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, 1998
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 - 148,672,582 shares outstanding on July 31,
1998.
1
<PAGE>
BALTIMORE GAS AND ELECTRIC COMPANY
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income (Unaudited)
- ---------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1998 1997 1998 1997
----------- ---------- ---------- -----------
(In Millions, Except Per-Share Amounts)
Revenues
<S> <C> <C> <C> <C>
Electric $ 525.2 $ 498.1 $ 1,024.3 $ 1,015.4
Gas 82.0 92.3 262.6 306.0
Diversified businesses 160.4 156.0 346.8 312.7
----------- ---------- ---------- -----------
Total revenues 767.6 746.4 1,633.7 1,634.1
----------- ---------- ---------- -----------
Expenses Other Than Interest and Income Taxes
Electric fuel and purchased energy 115.6 112.8 242.1 248.0
Gas purchased for resale 32.2 48.2 130.4 181.4
Operations 139.7 133.2 265.8 265.0
Maintenance 57.9 62.7 92.1 102.2
Diversified businesses - selling, general, and administrative 126.8 127.4 270.9 249.1
Write-downs of real estate investments - 49.1 - 67.6
Depreciation and amortization 89.6 85.2 186.1 170.8
Taxes other than income taxes 49.6 49.0 106.6 107.3
----------- ---------- ---------- -----------
Total expenses other than interest and income taxes 611.4 667.6 1,294.0 1,391.4
----------- ---------- ---------- -----------
Income From Operations 156.2 78.8 339.7 242.7
----------- ---------- ---------- -----------
Other Income
Allowance for equity funds used during construction 1.6 1.2 3.2 2.4
Equity in earnings of Safe Harbor Water Power Corporation 1.2 1.2 2.5 2.5
Net other income and (deductions) (1.9) (1.4) (2.9) (2.9)
----------- ---------- ---------- -----------
Total other income 0.9 1.0 2.8 2.0
----------- ---------- ---------- -----------
Income Before Interest and Income Taxes 157.1 79.8 342.5 244.7
----------- ---------- ---------- -----------
Interest Expense
Interest charges 59.6 59.8 121.4 116.1
Distributions on company obligated mandatorily
redeemable trust preferred securities 0.8 - 0.8 -
Capitalized interest (0.6) (1.7) (2.0) (4.0)
Allowance for borrowed funds used during construction (0.9) (0.7) (1.7) (1.3)
----------- ---------- ---------- -----------
Net interest expense 58.9 57.4 118.5 110.8
----------- ---------- ---------- -----------
Income Before Income Taxes 98.2 22.4 224.0 133.9
----------- ---------- ---------- -----------
Income Taxes
Current 30.7 24.8 88.1 68.8
Deferred 6.1 (15.5) (3.9) (18.2)
Investment tax credit adjustments (1.8) (1.9) (3.6) (3.8)
----------- ---------- ---------- -----------
Total income taxes 35.0 7.4 80.6 46.8
----------- ---------- ---------- -----------
Net Income 63.2 15.0 143.4 87.1
Preference Stock Dividends 5.8 7.9 11.6 15.8
----------- ---------- ---------- -----------
Earnings Applicable to Common Stock $ 57.4 $ 7.1 $ 131.8 $ 71.3
=========== ========== ========== ===========
Average Shares of Common Stock Outstanding 148.3 147.7 148.1 147.7
Earnings Per Common Share and
Earnings Per Common Share - Assuming Dilution $0.39 $0.05 $0.89 $0.48
Dividends Declared Per Common Share $0.42 $0.41 $0.83 $0.81
Consolidated Statements of Comprehensive Income (Unaudited)
Net Income $ 63.2 $ 15.0 $ 143.4 $ 87.1
Other comprehensive loss, net of taxes (1.0) (0.7) (0.1) (1.8)
----------- ---------- ---------- -----------
Comprehensive Income $ 62.2 $ 14.3 $ 143.3 $ 85.3
=========== ========== ========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
Certain prior period amounts have been reclassified to conform with the current
period's presentation.
2
<PAGE>
BALTIMORE GAS AND ELECTRIC COMPANY
PART I. FINANCIAL INFORMATION (Continued)
Item 1. Financial Statements
Consolidated Balance Sheets
- ---------------------------
<TABLE>
<CAPTION>
June 30, December 31,
1998* 1997
--------------- --------------
(In Millions)
ASSETS
Current Assets
<S> <C> <C>
Cash and cash equivalents $ 302.5 $ 162.6
Accounts receivable (net of allowance for uncollectibles
of $24.1 at June 30, 1998 and December 31, 1997 ) 388.1 419.8
Trading securities 121.7 119.7
Fuel stocks 75.3 87.6
Materials and supplies 160.5 164.2
Prepaid taxes other than income taxes 3.0 65.2
Assets from energy trading activities 351.3 9.4
Other 28.7 27.4
--------------- --------------
Total current assets 1,431.1 1,055.9
--------------- --------------
Investments and Other Assets
Real estate projects 422.4 446.8
Power generation systems 539.8 451.7
Financial investments 187.4 196.5
Nuclear decommissioning trust fund 165.0 145.3
Net pension asset 114.8 113.0
Safe Harbor Water Power Corporation 34.4 34.4
Senior living facilities 76.6 62.2
Other 106.1 98.7
--------------- --------------
Total investments and other assets 1,646.5 1,548.6
--------------- --------------
Utility Plant
Plant in service
Electric 6,805.2 6,725.6
Gas 889.0 846.9
Common 547.2 554.1
--------------- --------------
Total plant in service 8,241.4 8,126.6
Accumulated depreciation (2,966.9) (2,843.4)
--------------- --------------
Net plant in service 5,274.5 5,283.2
Construction work in progress 205.1 215.2
Nuclear fuel (net of amortization) 125.5 127.9
Plant held for future use 25.2 25.2
--------------- --------------
Net utility plant 5,630.3 5,651.5
--------------- --------------
Deferred Charges
Regulatory assets (net) 437.0 470.7
Other 53.4 46.7
--------------- --------------
Total deferred charges 490.4 517.4
--------------- --------------
TOTAL ASSETS $ 9,198.3 $ 8,773.4
=============== ==============
</TABLE>
* Unaudited
See Notes to Consolidated Financial Statements.
Certain prior period amounts have been reclassified to conform with the current
period's presentation.
3
<PAGE>
BALTIMORE GAS AND ELECTRIC COMPANY
PART I. FINANCIAL INFORMATION (Continued)
Item 1. Financial Statements
Consolidated Balance Sheets
- ---------------------------
<TABLE>
<CAPTION>
June 30, December 31,
1998* 1997
--------------- --------------
(In Millions)
LIABILITIES AND CAPITALIZATION
Current Liabilities
<S> <C> <C>
Short-term borrowings $ 72.5 $ 316.1
Current portions of long-term debt and preference stock 631.0 271.9
Accounts payable 200.6 203.0
Customer deposits 32.5 30.1
Accrued taxes 0.6 5.5
Accrued interest 60.5 58.4
Dividends declared 68.0 66.3
Accrued vacation costs 38.7 36.2
Liabilities from energy trading activities 333.1 8.6
Other 26.1 44.3
--------------- --------------
Total current liabilities 1,463.6 1,040.4
--------------- --------------
Deferred Credits and Other Liabilities
Deferred income taxes 1,285.3 1,294.9
Postretirement and postemployment benefits 195.3 185.5
Decommissioning of federal uranium enrichment facilities 34.9 34.9
Other 58.4 58.4
--------------- --------------
Total deferred credits and other liabilities 1,573.9 1,573.7
--------------- --------------
Capitalization
Long-term Debt
First refunding mortgage bonds of BGE 1,570.8 1,570.8
Other long-term debt of BGE 1,027.8 921.3
Long-term debt of diversified businesses 735.9 759.4
Unamortized discount and premium (13.3) (13.7)
Current portion of long-term debt (508.0) (248.9)
--------------- --------------
Total long-term debt 2,813.2 2,988.9
--------------- --------------
Company obligated mandatorily redeemable trust
preferred securities 250.0 -
--------------- --------------
Redeemable Preference Stock 110.0 113.0
Current portion of redeemable preference stock (103.0) (23.0)
--------------- --------------
Total redeemable preference stock 7.0 90.0
--------------- --------------
Preference Stock Not Subject to Mandatory Redemption 210.0 210.0
Current portion of preference stock not subject to
mandatory redemption (20.0) -
--------------- --------------
Total preference stock not subject to mandatory redemption 190.0 210.0
--------------- --------------
Common Shareholders' Equity
Common stock 1,454.5 1,433.0
Retained earnings 1,441.3 1,432.5
Accumulated other comprehensive income 4.8 4.9
--------------- --------------
Total common shareholders' equity 2,900.6 2,870.4
--------------- --------------
Total capitalization 6,160.8 6,159.3
--------------- --------------
TOTAL LIABILITIES AND CAPITALIZATION $ 9,198.3 $ 8,773.4
=============== ==============
</TABLE>
* Unaudited
See Notes to Consolidated Financial Statements.
Certain prior period amounts have been reclassified to conform with the current
period's presentation.
4
<PAGE>
BALTIMORE GAS AND ELECTRIC COMPANY
PART I. FINANCIAL INFORMATION (Continued)
Item 1. Financial Statements
Consolidated Statements of Cash Flows (Unaudited)
- -------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended June 30,
-----------------------------------
1998 1997
------------- --------------
(In Millions)
Cash Flows From Operating Activities
<S> <C> <C>
Net income $ 143.4 $ 87.1
Adjustments to reconcile to net cash provided by operating activities
Depreciation and amortization 209.0 195.7
Deferred income taxes (3.9) (18.2)
Investment tax credit adjustments (3.6) (3.8)
Deferred fuel costs 20.4 27.7
Accrued pension and postemployment benefits 10.6 (0.1)
Write-downs of real estate investments - 67.6
Allowance for equity funds used during construction (3.2) (2.4)
Equity in earnings of affiliates and joint ventures (net) (11.9) (15.6)
Changes in assets from energy trading activities (341.9) -
Changes in liabilities from energy trading activities 324.5 -
Changes in other current assets 104.9 57.9
Changes in other current liabilities (18.2) (31.9)
Other (15.1) (0.8)
------------- --------------
Net cash provided by operating activities 415.0 363.2
------------- --------------
Cash Flows From Financing Activities
Net maturity of short-term borrowings (243.6) (216.3)
Proceeds from issuance of
Long-term debt 141.4 528.3
Common stock 12.6 -
Company obligated mandatorily redeemable
trust preferred securities 250.0 -
Reacquisition of long-term debt (59.1) (102.2)
Redemption of preference stock (3.0) (1.5)
Common stock dividends paid (121.2) (118.1)
Preference stock dividends paid (11.6) (15.8)
Other 8.7 1.2
------------- --------------
Net cash (used in) provided by financing activities (25.8) 75.6
------------- --------------
Cash Flows From Investing Activities
Utility construction expenditures (including AFC) (143.8) (166.0)
Allowance for equity funds used during construction 3.2 2.4
Nuclear fuel expenditures (18.5) (17.1)
Deferred energy conservation expenditures (10.8) (13.1)
Contributions to nuclear decommissioning trust fund (8.8) (8.8)
Merger costs - (22.4)
Purchases of marketable equity securities (16.5) (9.9)
Sales of marketable equity securities 18.7 21.5
Other financial investments 13.6 (0.9)
Real estate projects 26.9 23.4
Power generation systems (82.1) (17.2)
Other (31.2) (26.2)
------------- --------------
Net cash used in investing activities (249.3) (234.3)
------------- --------------
Net Increase in Cash and Cash Equivalents 139.9 204.5
Cash and Cash Equivalents at Beginning of Period 162.6 66.7
------------- --------------
Cash and Cash Equivalents at End of Period $ 302.5 $ 271.2
============= ==============
Other Cash Flow Information:
Interest paid (net of amounts capitalized) $ 114.7 $ 100.6
Income taxes paid $ 89.9 $ 57.9
</TABLE>
See Notes to Consolidated Financial Statements.
Certain prior period amounts have been reclassified to conform with the current
period's 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.
Comprehensive Income
- --------------------
We adopted Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income, effective January 1, 1998. Comprehensive income includes
net income plus all changes in shareholders' equity for the period, excluding
shareholder transactions (some examples are stock issuances and dividend
payments). Our comprehensive income includes net income plus the effect of
unrealized gains or losses on available-for-sale securities. We have presented
comprehensive income in the Consolidated Statements of Comprehensive Income on
page 2, and accumulated other comprehensive income in the Consolidated Balance
Sheets on page 4.
BGE Financing Activity
- ----------------------
Issuances
- ---------
On June 15, 1998, BGE Capital Trust I (Trust), a Delaware business trust
established by BGE, issued 10,000,000 Trust Originated Preferred Securities
(TOPrS) for $250 million ($25 liquidation amount per preferred security) with a
distribution rate of 7.16%. The TOPrS are included as "Company obligated
mandatorily redeemable trust preferred securities" in the Consolidated Balance
Sheets on page 4.
The Trust used the net proceeds of $242.1 million from the issuance of the
preferred securities to purchase a series of 7.16% Deferrable Interest
Subordinated Debentures due June 30, 2038 (Debentures) from BGE with the same
terms as the TOPrS. The Trust must redeem the TOPrS at $25 per preferred
security plus accrued but unpaid distributions when the Debentures are paid at
maturity or upon any earlier redemption. BGE has the option to redeem the
Debentures at any time on or after June 15, 2003 or at any time when certain tax
or other events occur.
The interest paid on the Debentures, which the Trust will use to make
distributions on the TOPrS, is included in Interest Expense in the Consolidated
Statements of Income on page 2 and is deductible for income tax purposes.
BGE fully and unconditionally guarantees the TOPrS based on its various
obligations relating to the Debentures and the TOPrS.
We issued the following medium-term notes during the period from January 1,
1998 through the date of this report:
Date Net
Principal Issued Proceeds
--------- -------- ---------
(In millions)
Series E
- --------
6.21%, due 2008 $16.5 4/98 $16.4
Series G
- --------
6.36%, due 2008 $25.0 3/98 $24.9
6.21%, due 2008 $25.0 4/98 $24.9
6.20%, due 2008 $40.0 4/98 $39.8
During the period from January 1, 1998 through the date of this report,
we issued a total of 1,005,468 shares of common stock, without par value, under
our Common Stock Continuous Offering Program and our Dividend Reinvestment and
Stock Purchase Plan. Our net proceeds were about $32.5 million.
Early Redemptions
- -----------------
During the period from January 1, 1998 through the date of this report, we
redeemed or announced the partial or full redemption of several series of
long-term debt and preference stock prior to their maturity dates or required
redemption dates as follows:
Series Principal Date Price
------ or Par Redeemed Paid
------- --------- -------
(In millions)
7 1/2% First Refunding Mortgage
Bonds due 4/15/2023 $15.9 8/98 $100.00
7.78% 1973 Preference Stock $20.0 7/98 $101.00
7.50% 1986 Preference Stock $33.5 7/98 $102.50
6.75% 1987 Preference Stock $39.5 7/98 $102.25
6
<PAGE>
In addition, we made the following optional sinking fund redemptions:
Series Principal Date Price
------ or Par Redeemed Paid
--------- --------- --------
(In millions)
6.75% 1987 Preference Stock $1.5 4/98 $100.00
7.85% 1991 Preference Stock $7.0 7/98 $100.00
The above referenced early redemptions of preference stock are in addition
to mandatory redemptions of preference stock also made during this period.
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 Activity
- ---------------------------------------
We describe our diversified businesses in the "Diversified Businesses"
section of Management's Discussion and Analysis beginning on page 18. In the
first quarter of 1998, affiliates of our power generation business,
Constellation Power, Inc., entered into a $92.5 million credit facility to
finance the acquisition of existing generating facilities and the development
and construction of new generating facilities in Guatemala. At the date of this
report, Constellation Power's obligation under the facility was approximately
$83 million.
In August 1998, Constellation Enterprises(TM), Inc. entered into a $75
million credit facility to provide for the issuance of letters of credit for its
subsidiaries. The facility expires September 30, 1998. At the date of this
report, no amounts are outstanding under this credit facility.
Please refer to the "Diversified Business Debt and Liquidity" section of
Management's Discussion and Analysis on page 23 for additional information about
the debt of our diversified businesses.
Commitments
- -----------
In March 1998, our power marketing business, Constellation Power Source(TM),
Inc. and Goldman, Sachs Capital Partners II L.P., an affiliate of Goldman, Sachs
& Co., formed Orion Power Holdings, Inc. to acquire electric generating plants
in the United States and Canada. Constellation Power Source owns a minority
interest in Orion, and BGE has committed to contribute up to $115 million in
equity to Constellation Power Source to fund its investment in Orion.
In July 1998, we terminated the electric capacity contract awarded to PECO
Energy Company (PECO) in a 1994 competitive bidding program. The contract
provided for PECO to supply us 140 MW of firm electric capacity and associated
energy for 25 years.
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 phases:
o Phase I became effective January 1, 1995. We met the requirements of this
phase by installing flue gas desulfurization systems (scrubbers),
switching fuels, and retiring some units.
o Phase II must be implemented by 2000. We are currently examining what
actions we should take to comply with this phase. We expect to meet the
compliance requirements through some combination of installing 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 Federal government. The Maryland Department of the
Environment (MDE) issued NOx regulations which took effect June 1, 1998. These
regulations require major NOx sources to reduce NOx emissions up to 65% by May,
1999. Based on existing MDE regulations and proposed federal regulations, we
currently estimate that the additional controls needed at our generating plants
will cost approximately $120 million.
While we are already taking steps to control NOx emissions at our generating
plants, we communicated to MDE that we cannot install the required technology at
our Brandon Shores plant in time to meet the 1999 deadline referred to above. We
discuss this further in "Part II Other Information - Legal Proceedings" on page
26.
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.
7
<PAGE>
The Environmental Protection Agency (EPA) and several state agencies have
notified us that we are considered a potentially responsible party with respect
to the cleanup of certain environmentally contaminated sites owned and operated
by others. We cannot estimate the cleanup costs for all of these sites. We can,
however, estimate that our current 15.79% share of the possible cleanup costs at
one of these sites, Metal Bank of America (a metal reclaimer in Philadelphia),
could be as much as $6 million higher than amounts we have recorded as a
liability on our Consolidated Balance Sheets. This estimate is based on a Record
of Decision recently issued by the EPA. 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 MDE that requires us to implement remedial action plans for
contamination at and around the Spring Gardens site. We submitted the required
remedial action plans and they have been approved by MDE. Based on several
remedial action options for all sites, the costs we consider to be probable to
remedy the contamination are estimated to total $50 million in nominal dollars
(including inflation). We have recorded these costs as a liability on our
Consolidated Balance Sheets and have deferred these costs, net of accumulated
amortization and amounts recovered from insurance companies, as a regulatory
asset. We discuss this further in Note 5 of our 1997 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).
Our potential environmental liabilities and pending environmental actions
are described in our 1997 Annual Report on Form 10-K under "Item 1. Business -
Environmental Matters."
Nuclear Insurance
- -----------------
If there were an accident or an extended outage at either unit of the
Calvert Cliffs Nuclear Power Plant (Calvert Cliffs), it could have a substantial
adverse financial effect on BGE. The primary contingencies that would result
from an incident at Calvert Cliffs could include:
o physical damage to the plant,
o recoverability of replacement powercosts, and
o our liability to third parties for property damage and bodily injury.
We have insurance policies that cover these contingencies, but the policies
have certain exclusions. Furthermore, the costs that could result from a covered
major accident or a covered extended outage at either of the Calvert Cliffs
units could exceed our insurance coverage limits.
For physical damage to Calvert Cliffs, we have $2.75 billion of property
insurance from an industry mutual insurance company. If an outage at either of
the two units at Calvert Cliffs is caused by an insured physical damage loss and
lasts more than 17 weeks, we have insurance coverage for replacement power costs
up to $494.2 million per unit, provided by an industry mutual insurance company.
This amount can be reduced by up to $98.8 million per unit if an outage to both
units at the plant is caused by a single insured physical damage loss. If
accidents at any insured plants cause a shortfall of funds at the industry
mutual insurance company, all policyholders could be assessed, with our share
being up to $23 million.
In addition we, as well as others, could be charged for a portion of any
third party claims associated with a nuclear incident at any commercial nuclear
power plant in the country. At the date of this report, the limit for third
party claims from a nuclear incident is $8.92 billion under the provisions of
the Price Anderson Act. If third party claims exceed $200 million (the amount of
primary insurance), our share of the total liability for third party claims
could be up to $159 million per incident. That amount would be payable at a rate
of $20 million per year.
As an operator of a commercial nuclear power plant in the United States, we
are required to purchase insurance to cover radiation injury claims of certain
nuclear workers. On January 1, 1998, a new insurance
8
<PAGE>
policy became effective for all operators requiring coverage for current
operations. Waiving the right to make additional claims under the old policy was
a condition for acceptance under the new policy. We describe both the old and
new policies below.
o BGE nuclear worker claims reported on or after January 1, 1998 are
covered by a new insurance policy with an annual industry aggregate limit
of $200 million for radiation injury claims against all those insured by
this policy.
o All nuclear worker claims reported prior to January 1, 1998 are still
covered by the old insurance policies. Insureds under the old policies,
with no current operations, are not required to purchase the new policy
described above, and may still make claims against the old policies for
the next 10 years. If radiation injury claims under these old policies
exceed the policy reserves, all policyholders could be assessed, with our
share being up to $6.3 million.
If claims under these polices exceed the coverage limits, the provisions of
the Price Anderson Act (discussed above) would apply.
Recoverability of Electric Fuel Costs
- -------------------------------------
By law, we are allowed to recover our cost of electric fuel if the Maryland
Public Service Commission (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 evaluate the performance of our generating
plants, and will determine if we used all reasonable and cost-effective
maintenance and operating control procedures.
The Maryland PSC, under the Generating Unit Performance Program, measures
annually whether we have maintained the productive capacity of our generating
plants at reasonable levels. To do this, the program uses a system-wide
generating performance target and an individual performance target for each base
load generating unit. In fuel rate hearings, actual generating performance
adjusted for planned outages will be compared first to the system-wide target.
If that target is met, it should mean that the requirements of Maryland law have
been met. If the system-wide target is not met, each unit's adjusted actual
generating performance will be compared to its individual performance target to
determine if the requirements of Maryland law have been met and, if not, to
determine the basis for possibly imposing a penalty on BGE. Even if we meet
these targets, parties to fuel rate hearings may still question whether we used
all reasonable and cost-effective procedures to try to prevent an outage. If the
Maryland PSC decides we were deficient in some way, the Maryland PSC may not
allow us to recover the cost of replacement energy.
The two units at 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 past outages at Calvert Cliffs in our 1997 Annual Report on Form
10-K.
California Power Purchase Agreements
- ------------------------------------
Constellation Power, Inc. and Constellation Investments, Inc. (whose power
projects are managed by Constellation Power) have $275 million invested in 15
projects that sell electricity in California under power purchase agreements
called "Interim Standard Offer No. 4" agreements. Earnings from these projects
were $7 million, or $.05 per share, for the quarter ended June 30, 1998 and $17
million, or $.12 per share for the six months ended June 30, 1998.
Under these agreements, the projects supply electricity to utility companies
at:
o a fixed rate for capacity and energy for thefirst 10 years of the
agreements, and
o a fixed rate for capacity plus a variable rate for energy based on the
utilities' avoided cost for the remaining term of the agreements.
Generally, a "capacity rate" is paid to a power plant for its availability
to supply electricity, and an "energy rate" is paid for the electricity actually
generated. "Avoided cost" generally is the cost of a utility's cheapest
next-available source of generation to service the demands on its system.
We use the term transition period to describe the time frame when the
10-year periods for fixed energy rates expire for these 15 power generation
projects and they begin supplying electricity at variable rates. The transition
period for some of the projects began in 1996 and will continue for the
remaining projects through 2000. At the date of this report, six projects had
already transitioned to variable rates and two other projects will transition
later in 1998. The remaining seven projects will transition in 1999 or 2000.
The projects that have already transitioned to variable rates have had lower
revenues under variable rates than they did under fixed rates. However, we have
not yet experienced total lower earnings from the California projects because
the combined revenues from
9
<PAGE>
the remaining projects, which continued to supply electricity at fixed rates,
were high enough to offset the lower revenues from the variable-rate projects.
When the remaining projects transition to variable rates, we expect the revenues
from those projects to also be lower than they are under fixed rates. It is
difficult to estimate how much lower the revenues may be, but Constellation
Power's earnings could be affected significantly. However, the California
projects that make the highest revenues will transition to variable rates in
1999 and 2000. As a result, we do not expect Constellation Power to have
significantly lower earnings due to the transition to variable rates before
2000.
Constellation Power is pursuing alternatives for some of these power
generation projects including:
o repowering the projects to reduce operating costs,
o changing fuels to reduce operating costs,
o renegotiating the power purchase agreements to improve the terms,
o restructuring financings to improve the financing terms, and
o selling its ownership interests in the projects.
We cannot predict the financial effects of the transition from fixed to
variable rates on Constellation Power or on BGE, but the effects could be
material.
Constellation Real Estate
- -------------------------
In May 1998, Constellation Real Estate Group (CREG), announced that it has
entered into an agreement with Corporate Office Properties Trust (COPT), a real
estate investment trust based in Philadelphia. Under the terms of the agreement:
o COPT will pay CREG approximately $108 million in either cash or debt
assumption, and securities comprised of approximately 6.93 million shares
of common stock and $24 million in convertible preferred stock on the
closing date,
o CREG will contribute up to 16 operating properties and 2 properties under
development totaling 1.8 million square feet of office and retail space
as well as certain other assets,
o COPT will receive certain options and first refusal rights to
approximately 91 acres of identified properties which are next to office
properties being acquired by them and which have terms that range from
2-5 years, and
o CREG will become COPT's single largest investor, with approximately a
41.5% common stock ownership interest on the closing date.
The agreement must be approved by the COPT shareholders which is expected to
occur in the third quarter of 1998. There can be no assurances that the
agreement will be approved by the COPT shareholders.
If the COPT agreement is approved, the remaining real estate projects held
by our real estate business, will consist mostly of certain retail, office, and
land development projects in the Baltimore-Washington corridor.
CREG's real estate portfolio has continued to incur carrying costs and
depreciation over the years. Additionally, CREG has 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 obtained from the cash flows of, or additional borrowings by,
other BGE subsidiaries.
We consider market demand, interest rates, the availability of financing,
and the strength of the economy in general when making decisions about our real
estate investments. If we were to sell our real estate projects in the current
market, we would have losses, although the amount of the losses is hard to
predict.
Management's current real estate strategy is to hold each real estate
project until we can realize a reasonable value for it, as in the COPT
transaction discussed above. Management evaluates strategies for all its
businesses, including real estate, on an ongoing basis. We anticipate that
competing demands for our financial resources and changes in the utility
industry will cause us to evaluate thoroughly all diversified business
strategies on a regular basis so we use capital and other resources in a manner
that is most beneficial. Depending on market conditions in the future, we could
also have losses on any future sales.
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.
10
<PAGE>
Item 2. Management's Discussion
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 earnings and costs changed between periods,
o where our earnings came from,
o how all of this affects our overall financial condition,
o what our expenditures for capital projects were in the current period and
what we expect them to be in the future, and
o where we will get cash for future capital expenditures.
As you read Management's Discussion and Analysis, it may be helpful to refer
to our Consolidated Statements of Income on page 2, which present the results of
our operations for the quarters and six month periods ended June 30, 1998 and
1997. 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.
The electric utility industry is undergoing rapid and substantial change.
Competition in the generation part of our business is increasing. The regulatory
environment (federal and state) is shifting toward customer choice. These
matters are discussed briefly in the "Competition and Response to Regulatory
Change" section on page 13. They are discussed in detail in our 1997 Annual
Report on Form 10-K.
Results of Operations for the Quarter and Six Months Ended June 30, 1998
Compared With the Same Periods of 1997
- --------------------------------------------------------------------------------
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
-------------- ------------------
1998 1997 1998 1997
------- ------ -------- --------
Utility business...... $.34 $.23 $.75 $.62
Diversified businesses .05 .04 .14 .16
--- --- --- ---
Total earnings per share
from operations..... .39 .27 .89 .78
Write-downs of real
estate investments.. - (.22) - (.30)
---- ---- ---- ----
Total earnings per share $.39 $.05 $.89 $.48
==== ==== ==== ====
Quarter Ended June 30, 1998
- ---------------------------
Our total earnings for the quarter ended June 30, 1998 increased $50.3
million, or $.34 per share, compared to the same period of 1997. Our total
earnings improved mostly because in 1997 our real estate business wrote down its
investment in a real estate project by $31.9 million after-tax, or $.22 per
share. We discuss this write-down further in the "Real Estate Development and
Senior-Living Facilities" section of our 1997 Annual Report on Form 10-K.
In the second quarter of 1998, we had higher utility earnings from
operations than we did in the same period of 1997 mostly because we sold more
electricity. We discuss our utility earnings in more detail in the "Utility
Business" section beginning on page 12.
In the second quarter of 1998, diversified business earnings from operations
increased compared to the same period of 1997 mostly because of higher earnings
from our financial investments and power marketing businesses. We discuss our
diversified business earnings in more detail in the "Diversified Businesses"
section beginning on page 18.
11
<PAGE>
Six Months Ended June 30, 1998
- ------------------------------
Our total earnings for the six months ended June 30, 1998 increased $60.5
million, or $.41 per share, compared to the same period of 1997 mostly because
of the $31.9 million after-tax real estate write-down mentioned above and a $12
million after-tax, or $.08 per share, write-down of an investment in another
real estate project in the first quarter of 1997. We discuss these write-downs
further in the "Real Estate Development and Senior-Living Facilities" section of
our 1997 Annual Report on Form 10-K.
In the six months ended June 30, 1998, we had higher utility earnings from
operations than we did in the same period of 1997 mostly because we sold more
electricity and we had lower operations and maintenance expenses. Utility
earnings would have been higher except we had lower gas sales due to milder
winter weather this year (people use less gas to heat their homes in milder
weather). We discuss our utility earnings in more detail in the "Utility
Business" section below.
In the six months ended June 30, 1998, diversified business earnings from
operations decreased compared to the same period of 1997 mostly because of lower
earnings from our real estate and senior-living facilities business. We discuss
our diversified business earnings in more detail in the "Diversified Businesses"
section beginning on page 18.
Utility Business
- ----------------
Before we go into the details of our electric and gas operations, we believe
it is important to discuss four factors that have a strong influence on our
utility business performance: regulation, the weather, other factors including
the condition of the economy in our service territory, and competition.
Regulation by the Maryland Public Service Commission (Maryland PSC)
- -------------------------------------------------------------------
The Maryland PSC determines the rates we can charge our customers. Our rates
consist of a "base rate" and a "fuel rate." The base rate is the rate the
Maryland PSC allows us to charge our customers for the cost of providing them
service, plus a profit. We have both an electric base rate and a gas base rate.
Higher electric base rates apply during the summer when the demand for
electricity is the highest. Gas base rates are not affected by seasonal changes.
The Maryland PSC allows us to include in base rates a component to recover
money spent on conservation programs. This component is called an "energy
conservation surcharge." However, under this surcharge the Maryland PSC limits
what our profit can be. If, at the end of the year, we have exceeded our allowed
profit, we lower the amount of future surcharges to our customers to correct the
amount of overage, plus interest.
In addition, we charge our electric customers separately for the fuel we use
to generate electricity (nuclear fuel, coal, gas, or oil) and for the net cost
of purchases and sales of electricity (primarily with other utilities). We
charge the actual cost of these items to the customer with no profit to us. We
discuss this in more detail in the "Electric Fuel Rate Clause" section on page
16.
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 17.
From time to time, when necessary to cover increased costs, we ask the
Maryland PSC for base rate increases. The Maryland PSC holds hearings to
determine whether to grant us all or a portion of the amount requested. The
Maryland PSC has historically allowed us to increase base rates to recover costs
for replacing utility plant assets, plus a profit, beginning at the time of
replacement. Generally, rate increases improve our utility earnings because they
allow us to collect more revenue. However, rate increases are normally granted
based on historical data and those increases may not always keep pace with
increasing costs.
Weather
- -------
Weather affects the demand for electricity and gas, especially among our
residential customers. Very hot summers and very cold winters increase demand.
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.
12
<PAGE>
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.
Effective March 1, 1998, the Maryland PSC allowed us to implement a monthly
adjustment to our gas business revenues to eliminate the effect of seasonal
weather patterns. This means our monthly gas revenues will be based on weather
that is considered "normal" for the month and, therefore, will not be affected
by actual weather conditions.
The following chart shows the number of heating and cooling degree days in
1998 and 1997, and shows the percentage change in the number of degree days from
the prior period.
Quarter Ended Six Months Ended
June 30 June 30
-------------- ------------------
1998 1997 1998 1997
------- ------ -------- --------
Heating degree days... 463 671 2,485 2,923
Percent change
compared to prior period (31.0)% (15.0)%
Cooling degree days... 258 179 279 182
Percent change
compared to prior period 44.1% 53.3%
Other Factors
- -------------
Other factors, aside from weather, impact the demand for electricity and
gas. These factors include the "number of customers" and "usage per customer"
during a given period. We use these terms later in our discussions of electric
and gas operations. In those sections, we discuss how these and other factors
affected electric and gas sales during the periods presented.
The number of customers in a given period is affected by new home and
apartment construction and by the number of businesses in our service territory.
Usage per customer refers to all other items impacting customer sales which
cannot be separately measured. These factors include the strength of the economy
in our service territory. When the economy is healthy and expanding, customers
tend to consume more electricity and gas. Conversely, during an economic
downtrend, our customers tend to consume less electricity and gas.
Competition and Response to Regulatory Change
- ---------------------------------------------
Our electric and gas businesses are also affected by competition. We discuss
competition in each business below.
Electric Business
- -----------------
Electric utilities are facing competition on various fronts, including:
o in the construction of generating units to meet increased demand for
electricity,
o in the sale of electricity in 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.
On July 1, 1998, BGE and all other Maryland investor-owned electric
utilities filed with the Maryland PSC their individual proposals for the
transition from a regulated electric supply system to one where generation is
priced based on a competitive retail electric market. In our plan, we proposed
that:
o All customers would be able to choose other suppliers or our service,
o We would guarantee our service at rates frozen until July 2002. Prices
would then be adjusted for inflation until the transition is complete,
but not beyond 2008,
o Customers who choose an alternate supplier would receive a shopping
credit. This credit would reduce their BGE bill by the market value of
capacity, energy, and other services that we no longer provide those
customers,
o We will attempt to reduce potentially stranded investments by lowering
operating costs and applying all earnings in excess of our authorized
rate of return to accelerate the depreciation of generation assets. This
would lower the generation asset book values to their competitive market
value thereby reducing any potentially stranded investment,
o Market value of generation assets will be determined by annual
independent appraisals beginning in 2002 and continuing through the
transition period, and
o When the difference between the book value and market value of generation
assets is within 10%, the transition period ends and a non-bypassable
surcharge will be applied to customers' bills to recover the remaining
stranded investments over a two to three year period.
13
<PAGE>
The Maryland PSC will hold hearings to individually examine our electric
restructuring proposal and those of the other Maryland investor-owned utilities.
The current schedule is calling for settlement conferences to occur prior to
December 1, 1998. Other parties participating in the proceeding must file their
positions by that date. Absent a settlement, the Maryland PSC is to issue an
order to each utility by October 1, 1999.
We regularly reevaluate our strategies with two goals in mind: to improve
our competitive position, and to anticipate and adapt to regulatory changes.
However, we cannot predict the ultimate effect competition or regulatory change
will have on our earnings.
We discuss competition in our electric business in more detail in our 1997
Annual Report on Form 10-K under the heading "Electric Regulatory Matters and
Competition."
Gas Business
- ------------
Regulatory change in the natural gas industry is well under way. We discuss
competition in our gas business in more detail in our 1997 Annual Report on Form
10-K under the heading "Gas Regulatory Matters and Competition."
Strategies
- ----------
We will continue to develop strategies to keep us competitive. These
strategies might include one or more of the following:
o the complete or partial separation of our generation, transmission and
distribution functions,
o purchase or sale of generation assets,
o mergers or acquisitions of utility or non-utility businesses,
o spin-off or sale of one or more businesses, and
o growth of revenues from diversified businesses.
We discuss our diversified businesses in the "Diversified Businesses"
section beginning on page 18.
We cannot predict whether any transactions of the types described above may
actually occur, nor can we predict what their effect on our financial condition
or competitive position might be.
Utility Business Earnings per Share of Common Stock
- ---------------------------------------------------
Quarter Ended Six Months Ended
June 30 June 30
-------------- ------------------
1998 1997 1998 1997
------- ------ -------- --------
Electric business..... $.33 $.23 $.63 $.50
Gas business.......... .01 - .12 .12
--- --- --- ---
Total utility
earnings per share.. $.34 $.23 $.75 $.62
==== ==== ==== ====
Our utility earnings for the quarter ended June 30, 1998 increased $15.1
million, or $.11 per share compared to the same quarter of 1997. Our utility
earnings for the six months ended June 30, 1998 increased $18.5 million, or $.13
per share compared to the same six months of 1997. We discuss the factors
affecting utility earnings below.
Electric Operations
- -------------------
Electric Revenues
- -----------------
The changes in electric revenues in 1998 compared to 1997 were caused by:
Quarter Ended Six Months Ended
June 30 June 30
1998 vs. 1997 1998 vs. 1997
-------------- ------------------
(In millions)
Electric system
sales volumes....... $25.8 $17.6
Base rates............ (1.4) (5.7)
Fuel rates............ (0.5) (4.4)
---- ----
Total change in electric
revenues from electric
system sales........ 23.9 7.5
Interchange and
other sales......... 2.8 (0.5)
Other................. 0.4 1.9
--- ---
Total change in
electric revenues... $27.1 $8.9
===== ====
Electric System Sales Volumes
- -----------------------------
"Electric system sales volumes" 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.
14
<PAGE>
The percentage changes in our electric system sales volumes, by type of
customer, in 1998 compared to 1997 were:
Quarter Ended Six Months Ended
June 30 June 30
1998 vs. 1997 1998 vs. 1997
-------------- ------------------
Residential 4.8% (0.3)%
Commercial 6.1 4.0
Industrial 5.0 2.0
During the quarter ended June 30, 1998, we sold more electricity to
residential and commercial customers mostly due to warmer weather and higher
usage per customer. We sold more electricity to industrial customers due to
higher usage by industrial customers and an increased number of customers.
During the six months ended June 30, 1998, we sold about the same amount of
electricity to residential customers as we did in 1997. We sold more electricity
to commercial customers mostly due to higher usage per customer. We sold more
electricity to industrial customers due to an increased number of customers and
higher usage per customer.
Base Rates
- ----------
During the quarter and six months ended June 30, 1998, base rate revenues
were lower than they were in the same periods of 1997. Although we sold more
electricity this year, our base rate revenues decreased because of a lower
energy conservation surcharge.
Fuel Rates
- ----------
The fuel rate is the rate the Maryland PSC allows us to charge our
customers, with no profit to us, for:
o our actual cost of fuel used to generate electricity, and
o the net cost of purchases and sales of electricity (primarily with other
utilities).
If these costs go up, the Maryland PSC permits us to increase the fuel rate.
If these costs go down, our customers benefit from a reduction in the fuel rate.
The fuel rate is impacted most by the amount of electricity generated at the
Calvert Cliffs Nuclear Power Plant (Calvert Cliffs) because the cost of nuclear
fuel is cheaper than coal, gas, or oil.
We discuss the fuel rate in detail in Note 1 of our 1997 Annual Report on
Form 10-K.
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 in the "Recoverability of Electric Fuel Costs" section
of the Notes to Consolidated Financial Statements on page 9.
During the quarter and six months ended June 30, 1998, fuel rate revenues
decreased compared to the same periods of 1997. Even though we sold more
electricity, the fuel rate was lower, reflecting a less-costly mix of generating
plants and electricity purchases.
Interchange and Other Sales
- ---------------------------
"Interchange and other sales" are sales of energy in the Pennsylvania-New
Jersey-Maryland (PJM) Interconnection energy market and to others. The PJM is a
regional power pool with members that include many wholesale market
participants, as well as BGE and seven other utility companies. We sell energy
to PJM members and to others after we have satisfied the demand for electricity
in our own system.
During the quarter ended June 30, 1998, we had higher interchange and other
sales mostly because the price per megawatt of electricity we sold was higher
due to market conditions.
During the six months ended June 30, 1998, we had about the same amount of
interchange and other sales as we did in the corresponding period of 1997.
Electric Fuel and Purchased Energy Expenses
- -------------------------------------------
Quarter Ended Six Months Ended
June 30 June 30
-------------- ------------------
1998 1997 1998 1997
------- ------ -------- --------
(In millions)
Actual costs......... $124.1 $115.9 $238.7 $246.0
Net recovery (deferral)
of costs under electric
fuel rate clause (see
Note 1 of our 1997
Form 10-K)........... (8.5) (3.1) 3.4 2.0
---- ---- --- ---
Total electric fuel and
purchased energy
expenses........... $115.6 $112.8 $242.1 $248.0
====== ====== ====== ======
15
<PAGE>
Actual Costs
- ------------
During the quarter ended June 30, 1998, our actual costs of fuel to generate
electricity (nuclear fuel, coal, gas, or oil) and electricity we bought from
others were higher than in the same period of 1997 mostly because we generated
more electricity due to increased demand.
During the six months ended June 30, 1998, our actual costs of fuel to
generate electricity (nuclear fuel, coal, gas, or oil) and electricity we bought
from others were lower than in the same period of 1997 mostly for two reasons:
we bought less electricity from other utilities because we were able to meet
demand using the electricity we generated, and we were able to use a less-costly
mix of generating plants.
Electric Fuel Rate Clause
- -------------------------
Under the electric fuel rate clause, we defer (include as an asset or
liability on the Consolidated Balance Sheets and exclude from the Consolidated
Statements of Income) the difference between our actual costs of fuel and energy
and what we collect from customers under the fuel rate in a given period. We
either bill or refund our customers that difference in the future.
During the quarter ended June 30, 1998, our actual costs of fuel and energy
were higher than the fuel rate revenues we collected from our customers.
During the six months ended June 30, 1998, our actual costs of fuel and
energy were lower than the fuel rate revenues we collected from our customers.
Gas Operations
- --------------
Gas Revenues
- ------------
The changes in gas revenues in 1998 compared to 1997 were caused by:
Quarter Ended Six Months Ended
June 30 June 30
1998 vs. 1997 1998 vs. 1997
-------------- ------------------
(In millions)
Gas system
sales volumes....... $(1.9) $(5.6)
Base rates............ 4.6 9.3
Weather normalization. 2.6 3.4
Gas cost adjustments.. (18.7) (57.3)
----- -----
Total change in gas
revenues from gas
system sales........ (13.4) (50.2)
Off-system sales...... 3.2 6.9
Other................. (0.1) (0.1)
---- ----
Total change in
gas revenues........ $(10.3) $(43.4)
====== ======
Gas System Sales Volumes
- ------------------------
The percentage changes in our gas system sales volumes, by type of customer,
in 1998 compared to 1997 were:
Quarter Ended Six Months Ended
June 30 June 30
1998 vs. 1997 1998 vs. 1997
-------------- ------------------
Residential (18.6)% (10.4)%
Commercial (9.1) (8.8)
Industrial (14.6) (11.2)
During the quarter ended June 30, 1998, we sold less gas to residential and
commercial customers mostly due to milder weather. We sold less gas to
industrial customers mostly because usage by Bethlehem Steel (our largest
customer) and other industrial customers decreased.
During the six months ended June 30, 1998, we sold less gas to residential
and commercial customers mostly due to milder weather and lower usage per
customer. We would have sold even less gas to residential and commercial
customers except the number of customers increased. We sold less gas to
industrial customers mostly because usage by Bethlehem Steel and other
industrial customers decreased. We would have sold even less gas to industrial
customers except the mild weather caused fewer service interruptions. Sometimes
we need to interrupt service during periods with the highest demand. Some
industrial customers pay reduced rates in exchange for our right to interrupt
their service during these periods.
Base Rates
- ----------
During the quarter and six months ended June 30, 1998, base rate revenues
were higher than they were during the same periods of 1997. Although we sold
less gas during 1998, our base rate revenues increased because of two factors.
Effective March 1, 1998, the Maryland PSC allowed us to increase our base rates
- -- which will increase our base rate revenues over the twelve-month period March
1998 through February 1999 by $16 million, and we had a higher energy
conservation surcharge in effect during 1998.
Weather Normalization
- ---------------------
Effective March 1, 1998, the Maryland PSC allowed us to implement a monthly
adjustment to our gas revenues to eliminate the effect of seasonal weather
patterns on our gas system sales volumes. This means our monthly gas revenues
will be based on weather that is considered "normal" for the month and,
therefore, will not be affected by actual weather conditions.
16
<PAGE>
Gas Cost Adjustments
- --------------------
We charge our gas customers for the natural gas they consume using gas cost
adjustment clauses set by the Maryland PSC. These clauses operate similar to the
electric fuel rate clause described in the "Electric Fuel Rate Clause" section
on page 16.
However, effective October 1996, the Maryland PSC approved a modification
of these clauses to provide a market based rates incentive mechanism. Under
market based rates, our actual cost of gas is compared to a market index (a
measure of the market price of gas in a given period). The difference between
our actual cost and the market index is shared equally between BGE (which
benefits shareholders) and customers.
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, 1998, gas adjustment
revenues decreased mostly because we sold less gas.
Off-System Sales
- ----------------
Off-system gas sales, which are low-margin 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).
During the quarter and six months ended June 30, 1998, revenues from
off-system gas sales increased mostly because we sold more gas off-system, and
we sold it at a higher price. 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
-------------- ------------------
1998 1997 1998 1997
------- ------ -------- --------
(In millions)
Actual costs......... $32.6 $38.7 $129.1 $173.5
Net recovery (deferral)
of costs under gas
adjustment clauses
(see Note 1 of our
1997 Form 10-K).... (0.4) 9.5 1.3 7.9
---- --- --- ---
Total gas purchased
for resale expenses $32.2 $48.2 $130.4 $181.4
===== ===== ====== ======
Actual Costs
- ------------
Actual costs include the cost of gas purchased for resale to our customers
and for sale off-system. Actual costs do not include the cost of gas purchased
by delivery service customers, including Bethlehem Steel.
During the quarter and six months ended June 30, 1998, actual gas costs
decreased mostly because we sold less gas.
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 ended June 30, 1998, our actual gas costs were higher
than the fuel rate revenues we collected from our customers.
During the six months ended June 30, 1998, our actual gas costs were lower
than the fuel rate revenues we collected from our customers.
Other Operating Expenses
- ------------------------
Operations and Maintenance Expenses
- -----------------------------------
During the quarter ended June 30, 1998, our operations and maintenance
expenses increased $1.7 million. These expenses increased mostly because of a
$6.0 million write-off of contributions to a third party for a low-level
radiation waste facility that was never completed. Operations and maintenance
costs would have been higher except we had lower labor costs and lower costs
associated with a regular maintenance outage at Calvert Cliffs.
During the six months ended June 30, 1998, our operations and maintenance
expenses decreased $9.3 million. These expenses decreased mostly because of
lower labor costs and because we had lower costs associated with a regular
maintenance outage at Calvert Cliffs. Operations and maintenance costs would
have been even lower except for the $6.0 million write-off for the low-level
radiation waste facility discussed above.
Depreciation and Amortization Expenses
- --------------------------------------
During the quarter ended June 30, 1998, depreciation and amortization
increased $4.4 million. These expenses increased mostly because we had more
plant in service (as our level of plant in service changes, the amount of our
depreciation and amortization expenses changes).
17
<PAGE>
During the six months ended June 30, 1998, depreciation and amortization
increased $15.3 million. These expenses increased mostly for two reasons: we had
more plant in service, and we reduced the amortization period for certain
computer software during the first quarter of 1998.
Other Income and Expenses
- -------------------------
Interest Charges
- ----------------
Interest charges represent the interest on our outstanding debt. During the
quarter ended June 30, 1998, we had about the same amount of interest charges
compared to the same period of 1997. During the six months ended June 30, 1998,
we had $5.3 million of higher interest charges compared to the same period of
1997 primarily because we had more debt outstanding.
Income Taxes
- ------------
During the quarter ended June 30, 1998, our total income taxes increased
$27.6 million. During the six months ended June 30, 1998, our total income taxes
increased $33.8 million. Income taxes increased during both periods compared to
last year because we had higher taxable income from both our utility operations
and our diversified businesses.
Diversified Businesses
- ----------------------
In the 1980s, we began to diversify our business in response to limited
growth in gas and electric sales. Today, we continue to diversify our business
in response to regulatory changes in the utility industry, but we are focusing
our subsidiary operations on energy-related businesses.
We have combined our diversified businesses under Constellation Enterprises,
Inc. They are as follows:
o Constellation Power Source, Inc. -- our power marketing business,
o Constellation Power, Inc. -- our power generation business,
o Constellation Energy Source(TM), Inc. -- our energy products and
services business,
o BGE Home Products & Services, Inc. and Subsidiaries -- our home products,
commercial building systems, and residential and small commercial natural
gas brokering business,
o Constellation Investments, Inc. -- our financial investments business,
and
o Constellation Real Estate Group, Inc. -- our real estate and
senior-living facilities business.
Diversified Business Earnings per Share of Common Stock
- -------------------------------------------------------
Quarter Ended Six Months Ended
June 30 June 30
-------------- ------------------
1998 1997 1998 1997
------- ------ -------- --------
Power marketing....... $.01 $.00 $.01 $.00
Power generation...... .04 .05 .11 .12
Energy products and
services............ (.01) (.02) (.02) (.02)
Home products and
commercial building
systems............. .01 .01 .02 .02
Financial investments. .03 .02 .07 .05
Real estate and
senior-living....... (.03) (.01) (.05) .00
Other................. .00 (.01) .00 (.01)
--- ---- --- ----
Total diversified business
earnings per share
from operations..... .05 .04 .14 .16
Write-downs of real
estate investments.. - (.22) - (.30)
---- ---- ---- ----
Total earnings per share $.05 $(.18) $.14 $(.14)
==== ===== ==== =====
Quarter Ended June 30, 1998
- ---------------------------
Our total diversified business earnings for the quarter ended June 30, 1998
increased $35.2 million, or $.23 per share, compared to the same period of 1997.
This is mostly because in 1997 our real estate business wrote down its
investment in a real estate project by $31.9 million after-tax, or $.22 per
share. We discuss this write-down further in the "Real Estate Development and
Senior-Living Facilities" section of our 1997 Annual Report on Form 10-K.
In the second quarter of 1998, diversified business earnings from operations
increased compared to the same period of 1997 mostly because of higher earnings
from our financial investments and power marketing businesses.
Six Months Ended June 30, 1998
- ------------------------------
Our total diversified business earnings for the six months ended June 30,
1998 increased $42.0 million, or $.28 per share, compared to the same period of
1997 mostly because of the $31.9 million after-tax real estate write-down
mentioned above and a $12 million after-tax, or $.08 per share, write-down of an
investment in another real estate project in the first quarter of 1997. We
discuss these write-downs further in the "Real Estate Development and
Senior-Living Facilities" section of our 1997 Annual Report on Form 10-K.
18
<PAGE>
In the six months ended June 30, 1998, diversified business earnings from
operations decreased compared to the same period of 1997 mostly because of lower
earnings from our real estate and senior-living facilities business.
Power Marketing
- ---------------
Constellation Power Source, Inc. provides power marketing and risk
management services to wholesale customers in North America by purchasing and
selling electric power, other energy commodities, and related derivatives.
In addition, in March 1998, Constellation Power Source and Goldman, Sachs
Capital Partners II L.P., an affiliate of Goldman, Sachs & Co., formed Orion
Power Holdings, Inc. to acquire electric generating plants in the United States
and Canada.
Constellation Power Source's business activities include trading:
o electricity,
o other energy commodities, and
o related derivative contracts.
Constellation Power Source reports these trading activities using the
mark-to-market method of accounting. Under the mark-to-market method of
accounting, we report:
o commodity positions and derivatives at fair value as "Assets from energy
trading activities" on page 3 and "Liabilities from energy trading
activities" on page 4 in the Consolidated Balance Sheets, and
o changes in the fair value of these assets and liabilities as components
of "Diversified businesses revenues" in the Consolidated Statements of
Income on page 2.
As a result of using the mark-to-market method of accounting, Constellation
Power Source's revenue and earnings will fluctuate. The primary factors that
cause these fluctuations are:
o the number and size of new transactions,
o the magnitude and volatility of changes in commodity prices and interest
rates, and
o the number and size of open commodity and derivative positions
Constellation Power Source holds or sells.
Constellation Power Source management uses its best estimates to determine
the fair value of the commodities and derivatives positions it holds and sells.
These estimates consider various factors including closing exchange and
over-the-counter price quotations, time value, volatility factors, and credit
exposure. However, it is possible that future market prices could vary from
those used in recording assets and liabilities from trading activities, and such
variations could be material.
During the quarter and six months ended June 30, 1998, earnings from our
power marketing business increased compared to the same periods of 1997 because
Constellation Power Source had minimal trading activity in 1997. Assets and
liabilities from energy trading activities increased because of greater trading
activity and higher market prices as of June 30, 1998.
Power Generation
- ----------------
Overview
- --------
Constellation Power, Inc. develops, owns, and operates domestic and
international power generation projects and manages power generation projects
owned by Constellation Investments, Inc.
During the quarter and six months ended June 30, 1998, earnings from our
power generation business decreased compared to the same period of 1997 mostly
due to our share of lower earnings from various energy projects.
California Power Purchase Agreements
- ------------------------------------
Constellation Power and Constellation Investments have $275 million invested
in 15 projects that sell electricity in California under power purchase
agreements called "Interim Standard Offer No. 4" agreements. Earnings from these
projects were $7 million, or $.05 per share, for the quarter ended June 30, 1998
and $17 million, or $.12 per share for the six months ended June 30, 1998.
Under these agreements, the electricity rates change from fixed rates to
variable rates during 1996 through 2000. The projects which already have had
rate changes have lower revenues under variable rates than they did under fixed
rates. When the remaining projects transition to variable rates, we expect their
revenues also to be lower than they are under fixed rates. However, the
California projects that make the highest revenues will transition in 1999 and
2000. As a result, we do not expect Constellation Power to have significantly
lower earnings before 2000 due to the transition to variable
19
<PAGE>
rates. We cannot predict the financial effects of the transition from fixed to
variable rates on Constellation Power or on BGE, but the effects could be
material.
We describe these projects and the transition process in detail in the Notes
to Consolidated Financial Statements on page 9.
International
- -------------
Constellation Power's business in Latin America:
o develops, acquires, owns, and operates power generation projects, and
o acquires and owns distribution systems.
At June 30, 1998, Constellation Power had invested about $103 million and
committed another $13 million in power projects in Latin America.
In the future, Constellation Power may expand its power generation business
further in both domestic and international projects.
Energy Products and Services
- ----------------------------
Constellation Energy Source, Inc. offers energy products and services
designed to provide solutions to the energy needs of mid-sized to large
commercial and industrial customers. These energy products and services include:
o Wholesale and retail natural gas, and
o A broad range of customized energy products and services, including
private electric and gas distribution systems, energy consulting, power
quality services, and campus and multi-building energy systems.
During the quarter ended June 30, 1998, earnings from our energy products
and services business were slightly higher than they were in the same period of
1997 mostly due to greater natural gas sales.
During the six months ended June 30, 1998, earnings from our energy products
and services business were about the same as they were in the corresponding
period of 1997.
Home Products and Commercial Building Systems
- ---------------------------------------------
BGE Home Products & Services, Inc. and its subsidiaries:
o sell and service electric and gas appliances,
o engage in home improvements, and
o sell and service heating, air conditioning,plumbing, electrical, and
indoor air quality systems.
In addition, effective July 1, 1998, BGE Home Products & Services began
offering natural gas brokering services to residential and small commercial
customers.
During the quarter and six months ended June 30, 1998, earnings from our
home products and commercial building systems business were about the same as
they were in the corresponding periods of 1997.
Financial Investments
- ---------------------
Constellation Investments, Inc. engages in financial investments, including:
o marketable securities,
o financial limited partnerships, and
o financial guaranty insurance companies.
During the quarter and six months ended June 30, 1998, earnings from
financial investments were higher compared to the same periods of 1997 mostly
due to two factors. We recorded a $1.3 million after-tax write-down of one
investment during the second quarter of 1997. We did not have a similar
write-down in the same period of 1998. We also had improved earnings from
financial investments during both periods of 1998 due to market conditions.
Real Estate and Senior-Living
- -----------------------------
Constellation Real Estate Group, Inc. (CREG) develops, owns, and manages
real estate and senior-living facilities, including:
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.
20
<PAGE>
During the quarter and six months ended June 30, 1998, real estate and
senior living facilities earnings from operations decreased compared to the same
period of 1997 mostly due to lower earnings from various real estate projects.
In May 1998, CREG announced that it had entered into an agreement with
Corporate Office Properties Trust (COPT), a real estate investment trust based
in Philadelphia. Under the agreement, CREG will contribute certain properties
and other assets for a combination of cash, debt assumption, and COPT
securities.
We consider market demand, interest rates, the availability of financing,
and the strength of the economy in general when making decisions about our real
estate investments. If we were to sell our real estate projects in the current
market, we would have losses, although the amount of the losses is hard to
predict. Depending on market conditions in the future, we could also have losses
on any future sales.
We discuss CREG's real estate business and the announced agreement with COPT
further in the Notes to Consolidated Financial Statements on page 10.
21
<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, 1998, along with estimated annual
amounts for the years 1998 through 2000, are shown below. For the twelve months
ended June 30, 1998, our ratio of earnings to fixed charges was 3.11 and our
ratio of earnings to combined fixed charges and preferred and preference
dividend requirements was 2.68.
<TABLE>
<CAPTION>
Six Months Ended
June Calendar Year Estimate
1998 1998 1999 2000
----------- ------------ ---------- -----------
(In millions)
Utility Business Capital Requirements:
- --------------------------------------
<S> <C> <C> <C> <C>
Construction expenditures (excluding AFC)
Electric................................................. $ 109 $ 236 $ 272 $ 273
Gas...................................................... 25 70 76 72
Common................................................... 5 34 27 24
--- --- --- ---
Total construction expenditures.......................... 139 340 375 369
AFC......................................................... 5 9 11 14
Nuclear fuel (uranium purchases
and processing charges)................................... 19 50 50 48
Deferred energy conservation
expenditures.............................................. 11 15 1 -
Retirement of long-term debt and
redemption of preference stock ........................... 3 222 341 254
--- --- --- ---
Total utility business
capital requirements...................................... 177 636 778 685
--- --- --- ---
Diversified Business Capital Requirements:
- ------------------------------------------
Investment requirements..................................... 56 187 146 157
Retirement of long-term debt................................ 57 229 152 244
-- --- --- ---
Total diversified business
capital requirements...................................... 113 416 298 401
--- --- --- ---
Total capital requirements.................................. $ 290 $ 1,052 $1,076 $1,086
======== ======= ====== ======
</TABLE>
Capital Requirements of Our Utility Business
- --------------------------------------------
We continuously review and change our construction program, so actual
expenditures may vary from the estimates for the years 1998 through 2000 in the
capital requirements chart.
Our projections of future electric construction expenditures do not include
costs to build more generating units. Electric construction expenditures include
improvements to generating plants and to our transmission and distribution
facilities. They also include estimated costs for replacing the steam generators
and extending the operating licenses at Calvert Cliffs. The operating licenses
expire in 2014 for Unit 1 and in 2016 for Unit 2. We estimate these Calvert
Cliffs costs to be:
o $24 million in 1998,
o $34 million in 1999, and
o $45 million in 2000.
We estimate that during the three-year period 2001 through 2003, we will
spend an additional $210 million to complete the replacement of the steam
generators and extend the operating licenses at Calvert Cliffs.
If we do not replace the steam generators, we estimate that Calvert Cliffs
could not operate beyond the 2004-2006 time period. We expect the steam
generator replacements to occur during the 2002 refueling outage for Unit 1 and
during the 2003 outage for Unit 2.
22
<PAGE>
During the twelve months ended June 30, 1998, our utility operations
provided about 114% of the cash needed to meet our capital requirements,
excluding cash needed to retire debt and redeem preference stock.
During the three years from 1998 through 2000, we expect utility operations
to provide about 115% of the cash needed to meet our capital requirements,
excluding cash needed to retire debt and redeem preference stock.
When we cannot meet utility capital requirements internally, we sell debt
and equity securities. We also sell securities when market conditions permit us
to refinance existing debt or preference stock at a lower cost. The amount of
cash we need and market conditions determine when and how much we sell. From
January 1, 1998 through the date of this report, we issued $106.5 million of
long-term debt, $250 million of trust originated preferred securities, and
1,005,468 shares of common stock. The net proceeds from the issuances of common
stock were $32.5 million. During the same period, $70 million of debt either
matured or was redeemed early, and we redeemed $123 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,
distributions, dividends, and principal on these securities. These ratings
affect how much it will cost us to sell these securities. The better the rating,
the lower the cost of the securities to us when we sell them. Our securities
ratings at the date of this report are shown in the following table.
Standard Moody's Duff & Phelps
& Poors Investors Credit
Rating Service Rating Co.
Group
----------- --------- -----------
Mortgage Bonds AA- A1 AA-
Unsecured Debt A A2 A+
Trust Originated
Preferred Securities
and Preference
Stock A "a2" A
Capital Requirements of Our Diversified Businesses
- --------------------------------------------------
We describe the investment requirements and debt and liquidity of our
diversified businesses below.
Diversified Business Investment Requirements
- --------------------------------------------
The investment requirements of our diversified businesses include funding
for:
o growing our power marketing business,
o the development and acquisition of power projects, as well as loans made
to project entities,
o investments in financial limited partnerships, and
o construction of district energy projects by ComfortLink(R) -- a general
partnership in which BGE is a partner.
Investment requirements for 1998 through 2000 include estimates of funding
for existing and anticipated projects. We continuously review and modify those
estimates. Actual investment requirements could vary a great deal from the
estimates on page 22 because they would be subject to several variables,
including:
o the type and number of projects selected for development,
o the effect of market conditions on those projects,
o the ability to obtain financing, and
o the availability of cash from operations.
The investment requirements exclude BGE's commitment to contribute up to
$115 million in equity to Constellation Power Source, Inc. to fund its
investment in Orion Power Holdings, Inc.
Diversified Business Debt and Liquidity
- ---------------------------------------
Our diversified businesses expect to expand their businesses. This would
include expansion in the energy marketing and power generation 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. BGE Home Products & Services may also meet
capital requirements through sales of receivables. Our diversified businesses
plan to raise the cash needed to meet capital requirements in the future through
these same methods.
23
<PAGE>
If CREG can get a reasonable value for real estate, additional cash may be
obtained by selling real estate projects. Their ability to sell or liquidate
assets will depend on market conditions, and we cannot give assurances that
these sales or liquidations could be made. We discuss the real estate business
and market in the "Real Estate and Senior-Living" section on page 20 and in the
Notes to Consolidated Financial Statements on page 10.
Our diversified businesses also have revolving credit agreements totaling
$135 million to provide additional cash for short-term financial needs and a $75
million letter of credit facility as discussed on page 7.
Other Matters
- -------------
Environmental Matters
- ---------------------
We are subject to federal, state, and local laws and regulations that work
to improve or maintain the quality of the environment. If certain substances
were disposed of or released at any of our properties, whether currently
operating or not, these laws and regulations require us to remove or remedy the
effect on the environment. This includes Environmental Protection Agency
Superfund sites. You will find details of our environmental matters in the
"Environmental Matters" section of the Notes to Consolidated Financial
Statements beginning on page 7 and in our 1997 Annual Report on Form 10-K under
"Item 1. Business - Environmental Matters." These details include financial
information. Some of the information is about costs that may be material.
The Year 2000 Issue
- -------------------
We have not experienced any significant year 2000 problems to date and we do
not expect any significant problems to impair our operations as we transition to
the new century. However, due to the magnitude and complexity of the year 2000
issue, even the most conscientious efforts cannot guarantee that every problem
will be found and corrected prior to January 1, 2000. We are focusing on
critical operating and business systems and expect to have contingency plans in
place by September 1999 to deal with any problems if they should occur.
We estimate our total year 2000 costs to be between $38 million and $42
million. To date, we have spent approximately $11 million. About one-third of
the total costs are for system replacements and will be capitalized (included in
our Consolidated Balance Sheets). The remaining costs will be expensed (included
in our Consolidated Statements of Income). Only about one-third of our total
costs are incremental (not previously included in our information technology
budget).
Utility Business
- ----------------
Our primary year 2000 concern for our utility business is the potential for
any interruption in providing electric and gas service to our customers. We
cannot predict the impact of any interruption on our results of operations, but
the impact could be material. To address this and other concerns, we established
a year 2000 task force. Based on a work plan developed by the task force, we
have targeted the following five key areas:
o Information technology applications (our customer, business, and human
resources information systems),
o Computer hardware and software infrastructure,
o Telecommunications systems,
o Digital systems (devices with embedded microprocessors such as power
instrumentation, controls, and meters), and
o Major suppliers.
Except for our major suppliers, we have completed our initial assessment,
which involves inventorying all systems and identifying appropriate resources,
and have developed action plans to ensure that the key areas identified above
are year 2000 compliant. We have inventoried our major suppliers and are
currently assessing their year 2000 readiness through surveys. We plan to
follow-up with our major suppliers via interviews in late 1998.
We expect to certify our systems for year 2000 readiness on the dates below:
Date to be
Certified
---------
Information technology
applications March 1999
Computer hardware and software
infrastructure March 1999
Telecommunications systems March 1999
Digital systems June 1999
Major suppliers June 1999
24
<PAGE>
Through the date of this report, we have completed approximately 30% of our
year 2000 project.
Another issue we are addressing is the impact of electric power grid
problems that may occur outside of our own electric system. We have started year
2000 electric power grid impact planning through our various electric
interconnection affiliations. The PJM Interconnection has begun planning year
2000 operational preparedness and restoration scenarios. The North American
Electric Reliability Council has initiated discussions to decide how regional
electric grid year 2000 assessment can be accomplished. Through the Electric
Power Research Institute (EPRI), an industry-wide effort has been established to
deal with year 2000 problems affecting digital systems and equipment used by the
nation's electric power companies. Under this effort, participating utilities
are working together to assess specific vendors' system problems and test plans.
The assessment will be shared by the industry as a whole to facilitate year 2000
problem solving.
BGE has recently joined the American Gas Association in an initiative
similar to the one with EPRI to facilitate year 2000 problem solving among gas
utilities.
Diversified Businesses
- ----------------------
Our diversified businesses have substantially completed the initial
assessment phase, and are currently developing action plans to ensure that their
systems are year 2000 compliant. We expect that these systems will be certified
for year 2000 readiness by June 1999. These systems will be certified under a
similar process as our utility business.
Accounting Standards Issued
- ---------------------------
In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132 regarding disclosures about pensions
and other postretirement benefits. We must adopt the requirements of this
standard in our financial statements for the year ended December 31, 1998.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1 about accounting for the costs of computer software
developed or obtained for internal use. We must adopt the requirements of this
statement in our financial statements for year ended December 31, 1999.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5 about reporting the costs of start-up activities. We
must adopt the requirements of this statement in our financial statements for
the year ended December 31, 1999.
We do not expect the adoption of these statements to have a material impact
on our financial results.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 regarding derivative financial
instruments and hedging activities. We must adopt the requirements of this
standard in our financial statements for the quarter ended March 31, 2000. We
have not determined the effects of Statement No. 133 on our financial results.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- ------------------------------------------------------------------
Not applicable. However, we disclose information about our risk
management policies in Note 1 of our 1997 Annual Report on Form 10-K, and we
discuss the trading activities of our power marketing business in the "Power
Marketing" section of Management's Discussion and Analysis on page 19.
25
<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 plaintiff's employers, and
o the date on which the exposure allegedly occurred.
To date, seven of these cases were settled before trial for amounts that
were immaterial. Three more trials are currently scheduled -- one in September
1998 and two in 1999.
The second type are claims by one manufacturer -- Pittsburgh Corning Corp.
- -- against us and approximately eight others, as third-party defendants. These
claims relate to approximately 1,500 individual plaintiffs. We do not know the
specific facts necessary to estimate our potential liability for these claims.
The specific facts we do not know include:
o the identity of our facilities containing asbestos manufactured by the
manufacturer,
o the relationship (if any) of each of the individual plaintiffs to us,
o the settlement amounts for any individual plaintiffs who are shown to
have had a relationship to us, and
o the dates on which/places at which the exposure allegedly occurred.
Until the relevant facts for both types of 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.
NOx Emissions Litigation
- ------------------------
On June 19, 1998, we filed a lawsuit against the Maryland Department of the
Environment (MDE) in Baltimore City Circuit Court challenging regulations that
require reduction of nitrogen oxide (NOx) emissions. The regulations took effect
June 1, 1998, and require major NOx sources to reduce NOx emissions up to 65% by
May, 1999. While we are already taking steps to control NOx emissions at our
generating plants, we communicated to MDE that we cannot install the required
technology at our Brandon Shores plant in time to meet the 1999 deadline.
Non-compliance with the regulation potentially could expose us to significant
penalties.
We also discuss this litigation under the heading "Environmental Matters" in
the Notes to Consolidated Financial Statements on page 7.
26
<PAGE>
PART II. OTHER INFORMATION (Continued)
- -------- -----------------------------
Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
On April 24, 1998, we held our annual meeting of shareholders. At that
meeting, the following matters were voted upon:
1.All of the Directors nominated by BGE were selected as follows:
<TABLE>
<CAPTION>
COMMON SHARES CAST:
-------------------
For Against Abstain
<S> <C> <C> <C>
H. Furlong Baldwin 124,469,715 647,320 1,503,237
Beverly B. Byron 124,386,983 730,053 1,503,237
J. Owen Cole 124,638,009 479,028 1,503,237
Dan A. Colussy 124,612,436 504,601 1,503,237
Edward A. Crooke 124,458,178 658,858 1,503,237
James R. Curtiss 123,149,212 1,967,825 1,503,237
Jerome W. Geckle 124,596,089 520,946 1,503,237
Freeman A. Hrabowski, III 124,379,289 737,748 1,503,237
Nancy Lampton 124,703,323 413,713 1,503,237
George V. McGowan 124,429,333 687,703 1,503,237
Christian H. Poindexter 123,857,900 1,259,136 1,503,237
George L. Russell, Jr. 122,969,843 2,147,193 1,503,237
Michael D. Sullivan 124,211,798 905,239 1,503,237
</TABLE>
2. The appointment of Coopers & Lybrand L.L.P. (which changed its name to
PricewaterhouseCoopers L.L.P. ) as independent accountants was ratified.
With respect to holders of common stock, the number of affirmative votes
cast were 125,212,894, the number of negative votes cast were 853,463,
and the number of abstentions were 904,917.
3. The proposal for the adoption and implementation of a Confidential Voting
System was defeated. With respect to holders of common stock, the number
of affirmative votes cast were 45,829,217, the number of negative votes
cast were 61,151,970, and the number of abstentions were 5,538,822.
27
<PAGE>
PART II. OTHER INFORMATION (Continued)
- -------- -----------------------------
Item 5. Other Information
- ------- -----------------
Forward-Looking Statements
- --------------------------
We make statements in this report that are considered forward-looking
statements within the meaning of the Securities Exchange Act of 1934. Sometimes
these statements will contain words such as "believes," "expects," "intends,"
"plans," and other similar words. These statements are not guarantees of our
future performance and are subject to risks, uncertainties and other important
factors that could cause our actual performance or achievements to be materially
different from those we project. These risks, uncertainties and factors include,
but are not limited to:
o general economic, business and regulatory conditions,
o energy supply and demand,
o competition,
o federal and state regulations,
o availability, terms, and use of capital,
o nuclear and environmental issues,
o weather, and
o industry restructuring and cost recovery (including the potential effect
of stranded investments).
Given these uncertainties, you should not place undue reliance on these
forward-looking statements. Please see the other sections of this report and our
other periodic reports filed with the SEC for more information on these factors.
These forward-looking statements represent our estimates and assumptions only as
of the date of this report.
Use of Discretionary Voting Authority for 1999 Annual Meeting
- -------------------------------------------------------------
Without otherwise notifying shareholders, BGE management will use its
discretionary voting authority to vote on shareholder proposals presented at our
1999 annual meeting, if we receive notice from a shareholder of their intent to
present a proposal at the meeting after January 27, 1999.
28
<PAGE>
PART II. OTHER INFORMATION (Continued)
- -------- -----------------------------
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(a) Exhibit No. 3 Bylaws of Baltimore Gas and Electric Company, amended as of July
17, 1998.
Exhibit No. 4(a)* Form of Subordinated Indenture between the Company and the Bank of
New York, as Trustee in connection with the issuance of the Junior
Subordinated Debentures (Designated as Exhibit 4(d) in Form S-3
dated May 28, 1998, File No. 333-53767).
Exhibit No. 4(b)* Form of Supplemental Indenture between the Company and the Bank of
New York, as Trustee in connection with the issuances of the Junior
Subordinated Debentures (Designated as Exhibit 4(e) in Form S-3
dated May 28, 1998, File No. 333-53767).
Exhibit No. 4(c)* Form of Preferred Securities Guarantee (Designated as Exhibit 4(f)
in Form S-3 dated May 28, 1998, File No. 333-53767).
Exhibit No. 4(d)* Form of Junior Subordinated Debenture (Designated as Exhibit 4(h) in
Form S-3 dated May 28, 1998, File No. 333-53767).
Exhibit No. 4(e)* Form of Amended and Restated Declaration of Trust (including Form of
Preferred Security) (Designated as Exhibit 4(c) in Form S-3 dated
May 28, 1998, File No. 333-53767).
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.
</TABLE>
* Incorporated by Reference.
(b) Reports on Form 8-K for the quarter ended June 30, 1998:
Date Filed Items Reported
June 15, 1998 Item 5. Other Events
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, 1998 /s/ D. A. Brune
-------------------------- ----------------------------------------------------
D. A. Brune, Vice President on behalf of the
Registrant and as Principal Financial Officer
29
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibit
Number
<S> <C> <C>
3 Bylaws of Baltimore Gas and Electric Company, amended as of
July 17, 1998.
4(a)* Form of Subordinated Indenture between the Company and the Bank
of New York, as Trustee in connection with the issuance of
the Junior Subordinated Debentures (Designated as Exhibit 4(d)
in Form S-3 dated May 28, 1998, File No. 333-53767).
4(b)* Form of Supplemental Indenture between the Company and the Bank
of New York, as Trustee in connection with the issuances of
the Junior Subordinated Debentures (Designated as Exhibit 4(e)
in Form S-3 dated May 28, 1998, File No. 333-53767).
4(c)* Form of Preferred Securities Guarantee (Designated as
Exhibit 4(f) in Form S-3 dated May 28, 1998, File No. 333-53767).
4(d)* Form of Junior Subordinated Debenture (Designated as
Exhibit 4(h) in Form S-3 dated May 28, 1998, File No. 333-53767).
4(e)* Form of Amended and Restated Declaration of Trust (including
Form of Preferred Security) (Designated as Exhibit 4(c) in
Form S-3 dated May 28, 1998 File No. 333-53767).
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.
</TABLE>
* Incorporated by Reference
30
<PAGE>
BY-LAWS
OF
Baltimore Gas and Electric Company
Amended as of July 17, 1998
07/17/98
07/17/98
<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 April 14 through May 13, as determined year to year by the Board of
Directors. The time and location of the meeting shall be determined by the Board
of Directors.
The Chief Executive Officer of the Company shall prepare, or cause to
be prepared, an annual report containing a full and correct statement of the
affairs of the Company, including a balance sheet and a financial statement of
operations for the preceding fiscal year, which shall be submitted to the
stockholders at the annual meeting.
Section 2. - Special Meeting.
Special meetings of the stockholders may be held in the City of
Baltimore or in any county in which the Company provides service or owns
property upon call by the Chairman of the Board, the President, or a majority of
the Board of Directors whenever they deem expedient, or upon the written request
of the holders of shares entitled to not less than twenty-five percent of all
the votes entitled to be cast at such a meeting. Such request of the
stockholders shall state the purpose or purposes of the meeting and the matters
proposed to be acted on the threat and shall be delivered to the Secretary, who
shall inform such stockholders of the reasonably estimated cost of preparing and
mailing such notice of the meeting, and upon payment to the company of such
costs the Secretary shall give notice stating the purpose or purposes of the
meeting to all stockholders entitled to vote at such meeting. No special meeting
need be called upon the request of the holders of the shares entitled to cast
less than a majority of all votes entitled to be cast to such meeting, to
consider any matter which is substantially the same as a matter voted upon at
any special meeting of the stockholders held during the preceding twelve months.
The business at all special meetings shall be confined to that specially named
in the notice thereof.
Section 3. - Notice of Meetings.
Written or printed notice of every meeting of the stockholders, whether
annual or special, stating the place, day, and hour of such meeting and (in case
of special meetings) the business proposed to be transacted shall be given by
the Secretary to each stockholder entitled to vote at such meeting not less than
ten days but no more than ninety days before the date fixed for such meeting, by
depositing such notice in the United States mail addressed to him at his post
office address as it appears on the records of the Company, with postage thereon
prepaid.
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 fourteen (14), 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.
3
<PAGE>
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
4
<PAGE>
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.
5
<PAGE>
(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.
6
<PAGE>
ARTICLE III
OFFICERS
Section 1. - Officers.
The Company shall have a Chairman of the Board, a President, one or
more Vice Presidents, a Treasurer, and a Secretary who shall be elected by, and
hold office at the will of, the Board of Directors. The Chairman of the Board
and the President shall be chosen from among the Directors, and the Board of
Directors shall designate either the Chairman of the Board or the President to
be the Chief Executive Officer of the Company. The Board of Directors shall also
elect such other officers as they may deem necessary for the conduct of the
business and affairs of the Company. Any two offices, except those of President
and Vice President, may be held by the same person, but no person shall sign
checks, drafts and promissory notes, or execute, acknowledge or verify any other
instrument in more than one capacity, if such instrument is required by law, the
charter, these by-laws, a resolution of the Board of Directors or order of the
Chief Executive Officer to be signed, executed, acknowledged or verified by two
or more officers. The Chairman of the Board, President and Vice Presidents shall
receive such compensation as shall be fixed by the Board of Directors.
Compensation for officers other than the Chairman of the Board, President and
Vice Presidents shall be fixed by the Chief Executive Officer. The Board of
Directors shall require a fidelity bond to be given by each officer, or, in its
discretion, the Board may substitute a general blanket fidelity bond or
insurance contract to cover all officers and employees.
Section 2. - Duties of the Officers.
(a) Chairman of the Board
The Chairman of the Board shall preside at all meetings of the
Board of Directors and of stockholders. He shall also have such other
powers and duties as from time to time may be assigned to him by the
Board of Directors.
(b) President
The President shall have general executive powers, as well as
specific powers conferred by these by-laws. He, any Vice President, or
such other persons as may be designated by the Board of Directors,
shall sign all special contracts of the Company, countersign checks,
drafts and promissory notes, and such other papers as may be directed
by the Board of Directors. He, or any Vice President, together with the
Treasurer or an Assistant Treasurer, shall have authority to sell,
assign or transfer and deliver any bonds, stocks or other securities
owned by the Company. He shall also have such other powers and duties
as from time to time may be assigned to him by the Board of Directors.
In the absence of the Chairman of the Board, the President shall
perform all the duties of the Chairman of the Board.
(c) Vice Presidents
Each Vice President shall have such powers and duties as may be
assigned to him by the Board of Directors, or the Chief Executive
Officer, as well as the
7
<PAGE>
specific powers assigned by these by-laws. A Vice President may be
designated by the Board of Directors or the Chief Executive Officer to
perform, in the absence of the President, all the duties of the
President.
(d) Treasurer
The Treasurer shall have the care and the custody of the funds
and valuable papers of the Company, and shall receive and disburse all
moneys in such a manner as may be prescribed by the Board of Directors
or the Chief Executive Officer. He shall have such other powers and
duties as may be assigned to him by the Board of Directors, or the
Chief Executive Officer, as well as specific powers assigned by these
by-laws.
(e) Secretary
The Secretary shall attend all meetings of the stockholders and
Directors and shall notify the stockholders and Directors of such
meetings in the manner provided in these by-laws. He shall record the
proceedings of all such meetings in books kept for that purpose. He
shall have such other powers and duties as may be assigned to him by
the Board of Directors or the Chief Executive Officer, as well as the
specific powers assigned by these by-laws.
Section 3. - Removals and Vacancies.
Any officer may be removed by the Board of Directors whenever, in its
judgment, the best interest of the Company will be served thereby. In case of
removal, the salary of such officer shall cease. Removal shall be without
prejudice to the contractual rights, if any, of the person so removed, but
election of an officer shall not of itself create contractual rights.
Any vacancy occurring in any office of the Company shall be filled by
the Board of Directors and the officer so elected shall hold office for the
unexpired term in respect of which the vacancy occurred or until its successor
shall be duly elected and qualified.
In any event of absence or temporary disability of any officer of the
Company, the Board of Directors may authorize some other person to perform the
duties of that office.
ARTICLE IV
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Each person made or threatened to be made party to an action, suit or
proceeding, whether, civil, criminal, administrative or investigative, by reason
of the fact that such person is or was a director or officer of the Company, or,
at its request, is or was a director or officer of another corporation, shall be
indemnified by the Company (to the extent indemnification is not otherwise
provided by insurance) against the liabilities, costs and expenses of every kind
actually and reasonable incurred by him as a result of such action, suit or
proceeding, or any threat thereof or any appeal thereon, but in each case only
if and to the extent permissible under applicable common or statutory law, state
or federal. The foregoing indemnity shall not be inclusive of other rights to
which such person may be entitled.
8
<PAGE>
ARTICLE V
CAPITAL STOCK
Section 1. - Evidence of Stock Ownership.
Evidence of ownership of stock in the Company may be either pursuant to
a certificate(s) or a statement in compliance with Maryland law, each of which
shall represent the number of shares of stock owned by a stockholder in the
Company. Stockholders may request that their stock ownership be represented by a
certificate(s). Each certificate shall be signed on behalf of the Company by the
President or a Vice President and countersigned by the Secretary, and shall be
sealed with the corporate seal. The signatures may be either manual or
facsimile. In case any officer who signed any certificate, in facsimile or
otherwise, ceases to be such officer of the Company before the certificate is
issued, the certificate may nevertheless be issued by the Company with the same
effect as if the officer had not ceased to be such officer as of the date of its
issue.
For stock ownership evidenced by a statement, such statement shall be
in such form, and executed, as required from time to time by Maryland law.
Section 2. - Transfer of Shares.
Stock shall be transferable only on the books of the Company by
assignment in writing by the registered holder thereof, his legally constituted
attorney, or his legal representative, either upon surrender and cancellation of
the certificate(s) therefor, if such stock is represented by a certificate, or
upon receipt of such other documentation for stock not represented by a
certificate as the Board of Directors and Maryland law may, from time to time,
require.
Section 3. - Lost, Stolen or Destroyed Certificates.
No certificate for shares of stock of the Company shall be issued in
place of any other certificate alleged to have been lost, stolen, or destroyed,
except upon production of such evidence of the loss, theft or destruction and
upon indemnification of the Company to such extent and in such manner as the
Board of Directors may prescribe.
Section 4. - Transfer Agents and Registrars.
The Board of Directors shall appoint a person or persons, or any
incorporated trust company or companies or both, as transfer agents and
registrars and, if stock is represented by a certificate, may require that such
certificate bear the signatures or the counter-signatures of such transfer
agents and registrars, or either of them.
Section 5. - Stock Ledger.
The Company shall maintain at its principal office in Baltimore,
Maryland, a stock record containing the names and addresses of all stockholders
and the numbers of shares of each class held by each stockholder.
9
<PAGE>
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 23rd day of
July, 1998.
/s/ D. A. Brune
Secretary
10
<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
1998 1997 1996 1995 1994 1993
------------ ----------- ----------- ------------ ------------ ---------
(In Millions of Dollars)
<S> <C> <C> <C> <C> <C> <C>
Net Income $ 339.0 $ 282.8 $ 310.8 $ 338.0 $ 323.6 $ 309.8
Taxes on Income 195.6 161.5 169.2 172.4 156.7 140.8
------------ ----------- ----------- ------------ ------------ ---------
$ 534.6 $ 444.3 $ 480.0 $ 510.4 $ 480.3 $ 450.6
------------ ----------- ----------- ------------ ------------ ---------
Fixed Charges:
Interest and Amortization of
Debt Discount and Expense and
Premium on all Indebtedness $ 242.0 $ 234.2 $ 203.9 $ 206.7 $ 204.2 $ 199.4
Capitalized Interest 6.3 8.4 15.7 15.0 12.4 16.2
Interest Factor in Rentals 1.9 1.9 1.5 2.1 2.0 2.1
------------ ----------- ----------- ------------ ------------ ---------
Total Fixed Charges $ 250.2 $ 244.5 $ 221.1 $ 223.8 $ 218.6 $ 217.7
------------ ----------- ----------- ------------ ------------ ---------
Preferred and Preference
Dividend Requirements: (1)
Preferred and Preference $ 25.2 $ 28.7 $ 38.5 $ 40.6 $ 39.9 $ 41.8
Dividends
Income Tax Required 14.7 16.4 20.9 20.4 19.1 18.8
------------ ----------- ----------- ------------ ------------ --------
Total Preferred and Preference
Dividend Requirements $ 39.9 $ 45.1 $ 59.4 $ 61.0 $ 59.0 $ 60.6
------------ ----------- ----------- ------------ ------------ --------
Total Fixed Charges and
Preferred and Preference
Dividend Requirements $ 290.1 $ 289.6 $ 280.5 $ 284.8 $ 277.6 $ 278.3
============ =========== =========== ============ ============ ========
Earnings (2) $ 778.5 $ 680.4 $ 685.4 $ 719.2 $ 686.5 $ 652.1
============ =========== =========== ============ ============ ========
Ratio of Earnings to Fixed Charges 3.11 2.78 3.10 3.21 3.14 3.00
Ratio of Earnings to Combined Fixed
Charges and Preferred and Preference
Dividend Requirements 2.68 2.35 2.44 2.52 2.47 2.34
</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, 1998 INTERIM CONSOLIDATED INCOME STATEMENT, BALANCE SHEET AND STATEMENT OF
CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 5,630
<OTHER-PROPERTY-AND-INVEST> 1,647
<TOTAL-CURRENT-ASSETS> 1,431
<TOTAL-DEFERRED-CHARGES> 490
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 9,198
<COMMON> 1,455
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 1,441
<TOTAL-COMMON-STOCKHOLDERS-EQ> 2,901
7
190
<LONG-TERM-DEBT-NET> 2,813
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 73
<LONG-TERM-DEBT-CURRENT-PORT> 508
123
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 2,583
<TOT-CAPITALIZATION-AND-LIAB> 9,198
<GROSS-OPERATING-REVENUE> 1,634
<INCOME-TAX-EXPENSE> 81
<OTHER-OPERATING-EXPENSES> 1,294
<TOTAL-OPERATING-EXPENSES> 1,375
<OPERATING-INCOME-LOSS> 259
<OTHER-INCOME-NET> 3
<INCOME-BEFORE-INTEREST-EXPEN> 262
<TOTAL-INTEREST-EXPENSE> 119
<NET-INCOME> 143
12
<EARNINGS-AVAILABLE-FOR-COMM> 131
<COMMON-STOCK-DIVIDENDS> 121
<TOTAL-INTEREST-ON-BONDS> 121
<CASH-FLOW-OPERATIONS> 415
<EPS-PRIMARY> 0.89
<EPS-DILUTED> 0.89
</TABLE>
