Item 1 -- Business Overview of Consolidated Business......................... 1 Consolidated Capital Requirements..................... 3 Electric Business Electric Regulatory Matters and Competition.................... 4 Electric Rate Matters............ 5 Nuclear Operations............... 5 Electric Load Management, Energy, and Capacity Purchases...................... 6 Fuel for Electric Generation..... 7 Electric Operating Statistics.... 9 Gas Business Gas Operating Statistics......... 10 Gas Regulatory Matters and Competition.................... 11 Gas Operations................... 11 Gas Rate Matters................. 12 Franchises......................... 12 Diversified Businesses............. 12 Environmental Matters.............. 17 Employees.......................... 19 Item 2
ITEM 2. PROPERTIES
We describe our electric and gas business properties separately below.
ELECTRIC
Our principal electric generating plants are shown below:
- --------------- (A) These totals reflect BGE's proportionate interest and entitlement to capacity from Keystone and Conemaugh, which are 2 megawatts of diesel capacity for Keystone and 1 megawatt of diesel capacity for Conemaugh.
We also own two-thirds of the outstanding capital stock of Safe Harbor Water Power Corporation, and are currently entitled to 277 megawatts of the rated capacity of the Safe Harbor Hydroelectric Project. Safe Harbor is operated under a Federal Energy Regulatory Commission license which expires in the year 2030.
GAS
We own the following propane air and liquefied natural gas facilities:
o a liquefied natural gas facility for the liquefication and storage of natural gas with a total storage capacity of 1,000,000 DTH and a planned daily capacity of 287,988 DTH, and o a propane air facility with a mined cavern and refrigerated storage facilities with a total storage capacity of 1,000,000 DTH and a planned daily capacity of 85,000 DTH.
GENERAL INFORMATION
We own our principal plants and other important units that are located in Maryland including our principal headquarters building in downtown Baltimore. We also lease several properties in our service area which are used for various offices and services. We have electric transmission and electric and gas distribution lines located:
o in public streets and highways pursuant to franchises, and o on permanent rights-of-way secured for the most part by grants from owners of the property and for a relatively small part by condemnation.
We share the ownership of the properties for the Keystone and Conemaugh Plants in Pennsylvania. There are minor liens and easements on the Keystone and Conemaugh properties, but these encumbrances do not materially interfere with our use of the properties.
All of our property referred to above is subject to the lien of our mortgage securing our mortgage bonds.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS ASBESTOS
Since 1993, we have been involved in several actions concerning asbestos. All of the actions together are titled IN RE BALTIMORE CITY PERSONAL INJURIES ASBESTOS CASES in the Circuit Court for Baltimore City, Maryland. The actions are based upon the theory of "premises liability," alleging that we knew of and exposed individuals to an asbestos hazard. The actions relate to two types of claims.
The first type are direct claims by individuals exposed to asbestos. We described these claims in a Report on Form 8-K filed August 20, 1993. We are involved in these claims with approximately 70 other defendants. Approximately 520 individuals that were never employees of the Company each claim $6 million in damages ($2 million compensatory and $4 million punitive). We do not know the specific facts necessary to estimate our potential liability for these claims. The specific facts we do not know include:
o the identity of our facilities at which the plaintiffs allegedly worked as contractors, o the names of the plaintiffs' employers, and o the date on which the exposure allegedly occurred.
In 1997, six of these cases were settled before trial for amounts that were immaterial. Four more trials are currently scheduled -- two in 1998 and two in 1999.
The second type are claims by one manufacturer -- Pittsburgh Corning Corp. -- against us and approximately eight others, as third party defendants. These claims relate to approximately 1,500 individual plaintiffs. We do not know the specific facts necessary to estimate our potential liability for these claims. The specific facts we do not know include:
o the identity of our facilities containing asbestos manufactured by the manufacturer, o the relationship (if any) of each of the individual plaintiffs to us, o the settlement amounts for any individual plaintiffs who are shown to have had a relationship to us, and o the dates on which/places at which the exposure allegedly occurred.
Until the relevant facts for both type claims are determined, we are unable to estimate what our liability, if any, might be. Although insurance and hold harmless agreements from contractors who employed the plaintiffs may cover a portion of any awards in the actions, our potential liability could be material.
See ITEM 1. BUSINESS -- ELECTRIC RATE MATTERS, NUCLEAR OPERATIONS, ENVIRONMENTAL MATTERS, and NOTE 12 TO CONSOLIDATED FINANCIAL STATEMENTS for other information about our legal or regulatory proceedings.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Reference is made to the information set forth under Item 4. Submission of Matters to a Vote of Security Holders on page 35 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 1997.
ITEM 10. EXECUTIVE OFFICERS OF THE REGISTRANT
Executive Officers of BGE at the date of this report are:
- --------------- (A) Chief Executive Officer, Director, and member of the Executive Committee. (B) Director and member of the Executive Committee. Officers of BGE are elected by, and hold office at the will of, the Board of Directors and do not serve a "term of office" as such. There is no arrangement or understanding between any director or officer and any other person pursuant to which the director or officer was selected.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
STOCK TRADING
Our common stock is traded under the ticker symbol BGE. It is listed on the New York, Chicago, and Pacific stock exchanges. It has unlisted trading privileges on the Boston, Cincinnati, and Philadelphia exchanges.
As of February 28, 1998, there were 72,972 common shareholders of record.
DIVIDEND POLICY
We pay dividends on our common stock when our Board of Directors declares them. There is no limitation on our paying common stock dividends, other than we must first pay all dividends (and any redemption payments) due on our preference stock.
Dividends have been paid on the common stock continuously since 1910. Future dividends depend upon future earnings, our financial condition and other factors. Quarterly dividends were declared on the common stock during 1997 and 1996 in the amounts set forth below.
COMMON STOCK DIVIDENDS AND PRICE RANGES
- --------------- *Based on New York Stock Exchange Composite Transactions as reported in THE WALL STREET JOURNAL.
Item 6.
Item 6. Selected Financial Data
CERTAIN PRIOR-YEAR AMOUNTS HAVE BEEN RECLASSIFIED TO CONFORM WITH THE CURRENT YEAR'S PRESENTATION.
Baltimore Gas and Electric Company and Subsidiaries 25
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Introduction
In Management's Discussion and Analysis we explain the general financial condition and the results of operations for BGE and its diversified business subsidiaries including:
o what factors affect our businesses, o what our earnings and costs were in 1997 and 1996, o why earnings and costs changed from the year before, o where our earnings came from, o how all of this affects our overall financial condition, o what our expenditures for capital projects were in 1995 through 1997 and what we expect them to be in 1998 through 2000, and o where we will get cash for future capital expenditures.
As you read Management's Discussion and Analysis, it may be helpful to refer to our Consolidated Statements of Income on page 38, which present the results of our operations for 1997, 1996, and 1995. In Management's Discussion and Analysis, we analyze and explain the annual changes in the specific line items in the Consolidated Statements of Income. Our analysis may be important to you in making decisions about your investments in BGE.
The electric utility industry is undergoing rapid and substantial change. Competition in the generation part of our business is increasing. The regulatory environment (federal and state) is shifting toward customer choice. These matters are discussed briefly in the "Competition and Response to Regulatory Change" section beginning on page 27. They are discussed in detail in this Annual Report on Form 10-K.
We continuously evaluate changes in the utility industry. Based on the evaluations, we refine short and long term business plans. We may also enter new businesses, which may be opportunities to:
o provide our core energy business customers more services, or o attract new customers for our core energy business, or o expand our diversified stream of revenues. ________________________________________________________________________________
Results of Operations
In this section, we discuss our 1997 and 1996 earnings and the factors affecting them. We begin with a general overview, then separately discuss earnings for the utility business and for diversified businesses.
Overview
Total Earnings per Share of Common Stock
1997 1996 1995 - ------------------------------------------------------------------- Earnings per share from current-year operations:
Utility business $1.94 $1.96 $1.84 Diversified businesses (subsidiaries) .34 .31 .18 ---------------------- Total earnings per share from current-year operations 2.28 2.27 2.02 Write-off of merger costs (see Note 12) (.25) -- -- Write-downs of real estate investments (see Note 12) (.31) -- -- Disallowed replacement energy costs (see Note 12) -- (.42) -- ---------------------- Total earnings per share $1.72 $1.85 $2.02
- ---------------------------------------------======================
Our 1997 total earnings decreased $18.2 million, or $.13 per share, from 1996. Our total earnings decreased because:
o we wrote off costs associated with the proposed merger with Potomac Electric Power Company, and o Constellation Holdings, Inc. and Subsidiaries (together known as the Constellation Holdings Companies) wrote down their investments in two real estate projects.
We discuss the write-off of merger costs in the "Write-Off of Merger Costs" section on page 31, and the real estate write-downs in the "Real Estate Development and Senior-Living Facilities" section on page 33.
In 1997, utility earnings from current-year operations were lower mostly because we sold less electricity and gas due to milder weather (people use less electricity and gas to heat or cool their homes in milder weather). We discuss our utility earnings in more detail in the "Utility Business" section beginning on page 27.
In 1997, diversified business earnings from current-year operations were higher mostly because the Constellation Holdings Companies had higher earnings from power generation projects and financial investments. We discuss our diversified business earnings in more detail in the "Diversified Businesses" section beginning on page 32.
Our 1996 total earnings decreased $25.1 million, or $.17 per share, from 1995. Our total earnings decreased because we wrote off disallowed replacement energy costs. We discuss this in detail in the "Disallowed Replacement Energy Costs" section on page 29.
In 1996, utility earnings from operations were higher due to three factors: we sold more electricity and gas due to colder winter weather, there was an increase in the number of customers, and we had lower operations and maintenance expenses. We would have had even higher utility earnings from operations except we sold less electricity in the third quarter due to milder summer weather.
In 1996, diversified business earnings were higher mostly because the Constellation Holdings Companies had higher earnings from power generation projects and financial investments.
26 Baltimore Gas and Electric Company and Subsidiaries
Utility Business
Before we go into the details of our electric and gas operations, we believe it is important to discuss four factors that have a strong influence on our utility business performance: regulation, the weather, other factors including the condition of the economy in our service territory, and competition.
Regulation by the Maryland Public Service Commission (Maryland PSC)
The Maryland PSC determines the rates we can charge our customers. Our rates consist of a "base rate" and a "fuel rate." The base rate is the rate the Maryland PSC allows us to charge our customers for the cost of providing them service, plus a profit. We have both an electric base rate and a gas base rate. Higher electric base rates apply during the summer when the demand for electricity is the highest. Gas base rates are not affected by seasonal changes.
The Maryland PSC allows us to include in base rates a
component to recover money spent on conservation programs. This component is called an "energy conservation surcharge." However, under this surcharge the Maryland PSC limits what our profit can be. If, at the end of the year, we have exceeded our allowed profit, we lower the amount of future surcharges to our customers to correct the amount of overage, plus interest.
In addition, we charge our electric customers separately for the fuel we use to generate electricity (nuclear fuel, coal, gas, or oil) and for the net cost of purchases and sales of electricity (primarily with other utilities). We charge the actual cost of these items to the customer with no profit to us. We discuss this in more detail in the "Electric Fuel Rate Clause" section on page 29 and in Note 1.
We also charge our gas customers separately for the natural gas they consume. The price we charge for the natural gas is based on a market based rates incentive mechanism approved by the Maryland PSC. We discuss market based rates in more detail in the "Gas Cost Adjustments" section on page 30 and in Note 1.
From time to time, when necessary to cover increased costs, we ask the Maryland PSC for base rate increases. The Maryland PSC holds hearings to determine whether to grant us all or a portion of the amount requested. The Maryland PSC has historically allowed us to increase base rates to recover costs for replacing utility plant assets, plus a profit, beginning at the time of replacement. Generally, rate increases improve our utility earnings because they allow us to collect more revenue. However, rate increases are normally granted based on historical data and those increases may not always keep pace with increasing costs.
Weather
Weather affects the demand for electricity and gas, especially among our residential customers. Very hot summers and very cold winters increase demand. Mild weather reduces demand.
We measure the weather's effect using "degree days." A degree day is the difference between the average daily actual temperature and a baseline temperature of 65 degrees. Cooling degree days result when the daily actual temperature exceeds the 65 degree baseline. Heating degree days result when the daily actual temperature is less than the baseline.
During the cooling season, hotter weather is measured by more cooling degree days and results in greater demand for electricity to operate cooling systems. During the heating season, colder weather is measured by more heating degree days and results in greater demand for electricity and gas to operate heating systems.
We show the number of cooling and heating degree days in 1997 and 1996, the percentage changes in the number of degree days from prior years, and the number of degree days in a "normal" year as represented by the 30-year average in the following table.
30-Year 1997 1996 Average - ------------------------------------------------------------------ Cooling degree days 746 786 804 Percentage change from prior year (5.1)% (25.6)%
Heating degree days 4,822 5,138 4,901 Percentage change from prior year (6.2)% 11.7%
Other Factors
Other factors, aside from weather, impact the demand for electricity and gas. These factors include the "number of customers" and "usage per customer" during a given period. We use these terms later in our discussions of electric and gas operations. In those sections, we discuss how these and other factors affected electric and gas sales during 1997 and 1996.
The number of customers in a given period is affected by new home and apartment construction and by the number of businesses in our service territory.
Usage per customer refers to all other items impacting customer sales which cannot be separately measured. These factors include the strength of the economy in our service territory. When the economy is healthy and expanding, customers tend to consume more electricity and gas. Conversely, during an economic downtrend, our customers tend to consume less electricity and gas.
Competition and Response to Regulatory Change Our electric and gas businesses are also affected by competition. We discuss competition in each business below.
Electric Business
Electric utilities are facing competition on various fronts, including:
o in the construction of generating units to meet increased demand for electricity, o in the sale of their electricity in the bulk power markets, o in competing with alternative energy suppliers, and o in the future, for electric sales to retail customers which utilities now serve exclusively.
We regularly reevaluate our strategies with two goals in mind: to improve our competitive position, and to anticipate and adapt to regulatory changes. We cannot predict the ultimate effect competition or regulatory change will have on our earnings.
We discuss competition in our electric business in more detail in this Annual Report on Form 10-K under the heading "Electric Regulatory Matters and Competition."
Baltimore Gas and Electric Company and Subsidiaries 27
Gas Business
Regulatory change in the natural gas industry is well under way. We discuss competition in our gas business in more detail in this Annual Report on Form 10-K under the heading "Gas Regulatory Matters and Competition."
Strategies
We will continue to develop strategies to keep us competitive. These strategies might include one or more of the following:
o the complete or partial separation of our generation, transmission, and distribution functions, o purchase or sale of generation assets, o mergers or acquisitions of utility or non-utility businesses, o spin-off or sale of one or more businesses, o growth of revenues from diversified businesses.
We cannot predict whether any transactions of the types described above may actually occur, nor can we predict what their effect on our financial condition or competitive position might be.
Utility Business Earnings per Share of Common Stock
1997 1996 1995 - -------------------------------------------------------------------- Utility earnings per share from current-year operations:
Electric business $1.77 $1.75 $1.70 Gas business .17 .21 .14 ---------------------------- Total utility earnings per share from current-year operations 1.94 1.96 1.84 Write-off of merger costs (see Note 12) (.25) -- -- Disallowed replacement energy costs (see Note 12) -- (.42) -- ---------------------------- Total utility earnings per share $1.69 $1.54 $1.84
- ----------------------------------------============================
Our 1997 total utility earnings increased $24.0 million, or $.15 per share, from 1996. Our 1996 total utility earnings decreased $44.5 million, or $.30 per share, from 1995. We discuss the factors affecting utility earnings below.
Electric Operations Electric Revenues
The changes in electric revenues in 1997 and 1996 compared to the respective prior year were caused by:
1997 1996 - ------------------------------------------------------------------ (IN MILLIONS) Electric system sales volumes $(15.5) $ 0.3 Base rates 29.2 (2.5) Fuel rates (4.3) (12.3) ---------------------- Total change in electric revenues from electric system sales 9.4 (14.5) Interchange and other sales (23.2) (11.1) Other (3.2) 4.5 ---------------------- Total change in electric revenues $(17.0) $(21.1) - --------------------------------------------======================
Electric System Sales Volumes
"Electric system sales" are sales to customers in our service territory at rates set by the Maryland PSC. These sales do not include interchange sales and sales to others.
The percentage changes in our electric system sales volumes, by type of customer, in 1997 and 1996 compared to the respective prior year were:
1997 1996 - ------------------------------------------------------------------ Residential (3.9)% 2.5% Commercial 1.0 (0.3) Industrial (0.4) 0.1
In 1997, we sold less electricity to residential customers mostly for two reasons: lower electricity usage per customer and milder weather. We sold more electricity to commercial customers mostly because usage per customer increased. We would have sold even more electricity to commercial customers except for milder weather during the year. We sold about the same amount of electricity to industrial customers as we did in 1996.
In 1996, we sold more electricity to residential customers for three reasons: colder weather in the first quarter, greater electricity usage per customer, and an increase in the number of customers. We would have sold even more electricity to residential customers except for milder summer weather. We sold about the same amount of electricity to commercial and industrial customers as we did in 1995.
Weather impacts residential, more than commercial and industrial, sales. In 1997 and 1996, other items offset the impact of weather on commercial and industrial sales. Other items included the demand for power to fuel manufacturing equipment and office machinery, which vary with changes in the customers' businesses.
Base Rates
In 1997, base rate revenues were higher than they were in 1996 because of higher energy conservation surcharge revenues. During 1996, we exceeded our profit limit under the energy conservation surcharge. As a result, we excluded $28.5 million of our 1996 surcharge billings from revenue. To correct the overage, we lowered the surcharge on our customers' bills beginning in July 1997 and will continue to bill the lower surcharge through June 1998.
In 1996, base rate revenues were about the same as they were in 1995. Although we sold more electricity in 1996, our revenues did not increase because the higher sales occurred during the winter when our base rates are lower.
28 Baltimore Gas and Electric Company and Subsidiaries
Fuel Rates
The fuel rate is the rate the Maryland PSC allows us to charge our customers, with no profit to us, for:
o our actual cost of fuel used to generate electricity, and o the net cost of purchases and sales of electricity (primarily with other utilities).
If these costs go up, the Maryland PSC permits us to increase the fuel rate. If these costs go down, our customers benefit from a reduction in the fuel rate. The fuel rate is impacted most by the amount of electricity generated at our Calvert Cliffs Nuclear Power Plant (Calvert Cliffs) because the cost of nuclear fuel is cheaper than coal, gas, or oil. We discuss the calculation of the fuel rate in Note 1.
Changes in the fuel rate normally do not affect earnings. However, if the Maryland PSC disallows recovery of any part of the fuel costs, our earnings are reduced. We discuss this more thoroughly in the "Disallowed Replacement Energy Costs" section below and in Note 12.
In 1997, fuel rate revenues decreased mostly because we sold less electricity. In 1996, fuel rate revenues decreased due to a lower fuel rate because we were able to operate plants with the lowest fuel costs. Fuel rate revenues would have been even lower except we sold more electricity.
Interchange and Other Sales
"Interchange and other sales" are sales in the Pennsylvania-New Jersey-Maryland Interconnection (PJM) energy market and to others. PJM is a regional power pool with members that include many wholesale market participants, as well as BGE and seven other utility companies. We sell energy to PJM members and to others after we have satisfied the demand for electricity in our own system.
In 1997, we had lower interchange and other sales compared to 1996 mostly because of lower sales volumes due to reduced demand.
In 1996, we had lower interchange and other sales compared to 1995 because we generated less electricity at Calvert Cliffs. This meant that we had less electricity to sell outside of our service territory. We generated less electricity at that plant mostly because the 1996 outage for regular refueling and maintenance took longer than in 1995.
Electric Fuel and Purchased Energy Expenses
1997 1996 1995 - ------------------------------------------------------------------ (IN MILLIONS)
Actual costs $504.5 $539.2 $554.5 Net recovery of costs under electric fuel rate clause (see Note 1) 15.2 8.2 24.3 Disallowed replacement energy costs (including carrying charges) (see Note 12) -- 95.4 -- ------------------------------- Total electric fuel and purchased energy expenses $519.7 $642.8 $578.8 - -----------------------------------===============================
Actual Costs
In 1997, our actual costs of fuel to generate electricity (nuclear fuel, coal, gas, or oil) and electricity we bought from others were lower than in 1996 mostly for two reasons: we bought less electricity from other utilities because we were able to meet demand using the electricity we generated, and we were able to use a less-costly mix of generating plants mostly because of shorter refueling and maintenance downtime at Calvert Cliffs.
In 1996, our actual costs were lower than in 1995 because the price of electricity and capacity we bought from other utilities was lower and we sold less electricity. The price we pay for electricity and capacity we buy from other utilities changes based on market conditions, complex pricing formulas for PJM transactions, and contract terms.
Electric Fuel Rate Clause
Under the electric fuel rate clause, we defer (include as an asset or liability in our Consolidated Balance Sheets and exclude from our Consolidated Statements of Income) the difference between our actual costs of fuel and energy and what we collect from customers under the fuel rate in a given period. We either bill or refund our customers that difference in the future. We discuss the calculation of the fuel rate in Note 1.
In 1997 and 1996, our actual costs of fuel and energy were lower than the fuel rate revenues we collected from our customers.
Disallowed Replacement Energy Costs
In December 1996, we settled fuel rate proceedings about extended outages that occurred at Calvert Cliffs in 1989 through 1991. We agreed not to bill our customers for $118 million of electric replacement energy costs associated with these outages. We wrote off a portion of these costs in 1990 and wrote off the remainder in 1996. We discuss this further in Note 12.
Baltimore Gas and Electric Company and Subsidiaries 29
Gas Operations Gas Revenues
The changes in gas revenues in 1997 and 1996 compared to the respective prior year were caused by:
1997 1996 - ------------------------------------------------------------------ (IN MILLIONS) Gas system sales volumes $(7.3) $ 8.2 Base rates 0.6 18.9 Gas cost adjustments (0.2) 62.1 ---------------------- Total change in gas revenues from gas system sales (6.9) 89.2 Off-system sales 10.9 26.6 Other 0.3 1.0 ---------------------- Total change in gas revenues $ 4.3 $116.8 - --------------------------------------------======================
Gas System Sales Volumes
The percentage changes in our gas system sales volumes, by type of customer, in 1997 and 1996 compared to the respective prior year were:
1997 1996 - --------------------------------------------------------------- Residential (8.3)% 8.9% Commercial (0.2) 2.8 Industrial 4.4 (2.3)
In 1997, we sold less gas to residential customers mostly for two reasons: lower usage per customer and milder weather. We sold about the same amount of gas to commercial customers as we did in 1996. We sold more gas to industrial customers mostly because the milder weather caused fewer service interruptions and Bethlehem Steel (our largest customer) used more gas. We would have sold even more gas to industrial customers except gas usage by industrial customers other than Bethlehem Steel decreased.
In 1996, we sold more gas to residential and commercial customers due to colder winter and early spring weather and an increase in the number of customers. We would have sold even more gas to those customers except that gas usage per customer decreased. We sold less gas to industrial customers because Bethlehem Steel used less gas. We would have sold even less gas to industrial customers except for increased gas usage by other industrial customers, an increase in the number of customers, and colder winter weather.
Base Rates
In 1997, base rate revenues were higher than they were in 1996. Although we sold less gas in 1997, our base rate revenues increased because of a higher energy conservation surcharge in the last six months of the year.
In 1996, base rate revenues were higher than in 1995 because in November 1995, the Maryland PSC allowed us to increase our gas base rates. This increased our annual base rate revenues for 1996 by $19.3 million. That amount included $2.4 million to recover higher depreciation expense (an accounting procedure which spreads the cost of utility plant in service over the years in which it is used).
During 1997, we applied for a $36.7 million increase in our gas base rates. The Maryland PSC is currently reviewing our application, and is expected to issue an order by June 1998. Our earnings will be impacted during 1998 and 1999 by the outcome of this case.
Gas Cost Adjustments
We charge our gas customers for the natural gas they consume using gas cost adjustment clauses set by the Maryland PSC. These clauses operate similar to the electric fuel rate clause described in the "Electric Fuel Rate Clause" section on page 29.
However, effective October 1996, the Maryland PSC approved a modification of these clauses to provide a market based rates incentive mechanism. Under market based rates, our actual cost of gas is compared to a market index (a measure of the market price of gas in a given period). The difference between our actual cost and the market index is shared equally between BGE (which benefits shareholders) and customers. We also discuss this in Note 1.
Delivery service customers, including Bethlehem Steel, are not subject to the gas cost adjustment clauses because we are not selling them gas (we are selling them the service of delivering their gas).
In 1997, gas cost revenues decreased mostly because we sold less gas. In 1996, gas cost revenues increased because we had to pay more for gas and we sold more gas.
Off-System Sales
Off-system gas sales, which are low-margin direct sales to wholesale suppliers of natural gas outside our service territory, are not subject to gas cost adjustments. We began sales of off-system gas during the first quarter of 1996. The Maryland PSC approved an arrangement for part of the earnings from off-system sales to benefit customers (through reduced costs) and the remainder to be retained by BGE (which benefits shareholders).
In 1997 and 1996, off-system gas sales increased mostly because we first began off-system sales of gas in February of 1996. These increases in off-system sales did not significantly impact earnings.
Gas Purchased For Resale Expenses
1997 1996 1995 - ----------------------------------------------------------------- (IN MILLIONS) Actual costs $291.6 $295.4 $205.9 Net recovery (deferral) of costs under gas adjustment clauses (see Note 1) 0.5 (11.0) (7.8) ------------------------------- Total gas purchased for resale expenses $292.1 $284.4 $198.1 - ----------------------------------===============================
Actual Costs
Actual costs include the cost of gas purchased for resale to our customers and for sale off-system. Actual costs do not include the cost of gas purchased by delivery service customers, including Bethlehem Steel.
In 1997, actual gas costs decreased from 1996 mostly because we sold less gas. In 1996, actual gas costs increased from 1995 due to three factors: higher market prices of gas, higher sales volumes, and the purchase of gas to resell off-system (beginning in the first quarter of 1996).
30 Baltimore Gas and Electric Company and Subsidiaries
Gas Adjustment Clauses
We charge customers for the cost of gas sold through gas adjustment clauses (determined by the Maryland PSC), as discussed under "Gas Cost Adjustments" earlier in this section.
In 1997, the portion of our actual gas costs subject to these clauses was lower than the revenues we collected from our customers. In 1996, the portion of our actual gas costs subject to these clauses was higher than the revenues we collected from our customers.
Other Operating Expenses Operations and Maintenance Expenses
In 1997, our operations and maintenance expenses were slightly lower than they were in 1996.
In 1996, our operations and maintenance expenses decreased $18.5 million due to our continued efforts to control costs. This decrease would have been even greater except we had higher costs to maintain our nuclear plant.
Depreciation and Amortization Expenses
We describe depreciation and amortization expenses in Note 1.
In 1997, our depreciation and amortization expense increased $12.7 million from 1996 mostly because we had more plant in service (as our level of plant that is in service changes, the amount of our depreciation and amortization expense changes).
In 1996, our depreciation and amortization expense increased $12.8 million from 1995 because we had more utility plant in service, and we had more energy conservation program costs to be amortized.
The increase in 1996 expenses would have been even greater except that in 1995 depreciation and amortization expense included $14.2 million for the write-off of costs associated with planned future generation facilities at our Perryman site that will not be built. We discuss this write-off also in Note 1. In 1996, depreciation and amortization expense did not include any such write-off.
Taxes Other Than Income Taxes
In 1997, taxes other than income taxes were about the same as they were in 1996.
In 1996, taxes other than income taxes were $9.6 million higher than in 1995 mostly due to three factors: plant additions made in 1995 increased our property taxes about $7 million, higher 1996 revenues increased our gross receipts taxes about $2 million, and higher labor costs increased our payroll taxes about $1 million.
Other Income and Expenses Write-Off of Merger Costs
In September 1995 we signed an agreement with Potomac Electric Power Company to merge together into a new company, Constellation Energy(TM) Corporation, after all necessary regulatory approvals were received. In December 1997, both companies mutually terminated the merger agreement. Accordingly, in 1997, we wrote off $57.9 million of costs related to the merger. This write-off reduced after-tax earnings by $37.5 million, or $.25 per share. We also discuss the write-off of these costs in Note 12.
Allowance for Funds Used During Construction (AFC)
We finance construction projects with borrowed funds and equity funds. We are allowed by the Maryland PSC to record the cost of these funds as part of the cost of construction projects in our Consolidated Balance Sheets. We do this through the AFC, which we calculate using a rate authorized by the Maryland PSC. We bill our customers for the AFC plus a return after the utility plant is placed in service. We also describe AFC in Note 1.
In 1997, AFC was about the same as it was in 1996. In 1996, we had lower AFC compared to 1995 because we completed several projects and started less new construction. We also had lower AFC because the Maryland PSC decreased the gas AFC rate in November 1995 from 9.40% to 9.04%.
Net Other Income and Deductions
Net other income and deductions represent miscellaneous income and expenses which are not directly related to operations.
In 1997, net other income and deductions were about the same as they were in 1996. In 1996, net other income and deductions increased $4.9 million compared to 1995 mostly because the Constellation Holdings Companies had lower deductions not directly related to operations and BGE had about $2 million more of other interest and finance charge income.
Interest Charges
Interest charges represent the interest we paid on outstanding debt.
In 1997, we had $23.6 million higher interest charges compared to 1996 because we had more debt outstanding and interest rates were higher.
In 1996, we had $2.1 million lower interest charges compared to 1995 largely because of lower interest rates. We would have had even lower interest charges except we had more debt outstanding.
Income Taxes
In 1997 our income taxes decreased because we had lower taxable income from both our utility operations and our diversified businesses.
In 1996 our income taxes decreased because we had lower taxable income from utility operations. Our income taxes would have been even lower except that we had higher taxable income from our diversified businesses.
Baltimore Gas and Electric Company and Subsidiaries 31
Diversified Businesses
In the 1980s, we began to diversify our business in response to limited growth in gas and electric sales. Today, we continue to diversify our business in response to regulatory changes in the utility industry. Some of our diversified businesses are related to our core utility business and others are not. Our diversified businesses are organized in three groups:
o the Constellation Holdings Companies--our power generation, financial investments, and real estate businesses, o Constellation Energy Solutions, Inc. and Subsidiaries--our energy marketing businesses, and o BGE Home Products & Services, Inc. and Subsidiaries--our home products and commercial building systems businesses.
Diversified Business Earnings Per Share of Common Stock
1997 1996 1995 - ------------------------------------------------------------------- Constellation Holdings Companies $ .39 $ .29 $ .18 Constellation Energy Solutions (.08) .00 .00 BGE Home Products & Services .03 .02 .00 ------------------------- Total diversified business earnings per share from current-year operations .34 .31 .18 Write-downs of real estate investments by the Constellation Holdings Companies (see Note 12) (.31) -- -- ------------------------- Total diversified business earnings per share $ .03 $ .31 $ .18 - ------------------------------------------=========================
Our 1997 diversified business earnings decreased $42.2 million, or $.28 per share, from 1996. Our 1996 diversified business earnings increased $19.3 million, or $.13 per share, from 1995. These changes came mostly from the Constellation Holdings Companies. We discuss factors affecting the earnings of our diversified businesses below.
The Constellation Holdings Companies--Our Power Generation, Financial Investments, and Real Estate Businesses
The Constellation Holdings Companies:
o develop, own, and operate power generation projects, o engage in financial investments, and o develop, own, and manage real estate and senior-living facilities.
Earnings per share from the Constellation Holdings Companies were:
1997 1996 1995 - -------------------------------------------------------------------- Power generation $ .25 $ .18 $ .13 Financial investments .18 .14 .08 Real estate development and senior-living facilities (.01) (.02) (.02) Other (.03) (.01) (.01) -------------------------- Total Constellation Holdings Companies' earnings per share from current-year operations .39 .29 .18 Write-downs of real estate investments (see Note 12) (.31) -- -- -------------------------- Total Constellation Holdings Companies' earnings per share $ .08 $ .29 $ .18 - ------------------------------------------==========================
Power Generation
The Constellation Holdings Companies' power generation business develops, owns, and operates domestic and international power generation projects. We discuss international projects later in this section.
In 1997, earnings increased from 1996 mostly because of improved performance of various energy projects.
In 1996, earnings increased from 1995 mostly due to our share of higher earnings from energy projects and a $14.6 million after-tax gain on the sale by a Constellation partnership of a power purchase agreement with Jersey Central Power & Light Company back to that utility. Energy projects had higher earnings for a variety of reasons--some ongoing (like improved efficiency due to equipment or procedure changes) and some onetime (for example, losses incurred in 1995--to shut-down certain operations at a plant--did not occur again in 1996). These increases were offset by $16.2 million of write-offs of investments in certain power projects. We describe these write-offs further in Note 3.
California Power Purchase Agreements
The Constellation Holdings Companies have $261 million invested in 16 projects that sell electricity in California under power purchase agreements called "Interim Standard Offer No. 4" agreements. Earnings from these projects were $37.3 million, or $.25 per share, in 1997.
Under these agreements, the electricity rates change from fixed rates to variable rates during 1996 through 2000. The projects which already have had rate changes have lower revenues under variable rates than they did under fixed rates. When the remaining projects transition to variable rates, we expect their revenues also to be lower than they are under fixed rates. However, the California projects that make the highest revenues will transition in 1999 and 2000. As a result, we do not expect the Constellation Holdings Companies to have significantly lower earnings before 2000 due to the transition to variable rates. We cannot predict the financial effects of the transition from fixed to variable rates on the Constellation Holdings Companies or on BGE, but the effects could be material.
We describe these projects and the transition process in detail in Note 12.
International
The Constellation Holdings Companies' power generation business in Latin America:
o develops, acquires, owns, and operates power generation projects, and o acquires and owns distribution systems.
At December 31, 1997, the Constellation Holdings Companies had invested about $23.1 million and committed another $4.3 million in power projects in Latin America. In the future, the Constellation Holdings Companies' power generation business may be expanding further in both domestic and international projects.
32 Baltimore Gas and Electric Company and Subsidiaries
Financial Investments
Earnings from the Constellation Holdings Companies' portfolio of financial investments include income from:
o marketable securities, o financial limited partnerships, and o financial guaranty insurance companies.
In 1997, earnings were higher than in 1996 due to better earnings from trading securities, and increased gains from marketable securities.
In 1996, earnings were higher than in 1995 because of better earnings from marketable securities and increased gains from financial limited partnerships.
Real Estate Development and Senior-Living Facilities
The Constellation Holdings Companies' real estate development business includes:
o land under development, o office buildings, o retail projects, o distribution facility projects, o an entertainment, dining, and retail complex in Orlando, Florida, o a mixed-use planned-unit development, and n senior-living facilities.
In 1997, earnings from real estate development and senior-living facilities were lower than in 1996 mostly due to:
o a $14.1 million after-tax write-down of the investment in Church Street Station--an entertainment, dining, and retail complex in Orlando, Florida-- which occurred because the Constellation Holdings Companies have now decided to sell rather than keep the project, and
o a $31.9 million after-tax write-down of the investment in Piney Orchard--a mixed-use, planned-unit development-- which occurred because the expected cash flow from the project was less than the Constellation Holdings Companies' investment in the project.
In 1996, earnings from real estate development and senior-living facilities were about the same as they were in 1995.
We consider market demand, interest rates, the availability of financing, and the strength of the economy in general when making decisions about our real estate investments. If we were to sell our real estate projects in the current market, we would have losses, although the amount of the losses is hard to predict. Depending on market conditions in the future, we could also have losses on any future sales.
We describe the Constellation Holdings Companies' real estate business further in Note 12.
Constellation Energy Solutions, Inc. and Subsidiaries-- Our Energy Marketing Businesses
Our energy marketing businesses:
o provide power marketing and risk management services to wholesale customers in North America by purchasing and selling electric power, other energy commodities, and related derivatives,
o provide natural gas brokering and related services for wholesale and retail customers, and
o provide a broad range of customized energy services, including private electric and gas distribution systems, energy consulting, power quality services, and campus and multi-building energy systems.
In 1997, earnings from our energy marketing businesses were lower than in 1996 mostly because of lower gas brokering margins and increased uncollectible expense. In 1996, earnings were about the same as they were in 1995.
BGE Home Products & Services, Inc. and Subsidiaries--Our Home Products and Commercial Building Systems Businesses
BGE Home Products & Services, Inc. and subsidiaries:
o sells and services electric and gas appliances, o engages in home improvements, and o sells and services heating and air conditioning systems.
In 1997 and 1996, earnings increased due to improved performance in the service and installation business.
Baltimore Gas and Electric Company and Subsidiaries 33
Liquidity and Capital Resources Overview
Our business requires a great deal of capital. Our actual capital requirements for the years 1995 through 1997, along with estimated amounts for the years 1998 through 2000, are shown below.
Capital Requirements of Our Utility Business
We continuously review and change our construction program, so actual expenditures may vary from the estimates for the years 1998 through 2000 in the capital requirements chart.
Our projections of future electric construction expenditures do not include costs to build more generating units. Electric construction expenditures include improvements to our generating plants and transmission and distribution facilities. They also include estimated costs for replacing the steam generators and extending the operating licenses at Calvert Cliffs. The operating licenses expire in 2014 for Unit 1 and in 2016 for Unit 2. We estimate these Calvert Cliffs costs to be:
o $27 million in 1998, o $38 million in 1999, and o $44 million in 2000.
We estimate that during the three-year period 2001 through 2003, we will spend an additional $175 million to complete the replacement of the steam generators and extend the operating licenses of Calvert Cliffs.
If we do not replace the stream generators, we estimate that Calvert Cliffs could not operate beyond the 2004-2006 time period. We expect the steam generator replacements to occur during the 2002 spring refueling outage for Unit 1 and during the 2003 outage for Unit 2.
Our utility operations provided about 105% in 1997, 97% in 1996, and 100% in 1995, of the cash needed to meet our capital requirements, excluding cash needed to retire debt and redeem preferred and preference stock.
During the three years from 1998 through 2000, we expect utility operations to provide 106% of the cash needed to meet our capital requirements, excluding cash needed to retire debt and redeem preference stock.
When we cannot meet utility capital requirements internally, we sell debt and equity securities. We also sell securities when market conditions permit us to refinance existing debt or preference stock at a lower cost. The amount of cash we need and market conditions determine when and how much we sell. During the three years ended December 31, 1997, we sold:
o $619 million of long-term debt, o $60 million of preference stock, and o $4 million of common stock.
Security Ratings
Independent credit-rating agencies rate our fixed-income securities. The ratings indicate the agencies' assessment of our ability to pay interest, dividends, and principal on these securities. These ratings affect how much it will cost us when we sell these securities. The better the rating, the lower the cost of the securities to us when we sell them. Our securities ratings at the date of this report are shown in the following table. In October, 1997, Standard & Poors upgraded our mortgage bonds from A+ to AA-.
Standard Moody's & Poors Investors Duff & Phelps Rating Group Service Credit Rating Co. - ---------------------------------------------------------------- Mortgage Bonds AA- A1 AA- Unsecured Debt A A2 A+ Preference Stock A "a2" A
Capital Requirements of Our Diversified Businesses
In the past, capital requirements of our diversified businesses only included the Constellation Holdings Companies because they had the only significant capital requirements. From time to time, however, our other diversified businesses may develop significant capital requirements. As that occurs, we will include the capital requirements of those businesses in the capital requirements table above. As discussed under "Diversified Business Investment Requirements," capital requirements for Constellation Power Source--a subsidiary of Constellation Energy Solutions, Inc., and ComfortLink--a general partnership in which BGE is a partner, are also included this year.
34 Baltimore Gas and Electric Company and Subsidiaries
Our diversified businesses expect to expand their businesses. This may include expansion in the energy marketing, power generation, financial investments, real estate, and senior-living facility businesses. Such expansion could mean more investments in and acquisition of new projects. Our diversified businesses have met their capital requirements in the past through borrowing, cash from their operations, and from time to time, loans or equity contributions from BGE. Our diversified businesses plan to raise the cash needed to meet capital requirements in the future through these same methods.
Diversified Business Investment Requirements
The investment requirements of our diversified businesses include:
o the Constellation Holdings Companies' investments in financial limited partnerships and funding for the development and acquisition of projects, as well as loans made to project entities, o funding for growing Constellation Power Source's power marketing business, and o ComfortLink's funding for construction of district energy projects.
Investment requirements for 1998 through 2000 include estimates of funding for existing and anticipated projects. We continuously review and modify those estimates. Actual investment requirements could vary a great deal from the estimates on page 34 because they would be subject to several variables, including:
o the type and number of projects selected for development, o the effect of market conditions on those projects, o the ability to obtain financing, and o the availability of cash from operations.
The investment requirements exclude BGE's commitment to contribute up to $115 million in equity to Constellation Power Source, Inc. to fund its investment in Orion Power Holdings, Inc.
Diversified Business Debt and Liquidity
Our diversified businesses plan to meet capital requirements by refinancing debt as it comes due, by additional borrowing, and with cash generated by the businesses. This includes cash from operations, sale of assets, and earned tax benefits. BGE Home Products & Services may also meet capital requirements through sales of receivables. We also discuss receivable sales in Note 12.
If the Constellation Holdings Companies can get a reasonable value for real estate, additional cash may be obtained by selling real estate projects. The Constellation Holdings Companies' ability to sell or liquidate assets will depend on market conditions, and we cannot give assurances that these sales or liquidations could be made. For more information, see the discussion of the real estate business and market in the "Real Estate Development and Senior-Living Facilities" section beginning on page 33.
In 1997, the Constellation Holdings Companies issued $289 million of three and four-year notes. In addition, our diversified businesses have the following revolving credit agreements to provide additional cash for short-term financial needs:
Amount of Revolving Credit Agreement - --------------------------------------------------------------- Constellation Holdings Companies $75 million ComfortLink $50 million Constellation Energy Solutions, Inc. and Subsidiaries $10 million - ---------------------------------------------------------------
Other Matters Environmental Matters
We are subject to increasingly stringent federal, state, and local laws and regulations that work to improve or maintain the quality of the environment. If certain substances were disposed of or released at any of our properties, whether currently operating or not, these laws and regulations require us to remove or remedy the effect on the environment. This includes Environmental Protection Agency Superfund sites. You will find details of our environmental matters in Note 12 and in this Annual Report on Form 10-K under Item 1. Business--Environmental Matters. These details include financial information. Some of the information is about costs that may be material.
The Year 2000 Issue
The year 2000 issue affects virtually all companies and organizations. Many existing computer programs and digital systems use only two digits to identify a year in the date field. These programs and systems were designed and developed without considering the impact of the upcoming change in the century. If not corrected, many computer applications could fail or create erroneous results by or at the year 2000.
In 1997, we formed a special task force to:
o identify and evaluate our systems and applications that may be affected by the year 2000 issue, o modify or replace those systems and applications so they will work properly in the year 2000, and o communicate with our suppliers to make sure they are prepared for the year 2000.
We have identified and evaluated all of our systems and applications that may be affected by the year 2000 issue, and have developed plans to ready these systems and applications for the century change. Modification and replacement projects are currently under way. We plan to complete our evaluation of suppliers' systems and applications by mid-1998. We plan to have our systems and applications ready for the year 2000 by mid-1999. We do not expect the costs to address the year 2000 issue to be material.
Accounting Standards Issued
We will adopt the following statements that the Financial Accounting Standards Board issued in 1997 on the dates indicated below:
o Statement of Financial Accounting Standards No. 130, REPORTING COMPREHENSIVE INCOME, which we must adopt in our financial statements for the quarter ended March 31, 1998, and o Statement of Financial Accounting Standards No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, which we must adopt in our financial statements for the year ended December 31, 1998.
We do not expect the adoption of these standards to have a material impact on our financial results or financial statement disclosures.
Baltimore Gas and Electric Company and Subsidiaries 35
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable. However, we disclose information about our risk management policies in NOTE 1 TO CONSOLIDATED FINANCIAL STATEMENTS.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of Baltimore Gas and Electric Company
We have audited the consolidated financial statements and the financial statement schedule of Baltimore Gas and Electric Company and Subsidiaries listed in Item 14(a) of this Form 10-K. These financial statements and the financial statement schedule are the responsibility of the Company's Management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by Management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Baltimore Gas and Electric Company and Subsidiaries as of December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein.
We have also previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheets and statements of capitalization at December 31, 1995, 1994, and 1993, and the related consolidated statements of income, cash flows, common shareholders' equity, and income taxes for each of the two years in the period ended December 31, 1994 (none of which are presented herein); and we expressed unqualified opinions on those consolidated financial statements. In our opinion, the information set forth in the Summary of Operations included in the Selected Financial Data for each of the five years in the period ended December 31, 1997, appearing on page 25 is fairly stated in all material respects in relation to the financial statements from which it has been derived.
/s/ COOPERS & LYBRAND L.L.P. ____________________________
COOPERS & LYBRAND L.L.P. Baltimore, Maryland January 21, 1998
Consolidated Statements of Income
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
38 Baltimore Gas and Electric Company and Subsidiaries
Consolidated Balance Sheets
AT DECEMBER 31, 1997 1996 - ------------------------------------------------------------------------------- (IN MILLIONS) ASSETS CURRENT ASSETS Cash and cash equivalents $ 162.6 $ 66.7 Accounts receivable (net of allowance for uncollectibles of $24.1 and $18.0 respectively) 419.8 419.5 Trading securities 119.7 68.8 Fuel stocks 87.6 87.1 Materials and supplies 164.2 147.7 Prepaid taxes other than income taxes 65.2 64.7 Other 27.4 44.7 ---------------------- Total current assets 1,046.5 899.2 ---------------------- INVESTMENTS AND OTHER ASSETS Real estate projects 446.8 525.8 Power generation projects 451.7 379.1 Financial investments 196.5 204.4 Nuclear decommissioning trust fund 145.3 116.4 Net pension asset 113.0 84.5 Safe Harbor Water Power Corporation 34.4 34.4 Senior living facilities 62.2 36.4 Other 108.1 92.2 ---------------------- Total investments and other assets 1,558.0 1,473.2 ---------------------- UTILITY PLANT Plant in service Electric 6,725.6 6,514.9 Gas 846.9 777.0 Common 554.1 523.5 ---------------------- Total plant in service 8,126.6 7,815.4 Accumulated depreciation (2,843.4) (2,617.1) ---------------------- Net plant in service 5,283.2 5,198.3 Construction work in progress 215.2 221.9 Nuclear fuel (net of amortization) 127.9 132.9 Plant held for future use 25.2 25.5 ---------------------- Net utility plant 5,651.5 5,578.6 ---------------------- DEFERRED CHARGES Regulatory assets (net) 470.7 512.3 Other 46.7 81.0 ---------------------- Total deferred charges 517.4 593.3 ----------------------
TOTAL ASSETS $8,773.4 $8,544.3 - ---------------------------------------------------------======================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. CERTAIN PRIOR-YEAR AMOUNTS HAVE BEEN RECLASSIFIED TO CONFORM WITH THE CURRENT YEAR'S PRESENTATION.
Baltimore Gas and Electric Company and Subsidiaries 39
Consolidated Balance Sheets
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. CERTAIN PRIOR-YEAR AMOUNTS HAVE BEEN RECLASSIFIED TO CONFORM WITH THE CURRENT YEAR'S PRESENTATION.
40 Baltimore Gas and Electric Company and Subsidiaries
Consolidated Statements of Cash Flows
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. CERTAIN PRIOR-YEAR AMOUNTS HAVE BEEN RECLASSIFIED TO CONFORM WITH THE CURRENT YEAR'S PRESENTATION.
Baltimore Gas and Electric Company and Subsidiaries 41
Consolidated Statements of Common Shareholders' Equity
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. CERTAIN PRIOR-YEAR AMOUNTS HAVE BEEN RECLASSIFIED TO CONFORM WITH THE CURRENT YEAR'S PRESENTATION.
42 Baltimore Gas and Electric Company and Subsidiaries
Consolidated Statements of Capitalization
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. CERTAIN PRIOR-YEAR AMOUNTS HAVE BEEN RECLASSIFIED TO CONFORM WITH THE CURRENT YEAR'S PRESENTATION.
Baltimore Gas and Electric Company and Subsidiaries 43
Consolidated Statements of Capitalization
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. CERTAIN PRIOR-YEAR AMOUNTS HAVE BEEN RECLASSIFIED TO CONFORM WITH THE CURRENT YEAR'S PRESENTATION.
44 Baltimore Gas and Electric Company and Subsidiaries
Consolidated Statements of Income Taxes
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. CERTAIN PRIOR-YEAR AMOUNTS HAVE BEEN RECLASSIFIED TO CONFORM WITH THE CURRENT YEAR'S PRESENTATION.
Baltimore Gas and Electric Company and Subsidiaries 45
Notes to Consolidated Financial Statements
Note 1. Significant Accounting Policies - --------------------------------------------------------------------------------
Nature of Our Business
Baltimore Gas and Electric Company (BGE) is the parent company and conducts our primary business--the electric and gas utility business. That business serves Baltimore City and all or part of 10 Central Maryland counties. We also conduct various diversified businesses in subsidiary companies. We describe our diversified businesses in Note 3.
Consolidation Policy
We use three different accounting methods to report our investments in our subsidiaries or other companies: consolidation, the equity method, and the cost method.
Consolidation
We use consolidation when we own a majority of the voting stock of the subsidiary. This means the accounts of our subsidiaries are combined with our accounts. We eliminate intercompany balances and transactions when we consolidate these accounts. Our consolidated financial statements include the accounts of:
o BGE, o Constellation Holdings, Inc. and Subsidiaries (the Constellation Holdings Companies), o Constellation Energy Solutions, Inc. and Subsidiaries, and o BGE Home Products & Services, Inc. and Subsidiaries.
The Equity Method
We usually use the equity method to report corporate joint ventures, partnerships, and affiliated companies (including power generation projects) where we hold a 20% to 50% voting interest. Under the equity method, we report:
o our interest in the entity as an investment in our Consolidated Balance Sheets, and o our percentage share of the earnings from the entity in our Consolidated Statements of Income.
The only time we do not use this method is if we can exercise control over the operations and policies of the company. If we have control, accounting rules require us to use consolidation. We report our investment in Safe Harbor Water Power Corporation under the equity method.
The Cost Method
We usually use the cost method if we hold less than a 20% voting interest in an investment. Under the cost method, we report our investment at cost in our Consolidated Balance Sheets. The only time we do not use this method is when we can exercise significant influence over the operations and policies of the company. If we have significant influence, accounting rules require us to use the equity method.
Regulation of Utility Business
The Maryland Public Service Commission (Maryland PSC) regulates our utility business. Generally, we use the same accounting policies and practices used by nonregulated companies for financial reporting under generally accepted accounting principles.
However, sometimes the Maryland PSC orders an accounting treatment different from that used by nonregulated companies to determine the rates we charge our customers. We discuss this further in Note 5.
Utility Revenues
We record utility revenues in our Consolidated Statements of Income when we provide service to customers.
Fuel and Purchased Energy Costs
We incur costs for:
o the fuel we use to generate electricity, o purchases of electricity from others, and o natural gas that we resell.
These costs are shown in our Consolidated Statements of Income as "electric fuel and purchased energy" and "gas purchased for resale." We discuss each of these separately below.
Fuel Used to Generate Electricity and Purchases of Electricity From Others
Under the electric fuel rate clause set by the Maryland PSC, we charge our electric customers for:
o the fuel we use to generate electricity (nuclear fuel, coal, gas, or oil), and o the net cost of purchases and sales of electricity, primarily with other utilities.
We charge the actual costs of these items to customers with no profit to us. To do this, we must keep track of what we spend and what we collect from customers under the fuel rate in a given period. Usually these two amounts are not the same because there is a difference between the time we spend the money and the time we collect it from our customers.
Under the electric fuel rate clause, we defer (include as an asset or liability in our Consolidated Balance Sheets and exclude from our Consolidated Statements of Income) the difference between our actual costs of fuel and energy and what we collect from customers under the fuel rate in a given period. We either bill or refund our customers that difference in the future. We discuss this further in Note 5.
We calculate the electric fuel rate using three factors:
o the mix of generating plants we used over the last 24 months, o the latest three-month average fuel cost for each generating unit, and o the net cost of purchases and sales of electricity, primarily with other utilities, over the last 24 months.
We may change the fuel rate only if the calculated rate is more than 5% above or below the rate in effect. The fuel rate is affected most by the amount of electricity generated at our Calvert Cliffs Nuclear Power Plant (Calvert Cliffs) because the cost of nuclear fuel is cheaper than coal, gas, or oil.
46 Baltimore Gas and Electric Company and Subsidiaries
We also report two other items as "electric fuel and purchased energy" in our Consolidated Statements of Income:
o amortization of nuclear fuel (described under "Utility Plant" later in this note). We amortize nuclear fuel based on the energy produced over the life of the fuel. We pay quarterly fees to the Department of Energy for the future disposal of spent nuclear fuel, and accrue these fees based on the kilowatt-hours of electricity sold. We bill our customers for nuclear fuel as described earlier in this note. o amortization of deferred costs of decommissioning and decontaminating the Department of Energy's uranium enrichment facilities. We discuss these costs further in Note 5.
Extended outages at Calvert Cliffs drive up fuel costs and may result in fuel rate proceedings before the Maryland PSC. In these proceedings, the Maryland PSC would consider whether any portion of the extra fuel costs should be paid by BGE instead of passed on to customers. We discuss the financial impact of past extended outages in Note 12.
Natural Gas
We charge our gas customers for the natural gas they consume using "gas cost adjustment clauses" set by the Maryland PSC. These clauses operate the same as the electric fuel rate clause described earlier in this note. However, effective October 1996, the Maryland PSC approved a modification of the gas cost adjustment clauses to provide a market based rates incentive mechanism. Under market based rates our actual cost of gas is compared to a market index (a measure of the market price of gas in a given period). The difference between our actual cost and the market index is shared equally between BGE (which benefits shareholders) and customers.
Risk Management
We engage in risk management activities in our gas business and in our diversified businesses. We separately describe these activities for each business below.
Gas Business
In 1996, we began using basis swaps in the winter months (November through March) to hedge price risk associated with natural gas purchases. Under internal guidelines, we are not permitted to try to predict market changes.
We defer, as unrealized gains or losses, the net amount we owe (unrealized losses) or are due (unrealized gains) under the swaps in our Consolidated Balance Sheets. At December 31, 1997, we had outstanding basis swap agreements covering 15.4 million decatherms of natural gas purchases through March 1998. We had unrealized gains of $1.0 million related to the outstanding agreements. When amounts are paid under the agreements, we report the payments as gas costs in our Consolidated Statements of Income.
Diversified Businesses
Our subsidiary, Constellation Power Source, engages in power marketing activities, which include trading electricity, other energy commodities, and related derivatives (such as forwards, options, and swaps). Constellation Power Source reports trading activities using the mark-to-market method of accounting.
Under the mark-to-market method of accounting, we report:
o commodity positions and derivatives at fair value in our Consolidated Balance Sheets, and o changes in fair value as diversified business revenues in our Consolidated Statements of Income.
At December 31, 1997, Constellation Power Source had derivative assets with a fair value of about $9.4 million and derivative liabilities with a fair value of about $8.6 million.
Market Risk
We measure our exposure to market risk at any point in time by comparing our open positions to a market estimate of fair value. The market prices we use to determine fair value are based on management's best estimates, which consider various factors including:
o closing exchange prices, o time value of money, and o over-the-counter prices, o volatility factors.
At December 31, 1997, our exposure to market risk was not material.
Taxes
We summarize our income taxes in the Consolidated Statements of Income Taxes on page 45. As you read this section, it may be helpful to refer to those statements.
Income Tax Expense
We have two categories of income taxes in our Consolidated Statements of Income--current and deferred. We describe each of these below.
Our current income tax expense consists solely of regular tax less applicable tax credits. Our 1996 and 1995 current income tax expense amounts include alternative minimum tax credits of $30 million in 1996 and $40 million in 1995. The alternative minimum tax can be carried forward indefinitely and used as tax credits in years when our regular tax liability exceeds the alternative minimum tax liability. We do not have any remaining alternative minimum tax credits.
Our deferred income tax expense is equal to the changes in the deferred income tax liability and regulatory asset (described later in this note) during the year, excluding amounts charged or credited to common shareholders' equity.
Investment Tax Credits
We have also deferred the investment tax credit associated with our regulated utility business in our Consolidated Balance Sheets as a regulatory liability. The regulatory liability is amortized evenly to income over the life of each property. We discuss this further in Note 5. We reduce income tax expense in our Consolidated Statements of Income for the investment tax credit and other tax credits associated with our nonregulated diversified businesses, other than leveraged leases.
Deferred Income Tax Assets and Liabilities
We must report some of our assets and liabilities differently for our financial statements than we do for income tax purposes. The tax effects of the differences in these items are reported as deferred income tax assets or liabilities in our Consolidated Balance Sheets. We measure the assets and liabilities using income tax rates that are currently in effect.
Baltimore Gas and Electric Company and Subsidiaries 47
A portion of our total deferred income tax liability relates to our utility business, but has not been reflected in the rates we charge our customers. We refer to this portion of the liability as "income taxes recoverable through future rates." We have recorded that portion of the liability as a regulatory asset in our Consolidated Balance Sheets. We discuss this further in Note 5.
Franchise Taxes
We pay Maryland public service company franchise tax instead of state income tax on our utility revenue from sales in Maryland. We include the franchise tax in "taxes other than income taxes" in our Consolidated Statements of Income.
Inventory
We report the majority of our fuel stocks and materials and supplies at average cost.
Evaluation of Assets for Impairment
Statement of Financial Accounting Standards No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, applies particular requirements to some of our assets that have long lives (some examples are utility property and equipment, and real estate). We determine if those assets are impaired by comparing their undiscounted expected future cash flows to their carrying amount in our accounting records. We recognize an impairment loss if the undiscounted expected future cash flows are less than the carrying amount of the asset.
REAL ESTATE PROJECTS
In Note 4, we summarize the real estate projects that are in our Consolidated Balance Sheets. The projects consist of the Constellation Holdings Companies' investments in:
o rental and operating properties, that they are holding for investment, and o properties under development, that they are holding for future development and subsequent sale.
The Constellation Holdings Companies include the costs incurred to acquire and develop these properties as part of the costs of the properties. Generally, the Constellation Holdings Companies report these properties at cost, unless the amount invested exceeds the fair value. In these cases, the Constellation Holdings Companies write down the projects to their fair values.
Financial Investments and Trading Securities
In Note 4, we summarize the financial investments that are in our Consolidated Balance Sheets.
Statement of Financial Accounting Standards No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES, applies particular requirements to some of our investments in debt and equity securities. We report those investments at fair value, and we use specific identification to determine their cost for computing realized gains or losses. We classify these investments as either trading securities or available-for-sale securities, which we describe separately below. We report investments that are not covered by Statement of Financial Accounting Standards No. 115 at their cost.
Trading Securities
The Constellation Holdings Companies classify some of their investments in marketable equity securities and financial limited partnerships as trading securities. We include any unrealized gains or losses on these securities in diversified business revenues in our Consolidated Statements of Income.
Available-for-Sale Securities
We classify our investments in the nuclear decommissioning trust fund as available-for-sale securities. We include any unrealized gains or losses on the trust assets as a change in the decommissioning reserve. We describe the nuclear decommissioning trust and the reserve under the heading "Decommissioning Costs" later in this note.
In addition, the Constellation Holdings Companies classify some of their investments in marketable equity securities as available-for-sale securities. We include any unrealized gains or losses on these securities in shareholders' equity in our Consolidated Balance Sheets. We also include the Constellation Holdings Companies' portion of unrealized gains or losses on securities of equity-method (described earlier in this note) investees in shareholders' equity.
Utility Plant, Depreciation and Amortization, and Decommissioning
Utility Plant
Utility plant is the term we use to describe our utility business property and equipment that is in use, being held for future use, or under construction. We summarize utility plant in our Consolidated Balance Sheets. We report our utility plant at its original cost, which includes:
o material and labor, o contractor costs, o construction overhead costs (where applicable), and o an allowance for funds used during construction (described later in this note).
We charge retired or otherwise-disposed-of utility plant to accumulated depreciation.
We own an undivided interest in the Keystone and Conemaugh electric generating plants in Western Pennsylvania, as well as in the transmission line that transports the plants' output to the joint owners' service territories. Our ownership interests in these plants are 20.99% in Keystone and 10.56% in Conemaugh. These ownership interests represented a net investment of $152 million at December 31, 1997, and $153 million at December 31, 1996. We report these properties in the same accounts we use for our other utility plant (described above).
Depreciation Expense
Generally, we compute depreciation by applying composite, straight-line rates (approved by the Maryland PSC) to the average investment in classes of depreciable property. We depreciate vehicles based on their estimated useful lives. As a result of the Maryland PSC's November 1995 gas base rate order, we revised our gas utility plant depreciation rates to reflect the results of a detailed depreciation study. The revised rates increased depreciation expense by approximately $2.4 million annually.
48 Baltimore Gas and Electric Company and Subsidiaries
Our 1995 depreciation expense includes the write-off of expenditures associated with a second combustion turbine at our Perryman site that will not be built. This write-off reduced after-tax earnings during 1995 by $9.7 million, or $.07 per share. The construction of the first 140-megawatt combustion turbine at Perryman was completed, and the unit was placed in service, during June 1995.
Amortization Expense
Amortization is an accounting process of reducing an amount in our Consolidated Balance Sheets evenly over a period of time. When we reduce amounts in our Consolidated Balance Sheets, we increase amortization expense in our Consolidated Statements of Income. An amount is considered fully amortized when it has been reduced to zero.
Decommissioning Costs
We must accumulate a reserve for the costs that we expect to incur in the future to decommission the radioactive portion of Calvert Cliffs. We do this based on a sinking fund methodology. In 1995, the Maryland PSC authorized us to record decommissioning expense based on a facility-specific cost estimate so we can accumulate a decommissioning reserve of $521 million in 1993 dollars by the end of Calvert Cliffs' service life in 2016, adjusted to reflect expected inflation. We have reported the decommissioning reserve in "accumulated depreciation" in our Consolidated Balance Sheets. The total reserve was $201.6 million at December 31, 1997, and $167.5 million at December 31, 1996.
To fund the costs we expect to incur to decommission the plant, we established an external decommissioning trust in accordance with Nuclear Regulatory Commission (NRC) regulations. We report the assets in the trust in "nuclear decommissioning trust fund" in our Consolidated Balance Sheets. The NRC requires utilities to provide financial assurance that they will accumulate sufficient funds to pay for the cost of nuclear decommissioning based upon either a generic NRC formula or a facility-specific decommissioning cost estimate. We use the facility-specific cost estimate (mentioned above) for funding these costs and providing the required financial assurance.
Allowance for Funds Used During Construction and Capitalized Interest
Allowance for Funds Used During Construction (AFC)
We finance construction projects with borrowed funds and equity funds. We are allowed by the Maryland PSC to record the costs of these funds as part of the cost of construction projects in our Consolidated Balance Sheets. We do this through the AFC, which we calculate using a rate authorized by the Maryland PSC. We bill our customers for the AFC plus a return after the utility plant is placed in service.
Prior to November 1995, we used a pre-tax rate of 9.40% to calculate AFC for all of our utility plant. Effective November 1995, the Maryland PSC reduced the pre-tax AFC rates to 9.04% for gas plant and 9.36% for common plant. We continue to use 9.40% for electric plant. We compound AFC annually.
Capitalized Interest
The Constellation Holdings Companies capitalize interest costs incurred to finance real estate developed for internal use and power generation development projects.
Long-Term Debt
We defer (include as an asset or liability in our Consolidated Balance Sheets and exclude from our Consolidated Statements of Income) all costs related to the issuance of long-term debt. These costs include underwriters' commissions, discounts or premiums, and other costs such as legal, accounting and regulatory fees, and printing costs. We amortize these costs over the life of the debt.
When we incur gains or losses on debt that we retire prior to maturity, we amortize those gains or losses over the remaining original life of the debt.
Cash Flows
For the purpose of reporting our cash flows, we define cash equivalents as highly liquid investments that mature in three months or less.
Use of Accounting Estimates
Management makes estimates and assumptions when preparing financial statements under generally accepted accounting principles. These estimates and assumptions affect various matters, including:
o our reported amounts of assets and liabilities in our Consolidated Balance Sheets at the dates of the financial statements, o our disclosure of contingent assets and liabilities at the dates of the financial statements, and o our reported amounts of revenues and expenses in our Consolidated Statements of Income during the reporting periods.
These estimates involve judgments with respect to, among other things, future economic factors that are difficult to predict and are beyond management's control. As a result, actual amounts could differ from these estimates.
RECLASSIFICATIONS
We have reclassified certain prior-year amounts for comparative purposes. These reclassifications did not affect consolidated net income for the years presented.
Baltimore Gas and Electric Company and Subsidiaries 49
Note 2. Information by Business Segment
- --------------------------------------------------------------------------------
We have three business segments: electric, gas, and diversified businesses (subsidiaries). Our electric business generates, purchases, and sells electricity. Our gas business purchases, transports, and sells natural gas. Our diversified businesses are involved in various activities which we describe in Note 3. We show selected financial information for each of our business segments in the following table.
Note 3. Information About Our Subsidiaries - --------------------------------------------------------------------------------
Our diversified business subsidiaries are organized in three groups:
o Our power generation, financial investments, and real estate businesses, o Our energy marketing businesses, and o Our home products and commercial building systems businesses.
Our Power Generation, Financial Investments, and Real Estate Businesses
We refer to all of these together as the Constellation Holdings Companies. Constellation Holdings, Inc. is a wholly owned subsidiary of BGE and holds all of the stock of the following three subsidiaries:
o Constellation Power, Inc.--develops, owns, and operates power generation projects, o Constellation Investments, Inc.--engages in financial investments, and o Constellation Real Estate Group, Inc.--develops, owns, and manages real estate and senior-living facilities.
We show condensed financial information for the Constellation Holdings Companies in the following table. We have not reflected the elimination of intercompany balances or transactions that are eliminated in our consolidated financial statements. We describe this further in Note 1.
1997 1996 1995 - ----------------------------------------------------------------- (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) Income Statements Revenues Real estate projects $152.7 $80.8 $108.4 Power generation systems 109.1 93.1 57.7 Financial investments 51.9 38.9 25.2 ----------------------------- Total revenues 313.7 212.8 191.3 Expenses other than interest and income taxes 238.8 113.2 114.4 ----------------------------- Income from operations 74.9 99.6 76.9 Minority interest (3.2) (0.3) (2.3) Interest expense (56.4) (45.0) (46.7) Capitalized interest 8.4 14.6 13.6 Income tax expense (11.8) (26.6) (14.4) ----------------------------- Net income $ 11.9 $42.3 $ 27.1 - ------------------------------------============================= Contribution to our earnings per share of common stock $.08 $.29 $.18 - ------------------------------------=============================
Balance Sheets Current assets $ 170.4 $ 115.7 $ 98.5 Noncurrent assets 1,190.0 1,189.7 1,102.5 ------------------------------- Total assets $1,360.4 $1,305.4 $1,201.0 - ----------------------------------=============================== Current liabilities $ 181.1 $ 134.0 $ 70.4 Noncurrent liabilities 837.0 775.2 778.5 Shareholder's equity 342.3 396.2 352.1 ------------------------------- Total liabilities and shareholder's equity $1,360.4 $1,305.4 $1,201.0 - ----------------------------------===============================
50 Baltimore Gas and Electric Company and Subsidiaries
The 1997 income statement includes after-tax write-downs of real estate projects totaling $46 million. We describe these write-downs in the "Real Estate Development and Senior-Living Facilities" section of Management's Discussion and Analysis on page 33.
The 1996 income statement includes a $14.6 million after-tax gain on the sale of a power purchase agreement that was offset by:
o a $7.0 million after-tax write-off of an investment in two geothermal wholesale power generating projects that sell electricity under California power purchase agreements, o a $3.0 million after-tax write-off of development costs for a coal-fired power project, and o a $6.2 million after-tax write-off of a portion of an investment in a solar power project.
Our Energy Marketing Businesses
Constellation Energy Solutions, Inc. is a wholly owned subsidiary of BGE and serves as the holding company for our three energy marketing businesses:
o Constellation Power Source, Inc.--provides power marketing and risk management services to wholesale customers in North America by purchasing and selling electric power, other energy commodities, and related derivatives. o Constellation Energy Source, Inc.--provides natural gas brokering and related services for wholesale and retail customers. o Constellation Energy Projects & Services, Inc. and Subsidiaries--provides a broad range of customized energy services, including private electric and gas distribution systems, energy consulting, power quality services, and campus and multi-building energy systems.
Our Home Products and Commercial Building Systems Businesses
BGE Home Products & Services, Inc. and subsidiaries:
o sells and services electric and gas appliances, o engages in home improvements, and o sells and services heating and air conditioning systems.
Other
Safe Harbor Water Power Corporation is a producer of hydroelectric power. BGE owns two-thirds of Safe Harbor's total capital stock, including one-half of the voting stock, and a two-thirds interest in its retained earnings.
Note 4. Real Estate Projects and Financial Investments - --------------------------------------------------------------------------------
Real Estate Projects
Real estate projects consist of the following investments held by the Constellation Holdings Companies:
AT DECEMBER 31, 1997 1996 - --------------------------------------------------------------- (IN MILLIONS)
Properties under development $220.8 $286.2 Rental and operating properties (net of accumulated depreciation) 225.6 237.7 Other real estate ventures 0.4 1.9 ------------------------- Total real estate projects $446.8 $525.8 - --------------------------------------=========================
Financial Investments
Financial investments consist of the following investments held by the Constellation Holdings Companies:
AT DECEMBER 31, 1997 1996 - -------------------------------------------------------------- (IN MILLIONS)
Insurance companies $ 88.8 $ 76.8 Marketable equity securities 33.3 46.2 Financial limited partnerships 43.6 48.1 Leveraged leases 30.8 33.3 ------------------------- Total financial investments $196.5 $204.4 - --------------------------------------=========================
Investments Classified as Available-for-Sale
We classify our investments in the nuclear decommissioning trust fund and the Constellation Holdings Companies' marketable equity securities (shown above) as available-for-sale. This means we do not expect to hold them to maturity and we do not consider them trading securities.
We show the fair values, gross unrealized gains and losses, and amortized cost bases for these available-for-sale securities, exclusive of $3.5 million of unrealized net gains on securities of equity-method investees, in the following tables.
Amortized Unrealized Unrealized Fair AT DECEMBER 31, 1997 Cost Basis Gains Losses Value - ----------------------------------------------------------------------- (IN MILLIONS) Marketable Equity Securities $ 77.3 $12.0 $(0.5) $ 88.8 U.S. Government agency 14.9 0.2 -- 15.1 State municipal bonds 65.5 2.2 -- 67.7 --------------------------------------- Totals $157.7 $14.4 $(0.5) $171.6 - --------------------------------=======================================
Amortized Unrealized Unrealized Fair AT DECEMBER 31, 1996 Cost Basis Gains Losses Value - ----------------------------------------------------------------------- (IN MILLIONS) Marketable Equity Securities $ 52.5 $ 8.0 $(0.1) $ 60.4 U.S. Government agency 18.1 0.3 -- 18.4 State municipal bonds 73.6 2.2 (0.1) 75.7 --------------------------------------- Totals $144.2 $10.5 $(0.2) $154.5 - --------------------------------=======================================
Gross and net realized gains and losses on available-for-sale securities were as follows:
1997 1996 1995 - ------------------------------------------------------------------ (IN MILLIONS) Gross realized gains $9.3 $4.3 $5.5 Gross realized losses (0.6) (0.2) (2.5) ---------------------------------- Net realized gains $8.7 $4.1 $3.0 - --------------------------------==================================
The U.S. Government agency obligations and state municipal bonds (shown above) mature on the following schedule:
AT DECEMBER 31, 1997 AMOUNT - --------------------------------------------------------------- (IN MILLIONS) Less than 1 year $ 1.0 1-5 years 24.1 5-10 years 51.8 More than 10 years 5.9 ----- Total maturities of debt securities $82.8 - ---------------------------------------------------------=====
Baltimore Gas and Electric Company and Subsidiaries 51
Note 5. Regulatory Assets (net) - --------------------------------------------------------------------------------
As discussed in Note 1, the Maryland PSC regulates our utility business. Generally, we use the same accounting policies and practices used by nonregulated companies for financial reporting under generally accepted accounting principles. However, sometimes the Maryland PSC orders an accounting treatment different from that used by nonregulated companies to determine the rates we charge our customers. When this happens, we must defer certain utility expenses and income in our Consolidated Balance Sheets as regulatory assets and liabilities. We then record them in our Consolidated Statements of Income (using amortization) when we include them in the rates we charge our customers.
We have recorded these regulatory assets and liabilities in our Consolidated Balance Sheets in accordance with Statement of Financial Accounting Standards No. 71, Accounting for the Effects of Certain Types of Regulation. If we were required to terminate application of that statement for all of our regulated operations, we would have to record the amounts of all regulatory assets and liabilities in our Consolidated Statements of Income at that time. This means our earnings would be reduced by the total net amount in the table below, net of applicable income taxes.
We summarize our regulatory assets and liabilities in the following table, and we discuss each of them separately below.
AT DECEMBER 31, 1997 1996 - ------------------------------------------------------------------ (IN MILLIONS) Income taxes recoverable through future rates $256.5 $264.5 Deferred postretirement and postemployment benefit costs 96.4 89.2 Deferred nuclear expenditures 77.7 82.1 Deferred energy conservation expenditures 55.8 46.7 Deferred costs of decommissioning federal uranium enrichment facilities 42.4 46.0 Deferred environmental costs 38.8 47.7 Deferred termination benefit costs 21.0 41.1 Deferred fuel costs 4.4 22.7 Deferred investment tax credits (126.6) (133.9) Other 4.3 6.2 ---------------- Total regulatory assets (net) $470.7 $512.3 - --------------------------------------------------================
Income Taxes Recoverable Through Future Rates
As described in Note 1, income taxes recoverable through future rates are the portion of our deferred income tax liability that is applicable to our utility business, but has not been reflected in the rates we charge our customers. These income taxes represent the tax effect of temporary differences in depreciation and the allowance for equity funds used during construction, offset by differences in deferred tax rates and deferred taxes on deferred investment tax credits (discussed later in this note). We amortize these amounts as the temporary differences reverse.
Deferred Postretirement and Postemployment Benefit Costs
Deferred postretirement and postemployment benefit costs are the costs we recorded under Statements of Financial Accounting Standards No. 106 (for postretirement benefits) and No. 112 (for postemployment benefits) in excess of the costs we included in the rates we charge our customers. We will amortize these costs over a 15-year period beginning in 1998. We discuss these costs further in Note 6.
Deferred Nuclear Expenditures
Deferred nuclear expenditures are the net unamortized balance of certain operations and maintenance costs at Calvert Cliffs. These expenditures consist of:
o costs incurred from 1979 through 1982 for inspecting and repairing seismic pipe supports, o expenditures incurred from 1989 through 1994 associated with nonrecurring phases of certain nuclear operations projects, and o expenditures incurred during 1990 for investigating leaks in the pressurizer heater sleeves.
We are amortizing these costs over the remaining life of the plant in accordance with the Maryland PSC's orders.
Deferred Energy Conservation Expenditures
Deferred energy conservation expenditures include two components:
o operations costs (labor, materials, and indirect costs) associated with energy conservation programs approved by the Maryland PSC, which we are amortizing over five years in accordance with the Maryland PSC's orders, and o revenues we collected from customers in 1996 in excess of our profit limit under the energy conservation surcharge.
The Maryland PSC allows us to collect from customers money spent on conservation programs under an "energy conservation surcharge." However, under this surcharge the Maryland PSC limits what our profit can be. If, at the end of the year, we have exceeded our allowed profit, we lower the amount of future surcharges to our customers to correct the amount of overage, plus interest.
During 1996, we exceeded our profit limit under the energy conservation surcharge. As a result, we deferred $28.5 million of our 1996 revenue from surcharge billings as a regulatory liability. To correct the overage, we lowered the surcharge on our customers' bills from July 1997 to June 1998.
Deferred Costs of Decommissioning Federal Uranium Enrichment Facilities
Deferred costs of decommissioning federal uranium enrichment facilities are the unamortized portion of our required contributions to a fund for decommissioning and decontaminating the Department of Energy's uranium enrichment facilities. We are required, along with other domestic utilities, by the Energy Policy Act of 1992 to make contributions to the fund. The contributions are generally payable over 15 years with escalation for inflation and are based upon the proportionate amount of uranium enriched by the Department of Energy for each utility. We are amortizing these costs over the contribution period as a cost of fuel. We also discuss this in Note 1.
Deferred Environmental Costs
Deferred environmental costs are the estimated costs of investigating and cleaning up contaminated sites we own. We discuss this further in Note 12. We are amortizing $21.6 million of these costs (the amount we had incurred through October 1995) over a 10-year period in accordance with the Maryland PSC's November 1995 order.
52 Baltimore Gas and Electric Company and Subsidiaries
Deferred Termination Benefits
Deferred termination benefit costs are the net unamortized balance of the cost of certain termination benefits offered to employees of our regulated utility operations. We describe these termination benefits further in Note 7. We are amortizing these costs over a five-year period in accordance with the Maryland PSC's orders.
Deferred Fuel Costs
As described in Note 1, deferred fuel costs are the difference between our actual costs of electric fuel, net purchases and sales of electricity, and natural gas and our fuel rate revenues collected from customers. We reduce deferred fuel costs as we collect them from customers.
We show our deferred fuel costs in the following table.
AT DECEMBER 31, 1997 1996 - ------------------------------------------------------------------ (IN MILLIONS) Electric deferred fuel costs Costs deferred (over-recovered) $(19.0) $113.2 Disallowed replacement energy costs (see Note 12) -- (118.0) --------------------- Net electric deferred (over- recovered) fuel costs (19.0) (4.8) Gas deferred fuel costs 23.4 27.5 --------------------- Total deferred fuel costs $ 4.4 $ 22.7 - ---------------------------------------------=====================
Deferred Investment Tax Credits
As described in Note 1, deferred investment tax credits are investment tax credits associated with our regulated utility business. Under federal income tax regulations, we do not deduct deferred investment tax credits from rate base.
Note 6. Pension, Postretirement, Other Postemployment, and Employee Savings Plan Benefits - --------------------------------------------------------------------------------
We offer pension, postretirement, other postemployment, and employee savings plan benefits. We describe each of these separately below.
Pension Benefits
We sponsor several defined benefit pension plans for our employees. A defined benefit plan specifies the amount of benefits a plan participant is to receive using information about the participant. Our largest plan covers nearly all BGE employees and certain employees of our subsidiaries. Our other plans, which are not material in amount, provide supplemental benefits to certain key employees. Our employees do not contribute to these plans. Generally, we calculate the benefits under these plans based on age, years of service, and pay.
Sometimes we amend the plans retroactively. These retroactive plan amendments require us to recalculate benefits related to participants' past service. We amortize the change in the benefit costs from these plan amendments on a straight-line basis over the average remaining service period of active employees. We fund the plans by contributing at least the minimum amount required under Internal Revenue Service regulations. We calculate the amount of funding using an actuarial method called the projected unit credit cost method. The assets in all of the plans at December 31, 1997 were mostly marketable equity and fixed income securities, and group annuity contracts.
We show the funded status of all of the plans in the following table.
AT DECEMBER 31, 1997 1996 - ------------------------------------------------------------------ (IN MILLIONS) Vested benefit obligation $ 702.0 $695.6 Nonvested benefit obligation 40.0 18.0 ------------------ Accumulated benefit obligation 742.0 713.6 Projected benefits related to increase in future compensation levels 160.0 132.7 ------------------ Projected benefit obligation 902.0 846.3 Plan assets at fair value (912.3) (792.5) ------------------ Projected benefit obligation less plan assets (10.3) 53.8 Unrecognized prior service cost (19.4) (21.9) Unrecognized net loss (84.2) (117.2) Unamortized net asset from adoption of FASB Statement No. 87 0.9 0.8 ------------------ Accrued pension asset $(113.0) $ (84.5) - ------------------------------------------------==================
We show the components of total net pension cost in the following table. We do not include the cost of termination benefits described in Note 7 in net pension cost.
YEAR ENDED DECEMBER 31, 1997 1996 1995 - ------------------------------------------------------------------ (IN MILLIONS) Service cost-benefits earned during the period $16.8 $16.1 $11.4 Interest cost on projected benefit obligation 61.3 59.9 58.4 Actual return on plan assets (130.0) (57.7) (150.5) Net amortization and deferral 70.0 2.1 94.7 ------------------------------ Total net pension cost 18.1 20.4 14.0 Amount capitalized as construction cost (2.5) (2.4) (1.4) ------------------------------ Total net pension cost charged to expense $15.6 $18.0 $12.6 - ------------------------------------==============================
Postretirement Benefits
We sponsor defined benefit postretirement health care and life insurance plans which cover nearly all BGE employees and certain employees of our subsidiaries. Generally, we calculate the benefits under these plans based on age, years of service, and pension benefit levels. We do not fund these plans.
For nearly all of the health care plans, retirees make contributions to cover a portion of the plan costs. Contributions for employees who retire after June 30, 1992 are calculated based on age and years of service. The amount of retiree contributions increase based on expected increases in medical costs. For the life insurance plan, retirees do not make contributions to cover a portion of the plan costs.
Effective January 1, 1993, we adopted Statement of Financial Accounting Standards No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions. The adoption of that statement caused:
o a transition obligation, which we are amortizing over 20 years, and o an increase in annual postretirement benefit costs, which we discuss later in this note.
Baltimore Gas and Electric Company and Subsidiaries 53
For our diversified businesses, we expense all postretirement benefit costs. For our regulated utility business, we accounted for the increase in annual postretirement benefit costs under two Maryland PSC rate orders:
o In an April 1993 rate order, the Maryland PSC allowed us to expense one-half and defer, as a regulatory asset (see Note 5), the other half of the increase in annual postretirement benefit costs related to our utility business. o In a November 1995 rate order, the Maryland PSC allowed us to expense all of the increase in annual postretirement benefit costs related to our gas business.
Beginning in 1998, the Maryland PSC authorized us to:
o expense all of the increase in annual postretirement benefit costs related to our electric business, and o amortize the regulatory asset for postretirement benefit costs related to our utility business over 15 years.
The Maryland PSC authorized us to reflect these changes in our current electric base rates and will adjust our gas base rates to recover the higher costs that will be recognized in 1998.
Our treatment of the increase in annual postretirement benefit costs meets guidelines established by the Emerging Issues Task Force of the Financial Accounting Standards Board for deferring postretirement benefit costs as a regulatory asset.
We show the components of the accumulated postretirement benefit obligation and a reconciliation of these amounts to the accrued postretirement benefit liability in the following table.
AT DECEMBER 31, 1997 1996 - ------------------------------------------------------------------- Health Life Health Life Care Insurance Care Insurance - ------------------------------------------------------------------- (IN MILLIONS) Accumulated postretirement benefit obligation: Retirees $164.5 $47.3 $163.9 $45.5 Active employees 87.7 20.8 82.4 19.3 --------------------------------- Total accumulated post- retirement benefit obligation 252.2 68.1 246.3 64.8 Unrecognized transition obligation (132.2) (38.4) (141.1) (41.0) Unrecognized net loss (3.8) (7.1) (7.4) (5.7) --------------------------------- Accrued postretirement benefit liability $116.2 $22.6 $ 97.8 $18.1 - ----------------------------------=================================
We show the components of net postretirement benefit cost in the following table. We do not include the cost of termination benefits described in Note 7 in net postretirement benefit cost.
YEAR ENDED DECEMBER 31, 1997 1996 1995 - ------------------------------------------------------------------ (IN MILLIONS) Service cost--benefits earned during the period $ 5.4 $ 5.5 $ 3.9 Interest cost on accumulated post retirement benefit obligation 21.8 21.9 21.2 Amortization of transition obligation 11.4 11.4 11.4 Net amortization and deferral 0.1 0.2 (0.1) ------------------------- Total net postretirement benefit cost 38.7 39.0 36.4 Amount capitalized as construction cost (7.6) (6.2) (5.3) Amount deferred (7.2) (7.4) (8.0) ------------------------- Total net postretirement benefit cost charged to expense $23.9 $25.4 $23.1 - ------------------------------------------========================
Other Postemployment Benefits
We provide the following postemployment benefits:
o health and life insurance benefits to our employees and certain employees of our subsidiaries who are found to be disabled under our Disability Insurance Plan, and o income replacement payments for employees found to be disabled before November 1995 (payments for employees found to be disabled after that date are paid by an insurance company, and the cost is paid by employees).
The liability for these benefits totaled $45.4 million as of December 31, 1997 and $50.8 million as of December 31, 1996.
Effective December 31, 1993, we adopted Statement of Financial Accounting Standards No. 112, EMPLOYERS' ACCOUNTING FOR POSTEMPLOYMENT BENEFITS. The portion of the liability attributable to regulated activities as of December 31, 1993 was deferred as a regulatory asset (see Note 5), consistent with the Maryland PSC's orders for postretirement benefits (described earlier in this note). We will amortize the regulatory asset over 15 years beginning in 1998. The Maryland PSC authorized us to reflect this change in our current electric base rates and will adjust our gas base rates to recover the higher costs that will be recognized in 1998.
Assumptions
We made the assumptions below to calculate the pension, postretirement, and other postemployment benefit liabilities.
AT DECEMBER 31, 1997 1996 - ----------------------------------------------------------------- Discount rate Pension and postretirement benefits 7.25% 7.5% Other postemployment benefits 6.0 6.0 Average increase in future compensation levels 4.0 4.0 Expected long-term rate of return on assets 9.0 9.0
We assumed the health care inflation rates to be:
o in 1997, 6.0% for both Medicare-eligible retirees and retirees not covered by Medicare, and o in 1998, 8.0% for Medicare-eligible retirees and 9.5% for retirees not covered by Medicare.
After 1998, we assumed both rates will decrease by 0.5% annually to a rate of 5.5% in the years 2003 and 2006. A one-percent increase in the health care inflation rate from the assumed rates would increase the accumulated postretirement benefit obligation by approximately $40 million as of December 31, 1997 and would increase the combined service and interest costs of the postretirement benefit cost by approximately $4 million annually.
Employee Savings Plan Benefits
We also sponsor a defined contribution savings plan that is offered to all eligible BGE employees and certain employees of our subsidiaries. In a defined contribution plan, the benefits a participant is to receive result from regular contributions to a participant account. Under this plan, we make matching contributions to participant accounts. We made matching contributions to this plan of:
o $8.5 million in 1997, o $9.4 million in 1996, and o $8.5 million in 1995.
54 Baltimore Gas and Electric Company and Subsidiaries
Note 7. Termination Benefits - --------------------------------------------------------------------------------
Termination Benefits Offered in 1992
We offered a Voluntary Special Early Retirement Program to eligible employees who retired from February 1, 1992 through April 1, 1992. The termination benefits of this program cost $6.6 million and consisted mostly of an enhanced pension benefit. We are amortizing the cost of these benefits over a five-year period in accordance with the Maryland PSC's April 1993 order.
Termination Benefits Offered in 1993
We offered a second Voluntary Special Early Retirement Program to eligible employees who retired as of February 1, 1994. The termination benefits of this program consisted mostly of enhanced pension and postretirement benefits. As part of this program, we accomplished further employee reductions by eliminating positions, and offering additional benefits to employees affected by the eliminations. We deferred $88.3 million of the costs of this program that were attributable to regulated activities. We are amortizing these costs over a five-year period, consistent with the Maryland PSC's previous orders.
Note 8. Short-Term Borrowings - --------------------------------------------------------------------------------
SUMMARY OF SHORT-TERM BORROWINGS
Our short-term borrowings include bank loans, commercial paper notes, and bank lines of credit. Short-term borrowings mature within one year from the date of the financial statements. We pay commitment fees to banks for providing us lines of credit. When we borrow under the lines of credit, we pay market interest rates.
We summarize our short-term borrowings in the following table.
AT DECEMBER 31, 1997 1996 - --------------------------------------------------------------- (IN MILLIONS) BGE's bank loans $ -- $ 8.8 BGE's commercial paper notes 316.1 324.4 ---------------------- Total short-term borrowings $316.1 $333.2 - ------------------------------------------=====================
We had unused bank lines of credit supporting our commercial paper notes of $231 million at December 31, 1997 and $203 million at December 31, 1996. These amounts do not include unused revolving credit agreements of $100 million at December 31, 1997 and $150 million at December 31, 1996 that are discussed in Note 9.
Weighted-Average Interest Rates
Our weighted average effective interest rates for short-term borrowings were as follows:
YEAR ENDED DECEMBER 31, 1997 1996 - ------------------------------------------------------------------ Bank loans 5.00% 4.93% Commercial Paper Notes 5.66 5.53
Note 9. Long-Term Debt - --------------------------------------------------------------------------------
Long-term debt matures more than one year from the date of the financial statements. We summarize our long-term debt in the Consolidated Statements of Capitalization on page 43. As you read this section, it may be helpful to refer to those statements. We discuss BGE's, the Constellation Holdings Companies', and other diversified businesses' long-term debt separately below.
BGE's Long-Term Debt
BGE's First Refunding Mortgage Bonds
BGE's first refunding mortgage bonds are secured by a mortgage lien on nearly all of our assets, including all utility properties and franchises and our subsidiary capital stock. Our subsidiary capital stock pledged under the mortgage includes that of:
o Constellation Holdings, Inc., o Constellation Energy Solutions, Inc., o BGE Home Products & Services, Inc., and o Safe Harbor Water Power Corporation.
BGE is required to make an annual sinking fund payment each August 1 to the mortgage trustee. The amount of the payment is equal to 1% of the highest principal amount of bonds outstanding during the preceding 12 months. The trustee uses these funds to retire bonds from any series through repurchases or calls for early redemption. However, the trustee cannot call the following bonds for early redemption:
o 5 1/2% Installment Series, due 2002 o 6 1/2% Series, due 2003 o 8.40% Series, due 1999 o 6 1/8% Series, due 2003 o 5 1/2% Series, due 2000 o 5 1/2% Series, due 2004 o 8 3/8% Series, due 2001 o 7 1/2% Series, due 2007 o 7 1/4% Series, due 2002 o 6 5/8% Series, due 2008
We must pay principal on the 5 1/2% Installment Series as follows:
YEAR - --------------------------------------------------------------- (IN MILLIONS) 1998 and 1999 $ 0.7 2000 and 2001 0.9 2002 6.7
Holders of the Remarketed Floating Rate Series Due September 1, 2006 have the option to require BGE to repurchase their bonds at face value on September 1 of each year. BGE is required to repurchase and retire at par any bonds that are not remarketed or purchased by the remarketing agent. BGE also has the option to redeem all or some of these bonds at face value each September 1.
BGE's Other Long-Term Debt
BGE has $100 million of revolving credit agreements with several banks that are available through 2000. At December 31, 1997, BGE had no outstanding borrowings under these agreements. These banks charge us commitment fees based on the daily average of the unborrowed amount, and we pay market interest rates on any borrowings. These agreements also serve as back-up credit support for BGE's commercial paper notes, as described in Note 8.
Baltimore Gas and Electric Company and Subsidiaries 55
We show the weighted-average interest rates and maturity dates for BGE's fixed-rate medium-term notes outstanding at December 31, 1997 in the following table.
Weighted-Average Series Interest Rate Maturity Dates - --------------------------------------------------------------- B 8.43% 1998-2006 C 7.15% 1998-2003 D 6.36% 1998-2006 E 6.70% 2006-2012
Some of the medium-term notes include a "put option." These put options allow the holders to sell their notes back to BGE on the put option dates at a price equal to 100% of the principal amount. The following is a summary of medium-term notes with put options.
Series E Notes Principal Put Option Dates - -------------------------------------------------------------- (IN MILLIONS) 6.75%, due 2012 $60.0 June 2002 and 2007 6.75%, due 2012 $25.0 June 2004 and 2007 6.73%, due 2012 $25.0 June 2004 and 2007
Constellation Holdings Companies' Long-Term Debt
Revolving Credit Agreement
The Constellation Holdings Companies have a $75 million unsecured revolving credit agreement that matures December 9, 1999, which they use to provide liquidity for general corporate purposes. The Constellation Holdings Companies pay a commitment fee based on the daily average of the unborrowed portion of the commitment. At December 31, 1997, the Constellation Holdings Companies had no outstanding borrowings under this agreement.
Mortgage and Construction Loans
The Constellation Holdings Companies' mortgage and construction loans and other collateralized notes have varying terms. The following mortgage notes require monthly principal and interest payments:
o 7.90%, due in 2000 o 7.357%, due in 2009 o 8.00%, due in 2001 o 9.65%, due in 2028 o 7.50%, due in 2005
The 8.00% mortgage note due in 2003 requires interest payments until maturity. The variable rate mortgage notes require periodic payment of principal and interest. The 8.00% mortgage note due in 2033, requires interest payments initially then monthly principal and interest payments.
Unsecured Notes
The unsecured notes mature on the following schedule:
Amount - --------------------------------------------------------------- (IN MILLIONS) 7.05%, due April 22, 1998 $ 25.0 7.06%, due September 9, 1998 20.0 8.48%, due October 15, 1998 75.0 7.30%, due April 22, 1999 90.0 8.73%, due October 15, 1999 15.0 7.125%, due March 13, 2000 15.0 7.55%, due April 22, 2000 35.0 7.50%, due May 5, 2000 139.0 7.43%, due September 9, 2000 30.0 7.66%, due May 5, 2001 135.0 8.00%, due December 31, 2000 0.1 ------- Total unsecured notes at December 31, 1997 $579.1 - ---------------------------------------------------------======
Other Diversified Businesses' Long-Term Debt
ComfortLink, a general partnership in which BGE is a partner, has a $50 million unsecured revolving credit agreement that matures September 26, 2001. Under the terms of the agreement, ComfortLink has the option to obtain loans at various rates for terms up to nine months. ComfortLink pays a facility fee on the total amount of the commitment. At December 31, 1997, ComfortLink had $22 million outstanding under this agreement.
Constellation Energy Source has a $10 million revolving credit agreement that matures February 1, 2000. At December 31, 1997, Constellation Energy Source had no outstanding borrowings under this agreement.
Maturities of Long-Term Debt
All of our long-term borrowings mature on the following schedule (includes sinking fund requirements):
Diversified YEAR BGE Businesses - ------------------------------------------------------- (IN MILLIONS) 1998 $ 93.6 $155.3 1999 334.5 131.9 2000 253.8 244.5 2001 198.6 185.0 2002 156.2 2.8 Thereafter 1,455.4 39.9 ------------------------------- Total long-term debt at December 31, 1997 $2,492.1 $759.4 - ------------------------===============================
At December 31, 1997, BGE had long-term loans totaling $255 million that mature after 2002 that lenders could potentially require us to repay early. Of this amount, $145 million could potentially be repaid in 1998, $60 million could be repaid in 2002, and $50 million could be repaid thereafter. We have the ability and intent to refinance such debt by issuing medium-term notes or by borrowing under our revolving credit agreements, if necessary.
Weighted Average Interest Rates for Variable Rate Debt
Our weighted average interest rates for variable rate debt were:
YEAR ENDED DECEMBER 31, 1997 1996 - -----------------------------------------------------------------
BGE Floating rate series mortgage bonds 6.11% 5.87% Remarketed floating rate series mortgage bonds 5.75 5.63 Medium-term notes, series D 5.78 -- Pollution control loan 3.63 3.49 Port facilities loan 3.71 3.59 Adjustable rate pollution control loan 3.90 3.90 Economic development loan 3.69 3.57 Variable rate pollution control loan 3.73 --
CONSTELLATION HOLDINGS COMPANIES Loans under credit agreement 5.99 6.08 Mortgage and construction loans and other collateralized notes 8.10 8.33
OTHER DIVERSIFIED BUSINESSES Loans under credit agreement 6.04 6.13
56 Baltimore Gas and Electric Company and Subsidiaries
Note 10. Redeemable Preference Stock - --------------------------------------------------------------------------------
PRIORITY
For the payment of dividends and in the event of liquidation of BGE, we rank preference stock prior to common stock. We rank all preference stock equally.
Sinking Fund Redemptions
Required Sinking Fund Redemptions
Some of our preference stock issues have annual sinking fund requirements. Under those requirements, we must redeem some of our preference stock at $100 per share annually. We summarize the redemptions required in the following table.
Beginning Series Shares Year - -------------------------------------------------------------- 7.50%, 1986 Series 15,000 1992 6.75%, 1987 Series 15,000 1993 8.625%, 1990 Series 130,000 1996 7.85%, 1991 Series 70,000 1997
The following table summarizes the annual required redemptions of all redeemable preference stock.
YEAR - -------------------------------------- (IN MILLIONS)
1998 $ 23.0 1999 10.0 2000 10.0 2001 3.0 2002 3.0 Thereafter 64.0 ------ Total required redemptions $113.0 - --------------------------------======
Optional Sinking Fund Redemptions
For each series, we have the option to redeem shares in addition to the annual sinking fund requirements. Each year, we may redeem an amount up to the required annual number of sinking fund shares at $100 per share.
Other Redemptions
We also have the option to fully redeem the 7.50%, 1986 Series, and the 6.75%, 1987 Series, at the prices shown in the Consolidated Statements of Capitalization on page 44.
Note 11. Leases - --------------------------------------------------------------------------------
There are two types of leases--operating and capital. Capital leases qualify as sales or purchases of property and are reported in the Consolidated Balance Sheets. All other leases are operating leases and are reported in the Consolidated Statements of Income. We present information about our operating leases below.
Outgoing Lease Payments
We, as lessee, lease some facilities and equipment used in our business. The lease agreements expire on various dates and have various renewal options. We expense all lease payments associated with our regulated utility operations.
Lease expense was:
o $9.5 million in 1997, o $11.6 million in 1996, and o $12.2 million in 1995.
At December 31, 1997, we owed future minimum payments for long-term noncancelable operating leases as follows:
YEAR - -------------------------------------------------- (IN MILLIONS) 1998 $ 5.9 1999 3.6 2000 3.3 2001 2.8 2002 2.3 Thereafter 5.6 ----- Total future minimum lease payments $23.5 - ---------------------------------------------=====
Incoming Lease Rentals
Some Constellation Holdings Companies, as landlords, lease office and retail space to others. These operating leases expire over periods ranging from one to 20 years, and have options to renew. At December 31, 1997, the Constellation Holdings Companies had property under operating leases with a net book value of $184.9 million.
At December 31, 1997, tenants owed the Constellation Holdings Companies future minimum rentals under operating leases as follows:
YEAR - --------------------------------------------------- (IN MILLIONS) 1998 $ 17.9 1999 18.1 2000 17.7 2001 16.2 2002 14.6 Thereafter 63.1 ------ Total future minimum lease rentals $147.6 - ---------------------------------------------======
Baltimore Gas and Electric Company and Subsidiaries 57
Note 12. Commitments, Guarantees, and Contingencies - --------------------------------------------------------------------------------
Commitments
We have made substantial commitments in connection with our utility construction program for future years. In addition, we have entered into three long-term contracts for the purchase of electric generating capacity and energy. The contracts expire in 2001, 2013, and 2023. We made payments under these contracts of:
o $65.6 million in 1997, o $64.1 million in 1996, and o $68.4 million in 1995.
At December 31, 1997, we estimate our future payments for capacity and energy that we are obligated to buy under these contracts to be:
YEAR - --------------------------------------------------------------- (IN MILLIONS) 1998 $ 81.4 1999 92.2 2000 92.8 2001 63.2 2002 42.1 Thereafter 765.3 -------- Total estimated future payments for capacity and energy under long-term contracts $1,137.0 - -------------------------------------------------------========
Some Constellation Holdings Companies have committed to contribute additional capital and to make additional loans to some affiliates, joint ventures, and partnerships in which they have an interest. At December 31, 1997, the total amount of investment requirements committed to by the Constellation Holdings Companies was $35 million.
In December, 1994, BGE and BGE Home Products & Services entered into agreements with a financial institution to sell on an ongoing basis an undivided interest in a designated pool of customer receivables. Under the agreements, BGE can sell up to a total of $40 million, and BGE Home Products & Services can sell up to a total of $50 million. Under the terms of the agreements, the buyer of the receivables has limited recourse against BGE and has no recourse against BGE Home Products & Services. BGE and BGE Home Products & Services have recorded a reserve for credit losses. At December 31, 1997, BGE had sold $35 million and BGE Home Products & Services had sold $47 million of receivables under these agreements.
Guarantees
BGE guarantees two-thirds of certain debt of Safe Harbor Water Power Corporation. The maximum amount of our guarantee is $23 million. At December 31, 1997, Safe Harbor Water Power Corporation had outstanding debt of $30 million, of which $20 million is guaranteed by BGE.
BGE also issued an $11 million guaranty for debt under the revolving credit agreement of Constellation Energy Source. At December 31, 1997, Constellation Energy Source had no outstanding borrowings under this agreement.
At December 31, 1997, the Constellation Holdings Companies had guaranteed outstanding loans and letters of credit of certain power generation and real estate projects totaling $46 million. Also, the Constellation Holdings Companies guarantee certain other borrowings of various power generation and real estate projects.
We assess the risk of material loss from these guarantees to be minimal.
Termination of Proposed Merger With Potomac Electric Power Company
As previously disclosed, in September 1995 we signed an agreement with Potomac Electric Power Company to merge together into a new company, Constellation Energy Corporation, after all necessary regulatory approvals were received. In December 1997, both companies mutually terminated the merger agreement. Accordingly, in 1997, we wrote off $57.9 million of costs related to the merger. We have reported the write-off as "write-off of merger costs" in our Consolidated Statements of Income. This write-off reduced after-tax earnings by $37.5 million.
Environmental Matters
Clean Air
The Clean Air Act of 1990 contains two titles designed to reduce emissions of sulfur dioxide and nitrogen oxide (NOx) from electric generating stations - Title IV and Title I.
Title IV addresses emissions of sulfur dioxide. Compliance is required in two phases:
o Phase I became effective January 1, 1995. We met the requirements of this phase by installing flue gas desulfurization systems (scrubbers), switching fuels, and retiring some units. o Phase II must be implemented by 2000. We are currently examining what actions we should take to comply with this phase. We expect to meet the compliance requirements through some combination of installing flue gas desulfurization systems (scrubbers), switching fuels, retiring some units, or allowance trading.
Title I addresses emissions of NOx, but the regulations of this title have not been finalized by the government. As a result, our plans for complying with this title are less certain. By 1999 the regulations require more NOx controls for ozone attainment at our generating plants. The additional controls will result in more expenditures, but it is difficult to estimate the level of those expenditures since the regulations have not been finalized. However, based on existing and proposed regulations, we currently estimate that the additional controls at our generating plants will cost approximately $90 million.
In July 1997, the government published new National Ambient Air Quality Standards for very fine particulates and revised standards for ozone attainment. These standards may require increased controls at our fossil generating plants in the future. We cannot estimate the cost of these increased controls at this time because the states, including Maryland, still need to determine what reductions in pollutants will be necessary to meet the federal standards.
Waste Disposal
The Environmental Protection Agency and several state agencies have notified us that we are considered a potentially responsible party with respect to the cleanup of certain environmentally contaminated sites owned and operated by others. We cannot estimate the cleanup costs for all of these sites. We can, however, estimate that our 15.79% share of the possible cleanup costs at one of these sites, Metal Bank of America (a metal reclaimer in Philadelphia) could be approximately $7 million higher than amounts we have recorded. This estimate is based on the highest estimate of costs in the range of reasonably possible alternatives. The cleanup costs for some of the remaining sites
58 Baltimore Gas and Electric Company and Subsidiaries
could be significant, but we do not expect them to have a material effect on our financial position or results of operations.
Also, we are investigating several sites where gas was manufactured in the past. The investigation of these sites includes reviewing possible actions to remove coal tar. In late December 1996, we signed a consent order with the Maryland Department of the Environment that requires us to implement remedial action plans for contamination at and around the Spring Gardens site. We have submitted the required remedial action plans and the Maryland Department of the Environment is in the process of reviewing them. Based on several remedial action options for all sites, the costs we consider to be probable to remedy the contamination are estimated to total $50 million in nominal dollars (including inflation). We have recorded these costs as a liability on our Consolidated Balance Sheets and have deferred these costs, net of accumulated amortization and amounts we recovered from insurance companies, as a regulatory asset. We discuss this further in Note 5. We are also required by accounting rules to disclose additional costs we consider to be less likely than probable costs, but still "reasonably possible" of being incurred at these sites. Because of the results of studies at these sites, it is reasonably possible that these additional costs could exceed the amount we recognized by approximately $48 million in nominal dollars ($11 million in current dollars, plus the impact of inflation at 3.1% over a period of up to 60 years).
Nuclear Insurance
If there were an accident or an extended outage at either unit of Calvert Cliffs, it could have a substantial adverse financial effect on BGE. The primary contingencies that would result from an incident at Calvert Cliffs could include:
o the physical damage to the plant, o the recoverability of replacement power costs, and o our liability to third parties for property damage and bodily injury.
We have insurance policies that cover these contingencies, but the policies have certain exclusions. Furthermore, the costs that could result from a covered major accident or a covered extended outage at either of the Calvert Cliffs units could exceed our insurance coverage limits.
For physical damage to Calvert Cliffs, we have $2.75 billion of property insurance from an industry mutual insurance company. If an outage at either of the two units at Calvert Cliffs is caused by an insured physical damage loss and lasts more than 17 weeks, we have insurance coverage for replacement power costs up to $487.2 million per unit, provided by an industry mutual insurance company. This amount can be reduced by up to $94.6 million per unit if an outage to both units at the plant is caused by a single insured physical damage loss. If accidents at any insured plants cause a shortfall of funds at the industry mutual, all policyholders could be assessed with our share being up to $31 million.
In addition we, as well as others, could be charged for a portion of any third party claims associated with a nuclear incident at any commercial nuclear power plant in the country. Under the provisions of the Price Anderson Act, the limit for third party claims from a nuclear incident is $8.92 billion. If third party claims exceed $200 million (the amount of primary insurance), our share of the total liability for third party claims could be up to $159 million per incident. That amount would be payable at a rate of $20 million per year.
As an operator of a commercial nuclear power plant in the United States, we are required to purchase insurance to cover radiation injury claims of certain nuclear workers. On January 1, 1998, a new insurance policy became effective for all operators requiring coverage for current operations. Waiving the right to make additional claims under the old policy was a condition for acceptance under the new policy. We describe both the old and new policies below.
o BGE nuclear worker claims reported on or after January 1, 1998 are covered by a new insurance policy with an annual industry aggregate limit of $200 million for radiation injury claims against all operators insured by this policy. o All nuclear worker claims reported prior to January 1, 1998 are still covered by the old insurance policies. Insureds under the old policies, with no current operations, are not required to purchase the new policy described above, and may still make claims against the old policies for the next 10 years. If radiation injury claims under these old policies exceed the policy reserves, all policyholders could be assessed, with our share being up to $6.3 million.
If claims under these polices exceed the coverage limits, the provisions of the Price Anderson Act (discussed above) would apply.
Recoverability of Electric Fuel Costs
By law, we are allowed to recover our cost of electric fuel as long as the Maryland PSC finds that, among other things, we have kept the productive capacity of our generating plants at a reasonable level. To do this, the Maryland PSC will perform an evaluation of each outage (other than regular maintenance outages) at our generating plants. The evaluation will determine if we used all reasonable and cost-effective maintenance and operating control procedures to try to prevent the outage.
Effective January 1, 1987, the Maryland PSC established a Generating Unit Performance Program to measure, annually, whether we, and other utilities, have maintained the productive capacity of our generating plants at reasonable levels. To do this, the program uses a system-wide generating performance target and an individual performance target for each base load generating unit. In fuel rate hearings, actual generating performance adjusted for planned outages will be compared first to the system-wide target. If that target is met, it should mean that the requirements of Maryland law have been met. If the system-wide target is not met, each unit's adjusted actual generating performance will be compared to its individual performance target to determine if the requirements of Maryland law have been met and, if not, to determine the basis for possibly imposing a penalty on BGE. Even if we meet these targets, other parties to fuel rate hearings may still question whether we used all reasonable and cost-effective procedures to try to prevent an outage. If the Maryland PSC decides that we were deficient in some way, the Maryland PSC may not allow us to recover the cost of replacement energy.
The two units at Calvert Cliffs use the cheapest fuel. As a result, the costs of replacement energy associated with outages at these units can be significant. We cannot estimate the amount of replacement energy costs that could be challenged or disallowed in future fuel rate proceedings, but such amounts could be material.
Baltimore Gas and Electric Company and Subsidiaries 59
During 1989 through 1991 we had extended outages at Calvert Cliffs. These outages drove up fuel costs, and resulted in fuel rate proceedings before the Maryland PSC for several years. In these proceedings, the Maryland PSC considered whether any portion of the extra fuel costs should be charged to BGE instead of passed on to customers.
In December 1996, we settled the proceedings by agreeing not to bill our customers for $118 million of electric replacement energy costs associated with these outages. All costs associated with the outages in excess of $118 million have already been collected from customers through the fuel rate. In 1990, we wrote off $35 million of these costs. In 1996, we wrote off the remaining $83 million plus $5.6 million of related financing charges. The 1996 write-offs, together, reduced after-tax earnings by $57.6 million.
Also in 1996, we wrote off $6.8 million of fuel costs related to earlier outages that were disallowed by the Maryland PSC. This write-off reduced 1996 after-tax earnings by $4.5 million.
We have reported all of the 1996 write-offs as "disallowed replacement energy costs" in our Consolidated Statements of Income.
California Power Purchase Agreements
The Constellation Holdings Companies have $261 million invested in 16 projects that sell electricity in California under power purchase agreements called "Interim Standard Offer No. 4" agreements. Earnings from these projects were $37.3 million, or $.25 per share, in 1997.
Under these agreements, the projects supply electricity to utility companies at:
o a fixed rate for capacity and energy for the first 10 years of the agreements, and o a fixed rate for capacity plus a variable rate for energy based on the utilities' avoided cost for the remaining term of the agreements.
Generally, a "capacity rate" is paid to a power plant for its availability to supply electricity, and an "energy rate" is paid for the electricity actually generated. "Avoided cost" generally is the cost of a utility's cheapest next-available source of generation to service the demands on its system.
We use the term transition period to describe the timeframe when the 10-year periods for fixed energy rates expire for these 16 power generation projects and they begin supplying electricity at variable rates. The transition period for some of the projects began in 1996 and will continue for the remaining projects through 2000. At the date of this report, six projects had already transitioned to variable rates and three other projects will transition in 1998. The remaining seven projects will transition in 1999 or 2000.
The projects that have already transitioned to variable rates have had lower revenues under variable rates than they did under fixed rates. However, we have not yet experienced total lower earnings from the California projects because the combined revenues from the remaining projects, which continued to supply electricity at fixed rates, were high enough to offset the lower revenues from the variable-rate projects. When the remaining projects transition to variable rates, we expect the revenues from those projects to also be lower than they are under fixed rates. It is difficult to estimate how much lower the revenues may be, but the Constellation Holdings Companies' earnings could be affected significantly. However, the California projects that make the highest revenues will transition to variable rates in 1999 and 2000. As a result, we do not expect the Constellation Holdings Companies to have significantly lower earnings due to the transition to variable rates before 2000.
The Constellation Holdings Companies are pursuing alternatives for some of these power generation projects including:
o repowering the projects to reduce operating costs, o changing fuels to reduce operating costs, o renegotiating the power purchase agreements to improve the terms, o restructuring financings to improve the financing terms, and o selling its ownership interests in the projects.
We cannot predict the financial effects of the switch from fixed to variable rates on the Constellation Holdings Companies or on BGE, but the effects could be material.
Constellation Real Estate
Most of the Constellation Holdings Companies' real estate projects are in the Baltimore-Washington corridor. The area has had a surplus of available land and office space in recent years, during a time of low economic growth and corporate downsizings. The projects have been economically hurt by these conditions.
The Constellation Holdings Companies' real estate portfolio has continued to incur carrying costs and depreciation over the years. Additionally, the Constellation Holdings Companies have been charging interest payments to expense rather than capitalizing them for some undeveloped land where development activities have stopped. These carrying costs, depreciation, and interest expenses have decreased earnings and are expected to continue to do so.
Cash flow from real estate operations has not been enough to make the monthly loan payments on some of these projects. Cash shortfalls have been covered by cash from Constellation Holdings. Constellation Holdings obtained those funds from the cash flow from other Constellation Holdings Companies and through additional borrowing.
We consider market demand, interest rates, the availability of financing, and the strength of the economy in general when making decisions about our real estate investments. If we were to sell our real estate projects in the current market, we would have losses, although the amount of the losses is hard to predict.
Management's current real estate strategy is to hold each real estate project until we can realize a reasonable value for it. Management evaluates strategies for all its businesses, including real estate, on an ongoing basis. We anticipate that competing demands for our financial resources and changes in the utility industry will cause us to evaluate thoroughly all diversified business strategies on a regular basis so we use capital and other resources in a manner that is most beneficial. Depending on market conditions in the future, we could also have losses on any future sales.
60 Baltimore Gas and Electric Company and Subsidiaries
It may be helpful for you to understand when we are required, by accounting rules, to write down the value of a real estate investment to market value. A write-down is required in either of two cases. The first is if we change our intent about a project from an intent to hold to an intent to sell and the market value of that project is below book value. The second is if the expected cash flow from the project is less than the investment in the project.
In 1997, the Constellation Holdings Companies recorded the following write-downs of their investments in two projects:
o a $14.1 million after-tax write-down of the investment in Church Street Station--an entertainment, dining, and retail complex in Orlando, Florida--which occurred because the Constellation Holdings Companies have now decided to sell rather than keep the project, and o a $31.9 million after-tax write-down of the investment in Piney Orchard--a mixed-use, planned-unit development--which occurred because the expected cash flow from the project was less than the Constellation Holdings Companies' investment in the project.
Note 13. Fair Value of Financial Instruments - --------------------------------------------------------------------------------
We show the carrying amounts and fair values of financial instruments included in our Consolidated Balance Sheets in the following table, and we describe some of the items separately below.
AT DECEMBER 31, 1997 1996 - ---------------------------------------------------------------- Carrying Fair Carrying Fair Amount Value Amount Value - ---------------------------------------------------------------- (IN MILLIONS) Cash and cash equivalents $162.6 $162.6 $66.7 $66.7 Net accounts receivable 419.8 419.8 419.5 419.5 Other current assets 128.8 128.8 75.0 75.0 Investments and other assets for which it is: Practicable to estimate fair value 197.4 198.8 184.5 185.7 Not practicable to estimate fair value 57.5 -- 62.2 -- Short-term borrowings 316.1 316.1 333.2 333.2 Current portions of long-term debt and preference stock 271.9 271.9 280.8 280.8 Accounts payable 203.0 203.0 172.9 172.9 Other current liabilities 204.4 204.4 194.1 194.1 Deferred credits and other liabilities 9.6 9.6 -- -- Long-term debt 2,988.9 3,069.8 2,758.8 2,767.7 Redeemable preference stock 90.0 93.5 134.5 141.6
Other Current Assets and Other Current Liabilities
The financial instruments included in other current assets are trading securities and miscellaneous loans receivable of the Constellation Holdings Companies. The financial instruments included in other current liabilities are the total current liabilities from our Consolidated Balance Sheets excluding short-term borrowings, current portions of long-term debt and preference stock, accounts payable, and accrued vacation costs. The carrying amounts of current assets and current liabilities are the same as their fair values because these instruments have short maturities.
Investments and Other Assets
Practicable to Estimate Fair Value
Investments and other assets include investments in common and preferred securities, which are classified as financial investments in our Consolidated Balance Sheets, and the nuclear decommissioning trust fund. We base the fair value of investments and other assets on quoted market prices where available.
Not Practicable to Estimate Fair Value
It was not practicable to estimate the fair value of the Constellation Holdings Companies' investments in:
o several financial partnerships that invest in nonpublic debt and equity securities, o several partnerships that own solar powered energy production facilities, and o a company involved in developing international power projects.
This is because the timing and amount of cash flows from these investments are difficult to predict. We report these investments at their original cost in our Consolidated Balance Sheets.
The investments in financial partnerships totaled $43.6 million at December 31, 1997 and $48.1 million at December 31, 1996, representing ownership interests up to 10%. The total assets of all of these partnerships totaled $6 billion at December 31, 1996 (which is the latest information available).
The investments in solar powered energy production facility partnerships totaled $10.9 million at December 31, 1997 and $11.0 million December 31, 1996, representing ownership interests up to 12%. The total assets of all of these partnerships totaled $39.8 million at December 31, 1996 (which is the latest information available).
Long-Term Debt and Preference Stock
We estimate the fair value of fixed-rate long-term debt and redeemable preference stock using quoted market prices where available or by discounting remaining cash flows at current market rates. The carrying amount of variable-rate long-term debt approximates fair value.
Guarantees
It was not practicable to determine the fair value of certain loan guarantees of BGE and the Constellation Holdings Companies. BGE guaranteed outstanding debt of $20 million at December 31, 1997 and $21 million at December 31, 1996. The Constellation Holdings Companies guaranteed outstanding debt totaling $43 million at December 31, 1997 and $47 million at December 31, 1996. We do not anticipate that we will need to fund these guarantees.
Baltimore Gas and Electric Company and Subsidiaries 61
Note 14. Quarterly Financial Data (Unaudited) - --------------------------------------------------------------------------------
Our quarterly financial information has not been audited but, in management's opinion, includes all adjustments necessary for a fair presentation. Our utility business is seasonal in nature with the peak sales periods generally occurring during the summer and winter months. Accordingly, comparisons among quarters of a year may not represent overall trends and changes in operations.
1997 Quarterly Data
Earnings Earnings Income Applicable Per Share From Net to Common of Common Revenues Operations Income Stock Stock
- ------------------------------------------------------------------------------- (IN MILLIONS, EXCEPT PER-SHARE AMOUNTS) Quarter Ended: March 31 $ 887.7 $163.9 $ 72.1 $ 64.2 $0.43 June 30 746.4 78.8 15.0 7.1 0.05 September 30 860.8 321.0 171.4 164.4 1.11 December 31 812.7 159.9 24.3 18.4 0.12 ------------------------------------------------------------ Year Ended: December 31 $3,307.6 $723.6 $282.8 $254.1 $1.72 - -------------------============================================================
Our first quarter results include a $12.0 million after-tax write-down, by the Constellation Holdings Companies, of an investment in a real estate project (see Note 12).
Our second quarter results include a $31.9 million after-tax write-down, by the Constellation Holdings Companies, of an investment in a real estate project (see Note 12).
Our fourth quarter results include a:
o $37.5 million after-tax write-off of merger costs (see Note 12). o $2.1 million after-tax write-down, by the Constellation Holdings Companies, of an investment in a real estate project (see Note 12).
1996 Quarterly Data
Earnings Earnings Income Applicable Per Share From Net to Common of Common Revenues Operations Income Stock Stock - ------------------------------------------------------------------------------ (IN MILLIONS, EXCEPT PER-SHARE AMOUNTS) Quarter Ended: March 31 $ 861.3 $201.3 $100.8 $ 91.1 $0.62 June 30 731.7 148.6 64.5 52.4 0.36 September 30 826.0 275.7 146.5 137.9 0.93 December 31 734.2 43.9 (1.0) (9.1) (0.06) ----------------------------------------------------------- Year Ended: December 31 $3,153.2 $669.5 $310.8 $272.3 $1.85 - -------------------===========================================================
Our second quarter results include a:
o $4.5 million after-tax write-off of disallowed replacement energy costs (see Note 12). o $14.6 million after-tax gain on the sale by a Constellation partnership of a power purchase agreement (see Note 3). o $7.0 million after-tax write-off of the Constellation Holdings Companies' investment in two geothermal wholesale power generating projects (see Note 3). o $3.0 million after-tax write-off, by the Constellation Holdings Companies, of development costs for a coal-fired power project (see Note 3).
Our third quarter results include a $6.2 million after-tax write-off by the Constellation Holdings Companies of a portion of a solar power project investment (see Note 3).
Our fourth quarter results include a $57.6 million after-tax write-off of disallowed replacement energy costs (see Note 12).
The sum of the quarterly earnings per share amounts may not equal the total for the year due to the effects of rounding.
62 Baltimore Gas and Electric Company and Subsidiaries
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item with respect to directors is set forth on pages 5 through 9 under "Board of Directors" in the Proxy Statement and is incorporated herein by reference.
The information required by this item with respect to executive officers is, pursuant to instruction 3 of paragraph (b) of Item 401 of Regulation S-K, set forth in Item 10 of Part I of this Form 10-K under "Executive Officers of the Registrant," except that information with regard to a late filing of a Section 16(a) report by an executive officer is set forth on page 9 under "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement and is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is set forth on page 8 under "Board of Directors," on pages 11 through 16 under "Executive Compensation," and on pages 17 through 19 under "Report of Committee on Management on Executive Compensation" in the Proxy Statement and is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is set forth on page 10 under "Security Ownership" in the Proxy Statement and is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is set forth on page 9 under "Board of Directors -- Certain Relationships and Transactions" in the Proxy Statement and is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report:
1. Financial Statements:
Report of Independent Accountants dated January 21, 1998 of Coopers & Lybrand L.L.P. Consolidated Statements of Income for three years ended December 31, 1997 Consolidated Balance Sheets at December 31, 1997 and December 31, 1996 Consolidated Statements of Cash Flows for three years ended December 31, 1997 Consolidated Statements of Common Shareholders' Equity for three years ended December 31, 1997 Consolidated Statements of Capitalization at December 31, 1997 and December 31, 1996 Consolidated Statements of Income Taxes for three years ended December 31, 1997 Notes to Consolidated Financial Statements
2. Financial Statement Schedules: Schedule II -- Valuation and Qualifying Accounts
Schedules other than Schedule II are omitted as not applicable or not required.
3. Exhibits Required by Item 601 of Regulation S-K.
- --------------- *Incorporated by Reference. (b) Reports on Form 8-K:
DATE FILED ITEM REPORTED ---------- ------------- October 30, 1997 Item 5. Other Events Item 7. Financial Statements and Exhibits December 23, 1997 Item 5. Other Events Item 7. Financial Statements and Exhibits
BALTIMORE GAS AND ELECTRIC COMPANY AND SUBSIDIARIES SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
- --------------- (A) Represents principally net amounts charged off as uncollectible. (B) Represents net unrealized (gains)/losses (credited)/charged to common shareholders' equity. (C) Represents net unrealized (gains)/losses (credited)/charged to accumulated depreciation. (D) Represents removal of a reserve based on actual disallowance of replacement energy costs. (E) Represents removal of a reserve associated with an energy project of a subsidiary which was abandoned.
Certain prior-year amounts have been reclassified to conform with the current year's presentation.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Baltimore Gas and Electric Company, the Registrant, has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. BALTIMORE GAS AND ELECTRIC COMPANY (REGISTRANT)
Date: March 27, 1998 By /s/ C. H. POINDEXTER ___________________________________
C. H. POINDEXTER CHAIRMAN OF THE BOARD
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of Baltimore Gas and Electric Company, the Registrant, and in the capacities and on the dates indicated.
EXHIBIT INDEX
- --------------- *Incorporated by Reference.