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 March 31, 1998
Commission file number 1-1910
BALTIMORE GAS AND ELECTRIC COMPANY
(Exact name of registrant as specified in its charter)
Maryland 52-0280210
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(State of Incorporation) (IRS Employer Identification No.)
39 W. Lexington Street Baltimore, Maryland 21201
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(Address of principal executive offices) (Zip Code)
410-783-5920
(Registrant's telephone number, including area code)
Not Applicable
(Former name,former address and former fiscal year,if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
Common Stock, without par value - 147,867,114 shares outstanding on April 30,
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 March 31,
-------------------------------
1998 1997
---------- ----------
(In Millions, Except Per-Share Amounts)
Revenues
<S> <C> <C>
Electric .................................................... $ 499.2 $ 517.3
Gas ......................................................... 180.5 213.7
Diversified businesses ...................................... 186.4 156.7
------ ------
Total revenues .............................................. 866.1 887.7
------ ------
Expenses Other Than Interest and Income Taxes
Electric fuel and purchased energy .......................... 126.5 135.2
Gas purchased for resale .................................... 98.3 133.3
Operations .................................................. 126.1 131.9
Maintenance ................................................. 34.2 39.5
Diversified businesses - selling, general, and administrative 144.1 121.6
Write-downs of real estate investments ...................... -- 18.5
Depreciation and amortization ............................... 96.5 85.6
Taxes other than income taxes ............................... 57.0 58.2
------ ------
Total expenses other than interest and income taxes ......... 682.7 723.8
------ ------
Income From Operations ........................................ 183.4 163.9
------ ------
Other Income
Allowance for equity funds used during construction ......... 1.7 1.2
Equity in earnings of Safe Harbor Water Power Corporation ... 1.2 1.2
Net other income and deductions ............................. (1.0) (1.4)
------ ------
Total other income .......................................... 1.9 1.0
------ ------
Income Before Interest and Income Taxes ....................... 185.3 164.9
------ ------
Interest Expense
Interest charges ............................................ 61.8 56.3
Capitalized interest ........................................ (1.4) (2.3)
Allowance for borrowed funds used during construction ....... (0.9) (0.6)
------ ------
Net interest expense ........................................ 59.5 53.4
------ ------
Income Before Income Taxes .................................... 125.8 111.5
------ ------
Income Taxes
Current ..................................................... 57.3 44.0
Deferred .................................................... (9.9) (2.7)
Investment tax credit adjustments ........................... (1.8) (1.9)
------ ------
Total income taxes .......................................... 45.6 39.4
------ ------
Net Income .................................................... 80.2 72.1
Preference Stock Dividends .................................... 5.8 7.9
------ ------
Earnings Applicable to Common Stock ........................... $ 74.4 $ 64.2
====== ======
Average Shares of Common Stock Outstanding 147.9 147.7
Earnings Per Common Share and
Earnings Per Common Share - Assuming Dilution $0.50 $0.43
Dividends Declared Per Share of Common Stock $0.41 $0.40
Consolidated Statements of Comprehensive Income (Unaudited)
- -----------------------------------------------------------
Net income $ 80.2 $ 72.1
Other comprehensive income, net of taxes 0.9 (1.1)
------ ------
Comprehensive Income $ 81.1 $ 71.0
====== ======
</TABLE>
See Notes to Consolidated Financial Statements.
Certain prior period amounts have been reclassified to conform with the current
period presentation.
2
<PAGE>
BALTIMORE GAS AND ELECTRIC COMPANY
PART I. FINANCIAL INFORMATION (Continued)
Item 1. Financial Statements
Consolidated Balance Sheets
- ---------------------------
<TABLE>
<CAPTION>
March 31 December 31,
1998* 1997
-------- --------
(In Millions)
ASSETS
Current Assets
<S> <C> <C>
Cash and cash equivalents .............................. $ 179.3 $ 162.6
Accounts receivable (net of allowance for uncollectibles
of $23.6 and $24.1 respectively) ................. 384.1 419.8
Trading securities ..................................... 123.5 119.7
Fuel stocks ............................................ 59.6 87.6
Materials and supplies ................................. 162.3 164.2
Prepaid taxes other than income taxes .................. 30.1 65.2
Other .................................................. 21.4 27.4
-------- --------
Total current assets ................................... 960.3 1,046.5
-------- --------
Investments and Other Assets
Real estate projects ................................... 418.6 446.8
Power generation systems ............................... 516.7 451.7
Financial investments .................................. 199.7 196.5
Nuclear decommissioning trust fund ..................... 156.9 145.3
Net pension asset ...................................... 114.1 113.0
Safe Harbor Water Power Corporation .................... 34.4 34.4
Senior living facilities ............................... 67.8 62.2
Other .................................................. 171.7 108.1
-------- --------
Total investments and other assets ..................... 1,679.9 1,558.0
-------- --------
Utility Plant
Plant in service
Electric ............................................. 6,763.4 6,725.6
Gas .................................................. 874.8 846.9
Common ............................................... 551.2 554.1
-------- --------
Total plant in service ............................... 8,189.4 8,126.6
Accumulated depreciation ............................... (2,906.5) (2,843.4)
-------- --------
Net plant in service ................................... 5,282.9 5,283.2
Construction work in progress .......................... 194.7 215.2
Nuclear fuel (net of amortization) ..................... 117.1 127.9
Plant held for future use .............................. 25.2 25.2
-------- --------
Net utility plant ...................................... 5,619.9 5,651.5
-------- --------
Deferred Charges
Regulatory assets (net) ................................ 431.4 470.7
Other .................................................. 55.2 46.7
-------- --------
Total deferred charges ................................. 486.6 517.4
-------- --------
TOTAL ASSETS ............................................. $ 8,746.7 $ 8,773.4
======== ========
</TABLE>
* Unaudited
See Notes to Consolidated Financial Statements.
Certain prior period amounts have been reclassified to conform with the current
period presentation.
3
<PAGE>
BALTIMORE GAS AND ELECTRIC COMPANY
PART I. FINANCIAL INFORMATION (Continued)
Item 1. Financial Statements
Consolidated Balance Sheets
- ---------------------------
<TABLE>
<CAPTION>
March 31 December 31,
1998* 1997
-------- ------------
(In Millions)
LIABILITIES AND CAPITALIZATION
Current Liabilities
<S> <C> <C>
Short-term borrowings .................................. $ 220.6 $ 316.1
Current portions of long-term debt and preference stock 342.8 271.9
Accounts payable ....................................... 166.1 203.0
Customer deposits ...................................... 31.0 30.1
Accrued taxes .......................................... 61.2 5.5
Accrued interest ....................................... 65.6 58.4
Dividends declared ..................................... 66.4 66.3
Accrued vacation costs ................................. 37.2 36.2
Other .................................................. 19.7 44.3
-------- --------
Total current liabilities .............................. 1,010.6 1,031.8
-------- --------
Deferred Credits and Other Liabilities
Deferred income taxes .................................. 1,282.2 1,294.9
Postretirement and postemployment benefits ............. 189.7 185.5
Decommissioning of federal uranium enrichment facilities 34.9 34.9
Other .................................................. 107.1 67.0
-------- --------
Total deferred credits and other liabilities ........... 1,613.9 1,582.3
-------- --------
Capitalization
Long-term Debt
First refunding mortgage bonds of BGE .................. 1,570.8 1,570.8
Other long-term debt of BGE ............................ 946.3 921.3
Long-term debt of Constellation Holdings Companies ..... 716.0 737.4
Long-term debt of other diversified businesses ......... 25.0 22.0
Unamortized discount and premium ....................... (13.3) (13.7)
Current portion of long-term debt ...................... (318.3) (248.9)
-------- --------
Total long-term debt ................................... 2,926.5 2,988.9
-------- --------
Redeemable Preference Stock .............................. 113.0 113.0
Current portion of redeemable preference stock ......... (24.5) (23.0)
-------- --------
Total redeemable preference stock ...................... 88.5 90.0
-------- --------
Preference Stock Not Subject to Mandatory Redemption ..... 210.0 210.0
-------- --------
Common Shareholders' Equity
Common stock ........................................... 1,445.2 1,433.0
Retained earnings ...................................... 1,446.2 1,432.5
Accumulated other comprehensive income ................. 5.8 4.9
-------- --------
Total common shareholders' equity ...................... 2,897.2 2,870.4
-------- --------
Total capitalization ................................... 6,122.2 6,159.3
-------- --------
TOTAL LIABILITIES AND CAPITALIZATION ..................... $ 8,746.7 $ 8,773.4
======== ========
</TABLE>
* Unaudited
See Notes to Consolidated Financial Statements.
Certain prior period amounts have been reclassified to conform with the current
period 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>
Three Months Ended March 31,
----------------------------
1998 1997
---- ----
(In Millions)
Cash Flows From Operating Activities
<S> <C> <C>
Net income .......................................................... $ 80.2 $ 72.1
Adjustments to reconcile to net cash provided by operating activities
Depreciation and amortization ..................................... 110.3 99.5
Deferred income taxes ............................................. (9.9) (2.7)
Investment tax credit adjustments ................................. (1.8) (1.9)
Deferred fuel costs ............................................... 22.8 8.4
Accrued pension and postemployment benefits ....................... 4.5 6.2
Write-downs of real estate investments ............................ -- 18.5
Allowance for equity funds used during construction ............... (1.7) (1.2)
Equity in earnings of affiliates and joint ventures (net) ......... (6.0) (4.0)
Changes in current assets, other than sale of accounts receivable . 43.2 83.1
Changes in current liabilities, other than short-term borrowings .. 46.5 11.0
Other ............................................................. (12.1) 1.0
------ ------
Net cash provided by operating activities ........................... 276.0 290.0
------ ------
Cash Flows From Financing Activities
Net issuance (maturity) of short-term borrowings .................... (95.5) (187.5)
Proceeds from issuance of long-term debt ............................ 36.4 123.6
Proceeds from issuance of common stock .............................. 12.6 --
Reacquisition of long-term debt ..................................... (29.9) (28.6)
Common stock dividends paid ......................................... (60.5) (59.1)
Preferred and preference stock dividends paid ....................... (5.8) (7.9)
Other ............................................................... (3.3) (0.3)
------ ------
Net cash used in financing activities ............................... (146.0) (159.8)
------ ------
Cash Flows From Investing Activities
Utility construction expenditures (including AFC) ................... (63.1) (78.3)
Allowance for equity funds used during construction ................. 1.7 1.2
Nuclear fuel expenditures ........................................... (2.8) (2.8)
Deferred energy conservation expenditures ........................... (4.8) (7.3)
Contributions to nuclear decommissioning trust fund ................. (4.4) (4.4)
Merger costs ........................................................ -- (13.5)
Purchases of marketable equity securities ........................... (6.1) (6.1)
Sales of marketable equity securities ............................... 9.8 8.9
Other financial investments ......................................... (2.1) 10.2
Real estate projects ................................................ 31.8 (9.6)
Power generation systems ............................................ (61.7) (17.1)
Other ............................................................... (11.6) (8.1)
------ ------
Net cash used in investing activities ............................... (113.3) (126.9)
------ ------
Net Increase in Cash and Cash Equivalents ............................. 16.7 3.3
Cash and Cash Equivalents at Beginning of Period ...................... 162.6 66.7
------ ------
Cash and Cash Equivalents at End of Period ............................ $ 179.3 $ 70.0
====== ======
Other Cash Flow Information:
Interest paid (net of amounts capitalized) ........................ $ 51.5 $ 53.9
Income taxes paid (received) ...................................... $ 0.8 $ (19.9)
</TABLE>
See Notes to Consolidated Financial Statements.
Certain prior period amounts have been reclassified to conform with the current
period presentation.
5
<PAGE>
Notes to Consolidated Financial Statements
- ------------------------------------------
Weather conditions can have a great impact on our results for interim
periods. This means that results for interim periods do not necessarily
represent results to be expected for the year.
Our interim financial statements on the previous pages reflect all
adjustments which Management believes are necessary for the fair presentation of
the financial position and results of operations for the interim periods
presented. These adjustments are of a normal recurring nature.
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 Statements of Consolidated Comprehensive Income on
page 2, and accumulated other comprehensive income in the Consolidated Balance
Sheets on page 4.
BGE Financing Activity
- ----------------------
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
--------- ------ --------
(Dollars 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 January 1, 1998 through the date of this report, we issued
a total of 675,943 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 $22.2 million.
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
- ---------------------------------------
In this report, we refer to Constellation(TM) Holdings, Inc. and
Subsidiaries as the Constellation Holdings Companies. In the first quarter of
1998, affiliates of the Constellation Holdings Companies entered into a $92.5
million credit facility to finance the acquisition of existing generating
facilities and the development and construction of new generating facilities in
Guatemala. At the date of this report, the Constellation Holdings Companies'
obligation under the facility was approximately $83 million.
Please refer to the "Diversified Business Debt and Liquidity" section of
Management's Discussion and Analysis on page 20 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.
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.
6
<PAGE>
Title I addresses emissions of NOx, but the regulations of this title have
not been finalized by the government. As a result, our plans for complying with
this title are less certain. By 1999 the regulations require more NOx controls
for ozone attainment at our generating plants. The additional controls will
result in more expenditures, but it is difficult to estimate the level of those
expenditures since the regulations have not been finalized. However, based on
existing and proposed regulations, we currently estimate that the additional
controls at our generating plants will cost approximately $110 million.
In July 1997, the government published new National Ambient Air Quality
Standards for very fine particulates and revised standards for ozone attainment.
These standards may require increased controls at our fossil generating plants
in the future. We cannot estimate the cost of these increased controls at this
time because the states, including Maryland, still need to determine what
reductions in pollutants will be necessary to meet the federal standards.
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 approximately $6 million higher than amounts we have recorded. 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 Maryland Department of the Environment 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 the Maryland Department of the Environment. 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 ($11million
in current dollars, plus the impact of inflation at 3.1% over a period of up to
60 years).
Nuclear Insurance
- -----------------
If there were an accident or an extended outage at either unit of 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 power
costs, and
o our liability to third parties for property
damage and bodily injury.
We have insurance policies that cover these contingencies, but the policies
have certain exclusions. Furthermore, the costs that could result from a covered
major accident or a covered extended outage at either of the Calvert Cliffs
units could exceed our insurance coverage limits.
For physical damage to Calvert Cliffs, we have $2.75 billion of property
insurance from an industry mutual insurance company. If an outage at either of
the two units at Calvert Cliffs is caused by an insured physical damage loss and
lasts more than 17 weeks, we have insurance coverage for replacement power costs
up to $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, 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. Under the provisions of the Price Anderson Act, the
limit for
7
<PAGE>
third party claims from a nuclear incident is $8.92 billion. If third party
claims exceed $200 million (the amount of primary insurance), our share of the
total liability for third party claims could be up to $159 million per incident.
That amount would be payable at a rate of $20 million per year.
As an operator of a commercial nuclear power plant in the United States, we
are required to purchase insurance to cover radiation injury claims of certain
nuclear workers. On January 1, 1998, a new insurance policy became effective for
all operators requiring coverage for current operations. Waiving the right to
make additional claims under the old policy was a condition for acceptance under
the new policy. We describe both the old and new policies below.
o BGE nuclear worker claims reported on or after January 1, 1998 are
covered by a new insurance policy with an annual industry aggregate limit
of $200 million for radiation injury claims against all 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 perform an evaluation of each outage (other than
regular maintenance outages) at our generating plants. The evaluation will
determine if we used all reasonable and cost-effective maintenance and operating
control procedures to try to prevent the outage.
The Maryland PSC, under the Generating Unit Performance Program, measures
annually whether we have maintained the productive capacity of our generating
plants at reasonable levels. To do this, the program uses a system-wide
generating performance target and an individual performance target for each base
load generating unit. In fuel rate hearings, actual generating performance
adjusted for planned outages will be compared first to the system-wide target.
If that target is met, it should mean that the requirements of Maryland law have
been met. If the system-wide target is not met, each unit's adjusted actual
generating performance will be compared to its individual performance target to
determine if the requirements of Maryland law have been met and, if not, to
determine the basis for possibly imposing a penalty on BGE. Even if we meet
these targets, other parties to fuel rate hearings may still question whether we
used all reasonable and cost-effective procedures to try to prevent an outage.
If the Maryland PSC decides we were deficient in some way, the Maryland PSC may
not allow us to recover the cost of replacement energy.
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
- ------------------------------------
The Constellation Holdings Companies have $263 million invested in 16
projects that sell electricity in California under power purchase agreements
called "Interim Standard Offer No. 4" agreements. Earnings from these projects
were $10 million, or $.07 per share for the quarter ended March 31, 1998.
Under these agreements, the projects supply electricity to utility companies
at:
o a fixed rate for capacity and energy for the
first 10 years of the agreements, and
o a fixed rate for capacity plus a variable rate for energy based on the
utilities' avoided cost for the remaining term of the agreements.
Generally, a "capacity rate" is paid to a power plant for its availability
to supply electricity, and an "energy rate" is paid for the electricity actually
generated. "Avoided cost" generally is the cost of a utility's cheapest
next-available source of generation to service the demands on its system.
8
<PAGE>
We use the term transition period to describe the timeframe when the 10-year
periods for fixed energy rates expire for these 16 power generation projects and
they begin supplying electricity at variable rates. The transition period for
some of the projects began in 1996 and will continue for the remaining projects
through 2000. At the date of this report, seven 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 the remaining projects, which continued to supply
electricity at fixed rates, were high enough to offset the lower revenues from
the variable-rate projects. When the remaining projects transition to variable
rates, we expect the revenues from those projects to also be lower than they are
under fixed rates. It is difficult to estimate how much lower the revenues may
be, but the Constellation Holdings Companies' earnings could be affected
significantly. However, the California projects that make the highest revenues
will transition to variable rates in 1999 and 2000. As a result, we do not
expect the Constellation Holdings Companies to have significantly lower earnings
due to the transition to variable rates before 2000.
The Constellation Holdings Companies are pursuing alternatives for some of
these power generation projects including:
o repowering the projects to reduce operating
costs,
o changing fuels to reduce operating costs,
o renegotiating the power purchase agreements to
improve the terms,
o restructuring financings to improve the
financing terms, and
o selling its ownership interests in the
projects.
We cannot predict the financial effects of the transition from fixed to
variable rates on the Constellation Holdings Companies or on BGE, but the
effects could be material.
Constellation Real Estate
- -------------------------
Most of the Constellation Holdings Companies' real estate projects are in
the Baltimore-Washington corridor. The area has had a surplus of available land
and office space in recent years, during a time of low economic growth and
corporate downsizings. The projects have been economically hurt by these
conditions.
The Constellation Holdings Companies' real estate portfolio has continued to
incur carrying costs and depreciation over the years. Additionally, the
Constellation Holdings Companies have been charging interest payments to expense
rather than capitalizing them for some undeveloped land where development
activities have stopped. These carrying costs, depreciation, and interest
expenses have decreased earnings and are expected to continue to do so.
Cash flow from real estate operations has not been enough to make the
monthly loan payments on some of these projects. Cash shortfalls have been
covered by cash from Constellation Holdings. Constellation Holdings obtained
those funds from the cash flow from other Constellation Holdings Companies and
through additional borrowing.
We consider market demand, interest rates, the availability of financing,
and the strength of the economy in general when making decisions about our real
estate investments. If we were to sell our real estate projects in the current
market, we would have losses, although the amount of the losses is hard to
predict.
Management's current real estate strategy is to hold each real estate
project until we can realize a reasonable value for it. Management evaluates
strategies for all its businesses, including real estate, on an ongoing basis.
We anticipate that competing demands for our financial resources and changes in
the utility industry will cause us to evaluate thoroughly all diversified
business strategies on a regular basis so we use capital and other resources in
a manner that is most beneficial. Depending on market conditions in the future,
we could also have losses on any future sales.
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.
9
<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 ended March 31, 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 12. They are discussed in detail in our 1997 Annual
Report on Form 10-K.
Results of Operations for the Quarter Ended March 31, 1998 Compared With the
- --------------------------------------------------------------------------------
Same Period 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
March 31
----------------------
1998 1997
--------- ---------
Utility business............. $.41 $.39
Diversified businesses....... .09 .12
---- ----
Total earnings per share
from operations............ .50 .51
Write-down of real estate
investment................. - (.08)
---- ----
Total earnings per share..... $.50 $.43
==== ====
Our total earnings for the quarter ended March 31, 1998 increased $10.2
million, or $.07 per share, compared to the same period of 1997 mostly because
in 1997 the Constellation Holdings Companies wrote down their investment in a
real estate project by $12 million. We discuss this write-down also in the "Real
Estate Development and Senior-Living Facilities" section of our 1997 Annual
Report on Form 10-K.
In the first quarter of 1998, we had higher utility earnings from operations
than we did in the same period of 1997 even though we sold less electricity and
gas due to extremely mild weather (people use less electricity and gas to heat
or cool their homes in milder weather). Utility earnings increased mostly
because we had lower operations and maintenance expenses. We discuss our utility
earnings in more detail in the "Utility Business" section beginning on page 11.
In the first quarter of 1998, diversified business earnings from operations
decreased compared to the same period of 1997 mostly because of lower earnings
from the Constellation Holdings Companies' real estate business. We discuss our
diversified business earnings in more detail in the "Diversified Businesses"
section beginning on page 16.
10
<PAGE>
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
14.
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 14.
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.
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 degree days in the quarters
ended March 31, 1998 and 1997, and shows the percentage change in the number of
degree days from the prior period.
Quarter Ended
March 31
----------------------
1998 1997
-------- ---------
Heating degree days.......... 2,022 2,252
Percent change
compared to prior period.. (10.2)%
11
<PAGE>
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.
We regularly reevaluate our strategies with two goals in mind: to improve
our competitive position, and to anticipate and adapt to regulatory changes. We
cannot predict the ultimate effect competition or regulatory change will have on
our earnings.
We discuss competition in our electric business in more detail in 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,
o growth of revenues from diversified businesses.
We discuss our diversified businesses in the "Diversified Businesses" section
beginning on page 16.
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
March 31
------------------------
1998 1997
---------- ----------
Electric business....... $.31 $.27
Gas business............ .10 .12
---- ----
Total utility
earnings per share.... $.41 $.39
==== ====
Our utility earnings for the quarter ended March 31, 1998 increased $3.4
million, or $.02 per share compared to the same quarter of 1997. We discuss the
factors affecting utility earnings below.
12
<PAGE>
Electric Operations
- -------------------
Electric Revenues
- -----------------
The changes in electric revenues in 1998 compared to 1997 were caused by:
Quarter Ended
March 31
1998 vs. 1997
--------------------
(In millions)
Electric system sales volumes.... $(8.1)
Base rates....................... (4.4)
Fuel rates....................... (3.9)
------
Total change in electric revenues
from electric system sales..... (16.4)
Interchange and other sales...... (3.3)
Other............................ 1.6
------
Total change in
electric revenues.............. $(18.1)
======
Electric System Sales Volumes
- -----------------------------
"Electric system sales" are sales to customers in our service territory at
rates set by the Maryland PSC. These sales do not include interchange sales and
sales to others.
The percentage changes in our electric system sales volumes, by type of
customer, in 1998 compared to 1997 were:
Quarter Ended
March 31
1998 vs. 1997
----------------------
Residential.................... (4.2)%
Commercial..................... 1.9
Industrial..................... (1.0)
During the quarter ended March 31, 1998, we sold less electricity to
residential customers mostly due to extremely mild weather and lower usage by
residential customers. We sold more electricity to commercial customers mostly
due to higher usage per customer. We sold about the same amount of electricity
to industrial customers as we did in 1997.
Base Rates
- ----------
During the quarter ended March 31, 1998, base rate revenues were lower than
they were in the same period of 1997 mostly because we sold less electricity and
because of a lower energy conservation surcharge effective July 1, 1997.
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.
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 8.
During the quarter ended March 31, 1998, fuel rate revenues decreased
compared to the same period of 1997 mostly for two reasons: we sold less
electricity, and we were able to use a less-costly mix of generating plants and
electricity purchases which lowered the fuel rate.
Interchange and Other Sales
- ---------------------------
"Interchange and other sales" are sales of energy in the Pennsylvania-New
Jersey-Maryland Interconnection (PJM) 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 March 31, 1998, we had lower interchange and other
sales mostly because of two factors: the price per megawatt of electricity sold
was lower due to market conditions, and sales volumes were lower due to reduced
demand caused by the extremely mild weather.
13
<PAGE>
Electric Fuel and Purchased Energy Expenses
- -------------------------------------------
Quarter Ended
March 31
---------------------
1998 1997
--------- --------
(In millions)
Actual costs................... $114.6 $130.1
Net recovery of costs under
electric fuel rate clause (see
Note 1 of our 1997 Form 10-K) 11.9 5.1
------ -----
Total electric fuel and
purchased energy expenses.... $126.5 $135.2
====== ======
Actual Costs
- ------------
During the quarter ended March 31, 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 March 31, 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
March 31
1998 vs. 1997
--------------------
(In millions)
Gas system sales volumes....... $ (3.7)
Base rates..................... 5.5
Gas cost adjustments........... (38.6)
------
Total change in gas revenues
from gas system sales....... (36.8)
Off-system sales............... 3.6
Other.......................... -
------
Total change in gas revenues... $(33.2)
======
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
March 31
1998 vs. 1997
----------------------
Residential................... (7.3)%
Commercial.................... (8.7)
Industrial.................... (7.8)
During the quarter ended March 31, 1998, we sold less gas to residential
customers mostly due to extremely mild weather and lower usage by residential
customers. We sold less gas to commercial and industrial customers mostly
because usage by these 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 ended March 31, 1998, base rate revenues were higher than
they were in the same period of 1997. Although we sold less gas this quarter,
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
effective July 1, 1997.
Effective March 1, 1998, the Maryland PSC also 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.
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
above.
However, effective October 1996, the Maryland PSC approved a modification
of these clauses to
14
<PAGE>
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 (our largest
customer), 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 ended March 31, 1998, gas adjustment revenues decreased
mostly because we sold less gas due to extremely mild weather.
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 ended March 31, 1998, revenues from off-system gas sales
increased mostly because we sold more gas off-system, and we sold it at a higher
price. This change in off-system sales did not significantly impact earnings.
Gas Purchased For Resale Expenses
- ---------------------------------
Quarter Ended
March 31
--------------------
1998 1997
-------- --------
(In millions)
Actual costs.................... $96.6 $134.9
Net recovery (deferral) of costs
under gas adjustment clauses (see
Note 1 of our 1997 Form 10-K) 1.7 (1.6)
--- ----
Total gas purchased for
resale expenses.............. $98.3 $133.3
===== ======
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 ended March 31, 1998, actual gas costs decreased mostly
because we sold less gas due to extremely mild weather.
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 March 31, 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 March 31, 1998, our operations and maintenance
expenses decreased $11.1 million. These expenses decreased mostly because of
lower labor costs and because in 1997 these expenses were higher due to the
timing of payments associated with a regular maintenance outage at our Calvert
Cliffs Nuclear Power Plant.
Depreciation and Amortization Expenses
- --------------------------------------
During the quarter ended March 31, 1998, depreciation and amortization
increased $10.9 million mostly because we had more plant in service (as our
level of plant in service changes, the amount of our depreciation and
amortization expense changes).
Other Income and Expenses
- -------------------------
Interest Charges
- ----------------
Interest charges represent the interest we paid on outstanding debt. During
the quarter ended March 31, 1998, we had $5.5 million of higher interest charges
because we had more debt outstanding and interest rates were higher.
Income Taxes
- ------------
During the quarter ended March 31, 1998, our total income taxes increased
$6.2 million because we had higher taxable income from both our utility
operations and our diversified businesses.
15
<PAGE>
Diversified Businesses
- ----------------------
In the 1980s, we began to diversify our business in response to limited
growth in gas and electric sales. Today, we continue to diversify our business
in response to regulatory changes in the utility industry. Some of our
diversified businesses are related to our core utility business and others are
not. Our diversified businesses are in three groups:
o Constellation Holdings, Inc. and Subsidiaries,
together known as the Constellation Holdings
Companies -- our power generation, financial
investments, and real estate businesses,
o Constellation Energy Solutions(TM), Inc. and
Subsidiaries -- our energy marketing
businesses, and
o BGE Home Products & Services, Inc. and
Subsidiaries -- our home products and
commercial building systems businesses.
Diversified Business Earnings per Share of Common Stock
- -------------------------------------------------------
Quarter Ended
March 31
---------------------
1998 1997
--------- --------
Constellation Holdings
Companies.................... $.09 $.12
Constellation Energy Solutions. .00 .00
BGE Home Products & Services... .00 .00
--- ---
Total diversified business earnings
per share from operations.... .09 .12
Write-down of real estate
investment by the Constellation
Holdings Companies........... - (.08)
---- ----
Total diversified business
earnings per share.......... $.09 $.04
==== ====
Our total diversified business earnings for the quarter ended March 31, 1998
increased $6.8 million, or $.05 per share compared to the same quarter of 1997.
Diversified business earnings increased mostly because in 1997 the Constellation
Holdings Companies wrote down their investment in a real estate project by $12
million. We discuss this write-down in the "Real Estate Development and
Senior-Living Facilities" section of our 1997 Annual Report on Form 10-K. We
discuss the factors affecting the earnings of our diversified businesses below.
The Constellation Holdings Companies -- Our Power Generation, Financial
- --------------------------------------------------------------------------------
Investments, and Real Estate Businesses
- ---------------------------------------
The Constellation Holdings Companies:
o develop, own, and operate power generation
projects,
o engage in financial investments, and
o develop, own, and manage real estate and
senior-living facilities.
Earnings per share from the Constellation Holdings Companies were:
Quarter Ended
March 31
---------------------
1998 1997
-------- --------
Power generation systems........ $.07 $.07
Financial investments........... .04 .04
Real estate development and
senior-living facilities...... (.02) .01
Other........................... .00 .00
--- ---
Total Constellation Holdings
Companies' earnings per share
from operations............... .09 .12
Write-down of real estate
investment.................... - (.08)
--- ----
Total Constellation Holdings
Companies' earnings per share. $.09 $.04
==== ====
Power Generation
- ----------------
Overview
- --------
The Constellation Holdings Companies' power generation business develops,
owns, and operates domestic and international power generation projects. During
the quarter ended March 31, 1998, earnings from energy projects were about the
same as they were in the same period of 1997.
California Power Purchase Agreements
- ------------------------------------
The Constellation Holdings Companies have $263 million invested in 16
projects that sell electricity in California under power purchase agreements
called "Interim Standard Offer No. 4" agreements. Earnings from these projects
were $10 million, or $.07 per share, for the quarter ended March 31, 1998.
16
<PAGE>
Under these agreements, the electricity rates change from fixed rates to
variable rates during 1996 through 2000. The projects which already have had
rate changes have lower revenues under variable rates than they did under fixed
rates. When the remaining projects transition to variable rates, we expect their
revenues also to be lower than they are under fixed rates. However, the
California projects that make the highest revenues will transition in 1999 and
2000. As a result, we do not expect the Constellation Holdings Companies to have
significantly lower earnings before 2000 due to the transition to variable
rates. We cannot predict the financial effects of the transition from fixed to
variable rates on the Constellation Holdings Companies or on BGE, but the
effects could be material.
We describe these projects and the transition process in detail in the Notes
to Consolidated Financial Statements beginning on page 8.
International
- -------------
The Constellation Holdings Companies' power generation business in Latin
America:
o develops, acquires, owns, and operates power
generation projects, and
o acquires and owns distribution systems.
At March 31, 1998, the Constellation Holdings Companies had invested about
$84 million and committed another $15 million in power projects in Latin
America.
In the future, the Constellation Holdings Companies may expand their power
generation business further in both domestic and international projects.
Financial Investments
- ---------------------
Earnings from the Constellation Holdings Companies' portfolio of financial
investments include income from:
o marketable securities,
o financial limited partnerships, and
o financial guaranty insurance companies.
During the quarter ended March 31, 1998, earnings from financial investments
were about the same as they were in the same period of 1997.
Real Estate Development and Senior-Living Facilities
- ----------------------------------------------------
The Constellation Holdings Companies' real estate development business
includes:
o land under development,
o office buildings,
o retail projects,
o distribution facility projects,
o an entertainment, dining, and retail complex
in Orlando, Florida,
o a mixed-use planned-unit development, and
o senior-living facilities.
During the quarter ended March 31, 1998, real estate development 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.
We consider market demand, interest rates, the availability of financing,
and the strength of the economy in general when making decisions about our real
estate investments. If we were to sell our real estate projects in the current
market, we would have losses, although the amount of the losses is hard to
predict. Depending on market conditions in the future, we could also have losses
on any future sales.
We describe the Constellation Holdings Companies' real estate business
further in the Notes to Consolidated Financial Statements on page 9.
Constellation Energy Solutions, Inc. and Subsidiaries -- Our Energy Marketing
- --------------------------------------------------------------------------------
Businesses
- ----------
Our energy marketing businesses:
o provide power marketing and risk management services to wholesale
customers in North America by purchasing and selling electric power,
other energy commodities, and related derivatives,
o provide natural gas brokering and related services for wholesale and
retail customers, and provide a broad range of customized energy
o services, including private electric and gas distribution systems, energy
consulting, power quality services, and campus and multi-building energy
systems.
17
<PAGE>
In addition, in March 1998 our power marketing business, Constellation Power
Source, Inc. and Goldman, Sachs Capital Partners II L.P., an affiliate of
Goldman, Sachs & Co., formed Orion Power Holdings, Inc. to acquire electric
generating plants in the United States and Canada.
Constellation Power Source's business activities include trading:
o electricity,
o other energy commodities, and
o related derivative
contracts.
Constellation Power Source uses the mark-to-market method of accounting for
these activities. 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, and volatility factors. However,
it is possible that future market prices could vary from those used in recording
assets and liabilities from trading activities, and such variations could be
material.
During the quarter ended March 31, 1998, earnings from our energy marketing
businesses were about the same as they were in the same period of 1997.
BGE Home Products & Services, Inc. and Subsidiaries -- Our Home Products and
- --------------------------------------------------------------------------------
Commercial Building Systems Businesses
- --------------------------------------
Our home products and commercial building systems businesses:
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.
During the quarter ended March 31, 1998, earnings were about the same as
they were in the same period of 1997.
18
<PAGE>
Liquidity and Capital Resources
- -------------------------------
Overview
- --------
Our business requires a great deal of capital. Our actual capital
requirements for the three months ended March 31, 1998, along with estimated
annual amounts for the years 1998 through 2000, are shown below. For the twelve
months ended March 31, 1998, our ratio of earnings to fixed charges was 2.81 and
our ratio of earnings to combined fixed charges and preferred and preference
dividend requirements was 2.40.
<TABLE>
<CAPTION>
Three Months Ended
March 31 Calendar Year Estimate
1998 1998 1999 2000
----------- ------------ ---------- -----------
(In millions)
Utility Business Capital Requirements:
Construction expenditures (excluding AFC)
<S> <C> <C> <C> <C>
Electric................................................. $ 49 $ 236 $ 260 $ 273
Gas...................................................... 11 77 76 72
Common................................................... - 34 27 24
-------- -----------------------------------
Total construction expenditures.......................... 60 347 363 369
AFC......................................................... 3 8 11 14
Nuclear fuel (uranium purchases
and processing charges)................................... 3 49 50 48
Deferred energy conservation
expenditures.............................................. 5 15 10 10
Retirement of long-term debt and
redemption of preference stock ........................... - 118 344 264
-------- -----------------------------------
Total utility business
capital requirements...................................... 71 537 778 705
-------- -----------------------------------
Diversified Business Capital Requirements:
Investment requirements..................................... 30 179 136 154
Retirement of long-term debt................................ 30 216 134 244
-------- -----------------------------------
Total diversified business
capital requirements...................................... 60 395 270 398
-------- -----------------------------------
Total capital requirements.................................. $ 131 $ 932 $1,048 $1,103
======== ====================================
</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 $27 million in 1998,
o $38 million in 1999, and
o $44 million in 2000.
We estimate that during the three-year period 2001 through 2003, we will
spend an additional $175 million to complete the replacement of the steam
generators and extend the operating licenses at Calvert Cliffs.
If we do not replace the steam generators, we estimate that Calvert Cliffs
could not operate beyond the 2004-2006 time period. We expect the steam
generator replacements to occur during the 2002 refueling outage for Unit 1 and
during the 2003 outage for Unit 2.
19
<PAGE>
During the twelve months ended March 31, 1998, our utility operations
provided about 112% 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 106% of the cash needed to meet our capital requirements,
excluding cash needed to retire debt and redeem preference stock.
When we cannot meet utility capital requirements internally, we sell debt
and equity securities. We also sell securities when market conditions permit us
to refinance existing debt or preference stock at a lower cost. The amount of
cash we need and market conditions determine when and how much we sell. From
January 1, 1998 through the date of this report, we issued $106.5 million of
long-term debt, and we issued 675,943 shares of common stock. The net proceeds
from the common stock were $22.2 million. During the same period, we redeemed $3
million of preference stock.
Security Ratings
- ----------------
Independent credit-rating agencies rate our fixed-income securities. The
ratings indicate the agencies' assessment of our ability to pay interest,
dividends, and principal on these securities. These ratings affect how much it
will cost us to sell these securities. The better the rating, the 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 Group Service Rating Co.
------------ --------- -----------
Mortgage Bonds AA- A1 AA-
Unsecured Debt A A2 A+
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:
o the Constellation Holdings Companies' investments in financial limited
partnerships and funding for the development and acquisition of projects,
as well as loans made to project entities,
o funding for growing Constellation Power
Source's power marketing business, and
o ComfortLink's funding for construction of district energy projects.
ComfortLink(R) is 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 19 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.
20
<PAGE>
If the Constellation Holdings Companies can get a reasonable value for real
estate, additional cash may be obtained by selling real estate projects. The
Constellation Holdings Companies' ability to sell or liquidate assets will
depend on market conditions, and we cannot give assurances that these sales or
liquidations could be made. We discuss the real estate business and market in
the "Real Estate Development and Senior-Living Facilities" section on page 17
and in the Notes to Consolidated Financial Statements on page 9.
Our diversified businesses have the following revolving credit agreements to
provide additional cash for short-term financial needs:
Amount of
Revolving Credit
Agreement
-----------------
Constellation Holdings Companies $75 million
ComfortLink $50 million
Constellation Energy Solutions, Inc. $10 million
and Subsidiaries
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 6 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
- -------------------
The year 2000 issue affects virtually all companies and organizations. Many
existing computer programs and digital systems use only two digits to identify a
year in the date field. These programs and systems were designed and developed
without considering the impact of the upcoming change in the century. If not
corrected, many computer applications could fail or create erroneous results by
or at the year 2000.
We do not expect our costs to address the year 2000 issue to be material. We
discuss this further in our 1997 Annual Report on Form 10-K under the heading
"The Year 2000 Issue."
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.
We do not expect the adoption of these standards to have a material impact
on our financial results or financial statement disclosures.
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.
21
<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.
In 1997, six of these cases were settled before trial for amounts that were
immaterial. Four more trials are currently scheduled -- two in 1998 and two in
1999.
The second type are claims by one manufacturer -- Pittsburgh Corning Corp.
- -- against us and approximately eight others, as third-party defendants. These
claims relate to approximately 1,500 individual plaintiffs. We do not know the
specific facts necessary to estimate our potential liability for these claims.
The specific facts we do not know include:
o the identity of our facilities containing
asbestos manufactured by the manufacturer,
o the relationship (if any) of each of the
individual plaintiffs to us,
o the settlement amounts for any individual
plaintiffs who are shown to have had a
relationship to us, and
o the dates on which/places at which the exposure allegedly occurred.
Until the relevant facts for both type claims are determined, we are unable
to estimate what our liability, if any, might be. Although insurance and hold
harmless agreements from contractors who employed the plaintiffs may cover a
portion of any awards in the actions, our potential liability could be material.
22
<PAGE>
PART II. OTHER INFORMATION (Continued)
Item 6. Exhibits and Reports on Form 8-K
(a) 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.
(b) Reports on Form 8-K for the quarter ended March 31, 1998:
None.
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: May 14, 1998 /s/ D. A. Brune
------------ ----------------------------------
D. A. Brune, Vice President
on behalf of the Registrant and
as Principal Financial Officer
23
<PAGE>
EXHIBIT INDEX
Exhibit
Number
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.
24
<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
---------------------------------------------------------------------------
March December December December December December
1998 1997 1996 1995 1994 1993
------------ ----------- --------- -------- -------- --------
(In Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C>
Net Income .................................. $ 290.8 $ 282.8 $ 310.8 $ 338.0 $ 323.6 $ 309.8
Taxes on Income ............................. 168.0 161.5 169.2 172.4 156.7 140.8
------ ------ ------ ----- ------ ------
$ 458.8 $ 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 ................. $ 240.5 $ 234.2 $ 203.9 $ 206.7 $ 204.2 $ 199.4
Capitalized Interest ........................ 7.5 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 ......................... $ 249.9 $ 244.5 $ 221.1 $ 223.8 $ 218.6 $ 217.7
------ ------ ------ ----- ------ ------
Preferred and Preference
Dividend Requirements: (1)
Preferred and Preference .................... $ 26.6 $ 28.7 $ 38.5 $ 40.6 $ 39.9 $ 41.8
Dividends
Income Tax Required ......................... 15.4 16.4 20.9 20.4 19.1 18.8
------ ------ ------ ----- ------ ------
Total Preferred and Preference
Dividend Requirements ....................... $ 42.0 $ 45.1 $ 59.4 $ 61.0 $ 59.0 $ 60.6
------ ------ ------ ----- ------ ------
Total Fixed Charges and
Preferred and Preference
Dividend Requirements ....................... $ 291.9 $ 289.6 $ 280.5 $ 284.8 $ 277.6 $ 278.3
====== ====== ====== ====== ====== ======
Earnings (2) ................................ $ 701.2 $ 680.4 $ 685.4 $ 719.2 $ 686.5 $ 652.1
====== ====== ====== ====== ====== ======
Ratio of Earnings to Fixed Charges 2.81 2.78 3.10 3.21 3.14 3.00
Ratio of Earnings to Combined Fixed
Charges and Preferred and Preference
Dividend Requirements 2.40 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 MARCH
31, 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 5,620
<OTHER-PROPERTY-AND-INVEST> 1,680
<TOTAL-CURRENT-ASSETS> 960
<TOTAL-DEFERRED-CHARGES> 487
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 8,747
<COMMON> 1,445
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 1,446
<TOTAL-COMMON-STOCKHOLDERS-EQ> 2,897
89
210
<LONG-TERM-DEBT-NET> 2,927
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 221
<LONG-TERM-DEBT-CURRENT-PORT> 318
24
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 2,061
<TOT-CAPITALIZATION-AND-LIAB> 8,747
<GROSS-OPERATING-REVENUE> 866
<INCOME-TAX-EXPENSE> 45
<OTHER-OPERATING-EXPENSES> 683
<TOTAL-OPERATING-EXPENSES> 728
<OPERATING-INCOME-LOSS> 138
<OTHER-INCOME-NET> 2
<INCOME-BEFORE-INTEREST-EXPEN> 140
<TOTAL-INTEREST-EXPENSE> 60
<NET-INCOME> 80
6
<EARNINGS-AVAILABLE-FOR-COMM> 74
<COMMON-STOCK-DIVIDENDS> 61
<TOTAL-INTEREST-ON-BONDS> 62
<CASH-FLOW-OPERATIONS> 276
<EPS-PRIMARY> 0.50
<EPS-DILUTED> 0.50
</TABLE>
