Pension, Postretirement, Other Postemployment, and Employee Savings Plan Benefits

12 Months Ended

Dec. 31, 2011

Pension, Postretirement, Other Postemployment, and Employee Savings Plan Benefits

Pension, Postretirement, Other Postemployment, and Employee Savings Plan Benefits

7  Pension, Postretirement, Other Postemployment, and Employee Savings Plan Benefits

        We offer pension, postretirement, other postemployment, and employee savings plan benefits. BGE employees participate in the benefit plans that we offer. We describe each of our plans separately below. Nine Mile Point, owned by CENG, offers its own pension, postretirement, other postemployment, and employee savings plan benefits to its employees. In connection with the deconsolidation of CENG as a result of the investment in CENG by EDF on November 6, 2009, the Nine Mile Point plan is no longer included in our consolidated results. In addition, benefit plan assets and obligations relating to CENG employees that previously participated in our plans were transferred into new CENG plans that are no longer included in our consolidated results. Therefore, the tables below include the benefits for the CENG plans, including Nine Mile Point, through November 6, 2009. In 2011, we acquired certain Boston Generating plants. As a result, the benefit plan assets and obligations relating to Boston Generating employees are included in our consolidated results and included in the tables below.

        We use a December 31 measurement date for our pension, postretirement, other postemployment, and employee savings plans. The following table summarizes our defined benefit liabilities and their classification in our Consolidated Balance Sheets:

At December 31,	2011		2010
	(In millions)
Pension benefits	$	327.8	$	218.0
Postretirement benefits		347.8		334.9
Postemployment benefits		53.1		55.0
Total defined benefit obligations		728.7		607.9
Less: Amount recorded in other current liabilities		30.7		33.2
Total noncurrent defined benefit obligations	$	698.0	$	574.7

Pension Benefits

        We sponsor several defined benefit pension plans for our employees. These include basic qualified plans that most employees participate in and several non-qualified plans that are available only to certain employees. A defined benefit plan specifies the amount of benefits a plan participant is to receive using information about the participant. 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 qualified plan by contributing at least the minimum amount required under IRS regulations. We calculate the amount of funding using an actuarial method called the traditional unit credit method.

Postretirement Benefits

        We sponsor defined benefit postretirement health care and life insurance plans that cover the majority of our employees. Generally, we calculate the benefits under these plans based on age, years of service, and pension benefit levels or final base pay. 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. For the life insurance plan, retirees do not make contributions to cover a portion of the plan costs.

        Effective in 2002, we amended our postretirement medical plans for all subsidiaries other than Nine Mile Point. Our contributions for retiree medical coverage for future retirees who were under the age of 55 on January 1, 2002 are capped at the 2002 level. We also amended our plans to increase the Medicare eligible retirees' share of medical costs.

        In 2003, the President signed into law the Medicare Prescription Drug Improvement and Modernization Act of 2003 (the Act). This legislation provides a prescription drug benefit for Medicare beneficiaries, a benefit that we provide to our Medicare eligible retirees. Our actuaries concluded that prescription drug benefits available under our postretirement medical plan are "actuarially equivalent" to Medicare Part D and thus qualify for the subsidy under the Act. This subsidy reduced our 2011 Accumulated Postretirement Benefit Obligation by $30.3 million and our 2011 postretirement medical payments by $3.1 million.

Liability Adjustments

        At December 31, 2011 and 2010, our pension obligations and the fair value of our plan assets for our qualified and our nonqualified pension plans were as follows:

	Qualified Plans
						Non- Qualified Plans
At December 31, 2011	Constellation Energy		Boston Generating					Total
Accumulated benefit obligation	$	1,567.0	$	3.2		$	101.8	$	1,672.0
Fair value of assets		1,484.3		3.4			—		1,487.7
Net (asset) unfunded obligation	$	82.7	$	(0.2	)	$	101.8	$	184.3

At December 31, 2010	Qualified Plan			Non-Qualified Plans		Total
	(In millions)
Accumulated benefit obligation	$	1,405.2		$	87.8	$	1,493.0
Fair value of assets		1,408.1			—		1,408.1
Net (asset) unfunded obligation	$	(2.9	)	$	87.8	$	84.9

        We are required to reflect the funded status of our pension plans in terms of the projected benefit obligation, which is higher than the accumulated benefit obligation because it includes the impact of expected future compensation increases on the pension obligation. We reflect the funded status of our postretirement benefits in terms of the accumulated postretirement benefit obligation.

        The following table summarizes the impacts of funded status adjustments recorded during 2011 and 2010:

					Accumulated Other Comprehensive Income (Loss)
			Postretirement Benefit Liability
	Pension Liability
					Pre-tax			After-tax
	(In millions)
December 31, 2011	$	167.2	$	8.0	$	(175.2	)	$	(106.4	)
December 31, 2010	$	73.7	$	10.9	$	(84.6	)	$	(54.6	)

Obligations and Assets

        We show the change in the benefit obligations and plan assets of the pension and postretirement benefit plans in the following tables. Postretirement benefit plan amounts are presented net of expected reimbursements under Medicare Part D.

	Pension Benefits						Postretirement Benefits
	2011			2010			2011			2010
	(In millions)
Change in benefit obligation (1)
Benefit obligation at January 1	$	1,626.1		$	1,469.8		$	334.9		$	322.3
Service cost		50.3			37.9			2.9			2.4
Interest cost		87.4			84.7			17.1			17.7
Plan amendments		(0.5	)		—			1.3			(3.3	)
Plan participants' contributions		—			—			9.7			10.5
Actuarial loss		146.2			124.0			6.7			14.2
Acquisition of Boston Generating plan		3.2			—			—			—
Separation of CENG plans		—			(3.0	)		—			—
Settlements		(6.0	)		(5.2	)		—			—
Special termination benefits		—			0.6			0.2			0.1
Benefits paid (2)(3)		(91.2	)		(82.7	)		(25.0	)		(29.0	)
Benefit obligation at December 31	$	1,815.5		$	1,626.1		$	347.8		$	334.9

(1)

Amounts reflect projected benefit obligation for pension benefits and accumulated postretirement benefit obligation for postretirement benefits.

(2)

Pension benefits paid include annuity payments and lump-sum distributions.

(3)

Postretirement benefits paid are net of Medicare Part D and Early Retiree Reimbursement Program reimbursements.

	Pension Benefits						Postretirement Benefits
	2011			2010			2011			2010
	(In millions)
Change in plan assets
Fair value of plan assets at January 1	$	1,408.1		$	1,058.1		$	—		$	—
Actual return on plan assets		89.5			148.8			—			—
Employer contribution (1)		84.3			289.1			15.3			18.5
Plan participants' contributions		—			—			9.7			10.5
Acquisition of Boston Generating Plan		3.0			—			—			—
Settlements		(6.0	)		(5.2	)		—			—
Benefits paid (2)(3)		(91.2	)		(82.7	)		(25.0	)		(29.0	)
Fair value of plan assets at December 31	$	1,487.7		$	1,408.1		$	—		$	—

(1)

Includes benefit payments for unfunded plans.

(2)

Pension benefits paid include annuity payments and lump-sum distributions.

(3)

Postretirement benefits paid are net of Medicare Part D and Early Retiree Reimbursement Program reimbursements.

Net Periodic Benefit Cost and Amounts Recognized in Other Comprehensive Income

        We show the components of net periodic pension benefit cost in the following table:

Year Ended December 31,	2011			2010			2009
	(In millions)
Components of net periodic pension benefit cost
Service cost	$	50.3		$	37.9		$	50.8
Interest cost		87.4			84.7			101.1
Expected return on plan assets		(114.9	)		(101.8	)		(118.9	)
Amortization of unrecognized prior service cost		3.9			3.9			10.9
Recognized net actuarial loss		44.6			34.4			38.3
Amount capitalized as construction cost		(10.6	)		(10.2	)		(10.2	)
Net periodic pension benefit cost (1)	$	60.7		$	48.9		$	72.0

(1)

Net periodic pension benefit cost excludes settlement charges of $4.0 million and termination benefits of $0.2 million in 2011, settlement charge of $1.5 million and termination benefits of $0.6 million in 2010, and a settlement charge of $9.0 million and a termination benefit of $0.1 million in 2009. BGE's portion of our net periodic pension benefit costs, excluding amount capitalized, was $34.0 million in 2011, $30.9 million in 2010, and $27.9 million in 2009. The vast majority of our retirees were BGE employees.

        We show the components of net periodic postretirement benefit cost in the following table:

Year Ended December 31,	2011			2010			2009
	(In millions)
Components of net periodic postretirement benefit cost
Service cost	$	2.9		$	2.4		$	6.3
Interest cost		17.1			17.7			22.6
Amortization of transition obligation		1.7			2.1			2.1
Recognized net actuarial loss		1.5			0.4			2.2
Amortization of unrecognized prior service cost		(2.7	)		(2.6	)		(3.4	)
Amount capitalized as construction cost		(5.3	)		(5.4	)		(6.3	)
Net periodic postretirement benefit cost (1)	$	15.2		$	14.6		$	23.5

(1)

Net periodic postretirement benefit cost excludes termination benefits of $0.1 million in 2010. BGE's portion of our net periodic postretirement benefit cost, excluding amounts capitalized, was $17.5 million in 2011, $17.2 million in 2010, and $18.7 million in 2009.

        In determining net periodic pension benefit cost, we apply our expected return on plan assets to a market-related value of plan assets that recognizes asset gains and losses ratably over a five-year period.

        The following is a summary of amounts we have recorded in "Accumulated other comprehensive loss" and of expected amortization of those amounts over the next twelve months:

	Pension Benefits				Postretirement Benefits
											Expected Amortiz- ation Next 12 Months
	2011		2010		2011			2010
	(In millions)
Unrecognized actuarial loss	$	864.6	$	741.4	$	70.5		$	65.3		$	60.1
Unrecognized prior service cost		1.9		6.1		(10.0	)		(14.0	)		(0.5	)
Unrecognized transition obligation		—		—		1.8			3.5			1.8
Total	$	866.5	$	747.5	$	62.3		$	54.8		$	61.4

Expected Cash Benefit Payments

        The pension and postretirement benefits we expect to pay in each of the next five calendar years and in the aggregate for the subsequent five years are shown in the following table. These estimated benefits are based on the same assumptions used to measure the benefit obligation at December 31, 2011, but include benefits attributable to estimated future employee service.

	Pension Benefits		Postretirement Benefits (1)
2012	$	109.2	$	22.4
2013		107.6		23.0
2014		114.2		23.5
2015		165.7		23.9
2016		129.9		24.3
2017-2021		715.0		123.4

(1)

Postretirement benefit payments are net of Medicare Part D reimbursements.

Assumptions

        We made the assumptions below to calculate our pension and postretirement benefit obligations and periodic cost.

	Pension Benefits (1)						Postretirement Benefits
													Assumption Impacts Calculation of
	2011			2010			2011			2010
Discount rate as of January 1		5.50	%		6.00	%		5.50	%		6.00	%	Periodic Cost
Discount rate as of December 31		4.75	%		5.50	%		4.75	%		5.50	%	Benefit Obligation
Expected return on plan assets		8.00			8.50			N/A			N/A		Periodic Cost
Rate of compensation increase		4.0			4.0			4.0			4.0		Benefit Obligation and Periodic Cost

(1)

The Boston Generating Plan made the following assumptions to calculate its pension benefit obligation and periodic cost: discount rate as of January 3, 2011, the date of acquisition, 5.10%, discount rate as of December 31, 2011 4.20%, expected return on plan assets 8.00%, and rate of compensation increase 4.0%.

        Our discount rate is based on a bond portfolio analysis of high quality corporate bonds whose maturities match our expected benefit payments. Our 8.00% overall expected long-term rate of return on plan assets reflected our long-term investment strategy in terms of asset mix and expected returns for each asset class at the beginning of 2011. Effective in 2012, we reduced our expected long-term rate of return assumption to 7.50% reflecting our updated investment strategy, asset mix, and expected return for each asset class.

        Annual health care inflation rate assumptions also impact the calculation of our postretirement benefit obligation and periodic cost. We assumed the following health care inflation rates to produce average claims by year as shown below:

At December 31,	2011			2010
Next year		7.5	%		8.5	%
Following year		7.0	%		7.5	%
Ultimate trend rate		5.0	%		5.0	%
Year ultimate trend rate reached		2017			2017

        A one-percentage point increase in the health care inflation rate from the assumed rates would increase the accumulated postretirement benefit obligation by approximately $22.1 million as of December 31, 2011 and would increase the combined service and interest costs of the postretirement benefit cost by approximately $1.3 million annually.

        A one-percentage point decrease in the health care inflation rate from the assumed rates would decrease the accumulated postretirement benefit obligation by approximately $19.1 million as of December 31, 2011 and would decrease the combined service and interest costs of the postretirement benefit cost by approximately $1.1 million annually.

Qualified Pension Plan Assets

Investment Strategy

We invest our qualified pension plan assets using the following investment objectives:

• •

  ensure availability of funds for payment of plan benefits as they become due,

• •

  provide for a reasonable amount of long-term growth of capital (both principal and income) without excessive volatility,

  •

  produce investment results that meet or exceed the assumed long-term rate of return,

  •

  improve the funded status of the plan over time, and

  •

  reduce future contribution and expense volatility as funded status improves.

        To achieve these objectives, Constellation Energy, through a management Investment Committee (the Committee), which includes any advisors or experts that the Committee may hire, has adopted an investment strategy that divides its pension investment program into two primary portfolios:

• •

  return seeking assets—those assets intended to generate returns in excess of pension liability growth, and

  •

  liability hedging assets—those assets intended to have characteristics similar to pension liabilities.

        Currently, the Committee allocates 60% of its plan assets to return seeking assets to help reduce existing deficits in the funded status of the plan. As the funded status of our plans improves, the Committee expects to reduce its exposure to return seeking assets and increase its liability hedging assets to reduce its total risk.

Return Seeking Assets

The purpose of return seeking assets is to provide investment returns in excess of the growth of pension liabilities. This category includes a diversified portfolio of public equities, private equity, real estate, hedge funds, high yield bonds and other instruments. These assets are likely to have lower correlations with the pension liabilities and lead to higher funded status risk over shorter periods of time.

Liability Hedging Assets

The purpose of liability hedging assets, such as long duration bonds and interest rate derivatives, is to hedge against interest rate changes. Exposure to liability hedging assets is intended to reduce the volatility of plan funded status, contributions, and pension expense.

Risk Management

The Committee manages plan asset risk using several approaches. First, the assets are invested in two diverse portfolios: a growth portfolio and a portfolio that hedges changes in the liability due to interest rate movement. Each portfolio contains investments across a spectrum of asset classes. Second, the Committee considers the long-term investment horizon of the plan, which is greater than ten years. The long-term horizon enables the Committee to tolerate the risk of investment losses in the short-term with the expectation of higher returns in the long-term. Third, the Committee employs a thorough due diligence program prior to selecting an investment, and a rigorous ongoing monitoring program once assets are invested. The Committee evaluates risk on an ongoing basis.

Asset Allocation

Plan assets are diversified across various asset classes and securities based on the investment strategy approved by the Committee. This policy allocation is long-term oriented and consistent with the risk tolerance and funded status. The target asset allocation as well as the actual allocations for 2011 and 2010 are provided below.

	Target Allocation						Actual Allocation
At December 31,	2011			2010			2011			2010
Global equity securities		42	%		42	%		38	%		42	%
Fixed income securities		40			40			42			37
Alternative investments		12			12			11			8
High yield bonds		6			6			6			6
Cash and cash equivalents		—			—			3			7
Derivative instruments		—			—			—			—
Total		100	%		100	%		100	%		100	%

        The target asset allocation allows for investments in financial derivatives to hedge against liability changes caused by interest rate movement and capture security price volatility. These instruments are sensitive to changes in economic conditions.

        The Committee will also rebalance our portfolio periodically when the actual allocations fall outside of the ranges prescribed in the investment policy or as the funded status improves.

Fair Value Hierarchy

We determine the fair value of the plan assets using unadjusted quoted prices in active markets (Level 1) or pricing inputs that are observable (Level 2) whenever that information is available. We use unobservable inputs (Level 3) to estimate fair value only when relevant observable inputs are not available. We classify assets within this fair value hierarchy based on the lowest level of input that is significant to the fair value measurement of each individual asset taken as a whole.

        The following tables set forth by level, within the fair value hierarchy, the investments in the Plans' master trust at fair value as of December 31, 2011 and 2010:

At December 31, 2011	Level 1		Level 2		Level 3		Total Fair Value
	(In millions)
Global equity securities:
Money market funds (1)	$	22.6	$	—	$	—	$	22.6
Marketable equity securities		125.5		—		—		125.5
Common collective trusts		—		420.4		—		420.4
Mutual funds		2.2		—		—		2.2
Fixed income securities:
Money market funds (1)		20.4		—		—		20.4
Corporate debt securities		—		327.3		—		327.3
Government / agency securities		—		178.2		—		178.2
Municipal bonds		—		73.3		—		73.3
Guarantee insurance contracts		—		20.6		—		20.6
Asset and mortgage-backed securities		—		1.8		—		1.8
Mutual funds		1.0		—		—		1.0
High yield bonds:
Money market funds (1)		5.4		—		—		5.4
Corporate debt securities		—		76.9		—		76.9
Cash equivalents		49.0		—		—		49.0
Derivative instruments		—		0.4		—		0.4
Alternative investments		—		—		162.7		162.7
Total	$	226.1	$	1,098.9	$	162.7	$	1,487.7

(1)

Money market funds available for the portfolio manager to invest have been included within the respective security classification to differentiate from the actual cash position of the pension trust.

At December 31, 2010	Level 1		Level 2		Level 3		Total Fair Value
	(In millions)
Global equity securities:
Money market funds (1)	$	26.1	$	—	$	—	$	26.1
Marketable equity securities		143.6		—		—		143.6
Common collective trusts		—		421.4		—		421.4
Fixed income securities:
Money market funds (1)		9.8		—		—		9.8
Corporate debt securities		—		318.0		—		318.0
Government / agency securities		—		112.7		—		112.7
Municipal bonds		—		54.8		—		54.8
Guarantee insurance contracts		—		21.6		—		21.6
Asset and mortgage-backed securities		—		0.4		—		0.4
High yield bonds:
Money market funds (1)		4.7		—		—		4.7
Corporate debt securities		—		82.2		—		82.2
Cash equivalents		93.6		—		—		93.6
Derivative instruments		—		0.9		—		0.9
Alternative investments		—		—		118.3		118.3
Total	$	277.8	$	1,012.0	$	118.3	$	1,408.1

(1)

Money market funds available for the portfolio manager to invest have been included within the respective security classification to differentiate from the actual cash position of the pension trust.

        The following is a description of the valuation methodologies used for assets measured at fair value:

• •

  Global equity securities, which include marketable equity securities common collective trust securities, and mutual funds are valued at unadjusted quoted market share prices within active markets (Level 1) or based on external price/spread data of comparable securities (Level 2). Common collective trust funds within this category are valued at fair value based on the unit value of the fund which is observable on a less frequent basis (Level 2). Unit values are determined by the bank or financial institution sponsoring such funds by dividing the fund's net assets at fair value by its units outstanding at the valuation dates.

  •

  Fixed income (primarily corporate debt securities, government and agency securities, municipal bonds, guarantee insurance contracts, asset and mortgage-backed securities, and mutual funds), high yield bonds, and over-the-counter derivatives are valued based on external price data of comparable securities (Level 2).

  •

  Cash equivalents consist of money market funds, which are valued by multiplying unadjusted quoted prices in active markets by the quantity of the assets (Level 1).

  •

  Alternative investments primarily consist of hedge funds, real estate funds, and financial limited partnerships (private equity funds). These investments do not have readily determinable fair values because they are not listed on national exchanges or over-the-counter markets. We have valued these alternative investments at their respective net asset value per share (or its equivalent such as partner's capital) which has been calculated by each partnership's general partner in a manner consistent with generally accepted accounting principles in the United States of America for investment companies. Among other requirements, the partnerships must value their underlying investments at fair value. While the net asset value per share provides a reasonable approximation of fair value, the fair values of the alternative investments are estimates and, accordingly, such estimated values may differ from the values that would have been used had a ready market for the investments existed, and the differences could be material.

        The following table summarizes the changes in the fair value of the Level 3 assets for the years ended December 31, 2011 and 2010:

	Year Ended December 31,
	2011			2010
	(In millions)
Balance at beginning of period	$	118.3		$	74.4
Actual return on plan assets:
Assets still held at year end		(11.1	)		(32.1	)
Assets sold during the year		7.4			37.0
Purchases		160.3
Sales		(112.2	)
Net purchases, sales, and settlements		48.1			22.2
Transfers into Level 3		—			16.8
Transfers out of Level 3		—			—
Balance at end of year	$	162.7		$	118.3

Contributions and Benefit Payments

        We contributed $75.6 million to our qualified pension plans in 2011, of which $53.6 million was contributed by BGE. $75.0 million of this contribution was an acceleration of estimated calendar year 2012 contributions. Therefore, we do not plan to make contributions to our qualified pension plans in 2012. Our non-qualified pension plans and our postretirement benefit programs are not funded. We estimate that we will incur approximately $5 million in pension benefits for our non-qualified pension plans and approximately $22 million for retiree health and life insurance costs net of Medicare Part D during 2012.

Other Postemployment Benefits

        We provide the following postemployment benefits:

• •

  health and life insurance benefits to eligible employees determined to be disabled under our Disability Insurance Plan, and

  •

  income replacement payments for employees determined to be disabled before November 1995 (payments for employees determined to be disabled after that date are paid by an insurance company, and the cost is paid by employees).

        We recognized expense associated with our other postemployment benefits of $3.0 million in 2011, $9.9 million in 2010, and $5.3 million in 2009. BGE's portion of expense associated with other postemployment benefits was $2.8 million in 2011, $7.6 million in 2010, and $4.4 million in 2009.

        We assumed the discount rate for other postemployment benefits to be 3.00% as of December 31, 2011 and 4.00% as of December 31, 2010. This assumption impacts the calculation of our other postemployment benefit obligation and periodic cost.

Employee Savings Plan Benefits

        We sponsored two defined contribution plans until November 6, 2009, when upon the close of the sale of a 49.99% interest in CENG to EDF, we deconsolidated CENG and the defined contribution plan related to Nine Mile Point was removed from our books. For all remaining eligible employees of Constellation Energy, we continue to sponsor a defined contribution savings plan. The savings plan is a qualified 401(k) plan under the Internal Revenue Code. In a defined contribution plan, the benefits a participant is to receive result from regular contributions to a participant account. Matching contributions to participant accounts are made under these plans. Matching contributions were as follows:

Year Ended December 31,	2011		2010		2009
	(In millions)
Nonregulated businesses	$	10.1	$	9.9	$	14.8
BGE		6.6		6.3		5.7
Total Constellation Energy	$	16.7	$	16.2	$	20.5