December 31 4.74% - % - % Maximum borrowings during the year $ 3,845 $ - $ - BGE's Commercial Paper Notes Borrowings outstanding at December 31 $275,300 $ 63,700 $ - Weighted average interest rate of notes outstanding at December 31 5.92% 6.10% - % Unused lines of credit supporting commercial paper notes at December 31* $238,000 $148,000 $ 208,000 Maximum borrowings during the year $339,100 $187,500 $ 96,900 Constellation Companies' Lines of Credit Borrowings outstanding at December 31 $ 160 $ - $ - Weighted average interest rate of borrowings outstanding at December 31 -% - % - % Unused lines of credit at December 31 $ --- $ - $ 20,000 Maximum borrowings during the year $ 160 $ - $ -
*Exclusive of $150 million of revolving credit agreements undrawn at year-end (see Note 9). 49 Baltimore Gas and Electric Company and Subsidiaries Note 9. Long-Term Debt First Refunding Mortgage Bonds of BGE Substantially all of the principal properties and franchises owned by BGE, as well as the capital stock of Constellation Holdings, Inc., Safe Harbor Water Power Corporation, HP&S, EP&S, and BNG, Inc., are subject to the lien of the mortgage under which BGE's outstanding First Refunding Mortgage Bonds have been issued. On August 1 of each year, BGE is required to pay to the mortgage trustee an annual sinking fund payment equal to 1% of the largest principal amount of Mortgage Bonds outstanding under the mortgage during the preceding twelve months. Such funds are to be used, as provided in the mortgage, for the purchase and retirement by the trustee of Mortgage Bonds of any series other than the 5-1/2% Installment Series of 2002, the 8.40% Series of 1999, the 5-1/2% Series of 2000, the 8-3/8% Series of 2001, the 7-1/4% Series of 2002, the 6-1/2% Series of 2003, the 6-1/8% Series of 2003, the 5-1/2% Series of 2004, the 7-1/2% Series of 2007, and the 6-5/8% Series of 2008. Other Long-Term Debt of BGE BGE maintains revolving credit agreements that expire at various times during 1998. Under the terms of the agreements, BGE may, at its option, obtain loans at various interest rates. A commitment fee is paid on the daily average of the unborrowed portion of the commitment. At December 31, 1995, BGE had no borrowings under these revolving credit agreements and had available $150 million of unused capacity under these agreements. On December 29, 1995 BGE entered into a $50 million term bank loan which matures on March 29, 2001. Under the terms of the loan, the bank has a one-time option to cancel the loan on December 29, 1997. Until that date, the interest rate on the loan is 5.22%. If the bank does not cancel the loan on December 29, 1997, the interest rate for the remaining term will reset to 6.11%. Following is information regarding BGE's Medium-term Notes outstanding at December 31, 1995:
Weighted-Average Series Interest Rate Maturity Dates - -------------------------------------------------------------------- A 8.22% 1996 B 8.43% 1998-2006 C 7.04% 1996-2003 D 6.12% 1998-2005
The principal amounts of the 5-1/2% Installment Series Mortgage Bonds payable each year are as follows:
Year - -------------------------------------------------------------------- (In thousands) 1996 through 1997 $ 605 1998 and 1999 690 2000 and 2001 865 2002 6,725
Long-Term Debt of Constellation Companies The Constellation Companies entered into an unsecured revolving credit agreement on December 9, 1994 in the amount of $50 million. This agreement matures December 9, 1998 and will be used to provide liquidity for general corporate purposes. As of December 31, 1995, the Constellation Companies had $1 million outstanding under this agreement. The mortgage and construction loans and other collateralized notes have varying terms. The $9.9 million, 7.50% mortgage note requires monthly principal and interest payments through October 9, 2005. The $110 million of variable rate mortgage notes require periodic payment of principal and interest with various maturities from January 1996 through July 2009. The $5.9 million, 7.357% mortgage note requires quarterly principal and interest payments through March 15, 2009. The unsecured notes outstanding as of December 31, 1995 mature in accordance with the following schedule:
Amount - -------------------------------------------------------------------- (In thousands) 8.71%, due August 28, 1996 $ 23,000 6.19%, due September 9, 1996 10,000 8.93%, due August 28, 1997 52,000 6.65%, due September 9, 1997 15,000 8.23%, due October 15, 1997 30,000 7.05%, due April 22, 1998 25,000 7.06%, due September 9, 1998 20,000 8.48%, due October 15, 1998 75,000 7.30%, due April 22, 1999 90,000 8.73%, due October 15, 1999 15,000 7.55%, due April 22, 2000 35,000 7.43%, due September 9, 2000 30,000 - -------------------------------------------------------------------- Total $420,000 ====================================================================
Weighted Average Interest Rates for Variable Rate Debt The weighted average interest rates for variable rate debt during 1995 and 1994 were as follows:
1995 1994 - -------------------------------------------------------------------- BGE Floating rate series mortgage bonds 6.30% 4.91% Pollution control loan 3.79 2.80 Port facilities loan 4.06 3.02 Adjustable rate pollution control loan 3.75 3.13 Economic development loan 4.01 3.00 Constellation Companies Mortgage and construction loans and other collateralized notes 8.99 7.27 Loans under credit agreements 6.74 -
Aggregate Maturities The combined aggregate maturities and sinking fund requirements for all of the Company's long-term borrowings for each of the next five years are as follows:
Constellation Year BGE Companies - -------------------------------------------------------------------- (In thousands) 1996 $ 71,659 $ 49,310 1997 80,657 134,970 1998 92,328 138,351 1999 246,420 118,175 2000 251,441 85,521
50 Baltimore Gas and Electric Company and Subsidiaries Note 10. Redeemable Preference Stock The 7.80%, 1989 Series is subject to mandatory redemption in full at par on July 1, 1997. The following series are subject to an annual mandatory redemption of the number of shares shown below at par beginning in the year shown below. At BGE's option, an additional number of shares, not to exceed the same number as are mandatory, may be redeemed at par in any year, commencing in the same year in which the mandatory redemption begins. The 8.25%, 1989 Series, the 8.625%, 1990 Series, and the 7.85%, 1991 Series listed below are not redeemable except through operation of a sinking fund.
Beginning Series Shares Year - -------------------------------------------------------------------- 7.50%, 1986 Series 15,000 1992 6.75%, 1987 Series 15,000 1993 8.25%, 1989 Series 100,000 1995 8.625%, 1990 Series 130,000 1996 7.85%, 1991 Series 70,000 1997
The combined aggregate redemption requirements for all series of redeemable preference stock for each of the next five years are as follows:
Year - -------------------------------------------------------------------- (In thousands) 1996 $26,000 1997 83,000 1998 33,000 1999 23,000 2000 23,000
With regard to payment of dividends or assets available in the event of liquidation, preferred stock ranks prior to preference and common stock; all issues of preference stock, whether subject to mandatory redemption or not, rank equally; and all preference stock ranks prior to common stock. Note 11. Leases The Company, as lessee, contracts for certain facilities and equipment under lease agreements with various expiration dates and renewal options. Consistent with the regulatory treatment, lease payments for utility operations are charged to expense. Lease expense, which is comprised primarily of operating leases, totaled $12.2 million, $12.7 million, and $13.8 million for the years ended 1995, 1994, and 1993, respectively. The future minimum lease payments at December 31, 1995 for long-term noncancelable operating leases are as follows:
Year - -------------------------------------------------------------------- (In thousands) 1996 $ 4,485 1997 4,398 1998 3,681 1999 1,712 2000 1,537 Thereafter 4,214 - -------------------------------------------------------------------- Total minimum lease payments $20,027 ====================================================================
Certain of the Constellation Companies, as lessor, have entered into operating leases for office and retail space. These leases expire over periods ranging from 1 to 21 years, with options to renew. The net book value of property under operating leases was $147 million at December 31, 1995. The future minimum rentals to be received under operating leases in effect at December 31, 1995 are as follows:
Year - -------------------------------------------------------------------- (In thousands) 1996 $ 14,412 1997 12,134 1998 10,883 1999 10,130 2000 9,459 Thereafter 66,660 - -------------------------------------------------------------------- Total minimum rentals $123,678 ====================================================================
51 Baltimore Gas and Electric Company and Subsidiaries Note 12. Commitments, Guarantees, and Contingencies Commitments BGE has made substantial commitments in connection with its construction program for 1995 and subsequent years. In addition, BGE has entered into three long-term contracts for the purchase of electric generating capacity and energy. The contracts expire in 2001, 2013, and 2023. Total payments under these contracts were $68.4, $69.4, and $68.7 million during 1995, 1994, and 1993, respectively. At December 31, 1995, the estimated future payments for capacity and energy that BGE is obligated to buy under these contracts are as follows:
Year - -------------------------------------------------------------------- (In thousands) 1996 $ 62,989 1997 60,355 1998 78,950 1999 90,224 2000 91,365 Thereafter 902,432 - -------------------------------------------------------------------- Total payments $1,286,315 ====================================================================
Certain of the Constellation Companies have committed to contribute additional capital and to make additional loans to certain affiliates, joint ventures, and partnerships in which they have an interest. As of December 31, 1995, the total amount of investment requirements committed to by the Constellation Companies is $44 million. In December, 1994, BGE and HP&S entered into agreements with a financial institution whereby BGE and HP&S can sell on an ongoing basis up to an aggregate of $40 million and $50 million, respectively, of an undivided interest in a designated pool of customer receivables. Under the terms of the agreements, BGE and HP&S have limited recourse on the receivables and have recorded a reserve for credit losses. At December 31, 1995, BGE and HP&S had sold $30 million and $42 million of receivables, respectively, under these agreements. Guarantees BGE has agreed to guarantee two-thirds of certain indebtedness of Safe Harbor Water Power Corporation. The total amount of indebtedness that can be guaranteed is $45 million, of which $30 million represents BGE's share of the guarantee. As of December 31, 1995, outstanding indebtedness of Safe Harbor Water Power Corporation was $33 million, of which $22 million is guaranteed by BGE. BGE has also agreed to guarantee up to $20 million of obligations and indebtedness of BNG, Inc. As of December 31, 1995, there were no outstanding obligations under this guarantee. BGE assesses that the risk of material loss on the loans guaranteed is minimal. As of December 31, 1995, the total outstanding loans and letters of credit of certain power generation and real estate projects guaranteed by the Constellation Companies were $35 million. Also, the Constellation Companies have agreed to guarantee cer-tain other borrowings of various power generation and real estate projects. The Company has assessed that the risk of material loss on the loans guaranteed and performance guarantees is minimal. Pending Merger With Potomac Electric Power Company BGE, Potomac Electric Power Company, a District of Columbia and Virginia corporation (PEPCO) and Constellation Energy Corporation (formerly named "RH Acquisition Corp."), a Maryland corporation which will also be incorporated in Virginia (CEC), have entered into an Agreement and Plan of Merger, dated as of September 22, 1995. CEC was formed to accomplish the merger and its outstanding capital stock is owned 50% by BGE and 50% by PEPCO. The Agreement and Plan of Merger provides for a strategic business combination that will be accomplished by merging both BGE and PEPCO into CEC (the Transaction). The Transaction, which was unanimously approved by the Boards of Directors of BGE and PEPCO, is expected to close during 1997 after shareholder approval is obtained and all other conditions to the consummation of the Transaction, including obtaining applicable regulatory approvals, are met or waived. In connection with the Transaction, BGE common shareholders will receive one share of CEC common stock for each BGE share and PEPCO common shareholders will receive 0.997 share of CEC common stock for each PEPCO share. Further details about the proposed merger are provided in the report on Form 8-K dated September 22, 1995 and the Registration Statement on Form S-4 (Registration No. 33-64799). Environmental Matters The Clean Air Act of 1990 (the Act) contains two titles designed to reduce emissions of sulfur dioxide and nitrogen oxide (NOx) from electric generating stations. Title IV contains provisions for compliance in two separate phases. Phase I of Title IV became effective January 1, 1995, and Phase II of Title IV must be implemented by 2000. BGE met the requirements of Phase I by installing flue gas desulfurization systems and fuel switching and through unit retirements. BGE is currently examining what actions will be required in order to comply with Phase II of the Act. However, BGE anticipates that compliance will be attained by some combination of fuel switching, flue gas desulfurization, unit retirements, or allowance trading. At this time, plans for complying with NOx control requirements under Title I of the Act are less certain because all implementation regulations have not yet been finalized by the government. It is expected that by the year 1999 these regulations will require additional NOx controls for ozone attainment at BGE's generating plants and at other BGE facilities. The controls will result in additional expenditures that are difficult to predict prior to the issuance of such regulations. Based on existing and proposed ozone nonattainment regulations, BGE currently estimates that the NOx controls at BGE's generating plants will cost approximately $90 million. BGE is currently unable to predict the cost of compliance with the additional requirements at other BGE facilities. BGE has been notified by the Environmental Protection Agency and several state agencies that it is being considered a potentially responsible party (PRP) with respect to the cleanup of certain 52 Baltimore Gas and Electric Company and Subsidiaries environmentally contaminated sites owned and operated by third parties. In addition, a subsidiary of Constellation Holdings, Inc. has been named as a defendant in a case concerning an alleged environmentally contaminated site owned and operated by a third party. Cleanup costs for these sites cannot be estimated, except that BGE's 15.79% share of the possible cleanup costs at one of these sites, Metal Bank of America, a metal reclaimer in Philadelphia, could exceed amounts recognized by up to approximately $7 million based on the highest estimate of costs in the range of reasonably possible alternatives. Although the cleanup costs for certain of the remaining sites could be significant, BGE believes that the resolution of these matters will not have a material effect on its financial position or results of operations. Also, BGE is coordinating investigation of several former gas manufacturing plant sites, including exploration of corrective action options to remove coal tar. However, no formal legal proceedings have been instituted. BGE has recognized estimated environmental costs at these sites totaling $38.6 million as of December 31, 1995. These costs, net of accumulated amortization, have been deferred as a regulatory asset (see Note 5). The technology for cleaning up such sites is still developing, and potential remedies for these sites have not been identified. Cleanup costs in excess of the amounts recognized, which could be significant in total, cannot presently be estimated. Nuclear Insurance An accident or an extended outage at either unit of the Calvert Cliffs Nuclear Power Plant could have a substantial adverse effect on BGE. The primary contingencies resulting from an incident at the Calvert Cliffs plant would involve the physical damage to the plant, the recoverability of replacement power costs, and BGE's liability to third parties for property damage and bodily injury. BGE maintains various insurance policies for these contingencies. The costs that could result from a major accident or an extended outage at either of the Calvert Cliffs units could exceed the coverage limits. In addition, in the event of an incident at any commercial nuclear power plant in the country, BGE could be assessed for a portion of any third party claims associated with the incident. Under the provisions of the Price Anderson Act, the limit for third party claims from a nuclear incident is $8.92 billion. If third party claims relating to such an incident exceed $200 million (the amount of primary insurance), BGE's share of the total liability for third party claims could be up to $159 million per incident, that would be payable at a rate of $20 million per year. BGE and other operators of commercial nuclear power plants in the United States are required to purchase insurance to cover claims of certain nuclear workers. Other non-governmental commercial nuclear facilities may also purchase such insurance. Coverage of up to $400 million is provided for claims against BGE or others insured by these policies for radiation injuries. If certain claims were made under these policies, BGE and all policyholders could be assessed, with BGE's share being up to $6.08 million in any one year. For physical damage to Calvert Cliffs, BGE has $2.75 billion of property insurance from industry mutual insurance companies. If an outage at Calvert Cliffs is caused by an insured physical damage loss and lasts more than 21 weeks, BGE has up to $473.2 million per unit of insurance, provided by an industry mutual insurance company, for replacement power costs. This amount can be reduced by up to $94.6 million per unit if an outage to both units at Calvert Cliffs is caused by a singular insured physical damage loss. If accidents at any insured plants cause a short-fall of funds at the industry mutuals, BGE and all policyholders could be assessed, with BGE's share being up to $44.1 million. Recoverability of Electric Fuel Costs By statute, actual electric fuel costs are recoverable so long as the PSC finds that BGE demonstrates that, among other things, it has maintained the productive capacity of its generating plants at a reasonable level. The PSC and Maryland's highest appellate court have interpreted this as permitting a subjective evaluation of each unplanned outage at BGE's generating plants to determine whether or not BGE had implemented all reasonable and cost effective maintenance and operating control procedures appropriate for preventing the outage. Effective January 1, 1987, the PSC authorized the establishment of the Generating Unit Performance Program (GUPP) to measure, annually, utility compliance with maintaining the productive capacity of generating plants at reasonable levels by establishing a system-wide generating performance target and individual performance targets for each base load generating unit. In future fuel rate hearings, actual generating performance after adjustment for planned outages will be compared to the system-wide target and, if met, should signify that BGE has complied with the requirements of Maryland law. Failure to meet the system-wide target will result in review of each unit's adjusted actual generating performance versus its performance target in determining compliance with the law and the basis for possibly imposing a penalty on BGE. Parties to fuel rate hearings may still question the prudence of BGE's actions or inactions with respect to any given generating plant outage, which could result in the disallowance of replacement energy costs by the PSC. Since the two units at BGE's Calvert Cliffs Nuclear Power Plant utilize BGE's lowest cost fuel, replacement energy costs associated with outages at these units can be significant. BGE cannot estimate the amount of replacement energy costs that could be challenged or disallowed in future fuel rate proceedings, but such amounts could be material. In October 1988, BGE filed its first fuel rate application for a change in its electric fuel rate under the GUPP program. The resultant case before the PSC covers BGE's operating performance in calendar year 1987, and BGE's filing demonstrated that it met the system-wide and individual nuclear plant performance targets for 1987. In November 1989, testimony was filed on behalf of Maryland People's Counsel alleging that seven outages 53 Baltimore Gas and Electric Company and Subsidiaries at the Calvert Cliffs plant in 1987 were due to management imprudence and that the replacement energy costs associated with those outages should be disallowed by the PSC. Total replacement energy costs associated with the 1987 outages were approximately $33 million. On January 23, 1995, the Hearing Examiner issued his decision in the 1987 fuel rate proceeding and found that the Company had met the GUPP standard which establishes a presumption that BGE had operated the Plant at a reasonably productive capacity level. However, the Order found that the presumption of reasonableness would be overcome by a showing of mismanagement and that such a showing was made with respect to the environmental qualifications outage time. In mitigation for meeting the GUPP standard, the Hearing Examiner disallowed replacement energy costs recovery for 15.5 days of the 66-day outage time. The Hearing Examiner's Order was appealed to the PSC by both BGE and People's Counsel. If the PSC upholds the Hearing Examiner, the Company's earnings would be impacted by approximately $4.5 million. In May 1989, BGE filed its fuel rate case in which 1988 performance was to be examined. BGE met the system-wide and nuclear plant performance targets in 1988. People's Counsel alleges that BGE imprudently managed several outages at Calvert Cliffs, and BGE estimates that the total replacement energy costs associated with these 1988 outages were approximately $2 million. On November 14, 1991, a Hearing Examiner at the PSC issued a proposed Order, which became final on December 17, 1991 and concluded that no disallowance was warranted. The Hearing Examiner found that BGE maintained the productive capacity of the Plant at a reasonable level, noting that it produced a near record amount of power and exceeded the GUPP standard. Based on this record, the Order concluded there was sufficient cause to excuse any avoidable failures to maintain productive capacity at higher levels. During 1989, 1990, and 1991, BGE experienced extended outages at its Calvert Cliffs Nuclear Power Plant. In the Spring of 1989, a leak was discovered around the Unit 2 pressurizer heater sleeves during a refueling outage. BGE shut down Unit 1 as a precautionary measure on May 6, 1989 to inspect for similar leaks and none were found. However, Unit 1 was out of service for the remainder of 1989 and 285 days of 1990 to undergo maintenance and modification work to enhance the reliability of various safety systems, to repair equipment, and to perform required periodic surveillance tests. Unit 2, which returned to service on May 4, 1991, remained out of service for the remainder of 1989, 1990, and the first part of 1991 to repair the pressurizer, perform maintenance and modification work, and complete the refueling. The replacement energy costs associated with these extended outages for both units at Calvert Cliffs, concluding with the return to service of Unit 2, is estimated to be $458 million. In a December 1990 Order issued by the PSC in a BGE base rate proceeding, the PSC found that certain operations and maintenance expenses incurred at Calvert Cliffs during the test year should not be recovered from ratepayers. The PSC found that this work, which was performed during the 1989-1990 Unit 1 outage and fell within the test year, was avoidable and caused by BGE actions which were deficient. The Commission noted in the Order that its review and findings on these issues pertain to the reasonableness of BGE's test-year operations and maintenance expenses for purposes of setting base rates and not to the responsibility for replacement power costs associated with the outages at Calvert Cliffs. The PSC stated that its decision in the base rate case will have no res judicata (binding) effect in the fuel rate proceeding examining the 1989-1991 outages. The work characterized as avoidable significantly increased the duration of the Unit 1 outage. Despite the PSC's statement regarding no binding effect, BGE recognizes that the views expressed by the PSC make the full recovery of all of the replacement energy costs associated with the Unit 1 outage doubtful. Therefore, in December 1990, BGE recorded a provision of $35 million against the possible disallowance of such costs. BGE cannot determine whether replacement energy costs may be disallowed in the present fuel rate proceedings in excess of the provision, but such amounts could be material. Note 13. Fair Value of Financial Instruments The following table presents the carrying amounts and fair values of financial instruments included in the Consolidated Balance Sheets.
At December 31, 1995 1994 Carrying Fair Carrying Fair Amount Value Amount Value (In thousands) Cash and cash equivalents $ 23,443 $ 23,443 $ 38,590 $ 38,590 Net accounts receivable 400,005 400,005 314,842 314,842 Other current assets 54,070 54,070 29,344 29,344 Investments and other assets for which it is: Practicable to estimate fair value 149,645 150,170 138,978 137,782 Not practicable to estimate fair value 73,042 --- 69,514 --- Short-term borrowings 279,305 279,305 64,205 64,205 Current portions of long-term debt and preference stock 146,969 146,969 323,675 323,675 Accounts payable 177,092 177,092 181,931 181,931 Other current liabilities 193,992 193,992 191,121 191,121 Long-term debt 2,598,254 2,694,858 2,584,932 2,417,625 Redeemable preference stock 242,000 254,809 279,500 281,478
54 Baltimore Gas and Electric Company and Subsidiaries Financial instruments included in other current assets include trading securities and miscellaneous loans receivable of the Constellation Companies. Financial instruments included in other current liabilities represent total current liabilities from the Consolidated Balance Sheets excluding short-term borrowings, current portions of long-term debt and preference stock, accounts payable, and accrued vacation costs. The carrying amount of current assets and current liabilities approximates fair value because of the short maturity of these instruments. Investments and other assets include investments in common and preferred securities, which are classified as financial investments in the Consolidated Balance Sheets, and the nuclear decommissioning trust fund. The fair value of investments and other assets is based on quoted market prices where available. It was not practicable to estimate the fair value of the Constellation Companies' investments in 23 financial partnerships which invest in nonpublic debt and equity securities or investments in four partnerships which own solar powered energy production facilities because the timing and magnitude of cash flows from these investments are difficult to predict. These investments are carried at their original cost in the Consolidated Balance Sheets. The investments in financial partnerships totaled $50 million and $47 million at December 31, 1995 and 1994, respectively, representing ownership interests up to 10%. The aggregate assets of these partnerships totaled $6.3 billion at December 31, 1994. The investments in solar powered energy production facility partnerships totaled $23 million at December 31, 1995 and 1994, representing ownership interests up to 12%. The aggregate assets of these partnerships totaled $83 million at December 31, 1994. The fair value of fixed-rate long-term debt and redeemable preference stock is estimated using quoted market prices where available or by discounting remaining cash flows at the current market rate. The carrying amount of variable-rate long-term debt approximates fair value. BGE and the Constellation Companies have loan guarantees on outstanding indebtedness totaling $22 million and $35 million, respectively, at December 31, 1995 and $23.3 million and $17.0 million, respectively, at December 31, 1994 for which it is not practicable to determine fair value. It is not anticipated that these loan guarantees will need to be funded. Note 14. Quarterly Financial Data (Unaudited) The following data are unaudited but, in the opinion of Management, include all adjustments necessary for a fair presentation. BGE's utility business is seasonal in nature with the peak sales periods generally occurring during the summer and winter months. Accordingly, comparisons among quarters of a year may not be indicative of overall trends and changes in operations.
Quarter Ended Year Ended March 31 June 30 September 30 December 31 December 31 - ------------------------------------------------------------------------------------------------------------------------------ (In thousands, except per-share amounts) 1995 Revenues $717,806 $642,500 $848,781 $725,712 $2,934,799 Income from operations 148,222 120,920 299,744 126,806 695,692 Net income 70,854 50,889 163,335 52,929 338,007 Earnings applicable to common stock 60,902 40,937 153,104 42,486 297,429 Earnings per share of common stock 0.41 0.28 1.04 0.29 2.02 ============================================================================================================================== 1994 Revenues $767,686 $651,152 $753,878 $610,269 $2,782,985 Income from operations 162,559 136,778 232,472 103,450 635,259 Net income 82,145 66,708 126,616 48,148 323,617 Earnings applicable to common stock 72,114 56,687 116,714 38,180 283,695 Earnings per share of common stock 0.49 0.39 0.79 0.26 1.93 ==============================================================================================================================
Results for the first quarter of 1994 reflect a $10.0 million one-time bonus paid to employees in lieu of a general increase. Results for the third quarters of 1995 and 1994 reflect the $9.7 and $11.0 million write-offs, respectively, of certain Perryman costs (see Note 1). Certain prior-quarter amounts have been reclassified to conform with the current presentation. 55 Baltimore Gas and Electric Company and Subsidiaries ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item with respect to directors is set forth on pages 2 through 4 under "Item 1. Election of 14 Directors" in the Proxy Statement and is incorporated herein by reference. The information required by this item with respect to executive officers is, pursuant to instruction 3 of paragraph (b) of Item 401 of Regulation S-K, set forth in Item 10 of Part I of this Form 10-K under "Executive Officers of the Registrant." ITEM 11. EXECUTIVE COMPENSATION The information required by this item is set forth on pages 7 through 14 under "Item 1. Election of 14 Directors -- Compensation of Executive Officers by the Company" in the Proxy Statement and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is set forth on page 6 under "Item 1. Election of 14 Directors -- Security Ownership of Directors and Executive Officers" in the Proxy Statement and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is set forth on page 5 under "Item 1. Election of 14 Directors -- Certain Relationships and Transactions" in the Proxy Statement and is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as a part of this Report: 1. Financial Statements: Auditors' Report dated January 19, 1996 of Coopers & Lybrand L.L.P., Independent Accountants Consolidated Statements of Income for three years ended December 31, 1995 Consolidated Balance Sheets at December 31, 1995 and December 31, 1994 Consolidated Statements of Cash Flows for three years ended December 31, 1995 Consolidated Statements of Common Shareholders' Equity for three years ended December 31, 1995 Consolidated Statements of Capitalization at December 31, 1995 and December 31, 1994 Consolidated Statements of Income Taxes for three years ended December 31, 1995 Notes to Consolidated Financial Statements 2. Financial Statement Schedules: Schedule II -- Valuation and Qualifying Accounts Schedules other than those listed above are omitted as not applicable or not required. 3. Exhibits Required by Item 601 of Regulation S-K Including Each Management Contract or Compensatory Plan or Arrangement Required to be Filed as an Exhibit. 56
EXHIBIT NUMBER *2(a) -- Agreement and Plan of Merger dated as of September 22, 1995, by and among Baltimore Gas and Electric Company, Potomac Electric Power Company, and RH Acquisition Corp. (Designated as Exhibit A in the Joint Proxy Statement of Baltimore Gas and Electric Company and Potomac Electric Power Company, which was filed as part of Form S-4 of Constellation Energy Corporation, as amended, which became effective February 9, 1996, Registration No. 33-64799.) *2(b) -- BGE Stock Option Agreement dated as of September 22, 1995, by and between Baltimore Gas and Electric Company and Potomac Electric Power Company. (Designated as Exhibit B1 in the Joint Proxy Statement of Baltimore Gas and Electric Company and Potomac Electric Power Company, which was filed as part of Form S-4 of Constellation Energy Corporation, as amended, which became effective February 9, 1996, Registration No. 33-64799.) *2(c) -- PEPCO Stock Option Agreement dated as of September 22, 1995, by and between Baltimore Gas and Electric Company and Potomac Electric Power Company. (Designated as Exhibit B2 in the Joint Proxy Statement of Baltimore Gas and Electric Company and Potomac Electric Power Company, which was filed as part of Form S-4 of Constellation Energy Corporation, as amended, which became effective February 9, 1996, Registration No. 33-64799.) *2(d) -- Registration Statement on Form S-4 of Constellation Energy Corporation, as amended, which became effective February 9, 1996, Registration No. 33-64799. *3(a) -- Charter of BGE, restated as of April 25, 1995. (Designated as Exhibit No. 3(a) in Form 10-Q dated May 11, 1995, File No. 1-1910.) *3(b) -- Articles Supplementary, dated as of September 5, 1995, to the Charter of BGE. (Designated as Exhibit No. 3 in Form 10-Q dated November 13, 1995, File No. 1-1910.) *3(c) -- By-Laws of BGE, as amended to April 18, 1995. (Designated as Exhibit No. 3(b) in Form 10-Q dated May 11, 1995, File No. 1-1910.) *4(a) -- Supplemental Indenture between BGE and Bankers Trust Company, as Trustee, dated as of June 20, 1995, supplementing, amending and restating Deed of Trust dated February 1, 1919. (Designated as Exhibit No. 4 in Form 10-Q dated August 11, 1995, File No. 1-1910.); and the following Supplemental Indentures between BGE and Bankers Trust Company, Trustee:
DESIGNATED IN EXHIBIT DATED FILE NO. NUMBER *April 15, 1966 2-26278 4-3 *August 1, 1967 1-1910 (Form 10-K Annual Report for 1967) D-1 *July 1, 1972 2-45452 2-3 *July 15, 1977 2-59772 2-3 (3 Indentures) *October 15, 1989 1-1910 (Form 10-Q dated November 14, 1989) 4(a) *August 15, 1991 33-45259 (Form S-3 Registration) 4(a)(i) *January 15, 1992 33-45259 (Form S-3 Registration) 4(a)(ii) *July 1, 1992 1-1910 (Form 8-K Report for January 29, 1993) 4(a) *February 15, 1993 1-1910 (Form 10-K Annual Report for 1992) 4(a)(i) *March 1, 1993 1-1910 (Form 10-K Annual Report for 1992) 4(a)(ii) *March 15, 1993 1-1910 (Form 10-K Annual Report for 1992) 4(a)(iii) *April 15, 1993 1-1910 (Form 10-Q dated May 13, 1993) 4 *July 1, 1993 1-1910 (Form 10-Q dated August 13, 1993) 4(a) *July 15, 1993 1-1910 (Form 10-Q dated August 13, 1993) 4(b) *October 15, 1993 1-1910 (Form 10-Q dated November 12, 1993) 4 *March 15, 1994 1-1910 (Form 10-K Annual Report for 1993) 4(a)
*4(b) -- Indenture dated July 1, 1985, between BGE and The Bank of New York (Successor to Mercantile- Safe Deposit and Trust Company), Trustee. (Designated in Registration File No. 2-98443 as Exhibit 4(a)); as supplemented by Supplemental Indentures dated as of October 1, 1987 (Designated in Form 8-K, dated November 13, 1987, File No. 1-1910 as Exhibit 4(a)) and as of January 26, 1993 (Designated in Form 8-K, dated January 29, 1993, File No. 1-1910 as Exhibit 4(b).) *10(a) -- Baltimore Gas and Electric Company Executive Benefits Plan, as amended and restated. (Designated as Exhibit No. 10 in Form 10-Q dated August 11, 1995, File No. 1-1910.) *10(b) -- Executive Incentive Plan of the Baltimore Gas and Electric Company. (Designated as Exhibit No. 10(b) to the Annual Report on Form 10-K for the year ended December 31, 1992, File No. 1-1910.)
57 *10(c) -- Baltimore Gas and Electric Company 1995 Long-Term Incentive Plan. (Designated as Exhibit No. 10(c) to the Annual Report on Form 10-K for the year ended December 31, 1994, File No. 1-1910.) *10(d) -- Baltimore Gas and Electric Company Non-qualified Deferred Compensation Plan for Executive Officers. (Designated as Exhibit No. 10(d) to the Annual Report on Form 10-K for the year ended December 31, 1992, File No. 1-1910.) *10(e) -- Baltimore and Gas and Electric Company Non-qualified Deferred Compensation Plan for Non-Employee Directors (formerly Baltimore Gas and Electric Company Deferred Compensation Plan for Non-Employee Directors). (Designated as Exhibit No. 10(f) to the Annual Report on Form 10-K for the year ended December 31, 1993, File No. 1-1910.) *10(f) -- Baltimore Gas and Electric Company Retirement Plan for Non-Employee Directors, as amended and restated. (Designated as Exhibit No. 10(f) to the Annual Report on Form 10-K for the year ended December 31, 1994, File No. 1-1910.) *10(g) -- Summary of Baltimore Gas and Electric Company Long Term Performance Program. (Designated as Exhibit No. 10(h) to the Annual Report on Form 10-K for the year ended December 31, 1993, File No. 1-1910.) *10(h) -- Grantor Trust Agreement Dated as of July 31, 1994 between Baltimore Gas and Electric Company and Citibank, N.A. (Designated as Exhibit No. 10(h) to the Annual Report on Form 10-K for the year ended December 31, 1994, File No. 1-1910.) *10(i) -- Constellation Holdings, Inc., Summary of Amended Executive Benefits Plan. (Designated as Exhibit No. 10(i) to the Annual Report on Form 10-K for the year ended December 31, 1994, File No. 1-1910.) *10(j) -- Summary of Constellation Holdings, Inc. Annual Incentive Plan. (Designated as Exhibit No. 10(g) to the Annual Report on Form 10-K for the year ended December 31, 1992, File No. 1-1910.) *10(k) -- Amended Summary 1992 Long Term Incentive Plan of Constellation Holdings, Inc. (Designated as Exhibit No. 10(k) to the Annual Report on Form 10-K for the year ended December 31, 1993, File No. 1-1910.) *10(l) -- Summary 1994-96 Long Term Incentive Plan of Constellation Holdings, Inc. (Designated as Exhibit No. 10(l) to the Annual Report on Form 10-K for the year ended December 31, 1994, File No. 1-1910.) *10(m) -- Employment Agreement of Christian H. Poindexter. (Designated as Exhibit C2 in the Joint Proxy Statement of Baltimore Gas and Electric Company and Potomac Electric Power Company, which was filed as part of Form S-4 of Constellation Energy Corporation, as amended, which became effective February 9, 1996, Registration No. 33-64799.) *10(n) -- Employment Agreement of Edward A. Crooke. (Designated as Exhibit C3 in the Joint Proxy Statement of Baltimore Gas and Electric Company and Potomac Electric Power Company, which was filed as part of Form S-4 of Constellation Energy Corporation, as amended, which became effective February 9, 1996, Registration No. 33-64799.) 10(o) -- Severance Agreements between BGE and 15 key employees. 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. 21 -- Subsidiaries of the Registrant. 23 -- Consent of Coopers & Lybrand L.L.P., Independent Accountants. 27 -- Financial Data Schedule. *99(a) -- Indemnification of Directors and Officers of the Company. (Designated as Exhibit No. 28(a) to the Annual Report on Form 10-K for the year ended December 31, 1988, File No. 1-1910.) *99(b) -- Corporations and Associations Article, Section 2-418 of the Annotated Code of Maryland. (Designated as Exhibit 28(b) to the Annual Report on Form 10-K for the year ended December 31, 1987, File No. 1-1910.)
*Incorporated by Reference. (b) Reports on Form 8-K: None. 58 BALTIMORE GAS AND ELECTRIC COMPANY AND SUBSIDIARIES SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
COLUMN C COLUMN B ADDITIONS BALANCE CHARGED COLUMN E AT TO BALANCE BEGINNING COSTS CHARGED TO OTHER COLUMN D AT END COLUMN A OF AND ACCOUNTS -- (DEDUCTIONS) -- OF DESCRIPTION PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD (IN THOUSANDS) Reserves deducted in the Balance Sheet from the assets to which they apply: Accumulated Provision for Uncollectibles 1995.................................... $14,960 $19,170 $ -- $(17,740) $16,390 1994.................................... 13,957 20,557 -- (19,554)(A) 14,960 1993.................................... 12,484 19,155 -- (17,682)(A) 13,957 Valuation Allowance -- Net unrealized (gain) loss on available for sale securities 1995.................................... 5,609 -- (14,010)(B) -- (8,401 ) 1994.................................... -- -- 5,609(B) -- 5,609 1993.................................... -- -- -- -- -- Provision for possible disallowance of replacement energy costs 1995.................................... 35,000 -- -- -- 35,000 1994.................................... 35,000 -- -- -- 35,000 1993.................................... 35,000 -- -- -- 35,000 Loan loss reserve 1995.................................... -- -- -- -- -- 1994.................................... 5,123 -- -- (5,123)(C) -- 1993.................................... 4,382 741 -- -- 5,123 Energy projects under development reserves 1995.................................... 1,806 -- -- (1,504)(D) 302 1994.................................... 1,778 28 -- -- 1,806 1993.................................... 492 1,286 -- -- 1,778
(A) Represents principally net amounts charged off as uncollectible. (B) Represents net unrealized (gains)/losses (credited)/charged to common shareholders' equity. (C) Represents reversal of loan loss reserve due to reclassification of this amount as part of the purchase price of certain real estate partnership interests. (D) Represents removal of a reserve associated with an energy project of a subsidiary which was abandoned. 59 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Baltimore Gas and Electric Company, 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) By /s/ C. H. POINDEXTER Date: March 15, 1996 C. H. POINDEXTER CHAIRMAN OF THE BOARD Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of Baltimore Gas and Electric Company, the Registrant, and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE Principal executive officer and director: By /s/ C. H. POINDEXTER Chairman of the Board and Director March 15, 1996 C. H. POINDEXTER Principal financial and accounting officer: By /s/ C. W. SHIVERY Vice President and Secretary March 15, 1996 C. W. SHIVERY Directors: /s/ H. F. BALDWIN Director March 15, 1996 H. F. BALDWIN /s/ B. B. BYRON Director March 15, 1996 B. B. BYRON /s/ J. O. COLE Director March 15, 1996 J. O. COLE /s/ D. A. COLUSSY Director March 15, 1996 D. A. COLUSSY /s/ E. A. CROOKE Director March 15, 1996 E. A. CROOKE /s/ J. R. CURTISS Director March 15, 1996 J. R. CURTISS /s/ J. W. GECKLE Director March 15, 1996 J. W. GECKLE /s/ M. L. GRASS Director March 15, 1996 M. L. GRASS
60 /s/ F. A. HRABOWSKI III Director March 15, 1996 F. A. HRABOWSKI III /s/ N. LAMPTON Director March 15, 1996 N. LAMPTON /s/ G. V. MCGOWAN Director March 15, 1996 G. V. MCGOWAN /s/ G. L. RUSSELL, JR. Director March 15, 1996 G. L. RUSSELL, JR. /s/ M. D. SULLIVAN Director March 15, 1996 M. D. SULLIVAN
61 EXHIBIT INDEX
EXHIBIT NUMBER *2(a) -- Agreement and Plan of Merger dated as of September 22, 1995, by and among Baltimore Gas and Electric Company, Potomac Electric Power Company, and RH Acquisition Corp. (Designated as Exhibit A in the Joint Proxy Statement of Baltimore Gas and Electric Company and Potomac Electric Power Company, which was filed as part of Form S-4 of Constellation Energy Corporation, as amended, which became effective February 9, 1996, Registration No. 33-64799.) *2(b) -- BGE Stock Option Agreement dated as of September 22, 1995, by and between Baltimore Gas and Electric Company and Potomac Electric Power Company. (Designated as Exhibit B1 in the Joint Proxy Statement of Baltimore Gas and Electric Company and Potomac Electric Power Company, which was filed as part of Form S-4 of Constellation Energy Corporation, as amended, which became effective February 9, 1996, Registration No. 33-64799.) *2(c) -- PEPCO Stock Option Agreement dated as of September 22, 1995, by and between Baltimore Gas and Electric Company and Potomac Electric Power Company. (Designated as Exhibit B2 in the Joint Proxy Statement of Baltimore Gas and Electric Company and Potomac Electric Power Company, which was filed as part of Form S-4 of Constellation Energy Corporation, as amended, which became effective February 9, 1996, Registration No. 33-64799.) *2(d) -- Registration Statement on Form S-4 of Constellation Energy Corporation, as amended, which became effective February 9, 1996, Registration No. 33-64799. *3(a) -- Charter of BGE, restated as of April 25, 1995. (Designated as Exhibit No. 3(a) in Form 10-Q dated May 11, 1995, File No. 1-1910.) *3(b) -- Articles Supplementary, dated as of September 5, 1995, to the Charter of BGE. (Designated as Exhibit No. 3 in Form 10-Q dated November 13, 1995, File No. 1-1910.) *3(c) -- By-Laws of BGE, as amended to April 18, 1995. (Designated as Exhibit No. 3(b) in Form 10-Q dated May 11, 1995, File No. 1-1910.) *4(a) -- Supplemental Indenture between BGE and Bankers Trust Company, as Trustee, dated as of June 20, 1995, supplementing, amending and restating Deed of Trust dated February 1, 1919. (Designated as Exhibit No. 4 in Form 10-Q dated August 11, 1995, File No. 1-1910.); and the following Supplemental Indentures between BGE and Bankers Trust Company, Trustee:
DESIGNATED IN EXHIBIT DATED FILE NO. NUMBER *April 15, 1966 2-26278 4-3 *August 1, 1967 1-1910 (Form 10-K Annual Report for 1967) D-1 *July 1, 1972 2-45452 2-3 *July 15, 1977 2-59772 2-3 (3 Indentures) *October 15, 1989 1-1910 (Form 10-Q dated November 14, 1989) 4(a) *August 15, 1991 33-45259 (Form S-3 Registration) 4(a)(i) *January 15, 1992 33-45259 (Form S-3 Registration) 4(a)(ii) *July 1, 1992 1-1910 (Form 8-K Report for January 29, 1993) 4(a) *February 15, 1993 1-1910 (Form 10-K Annual Report for 1992) 4(a)(i) *March 1, 1993 1-1910 (Form 10-K Annual Report for 1992) 4(a)(ii) *March 15, 1993 1-1910 (Form 10-K Annual Report for 1992) 4(a)(iii) *April 15, 1993 1-1910 (Form 10-Q dated May 13, 1993) 4 *July 1, 1993 1-1910 (Form 10-Q dated August 13, 1993) 4(a) *July 15, 1993 1-1910 (Form 10-Q dated August 13, 1993) 4(b) *October 15, 1993 1-1910 (Form 10-Q dated November 12, 1993) 4 *March 15, 1994 1-1910 (Form 10-K Annual Report for 1993) 4(a)
*4(b) -- Indenture dated July 1, 1985, between BGE and The Bank of New York (Successor to Mercantile- Safe Deposit and Trust Company), Trustee. (Designated in Registration File No. 2-98443 as Exhibit 4(a)); as supplemented by Supplemental Indentures dated as of October 1, 1987 (Designated in Form 8-K, dated November 13, 1987, File No. 1-1910 as Exhibit 4(a)) and as of January 26, 1993 (Designated in Form 8-K, dated January 29, 1993, File No. 1-1910 as Exhibit 4(b).) *10(a) -- Baltimore Gas and Electric Company Executive Benefits Plan, as amended and restated. (Designated as Exhibit No. 10 in Form 10-Q dated August 11, 1995, File No. 1-1910.)
62 *10(b) -- Executive Incentive Plan of the Baltimore Gas and Electric Company. (Designated as Exhibit No. 10(b) to the Annual Report on Form 10-K for the year ended December 31, 1992, File No. 1-1910.) *10(c) -- Baltimore Gas and Electric Company 1995 Long-Term Incentive Plan. (Designated as Exhibit No. 10(c) to the Annual Report on Form 10-K for the year ended December 31, 1994, File No. 1-1910.) *10(d) -- Baltimore Gas and Electric Company Non-qualified Deferred Compensation Plan for Executive Officers. (Designated as Exhibit No. 10(d) to the Annual Report on Form 10-K for the year ended December 31, 1992, File No. 1-1910.) *10(e) -- Baltimore and Gas and Electric Company Non-qualified Deferred Compensation Plan for Non-Employee Directors (formerly Baltimore Gas and Electric Company Deferred Compensation Plan for Non-Employee Directors). (Designated as Exhibit No. 10(f) to the Annual Report on Form 10-K for the year ended December 31, 1993, File No. 1-1910.) *10(f) -- Baltimore Gas and Electric Company Retirement Plan for Non-Employee Directors, as amended and restated. (Designated as Exhibit No. 10(f) to the Annual Report on Form 10-K for the year ended December 31, 1994, File No. 1-1910.) *10(g) -- Summary of Baltimore Gas and Electric Company Long Term Performance Program. (Designated as Exhibit No. 10(h) to the Annual Report on Form 10-K for the year ended December 31, 1993, File No. 1-1910.) *10(h) -- Grantor Trust Agreement Dated as of July 31, 1994 between Baltimore Gas and Electric Company and Citibank, N.A. (Designated as Exhibit No. 10(h) to the Annual Report on Form 10-K for the year ended December 31, 1994, File No. 1-1910.) *10(i) -- Constellation Holdings, Inc., Summary of Amended Executive Benefits Plan. (Designated as Exhibit No. 10(i) to the Annual Report on Form 10-K for the year ended December 31, 1994, File No. 1-1910.) *10(j) -- Summary of Constellation Holdings, Inc. Annual Incentive Plan. (Designated as Exhibit No. 10(g) to the Annual Report on Form 10-K for the year ended December 31, 1992, File No. 1-1910.) *10(k) -- Amended Summary 1992 Long Term Incentive Plan of Constellation Holdings, Inc. (Designated as Exhibit No. 10(k) to the Annual Report on Form 10-K for the year ended December 31, 1993, File No. 1-1910.) *10(l) -- Summary 1994-96 Long Term Incentive Plan of Constellation Holdings, Inc. (Designated as Exhibit No. 10(l) to the Annual Report on Form 10-K for the year ended December 31, 1994, File No. 1-1910.) *10(m) -- Employment Agreement of Christian H. Poindexter. (Designated as Exhibit C2 in the Joint Proxy Statement of Baltimore Gas and Electric Company and Potomac Electric Power Company, which was filed as part of Form S-4 of Constellation Energy Corporation, as amended, which became effective February 9, 1996, Registration No. 33-64799.) *10(n) -- Employment Agreement of Edward A. Crooke. (Designated as Exhibit C3 in the Joint Proxy Statement of Baltimore Gas and Electric Company and Potomac Electric Power Company, which was filed as part of Form S-4 of Constellation Energy Corporation, as amended, which became effective February 9, 1996, Registration No. 33-64799.) 10(o) -- Severance Agreements between BGE and 15 key employees. 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. 21 -- Subsidiaries of the Registrant. 23 -- Consent of Coopers & Lybrand L.L.P., Independent Accountants. 27 -- Financial Data Schedule. *99(a) -- Indemnification of Directors and Officers of the Company. (Designated as Exhibit No. 28(a) to the Annual Report on Form 10-K for the year ended December 31, 1988, File No. 1-1910.) *99(b) -- Corporations and Associations Article, Section 2-418 of the Annotated Code of Maryland. (Designated as Exhibit 28(b) to the Annual Report on Form 10-K for the year ended December 31, 1987, File No. 1-1910.)
*Incorporated by Reference. 63 EX-10 2 EXHIBIT 10(O) MATERIAL CONTRACTS SEVERANCE AGREEMENT This Agreement is made the 6th day of December, 1995, by and between BALTIMORE GAS AND ELECTRIC COMPANY (the "Company") and BRUCE M. AMBLER (the "Executive"). For purposes of Sections 1 through 11 of this Agreement the term "Company" shall be deemed to include any successor company, and where applicable, shall be deemed to include Constellation Holdings, Inc. or any successor company. WHEREAS, Potomac Electric Power Company ("PEPCO") and the Company have entered into an Agreement and Plan of Merger dated as of September 22, 1995 (the "Merger Agreement"), whereby PEPCO and the Company will merge into RH Acquisition Corp. ("RH"), with RH as the surviving entity; and WHEREAS, the Company desires to establish a severance benefit for the Executive covering the period from the date hereof through the Effective Time (as hereinafter defined) and for the twenty-four month period following the Effective Time in the event the Merger (as hereinafter defined) occurs, to avoid the loss or the serious distraction of the Executive to the detriment of the Company and its stockholders during such periods when the Executive's undivided attention and commitment to the needs of the Company would be particularly important; and WHEREAS, the Executive desires to devote his time and energy for the benefit of the Company and its stockholders and not to be distracted during the Merger. NOW, THEREFORE, the parties agree as follows: 1. Definitions. 1.1 Merger. The term "Merger" shall have the meaning ascribed to such term in the Merger Agreement. 1.2 Effective Time. The term "Effective Time" shall have the meaning ascribed to such term in the Merger Agreement. 1.3 Qualifying Termination. (a) The occurrence of any one or more of the following events within twenty-four calendar months after the Effective Time shall constitute a "Qualifying Termination": (i) The Company's termination of the Executive's employment without Cause (as defined in Section 1.7); (ii) The Executive's resignation for Good Reason (as defined in Section 1.6); (iii) Failure or refusal by a successor company to assume the Company's obligations under this Agreement in its entirety, as required by Section 9 herein; or (iv) Commission by the Company of a material breach of any of the provisions of this Agreement. (b) A Qualifying Termination also shall include a termination of the Executive's employment, without Cause, from the date hereof, but prior to the Effective Time. (c) A Qualifying Termination shall not include a termination of employment by reason of death, disability, the Executive's voluntary termination of employment without Good Reason, or the Company's termination of the Executive's employment for Cause. 1.4 Ineligible to Retire. Ineligible to Retire, means an Executive who has not either (i) attained age 55 and completed 20 years of service with the Company and any successor company or (ii) attained age 60 and completed one year of service with the Company and any successor company, upon the occurrence of a Qualifying Termination. 1.5 Eligible to Retire. Eligible to Retire, means an Executive who has either (i) attained age 55 and completed 20 years of service with the Company and any successor company or (ii) attained age 60 with one year of service with the Company and any successor company, upon the occurrence of a Qualifying Termination. 1.6 Good Reason. Good Reason means, without the Executive's express written consent, the occurrence (i) after the Effective Time, or (ii) after the date hereof, but prior to the Effective Time, of any one or more of the following: (a) The assignment to the Executive of duties materially inconsistent with the Executive's authorities, duties, responsibilities, and status (including offices, title and reporting relationships) as an executive and/or officer of the Company, or a material reduction or alteration in the nature or status of the Executive's authorities, duties, or responsibilities from those in effect as of ninety days prior to the Effective Time (or, in the case of such an assignment, reduction or alteration after the date hereof, but prior to the Effective Time, ninety days prior to the date hereof), unless such act is remedied by the Company within 10 business days after receipt of written notice thereof given by the Executive; (b) A reduction by the Company of the Executive's base salary in effect at the Effective Time (or in the case of a reduction after the date hereof, but prior to the Effective Time, a reduction by the Company of the Executive's base salary in effect on the date hereof) or as the same shall be increased from time to time, unless such reduction is less than ten percent (10%) and it is either (i) replaced by an incentive opportunity equal in value; or is (ii) consistent and proportional with an overall reduction in management compensation due to extraordinary business conditions, including but not limited to reduced profitability and other financial stress (i.e., the base salary of the Executive will not be singled out for reduction in a manner inconsistent with a reduction imposed on other executives of the Company); (c) The relocation of the Executive's office more than 50 miles from the Executive's office at the Effective Time (or in the case of a relocation after the date hereof, but prior to the Effective Time, a relocation of the Executive's office more than 50 miles from the Executive's office on the date hereof). The Executive's right to terminate employment for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting Good Reason herein. 1.7 Cause. Cause shall mean the occurrence of any one or more of the following: (a) The Executive is convicted of a felony involving moral turpitude; or (b) The Executive engages in conduct or activities that constitutes disloyalty to the Company and such conduct or activities are materially damaging to the property, business or reputation of the Company; or (c) The Executive persistently fails or refuses to comply with any written direction of an authorized representative of the Company other than a directive constituting an assignment described in Section 1.6(a); or (d) The Executive embezzles or knowingly, and with intent, misappropriates property of the Company, or unlawfully appropriates any corporate opportunity of the Company. 1.8 Annual Award Amount. The average of the two highest annual incentive awards under the Company's Executive Incentive Plan (or the annual cash incentive plan maintained by a successor company) paid in the last five years to the Executive prior to the occurrence of the Qualifying Termination. 2. Severance Benefits for an Executive Ineligible to Retire. Upon the occurrence of a Qualifying Termination with respect to an Executive who is Ineligible to Retire: (a) Severance Payment: The Company shall pay to the Executive an amount equal to two and one-fourth times the Executive's annual base salary (as in effect on the date of the Qualifying Termination, not reduced by any reduction described in Section 1.6(b) above) and Annual Award Amount. The payment shall be made in twenty-four equal monthly installments beginning on the first day of the month following the Qualifying Termination. (b) Severance Health Benefits. For the thirty-six month period commencing on the occurrence of such Qualifying Termination, the Company shall provide to the Executive and the Executive's family medical and dental benefits as provided to other executive officers who remain employed by the Company. The Executive shall be required to make payments for such coverage in the same amount as is required of executive officers who remain employed by the Company. (c) Split Dollar. The Qualifying Termination shall not constitute a termination of the Split Dollar Agreement between the Company and the Executive (or the split dollar agreement between a successor company and the Executive), and the Executive shall be deemed to have retired upon such Qualifying Termination for purposes of such Split Dollar Agreement (or the split dollar agreement between a successor company and the Executive). 3. Severance Benefits for an Executive Eligible to Retire. Upon the occurrence of a Qualifying Termination with respect to an Executive who is Eligible to Retire: (a) Severance Payment: The Company shall pay to the Executive an amount equal to two times the Executive's annual base salary (as in effect on the date of the Qualifying Termination, not reduced by any reduction described in Section 1.6(b) above) and Annual Award Amount. The payment shall be made in twenty-four equal monthly installments beginning on the first day of the month following the Qualifying Termination. (b) Supplemental Retirement Benefits. For purposes of determining the Executive's supplemental retirement benefits which the Executive is entitled to under the Company's Executive Benefits Plan (or the supplemental retirement plan maintained by a successor company), the Early Retirement Adjustment Factor (as such term is defined in the Company's Pension Plan or within the meaning of the tax qualified retirement plan maintained by a successor company) will be one (1). (c) Severance Health Benefits. The Company shall provide to the Executive and the Executive's family medical and dental benefits on the same basis and on the same terms as any retiree who has attained age 65 and completed the greater of 20 years or actual years of service. (d) Retirement. The Executive shall be treated as having retired at the Company's request for purposes of all of the Company's benefit plans (or the benefit plans maintained by a successor company). 4. Code Section 28OG. 4.1 Limitations. Notwithstanding Section 2 and 3, in the event that a change in ownership or control (within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code")) of the Company occurs and the independent public accountants for the Company (the "Accountants") determine that if the benefits to be provided under Section 2 and 3 (together with any other benefits payable to the Executive under any applicable plan maintained by the Company) were paid to the Executive: (a) the Executive would incur an excise tax under Section 4999 of Code, and the Company would be denied a deduction under Section 280G of the Code of all or some of such amounts to be paid to the Executive, and (b) the net after tax benefits to the Executive attributable to payments under Sections 2 and 3 hereof would not be at least $10,000 greater than the net after tax benefits which would accrue to the Executive if the amounts which would otherwise cause the Executive to be subject to this excise tax were not paid, the amounts payable to the Executive pursuant to Section 2 and 3 (or pursuant to such other plans maintained by the Company) shall be reduced so that the amount payable to the Executive hereunder is the greatest amount (as determined by the Accountants) that may be paid by the Company to the Executive without any such amount being subject to an excise tax under Section 4999 or being nondeductible for the Company pursuant to Section 280G. 4.2 Executive's Election. If the amounts to be paid to the Executive are to be reduced under paragraph 4.1 of this Section, the Executive shall be given the opportunity to designate which benefits or payments shall be reduced and in what order of priority. 4.3 Later Adjustments. (a) If the Executive receives reduced payments or benefits pursuant to the preceding paragraph, or if it had been determined that no such reduction was required, but it nonetheless is established pursuant to the final determination of a court or an Internal Revenue Service proceeding that, notwithstanding the good faith of the Executive and the Company in applying the terms of this Section, the aggregate amount paid to the Executive or for his benefit would result in any amount being treated as an "excess parachute payment" for purposes of Sections 28OG and 4999 of the Code, then an amount equal to the amount that would be an "excess parachute payment" shall be deemed for all purposes a loan to the Executive made on the date of the receipt of such excess amount, which the Executive shall have an obligation to repay to the Company on demand, together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code) from the date of the Executive's receipt of such excess until the date of such repayment. (b) In the event that it is determined for any reason that the amount of "excess parachute payments" are less than originally calculated, the Company shall promptly pay to the Executive the amount necessary so that, after such adjustment, the Executive will have received or be entitled to receive the maximum payments payable under this Section without any of such payments constituting an "excess parachute payment," together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code). 5. Termination of Agreement. This Agreement shall remain in effect from the date hereof until the last day of the twenty-fourth calendar month following the Effective Time. Further, upon the Effective Time, this Agreement shall continue until the Company or its successor shall have fully performed all of its obligations thereunder with respect to the Executive, with no future performance being possible. Notwithstanding the foregoing, this Agreement shall terminate on the date the Company's Board of Directors decides by formal vote not to proceed with the Merger; provided, however, that in the event a Qualifying Termination occurs prior to such date, this Agreement shall continue until the Company or its successor shall have fully performed all of its obligations thereunder with respect to the Executive, with no further performance being possible. 6. Amendment of Agreement. Subject to the provisions of Section 5, this Agreement may not be amended in any manner which has a significant adverse effect on the rights of the Executive without the written consent of the Executive. Notwithstanding the foregoing, at and after the Effective Time, this Agreement may not be amended in any respect without the written consent of the Executive. 7. Construction. Wherever any words are used herein in the masculine gender they shall be construed as though they were also used in the feminine gender in all cases where they would so apply, and wherever any words are used herein in the singular form, they shall be construed as though they were also used in the plural form in all cases where they would so apply. 8. Governing Law. This Agreement shall be governed by the laws of Maryland. 9. Successors and Assigns. This Agreement shall be binding upon the Company and any assignee or successor in interest to the Company. 10. Indemnification. The Company will pay all reasonable fees and expenses, if any, (including, without limitation, legal fees and expenses) that are incurred by the Executive to enforce this Agreement and that result from a breach of this Agreement by the Company. 11. Notice. Any notices, requests, demands, or other communications provided for by this Agreement shall be sufficient if in writing and if sent by registered or certified mail to the Executive at the last address he has filed in writing with the Company, or in the case of the Company, to its principal offices. BALTIMORE GAS AND ELECTRIC COMPANY By: /s/ Jon M. Files Jon M. Files Vice President Management Services /s/ Bruce M. Ambler BRUCE M. AMBLER SEVERANCE AGREEMENT This Agreement is made the 6th day of December, 1995, by and between BALTIMORE GAS AND ELECTRIC COMPANY (the "Company") and THOMAS F. BRADY (the "Executive"). For purposes of Sections 1 through 11 of this Agreement the term "Company" shall be deemed to include any successor company. WHEREAS, Potomac Electric Power Company ("PEPCO") and the Company have entered into an Agreement and Plan of Merger dated as of September 22, 1995 (the "Merger Agreement"), whereby PEPCO and the Company will merge into RH Acquisition Corp. ("RH"), with RH as the surviving entity; and WHEREAS, the Company desires to establish a severance benefit for the Executive covering the period from the date hereof through the Effective Time (as hereinafter defined) and for the twenty-four month period following the Effective Time in the event the Merger (as hereinafter defined) occurs, to avoid the loss or the serious distraction of the Executive to the detriment of the Company and its stockholders during such periods when the Executive's undivided attention and commitment to the needs of the Company would be particularly important; and WHEREAS, the Executive desires to devote his time and energy for the benefit of the Company and its stockholders and not to be distracted during the Merger. NOW, THEREFORE, the parties agree as follows: 1. Definitions. 1.1 Merger. The term "Merger" shall have the meaning ascribed to such term in the Merger Agreement. 1.2 Effective Time. The term "Effective Time" shall have the meaning ascribed to such term in the Merger Agreement. 1.3 Qualifying Termination. (a) The occurrence of any one or more of the following events within twenty-four calendar months after the Effective Time shall constitute a "Qualifying Termination": (i) The Company's termination of the Executive's employment without Cause (as defined in Section 1.7); (ii) The Executive's resignation for Good Reason (as defined in Section 1.6); (iii) Failure or refusal by a successor company to assume the Company's obligations under this Agreement in its entirety, as required by Section 9 herein; or (iv) Commission by the Company of a material breach of any of the provisions of this Agreement. (b) A Qualifying Termination also shall include a termination of the Executive's employment, without Cause, from the date hereof, but prior to the Effective Time. (c) A Qualifying Termination shall not include a termination of employment by reason of death, disability, the Executive's voluntary termination of employment without Good Reason, or the Company's termination of the Executive's employment for Cause. 1.4 Ineligible to Retire. Ineligible to Retire, means an Executive who has not either (i) attained age 55 and completed 20 years of service with the Company and any successor company or (ii) attained age 60 and completed one year of service with the Company and any successor company, upon the occurrence of a Qualifying Termination. 1.5 Eligible to Retire. Eligible to Retire, means an Executive who has either (i) attained age 55 and completed 20 years of service with the Company and any successor company or (ii) attained age 60 with one year of service with the Company and any successor company, upon the occurrence of a Qualifying Termination. 1.6 Good Reason. Good Reason means, without the Executive's express written consent, the occurrence (i) after the Effective Time, or (ii) after the date hereof, but prior to the Effective Time, of any one or more of the following: (a) The assignment to the Executive of duties materially inconsistent with the Executive's authorities, duties, responsibilities, and status (including offices, title and reporting relationships) as an executive and/or officer of the Company, or a material reduction or alteration in the nature or status of the Executive's authorities, duties, or responsibilities from those in effect as of ninety days prior to the Effective Time (or, in the case of such an assignment, reduction or alteration after the date hereof, but prior to the Effective Time, ninety days prior to the date hereof), unless such act is remedied by the Company within 10 business days after receipt of written notice thereof given by the Executive; (b) A reduction by the Company of the Executive's base salary in effect at the Effective Time (or in the case of a reduction after the date hereof, but prior to the Effective Time, a reduction by the Company of the Executive's base salary in effect on the date hereof) or as the same shall be increased from time to time, unless such reduction is less than ten percent (10%) and it is either (i) replaced by an incentive opportunity equal in value; or is (ii) consistent and proportional with an overall reduction in management compensation due to extraordinary business conditions, including but not limited to reduced profitability and other financial stress (i.e., the base salary of the Executive will not be singled out for reduction in a manner inconsistent with a reduction imposed on other executives of the Company); (c) The relocation of the Executive's office more than 50 miles from the Executive's office at the Effective Time (or in the case of a relocation after the date hereof, but prior to the Effective Time, a relocation of the Executive's office more than 50 miles from the Executive's office on the date hereof). The Executive's right to terminate employment for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting Good Reason herein. 1.7 Cause. Cause shall mean the occurrence of any one or more of the following: (a) The Executive is convicted of a felony involving moral turpitude; or (b) The Executive engages in conduct or activities that constitutes disloyalty to the Company and such conduct or activities are materially damaging to the property, business or reputation of the Company; or (c) The Executive persistently fails or refuses to comply with any written direction of an authorized representative of the Company other than a directive constituting an assignment described in Section 1.6(a); or (d) The Executive embezzles or knowingly, and with intent, misappropriates property of the Company, or unlawfully appropriates any corporate opportunity of the Company. 1.8 Annual Award Amount. The average of the two highest annual incentive awards under the Company's Executive Incentive Plan (or the annual cash incentive plan maintained by a successor company) paid in the last five years to the Executive prior to the occurrence of the Qualifying Termination. 2. Severance Benefits for an Executive Ineligible to Retire. Upon the occurrence of a Qualifying Termination with respect to an Executive who is Ineligible to Retire: (a) Severance Payment: The Company shall pay to the Executive an amount equal to two and one-fourth times the Executive's annual base salary (as in effect on the date of the Qualifying Termination, not reduced by any reduction described in Section 1.6(b) above) and Annual Award Amount. The payment shall be made in twenty-four equal monthly installments beginning on the first day of the month following the Qualifying Termination. (b) Severance Health Benefits. For the thirty-six month period commencing on the occurrence of such Qualifying Termination, the Company shall provide to the Executive and the Executive's family medical and dental benefits as provided to other executive officers who remain employed by the Company. The Executive shall be required to make payments for such coverage in the same amount as is required of executive officers who remain employed by the Company. (c) Split Dollar. The Qualifying Termination shall not constitute a termination of the Split Dollar Agreement between the Company and the Executive (or the split dollar agreement between a successor company and the Executive), and the Executive shall be deemed to have retired upon such Qualifying Termination for purposes of such Split Dollar Agreement (or the split dollar agreement between a successor company and the Executive). 3. Severance Benefits for an Executive Eligible to Retire. Upon the occurrence of a Qualifying Termination with respect to an Executive who is Eligible to Retire: (a) Severance Payment: The Company shall pay to the Executive an amount equal to two times the Executive's annual base salary (as in effect on the date of the Qualifying Termination, not reduced by any reduction described in Section 1.6(b) above) and Annual Award Amount. The payment shall be made in twenty-four equal monthly installments beginning on the first day of the month following the Qualifying Termination. (b) Supplemental Retirement Benefits. For purposes of determining the Executive's supplemental retirement benefits which the Executive is entitled to under the Company's Executive Benefits Plan (or the supplemental retirement plan maintained by a successor company), the Early Retirement Adjustment Factor (as such term is defined in the Company's Pension Plan or within the meaning of the tax qualified retirement plan maintained by a successor company) will be one (1). (c) Severance Health Benefits. The Company shall provide to the Executive and the Executive's family medical and dental benefits on the same basis and on the same terms as any retiree who has attained age 65 and completed the greater of 20 years or actual years of service. (d) Retirement. The Executive shall be treated as having retired at the Company's request for purposes of all of the Company's benefit plans (or the benefit plans maintained by a successor company). 4. Code Section 28OG. 4.1 Limitations. Notwithstanding Section 2 and 3, in the event that a change in ownership or control (within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code")) of the Company occurs and the independent public accountants for the Company (the "Accountants") determine that if the benefits to be provided under Section 2 and 3 (together with any other benefits payable to the Executive under any applicable plan maintained by the Company) were paid to the Executive: (a) the Executive would incur an excise tax under Section 4999 of Code, and the Company would be denied a deduction under Section 280G of the Code of all or some of such amounts to be paid to the Executive, and (b) the net after tax benefits to the Executive attributable to payments under Sections 2 and 3 hereof would not be at least $10,000 greater than the net after tax benefits which would accrue to the Executive if the amounts which would otherwise cause the Executive to be subject to this excise tax were not paid, the amounts payable to the Executive pursuant to Section 2 and 3 (or pursuant to such other plans maintained by the Company) shall be reduced so that the amount payable to the Executive hereunder is the greatest amount (as determined by the Accountants) that may be paid by the Company to the Executive without any such amount being subject to an excise tax under Section 4999 or being nondeductible for the Company pursuant to Section 280G. 4.2 Executive's Election. If the amounts to be paid to the Executive are to be reduced under paragraph 4.1 of this Section, the Executive shall be given the opportunity to designate which benefits or payments shall be reduced and in what order of priority. 4.3 Later Adjustments. (a) If the Executive receives reduced payments or benefits pursuant to the preceding paragraph, or if it had been determined that no such reduction was required, but it nonetheless is established pursuant to the final determination of a court or an Internal Revenue Service proceeding that, notwithstanding the good faith of the Executive and the Company in applying the terms of this Section, the aggregate amount paid to the Executive or for his benefit would result in any amount being treated as an "excess parachute payment" for purposes of Sections 28OG and 4999 of the Code, then an amount equal to the amount that would be an "excess parachute payment" shall be deemed for all purposes a loan to the Executive made on the date of the receipt of such excess amount, which the Executive shall have an obligation to repay to the Company on demand, together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code) from the date of the Executive's receipt of such excess until the date of such repayment. (b) In the event that it is determined for any reason that the amount of "excess parachute payments" are less than originally calculated, the Company shall promptly pay to the Executive the amount necessary so that, after such adjustment, the Executive will have received or be entitled to receive the maximum payments payable under this Section without any of such payments constituting an "excess parachute payment," together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code). 5. Termination of Agreement. This Agreement shall remain in effect from the date hereof until the last day of the twenty-fourth calendar month following the Effective Time. Further, upon the Effective Time, this Agreement shall continue until the Company or its successor shall have fully performed all of its obligations thereunder with respect to the Executive, with no future performance being possible. Notwithstanding the foregoing, this Agreement shall terminate on the date the Company's Board of Directors decides by formal vote not to proceed with the Merger; provided, however, that in the event a Qualifying Termination occurs prior to such date, this Agreement shall continue until the Company or its successor shall have fully performed all of its obligations thereunder with respect to the Executive, with no further performance being possible. 6. Amendment of Agreement. Subject to the provisions of Section 5, this Agreement may not be amended in any manner which has a significant adverse effect on the rights of the Executive without the written consent of the Executive. Notwithstanding the foregoing, at and after the Effective Time, this Agreement may not be amended in any respect without the written consent of the Executive. 7. Construction. Wherever any words are used herein in the masculine gender they shall be construed as though they were also used in the feminine gender in all cases where they would so apply, and wherever any words are used herein in the singular form, they shall be construed as though they were also used in the plural form in all cases where they would so apply. 8. Governing Law. This Agreement shall be governed by the laws of Maryland. 9. Successors and Assigns. This Agreement shall be binding upon the Company and any assignee or successor in interest to the Company. 10. Indemnification. The Company will pay all reasonable fees and expenses, if any, (including, without limitation, legal fees and expenses) that are incurred by the Executive to enforce this Agreement and that result from a breach of this Agreement by the Company. 11. Notice. Any notices, requests, demands, or other communications provided for by this Agreement shall be sufficient if in writing and if sent by registered or certified mail to the Executive at the last address he has filed in writing with the Company, or in the case of the Company, to its principal offices. BALTIMORE GAS AND ELECTRIC COMPANY By: /s/ Jon M. Files Jon M. Files Vice President Management Services /s/ Thomas F. Brady THOMAS F. BRADY SEVERANCE AGREEMENT This Agreement is made the 6th day of December, 1995, by and between BALTIMORE GAS AND ELECTRIC COMPANY (the "Company") and DAVID A. BRUNE (the "Executive"). For purposes of Sections 1 through 11 of this Agreement the term "Company" shall be deemed to include any successor company. WHEREAS, Potomac Electric Power Company ("PEPCO") and the Company have entered into an Agreement and Plan of Merger dated as of September 22, 1995 (the "Merger Agreement"), whereby PEPCO and the Company will merge into RH Acquisition Corp. ("RH"), with RH as the surviving entity; and WHEREAS, the Company desires to establish a severance benefit for the Executive covering the period from the date hereof through the Effective Time (as hereinafter defined) and for the twenty-four month period following the Effective Time in the event the Merger (as hereinafter defined) occurs, to avoid the loss or the serious distraction of the Executive to the detriment of the Company and its stockholders during such periods when the Executive's undivided attention and commitment to the needs of the Company would be particularly important; and WHEREAS, the Executive desires to devote his time and energy for the benefit of the Company and its stockholders and not to be distracted during the Merger. NOW, THEREFORE, the parties agree as follows: 1. Definitions. 1.1 Merger. The term "Merger" shall have the meaning ascribed to such term in the Merger Agreement. 1.2 Effective Time. The term "Effective Time" shall have the meaning ascribed to such term in the Merger Agreement. 1.3 Qualifying Termination. (a) The occurrence of any one or more of the following events within twenty-four calendar months after the Effective Time shall constitute a "Qualifying Termination": (i) The Company's termination of the Executive's employment without Cause (as defined in Section 1.7); (ii) The Executive's resignation for Good Reason (as defined in Section 1.6); (iii) Failure or refusal by a successor company to assume the Company's obligations under this Agreement in its entirety, as required by Section 9 herein; or (iv) Commission by the Company of a material breach of any of the provisions of this Agreement. (b) A Qualifying Termination also shall include a termination of the Executive's employment, without Cause, from the date hereof, but prior to the Effective Time. (c) A Qualifying Termination shall not include a termination of employment by reason of death, disability, the Executive's voluntary termination of employment without Good Reason, or the Company's termination of the Executive's employment for Cause. 1.4 Ineligible to Retire. Ineligible to Retire, means an Executive who has not either (i) attained age 55 and completed 20 years of service with the Company and any successor company or (ii) attained age 60 and completed one year of service with the Company and any successor company, upon the occurrence of a Qualifying Termination. 1.5 Eligible to Retire. Eligible to Retire, means an Executive who has either (i) attained age 55 and completed 20 years of service with the Company and any successor company or (ii) attained age 60 with one year of service with the Company and any successor company, upon the occurrence of a Qualifying Termination. 1.6 Good Reason. Good Reason means, without the Executive's express written consent, the occurrence (i) after the Effective Time, or (ii) after the date hereof, but prior to the Effective Time, of any one or more of the following: (a) The assignment to the Executive of duties materially inconsistent with the Executive's authorities, duties, responsibilities, and status (including offices, title and reporting relationships) as an executive and/or officer of the Company, or a material reduction or alteration in the nature or status of the Executive's authorities, duties, or responsibilities from those in effect as of ninety days prior to the Effective Time (or, in the case of such an assignment, reduction or alteration after the date hereof, but prior to the Effective Time, ninety days prior to the date hereof), unless such act is remedied by the Company within 10 business days after receipt of written notice thereof given by the Executive; (b) A reduction by the Company of the Executive's base salary in effect at the Effective Time (or in the case of a reduction after the date hereof, but prior to the Effective Time, a reduction by the Company of the Executive's base salary in effect on the date hereof) or as the same shall be increased from time to time, unless such reduction is less than ten percent (10%) and it is either (i) replaced by an incentive opportunity equal in value; or is (ii) consistent and proportional with an overall reduction in management compensation due to extraordinary business conditions, including but not limited to reduced profitability and other financial stress (i.e., the base salary of the Executive will not be singled out for reduction in a manner inconsistent with a reduction imposed on other executives of the Company); (c) The relocation of the Executive's office more than 50 miles from the Executive's office at the Effective Time (or in the case of a relocation after the date hereof, but prior to the Effective Time, a relocation of the Executive's office more than 50 miles from the Executive's office on the date hereof). The Executive's right to terminate employment for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting Good Reason herein. 1.7 Cause. Cause shall mean the occurrence of any one or more of the following: (a) The Executive is convicted of a felony involving moral turpitude; or (b) The Executive engages in conduct or activities that constitutes disloyalty to the Company and such conduct or activities are materially damaging to the property, business or reputation of the Company; or (c) The Executive persistently fails or refuses to comply with any written direction of an authorized representative of the Company other than a directive constituting an assignment described in Section 1.6(a); or (d) The Executive embezzles or knowingly, and with intent, misappropriates property of the Company, or unlawfully appropriates any corporate opportunity of the Company. 1.8 Annual Award Amount. The average of the two highest annual incentive awards under the Company's Executive Incentive Plan (or the annual cash incentive plan maintained by a successor company) paid in the last five years to the Executive prior to the occurrence of the Qualifying Termination. 2. Severance Benefits for an Executive Ineligible to Retire. Upon the occurrence of a Qualifying Termination with respect to an Executive who is Ineligible to Retire: (a) Severance Payment: The Company shall pay to the Executive an amount equal to two and one-fourth times the Executive's annual base salary (as in effect on the date of the Qualifying Termination, not reduced by any reduction described in Section 1.6(b) above) and Annual Award Amount. The payment shall be made in twenty-four equal monthly installments beginning on the first day of the month following the Qualifying Termination. (b) Severance Health Benefits. For the thirty-six month period commencing on the occurrence of such Qualifying Termination, the Company shall provide to the Executive and the Executive's family medical and dental benefits as provided to other executive officers who remain employed by the Company. The Executive shall be required to make payments for such coverage in the same amount as is required of executive officers who remain employed by the Company. (c) Split Dollar. The Qualifying Termination shall not constitute a termination of the Split Dollar Agreement between the Company and the Executive (or the split dollar agreement between a successor company and the Executive), and the Executive shall be deemed to have retired upon such Qualifying Termination for purposes of such Split Dollar Agreement (or the split dollar agreement between a successor company and the Executive). 3. Severance Benefits for an Executive Eligible to Retire. Upon the occurrence of a Qualifying Termination with respect to an Executive who is Eligible to Retire: (a) Severance Payment: The Company shall pay to the Executive an amount equal to two times the Executive's annual base salary (as in effect on the date of the Qualifying Termination, not reduced by any reduction described in Section 1.6(b) above) and Annual Award Amount. The payment shall be made in twenty-four equal monthly installments beginning on the first day of the month following the Qualifying Termination. (b) Supplemental Retirement Benefits. For purposes of determining the Executive's supplemental retirement benefits which the Executive is entitled to under the Company's Executive Benefits Plan (or the supplemental retirement plan maintained by a successor company), the Early Retirement Adjustment Factor (as such term is defined in the Company's Pension Plan or within the meaning of the tax qualified retirement plan maintained by a successor company) will be one (1). (c) Severance Health Benefits. The Company shall provide to the Executive and the Executive's family medical and dental benefits on the same basis and on the same terms as any retiree who has attained age 65 and completed the greater of 20 years or actual years of service. (d) Retirement. The Executive shall be treated as having retired at the Company's request for purposes of all of the Company's benefit plans (or the benefit plans maintained by a successor company). 4. Code Section 28OG. 4.1 Limitations. Notwithstanding Section 2 and 3, in the event that a change in ownership or control (within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code")) of the Company occurs and the independent public accountants for the Company (the "Accountants") determine that if the benefits to be provided under Section 2 and 3 (together with any other benefits payable to the Executive under any applicable plan maintained by the Company) were paid to the Executive: (a) the Executive would incur an excise tax under Section 4999 of Code, and the Company would be denied a deduction under Section 280G of the Code of all or some of such amounts to be paid to the Executive, and (b) the net after tax benefits to the Executive attributable to payments under Sections 2 and 3 hereof would not be at least $10,000 greater than the net after tax benefits which would accrue to the Executive if the amounts which would otherwise cause the Executive to be subject to this excise tax were not paid, the amounts payable to the Executive pursuant to Section 2 and 3 (or pursuant to such other plans maintained by the Company) shall be reduced so that the amount payable to the Executive hereunder is the greatest amount (as determined by the Accountants) that may be paid by the Company to the Executive without any such amount being subject to an excise tax under Section 4999 or being nondeductible for the Company pursuant to Section 280G. 4.2 Executive's Election. If the amounts to be paid to the Executive are to be reduced under paragraph 4.1 of this Section, the Executive shall be given the opportunity to designate which benefits or payments shall be reduced and in what order of priority. 4.3 Later Adjustments. (a) If the Executive receives reduced payments or benefits pursuant to the preceding paragraph, or if it had been determined that no such reduction was required, but it nonetheless is established pursuant to the final determination of a court or an Internal Revenue Service proceeding that, notwithstanding the good faith of the Executive and the Company in applying the terms of this Section, the aggregate amount paid to the Executive or for his benefit would result in any amount being treated as an "excess parachute payment" for purposes of Sections 28OG and 4999 of the Code, then an amount equal to the amount that would be an "excess parachute payment" shall be deemed for all purposes a loan to the Executive made on the date of the receipt of such excess amount, which the Executive shall have an obligation to repay to the Company on demand, together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code) from the date of the Executive's receipt of such excess until the date of such repayment. (b) In the event that it is determined for any reason that the amount of "excess parachute payments" are less than originally calculated, the Company shall promptly pay to the Executive the amount necessary so that, after such adjustment, the Executive will have received or be entitled to receive the maximum payments payable under this Section without any of such payments constituting an "excess parachute payment," together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code). 5. Termination of Agreement. This Agreement shall remain in effect from the date hereof until the last day of the twenty-fourth calendar month following the Effective Time. Further, upon the Effective Time, this Agreement shall continue until the Company or its successor shall have fully performed all of its obligations thereunder with respect to the Executive, with no future performance being possible. Notwithstanding the foregoing, this Agreement shall terminate on the date the Company's Board of Directors decides by formal vote not to proceed with the Merger; provided, however, that in the event a Qualifying Termination occurs prior to such date, this Agreement shall continue until the Company or its successor shall have fully performed all of its obligations thereunder with respect to the Executive, with no further performance being possible. 6. Amendment of Agreement. Subject to the provisions of Section 5, this Agreement may not be amended in any manner which has a significant adverse effect on the rights of the Executive without the written consent of the Executive. Notwithstanding the foregoing, at and after the Effective Time, this Agreement may not be amended in any respect without the written consent of the Executive. 7. Construction. Wherever any words are used herein in the masculine gender they shall be construed as though they were also used in the feminine gender in all cases where they would so apply, and wherever any words are used herein in the singular form, they shall be construed as though they were also used in the plural form in all cases where they would so apply. 8. Governing Law. This Agreement shall be governed by the laws of Maryland. 9. Successors and Assigns. This Agreement shall be binding upon the Company and any assignee or successor in interest to the Company. 10. Indemnification. The Company will pay all reasonable fees and expenses, if any, (including, without limitation, legal fees and expenses) that are incurred by the Executive to enforce this Agreement and that result from a breach of this Agreement by the Company. 11. Notice. Any notices, requests, demands, or other communications provided for by this Agreement shall be sufficient if in writing and if sent by registered or certified mail to the Executive at the last address he has filed in writing with the Company, or in the case of the Company, to its principal offices. BALTIMORE GAS AND ELECTRIC COMPANY By: /s/ Jon M. Files Jon M. Files Vice President Management Services /s/ David A. Brune DAVID A. BRUNE SEVERANCE AGREEMENT This Agreement is made the 6th day of December, 1995, by and between BALTIMORE GAS AND ELECTRIC COMPANY (the "Company") and HERBERT D. COSS (the "Executive"). For purposes of Sections 1 through 11 of this Agreement the term "Company" shall be deemed to include any successor company. WHEREAS, Potomac Electric Power Company ("PEPCO") and the Company have entered into an Agreement and Plan of Merger dated as of September 22, 1995 (the "Merger Agreement"), whereby PEPCO and the Company will merge into RH Acquisition Corp. ("RH"), with RH as the surviving entity; and WHEREAS, the Company desires to establish a severance benefit for the Executive covering the period from the date hereof through the Effective Time (as hereinafter defined) and for the twenty-four month period following the Effective Time in the event the Merger (as hereinafter defined) occurs, to avoid the loss or the serious distraction of the Executive to the detriment of the Company and its stockholders during such periods when the Executive's undivided attention and commitment to the needs of the Company would be particularly important; and WHEREAS, the Executive desires to devote his time and energy for the benefit of the Company and its stockholders and not to be distracted during the Merger. NOW, THEREFORE, the parties agree as follows: 1. Definitions. 1.1 Merger. The term "Merger" shall have the meaning ascribed to such term in the Merger Agreement. 1.2 Effective Time. The term "Effective Time" shall have the meaning ascribed to such term in the Merger Agreement. 1.3 Qualifying Termination. (a) The occurrence of any one or more of the following events within twenty-four calendar months after the Effective Time shall constitute a "Qualifying Termination": (i) The Company's termination of the Executive's employment without Cause (as defined in Section 1.7); (ii) The Executive's resignation for Good Reason (as defined in Section 1.6); (iii) Failure or refusal by a successor company to assume the Company's obligations under this Agreement in its entirety, as required by Section 9 herein; or (iv) Commission by the Company of a material breach of any of the provisions of this Agreement. (b) A Qualifying Termination also shall include a termination of the Executive's employment, without Cause, from the date hereof, but prior to the Effective Time. (c) A Qualifying Termination shall not include a termination of employment by reason of death, disability, the Executive's voluntary termination of employment without Good Reason, or the Company's termination of the Executive's employment for Cause. 1.4 Ineligible to Retire. Ineligible to Retire, means an Executive who has not either (i) attained age 55 and completed 20 years of service with the Company and any successor company or (ii) attained age 60 and completed one year of service with the Company and any successor company, upon the occurrence of a Qualifying Termination. 1.5 Eligible to Retire. Eligible to Retire, means an Executive who has either (i) attained age 55 and completed 20 years of service with the Company and any successor company or (ii) attained age 60 with one year of service with the Company and any successor company, upon the occurrence of a Qualifying Termination. 1.6 Good Reason. Good Reason means, without the Executive's express written consent, the occurrence (i) after the Effective Time, or (ii) after the date hereof, but prior to the Effective Time, of any one or more of the following: (a) The assignment to the Executive of duties materially inconsistent with the Executive's authorities, duties, responsibilities, and status (including offices, title and reporting relationships) as an executive and/or officer of the Company, or a material reduction or alteration in the nature or status of the Executive's authorities, duties, or responsibilities from those in effect as of ninety days prior to the Effective Time (or, in the case of such an assignment, reduction or alteration after the date hereof, but prior to the Effective Time, ninety days prior to the date hereof), unless such act is remedied by the Company within 10 business days after receipt of written notice thereof given by the Executive; (b) A reduction by the Company of the Executive's base salary in effect at the Effective Time (or in the case of a reduction after the date hereof, but prior to the Effective Time, a reduction by the Company of the Executive's base salary in effect on the date hereof) or as the same shall be increased from time to time, unless such reduction is less than ten percent (10%) and it is either (i) replaced by an incentive opportunity equal in value; or is (ii) consistent and proportional with an overall reduction in management compensation due to extraordinary business conditions, including but not limited to reduced profitability and other financial stress (i.e., the base salary of the Executive will not be singled out for reduction in a manner inconsistent with a reduction imposed on other executives of the Company); (c) The relocation of the Executive's office more than 50 miles from the Executive's office at the Effective Time (or in the case of a relocation after the date hereof, but prior to the Effective Time, a relocation of the Executive's office more than 50 miles from the Executive's office on the date hereof). The Executive's right to terminate employment for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting Good Reason herein. 1.7 Cause. Cause shall mean the occurrence of any one or more of the following: (a) The Executive is convicted of a felony involving moral turpitude; or (b) The Executive engages in conduct or activities that constitutes disloyalty to the Company and such conduct or activities are materially damaging to the property, business or reputation of the Company; or (c) The Executive persistently fails or refuses to comply with any written direction of an authorized representative of the Company other than a directive constituting an assignment described in Section 1.6(a); or (d) The Executive embezzles or knowingly, and with intent, misappropriates property of the Company, or unlawfully appropriates any corporate opportunity of the Company. 1.8 Annual Award Amount. The average of the two highest annual incentive awards under the Company's Executive Incentive Plan (or the annual cash incentive plan maintained by a successor company) paid in the last five years to the Executive prior to the occurrence of the Qualifying Termination. 2. Severance Benefits for an Executive Ineligible to Retire. Upon the occurrence of a Qualifying Termination with respect to an Executive who is Ineligible to Retire: (a) Severance Payment: The Company shall pay to the Executive an amount equal to two and one-fourth times the Executive's annual base salary (as in effect on the date of the Qualifying Termination, not reduced by any reduction described in Section 1.6(b) above) and Annual Award Amount. The payment shall be made in twenty-four equal monthly installments beginning on the first day of the month following the Qualifying Termination. (b) Severance Health Benefits. For the thirty-six month period commencing on the occurrence of such Qualifying Termination, the Company shall provide to the Executive and the Executive's family medical and dental benefits as provided to other executive officers who remain employed by the Company. The Executive shall be required to make payments for such coverage in the same amount as is required of executive officers who remain employed by the Company. (c) Split Dollar. The Qualifying Termination shall not constitute a termination of the Split Dollar Agreement between the Company and the Executive (or the split dollar agreement between a successor company and the Executive), and the Executive shall be deemed to have retired upon such Qualifying Termination for purposes of such Split Dollar Agreement (or the split dollar agreement between a successor company and the Executive). 3. Severance Benefits for an Executive Eligible to Retire. Upon the occurrence of a Qualifying Termination with respect to an Executive who is Eligible to Retire: (a) Severance Payment: The Company shall pay to the Executive an amount equal to two times the Executive's annual base salary (as in effect on the date of the Qualifying Termination, not reduced by any reduction described in Section 1.6(b) above) and Annual Award Amount. The payment shall be made in twenty-four equal monthly installments beginning on the first day of the month following the Qualifying Termination. (b) Supplemental Retirement Benefits. For purposes of determining the Executive's supplemental retirement benefits which the Executive is entitled to under the Company's Executive Benefits Plan (or the supplemental retirement plan maintained by a successor company), the Early Retirement Adjustment Factor (as such term is defined in the Company's Pension Plan or within the meaning of the tax qualified retirement plan maintained by a successor company) will be one (1). (c) Severance Health Benefits. The Company shall provide to the Executive and the Executive's family medical and dental benefits on the same basis and on the same terms as any retiree who has attained age 65 and completed the greater of 20 years or actual years of service. (d) Retirement. The Executive shall be treated as having retired at the Company's request for purposes of all of the Company's benefit plans (or the benefit plans maintained by a successor company). 4. Code Section 28OG. 4.1 Limitations. Notwithstanding Section 2 and 3, in the event that a change in ownership or control (within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code")) of the Company occurs and the independent public accountants for the Company (the "Accountants") determine that if the benefits to be provided under Section 2 and 3 (together with any other benefits payable to the Executive under any applicable plan maintained by the Company) were paid to the Executive: (a) the Executive would incur an excise tax under Section 4999 of Code, and the Company would be denied a deduction under Section 280G of the Code of all or some of such amounts to be paid to the Executive, and (b) the net after tax benefits to the Executive attributable to payments under Sections 2 and 3 hereof would not be at least $10,000 greater than the net after tax benefits which would accrue to the Executive if the amounts which would otherwise cause the Executive to be subject to this excise tax were not paid, the amounts payable to the Executive pursuant to Section 2 and 3 (or pursuant to such other plans maintained by the Company) shall be reduced so that the amount payable to the Executive hereunder is the greatest amount (as determined by the Accountants) that may be paid by the Company to the Executive without any such amount being subject to an excise tax under Section 4999 or being nondeductible for the Company pursuant to Section 280G. 4.2 Executive's Election. If the amounts to be paid to the Executive are to be reduced under paragraph 4.1 of this Section, the Executive shall be given the opportunity to designate which benefits or payments shall be reduced and in what order of priority. 4.3 Later Adjustments. (a) If the Executive receives reduced payments or benefits pursuant to the preceding paragraph, or if it had been determined that no such reduction was required, but it nonetheless is established pursuant to the final determination of a court or an Internal Revenue Service proceeding that, notwithstanding the good faith of the Executive and the Company in applying the terms of this Section, the aggregate amount paid to the Executive or for his benefit would result in any amount being treated as an "excess parachute payment" for purposes of Sections 28OG and 4999 of the Code, then an amount equal to the amount that would be an "excess parachute payment" shall be deemed for all purposes a loan to the Executive made on the date of the receipt of such excess amount, which the Executive shall have an obligation to repay to the Company on demand, together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code) from the date of the Executive's receipt of such excess until the date of such repayment. (b) In the event that it is determined for any reason that the amount of "excess parachute payments" are less than originally calculated, the Company shall promptly pay to the Executive the amount necessary so that, after such adjustment, the Executive will have received or be entitled to receive the maximum payments payable under this Section without any of such payments constituting an "excess parachute payment," together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code). 5. Termination of Agreement. This Agreement shall remain in effect from the date hereof until the last day of the twenty-fourth calendar month following the Effective Time. Further, upon the Effective Time, this Agreement shall continue until the Company or its successor shall have fully performed all of its obligations thereunder with respect to the Executive, with no future performance being possible. Notwithstanding the foregoing, this Agreement shall terminate on the date the Company's Board of Directors decides by formal vote not to proceed with the Merger; provided, however, that in the event a Qualifying Termination occurs prior to such date, this Agreement shall continue until the Company or its successor shall have fully performed all of its obligations thereunder with respect to the Executive, with no further performance being possible. 6. Amendment of Agreement. Subject to the provisions of Section 5, this Agreement may not be amended in any manner which has a significant adverse effect on the rights of the Executive without the written consent of the Executive. Notwithstanding the foregoing, at and after the Effective Time, this Agreement may not be amended in any respect without the written consent of the Executive. 7. Construction. Wherever any words are used herein in the masculine gender they shall be construed as though they were also used in the feminine gender in all cases where they would so apply, and wherever any words are used herein in the singular form, they shall be construed as though they were also used in the plural form in all cases where they would so apply. 8. Governing Law. This Agreement shall be governed by the laws of Maryland. 9. Successors and Assigns. This Agreement shall be binding upon the Company and any assignee or successor in interest to the Company. 10. Indemnification. The Company will pay all reasonable fees and expenses, if any, (including, without limitation, legal fees and expenses) that are incurred by the Executive to enforce this Agreement and that result from a breach of this Agreement by the Company. 11. Notice. Any notices, requests, demands, or other communications provided for by this Agreement shall be sufficient if in writing and if sent by registered or certified mail to the Executive at the last address he has filed in writing with the Company, or in the case of the Company, to its principal offices. BALTIMORE GAS AND ELECTRIC COMPANY By: /s/ Jon M. Files Jon M. Files Vice President Management Services /s/ Herbert D. Coss HERBERT D. COSS SEVERANCE AGREEMENT This Agreement is made the 6th day of December, 1995, by and between BALTIMORE GAS AND ELECTRIC COMPANY (the "Company") and GEORGE C. CREEL (the "Executive"). For purposes of Sections 1 through 11 of this Agreement the term "Company" shall be deemed to include any successor company. WHEREAS, Potomac Electric Power Company ("PEPCO") and the Company have entered into an Agreement and Plan of Merger dated as of September 22, 1995 (the "Merger Agreement"), whereby PEPCO and the Company will merge into RH Acquisition Corp. ("RH"), with RH as the surviving entity; and WHEREAS, the Company desires to establish a severance benefit for the Executive covering the period from the date hereof through the Effective Time (as hereinafter defined) and for the twenty-four month period following the Effective Time in the event the Merger (as hereinafter defined) occurs, to avoid the loss or the serious distraction of the Executive to the detriment of the Company and its stockholders during such periods when the Executive's undivided attention and commitment to the needs of the Company would be particularly important; and WHEREAS, the Executive desires to devote his time and energy for the benefit of the Company and its stockholders and not to be distracted during the Merger. NOW, THEREFORE, the parties agree as follows: 1. Definitions. 1.1 Merger. The term "Merger" shall have the meaning ascribed to such term in the Merger Agreement. 1.2 Effective Time. The term "Effective Time" shall have the meaning ascribed to such term in the Merger Agreement. 1.3 Qualifying Termination. (a) The occurrence of any one or more of the following events within twenty-four calendar months after the Effective Time shall constitute a "Qualifying Termination": (i) The Company's termination of the Executive's employment without Cause (as defined in Section 1.7); (ii) The Executive's resignation for Good Reason (as defined in Section 1.6); (iii) Failure or refusal by a successor company to assume the Company's obligations under this Agreement in its entirety, as required by Section 9 herein; or (iv) Commission by the Company of a material breach of any of the provisions of this Agreement. (b) A Qualifying Termination also shall include a termination of the Executive's employment, without Cause, from the date hereof, but prior to the Effective Time. (c) A Qualifying Termination shall not include a termination of employment by reason of death, disability, the Executive's voluntary termination of employment without Good Reason, or the Company's termination of the Executive's employment for Cause. 1.4 Ineligible to Retire. Ineligible to Retire, means an Executive who has not either (i) attained age 55 and completed 20 years of service with the Company and any successor company or (ii) attained age 60 and completed one year of service with the Company and any successor company, upon the occurrence of a Qualifying Termination. 1.5 Eligible to Retire. Eligible to Retire, means an Executive who has either (i) attained age 55 and completed 20 years of service with the Company and any successor company or (ii) attained age 60 with one year of service with the Company and any successor company, upon the occurrence of a Qualifying Termination. 1.6 Good Reason. Good Reason means, without the Executive's express written consent, the occurrence (i) after the Effective Time, or (ii) after the date hereof, but prior to the Effective Time, of any one or more of the following: (a) The assignment to the Executive of duties materially inconsistent with the Executive's authorities, duties, responsibilities, and status (including offices, title and reporting relationships) as an executive and/or officer of the Company, or a material reduction or alteration in the nature or status of the Executive's authorities, duties, or responsibilities from those in effect as of ninety days prior to the Effective Time (or, in the case of such an assignment, reduction or alteration after the date hereof, but prior to the Effective Time, ninety days prior to the date hereof), unless such act is remedied by the Company within 10 business days after receipt of written notice thereof given by the Executive; (b) A reduction by the Company of the Executive's base salary in effect at the Effective Time (or in the case of a reduction after the date hereof, but prior to the Effective Time, a reduction by the Company of the Executive's base salary in effect on the date hereof) or as the same shall be increased from time to time, unless such reduction is less than ten percent (10%) and it is either (i) replaced by an incentive opportunity equal in value; or is (ii) consistent and proportional with an overall reduction in management compensation due to extraordinary business conditions, including but not limited to reduced profitability and other financial stress (i.e., the base salary of the Executive will not be singled out for reduction in a manner inconsistent with a reduction imposed on other executives of the Company); (c) The relocation of the Executive's office more than 50 miles from the Executive's office at the Effective Time (or in the case of a relocation after the date hereof, but prior to the Effective Time, a relocation of the Executive's office more than 50 miles from the Executive's office on the date hereof). The Executive's right to terminate employment for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting Good Reason herein. 1.7 Cause. Cause shall mean the occurrence of any one or more of the following: (a) The Executive is convicted of a felony involving moral turpitude; or (b) The Executive engages in conduct or activities that constitutes disloyalty to the Company and such conduct or activities are materially damaging to the property, business or reputation of the Company; or (c) The Executive persistently fails or refuses to comply with any written direction of an authorized representative of the Company other than a directive constituting an assignment described in Section 1.6(a); or (d) The Executive embezzles or knowingly, and with intent, misappropriates property of the Company, or unlawfully appropriates any corporate opportunity of the Company. 1.8 Annual Award Amount. The average of the two highest annual incentive awards under the Company's Executive Incentive Plan (or the annual cash incentive plan maintained by a successor company) paid in the last five years to the Executive prior to the occurrence of the Qualifying Termination. 2. Severance Benefits for an Executive Ineligible to Retire. Upon the occurrence of a Qualifying Termination with respect to an Executive who is Ineligible to Retire: (a) Severance Payment: The Company shall pay to the Executive an amount equal to two and one-fourth times the Executive's annual base salary (as in effect on the date of the Qualifying Termination, not reduced by any reduction described in Section 1.6(b) above) and Annual Award Amount. The payment shall be made in twenty-four equal monthly installments beginning on the first day of the month following the Qualifying Termination. (b) Severance Health Benefits. For the thirty-six month period commencing on the occurrence of such Qualifying Termination, the Company shall provide to the Executive and the Executive's family medical and dental benefits as provided to other executive officers who remain employed by the Company. The Executive shall be required to make payments for such coverage in the same amount as is required of executive officers who remain employed by the Company. (c) Split Dollar. The Qualifying Termination shall not constitute a termination of the Split Dollar Agreement between the Company and the Executive (or the split dollar agreement between a successor company and the Executive), and the Executive shall be deemed to have retired upon such Qualifying Termination for purposes of such Split Dollar Agreement (or the split dollar agreement between a successor company and the Executive). 3. Severance Benefits for an Executive Eligible to Retire. Upon the occurrence of a Qualifying Termination with respect to an Executive who is Eligible to Retire: (a) Severance Payment: The Company shall pay to the Executive an amount equal to two times the Executive's annual base salary (as in effect on the date of the Qualifying Termination, not reduced by any reduction described in Section 1.6(b) above) and Annual Award Amount. The payment shall be made in twenty-four equal monthly installments beginning on the first day of the month following the Qualifying Termination. (b) Supplemental Retirement Benefits. For purposes of determining the Executive's supplemental retirement benefits which the Executive is entitled to under the Company's Executive Benefits Plan (or the supplemental retirement plan maintained by a successor company), the Early Retirement Adjustment Factor (as such term is defined in the Company's Pension Plan or within the meaning of the tax qualified retirement plan maintained by a successor company) will be one (1). (c) Severance Health Benefits. The Company shall provide to the Executive and the Executive's family medical and dental benefits on the same basis and on the same terms as any retiree who has attained age 65 and completed the greater of 20 years or actual years of service. (d) Retirement. The Executive shall be treated as having retired at the Company's request for purposes of all of the Company's benefit plans (or the benefit plans maintained by a successor company). 4. Code Section 28OG. 4.1 Limitations. Notwithstanding Section 2 and 3, in the event that a change in ownership or control (within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code")) of the Company occurs and the independent public accountants for the Company (the "Accountants") determine that if the benefits to be provided under Section 2 and 3 (together with any other benefits payable to the Executive under any applicable plan maintained by the Company) were paid to the Executive: (a) the Executive would incur an excise tax under Section 4999 of Code, and the Company would be denied a deduction under Section 280G of the Code of all or some of such amounts to be paid to the Executive, and (b) the net after tax benefits to the Executive attributable to payments under Sections 2 and 3 hereof would not be at least $10,000 greater than the net after tax benefits which would accrue to the Executive if the amounts which would otherwise cause the Executive to be subject to this excise tax were not paid, the amounts payable to the Executive pursuant to Section 2 and 3 (or pursuant to such other plans maintained by the Company) shall be reduced so that the amount payable to the Executive hereunder is the greatest amount (as determined by the Accountants) that may be paid by the Company to the Executive without any such amount being subject to an excise tax under Section 4999 or being nondeductible for the Company pursuant to Section 280G. 4.2 Executive's Election. If the amounts to be paid to the Executive are to be reduced under paragraph 4.1 of this Section, the Executive shall be given the opportunity to designate which benefits or payments shall be reduced and in what order of priority. 4.3 Later Adjustments. (a) If the Executive receives reduced payments or benefits pursuant to the preceding paragraph, or if it had been determined that no such reduction was required, but it nonetheless is established pursuant to the final determination of a court or an Internal Revenue Service proceeding that, notwithstanding the good faith of the Executive and the Company in applying the terms of this Section, the aggregate amount paid to the Executive or for his benefit would result in any amount being treated as an "excess parachute payment" for purposes of Sections 28OG and 4999 of the Code, then an amount equal to the amount that would be an "excess parachute payment" shall be deemed for all purposes a loan to the Executive made on the date of the receipt of such excess amount, which the Executive shall have an obligation to repay to the Company on demand, together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code) from the date of the Executive's receipt of such excess until the date of such repayment. (b) In the event that it is determined for any reason that the amount of "excess parachute payments" are less than originally calculated, the Company shall promptly pay to the Executive the amount necessary so that, after such adjustment, the Executive will have received or be entitled to receive the maximum payments payable under this Section without any of such payments constituting an "excess parachute payment," together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code). 5. Termination of Agreement. This Agreement shall remain in effect from the date hereof until the last day of the twenty-fourth calendar month following the Effective Time. Further, upon the Effective Time, this Agreement shall continue until the Company or its successor shall have fully performed all of its obligations thereunder with respect to the Executive, with no future performance being possible. Notwithstanding the foregoing, this Agreement shall terminate on the date the Company's Board of Directors decides by formal vote not to proceed with the Merger; provided, however, that in the event a Qualifying Termination occurs prior to such date, this Agreement shall continue until the Company or its successor shall have fully performed all of its obligations thereunder with respect to the Executive, with no further performance being possible. 6. Amendment of Agreement. Subject to the provisions of Section 5, this Agreement may not be amended in any manner which has a significant adverse effect on the rights of the Executive without the written consent of the Executive. Notwithstanding the foregoing, at and after the Effective Time, this Agreement may not be amended in any respect without the written consent of the Executive. 7. Construction. Wherever any words are used herein in the masculine gender they shall be construed as though they were also used in the feminine gender in all cases where they would so apply, and wherever any words are used herein in the singular form, they shall be construed as though they were also used in the plural form in all cases where they would so apply. 8. Governing Law. This Agreement shall be governed by the laws of Maryland. 9. Successors and Assigns. This Agreement shall be binding upon the Company and any assignee or successor in interest to the Company. 10. Indemnification. The Company will pay all reasonable fees and expenses, if any, (including, without limitation, legal fees and expenses) that are incurred by the Executive to enforce this Agreement and that result from a breach of this Agreement by the Company. 11. Notice. Any notices, requests, demands, or other communications provided for by this Agreement shall be sufficient if in writing and if sent by registered or certified mail to the Executive at the last address he has filed in writing with the Company, or in the case of the Company, to its principal offices. BALTIMORE GAS AND ELECTRIC COMPANY By: /s/ Jon M. Files Jon M. Files Vice President Management Services /s/ George C. Creel GEORGE C. CREEL SEVERANCE AGREEMENT This Agreement is made the 31st day of December, 1995, by and between BALTIMORE GAS AND ELECTRIC COMPANY (the "Company") and CHARLES H. CRUSE (the "Executive"). For purposes of Sections 1 through 11 of this Agreement the term "Company" shall be deemed to include any successor company. WHEREAS, Potomac Electric Power Company ("PEPCO") and the Company have entered into an Agreement and Plan of Merger dated as of September 22, 1995 (the "Merger Agreement"), whereby PEPCO and the Company will merge into RH Acquisition Corp. ("RH"), with RH as the surviving entity; and WHEREAS, the Company desires to establish a severance benefit for the Executive covering the period from the date hereof through the Effective Time (as hereinafter defined) and for the twenty-four month period following the Effective Time in the event the Merger (as hereinafter defined) occurs, to avoid the loss or the serious distraction of the Executive to the detriment of the Company and its stockholders during such periods when the Executive's undivided attention and commitment to the needs of the Company would be particularly important; and WHEREAS, the Executive desires to devote his time and energy for the benefit of the Company and its stockholders and not to be distracted during the Merger. NOW, THEREFORE, the parties agree as follows: 1. Definitions. 1.1 Merger. The term "Merger" shall have the meaning ascribed to such term in the Merger Agreement. 1.2 Effective Time. The term "Effective Time" shall have the meaning ascribed to such term in the Merger Agreement. 1.3 Qualifying Termination. (a) The occurrence of any one or more of the following events within twenty-four calendar months after the Effective Time shall constitute a "Qualifying Termination": (i) The Company's termination of the Executive's employment without Cause (as defined in Section 1.7); (ii) The Executive's resignation for Good Reason (as defined in Section 1.6); (iii) Failure or refusal by a successor company to assume the Company's obligations under this Agreement in its entirety, as required by Section 9 herein; or (iv) Commission by the Company of a material breach of any of the provisions of this Agreement. (b) A Qualifying Termination also shall include a termination of the Executive's employment, without Cause, from the date hereof, but prior to the Effective Time. (c) A Qualifying Termination shall not include a termination of employment by reason of death, disability, the Executive's voluntary termination of employment without Good Reason, or the Company's termination of the Executive's employment for Cause. 1.4 Ineligible to Retire. Ineligible to Retire, means an Executive who has not either (i) attained age 55 and completed 20 years of service with the Company and any successor company or (ii) attained age 60 and completed one year of service with the Company and any successor company, upon the occurrence of a Qualifying Termination. 1.5 Eligible to Retire. Eligible to Retire, means an Executive who has either (i) attained age 55 and completed 20 years of service with the Company and any successor company or (ii) attained age 60 with one year of service with the Company and any successor company, upon the occurrence of a Qualifying Termination. 1.6 Good Reason. Good Reason means, without the Executive's express written consent, the occurrence (i) after the Effective Time, or (ii) after the date hereof, but prior to the Effective Time, of any one or more of the following: (a) The assignment to the Executive of duties materially inconsistent with the Executive's authorities, duties, responsibilities, and status (including offices, title and reporting relationships) as an executive and/or officer of the Company, or a material reduction or alteration in the nature or status of the Executive's authorities, duties, or responsibilities from those in effect as of ninety days prior to the Effective Time (or, in the case of such an assignment, reduction or alteration after the date hereof, but prior to the Effective Time, ninety days prior to the date hereof), unless such act is remedied by the Company within 10 business days after receipt of written notice thereof given by the Executive; (b) A reduction by the Company of the Executive's base salary in effect at the Effective Time (or in the case of a reduction after the date hereof, but prior to the Effective Time, a reduction by the Company of the Executive's base salary in effect on the date hereof) or as the same shall be increased from time to time, unless such reduction is less than ten percent (10%) and it is either (i) replaced by an incentive opportunity equal in value; or is (ii) consistent and proportional with an overall reduction in management compensation due to extraordinary business conditions, including but not limited to reduced profitability and other financial stress (i.e., the base salary of the Executive will not be singled out for reduction in a manner inconsistent with a reduction imposed on other executives of the Company); (c) The relocation of the Executive's office more than 50 miles from the Executive's office at the Effective Time (or in the case of a relocation after the date hereof, but prior to the Effective Time, a relocation of the Executive's office more than 50 miles from the Executive's office on the date hereof). The Executive's right to terminate employment for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting Good Reason herein. 1.7 Cause. Cause shall mean the occurrence of any one or more of the following: (a) The Executive is convicted of a felony involving moral turpitude; or (b) The Executive engages in conduct or activities that constitutes disloyalty to the Company and such conduct or activities are materially damaging to the property, business or reputation of the Company; or (c) The Executive persistently fails or refuses to comply with any written direction of an authorized representative of the Company other than a directive constituting an assignment described in Section 1.6(a); or (d) The Executive embezzles or knowingly, and with intent, misappropriates property of the Company, or unlawfully appropriates any corporate opportunity of the Company. 1.8 Annual Award Amount. The average of the two highest annual incentive awards under the Company's Executive Incentive Plan (or the annual cash incentive plan maintained by a successor company) paid in the last five years to the Executive prior to the occurrence of the Qualifying Termination. 2. Severance Benefits for an Executive Ineligible to Retire. Upon the occurrence of a Qualifying Termination with respect to an Executive who is Ineligible to Retire: (a) Severance Payment: The Company shall pay to the Executive an amount equal to two and one-fourth times the Executive's annual base salary (as in effect on the date of the Qualifying Termination, not reduced by any reduction described in Section 1.6(b) above) and Annual Award Amount. The payment shall be made in twenty-four equal monthly installments beginning on the first day of the month following the Qualifying Termination. (b) Severance Health Benefits. For the thirty-six month period commencing on the occurrence of such Qualifying Termination, the Company shall provide to the Executive and the Executive's family medical and dental benefits as provided to other executive officers who remain employed by the Company. The Executive shall be required to make payments for such coverage in the same amount as is required of executive officers who remain employed by the Company. (c) Split Dollar. The Qualifying Termination shall not constitute a termination of the Split Dollar Agreement between the Company and the Executive (or the split dollar agreement between a successor company and the Executive), and the Executive shall be deemed to have retired upon such Qualifying Termination for purposes of such Split Dollar Agreement (or the split dollar agreement between a successor company and the Executive). 3. Severance Benefits for an Executive Eligible to Retire. Upon the occurrence of a Qualifying Termination with respect to an Executive who is Eligible to Retire: (a) Severance Payment: The Company shall pay to the Executive an amount equal to two times the Executive's annual base salary (as in effect on the date of the Qualifying Termination, not reduced by any reduction described in Section 1.6(b) above) and Annual Award Amount. The payment shall be made in twenty-four equal monthly installments beginning on the first day of the month following the Qualifying Termination. (b) Supplemental Retirement Benefits. For purposes of determining the Executive's supplemental retirement benefits which the Executive is entitled to under the Company's Executive Benefits Plan (or the supplemental retirement plan maintained by a successor company), the Early Retirement Adjustment Factor (as such term is defined in the Company's Pension Plan or within the meaning of the tax qualified retirement plan maintained by a successor company) will be one (1). (c) Severance Health Benefits. The Company shall provide to the Executive and the Executive's family medical and dental benefits on the same basis and on the same terms as any retiree who has attained age 65 and completed the greater of 20 years or actual years of service. (d) Retirement. The Executive shall be treated as having retired at the Company's request for purposes of all of the Company's benefit plans (or the benefit plans maintained by a successor company). 4. Code Section 28OG. 4.1 Limitations. Notwithstanding Section 2 and 3, in the event that a change in ownership or control (within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code")) of the Company occurs and the independent public accountants for the Company (the "Accountants") determine that if the benefits to be provided under Section 2 and 3 (together with any other benefits payable to the Executive under any applicable plan maintained by the Company) were paid to the Executive: (a) the Executive would incur an excise tax under Section 4999 of Code, and the Company would be denied a deduction under Section 280G of the Code of all or some of such amounts to be paid to the Executive, and (b) the net after tax benefits to the Executive attributable to payments under Sections 2 and 3 hereof would not be at least $10,000 greater than the net after tax benefits which would accrue to the Executive if the amounts which would otherwise cause the Executive to be subject to this excise tax were not paid, the amounts payable to the Executive pursuant to Section 2 and 3 (or pursuant to such other plans maintained by the Company) shall be reduced so that the amount payable to the Executive hereunder is the greatest amount (as determined by the Accountants) that may be paid by the Company to the Executive without any such amount being subject to an excise tax under Section 4999 or being nondeductible for the Company pursuant to Section 280G. 4.2 Executive's Election. If the amounts to be paid to the Executive are to be reduced under paragraph 4.1 of this Section, the Executive shall be given the opportunity to designate which benefits or payments shall be reduced and in what order of priority. 4.3 Later Adjustments. (a) If the Executive receives reduced payments or benefits pursuant to the preceding paragraph, or if it had been determined that no such reduction was required, but it nonetheless is established pursuant to the final determination of a court or an Internal Revenue Service proceeding that, notwithstanding the good faith of the Executive and the Company in applying the terms of this Section, the aggregate amount paid to the Executive or for his benefit would result in any amount being treated as an "excess parachute payment" for purposes of Sections 28OG and 4999 of the Code, then an amount equal to the amount that would be an "excess parachute payment" shall be deemed for all purposes a loan to the Executive made on the date of the receipt of such excess amount, which the Executive shall have an obligation to repay to the Company on demand, together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code) from the date of the Executive's receipt of such excess until the date of such repayment. (b) In the event that it is determined for any reason that the amount of "excess parachute payments" are less than originally calculated, the Company shall promptly pay to the Executive the amount necessary so that, after such adjustment, the Executive will have received or be entitled to receive the maximum payments payable under this Section without any of such payments constituting an "excess parachute payment," together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code). 5. Termination of Agreement. This Agreement shall remain in effect from the date hereof until the last day of the twenty-fourth calendar month following the Effective Time. Further, upon the Effective Time, this Agreement shall continue until the Company or its successor shall have fully performed all of its obligations thereunder with respect to the Executive, with no future performance being possible. Notwithstanding the foregoing, this Agreement shall terminate on the date the Company's Board of Directors decides by formal vote not to proceed with the Merger; provided, however, that in the event a Qualifying Termination occurs prior to such date, this Agreement shall continue until the Company or its successor shall have fully performed all of its obligations thereunder with respect to the Executive, with no further performance being possible. 6. Amendment of Agreement. Subject to the provisions of Section 5, this Agreement may not be amended in any manner which has a significant adverse effect on the rights of the Executive without the written consent of the Executive. Notwithstanding the foregoing, at and after the Effective Time, this Agreement may not be amended in any respect without the written consent of the Executive. 7. Construction. Wherever any words are used herein in the masculine gender they shall be construed as though they were also used in the feminine gender in all cases where they would so apply, and wherever any words are used herein in the singular form, they shall be construed as though they were also used in the plural form in all cases where they would so apply. 8. Governing Law. This Agreement shall be governed by the laws of Maryland. 9. Successors and Assigns. This Agreement shall be binding upon the Company and any assignee or successor in interest to the Company. 10. Indemnification. The Company will pay all reasonable fees and expenses, if any, (including, without limitation, legal fees and expenses) that are incurred by the Executive to enforce this Agreement and that result from a breach of this Agreement by the Company. 11. Notice. Any notices, requests, demands, or other communications provided for by this Agreement shall be sufficient if in writing and if sent by registered or certified mail to the Executive at the last address he has filed in writing with the Company, or in the case of the Company, to its principal offices. BALTIMORE GAS AND ELECTRIC COMPANY By: /s/ Jon M. Files Jon M. Files Vice President Management Services /s/ Charles H. Cruse CHARLES H. CRUSE SEVERANCE AGREEMENT This Agreement is made the 6th day of December, 1995, by and between BALTIMORE GAS AND ELECTRIC COMPANY (the "Company") and ROBERT E. DENTON (the "Executive"). For purposes of Sections 1 through 11 of this Agreement the term "Company" shall be deemed to include any successor company. WHEREAS, Potomac Electric Power Company ("PEPCO") and the Company have entered into an Agreement and Plan of Merger dated as of September 22, 1995 (the "Merger Agreement"), whereby PEPCO and the Company will merge into RH Acquisition Corp. ("RH"), with RH as the surviving entity; and WHEREAS, the Company desires to establish a severance benefit for the Executive covering the period from the date hereof through the Effective Time (as hereinafter defined) and for the twenty-four month period following the Effective Time in the event the Merger (as hereinafter defined) occurs, to avoid the loss or the serious distraction of the Executive to the detriment of the Company and its stockholders during such periods when the Executive's undivided attention and commitment to the needs of the Company would be particularly important; and WHEREAS, the Executive desires to devote his time and energy for the benefit of the Company and its stockholders and not to be distracted during the Merger. NOW, THEREFORE, the parties agree as follows: 1. Definitions. 1.1 Merger. The term "Merger" shall have the meaning ascribed to such term in the Merger Agreement. 1.2 Effective Time. The term "Effective Time" shall have the meaning ascribed to such term in the Merger Agreement. 1.3 Qualifying Termination. (a) The occurrence of any one or more of the following events within twenty-four calendar months after the Effective Time shall constitute a "Qualifying Termination": (i) The Company's termination of the Executive's employment without Cause (as defined in Section 1.7); (ii) The Executive's resignation for Good Reason (as defined in Section 1.6); (iii) Failure or refusal by a successor company to assume the Company's obligations under this Agreement in its entirety, as required by Section 9 herein; or (iv) Commission by the Company of a material breach of any of the provisions of this Agreement. (b) A Qualifying Termination also shall include a termination of the Executive's employment, without Cause, from the date hereof, but prior to the Effective Time. (c) A Qualifying Termination shall not include a termination of employment by reason of death, disability, the Executive's voluntary termination of employment without Good Reason, or the Company's termination of the Executive's employment for Cause. 1.4 Ineligible to Retire. Ineligible to Retire, means an Executive who has not either (i) attained age 55 and completed 20 years of service with the Company and any successor company or (ii) attained age 60 and completed one year of service with the Company and any successor company, upon the occurrence of a Qualifying Termination. 1.5 Eligible to Retire. Eligible to Retire, means an Executive who has either (i) attained age 55 and completed 20 years of service with the Company and any successor company or (ii) attained age 60 with one year of service with the Company and any successor company, upon the occurrence of a Qualifying Termination. 1.6 Good Reason. Good Reason means, without the Executive's express written consent, the occurrence (i) after the Effective Time, or (ii) after the date hereof, but prior to the Effective Time, of any one or more of the following: (a) The assignment to the Executive of duties materially inconsistent with the Executive's authorities, duties, responsibilities, and status (including offices, title and reporting relationships) as an executive and/or officer of the Company, or a material reduction or alteration in the nature or status of the Executive's authorities, duties, or responsibilities from those in effect as of ninety days prior to the Effective Time (or, in the case of such an assignment, reduction or alteration after the date hereof, but prior to the Effective Time, ninety days prior to the date hereof), unless such act is remedied by the Company within 10 business days after receipt of written notice thereof given by the Executive; (b) A reduction by the Company of the Executive's base salary in effect at the Effective Time (or in the case of a reduction after the date hereof, but prior to the Effective Time, a reduction by the Company of the Executive's base salary in effect on the date hereof) or as the same shall be increased from time to time, unless such reduction is less than ten percent (10%) and it is either (i) replaced by an incentive opportunity equal in value; or is (ii) consistent and proportional with an overall reduction in management compensation due to extraordinary business conditions, including but not limited to reduced profitability and other financial stress (i.e., the base salary of the Executive will not be singled out for reduction in a manner inconsistent with a reduction imposed on other executives of the Company); (c) The relocation of the Executive's office more than 50 miles from the Executive's office at the Effective Time (or in the case of a relocation after the date hereof, but prior to the Effective Time, a relocation of the Executive's office more than 50 miles from the Executive's office on the date hereof). The Executive's right to terminate employment for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting Good Reason herein. 1.7 Cause. Cause shall mean the occurrence of any one or more of the following: (a) The Executive is convicted of a felony involving moral turpitude; or (b) The Executive engages in conduct or activities that constitutes disloyalty to the Company and such conduct or activities are materially damaging to the property, business or reputation of the Company; or (c) The Executive persistently fails or refuses to comply with any written direction of an authorized representative of the Company other than a directive constituting an assignment described in Section 1.6(a); or (d) The Executive embezzles or knowingly, and with intent, misappropriates property of the Company, or unlawfully appropriates any corporate opportunity of the Company. 1.8 Annual Award Amount. The average of the two highest annual incentive awards under the Company's Executive Incentive Plan (or the annual cash incentive plan maintained by a successor company) paid in the last five years to the Executive prior to the occurrence of the Qualifying Termination. 2. Severance Benefits for an Executive Ineligible to Retire. Upon the occurrence of a Qualifying Termination with respect to an Executive who is Ineligible to Retire: (a) Severance Payment: The Company shall pay to the Executive an amount equal to two and one-fourth times the Executive's annual base salary (as in effect on the date of the Qualifying Termination, not reduced by any reduction described in Section 1.6(b) above) and Annual Award Amount. The payment shall be made in twenty-four equal monthly installments beginning on the first day of the month following the Qualifying Termination. (b) Severance Health Benefits. For the thirty-six month period commencing on the occurrence of such Qualifying Termination, the Company shall provide to the Executive and the Executive's family medical and dental benefits as provided to other executive officers who remain employed by the Company. The Executive shall be required to make payments for such coverage in the same amount as is required of executive officers who remain employed by the Company. (c) Split Dollar. The Qualifying Termination shall not constitute a termination of the Split Dollar Agreement between the Company and the Executive (or the split dollar agreement between a successor company and the Executive), and the Executive shall be deemed to have retired upon such Qualifying Termination for purposes of such Split Dollar Agreement (or the split dollar agreement between a successor company and the Executive). 3. Severance Benefits for an Executive Eligible to Retire. Upon the occurrence of a Qualifying Termination with respect to an Executive who is Eligible to Retire: (a) Severance Payment: The Company shall pay to the Executive an amount equal to two times the Executive's annual base salary (as in effect on the date of the Qualifying Termination, not reduced by any reduction described in Section 1.6(b) above) and Annual Award Amount. The payment shall be made in twenty-four equal monthly installments beginning on the first day of the month following the Qualifying Termination. (b) Supplemental Retirement Benefits. For purposes of determining the Executive's supplemental retirement benefits which the Executive is entitled to under the Company's Executive Benefits Plan (or the supplemental retirement plan maintained by a successor company), the Early Retirement Adjustment Factor (as such term is defined in the Company's Pension Plan or within the meaning of the tax qualified retirement plan maintained by a successor company) will be one (1). (c) Severance Health Benefits. The Company shall provide to the Executive and the Executive's family medical and dental benefits on the same basis and on the same terms as any retiree who has attained age 65 and completed the greater of 20 years or actual years of service. (d) Retirement. The Executive shall be treated as having retired at the Company's request for purposes of all of the Company's benefit plans (or the benefit plans maintained by a successor company). 4 Code Section 28OG. 4.1 Limitations. Notwithstanding Section 2 and 3, in the event that a change in ownership or control (within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code")) of the Company occurs and the independent public accountants for the Company (the "Accountants") determine that if the benefits to be provided under Section 2 and 3 (together with any other benefits payable to the Executive under any applicable plan maintained by the Company) were paid to the Executive: (a) the Executive would incur an excise tax under Section 4999 of Code, and the Company would be denied a deduction under Section 280G of the Code of all or some of such amounts to be paid to the Executive, and (b) the net after tax benefits to the Executive attributable to payments under Sections 2 and 3 hereof would not be at least $10,000 greater than the net after tax benefits which would accrue to the Executive if the amounts which would otherwise cause the Executive to be subject to this excise tax were not paid, the amounts payable to the Executive pursuant to Section 2 and 3 (or pursuant to such other plans maintained by the Company) shall be reduced so that the amount payable to the Executive hereunder is the greatest amount (as determined by the Accountants) that may be paid by the Company to the Executive without any such amount being subject to an excise tax under Section 4999 or being nondeductible for the Company pursuant to Section 280G. 4.2 Executive's Election. If the amounts to be paid to the Executive are to be reduced under paragraph 4.1 of this Section, the Executive shall be given the opportunity to designate which benefits or payments shall be reduced and in what order of priority. 4.3 Later Adjustments. (a) If the Executive receives reduced payments or benefits pursuant to the preceding paragraph, or if it had been determined that no such reduction was required, but it nonetheless is established pursuant to the final determination of a court or an Internal Revenue Service proceeding that, notwithstanding the good faith of the Executive and the Company in applying the terms of this Section, the aggregate amount paid to the Executive or for his benefit would result in any amount being treated as an "excess parachute payment" for purposes of Sections 28OG and 4999 of the Code, then an amount equal to the amount that would be an "excess parachute payment" shall be deemed for all purposes a loan to the Executive made on the date of the receipt of such excess amount, which the Executive shall have an obligation to repay to the Company on demand, together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code) from the date of the Executive's receipt of such excess until the date of such repayment. (b) In the event that it is determined for any reason that the amount of "excess parachute payments" are less than originally calculated, the Company shall promptly pay to the Executive the amount necessary so that, after such adjustment, the Executive will have received or be entitled to receive the maximum payments payable under this Section without any of such payments constituting an "excess parachute payment," together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code). 5. Termination of Agreement. This Agreement shall remain in effect from the date hereof until the last day of the twenty-fourth calendar month following the Effective Time. Further, upon the Effective Time, this Agreement shall continue until the Company or its successor shall have fully performed all of its obligations thereunder with respect to the Executive, with no future performance being possible. Notwithstanding the foregoing, this Agreement shall terminate on the date the Company's Board of Directors decides by formal vote not to proceed with the Merger; provided, however, that in the event a Qualifying Termination occurs prior to such date, this Agreement shall continue until the Company or its successor shall have fully performed all of its obligations thereunder with respect to the Executive, with no further performance being possible. 6. Amendment of Agreement. Subject to the provisions of Section 5, this Agreement may not be amended in any manner which has a significant adverse effect on the rights of the Executive without the written consent of the Executive. Notwithstanding the foregoing, at and after the Effective Time, this Agreement may not be amended in any respect without the written consent of the Executive. 7. Construction. Wherever any words are used herein in the masculine gender they shall be construed as though they were also used in the feminine gender in all cases where they would so apply, and wherever any words are used herein in the singular form, they shall be construed as though they were also used in the plural form in all cases where they would so apply. 8. Governing Law. This Agreement shall be governed by the laws of Maryland. 9. Successors and Assigns. This Agreement shall be binding upon the Company and any assignee or successor in interest to the Company. 10. Indemnification. The Company will pay all reasonable fees and expenses, if any, (including, without limitation, legal fees and expenses) that are incurred by the Executive to enforce this Agreement and that result from a breach of this Agreement by the Company. 11. Notice. Any notices, requests, demands, or other communications provided for by this Agreement shall be sufficient if in writing and if sent by registered or certified mail to the Executive at the last address he has filed in writing with the Company, or in the case of the Company, to its principal offices. BALTIMORE GAS AND ELECTRIC COMPANY By: /s/ Jon M. Files Jon M. Files Vice President Management Services /s/ Robert E. Denton ROBERT E. DENTON SEVERANCE AGREEMENT This Agreement is made the 6th day of December, 1995, by and between BALTIMORE GAS AND ELECTRIC COMPANY (the "Company") and CARSERLO DOYLE (the "Executive"). For purposes of Sections 1 through 11 of this Agreement the term "Company" shall be deemed to include any successor company. WHEREAS, Potomac Electric Power Company ("PEPCO") and the Company have entered into an Agreement and Plan of Merger dated as of September 22, 1995 (the "Merger Agreement"), whereby PEPCO and the Company will merge into RH Acquisition Corp. ("RH"), with RH as the surviving entity; and WHEREAS, the Company desires to establish a severance benefit for the Executive covering the period from the date hereof through the Effective Time (as hereinafter defined) and for the twenty-four month period following the Effective Time in the event the Merger (as hereinafter defined) occurs, to avoid the loss or the serious distraction of the Executive to the detriment of the Company and its stockholders during such periods when the Executive's undivided attention and commitment to the needs of the Company would be particularly important; and WHEREAS, the Executive desires to devote his time and energy for the benefit of the Company and its stockholders and not to be distracted during the Merger. NOW, THEREFORE, the parties agree as follows: 1. Definitions. 1.1 Merger. The term "Merger" shall have the meaning ascribed to such term in the Merger Agreement. 1.2 Effective Time. The term "Effective Time" shall have the meaning ascribed to such term in the Merger Agreement. 1.3 Qualifying Termination. (a) The occurrence of any one or more of the following events within twenty-four calendar months after the Effective Time shall constitute a "Qualifying Termination": (i) The Company's termination of the Executive's employment without Cause (as defined in Section 1.7); (ii) The Executive's resignation for Good Reason (as defined in Section 1.6); (iii) Failure or refusal by a successor company to assume the Company's obligations under this Agreement in its entirety, as required by Section 9 herein; or (iv) Commission by the Company of a material breach of any of the provisions of this Agreement. (b) A Qualifying Termination also shall include a termination of the Executive's employment, without Cause, from the date hereof, but prior to the Effective Time. (c) A Qualifying Termination shall not include a termination of employment by reason of death, disability, the Executive's voluntary termination of employment without Good Reason, or the Company's termination of the Executive's employment for Cause. 1.4 Ineligible to Retire. Ineligible to Retire, means an Executive who has not either (i) attained age 55 and completed 20 years of service with the Company and any successor company or (ii) attained age 60 and completed one year of service with the Company and any successor company, upon the occurrence of a Qualifying Termination. 1.5 Eligible to Retire. Eligible to Retire, means an Executive who has either (i) attained age 55 and completed 20 years of service with the Company and any successor company or (ii) attained age 60 with one year of service with the Company and any successor company, upon the occurrence of a Qualifying Termination. 1.6 Good Reason. Good Reason means, without the Executive's express written consent, the occurrence (i) after the Effective Time, or (ii) after the date hereof, but prior to the Effective Time, of any one or more of the following: (a) The assignment to the Executive of duties materially inconsistent with the Executive's authorities, duties, responsibilities, and status (including offices, title and reporting relationships) as an executive and/or officer of the Company, or a material reduction or alteration in the nature or status of the Executive's authorities, duties, or responsibilities from those in effect as of ninety days prior to the Effective Time (or, in the case of such an assignment, reduction or alteration after the date hereof, but prior to the Effective Time, ninety days prior to the date hereof), unless such act is remedied by the Company within 10 business days after receipt of written notice thereof given by the Executive; (b) A reduction by the Company of the Executive's base salary in effect at the Effective Time (or in the case of a reduction after the date hereof, but prior to the Effective Time, a reduction by the Company of the Executive's base salary in effect on the date hereof) or as the same shall be increased from time to time, unless such reduction is less than ten percent (10%) and it is either (i) replaced by an incentive opportunity equal in value; or is (ii) consistent and proportional with an overall reduction in management compensation due to extraordinary business conditions, including but not limited to reduced profitability and other financial stress (i.e., the base salary of the Executive will not be singled out for reduction in a manner inconsistent with a reduction imposed on other executives of the Company); (c) The relocation of the Executive's office more than 50 miles from the Executive's office at the Effective Time (or in the case of a relocation after the date hereof, but prior to the Effective Time, a relocation of the Executive's office more than 50 miles from the Executive's office on the date hereof). The Executive's right to terminate employment for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting Good Reason herein. 1.7 Cause. Cause shall mean the occurrence of any one or more of the following: (a) The Executive is convicted of a felony involving moral turpitude; or (b) The Executive engages in conduct or activities that constitutes disloyalty to the Company and such conduct or activities are materially damaging to the property, business or reputation of the Company; or (c) The Executive persistently fails or refuses to comply with any written direction of an authorized representative of the Company other than a directive constituting an assignment described in Section 1.6(a); or (d) The Executive embezzles or knowingly, and with intent, misappropriates property of the Company, or unlawfully appropriates any corporate opportunity of the Company. 1.8 Annual Award Amount. The average of the two highest annual incentive awards under the Company's Executive Incentive Plan (or the annual cash incentive plan maintained by a successor company) paid in the last five years to the Executive prior to the occurrence of the Qualifying Termination. 2. Severance Benefits for an Executive Ineligible to Retire. Upon the occurrence of a Qualifying Termination with respect to an Executive who is Ineligible to Retire: (a) Severance Payment: The Company shall pay to the Executive an amount equal to two and one-fourth times the Executive's annual base salary (as in effect on the date of the Qualifying Termination, not reduced by any reduction described in Section 1.6(b) above) and Annual Award Amount. The payment shall be made in twenty-four equal monthly installments beginning on the first day of the month following the Qualifying Termination. (b) Severance Health Benefits. For the thirty-six month period commencing on the occurrence of such Qualifying Termination, the Company shall provide to the Executive and the Executive's family medical and dental benefits as provided to other executive officers who remain employed by the Company. The Executive shall be required to make payments for such coverage in the same amount as is required of executive officers who remain employed by the Company. (c) Split Dollar. The Qualifying Termination shall not constitute a termination of the Split Dollar Agreement between the Company and the Executive (or the split dollar agreement between a successor company and the Executive), and the Executive shall be deemed to have retired upon such Qualifying Termination for purposes of such Split Dollar Agreement (or the split dollar agreement between a successor company and the Executive). 3. Severance Benefits for an Executive Eligible to Retire. Upon the occurrence of a Qualifying Termination with respect to an Executive who is Eligible to Retire: (a) Severance Payment: The Company shall pay to the Executive an amount equal to two times the Executive's annual base salary (as in effect on the date of the Qualifying Termination, not reduced by any reduction described in Section 1.6(b) above) and Annual Award Amount. The payment shall be made in twenty-four equal monthly installments beginning on the first day of the month following the Qualifying Termination. (b) Supplemental Retirement Benefits. For purposes of determining the Executive's supplemental retirement benefits which the Executive is entitled to under the Company's Executive Benefits Plan (or the supplemental retirement plan maintained by a successor company), the Early Retirement Adjustment Factor (as such term is defined in the Company's Pension Plan or within the meaning of the tax qualified retirement plan maintained by a successor company) will be one (1). (c) Severance Health Benefits. The Company shall provide to the Executive and the Executive's family medical and dental benefits on the same basis and on the same terms as any retiree who has attained age 65 and completed the greater of 20 years or actual years of service. (d) Retirement. The Executive shall be treated as having retired at the Company's request for purposes of all of the Company's benefit plans (or the benefit plans maintained by a successor company). 4. Code Section 28OG. 4.1 Limitations. Notwithstanding Section 2 and 3, in the event that a change in ownership or control (within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code")) of the Company occurs and the independent public accountants for the Company (the "Accountants") determine that if the benefits to be provided under Section 2 and 3 (together with any other benefits payable to the Executive under any applicable plan maintained by the Company) were paid to the Executive: (a) the Executive would incur an excise tax under Section 4999 of Code, and the Company would be denied a deduction under Section 280G of the Code of all or some of such amounts to be paid to the Executive, and (b) the net after tax benefits to the Executive attributable to payments under Sections 2 and 3 hereof would not be at least $10,000 greater than the net after tax benefits which would accrue to the Executive if the amounts which would otherwise cause the Executive to be subject to this excise tax were not paid, the amounts payable to the Executive pursuant to Section 2 and 3 (or pursuant to such other plans maintained by the Company) shall be reduced so that the amount payable to the Executive hereunder is the greatest amount (as determined by the Accountants) that may be paid by the Company to the Executive without any such amount being subject to an excise tax under Section 4999 or being nondeductible for the Company pursuant to Section 280G. 4.2 Executive's Election. If the amounts to be paid to the Executive are to be reduced under paragraph 4.1 of this Section, the Executive shall be given the opportunity to designate which benefits or payments shall be reduced and in what order of priority. 4.3 Later Adjustments. (a) If the Executive receives reduced payments or benefits pursuant to the preceding paragraph, or if it had been determined that no such reduction was required, but it nonetheless is established pursuant to the final determination of a court or an Internal Revenue Service proceeding that, notwithstanding the good faith of the Executive and the Company in applying the terms of this Section, the aggregate amount paid to the Executive or for his benefit would result in any amount being treated as an "excess parachute payment" for purposes of Sections 28OG and 4999 of the Code, then an amount equal to the amount that would be an "excess parachute payment" shall be deemed for all purposes a loan to the Executive made on the date of the receipt of such excess amount, which the Executive shall have an obligation to repay to the Company on demand, together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code) from the date of the Executive's receipt of such excess until the date of such repayment. (b) In the event that it is determined for any reason that the amount of "excess parachute payments" are less than originally calculated, the Company shall promptly pay to the Executive the amount necessary so that, after such adjustment, the Executive will have received or be entitled to receive the maximum payments payable under this Section without any of such payments constituting an "excess parachute payment," together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code). 5. Termination of Agreement. This Agreement shall remain in effect from the date hereof until the last day of the twenty-fourth calendar month following the Effective Time. Further, upon the Effective Time, this Agreement shall continue until the Company or its successor shall have fully performed all of its obligations thereunder with respect to the Executive, with no future performance being possible. Notwithstanding the foregoing, this Agreement shall terminate on the date the Company's Board of Directors decides by formal vote not to proceed with the Merger; provided, however, that in the event a Qualifying Termination occurs prior to such date, this Agreement shall continue until the Company or its successor shall have fully performed all of its obligations thereunder with respect to the Executive, with no further performance being possible. 6. Amendment of Agreement. Subject to the provisions of Section 5, this Agreement may not be amended in any manner which has a significant adverse effect on the rights of the Executive without the written consent of the Executive. Notwithstanding the foregoing, at and after the Effective Time, this Agreement may not be amended in any respect without the written consent of the Executive. 7. Construction. Wherever any words are used herein in the masculine gender they shall be construed as though they were also used in the feminine gender in all cases where they would so apply, and wherever any words are used herein in the singular form, they shall be construed as though they were also used in the plural form in all cases where they would so apply. 8. Governing Law. This Agreement shall be governed by the laws of Maryland. 9. Successors and Assigns. This Agreement shall be binding upon the Company and any assignee or successor in interest to the Company. 10. Indemnification. The Company will pay all reasonable fees and expenses, if any, (including, without limitation, legal fees and expenses) that are incurred by the Executive to enforce this Agreement and that result from a breach of this Agreement by the Company. 11. Notice. Any notices, requests, demands, or other communications provided for by this Agreement shall be sufficient if in writing and if sent by registered or certified mail to the Executive at the last address he has filed in writing with the Company, or in the case of the Company, to its principal offices. BALTIMORE GAS AND ELECTRIC COMPANY By: /s/ Jon M. Files Jon M. Files Vice President Management Services /s/ Carserlo Doyle CARSERLO DOYLE SEVERANCE AGREEMENT This Agreement is made the 6th day of December, 1995, by and between BALTIMORE GAS AND ELECTRIC COMPANY (the "Company") and JON M. FILES (the "Executive"). For purposes of Sections 1 through 11 of this Agreement the term "Company" shall be deemed to include any successor company. WHEREAS, Potomac Electric Power Company ("PEPCO") and the Company have entered into an Agreement and Plan of Merger dated as of September 22, 1995 (the "Merger Agreement"), whereby PEPCO and the Company will merge into RH Acquisition Corp. ("RH"), with RH as the surviving entity; and WHEREAS, the Company desires to establish a severance benefit for the Executive covering the period from the date hereof through the Effective Time (as hereinafter defined) and for the twenty-four month period following the Effective Time in the event the Merger (as hereinafter defined) occurs, to avoid the loss or the serious distraction of the Executive to the detriment of the Company and its stockholders during such periods when the Executive's undivided attention and commitment to the needs of the Company would be particularly important; and WHEREAS, the Executive desires to devote his time and energy for the benefit of the Company and its stockholders and not to be distracted during the Merger. NOW, THEREFORE, the parties agree as follows: 1. Definitions. 1.1 Merger. The term "Merger" shall have the meaning ascribed to such term in the Merger Agreement. 1.2 Effective Time. The term "Effective Time" shall have the meaning ascribed to such term in the Merger Agreement. 1.3 Qualifying Termination. (a) The occurrence of any one or more of the following events within twenty-four calendar months after the Effective Time shall constitute a "Qualifying Termination": (i) The Company's termination of the Executive's employment without Cause (as defined in Section 1.7); (ii) The Executive's resignation for Good Reason (as defined in Section 1.6); (iii) Failure or refusal by a successor company to assume the Company's obligations under this Agreement in its entirety, as required by Section 9 herein; or (iv) Commission by the Company of a material breach of any of the provisions of this Agreement. (b) A Qualifying Termination also shall include a termination of the Executive's employment, without Cause, from the date hereof, but prior to the Effective Time. (c) A Qualifying Termination shall not include a termination of employment by reason of death, disability, the Executive's voluntary termination of employment without Good Reason, or the Company's termination of the Executive's employment for Cause. 1.4 Ineligible to Retire. Ineligible to Retire, means an Executive who has not either (i) attained age 55 and completed 20 years of service with the Company and any successor company or (ii) attained age 60 and completed one year of service with the Company and any successor company, upon the occurrence of a Qualifying Termination. 1.5 Eligible to Retire. Eligible to Retire, means an Executive who has either (i) attained age 55 and completed 20 years of service with the Company and any successor company or (ii) attained age 60 with one year of service with the Company and any successor company, upon the occurrence of a Qualifying Termination. 1.6 Good Reason. Good Reason means, without the Executive's express written consent, the occurrence (i) after the Effective Time, or (ii) after the date hereof, but prior to the Effective Time, of any one or more of the following: (a) The assignment to the Executive of duties materially inconsistent with the Executive's authorities, duties, responsibilities, and status (including offices, title and reporting relationships) as an executive and/or officer of the Company, or a material reduction or alteration in the nature or status of the Executive's authorities, duties, or responsibilities from those in effect as of ninety days prior to the Effective Time (or, in the case of such an assignment, reduction or alteration after the date hereof, but prior to the Effective Time, ninety days prior to the date hereof), unless such act is remedied by the Company within 10 business days after receipt of written notice thereof given by the Executive; (b) A reduction by the Company of the Executive's base salary in effect at the Effective Time (or in the case of a reduction after the date hereof, but prior to the Effective Time, a reduction by the Company of the Executive's base salary in effect on the date hereof) or as the same shall be increased from time to time, unless such reduction is less than ten percent (10%) and it is either (i) replaced by an incentive opportunity equal in value; or is (ii) consistent and proportional with an overall reduction in management compensation due to extraordinary business conditions, including but not limited to reduced profitability and other financial stress (i.e., the base salary of the Executive will not be singled out for reduction in a manner inconsistent with a reduction imposed on other executives of the Company); (c) The relocation of the Executive's office more than 50 miles from the Executive's office at the Effective Time (or in the case of a relocation after the date hereof, but prior to the Effective Time, a relocation of the Executive's office more than 50 miles from the Executive's office on the date hereof). The Executive's right to terminate employment for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting Good Reason herein. 1.7 Cause. Cause shall mean the occurrence of any one or more of the following: (a) The Executive is convicted of a felony involving moral turpitude; or (b) The Executive engages in conduct or activities that constitutes disloyalty to the Company and such conduct or activities are materially damaging to the property, business or reputation of the Company; or (c) The Executive persistently fails or refuses to comply with any written direction of an authorized representative of the Company other than a directive constituting an assignment described in Section 1.6(a); or (d) The Executive embezzles or knowingly, and with intent, misappropriates property of the Company, or unlawfully appropriates any corporate opportunity of the Company. 1.8 Annual Award Amount. The average of the two highest annual incentive awards under the Company's Executive Incentive Plan (or the annual cash incentive plan maintained by a successor company) paid in the last five years to the Executive prior to the occurrence of the Qualifying Termination. 2. Severance Benefits for an Executive Ineligible to Retire. Upon the occurrence of a Qualifying Termination with respect to an Executive who is Ineligible to Retire: (a) Severance Payment: The Company shall pay to the Executive an amount equal to two and one-fourth times the Executive's annual base salary (as in effect on the date of the Qualifying Termination, not reduced by any reduction described in Section 1.6(b) above) and Annual Award Amount. The payment shall be made in twenty-four equal monthly installments beginning on the first day of the month following the Qualifying Termination. (b) Severance Health Benefits. For the thirty-six month period commencing on the occurrence of such Qualifying Termination, the Company shall provide to the Executive and the Executive's family medical and dental benefits as provided to other executive officers who remain employed by the Company. The Executive shall be required to make payments for such coverage in the same amount as is required of executive officers who remain employed by the Company. (c) Split Dollar. The Qualifying Termination shall not constitute a termination of the Split Dollar Agreement between the Company and the Executive (or the split dollar agreement between a successor company and the Executive), and the Executive shall be deemed to have retired upon such Qualifying Termination for purposes of such Split Dollar Agreement (or the split dollar agreement between a successor company and the Executive). 3. Severance Benefits for an Executive Eligible to Retire. Upon the occurrence of a Qualifying Termination with respect to an Executive who is Eligible to Retire: (a) Severance Payment: The Company shall pay to the Executive an amount equal to two times the Executive's annual base salary (as in effect on the date of the Qualifying Termination, not reduced by any reduction described in Section 1.6(b) above) and Annual Award Amount. The payment shall be made in twenty-four equal monthly installments beginning on the first day of the month following the Qualifying Termination. (b) Supplemental Retirement Benefits. For purposes of determining the Executive's supplemental retirement benefits which the Executive is entitled to under the Company's Executive Benefits Plan (or the supplemental retirement plan maintained by a successor company), the Early Retirement Adjustment Factor (as such term is defined in the Company's Pension Plan or within the meaning of the tax qualified retirement plan maintained by a successor company) will be one (1). (c) Severance Health Benefits. The Company shall provide to the Executive and the Executive's family medical and dental benefits on the same basis and on the same terms as any retiree who has attained age 65 and completed the greater of 20 years or actual years of service. (d) Retirement. The Executive shall be treated as having retired at the Company's request for purposes of all of the Company's benefit plans (or the benefit plans maintained by a successor company). 4. Code Section 28OG. 4.1 Limitations. Notwithstanding Section 2 and 3, in the event that a change in ownership or control (within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code")) of the Company occurs and the independent public accountants for the Company (the "Accountants") determine that if the benefits to be provided under Section 2 and 3 (together with any other benefits payable to the Executive under any applicable plan maintained by the Company) were paid to the Executive: (a) the Executive would incur an excise tax under Section 4999 of Code, and the Company would be denied a deduction under Section 280G of the Code of all or some of such amounts to be paid to the Executive, and (b) the net after tax benefits to the Executive attributable to payments under Sections 2 and 3 hereof would not be at least $10,000 greater than the net after tax benefits which would accrue to the Executive if the amounts which would otherwise cause the Executive to be subject to this excise tax were not paid, the amounts payable to the Executive pursuant to Section 2 and 3 (or pursuant to such other plans maintained by the Company) shall be reduced so that the amount payable to the Executive hereunder is the greatest amount (as determined by the Accountants) that may be paid by the Company to the Executive without any such amount being subject to an excise tax under Section 4999 or being nondeductible for the Company pursuant to Section 280G. 4.2 Executive's Election. If the amounts to be paid to the Executive are to be reduced under paragraph 4.1 of this Section, the Executive shall be given the opportunity to designate which benefits or payments shall be reduced and in what order of priority. 4.3 Later Adjustments. (a) If the Executive receives reduced payments or benefits pursuant to the preceding paragraph, or if it had been determined that no such reduction was required, but it nonetheless is established pursuant to the final determination of a court or an Internal Revenue Service proceeding that, notwithstanding the good faith of the Executive and the Company in applying the terms of this Section, the aggregate amount paid to the Executive or for his benefit would result in any amount being treated as an "excess parachute payment" for purposes of Sections 28OG and 4999 of the Code, then an amount equal to the amount that would be an "excess parachute payment" shall be deemed for all purposes a loan to the Executive made on the date of the receipt of such excess amount, which the Executive shall have an obligation to repay to the Company on demand, together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code) from the date of the Executive's receipt of such excess until the date of such repayment. (b) In the event that it is determined for any reason that the amount of "excess parachute payments" are less than originally calculated, the Company shall promptly pay to the Executive the amount necessary so that, after such adjustment, the Executive will have received or be entitled to receive the maximum payments payable under this Section without any of such payments constituting an "excess parachute payment," together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code). 5. Termination of Agreement. This Agreement shall remain in effect from the date hereof until the last day of the twenty-fourth calendar month following the Effective Time. Further, upon the Effective Time, this Agreement shall continue until the Company or its successor shall have fully performed all of its obligations thereunder with respect to the Executive, with no future performance being possible. Notwithstanding the foregoing, this Agreement shall terminate on the date the Company's Board of Directors decides by formal vote not to proceed with the Merger; provided, however, that in the event a Qualifying Termination occurs prior to such date, this Agreement shall continue until the Company or its successor shall have fully performed all of its obligations thereunder with respect to the Executive, with no further performance being possible. 6. Amendment of Agreement. Subject to the provisions of Section 5, this Agreement may not be amended in any manner which has a significant adverse effect on the rights of the Executive without the written consent of the Executive. Notwithstanding the foregoing, at and after the Effective Time, this Agreement may not be amended in any respect without the written consent of the Executive. 7. Construction. Wherever any words are used herein in the masculine gender they shall be construed as though they were also used in the feminine gender in all cases where they would so apply, and wherever any words are used herein in the singular form, they shall be construed as though they were also used in the plural form in all cases where they would so apply. 8. Governing Law. This Agreement shall be governed by the laws of Maryland. 9. Successors and Assigns. This Agreement shall be binding upon the Company and any assignee or successor in interest to the Company. 10. Indemnification. The Company will pay all reasonable fees and expenses, if any, (including, without limitation, legal fees and expenses) that are incurred by the Executive to enforce this Agreement and that result from a breach of this Agreement by the Company. 11. Notice. Any notices, requests, demands, or other communications provided for by this Agreement shall be sufficient if in writing and if sent by registered or certified mail to the Executive at the last address he has filed in writing with the Company, or in the case of the Company, to its principal offices. BALTIMORE GAS AND ELECTRIC COMPANY By: /s/ Christian H. Poindexter Christian H. Poindexter Chairman of the Board /s/ Jon M. Files JON M. FILES SEVERANCE AGREEMENT This Agreement is made the 6th day of December, 1995, by and between BALTIMORE GAS AND ELECTRIC COMPANY (the "Company") and SHARON HOSTETTER (the "Executive"). For purposes of Sections 1 through 11 of this Agreement the term "Company" shall be deemed to include any successor company. WHEREAS, Potomac Electric Power Company ("PEPCO") and the Company have entered into an Agreement and Plan of Merger dated as of September 22, 1995 (the "Merger Agreement"), whereby PEPCO and the Company will merge into RH Acquisition Corp. ("RH"), with RH as the surviving entity; and WHEREAS, the Company desires to establish a severance benefit for the Executive covering the period from the date hereof through the Effective Time (as hereinafter defined) and for the twenty-four month period following the Effective Time in the event the Merger (as hereinafter defined) occurs, to avoid the loss or the serious distraction of the Executive to the detriment of the Company and its stockholders during such periods when the Executive's undivided attention and commitment to the needs of the Company would be particularly important; and WHEREAS, the Executive desires to devote her time and energy for the benefit of the Company and its stockholders and not to be distracted during the Merger. NOW, THEREFORE, the parties agree as follows: 1. Definitions. 1.1 Merger. The term "Merger" shall have the meaning ascribed to such term in the Merger Agreement. 1.2 Effective Time. The term "Effective Time" shall have the meaning ascribed to such term in the Merger Agreement. 1.3 Qualifying Termination. (a) The occurrence of any one or more of the following events within twenty-four calendar months after the Effective Time shall constitute a "Qualifying Termination": (i) The Company's termination of the Executive's employment without Cause (as defined in Section 1.7); (ii) The Executive's resignation for Good Reason (as defined in Section 1.6); (iii) Failure or refusal by a successor company to assume the Company's obligations under this Agreement in its entirety, as required by Section 9 herein; or (iv) Commission by the Company of a material breach of any of the provisions of this Agreement. (b) A Qualifying Termination also shall include a termination of the Executive's employment, without Cause, from the date hereof, but prior to the Effective Time. (c) A Qualifying Termination shall not include a termination of employment by reason of death, disability, the Executive's voluntary termination of employment without Good Reason, or the Company's termination of the Executive's employment for Cause. 1.4 Ineligible to Retire. Ineligible to Retire, means an Executive who has not either (i) attained age 55 and completed 20 years of service with the Company and any successor company or (ii) attained age 60 and completed one year of service with the Company and any successor company, upon the occurrence of a Qualifying Termination. 1.5 Eligible to Retire. Eligible to Retire, means an Executive who has either (i) attained age 55 and completed 20 years of service with the Company and any successor company or (ii) attained age 60 with one year of service with the Company and any successor company, upon the occurrence of a Qualifying Termination. 1.6 Good Reason. Good Reason means, without the Executive's express written consent, the occurrence (i) after the Effective Time, or (ii) after the date hereof, but prior to the Effective Time, of any one or more of the following: (a) The assignment to the Executive of duties materially inconsistent with the Executive's authorities, duties, responsibilities, and status (including offices, title and reporting relationships) as an executive and/or officer of the Company, or a material reduction or alteration in the nature or status of the Executive's authorities, duties, or responsibilities from those in effect as of ninety days prior to the Effective Time (or, in the case of such an assignment, reduction or alteration after the date hereof, but prior to the Effective Time, ninety days prior to the date hereof), unless such act is remedied by the Company within 10 business days after receipt of written notice thereof given by the Executive; (b) A reduction by the Company of the Executive's base salary in effect at the Effective Time (or in the case of a reduction after the date hereof, but prior to the Effective Time, a reduction by the Company of the Executive's base salary in effect on the date hereof) or as the same shall be increased from time to time, unless such reduction is less than ten percent (10%) and it is either (i) replaced by an incentive opportunity equal in value; or is (ii) consistent and proportional with an overall reduction in management compensation due to extraordinary business conditions, including but not limited to reduced profitability and other financial stress (i.e., the base salary of the Executive will not be singled out for reduction in a manner inconsistent with a reduction imposed on other executives of the Company); (c) The relocation of the Executive's office more than 50 miles from the Executive's office at the Effective Time (or in the case of a relocation after the date hereof, but prior to the Effective Time, a relocation of the Executive's office more than 50 miles from the Executive's office on the date hereof). The Executive's right to terminate employment for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting Good Reason herein. 1.7 Cause. Cause shall mean the occurrence of any one or more of the following: (a) The Executive is convicted of a felony involving moral turpitude; or (b) The Executive engages in conduct or activities that constitutes disloyalty to the Company and such conduct or activities are materially damaging to the property, business or reputation of the Company; or (c) The Executive persistently fails or refuses to comply with any written direction of an authorized representative of the Company other than a directive constituting an assignment described in Section 1.6(a); or (d) The Executive embezzles or knowingly, and with intent, misappropriates property of the Company, or unlawfully appropriates any corporate opportunity of the Company. 1.8 Annual Award Amount. The average of the two highest annual incentive awards under the Company's Executive Incentive Plan (or the annual cash incentive plan maintained by a successor company) paid in the last five years to the Executive prior to the occurrence of the Qualifying Termination. 2. Severance Benefits for an Executive Ineligible to Retire. Upon the occurrence of a Qualifying Termination with respect to an Executive who is Ineligible to Retire: (a) Severance Payment: The Company shall pay to the Executive an amount equal to two and one-fourth times the Executive's annual base salary (as in effect on the date of the Qualifying Termination, not reduced by any reduction described in Section 1.6(b) above) and Annual Award Amount. The payment shall be made in twenty-four equal monthly installments beginning on the first day of the month following the Qualifying Termination. (b) Severance Health Benefits. For the thirty-six month period commencing on the occurrence of such Qualifying Termination, the Company shall provide to the Executive and the Executive's family medical and dental benefits as provided to other executive officers who remain employed by the Company. The Executive shall be required to make payments for such coverage in the same amount as is required of executive officers who remain employed by the Company. (c) Split Dollar. The Qualifying Termination shall not constitute a termination of the Split Dollar Agreement between the Company and the Executive (or the split dollar agreement between a successor company and the Executive), and the Executive shall be deemed to have retired upon such Qualifying Termination for purposes of such Split Dollar Agreement (or the split dollar agreement between a successor company and the Executive). 3. Severance Benefits for an Executive Eligible to Retire. Upon the occurrence of a Qualifying Termination with respect to an Executive who is Eligible to Retire: (a) Severance Payment: The Company shall pay to the Executive an amount equal to two times the Executive's annual base salary (as in effect on the date of the Qualifying Termination, not reduced by any reduction described in Section 1.6(b) above) and Annual Award Amount. The payment shall be made in twenty-four equal monthly installments beginning on the first day of the month following the Qualifying Termination. (b) Supplemental Retirement Benefits. For purposes of determining the Executive's supplemental retirement benefits which the Executive is entitled to under the Company's Executive Benefits Plan (or the supplemental retirement plan maintained by a successor company), the Early Retirement Adjustment Factor (as such term is defined in the Company's Pension Plan or within the meaning of the tax qualified retirement plan maintained by a successor company) will be one (1). (c) Severance Health Benefits. The Company shall provide to the Executive and the Executive's family medical and dental benefits on the same basis and on the same terms as any retiree who has attained age 65 and completed the greater of 20 years or actual years of service. (d) Retirement. The Executive shall be treated as having retired at the Company's request for purposes of all of the Company's benefit plans (or the benefit plans maintained by a successor company). 4. Code Section 28OG. 4.1 Limitations. Notwithstanding Section 2 and 3, in the event that a change in ownership or control (within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code")) of the Company occurs and the independent public accountants for the Company (the "Accountants") determine that if the benefits to be provided under Section 2 and 3 (together with any other benefits payable to the Executive under any applicable plan maintained by the Company) were paid to the Executive: (a) the Executive would incur an excise tax under Section 4999 of Code, and the Company would be denied a deduction under Section 280G of the Code of all or some of such amounts to be paid to the Executive, and (b) the net after tax benefits to the Executive attributable to payments under Sections 2 and 3 hereof would not be at least $10,000 greater than the net after tax benefits which would accrue to the Executive if the amounts which would otherwise cause the Executive to be subject to this excise tax were not paid, the amounts payable to the Executive pursuant to Section 2 and 3 (or pursuant to such other plans maintained by the Company) shall be reduced so that the amount payable to the Executive hereunder is the greatest amount (as determined by the Accountants) that may be paid by the Company to the Executive without any such amount being subject to an excise tax under Section 4999 or being nondeductible for the Company pursuant to Section 280G. 4.2 Executive's Election. If the amounts to be paid to the Executive are to be reduced under paragraph 4.1 of this Section, the Executive shall be given the opportunity to designate which benefits or payments shall be reduced and in what order of priority. 4.3 Later Adjustments. (a) If the Executive receives reduced payments or benefits pursuant to the preceding paragraph, or if it had been determined that no such reduction was required, but it nonetheless is established pursuant to the final determination of a court or an Internal Revenue Service proceeding that, notwithstanding the good faith of the Executive and the Company in applying the terms of this Section, the aggregate amount paid to the Executive or for her benefit would result in any amount being treated as an "excess parachute payment" for purposes of Sections 28OG and 4999 of the Code, then an amount equal to the amount that would be an "excess parachute payment" shall be deemed for all purposes a loan to the Executive made on the date of the receipt of such excess amount, which the Executive shall have an obligation to repay to the Company on demand, together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code) from the date of the Executive's receipt of such excess until the date of such repayment. (b) In the event that it is determined for any reason that the amount of "excess parachute payments" are less than originally calculated, the Company shall promptly pay to the Executive the amount necessary so that, after such adjustment, the Executive will have received or be entitled to receive the maximum payments payable under this Section without any of such payments constituting an "excess parachute payment," together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code). 5. Termination of Agreement. This Agreement shall remain in effect from the date hereof until the last day of the twenty-fourth calendar month following the Effective Time. Further, upon the Effective Time, this Agreement shall continue until the Company or its successor shall have fully performed all of its obligations thereunder with respect to the Executive, with no future performance being possible. Notwithstanding the foregoing, this Agreement shall terminate on the date the Company's Board of Directors decides by formal vote not to proceed with the Merger; provided, however, that in the event a Qualifying Termination occurs prior to such date, this Agreement shall continue until the Company or its successor shall have fully performed all of its obligations thereunder with respect to the Executive, with no further performance being possible. 6. Amendment of Agreement. Subject to the provisions of Section 5, this Agreement may not be amended in any manner which has a significant adverse effect on the rights of the Executive without the written consent of the Executive. Notwithstanding the foregoing, at and after the Effective Time, this Agreement may not be amended in any respect without the written consent of the Executive. 7. Construction. Wherever any words are used herein in the feminine gender they shall be construed as though they were also used in the masculine gender in all cases where they would so apply, and wherever any words are used herein in the singular form, they shall be construed as though they were also used in the plural form in all cases where they would so apply. 8. Governing Law. This Agreement shall be governed by the laws of Maryland. 9. Successors and Assigns. This Agreement shall be binding upon the Company and any assignee or successor in interest to the Company. 10. Indemnification. The Company will pay all reasonable fees and expenses, if any, (including, without limitation, legal fees and expenses) that are incurred by the Executive to enforce this Agreement and that result from a breach of this Agreement by the Company. 11. Notice. Any notices, requests, demands, or other communications provided for by this Agreement shall be sufficient if in writing and if sent by registered or certified mail to the Executive at the last address she has filed in writing with the Company, or in the case of the Company, to its principal offices. BALTIMORE GAS AND ELECTRIC COMPANY By: /s/ Jon M. Files Jon M. Files Vice President Management Services /s/ Sharon Hostetter SHARON HOSTETTER SEVERANCE AGREEMENT This Agreement is made the 6th day of December, 1995, by and between BALTIMORE GAS AND ELECTRIC COMPANY (the "Company") and RONALD W. LOWMAN (the "Executive"). For purposes of Sections 1 through 11 of this Agreement the term "Company" shall be deemed to include any successor company. WHEREAS, Potomac Electric Power Company ("PEPCO") and the Company have entered into an Agreement and Plan of Merger dated as of September 22, 1995 (the "Merger Agreement"), whereby PEPCO and the Company will merge into RH Acquisition Corp. ("RH"), with RH as the surviving entity; and WHEREAS, the Company desires to establish a severance benefit for the Executive covering the period from the date hereof through the Effective Time (as hereinafter defined) and for the twenty-four month period following the Effective Time in the event the Merger (as hereinafter defined) occurs, to avoid the loss or the serious distraction of the Executive to the detriment of the Company and its stockholders during such periods when the Executive's undivided attention and commitment to the needs of the Company would be particularly important; and WHEREAS, the Executive desires to devote his time and energy for the benefit of the Company and its stockholders and not to be distracted during the Merger. NOW, THEREFORE, the parties agree as follows: 1. Definitions. 1.1 Merger. The term "Merger" shall have the meaning ascribed to such term in the Merger Agreement. 1.2 Effective Time. The term "Effective Time" shall have the meaning ascribed to such term in the Merger Agreement. 1.3 Qualifying Termination. (a) The occurrence of any one or more of the following events within twenty-four calendar months after the Effective Time shall constitute a "Qualifying Termination": (i) The Company's termination of the Executive's employment without Cause (as defined in Section 1.7); (ii) The Executive's resignation for Good Reason (as defined in Section 1.6); (iii) Failure or refusal by a successor company to assume the Company's obligations under this Agreement in its entirety, as required by Section 9 herein; or (iv) Commission by the Company of a material breach of any of the provisions of this Agreement. (b) A Qualifying Termination also shall include a termination of the Executive's employment, without Cause, from the date hereof, but prior to the Effective Time. (c) A Qualifying Termination shall not include a termination of employment by reason of death, disability, the Executive's voluntary termination of employment without Good Reason, or the Company's termination of the Executive's employment for Cause. 1.4 Ineligible to Retire. Ineligible to Retire, means an Executive who has not either (i) attained age 55 and completed 20 years of service with the Company and any successor company or (ii) attained age 60 and completed one year of service with the Company and any successor company, upon the occurrence of a Qualifying Termination. 1.5 Eligible to Retire. Eligible to Retire, means an Executive who has either (i) attained age 55 and completed 20 years of service with the Company and any successor company or (ii) attained age 60 with one year of service with the Company and any successor company, upon the occurrence of a Qualifying Termination. 1.6 Good Reason. Good Reason means, without the Executive's express written consent, the occurrence (i) after the Effective Time, or (ii) after the date hereof, but prior to the Effective Time, of any one or more of the following: (a) The assignment to the Executive of duties materially inconsistent with the Executive's authorities, duties, responsibilities, and status (including offices, title and reporting relationships) as an executive and/or officer of the Company, or a material reduction or alteration in the nature or status of the Executive's authorities, duties, or responsibilities from those in effect as of ninety days prior to the Effective Time (or, in the case of such an assignment, reduction or alteration after the date hereof, but prior to the Effective Time, ninety days prior to the date hereof), unless such act is remedied by the Company within 10 business days after receipt of written notice thereof given by the Executive; (b) A reduction by the Company of the Executive's base salary in effect at the Effective Time (or in the case of a reduction after the date hereof, but prior to the Effective Time, a reduction by the Company of the Executive's base salary in effect on the date hereof) or as the same shall be increased from time to time, unless such reduction is less than ten percent (10%) and it is either (i) replaced by an incentive opportunity equal in value; or is (ii) consistent and proportional with an overall reduction in management compensation due to extraordinary business conditions, including but not limited to reduced profitability and other financial stress (i.e., the base salary of the Executive will not be singled out for reduction in a manner inconsistent with a reduction imposed on other executives of the Company); (c) The relocation of the Executive's office more than 50 miles from the Executive's office at the Effective Time (or in the case of a relocation after the date hereof, but prior to the Effective Time, a relocation of the Executive's office more than 50 miles from the Executive's office on the date hereof). The Executive's right to terminate employment for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting Good Reason herein. 1.7 Cause. Cause shall mean the occurrence of any one or more of the following: (a) The Executive is convicted of a felony involving moral turpitude; or (b) The Executive engages in conduct or activities that constitutes disloyalty to the Company and such conduct or activities are materially damaging to the property, business or reputation of the Company; or (c) The Executive persistently fails or refuses to comply with any written direction of an authorized representative of the Company other than a directive constituting an assignment described in Section 1.6(a); or (d) The Executive embezzles or knowingly, and with intent, misappropriates property of the Company, or unlawfully appropriates any corporate opportunity of the Company. 1.8 Annual Award Amount. The average of the two highest annual incentive awards under the Company's Executive Incentive Plan (or the annual cash incentive plan maintained by a successor company) paid in the last five years to the Executive prior to the occurrence of the Qualifying Termination. 2. Severance Benefits for an Executive Ineligible to Retire. Upon the occurrence of a Qualifying Termination with respect to an Executive who is Ineligible to Retire: (a) Severance Payment: The Company shall pay to the Executive an amount equal to two and one-fourth times the Executive's annual base salary (as in effect on the date of the Qualifying Termination, not reduced by any reduction described in Section 1.6(b) above) and Annual Award Amount. The payment shall be made in twenty-four equal monthly installments beginning on the first day of the month following the Qualifying Termination. (b) Severance Health Benefits. For the thirty-six month period commencing on the occurrence of such Qualifying Termination, the Company shall provide to the Executive and the Executive's family medical and dental benefits as provided to other executive officers who remain employed by the Company. The Executive shall be required to make payments for such coverage in the same amount as is required of executive officers who remain employed by the Company. (c) Split Dollar. The Qualifying Termination shall not constitute a termination of the Split Dollar Agreement between the Company and the Executive (or the split dollar agreement between a successor company and the Executive), and the Executive shall be deemed to have retired upon such Qualifying Termination for purposes of such Split Dollar Agreement (or the split dollar agreement between a successor company and the Executive). 3. Severance Benefits for an Executive Eligible to Retire. Upon the occurrence of a Qualifying Termination with respect to an Executive who is Eligible to Retire: (a) Severance Payment: The Company shall pay to the Executive an amount equal to two times the Executive's annual base salary (as in effect on the date of the Qualifying Termination, not reduced by any reduction described in Section 1.6(b) above) and Annual Award Amount. The payment shall be made in twenty-four equal monthly installments beginning on the first day of the month following the Qualifying Termination. (b) Supplemental Retirement Benefits. For purposes of determining the Executive's supplemental retirement benefits which the Executive is entitled to under the Company's Executive Benefits Plan (or the supplemental retirement plan maintained by a successor company), the Early Retirement Adjustment Factor (as such term is defined in the Company's Pension Plan or within the meaning of the tax qualified retirement plan maintained by a successor company) will be one (1). (c) Severance Health Benefits. The Company shall provide to the Executive and the Executive's family medical and dental benefits on the same basis and on the same terms as any retiree who has attained age 65 and completed the greater of 20 years or actual years of service. (d) Retirement. The Executive shall be treated as having retired at the Company's request for purposes of all of the Company's benefit plans (or the benefit plans maintained by a successor company). 4. Code Section 28OG. 4.1 Limitations. Notwithstanding Section 2 and 3, in the event that a change in ownership or control (within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code")) of the Company occurs and the independent public accountants for the Company (the "Accountants") determine that if the benefits to be provided under Section 2 and 3 (together with any other benefits payable to the Executive under any applicable plan maintained by the Company) were paid to the Executive: (a) the Executive would incur an excise tax under Section 4999 of Code, and the Company would be denied a deduction under Section 280G of the Code of all or some of such amounts to be paid to the Executive, and (b) the net after tax benefits to the Executive attributable to payments under Sections 2 and 3 hereof would not be at least $10,000 greater than the net after tax benefits which would accrue to the Executive if the amounts which would otherwise cause the Executive to be subject to this excise tax were not paid, the amounts payable to the Executive pursuant to Section 2 and 3 (or pursuant to such other plans maintained by the Company) shall be reduced so that the amount payable to the Executive hereunder is the greatest amount (as determined by the Accountants) that may be paid by the Company to the Executive without any such amount being subject to an excise tax under Section 4999 or being nondeductible for the Company pursuant to Section 280G. 4.2 Executive's Election. If the amounts to be paid to the Executive are to be reduced under paragraph 4.1 of this Section, the Executive shall be given the opportunity to designate which benefits or payments shall be reduced and in what order of priority. 4.3 Later Adjustments. (a) If the Executive receives reduced payments or benefits pursuant to the preceding paragraph, or if it had been determined that no such reduction was required, but it nonetheless is established pursuant to the final determination of a court or an Internal Revenue Service proceeding that, notwithstanding the good faith of the Executive and the Company in applying the terms of this Section, the aggregate amount paid to the Executive or for his benefit would result in any amount being treated as an "excess parachute payment" for purposes of Sections 28OG and 4999 of the Code, then an amount equal to the amount that would be an "excess parachute payment" shall be deemed for all purposes a loan to the Executive made on the date of the receipt of such excess amount, which the Executive shall have an obligation to repay to the Company on demand, together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code) from the date of the Executive's receipt of such excess until the date of such repayment. (b) In the event that it is determined for any reason that the amount of "excess parachute payments" are less than originally calculated, the Company shall promptly pay to the Executive the amount necessary so that, after such adjustment, the Executive will have received or be entitled to receive the maximum payments payable under this Section without any of such payments constituting an "excess parachute payment," together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code). 5. Termination of Agreement. This Agreement shall remain in effect from the date hereof until the last day of the twenty-fourth calendar month following the Effective Time. Further, upon the Effective Time, this Agreement shall continue until the Company or its successor shall have fully performed all of its obligations thereunder with respect to the Executive, with no future performance being possible. Notwithstanding the foregoing, this Agreement shall terminate on the date the Company's Board of Directors decides by formal vote not to proceed with the Merger; provided, however, that in the event a Qualifying Termination occurs prior to such date, this Agreement shall continue until the Company or its successor shall have fully performed all of its obligations thereunder with respect to the Executive, with no further performance being possible. 6. Amendment of Agreement. Subject to the provisions of Section 5, this Agreement may not be amended in any manner which has a significant adverse effect on the rights of the Executive without the written consent of the Executive. Notwithstanding the foregoing, at and after the Effective Time, this Agreement may not be amended in any respect without the written consent of the Executive. 7. Construction. Wherever any words are used herein in the masculine gender they shall be construed as though they were also used in the feminine gender in all cases where they would so apply, and wherever any words are used herein in the singular form, they shall be construed as though they were also used in the plural form in all cases where they would so apply. 8. Governing Law. This Agreement shall be governed by the laws of Maryland. 9. Successors and Assigns. This Agreement shall be binding upon the Company and any assignee or successor in interest to the Company. 10. Indemnification. The Company will pay all reasonable fees and expenses, if any, (including, without limitation, legal fees and expenses) that are incurred by the Executive to enforce this Agreement and that result from a breach of this Agreement by the Company. 11. Notice. Any notices, requests, demands, or other communications provided for by this Agreement shall be sufficient if in writing and if sent by registered or certified mail to the Executive at the last address he has filed in writing with the Company, or in the case of the Company, to its principal offices. BALTIMORE GAS AND ELECTRIC COMPANY By: /s/ Jon M. Files Jon M. Files Vice President Management Services /s/ Ronald W. Lowman RONALD W. LOWMAN SEVERANCE AGREEMENT This Agreement is made the 6th day of December, 1995, by and between BALTIMORE GAS AND ELECTRIC COMPANY (the "Company") and G. DOWELL SCHWARTZ, JR. (the "Executive"). For purposes of Sections 1 through 11 of this Agreement the term "Company" shall be deemed to include any successor company. WHEREAS, Potomac Electric Power Company ("PEPCO") and the Company have entered into an Agreement and Plan of Merger dated as of September 22, 1995 (the "Merger Agreement"), whereby PEPCO and the Company will merge into RH Acquisition Corp. ("RH"), with RH as the surviving entity; and WHEREAS, the Company desires to establish a severance benefit for the Executive covering the period from the date hereof through the Effective Time (as hereinafter defined) and for the twenty-four month period following the Effective Time in the event the Merger (as hereinafter defined) occurs, to avoid the loss or the serious distraction of the Executive to the detriment of the Company and its stockholders during such periods when the Executive's undivided attention and commitment to the needs of the Company would be particularly important; and WHEREAS, the Executive desires to devote his time and energy for the benefit of the Company and its stockholders and not to be distracted during the Merger. NOW, THEREFORE, the parties agree as follows: 1. Definitions. 1.1 Merger. The term "Merger" shall have the meaning ascribed to such term in the Merger Agreement. 1.2 Effective Time. The term "Effective Time" shall have the meaning ascribed to such term in the Merger Agreement. 1.3 Qualifying Termination. (a) The occurrence of any one or more of the following events within twenty-four calendar months after the Effective Time shall constitute a "Qualifying Termination": (i) The Company's termination of the Executive's employment without Cause (as defined in Section 1.7); (ii) The Executive's resignation for Good Reason (as defined in Section 1.6); (iii) Failure or refusal by a successor company to assume the Company's obligations under this Agreement in its entirety, as required by Section 9 herein; or (iv) Commission by the Company of a material breach of any of the provisions of this Agreement. (b) A Qualifying Termination also shall include a termination of the Executive's employment, without Cause, from the date hereof, but prior to the Effective Time. (c) A Qualifying Termination shall not include a termination of employment by reason of death, disability, the Executive's voluntary termination of employment without Good Reason, or the Company's termination of the Executive's employment for Cause. 1.4 Ineligible to Retire. Ineligible to Retire, means an Executive who has not either (i) attained age 55 and completed 20 years of service with the Company and any successor company or (ii) attained age 60 and completed one year of service with the Company and any successor company, upon the occurrence of a Qualifying Termination. 1.5 Eligible to Retire. Eligible to Retire, means an Executive who has either (i) attained age 55 and completed 20 years of service with the Company and any successor company or (ii) attained age 60 with one year of service with the Company and any successor company, upon the occurrence of a Qualifying Termination. 1.6 Good Reason. Good Reason means, without the Executive's express written consent, the occurrence (i) after the Effective Time, or (ii) after the date hereof, but prior to the Effective Time, of any one or more of the following: (a) The assignment to the Executive of duties materially inconsistent with the Executive's authorities, duties, responsibilities, and status (including offices, title and reporting relationships) as an executive and/or officer of the Company, or a material reduction or alteration in the nature or status of the Executive's authorities, duties, or responsibilities from those in effect as of ninety days prior to the Effective Time (or, in the case of such an assignment, reduction or alteration after the date hereof, but prior to the Effective Time, ninety days prior to the date hereof), unless such act is remedied by the Company within 10 business days after receipt of written notice thereof given by the Executive; (b) A reduction by the Company of the Executive's base salary in effect at the Effective Time (or in the case of a reduction after the date hereof, but prior to the Effective Time, a reduction by the Company of the Executive's base salary in effect on the date hereof) or as the same shall be increased from time to time, unless such reduction is less than ten percent (10%) and it is either (i) replaced by an incentive opportunity equal in value; or is (ii) consistent and proportional with an overall reduction in management compensation due to extraordinary business conditions, including but not limited to reduced profitability and other financial stress (i.e., the base salary of the Executive will not be singled out for reduction in a manner inconsistent with a reduction imposed on other executives of the Company); (c) The relocation of the Executive's office more than 50 miles from the Executive's office at the Effective Time (or in the case of a relocation after the date hereof, but prior to the Effective Time, a relocation of the Executive's office more than 50 miles from the Executive's office on the date hereof). The Executive's right to terminate employment for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting Good Reason herein. 1.7 Cause. Cause shall mean the occurrence of any one or more of the following: (a) The Executive is convicted of a felony involving moral turpitude; or (b) The Executive engages in conduct or activities that constitutes disloyalty to the Company and such conduct or activities are materially damaging to the property, business or reputation of the Company; or (c) The Executive persistently fails or refuses to comply with any written direction of an authorized representative of the Company other than a directive constituting an assignment described in Section 1.6(a); or (d) The Executive embezzles or knowingly, and with intent, misappropriates property of the Company, or unlawfully appropriates any corporate opportunity of the Company. 1.8 Annual Award Amount. The average of the two highest annual incentive awards under the Company's Executive Incentive Plan (or the annual cash incentive plan maintained by a successor company) paid in the last five years to the Executive prior to the occurrence of the Qualifying Termination. 2. Severance Benefits for an Executive Ineligible to Retire. Upon the occurrence of a Qualifying Termination with respect to an Executive who is Ineligible to Retire: (a) Severance Payment: The Company shall pay to the Executive an amount equal to two and one-fourth times the Executive's annual base salary (as in effect on the date of the Qualifying Termination, not reduced by any reduction described in Section 1.6(b) above) and Annual Award Amount. The payment shall be made in twenty-four equal monthly installments beginning on the first day of the month following the Qualifying Termination. (b) Severance Health Benefits. For the thirty-six month period commencing on the occurrence of such Qualifying Termination, the Company shall provide to the Executive and the Executive's family medical and dental benefits as provided to other executive officers who remain employed by the Company. The Executive shall be required to make payments for such coverage in the same amount as is required of executive officers who remain employed by the Company. (c) Split Dollar. The Qualifying Termination shall not constitute a termination of the Split Dollar Agreement between the Company and the Executive (or the split dollar agreement between a successor company and the Executive), and the Executive shall be deemed to have retired upon such Qualifying Termination for purposes of such Split Dollar Agreement (or the split dollar agreement between a successor company and the Executive). 3. Severance Benefits for an Executive Eligible to Retire. Upon the occurrence of a Qualifying Termination with respect to an Executive who is Eligible to Retire: (a) Severance Payment: The Company shall pay to the Executive an amount equal to two times the Executive's annual base salary (as in effect on the date of the Qualifying Termination, not reduced by any reduction described in Section 1.6(b) above) and Annual Award Amount. The payment shall be made in twenty-four equal monthly installments beginning on the first day of the month following the Qualifying Termination. (b) Supplemental Retirement Benefits. For purposes of determining the Executive's supplemental retirement benefits which the Executive is entitled to under the Company's Executive Benefits Plan (or the supplemental retirement plan maintained by a successor company), the Early Retirement Adjustment Factor (as such term is defined in the Company's Pension Plan or within the meaning of the tax qualified retirement plan maintained by a successor company) will be one (1). (c) Severance Health Benefits. The Company shall provide to the Executive and the Executive's family medical and dental benefits on the same basis and on the same terms as any retiree who has attained age 65 and completed the greater of 20 years or actual years of service. (d) Retirement. The Executive shall be treated as having retired at the Company's request for purposes of all of the Company's benefit plans (or the benefit plans maintained by a successor company). 4. Code Section 28OG. 4.1 Limitations. Notwithstanding Section 2 and 3, in the event that a change in ownership or control (within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code")) of the Company occurs and the independent public accountants for the Company (the "Accountants") determine that if the benefits to be provided under Section 2 and 3 (together with any other benefits payable to the Executive under any applicable plan maintained by the Company) were paid to the Executive: (a) the Executive would incur an excise tax under Section 4999 of Code, and the Company would be denied a deduction under Section 280G of the Code of all or some of such amounts to be paid to the Executive, and (b) the net after tax benefits to the Executive attributable to payments under Sections 2 and 3 hereof would not be at least $10,000 greater than the net after tax benefits which would accrue to the Executive if the amounts which would otherwise cause the Executive to be subject to this excise tax were not paid, the amounts payable to the Executive pursuant to Section 2 and 3 (or pursuant to such other plans maintained by the Company) shall be reduced so that the amount payable to the Executive hereunder is the greatest amount (as determined by the Accountants) that may be paid by the Company to the Executive without any such amount being subject to an excise tax under Section 4999 or being nondeductible for the Company pursuant to Section 280G. 4.2 Executive's Election. If the amounts to be paid to the Executive are to be reduced under paragraph 4.1 of this Section, the Executive shall be given the opportunity to designate which benefits or payments shall be reduced and in what order of priority. 4.3 Later Adjustments. (a) If the Executive receives reduced payments or benefits pursuant to the preceding paragraph, or if it had been determined that no such reduction was required, but it nonetheless is established pursuant to the final determination of a court or an Internal Revenue Service proceeding that, notwithstanding the good faith of the Executive and the Company in applying the terms of this Section, the aggregate amount paid to the Executive or for his benefit would result in any amount being treated as an "excess parachute payment" for purposes of Sections 28OG and 4999 of the Code, then an amount equal to the amount that would be an "excess parachute payment" shall be deemed for all purposes a loan to the Executive made on the date of the receipt of such excess amount, which the Executive shall have an obligation to repay to the Company on demand, together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code) from the date of the Executive's receipt of such excess until the date of such repayment. (b) In the event that it is determined for any reason that the amount of "excess parachute payments" are less than originally calculated, the Company shall promptly pay to the Executive the amount necessary so that, after such adjustment, the Executive will have received or be entitled to receive the maximum payments payable under this Section without any of such payments constituting an "excess parachute payment," together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code). 5. Termination of Agreement. This Agreement shall remain in effect from the date hereof until the last day of the twenty-fourth calendar month following the Effective Time. Further, upon the Effective Time, this Agreement shall continue until the Company or its successor shall have fully performed all of its obligations thereunder with respect to the Executive, with no future performance being possible. Notwithstanding the foregoing, this Agreement shall terminate on the date the Company's Board of Directors decides by formal vote not to proceed with the Merger; provided, however, that in the event a Qualifying Termination occurs prior to such date, this Agreement shall continue until the Company or its successor shall have fully performed all of its obligations thereunder with respect to the Executive, with no further performance being possible. 6. Amendment of Agreement. Subject to the provisions of Section 5, this Agreement may not be amended in any manner which has a significant adverse effect on the rights of the Executive without the written consent of the Executive. Notwithstanding the foregoing, at and after the Effective Time, this Agreement may not be amended in any respect without the written consent of the Executive. 7. Construction. Wherever any words are used herein in the masculine gender they shall be construed as though they were also used in the feminine gender in all cases where they would so apply, and wherever any words are used herein in the singular form, they shall be construed as though they were also used in the plural form in all cases where they would so apply. 8. Governing Law. This Agreement shall be governed by the laws of Maryland. 9. Successors and Assigns. This Agreement shall be binding upon the Company and any assignee or successor in interest to the Company. 10. Indemnification. The Company will pay all reasonable fees and expenses, if any, (including, without limitation, legal fees and expenses) that are incurred by the Executive to enforce this Agreement and that result from a breach of this Agreement by the Company. 11. Notice. Any notices, requests, demands, or other communications provided for by this Agreement shall be sufficient if in writing and if sent by registered or certified mail to the Executive at the last address he has filed in writing with the Company, or in the case of the Company, to its principal offices. BALTIMORE GAS AND ELECTRIC COMPANY By: /s/ Jon M. Files Jon M. Files Vice President Management Services /s/ G. Dowell Schwartz, Jr. G. DOWELL SCHWARTZ, JR. SEVERANCE AGREEMENT This Agreement is made the 6th day of December, 1995, by and between BALTIMORE GAS AND ELECTRIC COMPANY (the "Company") and CHARLES W. SHIVERY (the "Executive"). For purposes of Sections 1 through 11 of this Agreement the term "Company" shall be deemed to include any successor company. WHEREAS, Potomac Electric Power Company ("PEPCO") and the Company have entered into an Agreement and Plan of Merger dated as of September 22, 1995 (the "Merger Agreement"), whereby PEPCO and the Company will merge into RH Acquisition Corp. ("RH"), with RH as the surviving entity; and WHEREAS, the Company desires to establish a severance benefit for the Executive covering the period from the date hereof through the Effective Time (as hereinafter defined) and for the twenty-four month period following the Effective Time in the event the Merger (as hereinafter defined) occurs, to avoid the loss or the serious distraction of the Executive to the detriment of the Company and its stockholders during such periods when the Executive's undivided attention and commitment to the needs of the Company would be particularly important; and WHEREAS, the Executive desires to devote his time and energy for the benefit of the Company and its stockholders and not to be distracted during the Merger. NOW, THEREFORE, the parties agree as follows: 1. Definitions. 1.1 Merger. The term "Merger" shall have the meaning ascribed to such term in the Merger Agreement. 1.2 Effective Time. The term "Effective Time" shall have the meaning ascribed to such term in the Merger Agreement. 1.3 Qualifying Termination. (a) The occurrence of any one or more of the following events within twenty-four calendar months after the Effective Time shall constitute a "Qualifying Termination": (i) The Company's termination of the Executive's employment without Cause (as defined in Section 1.7); (ii) The Executive's resignation for Good Reason (as defined in Section 1.6); (iii) Failure or refusal by a successor company to assume the Company's obligations under this Agreement in its entirety, as required by Section 9 herein; or (iv) Commission by the Company of a material breach of any of the provisions of this Agreement. (b) A Qualifying Termination also shall include a termination of the Executive's employment, without Cause, from the date hereof, but prior to the Effective Time. (c) A Qualifying Termination shall not include a termination of employment by reason of death, disability, the Executive's voluntary termination of employment without Good Reason, or the Company's termination of the Executive's employment for Cause. 1.4 Ineligible to Retire. Ineligible to Retire, means an Executive who has not either (i) attained age 55 and completed 20 years of service with the Company and any successor company or (ii) attained age 60 and completed one year of service with the Company and any successor company, upon the occurrence of a Qualifying Termination. 1.5 Eligible to Retire. Eligible to Retire, means an Executive who has either (i) attained age 55 and completed 20 years of service with the Company and any successor company or (ii) attained age 60 with one year of service with the Company and any successor company, upon the occurrence of a Qualifying Termination. 1.6 Good Reason. Good Reason means, without the Executive's express written consent, the occurrence (i) after the Effective Time, or (ii) after the date hereof, but prior to the Effective Time, of any one or more of the following: (a) The assignment to the Executive of duties materially inconsistent with the Executive's authorities, duties, responsibilities, and status (including offices, title and reporting relationships) as an executive and/or officer of the Company, or a material reduction or alteration in the nature or status of the Executive's authorities, duties, or responsibilities from those in effect as of ninety days prior to the Effective Time (or, in the case of such an assignment, reduction or alteration after the date hereof, but prior to the Effective Time, ninety days prior to the date hereof), unless such act is remedied by the Company within 10 business days after receipt of written notice thereof given by the Executive; (b) A reduction by the Company of the Executive's base salary in effect at the Effective Time (or in the case of a reduction after the date hereof, but prior to the Effective Time, a reduction by the Company of the Executive's base salary in effect on the date hereof) or as the same shall be increased from time to time, unless such reduction is less than ten percent (10%) and it is either (i) replaced by an incentive opportunity equal in value; or is (ii) consistent and proportional with an overall reduction in management compensation due to extraordinary business conditions, including but not limited to reduced profitability and other financial stress (i.e., the base salary of the Executive will not be singled out for reduction in a manner inconsistent with a reduction imposed on other executives of the Company); (c) The relocation of the Executive's office more than 50 miles from the Executive's office at the Effective Time (or in the case of a relocation after the date hereof, but prior to the Effective Time, a relocation of the Executive's office more than 50 miles from the Executive's office on the date hereof). The Executive's right to terminate employment for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting Good Reason herein. 1.7 Cause. Cause shall mean the occurrence of any one or more of the following: (a) The Executive is convicted of a felony involving moral turpitude; or (b) The Executive engages in conduct or activities that constitutes disloyalty to the Company and such conduct or activities are materially damaging to the property, business or reputation of the Company; or (c) The Executive persistently fails or refuses to comply with any written direction of an authorized representative of the Company other than a directive constituting an assignment described in Section 1.6(a); or (d) The Executive embezzles or knowingly, and with intent, misappropriates property of the Company, or unlawfully appropriates any corporate opportunity of the Company. 1.8 Annual Award Amount. The average of the two highest annual incentive awards under the Company's Executive Incentive Plan (or the annual cash incentive plan maintained by a successor company) paid in the last five years to the Executive prior to the occurrence of the Qualifying Termination. 2. Severance Benefits for an Executive Ineligible to Retire. Upon the occurrence of a Qualifying Termination with respect to an Executive who is Ineligible to Retire: (a) Severance Payment: The Company shall pay to the Executive an amount equal to two and one-fourth times the Executive's annual base salary (as in effect on the date of the Qualifying Termination, not reduced by any reduction described in Section 1.6(b) above) and Annual Award Amount. The payment shall be made in twenty-four equal monthly installments beginning on the first day of the month following the Qualifying Termination. (b) Severance Health Benefits. For the thirty-six month period commencing on the occurrence of such Qualifying Termination, the Company shall provide to the Executive and the Executive's family medical and dental benefits as provided to other executive officers who remain employed by the Company. The Executive shall be required to make payments for such coverage in the same amount as is required of executive officers who remain employed by the Company. (c) Split Dollar. The Qualifying Termination shall not constitute a termination of the Split Dollar Agreement between the Company and the Executive (or the split dollar agreement between a successor company and the Executive), and the Executive shall be deemed to have retired upon such Qualifying Termination for purposes of such Split Dollar Agreement (or the split dollar agreement between a successor company and the Executive). 3. Severance Benefits for an Executive Eligible to Retire. Upon the occurrence of a Qualifying Termination with respect to an Executive who is Eligible to Retire: (a) Severance Payment: The Company shall pay to the Executive an amount equal to two times the Executive's annual base salary (as in effect on the date of the Qualifying Termination, not reduced by any reduction described in Section 1.6(b) above) and Annual Award Amount. The payment shall be made in twenty-four equal monthly installments beginning on the first day of the month following the Qualifying Termination. (b) Supplemental Retirement Benefits. For purposes of determining the Executive's supplemental retirement benefits which the Executive is entitled to under the Company's Executive Benefits Plan (or the supplemental retirement plan maintained by a successor company), the Early Retirement Adjustment Factor (as such term is defined in the Company's Pension Plan or within the meaning of the tax qualified retirement plan maintained by a successor company) will be one (1). (c) Severance Health Benefits. The Company shall provide to the Executive and the Executive's family medical and dental benefits on the same basis and on the same terms as any retiree who has attained age 65 and completed the greater of 20 years or actual years of service. (d) Retirement. The Executive shall be treated as having retired at the Company's request for purposes of all of the Company's benefit plans (or the benefit plans maintained by a successor company). 4. Code Section 28OG. 4.1 Limitations. Notwithstanding Section 2 and 3, in the event that a change in ownership or control (within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code")) of the Company occurs and the independent public accountants for the Company (the "Accountants") determine that if the benefits to be provided under Section 2 and 3 (together with any other benefits payable to the Executive under any applicable plan maintained by the Company) were paid to the Executive: (a) the Executive would incur an excise tax under Section 4999 of Code, and the Company would be denied a deduction under Section 280G of the Code of all or some of such amounts to be paid to the Executive, and (b) the net after tax benefits to the Executive attributable to payments under Sections 2 and 3 hereof would not be at least $10,000 greater than the net after tax benefits which would accrue to the Executive if the amounts which would otherwise cause the Executive to be subject to this excise tax were not paid, the amounts payable to the Executive pursuant to Section 2 and 3 (or pursuant to such other plans maintained by the Company) shall be reduced so that the amount payable to the Executive hereunder is the greatest amount (as determined by the Accountants) that may be paid by the Company to the Executive without any such amount being subject to an excise tax under Section 4999 or being nondeductible for the Company pursuant to Section 280G. 4.2 Executive's Election. If the amounts to be paid to the Executive are to be reduced under paragraph 4.1 of this Section, the Executive shall be given the opportunity to designate which benefits or payments shall be reduced and in what order of priority. 4.3 Later Adjustments. (a) If the Executive receives reduced payments or benefits pursuant to the preceding paragraph, or if it had been determined that no such reduction was required, but it nonetheless is established pursuant to the final determination of a court or an Internal Revenue Service proceeding that, notwithstanding the good faith of the Executive and the Company in applying the terms of this Section, the aggregate amount paid to the Executive or for his benefit would result in any amount being treated as an "excess parachute payment" for purposes of Sections 28OG and 4999 of the Code, then an amount equal to the amount that would be an "excess parachute payment" shall be deemed for all purposes a loan to the Executive made on the date of the receipt of such excess amount, which the Executive shall have an obligation to repay to the Company on demand, together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code) from the date of the Executive's receipt of such excess until the date of such repayment. (b) In the event that it is determined for any reason that the amount of "excess parachute payments" are less than originally calculated, the Company shall promptly pay to the Executive the amount necessary so that, after such adjustment, the Executive will have received or be entitled to receive the maximum payments payable under this Section without any of such payments constituting an "excess parachute payment," together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code). 5. Termination of Agreement. This Agreement shall remain in effect from the date hereof until the last day of the twenty-fourth calendar month following the Effective Time. Further, upon the Effective Time, this Agreement shall continue until the Company or its successor shall have fully performed all of its obligations thereunder with respect to the Executive, with no future performance being possible. Notwithstanding the foregoing, this Agreement shall terminate on the date the Company's Board of Directors decides by formal vote not to proceed with the Merger; provided, however, that in the event a Qualifying Termination occurs prior to such date, this Agreement shall continue until the Company or its successor shall have fully performed all of its obligations thereunder with respect to the Executive, with no further performance being possible. 6. Amendment of Agreement. Subject to the provisions of Section 5, this Agreement may not be amended in any manner which has a significant adverse effect on the rights of the Executive without the written consent of the Executive. Notwithstanding the foregoing, at and after the Effective Time, this Agreement may not be amended in any respect without the written consent of the Executive. 7. Construction. Wherever any words are used herein in the masculine gender they shall be construed as though they were also used in the feminine gender in all cases where they would so apply, and wherever any words are used herein in the singular form, they shall be construed as though they were also used in the plural form in all cases where they would so apply. 8. Governing Law. This Agreement shall be governed by the laws of Maryland. 9. Successors and Assigns. This Agreement shall be binding upon the Company and any assignee or successor in interest to the Company. 10. Indemnification. The Company will pay all reasonable fees and expenses, if any, (including, without limitation, legal fees and expenses) that are incurred by the Executive to enforce this Agreement and that result from a breach of this Agreement by the Company. 11. Notice. Any notices, requests, demands, or other communications provided for by this Agreement shall be sufficient if in writing and if sent by registered or certified mail to the Executive at the last address he has filed in writing with the Company, or in the case of the Company, to its principal offices. BALTIMORE GAS AND ELECTRIC COMPANY By: /s/ Jon M. Files Jon M. Files Vice President Management Services /s/ Charles W. Shivery CHARLES W. SHIVERY SEVERANCE AGREEMENT This Agreement is made the 6th day of December, 1995, by and between BALTIMORE GAS AND ELECTRIC COMPANY (the "Company") and JOSEPH A. TIERNAN (the "Executive"). For purposes of Sections 1 through 11 of this Agreement the term "Company" shall be deemed to include any successor company. WHEREAS, Potomac Electric Power Company ("PEPCO") and the Company have entered into an Agreement and Plan of Merger dated as of September 22, 1995 (the "Merger Agreement"), whereby PEPCO and the Company will merge into RH Acquisition Corp. ("RH"), with RH as the surviving entity; and WHEREAS, the Company desires to establish a severance benefit for the Executive covering the period from the date hereof through the Effective Time (as hereinafter defined) and for the twenty-four month period following the Effective Time in the event the Merger (as hereinafter defined) occurs, to avoid the loss or the serious distraction of the Executive to the detriment of the Company and its stockholders during such periods when the Executive's undivided attention and commitment to the needs of the Company would be particularly important; and WHEREAS, the Executive desires to devote his time and energy for the benefit of the Company and its stockholders and not to be distracted during the Merger. NOW, THEREFORE, the parties agree as follows: 1. Definitions. 1.1 Merger. The term "Merger" shall have the meaning ascribed to such term in the Merger Agreement. 1.2 Effective Time. The term "Effective Time" shall have the meaning ascribed to such term in the Merger Agreement. 1.3 Qualifying Termination. (a) The occurrence of any one or more of the following events within twenty-four calendar months after the Effective Time shall constitute a "Qualifying Termination": (i) The Company's termination of the Executive's employment without Cause (as defined in Section 1.7); (ii) The Executive's resignation for Good Reason (as defined in Section 1.6); (iii) Failure or refusal by a successor company to assume the Company's obligations under this Agreement in its entirety, as required by Section 9 herein; or (iv) Commission by the Company of a material breach of any of the provisions of this Agreement. (b) A Qualifying Termination also shall include a termination of the Executive's employment, without Cause, from the date hereof, but prior to the Effective Time. (c) A Qualifying Termination shall not include a termination of employment by reason of death, disability, the Executive's voluntary termination of employment without Good Reason, or the Company's termination of the Executive's employment for Cause. 1.4 Ineligible to Retire. Ineligible to Retire, means an Executive who has not either (i) attained age 55 and completed 20 years of service with the Company and any successor company or (ii) attained age 60 and completed one year of service with the Company and any successor company, upon the occurrence of a Qualifying Termination. 1.5 Eligible to Retire. Eligible to Retire, means an Executive who has either (i) attained age 55 and completed 20 years of service with the Company and any successor company or (ii) attained age 60 with one year of service with the Company and any successor company, upon the occurrence of a Qualifying Termination. 1.6 Good Reason. Good Reason means, without the Executive's express written consent, the occurrence (i) after the Effective Time, or (ii) after the date hereof, but prior to the Effective Time, of any one or more of the following: (a) The assignment to the Executive of duties materially inconsistent with the Executive's authorities, duties, responsibilities, and status (including offices, title and reporting relationships) as an executive and/or officer of the Company, or a material reduction or alteration in the nature or status of the Executive's authorities, duties, or responsibilities from those in effect as of ninety days prior to the Effective Time (or, in the case of such an assignment, reduction or alteration after the date hereof, but prior to the Effective Time, ninety days prior to the date hereof), unless such act is remedied by the Company within 10 business days after receipt of written notice thereof given by the Executive; (b) A reduction by the Company of the Executive's base salary in effect at the Effective Time (or in the case of a reduction after the date hereof, but prior to the Effective Time, a reduction by the Company of the Executive's base salary in effect on the date hereof) or as the same shall be increased from time to time, unless such reduction is less than ten percent (10%) and it is either (i) replaced by an incentive opportunity equal in value; or is (ii) consistent and proportional with an overall reduction in management compensation due to extraordinary business conditions, including but not limited to reduced profitability and other financial stress (i.e., the base salary of the Executive will not be singled out for reduction in a manner inconsistent with a reduction imposed on other executives of the Company); (c) The relocation of the Executive's office more than 50 miles from the Executive's office at the Effective Time (or in the case of a relocation after the date hereof, but prior to the Effective Time, a relocation of the Executive's office more than 50 miles from the Executive's office on the date hereof). The Executive's right to terminate employment for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting Good Reason herein. 1.7 Cause. Cause shall mean the occurrence of any one or more of the following: (a) The Executive is convicted of a felony involving moral turpitude; or (b) The Executive engages in conduct or activities that constitutes disloyalty to the Company and such conduct or activities are materially damaging to the property, business or reputation of the Company; or (c) The Executive persistently fails or refuses to comply with any written direction of an authorized representative of the Company other than a directive constituting an assignment described in Section 1.6(a); or (d) The Executive embezzles or knowingly, and with intent, misappropriates property of the Company, or unlawfully appropriates any corporate opportunity of the Company. 1.8 Annual Award Amount. The average of the two highest annual incentive awards under the Company's Executive Incentive Plan (or the annual cash incentive plan maintained by a successor company) paid in the last five years to the Executive prior to the occurrence of the Qualifying Termination. 2. Severance Benefits for an Executive Ineligible to Retire. Upon the occurrence of a Qualifying Termination with respect to an Executive who is Ineligible to Retire: (a) Severance Payment: The Company shall pay to the Executive an amount equal to two and one-fourth times the Executive's annual base salary (as in effect on the date of the Qualifying Termination, not reduced by any reduction described in Section 1.6(b) above) and Annual Award Amount. The payment shall be made in twenty-four equal monthly installments beginning on the first day of the month following the Qualifying Termination. (b) Severance Health Benefits. For the thirty-six month period commencing on the occurrence of such Qualifying Termination, the Company shall provide to the Executive and the Executive's family medical and dental benefits as provided to other executive officers who remain employed by the Company. The Executive shall be required to make payments for such coverage in the same amount as is required of executive officers who remain employed by the Company. (c) Split Dollar. The Qualifying Termination shall not constitute a termination of the Split Dollar Agreement between the Company and the Executive (or the split dollar agreement between a successor company and the Executive), and the Executive shall be deemed to have retired upon such Qualifying Termination for purposes of such Split Dollar Agreement (or the split dollar agreement between a successor company and the Executive). 3. Severance Benefits for an Executive Eligible to Retire. Upon the occurrence of a Qualifying Termination with respect to an Executive who is Eligible to Retire: (a) Severance Payment: The Company shall pay to the Executive an amount equal to two times the Executive's annual base salary (as in effect on the date of the Qualifying Termination, not reduced by any reduction described in Section 1.6(b) above) and Annual Award Amount. The payment shall be made in twenty-four equal monthly installments beginning on the first day of the month following the Qualifying Termination. (b) Supplemental Retirement Benefits. For purposes of determining the Executive's supplemental retirement benefits which the Executive is entitled to under the Company's Executive Benefits Plan (or the supplemental retirement plan maintained by a successor company), the Early Retirement Adjustment Factor (as such term is defined in the Company's Pension Plan or within the meaning of the tax qualified retirement plan maintained by a successor company) will be one (1). (c) Severance Health Benefits. The Company shall provide to the Executive and the Executive's family medical and dental benefits on the same basis and on the same terms as any retiree who has attained age 65 and completed the greater of 20 years or actual years of service. (d) Retirement. The Executive shall be treated as having retired at the Company's request for purposes of all of the Company's benefit plans (or the benefit plans maintained by a successor company). 4. Code Section 28OG. 4.1 Limitations. Notwithstanding Section 2 and 3, in the event that a change in ownership or control (within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code")) of the Company occurs and the independent public accountants for the Company (the "Accountants") determine that if the benefits to be provided under Section 2 and 3 (together with any other benefits payable to the Executive under any applicable plan maintained by the Company) were paid to the Executive: (a) the Executive would incur an excise tax under Section 4999 of Code, and the Company would be denied a deduction under Section 280G of the Code of all or some of such amounts to be paid to the Executive, and (b) the net after tax benefits to the Executive attributable to payments under Sections 2 and 3 hereof would not be at least $10,000 greater than the net after tax benefits which would accrue to the Executive if the amounts which would otherwise cause the Executive to be subject to this excise tax were not paid, the amounts payable to the Executive pursuant to Section 2 and 3 (or pursuant to such other plans maintained by the Company) shall be reduced so that the amount payable to the Executive hereunder is the greatest amount (as determined by the Accountants) that may be paid by the Company to the Executive without any such amount being subject to an excise tax under Section 4999 or being nondeductible for the Company pursuant to Section 280G. 4.2 Executive's Election. If the amounts to be paid to the Executive are to be reduced under paragraph 4.1 of this Section, the Executive shall be given the opportunity to designate which benefits or payments shall be reduced and in what order of priority. 4.3 Later Adjustments. (a) If the Executive receives reduced payments or benefits pursuant to the preceding paragraph, or if it had been determined that no such reduction was required, but it nonetheless is established pursuant to the final determination of a court or an Internal Revenue Service proceeding that, notwithstanding the good faith of the Executive and the Company in applying the terms of this Section, the aggregate amount paid to the Executive or for his benefit would result in any amount being treated as an "excess parachute payment" for purposes of Sections 28OG and 4999 of the Code, then an amount equal to the amount that would be an "excess parachute payment" shall be deemed for all purposes a loan to the Executive made on the date of the receipt of such excess amount, which the Executive shall have an obligation to repay to the Company on demand, together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code) from the date of the Executive's receipt of such excess until the date of such repayment. (b) In the event that it is determined for any reason that the amount of "excess parachute payments" are less than originally calculated, the Company shall promptly pay to the Executive the amount necessary so that, after such adjustment, the Executive will have received or be entitled to receive the maximum payments payable under this Section without any of such payments constituting an "excess parachute payment," together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code). 5. Termination of Agreement. This Agreement shall remain in effect from the date hereof until the last day of the twenty-fourth calendar month following the Effective Time. Further, upon the Effective Time, this Agreement shall continue until the Company or its successor shall have fully performed all of its obligations thereunder with respect to the Executive, with no future performance being possible. Notwithstanding the foregoing, this Agreement shall terminate on the date the Company's Board of Directors decides by formal vote not to proceed with the Merger; provided, however, that in the event a Qualifying Termination occurs prior to such date, this Agreement shall continue until the Company or its successor shall have fully performed all of its obligations thereunder with respect to the Executive, with no further performance being possible. 6. Amendment of Agreement. Subject to the provisions of Section 5, this Agreement may not be amended in any manner which has a significant adverse effect on the rights of the Executive without the written consent of the Executive. Notwithstanding the foregoing, at and after the Effective Time, this Agreement may not be amended in any respect without the written consent of the Executive. 7. Construction. Wherever any words are used herein in the masculine gender they shall be construed as though they were also used in the feminine gender in all cases where they would so apply, and wherever any words are used herein in the singular form, they shall be construed as though they were also used in the plural form in all cases where they would so apply. 8. Governing Law. This Agreement shall be governed by the laws of Maryland. 9. Successors and Assigns. This Agreement shall be binding upon the Company and any assignee or successor in interest to the Company. 10. Indemnification. The Company will pay all reasonable fees and expenses, if any, (including, without limitation, legal fees and expenses) that are incurred by the Executive to enforce this Agreement and that result from a breach of this Agreement by the Company. 11. Notice. Any notices, requests, demands, or other communications provided for by this Agreement shall be sufficient if in writing and if sent by registered or certified mail to the Executive at the last address he has filed in writing with the Company, or in the case of the Company, to its principal offices. BALTIMORE GAS AND ELECTRIC COMPANY By: /s/ Jon M. Files Jon M. Files Vice President Management Services /s/ Joseph A. Tiernan JOSEPH A. TIERNAN SEVERANCE AGREEMENT This Agreement is made the 6th day of December, 1995, by and between BALTIMORE GAS AND ELECTRIC COMPANY (the "Company") and STEPHEN F. WOOD (the "Executive"). For purposes of Sections 1 through 11 of this Agreement the term "Company" shall be deemed to include any successor company. WHEREAS, Potomac Electric Power Company ("PEPCO") and the Company have entered into an Agreement and Plan of Merger dated as of September 22, 1995 (the "Merger Agreement"), whereby PEPCO and the Company will merge into RH Acquisition Corp. ("RH"), with RH as the surviving entity; and WHEREAS, the Company desires to establish a severance benefit for the Executive covering the period from the date hereof through the Effective Time (as hereinafter defined) and for the twenty-four month period following the Effective Time in the event the Merger (as hereinafter defined) occurs, to avoid the loss or the serious distraction of the Executive to the detriment of the Company and its stockholders during such periods when the Executive's undivided attention and commitment to the needs of the Company would be particularly important; and WHEREAS, the Executive desires to devote his time and energy for the benefit of the Company and its stockholders and not to be distracted during the Merger. NOW, THEREFORE, the parties agree as follows: 1. Definitions. 1.1 Merger. The term "Merger" shall have the meaning ascribed to such term in the Merger Agreement. 1.2 Effective Time. The term "Effective Time" shall have the meaning ascribed to such term in the Merger Agreement. 1.3 Qualifying Termination. (a) The occurrence of any one or more of the following events within twenty-four calendar months after the Effective Time shall constitute a "Qualifying Termination": (i) The Company's termination of the Executive's employment without Cause (as defined in Section 1.7); (ii) The Executive's resignation for Good Reason (as defined in Section 1.6); (iii) Failure or refusal by a successor company to assume the Company's obligations under this Agreement in its entirety, as required by Section 9 herein; or (iv) Commission by the Company of a material breach of any of the provisions of this Agreement. (b) A Qualifying Termination also shall include a termination of the Executive's employment, without Cause, from the date hereof, but prior to the Effective Time. (c) A Qualifying Termination shall not include a termination of employment by reason of death, disability, the Executive's voluntary termination of employment without Good Reason, or the Company's termination of the Executive's employment for Cause. 1.4 Ineligible to Retire. Ineligible to Retire, means an Executive who has not either (i) attained age 55 and completed 20 years of service with the Company and any successor company or (ii) attained age 60 and completed one year of service with the Company and any successor company, upon the occurrence of a Qualifying Termination. 1.5 Eligible to Retire. Eligible to Retire, means an Executive who has either (i) attained age 55 and completed 20 years of service with the Company and any successor company or (ii) attained age 60 with one year of service with the Company and any successor company, upon the occurrence of a Qualifying Termination. 1.6 Good Reason. Good Reason means, without the Executive's express written consent, the occurrence (i) after the Effective Time, or (ii) after the date hereof, but prior to the Effective Time, of any one or more of the following: (a) The assignment to the Executive of duties materially inconsistent with the Executive's authorities, duties, responsibilities, and status (including offices, title and reporting relationships) as an executive and/or officer of the Company, or a material reduction or alteration in the nature or status of the Executive's authorities, duties, or responsibilities from those in effect as of ninety days prior to the Effective Time (or, in the case of such an assignment, reduction or alteration after the date hereof, but prior to the Effective Time, ninety days prior to the date hereof), unless such act is remedied by the Company within 10 business days after receipt of written notice thereof given by the Executive; (b) A reduction by the Company of the Executive's base salary in effect at the Effective Time (or in the case of a reduction after the date hereof, but prior to the Effective Time, a reduction by the Company of the Executive's base salary in effect on the date hereof) or as the same shall be increased from time to time, unless such reduction is less than ten percent (10%) and it is either (i) replaced by an incentive opportunity equal in value; or is (ii) consistent and proportional with an overall reduction in management compensation due to extraordinary business conditions, including but not limited to reduced profitability and other financial stress (i.e., the base salary of the Executive will not be singled out for reduction in a manner inconsistent with a reduction imposed on other executives of the Company); (c) The relocation of the Executive's office more than 50 miles from the Executive's office at the Effective Time (or in the case of a relocation after the date hereof, but prior to the Effective Time, a relocation of the Executive's office more than 50 miles from the Executive's office on the date hereof). The Executive's right to terminate employment for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting Good Reason herein. 1.7 Cause. Cause shall mean the occurrence of any one or more of the following: (a) The Executive is convicted of a felony involving moral turpitude; or (b) The Executive engages in conduct or activities that constitutes disloyalty to the Company and such conduct or activities are materially damaging to the property, business or reputation of the Company; or (c) The Executive persistently fails or refuses to comply with any written direction of an authorized representative of the Company other than a directive constituting an assignment described in Section 1.6(a); or (d) The Executive embezzles or knowingly, and with intent, misappropriates property of the Company, or unlawfully appropriates any corporate opportunity of the Company. 1.8 Annual Award Amount. The average of the two highest annual incentive awards under the Company's Executive Incentive Plan (or the annual cash incentive plan maintained by a successor company) paid in the last five years to the Executive prior to the occurrence of the Qualifying Termination. 2. Severance Benefits for an Executive Ineligible to Retire. Upon the occurrence of a Qualifying Termination with respect to an Executive who is Ineligible to Retire: (a) Severance Payment: The Company shall pay to the Executive an amount equal to two and one-fourth times the Executive's annual base salary (as in effect on the date of the Qualifying Termination, not reduced by any reduction described in Section 1.6(b) above) and Annual Award Amount. The payment shall be made in twenty-four equal monthly installments beginning on the first day of the month following the Qualifying Termination. (b) Severance Health Benefits. For the thirty-six month period commencing on the occurrence of such Qualifying Termination, the Company shall provide to the Executive and the Executive's family medical and dental benefits as provided to other executive officers who remain employed by the Company. The Executive shall be required to make payments for such coverage in the same amount as is required of executive officers who remain employed by the Company. (c) Split Dollar. The Qualifying Termination shall not constitute a termination of the Split Dollar Agreement between the Company and the Executive (or the split dollar agreement between a successor company and the Executive), and the Executive shall be deemed to have retired upon such Qualifying Termination for purposes of such Split Dollar Agreement (or the split dollar agreement between a successor company and the Executive). 3. Severance Benefits for an Executive Eligible to Retire. Upon the occurrence of a Qualifying Termination with respect to an Executive who is Eligible to Retire: (a) Severance Payment: The Company shall pay to the Executive an amount equal to two times the Executive's annual base salary (as in effect on the date of the Qualifying Termination, not reduced by any reduction described in Section 1.6(b) above) and Annual Award Amount. The payment shall be made in twenty-four equal monthly installments beginning on the first day of the month following the Qualifying Termination. (b) Supplemental Retirement Benefits. For purposes of determining the Executive's supplemental retirement benefits which the Executive is entitled to under the Company's Executive Benefits Plan (or the supplemental retirement plan maintained by a successor company), the Early Retirement Adjustment Factor (as such term is defined in the Company's Pension Plan or within the meaning of the tax qualified retirement plan maintained by a successor company) will be one (1). (c) Severance Health Benefits. The Company shall provide to the Executive and the Executive's family medical and dental benefits on the same basis and on the same terms as any retiree who has attained age 65 and completed the greater of 20 years or actual years of service. (d) Retirement. The Executive shall be treated as having retired at the Company's request for purposes of all of the Company's benefit plans (or the benefit plans maintained by a successor company). 4. Code Section 28OG. 4.1 Limitations. Notwithstanding Section 2 and 3, in the event that a change in ownership or control (within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code")) of the Company occurs and the independent public accountants for the Company (the "Accountants") determine that if the benefits to be provided under Section 2 and 3 (together with any other benefits payable to the Executive under any applicable plan maintained by the Company) were paid to the Executive: (a) the Executive would incur an excise tax under Section 4999 of Code, and the Company would be denied a deduction under Section 280G of the Code of all or some of such amounts to be paid to the Executive, and (b) the net after tax benefits to the Executive attributable to payments under Sections 2 and 3 hereof would not be at least $10,000 greater than the net after tax benefits which would accrue to the Executive if the amounts which would otherwise cause the Executive to be subject to this excise tax were not paid, the amounts payable to the Executive pursuant to Section 2 and 3 (or pursuant to such other plans maintained by the Company) shall be reduced so that the amount payable to the Executive hereunder is the greatest amount (as determined by the Accountants) that may be paid by the Company to the Executive without any such amount being subject to an excise tax under Section 4999 or being nondeductible for the Company pursuant to Section 280G. 4.2 Executive's Election. If the amounts to be paid to the Executive are to be reduced under paragraph 4.1 of this Section, the Executive shall be given the opportunity to designate which benefits or payments shall be reduced and in what order of priority. 4.3 Later Adjustments. (a) If the Executive receives reduced payments or benefits pursuant to the preceding paragraph, or if it had been determined that no such reduction was required, but it nonetheless is established pursuant to the final determination of a court or an Internal Revenue Service proceeding that, notwithstanding the good faith of the Executive and the Company in applying the terms of this Section, the aggregate amount paid to the Executive or for his benefit would result in any amount being treated as an "excess parachute payment" for purposes of Sections 28OG and 4999 of the Code, then an amount equal to the amount that would be an "excess parachute payment" shall be deemed for all purposes a loan to the Executive made on the date of the receipt of such excess amount, which the Executive shall have an obligation to repay to the Company on demand, together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code) from the date of the Executive's receipt of such excess until the date of such repayment. (b) In the event that it is determined for any reason that the amount of "excess parachute payments" are less than originally calculated, the Company shall promptly pay to the Executive the amount necessary so that, after such adjustment, the Executive will have received or be entitled to receive the maximum payments payable under this Section without any of such payments constituting an "excess parachute payment," together with interest on such amount at the applicable Federal rate (as defined in Section 1274(d) of the Code). 5. Termination of Agreement. This Agreement shall remain in effect from the date hereof until the last day of the twenty-fourth calendar month following the Effective Time. Further, upon the Effective Time, this Agreement shall continue until the Company or its successor shall have fully performed all of its obligations thereunder with respect to the Executive, with no future performance being possible. Notwithstanding the foregoing, this Agreement shall terminate on the date the Company's Board of Directors decides by formal vote not to proceed with the Merger; provided, however, that in the event a Qualifying Termination occurs prior to such date, this Agreement shall continue until the Company or its successor shall have fully performed all of its obligations thereunder with respect to the Executive, with no further performance being possible. 6. Amendment of Agreement. Subject to the provisions of Section 5, this Agreement may not be amended in any manner which has a significant adverse effect on the rights of the Executive without the written consent of the Executive. Notwithstanding the foregoing, at and after the Effective Time, this Agreement may not be amended in any respect without the written consent of the Executive. 7. Construction. Wherever any words are used herein in the masculine gender they shall be construed as though they were also used in the feminine gender in all cases where they would so apply, and wherever any words are used herein in the singular form, they shall be construed as though they were also used in the plural form in all cases where they would so apply. 8. Governing Law. This Agreement shall be governed by the laws of Maryland. 9. Successors and Assigns. This Agreement shall be binding upon the Company and any assignee or successor in interest to the Company. 10. Indemnification. The Company will pay all reasonable fees and expenses, if any, (including, without limitation, legal fees and expenses) that are incurred by the Executive to enforce this Agreement and that result from a breach of this Agreement by the Company. 11. Notice. Any notices, requests, demands, or other communications provided for by this Agreement shall be sufficient if in writing and if sent by registered or certified mail to the Executive at the last address he has filed in writing with the Company, or in the case of the Company, to its principal offices. BALTIMORE GAS AND ELECTRIC COMPANY By: /s/ Jon M. Files Jon M. Files Vice President Management Services /s/ Stephen F. Wood STEPHEN F. WOOD EX-12 3 COMPUTATIONS OF RATIOS EXHIBIT 12 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED AND PREFERENCE DIVIDEND REQUIREMENTS
12 MONTHS ENDED DECEMBER DECEMBER DECEMBER DECEMBER DECEMBER 1995 1994 1993 1992 1991 (IN THOUSANDS OF DOLLARS) Net Income........................................... $338,007 $323,617 $309,866 $264,347 $233,681 Taxes on Income...................................... 172,388 156,702 140,833 105,994 88,041 Adjusted Net Income.................................. $510,395 $480,319 $450,699 $370,341 $321,722 Fixed Charges: Interest and Amortization of Debt Discount and Expense and Premium on all Indebtedness......... $206,666 $204,206 $199,415 $200,848 $213,616 Capitalized Interest............................... 15,050 12,427 16,167 13,800 20,953 Interest Factor in Rentals......................... 2,099 2,010 2,144 2,033 1,801 Total Fixed Charges................................ $223,815 $218,643 $217,726 $216,681 $236,370 Preferred and Preference Dividend Requirements: (1) Preferred and Preference Dividends.............. $ 40,578 $ 39,922 $ 41,839 $ 42,247 $ 42,746 Income Tax Required............................. 20,434 19,074 18,763 16,729 15,916 Total Preferred and Preference Dividend Requirements.................................. $ 61,012 $ 58,996 $ 60,602 $ 58,976 $ 58,662 Total Fixed Charges and Preferred and Preference Dividend Requirements.............................. $284,827 $277,639 $278,328 $275,657 $295,032 Earnings (2)......................................... $719,160 $686,535 $652,258 $573,222 $537,139 Ratio of Earnings to Fixed Charges................... 3.21 3.14 3.00 2.65 2.27 Ratio of Earnings to Combined Fixed Charges and Preferred and Preference Dividend Requirements..... 2.52 2.47 2.34 2.08 1.82
(1) Preferred and preference dividend requirements consist of an amount equal to the pre-tax earnings which would be required to meet dividend requirements on preferred stock and preference stock. (2) Earnings are deemed to consist of net income which 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-21 4 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT*
JURISDICTION OF INCORPORATION Constellation Holdings, Inc. ..................................................................... Maryland Constellation Investments, Inc. .................................................................. Maryland BNG, Inc. ........................................................................................ Delaware Safe Harbor Water Power Corporation............................................................... Pennsylvania BGE Home Products & Services, Inc................................................................. Maryland BGE Energy Projects & Services, Inc............................................................... Maryland
*The names of certain indirectly owned subsidiaries have been omitted because, considered in the aggregate as a single subsidiary, they would not constitute a significant subsidiary pursuant to Rule 1-02(w) of Regulation S-X. EX-23 5 CONSENT OF INDEPENDENT CERT. PUBLIC ACCOUNTANTS EXHIBIT 23 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We consent to the incorporation by reference in the Prospectuses of Baltimore Gas and Electric Company prepared in accordance with the requirements of Forms S-8 (File Nos. 33-56084 and 33-59545) and Forms S-3 (File Nos. 33-49801, 33-45260, 33-33559, 33-57658, 33-61297, and 33-50331) and the Prospectus of Constellation Energy Corporation prepared in accordance with the requirements of Form S-4 (File No. 33-64799) of our report dated January 19, 1996 accompanying the consolidated financial statements and the consolidated financial statement schedule of Baltimore Gas and Electric Company as of December 31, 1995 and 1994 and for each of the three years in the period ended December 31, 1995, included in this Annual Report on Form 10-K of Baltimore Gas and Electric Company. /s/ Coopers & Lybrand L.L.P. COOPERS & LYBRAND L.L.P. Baltimore, Maryland March 29, 1996 EX-27 6 FDS --
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BGE'S DECEMBER 31, 1995 CONSOLIDATED INCOME STATEMENT, BALANCE SHEET AND STATEMENT OF CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000009466 Baltimore Gas & Electric Company 1,000 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 PER-BOOK 5,497,596 1,311,968 805,778 701,321 0 8,316,663 1,425,805 0 1,381,417 2,812,682 242,000 269,185 2,598,254 0 0 279,305 120,969 26,000 0 0 1,968,268 8,316,663 2,934,799 169,527 2,239,107 2,408,634 695,692 8,819 704,511 196,977 338,007 40,578 297,429 227,192 219,689 663,045 $2.02 $2.02
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