UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended June 30, 1997
Commission file number 1-1910
BALTIMORE GAS AND ELECTRIC COMPANY
(Exact name of registrant as specified in its charter)
Maryland 52-0280210
(State of incorporation) (IRS 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)
Not Applicable
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
Common Stock, without par value - 147,667,114 shares outstanding on July 31,
1997.
1
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BALTIMORE GAS AND ELECTRIC COMPANY
----------------------------------
PART I. FINANCIAL INFORMATION
- -----------------------------
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended June 30, Six Months Ended June 30,
-------------------------- -------------------------
1997 1996 1997 1996
----------- ----------- ---------- ----------
(In Thousands, Except Per-Share Amounts)
Revenues
<S> <C> <C> <C> <C>
Electric ............................................................. $ 498,066 $ 517,780 $ 1,015,362 $ 1,072,224
Gas .................................................................. 92,338 93,515 306,046 312,779
Diversified businesses ............................................... 156,032 120,412 312,714 208,034
----------- ----------- ----------- -----------
Total revenues ....................................................... 746,436 731,707 1,634,122 1,593,037
----------- ----------- ----------- -----------
Expenses Other Than Interest and Income Taxes
Electric fuel and purchased energy ................................... 112,836 120,704 248,008 274,556
Disallowed replacement energy costs .................................. -- 6,764 -- 6,764
Gas purchased for resale ............................................. 48,167 49,384 181,421 178,412
Operations ........................................................... 133,157 130,196 265,031 262,364
Maintenance .......................................................... 62,650 60,811 102,195 95,252
Diversified businesses - selling, general, and administrative ........ 127,417 84,251 249,047 151,824
Write-downs of real estate investments ............................... 49,146 -- 67,596 --
Depreciation and amortization ........................................ 85,186 82,332 170,786 167,730
Taxes other than income taxes ........................................ 49,078 48,628 107,323 106,183
----------- ----------- ----------- -----------
Total expenses other than interest and income taxes .................. 667,637 583,070 1,391,407 1,243,085
----------- ----------- ----------- -----------
Income From Operations ................................................. 78,799 148,637 242,715 349,952
----------- ----------- ----------- -----------
Other Income
Allowance for equity funds used during construction .................. 1,206 2,006 2,416 3,971
Equity in earnings of Safe Harbor Water Power Corporation ............ 1,231 1,123 2,461 2,247
Net other income and deductions ...................................... (1,384) (1,950) (2,861) (4,098)
----------- ----------- ----------- -----------
Total other income ................................................... 1,053 1,179 2,016 2,120
----------- ----------- ----------- -----------
Income Before Interest and Income Taxes ................................ 79,852 149,816 244,731 352,072
----------- ----------- ----------- -----------
Interest Expense
Interest charges ..................................................... 59,827 53,054 116,114 105,772
Capitalized interest ................................................. (1,740) (3,416) (4,024) (6,568)
Allowance for borrowed funds used during construction ................ (653) (1,083) (1,306) (2,146)
----------- ----------- ----------- -----------
Net interest expense ................................................. 57,434 48,555 110,784 97,058
----------- ----------- ----------- -----------
Income Before Income Taxes ............................................. 22,418 101,261 133,947 255,014
----------- ----------- ----------- -----------
Income Taxes
Current .............................................................. 24,798 23,232 68,838 70,131
Deferred ............................................................. (15,467) 15,387 (18,208) 23,372
Investment tax credit adjustments .................................... (1,883) (1,911) (3,764) (3,823)
----------- ----------- ----------- -----------
Total income taxes ................................................... 7,448 36,708 46,866 89,680
----------- ----------- ----------- -----------
Net Income ............................................................. 14,970 64,553 87,081 165,334
Preferred and Preference Stock Dividends ............................... 7,874 12,104 15,758 21,768
----------- ----------- ----------- -----------
Earnings Applicable to Common Stock .................................... $ 7,096 $ 52,449 $ 71,323 $ 143,566
=========== =========== =========== ===========
Average Shares of Common Stock Outstanding 147,667 147,527 147,667 147,527
Earnings Per Share of Common Stock $0.05 $0.36 $0.48 $0.97
Dividends Declared Per Share of Common Stock $0.41 $0.40 $0.81 $0.79
</TABLE>
See Notes to Consolidated Financial Statements.
Certain prior period amounts have been reclassified to conform with the current
period presentation.
2
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BALTIMORE GAS AND ELECTRIC COMPANY
----------------------------------
PART I. FINANCIAL INFORMATION (Continued)
- -----------------------------------------
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1997* 1996
----------------- ---------------
(In Thousands)
ASSETS
Current Assets
<S> <C> <C>
Cash and cash equivalents ........................................................ $ 271,212 $ 66,708
Accounts receivable (net of allowance for uncollectibles ......................... 400,483 419,479
of $16,416 and $18,028 respectively)
Trading securities ............................................................... 84,956 68,794
Fuel stocks ...................................................................... 80,173 87,073
Materials and supplies ........................................................... 166,320 147,729
Prepaid taxes other than income taxes ............................................ 3,049 64,763
Deferred income taxes ............................................................ -- 2,943
Other ............................................................................ 39,051 44,709
----------- -----------
Total current assets ............................................................. 1,045,244 902,198
----------- -----------
Investments and Other Assets
Real estate projects ............................................................. 440,846 525,765
Power generation systems ......................................................... 404,868 379,130
Financial investments ............................................................ 198,037 204,443
Nuclear decommissioning trust fund ............................................... 128,723 116,368
Net pension asset ................................................................ 96,849 84,510
Safe Harbor Water Power Corporation .............................................. 34,385 34,363
Senior living facilities ......................................................... 46,351 36,415
Other ............................................................................ 99,019 92,171
----------- -----------
Total investments and other assets ............................................... 1,449,078 1,473,165
----------- -----------
Utility Plant
Plant in service
Electric ....................................................................... 6,644,436 6,514,950
Gas ............................................................................ 813,672 776,973
Common ......................................................................... 544,790 523,485
----------- -----------
Total plant in service ......................................................... 8,002,898 7,815,408
Accumulated depreciation ......................................................... (2,715,425) (2,613,355)
----------- -----------
Net plant in service ............................................................. 5,287,473 5,202,053
Construction work in progress .................................................... 158,600 221,857
Nuclear fuel (net of amortization) ............................................... 128,427 132,937
Plant held for future use ........................................................ 25,470 25,503
----------- -----------
Net utility plant ................................................................ 5,599,970 5,582,350
----------- -----------
Deferred Charges
Regulatory assets (net) .......................................................... 464,514 512,279
Other ............................................................................ 108,475 80,978
----------- -----------
Total deferred charges ........................................................... 572,989 593,257
----------- -----------
TOTAL ASSETS ....................................................................... $ 8,667,281 $ 8,550,970
=========== ===========
</TABLE>
* Unaudited
See Notes to Consolidated Financial Statements.
3
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BALTIMORE GAS AND ELECTRIC COMPANY
----------------------------------
PART I. FINANCIAL INFORMATION (Continued)
- -----------------------------------------
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1997* 1996
----------------- ---------------
(In Thousands)
LIABILITIES AND CAPITALIZATION
Current Liabilities
<S> <C> <C>
Short-term borrowings ............................................................ $ 116,900 $ 333,185
Current portions of long-term debt and preference stock .......................... 324,783 280,772
Accounts payable ................................................................. 147,536 172,889
Customer deposits ................................................................ 28,419 27,993
Accrued taxes .................................................................... 3,247 6,473
Accrued interest ................................................................. 61,356 57,440
Dividends declared ............................................................... 68,402 66,950
Accrued vacation costs ........................................................... 38,872 34,351
Other ............................................................................ 23,486 37,046
----------- -----------
Total current liabilities ........................................................ 813,001 1,017,099
----------- -----------
Deferred Credits and Other Liabilities
Deferred income taxes ............................................................ 1,276,242 1,300,174
Postretirement and postemployment benefits ....................................... 180,530 169,253
Decommissioning of federal uranium enrichment facilities ......................... 38,599 38,599
Other ............................................................................ 64,542 65,463
----------- -----------
Total deferred credits and other liabilities ..................................... 1,559,913 1,573,489
----------- -----------
Capitalization
Long-term Debt
First refunding mortgage bonds of BGE ............................................ 1,619,357 1,619,357
Other long-term debt of BGE ...................................................... 937,785 732,000
Long-term debt of Constellation Companies ........................................ 819,105 607,727
Long-term debt of other diversified businesses ................................... 22,000 12,000
Unamortized discount and premium ................................................. (14,317) (14,543)
Current portion of long-term debt ................................................ (221,783) (197,772)
----------- -----------
Total long-term debt ............................................................. 3,162,147 2,758,769
----------- -----------
Redeemable Preference Stock ........................................................ 216,000 217,500
Current portion of redeemable preference stock ................................... (103,000) (83,000)
----------- -----------
Total redeemable preference stock ................................................ 113,000 134,500
----------- -----------
Preference Stock Not Subject to Mandatory Redemption ............................... 210,000 210,000
----------- -----------
Common Shareholders' Equity
Common stock ..................................................................... 1,431,748 1,429,942
Retained earnings ................................................................ 1,370,778 1,419,065
Net unrealized gain on available-for-sale securities ............................. 6,694 8,106
----------- -----------
Total common shareholders' equity ................................................ 2,809,220 2,857,113
----------- -----------
Total capitalization ............................................................. 6,294,367 5,960,382
----------- -----------
TOTAL LIABILITIES AND CAPITALIZATION ............................................... $ 8,667,281 $ 8,550,970
=========== ===========
</TABLE>
* Unaudited
See Notes to Consolidated Financial Statements.
4
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BALTIMORE GAS AND ELECTRIC COMPANY
----------------------------------
PART I. FINANCIAL INFORMATION (Continued)
- -----------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-----------------------------------
1997 1996
--------------- ----------
(In Thousands)
Cash Flows From Operating Activities
<S> <C> <C>
Net income ............................................................................... $ 87,081 $ 165,334
Adjustments to reconcile to net cash provided by operating activities
Depreciation and amortization .......................................................... 195,730 191,549
Deferred income taxes .................................................................. (18,208) 23,372
Investment tax credit adjustments ...................................................... (3,764) (3,823)
Deferred fuel costs .................................................................... 27,738 20,060
Disallowance of replacement energy costs ............................................... -- 6,764
Accrued pension and postemployment benefits ............................................ (116) (9,999)
Write-downs of real estate investments ................................................. 67,596 --
Allowance for equity funds used during construction .................................... (2,416) (3,971)
Equity in earnings of affiliates and joint ventures (net) .............................. (15,604) (22,944)
Changes in current assets, other than sale of accounts receivable ...................... 57,882 26,530
Changes in current liabilities, other than short-term borrowings ....................... (31,943) (49,651)
Other .................................................................................. (816) 23,352
--------- ---------
Net cash provided by operating activities ................................................ 363,160 366,573
--------- ---------
Cash Flows From Financing Activities
Net issuance (maturity) of short-term borrowings ......................................... (207,500) (4,460)
Proceeds from issuance of long-term debt ................................................. 519,557 161,346
Reacquisition of long-term debt .......................................................... (102,219) (70,615)
Reacquisition of preferred and preference stock .......................................... (1,500) (63,559)
Common stock dividends paid .............................................................. (118,133) (115,071)
Preferred and preference stock dividends paid ............................................ (15,767) (19,785)
Other .................................................................................... 1,201 (436)
--------- ---------
Net cash provided by (used in) financing activities ...................................... 75,639 (112,580)
--------- ---------
Cash Flows From Investing Activities
Utility construction expenditures (including AFC) ........................................ (166,006) (164,747)
Allowance for equity funds used during construction ...................................... 2,416 3,971
Nuclear fuel expenditures ................................................................ (17,078) (15,125)
Deferred energy conservation expenditures ................................................ (13,149) (14,735)
Contributions to nuclear decommissioning trust fund ...................................... (8,816) (16,667)
Costs to achieve the proposed merger ..................................................... (22,355) (4,897)
Purchases of marketable equity securities ................................................ (9,904) (22,709)
Sales of marketable equity securities .................................................... 21,488 24,223
Other financial investments .............................................................. (853) 5,938
Real estate projects ..................................................................... 23,388 (19,913)
Power generation systems ................................................................. (17,193) (9,798)
Other .................................................................................... (26,233) (4,943)
--------- ---------
Net cash used in investing activities .................................................... (234,295) (239,402)
--------- ---------
Net Increase in Cash and Cash Equivalents .................................................. 204,504 14,591
Cash and Cash Equivalents at Beginning of Period ........................................... 66,708 23,443
--------- ---------
Cash and Cash Equivalents at End of Period ................................................. $ 271,212 $ 38,034
========= =========
Other Cash Flow Information Cash paid (received) during the period for:
Interest (net of amounts capitalized) $ 100,569 $ 96,790
Income taxes $ 57,901 $ 74,759
</TABLE>
See Notes to Consolidated Financial Statements.
Certain prior period amounts have been reclassified to conform with the current
period presentation.
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Weather conditions can have a great impact on our results for interim
periods. This means that results for interim periods do not necessarily
represent results to be expected for the year.
Our interim financial statements on the previous pages reflect all
adjustments which Management believes are necessary for the fair presentation of
the financial position and results of operations for the interim periods
presented. These adjustments are of a normal recurring nature.
ACCOUNTING STANDARDS ISSUED
- ---------------------------
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128 regarding earnings per share
which requires us to present basic and diluted earnings per share in our
financial statements. We must adopt the requirements of this standard in our
financial statements for the year ended December 31, 1997.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130
about reporting comprehensive income and SFAS No. 131 regarding disclosures
about operating segments. We must adopt the requirements of SFAS No. 130 in our
financial statements for the quarter ended March 31, 1998 and adopt the
requirements of SFAS No. 131 in our financial statements for the year ended
December 31, 1998.
Adoption of these standards is not expected to have a material impact on our
financial results or financial statement disclosures.
BGE FINANCING ACTIVITY
- ----------------------
Issuances
- ---------
We issued the following long-term debt during the period from January 1,
1997 through the date of this report:
Date Net Put Option
Principal Issued Proceeds Dates
--------- ------ -------- -----------
Medium-Term Notes, Series D
Floating Rate, Due 1999 $87,000,000 3/97 $86,826,000 -
Medium-Term Notes, Series E
6.75%, Due 2012 $60,000,000 6/97 $59,700,000 June 2002 and
June 2007
6.75%, Due 2012 $25,000,000 6/97 $24,862,500 June 2004 and
June 2007
6.73%, Due 2012 $25,000,000 6/97 $24,862,500 June 2004 and
June 2007
6.66%, Due 2006 $25,000,000 7/97 $24,862,500 -
Pollution Control Loan
Variable Rate, Due 2027 $8,785,000 6/97 $8,582,493 -
As noted above, some of the medium-term notes include a "put option." These
put options allow the holders to sell their notes back to BGE on the put option
dates at a price equal to 100% of the principal amount.
Early Redemptions
- -----------------
We redeemed some of our long-term debt and preference stock prior to their
maturity dates or required redemption dates during the period from January 1,
1997 through the date of this report.
6
<PAGE>
We redeemed or announced the redemption of the following bonds in connection
with the annual sinking fund required by our mortgage indenture:
Date of Price
Principal Redemption Paid
--------- ---------- ----
Various Bond Series $250,000 8/1/97 Various
7-1/8% Series, Due 1/1/2002 $16,060,000 8/28/97 100%
In addition, we made the following preference stock redemptions. Some were
mandatory under sinking fund provisions and others were optional.
Date Price
Shares Redeemed Per Share
------ -------- ---------
8.625%, 1990 Series 260,000 7/1/97 $100
7.85%, 1991 Series 140,000 7/1/97 $100
In the future, we may purchase some of our long-term debt or preference stock
in the market. This will depend on market conditions and our capital structure,
including our mix of secured and unsecured debt.
DIVERSIFIED BUSINESS FINANCING MATTERS
- --------------------------------------
Please refer to Management's Discussion and Analysis-Capital Requirements of
Our Diversified Businesses on page 31 for additional information about the debt
of our diversified businesses.
UPDATE ON PENDING MERGER WITH POTOMAC ELECTRIC POWER COMPANY (PEPCO) - ONE
- --------------------------------------------------------------------------------
REGULATORY APPROVAL CONTAINS UNACCEPTABLE CONDITIONS
- ----------------------------------------------------
Background
- ----------
As previously disclosed, in September 1995, we agreed with a neighboring
utility, Pepco, to merge together into a new company, Constellation EnergyTM
Corporation, after all necessary regulatory approvals were received. On April
16, 1997, we received two of the necessary approvals related to the merger, but
one of the approvals contains unacceptable conditions.
Management of both companies made a preliminary estimate of the net savings
that could be achieved from combining their utility operations. The net cost
savings are estimated to be up to $1.3 billion over the 10 years following the
merger. These savings would come from:
o reduced labor costs (about two-thirds of estimated savings),
o reduced purchasing costs of items other than fuel, and
o elimination of duplication in corporate and administrative programs.
The estimated savings are net of costs to achieve the merger, currently
estimated at $150 million. BGE and Pepco had proposed that the savings be shared
between the shareholders and customers of Constellation Energy Corporation. The
sharing of these costs will depend upon results of regulatory proceedings in the
various jurisdictions in which BGE and Pepco operate utility businesses.
However, a recent order from the Maryland Public Service Commission (Maryland
PSC) allocated almost all savings to customers. The Maryland PSC order and the
status of other regulatory approvals are discussed below.
7
<PAGE>
The estimate of the net cost savings from the merger was necessarily based on
various assumptions which involve judgments. The assumptions included, among
other items:
o future national and regional economic and competitive conditions,
o inflation rates,
o regulatory treatments,
o weather conditions,
o financial market conditions,
o interest rates, and
o future business decisions.
All of these items and other uncertainties are difficult to predict and many of
them are beyond our or Pepco's control. Accordingly, while we believe the
assumptions are reasonable for developing the estimate of net cost savings, we
cannot provide any assurance that the assumptions will approximate actual
results if the merger is closed or that all of the estimated savings will be
realized.
A Registration Statement on Form S-4 (Registration No. 33- 64799) discusses
in detail:
o the reasons for the merger,
o the terms and conditions contained in the merger agreement (which
terminates March 31, 1998),
o the regulatory approvals required prior to closing the merger, and
o other related matters.
That document is included as an exhibit to this Report on Form 10- Q by
incorporation by reference. Important updates about the status of regulatory
approvals needed before the merger can close are provided regularly in our
Reports on Forms 10-K, 10-Q, and 8- K. Also see additional information about
these approvals on the following pages.
An Important Condition to Our Obligation to Close the Merger
- ---------------------------------------------------------------------
The merger agreement includes conditions to BGE's and Pepco's obligations to
close the merger. One condition is that no necessary regulatory approval, like
the Maryland PSC order:
would have, or be reasonably likely to have, a material adverse effect on
the business, operations, properties, assets, condition (financial or
otherwise), prospects, or results of operations of Constellation Energy
Corporation.
Maryland PSC Order Approving the Merger Contains Unacceptable Financial Terms
- -----------------------------------------------------------------------------
Although the Maryland PSC approved the merger, its April 16, 1997 order
imposed a number of conditions that, together, in BGE's opinion would produce an
unacceptable financial result for Constellation Energy Corporation. BGE and
Pepco had proposed a regulatory plan to the Maryland and District of Columbia
Public Service Commissions that was designed to share the merger benefits
equitably between the shareholders and customers. The Maryland PSC order
included a number of conditions that, together, deny the shareholders a
reasonable opportunity to receive savings associated with the merger. Absent a
change in the order's negative financial implications to Constellation Energy
Corporation and its shareholders, the merger could not proceed.
BGE believes the Maryland PSC order would have a material adverse effect on
Constellation Energy Corporation and thus would not satisfy the condition to
closing mentioned above. On May 2, 1997, BGE and Pepco asked the Maryland PSC to
reconsider its decision. The companies detailed areas of the order that need to
be revised for the merger to proceed. BGE and Pepco proposed a modified plan to
address these concerns. The highlights of our original regulatory plan, the
Maryland PSC order, and our modified plan are as follows:
8
<PAGE>
BGE/Pepco
Maryland PSC BGE/Pepco Application for
Order Original Filing Rehearing
----- --------------- ---------
(all dollars in millions)
Up-Front Rate $56 $0 $26
Reduction (75% of (synergy (50/50
savings) sharing sharing)
giveback at
year-end)
Base Rate Freeze 3 years January 1,2000 4 years
(from merger (approximately (from merger
date) 2.5 years) date)
Purchased Capacity None for Surcharge Surcharge
Surcharge Panda and for all for all
(Approx. $100 Ohio Edison Maryland PSC Maryland PSC
million combined contracts approved approved
annual increase by contracts contracts
1999 in Maryland (subject to (no earnings (no earnings
and the District earnings tests) tests)
of Columbia in test)
purchased capacity
costs)
Return on Equity 11.4% 13% 11.9%
Threshold for
Synergy Sharing
Costs to Achieve the 5 years for 3 years 4 years
Merger Reflected in employee (rate freeze (rate freeze
Calculation for termination period) period)
Synergy Sharing costs, 10
Purposes years for
other costs
Accounting Treatment Same as for Same as for Write off
for Costs to Achieve synergy synergy in year
the Merger* sharing sharing merger
purposes purposes occurs
*As of June 30, 1997, BGE had deferred approximately $57 million of costs to
achieve the merger. If the merger does not occur, BGE will write off all or a
portion of these costs. The total costs expected to be incurred by BGE and
Pepco are estimated to be $150 million.
IBEW Appeal of Maryland PSC Order Clouds Jurisdiction for Rehearing
- -------------------------------------------------------------------
A union, The International Brotherhood of Electrical Workers (IBEW),
represents many of Pepco's employees who are paid by the hour. The IBEW had
attempted to organize BGE workers several times in the past. Their most recent
attempt ended in an election held in December 1996 where BGE workers voted 70%
against the union. The IBEW will have no standing to represent Constellation
Energy Corporation workers after the merger under Federal labor law, unless the
IBEW were to win an election at Constellation Energy Corporation.
The IBEW has intervened in many of the regulatory proceedings about the
merger, including the Maryland PSC proceeding. On May 1, 1997, the IBEW appealed
the Maryland PSC's order to the Circuit Court of Baltimore County. The union
asked the Court to reverse the PSC's approval of the merger. In past
proceedings, the Maryland PSC has taken the position that once an appeal is
filed with the Circuit Court following the PSC's issuance of an order, the
Maryland PSC loses its jurisdiction to reconsider or modify the order. BGE
believes the Maryland PSC retains jurisdiction and that the most appropriate
forum for consideration of its modified rate plan is the Maryland PSC. Also, the
Maryland PSC order contains certain mathematical errors in calculating the rate
reduction which as a matter of law should require that the order be remanded.
For these reasons, BGE and Pepco filed with the Circuit Court on May 9, 1997 a
motion to have the order remanded to the Maryland PSC for further consideration.
9
<PAGE>
On July 28, 1997 the Circuit Court accepted a correction to the PSC order
that reduced the up-front rate reduction to $47 million. The court then denied
the motion to remand the order, scheduled dates for filing memoranda, and
scheduled the appeal for hearing on October 20, 1997. BGE is examining all
avenues to have the order addressed by the Maryland PSC, but that is unlikely to
occur prior to the Circuit Court's processing of the appeal.
Where to Find the Maryland PSC Order
- ------------------------------------
The Maryland PSC order approving the merger is available at the Maryland PSC
web site at http://www.psc.state.md.us/psc/. You may also get a copy of the
order by calling us at (410)783-5920 or by writing to Baltimore Gas and Electric
Company, Shareholder Services, P.O. Box 1642, Baltimore, Maryland 21203-1642.
District of Columbia Public Service Commission (D.C. PSC)
- ---------------------------------------------------------
Hearings at the D.C. PSC on our proposed regulatory plan and the
applicability of an antimerger law concluded during the first quarter of 1997.
On August 5, 1997 the D.C. PSC concluded that the antimerger law does not apply
to mergers and consolidations and, therefore, does not impact the merger. No
decision has been rendered on the regulatory plan.
The D.C. Office of People's Counsel (the advocates for residential customers)
opposes the merger because they believe that BGE and Pepco have not proved that
the merger is in the public interest. However, if the merger is approved, the
D.C. People's counsel believes that the following conditions, among others,
should be imposed:
o rates should be reduced by $37.4 million,
o divestiture of all nonutility affiliate companies,
o insulation of all D.C. customers from all risks and costs associated
with our Calvert Cliffs Nuclear Power Plant,
o establishment of a 5-year $23.37 million per year economic
development program,
o 50/50 split between customers and shareholders of the costs
to achieve the merger, and
o a full divestiture of generation assets.
The General Services Administration (GSA), a major D.C. customer, believes
that approval of the merger should occur only if three conditions are met:
retail competition access for customers such as GSA is allowed, the costs
incurred to achieve the merger are amortized over 25 years, and generation at
our Calvert Cliffs facility is eliminated from the generating mix.
Federal Energy Regulatory Commission (FERC)
- -------------------------------------------------
On April 16, 1997, the FERC unanimously approved the merger without any
conditions.
ENVIRONMENTAL MATTERS
- ---------------------
The Clean Air Act of 1990 contains two titles designed to reduce emissions of
sulfur dioxide and nitrogen oxide (NOx) from electric generating stations -
Title IV and Title I.
Title IV addresses emissions of sulfur dioxide. Compliance is required in two
separate phases:
o Phase I became effective January 1, 1995. We met the requirements of this
phase by installing flue gas desulfurization systems (scrubbers),
switching fuels, and retiring some units.
o Phase II must be implemented by 2000. We are currently examining what
actions we should take to comply with this phase. We expect to meet the
compliance requirements through some combination
10
<PAGE>
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. We expect that by 1999 the regulations will require
more NOx controls for ozone attainment at our generating plants and other
facilities. 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. We cannot estimate the cost of additional
controls at our other facilities.
In July 1997, the government published new National Ambient Air Quality
Standards for very fine particulates and revised standards for ozone attainment.
These standards may require increased controls at our fossil generating plants
in the future. We cannot estimate the cost of these increased controls at this
time because the states, including Maryland, still need to determine what
reductions in pollutants will be necessary to meet the federal standards.
We have been notified by the Environmental Protection Agency and several
state agencies that we are considered a potentially responsible party (PRP) with
respect to the cleanup of certain environmentally contaminated sites. Those
sites are owned and operated by others. We cannot estimate the cleanup costs for
these sites. However, we can estimate that our 15.79% share of the possible
cleanup costs at one of these sites, Metal Bank of America (a metal reclaimer in
Philadelphia) could be approximately $7 million higher than amounts we have
recorded. This estimate is based on the highest estimate of costs in the range
of reasonably possible alternatives. The cleanup costs for some of the remaining
sites could be significant, but we do not expect them to have a material effect
on our financial position or results of operations.
Also, we are coordinating investigation of several sites where gas was
manufactured in the past. The investigation of these sites includes reviewing
possible actions to remove coal tar. In late December 1996, we signed a consent
order with the Maryland Department of the Environment that requires us to
implement remedial action plans for contamination at and around the Spring
Gardens site. The specific remedial actions for this site are being developed.
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 Sheet and have deferred these costs, net
of accumulated amortization, as a regulatory asset (we discuss this further in
Note 5 of our 1996 Annual Report on Form 10-K). We are also required by
accounting rules to disclose additional costs we consider to be less likely than
probable costs, but still "reasonably possible" of being incurred at these
sites. Because of the results of studies at these sites, it is reasonably
possible that these additional costs could exceed the amount we recognized by
approximately $48 million in nominal dollars ($11 million in current dollars,
plus the impact of inflation at 3.1% over a period of up to 60 years).
NUCLEAR INSURANCE
- -----------------
If there was an accident or an extended outage at either unit of the Calvert
Cliffs Nuclear Power Plant, it could have a substantial adverse effect on BGE.
The primary contingencies that would result from an incident at the Calvert
Cliffs plant would involve:
o the physical damage to the plant,
o the recoverability of replacement power costs, and
o our liability to third parties for property damage and bodily injury.
We have various insurance policies for these contingencies. However, the
costs that could result from a major accident or an extended outage at either of
the Calvert Cliffs units could exceed the insurance coverage limits.
11
<PAGE>
In addition, we could be assessed for a portion of any third party claims
associated with an incident at any commercial nuclear power plant in the
country. Under the provisions of the Price Anderson Act, the limit for third
party claims from a nuclear incident is $8.92 billion. If third party claims
exceed $200 million (the amount of primary insurance), our share of the total
liability for third party claims could be up to $159 million per incident. That
amount would be payable at a rate of $20 million per year.
As an operator of a commercial nuclear power plant in the United States, we
are required to purchase insurance to cover claims of certain nuclear workers.
We have primary coverage of up to $400 million for claims against us, or against
other operators who are insured by these policies, for radiation injuries. If
certain claims were made under these policies, we could be assessed along with
the other policyholders. Our share could be up to $6.02 million in any one year.
In addition, if these claims exceed the $400 million limit of the primary
coverage, the provisions of the Price Anderson Act (discussed above) would
apply.
For physical damage to Calvert Cliffs, we have $2.75 billion of property
insurance from industry mutual insurance companies. If an outage at Calvert
Cliffs is caused by an insured physical damage loss and lasts more than 21
weeks, we have up to $473.2 million per unit of insurance, provided by an
industry mutual insurance company, for replacement power costs. This amount can
be reduced by up to $94.6 million per unit if an outage to both units at Calvert
Cliffs is caused by a singular insured physical damage loss. If accidents at any
insured plants cause a shortfall of funds at the industry mutuals, we could be
assessed along with other policyholders. Our share could be up to $35 million.
RECOVERABILITY OF ELECTRIC FUEL COSTS
- -------------------------------------
By statute, we are allowed to recover our cost of electric fuel as long as
the Maryland PSC finds that, among other things, we have kept the productive
capacity of our generating plants at a reasonable level. To do this, the
Maryland PSC will perform an evaluation of each outage (other than regular
maintenance outages) at our generating plants. The evaluation will determine if
we used all reasonable and cost-effective maintenance and operating control
procedures to try to prevent the outage.
Effective January 1, 1987, the Maryland PSC established a Generating Unit
Performance Program to measure, annually, whether we, and other utilities, have
maintained the productive capacity of our generating plants at reasonable
levels. To do this, the program uses a system-wide generating performance target
or an individual performance target for each base load generating unit. In fuel
rate hearings, actual generating performance will be compared first to the
system-wide target. If that target is met, it should mean that the requirements
of Maryland law have been met. If the system-wide target is not met, each unit's
adjusted actual generating performance will be compared to its individual
performance target to determine if the requirements of Maryland law have been
met and 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 successful, the Maryland PSC may not allow us to recover the cost
of replacement energy.
The two units at our Calvert Cliffs Nuclear Power Plant (Calvert Cliffs) use
the cheapest fuel. As a result, the costs of replacement energy associated with
outages at these units can be significant. We cannot estimate the amount of
replacement energy costs that could be challenged or disallowed in future fuel
rate proceedings, but such amounts could be material. We discuss significant
disallowances in prior years related to an extended outage at Calvert Cliffs in
our 1996 Annual Report on Form 10-K.
CALIFORNIA POWER PURCHASE AGREEMENTS
- ------------------------------------
ConstellationTM Holdings, Inc. and Subsidiaries, together known as the
Constellation Companies, has ownership interests in 16 projects that sell
electricity in California under power purchase agreements called "Interim
Standard Offer No. 4" agreements. Under these agreements, the projects supply
electricity to utility companies at:
12
<PAGE>
o a fixed rate for capacity and energy the first 10 years of
the agreements, and
o a fixed rate for capacity plus a variable rate for energy based on the
utilities' avoided cost for the remaining term of the agreements.
Generally, a "capacity rate" is paid to a power plant for its availability to
supply electricity, and an "energy rate" is paid for the electricity actually
generated. "Avoided cost" generally is the cost of a utility's cheapest
next-available source of generation to service the demands on its system.
From 1996 through 2000, the 10-year periods for fixed energy rates expire for
these 16 power generation projects and they begin supplying electricity at
variable rates. When this happens, the revenues at these projects are expected
to be lower than they are now. It is difficult to estimate how much lower the
revenues may be, but the Constellation Companies' earnings could be affected
significantly.
Three projects have already begun supplying electricity at variable rates and
six other projects transition to variable rates later in 1997 or in 1998. This
means the Constellation Companies could experience lower earnings from those
projects. However, the remaining projects, which will continue to supply
electricity at fixed rates, are expected to have higher revenues in 1997 and
1998. These higher revenues may offset the lower revenues from the variable-rate
projects during those years.
The California projects that make the highest revenues will begin supplying
electricity at variable rates in 1999 and 2000. As a result, we do not expect
the Constellation Companies to have significantly lower earnings due to the
switch from fixed to variable rates before 2000.
The Constellation 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 Companies or on BGE, but the effects could be
material.
CONSTELLATION REAL ESTATE
- -------------------------
We consider market demand, interest rates, the availability of financing, and
the strength of the economy in general when making decisions about our real
estate investments. We believe that until the economy shows sustained growth and
there is more demand for new development, our real estate values will not
improve much. If we were to sell our real estate projects in the current market,
we would have losses, although the amount of the losses is hard to predict.
Management's current real estate strategy is to hold each real estate project
until we can realize a reasonable value for it. Management evaluates strategies
for all its businesses, including real estate, on an ongoing basis. We
anticipate that competing demands for our financial resources, changes in the
utility industry, and the proposed merger with Pepco, will cause us to evaluate
thoroughly all diversified business strategies on a regular basis so we use
capital and other resources in a manner that is most beneficial. Depending on
market conditions in the future, we could also have losses on any future sales.
It may be helpful for you to understand when we are required, by accounting
rules, to write down the value of a real estate investment to market value. A
write-down is required in either of two cases. The first is if we change our
intent about a project from an intent to hold to an intent to sell and the
market value of that project is below book value. The second is if the expected
cash flow from the project is less than the investment in the project.
13
<PAGE>
In mid-March we received an unsolicited offer to buy Church Street Station,
which is an entertainment, dining, and retail complex in Orlando, Florida.
Because of the unique character of Church Street Station and the geographic
distance of this project from our other real estate holdings in the
Baltimore-Washington corridor, we decided that considering a sale was the
appropriate strategy. Based on the accounting rules mentioned above, our
decision was a change of intent which required us to write down our investment
to the market value. In the first quarter of 1997, the Constellation Companies
recorded a $12 million after-tax write-down of the investment in the project.
Determining the market value for such a unique project is difficult, but the
unsolicited offer is the best indication available to us and we used it to
determine the amount of the write-down. Subsequently, other parties have
expressed interest in the project and negotiations are ongoing.
In the second quarter of 1997, the Constellation Companies recorded a $31.9
million after-tax write-down of the investment in a mixed-use, planned-unit
development named Piney Orchard. The development, located in the Baltimore-
Washington corridor, has been economically hurt by a prolonged period of low
economic growth in the corridor. While the project is successful operationally,
delays in the rebound of the real estate market caused delays in completion of
phases of the development and sales which drove up project costs, specifically
carrying costs which include interest expenses.
Under applicable accounting rules we are required to write down the value of
a real estate investment if expected cash flow from the project is less than the
investment in the project. The write-down discussed above was recorded because
the expected cash flow from the Piney Orchard project was less than the
Constellation Companies' investment in the project. This was due primarily to
carrying costs which include interest expenses.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
- --------------------------------------------------------------------------------
OPERATIONS
- ----------
INTRODUCTION
- ------------
In Management's Discussion and Analysis we explain the general financial
condition and the results of operations for BGE and its diversified business
subsidiaries including:
o what factors affect our business,
o what our earnings and costs were in the periods presented,
o why those earnings and costs were different between periods,
o where our earnings came from,
o how all of this affects our overall financial condition,
o what our actual expenditures for capital projects were in
the current period and what we expect them to be in the future, and
o where cash will come from to pay for future capital expenditures.
As you read Management's Discussion and Analysis, it may be helpful to refer
to our Consolidated Statements of Income on page 2, which present the results of
our operations for the quarters and the six month periods ended June 30, 1997
and 1996. In Management's Discussion and Analysis, we analyze and explain the
differences between periods in the specific line items of the Consolidated
Statements of Income. Our analysis may be important to you in making decisions
about your investments in BGE.
BGE and Potomac Electric Power Company (Pepco) have agreed to merge into a
new company named Constellation Energy Corporation. We plan to complete the
merger as soon as we obtain all regulatory approvals, assuming any conditions to
the approvals are acceptable. One such approval, an order from the Maryland
Public Service Commission (Maryland PSC), contains unacceptable financial
conditions. The merger will not occur unless these conditions are modified. We
discuss these matters in more detail in the Notes to Consolidated Financial
Statements on page 7 and in a Registration Statement on Form S-4 (Registration
No. 33-64799). If the merger occurs, it will impact many of the matters
discussed in Management's Discussion and Analysis including earnings, results of
electric operations, expenses, liquidity, and capital resources.
The electric utility industry is undergoing rapid and substantial change.
Competition is increasing. The regulatory environment (federal and state) is
shifting. These matters are discussed briefly in the "Competition and Response
to Regulatory Change" section on page 18 in Management's Discussion and
Analysis. They are discussed in detail in our 1996 Annual Report on Form 10-K.
We continuously evaluate these changes. Based on the evaluations, we refine
short and long term business plans with the primary goal of protecting our
security holders' investments and providing them with superior returns on their
investment in BGE.
In order to support this primary goal, we also focus on other groups who
impact our primary goal. For example, we stress providing low cost, reliable
power to our electric customers. As you read Management's Discussion and
Analysis, many of our initiatives to support our primary goal are mentioned.
These include the proposed merger with Pepco, designed to position us to remain
competitive as the industry changes (assuming it is possible to obtain
reasonable regulatory approvals), and our diversification effort. We enter new
businesses which we believe will support our primary goal. For example, new
businesses may be opportunities to:
o provide customers of our core energy business additional services, or
o attract new customers for our core energy business, or
o expand our diversified stream of revenues.
We believe our newest subsidiary, Constellation Power Source, Inc., will
provide an opportunity to satisfy all three criteria. Its proposed power
marketing business is described in detail under Diversified Businesses on page
28.
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<PAGE>
RESULTS OF OPERATIONS FOR THE QUARTER AND SIX MONTHS ENDED JUNE 30, 1997
- --------------------------------------------------------------------------------
COMPARED WITH THE CORRESPONDING PERIODS OF 1996
- -----------------------------------------------
In this section, we discuss our earnings and the factors affecting them. We
begin with a general overview, then separately discuss earnings for the utility
business and for diversified businesses.
OVERVIEW
- --------
Total Earnings per Share of Common Stock
- ----------------------------------------
Quarter Ended Six Months Ended
June 30 June 30
------- -------
1997 1996 1997 1996
---- ---- ---- ----
Earnings per share from
current-year operations:
Utility business $ .23 $ .29 $ .62 $ .86
Diversified businesses (.18) .10 (.14) .14
---- --- ---- ---
Total earnings per share from
current-year operations .05 .39 .48 1.00
Disallowed replacement
energy costs .00 (.03) .00 (.03)
--- ---- --- ----
Total earnings per share $ .05 $ .36 $ .48 $ .97
===== ===== ===== =====
Quarter Ended June 30, 1997
- ---------------------------
Our total earnings for the quarter ended June 30, 1997 decreased $45.3
million, or $.31 per share, compared to the same period of 1996.
In the second quarter of 1997, we had lower utility earnings due mostly to
two factors: we sold less electricity due to milder weather (people use less
electricity to heat or cool their homes in milder weather) and we had higher
operations and maintenance expenses. In addition, we wrote off certain fuel
costs in 1996 that were disallowed by the Maryland PSC. We did not have any
similar costs disallowed in 1997. This helped our earnings slightly. We discuss
our utility earnings in more detail beginning on page 17.
In the second quarter of 1997, we had lower earnings from our diversified
business subsidiaries mostly because the Constellation Companies had lower
earnings from real estate projects due to a $31.9 million, or $.22 per share,
after-tax write-down of an investment in one project. The Constellation
Companies also had lower earnings from power generation projects and financial
investments. We discuss this write-down and our diversified business earnings in
more detail beginning on page 24.
Six Months Ended June 30, 1997
- ------------------------------
Our total earnings for the six months ended June 30, 1997 decreased $72.2
million, or $.49 per share, compared to the same period of 1996.
In the six months ended June 30, 1997, we had lower utility earnings due
mostly to two factors: we sold less electricity and gas due to milder weather
(people use less gas and electricity to heat or cool their homes in milder
weather) and we had higher operations and maintenance expenses. In addition, we
wrote off certain fuel costs in 1996 that were disallowed by the Maryland PSC.
We did not have any similar costs disallowed in 1997. This helped our earnings
slightly. We discuss our utility earnings in more detail beginning on page 17.
In the six months ended June 30, 1997, we had lower earnings from our
diversified business subsidiaries mostly due to two factors: the Constellation
Companies had lower earnings from real estate projects because of the
16
<PAGE>
$31.9 million, or $.22 per share, after-tax write-down mentioned above and a $12
million, or $.08 per share, after-tax write-down of an investment in another
project during the first quarter of 1997. We discuss these write-downs and our
diversified business earnings in more detail beginning on page 24.
UTILITY BUSINESS
- ----------------
Before we go into the details of our electric and gas operations, we believe
it is important to discuss four factors that have a strong influence on our
utility business performance: regulation, the weather, other factors including
the condition of the economy in our service territory, and competition.
Regulation by the Maryland Public Service Commission
- ----------------------------------------------------
The Maryland PSC determines the rates we can charge our
customers. Our rates consist of a "base rate" and a "fuel rate". The base rate
is the rate the Maryland PSC allows us to charge our customers for the cost of
providing them service, plus a profit. We have both an electric base rate and a
gas base rate. Higher electric base rates apply during the summer when the
demand for electricity is the greatest. Gas base rates are not affected by
seasonal changes.
The Maryland PSC allows us to include in base rates a component to recover
money spent on conservation programs. This component is called an "energy
conservation surcharge." However, under this surcharge the Maryland PSC limits
what our profit can be. If, at the end of the year, we have exceeded our allowed
profit, we lower the amount of future surcharges to our customers to correct the
amount of overage, plus interest.
In addition, we charge our electric customers separately for the fuel
(nuclear fuel, coal, gas, or oil) we use to generate electricity. The actual
cost of the fuel is passed on to the customer with no profit. We also charge our
gas customers separately for the natural gas they consume. The price we charge
for the natural gas is based on a Market Based Rates incentive mechanism
approved by the Maryland PSC. We discuss Market Based Rates in more detail in
the "Gas Cost Adjustments" section on page 23.
From time to time, when necessary to cover increased costs, we ask the
Maryland PSC for base rate increases. Not every request for base rate increases
is granted in full. However, the Maryland PSC has historically allowed BGE to
increase base rates to recover costs for replacing utility plant assets, plus a
profit, beginning at the time of replacement. Generally, rate increases improve
our utility earnings because they allow us to collect more revenue. However,
rate increases are normally granted based on historical data and those increases
may not always keep pace with increasing costs.
Weather
- -------
Weather affects the demand for electricity and gas, especially among our
residential customers. Very hot summers and very cold winters increase demand.
Milder weather reduces demand.
We measure the weather's effect using "degree days." A degree day is the
difference between the average daily actual temperature and a baseline
temperature of 65 degrees. Cooling degree days result when the daily actual
temperature exceeds the 65 degree baseline. Heating degree days result when the
daily actual temperature is less than the baseline.
During the cooling season, hotter weather is measured by more cooling degree
days and results in greater demand for electricity to operate cooling systems.
During the heating season, colder weather is measured by more heating degree
days and results in greater demand for electricity and gas to operate heating
systems.
The following chart shows the number of heating and cooling degree-days in
1997 and 1996, and shows the percentage change in the number of degree days from
the prior period.
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<PAGE>
Quarter Ended Six Months Ended
June 30 June 30
------- -------
1997 1996 1997 1996
---- ---- ---- ----
Heating degree days 671 597 2,923 3,222
Percent change compared
to prior period 12.4% (9.3)%
Cooling degree days 179 279 182 279
Percent change compared
to prior period (35.8)% (34.8)%
Other Factors
- -------------
Other factors, aside from weather, impact the demand for electricity and gas.
These factors include the "number of customers" and "usage per customer" during
a given period.
The number of customers in a given period is affected by new home and
apartment construction and by the number of businesses in our service territory.
Usage per customer refers to all other items impacting customer sales which
cannot be separately measured. These factors include the strength of the economy
in our service territory. When the economy is healthy and expanding, customers
tend to consume more electricity and gas. Conversely, during an economic
downtrend, our customers tend to consume less electricity and gas.
We use these terms later in our discussions of electric and gas operations.
In those sections, we discuss how these and other factors affected electric and
gas sales during the periods presented.
Competition and Response to Regulatory Change
- ---------------------------------------------
Our business is also affected by competition. Electric utilities are facing
this challenge on various fronts, including:
o in the construction of generating units to meet increased demand for
electricity,
o in the sale of their electricity in the bulk power markets,
o in competing with alternative energy suppliers, and
o in the future, for electric sales to retail customers which utilities now
serve exclusively.
We regularly reevaluate our strategies with two goals in mind: to improve our
competitive position, and to anticipate and adapt to regulatory changes. In
September 1995, we decided that a merger with Pepco would help us compete by
maintaining low-cost production and increasing our size. The merger is more
thoroughly discussed in the Notes to Consolidated Financial Statements on page
7. Although we believe the merger will improve our competitive position in the
future, no one can predict the ultimate effect competition or regulatory change
will have on our earnings or on the earnings of the merged company.
We will continue to develop strategies to keep us competitive. These
strategies might include one or more of the following:
o the complete or partial separation of our generation, transmission, and
distribution functions
o other internal restructuring
o mergers or acquisitions of utility or non-utility businesses
o addition or disposition of portions of our service territories
o spin-off or distribution of one or more businesses
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.
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<PAGE>
We discuss competition in our electric and gas businesses in more detail in
our 1996 Annual Report on Form 10-K under the headings "Electric Regulatory
Matters and Competition" and "Gas Regulatory Matters and Competition."
Utility Business Earnings per Share of Common Stock
- ---------------------------------------------------
Quarter Ended Six Months Ended
June 30 June 30
------- -------
1997 1996 1997 1996
---- ---- ---- ----
Utility earnings per share
from current-year operations:
Electric business $ .23 $.29 $ .50 $ .71
Gas business .00 .00 .12 .15
--- --- --- ---
Total utility earnings per share
from current-year operations .23 .29 .62 .86
Disallowed replacement
energy costs .00 (.03) .00 (.03)
--- ---- --- ----
Total utility earnings per share $ .23 $ .26 $ .62 $ .83
===== ===== ===== =====
Our utility earnings for the quarter ended June 30, 1997 decreased $3.2
million, or $.03 per share compared to the same quarter of 1996. Our utility
earnings for the six months ended June 30, 1997 decreased $30.2 million, or $.21
per share compared to the same six months of 1996. We discuss the factors
affecting utility earnings below.
Electric Operations
- -------------------
Electric Revenues
- -----------------
The changes in electric revenues in 1997 compared to 1996 were caused by:
Quarter Ended Six Months Ended
June 30 June 30
1997 vs. 1996 1997 vs. 1996
------------- -------------
(In millions)
Electric system sales volumes $(16.1) $(40.2)
Base rates 4.7 11.0
Fuel rates (1.7) (8.0)
---- ----
Total change in electric revenues
from electric system sales (13.1) (37.2)
Interchange and other sales (6.6) (19.5)
Other 0.0 (0.2)
--- ----
Total change in electric revenues $(19.7) $(56.9)
====== ======
Electric System Sales Volumes
- -----------------------------
"Electric system sales" are sales to customers in our service territory at
rates set by the Maryland PSC. These sales do not include interchange sales and
sales to others.
The percentage changes in our electric system sales volumes, by type of
customer, in 1997 compared to 1996 were:
19
<PAGE>
Quarter Ended Six Months Ended
June 30 June 30
1997 vs. 1996 1997 vs. 1996
------------- -------------
Residential (6.9)% (10.2)%
Commercial 0.8 (0.8)
Industrial (1.2) (1.4)
During the quarter ended June 30, 1997, we sold less electricity to
residential and industrial customers mostly for two reasons: lower electricity
usage per customer and milder weather. We sold slightly more electricity to
commercial customers mostly due to higher usage per customer. We would have sold
even more electricity to commercial customers except for milder weather.
During the six months ended June 30, 1997, we sold less electricity to
residential and industrial customers mostly for two reasons: lower electricity
usage per customer and milder weather. We sold slightly less electricity to
commercial customers mostly due to milder weather. We would have sold even less
electricity to commercial customers except usage per customer increased.
Base Rates
- ----------
During the quarter and six months ended June 30, 1997, base rate revenues
were higher than they were in the same periods of 1996. Although we sold less
electricity this year, our base rate revenues increased because of a higher
energy conservation surcharge.
Fuel Rates
- ----------
The fuel rate is the rate the Maryland PSC allows us to charge our customers
for our actual cost of fuel with no profit to us. If the cost of fuel goes up,
the Maryland PSC permits us to increase the fuel rate. If the cost of fuel goes
down, our customers benefit from a reduction in the fuel rate. The fuel rate is
impacted most by the amount of electricity generated at the Calvert Cliffs
Nuclear Power Plant because the cost of nuclear fuel is cheaper than coal, gas,
or oil.
Changes in the fuel rate normally do not affect earnings. However, if the
Maryland PSC disallows recovery of any part of the fuel costs, our earnings are
reduced. (We discuss this more thoroughly in the "Electric Fuel and Purchased
Energy Expenses" section below and in the Notes to Consolidated Financial
Statements on page 12.)
During the quarter and six months ended June 30, 1997, fuel rate revenues
decreased because we sold less electricity.
Interchange and Other Sales
- ---------------------------
"Interchange and other sales" are sales of energy in the Pennsylvania-New
Jersey-Maryland Interconnection (PJM) and to others. The PJM is a regional power
pool of eight utility member companies, including BGE. We sell energy to PJM
members and to others after we have satisfied the demand for electricity in our
own system.
During the quarter and six months ended June 30, 1997, we had lower
interchange and other sales mostly because of lower sales volumes due to reduced
demand.
20
<PAGE>
Electric Fuel and Purchased Energy Expenses
- -------------------------------------------
Quarter Ended Six Months Ended
June 30 June 30
------- -------
1997 1996 1997 1996
---- ---- ---- ----
(In millions)
Actual costs $115.9 $131.6 $246.0 $279.1
Net recovery (deferral)
of costs under electric
fuel rate clause (see
Note 1 of the Form 10-K) (3.1) (10.9) 2.0 (4.6)
Disallowed replacement
energy costs 0.0 6.8 0.0 6.8
--- --- --- ---
Total electric fuel and
purchased energy expenses $112.8 $127.5 $248.0 $281.3
====== ====== ====== ======
Actual Costs
- ------------
During the quarter and six months ended June 30, 1997, our actual cost of
fuel to generate electricity (nuclear fuel, coal, gas, or oil) and electricity
we bought from other utilities was lower than in the same periods of 1996
because we generated and purchased less electricity due to reduced demand.
Electric Fuel Rate Clause
- -------------------------
The "electric fuel rate clause" (determined by the Maryland PSC) requires
that we defer (to include as an asset or liability on the balance sheet and
exclude from income and expense) the difference between our actual costs of fuel
and our fuel rate revenues collected from customers through the fuel rate. We
bill or refund that difference to customers in the future.
During the quarter ended June 30, 1997, our actual fuel costs were higher
than the fuel rate revenues we collected from our customers. As a result, we
deferred the difference and will collect the costs from our customers in the
future.
During the six months ended June 30, 1997, our actual fuel costs were lower
than the fuel rate revenues we collected from our customers. As a result, we
recovered fuel costs which we had deferred in prior years.
Disallowed Replacement Energy Costs
- -----------------------------------
In June 1996, we wrote off $6.8 million of fuel costs that were disallowed by
the Maryland PSC. We did not have any similar costs disallowed in 1997.
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<PAGE>
Gas Operations
- --------------
Gas Revenues
- ------------
The changes in gas revenues in 1997 compared to 1996 were caused by:
Quarter Ended Six Months Ended
June 30 June 30
1997 vs. 1996 1997 vs. 1996
------------- -------------
(In millions)
Gas system sales volumes $0.4 $(8.3)
Base rates (0.4) (2.3)
Gas cost adjustments 1.1 (1.4)
--- ----
Total change in gas revenues
from gas system sales 1.1 (12.0)
Off-system sales (2.1) 5.4
Other (0.2) (0.1)
---- ----
Total change in gas revenues $(1.2) $(6.7)
===== =====
Gas System Sales Volumes
- ------------------------
The percentage changes in our gas system sales volumes, by type of customer,
in 1997 compared to 1996 were:
Quarter Ended Six Months Ended
June 30 June 30
1997 vs. 1996 1997 vs. 1996
------------- -------------
Residential 2.1% (11.8)%
Commercial (4.9) (1.2)
Industrial 4.1 8.2
During the quarter ended June 30, 1997, we sold more gas to residential
customers due mostly to cooler early spring weather and an increase in the
number of customers. We would have sold even more gas to residential customers
except that usage per customer decreased. We sold less gas to commercial
customers due mostly to lower usage per customer. We would have sold even less
gas to commercial customers except for cooler early spring weather. We sold more
gas to industrial customers mostly because Bethlehem Steel used more gas. We
would have sold even more gas to industrial customers except gas usage by other
industrial customers decreased.
During the six months ended June 30, 1997, we sold less gas to residential
and commercial customers due mostly to lower usage per customer and milder
winter weather. We would have sold even less gas to these customers except the
number of customers increased. We sold more gas to industrial customers mostly
because Bethlehem Steel used more gas and the milder winter weather caused fewer
service interruptions. We would have sold even more gas to industrial customers
except gas usage by other industrial customers decreased.
Base Rates
- ----------
During the quarter ended June 30, 1997, base rate revenues decreased mostly
because of a lower energy conservation surcharge. During the six months ended
June 30, 1997, base rate revenues decreased mostly because of a lower energy
conservation surcharge and because of lower sales volumes due to reduced demand.
22
<PAGE>
Gas Cost Adjustments
- --------------------
Prior to October 1996, the Maryland PSC allowed us to recover the actual cost
of the gas sold to our customers through "gas cost adjustment clauses" that
require us to defer the difference between our actual cost of gas and the gas
revenues we collect from customers. We bill or refund that difference to
customers in the future.
Effective October 1996, the Maryland PSC approved a modification of the gas
cost adjustment clauses to provide a "Market Based Rates" incentive mechanism.
In general terms, under Market Based Rates our actual cost of gas is compared to
a market index (a measure of the market price of gas in a given period), and
half of the difference belongs to shareholders.
Delivery service customers, including Bethlehem Steel, are not subject to the
gas cost adjustment clauses because we are not selling them gas (we are selling
them the service of delivering their gas).
During the quarter and six months ended June 30, 1997, gas adjustment
revenues changed based on the operation of the Market Based Rates incentive
mechanism.
Off-System Sales
- ----------------
Off-system gas sales, which are direct sales to wholesale suppliers of
natural gas outside our service territory, also are not subject to gas cost
adjustments. The Maryland PSC approved an arrangement for part of the earnings
from off-system sales to benefit customers (through reduced costs) and the
remainder to be retained by BGE (which benefits shareholders). The price of this
gas changes based on market conditions.
During the quarter ended June 30, 1997, revenues from off- system gas sales
decreased because we sold gas off-system at a lower price. During the six months
ended June 30, 1997, off- system gas sales increased mostly because we first
began off- system sales of gas in February of 1996. These changes in off- system
sales did not significantly impact earnings.
Gas Purchased For Resale Expenses
- ---------------------------------
Quarter Ended Six Months Ended
June 30 June 30
------- -------
1997 1996 1997 1996
---- ---- ---- ----
(In millions)
Actual costs $38.7 $48.3 $173.5 $175.2
Net recovery of costs under
gas adjustment clauses
(see Note 1 of the Form 10-K) 9.5 1.1 7.9 3.2
--- --- --- ---
Total gas purchased for
resale expenses $48.2 $49.4 $181.4 $178.4
===== ===== ====== ======
Actual Costs
- ------------
Actual costs include the cost of gas purchased for resale to our customers
and for sale off-system. These costs do not include the cost of gas purchased by
delivery service customers, including Bethlehem Steel.
During the quarter ended June 30, 1997, actual gas costs decreased mostly
because the market price of gas was lower. During the six months ended June 30,
1997, actual gas costs decreased mostly because we sold less gas.
23
<PAGE>
Gas Adjustment Clauses
- ----------------------
We charge customers for the cost of gas sold through gas adjustment clauses
(determined by the Maryland PSC), as discussed under "Gas Cost Adjustments"
earlier in this section.
During the quarter and six months ended June 30, 1997, the portion of our
actual gas costs subject to these clauses was lower than the revenues we
collected from our customers. As a result, we recovered costs which we had
deferred in prior years.
Other Operating Expenses
- ------------------------
Operations and Maintenance Expenses
- -----------------------------------
During the quarter ended June 30, 1997, our operations and maintenance
expenses increased $4.8 million. During the six months ended June 30, 1997, our
operations and maintenance expenses increased $9.6 million. These increases were
mostly due to costs associated with a regular maintenance outage at our Calvert
Cliffs Nuclear Power Plant.
Other Income and Expenses
- -------------------------
Interest Charges
- ----------------
Interest charges represent the interest we paid on outstanding debt. During
the quarter ended June 30, 1997, we had $6.8 million of higher interest charges.
During the six months ended June 30, 1997, we had $10.3 million of higher
interest charges. Our interest charges increased during these periods because we
had more debt outstanding and interest rates were higher.
Income Taxes
- ------------
During the quarter ended June 30, 1997, our total income taxes decreased
$29.3 million. During the six months ended June 30, 1997, our total income taxes
decreased $42.8 million. Our income taxes decreased during these periods because
we had lower taxable income from both our utility operations and our diversified
businesses.
Environmental Matters
- ---------------------
We are subject to increasingly stringent federal, state, and local laws and
regulations that work to improve or maintain the quality of the environment. If
certain substances were disposed of or released at any of our properties,
whether currently operating or not, these laws and regulations require us to
remove or remedy the effect on the environment. This includes Environmental
Protection Agency Superfund sites. You will find details of our environmental
matters in the Notes to Consolidated Financial Statements on page 10 and in our
1996 Annual Report on Form 10-K under Item 1. Business - Environmental Matters.
These details include financial information. Some of the information is about
costs that may be material.
DIVERSIFIED BUSINESSES
- ----------------------
In the 1980's, we began to diversify our business in response to limited
growth in gas and electric sales. Today, we continue to diversify our business
in response to regulatory changes in the utility industry. Some of our
diversified businesses are related to our core utility business and others are
not. Our diversified businesses are in three groups:
24
<PAGE>
o Constellation Holdings, Inc. and Subsidiaries, together known
as the Constellation Companies,
o Constellation Energy Solutions, Inc. (formerly named BGE
Corp.) and Subsidiaries, and
o BGE Home Products & Services, Inc. and Subsidiary.
Diversified Business Earnings per Share of Common Stock
- -------------------------------------------------------
Quarter Ended Six Months Ended
June 30 June 30
------- -------
1997 1996 1997 1996
---- ---- ---- ----
Constellation Companies $ (.17) $ .09 $ (.14) $ .13
Constellation Energy Solutions (.02) .00 (.02) .00
BGE Home Products & Services .01 .01 .02 .01
--- --- --- ---
Total diversified business
earnings per share $(.18) $ .10 $(.14) $ .14
===== ===== ===== =====
Our diversified business earnings for the quarter ended June 30, 1997
decreased $42.2 million, or $.28 per share compared to the same quarter of 1996.
Our diversified business earnings for the six months ended June 30, 1997
decreased $42.1 million, or $.28 per share compared to the same six months of
1996. These decreases came mostly from the Constellation Companies. We discuss
the factors affecting the earnings of our diversified businesses below.
The Constellation Companies - Power Generation, Financial Investments, and Real
- --------------------------------------------------------------------------------
Estate
- ------
The Constellation Companies engage in the following:
o development, ownership, and operation of power generation projects,
o financial investments, and
o development, ownership, and management of real estate and senior-living
facilities.
Earnings per share from the Constellation Companies were:
Quarter Ended Six Months Ended
June 30 June 30
------- -------
1997 1996 1997 1996
---- ---- ---- ----
Power generation systems $ .05 $ .07 $ .12 $ .11
Financial investments .02 .04 .05 .05
Real estate development and
senior-living facilities (.23) (.01) (.30) (.02)
Other (.01) (.01) (.01) (.01)
---- ---- ---- ----
Total Constellation Companies'
earnings per share $(.17) $ .09 $(.14) $ .13
===== ===== ===== =====
Power Generation
- ----------------
The Constellation Companies' power generation business develops, owns, and
operates power generation facilities. Earnings from these projects fluctuate
based on their operating performance. Earnings may also fluctuate in the future
based on the pricing provisions of certain agreements. This is discussed further
in the "California Power Purchase Agreements" section that follows.
25
<PAGE>
During the quarter ended June 30, 1997, earnings decreased mostly due to our
share of lower earnings from energy projects. During the six months ended June
30, 1997, earnings increased mostly due to our share of higher earnings from
energy projects.
California Power Purchase Agreements
- ------------------------------------
The Constellation Companies have $232 million invested in 16 projects that
sell electricity in California under power purchase agreements called "Interim
Standard Offer No. 4" agreements.
Under these agreements, the projects supply electricity to utility companies
at:
o a fixed rate for capacity and energy the first 10 years of
the agreements, and
o a fixed rate for capacity plus a variable rate for energy based on the
utilities' avoided cost for the remaining term of the agreements.
Generally, a "capacity rate" is paid to a power plant for its availability to
supply electricity, and an "energy rate" is paid for the electricity actually
generated. "Avoided cost" generally is the cost of a utility's cheapest
next-available source of generation to service the demands on its system.
From 1996 through 2000, the 10-year periods for fixed energy rates expire for
these 16 power generation projects and they begin supplying electricity at
variable rates. When this happens, the revenues at these projects are expected
to be lower than they are now. It is difficult to estimate how much lower the
revenues may be, but the Constellation Companies' earnings could be affected
significantly.
Three projects have already begun supplying electricity at variable rates and
six other projects transition to variable rates later in 1997 or in 1998. This
means the Constellation Companies could experience lower earnings from those
projects. However, the remaining projects, which will continue to supply
electricity at fixed rates, are expected to have higher revenues in 1997 and
1998. These higher revenues may offset the lower revenues from the variable-rate
projects during those years.
The California projects that make the highest revenues will begin supplying
electricity at variable rates in 1999 and 2000. As a result, we do not expect
the Constellation Companies to have significantly lower earnings due to the
switch from fixed to variable rates before 2000.
The Constellation 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 Companies or on BGE, but the effects could be
material.
International
- -------------
Historically, the Constellation Companies' power generation projects have
been in the United States. Over the last two years, however, the Constellation
Companies have sought projects in Latin America. As of June 30, 1997, the
Constellation Companies had invested about $17.1 million and committed another
$6.4 million in power projects in Latin America. In the future, the
Constellation Companies' power generation business may be expanding further in
both domestic and international projects.
26
<PAGE>
Financial Investments
- ---------------------
Earnings from the Constellation Companies' portfolio of financial investments
include:
o income from marketable securities,
o income from financial limited partnerships, and
o income from financial guaranty insurance companies.
During the quarter ended June 30, 1997, earnings were lower than in 1996
mostly due to two factors. We recorded a $1.9 million after-tax gain on a sale
of stock in the second quarter of 1996. We did not record a similar gain in the
same period of 1997. Also, in the second quarter of 1997 we recorded a $1.3
million after-tax write-down of one investment. During the six months ended June
30, 1997, earnings were about the same as they were in the same period of 1996.
Real Estate Development and Senior-Living Facilities
- ----------------------------------------------------
The Constellation Companies' real estate development business includes:
o land under development,
o office buildings,
o retail projects,
o distribution facility projects,
o an entertainment, dining, and retail complex in Orlando, Florida,
o a mixed-use planned-unit development, and
o senior-living facilities.
Most of these projects are in the Baltimore-Washington corridor. The area has
had a surplus of available land and office space in recent years, during a time
of low economic growth and corporate downsizings. Our projects have been
economically hurt by these conditions.
During the quarter ended June 30, 1997, earnings from real estate development
and senior-living facilities were lower mostly due to a $31.9 million, or $.22
per share, after-tax write-down of the investment in one project. During the six
months ended June 30, 1997, earnings from real estate development and senior-
living facilities were lower mostly because of the $31.9 million, or $.22 per
share, write-down mentioned above and a $12 million, or $.08 per share,
after-tax write-down of the investment in another project during the first
quarter of 1997. These write-downs are discussed later in this section.
The Constellation Companies' real estate portfolio has continued to incur
carrying costs and depreciation over the years. Additionally, the Constellation
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 Companies and through additional
borrowing.
We consider market demand, interest rates, the availability of financing, and
the strength of the economy in general when making decisions about our real
estate investments. We believe that until the economy shows sustained growth and
there is more demand for new development, our real estate values will not
improve much. If we were to sell our real estate projects in the current market,
we would have losses, although the amount of the losses is hard to predict.
Management's current real estate strategy is to hold each real estate project
until we can realize a reasonable value for it. Management evaluates strategies
for all its businesses, including real estate, on an ongoing basis. We
anticipate that competing demands for our financial resources, changes in the
utility industry, and the proposed merger with Pepco, will cause us to evaluate
thoroughly all diversified business strategies on a regular basis so we use
capital and other resources in a manner that is most beneficial. Depending on
market conditions in the future, we could also have losses on any future sales.
27
<PAGE>
It may be helpful for you to understand when we are required, by accounting
rules, to write down the value of a real estate investment to market value. A
write-down is required in either of two cases. The first is if we change our
intent about a project from an intent to hold to an intent to sell and the
market value of that project is below book value. The second is if the expected
cash flow from the project is less than the investment in the project.
In mid-March we received an unsolicited offer to buy Church Street Station,
which is an entertainment, dining, and retail complex in Orlando, Florida.
Because of the unique character of Church Street Station and the geographic
distance of this project from our other real estate holdings in the
Baltimore-Washington corridor, we decided that considering a sale was the
appropriate strategy. Based on the accounting rules mentioned above, our
decision was a change of intent which required us to write down our investment
to the market value. In the first quarter of 1997, the Constellation Companies
recorded a $12 million after-tax write-down of the investment in the project.
Determining the market value for such a unique project is difficult, but the
unsolicited offer is the best indication available to us and we used it to
determine the amount of the write-down. Subsequently, other parties have
expressed interest in the project and negotiations are ongoing.
In the second quarter of 1997, the Constellation Companies recorded a $31.9
million after-tax write-down of the investment in a mixed-use, planned-unit
development named Piney Orchard. The development, located in the Baltimore-
Washington corridor, has been economically hurt by a prolonged period of low
economic growth in the corridor. While the project is successful operationally,
delays in the rebound of the real estate market caused delays in completion of
phases of the development and sales which drove up project costs, specifically
carrying costs which includes interest expenses.
Under applicable accounting rules we are required to write down the value of
a real estate investment if expected cash flow from the project is less than the
investment in the project. The write-down discussed above was recorded because
the expected cash flow from the Piney Orchard project was less than the
Constellation Companies' investment in the project. This was due primarily to
carrying costs which include interest expenses.
Constellation Energy Solutions, Inc. and Subsidiaries - Our Energy Marketing
- --------------------------------------------------------------------------------
Companies
- ---------
Constellation Energy Solutions (formerly named BGE Corp.) is a wholly owned
subsidiary of BGE and serves as the holding company for our three energy
marketing businesses:
o Constellation Power Source, Inc. - our power marketing
business,
o Constellation Energy Source, Inc. (formerly named BNG, Inc.) -
our natural gas brokering business, and
o BGE Energy Projects & Services, Inc. and Subsidiaries - our
energy services business.
Earnings per share from our energy marketing subsidiaries were not
significant in 1997 or 1996. We describe each subsidiary's business in detail
below.
Constellation Power Source, Inc.
- --------------------------------
Constellation Power Source was formed in February 1997 for the purpose of
entering the power marketing business. This new business involves the purchase
and sale of electric power and electric power derivatives, and related
activities including:
o power brokering,
o power marketing,
o risk management activities, and
o derivative trading.
28
<PAGE>
Goldman Sachs Power, LLC, an affiliate of Goldman Sachs & Co., the investment
banking firm, is the exclusive advisor to Constellation Power Source for risk
management and power marketing.
Constellation Energy Source, Inc.
- ---------------------------------
Constellation Energy Source (formerly named BNG, Inc.) engages in natural gas
brokering and related services for wholesale and retail customers.
BGE Energy Projects & Services, Inc. and Subsidiaries
- -----------------------------------------------------
BGE Energy Projects & Services provides a broad range of customized energy
services, including:
o private electric and gas distribution systems,
o energy consulting,
o power quality services, and
o campus and multi-building energy systems.
BGE Energy Projects & Services also provides district energy systems through
ComfortLink(R) (a partnership with the Poole & Kent Company).
BGE Home Products & Services, Inc. and its Subsidiary - Our Home Products and
- --------------------------------------------------------------------------------
Commercial Building Systems Businesses
- --------------------------------------
BGE Home Products & Services engages in:
o sales and service of electric and gas appliances,
o home improvements, and
o sales and service of heating and air conditioning systems.
This subsidiary had no significant earnings in 1997 or 1996.
29
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
OVERVIEW
- --------
Our business requires a great deal of capital. Our actual capital
requirements for the six months ended June 30, 1997, along with estimated annual
amounts for the years 1997 through 1999, are shown below. For the twelve months
ended June 30, 1997, our ratio of earnings to fixed charges was 2.50 and our
ratio of earnings to combined fixed charges and preferred and preference
dividend requirements was 2.05.
Six Months Ended
June 30 Calendar Year Estimate
1997 1997 1998 1999
---- ---- ---- ----
(In millions)
Utility Business Capital
- -------------------------
Requirements:
- -------------
Construction expenditures
(excluding AFC)
Electric $110 $230 $216 $215
Gas 39 72 70 73
Common 13 33 39 37
-- -- -- --
Total construction expenditures 162 335 325 325
AFC 4 7 7 7
Nuclear fuel (uranium purchases
and processing charges) 17 49 50 50
Deferred energy conservation
expenditures 13 24 19 18
Retirement of long-term debt and
redemption of preference stock 2 185 117 345
- --- --- ---
Total utility business
capital requirements 198 600 518 745
--- --- --- ---
Diversified Business
- ---------------------
Capital Requirements:
- ---------------------
Investment requirements 69 220 168 173
Retirement of long-term debt 86 187 165 121
-- --- --- ---
Total diversified business
capital requirements 155 407 333 294
--- --- --- ---
Total capital requirements $353 $1,007 $851 $1,039
==== ====== ==== ======
CAPITAL REQUIREMENTS OF OUR UTILITY BUSINESS
- --------------------------------------------------
Capital requirements for our utility business do not include:
o costs to complete the pending merger with Pepco, or
o costs for increased controls at our fossil generating plants to meet
the new standards for very fine particulates and the revised standards
for ozone attainment.
The costs to complete the pending merger with Pepco, which are expected to be
$150 million, are discussed in the Notes to Consolidated Financial Statements on
page 7. The costs for increased controls at our fossil generating plants to meet
the new standards for very fine particulates and the revised standards for ozone
attainment are discussed in the Notes to Consolidated Financial Statements on
page 11.
We continuously review and change our construction program, so actual
expenditures may vary from the estimates for the years 1997 through 1999 in the
capital requirements chart. Additionally, actual capital requirements may be
different than the estimates for 1997 through 1999 because adjustments which may
result from the pending merger with Pepco have not been considered in those
estimates.
30
<PAGE>
Electric construction expenditures include improvements to generating plants
and to our transmission and distribution facilities. Our projections of future
electric construction expenditures do not include costs to build more generating
units.
During the twelve months ended June 30, 1997, our utility operations provided
about 74% of the cash needed to meet our capital requirements, excluding cash
needed to retire debt and redeem preference stock.
During the three years from 1997 through 1999, we expect utility operations
to provide 115% of the cash needed to meet our capital requirements, excluding
cash needed to retire debt and redeem preference stock. This estimate does not
consider the pending merger with Pepco.
When we cannot meet utility capital requirements internally, we sell debt and
equity securities. The amount of cash we need and market conditions determine
when and how much we sell. From January 1, 1997 through the date of this report,
we issued $231 million of long-term debt and we redeemed or announced the
redemption of $82 million of long-term debt and $92 million of preference stock.
Security Ratings
- ----------------
Independent credit-rating agencies rate our fixed-income securities. The
ratings indicate the agencies' assessment of our ability to pay interest,
dividends, and principal on these securities. These ratings affect how much it
will cost us to sell these securities. The better the rating, the cheaper it is
for us to sell. At the date of this report, our securities ratings were as
follows:
Standard Moody's
& Poors Investors Duff & Phelps
Rating Group Service Credit Rating Co.
------------ ------- -----------------
Mortgage Bonds A+ 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 Companies because they had the only significant capital
requirements. From time to time, however, our other diversified businesses may
develop significant capital requirements. As that occurs, we will include the
capital requirements of those businesses in the capital requirements table on
page 30. As discussed below under "Diversifed 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 Companies' investments in financial limited partnerships
and funding for the development and acquisition of projects, as well as
loans made to project partnerships,
o ComfortLink's funding for construction of district energy projects, and
o funding for growing Constellation Power Source's power marketing business.
31
<PAGE>
Investment requirements for 1997 through 1999 include estimates of funding
for ongoing and anticipated projects. We continuously review and modify those
estimates. Actual investment requirements could vary a great deal from the
estimates on page 30 due to:
o the type and number of projects selected for development,
o the effect of market conditions on those projects,
o the ability to obtain financing, and
o the availability of cash from operations.
Diversified Business Debt and Liquidity
- ---------------------------------------
Our diversified businesses plan to meet capital requirements by refinancing
debt as it comes due, by additional borrowing, and with cash generated by the
businesses. This includes cash from operations, sale of assets, and earned tax
benefits. BGE Home Products & Services may also meet capital requirements
through sales of receivables.
If the Constellation Companies can get a reasonable value for real estate,
additional cash may be obtained by selling real estate projects. The
Constellation 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 on page 27.
On May 5, 1997, the Constellation Companies issued $274 million of three and
four-year notes. The three-year notes have an interest rate of 7.50% and the
four-year notes have an interest rate of 7.66%. The notes were issued to several
institutional investors in a private placement offering. In addition, the
Constellation Companies have a $75 million revolving credit agreement and
ComfortLink has a $50 million revolving credit agreement to provide additional
cash for short-term financial needs.
32
<PAGE>
PART II. OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings
- --------------------------
Asbestos
- --------
Since 1993, we have been involved in several actions concerning asbestos. All
of the actions together are titled In re Baltimore City Personal Injuries
Asbestos Cases in the Circuit Court for Baltimore City, Maryland. The actions
are based upon the theory of "premises liability," alleging that we knew of and
exposed individuals to an asbestos hazard. The actions relate to two types of
claims.
The first type are direct claims by individuals exposed to asbestos. We
described these claims in a Report on Form 8-K filed August 20, 1993. We are
involved in these claims with approximately 70 other defendants. Approximately
520 individuals that were never employees of the Company each claim $6 million
in damages ($2 million compensatory and $4 million punitive). We do not know the
specific facts necessary to estimate our potential liability for these claims.
The specific facts we do not know include:
o the identity of our facilities at which the plaintiffs
allegedly worked as contractors,
o the names of the individuals' employers, and
o the date on which the exposure allegedly occurred.
The second type are claims by one manufacturer - Pittsburgh Corning Corp. -
against us and approximately eight others, as third-party defendants. These
claims relate to approximately 1,500 individual plaintiffs. We do not know the
specific facts necessary to assess our potential liability for these type
claims. The specific facts we do not know include:
o the identity of our facilities containing asbestos
manufactured by the manufacturer,
o the relationship (if any) of each of the individual
plaintiffs to us,
o the settlement amounts for any individual plaintiffs who are
shown to have had a relationship to us, and
o the dates on which/places at which the exposure allegedly
occurred.
Until the relevant facts for both type claims are determined, we are unable
to estimate what our liability, if any, might be. Although insurance and hold
harmless agreements from contractors who employed the plaintiffs may cover a
portion of any awards in the actions, our potential liability could be material.
Environmental Matters
- ---------------------
Our potential environmental liabilities and pending environmental actions are
listed in Item 1. Business- Environmental Matters of our 1996 Annual Report on
Form 10-K.
In April, 1997, we received an information request from the Environmental
Protection Agency (EPA) concerning the 68th Street Dump Site, also known as the
Robb Tyler Dump, located in Baltimore, Maryland. This site is not currently
listed as a federal Superfund site, however the State of Maryland has asked the
EPA to so designate the site. We understand that the EPA has sent information
requests to over 70 other parties. Our response to the EPA is that our records
do not show that we sent waste to the site. This response is based on reviewing
all relevant documents and interviewing employees involved in waste disposal for
the Company from 1950 to 1975, which is the period covered by the EPA's inquiry.
Our potential liability cannot be estimated at this time.
33
<PAGE>
PART II. OTHER INFORMATION (Continued)
- ---------------------------------------
Item 5. Other Information
- -------------------------
Unaudited Pro Forma Combined Condensed Financial Information
- ------------------------------------------------------------
The following unaudited pro forma condensed financial
information combines our historical consolidated balance sheets and statements
of income with those of Potomac Electric Power Company (Pepco) and presents the
effect of our proposed merger into Constellation Energy Corporation. As
previously disclosed, we plan to complete the merger as soon as we obtain all
regulatory approvals, assuming any conditions to the approvals are acceptable.
The unaudited pro forma combined condensed balance sheet at June 30, 1997
gives effect to the merger as if it had occurred at June 30, 1997. The unaudited
pro forma combined condensed statement of income for the six months ended June
30, 1997, gives effect to the merger as if it had occurred at January 1, 1997.
These statements are prepared on the basis of accounting for the merger as a
pooling of interests and are based on the assumptions included in the notes
following the financial statements. Constellation Energy Corporation was formed
September 22, 1995 and has no assets or operations. Therefore, Constellation
Energy Corporation has no financial statements so there has been no audit of
such statements.
The following pro forma financial information was prepared using our
consolidated financial statements and related notes that are included in this
document and the consolidated financial statements and related notes that are
included in Pepco's quarterly filing under the Securities Exchange Act of 1934
(1934 Act). The pro forma information should be read in conjunction with those
consolidated financial statements. The pro forma financial information does not
necessarily indicate the financial position or operating results that would have
occurred if the merger was consummated on the dates for which the merger is
being given effect nor is it necessarily indicative of future financial position
or operating results.
The following unaudited pro forma combined condensed financial information of
Constellation Energy Corporation is set forth in this Form 10-Q:
Balance Sheet as of June 30, 1997
Income Statement for the Six Months Ended June 30, 1997
Notes to Consolidated Financial Statements
The following financial information of Pepco is also set forth in this Form
10-Q:
Reclassifying Balance Sheet as of June 30, 1997
Reclassifying Income Statement for the Six Months Ended June 30, 1997
Other Information
- -----------------
Both BGE and Pepco file annual and quarterly reports with the Securities and
Exchange Commission (SEC) under the 1934 Act. These are available at the SEC's
public reference rooms in Washington, D.C. and New York, New York (call
1-800-SEC-0330 for more information); and at the SEC's web site at
http://www.sec.gov. BGE's reports are also available at BGE's web site at
http://www.bge.com.
34
<PAGE>
CONSTELLATION ENERGY CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
JUNE 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
BGE PEPCO Pro Forma Pro Forma
(As Reported) (As Reclassified) Adjustments Combined
--------------- ----------------- ------------- ------------
ASSETS (See Note 5)
Current Assets
<S> <C> <C> <C> <C>
Cash and cash equivalents ........................... $ 271,212 $ 26,751 $ - $297,963
Accounts receivable - net ........................... 400,483 302,340 - 702,823
Materials and supplies .............................. 166,320 131,765 - 298,085
Prepayments and other ............................... 207,229 6,997 - 214,226
------------ ------------ --------- ------------
Total current assets ............................. 1,045,244 467,853 - 1,513,097
------------ ------------ --------- ------------
Investments and Other Assets
Notes receivable .................................... -- 34,253 - 34,253
Real estate projects ................................ 440,846 72,627 - 513,473
Power generation systems ............................ 404,868 968 - 405,836
Financial investments ............................... 127,980 -- - 127,980
Marketable securities ............................... 40,679 289,293 - 329,972
Investment in finance leases ........................ 29,378 486,049 - 515,427
Operating lease equipment - net ..................... -- 179,337 - 179,337
Assets held for disposal ............................ -- 3,700 - 3,700
Other investments ................................... 405,327 113,311 - 518,638
------------ ------------ --------- ------------
Total investments and other assets ............... 1,449,078 1,179,538 - 2,628,616
------------ ------------ --------- ------------
Utility Plant
Plant in service
Electric ......................................... 6,644,436 6,299,044 - 12,943,480
Gas .............................................. 813,672 -- - 813,672
Common ........................................... 544,790 -- - 544,790
------------ ------------ --------- ------------
Total plant in service ........................... 8,002,898 6,299,044 - 14,301,942
Accumulated depreciation ............................ (2,715,425) (1,960,616) - (4,676,041)
------------ ------------ --------- ------------
Net plant in service ................................ 5,287,473 4,338,428 - 9,625,901
Construction work in progress ....................... 158,600 78,450 - 237,050
Nuclear fuel - net .................................. 128,427 -- - 128,427
Other plant - net ................................... 25,470 26,263 - 51,733
------------ ------------ --------- ------------
Net utility plant ................................ 5,599,970 4,443,141 - 10,043,111
------------ ------------ --------- ------------
Deferred charges
Regulatory assets ................................... 464,514 466,376 - 930,890
Other ............................................... 108,475 183,123 - 291,598
------------ ------------ --------- ------------
Total deferred charges ........................... 572,989 649,499 - 1,222,488
------------ ------------ --------- ------------
============ ============ ========= ============
Total Assets ........................................... $ 8,667,281 $ 6,740,031 $ - $15,407,312
============ ============ ========= ============
See Accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Statements
</TABLE>
35
<PAGE>
CONSTELLATION ENERGY CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
JUNE 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
BGE PEPCO Pro Forma Pro Forma
(As Reported) (As Reclassified) Adjustments Combined
----------------- -------------- ----------- -----------
LIABILITIES AND CAPITALIZATION (See Note 5)
Current Liabilities
<S> <C> <C> <C> <C>
Short-term borrowings ......................................... $ 116,900 $ 311,600 $ - $ 428,500
Current portion of long-term debt,
preferred stock, and preference stock ...................... 324,783 478,485 - 803,268
Accounts payable .............................................. 147,536 209,781 - 357,317
Other ......................................................... 223,782 102,482 - 326,264
----------- ----------- -------- -----------
Total current liabilities .................................. 813,001 1,102,348 - 1,915,349
----------- ----------- -------- -----------
Deferred Credits and Other Liabilities
Deferred income taxes ......................................... 1,276,242 1,037,690 - 2,313,932
Capital lease obligations ..................................... -- 161,702 - 161,702
Pension and postemployment benefits ........................... 180,530 -- - 180,530
Other ......................................................... 103,141 52,604 - 155,745
----------- ----------- -------- -----------
Total deferred credits and other liabilities ............... 1,559,913 1,251,996 - 2,811,909
----------- ----------- -------- -----------
Capitalization
Long-term debt ................................................ 3,162,147 2,262,274 - 5,424,421
Preferred stock ............................................... -- 266,293 - 266,293
Preference stock .............................................. 323,000 -- - 323,000
Common shareholders' equity ................................... 2,809,220 1,857,120 - 4,666,340
----------- ----------- -------- -----------
Total capitalization ....................................... 6,294,367 4,385,687 - 10,680,054
----------- ----------- -------- -----------
=========== =========== ======== ===========
Total Liabilities and Capitalization ............................. $ 8,667,281 $ 6,740,031 $ - $15,407,312
=========== =========== ======== ===========
See Accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Statements
</TABLE>
36
<PAGE>
CONSTELLATION ENERGY CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED INCOME STATEMENT
SIX MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
BGE PEPCO Pro Forma Pro Forma
(As Reported) (As Reclassified) Adjustments Combined
------------- ------------- ------------ ------------
(See Note 5)
Revenues
<S> <C> <C> <C> <C>
Electric ................................................. $1,015,362 $ 840,031 $ - $1,855,393
Gas ...................................................... 306,046 -- - 306,046
Diversified businesses ................................... 312,714 68,472 - 381,186
---------- ---------- ------- ----------
Total revenues ........................................ 1,634,122 908,503 - 2,542,625
---------- ---------- ------- ----------
Operating Expenses
Electric fuel and purchased energy ....................... 248,008 324,877 - 572,885
Gas purchased for resale ................................. 181,421 -- - 181,421
Operations ............................................... 265,031 105,132 - 370,163
Maintenance .............................................. 102,195 45,080 - 147,275
Diversified businesses expenses .......................... 316,643 37,934 - 354,577
Depreciation and amortization ............................ 170,786 114,401 - 285,187
Taxes other than income taxes ............................ 107,323 94,641 - 201,964
---------- ---------- ------- ----------
Total operating expenses .............................. 1,391,407 722,065 - 2,113,472
---------- ---------- ------- ----------
Income From Operations ...................................... 242,715 186,438 - 429,153
Total Other Income .......................................... 2,016 5,592 - 7,608
---------- ---------- ------- ----------
Income Before Interest and Income Taxes ..................... 244,731 192,030 - 436,761
---------- ---------- ------- ----------
Net Interest Expense ........................................ 110,784 106,856 - 217,640
---------- ---------- ------- ----------
Income Before Income Taxes .................................. 133,947 85,174 - 219,121
---------- ---------- ------- ----------
Income Taxes ................................................ 46,866 12,068 - 58,934
---------- ---------- ------- ----------
Net Income .................................................. 87,081 73,106 - 160,187
---------- ---------- ------- ----------
Preferred and Preference Stock Dividends .................... 15,758 8,282 - 24,040
========== ========== ======= ==========
Earnings Applicable to Common Stock ......................... $ 71,323 $ 64,824 $ - $136,147
========== ========== ======= ==========
Average Shares of Common Stock
Outstanding (Note 2) 147,667 118,500 - 265,812
Earnings Per Share of Common Stock $0.48 $0.55 $0.51
See Accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Statements
</TABLE>
37
<PAGE>
PEPCO
RECLASSIFYING BALANCE SHEET
JUNE 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
PEPCO PEPCO PEPCO
(As Reported) (Reclasses) (As Reclassified)
------------------ -------------- -------------
ASSETS
Current Assets
<S> <C> <C> <C>
Cash and cash equivalents ................................ $ 7,640 $ 19,111 $ 26,751
Accounts receivable - net ................................ -- 302,340 302,340
Customer accounts receivable - net ....................... 164,006 (164,006) --
Other accounts receivable - net .......................... 29,633 (29,633) --
Accrued unbilled revenue ................................. 94,973 (94,973) --
Materials and supplies ................................... -- 131,765 131,765
Fuel .................................................. 63,834 (63,834) --
Construction and maintenance .......................... 67,931 (67,931) --
Prepayments and other .................................... -- 6,997 6,997
Prepaid taxes ............................................ 105 (105) --
Other prepaid expenses ................................... 6,892 (6,892) --
----------- ----------- -----------
Total current assets .................................. 435,014 32,839 467,853
----------- ----------- -----------
Investments and Other Assets
Notes receivable ......................................... -- 34,253 34,253
Real estate projects ..................................... -- 72,627 72,627
Power generation systems ................................. -- 968 968
Marketable securities .................................... -- 289,293 289,293
Investment in finance leases ............................. -- 486,049 486,049
Operating lease equipment - net .......................... -- 179,337 179,337
Assets held for disposal ................................. -- 3,700 3,700
Other investments ........................................ -- 113,311 113,311
----------- ----------- -----------
Total investments and other assets .................... -- 1,179,538 1,179,538
----------- ----------- -----------
Utility Plant
Plant in service
Electric .............................................. 6,299,044 -- 6,299,044
Construction work in progress ......................... 78,450 (78,450) --
Electric plant held for future use .................... 4,190 (4,190) --
Nonoperating property ................................. 22,976 (22,976) --
----------- ----------- -----------
Total plant in service ................................ 6,404,660 (105,616) 6,299,044
Accumulated depreciation ................................. (1,961,519) 903 (1,960,616)
----------- ----------- -----------
Net plant in service ..................................... 4,443,141 (104,713) 4,338,428
Construction work in progress ............................ -- 78,450 78,450
Other plant - net ........................................ -- 26,263 26,263
----------- ----------- -----------
Net utility plant ..................................... 4,443,141 -- 4,443,141
----------- ----------- -----------
Deferred Charges
Regulatory assets ........................................ -- 466,376 466,376
Income taxes recoverable through future rates, net ....... 239,435 (239,435) --
Conservation costs, net .................................. 229,010 (229,010) --
Unamortized debt reacquisition costs ..................... 54,149 (54,149) --
Other .................................................... 171,758 11,365 183,123
----------- ----------- -----------
Total deferred charges ................................ 694,352 (44,853) 649,499
----------- ----------- -----------
Nonutility Subsidiary Assets
Cash and cash equivalents ................................ 19,111 (19,111) --
Marketable securities .................................... 289,293 (289,293) --
Investment in finance leases ............................. 486,049 (486,049) --
Operating lease equipment - net .......................... 179,337 (179,337) --
Assets held for disposal ................................. 3,700 (3,700) --
Receivables - net ........................................ 47,981 (47,981) --
Other investments ........................................ 186,906 (186,906) --
Other assets ............................................. 14,280 (14,280) --
----------- ----------- -----------
Total nonutility subsidiary assets .................... 1,226,657 (1,226,657) --
----------- ----------- -----------
=========== =========== ===========
Total Assets ................................................ $ 6,799,164 $ (59,133) $6,740,031
=========== =========== ===========
</TABLE>
38
<PAGE>
PEPCO
RECLASSIFYING BALANCE SHEET
JUNE 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
PEPCO PEPCO PEPCO
(As Reported) (Reclasses) (As Reclassified)
------------- -------------- --------------
LIABILITIES AND CAPITALIZATION
Current Liabilities
<S> <C> <C> <C>
Short-term borrowings ...................................... $ 311,600 $ -- $ 311,600
Current portion of long-term debt
and preferred stock ..................................... 100,985 377,500 478,485
Accounts payable and accrued expenses ...................... 158,846 50,935 209,781
Capital lease obligation due within one year ............... 20,772 (20,772) --
Other ...................................................... 81,710 20,772 102,482
---------- ---------- ----------
Total current liabilities ............................... 673,913 428,435 1,102,348
---------- ---------- ----------
Deferred Credits and Other Liabilities
Deferred income taxes ...................................... 1,001,460 36,230 1,037,690
Deferred investment tax credits ............................ 59,133 (59,133) --
Capital lease obligations .................................. -- 161,702 161,702
Other ...................................................... 40,561 12,043 52,604
---------- ---------- ----------
Total deferred credits and other liabilities ............ 1,101,154 150,842 1,251,996
---------- ---------- ----------
Other Noncurrent Liabilities
Capital lease obligations .................................. 161,702 (161,702) --
---------- ---------- ----------
Total other noncurrent liabilities ...................... 161,702 (161,702) --
---------- ---------- ----------
Capitalization
Long-term debt ............................................. 1,727,065 535,209 2,262,274
Preferred stock ............................................ -- 266,293 266,293
Serial preferred stock ..................................... 125,293 (125,293) --
Redeemable serial preferred stock .......................... 141,000 (141,000) --
Common shareholders' equity ................................ -- 1,857,120 1,857,120
Common stock ............................................... 118,501 (118,501) --
Other common equity ........................................ 1,738,619 (1,738,619) --
---------- ---------- ----------
Total capitalization .................................... 3,850,478 535,209 4,385,687
---------- ---------- ----------
Nonutility Subsidiary Liabilities
Long-term debt ............................................. 912,709 (912,709) --
Short-term notes payable ................................... -- -- --
Deferred taxes and other ................................... 99,208 (99,208) --
---------- ---------- ----------
Total nonutility subsidiary liabilities ................. 1,011,917 (1,011,917) --
---------- ---------- ----------
========== ========== ==========
Total Liabilities and Capitalization .......................... $6,799,164 $ (59,133) $6,740,031
========== ========== ==========
</TABLE>
39
<PAGE>
PEPCO
RECLASSIFYING STATEMENT OF INCOME
SIX MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PEPCO PEPCO PEPCO
(As Reported) (Reclasses) (As Reclassified)
---------- ---------- ------------
Revenues
<S> <C> <C> <C>
Electric ............................................................... $ 840,031 $ -- $840,031
Diversified businesses ................................................. -- 68,472 68,472
--------- --------- ---------
Total revenues ...................................................... 840,031 68,472 908,503
--------- --------- ---------
Operating Expenses
Electric fuel and purchased energy ..................................... -- 324,877 324,877
Fuel ................................................................... 156,702 (156,702) --
Purchased energy ....................................................... 95,450 (95,450) --
Capacity purchase payments ............................................. 72,725 (72,725) --
Operations ............................................................. 105,132 -- 105,132
Maintenance ............................................................ 45,080 -- 45,080
Diversified businesses expenses ........................................ -- 37,934 37,934
Depreciation and amortization .......................................... 114,401 -- 114,401
Income taxes ........................................................... 33,058 (33,058) --
Taxes other than income taxes .......................................... 94,641 -- 94,641
--------- --------- ---------
Total operating expenses ............................................ 717,189 4,876 722,065
--------- --------- ---------
Income From Operations .................................................... 122,842 63,596 186,438
Other Income
Nonutility subsidiary income ........................................... 68,472 (68,472) --
Expenses, including interest and income taxes .......................... (53,566) 53,566 --
--------- --------- ---------
Net earnings from nonutility subsidiary ............................. 14,906 (14,906) --
Allowance for other funds used during construction
and capital cost recovery factor .................................... 3,341 -- 3,341
Other, net ............................................................. 2,324 (73) 2,251
--------- --------- ---------
Total Other Income .................................................. 20,571 (14,979) 5,592
--------- --------- ---------
--------- --------- ---------
Income Before Interest and Income Taxes ................................... 143,413 48,617 192,030
--------- --------- ---------
Interest Expense
Interest on debt ....................................................... 68,847 -- 68,847
Other .................................................................. 5,505 -- 5,505
Subsidiary interest expense ............................................ -- 36,549 36,549
Allowance for borrowed funds used during construction
and capital cost recovery factor .................................... (4,045) -- (4,045)
--------- --------- ---------
Net Interest Expense ................................................ 70,307 36,549 106,856
--------- --------- ---------
--------- --------- ---------
Income Before Income Taxes ................................................ 73,106 12,068 85,174
--------- --------- ---------
Income Taxes
Income taxes-utility ................................................... -- 33,058 33,058
Income taxes-nonoperating .............................................. -- (73) (73)
Income taxes-subsidiary ................................................ -- (20,917) (20,917)
--------- --------- ---------
Total Income Taxes .................................................. -- 12,068 12,068
--------- --------- ---------
--------- --------- ---------
Net Income ................................................................ 73,106 -- 73,106
--------- --------- ---------
Preferred Dividends ....................................................... 8,282 -- 8,282
========= ========= =========
Earnings Applicable to Common Stock ....................................... $ 64,824 $ -- $64,824
========= ========= =========
Average Shares of Common Stock Outstanding 118,500 118,500
Earnings Per Share of Common Stock $0.55 $0.55
</TABLE>
40
<PAGE>
Notes to Unaudited Pro Forma Combined Condensed Financial Statements
- --------------------------------------------------------------------
1.The revenues, expenses, assets, and liabilities of Pepco's nonregulated
subsidiaries have been reclassified to conform with the presentation used by
BGE. The effect of accounting policy differences are immaterial and have not
been adjusted in the pro forma combined condensed financial statements.
2.Pro forma per common share amounts give effect to the conversion of each share
of BGE and Pepco Common Stock into 1 share and .997 share, respectively of
Constellation Energy Corporation Common Stock. The pro forma combined
condensed financial statements are presented as if the companies were combined
during all periods included therein.
3.The allocation between BGE and Pepco and their customers of the estimated cost
savings resulting from the merger, net of the costs incurred to achieve such
savings, will be subject to regulatory review and approval. None of these
estimated cost savings, the costs to achieve such savings, or transaction
costs have been reflected in the pro forma combined condensed financial
statements.
4.Intercompany transactions between BGE and Pepco during the periods presented
were not material and, accordingly, no pro forma adjustments were made to
eliminate such transactions.
5.The Pepco reclassifying information reflects the reclassifying entries
necessary to adjust Pepco's consolidated balance sheet and statement of income
presentation to be consistent with the presentation expected to be used by
Constellation Energy Corporation.
41
<PAGE>
PART II. OTHER INFORMATION (Continued)
- ---------------------------------------
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
(a) Exhibit No. 2* Registration Statement on Form S-4
of Constellation Energy
Corporation, as amended, which
became effective February 9,
1996, Registration No. 33-64799.
Exhibit No. 3 By-Laws of Baltimore Gas and
Electric Company, as amended to
July 24, 1997.
Exhibit No. 10 Baltimore Gas and Electric Company
Deferred Compensation Plan for Non-
Employee Directors.
Exhibit No. 12 Computation of Ratio of Earnings
to Fixed Charges and Computation
of Ratio of Earnings to Combined
Fixed Charges and Preferred and
Preference Dividend Requirements.
Exhibit No. 27 Financial Data Schedule.
*Incorporated by Reference.
(b) Reports on Form 8-K for the quarter ended June 30, 1997:
Date Filed Items Reported
---------- --------------
April 7, 1997 Item 5. Other Events
Item 7. Financial Statements and Exhibits
April 17, 1997 Item 5. Other Events
Item 7. Financial Statements and Exhibits
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BALTIMORE GAS AND ELECTRIC COMPANY
----------------------------------
(Registrant)
Date August 13, 1997 /s/ D. A. Brune
--------------- ---------------
D. A. Brune, Vice President
on behalf of the Registrant and
as Principal Financial Officer
42
<PAGE>
EXHIBIT INDEX
Exhibit
Number
------
2* Registration Statement on Form S-4 of
Constellation Energy Corporation, as
amended, which became effective
February 9, 1996, Registration No. 33-
64799.
3 By-Laws of Baltimore Gas and Electric
Company, as amended to July 24, 1997.
10 Baltimore Gas and Electric Company
Deferred Compensation Plan for Non-
Employee Directors.
12 Computation of Ratio of Earnings to
Fixed Charges and Computation of Ratio
of Earnings to Combined Fixed Charges
and Preferred and Preference Dividend
Requirements.
27 Financial Data Schedule.
*Incorporated by Reference.
43
<PAGE>
Exhibit 3
---------
BY-LAWS
OF
Baltimore Gas and Electric Company
Amended to July 24, 1997
1
<PAGE>
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 October 12, through November 10, 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.
1
<PAGE>
Section 4. - Organization of Meeting.
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.
2
<PAGE>
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 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.
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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
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
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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 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.
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(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.
(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.
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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
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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.
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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.
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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 25th day
of July, 1997.
Secretary
/s/ David A. Brune
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Exhibit 10
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Baltimore Gas and Electric Company
Deferred Compensation Plan
For Non-Employee Directors
1. Objective. The objective of this Plan is to provide a portion of the
Compensation of non-employee Directors of BGE in the form of Stock Units,
thereby promoting a greater identity of interest between BGE's non-employee
Directors and its stockholders, and to enable such Directors to defer
receipt of the portion of their Compensation that is payable in cash.
2. Definitions. As used herein, the following terms will have the meaning
specified below:
"Annual Retainer" means the amount payable by BGE to a Director as annual
compensation for performance of services as a Director, and includes
Committee Chair retainers. All other amounts (including without limitation
Board/committee meeting fees, and expense reimbursements) shall be excluded
in calculating the amount of the Annual Retainer.
"BGE" means Baltimore Gas and Electric Company, a Maryland corporation, or
its successor.
"Board" means the Board of Directors of BGE.
"Cash Account" means an account by that name established pursuant to Section
7. The maintenance of Cash Accounts is for bookkeeping purposes only.
"Change in Control" means (i) the purchase or acquisition by any person,
entity or group of persons (within the meaning of section 13(d) or 14(d) of
the Securities Exchange Act of 1934 (the "Exchange Act"), or any comparable
successor provisions), of beneficial ownership (within the meaning of Rule
13d-3 promulgated under the Exchange Act) of 20 percent or more of either
the outstanding shares of common stock of BGE or the combined voting power
of BGE's then outstanding shares of voting securities entitled to a vote
generally, or (ii) the approval by the stockholders of BGE of a
reorganization, merger or consolidation, in each case, with respect to which
persons who were stockholders of BGE immediately prior to such
reorganization, merger or consolidation do not, immediately thereafter, own
more than 50 percent of the combined voting power entitled to vote generally
in the election of directors of the reorganized, merged or consolidated
entity's then outstanding securities, or (iii) a liquidation or dissolution
of BGE or the sale of
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substantially all of its assets, or (iv) a change of more than one-half of
the members of the Board within a 90-day period for reasons other than the
death, disability, or retirement of such members.
"Committee" means the Committee on Management of the Board.
"Common Stock" means the common stock, without par value, of BGE.
"Compensation" means any Annual Retainer and meeting fees payable by BGE to
a participant in his/her capacity as a Director. Compensation excludes
expense reimbursements paid by BGE to a participant in his/her capacity as a
Director.
"Deferred Cash Compensation" means any cash Compensation that is voluntarily
deferred by a participant pursuant to Section 6.
"Director" means a member of the Board who is not an employee of BGE or any
of its subsidiaries/ affiliates.
"Disability" or "Disabled" means that the Plan Administrator has determined
that the participant is unable to fulfill his/her responsibilities of Board
membership because of illness or injury. For purposes of this Plan, a
participant's eligibility to participate shall be deemed to have terminated
on the date he/she is determined by the Plan Administrator to be Disabled.
"Earnings" means, with respect to the Cash Account, hypothetical interest
credited to the Cash Account. "Earnings" means, with respect to the Stock
Account, hypothetical dividends credited to the Stock Account.
"Fair Market Value" means, as of any specified date, the average closing
price of a share of Common Stock, reported in "New York Stock Exchange
Composite Transactions" as published in the Eastern Edition of The Wall
Street Journal for the most recent 30 days during which Common Stock was
traded on the New York Stock Exchange (including such valuation date if a
trading date).
"Plan Accounts" means a participant's Cash Account and/or Stock Account. The
maintenance of Plan Accounts is for bookkeeping purposes only.
"Plan Administrator" means, as set forth in Section 3, the Board.
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"Stock Account" means an account by that name established pursuant to
Section 8. The maintenance of Stock Accounts is for bookkeeping purposes
only.
"Stock Unit(s)" means the share equivalents credited to a Participant's
Stock Account pursuant to Section 8. The use of Stock Units is for
bookkeeping purposes only; the Stock Units are not actual shares of Common
Stock. BGE will not reserve or otherwise set aside any Common Stock for or
to any Stock Account.
3. Plan Administration.
(i) Plan Administrator - The Plan is administered by the Board, who has sole
authority to interpret the Plan, and, in general, to make all other
determinations advisable for the administration of the Plan to achieve its
stated objective. Decisions by the Plan Administrator shall be final and
binding upon all persons for all purposes. The Plan Administrator shall have
the power to delegate all or any part of its non-discretionary duties to one
or more designees, and to withdraw such authority, by written designation.
(ii) Amendment - This Plan may be amended from time to time or suspended or
terminated at any time, at the written direction of the Plan Administrator.
However, amendments required to keep the Plan in compliance with applicable
laws and regulations may be made by the Vice President Management Services
of BGE (or other vice president succeeding to that function) on advice of
counsel. Nothing herein creates a vested right.
(iii) Indemnification - The Plan Administrator (and its designees), Chairman
of the Board, Chief Executive Officer, President, and Vice
President-Management Services of BGE and all other employees of BGE or its
subsidiaries/affiliates whose assigned duties include matters under the
Plan, shall be indemnified by BGE or its subsidiaries /affiliates or from
proceeds under insurance policies purchased by BGE or its
subsidiaries/affiliates, against any and all liabilities arising by reason
of any act or failure to act made in good faith pursuant to the provisions
of the Plan, including expenses reasonably incurred in the defense of any
related claim.
4. Eligibility and Participation.
(i) Mandatory participation - A Director is required to participate in this
Plan with respect to the receipt of fifty
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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 the remainder of the participant's Compensation,
that is payable in cash, under Section 6 of the Plan, while so classified.
(iii) Termination of participation - Eligibility to participate shall
terminate on the date the participant ceases to be a Director.
Notwithstanding termination of eligibility, such person with Plan Accounts
will remain a participant of the Plan, solely for purposes of the
administration of existing Plan Accounts, and no additional Stock Units will
be granted and no further deferrals of cash Compensation under the Plan will
be permitted.
5. Mandatory Stock Units. The Stock Account of a participant will be credited
on January 1 of each calendar year with Stock Units equal to the number of
shares of Common Stock (including fractions of a share) that could have been
purchased, with fifty percent (50%) of the participant's Annual Retainer for
such calendar year, at Fair Market Value on such January 1.
If a participant initially becomes eligible to participate in the Plan
during a calendar year, the Stock Account of the participant for such
calendar year will be credited, on the date that is the first day of the
calendar month after the participant initially becomes eligible to
participate in the Plan, with Stock Units equal to the number of shares of
Common Stock (including fractions of a share) that could have been purchased
at Fair Market Value on such date, with an amount equal to (i) fifty percent
(50%) of the participant's Annual Retainer multiplied by (ii) a fraction the
numerator of which is the number of full calendar months in the calendar
year on and after such date, and the denominator of which is 12.
The Stock Account will be maintained pursuant to Section 8.
6. Cash Compensation Deferral Election. A participant may elect to defer all 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 all 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
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other Cash Compensation that a participant elects to defer will be credited
to the Cash Account.
Such election shall be made by written notification to the Vice
President-Management Services of BGE (or other vice president succeeding to
that function). Such election shall be made prior to the calendar year
during which the applicable cash Compensation is payable, and shall be
effective as of the first day of such calendar year. If a participant
initially becomes eligible to participate in the Plan during a calendar
year, the election for such calendar year must be made within thirty (30)
calendar days after the date the participant initially becomes eligible to
participate in the Plan, and shall be effective with respect to Compensation
earned after the date the election is received by the Vice
President-Management Services of BGE (or other vice president succeeding to
that function). Elections under this Section shall remain in effect for all
succeeding calendar years until revoked. Elections may be revoked by written
notification to the Vice President-Management Services of BGE (or other vice
president succeeding to that function), and shall be effective as of the
first day of the calendar year following the calendar year during which the
revocation is received by such Vice President.
Notwithstanding anything herein contained to the contrary, the Plan
Administrator shall have the right in its sole discretion to permit a
participant to defer a portion (rather than all) 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
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Account on January 1 (or if later, the date the participant's initial
election to participate in the Plan becomes effective). A participant's
Stock Account shall be credited with Stock Units equal to the number of
shares of Common Stock (including fractions of a share) that could have been
purchased with such Deferred Cash Compensation, at Fair Market Value on such
date. Grants of mandatory Stock Units are credited to the Stock Account as
set forth in Section 5.
As of any dividend distribution date for the Common Stock, the participant's
Stock Account shall be credited with additional Stock Units equal to the
number of shares of Common Stock (including fractions of a share) that could
have been purchased, at the closing price of a share of Common Stock on such
date as reported in "New York Stock Exchange Composite Transactions" as
published in the Eastern Edition of the The Wall Street Journal, with the
amount which would have been paid as dividends on that number of shares
(including fractions of a share) of Common Stock which is equal to the
number of Stock Units then credited to the participant's Stock Account.
In the event of any change in the outstanding shares of Common Stock by
reason of any stock dividend or split, recapitalization, combination or
exchange of shares or other similar changes in the Common Stock, then
appropriate adjustments shall be made in the number of Stock Units in each
participant's Stock Account. Such adjustments shall be made effective on the
date of the change related to the Common Stock.
9. Distributions of Plan Accounts. Distributions of Plan Accounts shall be made
in cash only, from the general assets of BGE.
A participant may elect (by notification in the form and manner established
by the Vice President-Management Services of BGE (or other vice President
succeeding to that function) from time to time) to begin distributions (i)
in the calendar year following the calendar year that eligibility to
participate terminates, (ii) in the calendar year following the calendar
year in which a participant attains age 70, if later, or (iii) any calendar
year between (i) and (ii). Such election must be made prior to the end of
the calendar year in which eligibility to participate terminates.
Alternatively, a participant who reaches age 70 while still 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
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Accounts as of the end of the calendar year the participant reaches age 70.
Such election must be made prior to the end of the calendar year in which
the participant reaches age 70, and a distribution election to receive any
subsequently deferred amounts beginning in the calendar year following the
calendar year that eligibility to participate terminates, must be made prior
to the end of the calendar year in which eligibility to participate
terminates.
A participant may elect (by notification in the form and manner established
by the Vice President-Management Services of BGE (or other vice President
succeeding to that function) from time to time) to receive distributions in
a single payment or in annual installments during a period not to exceed
fifteen years. The single payment or the first installment payment,
whichever is applicable, shall be made within the first sixty (60) calendar
days of the calendar year elected for distribution. Subsequent installments,
if any, shall be made within the first sixty (60) calendar days of each
succeeding calendar year until the participant's Cash Account has been paid
out.
In the event applicable elections are not timely made, a participant shall
receive a distribution in a single payment within the first sixty (60)
calendar days of the calendar year following the calendar year that
eligibility to participate terminates.
The value of the Stock Account, which is equal to the number of Stock Units
in the Stock Account multiplied by the Fair Market Value on the date on
which the participant's eligibility to participate terminates (or, the date
that is the last day of the calendar year during which the participant
reaches age 70, for a participant who elects to begin distributions while
still eligible to participate), is transferred to the Cash Account on such
date. Earnings are credited to the Cash Account through the date of
distribution, and amounts held for installment payments shall continue to be
credited with Earnings. The value of the Cash Account that is payable in
cash on the date of the single payment distribution is equal to the balance
in the Cash Account on the date that is no earlier than five (5) calendar
days prior to the day of such distribution ("Distribution Valuation Date").
The amount of any cash distribution to be made in installments from the Cash
Account will be determined by multiplying (i) the balance in such Cash
Account on the Distribution Valuation Date by (ii) a fraction, the 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).
7
<PAGE>
If a participant dies or becomes Disabled, the entire unpaid balance of
his/her Plan Accounts shall be paid to the beneficiary(ies) designated by
the participant by notification in the form and manner established by the
Vice President-Management Services of BGE (or other vice president
succeeding to that function) from time to time or, if no designation was
made, in the event of death, to the estate of the participant, and in the
event of Disability, to the participant. Payment shall be made within sixty
(60) calendar days after notice of death or Disability is received by such
Vice President, unless prior to the participant's death or Disability, the
participant elected (in the form and manner established by the Vice
President-Management Services of BGE (or other vice president succeeding to
that function) from time to time) a delayed and/or installment distribution
option for such beneficiary(ies); provided, however that (i) such a
distribution option election shall be effective only if the value of the
participant's Plan Accounts is more than $50,000 on the date of the
participant's death or Disability; and (ii) the final distribution must be
made to such beneficiary(ies) no later than 15 years after the participant's
death or Disability. After the end of the calendar year that a participant's
eligibility to participate terminates, a distribution option election for a
particular beneficiary is irrevocable; provided, however, that the
participant may make a distribution option election for a new beneficiary
who is initially designated after the participant's eligibility to
participate terminates, and such election is irrevocable with respect to the
new beneficiary.
The value of the Stock Account, which is equal to the number of Stock Units
in the Stock Account multiplied by the Fair Market Value on the date of the
participant's death or Disability, is transferred to the Cash Account on
such date. Earnings are credited to the Cash Account through the date of
distribution, and amounts held for installment payments shall continue to be
credited with Earnings. The value of the Cash Account that is payable in
cash on the date of the single payment distribution is equal to the balance
in the Cash Account on the date that is no earlier than five (5) calendar
days prior to the day of such distribution ("Beneficiary Distribution
Valuation Date"). The amount of any cash distribution to be made in
installments from the Cash Account will be determined by multiplying (i) the
balance in such Cash Account on the Beneficiary Distribution Valuation Date
by (ii) a fraction, the numerator of which is one and the denominator of
which is the number of installments in which distributions remain to be made
(including the current distribution).
8
<PAGE>
Upon the death of a participant's beneficiary for whom a delayed and/or
installment distribution option was elected, the entire unpaid balance of
the participant's Cash Account shall be paid to the beneficiary(ies)
designated by the participant's beneficiary by notification in the form and
manner established by the Vice President-Management Services of BGE (or
other vice president succeeding to that function) from time to time or, if
no designation was made, to the estate of the participant's beneficiary.
Payment shall be made within sixty (60) calendar days after notice of death
is received by such Vice President. The value of the Cash Account that is
payable in cash is equal to the balance in the Cash Account on the date that
is no earlier than five (5) calendar days prior to the day of such
distribution.
Notwithstanding anything herein contained to the contrary, the Plan
Administrator shall have the right in its sole discretion to (i) vary the
manner and timing of distributions of a participant or beneficiary entitled
to a distribution under this Section 9, and may make such distributions in a
single payment or over a shorter or longer period of time than that elected
by a participant; and (ii) vary the period during which the closing price of
Common Stock is referenced to determine the value of the Stock Account that
is transferred to the Cash Account on the date on which the participant's
eligibility to participate terminates. Any affected participants will not
participate in exercising such discretion.
10. Beneficiaries. A participant shall have the right to designate, change or
rescind a beneficiary(ies) who is to receive a distribution(s) pursuant to
Section 9 in the event of the death or Disability of the participant. A
participant's beneficiary(ies) for whom a delayed and/or installment
distribution option was elected shall have the right to designate a
beneficiary(ies) who is to receive a distribution pursuant to Section 9 in
the event of the death of the participant's beneficiary(ies).
Any designation, change or recision of the designation of beneficiary shall
be made by notification in the form and manner established by the Vice
President-Management Services of BGE (or other vice president succeeding to
that function) from time to time. The last designation of beneficiary
received by such Vice President shall be controlling over any testamentary
or purported disposition by the participant (or, if applicable, the
participant's beneficiary(ies)), provided that no designation, recision or
change thereof shall be effective unless received by such Vice President
prior to the
9
<PAGE>
death or Disability (whichever is applicable) of the participant (or, if
applicable, the death of the participant's beneficiary(ies)).
If the designated beneficiary is the estate, or the executor or
administrator of the estate, of the participant (or, if applicable, the
participant's beneficiary(ies)), a distribution pursuant to Section 9 may be
made to the person(s) or entity (including a trust) entitled thereto under
the will of the participant (or, if applicable, the participant's
beneficiary(ies)), or, in the case of intestacy, under the laws relating to
intestacy.
11. Valuation of Plan Accounts. The Plan Administrator shall cause the value of
a participant's Plan Accounts to be determined and reported to BGE and the
participant at least once per year as of the last business day of the
calendar year. The value of the Stock Account will equal the number of Stock
Units in the Stock Account multiplied by the closing price of a share of
Common Stock on the last business day of the calendar year as reported in
"New York Stock Exchange Composite Transactions" as published in the Eastern
Edition of the The Wall Street Journal. The value of the Cash Account will
equal the balance in the Cash Account on the last business day of the
calendar year.
12. Withdrawals. No withdrawals of Plan Accounts may be made, except a
participant may at any time request a hardship withdrawal from his/her Plan
Accounts if he/she has incurred an unforeseeable financial emergency. An
unforeseeable financial emergency is defined as severe financial hardship to
the participant resulting from a sudden and unexpected illness or accident
of the participant (or of his/her dependents), loss of the participant's
property due to casualty, or other similar extraordinary and unforeseeable
circumstances arising as a result of events beyond the control of the
participant. The need to send a child to college or the desire to purchase a
home are not considered to be unforeseeable emergencies. The circumstance
that will constitute an unforeseeable emergency will depend upon the facts
of each case.
A hardship withdrawal will be permitted by the Plan Administrator only as
necessary to satisfy an immediate and heavy financial need. A hardship
withdrawal may be permitted only to the extent reasonably necessary to
satisfy the financial need. Payment may not be made to the extent that 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
10
<PAGE>
liquidation of such assets would not itself cause severe financial hardship,
or (iii) by cessation of deferrals under the Plan.
The request for hardship withdrawal shall be made by notification in the
form and manner established by the Plan Administrator from time to time.
Such hardship withdrawal will be permitted only with approval of the Plan
Administrator. The participant will receive a lump sum payment after the
Plan Administrator has had reasonable time to consider and then approve the
request.
The value of the Stock Account for purposes of processing a hardship cash
withdrawal is equal to the number of Stock Units in the Stock Account
multiplied by the Fair Market Value on the date on which the hardship
withdrawal is processed. The value of the Cash Account for purposes of
processing a hardship cash withdrawal is equal to the balance in the Cash
Account on the date on which the hardship withdrawal is processed.
13. Change in Control. The terms of this Section 13 shall immediately become
operative, without further action or consent by any person or entity, upon a
Change in Control, and once operative shall supersede and control over any
other provisions of this Plan. Upon the occurrence of a Change in Control
followed within one year of the date of such Change in Control by the
participant's cessation of Board membership for any reason, such participant
shall be paid the value of his/her Plan Accounts in a single, lump sum cash
payment. The value of the Stock Account, which is equal to the number of
Stock Units in the Stock Account multiplied by the Fair Market Value on the
date of the participant's cessation of Board membership, is transferred to
the Cash Account on such date. Earnings are credited to the Cash Account
through the date of distribution. The value of the Cash Account that is
payable in cash on the date of the single lump sum cash payment is equal to
the balance in the Cash Account on the date that is no earlier than five (5)
calendar days prior to the day of such distribution. Such payment shall be
made as soon as practicable, but in no event later than thirty (30) calendar
days after the date of the participant's cessation of Board membership. On
or after a Change in Control, no action, including, but not by way of
limitation, the amendment, suspension or termination of the Plan, shall be
taken which would affect the rights of any participant or the operation of
this Plan with respect to the balance in the participant's Plan Accounts.
11
<PAGE>
14. Withholding. BGE may withhold to the extent required by law all applicable
income and other taxes from amounts deferred or distributed under the Plan.
15. Copies of Plan Available. Copies of the Plan and any and all amendments
thereto shall be made available to all participants during normal business
hours at the office of the Plan Administrator.
16. Miscellaneous.
(i) Inalienability of benefits - Except as may otherwise be required by law
or court order, the interest of each participant or beneficiary under the
Plan cannot be sold, pledged, assigned, alienated or transferred in any
manner or be subject to attachment or other legal process of whatever
nature; provided, however, that any applicable taxes may be withheld from
any cash benefit payment made under this Plan.
(ii) Controlling law - The Plan and its administration shall be governed by
the laws of the State of Maryland, except to the extent preempted by federal
law.
(iii) Gender and number - A masculine pronoun when used herein refers to
both men and women and words used in the singular are intended to include
the plural, and vice versa, whenever appropriate.
(iv) Titles and headings - Titles and headings to articles and sections in
the Plan are placed herein solely for convenience of reference and in any
case of conflict, the text of the Plan rather than such titles and headings
shall control.
(v) References to law - All references to specific provisions of any federal
or state law, rule or regulation shall be deemed to also include references
to any successor provisions or amendments.
(vi) Funding and expenses - Benefits under the Plan are not vested or
funded, and shall be paid out of the general assets of BGE. To the extent
that any person acquires a right to receive payments from BGE under this
Plan, such rights shall be no greater than the right of any unsecured
general creditor of BGE. The expenses of administering the Plan will be
borne by BGE.
(vii) Not a contract - Participation in this Plan shall not constitute a
contract of employment or Board membership between BGE and any person and
shall not be deemed to be
12
<PAGE>
consideration for, or a condition of, continued employment or Board
membership of any person.
(viii) Successors - In the event BGE becomes a party to a merger,
consolidation, sale of substantially all of its assets or any other
corporate reorganization in which BGE will not be the surviving corporation
or in which the holders of the common stock of BGE will receive securities
of another corporation (in any such case, the "New Company"), then the New
Company shall assume the rights and obligations of BGE under this Plan.
13
<PAGE>
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND
PREFERRED AND PREFERENCE DIVIDEND REQUIREMENTS
<TABLE>
<CAPTION>
12 Months Ended
------------------------------------------------------------------------------
June December December December December December
1997 1996 1995 1994 1993 1992
--------- -------- -------- -------- -------- --------
(In Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C>
Net Income ........................................... $232,571 $310,824 $338,007 $323,617 $309,866 $264,347
Taxes on Income ...................................... 126,506 169,202 172,388 156,702 140,833 105,994
-------- -------- -------- -------- -------- --------
Adjusted Net Income .................................. $359,077 $480,026 $510,395 $480,319 $450,699 $370,341
-------- -------- -------- -------- -------- --------
Fixed Charges:
Interest and Amortization of
Debt Discount and Expense and
Premium on all Indebtedness ................. $216,541 $203,923 $206,666 $204,206 $199,415 $200,848
Capitalized Interest ........................... 13,121 15,664 15,050 12,427 16,167 13,800
Interest Factor in Rentals ..................... 1,600 1,548 2,099 2,010 2,144 2,033
-------- -------- -------- -------- -------- --------
Total Fixed Charges ............................ $231,262 $221,135 $223,815 $218,643 $217,726 $216,681
-------- -------- -------- -------- -------- --------
Preferred and Preference
Dividend Requirements: (1)
Preferred and Preference Dividends ............. $ 32,525 $ 38,536 $ 40,578 $ 39,922 $ 41,839 $ 42,247
Income Tax Required ............................ 17,694 20,849 20,434 19,074 18,763 16,729
-------- -------- -------- -------- -------- --------
Total Preferred and Preference
Dividend Requirements ....................... $ 50,219 $ 59,385 $ 61,012 $ 58,996 $ 60,602 $ 58,976
-------- -------- -------- -------- -------- --------
Total Fixed Charges and Preferred
and Preference Dividend Requirements ........... $281,481 $280,520 $284,827 $277,639 $278,328 $275,657
======== ======== ======== ======== ======== ========
Earnings (2) ......................................... $577,218 $685,497 $719,160 $686,535 $652,258 $573,222
======== ======== ======== ======== ======== ========
Ratio of Earnings to Fixed Charges 2.50 3.10 3.21 3.14 3.00 2.65
Ratio of Earnings to Combined Fixed
Charges and Preferred and Preference
Dividend Requirements 2.05 2.44 2.52 2.47 2.34 2.08
</TABLE>
(1) Preferred and preference dividend requirements consist of an amount equal
to the pre-tax earnings that would be required to meet dividend
requirements on preferred stock and preference stock.
(2) Earnings are deemed to consist of net income that includes earnings of
BGE's consolidated subsidiaries, equity in the net income of BGE's
unconsolidated subsidiary, income taxes (including deferred income taxes
and investment tax credit adjustments), and fixed charges other than
capitalized interest.
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BGE'S JUNE
30, 1997 INTERIM CONSOLIDATED INCOME STATEMENT, BALANCE SHEET AND STATEMENT OF
CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 5,599,970
<OTHER-PROPERTY-AND-INVEST> 1,449,078
<TOTAL-CURRENT-ASSETS> 1,045,244
<TOTAL-DEFERRED-CHARGES> 572,989
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 8,667,281
<COMMON> 1,431,748
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 1,370,778
<TOTAL-COMMON-STOCKHOLDERS-EQ> 2,809,220
113,000
210,000
<LONG-TERM-DEBT-NET> 3,162,147
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 116,900
<LONG-TERM-DEBT-CURRENT-PORT> 221,783
103,000
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,931,231
<TOT-CAPITALIZATION-AND-LIAB> 8,667,281
<GROSS-OPERATING-REVENUE> 1,634,122
<INCOME-TAX-EXPENSE> 46,866
<OTHER-OPERATING-EXPENSES> 1,391,407
<TOTAL-OPERATING-EXPENSES> 1,438,273
<OPERATING-INCOME-LOSS> 195,849
<OTHER-INCOME-NET> 2,016
<INCOME-BEFORE-INTEREST-EXPEN> 197,865
<TOTAL-INTEREST-EXPENSE> 110,784
<NET-INCOME> 87,081
15,758
<EARNINGS-AVAILABLE-FOR-COMM> 71,323
<COMMON-STOCK-DIVIDENDS> 118,133
<TOTAL-INTEREST-ON-BONDS> 116,114
<CASH-FLOW-OPERATIONS> 363,160
<EPS-PRIMARY> 0.48
<EPS-DILUTED> 0.48
</TABLE>
