-----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, TkKW5vIwySbFYeXmgFsulhWm1kkMt3/SQPHRyyT7gGipe1xdRAV6qELrzfPJyrht Z1/4yzfbqsUp9y+xvjmPkQ== 0000950169-98-000330.txt : 19980330 0000950169-98-000330.hdr.sgml : 19980330 ACCESSION NUMBER: 0000950169-98-000330 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 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: SEC FILE NUMBER: 001-01910 FILM NUMBER: 98575239 BUSINESS ADDRESS: STREET 1: 39 W LEXINGTON ST STREET 2: CHARLES CTR CITY: BALTIMORE STATE: MD ZIP: 21201 BUSINESS PHONE: 4107835920 10-K 1 BALTIMORE GAS & ELECTRIC ================================================================================ - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ------------------------------ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended 1-1910 DECEMBER 31, 1997 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 Chicago Stock Exchange, Inc. Pacific Stock Exchange, Inc. Preference Stock, Cumulative, $100 Par Value: 7.78%, 1973 Series 7.50%, 1986 Series Philadelphia Stock Exchange, Inc. 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 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. [ ] Aggregate market value of Common Stock, without par value, held by non-affiliates as of February 28, 1998 was approximately $4,645,485 based upon New York Stock Exchange composite transaction closing price. COMMON STOCK, WITHOUT PAR VALUE -- 147,867,114 SHARES OUTSTANDING ON FEBRUARY 28, 1998. 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 24, 1998 (Proxy Statement).
- -------------------------------------------------------------------------------- ================================================================================ TABLE OF CONTENTS PAGE ---- PART I Item 1 -- Business Overview of Consolidated Business......................... 1 Consolidated Capital Requirements..................... 3 Electric Business Electric Regulatory Matters and Competition.................... 4 Electric Rate Matters............ 5 Nuclear Operations............... 5 Electric Load Management, Energy, and Capacity Purchases...................... 6 Fuel for Electric Generation..... 7 Electric Operating Statistics.... 9 Gas Business Gas Operating Statistics......... 10 Gas Regulatory Matters and Competition.................... 11 Gas Operations................... 11 Gas Rate Matters................. 12 Franchises......................... 12 Diversified Businesses............. 12 Environmental Matters.............. 17 Employees.......................... 19 Item 2 -- Properties......................... 20 Item 3 -- Legal Proceedings.................. 21 Item 4 -- Submission of Matters to a Vote of Security Holders................. 21 Item 10 -- Executive Officers of the Registrant (Instruction 3 to Item 401(b) of Regulation S-K)........ 22 PART II Item 5 -- Market for Registrant's Common Equity and Related Stockholder Matters.......................... 24 Item 6 -- Selected Financial Data............ 25 Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operations......................... 26 Item 7A -- Quantitative and Qualitative Disclosures About Market Risk.... 36 Item 8 -- Financial Statements and Supplementary Data............... 37 Item 9 -- Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......................... 63 PART III Item 10 -- Directors and Executive Officers of the Registrant..................... 63 Item 11 -- Executive Compensation............. 63 Item 12 -- Security Ownership of Certain Beneficial Owners and Management....................... 63 Item 13 -- Certain Relationships and Related Transactions..................... 63 PART IV Item 14 -- Exhibits, Financial Statement Schedules and Reports on Form 8-K......................... 64 Signatures....................................... 68 PART I ITEM 1. BUSINESS OVERVIEW OF CONSOLIDATED BUSINESS Baltimore Gas and Electric Company (BGE) is the parent company and conducts our primary business -- the electric and gas utility business. We also conduct diversified businesses in subsidiary companies. BGE was incorporated under the laws of the State of Maryland on June 20, 1906. BGE owns two-thirds of the outstanding capital stock, including one-half of the voting stock, of Safe Harbor Water Power Corporation. Safe Harbor is a producer of hydroelectric power on the Susquehanna River at Safe Harbor, Pennsylvania. We discuss this further in ITEM 2. PROPERTIES -- ELECTRIC. OVERVIEW OF UTILITY BUSINESS Our utility business includes our electric and gas businesses. Our electric business generates, purchases, and sells electricity. Our gas business purchases, transports, and sells natural gas. The focus of these activities is serving customers in our service territory. We furnish electric and gas retail services in the City of Baltimore and in all or part of ten counties in Central Maryland. Our electric service territory includes an area of approximately 2,300 square miles with an estimated population of 2.6 million. Our gas service territory includes an area of more than 600 square miles with an estimated population of 2.0 million. There are no municipal or cooperative wholesale customers within our service territory. As discussed throughout this report, the two units at our Calvert Cliffs Nuclear Power Plant (Calvert Cliffs) are our principal generating facilities and have the lowest fuel cost in our system. An extended shutdown of either of these Units could have a substantial adverse effect on our business and financial condition. We describe prior outages at our nuclear plant in the NUCLEAR OPERATIONS section and in NOTE 12 TO CONSOLIDATED FINANCIAL STATEMENTS. We describe our utility business further in five other sections of this report -- ELECTRIC BUSINESS, ELECTRIC OPERATING STATISTICS, GAS OPERATING STATISTICS, GAS BUSINESS, and FRANCHISES. COMPETITION AND RESPONSE TO REGULATORY CHANGE The utility industry is facing substantial regulatory change designed to encourage competition in the sale of gas and electric services. To prepare for this change, we regularly reevaluate our strategies. We reevaluate our strategies with two goals in mind: to improve our competitive position, and to anticipate and adapt to regulatory changes. We will continue to develop strategies to keep us competitive. These strategies might include one or more of the following: o complete or partial separation of our generation, transmission and distribution functions, o purchase or sale of generation assets, o mergers or acquisitions of utility or non-utility businesses, o spin-off or sale of one or more businesses, o growth of revenues from diversified businesses. We cannot predict whether any transactions of the types described above may actually occur, nor can we predict what their effect on our financial condition or competitive position might be. We discuss competition in our electric and gas businesses in more detail in the ELECTRIC REGULATORY MATTERS AND COMPETITION and GAS REGULATORY MATTERS AND COMPETITION sections. OVERVIEW OF DIVERSIFIED BUSINESSES Our diversified businesses are organized in three groups: o Constellation(TM) Holdings, Inc. and Subsidiaries, together known as the Constellation Holdings Companies -- our power generation, financial investments, and real estate businesses, o Constellation Energy Solutions(TM), Inc. and Subsidiaries -- our energy marketing businesses, and o BGE Home Products & Services, Inc. and Subsidiaries -- our home products and commercial building systems businesses. We describe our diversified businesses in more detail in the DIVERSIFIED BUSINESSES section. 1 OPERATING REVENUES AND INCOME The percentages of Operating Revenues and Operating Income attributable to our electric, gas, and diversified businesses are shown in the tables below. We present other information about these segments in NOTE 2 TO CONSOLIDATED FINANCIAL STATEMENTS. OPERATING REVENUES ------------------------------ ELECTRIC GAS DIVERSIFIED -------- --- ----------- 1997...................... 66% 16% 18% 1996...................... 70 16 14 1995...................... 76 14 10 1994...................... 76 15 9 1993...................... 77 16 7 OPERATING INCOME* ------------------------------ ELECTRIC GAS DIVERSIFIED -------- --- ----------- 1997...................... 82% 9% 9% 1996...................... 75 10 15 1995...................... 83 7 10 1994...................... 85 4 11 1993...................... 87 6 7 - --------------- *Excluding the effect of income taxes. The percentages for our gas and electric business differ due to two factors: o our level of investment in each business, and o our fuel costs in each business. Our electric and gas operating revenues reflect amounts collected for fuel and other operating expenses plus a return on our investment. Our investment for ratemaking purposes in the electric business is $4.8 billion, but our investment for ratemaking purposes in the gas business is approximately $676 million. As a result, our electric operating revenues include a much higher return component than our gas operating revenues. Also, as shown in our Consolidated Statements of Income in ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA, our electric fuel costs ("electric fuel and purchased energy") were 24% of electric revenues in 1997, and our purchased gas costs ("gas purchased for resale") were 56% of gas revenues in 1997. This means our cost of fuel in relation to our revenues is lower in the electric business than in the gas business. We charge the actual cost of the fuel we use to generate electricity to customers with no profit to us. The price we charge for natural gas is based on a market based rates incentive mechanism approved by the Maryland Public Service Commission (Maryland PSC). We discuss market based rates further in the GAS REGULATORY MATTERS AND COMPETITION section. Our revenues come from many customers -- residential, commercial, and industrial. Our largest electric customer provides 2.4% of our total electric revenues. Our largest gas customer provides 1.3% of our total gas revenues. As shown in the tables, the percentages for operating revenues and operating income have historically been about the same for diversified businesses. However, in 1997 the percentages differ because the Constellation Holdings Companies wrote down their investments in two real estate projects. These write-downs reduced diversified business operating income by about $71 million. We discuss these write-downs further in the DIVERSIFIED BUSINESSES Section. 2 CONSOLIDATED CAPITAL REQUIREMENTS Our business requires a great deal of capital. Our actual capital requirements for the years 1995 through 1997, along with estimated amounts for the years 1998 through 2000, are shown below:
1995 1996 1997 1998 1999 2000 ---- ---- ------ ---- ------ ------ (IN MILLIONS) Utility Business Capital Requirements Construction expenditures (excluding AFC) Electric................................................... $223 $219 $ 238 $236 $ 260 $ 273 Gas........................................................ 70 84 89 77 76 72 Common..................................................... 51 46 38 34 27 24 ---- ---- ------ ---- ------ ------ Total construction expenditures......................... 344 349 365 347 363 369 AFC (a)...................................................... 22 10 8 8 11 14 Nuclear fuel (uranium purchases and processing charges)........................................ 46 47 44 50 50 48 Deferred energy conservation expenditures (b)................ 46 31 27 12 10 10 Retirement of long-term debt and redemption of preference stock...................................................... 279 184 243 117 344 264 ---- ---- ------ ---- ------ ------ Total utility business capital requirements............. 737 621 687 534 778 705 ---- ---- ------ ---- ------ ------ Diversified Business Capital Requirements.................... 173 170 344 333 271 403 ---- ---- ------ ---- ------ ------ Total capital requirements.............................. $910 $791 $1,031 $867 $1,049 $1,108 ==== ==== ====== ==== ====== ======
- --------------- (a) Allowance for Funds Used During Construction (AFC) is recorded for all construction projects with a construction period of more than one month. We discuss AFC further in NOTE 1 TO CONSOLIDATED FINANCIAL STATEMENTS. (b) We discuss deferred energy conservation expenditures further in NOTE 5 TO CONSOLIDATED FINANCIAL STATEMENTS. CAPITAL REQUIREMENTS OF OUR UTILITY BUSINESS We continuously review and change our construction program, so actual expenditures may vary from the estimates for the years 1998 through 2000 in the capital requirements chart. Our actual capital requirements may vary from the estimates set forth in the table because of a number of factors such as: o inflation and economic conditions, o regulation and legislation, o load growth, o environmental protection standards, and o the cost and availability of capital. During the five-year period 1998 through 2002, we expect to spend about: o $1.8 billion for construction projects, o $240 million for nuclear fuel, and o $50 million for deferred energy conservation programs. Our projections of future electric construction expenditures do not include costs to build more generating units. Electric construction expenditures include improvements to our generating plants and transmission and distribution facilities. They also include estimated costs for replacing the steam generators and extending the operating licenses at Calvert Cliffs. The operating licenses expire in 2014 for Unit 1 and in 2016 for Unit 2. We estimate these Calvert Cliffs costs to be: o $27 million in 1998, o $38 million in 1999, and o $44 million in 2000. We estimate that during the three-year period 2001 through 2003, we will spend an additional $175 million to complete the replacement of the steam generators and extend the operating licenses at Calvert Cliffs. If we do not replace the steam generators, we estimate that Calvert Cliffs could not operate beyond the 2004-2006 time period. We expect the steam generator replacements to occur during the 2002 refueling outage for Unit 1 and during the 2003 outage for Unit 2. During the period January 1, 1993 through December 31, 1997 we: o spent about $2.0 billion for additions to our utility plant, which is about 24% of our total utility plant (excluding nuclear fuel) at December 31, 1997, and o retired $414 million of our utility plant. We estimate that we will need about $1.1 billion to retire long-term debt (including sinking fund payments) and redeem preference stock during the five-year period 1998-2002. We discuss our capital requirements further in ITEM 7. MD&A -- LIQUIDITY AND CAPITAL RESOURCES. 3 CAPITAL REQUIREMENTS OF OUR DIVERSIFIED BUSINESSES The capital requirements for our diversified businesses may vary from the estimates set forth in the table due to a number of factors including market and economic conditions. We discuss the capital requirements for these businesses further in two sections of this report: DIVERSIFIED BUSINESS CAPITAL REQUIREMENTS and ITEM 7. MD&A -- CAPITAL REQUIREMENTS OF OUR DIVERSIFIED BUSINESSES. ELECTRIC BUSINESS We get most of our revenues and operating income from our electric utility business. We describe this business in several paragraphs below. We discuss our electric power marketing business separately under the heading DIVERSIFIED BUSINESSES. ELECTRIC REGULATORY MATTERS AND COMPETITION In recent years we have focused strategic attention on federal regulatory changes that have increased competition in the wholesale market for bulk power and expanded competition in the market for generation. Our board of directors has a Long Range Strategy Committee to oversee the development of our long range strategic goals, and to consider strategic initiatives presented by management. Many of these changes were prompted by the Energy Policy Act of 1992 (the 1992 Act). The 1992 Act: o granted the Federal Energy Regulatory Commission 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, and o created a new class of power producers called 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 electric generation market. Other changes resulted from policies at the Securities and Exchange Commission, 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. In addition to the above changes, state legislators and regulators around the United States are redefining regulatory plans for the electric utility industry. In Maryland, the State Legislature established a task force in 1997 to examine the structure of the electric utility industry. The task force met several times starting in September 1997 to explore whether all Maryland retail customers should be allowed to choose any electricity supplier. Presently each retail customer in Maryland is served by the single electric utility company that holds the franchise in the area where the customer lives. Under customer choice, the local electric utility would continue to transmit and deliver electricity; however, the customer could contract to buy the electricity from any willing supplier. From the perspective of the electric utility, this means that transmission and distribution of electricity will remain regulated services and the generation of electricity will become a competitive service. There are many issues associated with moving from a regulated generation market to a competitive generation market. These issues include, among others: o the recovery of stranded costs(1) by electric utilities, o adjusting the tax burden so as not to penalize electric utilities' current generating assets in a competitive market, o how to address the needs of low income customers, and o the need to maintain reliable electric service. The Maryland task force has determined that these issues are complex and that comprehensive legislation cannot be enacted in the 1998 legislative session. The Maryland legislature meets annually from mid-January to mid-April. The task force may continue its work during 1998 and recommend legislation for enactment in the 1999 legislative session. It appears the task force believes that the issues can be fully evaluated so that implementation of customer choice should begin not later than October 1, 2000. - --------------- (1) What are stranded costs? They are costs a utility would recover under a regulated pricing system, but not a competitive one. Traditionally, utilities have been required to serve all customers in their franchised area while regulators have set the rates customers pay for that service. To meet customers' demand for electricity, utilities have had to build facilities, including generating plants, and enter into contracts to buy power, among other things. While regulators have approved these investments, they have tried to keep prices low for consumers by setting rates that defer recovery of these costs over longer than normal time periods. Under customer choice, however, electric supply rates will be set by the market, not by regulators. That means if the market price drops below the current regulated price, the utility would not recover its investments in facilities or costs under contracts to buy power and, therefore, the costs would be "stranded'. 4 The Maryland Public Service Commission (Maryland PSC) has also addressed the customer choice issues. In its order issued in December 1997, the Maryland PSC required the phase-in of customer choice in three increments, with one third of the customers being offered customer choice in each increment. The three increments are phased in over two years from July 1, 2000 to July 1, 2002. The Maryland PSC order contemplates a series of hearings and meetings to address the issues surrounding customer choice. The Maryland PSC also recognizes the need for legislation to deal with certain issues. BGE will be participating in the hearings and meetings to be held by the Maryland PSC. We will quantify our stranded costs and argue for recovery of these costs over a reasonable period of time. Based on similar proceedings in other states, including neighboring Pennsylvania, we can expect opposition to the recovery of stranded costs. It is not possible to predict the ultimate effect competition will have on our earnings in the future. ELECTRIC RATE MATTERS ENERGY CONSERVATION SURCHARGE The Maryland PSC allows us to include in base rates a component to recover money we have spent on conservation programs. This component is called an "energy conservation surcharge" and was approved by the Maryland PSC effective July 1, 1992. Under this surcharge the Maryland PSC limits what our electric business profit can be. If, at the end of the year, we have exceeded our allowed profit, we lower the amount of future surcharges to our customers to correct the amount of overage, plus interest. The surcharge is reset on July 1 of each year. We also discuss the surcharge in ITEM 7. MD&A -- RESULTS OF OPERATIONS. POSTRETIREMENT AND POSTEMPLOYMENT BENEFIT COSTS Beginning in 1998, the Maryland PSC authorized us to make some changes in the way we account for postretirement and other postemployment benefit costs. The Maryland PSC authorized us to: o expense all of the increase in annual postretirement benefit costs related to our electric business, and o amortize deferred postretirement and other postemployment benefit costs related to our utility business over 15 years. The Maryland PSC authorized us to reflect these changes in our current electric base rates and will adjust our gas base rates to recover the higher costs that will be recognized in 1998. We discuss this also in the GAS RATE MATTERS section and in NOTE 6 TO CONSOLIDATED FINANCIAL STATEMENTS. ELECTRIC FUEL RATE PROCEEDINGS By law, we are allowed to recover our cost of electric fuel if the Maryland PSC finds that, among other things, we have kept the productive capacity of our generating plants at a reasonable level. To do this, the Maryland PSC will perform an evaluation of each outage (other than regular maintenance outages) at our generating plants. The evaluation will determine if we used all reasonable and cost-effective maintenance and operating control procedures to try to prevent the outage. The Maryland PSC, under the Generating Unit Performance Program, measures annually whether we have maintained the productive capacity of our generating plants at reasonable levels. To do this, the program uses a system-wide generating performance target and an individual performance target for each base load generating unit. In fuel rate hearings, actual generating performance adjusted for planned outages will be compared first to the system-wide target. If that target is met, it should mean that the requirements of Maryland law have been met. If the system-wide target is not met, each unit's adjusted actual generating performance will be compared to its individual performance target to determine if the requirements of Maryland law have been met and, if not, to determine the basis for possibly imposing a penalty on BGE. Even if we meet these targets, other parties to fuel rate hearings may still question whether we used all reasonable and cost-effective procedures to try to prevent an outage. If the Maryland PSC decides we were deficient in some way, the Maryland PSC may not allow us to recover the cost of replacement energy. BGE is required to submit to the Maryland PSC the actual generating performance data for each calendar year 45 days after year end. The Maryland PSC reviews the performance for each calendar year in the first fuel rate proceeding that is initiated after the data is submitted. 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 The two units at Calvert Cliffs use the cheapest fuel. As a result, the costs of replacement energy associated with outages at these units can be significant. 5 Before the Generating Unit Performance Program became effective, we were unable to recover a total of $9.6 million in replacement energy costs for outages at Calvert Cliffs. Since 1987 when the Generating Unit Performance Program became effective, we have been able to recover all replacement energy costs for Calvert Cliffs outages in 1988, 1992, 1993 and 1994. However, for a 66-day outage at Calvert Cliffs during 1987 we were unable to recover approximately $4.5 million of our replacement energy costs. Although we met the system-wide and Calvert Cliffs performance targets, the Maryland PSC found that the presumption of reasonableness was overcome by a showing that the outage was caused by mismanagement. As a result of the settlement of litigation surrounding an extended outage at Calvert Cliffs during 1989 to 1991, we wrote off a total of $118 million of replacement energy costs ($35 million in 1990 and $83 million in 1996), plus $5.6 million of related financing charges (written off in 1996). Our performance in 1995 and 1996 is currently being reviewed in a fuel rate proceeding. We established that we exceeded the system-wide target for those years as well as the performance target for Calvert Cliffs for 1995. Performance for 1997 will be reviewed when we submit our next fuel rate application. We cannot estimate the amount of replacement energy costs that could be challenged or disallowed in future fuel rate proceedings, but such amounts could be material. The following is a summary of Calvert Cliffs' performance over the last 5 years: GENERATION (MWH) CAPACITY FACTOR ---------------- --------------- 1993............. 12,300,816 85% 1994............. 11,225,977 77% 1995............. 12,940,496 88% 1996............. 12,069,937 82% 1997............. 13,133,441 90% ELECTRIC LOAD MANAGEMENT, ENERGY, AND CAPACITY PURCHASES We have implemented various programs for use when system operating conditions require a reduction in load. We refer to these programs as active load management programs. These programs include: o customer-owned generation and curtailable service for large commercial and industrial customers, o air conditioning control which is available to residential and commercial customers, and o residential water heater control. We have generally activated these programs on peak summer days. The potential reduction in the Summer 1998 peak load from active load management is approximately 540 megawatts (MW). We recover the costs of these load management programs from our customers. Our generation and transmission facilities are connected to those of neighboring utility systems to form the Pennsylvania-New Jersey-Maryland Interconnection (PJM). Under the PJM agreement, we use the interconnected facilities for substantial energy interchange and capacity transactions as well as emergency assistance. In addition, sometimes we enter into short-term capacity transactions to meet PJM obligations. We have an agreement with Pennsylvania Power & Light Company (PP&L) to purchase electricity and capacity (availability to supply electricity) from June 1, 1990 through May 31, 2001. This agreement, which has been accepted by the Federal Energy Regulatory Commission, is designed to help maintain adequate reserve margins through this decade and provide flexibility in meeting capacity obligations. The PP&L agreement: o entitles us to 5.94% of the electricity 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 o enables us to treat a portion of PP&L's capacity as our capacity for purposes of satisfying our installed capacity requirements as a member of the PJM. We are 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. Our firm capacity purchases at December 31, 1997 represented: o 170 MW of rated capacity of Bethlehem Steel Corporation's Sparrows Point complex, o 57 MW of rated capacity of the Baltimore Refuse Energy Systems Company, and o 130 MW of Susquehanna capacity from PP&L. In 1994 PECO Energy won a competitive bidding program to supply us 140 MW of firm electric capacity and associated energy for 25 years beginning June 1, 1998. The Federal Energy Regulatory Commission and the Maryland PSC have both accepted this contract. 6 FUEL FOR ELECTRIC GENERATION Our electric generation by type of fuel and the cost of each fuel in the five-year period 1993-1997 are shown below:
AVERAGE COST OF FUEL CONSUMED GENERATION BY FUEL TYPE ((CENTS) PER MILLION BTU) ------------------------------------ ---------------------------------------------- 1997 1996 1995 1994 1993 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- ------ ------ ------ ------ ------ Nuclear (a)................... 44% 40% 43% 39% 43% 46.51 47.29 47.22 52.06 53.01 Coal.......................... 59 58 57 56 55 140.41 143.80 148.64 148.64 151.85 Oil........................... 1 1 1 3 3 283.61 313.33 267.59 245.28 253.36 Hydro & Gas................... 3 4 3 3 3 -- -- -- -- -- ---- ---- ---- ---- ---- 107 103 104 101 104 Net Interchange Purchases (Sales)....................... (7) (3) (4) (1) (4) ---- ---- ---- ---- ---- 100% 100% 100% 100% 100% ==== ==== ==== ==== ====
- --------------- (a) Nuclear fuel costs include disposal costs associated with long-term off-site spent fuel storage and shipping, which is currently set by law at one mill per kilowatt-hour of nuclear generation (approximately 10 cents per million Btu), and contributions to a fund for decommissioning and decontaminating the Department of Energy's uranium enrichment facility. We discuss this further below. NUCLEAR The supply of fuel for nuclear generating stations includes the: o purchase of uranium concentrates, o conversion to uranium hexafluoride, o enrichment of uranium hexafluoride, and o fabrication of nuclear fuel assemblies. Information is shown below about fuel requirements for Calvert Cliffs Units 1 and 2: Uranium We have, either in inventory or under Concentrates: contract, sufficient quantities of uranium to meet 70 to 80% of our requirements through 2004. Conversion: We have contractual commitments providing for the conversion of uranium concentrates into uranium hexafluoride which will meet approximately 75% of our requirements through 2004. Enrichment: We have a contract with the U.S. Enrichment Corporation for the enrichment of 100% of our enrichment requirements through 1998, declining to approximately 50% by 2004. Fuel Assembly We have contracted for the Fabrication: fabrication of fuel assemblies for reloads required through 2013. The nuclear fuel market is very competitive and we do not anticipate any problem in meeting our requirements beyond the periods noted above. We discuss our expenditures for nuclear fuel in ITEM 7. MD&A -- LIQUIDITY AND CAPITAL RESOURCES. STORAGE OF SPENT NUCLEAR FUEL: Under the Nuclear Waste Policy Act of 1982 (the 1982 Act), we are required to place spent fuel discharged from Calvert Cliffs into a federal repository. Such facilities do not currently exist, and, consequently, must be developed and licensed. We cannot predict when such facilities will be available. However, the 1982 Act requires the federal government to accept spent fuel starting in 1998. We cannot predict what the ultimate cost to dispose of the spent fuel will be. However, the 1982 Act assesses a one mill per kilowatt-hour fee on nuclear electricity generated and sold. We estimate this fee to be approximately $13 million for Calvert Cliffs each year based on expected operating levels. Fees are deposited into the Nuclear Waste Fund. In December 1996, the United States Department of Energy (DOE) notified us and other nuclear utilities that it is unable to meet the 1998 deadline for accepting spent fuel. We are participating in litigation, along with 36 other utilities, against the DOE. The litigation, titled NORTHERN STATES POWER, ET AL. V. DOE, was filed January 31, 1997 in the United States Court of Appeals for the D.C. Circuit. That court has original jurisdiction under the 1982 Act. The utilities asked the court to allow them to pay fees, that formerly went directly to DOE for deposit into the Nuclear Waste Fund, into escrow instead. Among other remedies, the utilities also asked the court to force DOE to submit a program with milestones illustrating how it would meet the deadline for accepting spent nuclear fuel, and a monthly report to allow the utilities to monitor DOE's progress. 7 On November 14, 1997 the court ordered DOE to comply with its unconditional obligation under the 1982 Act to dispose of spent fuel. The court did not grant the utilities the remedies sought, stating that adequate contractual and statutory remedies already existed. The DOE and one utility have filed separate motions for reconsideration with the court. In its motion for reconsideration, DOE has advised the court that damage claims for breach of its spent fuel disposal contracts would be paid from the Nuclear Waste Fund. Any shortfall in funding would be replenished by increasing utility fees. This would render the utilities' contract remedies meaningless. On February 19, 1998 the 36 utilities, including BGE, filed a joint motion to enforce the court's order. Similar motions were filed by six additional utilities. These 42 utilities represent virtually the entire nuclear industry. The motions request: o that the damages for breach not be paid by DOE from the Nuclear Waste Fund, o that DOE establish, in good faith, a program for immediate disposal of spent fuel, specifying milestones, o that the utilities be allowed to withhold future payment into the Nuclear Waste Fund unless and until DOE complies with its obligations to dispose of spent fuel, and o that utilities not be penalized by DOE for withholding future payments. BGE is currently evaluating its contract options in light of the court's decision. BGE cannot currently estimate the total amount of the costs it will incur as a result of DOE's failure to meet the 1998 deadline. Maryland law makes it unlawful to establish within the State a facility for the permanent storage of high-level nuclear waste, unless required by federal law. We received a license from the Nuclear Regulatory Commission to operate our on-site independent spent fuel storage facility. We now have storage capacity at Calvert Cliffs that will accommodate spent fuel from operations through the year 2006. In addition, we can expand our temporary storage capacity to meet future requirements until federal storage is available. COSTS FOR DECOMMISSIONING URANIUM ENRICHMENT FACILITIES: 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 CONSOLIDATED FINANCIAL STATEMENTS under the heading "UTILITY PLANT, DEPRECIATION AND AMORTIZATION, AND DECOMMISSIONING." COAL We get most of our coal under supply contracts with mining operators, and we get the rest through spot purchases. We believe that we will be able to renew supply contracts as they expire or enter into similar contracts with other coal suppliers. Our coal-burning facilities have the following requirements: ANNUAL COAL REQUIREMENT (TONS) ------------------ Brandon Shores (a) Units 1 and 2 (combined)........ 3,500,000 Crane (b) Units 1 and 2 (combined)........ 700,000 Wagner (c) Units 2 and 3 (combined)........ 900,000 - --------------- Special Coal Restrictions: (a) Sulfur content less than 0.8% (b) Low ash melting temperature (c) Sulfur content no more than 1% Coal deliveries to our coal burning facilities are made by rail and barge. The coal we use is produced from mines located in central and northern Appalachia. We have 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. Both of these plants are located in Pennsylvania. 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. 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. GAS We have a firm natural gas transportation entitlement of 3,500 dekatherms a day to provide ignition and banking at certain power plants. We purchase gas for electric generation as needed in the spot market using interruptible transportation arrangements. Some of our gas fired units can use residual fuel oil instead of gas. 8 ELECTRIC OPERATING STATISTICS
YEAR ENDED DECEMBER 31, -------------------------------------------------------- 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- Electric Output (In Thousands) -- MWH: Generated............................................. 31,289 30,107 30,548 28,413 28,907 Purchased (A)......................................... 4,737 7,560 7,403 6,270 3,643 -------- -------- -------- -------- -------- Subtotal......................................... 36,026 37,667 37,951 34,683 32,550 Less Interchange and Other Sales...................... 6,224 7,580 8,149 5,684 4,149 -------- -------- -------- -------- -------- Total Output..................................... 29,802 30,087 29,802 28,999 28,401 ======== ======== ======== ======== ======== Power Generated and Purchased at Times of Peak Load (MW) (one hour): Generated by Company.................................. 5,472 4,789 5,162 3,384 5,245 Net Purchased (A)..................................... 508 1,166 785 2,654 631 -------- -------- -------- -------- -------- Peak Load (B)......................................... 5,980 5,955 5,947 6,038 5,876 ======== ======== ======== ======== ======== Annual System Load Factor (%)........................... 56.9 57.5 57.2 54.7 55.2 Revenues (In Millions) Residential........................................... $ 932.5 $ 958.7 $ 955.2 $ 931.7 $ 931.7 Commercial............................................ 892.6 861.3 879.4 853.0 869.8 Industrial............................................ 211.9 207.6 208.5 205.6 199.0 -------- -------- -------- -------- -------- System Sales.......................................... 2,037.0 2,027.6 2,043.1 1,990.3 2,000.5 Interchange and Other Sales........................... 132.7 155.9 167.0 118.0 91.5 Other................................................. 22.3 25.5 21.0 19.1 20.1 -------- -------- -------- -------- -------- Total............................................ $2,192.0 $2,209.0 $2,231.1 $2,127.4 $2,112.1 ======== ======== ======== ======== ======== Sales (In Thousands) -- MWH: Residential........................................... 10,806 11,243 10,966 10,670 10,614 Commercial............................................ 12,718 12,591 12,635 12,351 12,395 Industrial............................................ 4,575 4,596 4,591 4,433 3,763 -------- -------- -------- -------- -------- System Sales.......................................... 28,099 28,430 28,192 27,454 26,772 Interchange and Other Sales........................... 6,224 7,580 8,149 5,684 4,149 -------- -------- -------- -------- -------- Total............................................ 34,323 36,010 36,341 33,138 30,921 ======== ======== ======== ======== ======== Customers (In Thousands) Residential........................................... 1,001.0 995.2 988.2 978.6 968.2 Commercial............................................ 105.9 104.5 103.4 101.9 100.8 Industrial............................................ 4.5 4.3 4.1 4.0 3.8 -------- -------- -------- -------- -------- Total............................................ 1,111.4 1,104.0 1,095.7 1,084.5 1,072.8 ======== ======== ======== ======== ======== Average Cost of Fuel Consumed ((cents) per million BTU).................................................. 105.76 108.05 104.78 112.44 112.77 ======== ======== ======== ======== ========
We 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 we own two-thirds of the capital stock. (B) We discuss active load management programs which may be activated at times of peak load in ELECTRIC LOAD MANAGEMENT, ENERGY, AND CAPACITY PURCHASES. 9 GAS OPERATING STATISTICS
YEAR ENDED DECEMBER 31, -------------------------------------------------------- 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- Gas Output (In Thousands) -- DTH: Purchased.......................................... 62,988 70,260 70,391 68,541 71,221 LNG Withdrawn from Storage......................... 484 904 815 698 725 Produced........................................... 541 784 528 828 259 -------- -------- -------- -------- -------- Total Output.................................. 64,013 71,948 71,734 70,067 72,205 Delivery service gas (A)........................... 52,629 45,964 43,854 41,897 38,521 Off-system sales (B)............................... 17,611 10,204 -- -- -- -------- -------- -------- -------- -------- Total......................................... 134,253 128,116 115,588 111,964 110,726 ======== ======== ======== ======== ======== Peak Day Sendout (DTH)............................... 765,011 708,966 706,287 761,900 657,700 ======== ======== ======== ======== ======== Capability on Peak Day (DTH)......................... 870,000 870,000 847,000 847,000 847,000 Revenues (In Millions) Residential Excluding Delivery Service...................... $ 321.7 $ 320.1 $ 248.3 $ 262.7 $ 265.6 Delivery Service (C)............................ 0.5 -- -- -- -- Commercial Excluding Delivery Service...................... 113.5 125.1 109.9 121.0 121.8 Delivery Service................................ 12.9 7.2 3.7 2.3 3.3 Industrial Excluding Delivery Service...................... 11.4 17.1 16.7 20.2 22.3 Delivery Service................................ 17.2 14.6 16.3 9.6 12.9 -------- -------- -------- -------- -------- System sales....................................... 477.2 484.1 394.9 415.8 425.9 Off-system sales................................... 37.5 26.6 -- -- -- -------- -------- -------- -------- -------- Other.............................................. 6.9 6.6 5.6 5.4 7.3 -------- -------- -------- -------- -------- Total......................................... $ 521.6 $ 517.3 $ 400.5 $ 421.2 $ 433.2 ======== ======== ======== ======== ======== Sales (In Thousands) -- DTH: Residential Excluding Delivery Service...................... 39,958 43,784 40,211 40,279 40,029 Delivery Service................................ 205 -- -- -- -- Commercial Excluding Delivery Service...................... 18,435 22,698 23,612 23,712 23,830 Delivery Service................................ 12,964 8,755 6,982 6,490 7,428 Industrial Excluding Delivery Service...................... 2,016 2,887 4,102 4,410 5,298 Delivery Service................................ 38,791 36,201 35,925 33,837 31,390 -------- -------- -------- -------- -------- System sales....................................... 112,369 114,325 110,832 108,728 107,975 Off-system sales................................... 17,611 10,204 -- -- -- -------- -------- -------- -------- -------- Total......................................... 129,980 124,529 110,832 108,728 107,975 ======== ======== ======== ======== ======== Customers (In Thousands) Residential........................................ 524.5 516.5 506.8 498.2 491.2 Commercial......................................... 39.3 38.9 38.4 37.9 37.5 Industrial......................................... 1.3 1.3 1.3 1.3 1.3 -------- -------- -------- -------- -------- Total......................................... 565.1 556.7 546.5 537.4 530.0 ======== ======== ======== ======== ========
We achieved an all-time peak day sendout of 765,011 DTH on January 18, 1997. - --------------- (A) Delivery service gas is gas purchased by customers directly from suppliers for which we receive a fee for transportation through our system. We discuss this further in ITEM 7. MD&A -- RESULTS OF OPERATIONS. (B) Off-system sales are low-margin sales to wholesale suppliers of natural gas outside our service territory (beginning first quarter 1996). We discuss this further in ITEM 7. MD&A -- RESULTS OF OPERATIONS. (C) Residential delivery service represents sales of gas through our Gas Options pilot program that we began in late 1997. We discuss this program further in the GAS REGULATORY MATTERS AND COMPETITION section. 10 GAS BUSINESS We discuss our utility gas business on the previous page under GAS OPERATING STATISTICS and in three other sections of this report: GAS REGULATORY MATTERS AND COMPETITION; GAS OPERATIONS; AND GAS RATE MATTERS. We discuss our gas marketing business separately under the heading DIVERSIFIED BUSINESSES. GAS REGULATORY MATTERS AND COMPETITION To introduce competition, the natural gas industry is being deregulated, and regulatory changes are well under way. In 1992, the Federal Energy Regulatory Commission issued Order 636, which increased gas users' ability to choose various gas purchasing, transportation, brokering, and storage options. Consequently, we now buy all gas that we resell directly from various suppliers (rather than pipeline companies) and arrange separately for transportation and storage. We offer gas for sale to our residential customers on a firm basis, and to our commercial and industrial customers on a firm or interruptable basis. Alternatively, we can transport gas for our customers. We also participate in the interstate markets, by releasing pipeline capacity or bundling pipeline capacity with gas for off-system sales. We provide our commercial and industrial customers who annually consume 250 DTH or more of gas with transportation service across our distribution system so that they may make direct purchase and transportation arrangements with suppliers and pipelines. Approximately 46% of the gas on our distribution system is for these customers. We charge a fee for this transportation service. This per unit charge assures that fixed costs are spread over the maximum number of DTH. We also provide balancing and gas brokering services for these customers. The Maryland PSC continues to encourage us and other utilities to offer options for unbundling gas services and to allow smaller customers to arrange for their own gas supplies. In response, we began a two-year Gas Options pilot program for residential customers on November 1, 1997. Under the program: o all of our residential natural gas customers are eligible, but only up to 25,000 of them may participate (about 12,000 customers currently participate). o participants may shop for a natural gas supplier from a list of companies, including one of our diversified businesses, participating in the program. o we continue to deliver the gas to customers' homes, and provide customer services such as meter reading, billing, emergency response, and regular maintenance. Our Gas Options program is one of many natural gas pilot programs under way across the country. The Gas Options program and our delivery service should not significantly impact our gas business earnings. As part of our response to the increase in competition in the natural gas business, we obtained approval from the Maryland PSC to utilize profit sharing for earnings from off-system gas sales and capacity release revenues, and to implement a market based rates incentive mechanism for gas sold by BGE on our system. Off-system gas sales are direct sales to suppliers and end users of natural gas outside our service territory. We make these sales as part of a program to balance our supply of, and cost of, natural gas. Under market based rates our actual cost of gas is compared to a market index (a measure of the market price of gas in a given period). The difference between our actual cost and the market index is shared equally between BGE (which benefits shareholders) and customers. GAS OPERATIONS We distribute natural gas purchased directly from many producers and marketers. We have transportation and storage agreements as shown below. These agreements are on file with the Federal Energy Regulatory Commission. The gas is transported to our city gate, under various transportation agreements, by: o Columbia Gas Transmission Corporation, o CNG Transmission Corporation, and o Transcontinental Gas Pipe Line Corporation. We have upstream transportation capacity under contract with: o Tennessee Gas Pipeline Company, o Texas Eastern Transmission Corporation, o Columbia Gulf Transmission Company, and o ANR Pipeline Company. We have storage service agreements with: o Columbia Gas Transmission Corporation, o CNG Transmission Corporation, and o ANR Pipeline Company. Our current pipeline firm transportation entitlements to serve our firm loads are 291,731 11 dekatherms (DTH) per day during the winter period and 266,731 DTH per day during the summer period. We use the firm transportation capacity to move gas from the Gulf of Mexico, Louisiana, south central regions of Texas and Canada to our 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. We can arrange additional short-term contracts or exchange agreements with other gas companies in the event of short-term emergencies. We have three market area storage contracts to manage weather sensitive gas demand during the winter period. Our current maximum storage entitlements are 224,435 DTH per day. To supplement our gas supply at times of heavy winter demands and to be available in temporary emergencies affecting gas supply, we have: o a liquified natural gas facility 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, and o a propane air facility 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. We have under contract sufficient volumes of propane for the operation of the propane air facility and are capable of liquefying sufficient volumes of natural gas during the summer months for operation of our liquefied natural gas facility during winter periods. GAS RATE MATTERS POSTRETIREMENT AND POSTEMPLOYMENT BENEFIT COSTS Beginning in 1998, the Maryland PSC authorized us to make a change in the way we account for postretirement and other postemployment benefit costs. The Maryland PSC authorized us to amortize deferred postretirement and other postemployment benefit costs related to our utility business over 15 years. The Maryland PSC will adjust our gas base rates to recover the higher costs that will be recognized in 1998. We discuss this also in the ELECTRIC RATE MATTERS section and in NOTE 6 TO CONSOLIDATED FINANCIAL STATEMENTS. 1997 RATE CASE During 1997, we applied for a $36.7 million increase in our gas base rates. We applied for the increase to: o provide a return on a higher level of gas rate base, due to expansion of our gas distribution system and future capital expenditures to meet customer growth, o provide for an overall rate of return of 9.36% versus 9.04% (our presently authorized rate), and o to recover future increases in operating expenses that we have committed to make. In February 1998, we reached a settlement with the Maryland PSC for a $16 million increase in our gas base rates. The increase became effective March 1, 1998. FRANCHISES We have nonexclusive electric and gas franchises to use streets and other highways which are adequate and sufficient to permit us to engage in our 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 our gas properties in that municipality. Conditions of the franchises are satisfactory. We also have 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 their last year 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 Our diversified businesses are organized in three groups: o Our power generation, financial investments, and real estate businesses, o Our energy marketing businesses, and o Our home products and commercial building systems businesses. 12 OUR POWER GENERATION, FINANCIAL INVESTMENTS, AND REAL ESTATE BUSINESSES We refer to all of these together as the Constellation Holdings Companies. Constellation Holdings, Inc. is a subsidiary of BGE and holds all of the stock of the following three subsidiaries: o Constellation Power, Inc. -- develops, owns, and operates power generation projects, o Constellation Investments, Inc. -- engages in financial investments, and o Constellation Real Estate Group, Inc. -- develops, owns, and manages real estate and senior-living facilities. The Constellation Holdings Companies' conduct a significant portion of their activities through joint ventures in which they hold varying ownership interests. POWER GENERATION Domestic The Constellation Holdings Companies hold up to a 50% ownership interest in 23 power generating projects in operation accounting for $393 million of the Constellation Holdings 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: o coal-166 MW o waste coal-185 MW o solar-90 MW o wood burning-70 MW o geothermal-126 MW o hydro-33 MW In addition, the Constellation Holdings Companies: o have spent another $17 million on projects in development, o participate in the operation and maintenance of 13 power generation projects existing or under construction, 12 of which are projects in which the Constellation Holdings Companies hold an ownership interest, and o have invested $10.8 million in a coal processing facility that they operate. The Constellation Holdings Companies also invest in international power projects. These are discussed later in this section. CALIFORNIA POWER PURCHASE AGREEMENTS The Constellation Holdings Companies have $261 million invested in 16 projects that sell electricity in California under power purchase agreements called "Interim Standard Offer No. 4" agreements. Earnings from these projects were $37.3 million, or $.25 per share, in 1997. Under these agreements, the electricity rates are scheduled to change from fixed rates to variable rates during 1996 through 2000. Some of the projects have already had rate changes and have had lower revenues under variable rates than they did under fixed rates. When the remaining projects transition to variable rates, we expect the revenues from those projects to also be lower than they are under fixed rates. However, the California projects that make the highest revenues will not transition until 1999 and 2000. As a result, we do not expect the Constellation Holdings Companies to have significantly lower earnings due to the transition to variable rates before 2000. We cannot predict the financial effects of the transition from fixed to variable rates on the Constellation Holdings Companies or on BGE, but the effects could be material. We describe these projects and the transition process in detail in NOTE 12 TO CONSOLIDATED FINANCIAL STATEMENTS. International The Constellation Holdings Companies' power generation business in Latin America: o develops, acquires, owns, and operates power generation projects, and o acquires and owns distribution systems. At December 31, 1997, the Constellation Holdings Companies had invested about $23.1 million and committed another $4.3 million in power projects in Latin America. In the future, the Constellation Holdings Companies' power generation business may be expanding further in both domestic and international projects. FIRST QUARTER 1998 EVENT INCLUDES CONSTELLATION HOLDINGS COMPANIES' GUARANTEE OF $73 MILLION In the first quarter of 1998, affiliates of the Constellation Holdings Companies entered into a $92.5 million credit facility to finance the acquisition of 13 existing generating facilities and the development and construction of new generating facilities in Guatemala. At the date of this report, the Constellation Holdings Companies' obligation under the facility is $73 million. FINANCIAL INVESTMENTS Financial investments account for $197 million of the Constellation Holdings Companies' assets. These assets include: o $77 million in internally and externally managed securities portfolios, o $89 million in a financial guaranty insurance company, and o $31 million in tax-oriented transactions. REAL ESTATE Real estate and senior-living projects account for $509 million of the Constellation Holdings Companies' assets. These projects include: o land under development, o office buildings, o retail projects, o distribution facility projects, o an entertainment, dining, and retail complex in Orlando, Florida, o a mixed-use planned-unit development, o and senior-living facilities. In 1997, the Constellation Holdings Companies recorded: o a $14.1 million after-tax write-down of the investment in Church Street Station -- an entertainment, dining, and retail complex in Orlando, Florida -- because the Constellation Holdings Companies have now decided to sell rather than keep the project, and o a $31.9 million after-tax write-down of the investment in Piney Orchard -- a mixed-use, planned-unit development -- because the expected cash flow from the project was less than the Constellation Holdings Companies' investment in the project. We consider market demand, interest rates, the availability of financing, and the strength of the economy in general when making decisions about our real estate investments. If we were to sell our real estate projects in the current market, we would have losses, although the amount of the losses is hard to predict. Depending on market conditions in the future, we could also have losses on any future sales. We describe the Constellation Holdings Companies' real estate business further in NOTE 12 TO CONSOLIDATED FINANCIAL STATEMENTS. OUR ENERGY MARKETING BUSINESSES Constellation Energy Solutions, Inc. is a subsidiary of BGE and serves as the holding company for our three energy marketing businesses: o Constellation Power Source(TM), Inc. -- our power marketing business, o Constellation Energy Source(TM), Inc. -- our natural gas brokering business, and o Constellation Energy Projects and Services(TM), Inc. and Subsidiaries -- our energy services businesses. POWER MARKETING We formed CONSTELLATION POWER SOURCE, INC. in February 1997 to enter the power marketing business. This new business provides power marketing and risk management services to wholesale customers in North America by purchasing and selling electric power, other energy commodities, and related derivatives. Goldman Sachs Power, LLC, an affiliate of Goldman, Sachs & Co., the investment banking firm, is the exclusive advisor to Constellation Power Source for these services. Constellation Power Source's business activities include trading: o electricity, o other energy commodities, and o related derivative contracts. Constellation Power Source uses the mark-to-market method of accounting for these activities. Under the mark-to-market method of accounting, Constellation Power Source: o records assets and liabilities equal to the fair value of commodities and derivatives it holds or sells, o records these assets and liabilities at the time that it executes contracts for these transactions, and o records net gains and losses from both realized transactions and changes in fair value of open commodity and derivative positions as revenues in its income statement. As a result of using the mark-to-market method of accounting, Constellation Power 14 Source's revenue and earnings will fluctuate. The primary factors that cause these fluctuations are: o the number and size of new transactions, o the magnitude and volatility of changes in commodity prices and interest rates, and o the number and size of open commodity and derivative positions Constellation Power Source holds or sells. Constellation Power Source management uses its best estimates to determine the fair value of the commodities and derivatives positions it holds and sells. These estimates consider various factors including closing exchange and over-the-counter price quotations, time value, and volatility factors. However, it is possible that future market prices could vary from those used in recording assets and liabilities from trading activities, and such variations could be material. FIRST QUARTER 1998 EVENT INCLUDES BGE COMMITMENT OF $115 MILLION In March 1998, Constellation Power Source, Inc. and Goldman, Sachs Capital Partners II L.P., an affiliate of Goldman, Sachs & Co., formed Orion Power Holdings, Inc. to acquire electric generating plants in the United States and Canada. Constellation Power Source owns a minority interest in Orion, and BGE has committed to contribute up to $115 million in equity to Constellation Power Source to fund its investment in Orion. Orion has entered into strategic relationships with Constellation Power Source and Constellation Operating Services, Inc. Constellation Power Source will be the exclusive provider of power marketing and risk management services to Orion. Constellation Operating Services will provide exclusive operating and maintenance services to Orion's plants. NATURAL GAS BROKERING CONSTELLATION ENERGY SOURCE, INC. provides natural gas brokering and related services for wholesale and retail customers. ENERGY SERVICES CONSTELLATION ENERGY PROJECTS & SERVICES, INC. AND ITS SUBSIDIARIES provide a broad range of customized energy services, including: o private electric and gas distribution systems, o energy consulting, o power quality services and equipment, o campus and multi-building energy systems, and o energy services contract work. COMFORTLINK(REGISTER MARK) (a general partnership in which BGE is a partner) provides district energy systems. OUR HOME PRODUCTS AND COMMERCIAL BUILDING SYSTEMS BUSINESSES BGE HOME PRODUCTS & SERVICES, INC. provides comprehensive maintenance, repair and replacement services for heating, air conditioning, plumbing, electrical, indoor air quality systems, and major home appliances and electronics. It also operates appliance and electronics retail stores and has a home improvement business including kitchen and bathroom remodeling, replacement doors and windows, siding, and roofing. Its subsidiary, BGE COMMERCIAL BUILDING SYSTEMS, INC. (formerly named Maryland Environmental Systems, Inc.) specializes in providing total building solutions for the commercial market. These services include comprehensive maintenance, repair, replacement and new equipment installation services for heating, ventilation, air conditioning, plumbing, electrical, and building automation systems in small and large commercial facilities. In 1997, BGE Home Products & Services, Inc. formed HP&S RECEIVABLES, INC. -- solely to acquire and finance merchandise and service loans made by BGE Home Products & Services, Inc. 15 DIVERSIFIED BUSINESS CAPITAL REQUIREMENTS Capital requirements for our diversified businesses for 1995 through 1997, along with estimated amounts for 1998 through 2000, are set forth below:
1995 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- ---- (IN MILLIONS) Diversified Business Capital Requirements Investment requirements........................................... $118 $118 $156 $169 $134 $157 Retirement of long-term debt...................................... 55 52 188 164 137 246 ---- ---- ---- ---- ---- ---- Total diversified business capital requirements................... $173 $170 $344 $333 $271 $403 ==== ==== ==== ==== ==== ====
In the past, capital requirements of our diversified businesses only included the Constellation Holdings Companies because they had the only significant capital requirements. From time to time, however, our other diversified businesses may develop significant capital requirements. As that occurs, we will include the capital requirements of those businesses in the capital requirements table. As discussed below under "DIVERSIFIED BUSINESS INVESTMENT REQUIREMENTS," capital requirements for Constellation Power Source and ComfortLink are also included this year. Our diversified businesses expect to expand their businesses. This may include expansion in the energy marketing, power generation, financial investments, real estate, and senior-living facility businesses. Such expansion could mean more investments in and acquisition of new projects. Our diversified businesses have met their capital requirements in the past through borrowing, cash from their operations, and from time to time, loans or equity contributions from BGE. Our diversified businesses plan to raise the cash needed to meet capital requirements in the future through these same methods. DIVERSIFIED BUSINESS INVESTMENT REQUIREMENTS The investment requirements of our diversified businesses include: o the Constellation Holdings Companies' investments in financial limited partnerships and funding for the development and acquisition of projects, as well as loans made to project entities, o funding for growing Constellation Power Source's power marketing business, and o ComfortLink's funding for construction of district energy projects. Investment requirements for the years 1998 through 2000 include estimates of funding for existing and anticipated projects. We continuously review and modify those estimates. Actual investment requirements could vary a great deal from the estimates in the table because they would be subject to several variables, including: o the type and number of projects selected for development, o the effect of market conditions on those projects, o the ability to obtain financing, and o the availability of cash from operations. The investment requirements exclude BGE's commitment to contribute up to $115 million in equity to Constellation Power Source Inc. to fund its investment in Orion Power Holdings, Inc. DIVERSIFIED BUSINESS DEBT AND LIQUIDITY Our diversified businesses plan to meet capital requirements by refinancing debt as it comes due, by borrowing additional funds, and using cash generated by the businesses. This includes cash from operations, sale of assets, and earned tax benefits. BGE Home Products & Services, Inc. may also meet capital requirements through sales of receivables. If the Constellation Holdings Companies can get a reasonable value for real estate, additional cash may be obtained by selling real estate projects. The Constellation Holdings Companies' ability to sell or liquidate assets will depend on market conditions, and we cannot give assurances that these sales or liquidations could be made. For more information, see the discussion of the real estate business and market in the REAL ESTATE section. 16 In 1997, the Constellation Holdings Companies issued $289 million of three and four-year notes. In addition, our diversified businesses have the following revolving credit agreements to provide additional cash for short-term financial needs: AMOUNT OF REVOLVING CREDIT AGREEMENT -------------------------- Constellation Holdings Companies................ $75 million ComfortLink................ $50 million Constellation Energy Solutions, Inc. and Subsidiaries............. $10 million See NOTES 3 and 4 TO CONSOLIDATED FINANCIAL STATEMENTS AND ITEM 7. MD&A -- LIQUIDITY AND CAPITAL RESOURCES -- CAPITAL REQUIREMENTS OF OUR DIVERSIFIED BUSINESSES for additional information about diversified businesses. ENVIRONMENTAL MATTERS We are subject to regulation by various federal, state, and local authorities with regard to: o air quality, o water quality, o waste disposal, and o other environmental matters. Some of the regulations require substantial expenditures for additions to our utility plant and the use of more expensive low-sulfur fuels. We cannot precisely estimate the total effect on our facilities and operations of current and future environmental regulations and standards. However, we have increased capital expenditures by approximately $117 million during the five-year period 1993-1997 to comply with existing standards and regulations, and we estimate that the future capital expenditures necessary to comply with the standards and regulations will be approximately: o $14 million in 1998, o $17 million in 1999, and o $36 million in 2000. CLEAN AIR The Federal Clean Air Act (the Act) regulates health and welfare standards for concentrations of air pollutants. Under the Act, the State of Maryland must set limits on all major sources of these pollutants in the State so that the standards are not exceeded. We have certain limits on our generating units that put us in compliance with existing air quality regulations, as follows: o All of our generating units, except Crane Units 1 and 2, are limited to burning fuel (coal or oil) with a sulfur content of 1% or below. o The Crane Units 1 and 2 are limited to 3.5 pounds per million Btu for sulfur dioxide, which is equivalent to a coal sulfur content of approximately 2.4%. o All units are limited to releasing 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. o 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 Clean Air Act of 1990 contains two titles designed to reduce emissions of sulfur dioxide and nitrogen oxide (NOx) from electric generating stations -- Title IV and Title I. Title IV addresses emissions of sulfur dioxide. Compliance is required in two separate phases: o Phase I became effective January 1, 1995. We met the requirements of this phase by installing flue gas desulfurization systems (scrubbers), switching fuels, and retiring some units. o Phase II must be implemented by 2000. We are currently examining what actions we should take to comply with this phase. We expect to meet the compliance requirements through some combination of installing flue gas desulfurization systems (scrubbers), switching fuels, retiring some units, or allowance trading. Title I addresses emissions of NOx, but the regulations of this title have not been finalized by the government. As a result, our plans for complying with this title are less certain. By 1999 the regulations require more NOx controls for ozone attainment at our generating plants. The additional controls will result in more expenditures, but it is difficult to estimate the level of those expenditures since the regulations have not been finalized. However, based on existing and proposed regulations, we currently estimate that the additional controls at our generating plants will cost approximately $90 million. In July 1997, the federal government published new National Ambient Air Quality Standards for very fine particulates and revised standards for ozone attainment. These standards may require increased controls at our fossil generating plants in the future. We cannot estimate the cost of these increased controls at this time because the states, 17 including Maryland, still need to determine what reductions in pollutants will be necessary to meet the new federal standards. WATER The Maryland Department of the Environment regulates the discharge of waste materials into the waters of the State of Maryland under the National Pollutant Discharge Elimination System permit program. This program was established as part of the Federal Clean Water Act. At the present time, we have the required permits under the program for all of our steam electric generating plants. The Maryland Department of the Environment water quality regulations require us to, among other things, define procedures to determine 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. We continually perform studies to determine whether any modifications will be necessary to comply with these regulations. WASTE DISPOSAL The United States Environmental Protection Agency (EPA) has regulations for implementing the portions of the Resource Conservation and Recovery Act that deal with the management of hazardous wastes. These regulations, and the Hazardous and Solid Waste Amendments of 1984, identify 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 regulations governing the management of hazardous wastes that are similar to the federal regulations. We have procedures in place to comply with all applicable federal and state regulations governing the management of hazardous wastes. Some high volume utility wastes, such as fly ash and bottom ash, are exempt from these regulations. We currently use almost all of our coal fly ash and bottom ash as structural fill material in a manner approved by the State of Maryland. We sell the remainder of the coal ash to the construction industry for a number of approved uses. The Federal Comprehensive Environmental Response, Compensation and Liability Act (Superfund statute) establishes liability for the cleanup of hazardous wastes that contaminate 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 the owner when the contamination occurred. Many states have implemented 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 us and seven other defendants to recover past and future expenditures associated with the cleanup of a site located at Kane and Lombard Streets in Baltimore. The State of Maryland filed a similar complaint in the same case and court on February 12, 1990. The complaints alleged that we arranged for our fly ash to be deposited on the site. The Court dismissed these complaints in November 1995. The Maryland Department of the Environment began additional investigation on the remainder of the site for the EPA, but never completed the investigation. We, along with 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, we cannot estimate the total amount or our share of the site cleanup costs. In the early 1970s, we 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 (hazardous chemicals frequently used as a fire-resistant coolant in electrical equipment). On December 7, 1987, the EPA notified us and nine other utilities that we are considered potentially responsible parties (PRPs) with respect to the cleanup of the site. We, along with the other PRPs, submitted a remedial investigation and feasibility study (RI/FS) to the EPA on October 14, 1994. The estimated costs for the possible remedies range greatly (from $15 million to $45 million). Until a specific remedy is chosen, we are not able to predict the actual cleanup costs. Our share of the cleanup costs, estimated to be approximately 15.79%, could be material. From 1985 until 1989, we 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 us on August 15, 1990, that we and approximately 1,000 other entities are PRPs with respect to the cost of all remedial activities to be conducted at the site. The PRPs have performed waste characterization, removed and disposed of all tanks and drums of waste, and 18 completed a RI/FS at the site. Our share of the waste sent to this site is estimated to be approximately 2.7%, but this may change as additional information about the site is obtained. We have not determined the actual cost of remedial activities. As a result of these factors, our potential liability cannot be estimated. However, we do not expect such liability to be material. On August 30, 1994, we were named as a defendant in UNITED STATES V. KEYSTONE SANITATION COMPANY, ET AL. The litigation was instituted by the EPA and involved contamination of the Keystone Sanitation Company landfill Superfund site located in Adams County, Pennsylvania. In 1997, BGE and other defendants entered into a settlement with the EPA for an immaterial amount but the court has not yet approved the settlement. In December 1995, we were notified by the EPA that we are 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. We, through our 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. After the EPA completes its drum removal phase of the clean up it will investigate potential soil and groundwater contamination. Although our potential liability cannot be estimated, we do not expect such liability to be material based on the limited amount of waste we shipped to the site. In September 1996, we received an information request from the EPA about the Drumco Drum Dump Site, located in the Curtis Bay area of Maryland. This site was the subject of an emergency drum removal action in 1991, due to a concern about hazardous substances leaking from drums and posing a threat to human health and the environment. According to EPA documents, approximately $2 million dollars was spent on the drum removal action. To our knowledge, no long-term remediation is planned for this site. In addition, we understand that the EPA has sent information requests to approximately 17 other parties. Our records indicate that we sold empty drums to Drumco, Inc. from approximately 1983-1990. Although our potential liability cannot be estimated, we do not expect such liability to be material based on our records showing that we sold only empty storage drums to Drumco, Inc. In April 1997, we received an information request from the EPA concerning the 68th Street Dump Site, also known as the Robb Tyler Dump, located in Baltimore, Maryland. This site is not currently listed as a federal Superfund site. We understand that the EPA has sent information requests to over 70 other parties. Our response to the EPA is that our records do not show that we sent waste to the site. This response is based on reviewing all relevant documents and interviewing employees involved in waste disposal for the Company from 1950 to 1975, which is the period covered by the EPA's inquiry. Although our potential liability cannot be estimated, we do not expect such liability to be material based on our records showing that we did not send waste to the site. 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. We are coordinating an investigation of these former manufacturing sites, which includes reviewing possible actions to remove coal tar. In late December 1996, we signed a consent order with the Maryland Department of the Environment that requires us to implement remedial action plans for contamination at and around the Spring Gardens site. We have submitted the required remedial action plans and the Maryland Department of the Environment is in the process of reviewing them. Based on several remedial action options, the costs we consider to be probable to remedy the contamination are estimated to total $50 million in nominal dollars (including inflation). We have recorded these costs as a liability on our Consolidated Balance Sheet and have deferred these costs, net of accumulated amortization and amounts we recovered from insurance companies, as a regulatory asset (we discuss this further in NOTE 5 TO CONSOLIDATED FINANCIAL STATEMENTS). We are also required by accounting rules to disclose additional costs we consider to be less likely than probable costs, but still "reasonably possible" of being incurred at these sites. Because of the results of studies at these sites, it is reasonably possible that these additional costs could exceed the amount we recognized by approximately $48 million in nominal dollars ($11 million in current dollars, plus the impact of inflation at 3.1% over a period of up to 60 years). EMPLOYEES As of December 31, 1997, we employed about 9,000 people. 19 ITEM 2. PROPERTIES We describe our electric and gas business properties separately below. ELECTRIC Our principal electric generating plants are shown below:
GENERATION (MWH) INSTALLED PRIMARY ------------------------- PLANT LOCATION CAPACITY (MW) FUEL 1997 1996 - ------------------------- ------------------------ ------------- ------------- ---------- ---------- (AT DECEMBER 31, 1997) Steam Calvert Cliffs Calvert County, MD 1,675 Nuclear 13,133,441 12,069,937 Brandon Shores Anne Arundel County, MD 1,296 Coal 8,483,339 8,849,357 Herbert A. Wagner Anne Arundel County, MD 1,006 Coal/Oil/Gas 3,399,601 3,149,334 Charles P. Crane Baltimore County, MD 385 Coal 1,942,621 2,000,992 Gould Street Baltimore City, MD 104 Oil 89,115 49,583 Riverside Baltimore County, MD 78 Oil/Gas 14,480 15,356 Jointly Owned -- Steam Keystone Armstrong and 359(A) Coal 2,788,081 2,650,786 Indiana Counties, PA Conemaugh Indiana County, PA 181(A) Coal 1,294,234 1,202,914 Combustion Turbine Notch Cliff Baltimore County, MD 128 Gas 14,024 12,470 Perryman Harford County, MD 350 Oil/Gas 106,748 91,197 Westport Baltimore City, MD 121 Gas 10,236 6,420 Riverside Baltimore County, MD 173 Oil/Gas 8,197 5,450 Philadelphia Road Baltimore City, MD 64 Oil 3,391 1,829 Charles P. Crane Baltimore County, MD 14 Oil 960 707 Herbert A. Wagner Anne Arundel County, MD 14 Oil 754 513 ----- ---------- ---------- Totals 5,948 31,289,222 30,106,845 ===== ========== ==========
- --------------- (A) These totals reflect BGE's proportionate interest and entitlement to capacity from Keystone and Conemaugh, which are 2 megawatts of diesel capacity for Keystone and 1 megawatt of diesel capacity for Conemaugh. We also own two-thirds of the outstanding capital stock of Safe Harbor Water Power Corporation, and are currently entitled to 277 megawatts of the rated capacity of the Safe Harbor Hydroelectric Project. Safe Harbor is operated under a Federal Energy Regulatory Commission license which expires in the year 2030. GAS We own the following propane air and liquefied natural gas facilities: o a liquefied natural gas facility for the liquefication and storage of natural gas with a total storage capacity of 1,000,000 DTH and a planned daily capacity of 287,988 DTH, and o a propane air facility with a mined cavern and refrigerated storage facilities with a total storage capacity of 1,000,000 DTH and a planned daily capacity of 85,000 DTH. GENERAL INFORMATION We own our principal plants and other important units that are located in Maryland including our principal headquarters building in downtown Baltimore. We also lease several properties in our service area which are used for various offices and services. We have electric transmission and electric and gas distribution lines located: o in public streets and highways pursuant to franchises, and o on permanent rights-of-way secured for the most part by grants from owners of the property and for a relatively small part by condemnation. We share the ownership of the properties for the Keystone and Conemaugh Plants in Pennsylvania. There are minor liens and easements on the Keystone and Conemaugh properties, but these encumbrances do not materially interfere with our use of the properties. All of our property referred to above is subject to the lien of our mortgage securing our mortgage bonds. 20 ITEM 3. LEGAL PROCEEDINGS ASBESTOS Since 1993, we have been involved in several actions concerning asbestos. All of the actions together are titled IN RE BALTIMORE CITY PERSONAL INJURIES ASBESTOS CASES in the Circuit Court for Baltimore City, Maryland. The actions are based upon the theory of "premises liability," alleging that we knew of and exposed individuals to an asbestos hazard. The actions relate to two types of claims. The first type are direct claims by individuals exposed to asbestos. We described these claims in a Report on Form 8-K filed August 20, 1993. We are involved in these claims with approximately 70 other defendants. Approximately 520 individuals that were never employees of the Company each claim $6 million in damages ($2 million compensatory and $4 million punitive). We do not know the specific facts necessary to estimate our potential liability for these claims. The specific facts we do not know include: o the identity of our facilities at which the plaintiffs allegedly worked as contractors, o the names of the plaintiffs' employers, and o the date on which the exposure allegedly occurred. In 1997, six of these cases were settled before trial for amounts that were immaterial. Four more trials are currently scheduled -- two in 1998 and two in 1999. The second type are claims by one manufacturer -- Pittsburgh Corning Corp. -- against us and approximately eight others, as third party defendants. These claims relate to approximately 1,500 individual plaintiffs. We do not know the specific facts necessary to estimate our potential liability for these claims. The specific facts we do not know include: o the identity of our facilities containing asbestos manufactured by the manufacturer, o the relationship (if any) of each of the individual plaintiffs to us, o the settlement amounts for any individual plaintiffs who are shown to have had a relationship to us, and o the dates on which/places at which the exposure allegedly occurred. Until the relevant facts for both type claims are determined, we are unable to estimate what our liability, if any, might be. Although insurance and hold harmless agreements from contractors who employed the plaintiffs may cover a portion of any awards in the actions, our potential liability could be material. See ITEM 1. BUSINESS -- ELECTRIC RATE MATTERS, NUCLEAR OPERATIONS, ENVIRONMENTAL MATTERS, and NOTE 12 TO CONSOLIDATED FINANCIAL STATEMENTS for other information about our legal or regulatory proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Reference is made to the information set forth under Item 4. Submission of Matters to a Vote of Security Holders on page 35 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 1997. 21 ITEM 10. EXECUTIVE OFFICERS OF THE REGISTRANT Executive Officers of BGE at the date of this report are:
OTHER OFFICES OR POSITIONS NAME AGE PRESENT OFFICE HELD DURING PAST FIVE YEARS - ------------------------ --- --------------------------------- ------------------------------------- Christian H. Poindexter 59 Chairman of the Board and Chairman of the Board and Chief President (A) Executive Officer (Since March 1, 1998) Vice Chairman of the Board Edward A. Crooke 59 Vice Chairman of the Board and President, Chief Operating Officer, Chairman of the Board - and Chairman of the Board - Subsidiaries Subsidiaries (B) President, Utility Operations (Since March 1, 1998) Bruce M. Ambler 58 President and Chief Executive Officer Constellation Holdings, Inc. (Since August 1, 1989) Charles W. Shivery 52 President Vice President Constellation Energy Solutions, Finance and Accounting, Inc. and President Chief Financial Officer and and Chief Executive Secretary Officer Constellation Power Vice President and Treasurer, Source, Inc. Corporate Finance Group (Since February 25, 1997) Robert E. Denton 55 Executive Vice President Senior Vice President, Generation Generation Vice President, Nuclear Energy (Since March 1, 1998) Plant General Manager, Calvert Cliffs Nuclear Power Plant Frank O. Heintz 53 Executive Vice President Vice President, Gas Utility Operations and Vice Executive Director, LDC Caucus -- President Gas American Gas Association (Since March 1, 1998) Chairman, Maryland Public Service Commission Thomas F. Brady 48 Vice President Vice President, Customer Service Customer Service and and Accounting Distribution Vice President, Accounting and (Since July 1, 1993) Economics David A. Brune 57 Vice President General Counsel Finance and Accounting, Chief Financial Officer and Secretary (Since February 25, 1997) Charles H. Cruse 53 Vice President Plant General Manager, Calvert Nuclear Energy Cliffs Nuclear Power Plant (Since January 1, 1996) Manager, Nuclear Engineering Carserlo Doyle 55 Vice President Manager, Telecommunications Electric Interconnection Principal Engineer -- Electric and Transmission Interconnection (Since January 1, 1994) Sharon S. Hostetter 53 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 53 Vice President Manager, Fossil Engineering Fossil Energy Manager, Fossil Engineering (Since January 1, 1993) Services Gregory C. Martin 49 Vice President Manager, Customer Service General Services Manager, Customer Accounts (Since November 1, 1997)
22
OTHER OFFICES OR POSITIONS NAME AGE PRESENT OFFICE HELD DURING PAST FIVE YEARS - ------------------------ --- --------------------------------- -------------------------------------- Linda D. Miller 47 Vice President Manager, Employee Services Management Services (Since November 1, 1997) Stephen F. Wood 45 President Vice President, Marketing and Sales Constellation Energy Projects Manager, Major Customer Projects & Services, Inc. Manager, System Engineering (Since November 1, 1995) and Construction Vice President Manager, Distribution Engineering (Since February 16, 1996)
- --------------- (A) Chief Executive Officer, Director, and member of the Executive Committee. (B) Director and member of the Executive Committee. Officers of BGE 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 director or officer and any other person pursuant to which the director or officer was selected. 23 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS STOCK TRADING Our common stock is traded under the ticker symbol BGE. It is listed on the New York, Chicago, and Pacific stock exchanges. It has unlisted trading privileges on the Boston, Cincinnati, and Philadelphia exchanges. As of February 28, 1998, there were 72,972 common shareholders of record. DIVIDEND POLICY We pay dividends on our common stock when our Board of Directors declares them. There is no limitation on our paying common stock dividends, other than we must first pay all dividends (and any redemption payments) due on our preference stock. Dividends have been paid on the common stock continuously since 1910. Future dividends depend upon future earnings, our financial condition and other factors. Quarterly dividends were declared on the common stock during 1997 and 1996 in the amounts set forth below. COMMON STOCK DIVIDENDS AND PRICE RANGES
1997 1996 ----------------------------------------- ------------------------------------ PRICE* PRICE* DIVIDEND ---------------------------- DIVIDEND -------------------------- DECLARED HIGH LOW DECLARED HIGH LOW -------- ------------ ----------- -------- ---------- ----------- First Quarter................ $ .40 $28 $26 1/4 $ .39 $29 1/2 $26 1/8 Second Quarter............... .41 27 24 3/4 .40 28 5/8 25 1/2 Third Quarter................ .41 28 1/16 26 .40 28 5/8 25 Fourth Quarter............... .41 34 5/16 25 13/16 .40 28 3/4 25 3/4 ----- ----- Total...................... $1.63 $1.59 ===== =====
- --------------- *Based on New York Stock Exchange Composite Transactions as reported in THE WALL STREET JOURNAL. 24 Item 6. Selected Financial Data
Compound 1997 1996 1995 1994 1993 Growth - ----------------------------------------------------------------------------------------------------------------------------------- (DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 5-Year 10-Year SUMMARY OF OPERATIONS Total Revenues $3,307.6 $3,153.2 $2,934.8 $2,783.0 $2,741.4 5.26% 5.47% Expenses Other Than Interest and Income Taxes 2,584.0 2,483.7 2,239.1 2,147.7 2,125.0 5.00 6.22 --------------------------------------------------------------- Income From Operations 723.6 669.5 695.7 635.3 616.4 6.21 3.21 Other Income (Expense) (52.8) 6.1 8.8 32.3 20.3 -- -- --------------------------------------------------------------- Income Before Interest and Income Taxes 670.8 675.6 704.5 667.6 636.7 3.77 2.07 Net Interest Expense 230.0 198.5 197.0 190.1 188.8 3.93 7.10 --------------------------------------------------------------- Income Before Income Taxes 440.8 477.1 507.5 477.5 447.9 3.69 0.24 Income Taxes 158.0 166.3 169.5 153.9 138.1 8.87 1.94 --------------------------------------------------------------- Net Income 282.8 310.8 338.0 323.6 309.8 1.36 (0.59) Preferred and Preference Stock Dividends 28.7 38.5 40.6 39.9 41.8 (7.42) 0.84 --------------------------------------------------------------- Earnings Applicable to Common Stock $ 254.1 $ 272.3 $ 297.4 $ 283.7 $ 268.0 2.73 (0.74) - ---------------------------------------------------=============================================================== Earnings Per Share of Common Stock $1.72 $1.85 $2.02 $1.93 $1.85 1.08 (2.91) Dividends Declared Per Share of Common Stock $1.63 $1.59 $1.55 $1.51 $1.47 2.65 2.69 Ratio of Earnings to Fixed Charges 2.78 3.10 3.21 3.14 3.00 0.96 (3.97) Ratio of Earnings to Fixed Charges and Preferred and Preference Stock Dividends Combined 2.35 2.44 2.52 2.47 2.34 2.47 (3.22) FINANCIAL STATISTICS AT YEAR END Total Assets $8,773.4 $8,544.3 $8,277.6 $7,995.9 $7,829.6 4.01 6.26 - ---------------------------------------------------=============================================================== Capitalization Long-term debt $2,988.9 $2,758.8 $2,598.2 $2,584.9 $2,823.1 4.69 5.76 Preferred stock -- -- 59.2 59.2 59.2 -- -- Redeemable preference stock 90.0 134.5 242.0 279.5 342.5 (25.63) (7.02) Preference stock not subject to mandatory redemption 210.0 210.0 210.0 150.0 150.0 13.81 6.68 Common shareholders' equity 2,870.4 2,854.7 2,811.2 2,719.0 2,620.5 2.52 5.04 --------------------------------------------------------------- Total Capitalization $6,159.3 $5,958.0 $5,920.6 $5,792.6 $5,995.3 2.38 4.90 - ---------------------------------------------------=============================================================== Book Value Per Share of Common Stock $19.44 $19.33 $19.06 $18.43 $17.94 1.97 2.74 Number of Common Shareholders (IN THOUSANDS) 73.7 77.6 79.8 81.5 82.3 (1.73) (1.10)
CERTAIN PRIOR-YEAR AMOUNTS HAVE BEEN RECLASSIFIED TO CONFORM WITH THE CURRENT YEAR'S PRESENTATION. Baltimore Gas and Electric Company and Subsidiaries 25 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Introduction In Management's Discussion and Analysis we explain the general financial condition and the results of operations for BGE and its diversified business subsidiaries including: o what factors affect our businesses, o what our earnings and costs were in 1997 and 1996, o why earnings and costs changed from the year before, o where our earnings came from, o how all of this affects our overall financial condition, o what our expenditures for capital projects were in 1995 through 1997 and what we expect them to be in 1998 through 2000, and o where we will get cash for future capital expenditures. As you read Management's Discussion and Analysis, it may be helpful to refer to our Consolidated Statements of Income on page 38, which present the results of our operations for 1997, 1996, and 1995. In Management's Discussion and Analysis, we analyze and explain the annual changes in the specific line items in the Consolidated Statements of Income. Our analysis may be important to you in making decisions about your investments in BGE. The electric utility industry is undergoing rapid and substantial change. Competition in the generation part of our business is increasing. The regulatory environment (federal and state) is shifting toward customer choice. These matters are discussed briefly in the "Competition and Response to Regulatory Change" section beginning on page 27. They are discussed in detail in this Annual Report on Form 10-K. We continuously evaluate changes in the utility industry. Based on the evaluations, we refine short and long term business plans. We may also enter new businesses, which may be opportunities to: o provide our core energy business customers more services, or o attract new customers for our core energy business, or o expand our diversified stream of revenues. ________________________________________________________________________________ Results of Operations In this section, we discuss our 1997 and 1996 earnings and the factors affecting them. We begin with a general overview, then separately discuss earnings for the utility business and for diversified businesses. Overview Total Earnings per Share of Common Stock 1997 1996 1995 - ------------------------------------------------------------------- Earnings per share from current-year operations: Utility business $1.94 $1.96 $1.84 Diversified businesses (subsidiaries) .34 .31 .18 ---------------------- Total earnings per share from current-year operations 2.28 2.27 2.02 Write-off of merger costs (see Note 12) (.25) -- -- Write-downs of real estate investments (see Note 12) (.31) -- -- Disallowed replacement energy costs (see Note 12) -- (.42) -- ---------------------- Total earnings per share $1.72 $1.85 $2.02 - ---------------------------------------------====================== 1997 Our 1997 total earnings decreased $18.2 million, or $.13 per share, from 1996. Our total earnings decreased because: o we wrote off costs associated with the proposed merger with Potomac Electric Power Company, and o Constellation Holdings, Inc. and Subsidiaries (together known as the Constellation Holdings Companies) wrote down their investments in two real estate projects. We discuss the write-off of merger costs in the "Write-Off of Merger Costs" section on page 31, and the real estate write-downs in the "Real Estate Development and Senior-Living Facilities" section on page 33. In 1997, utility earnings from current-year operations were lower mostly because we sold less electricity and gas due to milder weather (people use less electricity and gas to heat or cool their homes in milder weather). We discuss our utility earnings in more detail in the "Utility Business" section beginning on page 27. In 1997, diversified business earnings from current-year operations were higher mostly because the Constellation Holdings Companies had higher earnings from power generation projects and financial investments. We discuss our diversified business earnings in more detail in the "Diversified Businesses" section beginning on page 32. 1996 Our 1996 total earnings decreased $25.1 million, or $.17 per share, from 1995. Our total earnings decreased because we wrote off disallowed replacement energy costs. We discuss this in detail in the "Disallowed Replacement Energy Costs" section on page 29. In 1996, utility earnings from operations were higher due to three factors: we sold more electricity and gas due to colder winter weather, there was an increase in the number of customers, and we had lower operations and maintenance expenses. We would have had even higher utility earnings from operations except we sold less electricity in the third quarter due to milder summer weather. In 1996, diversified business earnings were higher mostly because the Constellation Holdings Companies had higher earnings from power generation projects and financial investments. 26 Baltimore Gas and Electric Company and Subsidiaries Utility Business Before we go into the details of our electric and gas operations, we believe it is important to discuss four factors that have a strong influence on our utility business performance: regulation, the weather, other factors including the condition of the economy in our service territory, and competition. Regulation by the Maryland Public Service Commission (Maryland PSC) The Maryland PSC determines the rates we can charge our customers. Our rates consist of a "base rate" and a "fuel rate." The base rate is the rate the Maryland PSC allows us to charge our customers for the cost of providing them service, plus a profit. We have both an electric base rate and a gas base rate. Higher electric base rates apply during the summer when the demand for electricity is the highest. Gas base rates are not affected by seasonal changes. The Maryland PSC allows us to include in base rates a component to recover money spent on conservation programs. This component is called an "energy conservation surcharge." However, under this surcharge the Maryland PSC limits what our profit can be. If, at the end of the year, we have exceeded our allowed profit, we lower the amount of future surcharges to our customers to correct the amount of overage, plus interest. In addition, we charge our electric customers separately for the fuel we use to generate electricity (nuclear fuel, coal, gas, or oil) and for the net cost of purchases and sales of electricity (primarily with other utilities). We charge the actual cost of these items to the customer with no profit to us. We discuss this in more detail in the "Electric Fuel Rate Clause" section on page 29 and in Note 1. We also charge our gas customers separately for the natural gas they consume. The price we charge for the natural gas is based on a market based rates incentive mechanism approved by the Maryland PSC. We discuss market based rates in more detail in the "Gas Cost Adjustments" section on page 30 and in Note 1. From time to time, when necessary to cover increased costs, we ask the Maryland PSC for base rate increases. The Maryland PSC holds hearings to determine whether to grant us all or a portion of the amount requested. The Maryland PSC has historically allowed us to increase base rates to recover costs for replacing utility plant assets, plus a profit, beginning at the time of replacement. Generally, rate increases improve our utility earnings because they allow us to collect more revenue. However, rate increases are normally granted based on historical data and those increases may not always keep pace with increasing costs. Weather Weather affects the demand for electricity and gas, especially among our residential customers. Very hot summers and very cold winters increase demand. Mild weather reduces demand. We measure the weather's effect using "degree days." A degree day is the difference between the average daily actual temperature and a baseline temperature of 65 degrees. Cooling degree days result when the daily actual temperature exceeds the 65 degree baseline. Heating degree days result when the daily actual temperature is less than the baseline. During the cooling season, hotter weather is measured by more cooling degree days and results in greater demand for electricity to operate cooling systems. During the heating season, colder weather is measured by more heating degree days and results in greater demand for electricity and gas to operate heating systems. We show the number of cooling and heating degree days in 1997 and 1996, the percentage changes in the number of degree days from prior years, and the number of degree days in a "normal" year as represented by the 30-year average in the following table. 30-Year 1997 1996 Average - ------------------------------------------------------------------ Cooling degree days 746 786 804 Percentage change from prior year (5.1)% (25.6)% Heating degree days 4,822 5,138 4,901 Percentage change from prior year (6.2)% 11.7% Other Factors Other factors, aside from weather, impact the demand for electricity and gas. These factors include the "number of customers" and "usage per customer" during a given period. We use these terms later in our discussions of electric and gas operations. In those sections, we discuss how these and other factors affected electric and gas sales during 1997 and 1996. The number of customers in a given period is affected by new home and apartment construction and by the number of businesses in our service territory. Usage per customer refers to all other items impacting customer sales which cannot be separately measured. These factors include the strength of the economy in our service territory. When the economy is healthy and expanding, customers tend to consume more electricity and gas. Conversely, during an economic downtrend, our customers tend to consume less electricity and gas. Competition and Response to Regulatory Change Our electric and gas businesses are also affected by competition. We discuss competition in each business below. Electric Business Electric utilities are facing competition on various fronts, including: o in the construction of generating units to meet increased demand for electricity, o in the sale of their electricity in the bulk power markets, o in competing with alternative energy suppliers, and o in the future, for electric sales to retail customers which utilities now serve exclusively. We regularly reevaluate our strategies with two goals in mind: to improve our competitive position, and to anticipate and adapt to regulatory changes. We cannot predict the ultimate effect competition or regulatory change will have on our earnings. We discuss competition in our electric business in more detail in this Annual Report on Form 10-K under the heading "Electric Regulatory Matters and Competition." Baltimore Gas and Electric Company and Subsidiaries 27 Gas Business Regulatory change in the natural gas industry is well under way. We discuss competition in our gas business in more detail in this Annual Report on Form 10-K under the heading "Gas Regulatory Matters and Competition." Strategies We will continue to develop strategies to keep us competitive. These strategies might include one or more of the following: o the complete or partial separation of our generation, transmission, and distribution functions, o purchase or sale of generation assets, o mergers or acquisitions of utility or non-utility businesses, o spin-off or sale of one or more businesses, o growth of revenues from diversified businesses. We cannot predict whether any transactions of the types described above may actually occur, nor can we predict what their effect on our financial condition or competitive position might be. Utility Business Earnings per Share of Common Stock 1997 1996 1995 - -------------------------------------------------------------------- Utility earnings per share from current-year operations: Electric business $1.77 $1.75 $1.70 Gas business .17 .21 .14 ---------------------------- Total utility earnings per share from current-year operations 1.94 1.96 1.84 Write-off of merger costs (see Note 12) (.25) -- -- Disallowed replacement energy costs (see Note 12) -- (.42) -- ---------------------------- Total utility earnings per share $1.69 $1.54 $1.84 - ----------------------------------------============================ Our 1997 total utility earnings increased $24.0 million, or $.15 per share, from 1996. Our 1996 total utility earnings decreased $44.5 million, or $.30 per share, from 1995. We discuss the factors affecting utility earnings below. Electric Operations Electric Revenues The changes in electric revenues in 1997 and 1996 compared to the respective prior year were caused by: 1997 1996 - ------------------------------------------------------------------ (IN MILLIONS) Electric system sales volumes $(15.5) $ 0.3 Base rates 29.2 (2.5) Fuel rates (4.3) (12.3) ---------------------- Total change in electric revenues from electric system sales 9.4 (14.5) Interchange and other sales (23.2) (11.1) Other (3.2) 4.5 ---------------------- Total change in electric revenues $(17.0) $(21.1) - --------------------------------------------====================== Electric System Sales Volumes "Electric system sales" are sales to customers in our service territory at rates set by the Maryland PSC. These sales do not include interchange sales and sales to others. The percentage changes in our electric system sales volumes, by type of customer, in 1997 and 1996 compared to the respective prior year were: 1997 1996 - ------------------------------------------------------------------ Residential (3.9)% 2.5% Commercial 1.0 (0.3) Industrial (0.4) 0.1 In 1997, we sold less electricity to residential customers mostly for two reasons: lower electricity usage per customer and milder weather. We sold more electricity to commercial customers mostly because usage per customer increased. We would have sold even more electricity to commercial customers except for milder weather during the year. We sold about the same amount of electricity to industrial customers as we did in 1996. In 1996, we sold more electricity to residential customers for three reasons: colder weather in the first quarter, greater electricity usage per customer, and an increase in the number of customers. We would have sold even more electricity to residential customers except for milder summer weather. We sold about the same amount of electricity to commercial and industrial customers as we did in 1995. Weather impacts residential, more than commercial and industrial, sales. In 1997 and 1996, other items offset the impact of weather on commercial and industrial sales. Other items included the demand for power to fuel manufacturing equipment and office machinery, which vary with changes in the customers' businesses. Base Rates In 1997, base rate revenues were higher than they were in 1996 because of higher energy conservation surcharge revenues. During 1996, we exceeded our profit limit under the energy conservation surcharge. As a result, we excluded $28.5 million of our 1996 surcharge billings from revenue. To correct the overage, we lowered the surcharge on our customers' bills beginning in July 1997 and will continue to bill the lower surcharge through June 1998. In 1996, base rate revenues were about the same as they were in 1995. Although we sold more electricity in 1996, our revenues did not increase because the higher sales occurred during the winter when our base rates are lower. 28 Baltimore Gas and Electric Company and Subsidiaries Fuel Rates The fuel rate is the rate the Maryland PSC allows us to charge our customers, with no profit to us, for: o our actual cost of fuel used to generate electricity, and o the net cost of purchases and sales of electricity (primarily with other utilities). If these costs go up, the Maryland PSC permits us to increase the fuel rate. If these costs go down, our customers benefit from a reduction in the fuel rate. The fuel rate is impacted most by the amount of electricity generated at our Calvert Cliffs Nuclear Power Plant (Calvert Cliffs) because the cost of nuclear fuel is cheaper than coal, gas, or oil. We discuss the calculation of the fuel rate in Note 1. Changes in the fuel rate normally do not affect earnings. However, if the Maryland PSC disallows recovery of any part of the fuel costs, our earnings are reduced. We discuss this more thoroughly in the "Disallowed Replacement Energy Costs" section below and in Note 12. In 1997, fuel rate revenues decreased mostly because we sold less electricity. In 1996, fuel rate revenues decreased due to a lower fuel rate because we were able to operate plants with the lowest fuel costs. Fuel rate revenues would have been even lower except we sold more electricity. Interchange and Other Sales "Interchange and other sales" are sales in the Pennsylvania-New Jersey-Maryland Interconnection (PJM) energy market and to others. PJM is a regional power pool with members that include many wholesale market participants, as well as BGE and seven other utility companies. We sell energy to PJM members and to others after we have satisfied the demand for electricity in our own system. In 1997, we had lower interchange and other sales compared to 1996 mostly because of lower sales volumes due to reduced demand. In 1996, we had lower interchange and other sales compared to 1995 because we generated less electricity at Calvert Cliffs. This meant that we had less electricity to sell outside of our service territory. We generated less electricity at that plant mostly because the 1996 outage for regular refueling and maintenance took longer than in 1995. Electric Fuel and Purchased Energy Expenses 1997 1996 1995 - ------------------------------------------------------------------ (IN MILLIONS) Actual costs $504.5 $539.2 $554.5 Net recovery of costs under electric fuel rate clause (see Note 1) 15.2 8.2 24.3 Disallowed replacement energy costs (including carrying charges) (see Note 12) -- 95.4 -- ------------------------------- Total electric fuel and purchased energy expenses $519.7 $642.8 $578.8 - -----------------------------------=============================== Actual Costs In 1997, our actual costs of fuel to generate electricity (nuclear fuel, coal, gas, or oil) and electricity we bought from others were lower than in 1996 mostly for two reasons: we bought less electricity from other utilities because we were able to meet demand using the electricity we generated, and we were able to use a less-costly mix of generating plants mostly because of shorter refueling and maintenance downtime at Calvert Cliffs. In 1996, our actual costs were lower than in 1995 because the price of electricity and capacity we bought from other utilities was lower and we sold less electricity. The price we pay for electricity and capacity we buy from other utilities changes based on market conditions, complex pricing formulas for PJM transactions, and contract terms. Electric Fuel Rate Clause Under the electric fuel rate clause, we defer (include as an asset or liability in our Consolidated Balance Sheets and exclude from our Consolidated Statements of Income) the difference between our actual costs of fuel and energy and what we collect from customers under the fuel rate in a given period. We either bill or refund our customers that difference in the future. We discuss the calculation of the fuel rate in Note 1. In 1997 and 1996, our actual costs of fuel and energy were lower than the fuel rate revenues we collected from our customers. Disallowed Replacement Energy Costs In December 1996, we settled fuel rate proceedings about extended outages that occurred at Calvert Cliffs in 1989 through 1991. We agreed not to bill our customers for $118 million of electric replacement energy costs associated with these outages. We wrote off a portion of these costs in 1990 and wrote off the remainder in 1996. We discuss this further in Note 12. Baltimore Gas and Electric Company and Subsidiaries 29 Gas Operations Gas Revenues The changes in gas revenues in 1997 and 1996 compared to the respective prior year were caused by: 1997 1996 - ------------------------------------------------------------------ (IN MILLIONS) Gas system sales volumes $(7.3) $ 8.2 Base rates 0.6 18.9 Gas cost adjustments (0.2) 62.1 ---------------------- Total change in gas revenues from gas system sales (6.9) 89.2 Off-system sales 10.9 26.6 Other 0.3 1.0 ---------------------- Total change in gas revenues $ 4.3 $116.8 - --------------------------------------------====================== Gas System Sales Volumes The percentage changes in our gas system sales volumes, by type of customer, in 1997 and 1996 compared to the respective prior year were: 1997 1996 - --------------------------------------------------------------- Residential (8.3)% 8.9% Commercial (0.2) 2.8 Industrial 4.4 (2.3) In 1997, we sold less gas to residential customers mostly for two reasons: lower usage per customer and milder weather. We sold about the same amount of gas to commercial customers as we did in 1996. We sold more gas to industrial customers mostly because the milder weather caused fewer service interruptions and Bethlehem Steel (our largest customer) used more gas. We would have sold even more gas to industrial customers except gas usage by industrial customers other than Bethlehem Steel decreased. In 1996, we sold more gas to residential and commercial customers due to colder winter and early spring weather and an increase in the number of customers. We would have sold even more gas to those customers except that gas usage per customer decreased. We sold less gas to industrial customers because Bethlehem Steel used less gas. We would have sold even less gas to industrial customers except for increased gas usage by other industrial customers, an increase in the number of customers, and colder winter weather. Base Rates In 1997, base rate revenues were higher than they were in 1996. Although we sold less gas in 1997, our base rate revenues increased because of a higher energy conservation surcharge in the last six months of the year. In 1996, base rate revenues were higher than in 1995 because in November 1995, the Maryland PSC allowed us to increase our gas base rates. This increased our annual base rate revenues for 1996 by $19.3 million. That amount included $2.4 million to recover higher depreciation expense (an accounting procedure which spreads the cost of utility plant in service over the years in which it is used). During 1997, we applied for a $36.7 million increase in our gas base rates. The Maryland PSC is currently reviewing our application, and is expected to issue an order by June 1998. Our earnings will be impacted during 1998 and 1999 by the outcome of this case. Gas Cost Adjustments We charge our gas customers for the natural gas they consume using gas cost adjustment clauses set by the Maryland PSC. These clauses operate similar to the electric fuel rate clause described in the "Electric Fuel Rate Clause" section on page 29. However, effective October 1996, the Maryland PSC approved a modification of these clauses to provide a market based rates incentive mechanism. Under market based rates, our actual cost of gas is compared to a market index (a measure of the market price of gas in a given period). The difference between our actual cost and the market index is shared equally between BGE (which benefits shareholders) and customers. We also discuss this in Note 1. Delivery service customers, including Bethlehem Steel, are not subject to the gas cost adjustment clauses because we are not selling them gas (we are selling them the service of delivering their gas). In 1997, gas cost revenues decreased mostly because we sold less gas. In 1996, gas cost revenues increased because we had to pay more for gas and we sold more gas. Off-System Sales Off-system gas sales, which are low-margin direct sales to wholesale suppliers of natural gas outside our service territory, are not subject to gas cost adjustments. We began sales of off-system gas during the first quarter of 1996. The Maryland PSC approved an arrangement for part of the earnings from off-system sales to benefit customers (through reduced costs) and the remainder to be retained by BGE (which benefits shareholders). In 1997 and 1996, off-system gas sales increased mostly because we first began off-system sales of gas in February of 1996. These increases in off-system sales did not significantly impact earnings. Gas Purchased For Resale Expenses 1997 1996 1995 - ----------------------------------------------------------------- (IN MILLIONS) Actual costs $291.6 $295.4 $205.9 Net recovery (deferral) of costs under gas adjustment clauses (see Note 1) 0.5 (11.0) (7.8) ------------------------------- Total gas purchased for resale expenses $292.1 $284.4 $198.1 - ----------------------------------=============================== Actual Costs Actual costs include the cost of gas purchased for resale to our customers and for sale off-system. Actual costs do not include the cost of gas purchased by delivery service customers, including Bethlehem Steel. In 1997, actual gas costs decreased from 1996 mostly because we sold less gas. In 1996, actual gas costs increased from 1995 due to three factors: higher market prices of gas, higher sales volumes, and the purchase of gas to resell off-system (beginning in the first quarter of 1996). 30 Baltimore Gas and Electric Company and Subsidiaries Gas Adjustment Clauses We charge customers for the cost of gas sold through gas adjustment clauses (determined by the Maryland PSC), as discussed under "Gas Cost Adjustments" earlier in this section. In 1997, the portion of our actual gas costs subject to these clauses was lower than the revenues we collected from our customers. In 1996, the portion of our actual gas costs subject to these clauses was higher than the revenues we collected from our customers. Other Operating Expenses Operations and Maintenance Expenses In 1997, our operations and maintenance expenses were slightly lower than they were in 1996. In 1996, our operations and maintenance expenses decreased $18.5 million due to our continued efforts to control costs. This decrease would have been even greater except we had higher costs to maintain our nuclear plant. Depreciation and Amortization Expenses We describe depreciation and amortization expenses in Note 1. In 1997, our depreciation and amortization expense increased $12.7 million from 1996 mostly because we had more plant in service (as our level of plant that is in service changes, the amount of our depreciation and amortization expense changes). In 1996, our depreciation and amortization expense increased $12.8 million from 1995 because we had more utility plant in service, and we had more energy conservation program costs to be amortized. The increase in 1996 expenses would have been even greater except that in 1995 depreciation and amortization expense included $14.2 million for the write-off of costs associated with planned future generation facilities at our Perryman site that will not be built. We discuss this write-off also in Note 1. In 1996, depreciation and amortization expense did not include any such write-off. Taxes Other Than Income Taxes In 1997, taxes other than income taxes were about the same as they were in 1996. In 1996, taxes other than income taxes were $9.6 million higher than in 1995 mostly due to three factors: plant additions made in 1995 increased our property taxes about $7 million, higher 1996 revenues increased our gross receipts taxes about $2 million, and higher labor costs increased our payroll taxes about $1 million. Other Income and Expenses Write-Off of Merger Costs In September 1995 we signed an agreement with Potomac Electric Power Company to merge together into a new company, Constellation Energy(TM) Corporation, after all necessary regulatory approvals were received. In December 1997, both companies mutually terminated the merger agreement. Accordingly, in 1997, we wrote off $57.9 million of costs related to the merger. This write-off reduced after-tax earnings by $37.5 million, or $.25 per share. We also discuss the write-off of these costs in Note 12. Allowance for Funds Used During Construction (AFC) We finance construction projects with borrowed funds and equity funds. We are allowed by the Maryland PSC to record the cost of these funds as part of the cost of construction projects in our Consolidated Balance Sheets. We do this through the AFC, which we calculate using a rate authorized by the Maryland PSC. We bill our customers for the AFC plus a return after the utility plant is placed in service. We also describe AFC in Note 1. In 1997, AFC was about the same as it was in 1996. In 1996, we had lower AFC compared to 1995 because we completed several projects and started less new construction. We also had lower AFC because the Maryland PSC decreased the gas AFC rate in November 1995 from 9.40% to 9.04%. Net Other Income and Deductions Net other income and deductions represent miscellaneous income and expenses which are not directly related to operations. In 1997, net other income and deductions were about the same as they were in 1996. In 1996, net other income and deductions increased $4.9 million compared to 1995 mostly because the Constellation Holdings Companies had lower deductions not directly related to operations and BGE had about $2 million more of other interest and finance charge income. Interest Charges Interest charges represent the interest we paid on outstanding debt. In 1997, we had $23.6 million higher interest charges compared to 1996 because we had more debt outstanding and interest rates were higher. In 1996, we had $2.1 million lower interest charges compared to 1995 largely because of lower interest rates. We would have had even lower interest charges except we had more debt outstanding. Income Taxes In 1997 our income taxes decreased because we had lower taxable income from both our utility operations and our diversified businesses. In 1996 our income taxes decreased because we had lower taxable income from utility operations. Our income taxes would have been even lower except that we had higher taxable income from our diversified businesses. Baltimore Gas and Electric Company and Subsidiaries 31 Diversified Businesses In the 1980s, we began to diversify our business in response to limited growth in gas and electric sales. Today, we continue to diversify our business in response to regulatory changes in the utility industry. Some of our diversified businesses are related to our core utility business and others are not. Our diversified businesses are organized in three groups: o the Constellation Holdings Companies--our power generation, financial investments, and real estate businesses, o Constellation Energy Solutions, Inc. and Subsidiaries--our energy marketing businesses, and o BGE Home Products & Services, Inc. and Subsidiaries--our home products and commercial building systems businesses. Diversified Business Earnings Per Share of Common Stock 1997 1996 1995 - ------------------------------------------------------------------- Constellation Holdings Companies $ .39 $ .29 $ .18 Constellation Energy Solutions (.08) .00 .00 BGE Home Products & Services .03 .02 .00 ------------------------- Total diversified business earnings per share from current-year operations .34 .31 .18 Write-downs of real estate investments by the Constellation Holdings Companies (see Note 12) (.31) -- -- ------------------------- Total diversified business earnings per share $ .03 $ .31 $ .18 - ------------------------------------------========================= Our 1997 diversified business earnings decreased $42.2 million, or $.28 per share, from 1996. Our 1996 diversified business earnings increased $19.3 million, or $.13 per share, from 1995. These changes came mostly from the Constellation Holdings Companies. We discuss factors affecting the earnings of our diversified businesses below. The Constellation Holdings Companies--Our Power Generation, Financial Investments, and Real Estate Businesses The Constellation Holdings Companies: o develop, own, and operate power generation projects, o engage in financial investments, and o develop, own, and manage real estate and senior-living facilities. Earnings per share from the Constellation Holdings Companies were: 1997 1996 1995 - -------------------------------------------------------------------- Power generation $ .25 $ .18 $ .13 Financial investments .18 .14 .08 Real estate development and senior-living facilities (.01) (.02) (.02) Other (.03) (.01) (.01) -------------------------- Total Constellation Holdings Companies' earnings per share from current-year operations .39 .29 .18 Write-downs of real estate investments (see Note 12) (.31) -- -- -------------------------- Total Constellation Holdings Companies' earnings per share $ .08 $ .29 $ .18 - ------------------------------------------========================== Power Generation The Constellation Holdings Companies' power generation business develops, owns, and operates domestic and international power generation projects. We discuss international projects later in this section. In 1997, earnings increased from 1996 mostly because of improved performance of various energy projects. In 1996, earnings increased from 1995 mostly due to our share of higher earnings from energy projects and a $14.6 million after-tax gain on the sale by a Constellation partnership of a power purchase agreement with Jersey Central Power & Light Company back to that utility. Energy projects had higher earnings for a variety of reasons--some ongoing (like improved efficiency due to equipment or procedure changes) and some onetime (for example, losses incurred in 1995--to shut-down certain operations at a plant--did not occur again in 1996). These increases were offset by $16.2 million of write-offs of investments in certain power projects. We describe these write-offs further in Note 3. California Power Purchase Agreements The Constellation Holdings Companies have $261 million invested in 16 projects that sell electricity in California under power purchase agreements called "Interim Standard Offer No. 4" agreements. Earnings from these projects were $37.3 million, or $.25 per share, in 1997. Under these agreements, the electricity rates change from fixed rates to variable rates during 1996 through 2000. The projects which already have had rate changes have lower revenues under variable rates than they did under fixed rates. When the remaining projects transition to variable rates, we expect their revenues also to be lower than they are under fixed rates. However, the California projects that make the highest revenues will transition in 1999 and 2000. As a result, we do not expect the Constellation Holdings Companies to have significantly lower earnings before 2000 due to the transition to variable rates. We cannot predict the financial effects of the transition from fixed to variable rates on the Constellation Holdings Companies or on BGE, but the effects could be material. We describe these projects and the transition process in detail in Note 12. International The Constellation Holdings Companies' power generation business in Latin America: o develops, acquires, owns, and operates power generation projects, and o acquires and owns distribution systems. At December 31, 1997, the Constellation Holdings Companies had invested about $23.1 million and committed another $4.3 million in power projects in Latin America. In the future, the Constellation Holdings Companies' power generation business may be expanding further in both domestic and international projects. 32 Baltimore Gas and Electric Company and Subsidiaries Financial Investments Earnings from the Constellation Holdings Companies' portfolio of financial investments include income from: o marketable securities, o financial limited partnerships, and o financial guaranty insurance companies. In 1997, earnings were higher than in 1996 due to better earnings from trading securities, and increased gains from marketable securities. In 1996, earnings were higher than in 1995 because of better earnings from marketable securities and increased gains from financial limited partnerships. Real Estate Development and Senior-Living Facilities The Constellation Holdings Companies' real estate development business includes: o land under development, o office buildings, o retail projects, o distribution facility projects, o an entertainment, dining, and retail complex in Orlando, Florida, o a mixed-use planned-unit development, and n senior-living facilities. In 1997, earnings from real estate development and senior-living facilities were lower than in 1996 mostly due to: o a $14.1 million after-tax write-down of the investment in Church Street Station--an entertainment, dining, and retail complex in Orlando, Florida-- which occurred because the Constellation Holdings Companies have now decided to sell rather than keep the project, and o a $31.9 million after-tax write-down of the investment in Piney Orchard--a mixed-use, planned-unit development-- which occurred because the expected cash flow from the project was less than the Constellation Holdings Companies' investment in the project. In 1996, earnings from real estate development and senior-living facilities were about the same as they were in 1995. We consider market demand, interest rates, the availability of financing, and the strength of the economy in general when making decisions about our real estate investments. If we were to sell our real estate projects in the current market, we would have losses, although the amount of the losses is hard to predict. Depending on market conditions in the future, we could also have losses on any future sales. We describe the Constellation Holdings Companies' real estate business further in Note 12. Constellation Energy Solutions, Inc. and Subsidiaries-- Our Energy Marketing Businesses Our energy marketing businesses: o provide power marketing and risk management services to wholesale customers in North America by purchasing and selling electric power, other energy commodities, and related derivatives, o provide natural gas brokering and related services for wholesale and retail customers, and o provide a broad range of customized energy services, including private electric and gas distribution systems, energy consulting, power quality services, and campus and multi-building energy systems. In 1997, earnings from our energy marketing businesses were lower than in 1996 mostly because of lower gas brokering margins and increased uncollectible expense. In 1996, earnings were about the same as they were in 1995. BGE Home Products & Services, Inc. and Subsidiaries--Our Home Products and Commercial Building Systems Businesses BGE Home Products & Services, Inc. and subsidiaries: o sells and services electric and gas appliances, o engages in home improvements, and o sells and services heating and air conditioning systems. In 1997 and 1996, earnings increased due to improved performance in the service and installation business. Baltimore Gas and Electric Company and Subsidiaries 33 Liquidity and Capital Resources Overview Our business requires a great deal of capital. Our actual capital requirements for the years 1995 through 1997, along with estimated amounts for the years 1998 through 2000, are shown below.
1995 1996 1997 1998 1999 2000 - --------------------------------------------------------------------------------------------------------------------------------- (IN MILLIONS) Utility Business Capital Requirements: Construction expenditures (excluding AFC) Electric $223 $219 $238 $236 $ 260 $ 273 Gas 70 84 89 77 76 72 Common 51 46 38 34 27 24 -------------------------------------------------------------- Total construction expenditures 344 349 365 347 363 369 AFC 22 10 8 8 11 14 Nuclear fuel (uranium purchases and processing charges) 46 47 44 50 50 48 Deferred energy conservation expenditures 46 31 27 12 10 10 Retirement of long-term debt and redemption of preference stock 279 184 243 117 344 264 -------------------------------------------------------------- Total utility business capital requirements 737 621 687 534 778 705 Diversified Business Capital Requirements: Investment requirements 118 118 156 169 134 157 Retirement of long-term debt 55 52 188 164 137 246 -------------------------------------------------------------- Total diversified business capital requirements 173 170 344 333 271 403 Total capital requirements $910 $791 $1,031 $867 $1,049 $1,108 - -------------------------------------------------------------------==============================================================
Capital Requirements of Our Utility Business We continuously review and change our construction program, so actual expenditures may vary from the estimates for the years 1998 through 2000 in the capital requirements chart. Our projections of future electric construction expenditures do not include costs to build more generating units. Electric construction expenditures include improvements to our generating plants and transmission and distribution facilities. They also include estimated costs for replacing the steam generators and extending the operating licenses at Calvert Cliffs. The operating licenses expire in 2014 for Unit 1 and in 2016 for Unit 2. We estimate these Calvert Cliffs costs to be: o $27 million in 1998, o $38 million in 1999, and o $44 million in 2000. We estimate that during the three-year period 2001 through 2003, we will spend an additional $175 million to complete the replacement of the steam generators and extend the operating licenses of Calvert Cliffs. If we do not replace the stream generators, we estimate that Calvert Cliffs could not operate beyond the 2004-2006 time period. We expect the steam generator replacements to occur during the 2002 spring refueling outage for Unit 1 and during the 2003 outage for Unit 2. Our utility operations provided about 105% in 1997, 97% in 1996, and 100% in 1995, of the cash needed to meet our capital requirements, excluding cash needed to retire debt and redeem preferred and preference stock. During the three years from 1998 through 2000, we expect utility operations to provide 106% of the cash needed to meet our capital requirements, excluding cash needed to retire debt and redeem preference stock. When we cannot meet utility capital requirements internally, we sell debt and equity securities. We also sell securities when market conditions permit us to refinance existing debt or preference stock at a lower cost. The amount of cash we need and market conditions determine when and how much we sell. During the three years ended December 31, 1997, we sold: o $619 million of long-term debt, o $60 million of preference stock, and o $4 million of common stock. Security Ratings Independent credit-rating agencies rate our fixed-income securities. The ratings indicate the agencies' assessment of our ability to pay interest, dividends, and principal on these securities. These ratings affect how much it will cost us when we sell these securities. The better the rating, the lower the cost of the securities to us when we sell them. Our securities ratings at the date of this report are shown in the following table. In October, 1997, Standard & Poors upgraded our mortgage bonds from A+ to AA-. Standard Moody's & Poors Investors Duff & Phelps Rating Group Service Credit Rating Co. - ---------------------------------------------------------------- Mortgage Bonds AA- A1 AA- Unsecured Debt A A2 A+ Preference Stock A "a2" A Capital Requirements of Our Diversified Businesses In the past, capital requirements of our diversified businesses only included the Constellation Holdings Companies because they had the only significant capital requirements. From time to time, however, our other diversified businesses may develop significant capital requirements. As that occurs, we will include the capital requirements of those businesses in the capital requirements table above. As discussed under "Diversified Business Investment Requirements," capital requirements for Constellation Power Source--a subsidiary of Constellation Energy Solutions, Inc., and ComfortLink--a general partnership in which BGE is a partner, are also included this year. 34 Baltimore Gas and Electric Company and Subsidiaries Our diversified businesses expect to expand their businesses. This may include expansion in the energy marketing, power generation, financial investments, real estate, and senior-living facility businesses. Such expansion could mean more investments in and acquisition of new projects. Our diversified businesses have met their capital requirements in the past through borrowing, cash from their operations, and from time to time, loans or equity contributions from BGE. Our diversified businesses plan to raise the cash needed to meet capital requirements in the future through these same methods. Diversified Business Investment Requirements The investment requirements of our diversified businesses include: o the Constellation Holdings Companies' investments in financial limited partnerships and funding for the development and acquisition of projects, as well as loans made to project entities, o funding for growing Constellation Power Source's power marketing business, and o ComfortLink's funding for construction of district energy projects. Investment requirements for 1998 through 2000 include estimates of funding for existing and anticipated projects. We continuously review and modify those estimates. Actual investment requirements could vary a great deal from the estimates on page 34 because they would be subject to several variables, including: o the type and number of projects selected for development, o the effect of market conditions on those projects, o the ability to obtain financing, and o the availability of cash from operations. The investment requirements exclude BGE's commitment to contribute up to $115 million in equity to Constellation Power Source, Inc. to fund its investment in Orion Power Holdings, Inc. Diversified Business Debt and Liquidity Our diversified businesses plan to meet capital requirements by refinancing debt as it comes due, by additional borrowing, and with cash generated by the businesses. This includes cash from operations, sale of assets, and earned tax benefits. BGE Home Products & Services may also meet capital requirements through sales of receivables. We also discuss receivable sales in Note 12. If the Constellation Holdings Companies can get a reasonable value for real estate, additional cash may be obtained by selling real estate projects. The Constellation Holdings Companies' ability to sell or liquidate assets will depend on market conditions, and we cannot give assurances that these sales or liquidations could be made. For more information, see the discussion of the real estate business and market in the "Real Estate Development and Senior-Living Facilities" section beginning on page 33. In 1997, the Constellation Holdings Companies issued $289 million of three and four-year notes. In addition, our diversified businesses have the following revolving credit agreements to provide additional cash for short-term financial needs: Amount of Revolving Credit Agreement - --------------------------------------------------------------- Constellation Holdings Companies $75 million ComfortLink $50 million Constellation Energy Solutions, Inc. and Subsidiaries $10 million - --------------------------------------------------------------- Other Matters Environmental Matters We are subject to increasingly stringent federal, state, and local laws and regulations that work to improve or maintain the quality of the environment. If certain substances were disposed of or released at any of our properties, whether currently operating or not, these laws and regulations require us to remove or remedy the effect on the environment. This includes Environmental Protection Agency Superfund sites. You will find details of our environmental matters in Note 12 and in this Annual Report on Form 10-K under Item 1. Business--Environmental Matters. These details include financial information. Some of the information is about costs that may be material. The Year 2000 Issue The year 2000 issue affects virtually all companies and organizations. Many existing computer programs and digital systems use only two digits to identify a year in the date field. These programs and systems were designed and developed without considering the impact of the upcoming change in the century. If not corrected, many computer applications could fail or create erroneous results by or at the year 2000. In 1997, we formed a special task force to: o identify and evaluate our systems and applications that may be affected by the year 2000 issue, o modify or replace those systems and applications so they will work properly in the year 2000, and o communicate with our suppliers to make sure they are prepared for the year 2000. We have identified and evaluated all of our systems and applications that may be affected by the year 2000 issue, and have developed plans to ready these systems and applications for the century change. Modification and replacement projects are currently under way. We plan to complete our evaluation of suppliers' systems and applications by mid-1998. We plan to have our systems and applications ready for the year 2000 by mid-1999. We do not expect the costs to address the year 2000 issue to be material. Accounting Standards Issued We will adopt the following statements that the Financial Accounting Standards Board issued in 1997 on the dates indicated below: o Statement of Financial Accounting Standards No. 130, REPORTING COMPREHENSIVE INCOME, which we must adopt in our financial statements for the quarter ended March 31, 1998, and o Statement of Financial Accounting Standards No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, which we must adopt in our financial statements for the year ended December 31, 1998. We do not expect the adoption of these standards to have a material impact on our financial results or financial statement disclosures. Baltimore Gas and Electric Company and Subsidiaries 35 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Not applicable. However, we disclose information about our risk management policies in NOTE 1 TO CONSOLIDATED FINANCIAL STATEMENTS. 36 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders of Baltimore Gas and Electric Company We have audited the consolidated financial statements and the financial statement schedule of Baltimore Gas and Electric Company and Subsidiaries listed in Item 14(a) 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, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic 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 auditing standards, the consolidated balance sheets and statements of capitalization at December 31, 1995, 1994, and 1993, 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, 1994 (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, 1997, appearing on page 25 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 21, 1998 37 Consolidated Statements of Income
YEAR ENDED DECEMBER 31, 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------------- (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) REVENUES Electric $2,191.7 $2,208.7 $2,229.8 Gas 521.6 517.3 400.5 Diversified businesses 594.3 427.2 304.5 ------------------------------------------------- Total revenues 3,307.6 3,153.2 2,934.8 ------------------------------------------------- EXPENSES OTHER THAN INTEREST AND INCOME TAXES Electric fuel and purchased energy 519.7 547.4 578.8 Disallowed replacement energy costs (see Note 12) -- 95.4 -- Gas purchased for resale 292.1 284.4 198.1 Operations 518.3 526.4 550.8 Maintenance 178.5 174.1 168.3 Diversified businesses--selling, general, and administrative 444.9 311.1 220.6 Write-downs of real estate investments (see Note 12) 70.8 -- -- Depreciation and amortization 342.9 330.2 317.4 Taxes other than income taxes 216.8 214.7 205.1 ------------------------------------------------- Total expenses other than interest and income taxes 2,584.0 2,483.7 2,239.1 ------------------------------------------------- INCOME FROM OPERATIONS 723.6 669.5 695.7 ------------------------------------------------- OTHER INCOME (EXPENSE) Write-off of merger costs (see Note 12) (57.9) -- -- Allowance for equity funds used during construction 5.3 6.5 14.2 Equity in earnings of Safe Harbor Water Power Corporation 5.0 4.6 4.5 Net other income and (deductions) (5.2) (5.0) (9.9) ------------------------------------------------- Total other income (expense) (52.8) 6.1 8.8 ------------------------------------------------- INCOME BEFORE INTEREST AND INCOME TAXES 670.8 675.6 704.5 ------------------------------------------------- INTEREST EXPENSE Interest charges 241.2 217.6 219.7 Capitalized interest (8.4) (15.6) (15.0) Allowance for borrowed funds used during construction (2.8) (3.5) (7.7) ------------------------------------------------- Net interest expense 230.0 198.5 197.0 ------------------------------------------------- INCOME BEFORE INCOME TAXES 440.8 477.1 507.5 INCOME TAXES 158.0 166.3 169.5 ------------------------------------------------- NET INCOME 282.8 310.8 338.0 PREFERRED AND PREFERENCE STOCK DIVIDENDS 28.7 38.5 40.6 ------------------------------------------------- EARNINGS APPLICABLE TO COMMON STOCK $ 254.1 $ 272.3 $ 297.4 - -------------------------------------------------------------------================================================= AVERAGE SHARES OF COMMON STOCK OUTSTANDING 147.7 147.6 147.5 EARNINGS PER COMMON SHARE AND EARNINGS PER COMMON SHARE--ASSUMING DILUTION $1.72 $1.85 $2.02 - -------------------------------------------------------------------=================================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 38 Baltimore Gas and Electric Company and Subsidiaries Consolidated Balance Sheets AT DECEMBER 31, 1997 1996 - ------------------------------------------------------------------------------- (IN MILLIONS) ASSETS CURRENT ASSETS Cash and cash equivalents $ 162.6 $ 66.7 Accounts receivable (net of allowance for uncollectibles of $24.1 and $18.0 respectively) 419.8 419.5 Trading securities 119.7 68.8 Fuel stocks 87.6 87.1 Materials and supplies 164.2 147.7 Prepaid taxes other than income taxes 65.2 64.7 Other 27.4 44.7 ---------------------- Total current assets 1,046.5 899.2 ---------------------- INVESTMENTS AND OTHER ASSETS Real estate projects 446.8 525.8 Power generation projects 451.7 379.1 Financial investments 196.5 204.4 Nuclear decommissioning trust fund 145.3 116.4 Net pension asset 113.0 84.5 Safe Harbor Water Power Corporation 34.4 34.4 Senior living facilities 62.2 36.4 Other 108.1 92.2 ---------------------- Total investments and other assets 1,558.0 1,473.2 ---------------------- UTILITY PLANT Plant in service Electric 6,725.6 6,514.9 Gas 846.9 777.0 Common 554.1 523.5 ---------------------- Total plant in service 8,126.6 7,815.4 Accumulated depreciation (2,843.4) (2,617.1) ---------------------- Net plant in service 5,283.2 5,198.3 Construction work in progress 215.2 221.9 Nuclear fuel (net of amortization) 127.9 132.9 Plant held for future use 25.2 25.5 ---------------------- Net utility plant 5,651.5 5,578.6 ---------------------- DEFERRED CHARGES Regulatory assets (net) 470.7 512.3 Other 46.7 81.0 ---------------------- Total deferred charges 517.4 593.3 ---------------------- TOTAL ASSETS $8,773.4 $8,544.3 - ---------------------------------------------------------====================== SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. CERTAIN PRIOR-YEAR AMOUNTS HAVE BEEN RECLASSIFIED TO CONFORM WITH THE CURRENT YEAR'S PRESENTATION. Baltimore Gas and Electric Company and Subsidiaries 39 Consolidated Balance Sheets
AT DECEMBER 31, 1997 1996 - --------------------------------------------------------------------------------------------------------- (IN MILLIONS) Liabilities and Capitalization CURRENT LIABILITIES Short-term borrowings $ 316.1 $ 333.2 Current portions of long-term debt and preference stock 271.9 280.8 Accounts payable 203.0 172.9 Customer deposits 30.1 28.0 Accrued taxes 5.5 6.5 Accrued interest 58.4 57.4 Dividends declared 66.3 66.9 Accrued vacation costs 36.2 34.3 Other 44.3 37.1 ------------------------- Total current liabilities 1,031.8 1,017.1 ------------------------- DEFERRED CREDITS AND OTHER LIABILITIES Deferred income taxes 1,294.9 1,295.9 Postretirement and postemployment benefits 185.5 169.2 Decommissioning of federal uranium enrichment facilities 34.9 38.6 Other 67.0 65.5 ------------------------- Total deferred credits and other liabilities 1,582.3 1,569.2 ------------------------- CAPITALIZATION Long-term debt 2,988.9 2,758.8 Redeemable preference stock 90.0 134.5 Preference stock not subject to mandatory redemption 210.0 210.0 Common shareholders' equity 2,870.4 2,854.7 ------------------------- Total capitalization 6,159.3 5,958.0 ------------------------- COMMITMENTS, GUARANTEES, AND CONTINGENCIES--SEE NOTE 12 TOTAL LIABILITIES AND CAPITALIZATION $8,773.4 $8,544.3 - --------------------------------------------------------------------------------=========================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. CERTAIN PRIOR-YEAR AMOUNTS HAVE BEEN RECLASSIFIED TO CONFORM WITH THE CURRENT YEAR'S PRESENTATION. 40 Baltimore Gas and Electric Company and Subsidiaries Consolidated Statements of Cash Flows
YEAR ENDED DECEMBER 31, 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------------- (IN MILLIONS) CASH FLOWS FROM OPERATING ACTIVITIES Net income $282.8 $310.8 $338.0 Adjustments to reconcile to net cash provided by operating activities Depreciation and amortization 396.8 383.1 379.0 Deferred income taxes 7.4 26.0 103.5 Investment tax credit adjustments (7.5) (7.6) (8.1) Deferred fuel costs 18.3 0.5 5.6 Deferred energy conservation revenues -- 28.5 1.3 Disallowed replacement energy costs -- 95.4 -- Accrued pension and postemployment benefits (18.0) (13.8) (7.6) Write-off of merger costs 57.9 -- -- Write-downs of real estate investments 70.8 -- -- Allowance for equity funds used during construction (5.3) (6.5) (14.2) Equity in earnings of affiliates and joint ventures (net) (42.5) (48.3) (21.3) Changes in current assets, other than sales of accounts receivable (54.7) (88.0) (107.4) Changes in current liabilities, other than short-term borrowings 42.6 (4.9) (7.3) Other (22.6) 26.7 6.7 ----------------------------------------- Net cash provided by operating activities 726.0 701.9 668.2 ----------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Net issuance (maturity) of short-term borrowings (17.1) 53.9 215.6 Proceeds from issuance of Long-term debt 622.0 383.2 184.4 Preference stock -- -- 59.3 Common stock -- 3.7 0.3 Proceeds from sales of receivables -- 10.0 2.0 Reacquisition of long-term debt (343.3) (158.5) (315.1) Redemption of preferred and preference stock (104.5) (112.6) (73.0) Common stock dividends paid (239.2) (233.1) (227.2) Preferred and preference stock dividends paid (29.7) (37.0) (40.1) Other 2.5 (1.2) -- ----------------------------------------- Net cash used in financing activities (109.3) (91.6) (193.8) ----------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Utility construction expenditures (including AFC) (373.2) (360.5) (366.0) Allowance for equity funds used during construction 5.3 6.5 14.2 Nuclear fuel expenditures (43.6) (46.8) (46.3) Deferred energy conservation expenditures (27.1) (31.4) (45.5) Contributions to nuclear decommissioning trust fund (17.6) (25.5) (9.8) Merger costs (20.9) (28.5) (5.1) Purchases of marketable equity securities (23.0) (32.7) (18.5) Sales of marketable equity securities 46.5 39.7 49.8 Other financial investments (0.4) 7.1 9.4 Real estate projects 24.2 (55.3) (15.6) Power generation systems (44.3) (5.3) (34.4) Other (46.7) (34.3) (21.8) ----------------------------------------- Net cash used in investing activities (520.8) (567.0) (489.6) ----------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 95.9 43.3 (15.2) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 66.7 23.4 38.6 ----------------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $162.6 $ 66.7 $ 23.4 - -------------------------------------------------------------------------------------------========================================= OTHER CASH FLOW INFORMATION Cash paid during the year for: Interest (net of amounts capitalized) $224.2 $193.6 $195.3 Income taxes $171.2 $160.1 $ 99.6
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. CERTAIN PRIOR-YEAR AMOUNTS HAVE BEEN RECLASSIFIED TO CONFORM WITH THE CURRENT YEAR'S PRESENTATION. Baltimore Gas and Electric Company and Subsidiaries 41 Consolidated Statements of Common Shareholders' Equity
Unrealized Gain (Loss) on Available Pension Common Stock Retained For Sale Liability Total YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995 Shares Amount Earnings Securities Adjustment Amount - ------------------------------------------------------------------------------------------------------------------------------------ (DOLLAR AMOUNTS IN MILLIONS, NUMBER OF SHARES IN THOUSANDS) BALANCE AT DECEMBER 31, 1994 147,527 $1,425.4 $1,312.6 $(2.5) $(16.5) $2,719.0 Net income 338.0 338.0 Dividends declared Preferred and preference stock (40.6) (40.6) Common stock ($1.55 per share) (228.6) (228.6) Common stock issued 0.3 0.3 Other 0.1 0.1 Net unrealized gain on securities 10.0 10.0 Deferred taxes on net unrealized gain on securities (3.5) (3.5) Pension liability adjustment 25.4 25.4 Deferred taxes on pension liability adjustment (8.9) (8.9) -------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1995 147,527 1,425.8 1,381.4 4.0 -- 2,811.2 Net income 310.8 310.8 Dividends declared Preferred and preference stock (38.5) (38.5) Common stock ($1.59 per share) (234.6) (234.6) Common stock issued 140 3.7 3.7 Other 0.4 0.4 Net unrealized gain on securities 2.6 2.6 Deferred taxes on net unrealized gain on securities (0.9) (0.9) -------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1996 147,667 1,429.9 1,419.1 5.7 -- 2,854.7 Net income 282.8 282.8 Dividends declared Preference stock (28.7) (28.7) Common stock ($1.63 per share) (240.7) (240.7) Other 3.1 3.1 Net unrealized loss on securities (1.2) (1.2) Deferred taxes on net unrealized loss on securities 0.4 0.4 -------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1997 147,667 $1,433.0 $1,432.5 $4.9 $ -- $2,870.4 - ----------------------------------------------------------==========================================================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. CERTAIN PRIOR-YEAR AMOUNTS HAVE BEEN RECLASSIFIED TO CONFORM WITH THE CURRENT YEAR'S PRESENTATION. 42 Baltimore Gas and Electric Company and Subsidiaries Consolidated Statements of Capitalization
AT DECEMBER 31, 1997 1996 - ------------------------------------------------------------------------------------------------------------------------ (IN MILLIONS) LONG-TERM DEBT First Refunding Mortgage Bonds of BGE 6 1/8% Series, due August 1, 1997 $ -- $ 24.9 Floating rate series, due April 15, 1999 125.0 125.0 8.40% Series, due October 15, 1999 91.1 91.1 5 1/2% Series, due July 15, 2000 125.0 125.0 8 3/8% Series, due August 15, 2001 122.3 122.4 7 1/8% Series, due January 1, 2002 -- 22.7 7 1/4% Series, due July 1, 2002 124.5 124.5 5 1/2% Installment Series, due July 15, 2002 9.8 10.4 6 1/2% Series, due February 15, 2003 124.8 124.8 6 1/8% Series, due July 1, 2003 124.9 124.9 5 1/2% Series, due April 15, 2004 125.0 125.0 Remarketed floating rate series, due September 1, 2006 125.0 125.0 7 1/2% Series, due January 15, 2007 123.5 123.7 6 5/8% Series, due March 15, 2008 124.9 125.0 7 1/2% Series, due March 1, 2023 125.0 125.0 7 1/2% Series, due April 15, 2023 100.0 100.0 --------------------------------- Total First Refunding Mortgage Bonds of BGE 1,570.8 1,619.4 --------------------------------- Other long-term debt of BGE Term bank loan due March 29, 2001 -- 50.0 Medium-term notes, Series B 100.0 100.0 Medium-term notes, Series C 143.0 183.0 Medium-term notes, Series D 225.0 138.0 Medium-term notes, Series E 183.5 -- Pollution control loan, due July 1, 2011 36.0 36.0 Port facilities loan, due June 1, 2013 48.0 48.0 Adjustable rate pollution control loan, due July 1, 2014 20.0 20.0 5.55% Pollution control revenue refunding loan, due July 15, 2014 47.0 47.0 Economic development loan, due December 1, 2018 35.0 35.0 6.00% Pollution control revenue refunding loan, due April 1, 2024 75.0 75.0 Variable rate pollution control loan, due June 1, 2027 8.8 -- --------------------------------- Total other long-term debt of BGE 921.3 732.0 --------------------------------- Long-term debt of Constellation Holdings Companies Loans under revolving credit agreement Variable rates based on LIBOR, due December 9, 1999 -- 65.0 Mortgage and construction loans and other collateralized notes 8.69% mortgage note, due January 28, 1998 28.4 24.9 7.90% mortgage note, due September 12, 2000 8.6 8.8 8.00% mortgage note, due July 31, 2001 0.1 0.1 8.00% mortgage note, due October 30, 2003 1.6 1.5 7.50% mortgage note, due October 9, 2005 9.7 9.8 Variable rate mortgage notes, due through 2009 93.5 94.9 7.357% mortgage note, due March 15, 2009 5.5 5.8 9.65% mortgage note, due February 1, 2028 9.7 9.7 8.00% mortgage note, due November 1, 2033 1.2 -- Unsecured notes 579.1 387.2 --------------------------------- Total long-term debt of Constellation Holdings Companies 737.4 607.7 --------------------------------- Long-term debt of other diversified businesses Loans under revolving credit agreement 22.0 12.0 --------------------------------- Unamortized discount and premium (13.7) (14.5) Current portion of long-term debt (248.9) (197.8) --------------------------------- Total long-term debt $2,988.9 $2,758.8 --------------------------------- CONTINUED ON PAGE 44
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. CERTAIN PRIOR-YEAR AMOUNTS HAVE BEEN RECLASSIFIED TO CONFORM WITH THE CURRENT YEAR'S PRESENTATION. Baltimore Gas and Electric Company and Subsidiaries 43 Consolidated Statements of Capitalization
AT DECEMBER 31, 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------------- (IN MILLIONS) PREFERENCE STOCK Cumulative, $100 par value, 6,500,000 shares authorized Redeemable preference stock 7.50%, 1986 Series, 365,000 and 395,000 shares outstanding. Callable at $102.50 per share prior to October 1, 2001 and at lesser amounts thereafter $ 36.5 $ 39.5 6.75 %, 1987 Series, 425,000 and 440,000 shares outstanding. Callable at $102.25 per share prior to April 1, 2002 and at lesser amounts thereafter 42.5 44.0 7.80%, 1989 Series, 500,000 shares redeemed at par on July 1, 1997 -- 50.0 8.25%, 1989 Series, 100,000 shares redeemed at par on October 1, 1997 -- 10.0 8.625%, 1990 Series, 130,000 and 390,000 shares outstanding 13.0 39.0 7.85%, 1991 Series, 210,000 and 350,000 shares outstanding 21.0 35.0 Current portion of redeemable preference stock (23.0) (83.0) --------------------------------- Total redeemable preference stock 90.0 134.5 --------------------------------- Preference stock not subject to mandatory redemption 7.78%, 1973 Series, 200,000 shares outstanding, callable at $101 per share 20.0 20.0 7.125%, 1993 Series, 400,000 shares outstanding, not callable prior to July 1, 2003 40.0 40.0 6.97%, 1993 Series, 500,000 shares outstanding, not callable prior to October 1, 2003 50.0 50.0 6.70%, 1993 Series, 400,000 shares outstanding, not callable prior to January 1, 2004 40.0 40.0 6.99%, 1995 Series, 600,000 shares outstanding, not callable prior to October 1, 2005 60.0 60.0 --------------------------------- Total preference stock not subject to mandatory redemption 210.0 210.0 --------------------------------- COMMON SHAREHOLDERS' EQUITY Common stock without par value, 175,000,000 shares authorized; 147,667,114 shares issued and outstanding at December 31, 1997 and 1996. (At December 31, 1997 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.) 1,433.0 1,429.9 Retained earnings 1,432.5 1,419.1 Unrealized gain on available-for-sale securities 4.9 5.7 --------------------------------- Total common shareholders' equity 2,870.4 2,854.7 --------------------------------- TOTAL CAPITALIZATION $6,159.3 $5,958.0 - -------------------------------------------------------------------------------------------------=================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. CERTAIN PRIOR-YEAR AMOUNTS HAVE BEEN RECLASSIFIED TO CONFORM WITH THE CURRENT YEAR'S PRESENTATION. 44 Baltimore Gas and Electric Company and Subsidiaries Consolidated Statements of Income Taxes
YEAR ENDED DECEMBER 31, 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------------- (DOLLAR AMOUNTS IN MILLIONS) INCOME TAXES Current $158.1 $147.9 $ 74.1 ----------------------------------------------- Deferred Change in tax effect of temporary differences (1.0) 22.0 116.9 Change in income taxes recoverable through future rates 8.0 4.9 (1.0) Deferred taxes credited (charged) to shareholders' equity 0.4 (0.9) (12.4) ----------------------------------------------- Deferred taxes charged to expense 7.4 26.0 103.5 Investment tax credit adjustments (7.5) (7.6) (8.1) ----------------------------------------------- Income taxes per Consolidated Statements of Income $158.0 $166.3 $169.5 - -----------------------------------------------------------------------------------=============================================== RECONCILIATION OF INCOME TAXES COMPUTED AT STATUTORY FEDERAL RATE TO TOTAL INCOME TAXES Income before income taxes $440.8 $477.1 $507.5 Statutory federal income tax rate 35% 35% 35% ----------------------------------------------- Income taxes computed at statutory federal rate 154.3 167.0 177.6 Increases (decreases) in income taxes due to Depreciation differences not normalized on regulated activities 13.9 12.6 11.0 Allowance for equity funds used during construction (1.9) (2.3) (5.0) Amortization of deferred investment tax credits (7.5) (7.7) (8.1) Tax credits flowed through to income (0.5) (0.5) (0.5) Amortization of deferred tax rate differential on regulated activities (2.3) (1.9) (2.0) State income taxes 6.2 4.1 1.6 Other (4.2) (5.0) (5.1) ----------------------------------------------- Total income taxes $158.0 $166.3 $169.5 - -----------------------------------------------------------------------------------=============================================== Effective federal income tax rate 35.8% 34.9% 33.4% AT DECEMBER 31, 1997 1996 - ---------------------------------------------------------------------------------------------------------------------- (DOLLAR AMOUNTS IN MILLIONS) DEFERRED INCOME TAXES Deferred tax liabilities Accelerated depreciation $ 953.5 $ 920.6 Allowance for funds used during construction 206.7 209.2 Income taxes recoverable through future rates 89.8 92.6 Deferred termination and postemployment costs 41.1 45.6 Deferred fuel costs 1.5 7.9 Leveraged leases 25.2 27.6 Percentage repair allowance 38.7 38.4 Energy conservation expenditures 24.5 26.6 Other 191.5 175.6 ----------------------------- Total deferred tax liabilities 1,572.5 1,544.1 ----------------------------- Deferred tax assets Accrued pension and postemployment benefit costs 37.6 40.6 Deferred investment tax credits 44.3 46.9 Capitalized interest and overhead 44.5 42.5 Contributions in aid of construction 39.7 35.7 Nuclear decommissioning liability 24.3 20.0 Other 87.2 62.5 ----------------------------- Total deferred tax assets 277.6 248.2 ----------------------------- Deferred tax liability, net $1,294.9 $1,295.9 - -----------------------------------------------------------------------------------------=============================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. CERTAIN PRIOR-YEAR AMOUNTS HAVE BEEN RECLASSIFIED TO CONFORM WITH THE CURRENT YEAR'S PRESENTATION. Baltimore Gas and Electric Company and Subsidiaries 45 Notes to Consolidated Financial Statements Note 1. Significant Accounting Policies - -------------------------------------------------------------------------------- Nature of Our Business Baltimore Gas and Electric Company (BGE) is the parent company and conducts our primary business--the electric and gas utility business. That business serves Baltimore City and all or part of 10 Central Maryland counties. We also conduct various diversified businesses in subsidiary companies. We describe our diversified businesses in Note 3. Consolidation Policy We use three different accounting methods to report our investments in our subsidiaries or other companies: consolidation, the equity method, and the cost method. Consolidation We use consolidation when we own a majority of the voting stock of the subsidiary. This means the accounts of our subsidiaries are combined with our accounts. We eliminate intercompany balances and transactions when we consolidate these accounts. Our consolidated financial statements include the accounts of: o BGE, o Constellation Holdings, Inc. and Subsidiaries (the Constellation Holdings Companies), o Constellation Energy Solutions, Inc. and Subsidiaries, and o BGE Home Products & Services, Inc. and Subsidiaries. The Equity Method We usually use the equity method to report corporate joint ventures, partnerships, and affiliated companies (including power generation projects) where we hold a 20% to 50% voting interest. Under the equity method, we report: o our interest in the entity as an investment in our Consolidated Balance Sheets, and o our percentage share of the earnings from the entity in our Consolidated Statements of Income. The only time we do not use this method is if we can exercise control over the operations and policies of the company. If we have control, accounting rules require us to use consolidation. We report our investment in Safe Harbor Water Power Corporation under the equity method. The Cost Method We usually use the cost method if we hold less than a 20% voting interest in an investment. Under the cost method, we report our investment at cost in our Consolidated Balance Sheets. The only time we do not use this method is when we can exercise significant influence over the operations and policies of the company. If we have significant influence, accounting rules require us to use the equity method. Regulation of Utility Business The Maryland Public Service Commission (Maryland PSC) regulates our utility business. Generally, we use the same accounting policies and practices used by nonregulated companies for financial reporting under generally accepted accounting principles. However, sometimes the Maryland PSC orders an accounting treatment different from that used by nonregulated companies to determine the rates we charge our customers. We discuss this further in Note 5. Utility Revenues We record utility revenues in our Consolidated Statements of Income when we provide service to customers. Fuel and Purchased Energy Costs We incur costs for: o the fuel we use to generate electricity, o purchases of electricity from others, and o natural gas that we resell. These costs are shown in our Consolidated Statements of Income as "electric fuel and purchased energy" and "gas purchased for resale." We discuss each of these separately below. Fuel Used to Generate Electricity and Purchases of Electricity From Others Under the electric fuel rate clause set by the Maryland PSC, we charge our electric customers for: o the fuel we use to generate electricity (nuclear fuel, coal, gas, or oil), and o the net cost of purchases and sales of electricity, primarily with other utilities. We charge the actual costs of these items to customers with no profit to us. To do this, we must keep track of what we spend and what we collect from customers under the fuel rate in a given period. Usually these two amounts are not the same because there is a difference between the time we spend the money and the time we collect it from our customers. Under the electric fuel rate clause, we defer (include as an asset or liability in our Consolidated Balance Sheets and exclude from our Consolidated Statements of Income) the difference between our actual costs of fuel and energy and what we collect from customers under the fuel rate in a given period. We either bill or refund our customers that difference in the future. We discuss this further in Note 5. We calculate the electric fuel rate using three factors: o the mix of generating plants we used over the last 24 months, o the latest three-month average fuel cost for each generating unit, and o the net cost of purchases and sales of electricity, primarily with other utilities, over the last 24 months. We may change the fuel rate only if the calculated rate is more than 5% above or below the rate in effect. The fuel rate is affected most by the amount of electricity generated at our Calvert Cliffs Nuclear Power Plant (Calvert Cliffs) because the cost of nuclear fuel is cheaper than coal, gas, or oil. 46 Baltimore Gas and Electric Company and Subsidiaries We also report two other items as "electric fuel and purchased energy" in our Consolidated Statements of Income: o amortization of nuclear fuel (described under "Utility Plant" later in this note). We amortize nuclear fuel based on the energy produced over the life of the fuel. We pay quarterly fees to the Department of Energy for the future disposal of spent nuclear fuel, and accrue these fees based on the kilowatt-hours of electricity sold. We bill our customers for nuclear fuel as described earlier in this note. o amortization of deferred costs of decommissioning and decontaminating the Department of Energy's uranium enrichment facilities. We discuss these costs further in Note 5. Extended outages at Calvert Cliffs drive up fuel costs and may result in fuel rate proceedings before the Maryland PSC. In these proceedings, the Maryland PSC would consider whether any portion of the extra fuel costs should be paid by BGE instead of passed on to customers. We discuss the financial impact of past extended outages in Note 12. Natural Gas We charge our gas customers for the natural gas they consume using "gas cost adjustment clauses" set by the Maryland PSC. These clauses operate the same as the electric fuel rate clause described earlier in this note. However, effective October 1996, the Maryland PSC approved a modification of the gas cost adjustment clauses to provide a market based rates incentive mechanism. Under market based rates our actual cost of gas is compared to a market index (a measure of the market price of gas in a given period). The difference between our actual cost and the market index is shared equally between BGE (which benefits shareholders) and customers. Risk Management We engage in risk management activities in our gas business and in our diversified businesses. We separately describe these activities for each business below. Gas Business In 1996, we began using basis swaps in the winter months (November through March) to hedge price risk associated with natural gas purchases. Under internal guidelines, we are not permitted to try to predict market changes. We defer, as unrealized gains or losses, the net amount we owe (unrealized losses) or are due (unrealized gains) under the swaps in our Consolidated Balance Sheets. At December 31, 1997, we had outstanding basis swap agreements covering 15.4 million decatherms of natural gas purchases through March 1998. We had unrealized gains of $1.0 million related to the outstanding agreements. When amounts are paid under the agreements, we report the payments as gas costs in our Consolidated Statements of Income. Diversified Businesses Our subsidiary, Constellation Power Source, engages in power marketing activities, which include trading electricity, other energy commodities, and related derivatives (such as forwards, options, and swaps). Constellation Power Source reports trading activities using the mark-to-market method of accounting. Under the mark-to-market method of accounting, we report: o commodity positions and derivatives at fair value in our Consolidated Balance Sheets, and o changes in fair value as diversified business revenues in our Consolidated Statements of Income. At December 31, 1997, Constellation Power Source had derivative assets with a fair value of about $9.4 million and derivative liabilities with a fair value of about $8.6 million. Market Risk We measure our exposure to market risk at any point in time by comparing our open positions to a market estimate of fair value. The market prices we use to determine fair value are based on management's best estimates, which consider various factors including: o closing exchange prices, o time value of money, and o over-the-counter prices, o volatility factors. At December 31, 1997, our exposure to market risk was not material. Taxes We summarize our income taxes in the Consolidated Statements of Income Taxes on page 45. As you read this section, it may be helpful to refer to those statements. Income Tax Expense We have two categories of income taxes in our Consolidated Statements of Income--current and deferred. We describe each of these below. Our current income tax expense consists solely of regular tax less applicable tax credits. Our 1996 and 1995 current income tax expense amounts include alternative minimum tax credits of $30 million in 1996 and $40 million in 1995. The alternative minimum tax can be carried forward indefinitely and used as tax credits in years when our regular tax liability exceeds the alternative minimum tax liability. We do not have any remaining alternative minimum tax credits. Our deferred income tax expense is equal to the changes in the deferred income tax liability and regulatory asset (described later in this note) during the year, excluding amounts charged or credited to common shareholders' equity. Investment Tax Credits We have also deferred the investment tax credit associated with our regulated utility business in our Consolidated Balance Sheets as a regulatory liability. The regulatory liability is amortized evenly to income over the life of each property. We discuss this further in Note 5. We reduce income tax expense in our Consolidated Statements of Income for the investment tax credit and other tax credits associated with our nonregulated diversified businesses, other than leveraged leases. Deferred Income Tax Assets and Liabilities We must report some of our assets and liabilities differently for our financial statements than we do for income tax purposes. The tax effects of the differences in these items are reported as deferred income tax assets or liabilities in our Consolidated Balance Sheets. We measure the assets and liabilities using income tax rates that are currently in effect. Baltimore Gas and Electric Company and Subsidiaries 47 A portion of our total deferred income tax liability relates to our utility business, but has not been reflected in the rates we charge our customers. We refer to this portion of the liability as "income taxes recoverable through future rates." We have recorded that portion of the liability as a regulatory asset in our Consolidated Balance Sheets. We discuss this further in Note 5. Franchise Taxes We pay Maryland public service company franchise tax instead of state income tax on our utility revenue from sales in Maryland. We include the franchise tax in "taxes other than income taxes" in our Consolidated Statements of Income. Inventory We report the majority of our fuel stocks and materials and supplies at average cost. Evaluation of Assets for Impairment Statement of Financial Accounting Standards No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, applies particular requirements to some of our assets that have long lives (some examples are utility property and equipment, and real estate). We determine if those assets are impaired by comparing their undiscounted expected future cash flows to their carrying amount in our accounting records. We recognize an impairment loss if the undiscounted expected future cash flows are less than the carrying amount of the asset. REAL ESTATE PROJECTS In Note 4, we summarize the real estate projects that are in our Consolidated Balance Sheets. The projects consist of the Constellation Holdings Companies' investments in: o rental and operating properties, that they are holding for investment, and o properties under development, that they are holding for future development and subsequent sale. The Constellation Holdings Companies include the costs incurred to acquire and develop these properties as part of the costs of the properties. Generally, the Constellation Holdings Companies report these properties at cost, unless the amount invested exceeds the fair value. In these cases, the Constellation Holdings Companies write down the projects to their fair values. Financial Investments and Trading Securities In Note 4, we summarize the financial investments that are in our Consolidated Balance Sheets. Statement of Financial Accounting Standards No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES, applies particular requirements to some of our investments in debt and equity securities. We report those investments at fair value, and we use specific identification to determine their cost for computing realized gains or losses. We classify these investments as either trading securities or available-for-sale securities, which we describe separately below. We report investments that are not covered by Statement of Financial Accounting Standards No. 115 at their cost. Trading Securities The Constellation Holdings Companies classify some of their investments in marketable equity securities and financial limited partnerships as trading securities. We include any unrealized gains or losses on these securities in diversified business revenues in our Consolidated Statements of Income. Available-for-Sale Securities We classify our investments in the nuclear decommissioning trust fund as available-for-sale securities. We include any unrealized gains or losses on the trust assets as a change in the decommissioning reserve. We describe the nuclear decommissioning trust and the reserve under the heading "Decommissioning Costs" later in this note. In addition, the Constellation Holdings Companies classify some of their investments in marketable equity securities as available-for-sale securities. We include any unrealized gains or losses on these securities in shareholders' equity in our Consolidated Balance Sheets. We also include the Constellation Holdings Companies' portion of unrealized gains or losses on securities of equity-method (described earlier in this note) investees in shareholders' equity. Utility Plant, Depreciation and Amortization, and Decommissioning Utility Plant Utility plant is the term we use to describe our utility business property and equipment that is in use, being held for future use, or under construction. We summarize utility plant in our Consolidated Balance Sheets. We report our utility plant at its original cost, which includes: o material and labor, o contractor costs, o construction overhead costs (where applicable), and o an allowance for funds used during construction (described later in this note). We charge retired or otherwise-disposed-of utility plant to accumulated depreciation. We own an undivided interest in the Keystone and Conemaugh electric generating plants in Western Pennsylvania, as well as in the transmission line that transports the plants' output to the joint owners' service territories. Our ownership interests in these plants are 20.99% in Keystone and 10.56% in Conemaugh. These ownership interests represented a net investment of $152 million at December 31, 1997, and $153 million at December 31, 1996. We report these properties in the same accounts we use for our other utility plant (described above). Depreciation Expense Generally, we compute depreciation by applying composite, straight-line rates (approved by the Maryland PSC) to the average investment in classes of depreciable property. We depreciate vehicles based on their estimated useful lives. As a result of the Maryland PSC's November 1995 gas base rate order, we revised our gas utility plant depreciation rates to reflect the results of a detailed depreciation study. The revised rates increased depreciation expense by approximately $2.4 million annually. 48 Baltimore Gas and Electric Company and Subsidiaries Our 1995 depreciation expense includes the write-off of expenditures associated with a second combustion turbine at our Perryman site that will not be built. This write-off reduced after-tax earnings during 1995 by $9.7 million, or $.07 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. Amortization Expense Amortization is an accounting process of reducing an amount in our Consolidated Balance Sheets evenly over a period of time. When we reduce amounts in our Consolidated Balance Sheets, we increase amortization expense in our Consolidated Statements of Income. An amount is considered fully amortized when it has been reduced to zero. Decommissioning Costs We must accumulate a reserve for the costs that we expect to incur in the future to decommission the radioactive portion of Calvert Cliffs. We do this based on a sinking fund methodology. In 1995, the Maryland PSC authorized us to record decommissioning expense based on a facility-specific cost estimate so we can 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. We have reported the decommissioning reserve in "accumulated depreciation" in our Consolidated Balance Sheets. The total reserve was $201.6 million at December 31, 1997, and $167.5 million at December 31, 1996. To fund the costs we expect to incur to decommission the plant, we established an external decommissioning trust in accordance with Nuclear Regulatory Commission (NRC) regulations. We report the assets in the trust in "nuclear decommissioning trust fund" in our Consolidated Balance Sheets. 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. We use the facility-specific cost estimate (mentioned above) for funding these costs and providing the required financial assurance. Allowance for Funds Used During Construction and Capitalized Interest Allowance for Funds Used During Construction (AFC) We finance construction projects with borrowed funds and equity funds. We are allowed by the Maryland PSC to record the costs of these funds as part of the cost of construction projects in our Consolidated Balance Sheets. We do this through the AFC, which we calculate using a rate authorized by the Maryland PSC. We bill our customers for the AFC plus a return after the utility plant is placed in service. Prior to November 1995, we used a pre-tax rate of 9.40% to calculate AFC for all of our utility plant. Effective November 1995, the Maryland PSC reduced the pre-tax AFC rates to 9.04% for gas plant and 9.36% for common plant. We continue to use 9.40% for electric plant. We compound AFC annually. Capitalized Interest The Constellation Holdings Companies capitalize interest costs incurred to finance real estate developed for internal use and power generation development projects. Long-Term Debt We defer (include as an asset or liability in our Consolidated Balance Sheets and exclude from our Consolidated Statements of Income) all costs related to the issuance of long-term debt. These costs include underwriters' commissions, discounts or premiums, and other costs such as legal, accounting and regulatory fees, and printing costs. We amortize these costs over the life of the debt. When we incur gains or losses on debt that we retire prior to maturity, we amortize those gains or losses over the remaining original life of the debt. Cash Flows For the purpose of reporting our cash flows, we define cash equivalents as highly liquid investments that mature in three months or less. Use of Accounting Estimates Management makes estimates and assumptions when preparing financial statements under generally accepted accounting principles. These estimates and assumptions affect various matters, including: o our reported amounts of assets and liabilities in our Consolidated Balance Sheets at the dates of the financial statements, o our disclosure of contingent assets and liabilities at the dates of the financial statements, and o our reported amounts of revenues and expenses in our Consolidated Statements of Income during the reporting periods. These estimates involve judgments with respect to, among other things, future economic factors that are difficult to predict and are beyond management's control. As a result, actual amounts could differ from these estimates. RECLASSIFICATIONS We have reclassified certain prior-year amounts for comparative purposes. These reclassifications did not affect consolidated net income for the years presented. Baltimore Gas and Electric Company and Subsidiaries 49 Note 2. Information by Business Segment - -------------------------------------------------------------------------------- We have three business segments: electric, gas, and diversified businesses (subsidiaries). Our electric business generates, purchases, and sells electricity. Our gas business purchases, transports, and sells natural gas. Our diversified businesses are involved in various activities which we describe in Note 3. We show selected financial information for each of our business segments in the following table.
Construction Identifiable Segment Intersegment Total Income from Depreciation/ Expenditures Assets at Revenues Revenues Revenues Operations Amortization (Including AFC) December 31 - ------------------------------------------------------------------------------------------------------------------------------------ (IN MILLIONS) 1997--Electric $2,191.7 $ 0.3 $2,192.0 $596.8 $286.5 $278.7 $6,204.7 Gas 521.6 -- 521.6 63.5 39.3 94.5 896.9 Diversified businesses 594.3 10.3 604.6 63.3 17.1 -- 1,595.2 Other identifiable assets -- -- -- -- -- -- 76.6 Intercompany eliminations -- (10.6) (10.6) -- -- -- -- -------------------------------------- ------ ------ ------ -------- Total $3,307.6 $ -- $3,307.6 $723.6 $342.9 $373.2 $8,773.4 - -----------------------------------====================================== ====== ====== ====== ======== 1996--Electric $2,208.7 $ 0.3 $2,209.0 $498.0 $279.3 $262.5 $6,222.6 Gas 517.3 -- 517.3 68.9 37.8 98.0 810.1 Diversified businesses 427.2 6.8 434.0 102.6 13.1 -- 1,400.6 Other identifiable assets -- -- -- -- -- -- 111.0 Intercompany eliminations -- (7.1) (7.1) -- -- -- -- -------------------------------------- ------ ------ ------ -------- Total $3,153.2 $ -- $3,153.2 $669.5 $330.2 $360.5 $8,544.3 - -----------------------------------====================================== ====== ====== ====== ======== 1995--Electric $2,229.8 $ 1.3 $2,231.1 $574.3 $276.3 $288.5 $6,193.4 Gas 400.5 -- 400.5 48.1 29.6 77.5 748.5 Diversified businesses 304.5 6.6 311.1 73.3 11.5 -- 1,266.1 Other identifiable assets -- -- -- -- -- -- 69.6 Intercompany eliminations -- (7.9) (7.9) -- -- -- -- -------------------------------------- ------ ------ ------ -------- Total $2,934.8 $ -- $2,934.8 $695.7 $317.4 $366.0 $8,277.6 - -----------------------------------====================================== ====== ====== ====== ========
Note 3. Information About Our Subsidiaries - -------------------------------------------------------------------------------- Our diversified business subsidiaries are organized in three groups: o Our power generation, financial investments, and real estate businesses, o Our energy marketing businesses, and o Our home products and commercial building systems businesses. Our Power Generation, Financial Investments, and Real Estate Businesses We refer to all of these together as the Constellation Holdings Companies. Constellation Holdings, Inc. is a wholly owned subsidiary of BGE and holds all of the stock of the following three subsidiaries: o Constellation Power, Inc.--develops, owns, and operates power generation projects, o Constellation Investments, Inc.--engages in financial investments, and o Constellation Real Estate Group, Inc.--develops, owns, and manages real estate and senior-living facilities. We show condensed financial information for the Constellation Holdings Companies in the following table. We have not reflected the elimination of intercompany balances or transactions that are eliminated in our consolidated financial statements. We describe this further in Note 1. 1997 1996 1995 - ----------------------------------------------------------------- (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) Income Statements Revenues Real estate projects $152.7 $80.8 $108.4 Power generation systems 109.1 93.1 57.7 Financial investments 51.9 38.9 25.2 ----------------------------- Total revenues 313.7 212.8 191.3 Expenses other than interest and income taxes 238.8 113.2 114.4 ----------------------------- Income from operations 74.9 99.6 76.9 Minority interest (3.2) (0.3) (2.3) Interest expense (56.4) (45.0) (46.7) Capitalized interest 8.4 14.6 13.6 Income tax expense (11.8) (26.6) (14.4) ----------------------------- Net income $ 11.9 $42.3 $ 27.1 - ------------------------------------============================= Contribution to our earnings per share of common stock $.08 $.29 $.18 - ------------------------------------============================= Balance Sheets Current assets $ 170.4 $ 115.7 $ 98.5 Noncurrent assets 1,190.0 1,189.7 1,102.5 ------------------------------- Total assets $1,360.4 $1,305.4 $1,201.0 - ----------------------------------=============================== Current liabilities $ 181.1 $ 134.0 $ 70.4 Noncurrent liabilities 837.0 775.2 778.5 Shareholder's equity 342.3 396.2 352.1 ------------------------------- Total liabilities and shareholder's equity $1,360.4 $1,305.4 $1,201.0 - ----------------------------------=============================== 50 Baltimore Gas and Electric Company and Subsidiaries The 1997 income statement includes after-tax write-downs of real estate projects totaling $46 million. We describe these write-downs in the "Real Estate Development and Senior-Living Facilities" section of Management's Discussion and Analysis on page 33. The 1996 income statement includes a $14.6 million after-tax gain on the sale of a power purchase agreement that was offset by: o a $7.0 million after-tax write-off of an investment in two geothermal wholesale power generating projects that sell electricity under California power purchase agreements, o a $3.0 million after-tax write-off of development costs for a coal-fired power project, and o a $6.2 million after-tax write-off of a portion of an investment in a solar power project. Our Energy Marketing Businesses Constellation Energy Solutions, Inc. is a wholly owned subsidiary of BGE and serves as the holding company for our three energy marketing businesses: o Constellation Power Source, Inc.--provides power marketing and risk management services to wholesale customers in North America by purchasing and selling electric power, other energy commodities, and related derivatives. o Constellation Energy Source, Inc.--provides natural gas brokering and related services for wholesale and retail customers. o Constellation Energy Projects & Services, Inc. and Subsidiaries--provides a broad range of customized energy services, including private electric and gas distribution systems, energy consulting, power quality services, and campus and multi-building energy systems. Our Home Products and Commercial Building Systems Businesses BGE Home Products & Services, Inc. and subsidiaries: o sells and services electric and gas appliances, o engages in home improvements, and o sells and services heating and air conditioning systems. Other Safe Harbor Water Power Corporation is a producer of hydroelectric power. BGE owns 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. Note 4. Real Estate Projects and Financial Investments - -------------------------------------------------------------------------------- Real Estate Projects Real estate projects consist of the following investments held by the Constellation Holdings Companies: AT DECEMBER 31, 1997 1996 - --------------------------------------------------------------- (IN MILLIONS) Properties under development $220.8 $286.2 Rental and operating properties (net of accumulated depreciation) 225.6 237.7 Other real estate ventures 0.4 1.9 ------------------------- Total real estate projects $446.8 $525.8 - --------------------------------------========================= Financial Investments Financial investments consist of the following investments held by the Constellation Holdings Companies: AT DECEMBER 31, 1997 1996 - -------------------------------------------------------------- (IN MILLIONS) Insurance companies $ 88.8 $ 76.8 Marketable equity securities 33.3 46.2 Financial limited partnerships 43.6 48.1 Leveraged leases 30.8 33.3 ------------------------- Total financial investments $196.5 $204.4 - --------------------------------------========================= Investments Classified as Available-for-Sale We classify our investments in the nuclear decommissioning trust fund and the Constellation Holdings Companies' marketable equity securities (shown above) as available-for-sale. This means we do not expect to hold them to maturity and we do not consider them trading securities. We show the fair values, gross unrealized gains and losses, and amortized cost bases for these available-for-sale securities, exclusive of $3.5 million of unrealized net gains on securities of equity-method investees, in the following tables. Amortized Unrealized Unrealized Fair AT DECEMBER 31, 1997 Cost Basis Gains Losses Value - ----------------------------------------------------------------------- (IN MILLIONS) Marketable Equity Securities $ 77.3 $12.0 $(0.5) $ 88.8 U.S. Government agency 14.9 0.2 -- 15.1 State municipal bonds 65.5 2.2 -- 67.7 --------------------------------------- Totals $157.7 $14.4 $(0.5) $171.6 - --------------------------------======================================= Amortized Unrealized Unrealized Fair AT DECEMBER 31, 1996 Cost Basis Gains Losses Value - ----------------------------------------------------------------------- (IN MILLIONS) Marketable Equity Securities $ 52.5 $ 8.0 $(0.1) $ 60.4 U.S. Government agency 18.1 0.3 -- 18.4 State municipal bonds 73.6 2.2 (0.1) 75.7 --------------------------------------- Totals $144.2 $10.5 $(0.2) $154.5 - --------------------------------======================================= Gross and net realized gains and losses on available-for-sale securities were as follows: 1997 1996 1995 - ------------------------------------------------------------------ (IN MILLIONS) Gross realized gains $9.3 $4.3 $5.5 Gross realized losses (0.6) (0.2) (2.5) ---------------------------------- Net realized gains $8.7 $4.1 $3.0 - --------------------------------================================== The U.S. Government agency obligations and state municipal bonds (shown above) mature on the following schedule: AT DECEMBER 31, 1997 AMOUNT - --------------------------------------------------------------- (IN MILLIONS) Less than 1 year $ 1.0 1-5 years 24.1 5-10 years 51.8 More than 10 years 5.9 ----- Total maturities of debt securities $82.8 - ---------------------------------------------------------===== Baltimore Gas and Electric Company and Subsidiaries 51 Note 5. Regulatory Assets (net) - -------------------------------------------------------------------------------- As discussed in Note 1, the Maryland PSC regulates our utility business. Generally, we use the same accounting policies and practices used by nonregulated companies for financial reporting under generally accepted accounting principles. However, sometimes the Maryland PSC orders an accounting treatment different from that used by nonregulated companies to determine the rates we charge our customers. When this happens, we must defer certain utility expenses and income in our Consolidated Balance Sheets as regulatory assets and liabilities. We then record them in our Consolidated Statements of Income (using amortization) when we include them in the rates we charge our customers. We have recorded these regulatory assets and liabilities in our Consolidated Balance Sheets in accordance with Statement of Financial Accounting Standards No. 71, Accounting for the Effects of Certain Types of Regulation. If we were required to terminate application of that statement for all of our regulated operations, we would have to record the amounts of all regulatory assets and liabilities in our Consolidated Statements of Income at that time. This means our earnings would be reduced by the total net amount in the table below, net of applicable income taxes. We summarize our regulatory assets and liabilities in the following table, and we discuss each of them separately below. AT DECEMBER 31, 1997 1996 - ------------------------------------------------------------------ (IN MILLIONS) Income taxes recoverable through future rates $256.5 $264.5 Deferred postretirement and postemployment benefit costs 96.4 89.2 Deferred nuclear expenditures 77.7 82.1 Deferred energy conservation expenditures 55.8 46.7 Deferred costs of decommissioning federal uranium enrichment facilities 42.4 46.0 Deferred environmental costs 38.8 47.7 Deferred termination benefit costs 21.0 41.1 Deferred fuel costs 4.4 22.7 Deferred investment tax credits (126.6) (133.9) Other 4.3 6.2 ---------------- Total regulatory assets (net) $470.7 $512.3 - --------------------------------------------------================ Income Taxes Recoverable Through Future Rates As described in Note 1, income taxes recoverable through future rates are the portion of our deferred income tax liability that is applicable to our utility business, but has not been reflected in the rates we charge our customers. These income taxes represent the tax effect of temporary differences in depreciation and the allowance for equity funds used during construction, offset by differences in deferred tax rates and deferred taxes on deferred investment tax credits (discussed later in this note). We amortize these amounts as the temporary differences reverse. Deferred Postretirement and Postemployment Benefit Costs Deferred postretirement and postemployment benefit costs are the costs we recorded under Statements of Financial Accounting Standards No. 106 (for postretirement benefits) and No. 112 (for postemployment benefits) in excess of the costs we included in the rates we charge our customers. We will amortize these costs over a 15-year period beginning in 1998. We discuss these costs further in Note 6. Deferred Nuclear Expenditures Deferred nuclear expenditures are the net unamortized balance of certain operations and maintenance costs at Calvert Cliffs. These expenditures consist of: o costs incurred from 1979 through 1982 for inspecting and repairing seismic pipe supports, o expenditures incurred from 1989 through 1994 associated with nonrecurring phases of certain nuclear operations projects, and o expenditures incurred during 1990 for investigating leaks in the pressurizer heater sleeves. We are amortizing these costs over the remaining life of the plant in accordance with the Maryland PSC's orders. Deferred Energy Conservation Expenditures Deferred energy conservation expenditures include two components: o operations costs (labor, materials, and indirect costs) associated with energy conservation programs approved by the Maryland PSC, which we are amortizing over five years in accordance with the Maryland PSC's orders, and o revenues we collected from customers in 1996 in excess of our profit limit under the energy conservation surcharge. The Maryland PSC allows us to collect from customers money spent on conservation programs under an "energy conservation surcharge." However, under this surcharge the Maryland PSC limits what our profit can be. If, at the end of the year, we have exceeded our allowed profit, we lower the amount of future surcharges to our customers to correct the amount of overage, plus interest. During 1996, we exceeded our profit limit under the energy conservation surcharge. As a result, we deferred $28.5 million of our 1996 revenue from surcharge billings as a regulatory liability. To correct the overage, we lowered the surcharge on our customers' bills from July 1997 to June 1998. Deferred Costs of Decommissioning Federal Uranium Enrichment Facilities Deferred costs of decommissioning federal uranium enrichment facilities are the unamortized portion of our required contributions to a fund for decommissioning and decontaminating the Department of Energy's uranium enrichment facilities. We are required, along with other domestic utilities, by the Energy Policy Act of 1992 to make contributions to the fund. The contributions are generally payable over 15 years with escalation for inflation and are based upon the proportionate amount of uranium enriched by the Department of Energy for each utility. We are amortizing these costs over the contribution period as a cost of fuel. We also discuss this in Note 1. Deferred Environmental Costs Deferred environmental costs are the estimated costs of investigating and cleaning up contaminated sites we own. We discuss this further in Note 12. We are amortizing $21.6 million of these costs (the amount we had incurred through October 1995) over a 10-year period in accordance with the Maryland PSC's November 1995 order. 52 Baltimore Gas and Electric Company and Subsidiaries Deferred Termination Benefits Deferred termination benefit costs are the net unamortized balance of the cost of certain termination benefits offered to employees of our regulated utility operations. We describe these termination benefits further in Note 7. We are amortizing these costs over a five-year period in accordance with the Maryland PSC's orders. Deferred Fuel Costs As described in Note 1, deferred fuel costs are the difference between our actual costs of electric fuel, net purchases and sales of electricity, and natural gas and our fuel rate revenues collected from customers. We reduce deferred fuel costs as we collect them from customers. We show our deferred fuel costs in the following table. AT DECEMBER 31, 1997 1996 - ------------------------------------------------------------------ (IN MILLIONS) Electric deferred fuel costs Costs deferred (over-recovered) $(19.0) $113.2 Disallowed replacement energy costs (see Note 12) -- (118.0) --------------------- Net electric deferred (over- recovered) fuel costs (19.0) (4.8) Gas deferred fuel costs 23.4 27.5 --------------------- Total deferred fuel costs $ 4.4 $ 22.7 - ---------------------------------------------===================== Deferred Investment Tax Credits As described in Note 1, deferred investment tax credits are investment tax credits associated with our regulated utility business. Under federal income tax regulations, we do not deduct deferred investment tax credits from rate base. Note 6. Pension, Postretirement, Other Postemployment, and Employee Savings Plan Benefits - -------------------------------------------------------------------------------- We offer pension, postretirement, other postemployment, and employee savings plan benefits. We describe each of these separately below. Pension Benefits We sponsor several defined benefit pension plans for our employees. A defined benefit plan specifies the amount of benefits a plan participant is to receive using information about the participant. Our largest plan covers nearly all BGE employees and certain employees of our subsidiaries. Our other plans, which are not material in amount, provide supplemental benefits to certain key employees. Our employees do not contribute to these plans. Generally, we calculate the benefits under these plans based on age, years of service, and pay. Sometimes we amend the plans retroactively. These retroactive plan amendments require us to recalculate benefits related to participants' past service. We amortize the change in the benefit costs from these plan amendments on a straight-line basis over the average remaining service period of active employees. We fund the plans by contributing at least the minimum amount required under Internal Revenue Service regulations. We calculate the amount of funding using an actuarial method called the projected unit credit cost method. The assets in all of the plans at December 31, 1997 were mostly marketable equity and fixed income securities, and group annuity contracts. We show the funded status of all of the plans in the following table. AT DECEMBER 31, 1997 1996 - ------------------------------------------------------------------ (IN MILLIONS) Vested benefit obligation $ 702.0 $695.6 Nonvested benefit obligation 40.0 18.0 ------------------ Accumulated benefit obligation 742.0 713.6 Projected benefits related to increase in future compensation levels 160.0 132.7 ------------------ Projected benefit obligation 902.0 846.3 Plan assets at fair value (912.3) (792.5) ------------------ Projected benefit obligation less plan assets (10.3) 53.8 Unrecognized prior service cost (19.4) (21.9) Unrecognized net loss (84.2) (117.2) Unamortized net asset from adoption of FASB Statement No. 87 0.9 0.8 ------------------ Accrued pension asset $(113.0) $ (84.5) - ------------------------------------------------================== We show the components of total net pension cost in the following table. We do not include the cost of termination benefits described in Note 7 in net pension cost. YEAR ENDED DECEMBER 31, 1997 1996 1995 - ------------------------------------------------------------------ (IN MILLIONS) Service cost-benefits earned during the period $16.8 $16.1 $11.4 Interest cost on projected benefit obligation 61.3 59.9 58.4 Actual return on plan assets (130.0) (57.7) (150.5) Net amortization and deferral 70.0 2.1 94.7 ------------------------------ Total net pension cost 18.1 20.4 14.0 Amount capitalized as construction cost (2.5) (2.4) (1.4) ------------------------------ Total net pension cost charged to expense $15.6 $18.0 $12.6 - ------------------------------------============================== Postretirement Benefits We sponsor defined benefit postretirement health care and life insurance plans which cover nearly all BGE employees and certain employees of our subsidiaries. Generally, we calculate the benefits under these plans based on age, years of service, and pension benefit levels. We do not fund these plans. For nearly all of the health care plans, retirees make contributions to cover a portion of the plan costs. Contributions for employees who retire after June 30, 1992 are calculated based on age and years of service. The amount of retiree contributions increase based on expected increases in medical costs. For the life insurance plan, retirees do not make contributions to cover a portion of the plan costs. Effective January 1, 1993, we adopted Statement of Financial Accounting Standards No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions. The adoption of that statement caused: o a transition obligation, which we are amortizing over 20 years, and o an increase in annual postretirement benefit costs, which we discuss later in this note. Baltimore Gas and Electric Company and Subsidiaries 53 For our diversified businesses, we expense all postretirement benefit costs. For our regulated utility business, we accounted for the increase in annual postretirement benefit costs under two Maryland PSC rate orders: o In an April 1993 rate order, the Maryland PSC allowed us to expense one-half and defer, as a regulatory asset (see Note 5), the other half of the increase in annual postretirement benefit costs related to our utility business. o In a November 1995 rate order, the Maryland PSC allowed us to expense all of the increase in annual postretirement benefit costs related to our gas business. Beginning in 1998, the Maryland PSC authorized us to: o expense all of the increase in annual postretirement benefit costs related to our electric business, and o amortize the regulatory asset for postretirement benefit costs related to our utility business over 15 years. The Maryland PSC authorized us to reflect these changes in our current electric base rates and will adjust our gas base rates to recover the higher costs that will be recognized in 1998. Our treatment of the increase in annual postretirement benefit costs meets guidelines established by the Emerging Issues Task Force of the Financial Accounting Standards Board for deferring postretirement benefit costs as a regulatory asset. We show the components of the accumulated postretirement benefit obligation and a reconciliation of these amounts to the accrued postretirement benefit liability in the following table. AT DECEMBER 31, 1997 1996 - ------------------------------------------------------------------- Health Life Health Life Care Insurance Care Insurance - ------------------------------------------------------------------- (IN MILLIONS) Accumulated postretirement benefit obligation: Retirees $164.5 $47.3 $163.9 $45.5 Active employees 87.7 20.8 82.4 19.3 --------------------------------- Total accumulated post- retirement benefit obligation 252.2 68.1 246.3 64.8 Unrecognized transition obligation (132.2) (38.4) (141.1) (41.0) Unrecognized net loss (3.8) (7.1) (7.4) (5.7) --------------------------------- Accrued postretirement benefit liability $116.2 $22.6 $ 97.8 $18.1 - ----------------------------------================================= We show the components of net postretirement benefit cost in the following table. We do not include the cost of termination benefits described in Note 7 in net postretirement benefit cost. YEAR ENDED DECEMBER 31, 1997 1996 1995 - ------------------------------------------------------------------ (IN MILLIONS) Service cost--benefits earned during the period $ 5.4 $ 5.5 $ 3.9 Interest cost on accumulated post retirement benefit obligation 21.8 21.9 21.2 Amortization of transition obligation 11.4 11.4 11.4 Net amortization and deferral 0.1 0.2 (0.1) ------------------------- Total net postretirement benefit cost 38.7 39.0 36.4 Amount capitalized as construction cost (7.6) (6.2) (5.3) Amount deferred (7.2) (7.4) (8.0) ------------------------- Total net postretirement benefit cost charged to expense $23.9 $25.4 $23.1 - ------------------------------------------======================== Other Postemployment Benefits We provide the following postemployment benefits: o health and life insurance benefits to our employees and certain employees of our subsidiaries who are found to be disabled under our Disability Insurance Plan, and o income replacement payments for employees found to be disabled before November 1995 (payments for employees found to be disabled after that date are paid by an insurance company, and the cost is paid by employees). The liability for these benefits totaled $45.4 million as of December 31, 1997 and $50.8 million as of December 31, 1996. Effective December 31, 1993, we adopted Statement of Financial Accounting Standards No. 112, EMPLOYERS' ACCOUNTING FOR POSTEMPLOYMENT BENEFITS. The portion of the liability attributable to regulated activities as of December 31, 1993 was deferred as a regulatory asset (see Note 5), consistent with the Maryland PSC's orders for postretirement benefits (described earlier in this note). We will amortize the regulatory asset over 15 years beginning in 1998. The Maryland PSC authorized us to reflect this change in our current electric base rates and will adjust our gas base rates to recover the higher costs that will be recognized in 1998. Assumptions We made the assumptions below to calculate the pension, postretirement, and other postemployment benefit liabilities. AT DECEMBER 31, 1997 1996 - ----------------------------------------------------------------- Discount rate Pension and postretirement benefits 7.25% 7.5% Other postemployment benefits 6.0 6.0 Average increase in future compensation levels 4.0 4.0 Expected long-term rate of return on assets 9.0 9.0 We assumed the health care inflation rates to be: o in 1997, 6.0% for both Medicare-eligible retirees and retirees not covered by Medicare, and o in 1998, 8.0% for Medicare-eligible retirees and 9.5% for retirees not covered by Medicare. After 1998, we assumed both rates will decrease by 0.5% annually to a rate of 5.5% in the years 2003 and 2006. A one-percent 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, 1997 and would increase the combined service and interest costs of the postretirement benefit cost by approximately $4 million annually. Employee Savings Plan Benefits We also sponsor a defined contribution savings plan that is offered to all eligible BGE employees and certain employees of our subsidiaries. In a defined contribution plan, the benefits a participant is to receive result from regular contributions to a participant account. Under this plan, we make matching contributions to participant accounts. We made matching contributions to this plan of: o $8.5 million in 1997, o $9.4 million in 1996, and o $8.5 million in 1995. 54 Baltimore Gas and Electric Company and Subsidiaries Note 7. Termination Benefits - -------------------------------------------------------------------------------- Termination Benefits Offered in 1992 We offered a Voluntary Special Early Retirement Program to eligible employees who retired from February 1, 1992 through April 1, 1992. The termination benefits of this program cost $6.6 million and consisted mostly of an enhanced pension benefit. We are amortizing the cost of these benefits over a five-year period in accordance with the Maryland PSC's April 1993 order. Termination Benefits Offered in 1993 We offered a second Voluntary Special Early Retirement Program to eligible employees who retired as of February 1, 1994. The termination benefits of this program consisted mostly of enhanced pension and postretirement benefits. As part of this program, we accomplished further employee reductions by eliminating positions, and offering additional benefits to employees affected by the eliminations. We deferred $88.3 million of the costs of this program that were attributable to regulated activities. We are amortizing these costs over a five-year period, consistent with the Maryland PSC's previous orders. Note 8. Short-Term Borrowings - -------------------------------------------------------------------------------- SUMMARY OF SHORT-TERM BORROWINGS Our short-term borrowings include bank loans, commercial paper notes, and bank lines of credit. Short-term borrowings mature within one year from the date of the financial statements. We pay commitment fees to banks for providing us lines of credit. When we borrow under the lines of credit, we pay market interest rates. We summarize our short-term borrowings in the following table. AT DECEMBER 31, 1997 1996 - --------------------------------------------------------------- (IN MILLIONS) BGE's bank loans $ -- $ 8.8 BGE's commercial paper notes 316.1 324.4 ---------------------- Total short-term borrowings $316.1 $333.2 - ------------------------------------------===================== We had unused bank lines of credit supporting our commercial paper notes of $231 million at December 31, 1997 and $203 million at December 31, 1996. These amounts do not include unused revolving credit agreements of $100 million at December 31, 1997 and $150 million at December 31, 1996 that are discussed in Note 9. Weighted-Average Interest Rates Our weighted average effective interest rates for short-term borrowings were as follows: YEAR ENDED DECEMBER 31, 1997 1996 - ------------------------------------------------------------------ Bank loans 5.00% 4.93% Commercial Paper Notes 5.66 5.53 Note 9. Long-Term Debt - -------------------------------------------------------------------------------- Long-term debt matures more than one year from the date of the financial statements. We summarize our long-term debt in the Consolidated Statements of Capitalization on page 43. As you read this section, it may be helpful to refer to those statements. We discuss BGE's, the Constellation Holdings Companies', and other diversified businesses' long-term debt separately below. BGE's Long-Term Debt BGE's First Refunding Mortgage Bonds BGE's first refunding mortgage bonds are secured by a mortgage lien on nearly all of our assets, including all utility properties and franchises and our subsidiary capital stock. Our subsidiary capital stock pledged under the mortgage includes that of: o Constellation Holdings, Inc., o Constellation Energy Solutions, Inc., o BGE Home Products & Services, Inc., and o Safe Harbor Water Power Corporation. BGE is required to make an annual sinking fund payment each August 1 to the mortgage trustee. The amount of the payment is equal to 1% of the highest principal amount of bonds outstanding during the preceding 12 months. The trustee uses these funds to retire bonds from any series through repurchases or calls for early redemption. However, the trustee cannot call the following bonds for early redemption: o 5 1/2% Installment Series, due 2002 o 6 1/2% Series, due 2003 o 8.40% Series, due 1999 o 6 1/8% Series, due 2003 o 5 1/2% Series, due 2000 o 5 1/2% Series, due 2004 o 8 3/8% Series, due 2001 o 7 1/2% Series, due 2007 o 7 1/4% Series, due 2002 o 6 5/8% Series, due 2008 We must pay principal on the 5 1/2% Installment Series as follows: YEAR - --------------------------------------------------------------- (IN MILLIONS) 1998 and 1999 $ 0.7 2000 and 2001 0.9 2002 6.7 Holders of the Remarketed Floating Rate Series Due September 1, 2006 have the option to require BGE to repurchase their bonds at face value on September 1 of each year. BGE is required to repurchase and retire at par any bonds that are not remarketed or purchased by the remarketing agent. BGE also has the option to redeem all or some of these bonds at face value each September 1. BGE's Other Long-Term Debt BGE has $100 million of revolving credit agreements with several banks that are available through 2000. At December 31, 1997, BGE had no outstanding borrowings under these agreements. These banks charge us commitment fees based on the daily average of the unborrowed amount, and we pay market interest rates on any borrowings. These agreements also serve as back-up credit support for BGE's commercial paper notes, as described in Note 8. Baltimore Gas and Electric Company and Subsidiaries 55 We show the weighted-average interest rates and maturity dates for BGE's fixed-rate medium-term notes outstanding at December 31, 1997 in the following table. Weighted-Average Series Interest Rate Maturity Dates - --------------------------------------------------------------- B 8.43% 1998-2006 C 7.15% 1998-2003 D 6.36% 1998-2006 E 6.70% 2006-2012 Some of the medium-term notes include a "put option." These put options allow the holders to sell their notes back to BGE on the put option dates at a price equal to 100% of the principal amount. The following is a summary of medium-term notes with put options. Series E Notes Principal Put Option Dates - -------------------------------------------------------------- (IN MILLIONS) 6.75%, due 2012 $60.0 June 2002 and 2007 6.75%, due 2012 $25.0 June 2004 and 2007 6.73%, due 2012 $25.0 June 2004 and 2007 Constellation Holdings Companies' Long-Term Debt Revolving Credit Agreement The Constellation Holdings Companies have a $75 million unsecured revolving credit agreement that matures December 9, 1999, which they use to provide liquidity for general corporate purposes. The Constellation Holdings Companies pay a commitment fee based on the daily average of the unborrowed portion of the commitment. At December 31, 1997, the Constellation Holdings Companies had no outstanding borrowings under this agreement. Mortgage and Construction Loans The Constellation Holdings Companies' mortgage and construction loans and other collateralized notes have varying terms. The following mortgage notes require monthly principal and interest payments: o 7.90%, due in 2000 o 7.357%, due in 2009 o 8.00%, due in 2001 o 9.65%, due in 2028 o 7.50%, due in 2005 The 8.00% mortgage note due in 2003 requires interest payments until maturity. The variable rate mortgage notes require periodic payment of principal and interest. The 8.00% mortgage note due in 2033, requires interest payments initially then monthly principal and interest payments. Unsecured Notes The unsecured notes mature on the following schedule: Amount - --------------------------------------------------------------- (IN MILLIONS) 7.05%, due April 22, 1998 $ 25.0 7.06%, due September 9, 1998 20.0 8.48%, due October 15, 1998 75.0 7.30%, due April 22, 1999 90.0 8.73%, due October 15, 1999 15.0 7.125%, due March 13, 2000 15.0 7.55%, due April 22, 2000 35.0 7.50%, due May 5, 2000 139.0 7.43%, due September 9, 2000 30.0 7.66%, due May 5, 2001 135.0 8.00%, due December 31, 2000 0.1 ------- Total unsecured notes at December 31, 1997 $579.1 - ---------------------------------------------------------====== Other Diversified Businesses' Long-Term Debt ComfortLink, a general partnership in which BGE is a partner, has a $50 million unsecured revolving credit agreement that matures September 26, 2001. Under the terms of the agreement, ComfortLink has the option to obtain loans at various rates for terms up to nine months. ComfortLink pays a facility fee on the total amount of the commitment. At December 31, 1997, ComfortLink had $22 million outstanding under this agreement. Constellation Energy Source has a $10 million revolving credit agreement that matures February 1, 2000. At December 31, 1997, Constellation Energy Source had no outstanding borrowings under this agreement. Maturities of Long-Term Debt All of our long-term borrowings mature on the following schedule (includes sinking fund requirements): Diversified YEAR BGE Businesses - ------------------------------------------------------- (IN MILLIONS) 1998 $ 93.6 $155.3 1999 334.5 131.9 2000 253.8 244.5 2001 198.6 185.0 2002 156.2 2.8 Thereafter 1,455.4 39.9 ------------------------------- Total long-term debt at December 31, 1997 $2,492.1 $759.4 - ------------------------=============================== At December 31, 1997, BGE had long-term loans totaling $255 million that mature after 2002 that lenders could potentially require us to repay early. Of this amount, $145 million could potentially be repaid in 1998, $60 million could be repaid in 2002, and $50 million could be repaid thereafter. We have the ability and intent to refinance such debt by issuing medium-term notes or by borrowing under our revolving credit agreements, if necessary. Weighted Average Interest Rates for Variable Rate Debt Our weighted average interest rates for variable rate debt were: YEAR ENDED DECEMBER 31, 1997 1996 - ----------------------------------------------------------------- BGE Floating rate series mortgage bonds 6.11% 5.87% Remarketed floating rate series mortgage bonds 5.75 5.63 Medium-term notes, series D 5.78 -- Pollution control loan 3.63 3.49 Port facilities loan 3.71 3.59 Adjustable rate pollution control loan 3.90 3.90 Economic development loan 3.69 3.57 Variable rate pollution control loan 3.73 -- CONSTELLATION HOLDINGS COMPANIES Loans under credit agreement 5.99 6.08 Mortgage and construction loans and other collateralized notes 8.10 8.33 OTHER DIVERSIFIED BUSINESSES Loans under credit agreement 6.04 6.13 56 Baltimore Gas and Electric Company and Subsidiaries Note 10. Redeemable Preference Stock - -------------------------------------------------------------------------------- PRIORITY For the payment of dividends and in the event of liquidation of BGE, we rank preference stock prior to common stock. We rank all preference stock equally. Sinking Fund Redemptions Required Sinking Fund Redemptions Some of our preference stock issues have annual sinking fund requirements. Under those requirements, we must redeem some of our preference stock at $100 per share annually. We summarize the redemptions required in the following table. Beginning Series Shares Year - -------------------------------------------------------------- 7.50%, 1986 Series 15,000 1992 6.75%, 1987 Series 15,000 1993 8.625%, 1990 Series 130,000 1996 7.85%, 1991 Series 70,000 1997 The following table summarizes the annual required redemptions of all redeemable preference stock. YEAR - -------------------------------------- (IN MILLIONS) 1998 $ 23.0 1999 10.0 2000 10.0 2001 3.0 2002 3.0 Thereafter 64.0 ------ Total required redemptions $113.0 - --------------------------------====== Optional Sinking Fund Redemptions For each series, we have the option to redeem shares in addition to the annual sinking fund requirements. Each year, we may redeem an amount up to the required annual number of sinking fund shares at $100 per share. Other Redemptions We also have the option to fully redeem the 7.50%, 1986 Series, and the 6.75%, 1987 Series, at the prices shown in the Consolidated Statements of Capitalization on page 44. Note 11. Leases - -------------------------------------------------------------------------------- There are two types of leases--operating and capital. Capital leases qualify as sales or purchases of property and are reported in the Consolidated Balance Sheets. All other leases are operating leases and are reported in the Consolidated Statements of Income. We present information about our operating leases below. Outgoing Lease Payments We, as lessee, lease some facilities and equipment used in our business. The lease agreements expire on various dates and have various renewal options. We expense all lease payments associated with our regulated utility operations. Lease expense was: o $9.5 million in 1997, o $11.6 million in 1996, and o $12.2 million in 1995. At December 31, 1997, we owed future minimum payments for long-term noncancelable operating leases as follows: YEAR - -------------------------------------------------- (IN MILLIONS) 1998 $ 5.9 1999 3.6 2000 3.3 2001 2.8 2002 2.3 Thereafter 5.6 ----- Total future minimum lease payments $23.5 - ---------------------------------------------===== Incoming Lease Rentals Some Constellation Holdings Companies, as landlords, lease office and retail space to others. These operating leases expire over periods ranging from one to 20 years, and have options to renew. At December 31, 1997, the Constellation Holdings Companies had property under operating leases with a net book value of $184.9 million. At December 31, 1997, tenants owed the Constellation Holdings Companies future minimum rentals under operating leases as follows: YEAR - --------------------------------------------------- (IN MILLIONS) 1998 $ 17.9 1999 18.1 2000 17.7 2001 16.2 2002 14.6 Thereafter 63.1 ------ Total future minimum lease rentals $147.6 - ---------------------------------------------====== Baltimore Gas and Electric Company and Subsidiaries 57 Note 12. Commitments, Guarantees, and Contingencies - -------------------------------------------------------------------------------- Commitments We have made substantial commitments in connection with our utility construction program for future years. In addition, we have entered into three long-term contracts for the purchase of electric generating capacity and energy. The contracts expire in 2001, 2013, and 2023. We made payments under these contracts of: o $65.6 million in 1997, o $64.1 million in 1996, and o $68.4 million in 1995. At December 31, 1997, we estimate our future payments for capacity and energy that we are obligated to buy under these contracts to be: YEAR - --------------------------------------------------------------- (IN MILLIONS) 1998 $ 81.4 1999 92.2 2000 92.8 2001 63.2 2002 42.1 Thereafter 765.3 -------- Total estimated future payments for capacity and energy under long-term contracts $1,137.0 - -------------------------------------------------------======== Some Constellation Holdings Companies have committed to contribute additional capital and to make additional loans to some affiliates, joint ventures, and partnerships in which they have an interest. At December 31, 1997, the total amount of investment requirements committed to by the Constellation Holdings Companies was $35 million. In December, 1994, BGE and BGE Home Products & Services entered into agreements with a financial institution to sell on an ongoing basis an undivided interest in a designated pool of customer receivables. Under the agreements, BGE can sell up to a total of $40 million, and BGE Home Products & Services can sell up to a total of $50 million. Under the terms of the agreements, the buyer of the receivables has limited recourse against BGE and has no recourse against BGE Home Products & Services. BGE and BGE Home Products & Services have recorded a reserve for credit losses. At December 31, 1997, BGE had sold $35 million and BGE Home Products & Services had sold $47 million of receivables under these agreements. Guarantees BGE guarantees two-thirds of certain debt of Safe Harbor Water Power Corporation. The maximum amount of our guarantee is $23 million. At December 31, 1997, Safe Harbor Water Power Corporation had outstanding debt of $30 million, of which $20 million is guaranteed by BGE. BGE also issued an $11 million guaranty for debt under the revolving credit agreement of Constellation Energy Source. At December 31, 1997, Constellation Energy Source had no outstanding borrowings under this agreement. At December 31, 1997, the Constellation Holdings Companies had guaranteed outstanding loans and letters of credit of certain power generation and real estate projects totaling $46 million. Also, the Constellation Holdings Companies guarantee certain other borrowings of various power generation and real estate projects. We assess the risk of material loss from these guarantees to be minimal. Termination of Proposed Merger With Potomac Electric Power Company As previously disclosed, in September 1995 we signed an agreement with Potomac Electric Power Company to merge together into a new company, Constellation Energy Corporation, after all necessary regulatory approvals were received. In December 1997, both companies mutually terminated the merger agreement. Accordingly, in 1997, we wrote off $57.9 million of costs related to the merger. We have reported the write-off as "write-off of merger costs" in our Consolidated Statements of Income. This write-off reduced after-tax earnings by $37.5 million. Environmental Matters Clean Air The Clean Air Act of 1990 contains two titles designed to reduce emissions of sulfur dioxide and nitrogen oxide (NOx) from electric generating stations - Title IV and Title I. Title IV addresses emissions of sulfur dioxide. Compliance is required in two phases: o Phase I became effective January 1, 1995. We met the requirements of this phase by installing flue gas desulfurization systems (scrubbers), switching fuels, and retiring some units. o Phase II must be implemented by 2000. We are currently examining what actions we should take to comply with this phase. We expect to meet the compliance requirements through some combination of installing flue gas desulfurization systems (scrubbers), switching fuels, retiring some units, or allowance trading. Title I addresses emissions of NOx, but the regulations of this title have not been finalized by the government. As a result, our plans for complying with this title are less certain. By 1999 the regulations require more NOx controls for ozone attainment at our generating plants. The additional controls will result in more expenditures, but it is difficult to estimate the level of those expenditures since the regulations have not been finalized. However, based on existing and proposed regulations, we currently estimate that the additional controls at our generating plants will cost approximately $90 million. In July 1997, the government published new National Ambient Air Quality Standards for very fine particulates and revised standards for ozone attainment. These standards may require increased controls at our fossil generating plants in the future. We cannot estimate the cost of these increased controls at this time because the states, including Maryland, still need to determine what reductions in pollutants will be necessary to meet the federal standards. Waste Disposal The Environmental Protection Agency and several state agencies have notified us that we are considered a potentially responsible party with respect to the cleanup of certain environmentally contaminated sites owned and operated by others. We cannot estimate the cleanup costs for all of these sites. We can, however, estimate that our 15.79% share of the possible cleanup costs at one of these sites, Metal Bank of America (a metal reclaimer in Philadelphia) could be approximately $7 million higher than amounts we have recorded. This estimate is based on the highest estimate of costs in the range of reasonably possible alternatives. The cleanup costs for some of the remaining sites 58 Baltimore Gas and Electric Company and Subsidiaries could be significant, but we do not expect them to have a material effect on our financial position or results of operations. Also, we are investigating several sites where gas was manufactured in the past. The investigation of these sites includes reviewing possible actions to remove coal tar. In late December 1996, we signed a consent order with the Maryland Department of the Environment that requires us to implement remedial action plans for contamination at and around the Spring Gardens site. We have submitted the required remedial action plans and the Maryland Department of the Environment is in the process of reviewing them. Based on several remedial action options for all sites, the costs we consider to be probable to remedy the contamination are estimated to total $50 million in nominal dollars (including inflation). We have recorded these costs as a liability on our Consolidated Balance Sheets and have deferred these costs, net of accumulated amortization and amounts we recovered from insurance companies, as a regulatory asset. We discuss this further in Note 5. We are also required by accounting rules to disclose additional costs we consider to be less likely than probable costs, but still "reasonably possible" of being incurred at these sites. Because of the results of studies at these sites, it is reasonably possible that these additional costs could exceed the amount we recognized by approximately $48 million in nominal dollars ($11 million in current dollars, plus the impact of inflation at 3.1% over a period of up to 60 years). Nuclear Insurance If there were an accident or an extended outage at either unit of Calvert Cliffs, it could have a substantial adverse financial effect on BGE. The primary contingencies that would result from an incident at Calvert Cliffs could include: o the physical damage to the plant, o the recoverability of replacement power costs, and o our liability to third parties for property damage and bodily injury. We have insurance policies that cover these contingencies, but the policies have certain exclusions. Furthermore, the costs that could result from a covered major accident or a covered extended outage at either of the Calvert Cliffs units could exceed our insurance coverage limits. For physical damage to Calvert Cliffs, we have $2.75 billion of property insurance from an industry mutual insurance company. If an outage at either of the two units at Calvert Cliffs is caused by an insured physical damage loss and lasts more than 17 weeks, we have insurance coverage for replacement power costs up to $487.2 million per unit, provided by an industry mutual insurance company. This amount can be reduced by up to $94.6 million per unit if an outage to both units at the plant is caused by a single insured physical damage loss. If accidents at any insured plants cause a shortfall of funds at the industry mutual, all policyholders could be assessed with our share being up to $31 million. In addition we, as well as others, could be charged for a portion of any third party claims associated with a nuclear incident at any commercial nuclear power plant in the country. Under the provisions of the Price Anderson Act, the limit for third party claims from a nuclear incident is $8.92 billion. If third party claims exceed $200 million (the amount of primary insurance), our share of the total liability for third party claims could be up to $159 million per incident. That amount would be payable at a rate of $20 million per year. As an operator of a commercial nuclear power plant in the United States, we are required to purchase insurance to cover radiation injury claims of certain nuclear workers. On January 1, 1998, a new insurance policy became effective for all operators requiring coverage for current operations. Waiving the right to make additional claims under the old policy was a condition for acceptance under the new policy. We describe both the old and new policies below. o BGE nuclear worker claims reported on or after January 1, 1998 are covered by a new insurance policy with an annual industry aggregate limit of $200 million for radiation injury claims against all operators insured by this policy. o All nuclear worker claims reported prior to January 1, 1998 are still covered by the old insurance policies. Insureds under the old policies, with no current operations, are not required to purchase the new policy described above, and may still make claims against the old policies for the next 10 years. If radiation injury claims under these old policies exceed the policy reserves, all policyholders could be assessed, with our share being up to $6.3 million. If claims under these polices exceed the coverage limits, the provisions of the Price Anderson Act (discussed above) would apply. Recoverability of Electric Fuel Costs By law, we are allowed to recover our cost of electric fuel as long as the Maryland PSC finds that, among other things, we have kept the productive capacity of our generating plants at a reasonable level. To do this, the Maryland PSC will perform an evaluation of each outage (other than regular maintenance outages) at our generating plants. The evaluation will determine if we used all reasonable and cost-effective maintenance and operating control procedures to try to prevent the outage. Effective January 1, 1987, the Maryland PSC established a Generating Unit Performance Program to measure, annually, whether we, and other utilities, have maintained the productive capacity of our generating plants at reasonable levels. To do this, the program uses a system-wide generating performance target and an individual performance target for each base load generating unit. In fuel rate hearings, actual generating performance adjusted for planned outages will be compared first to the system-wide target. If that target is met, it should mean that the requirements of Maryland law have been met. If the system-wide target is not met, each unit's adjusted actual generating performance will be compared to its individual performance target to determine if the requirements of Maryland law have been met and, if not, to determine the basis for possibly imposing a penalty on BGE. Even if we meet these targets, other parties to fuel rate hearings may still question whether we used all reasonable and cost-effective procedures to try to prevent an outage. If the Maryland PSC decides that we were deficient in some way, the Maryland PSC may not allow us to recover the cost of replacement energy. The two units at Calvert Cliffs use the cheapest fuel. As a result, the costs of replacement energy associated with outages at these units can be significant. We cannot estimate the amount of replacement energy costs that could be challenged or disallowed in future fuel rate proceedings, but such amounts could be material. Baltimore Gas and Electric Company and Subsidiaries 59 During 1989 through 1991 we had extended outages at Calvert Cliffs. These outages drove up fuel costs, and resulted in fuel rate proceedings before the Maryland PSC for several years. In these proceedings, the Maryland PSC considered whether any portion of the extra fuel costs should be charged to BGE instead of passed on to customers. In December 1996, we settled the proceedings by agreeing not to bill our customers for $118 million of electric replacement energy costs associated with these outages. All costs associated with the outages in excess of $118 million have already been collected from customers through the fuel rate. In 1990, we wrote off $35 million of these costs. In 1996, we wrote off the remaining $83 million plus $5.6 million of related financing charges. The 1996 write-offs, together, reduced after-tax earnings by $57.6 million. Also in 1996, we wrote off $6.8 million of fuel costs related to earlier outages that were disallowed by the Maryland PSC. This write-off reduced 1996 after-tax earnings by $4.5 million. We have reported all of the 1996 write-offs as "disallowed replacement energy costs" in our Consolidated Statements of Income. California Power Purchase Agreements The Constellation Holdings Companies have $261 million invested in 16 projects that sell electricity in California under power purchase agreements called "Interim Standard Offer No. 4" agreements. Earnings from these projects were $37.3 million, or $.25 per share, in 1997. Under these agreements, the projects supply electricity to utility companies at: o a fixed rate for capacity and energy for the first 10 years of the agreements, and o a fixed rate for capacity plus a variable rate for energy based on the utilities' avoided cost for the remaining term of the agreements. Generally, a "capacity rate" is paid to a power plant for its availability to supply electricity, and an "energy rate" is paid for the electricity actually generated. "Avoided cost" generally is the cost of a utility's cheapest next-available source of generation to service the demands on its system. We use the term transition period to describe the timeframe when the 10-year periods for fixed energy rates expire for these 16 power generation projects and they begin supplying electricity at variable rates. The transition period for some of the projects began in 1996 and will continue for the remaining projects through 2000. At the date of this report, six projects had already transitioned to variable rates and three other projects will transition in 1998. The remaining seven projects will transition in 1999 or 2000. The projects that have already transitioned to variable rates have had lower revenues under variable rates than they did under fixed rates. However, we have not yet experienced total lower earnings from the California projects because the combined revenues from the remaining projects, which continued to supply electricity at fixed rates, were high enough to offset the lower revenues from the variable-rate projects. When the remaining projects transition to variable rates, we expect the revenues from those projects to also be lower than they are under fixed rates. It is difficult to estimate how much lower the revenues may be, but the Constellation Holdings Companies' earnings could be affected significantly. However, the California projects that make the highest revenues will transition to variable rates in 1999 and 2000. As a result, we do not expect the Constellation Holdings Companies to have significantly lower earnings due to the transition to variable rates before 2000. The Constellation Holdings Companies are pursuing alternatives for some of these power generation projects including: o repowering the projects to reduce operating costs, o changing fuels to reduce operating costs, o renegotiating the power purchase agreements to improve the terms, o restructuring financings to improve the financing terms, and o selling its ownership interests in the projects. We cannot predict the financial effects of the switch from fixed to variable rates on the Constellation Holdings Companies or on BGE, but the effects could be material. Constellation Real Estate Most of the Constellation Holdings Companies' real estate projects are in the Baltimore-Washington corridor. The area has had a surplus of available land and office space in recent years, during a time of low economic growth and corporate downsizings. The projects have been economically hurt by these conditions. The Constellation Holdings Companies' real estate portfolio has continued to incur carrying costs and depreciation over the years. Additionally, the Constellation Holdings Companies have been charging interest payments to expense rather than capitalizing them for some undeveloped land where development activities have stopped. These carrying costs, depreciation, and interest expenses have decreased earnings and are expected to continue to do so. Cash flow from real estate operations has not been enough to make the monthly loan payments on some of these projects. Cash shortfalls have been covered by cash from Constellation Holdings. Constellation Holdings obtained those funds from the cash flow from other Constellation Holdings Companies and through additional borrowing. We consider market demand, interest rates, the availability of financing, and the strength of the economy in general when making decisions about our real estate investments. If we were to sell our real estate projects in the current market, we would have losses, although the amount of the losses is hard to predict. Management's current real estate strategy is to hold each real estate project until we can realize a reasonable value for it. Management evaluates strategies for all its businesses, including real estate, on an ongoing basis. We anticipate that competing demands for our financial resources and changes in the utility industry will cause us to evaluate thoroughly all diversified business strategies on a regular basis so we use capital and other resources in a manner that is most beneficial. Depending on market conditions in the future, we could also have losses on any future sales. 60 Baltimore Gas and Electric Company and Subsidiaries It may be helpful for you to understand when we are required, by accounting rules, to write down the value of a real estate investment to market value. A write-down is required in either of two cases. The first is if we change our intent about a project from an intent to hold to an intent to sell and the market value of that project is below book value. The second is if the expected cash flow from the project is less than the investment in the project. In 1997, the Constellation Holdings Companies recorded the following write-downs of their investments in two projects: o a $14.1 million after-tax write-down of the investment in Church Street Station--an entertainment, dining, and retail complex in Orlando, Florida--which occurred because the Constellation Holdings Companies have now decided to sell rather than keep the project, and o a $31.9 million after-tax write-down of the investment in Piney Orchard--a mixed-use, planned-unit development--which occurred because the expected cash flow from the project was less than the Constellation Holdings Companies' investment in the project. Note 13. Fair Value of Financial Instruments - -------------------------------------------------------------------------------- We show the carrying amounts and fair values of financial instruments included in our Consolidated Balance Sheets in the following table, and we describe some of the items separately below. AT DECEMBER 31, 1997 1996 - ---------------------------------------------------------------- Carrying Fair Carrying Fair Amount Value Amount Value - ---------------------------------------------------------------- (IN MILLIONS) Cash and cash equivalents $162.6 $162.6 $66.7 $66.7 Net accounts receivable 419.8 419.8 419.5 419.5 Other current assets 128.8 128.8 75.0 75.0 Investments and other assets for which it is: Practicable to estimate fair value 197.4 198.8 184.5 185.7 Not practicable to estimate fair value 57.5 -- 62.2 -- Short-term borrowings 316.1 316.1 333.2 333.2 Current portions of long-term debt and preference stock 271.9 271.9 280.8 280.8 Accounts payable 203.0 203.0 172.9 172.9 Other current liabilities 204.4 204.4 194.1 194.1 Deferred credits and other liabilities 9.6 9.6 -- -- Long-term debt 2,988.9 3,069.8 2,758.8 2,767.7 Redeemable preference stock 90.0 93.5 134.5 141.6 Other Current Assets and Other Current Liabilities The financial instruments included in other current assets are trading securities and miscellaneous loans receivable of the Constellation Holdings Companies. The financial instruments included in other current liabilities are the total current liabilities from our Consolidated Balance Sheets excluding short-term borrowings, current portions of long-term debt and preference stock, accounts payable, and accrued vacation costs. The carrying amounts of current assets and current liabilities are the same as their fair values because these instruments have short maturities. Investments and Other Assets Practicable to Estimate Fair Value Investments and other assets include investments in common and preferred securities, which are classified as financial investments in our Consolidated Balance Sheets, and the nuclear decommissioning trust fund. We base the fair value of investments and other assets on quoted market prices where available. Not Practicable to Estimate Fair Value It was not practicable to estimate the fair value of the Constellation Holdings Companies' investments in: o several financial partnerships that invest in nonpublic debt and equity securities, o several partnerships that own solar powered energy production facilities, and o a company involved in developing international power projects. This is because the timing and amount of cash flows from these investments are difficult to predict. We report these investments at their original cost in our Consolidated Balance Sheets. The investments in financial partnerships totaled $43.6 million at December 31, 1997 and $48.1 million at December 31, 1996, representing ownership interests up to 10%. The total assets of all of these partnerships totaled $6 billion at December 31, 1996 (which is the latest information available). The investments in solar powered energy production facility partnerships totaled $10.9 million at December 31, 1997 and $11.0 million December 31, 1996, representing ownership interests up to 12%. The total assets of all of these partnerships totaled $39.8 million at December 31, 1996 (which is the latest information available). Long-Term Debt and Preference Stock We estimate the fair value of fixed-rate long-term debt and redeemable preference stock using quoted market prices where available or by discounting remaining cash flows at current market rates. The carrying amount of variable-rate long-term debt approximates fair value. Guarantees It was not practicable to determine the fair value of certain loan guarantees of BGE and the Constellation Holdings Companies. BGE guaranteed outstanding debt of $20 million at December 31, 1997 and $21 million at December 31, 1996. The Constellation Holdings Companies guaranteed outstanding debt totaling $43 million at December 31, 1997 and $47 million at December 31, 1996. We do not anticipate that we will need to fund these guarantees. Baltimore Gas and Electric Company and Subsidiaries 61 Note 14. Quarterly Financial Data (Unaudited) - -------------------------------------------------------------------------------- Our quarterly financial information has not been audited but, in management's opinion, includes all adjustments necessary for a fair presentation. Our 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 represent overall trends and changes in operations. 1997 Quarterly Data Earnings Earnings Income Applicable Per Share From Net to Common of Common Revenues Operations Income Stock Stock - ------------------------------------------------------------------------------- (IN MILLIONS, EXCEPT PER-SHARE AMOUNTS) Quarter Ended: March 31 $ 887.7 $163.9 $ 72.1 $ 64.2 $0.43 June 30 746.4 78.8 15.0 7.1 0.05 September 30 860.8 321.0 171.4 164.4 1.11 December 31 812.7 159.9 24.3 18.4 0.12 ------------------------------------------------------------ Year Ended: December 31 $3,307.6 $723.6 $282.8 $254.1 $1.72 - -------------------============================================================ Our first quarter results include a $12.0 million after-tax write-down, by the Constellation Holdings Companies, of an investment in a real estate project (see Note 12). Our second quarter results include a $31.9 million after-tax write-down, by the Constellation Holdings Companies, of an investment in a real estate project (see Note 12). Our fourth quarter results include a: o $37.5 million after-tax write-off of merger costs (see Note 12). o $2.1 million after-tax write-down, by the Constellation Holdings Companies, of an investment in a real estate project (see Note 12). 1996 Quarterly Data Earnings Earnings Income Applicable Per Share From Net to Common of Common Revenues Operations Income Stock Stock - ------------------------------------------------------------------------------ (IN MILLIONS, EXCEPT PER-SHARE AMOUNTS) Quarter Ended: March 31 $ 861.3 $201.3 $100.8 $ 91.1 $0.62 June 30 731.7 148.6 64.5 52.4 0.36 September 30 826.0 275.7 146.5 137.9 0.93 December 31 734.2 43.9 (1.0) (9.1) (0.06) ----------------------------------------------------------- Year Ended: December 31 $3,153.2 $669.5 $310.8 $272.3 $1.85 - -------------------=========================================================== Our second quarter results include a: o $4.5 million after-tax write-off of disallowed replacement energy costs (see Note 12). o $14.6 million after-tax gain on the sale by a Constellation partnership of a power purchase agreement (see Note 3). o $7.0 million after-tax write-off of the Constellation Holdings Companies' investment in two geothermal wholesale power generating projects (see Note 3). o $3.0 million after-tax write-off, by the Constellation Holdings Companies, of development costs for a coal-fired power project (see Note 3). Our third quarter results include a $6.2 million after-tax write-off by the Constellation Holdings Companies of a portion of a solar power project investment (see Note 3). Our fourth quarter results include a $57.6 million after-tax write-off of disallowed replacement energy costs (see Note 12). The sum of the quarterly earnings per share amounts may not equal the total for the year due to the effects of rounding. 62 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 5 through 9 under "Board of 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," except that information with regard to a late filing of a Section 16(a) report by an executive officer is set forth on page 9 under "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is set forth on page 8 under "Board of Directors," on pages 11 through 16 under "Executive Compensation," and on pages 17 through 19 under "Report of Committee on Management on Executive Compensation" 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 10 under "Security Ownership" 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 9 under "Board of Directors -- Certain Relationships and Transactions" in the Proxy Statement and is incorporated herein by reference. 63 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: Report of Independent Accountants dated January 21, 1998 of Coopers & Lybrand L.L.P. Consolidated Statements of Income for three years ended December 31, 1997 Consolidated Balance Sheets at December 31, 1997 and December 31, 1996 Consolidated Statements of Cash Flows for three years ended December 31, 1997 Consolidated Statements of Common Shareholders' Equity for three years ended December 31, 1997 Consolidated Statements of Capitalization at December 31, 1997 and December 31, 1996 Consolidated Statements of Income Taxes for three years ended December 31, 1997 Notes to Consolidated Financial Statements 2. Financial Statement Schedules: Schedule II -- Valuation and Qualifying Accounts Schedules other than Schedule II are omitted as not applicable or not required. 3. Exhibits Required by Item 601 of Regulation S-K. 64
EXHIBIT NUMBER - ------- *3(a) -- Charter of BGE, restated as of August 16, 1996. (Designated as Exhibit No. 3 in Form 10-Q dated November 14, 1996, File No. 1-1910.) 3(b) -- By-Laws of BGE, as amended to January 23, 1998. *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 -------------------- --------- ------------ *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) *June 15, 1996 1-1910 (Form 10-Q dated August 13, 1996) 4
*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(a) in Form 10-Q dated November 14, 1996, 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.) *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 Nonqualified Deferred Compensation Plan, as amended and restated. (Designated as Exhibit No. 10(d) to the Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-1910.) *10(e) -- Amended and Restated Baltimore and Gas and Electric Company 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 in Form 10-Q dated November 13, 1997, 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.) (Terminated effective August 1, 1997.) *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) -- 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.)
65 *10(j) -- Summary of 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(k) -- Severance Agreements between BGE and six key employees. 10(l) -- Constellation Holdings, Inc. Deferred Compensation Plan for Non-Employee Directors. *10(m) -- Severance Agreements between BGE and 15 key employees. (Designated as Exhibit No. 10(o) to the Annual Report on Form 10-K for the year ended December 31, 1995, File No. 1-1910.) *10(n) -- Grantor Trust Agreement dated as of June 1, 1996 between Baltimore Gas and Electric Company and T. Rowe Price Trust Company. (Designated as Exhibit No. 10(b) in Form 10-Q dated August 13, 1996, File No. 1-1910.) 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: DATE FILED ITEM REPORTED ---------- ------------- October 30, 1997 Item 5. Other Events Item 7. Financial Statements and Exhibits December 23, 1997 Item 5. Other Events Item 7. Financial Statements and Exhibits 66 BALTIMORE GAS AND ELECTRIC COMPANY AND SUBSIDIARIES SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - ---------------------------------------------- -------- --------------------------- ------------------ -------- ADDITIONS --------------------------- BALANCE CHARGED AT TO BALANCE BEGINNING COSTS CHARGED TO OTHER AT END OF AND ACCOUNTS -- (DEDUCTIONS) -- OF DESCRIPTION PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD - ---------------------------------------------- -------- ------- ---------------- ------------------ -------- (IN MILLIONS) Reserves deducted in the Balance Sheet from the assets to which they apply: Accumulated Provision for Uncollectibles 1997..................................... $ 18.0 $ 34.4 $ -- $(28.3)(A) $ 24.1 1996..................................... 16.4 24.9 -- (23.3)(A) 18.0 1995..................................... 14.9 19.2 -- (17.7)(A) 16.4 Valuation Allowance -- Net unrealized (gain) loss on available for sale securities 1997..................................... (8.8) -- 1.2(B) -- (7.6) 1996..................................... (6.2) -- (2.6)(B) -- (8.8) 1995..................................... 3.8 -- (10.0)(B) -- (6.2) Valuation Allowance -- Net unrealized (gain) loss on nuclear decommissioning trust fund 1997..................................... (3.7) -- (6.3)(C) -- (10.0) 1996..................................... (2.2) -- (1.5)(C) -- (3.7) 1995..................................... 1.8 -- (4.0)(C) -- (2.2) Provision for possible disallowance of replacement energy costs 1997..................................... 118.0 -- -- (118.0)(D) -- 1996..................................... 35.0 83.0 -- -- 118.0 1995..................................... 35.0 -- -- -- 35.0 Energy projects under development reserves 1997..................................... 5.2 0.3 -- (5.5)(E) -- 1996..................................... .3 5.2 -- (.3)(E) 5.2 1995..................................... 1.8 -- -- (1.5)(E) .3
- --------------- (A) Represents principally net amounts charged off as uncollectible. (B) Represents net unrealized (gains)/losses (credited)/charged to common shareholders' equity. (C) Represents net unrealized (gains)/losses (credited)/charged to accumulated depreciation. (D) Represents removal of a reserve based on actual disallowance of replacement energy costs. (E) Represents removal of a reserve associated with an energy project of a subsidiary which was abandoned. Certain prior-year amounts have been reclassified to conform with the current year's presentation. 67 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) Date: March 27, 1998 By /s/ C. H. POINDEXTER ___________________________________ 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 March 27, 1998 ______________________________________________ Director C. H. POINDEXTER Principal financial and accounting officer: By /s/ D. A. BRUNE Vice President and Secretary March 27, 1998 ______________________________________________ D. A. BRUNE Directors: /s/ H. F. BALDWIN Director March 27, 1998 _________________________________________________ H. F. BALDWIN /s/ B. B. BYRON Director March 27, 1998 _________________________________________________ B. B. BYRON /s/ J. O. COLE Director March 27, 1998 _________________________________________________ J. O. COLE /s/ D. A. COLUSSY Director March 27, 1998 _________________________________________________ D. A. COLUSSY /s/ E. A. CROOKE Director March 27, 1998 _________________________________________________ E. A. CROOKE /s/ J. R. CURTISS Director March 27, 1998 _________________________________________________ J. R. CURTISS /s/ J. W. GECKLE Director March 27, 1998 _________________________________________________ J. W. GECKLE /s/ F. A. HRABOWSKI III Director March 27, 1998 _________________________________________________ F. A. HRABOWSKI III /s/ N. LAMPTON Director March 27, 1998 _________________________________________________ N. LAMPTON /s/ G. V. MCGOWAN Director March 27, 1998 _________________________________________________ G. V. MCGOWAN /s/ G. L. RUSSELL, JR. Director March 27, 1998 _________________________________________________ G. L. RUSSELL, JR. /s/ M. D. SULLIVAN Director March 27, 1998 _________________________________________________ M. D. SULLIVAN
68 EXHIBIT INDEX
EXHIBIT NUMBER - ------- *3(a) -- Charter of BGE, restated as of August 16, 1996. (Designated as Exhibit No. 3 in Form 10-Q dated November 14, 1996, File No. 1-1910.) 3(b) -- By-Laws of BGE, as amended to January 23, 1998. *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 -------------------- --------- ------------ *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) *June 15, 1996 1-1910 (Form 10-Q dated August 13, 1996) 4
*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(a) in Form 10-Q dated November 14, 1996, 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.) *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 Nonqualified Deferred Compensation Plan, as amended and restated. (Designated as Exhibit No. 10(d) to the Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-1910.) *10(e) -- Amended and Restated Baltimore and Gas and Electric Company 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 in Form 10-Q dated November 13, 1997, 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.) (Terminated effective August 1, 1997.) *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.)
69 *10(i) -- 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(j) -- Summary of 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(k) -- Severance Agreements between BGE and six key employees. 10(l) -- Constellation Holdings, Inc. Deferred Compensation Plan for Non-Employee Directors. *10(m) -- Severance Agreements between BGE and 15 key employees. (Designated as Exhibit No. 10(o) to the Annual Report on Form 10-K for the year ended December 31, 1995, File No. 1-1910.) *10(n) -- Grantor Trust Agreement dated as of June 1, 1996 between Baltimore Gas and Electric Company and T. Rowe Price Trust Company. (Designated as Exhibit No. 10(b) in Form 10-Q dated August 13, 1996, File No. 1-1910.) 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. 70 EX-3 2 EXHIBIT 3(B) EXHIBIT 3(b) BY-LAWS OF BALTIMORE GAS AND ELECTRIC COMPANY Amended as of January 23, 1998 BY-LAWS OF BALTIMORE GAS AND ELECTRIC COMPANY ARTICLE I MEETINGS OF STOCKHOLDERS Section 1. - Annual Meeting. The annual meeting of the stockholders for the election of Directors and for the transaction of general business shall be held on any date during the period of April 14 through May 13, as determined year to year by the Board of Directors. The time and location of the meeting shall be determined by the Board of Directors. The Chief Executive Officer of the Company shall prepare, or cause to be prepared, an annual report containing a full and correct statement of the affairs of the Company, including a balance sheet and a financial statement of operations for the preceding fiscal year, which shall be submitted to the stockholders at the annual meeting. Section 2. - Special Meeting. Special meetings of the stockholders may be held in the City of Baltimore or in any county in which the Company provides service or owns property upon call by the Chairman of the Board, the President, or a majority of the Board of Directors whenever they deem expedient, or upon the written request of the holders of shares entitled to not less than twenty-five percent of all the votes entitled to be cast at such a meeting. Such request of the stockholders shall state the purpose or purposes of the meeting and the matters proposed to be acted on the threat and shall be delivered to the Secretary, who shall inform such stockholders of the reasonably estimated cost of preparing and mailing such notice of the meeting, and upon payment to the company of such costs the Secretary shall give notice stating the purpose or purposes of the meeting to all stockholders entitled to vote at such meeting. No special meeting need be called upon the request of the holders of the shares entitled to cast less than a majority of all votes entitled to be cast to such meeting, to consider any matter which is substantially the same as a matter voted upon at any special meeting of the stockholders held during the preceding twelve months. The business at all special meetings shall be confined to that specially named in the notice thereof. Section 3. - Notice of Meetings. Written or printed notice of every meeting of the stockholders, whether annual or special, stating the place, day, and hour of such meeting and (in case of special meetings) the business proposed to be transacted shall be given by the Secretary to each stockholder entitled to vote at such meeting not less than ten days but no more than ninety days before the date fixed for such meeting, by depositing such notice in the United States mail addressed to him at his post office address as it appears on the records of the Company, with postage thereon prepaid. Section 4. - Organization of Meeting. 1 All meetings of the stockholders shall be called to order by the Chairman of the Board, or in his absence by the President, or in his absence by a Vice President; or in the case of the absence of such officers, then by any stockholder, whereupon the meeting shall organize by electing a chairman. The Secretary of the Company, if present, shall act as Secretary of the meeting, unless some other person shall be elected by the meeting to act. An accurate record of the meeting shall be kept by the secretary thereof, and placed in the record books of the Company. Section 5. - Quorum. At any meeting of the stockholders the presence in person or by proxy of stockholders entitled to cast a majority of the votes thereat shall constitute a quorum for the transaction of business. If a quorum be not present at any meeting, holders of a majority of the shares of stock so present or represented may adjourn the meeting either sine die or to a date certain. Section 6. - Voting. At all meetings of the stockholders each stockholder shall be entitled to one vote for each share of common stock standing in his name and, when the preferred or preference stock is entitled to vote, such number of votes as shall be provided in the Charter of the Company for each share of preferred and preference stock standing in his name, and the votes shall be cast by stockholders in person or by lawful proxy. Section 7. - Judge of Election and Tellers. The Directors shall, at a regular or special meeting, appoint a Judge of Election and two Tellers to serve at each meeting of stockholders. If the Directors fail to make such appointments, or if the Judge of Election and/or Tellers, or any of them, fail to appear at the meeting, the Chairman of the meeting shall appoint a Judge of Election and/or a Teller or Tellers to serve at that meeting. It shall be the duty of the Tellers to receive the ballots of all the holders of stock entitled to vote and present at a meeting either in person or by proxy, and to count and tally said ballots by the official record of stockholders of the Company, or by a summary prepared therefrom and certified by the Stock Transfer Agent or the Secretary of the Company showing the number of shares of common and, if entitled to vote, preferred and preference stock owned of record by each stockholder, who may be designated therein by name, code number, or otherwise, and certify them to the Judge of Election, and the said Judge shall communicate in writing the result of the balloting so certified by the Tellers to the Chairman who shall at once announce the same to the meeting. This certificate, signed by the Tellers and countersigned by the Judge, shall be duly recorded as part of the minutes of the meeting and filed among the records of the Company. Section 8. - Record Date for Stockholders and Closing of Transfer Books. The Board of Directors may fix, in advance, a date as the record for the determination of the stockholders entitled to notice of, or to vote at, any meeting of stockholders, or entitled to receive payment of any dividend, or entitled to the allotment of any rights, or for any other proper purpose. Such date in any case shall not be more than ninety days (and in the case of a meeting of 2 stockholders not less than ten days) prior to the date on which the particular action requiring such determination of stockholders is to be taken. Only stockholders of record on such date shall be entitled to notice of or to vote at such meeting or to receive such dividends or rights, as the case may be. In lieu of fixing a record date the Board of Directors may close the stock transfer books of the Company for a period not exceeding twenty nor less than ten days preceding the date of any meeting of stockholders or not exceeding twenty days preceding any other of the above mentioned events. ARTICLE II BOARD OF DIRECTORS AND COMMITTEES Section 1. - Powers of Directors The business and affairs of the Company shall be managed by a Board of Directors which shall have and may exercise all the powers of the Company, except such as are expressly conferred upon or reserved by the stockholders by law, by Charter, or by these by-laws. Except as otherwise provided herein, the Board of Directors shall appoint the officers for the conduct of the business of the Company, determine their duties and responsibilities and fix their compensation. The Board of Directors may remove any officer. Section 2. - Number and Election of Directors. The number of Directors shall be thirteen (13), all of whom shall own at least 300 shares of the Company's common stock. The Directors shall be elected at each Annual Meeting of the Stockholders except as otherwise provided in these by-laws. They shall hold their offices for one year and until their successors are elected and qualified. Section 3. - Removals and Vacancies. The stockholders, at any meeting duly called and at which a quorum is present, may remove any Director or Directors from Office by the affirmative vote of the holders of a majority of the outstanding shares entitled to the vote thereon, and may elect a successor or successors to fill any resulting vacancies for the unexpired terms of the removed Directors. Any vacancy occurring in the Board of Directors from any cause other than by reason of a removal or an increase in the number of Directors, may be filled by a majority of the remaining Directors although such majority is less than a quorum. Any vacancy occurring by reason of an increase in the number of Directors may be filled by action of a majority of Directors. A Director elected to fill a vacancy shall hold office until the next annual meeting of stockholders or until his successor is elected and qualified. Section 4. - Meetings of the Board. A regular meeting of the Board of Directors shall be held immediately after the annual meeting of stockholders or any special meeting of the stockholders at which the Board of Directors is elected, and thereafter regular meetings of the Board of Directors shall be held on such dates during the year as may be designated from time to time by the Board. All meetings of the Board of 3 Directors shall be held at the general offices of the Company in the City of Baltimore or elsewhere, as ordered by the Board. Of all such meetings (except the regular meeting held immediately after the election of Directors) the Secretary shall give notice to each Director personally or by telephone, by telegram directed to, or by written notice deposited in the mails addressed to, his residence or business address at lease 48 hours before such meeting. Special meetings may be held at any time or place upon the call of the Chairman of the Board, or, the Chief Executive Officer, or in their absence, on order of the Executive Committee by notices as above, unless the meetings be called during the months of July and August, in which case five days' notice shall be given. In the event three-fourths of the Directors in office waive notice of any meeting in writing at or before the meeting, the meeting may be held without the aforesaid advance notices. The Chairman shall preside at all meetings of the Board, or, in his absence, the President, or one of the Vice Presidents (if a member of the Board) shall preside. If at any meeting none of the foregoing persons is present, the Directors present shall designate one of their number to preside at such meeting. Section 5. - Quorum. A majority of the Directors in office, but in no event less than five, shall constitute a quorum of the Board for the transaction of business. If a quorum be not present at any meeting, a majority of the Directors present may adjourn to any time and place they may see fit. Section 6. - Executive Committee. The Directors shall annually, at their first meeting succeeding the stockholders' meeting at which they are elected, elect from among their number an Executive Committee of five or more (but no more than nine), as the Board may determine. The Executive Committee may exercise, in the intervals between meetings of the Board of Directors, all of the powers of the Board of Directors in the management of the business and affairs of the Company, except the power to declare dividends, to issue stock other than as hereinafter stated, to recommend to stockholders any action requiring stockholder approval, amend the by-laws, or approve any merger or share exchange which does not require stockholder approval. If the Board of Directors has given general authorization for the issuance of stock, the Executive Committee, in accordance with a general formula or method specified by the Board by resolution or by adoption of a stock option or other plan, may fix the terms of stock subject to classification or reclassification and the terms on which any stock may be issued, including all terms and conditions required or permitted to be established or authorized by the Board of Directors. The members of the Executive Committee shall hold their offices as such for one year or until their successors are elected and qualified; all vacancies in said Committee shall be filled by the Board of Directors, but in the absence of a member or members of the Executive Committee, the members thereof present at any meeting (whether or not they constitute a quorum) may appoint a member of the Board of Directors to act in the place of such absent member. They shall designate one of their number as Chairman of the Committee, and shall keep a separate book of minutes of their proceedings and actions. They shall elect a Secretary to the Committee who shall give notice personally or by mail, telephone, or telegraph to each member of 4 the Committee of all meetings, not later than 12 noon of the day before the meeting, unless a majority of the members of the Executive Committee in office waive notice thereof in writing at or before the meeting in which case the meeting may be held without the aforesaid advance notice. Meetings may be called by the Chairman of the Committee or by the Chief Executive Officer, or, in the event of their death, absence, or disability, by one of the other officers among the Chairman of the Board, the President, or the Vice Presidents. A majority of the members of the Executive Committee in office, but in no event less than three, shall constitute a quorum for the transaction of business. Section 7. - Audit Committee. The Directors shall annually, at their first meeting succeeding the stockholders' meeting at which they are elected, elect from among their number an Audit Committee which shall consist of at least three Directors who shall be independent of Management and free from any relationship that, in the opinion of the Board, would interfere with the exercise of independent judgment as a Committee member, and provided further that no Director who was formerly an Officer of the Company shall be a member of the said Audit Committee. One such member of the Committee shall be designated by the Board of Directors to be Chairman of the Audit Committee. The tenure of the office of the members of the Audit Committee shall; be one year or until their successors shall have been duly appointed or elected. Any vacancy shall be filled by the Board of Directors. Two members of the Audit Committee shall constitute a quorum. In order to provide for direct communication between representatives of the Board and the Independent Auditors for this corporation, the Audit Committee, in furtherance of this charge, shall have the following duties and responsibilities: (1) To recommend to the Board of Directors the public accounting firm to be engaged to conduct the annual financial audit of the corporation. (2) To discuss with such Auditors the scope of their examination which shall be in accordance with generally accepted auditing standards with appropriate reports thereon to be submitted to the Board of Directors. (3) To review with the Auditors and appropriate financial Officers and Management of the corporation the annual financial statements and the Auditors' report thereon. (4) To invite comments and recommendations from the Auditors regarding the need for and/or results of the reviews of those financial statements and other documents and data reviewed or certified by the public accounting firm thus engaged. (5) To invite comments and recommendations from the Auditors regarding the system of internal controls, accounting policies and practices, and any other related matters employed by the corporation. (6) To meet with the corporation's Internal Auditor in order to ensure, as a part of the system of internal controls, that an adequate program of internal auditing is being continuously carried out, to determine that the corporation's Internal Audit Staff is adequate and to review the findings of such Staff's investigations. 5 (7) To report periodically regarding its activities to the Board of Directors of the corporation and to make such recommendations and findings concerning any audit or audit-related matter as the Audit Committee deems appropriate. Section 8. - Committee on Management. The Directors shall annually, at their first meeting succeeding the stockholders' meeting at which they are elected, elect from among their number a Committee on Management consisting of four members. One such member shall be designated by the Board of Directors to be the Chairman of the Committee on Management. The tenure of office of the members of the Committee on Management shall be one year or until their successors shall have been duly appointed or elected. Any vacancy shall be filled by the Board of Directors. Two members shall constitute a quorum. The Committee on Management shall recommend to the Board of Directors nominees for election as Directors and shall consider the performance of incumbent Directors in determining whether to nominate them to stand for reelection; the Committee shall, among other things, consider any major changes in the organization of the corporation; it shall recommend to the Board of Directors the remuneration arrangements for Officers and Directors of the corporation. The Committee shall recommend to the full Board of Directors nominees for Officers of the corporation. The Committee on Management shall have such additional powers to perform such duties as shall be prescribed by resolution of the Board of Directors. Section 9. - Other Committees. The Board of Directors is authorized to appoint from among its members such other committees as it may, from time to time, deem advisable and to delegate to such committee or committees any of the powers of the Board of Directors which it may lawfully delegate. Each such committee shall consist of at least two Directors. Section 10. - Fees and Expenses. Each member of the Board of Directors, other than salaried Officers and employees, shall be paid an annual retainer fee, payable in quarterly installments, in such amount as shall be specified from time to time by the Board. Each member of the Board of Directors, other than salaried Officers and employees, shall be paid such fee as shall be specified from time to time by the Board for attending each regular or special meeting of the Board and for attending, as a committee member, each meeting of the Executive Committee, Audit Committee, Committee on Management and any other committee appointed by the Board. Each member shall be paid reasonable traveling expenses incident to attendance at meetings. 6 ARTICLE III OFFICERS Section 1. - Officers. The Company shall have a Chairman of the Board, a President, one or more Vice Presidents, a Treasurer, and a Secretary who shall be elected by, and hold office at the will of, the Board of Directors. The Chairman of the Board and the President shall be chosen from among the Directors, and the Board of Directors shall designate either the Chairman of the Board or the President to be the Chief Executive Officer of the Company. The Board of Directors shall also elect such other officers as they may deem necessary for the conduct of the business and affairs of the Company. Any two offices, except those of President and Vice President, may be held by the same person, but no person shall sign checks, drafts and promissory notes, or execute, acknowledge or verify any other instrument in more than one capacity, if such instrument is required by law, the charter, these by-laws, a resolution of the Board of Directors or order of the Chief Executive Officer to be signed, executed, acknowledged or verified by two or more officers. The Chairman of the Board, President and Vice Presidents shall receive such compensation as shall be fixed by the Board of Directors. Compensation for officers other than the Chairman of the Board, President and Vice Presidents shall be fixed by the Chief Executive Officer. The Board of Directors shall require a fidelity bond to be given by each officer, or, in its discretion, the Board may substitute a general blanket fidelity bond or insurance contract to cover all officers and employees. Section 2. - Duties of the Officers. (a) Chairman of the Board The Chairman of the Board shall preside at all meetings of the Board of Directors and of stockholders. He shall also have such other powers and duties as from time to time may be assigned to him by the Board of Directors. (b) President The President shall have general executive powers, as well as specific powers conferred by these by-laws. He, any Vice President, or such other persons as may be designated by the Board of Directors, shall sign all special contracts of the Company, countersign checks, drafts and promissory notes, and such other papers as may be directed by the Board of Directors. He, or any Vice President, together with the Treasurer or an Assistant Treasurer, shall have authority to sell, assign or transfer and deliver any bonds, stocks or other securities owned by the Company. He shall also have such other powers and duties as from time to time may be assigned to him by the Board of Directors. In the absence of the Chairman of the Board, the President shall perform all the duties of the Chairman of the Board. (c) Vice Presidents Each Vice President shall have such powers and duties as may be assigned to him by the Board of Directors, or the Chief Executive Officer, as well as the 7 specific powers assigned by these by-laws. A Vice President may be designated by the Board of Directors or the Chief Executive Officer to perform, in the absence of the President, all the duties of the President. (d) Treasurer The Treasurer shall have the care and the custody of the funds and valuable papers of the Company, and shall receive and disburse all moneys in such a manner as may be prescribed by the Board of Directors or the Chief Executive Officer. He shall have such other powers and duties as may be assigned to him by the Board of Directors, or the Chief Executive Officer, as well as specific powers assigned by these by-laws. (e) Secretary The Secretary shall attend all meetings of the stockholders and Directors and shall notify the stockholders and Directors of such meetings in the manner provided in these by-laws. He shall record the proceedings of all such meetings in books kept for that purpose. He shall have such other powers and duties as may be assigned to him by the Board of Directors or the Chief Executive Officer, as well as the specific powers assigned by these by-laws. Section 3. - Removals and Vacancies. Any officer may be removed by the Board of Directors whenever, in its judgment, the best interest of the Company will be served thereby. In case of removal, the salary of such officer shall cease. Removal shall be without prejudice to the contractual rights, if any, of the person so removed, but election of an officer shall not of itself create contractual rights. Any vacancy occurring in any office of the Company shall be filled by the Board of Directors and the officer so elected shall hold office for the unexpired term in respect of which the vacancy occurred or until its successor shall be duly elected and qualified. In any event of absence or temporary disability of any officer of the Company, the Board of Directors may authorize some other person to perform the duties of that office. ARTICLE IV INDEMNIFICATION OF DIRECTORS AND OFFICERS Each person made or threatened to be made party to an action, suit or proceeding, whether, civil, criminal, administrative or investigative, by reason of the fact that such person is or was a director or officer of the Company, or, at its request, is or was a director or officer of another corporation, shall be indemnified by the Company (to the extent indemnification is not otherwise provided by insurance) against the liabilities, costs and expenses of every kind actually and reasonable incurred by him as a result of such action, suit or proceeding, or any threat thereof or any appeal thereon, but in each case only if and to the extent permissible under applicable common or statutory law, state or federal. The foregoing indemnity shall not be inclusive of other rights to which such person may be entitled. 8 ARTICLE V CAPITAL STOCK Section 1. - Evidence of Stock Ownership. Evidence of ownership of stock in the Company may be either pursuant to a certificate(s) or a statement in compliance with Maryland law, each of which shall represent the number of shares of stock owned by a stockholder in the Company. Stockholders may request that their stock ownership be represented by a certificate(s). Each certificate shall be signed on behalf of the Company by the President or a Vice President and countersigned by the Secretary, and shall be sealed with the corporate seal. The signatures may be either manual or facsimile. In case any officer who signed any certificate, in facsimile or otherwise, ceases to be such officer of the Company before the certificate is issued, the certificate may nevertheless be issued by the Company with the same effect as if the officer had not ceased to be such officer as of the date of its issue. For stock ownership evidenced by a statement, such statement shall be in such form, and executed, as required from time to time by Maryland law. Section 2. - Transfer of Shares. Stock shall be transferable only on the books of the Company by assignment in writing by the registered holder thereof, his legally constituted attorney, or his legal representative, either upon surrender and cancellation of the certificate(s) therefor, if such stock is represented by a certificate, or upon receipt of such other documentation for stock not represented by a certificate as the Board of Directors and Maryland law may, from time to time, require. Section 3. - Lost, Stolen or Destroyed Certificates. No certificate for shares of stock of the Company shall be issued in place of any other certificate alleged to have been lost, stolen, or destroyed, except upon production of such evidence of the loss, theft or destruction and upon indemnification of the Company to such extent and in such manner as the Board of Directors may prescribe. Section 4. - Transfer Agents and Registrars. The Board of Directors shall appoint a person or persons, or any incorporated trust company or companies or both, as transfer agents and registrars and, if stock is represented by a certificate, may require that such certificate bear the signatures or the counter-signatures of such transfer agents and registrars, or either of them. Section 5. - Stock Ledger. The Company shall maintain at its principal office in Baltimore, Maryland, a stock record containing the names and addresses of all stockholders and the numbers of shares of each class held by each stockholder. 9 ARTICLE VI SEAL The Board of Directors shall provide, subject to change, a suitable corporate seal which may be used by causing it, or facsimile thereof, to be impressed or affixed or reproduced one the Company's stock certificates, bonds, or any other documents on which the seal may be appropriate. ARTICLE VII AMENDMENTS These by-laws, or any of them, may be amended or repealed, and new by-laws may be made or adopted at any meeting of the Board of Directors, by vote of a majority of the Directors, or by the stockholders at any annual meeting, or at any special meeting called for that purpose. I HEREBY CERTIFY that the foregoing is a true copy of the by-laws of Baltimore Gas and Electric Company in effect at the date hereof. IN WITNESS WHEREOF I have hereunto set my hand as Secretary of said Company and affixed its corporate seal this 26th day of January, 1998. /s/ D. A. Brune ___________________________ Secretary 10 EX-10 3 EXHIBIT 10(K) Exhibit 10(k) SEVERANCE AGREEMENT This Agreement is made the 23rd day of December, 1997, by and between BALTIMORE GAS AND ELECTRIC COMPANY (the "Company") and Bruce M. Ambler (the "Executive"). WHEREAS, the Company wishes to encourage the orderly succession of management in the event of a Change in Control (as hereinafter defined); and WHEREAS, the Company desires to establish a severance benefit for the Executive covering the period from the date of a Change in Control (as hereinafter defined) until the end of the twenty-four month period following the date of a Change in Control, to avoid the loss or the serious distraction of the Executive to the detriment of the Company and its stockholders prior to and during such period 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 as a result of a Change in Control. NOW, THEREFORE, the parties agree as follows: 1. DEFINITIONS. 1.1 Board. The term "Board" means the Board of Directors of the Company. 1.2 Change in Control. The term "Change in Control" means: (i) the purchase or acquisition by any person, entity or group of persons (within the meaning of section 13(d) or 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act"), or any comparable successor provisions), of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20 percent or more of either the outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding shares of voting securities entitled to a vote generally, or (ii) the consummation of, following the approval by the Company's stockholders of, a reorganization, merger or consolidation of the Company, in each case, with respect to which persons who were stockholders of the Company immediately prior to such reorganization, merger or consolidation do not, immediately thereafter, own more than 50 percent of the combined voting power entitled to vote generally in the election of directors of the reorganized, merged or consolidated entity's then outstanding securities, or (iii) a liquidation or dissolution of the Company or the sale of substantially all of its assets, or (iv) a change of more than one-half of the members of the Board within a 90-day period for reasons other than the death, disability, or retirement of such members. 1.3 Qualifying Termination. (a) The occurrence of any one or more of the following events within twenty-four calendar months after the date of a Change in Control shall constitute a "Qualifying Termination": (i) The Company's termination of the Executive's employment without Cause (as defined in Section 1.7); or (ii) The Executive's resignation for Good Reason (as defined in Section 1.6). (b) 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 after the date of a Change in Control of any one or more of the following: 2 (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 immediately prior to the date of the Change in Control, or a material reduction or alteration in the nature or status of the Executive's authorities, duties, or responsibilities from those in effect immediately prior to the date of the Change in Control, unless such act is remedied by the Company within 10 business days after receipt of written notice thereof given by the Executive; or (b) A reduction by the Company of the Executive's base salary in effect immediately prior to the date of the Change in Control 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); or (c) The relocation of the Executive's office more than 50 miles from the Executive's office immediately prior to the date of the Change in Control; or (d) Failure of the Company to provide (i) the Executive the opportunity to participate in all applicable incentive, savings and retirement plans, practices, policies and programs of the Company to the same extent as other senior executives (or, where applicable, retired senior executives) of the Company, and (ii) the Executive and/or the Executive's family, as the case may be, the opportunity to participate in, and receive all benefits under, all applicable welfare benefit plans, practices, policies and programs provided by the Company, including, without limitation, medical, prescription, dental, disability, sick benefits, employee life insurance, accidental death and travel insurance plans and programs, to the same extent as other senior executives (or, where applicable, retired senior executives) of the Company; or (e) Failure of the Company to provide the Executive such perquisites as the Company may establish from time to time which are commensurate with the Executive's position and at least comparable to those received by other senior executives at the Company; or 3 (f) The failure by the Company to comply with paragraph (c) of Section 11 of this Agreement; or (g) Any other substantial breach of this Agreement by the Company that either is not taken in good faith or is not remedied by the Company promptly after receipt of notice thereof from the Executive. 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. A termination of the Executive's employment for Cause for purposes of this Agreement shall be effected in accordance with the following procedures. The Company shall give the Executive written notice ("Notice of Termination for Cause") of its intention to terminate the Executive's employment for Cause, setting forth in reasonable detail the specific conduct of the Executive that it considers to constitute Cause and the specific provision(s) of this Agreement on which it relies, and stating the date, time and place of the Board Meeting for Cause. The "Board Meeting for Cause" means a meeting of the Board at which the Executive's termination for Cause will be considered, that takes place not less than ten (10) and not more than twenty (20) business days after the Executive receives the Notice of Termination for Cause. The Executive shall be given an opportunity, together with counsel, to be heard at the Board Meeting for Cause. The Executive's termination for Cause shall 4 be effective when and if a resolution is duly adopted at the Board Meeting for Cause by a two-thirds vote of the entire membership of the Board, excluding employee directors, stating that in the good faith opinion of the Board, the Executive is guilty of the conduct described in the Notice of Termination for Cause, and that conduct constitutes Cause under this Agreement. 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 5 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 (l). (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. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company for which the Executive may qualify, nor shall anything in this Agreement limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company. Vested benefits and other amounts that the Executive is otherwise entitled to receive under any incentive compensation, deferred compensation and other benefit programs listed in Section 1.6(d), life insurance coverage, or any other plan, policy, practice or program of, or any contract or agreement with, the Company on or after the date of the Qualifying Termination shall be payable in accordance with the terms of each such plan, policy, practice, program, contract or agreement, as the case may be, except as explicitly modified by this Agreement. 5. FULL SETTLEMENT. The Company's obligation to make the payments provided for in, and otherwise to perform its obligations under, this Agreement shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action that the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions 6 of this Agreement and, such amounts shall not be reduced, regardless of whether the Executive obtains other employment. 6. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive (other than a payment or distribution made in respect of any program in which the Executive participated while employed by Baltimore Gas and Electric Company, regardless whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, and determined without regard to any additional payments required under this Section 6) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereon) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (b) Subject to the provisions of paragraph (c) of this Section 6, all determinations required to be made under this Section 6, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by one of the major internationally recognized certified public accounting firms (commonly referred to, as of the date hereof, as a Big Six firm) designated by the Executive and approved by the Company (which approval shall not be unreasonably withheld) (the "Accounting Firm"), which shall provide detailed supporting calculations both to the Company and the Executive within fifteen (15) business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group affecting the change of control, the Executive shall designate another Big Six accounting firm (subject to the approval of the Company, which approval shall not be unreasonably withheld) to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the 7 Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 6, shall be paid by the Company to the Executive within five (5) days of the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment") consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to paragraph (c) of this Section 6 and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten (10) business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the thirty (30) day period following the date on which he gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; PROVIDED, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and 8 penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this paragraph (c) of Section 6, the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; PROVIDED, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and PROVIDED, further, that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to paragraph (c) of this Section 6, the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall promptly take all necessary action to obtain such refund and (subject to the Company's complying with the requirements of paragraph (c) of this Section 6) upon receipt of such refund shall promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If after the receipt by the Executive of an amount advanced by the Company pursuant to paragraph (c) of this Section 6, a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of thirty (30) days after such determination, then such advance shall be forgiven and 9 shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 7. 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 date of a Change in Control. Further, upon the date of a Change in Control, 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 may be terminated by the Board at any time prior to the date of a Change in Control. 8. AMENDMENT OF AGREEMENT. This Agreement may be amended by the Board at any time prior to the date of a Change in Control. At and after the date of a Change in Control, this Agreement may not be amended in any respect without the written consent of the Executive. 9. 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. 10. GOVERNING LAW. This Agreement shall be governed by the laws of Maryland. 11. SUCCESSORS AND ASSIGNS. (a) This Agreement shall inure to the benefit of and be enforecable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would have been required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean both the Company as defined above and any such successor that assumes and agrees to perform this Agreement, by operation of law or otherwise. 10 12. 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. 13. 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. 14. SEVERABILITY. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. If any provision of this Agreement shall be held invalid or unenforceable in part, the remaining portion of such provision, together with all other provisions of this Agreement, shall remain valid and enforceable and continue in full force and effect to the fullest extent consistent with law. 15. WITHHOLDING. Notwithstanding any other provision of this Agreement, the Company may withhold from amounts payable under this Agreement all federal, state, local and foreign taxes that are required to be withheld by applicable laws or regulations. 16. ENTIRE AGREEMENT. Unless otherwise specifically provided in this Agreement, the Executive and the Company acknowledge that this Agreement supersedes any other agreement between them or between the Executive and Baltimore Gas and Electric Company, concerning the subject matter hereof. 17. ALIENABILITY. The rights and benefits of the Executive under this Agreement may not be anticipated, alienated or subject to attachment, garnishment, levy, execution or other legal or equitable process except as required by law. Any attempt by the Executive to anticipate, alienate, assign, sell, transfer, pledge, encumber or charge the same shall be void. Payments hereunder shall not be considered assets of the Executive in the event of insolvency or bankruptcy. 18. COUNTERPARTS. This Agreement may be executed in several counterparts, each of which shall be deemed an original, and said counterparts shall constitute but one and the same instrument. 11 IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization of the Board, the Company has caused this Agreement to be executed in its name on its behalf, all as of the day and year first above written. BALTIMORE GAS AND ELECTRIC COMPANY By: /s/ C. H. Poindexter ________________________ /s/ Bruce M. Ambler ________________________ Bruce M. Ambler 12 Exhibit 10(k) SEVERANCE AGREEMENT This Agreement is made the 24th day of December, 1997, by and between BALTIMORE GAS AND ELECTRIC COMPANY (the "Company") and David A. Brune (the "Executive"). WHEREAS, the Company wishes to encourage the orderly succession of management in the event of a Change in Control (as hereinafter defined); and WHEREAS, the Company desires to establish a severance benefit for the Executive covering the period from the date of a Change in Control (as hereinafter defined) until the end of the twenty-four month period following the date of a Change in Control, to avoid the loss or the serious distraction of the Executive to the detriment of the Company and its stockholders prior to and during such period 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 as a result of a Change in Control. NOW, THEREFORE, the parties agree as follows: 1. DEFINITIONS. 1.1 Board. The term "Board" means the Board of Directors of the Company. 1.2 Change in Control. The term "Change in Control" means: (i) the purchase or acquisition by any person, entity or group of persons (within the meaning of section 13(d) or 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act"), or any comparable successor provisions), of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20 percent or more of either the outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding shares of voting securities entitled to a vote generally, or (ii) the consummation of, following the approval by the Company's stockholders of, a reorganization, merger or consolidation of the Company, in each case, with respect to which persons who were stockholders of the Company immediately prior to such reorganization, merger or consolidation do not, immediately thereafter, own more than 50 percent of the combined voting power entitled to vote generally in the election of directors of the reorganized, merged or consolidated entity's then outstanding securities, or (iii) a liquidation or dissolution of the Company or the sale of substantially all of its assets, or (iv) a change of more than one-half of the members of the Board within a 90-day period for reasons other than the death, disability, or retirement of such members. 1.3 Qualifying Termination. (a) The occurrence of any one or more of the following events within twenty-four calendar months after the date of a Change in Control shall constitute a "Qualifying Termination": (i) The Company's termination of the Executive's employment without Cause (as defined in Section 1.7); or (ii) The Executive's resignation for Good Reason (as defined in Section 1.6). (b) 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 after the date of a Change in Control of any one or more of the following: 2 (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 immediately prior to the date of the Change in Control, or a material reduction or alteration in the nature or status of the Executive's authorities, duties, or responsibilities from those in effect immediately prior to the date of the Change in Control, unless such act is remedied by the Company within 10 business days after receipt of written notice thereof given by the Executive; or (b) A reduction by the Company of the Executive's base salary in effect immediately prior to the date of the Change in Control 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); or (c) The relocation of the Executive's office more than 50 miles from the Executive's office immediately prior to the date of the Change in Control; or (d) Failure of the Company to provide (i) the Executive the opportunity to participate in all applicable incentive, savings and retirement plans, practices, policies and programs of the Company to the same extent as other senior executives (or, where applicable, retired senior executives) of the Company, and (ii) the Executive and/or the Executive's family, as the case may be, the opportunity to participate in, and receive all benefits under, all applicable welfare benefit plans, practices, policies and programs provided by the Company, including, without limitation, medical, prescription, dental, disability, sick benefits, employee life insurance, accidental death and travel insurance plans and programs, to the same extent as other senior executives (or, where applicable, retired senior executives) of the Company; or (e) Failure of the Company to provide the Executive such perquisites as the Company may establish from time to time which are commensurate with the Executive's position and at least comparable to those received by other senior executives at the Company; or 3 (f) The failure by the Company to comply with paragraph (c) of Section 11 of this Agreement; or (g) Any other substantial breach of this Agreement by the Company that either is not taken in good faith or is not remedied by the Company promptly after receipt of notice thereof from the Executive. 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. A termination of the Executive's employment for Cause for purposes of this Agreement shall be effected in accordance with the following procedures. The Company shall give the Executive written notice ("Notice of Termination for Cause") of its intention to terminate the Executive's employment for Cause, setting forth in reasonable detail the specific conduct of the Executive that it considers to constitute Cause and the specific provision(s) of this Agreement on which it relies, and stating the date, time and place of the Board Meeting for Cause. The "Board Meeting for Cause" means a meeting of the Board at which the Executive's termination for Cause will be considered, that takes place not less than ten (10) and not more than twenty (20) business days after the Executive receives the Notice of Termination for Cause. The Executive shall be given an opportunity, together with counsel, to be heard at the Board Meeting for Cause. The Executive's termination for Cause shall 4 be effective when and if a resolution is duly adopted at the Board Meeting for Cause by a two-thirds vote of the entire membership of the Board, excluding employee directors, stating that in the good faith opinion of the Board, the Executive is guilty of the conduct described in the Notice of Termination for Cause, and that conduct constitutes Cause under this Agreement. 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 5 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 (l). (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. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company for which the Executive may qualify, nor shall anything in this Agreement limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company. Vested benefits and other amounts that the Executive is otherwise entitled to receive under any incentive compensation, deferred compensation and other benefit programs listed in Section 1.6(d), life insurance coverage, or any other plan, policy, practice or program of, or any contract or agreement with, the Company on or after the date of the Qualifying Termination shall be payable in accordance with the terms of each such plan, policy, practice, program, contract or agreement, as the case may be, except as explicitly modified by this Agreement. 5. FULL SETTLEMENT. The Company's obligation to make the payments provided for in, and otherwise to perform its obligations under, this Agreement shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action that the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions 6 of this Agreement and, such amounts shall not be reduced, regardless of whether the Executive obtains other employment. 6. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive (other than a payment or distribution made in respect of any program in which the Executive participated while employed by Baltimore Gas and Electric Company, regardless whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, and determined without regard to any additional payments required under this Section 6) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereon) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (b) Subject to the provisions of paragraph (c) of this Section 6, all determinations required to be made under this Section 6, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by one of the major internationally recognized certified public accounting firms (commonly referred to, as of the date hereof, as a Big Six firm) designated by the Executive and approved by the Company (which approval shall not be unreasonably withheld) (the "Accounting Firm"), which shall provide detailed supporting calculations both to the Company and the Executive within fifteen (15) business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group affecting the change of control, the Executive shall designate another Big Six accounting firm (subject to the approval of the Company, which approval shall not be unreasonably withheld) to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the 7 Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 6, shall be paid by the Company to the Executive within five (5) days of the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment") consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to paragraph (c) of this Section 6 and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten (10) business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the thirty (30) day period following the date on which he gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; PROVIDED, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and 8 penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this paragraph (c) of Section 6, the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; PROVIDED, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and PROVIDED, further, that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to paragraph (c) of this Section 6, the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall promptly take all necessary action to obtain such refund and (subject to the Company's complying with the requirements of paragraph (c) of this Section 6) upon receipt of such refund shall promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If after the receipt by the Executive of an amount advanced by the Company pursuant to paragraph (c) of this Section 6, a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of thirty (30) days after such determination, then such advance shall be forgiven and 9 shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 7. 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 date of a Change in Control. Further, upon the date of a Change in Control, 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 may be terminated by the Board at any time prior to the date of a Change in Control. 8. AMENDMENT OF AGREEMENT. This Agreement may be amended by the Board at any time prior to the date of a Change in Control. At and after the date of a Change in Control, this Agreement may not be amended in any respect without the written consent of the Executive. 9. 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. 10. GOVERNING LAW. This Agreement shall be governed by the laws of Maryland. 11. SUCCESSORS AND ASSIGNS. (a) This Agreement shall inure to the benefit of and be enforecable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would have been required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean both the Company as defined above and any such successor that assumes and agrees to perform this Agreement, by operation of law or otherwise. 10 12. 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. 13. 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. 14. SEVERABILITY. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. If any provision of this Agreement shall be held invalid or unenforceable in part, the remaining portion of such provision, together with all other provisions of this Agreement, shall remain valid and enforceable and continue in full force and effect to the fullest extent consistent with law. 15. WITHHOLDING. Notwithstanding any other provision of this Agreement, the Company may withhold from amounts payable under this Agreement all federal, state, local and foreign taxes that are required to be withheld by applicable laws or regulations. 16. ENTIRE AGREEMENT. Unless otherwise specifically provided in this Agreement, the Executive and the Company acknowledge that this Agreement supersedes any other agreement between them or between the Executive and Baltimore Gas and Electric Company, concerning the subject matter hereof. 17. ALIENABILITY. The rights and benefits of the Executive under this Agreement may not be anticipated, alienated or subject to attachment, garnishment, levy, execution or other legal or equitable process except as required by law. Any attempt by the Executive to anticipate, alienate, assign, sell, transfer, pledge, encumber or charge the same shall be void. Payments hereunder shall not be considered assets of the Executive in the event of insolvency or bankruptcy. 18. COUNTERPARTS. This Agreement may be executed in several counterparts, each of which shall be deemed an original, and said counterparts shall constitute but one and the same instrument. 11 IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization of the Board, the Company has caused this Agreement to be executed in its name on its behalf, all as of the day and year first above written. BALTIMORE GAS AND ELECTRIC COMPANY By: /s/ C. H. Poindexter ____________________________ /s/ David A. Brune ____________________________ David A. Brune 12 Exhibit 10(k) SEVERANCE AGREEMENT This Agreement is made the 24th day of December, 1997, by and between BALTIMORE GAS AND ELECTRIC COMPANY (the "Company") and Edward A. Crooke (the "Executive"). WHEREAS, the Company wishes to encourage the orderly succession of management in the event of a Change in Control (as hereinafter defined); and WHEREAS, the Company desires to establish a severance benefit for the Executive covering the period from the date of a Change in Control (as hereinafter defined) until the end of the twenty-four month period following the date of a Change in Control, to avoid the loss or the serious distraction of the Executive to the detriment of the Company and its stockholders prior to and during such period 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 as a result of a Change in Control. NOW, THEREFORE, the parties agree as follows: 1. DEFINITIONS. 1.1 Board. The term "Board" means the Board of Directors of the Company. 1.2 Change in Control. The term "Change in Control" means: (i) the purchase or acquisition by any person, entity or group of persons (within the meaning of section 13(d) or 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act"), or any comparable successor provisions), of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20 percent or more of either the outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding shares of voting securities entitled to a vote generally, or (ii) the consummation of, following the approval by the Company's stockholders of, a reorganization, merger or consolidation of the Company, in each case, with respect to which persons who were stockholders of the Company immediately prior to such reorganization, merger or consolidation do not, immediately thereafter, own more than 50 percent of the combined voting power entitled to vote generally in the election of directors of the reorganized, merged or consolidated entity's then outstanding securities, or (iii) a liquidation or dissolution of the Company or the sale of substantially all of its assets, or (iv) a change of more than one-half of the members of the Board within a 90-day period for reasons other than the death, disability, or retirement of such members. 1.3 Qualifying Termination. (a) The occurrence of any one or more of the following events within twenty-four calendar months after the date of a Change in Control shall constitute a "Qualifying Termination": (i) The Company's termination of the Executive's employment without Cause (as defined in Section 1.7); or (ii) The Executive's resignation for Good Reason (as defined in Section 1.6). (b) 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 after the date of a Change in Control 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 immediately prior to the date of the Change in Control, or a material reduction or alteration in the nature or status of the Executive's authorities, duties, or responsibilities from those in effect immediately prior to the date of the Change in Control, unless such act is remedied by the Company within 10 business days after receipt of written notice thereof given by the Executive; or (b) A reduction by the Company of the Executive's base salary in effect immediately prior to the date of the Change in Control 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); or (c) The relocation of the Executive's office more than 50 miles from the Executive's office immediately prior to the date of the Change in Control; or (d) Failure of the Company to provide (i) the Executive the opportunity to participate in all applicable incentive, savings and retirement plans, practices, policies and programs of the Company to the same extent as other senior executives (or, where applicable, retired senior executives) of the Company, and (ii) the Executive and/or the Executive's family, as the case may be, the opportunity to participate in, and receive all benefits under, all applicable welfare benefit plans, practices, policies and programs provided by the Company, including, without limitation, medical, prescription, dental, disability, sick benefits, employee life insurance, accidental death and travel insurance plans and programs, to the same extent as other senior executives (or, where applicable, retired senior executives) of the Company; or (e) Failure of the Company to provide the Executive such perquisites as the Company may establish from time to time which are commensurate with the Executive's position and at least comparable to those received by other senior executives at the Company; or (f) The failure by the Company to comply with paragraph (c) of Section 11 of this Agreement; or (g) Any other substantial breach of this Agreement by the Company that either is not taken in good faith or is not remedied by the Company promptly after receipt of notice thereof from the Executive. 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's willful and continued failure substantially to perform the Executive's duties (other than as a result of physical or mental illness or injury), after the Board delivers to the Executive a written demand for substantial performance that specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive's duties]; or (d) The Executive embezzles or knowingly, and with intent, misappropriates property of the Company, or unlawfully appropriates any corporate opportunity of the Company. No act or failure to act on the part of the Executive shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Company. Any act or failure to act that is based upon authority given pursuant to a resolution duly adopted by the Board, or the advice of counsel for the Company, shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. A termination of the Executive's employment for Cause for purposes of this Agreement shall be effected in accordance with the following procedures. The Company shall give the Executive written notice ("Notice of Termination for Cause") of its intention to terminate the Executive's employment for Cause, setting forth in reasonable detail the specific conduct of the Executive that it considers to constitute Cause and the specific provision(s) of this Agreement on which it relies, and stating the date, time and place of the Board Meeting for Cause. The "Board Meeting for Cause" means a meeting of the Board at which the Executive's termination for Cause will be considered, that takes place not less than ten (10) and not more than twenty (20) business days after the Executive receives the Notice of Termination for Cause. The Executive shall be given an opportunity, together with counsel, to be heard at the Board Meeting for Cause. The Executive's termination for Cause shall be effective when and if a resolution is duly adopted at the Board Meeting for Cause by a two-thirds vote of the entire membership of the Board, excluding employee directors, stating that in the good faith opinion of the Board, the Executive is guilty of the conduct described in the Notice of Termination for Cause, and that conduct constitutes Cause under this Agreement. 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 (l). (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. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company for which the Executive may qualify, nor shall anything in this Agreement limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company. Vested benefits and other amounts that the Executive is otherwise entitled to receive under any incentive compensation, deferred compensation and other benefit programs listed in Section 1.6(d), life insurance coverage, or any other plan, policy, practice or program of, or any contract or agreement with, the Company on or after the date of the Qualifying Termination shall be payable in accordance with the terms of each such plan, policy, practice, program, contract or agreement, as the case may be, except as explicitly modified by this Agreement. 5. FULL SETTLEMENT. The Company's obligation to make the payments provided for in, and otherwise to perform its obligations under, this Agreement shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action that the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and, such amounts shall not be reduced, regardless of whether the Executive obtains other employment. 6. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive (other than a payment or distribution made in respect of any program in which the Executive participated while employed by Baltimore Gas and Electric Company, regardless whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, and determined without regard to any additional payments required under this Section 6) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereon) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (b) Subject to the provisions of paragraph (c) of this Section 6, all determinations required to be made under this Section 6, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by one of the major internationally recognized certified public accounting firms (commonly referred to, as of the date hereof, as a Big Six firm) designated by the Executive and approved by the Company (which approval shall not be unreasonably withheld) (the "Accounting Firm"), which shall provide detailed supporting calculations both to the Company and the Executive within fifteen (15) business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group affecting the change of control, the Executive shall designate another Big Six accounting firm (subject to the approval of the Company, which approval shall not be unreasonably withheld) to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 6, shall be paid by the Company to the Executive within five (5) days of the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment") consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to paragraph (c) of this Section 6 and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten (10) business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the thirty (30) day period following the date on which he gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; PROVIDED, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this paragraph (c) of Section 6, the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; PROVIDED, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and PROVIDED, further, that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to paragraph (c) of this Section 6, the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall promptly take all necessary action to obtain such refund and (subject to the Company's complying with the requirements of paragraph (c) of this Section 6) upon receipt of such refund shall promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If after the receipt by the Executive of an amount advanced by the Company pursuant to paragraph (c) of this Section 6, a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of thirty (30) days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 7. 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 date of a Change in Control. Further, upon the date of a Change in Control, 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 may be terminated by the Board at any time prior to the date of a Change in Control. 8. AMENDMENT OF AGREEMENT. This Agreement may be amended by the Board at any time prior to the date of a Change in Control. At and after the date of a Change in Control, this Agreement may not be amended in any respect without the written consent of the Executive. 9. 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. 10. GOVERNING LAW. This Agreement shall be governed by the laws of Maryland. 11. SUCCESSORS AND ASSIGNS. (a) This Agreement shall inure to the benefit of and be enforecable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would have been required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean both the Company as defined above and any such successor that assumes and agrees to perform this Agreement, by operation of law or otherwise. 12. 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. 13. 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. 14. SEVERABILITY. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. If any provision of this Agreement shall be held invalid or unenforceable in part, the remaining portion of such provision, together with all other provisions of this Agreement, shall remain valid and enforceable and continue in full force and effect to the fullest extent consistent with law. 15. WITHHOLDING. Notwithstanding any other provision of this Agreement, the Company may withhold from amounts payable under this Agreement all federal, state, local and foreign taxes that are required to be withheld by applicable laws or regulations. 16. ENTIRE AGREEMENT. Unless otherwise specifically provided in this Agreement, the Executive and the Company acknowledge that this Agreement supersedes any other agreement between them or between the Executive and Baltimore Gas and Electric Company, concerning the subject matter hereof. 17. ALIENABILITY. The rights and benefits of the Executive under this Agreement may not be anticipated, alienated or subject to attachment, garnishment, levy, execution or other legal or equitable process except as required by law. Any attempt by the Executive to anticipate, alienate, assign, sell, transfer, pledge, encumber or charge the same shall be void. Payments hereunder shall not be considered assets of the Executive in the event of insolvency or bankruptcy. 18. COUNTERPARTS. This Agreement may be executed in several counterparts, each of which shall be deemed an original, and said counterparts shall constitute but one and the same instrument. IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization of the Board, the Company has caused this Agreement to be executed in its name on its behalf, all as of the day and year first above written. BALTIMORE GAS AND ELECTRIC COMPANY By: /s/ C. H. Poindexter _________________________ /s/ Edward A. Crooke _________________________ Edward A. Crooke Exhibit 10(k) SEVERANCE AGREEMENT This Agreement is made the 23rd day of December, 1997, by and between BALTIMORE GAS AND ELECTRIC COMPANY (the "Company") and Robert E. Denton (the "Executive"). WHEREAS, the Company wishes to encourage the orderly succession of management in the event of a Change in Control (as hereinafter defined); and WHEREAS, the Company desires to establish a severance benefit for the Executive covering the period from the date of a Change in Control (as hereinafter defined) until the end of the twenty-four month period following the date of a Change in Control, to avoid the loss or the serious distraction of the Executive to the detriment of the Company and its stockholders prior to and during such period 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 as a result of a Change in Control. NOW, THEREFORE, the parties agree as follows: 1. DEFINITIONS. 1.1 Board. The term "Board" means the Board of Directors of the Company. 1.2 Change in Control. The term "Change in Control" means: (i) the purchase or acquisition by any person, entity or group of persons (within the meaning of section 13(d) or 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act"), or any comparable successor provisions), of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20 percent or more of either the outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding shares of voting securities entitled to a vote generally, or (ii) the consummation of, following the approval by the Company's stockholders of, a reorganization, merger or consolidation of the Company, in each case, with respect to which persons who were stockholders of the Company immediately prior to such reorganization, merger or consolidation do not, immediately thereafter, own more than 50 percent of the combined voting power entitled to vote generally in the election of directors of the reorganized, merged or consolidated entity's then outstanding securities, or (iii) a liquidation or dissolution of the Company or the sale of substantially all of its assets, or (iv) a change of more than one-half of the members of the Board within a 90-day period for reasons other than the death, disability, or retirement of such members. 1.3 Qualifying Termination. (a) The occurrence of any one or more of the following events within twenty-four calendar months after the date of a Change in Control shall constitute a "Qualifying Termination": (i) The Company's termination of the Executive's employment without Cause (as defined in Section 1.7); or (ii) The Executive's resignation for Good Reason (as defined in Section 1.6). (b) 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 after the date of a Change in Control 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 immediately prior to the date of the Change in Control, or a material reduction or alteration in the nature or status of the Executive's authorities, duties, or responsibilities from those in effect immediately prior to the date of the Change in Control, unless such act is remedied by the Company within 10 business days after receipt of written notice thereof given by the Executive; or (b) A reduction by the Company of the Executive's base salary in effect immediately prior to the date of the Change in Control 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); or (c) The relocation of the Executive's office more than 50 miles from the Executive's office immediately prior to the date of the Change in Control; or (d) Failure of the Company to provide (i) the Executive the opportunity to participate in all applicable incentive, savings and retirement plans, practices, policies and programs of the Company to the same extent as other senior executives (or, where applicable, retired senior executives) of the Company, and (ii) the Executive and/or the Executive's family, as the case may be, the opportunity to participate in, and receive all benefits under, all applicable welfare benefit plans, practices, policies and programs provided by the Company, including, without limitation, medical, prescription, dental, disability, sick benefits, employee life insurance, accidental death and travel insurance plans and programs, to the same extent as other senior executives (or, where applicable, retired senior executives) of the Company; or (e) Failure of the Company to provide the Executive such perquisites as the Company may establish from time to time which are commensurate with the Executive's position and at least comparable to those received by other senior executives at the Company; or (f) The failure by the Company to comply with paragraph (c) of Section 11 of this Agreement; or (g) Any other substantial breach of this Agreement by the Company that either is not taken in good faith or is not remedied by the Company promptly after receipt of notice thereof from the Executive. 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. A termination of the Executive's employment for Cause for purposes of this Agreement shall be effected in accordance with the following procedures. The Company shall give the Executive written notice ("Notice of Termination for Cause") of its intention to terminate the Executive's employment for Cause, setting forth in reasonable detail the specific conduct of the Executive that it considers to constitute Cause and the specific provision(s) of this Agreement on which it relies, and stating the date, time and place of the Board Meeting for Cause. The "Board Meeting for Cause" means a meeting of the Board at which the Executive's termination for Cause will be considered, that takes place not less than ten (10) and not more than twenty (20) business days after the Executive receives the Notice of Termination for Cause. The Executive shall be given an opportunity, together with counsel, to be heard at the Board Meeting for Cause. The Executive's termination for Cause shall be effective when and if a resolution is duly adopted at the Board Meeting for Cause by a two-thirds vote of the entire membership of the Board, excluding employee directors, stating that in the good faith opinion of the Board, the Executive is guilty of the conduct described in the Notice of Termination for Cause, and that conduct constitutes Cause under this Agreement. 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 (l). (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. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company for which the Executive may qualify, nor shall anything in this Agreement limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company. Vested benefits and other amounts that the Executive is otherwise entitled to receive under any incentive compensation, deferred compensation and other benefit programs listed in Section 1.6(d), life insurance coverage, or any other plan, policy, practice or program of, or any contract or agreement with, the Company on or after the date of the Qualifying Termination shall be payable in accordance with the terms of each such plan, policy, practice, program, contract or agreement, as the case may be, except as explicitly modified by this Agreement. 5. FULL SETTLEMENT. The Company's obligation to make the payments provided for in, and otherwise to perform its obligations under, this Agreement shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action that the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and, such amounts shall not be reduced, regardless of whether the Executive obtains other employment. 6. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive (other than a payment or distribution made in respect of any program in which the Executive participated while employed by Baltimore Gas and Electric Company, regardless whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, and determined without regard to any additional payments required under this Section 6) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereon) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (b) Subject to the provisions of paragraph (c) of this Section 6, all determinations required to be made under this Section 6, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by one of the major internationally recognized certified public accounting firms (commonly referred to, as of the date hereof, as a Big Six firm) designated by the Executive and approved by the Company (which approval shall not be unreasonably withheld) (the "Accounting Firm"), which shall provide detailed supporting calculations both to the Company and the Executive within fifteen (15) business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group affecting the change of control, the Executive shall designate another Big Six accounting firm (subject to the approval of the Company, which approval shall not be unreasonably withheld) to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 6, shall be paid by the Company to the Executive within five (5) days of the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment") consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to paragraph (c) of this Section 6 and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten (10) business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the thirty (30) day period following the date on which he gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; PROVIDED, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this paragraph (c) of Section 6, the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; PROVIDED, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and PROVIDED, further, that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to paragraph (c) of this Section 6, the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall promptly take all necessary action to obtain such refund and (subject to the Company's complying with the requirements of paragraph (c) of this Section 6) upon receipt of such refund shall promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If after the receipt by the Executive of an amount advanced by the Company pursuant to paragraph (c) of this Section 6, a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of thirty (30) days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 7. 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 date of a Change in Control. Further, upon the date of a Change in Control, 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 may be terminated by the Board at any time prior to the date of a Change in Control. 8. AMENDMENT OF AGREEMENT. This Agreement may be amended by the Board at any time prior to the date of a Change in Control. At and after the date of a Change in Control, this Agreement may not be amended in any respect without the written consent of the Executive. 9. 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. 10. GOVERNING LAW. This Agreement shall be governed by the laws of Maryland. 11. SUCCESSORS AND ASSIGNS. (a) This Agreement shall inure to the benefit of and be enforecable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would have been required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean both the Company as defined above and any such successor that assumes and agrees to perform this Agreement, by operation of law or otherwise. 12. 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. 13. 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. 14. SEVERABILITY. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. If any provision of this Agreement shall be held invalid or unenforceable in part, the remaining portion of such provision, together with all other provisions of this Agreement, shall remain valid and enforceable and continue in full force and effect to the fullest extent consistent with law. 15. WITHHOLDING. Notwithstanding any other provision of this Agreement, the Company may withhold from amounts payable under this Agreement all federal, state, local and foreign taxes that are required to be withheld by applicable laws or regulations. 16. ENTIRE AGREEMENT. Unless otherwise specifically provided in this Agreement, the Executive and the Company acknowledge that this Agreement supersedes any other agreement between them or between the Executive and Baltimore Gas and Electric Company, concerning the subject matter hereof. 17. ALIENABILITY. The rights and benefits of the Executive under this Agreement may not be anticipated, alienated or subject to attachment, garnishment, levy, execution or other legal or equitable process except as required by law. Any attempt by the Executive to anticipate, alienate, assign, sell, transfer, pledge, encumber or charge the same shall be void. Payments hereunder shall not be considered assets of the Executive in the event of insolvency or bankruptcy. 18. COUNTERPARTS. This Agreement may be executed in several counterparts, each of which shall be deemed an original, and said counterparts shall constitute but one and the same instrument. IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization of the Board, the Company has caused this Agreement to be executed in its name on its behalf, all as of the day and year first above written. BALTIMORE GAS AND ELECTRIC COMPANY By: /s/ C. H. Poindexter _________________________ /s/ Robert E. Denton _________________________ Robert E. Denton Exhibit 10(k) SEVERANCE AGREEMENT This Agreement is made the 24th day of December, 1997, by and between BALTIMORE GAS AND ELECTRIC COMPANY (the "Company") and Christian H. Poindexter (the "Executive"). WHEREAS, the Company wishes to encourage the orderly succession of management in the event of a Change in Control (as hereinafter defined); and WHEREAS, the Company desires to establish a severance benefit for the Executive covering the period from the date of a Change in Control (as hereinafter defined) until the end of the twenty-four month period following the date of a Change in Control, to avoid the loss or the serious distraction of the Executive to the detriment of the Company and its stockholders prior to and during such period 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 as a result of a Change in Control. NOW, THEREFORE, the parties agree as follows: 1. DEFINITIONS. 1.1 Board. The term "Board" means the Board of Directors of the Company. 1.2 Change in Control. The term "Change in Control" means: (i) the purchase or acquisition by any person, entity or group of persons (within the meaning of section 13(d) or 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act"), or any comparable successor provisions), of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20 percent or more of either the outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding shares of voting securities entitled to a vote generally, or (ii) the consummation of, following the approval by the Company's stockholders of, a reorganization, merger or consolidation of the Company, in each case, with respect to which persons who were stockholders of the Company immediately prior to such reorganization, merger or consolidation do not, immediately thereafter, own more than 50 percent of the combined voting power entitled to vote generally in the election of directors of the reorganized, merged or consolidated entity's then outstanding securities, or (iii) a liquidation or dissolution of the Company or the sale of substantially all of its assets, or (iv) a change of more than one-half of the members of the Board within a 90-day period for reasons other than the death, disability, or retirement of such members. 1.3 Qualifying Termination. (a) The occurrence of any one or more of the following events within twenty-four calendar months after the date of a Change in Control shall constitute a "Qualifying Termination": (i) The Company's termination of the Executive's employment without Cause (as defined in Section 1.7); or (ii) The Executive's resignation for Good Reason (as defined in Section 1.6). (b) 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 after the date of a Change in Control of any one or more of the following: 2 (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 immediately prior to the date of the Change in Control, or a material reduction or alteration in the nature or status of the Executive's authorities, duties, or responsibilities from those in effect immediately prior to the date of the Change in Control, unless such act is remedied by the Company within 10 business days after receipt of written notice thereof given by the Executive; or (b) A reduction by the Company of the Executive's base salary in effect immediately prior to the date of the Change in Control 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); or (c) The relocation of the Executive's office more than 50 miles from the Executive's office immediately prior to the date of the Change in Control; or (d) Failure of the Company to provide (i) the Executive the opportunity to participate in all applicable incentive, savings and retirement plans, practices, policies and programs of the Company to the same extent as other senior executives (or, where applicable, retired senior executives) of the Company, and (ii) the Executive and/or the Executive's family, as the case may be, the opportunity to participate in, and receive all benefits under, all applicable welfare benefit plans, practices, policies and programs provided by the Company, including, without limitation, medical, prescription, dental, disability, sick benefits, employee life insurance, accidental death and travel insurance plans and programs, to the same extent as other senior executives (or, where applicable, retired senior executives) of the Company; or (e) Failure of the Company to provide the Executive such perquisites as the Company may establish from time to time which are commensurate with the Executive's position and at least comparable to those received by other senior executives at the Company; or 3 (f) The failure by the Company to comply with paragraph (c) of Section 11 of this Agreement; or (g) Any other substantial breach of this Agreement by the Company that either is not taken in good faith or is not remedied by the Company promptly after receipt of notice thereof from the Executive. 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's willful and continued failure substantially to perform the Executive's duties (other than as a result of physical or mental illness or injury), after the Board delivers to the Executive a written demand for substantial performance that specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive's duties]; or (d) The Executive embezzles or knowingly, and with intent, misappropriates property of the Company, or unlawfully appropriates any corporate opportunity of the Company. No act or failure to act on the part of the Executive shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Company. Any act or failure to act that is based upon authority given pursuant to a resolution duly adopted by the Board, or the advice of counsel for the Company, shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. A termination of the Executive's employment for Cause for purposes of this Agreement shall be effected in accordance with the following procedures. The Company shall give the 4 Executive written notice ("Notice of Termination for Cause") of its intention to terminate the Executive's employment for Cause, setting forth in reasonable detail the specific conduct of the Executive that it considers to constitute Cause and the specific provision(s) of this Agreement on which it relies, and stating the date, time and place of the Board Meeting for Cause. The "Board Meeting for Cause" means a meeting of the Board at which the Executive's termination for Cause will be considered, that takes place not less than ten (10) and not more than twenty (20) business days after the Executive receives the Notice of Termination for Cause. The Executive shall be given an opportunity, together with counsel, to be heard at the Board Meeting for Cause. The Executive's termination for Cause shall be effective when and if a resolution is duly adopted at the Board Meeting for Cause by a two-thirds vote of the entire membership of the Board, excluding employee directors, stating that in the good faith opinion of the Board, the Executive is guilty of the conduct described in the Notice of Termination for Cause, and that conduct constitutes Cause under this Agreement. 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 5 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 (l). (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. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company for which the Executive may qualify, nor shall anything in this Agreement limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company. Vested benefits and other amounts that the Executive is otherwise entitled to receive under any incentive compensation, deferred compensation and other benefit programs listed in Section 1.6(d), life insurance coverage, or any other plan, policy, practice or program of, or any contract or agreement with, the Company on or after the date of the 6 Qualifying Termination shall be payable in accordance with the terms of each such plan, policy, practice, program, contract or agreement, as the case may be, except as explicitly modified by this Agreement. 5. FULL SETTLEMENT. The Company's obligation to make the payments provided for in, and otherwise to perform its obligations under, this Agreement shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action that the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and, such amounts shall not be reduced, regardless of whether the Executive obtains other employment. 6. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive (other than a payment or distribution made in respect of any program in which the Executive participated while employed by Baltimore Gas and Electric Company, regardless whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, and determined without regard to any additional payments required under this Section 6) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereon) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (b) Subject to the provisions of paragraph (c) of this Section 6, all determinations required to be made under this Section 6, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by one of the major internationally recognized certified public accounting firms (commonly referred to, as of the date hereof, as a Big Six firm) designated by the Executive 7 and approved by the Company (which approval shall not be unreasonably withheld) (the "Accounting Firm"), which shall provide detailed supporting calculations both to the Company and the Executive within fifteen (15) business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group affecting the change of control, the Executive shall designate another Big Six accounting firm (subject to the approval of the Company, which approval shall not be unreasonably withheld) to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 6, shall be paid by the Company to the Executive within five (5) days of the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment") consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to paragraph (c) of this Section 6 and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten (10) business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the thirty (30) day period following the date on which he gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, 8 (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; PROVIDED, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this paragraph (c) of Section 6, the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; PROVIDED, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and PROVIDED, further, that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to paragraph (c) of this 9 Section 6, the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall promptly take all necessary action to obtain such refund and (subject to the Company's complying with the requirements of paragraph (c) of this Section 6) upon receipt of such refund shall promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If after the receipt by the Executive of an amount advanced by the Company pursuant to paragraph (c) of this Section 6, a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of thirty (30) days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 7. 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 date of a Change in Control. Further, upon the date of a Change in Control, 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 may be terminated by the Board at any time prior to the date of a Change in Control. 8. AMENDMENT OF AGREEMENT. This Agreement may be amended by the Board at any time prior to the date of a Change in Control. At and after the date of a Change in Control, this Agreement may not be amended in any respect without the written consent of the Executive. 9. 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. 10. GOVERNING LAW. This Agreement shall be governed by the laws of Maryland. 11. SUCCESSORS AND ASSIGNS. (a) This Agreement shall inure to the benefit of and be enforecable by the Executive's legal representatives. 10 (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would have been required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean both the Company as defined above and any such successor that assumes and agrees to perform this Agreement, by operation of law or otherwise. 12. 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. 13. 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. 14. SEVERABILITY. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. If any provision of this Agreement shall be held invalid or unenforceable in part, the remaining portion of such provision, together with all other provisions of this Agreement, shall remain valid and enforceable and continue in full force and effect to the fullest extent consistent with law. 15. WITHHOLDING. Notwithstanding any other provision of this Agreement, the Company may withhold from amounts payable under this Agreement all federal, state, local and foreign taxes that are required to be withheld by applicable laws or regulations. 16. ENTIRE AGREEMENT. Unless otherwise specifically provided in this Agreement, the Executive and the Company acknowledge that this Agreement supersedes any other agreement between them or between the Executive and Baltimore Gas and Electric Company, concerning the subject matter hereof. 11 17. ALIENABILITY. The rights and benefits of the Executive under this Agreement may not be anticipated, alienated or subject to attachment, garnishment, levy, execution or other legal or equitable process except as required by law. Any attempt by the Executive to anticipate, alienate, assign, sell, transfer, pledge, encumber or charge the same shall be void. Payments hereunder shall not be considered assets of the Executive in the event of insolvency or bankruptcy. 18. COUNTERPARTS. This Agreement may be executed in several counterparts, each of which shall be deemed an original, and said counterparts shall constitute but one and the same instrument. 12 IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization of the Board, the Company has caused this Agreement to be executed in its name on its behalf, all as of the day and year first above written. BALTIMORE GAS AND ELECTRIC COMPANY By: /s/ E. A. Crooke ___________________________ /s/ Christian H. Poindexter ___________________________ Christian H. Poindexter 13 Exhibit 10(k) SEVERANCE AGREEMENT This Agreement is made the 29th day of December, 1997, by and between BALTIMORE GAS AND ELECTRIC COMPANY (the "Company") and Charles W. Shivery (the "Executive"). WHEREAS, the Company wishes to encourage the orderly succession of management in the event of a Change in Control (as hereinafter defined); and WHEREAS, the Company desires to establish a severance benefit for the Executive covering the period from the date of a Change in Control (as hereinafter defined) until the end of the twenty-four month period following the date of a Change in Control, to avoid the loss or the serious distraction of the Executive to the detriment of the Company and its stockholders prior to and during such period 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 as a result of a Change in Control. NOW, THEREFORE, the parties agree as follows: 1. DEFINITIONS. 1.1 Board. The term "Board" means the Board of Directors of the Company. 1.2 Change in Control. The term "Change in Control" means: (i) the purchase or acquisition by any person, entity or group of persons (within the meaning of section 13(d) or 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act"), or any comparable successor provisions), of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20 percent or more of either the outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding shares of voting securities entitled to a vote generally, or (ii) the consummation of, following the approval by the Company's stockholders of, a reorganization, merger or consolidation of the Company, in each case, with respect to which persons who were stockholders of the Company immediately prior to such reorganization, merger or consolidation do not, immediately thereafter, own more than 50 percent of the combined voting power entitled to vote generally in the election of directors of the reorganized, merged or consolidated entity's then outstanding securities, or (iii) a liquidation or dissolution of the Company or the sale of substantially all of its assets, or (iv) a change of more than one-half of the members of the Board within a 90-day period for reasons other than the death, disability, or retirement of such members. 1.3 Qualifying Termination. (a) The occurrence of any one or more of the following events within twenty-four calendar months after the date of a Change in Control shall constitute a "Qualifying Termination": (i) The Company's termination of the Executive's employment without Cause (as defined in Section 1.7); or (ii) The Executive's resignation for Good Reason (as defined in Section 1.6). (b) 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 after the date of a Change in Control of any one or more of the following: 2 (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 immediately prior to the date of the Change in Control, or a material reduction or alteration in the nature or status of the Executive's authorities, duties, or responsibilities from those in effect immediately prior to the date of the Change in Control, unless such act is remedied by the Company within 10 business days after receipt of written notice thereof given by the Executive; or (b) A reduction by the Company of the Executive's base salary in effect immediately prior to the date of the Change in Control 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); or (c) The relocation of the Executive's office more than 50 miles from the Executive's office immediately prior to the date of the Change in Control; or (d) Failure of the Company to provide (i) the Executive the opportunity to participate in all applicable incentive, savings and retirement plans, practices, policies and programs of the Company to the same extent as other senior executives (or, where applicable, retired senior executives) of the Company, and (ii) the Executive and/or the Executive's family, as the case may be, the opportunity to participate in, and receive all benefits under, all applicable welfare benefit plans, practices, policies and programs provided by the Company, including, without limitation, medical, prescription, dental, disability, sick benefits, employee life insurance, accidental death and travel insurance plans and programs, to the same extent as other senior executives (or, where applicable, retired senior executives) of the Company; or (e) Failure of the Company to provide the Executive such perquisites as the Company may establish from time to time which are commensurate with the Executive's position and at least comparable to those received by other senior executives at the Company; or 3 (f) The failure by the Company to comply with paragraph (c) of Section 11 of this Agreement; or (g) Any other substantial breach of this Agreement by the Company that either is not taken in good faith or is not remedied by the Company promptly after receipt of notice thereof from the Executive. 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. A termination of the Executive's employment for Cause for purposes of this Agreement shall be effected in accordance with the following procedures. The Company shall give the Executive written notice ("Notice of Termination for Cause") of its intention to terminate the Executive's employment for Cause, setting forth in reasonable detail the specific conduct of the Executive that it considers to constitute Cause and the specific provision(s) of this Agreement on which it relies, and stating the date, time and place of the Board Meeting for Cause. The "Board Meeting for Cause" means a meeting of the Board at which the Executive's termination for Cause will be considered, that takes place not less than ten (10) and not more than twenty (20) business days after the Executive receives the Notice of Termination for Cause. The Executive shall be given an opportunity, together with counsel, to be heard at the Board Meeting for Cause. The Executive's termination for Cause shall 4 be effective when and if a resolution is duly adopted at the Board Meeting for Cause by a two-thirds vote of the entire membership of the Board, excluding employee directors, stating that in the good faith opinion of the Board, the Executive is guilty of the conduct described in the Notice of Termination for Cause, and that conduct constitutes Cause under this Agreement. 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 5 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 (l). (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. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company for which the Executive may qualify, nor shall anything in this Agreement limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company. Vested benefits and other amounts that the Executive is otherwise entitled to receive under any incentive compensation, deferred compensation and other benefit programs listed in Section 1.6(d), life insurance coverage, or any other plan, policy, practice or program of, or any contract or agreement with, the Company on or after the date of the Qualifying Termination shall be payable in accordance with the terms of each such plan, policy, practice, program, contract or agreement, as the case may be, except as explicitly modified by this Agreement. 5. FULL SETTLEMENT. The Company's obligation to make the payments provided for in, and otherwise to perform its obligations under, this Agreement shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action that the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions 6 of this Agreement and, such amounts shall not be reduced, regardless of whether the Executive obtains other employment. 6. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive (other than a payment or distribution made in respect of any program in which the Executive participated while employed by Baltimore Gas and Electric Company, regardless whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, and determined without regard to any additional payments required under this Section 6) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereon) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (b) Subject to the provisions of paragraph (c) of this Section 6, all determinations required to be made under this Section 6, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by one of the major internationally recognized certified public accounting firms (commonly referred to, as of the date hereof, as a Big Six firm) designated by the Executive and approved by the Company (which approval shall not be unreasonably withheld) (the "Accounting Firm"), which shall provide detailed supporting calculations both to the Company and the Executive within fifteen (15) business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group affecting the change of control, the Executive shall designate another Big Six accounting firm (subject to the approval of the Company, which approval shall not be unreasonably withheld) to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the 7 Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 6, shall be paid by the Company to the Executive within five (5) days of the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment") consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to paragraph (c) of this Section 6 and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten (10) business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the thirty (30) day period following the date on which he gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; PROVIDED, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and 8 penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this paragraph (c) of Section 6, the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; PROVIDED, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and PROVIDED, further, that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to paragraph (c) of this Section 6, the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall promptly take all necessary action to obtain such refund and (subject to the Company's complying with the requirements of paragraph (c) of this Section 6) upon receipt of such refund shall promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If after the receipt by the Executive of an amount advanced by the Company pursuant to paragraph (c) of this Section 6, a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of thirty (30) days after such determination, then such advance shall be forgiven and 9 shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 7. 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 date of a Change in Control. Further, upon the date of a Change in Control, 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 may be terminated by the Board at any time prior to the date of a Change in Control. 8. AMENDMENT OF AGREEMENT. This Agreement may be amended by the Board at any time prior to the date of a Change in Control. At and after the date of a Change in Control, this Agreement may not be amended in any respect without the written consent of the Executive. 9. 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. 10. GOVERNING LAW. This Agreement shall be governed by the laws of Maryland. 11. SUCCESSORS AND ASSIGNS. (a) This Agreement shall inure to the benefit of and be enforecable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would have been required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean both the Company as defined above and any such successor that assumes and agrees to perform this Agreement, by operation of law or otherwise. 10 12. 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. 13. 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. 14. SEVERABILITY. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. If any provision of this Agreement shall be held invalid or unenforceable in part, the remaining portion of such provision, together with all other provisions of this Agreement, shall remain valid and enforceable and continue in full force and effect to the fullest extent consistent with law. 15. WITHHOLDING. Notwithstanding any other provision of this Agreement, the Company may withhold from amounts payable under this Agreement all federal, state, local and foreign taxes that are required to be withheld by applicable laws or regulations. 16. ENTIRE AGREEMENT. Unless otherwise specifically provided in this Agreement, the Executive and the Company acknowledge that this Agreement supersedes any other agreement between them or between the Executive and Baltimore Gas and Electric Company, concerning the subject matter hereof. 17. ALIENABILITY. The rights and benefits of the Executive under this Agreement may not be anticipated, alienated or subject to attachment, garnishment, levy, execution or other legal or equitable process except as required by law. Any attempt by the Executive to anticipate, alienate, assign, sell, transfer, pledge, encumber or charge the same shall be void. Payments hereunder shall not be considered assets of the Executive in the event of insolvency or bankruptcy. 18. COUNTERPARTS. This Agreement may be executed in several counterparts, each of which shall be deemed an original, and said counterparts shall constitute but one and the same instrument. 11 IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization of the Board, the Company has caused this Agreement to be executed in its name on its behalf, all as of the day and year first above written. BALTIMORE GAS AND ELECTRIC COMPANY By: /s/ C. H. Poindexter ______________________________ /s/ Charles W. Shivery ______________________________ Charles W. Shivery EX-10 4 EXHIBIT 10(L) EXHIBIT 10(l) CONSTELLATION HOLDINGS, INC. DEFERRED COMPENSATION PLAN FOR NON-EMPLOYEE DIRECTORS 1. Objective. The objective of this Plan is to provide a portion of the Compensation of non-employee Directors of CHI in the form of Stock Units, thereby promoting a greater identity of interest between CHI's non-employee Directors and its parent company's stockholders, and to enable such Directors to defer receipt of the portion of their Compensation that is payable in cash. 2. Definitions. As used herein, the following terms will have the meaning specified below: "Annual Retainer" means the amount payable by CHI to a Director as annual compensation for performance of services as a Director, and includes Committee Chair retainers. All other amounts (including without limitation Board/committee meeting fees, and expense reimbursements) shall be excluded in calculating the amount of the Annual Retainer. "BGE" means Baltimore Gas and Electric Company, a Maryland corporation, or its successor. "Board" means the Board of Directors of CHI. "Cash Account" means an account by that name established pursuant to Section 7. The maintenance of Cash Accounts is for bookkeeping purposes only. "Change in Control" means (i) the purchase or acquisition by any person, entity or group of persons (within the meaning of section 13(d) or 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act"), or any comparable successor provisions), of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20 percent or more of either the outstanding shares of common stock of BGE or the combined voting power of BGE's then outstanding shares of voting securities entitled to a vote generally, or (ii) the approval by the stockholders of BGE of a reorganization, merger or consolidation, in each case, with respect to which persons who were stockholders of BGE immediately prior to such reorganization, merger or consolidation do not, immediately thereafter, own more than 50 percent of the combined voting power entitled to vote generally in the election of directors of the reorganized, merged or consolidated entity's then outstanding securities, or (iii) a liquidation or dissolution of BGE or the sale of substantially all of its assets, or (iv) a change of more than one-half of the members of the board of directors of BGE within a 90-day period for reasons other than the death, disability, or retirement of such members or (v) the purchase or acquisition by any person, entity or group of persons (within the meaning of section 13(d) or 14(d) of the Exchange Act, or any comparable successor provisions), of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20 percent or more of either the outstanding shares of common stock of CHI or the combined voting power of CHI's then outstanding shares of voting securities entitled to a vote generally unless such purchase or acquisition is deemed to have occurred as the result of a reorganization, merger or consolidation involving BGE, or (vi) the approval by the stockholders of CHI of a reorganization, merger or consolidation, in each case, with respect to which persons who were stockholders of CHI immediately prior to such reorganization, merger or consolidation do not, immediately thereafter, own more than 50 percent of the combined voting power entitled to vote generally in the election of directors of the reorganized, merged or consolidated entity's then outstanding securities, or (vii) a liquidation or dissolution of CHI or the sale of substantially all of its assets, or (viii) a change of more than one-half of the members of the Board of Directors of CHI within a 90-day period for reasons other than the death, disability, or retirement of such members. "CHI" means Constellation Holdings, Inc., a Maryland corporation, or its successor. "Common Stock" means the common stock, without par value, of BGE. "Compensation" means any Annual Retainer and meeting fees payable by CHI to a participant in his/her capacity as a Director. Compensation excludes expense reimbursements paid by CHI to a participant in his/her capacity as a Director. "Deferred Cash Compensation" means any cash Compensation that is voluntarily deferred by a participant pursuant to Section 6. "Director" means a member of the Board who is not an employee of CHI or any of its subsidiaries/affiliates. "Disability" or "Disabled" means that the Plan Administrator has determined that the participant is unable to fulfill his/her responsibilities of Board membership because of illness or injury. For purposes of this Plan, a 2 participant's eligibility to participate shall be deemed to have terminated on the date he/she is determined by the Plan Administrator to be Disabled. "Earnings" means, with respect to the Cash Account, hypothetical interest credited to the Cash Account. "Earnings" means, with respect to the Stock Account, hypothetical dividends credited to the Stock Account. "Fair Market Value" means, as of any specified date, the average closing price of a share of Common Stock, reported in "New York Stock Exchange Composite Transactions" as published in the Eastern Edition of The Wall Street Journal for the most recent 30 days during which Common Stock was traded on the New York Stock Exchange (including such valuation date if a trading date). "Plan Accounts" means a participant's Cash Account and/or Stock Account. The maintenance of Plan Accounts is for bookkeeping purposes only. "Plan Administrator" means, as set forth in Section 3, the Board. "Stock Account" means an account by that name established pursuant to Section 8. The maintenance of Stock Accounts is for bookkeeping purposes only. "Stock Unit(s)" means the share equivalents credited to a Participant's Stock Account pursuant to Section 8. The use of Stock Units is for bookkeeping purposes only; the Stock Units are not actual shares of Common Stock. CHI will not reserve or otherwise set aside any Common Stock for or to any Stock Account. 3. Plan Administration. (i) Plan Administrator - The Plan is administered by the Board, who has sole authority to interpret the Plan, and, in general, to make all other determinations advisable for the administration of the Plan to achieve its stated objective. Decisions by the Plan Administrator shall be final and binding upon all persons for all purposes. The Plan Administrator shall have the power to delegate all or any part of its non-discretionary duties to one or more designees, and to withdraw such authority, by written designation. (ii) Amendment - This Plan may be amended from time to time or suspended or terminated at any time, at the written 3 direction of the Plan Administrator. However, amendments required to keep the Plan in compliance with applicable laws and regulations may be made by the Secretary of CHI (or other officer of CHI succeeding to that function) on advice of counsel. Nothing herein creates a vested right. (iii) Indemnification - The Plan Administrator (and its designees), Chairman of the Board, Chief Executive Officer, President, and Secretary of CHI and all other employees of CHI or its subsidiaries/affiliates whose assigned duties include matters under the Plan, shall be indemnified by CHI or its subsidiaries /affiliates or from proceeds under insurance policies purchased by CHI or its subsidiaries/affiliates, against any and all liabilities arising by reason of any act or failure to act made in good faith pursuant to the provisions of the Plan, including expenses reasonably incurred in the defense of any related claim. 4. Eligibility and Participation. (i) Mandatory participation - A Director is required to participate in this Plan with respect to the receipt of fifty percent (50%) of his/her Annual Retainer in the form of Stock Units under Section 5 of the Plan, while so classified. (ii) Voluntary participation - A Director is eligible to participate in the Plan by electing to defer all or certain portions of the participant's Compensation, that is payable in cash, under Section 6 of the Plan, while so classified. (iii) Termination of participation - Eligibility to participate shall terminate on the date the participant ceases to be a Director. Notwithstanding termination of eligibility, such person with Plan Accounts will remain a participant of the Plan, solely for purposes of the administration of existing Plan Accounts, and no additional Stock Units will be granted and no further deferrals of cash Compensation under the Plan will be permitted. 5. Mandatory Stock Units. The Stock Account of a participant will be credited on January 1 of each calendar year with Stock Units equal to the number of shares of Common Stock (including fractions of a share) that could have been purchased, with fifty percent (50%) of the participant's Annual Retainer for such calendar year, at Fair Market Value on such January 1. If a participant initially becomes eligible to participate in the Plan during a calendar year, the Stock Account of the 4 participant for such calendar year will be credited, on the date that is the first day of the calendar month after the participant initially becomes eligible to participate in the Plan, with Stock Units equal to the number of shares of Common Stock (including fractions of a share) that could have been purchased at Fair Market Value on such date, with an amount equal to (i) fifty percent (50%) of the participant's Annual Retainer multiplied by (ii) a fraction the numerator of which is the number of full calendar months in the calendar year on and after such date, and the denominator of which is 12. The Stock Account will be maintained pursuant to Section 8. 6. Cash Compensation Deferral Election. A participant may elect to defer none, all or fifty percent (50%) of his/her Annual Retainer that is payable in cash (i.e., fifty percent (50%) of the Annual Retainer) and/or may elect to defer none, all, fifty percent (50%), or seventy-five percent (75%) of his/her other Compensation that is payable in cash (i.e., one hundred percent (100%) of all other Compensation). A participant's cash Compensation deferral election with respect to the Annual Retainer shall specify whether the deferred Annual Retainer is to be credited to the Cash Account or to the Stock Account. All other Cash Compensation that a participant elects to defer will be credited to the Cash Account. Such election shall be made by written notification to the Secretary of CHI (or other officer of CHI succeeding to that function). Such election shall be made prior to the calendar year during which the applicable cash Compensation is payable, and shall be effective as of the first day of such calendar year. If a participant initially becomes eligible to participate in the Plan during a calendar year, the election for such calendar year must be made within thirty (30) calendar days after the date the participant initially becomes eligible to participate in the Plan, and shall be effective with respect to Compensation earned after the date the election is received by the Secretary of CHI (or other officer of CHI succeeding to that function). Elections under this Section shall remain in effect for all succeeding calendar years until revoked. Elections may be revoked by written notification to the Secretary of CHI (or other officer of CHI succeeding to that function), and shall be effective as of the first day of the calendar year following the calendar year during which the revocation is received by the Secretary of CHI. 5 Notwithstanding anything herein contained to the contrary, the Plan Administrator shall have the right in its sole discretion to permit a participant to defer other percentages of his/her Annual Retainer and/or other Compensation that is payable in cash. 7. Cash Accounts. Cash Compensation that consists of the Annual Retainer that a participant has elected to defer into the Cash Account is credited to the participant's Cash Account on January 1 (or if later, the date the participant's initial election to participate in the Plan becomes effective). All other cash Compensation that a participant has elected to defer is credited to the participant's Cash Account on each date such cash Compensation would otherwise have been paid to the Director. A participant's Cash Account shall be credited with earnings at the rate earned by the Interest Income Fund under the Baltimore Gas and Electric Company Employee Savings Plan, and computed in the same manner as under such plan. Earnings are credited to the Cash Account commencing on the date the applicable Deferred Cash Compensation is credited to the Cash Account. 8. Stock Accounts. Cash Compensation that consists of the Annual Retainer that a participant has elected to defer into the Stock Account is credited to the participant's Stock Account on January 1 (or if later, the date the participant's initial election to participate in the Plan becomes effective). A participant's Stock Account shall be credited with Stock Units equal to the number of shares of Common Stock (including fractions of a share) that could have been purchased with such Deferred Cash Compensation, at Fair Market Value on such date. Grants of mandatory Stock Units are credited to the Stock Account as set forth in Section 5. As of any dividend distribution date for the Common Stock, the participant's Stock Account shall be credited with additional Stock Units equal to the number of shares of Common Stock (including fractions of a share) that could have been purchased, at the closing price of a share of Common Stock on such date as reported in "New York Stock Exchange Composite Transactions" as published in the Eastern Edition of the The Wall Street Journal, with the amount which would have been paid as dividends on that number of shares (including fractions of a share) of Common Stock which is equal to the number of Stock Units then credited to the participant's Stock Account. In the event of any change in the outstanding shares of Common Stock by reason of any stock dividend or split, recapitalization, combination or exchange of shares or other 6 similar changes in the Common Stock, then appropriate adjustments shall be made in the number of Stock Units in each participant's Stock Account. Such adjustments shall be made effective on the date of the change related to the Common Stock. 9. Distributions of Plan Accounts. Distributions of Plan Accounts shall be made in cash only, from the general assets of CHI. A participant may elect (by notification in the form and manner established by the Secretary of CHI (or other officer of CHI succeeding to that function) from time to time) to begin distributions (i) in the calendar year following the calendar year that eligibility to participate terminates, (ii) in the calendar year following the calendar year in which a participant attains age 70, if later, or (iii) any calendar year between (i) and (ii). Such election must be made prior to the end of the calendar year in which eligibility to participate terminates. Alternatively, a participant who reaches age 70 while still eligible to participate may elect to begin distributions, in the calendar year following the calendar year that the participant reaches age 70, of amounts in his/her Plan Accounts as of the end of the calendar year the participant reaches age 70. Such election must be made prior to the end of the calendar year in which the participant reaches age 70, and a distribution election to receive any subsequently deferred amounts beginning in the calendar year following the calendar year that eligibility to participate terminates, must be made prior to the end of the calendar year in which eligibility to participate terminates. A participant may elect (by notification in the form and manner established by the Secretary of CHI (or other officer of CHI succeeding to that function) from time to time) to receive distributions in a single payment or in annual installments during a period not to exceed fifteen years. The single payment or the first installment payment, whichever is applicable, shall be made within the first sixty (60) calendar days of the calendar year elected for distribution. Subsequent installments, if any, shall be made within the first sixty (60) calendar days of each succeeding calendar year until the participant's Cash Account has been paid out. In the event applicable elections are not timely made, a participant shall receive a distribution in a single payment within the first sixty (60) calendar days of the calendar 7 year following the calendar year that eligibility to participate terminates. The value of the Stock Account, which is equal to the number of Stock Units in the Stock Account multiplied by the Fair Market Value on the date on which the participant's eligibility to participate terminates (or, the date that is the last day of the calendar year during which the participant reaches age 70, for a participant who elects to begin distributions while still eligible to participate), is transferred to the Cash Account on such date. Earnings are credited to the Cash Account through the date of distribution, and amounts held for installment payments shall continue to be credited with Earnings. The value of the Cash Account that is payable in cash on the date of the single payment distribution is equal to the balance in the Cash Account on the date that is no earlier than five (5) calendar days prior to the day of such distribution ("Distribution Valuation Date"). The amount of any cash distribution to be made in installments from the Cash Account will be determined by multiplying (i) the balance in such Cash Account on the Distribution Valuation Date by (ii) a fraction, the numerator of which is one and the denominator of which is the number of installments in which distributions remain to be made (including the current distribution). If a participant dies or becomes Disabled, the entire unpaid balance of his/her Plan Accounts shall be paid to the beneficiary(ies) designated by the participant by notification in the form and manner established by the Secretary of CHI (or other officer of CHI succeeding to that function) from time to time or, if no designation was made, in the event of death, to the estate of the participant, and in the event of Disability, to the participant. Payment shall be made within sixty (60) calendar days after notice of death or Disability is received by the Secretary, unless prior to the participant's death or Disability, the participant elected (in the form and manner established by the Secretary of CHI (or other officer of CHI succeeding to that function) from time to time) a delayed and/or installment distribution option for such beneficiary(ies); provided, however that (i) such a distribution option election shall be effective only if the value of the participant's Plan Accounts is more than $50,000 on the date of the participant's death or Disability; and (ii) the final distribution must be made to such beneficiary(ies) no later than 15 years after the participant's death or Disability. After the end of the calendar year that a participant's eligibility to participate terminates, a distribution option election for a particular beneficiary is irrevocable; 8 provided, however, that the participant may make a distribution option election for a new beneficiary who is initially designated after the participant's eligibility to participate terminates, and such election is irrevocable with respect to the new beneficiary. The value of the Stock Account, which is equal to the number of Stock Units in the Stock Account multiplied by the Fair Market Value on the date of the participant's death or Disability, is transferred to the Cash Account on such date. Earnings are credited to the Cash Account through the date of distribution, and amounts held for installment payments shall continue to be credited with Earnings. The value of the Cash Account that is payable in cash on the date of the single payment distribution is equal to the balance in the Cash Account on the date that is no earlier than five (5) calendar days prior to the day of such distribution ("Beneficiary Distribution Valuation Date"). The amount of any cash distribution to be made in installments from the Cash Account will be determined by multiplying (i) the balance in such Cash Account on the Beneficiary Distribution Valuation Date by (ii) a fraction, the numerator of which is one and the denominator of which is the number of installments in which distributions remain to be made (including the current distribution). Upon the death of a participant's beneficiary for whom a delayed and/or installment distribution option was elected, the entire unpaid balance of the participant's Cash Account shall be paid to the beneficiary(ies) designated by the participant's beneficiary by notification in the form and manner established by the Secretary of CHI (or other officer of CHI succeeding to that function) from time to time or, if no designation was made, to the estate of the participant's beneficiary. Payment shall be made within sixty (60) calendar days after notice of death is received by the Secretary . The value of the Cash Account that is payable in cash is equal to the balance in the Cash Account on the date that is no earlier than five (5) calendar days prior to the day of such distribution. Notwithstanding anything herein contained to the contrary, the Plan Administrator shall have the right in its sole discretion to (i) vary the manner and timing of distributions of a participant or beneficiary entitled to a distribution under this Section 9, and may make such distributions in a single payment or over a shorter or longer period of time than that elected by a participant; and (ii) vary the period during which the closing price of Common Stock is referenced to determine the value of the Stock Account that is 9 transferred to the Cash Account on the date on which the participant's eligibility to participate terminates. Any affected participants will not participate in exercising such discretion. 10. Beneficiaries. A participant shall have the right to designate, change or rescind a beneficiary(ies) who is to receive a distribution(s) pursuant to Section 9 in the event of the death or Disability of the participant. A participant's beneficiary(ies) for whom a delayed and/or installment distribution option was elected shall have the right to designate a beneficiary(ies) who is to receive a distribution pursuant to Section 9 in the event of the death of the participant's beneficiary(ies). Any designation, change or recision of the designation of beneficiary shall be made by notification in the form and manner established by the Secretary of CHI (or other officer of CHI succeeding to that function) from time to time. The last designation of beneficiary received by the Secretary shall be controlling over any testamentary or purported disposition by the participant (or, if applicable, the participant's beneficiary(ies)), provided that no designation, recision or change thereof shall be effective unless received by the Secretary prior to the death or Disability (whichever is applicable) of the participant (or, if applicable, the death of the participant's beneficiary(ies)). If the designated beneficiary is the estate, or the executor or administrator of the estate, of the participant (or, if applicable, the participant's beneficiary(ies)), a distribution pursuant to Section 9 may be made to the person(s) or entity (including a trust) entitled thereto under the will of the participant (or, if applicable, the participant's beneficiary(ies)), or, in the case of intestacy, under the laws relating to intestacy. 11. Valuation of Plan Accounts. The Plan Administrator shall cause the value of a participant's Plan Accounts to be determined and reported to CHI and the participant at least once per year as of the last business day of the calendar year. The value of the Stock Account will equal the number of Stock Units in the Stock Account multiplied by the closing price of a share of Common Stock on the last business day of the calendar year as reported in "New York Stock Exchange Composite Transactions" as published in the Eastern Edition of the The Wall Street Journal. The value of the Cash Account will equal the balance in the Cash Account on the last business day of the calendar year. 10 12. Withdrawals. No withdrawals of Plan Accounts may be made, except a participant may at any time request a hardship withdrawal from his/her Plan Accounts if he/she has incurred an unforeseeable financial emergency. An unforeseeable financial emergency is defined as severe financial hardship to the participant resulting from a sudden and unexpected illness or accident of the participant (or of his/her dependents), loss of the participant's property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the participant. The need to send a child to college or the desire to purchase a home are not considered to be unforeseeable emergencies. The circumstance that will constitute an unforeseeable emergency will depend upon the facts of each case. A hardship withdrawal will be permitted by the Plan Administrator only as necessary to satisfy an immediate and heavy financial need. A hardship withdrawal may be permitted only to the extent reasonably necessary to satisfy the financial need. Payment may not be made to the extent that such hardship is or may be relieved (i) through reimbursement or compensation by insurance or otherwise, (ii) by liquidation of the participant's assets, to the extent the liquidation of such assets would not itself cause severe financial hardship, or (iii) by cessation of deferrals under the Plan. The request for hardship withdrawal shall be made by notification in the form and manner established by the Plan Administrator from time to time. Such hardship withdrawal will be permitted only with approval of the Plan Administrator. The participant will receive a lump sum payment after the Plan Administrator has had reasonable time to consider and then approve the request. The value of the Stock Account for purposes of processing a hardship cash withdrawal is equal to the number of Stock Units in the Stock Account multiplied by the Fair Market Value on the date on which the hardship withdrawal is processed. The value of the Cash Account for purposes of processing a hardship cash withdrawal is equal to the balance in the Cash Account on the date on which the hardship withdrawal is processed. 13. Change in Control. The terms of this Section 13 shall immediately become operative, without further action or consent by any person or entity, upon a Change in Control, and once operative shall supersede and control over any other 11 provisions of this Plan. Upon the occurrence of a Change in Control followed within one year of the date of such Change in Control by the participant's cessation of Board membership for any reason, such participant shall be paid the value of his/her Plan Accounts in a single, lump sum cash payment. The value of the Stock Account, which is equal to the number of Stock Units in the Stock Account multiplied by the Fair Market Value on the date of the participant's cessation of Board membership, is transferred to the Cash Account on such date. Earnings are credited to the Cash Account through the date of distribution. The value of the Cash Account that is payable in cash on the date of the single lump sum cash payment is equal to the balance in the Cash Account on the date that is no earlier than five (5) calendar days prior to the day of such distribution. Such payment shall be made as soon as practicable, but in no event later than thirty (30) calendar days after the date of the participant's cessation of Board membership. On or after a Change in Control, no action, including, but not by way of limitation, the amendment, suspension or termination of the Plan, shall be taken which would affect the rights of any participant or the operation of this Plan with respect to the balance in the participant's Plan Accounts. 14. Withholding. CHI may withhold to the extent required by law all applicable income and other taxes from amounts deferred or distributed under the Plan. 15. Copies of Plan Available. Copies of the Plan and any and all amendments thereto shall be made available to all participants during normal business hours at the office of the Plan Administrator. 16. Miscellaneous. (i) Inalienability of benefits - Except as may otherwise be required by law or court order, the interest of each participant or beneficiary under the Plan cannot be sold, pledged, assigned, alienated or transferred in any manner or be subject to attachment or other legal process of whatever nature; provided, however, that any applicable taxes may be withheld from any cash benefit payment made under this Plan. (ii) Controlling law - The Plan and its administration shall be governed by the laws of the State of Maryland, except to the extent preempted by federal law. (iii) Gender and number - A masculine pronoun when used herein refers to both men and women and words used in the singular are intended to include the plural, and vice versa, whenever appropriate. 12 (iv) Titles and headings - Titles and headings to articles and sections in the Plan are placed herein solely for convenience of reference and in any case of conflict, the text of the Plan rather than such titles and headings shall control. (v) References to law - All references to specific provisions of any federal or state law, rule or regulation shall be deemed to also include references to any successor provisions or amendments. (vi) Funding and expenses - Benefits under the Plan are not vested or funded, and shall be paid out of the general assets of CHI. To the extent that any person acquires a right to receive payments from CHI under this Plan, such rights shall be no greater than the right of any unsecured general creditor of CHI. The expenses of administering the Plan will be borne by CHI. (vii) Not a contract - Participation in this Plan shall not constitute a contract of employment or Board membership between CHI and any person and shall not be deemed to be consideration for, or a condition of, continued employment or Board membership of any person. (viii) Successors - In the event CHI becomes a party to a merger, consolidation, sale of substantially all of its assets or any other corporate reorganization in which CHI will not be the surviving corporation or in which the holders of the common stock of CHI will receive securities of another corporation (in any such case, the "New Company"), then the New Company shall assume the rights and obligations of CHI under this Plan. 13 EX-12 5 EXHIBIT 12 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 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- (IN MILLIONS OF DOLLARS) Net Income.............................................. $282.8 $310.8 $338.0 $323.6 $309.8 Taxes on Income......................................... 161.5 169.2 172.4 156.7 140.8 -------- -------- -------- -------- -------- Adjusted Net Income..................................... $444.3 $480.0 $510.4 $480.3 $450.6 -------- -------- -------- -------- -------- Fixed Charges: Interest and Amortization of Debt Discount and Expense and Premium on all Indebtedness.................... $234.2 $203.9 $206.7 $204.2 $199.4 Capitalized Interest.................................. 8.4 15.7 15.0 12.4 16.2 Interest Factor in Rentals............................ 1.9 1.5 2.1 2.0 2.1 -------- -------- -------- -------- -------- Total Fixed Charges................................... $244.5 $221.1 $223.8 $218.6 $217.7 -------- -------- -------- -------- -------- Preferred and Preference Dividend Requirements: (1) Preferred and Preference Dividends................. $ 28.7 $ 38.5 $ 40.6 $ 39.9 $ 41.8 Income Tax Required................................ 16.4 20.9 20.4 19.1 18.8 -------- -------- -------- -------- -------- Total Preferred and Preference Dividend Requirements..................................... $ 45.1 $ 59.4 $ 61.0 $ 59.0 $ 60.6 -------- -------- -------- -------- -------- Total Fixed Charges and Preferred and Preference Dividend Requirements................................. $289.6 $280.5 $284.8 $277.6 $278.3 -------- -------- -------- -------- -------- Earnings (2)............................................ $680.4 $685.4 $719.2 $686.5 $652.1 -------- -------- -------- -------- -------- Ratio of Earnings to Fixed Charges...................... 2.78 3.10 3.21 3.14 3.00 Ratio of Earnings to Combined Fixed Charges and Preferred and Preference Dividend Requirements........ 2.35 2.44 2.52 2.47 2.34
- --------------- (1) Preferred and preference dividend requirements consist of an amount equal to the pre-tax earnings 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. 71 EX-21 6 EXHIBIT 21 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT* JURISDICTION OF INCORPORATION ------------- Constellation Holdings, Inc. ................................... Maryland Constellation Investments, Inc. ................................ Maryland Constellation Power, Inc. ...................................... Maryland Constellation Real Estate Group, Inc. .......................... Maryland Constellation EnterprisesTM, Inc................................ Maryland Constellation Energy Solutions, Inc. ........................... Delaware Constellation Power Source, Inc. ............................... Delaware Constellation Energy Source, Inc. .............................. Delaware Constellation Energy Projects & Services, Inc. ................. Delaware Safe Harbor Water Power Corporation............................. Pennsylvania BGE Home Products & 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. 72 EX-23 7 EXHIBIT 23 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Prospectuses of Baltimore Gas and Electric Company on Forms S-8 (File Nos. 33-56084, 33-59545 and 333-45051) and Forms S-3 (File Nos. 33-49801, 33-45260, 33-33559, 33-57658, 333-19263, 333-22697, and 333-32311) of our report dated January 21, 1998 on the consolidated financial statements and the financial statement schedule of Baltimore Gas and Electric Company as of December 31, 1997 and 1996 and for the three years in the period ended December 31, 1997, which report is included in this Annual Report on Form 10-K. /s/ Coopers & Lybrand L.L.P. ______________________________________ COOPERS & LYBRAND L.L.P. Baltimore, Maryland March 27, 1998 73 EX-27 8 FINANCIAL DATA SCHEDULE
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BGE'S DECEMBER 31, 1997 INTERIM CONSOLIDATED INCOME STATEMENT, BALANCE SHEET AND STATEMENT OF CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS. 1,000,000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 PER-BOOK 5,652 1,558 1,047 517 0 8,773 1,433 0 1,433 2,870 90 210 2,989 0 0 316 249 23 0 0 2,026 8,773 3,308 158 2,584 2,742 566 (53) 513 230 283 29 254 239 241 726 1.72 1.72
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