ML20137H705

Bg&E 1996 Annual Rept

ML20137H705
Person / Time
Site:	Calvert Cliffs
Issue date:	12/31/1996
From:	Cruse C BALTIMORE GAS & ELECTRIC CO.
To:	NRC OFFICE OF INFORMATION RESOURCES MANAGEMENT (IRM)
References
NUDOCS 9704030029
Download: ML20137H705 (59)

Text

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CHAM 1.EN II. CRUEE Baltimore Gas and Electric Company Vice President Calven Cliffs Nuclear Power Plant Nuclear Energy 1650 Calven Cliffs Parkway Lusby, Maryland 20657 410 495-4455 March 28,1997 U. S. Nuclear Regulatory Commission Washington, DC 20555 1

l ATTENTION:

Document Control Desk l

l

SUBJECT:

Calvert Cliffs Nuclear Power Plant Unit Nos.1 & 2; Docket Nos. 50-317 & 50-318 1996 Annual Report in accordance with the requirements of 10 CFR 50.71(b), enclosed please find a copy of the Baltimore Gas and Electric Company's 1996 Annual Report to its shareholders.

Should you have questions regarding this matter, we will be pleased to discuss them with you.

Very truly yours,

'y; j/f 44W ClIC/DWM/ dim Enclosure cc:

Resident inspector, NRC

- (Without Enclosure)

D. A. Brune, Esquire

11. J. Miller, NRC O()

J. E. Silberg, Esquire R.1. McLean, DNR Director, Project Directorate 1-1, NRC J. II. Walter, PSC A. W. Dromerick, NRC 9704030029 961231 PDR ADOCK 05000317 R

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BGE at a Glance As the natior,'s oldest gas utility and one of the earliest electric utilities, the B Electric Company brings gas and electricity to more than 2.6 million residents in Central Maryland. BGE's four main subsidiaries also enhance customer service and increase revenue growth. In 1996 combined revenues totaled $3.2 billion from utility and diversified operations. In September 1995 BGE signed an agreement to merge with Potomac Electric Power Company (Pepco) to form Constellation Energy Corporation, one of the 10 largest utilities in the United States. The merger is awaiting regulatory approvals. Electric and management of real estate and senior-living Provides electricity and related services to more facilities, than one million customers in a 2,300-square-mile BGE Energy Projects & Services, Inc. area of Central Maryland. The company ow ns and Provides a broad range of customized energy operates 10 generating plants, including two services to commercial and industrial customers. nuclear units. Our total generating capacity Among its business lines are power quality exceeds 6,200 megawatts. services, electrical system improvements, lighting l Gas and mechanical engineering and installation. Serves more than 555fXX) customers in about a district energy systems, and private electric and 600-square-mile area in Central Maryland. We gas distribution systems. l preide storage and distribution as well as BGE Home Products & Services, Inc, commercial transmission through two gas plants Sells and services residential and commercial and nine gate stations in and around Baltimore. customers' electric and gas appliances and heating Constellation" Holdings, lac, nd ir-conditioning systems, and offers home Consists of Constellation Power, Constellation improvement services to residential customers. Investments, Constellation Real Estate, and Constellation Energy Source, Inc. (formerly BNG, Inc.) Constellation llealth Services. These businesses Is in the natural gas bmkering business, hicating, are involved in the development, ownership, and purchasing, and arranging for transmission of gas operation of power generation projects; financial for large industrial, commercial, and residential insestments; and the development, ownership, customers. Contents More Reader-Friendly Financials In 1996 BGE became the first utikty to sign up for the 1 Behind Every Customer. Secunties and Exchange Commission's ' Plain Enghsh A Team of BGE Employees Program," which aims to make investor communications 2 Highlights clearer and easier to read See page 20 for details. 3 Chairman's Letter to Shareholders Visit Us on Our Website at http://www.bge.com 9 Energy Has Come a Long Way There you'll find financial and merger information, as well as the latest residential and business products and services 17 FinancialContents BGE has to offer. 54 Directors and Officers Committed to Equal Opportunity 57 Shareholder Information As an Equal 0pportunity Employer, BGE does not discriminate on the basis of age, color, disabihty, mantal status, national origin, race, rehgion, sex, sexual orientation, O Pnnted on recycled paper or veteran status.

B e h i n d e v e r y c u s to rn'e r... hen BGE's predecessor, the Gas Light Company of Baltimore, began in I8/(>, it had a Wfew thousand dollars in assets,five unusually able men, and one brig city. Thanks to the strength of one team ofpeople conunitted to servejust one customer, the City of Baltimore, this com;>any reali:cd a vision to become thefirst to bring gaslight to America. a team of BGE employees I we~- j t vv a Today, our vision has grown much broader and more responded beautifully to every request and problem," bnitiant than this pioneering team could have imagined. says Diane. "I know there are so many employees With Constellation Energy in our future, we are well whose work is never recognized, and i just wanted to on our way to becoming one of the largest eneigy say thank you." companies in the nation. Our goal is to have every customer feel that way. Yet as we did 180 years ago, we know our success it's a goal we've strived for since the beginning. Behind rests on the strength of our team to serve each Diane on our covers are four white-marble figures customer. Longtime BGE customer Diane Lewandowski, symbolizing light, heat, knowledge, and power. For 80 pictured on our cover, understands that. And last fall' ens mese Mes d W$on Street" have ahned during National Customer Service Month, Diane the facade of our company headquar1ers. They repre-j dropped us a note just to tell us how we're doing. sent the cornerstones of our enduring commitment to

• 0ver the 25 years I've been a BGE customer, your our customers.

employees have always been courteous, and have

Highlights i In millioru. except per. share amounts 1996 1995 % Chanye Common Stock Data Earnings per share Earnings per share from current-year operations Utility business $1.96 $1.84 6.5% Diversified businesses 0.31 0.18 72.2 % Total carnings per share from current year operations $2.27 $2.02 12.4 %

• Disallowed replacement energy costs (0.42)

Total earnings per share JI.HS $2.02 (8.4)% Dividends declared per share $1.59 $1.55 2.6% Average shares outstanding 147.6 147.5 0.1% Return on average common equity Reported 9.5 % 10.8 % (12.01%

• Excluding disallowed replacement energy costs 11.7 9 10.8 %

8.3% Book value per share-year end $ 19.35 $ 19.07 1.59 Market price per share-year end $26% $28% (6.1)% Financial Data Revenues Electric business $ 2,209 $ 2.230 (0.9)9 Gas business 517 400 29.3 % Diversified businesses 427 305 40.0% Total revenues $3.153 $ 2.935 7.4G Net income $311 $338 (8.0)% Earnirgs applicable to common stock $272 $297 (8.4)% Assets i l Utility business $7,150 $ 7.051 1.4% Diversified businesses 1,401 1.266 10.7 % Total assets $ N.551 $ 8.317 2.8% Utility construction expenditures (excluding AFC) $349 $344 1.5% BGE investment in the Constellation Companies $396 $352 12.5 % Utility System Data Electric sales-megawatt-hours 28.4 28.2 0.7% Gas system sales-dekatherms 114.3 110.8 3.2%

• A nonrecurring < harge to earnings disauued in Note 12 to the Cornolidated Financial Statements.

Earnings and Dividends Declared Return on Common Stock Market Price per Share et Common Stock Average Common Equity and Book Value $2.50 l 12 * $25 10%~ $2.00 : 8% ! l $20 l $1.50 f-t; { $15j 6% j ~ s g $1.00 ' i l 4% i h 3 $10 0 jf ~ h N $0.50 L h E L Aku b h I: 3;; p 0 92 93 94 95 90 92 93 94 95 % 92 93 94 95 96 F Earmngs(Consolidated) J Market Price (Year-End Close) I Dmdends Declared I BookValue(YearEnd)

Te a mv/o r k a powerf ul concept Chairman's Letter To Shareholders 'Thefarther backward you can look, thefartherforward you are likely to see." Winston Churchill knew that tomorrow's strategies are apparent to those who practice the art of the long view. Rewinding through I80 years, we see clearly that the events rocking our industry today are just the latest in a long evolution. Once again the energy industry is in the throes of consolidation. And once again we are creating a stronger company by forming an alliance with a neighbor utility. This time our merger partner is the Potomac Electric Power Company (Pepco). Constellation Energy Corporation is the new company we are forming through our proposed merger. l*ve summarized the rationale for the merger and the status of the regulatory approval process on pages 7 and 8. This report illustrates a year of exceptional teamwork. More than 400 BGE men and women served on teams with their Pepco counterparts to build the framework of Constellation Energy. The rest of our l people kept us moving forward on all fronts. Our employees also gave this company a big vote of confidence when they chose to remain union free following an intense union organizing campaign. l l l Shownfrom left: George C. Crect, lhecsaire l Vice President and Acting Chief Operating l Opicer: Christian H. Poinde. ster, Chairman of I the Board and Chief Etecutive Officer; and Edward A. Cro<de, Persident and Chief Operating Of]icer. 3

I i We owe these, and the many other successes of last of energy suppliers. The 105th Congress will also be year, to the quality of our people. Nowhere was considering the issue of electric industry restruc-quality more evident than in the leadership shown by turing. One of our key goals is to make sure that our President and Chief Operating Officer Edward A. representatives understand the unique issues facing Cnxike and Executive Vice President and Acting our industry. Chief Operating Officer George C. Creel. Along with The Federal Energy Regulatory Commission his Pepco counterpart John M. Derrick, Ed guided the (FERC) continued to expand competition in the transition teams through the many complex tasks wholesale power market. Last year the FERC ruled needed to create Constellation Energy Corporation. that public and investor-owned utilities must open As Acting Chief Operating Officer, George kept BGE their transmission lines to competitors. The FERC running well and guided our union-free campaign, also required members of power p x>ls to offer Taken together, our efforts strengthened the value of service to all users on the same terms as pool your investment in llGE. We also cleared our finan-members. BGE's power pml, the Pennsylvania-New cial picture by resolving two long-standing cases with Jersey-Maryland Interconnection (PJM), has offered the Maryland Public Service Commission. The cases to make this service available on March 1,1998, concemed outages at our Calvert Cliffs Nuclear subject to the FERC's approval of the terms being Power Plant between 1987 and 1991. The resolutions, proposed by the pml members. w hich we consider fair, resuked in a $62-million, States Move at Different Speeds noneash charge to 1996 aDer-tax eamings. In 1996 state regulators continued to move at l Ilere's a brief recount of how your investment in different speeds toward full competition. As of l BGE perfonned last year. the date of this letter, four states had passed laws that I u Earnings from current-year operations equaled will give all customers a choice of energy providers, $334 million, or $2.27 per share. That's a 12-while 10 had okayed pilots that will allow the percent increase over 1995 before the 42-cents-industry to test how a fully open electric market per-share, nonrecurring charge to settle the could work. Calvert Clif fs f uel rate cases. Maryland's regulators reopened their case and are a I!GE's Board of Directors voted to increase the evaluating w hen and how to restructure the electric annual dividend to $1.60, up 2.6 percent over last market. The Commission Staff is expected to issue year. This marked our 87th straight year of its report this May. paying dividends. Also, we have never reduced our dis idends. "l'"I

• "" "PE** "'

to conduct a residential gas pilot program. This a We continued to strengthen our dividend payout follows about a decade of changing regulation on the ratio. Before the Cah ert Cliffs settlement, the gas side of our business aimed at opening the natural payout ratio at year end 1996 would hase been gas market to competition. Under the plan, which j 70 percent, a sizable improvement from an 88-begim in November 1997,25.(K10 of our customers percent ratio in 1992. will select their own natural gas suppliers. m Eamings from diversified businesses totaled l $45.7 million, representing a 73-percent increase Gas Targets Strong Growth 4 over 1995 Clearly we are at a critical juncture in our gas busi-ness's 180-year-old history. We have responded with Competition Heits Up increasingly ambitious goals for gas growth in our On the federal aid state levels, regulators continue territory. Leading that effort is Frank O. Ileintz, w ho i to w restle with Low best to offer customers a choice l

d L officially took over as BGE's Vice President, Gas, BGE nearly 20 percent higher than the industry on January 1,1997. average for customer satisfaction. Chairman of the Maryland Commission for 13 We still have some work to do to with our in-years Frank presided over the restructuring of the dustrial and commercial customers, however. state's gas industry. After leaving the Commission Recognizing that these customers are affected by in 1995, Frank worked with the American Gas both momentary and sustained outages, we set out Association on high-level issues affecting the gas to reduce those last year. Focusing on 100 key industry. Frank is a true visionary whose leadership industrial and commercial customers, we decreased abilities Ed and I have admired for years. their outages 25 percent compared with 1995. Price is another key success factor in the Learning to Differentiate Customers Increasing customer choice has galvanized our national energy market. Our employees have been unrelenting in improving the areas that most elforts around the dual goals of customer growth and affect ur ability to compete on price. They have retention. 'lhis calls for a much more detailed knowl. raised operating efficiency, increased generating edge about the dif ferent categories of customers we output, and lowered expenses. As a result, BGE serve. We look at all the factors that affect their deci. is now mong the lowest cost generators in its sion making. Ilow much energy do they use? Ilow sophisticated is their equipment? What competitive region I comparison group, the PJM power pool. pressures do they face? With this knowledge, we can Growing Diversified Businesses give our customers the advice they need to get the While competition squeezes profit margins on the best value for their energy dollars. sale of natural gas and electricity, it also offers Just as it is important that we understand our new and promising opportunities for growth and j customers' businesses, we believe it is equally l important that our customers understand our busi-in an open market, two key measures ness. To that end, last year we conducted a number of success are customer growth and of seminars and field trips to help our customers retention, factors that have clerated understand both the competition in our industry and the role our sales the issues we face.m providing them the reliable m representatives play service they want. l arge. dustnal customers, hospi-tals, and military organizations are just a few of the

1. "'"""" "#"N""'

customer groups to w hich we reached out in 1996. National Account Going National in 1997 Etecurite Danicl/c As we move both HGE and Pepco to Constellation it'illiams aplains Tm my Energy, we plan to establish a national brand that cu3tomers' advocate within will help us market niche products and services BGE. I'm always enhancing that have broad appeal. We are evaluating our my Anowleduc of their industry, positioning and will move forward with the Imsiness and operations. I me Constellation Energy branding to strengthen this Jnowledge to solve proh/ cms our marketing efforts in targeted areas. and improve their bottom line." incirasing competition has also caused us to eval-uate more closely our strengths and shortcomings. Take reliability as one example. Our residential l l customers see this as a strong HGE positive, rating

profitability in nonregulated businesses. In fact, banking industries make him the ideal person to within days of signing this letter I expect to guide this venture. announce the formation of Constellation. Power Employees Work With Forces of Change Source, Inc., a subsidiary that will give IlGf! a in 1996 FA George, and I chicked a lot of hours substantial presence in the emerging Iwwer-speaking to our employees about our changing marketing busmess. industly. I am thankful that our employees recog-Constellation Power Source will buy and sell nited that it is better to work with the forces of electric power and trlated derivatives, develop risk change rather than working against them by voting management strategies, ami offer a wide array of for a union. More than 70 percent of employees pnxtucts that help customers gain greater control whose votes were counted chose to preserve the of their energy costs. It will draw upon the risk advantage llGli has as a nonunion company in a management and trading expertise of one of the unionized industry. There is no doubt in my mind world's most prestigious investment banks, Goldman, that we are a stronger, more focused company for Sachs & Co., thmugh an exclusive advisory relation. having gone through this experience, ship with its subsidiary, Goldman Sachs Power. Commitment to Shareholder Value Charles W. Shivery has been elected Pirsident and I believe our sharehoklers, too, att aware of the way Chief fixecutive Officer of Constellation Power our industry is changing. That's why 97 percent of Source, w hich will be a wholly owned subsidiary of those w ho voted favored the merger. Our plans are l IlGli. Chuck has served as llGli's Chief Financial to rmxlel Constellation linergy's dividend policy Oflicer and Corporate Secretary as well as Vice after IIGli's-that is, with an emphasis on President, Finance & Accounting. Chuck's leadership consistency and appropriate growth. abilities, financial acumen, and his connections in Obviously a more competitive market dictates a luth the electric and investment greater need to teinve>t in the business to provide growth opportunities, and indeed our payout ratio has decreased. We are achieving the goal not by Chuck Shircry. Firsident and Chief decreasing the dividend but by increasing our l Inccutive 0]/icer of Constellation carnings. We plan to continue as an excellent yield. Power Source, Inc., our newest oriented investment, funding dividend increases subsidmry, spent the latter part of through caming growth. 1996 dcrcloping a strategic planfor On behalf of our entire team, I thank you for your liGl3 entry into the ricctric power continued faith in the llaltimore Gas and I!!cetric marketing and rist-management Company. We look forward to making the business. " Constellation Power transition to Constellation linergy Corjuration in Soun'e combines the strengths of the near future. In'a top notch organizations-11Gl3 ISO-years of c.tcellence in the energy industry with the unparalleledfinancial ,/ / ri>L-managernent espertise of Goldman N Sachs." Chuck says. This advisory rela- -~ 'h' i*" II' P" "O tionship-thefirst ofits Lind in the power-marketing industrv-puts us in Chairman of the livard and i a superb position to benefit in a Chief therutive Officer i deregulated enrinmment. " February IH. I997 l kd* i l

B G E-P e p c o m e r g e r~... This historic rnerger not only strengthens our position in the increasingly competitive energy industry, it also ensures that the energy products and services we offer our customers in the future will be among the best in the country. a winning combination Mergers Gain Momentum This sharp increase in the number of proposed As of the date of this letter,17 proposed mergers rnergers caused the FERC to revisit its await FERC approval. Several represent the combi-30-year-old merger policy. The FERC will now nation of large electric and gas companies. That concentrate its evaluation of each merger on the bears out what IlGE has been saying for 90 years: merger's effect on competition, on rates, and on There is a competitive advantage in being able to state and federal regulation. This merger policy deliver both gas and electricity. It also lends credi-will be applied on a case-by-case basis to o bility to speculation that the leaders of the energy pending mergers. industry of the future will be larger companies, created through consolidations. g} y A Seamless Shift for Constellation Customers ~ B oth BGE and Pepco have j j'. MellatiOt[h if excellent reputations for Estes'gy gr quakty customer service, reputa-tions the Customer Relations y i Activity Team set out to preserve when we become Constellation Energy Corporation. Made up of a diverse gmup of BGE and Pepco employees, team members had one thing in common: Every one of them was an experienced problem solver who knew how to successfully handle customer concerns. The team's mission was to research our current methods and those used by best-practice companies, then recommend ways to bridge the transition from two companies to one. "Sure there were differences in the way the companies operated," says Pepco's leader Joy Cole. "But we were all driven by the same common goa!-to provide seamless service to Constellation's customers 7 'It's a job that was made easier," adds BGE's leader Mary Ellen January, "by the f act that we were able to pool our resources and talents and stay focused on our customers " Shown from left: Terry Gastfield. Rose Darone, Carolyn Cardwell, John Disney, Joy Cole. William Latlief Priscilla Sa/cy, Robert Atkins lil, and Mary Ellen January.

As a combined company with over $15 billwn g e,,, in assets, Constellation Energy will be among \\ . C** the 10 largest electrie utilities in the United States, serving a diverse population of more %.)/ than 1.8 million electrie customers and more 1 Pennsylvams than $55/XX) gas customers. i, om o Constellation Energy will be structured as a U., single saility with subsidiaries conducting the

• • '*'*C' nonutility operations. Its senice territory will m

encompass all orpart of10 Afaryland counties, " ' '*[ *" Baltimore City, and Washington, D.C.-virtually mann renco wnesesase customer C*'"' all of Centsal Afaryland, including the entire y C** Southern Maryland Electrlc Cooperative + Baltimore Washington corridor. Constellation Energy will also sell electricity at n holesale to the Southern Afaryland Electric Cooperative (SAfECO). Approvals Progressing Customers will reap the benefits of improved opera-l Regarding I'ERC approval of the IlGE-Pepco tions as well. The merger will allow us to keep rates merger, all required documents have been lower than we could as a stand-alone company. It submitted, all hearings have been completed, and will increase reliability at our common borders and ~ we are awaiting an approval. The same applies to create a better customer mix. And, given our coal, the approvals needed from the Maryland nuclear, and gas resources, the merger will also Commission. result in a more balanced fuel mix that will help us The merger also requires the approval of the enhance price stability in changing markets. District of Columbia Public Service Commission. Commitment to Community Will Continue which has postponed until late February 1997 hear-A larger but still kically based energy company will ings originally scheduled for early December 1996. also better serve the needs of the community at All documentation will be submitted by mid-large. The llGE-Pepco merger does not disadvan-March. We expect the D.C. Commission to rule on tage kical interests. Our corporate headquarters will these matters promptly thereafter, be hicated in Maryland's capital city, Annapolis, and Merger Strengthens Customer Focus we will maintain significant concentrations of Achieving cost savings is one of the prime motiva-employees in both flaltimore and Washington. tions behind our merger with Pepco. We estimate floth IlGE and Pepco are regarded as excellent i the merger will save 51.3 billion over the first corporate citizens. As individual companies, each is 10 years. In April 1996, we filed our joint merger known throughout the llaltimore-Washington area apphcation with the Maryland t v.I D.C. for its commitment to economic development, Commissions, proposing that our sharehoklers and corporate philanthropy, low-income customer initia-l8 customen share those savings and that we increase tis es, and volunteerism. Together, as Constellation our already strong commitment to the community. Energy Corporation, we will remain steadfast in that commitment. 4 i t

Energy has come a long way... On the pages thatfollow, you'll see surne imagesfrom our past, mixed in with our 1996 highlights. They remind us that we have inherited an important legacyfro n those who preceded us: improving the lives of the people we serve. and so have we em ur job was not easy in the " good old days." Workers s -f lacked the powerful technology and machinery we $/i p % "

• ' " " take for granted today. As this photo shows, laying electric
• Y cable circa 1900 was no small feat. Yet our archives are full of pictures of proud men and women doing whatever they J

,.f-needed to do to get the job done. b L Contrast that with one of our best teamwork stories of 1996: our role in renovating Annapolis, Maryland's state capital. As part of the $5.5 million upgrade of its historic Main Street District, the City of Annapolis asked BGE to put all electric lines underground and to replace and update gas lines. Employees from both the gas and electric sides of our company worked on a fast track to complete the project on schedule. "BGE's crews were absolutely outstanding," says Annapolis Mayor Al Hopkins (inset). "They understood the timeliness of the project, and they made all of our jobs a lot easier." Included on the BGE team were, from left, Q - h,7 Terry Bowen, Gas Construction; Frank Elliott, Customer Operations; and Jeff [b ' 0' Jefferson, Public Affairs. While our equipment and the methods are drastically different, the heart of our company remains the same. Now, as then, teams of q employees working together to / q give our customers the best W possible service-a legacy we'll g continue at Constellation Energy.

Be hin d eve ry c u sto m e r... I Thomas Alva Edison, the father of the Electric Age. Because o n 1997 we celebrate the 150th anniversary of the birth of his innovations, BGE has been providing electricity to a growing base j of customers for much of our long history. Now, as competition moves into the marketplace, we're setting aggressive goals to remain among the industry's leaders. To write a F new chapter in our history, we've been working to reduce generating costs, deliver reliable electric service, provide energy products and services that meet customers' needs, and successfully compete in the bulk-power market. Hei - some of our accomplishments for the year. Since 1992 we're reduced Fossil Generating Costs year pnxtucing more than 18 million megawatt 2 n Years operations and mainte. hours, an all-time record for our fossil plants. nance costs at ourfos3il-a in 1996 our Calven Cliffs Nuclear Power Plant I fueledpower plants by $150 generated 12.1 million megawatt hours-the j nearly $28 nn/ lion. T/mse fourth highest generation total in the plant's reductions have been $125. g; driven by continuous i imprarement processes. $100! a Calvt1 Cliffs also earned the highest marks in s such as cro3s-training three of four categories assessed by the Nuclear hp yj Regulatory Commission (NRC). The plant $75 employces in both opera. tion 3 and maintenance Q f]f f g camd su@w ndnp in endneedng, open $50 activitic3. 92 93 94 95 96 tions, and plant support. The NRC also noted impmvement in the plant's maintenance. m Our cost reduction efforts helped us continue to generate competitively priced power. BGE is a A new operating E g-g y y, among the lowest cost producers of electricity strategy implemented in its regional comparison group, the PJM last year is helpmg us g,wer piol. reduce expenses and the time it takes to I a 1.ast year our generation employees also set mn cme' new records for working safely. In both our -i d4 m -( Fossil and Nuclear divisions, our employees related outages. The had the lowest occupational injury rate in BGE im rovements moved ~ generation history. our dispatchers and

to a New technologies and an aggressive predictise system operators to a maintenance program helped us pnsluce an central location during stomis, giving them additional 426.(XX) megawatt hours at our eight better, more direct access to needed stonn key fossil fueled power plants. We finished the system data,

a history of reliable electric service Employees lile Dewane Daley are a We intensified our reliability efforts by estab- + helping BGE prepare to compete lishing a Reliability and Power Quality Master A u.$ succes3fsdly. As project manager Plan. It is a broad-based program to develop M w of our Di3tribution Sysicm Power system infrastructure changes that improve Guality Assessment Project, Dewane reliability and power quality. This year we also oversecs the installation of special focused our reliability efforts on our industrial meters that track disturbances in our and commercial customers. ponvr supply to industrial customers' a To make the transition to the emerging competi- "Dnc thing that will set us apart is tive bulk-power market, we're continuing to clectric service our industrial expand our efforts to market wholesale elec. rustomers can trust," says Dewanc. i ity, in 1996 our HuR Power Arrangements " Knowing sihere we stand now in Group made great strides as they engaged in terms ofpower quality will give us an orD illion megawatt hours of uholesale edge in tomorrow's competitive purchases and sales of electricity. electric market." Responding Rapidly to Electric Needs B ehind Al Reid (inset)is a team of BGE Customer Operations employees working to m Reid is president of Rapid Response, a direct-mail marketing business that depends on sensitive electronic equipment to produce customized brochures. Last year a power surge caused Rapid Response to lose critical information from its databases, and caused Reid to call BGE. In response, he got a whole team. Helen Handy, Special l Investigator-Customer Operations, received the infor- ^' l mation on Rapid Response from our Customer h 3 bb Communications Center. Her initial analysis n .. n, revealed a reliabihty problem, She turned y M that information over to John Mathews, an Awistant Distnbution Technician who went into the field and found the problem-faulty insulators on the power lines that supply Rapid Response. The work order then went to Al Leightner, a Distribution Construction supervisor, who along with crew members Gary Diffenderter and Bob Fogle, Jr., quickly repaired the line and put Rapid Response back in business 11' "When BGE learned about our power problem and how cntical it was for us to find a permanent solution, an expert team arrived the next day," says Reid. "I was impressed with the response, and I was impressed wdh the results." Shown from left: John Mathews, Bob Fogle, Jr., Al Leightner, Helen Handy, and Gary Diffenderier.

Behind eve ry cu sto m e r... l hen artist and entrepreneur Rembrandt Peale lit a gas-powered light in his Baltimore museum in 1816, he planted a seed that's i still growing today. Peale's successful demonstration of the value of [ gas led to the founding of the Gas Light Company of Baltimore, our forerunner. From that modest start, BGE has developed a gas business ' that continues to expand rapidly in a competitive energy marketplace. With more customers demanding natural gas in their homes and busi-nesses, we've developed aggressive, profitable growth strategies to meet their needs. Over the next couple of years, we plan to continue to increase the number of new residential, commercial, and industrial customers we serve, and to capitalize on the value of home gas-heat comfort and other gas applications. This year we made great strides in our gas growth, including the following. Continuing an c.tcc//ent Gas increases Share Commission. The new program provides carn- " "' 'I fire-year growth trend, ings opportunities and financial incentives for llGE to reduce the cost of buying gas and to we again 3igmficantly a increased our 3 hare of the share the savings with our customers. new home-heating market. 80 % y; y Afore than 9/#0 of the first quarter of 1996. The Maryland Commission

• • L p

l new houses built in g Central Afarylandlast ,g; q holders to keep a portion of the camings on year connected to our gas k system, establishing a new 20% - ? marAct penetration record a Our Gas Construction employees teamed with 0 the Gas Research Institute, the gas industry's of 72 percent. 92 93 94 95 96 leading research and development organization, a in our continuing effon to expand our gas n a pilot program testing new applications for business, we converted almost 6,(KO residential flex ble pas pipes. The pilot has reduced average customers to natural gas heat last year, nstallation time from six hours to under one a Measuring our growth in miles, the gas system hour, a significant benefit in lowering installa-grew by 339 miles in 1996. giving us a total of tion costs. We plan to begin using the new Hex-nearly 5,4(K) miles of gas mains serving about ible pipe regularly in 1997. 555,(KK) customers in Italtimore City and nine , we,re kmking to further improve gas sales to Maryland counties. large customers through several initiatives, a In October we began a market-based rates First, we're educating architectural and engi-program approved by the Maryland neering firms about the benefits of choosing

a growing gas business gas equipment for their industrial and commer-cial customers. We also began an advisory group with several of our larger customers, including Johns llopkins llospital, General Motors, and Maryland's Department of General Services. The group provides a forum to address customer needs and / concerns on natural gas issues. // i D 1.ast year we began retiring the last o three of our huge steel gas holders, l w hich are memorials to the earliest days of our gas supply. With their retirement, we're saving nearly 51 million per year in operations and maintenance costs and an additional 57 million that would have been spent for a scheduled maintenance. Extending Ourselves to Meet Gas Demand eamwork is helping us quickly meet customer i Frank O. //cint:, #GE3 new demand for natural gas. Take the case of AAI l Vice Prc3ident, Gas, brings Corporation, a defense contractor and light rail manufac-l a wp level view of the g emerging competitive gas industry, thank3 to his 13 P" " Y O years as Chairman of the Afaryland Public Service Commis3 ion. " Growth Enter Keith Brock, Energy Sales & Services. Knowing AAl is ourfbremost was on a fast track to meet the contract, Keith took it upon strategy." says FranA. himself to pour a concrete pad to accommodate the meter "We're growing by needed for AAl's new booth. That done, employees from positioning ourselves to Gas Engineering and Construction, led by supervisor Lee tale advantage of new Cavey and crew mernbers Tim Wilson and Charles Kelly, tyyiortunitic3 and by took over with the digging and welding needed to extend finding bcner way^ '" the main and install the metering equipment. deliver gas and service to Together, the team finished the job in time for AAI to meet the customer. Its deadhne, which included a planned celebration with the governor for the rollout of the first car. "We were impressed 13 with BGE's commitment to get the job done on time," said J' AAI facihty engineer Steve Brodbeck (inset). "They went above what you'd notmally expect from a utikty." Shown from left: Tim Wilson, Keith Brock. Lee Cavey, and

B e hin d eve ry c u st o m e r... Acentury ago fierce competition forced many energy companies in struggle for survival. To rise above the rest, Baltimore's dominant electric company and its largest gas company made the bold decision to merge in 1906, forming the area's first combined gas and electric company. Ninety years later utilities again find themselves facing competitive challenges. By combining the talents of the utility and its subsidiaries, BGE holds an advantage as it moves forward. In 1996 our subsidiary operations both increased overall profitability and helped strengthen ties with our customers. Here are a few highlights. IlG/.i <b rer.ufied Diversified Earnings Nearly a in llawaii the Puna Geothernial Project 8 "C'

• inniness cainings expanded its pencrating capacity.11 now f

were 1/3,7 million, a provides nearly 25 percent of the electrical $50 73 pen ent sm rcaic power used on the liig Island. orrr IWS thanA3 to a e ('o Hation Imm nh cad in on wg anong performam e by nnaiA nAh to w nwd tmim Conucl/ation //ohhngt d by mi&nt adh from in in&in-O i y[ - securities program and investmenh in linancial $20 N" j pannerships Constellation Holdings $10 ! ' "y ; e Constellation Power ? e ConsteHadon Real F.statA aw-t and progny strengthened ib nithe management division merged with lil. Nil in the domestic energy 0 Management Services to fonn Constellation g ma:Let w hile it espanded Realty Management, the largest company of in its interesh in I arin America. Lind in the llaltimore region. a l'ower maga /ine and l'on er Engineering a Constellation llealth Services continued to maga /ine named Constellation's Colver Power expand. It now has investments in $20 of the Project in Pennsylvania the 1996 Power Plant more Ilian 2JKN) senior-living unih it manages of the Year. and is developing more than 700 additional unih. D , h, y'O BGE Energy Projects & Services -( l,, a Serving large commercial customers throughout 4( ' the Mid-Atlantic region, ilGlilinergy Projects 3, & Services' projects included such things as Mrw J. j ' lighting retrofits for retail stores in Ove states; N b, ' f S 4 N' ' energy system upgratk s for several U.S. Post lu 'an -;t ' %gg & ,, S y.4 , 9. ;- Of fices; and installation of a ponable turf-z + s hMig em W IMmm's n NL' lim I Hohria's l' lle flernuno Posur Plant. one of theItarens a ConstcIlarion Pou cr's I.atin Amerit an inve3tmentt

a diversity of energy solutions i I o PowerDigm Systems *, Inc., provides power quality pnxlucts and services to utilities and other large electric users. In 1996 the company signed five f, % contracts for its PowerDigm* Transfer

• system, a

, ;ii di technology that can dramatically improve power I ,j 6' quality. It also launched its PowerDigm Automation

• v

__ 1 service line to help utilities improve power quality M "9 through distribution and substation automation. BGE Home Products & Services a llGliilome Pnslucts and Services HIP &S) 's ( I continues to meet residential and commercial customers' high demand for quality pnx!ucts and services. One of the biggest growth areas ia 1996 has been assisting kical commercial customers with their building systems. For example, when llattimore City Schools needed to overhaul their -h heating systems, they tumed to llP&S' Commercial { COMTORTLINK' CO0lS l Services Team to help solve their problem. Convention Center l hen Baltimore expanded its Convention Constellation Energy Source Center last year, CouronrLiux-a partnership a in the past year, llGE's gas-between BGE and The Poole & Kent Company-marketing subsidiary changed PgDMs its name from IING to Constellation linergy Source. t l co@ng pant h, and hn reap me knem d it also established itself in three low <0st ak conMoning for years to come regions of the country to launch its gas-marketing effort. Ily Thanks to Dennis Manning, Greg Fox, Poole & Kent's i the year 2000 it plans to Bill Parsons, and the rest of the CouronTLtur team, the have a major presence i Convention Center now houses the plant. And more l downtown businesses have recognized its advantages. throughout the U.S. CouronrLiur now has agreements to cool nine Partilovelady, Vice President, buildings, including Oriole Park at Camden Yards. the Constellation Encryy Sourre, runs ! Ravens' new football stadium, and two of fidehty & .nr daily operations of our gas-Deposit Company of Maryland's office t,utidings. l I marketing subsidiary at a time CouronrLINK is designed to Use Central f3Cihties to n hen the whole industry is breaking ' pump hot and cold water beneath city streets to heat new gmund. "Thefuture of the and cool downtown Baltimore bui\\ dings. l industry is energy marketing. notjust W gas, oil, or electricity marketing. I see Snown from lett Bill Parsons, Greg Fox and Constellation Energy Soun e playinx Dennis Manning. l a Ley nde in ourfidl-service l e)) orts." says Patti.

B e hin d eve ry c u sto m e r... a leading corporate c.t.ize n i Ohis sleeve to donate the first unit to BGE's blood program. T n December 1,1958, BGE President J. Theodore Wolfe rolled up as then, we recognize that the vitality of our company depends on the B well-being of the communities we serve. In 1996 we rolled up our E Ga sleeves to strengthen the economic, environmental, and social fabric of ri1 Central Maryland. The results are nothing less than dramatic. j a llGE has a long-standing commitment to busi-a Our employees have always been our greatest ness growth and retention, job creation, and asset, and we are constantly encouraging them to economic expansion in Maryland. That's w hy take their talents and expertise beyond the walls we began offering an of our company. More than 6,(XX)IIGE Economic Development employees and retirees vo!unteered over Discount to businesses for 9,1(X) hours of their own time in 1996, raising rekicating or expanding in a total of 51.4 million for charity through our Central Maryland. Sixteen Employee Volunteer Program. companies have already a As an industry leader in pollution prevention, ([j[' signed on for these tempo-IIGE has created a balance between the need to rary electric-price reduc-provide safe, reliable, and economical energy tions, bringing an rvice and the need to protect the environment. estimated 1.(dN) jobs to our i r our effons earned us two WasteWi$e area. Chesapeake Iliological 1.aboratories is but Awards from the Environmental Protection one example. Agency. We recycled (d) percent of our solid u Our desire to improve the quality of life for the waste, saving the company 55.7 million. members of the communities we serve is w hat drives our corporate-giving program. In 1996 we remained the largest corporate giver in Central l'or nunc dum a cfuarter of a ccinury, 7 '""r Gui"CShd*d^rdbd'AC'hdlld^ Maryland, granting $4.3 million to a variety of J nonprofit groups. A major focus of our " bait" to Acep hundreds of Aids off corporate giving is early childhood i Ciff Struts and awayfrom crime. "ffd" "Xd n hen I hcan/ desclopment, a cause we see as an t imestment in Maryland's future. people saying, 'If you could k' f, O_ just sarc one.' that wasn't a With rapid technological change A t 1 cnouglM wanted to altering the state of local industry, a save them all... says \\. 4 highly skilled and adaptable work force 'u n the llGL. Wlunteer =f 4 is more critical than ever to Maryland's g, f dw rea "ht economic strength, ilGE awarded grants j" now I reali:e that g to six of Maryland's community saving that one os colleges to help Maryland citizens phCnomCnal., acquire the skills needed in today's high-perfoonance workplaces. 7

Financial Contents 18 Utility Operating Statistics 30 Reportof Management 36 Consolidated Statements a p abon 19 Selected Financial Data 30 Report of Independent udanB M ConsoMaWatements 20 Management's Discussion o ome aus and Ana!ysis 31 Consolidated Statements 20 m introduction of Income 39 Notes to Consolidated andal Statement 20 m Resultsof Operations 32 Consolidated Balance Sheets i rs and Omrs 34 Consolidated Statements 21 Utility Business of Cash Flows 56 Five-Year Statistical Summary 26 Diversified Businesses 28 s Liquidity and Capital Resources of Common Shareholders' Equity Sales of Electricity Sales of Gas Utility Construction Eyenditures Billions of Kilowatt-Hours M.Ilions of Dekatherms Milhons of Dollars 20 50 15 40 { a{ 1g }w 900 %, g 7 e x a 5 is: N $300 ,] g g 3 4 4 4 10 7 7 7g J,lyo MINii jil g i Sud a st = llRllRI IIRllR

millillillimi 1

niisi-92 93 94 95 96 92 93 94 95 96 92 93 94 95 96 97 I Residental Residential [ Construction I Commercial { AllowanceforFunds l Commercial ! Industrial Used Dunng Construction I Industnal 17 Itallimote Gas arid Electne Company and Subsidiaries

Utility Operating Statistics Compound 1996 1995 1994 1993 1992 Growth Doctric Operating Statistics 5-Year 10-Year Revenues Iin Thousarvh) Residential 5 958,736 5 955.239 5 931,711 5 931/43 5 839,954 1.67 % 5.23 % Cannmercial 861,M3 879,438 852,989 869,829 842,694 0.26 3.49 hx!ustnal 207,579 208,441 205,611 199/42 201,950 (0.50) 0.77 System Sales 2,027,658 2J43,118 1.990.311 2J#X) 514 1,884,598 0.83 3.93 Interchange arx10ther Sales 155,877 166,9M 118,027 91,543 % 323 45.57 5.26 Other 25,492 21f29 19,083 20/190 16,611 3.44 8.07 Total $2,209,027 52,231,111 52,127.421 52 112,147 51,965,532 2.10 4.05 1 Sales (in WusarxisFMw H Residential 11,243 10,966 10,670 10,614 9,735 2.17 3.73 Cormnercial 12,591 12,635 12,351 12395 11,909 1.47 2.98 Irwiustrial 4,596 4.591 4,433 3,763 3,663 439 1,26 System Sales 28,430 28,192 27,454 26,772 25.307 2.19 2.% Interchange and Other Sales 7,580 8.149 5,684 4,149 3.180 45.41 6.57 'Iotal 36,010 36341 33,138 30,921 28,487 6.18 3.62 Customers Residential 995,197 988,179 978,591 958,212 956,570 1.15 1,54 Commercial 104,501 103399 101,957 100,820 99,673 1.24 1.99 Industrial 4,261 4,161 3,967 3,800 3,761 3.52 538 Total 1,103,959 1/N5,739 t /184,515 1,072,832 IJ)60fW4 1.17 1.60 AveraFe Use per Residential Customer-xwn Il.297 11,097 10,903 10,963 10,177 1.01 2.15 Average Rate per xw H (System SalesFs Residential 8,53 8.71 8.73 8.78 8.63 (0.49) 1,46 Commercial 6.84 6 96 6.91 7,02 7.08 (1.18) 0.48 Irutustrial 4,52 4.54 4M 5.29 5.51 (4.67) (0.47) Peak Iml (One-lhiur)-Mw 5,955 5,947 6,038 5,876 5.558 0.15 2.58 Capabihty at Summer Puak-Mw 6,8fN) 6,731 6,722 6,701 6,687 0.57 1.61 System load Factor $7,5 % 57.2% 54.7 % 55.2% $4.8% 1.87 0.21 Cas Operating Statistics Revenues (In Thomarwh) Reskiential $ 320,105 5 248,283 5 262,736 5 265,601 5 242,737 7.73 2.14 Commercial Euludmg iklivery Senice 125.052 109,859 121,005 121,832 !!2,147 539 (0.03) Ikhvery Service 7,217 3,696 2.285 3,287 3,591 18.95 9.83 Irxtustrial Excludmg Iklivery Service 17,064 16,730 20,140 22,250 21,123 6.57 (3.55) Iklivery Service 14,598 16332 9,635 12,920 14,290 (4 69) (3.23) System Sales 484,036 394,9(X) 415,801 425,890 343.888 6.76 1.14 Of f-System Sales 26/dN) Other 6.656 5/W4 5,448 7,273 6,511 (036) (6.90) Total 5 517,292 5 400,504 5 421.249 5 433,163 5 4(W),399 7.77 1.50 Sales (In husand+tmi Residential 43,784 40,211 40,279 40,029 39fM2 3.70 1,26 Commercial Excluding iklivery Service 22,698 23,612 23,712 23,830 23,478 1.87 0.49 Ikhvery Service 8,755 6,982 6,490 7,428 7.102 636 6.55 Industnal Euludmg Iklivery Service 2,887 4,102 4,410 5,298 5314 (434) (639) Ikhvery Senice 36,201 35,925 31,817 31.390 33,638 1.12 3.01 System Sain i14,325 110,832 108,728 107.975 108,574 2.4 I I 62 Oil. System Sales 10,204 Customers , 124,529 110,832 108,728 107,975 108,574 4.18 2.49 Total Residential 516,523 506,739 498,152 491,165 486,863 139 0.69 Commercial 38,861 38,422 37,891 37,518 37JEK) 1.23 1.23 Industrhd 1,350 1,334 1354 1353 1,412 (0.51) 0.42 Total 556,734 546,495 537,397 530/136 525275 137 0.72 Average Use per Residential Customer-Thenns 848 794 809 815 802 2.27 0.57 18 Average Rate per Therm--$ Residential ,73 .62 .65 66 .62 4.(K) 0.86 Commen ud (Excluding Delivery Senice) .55 .47 .51 .51 .48 3.64 (0.53) Irklustrial (Excludmg ikhvery Service) .59 4I .46 .42 40 11.61 3.16 IVak Day Serukiut-tyrH 708,966 706,287 761,900 657,700 609.2(X) 3.05 1.27 Itak Day Capability--imt 870JMio 847/XX) 847/XK) 847/XE) 847,(KW) 1.27 1.52 Utthly qwratirtg st mstics da not teflect the rhnunatum ef micrnmtpmy tramacrimu. Baltimore Gas and Elecinc Company and Sut)sidiaries

Selected Financial Data Compound 1996 1995 1994 1993 1992 Growth (Dollar anumnts in slum. sands, en ept per siwer anumnts b 5-%r 10-Year Summary of Operations Total Revenues 53,153.247 52.934,799 52,782,985 $2,741,385 $2.559.536 4.63% 4.63 % Expenwa Odier 7han Interest and income Taxes 2.483.782 2.239,1(17 2,147,726 2,124,993 2J)24,227 4.15 5.21 income Frtun Operations 669,465 695.692 635,259 616,392 535,309 6.54 2.73 Other incrune 6.130 8.819 32,365 20,310 22,132 (26.25) (9.83) Income Before Interest and Income Taxes 675,595 7N,511 667,624 636,702 557,441 5.55 2.49 Net interest Expense 198,438 196 977 190,154 188,764 189,747 0.19 5.82 Income Before income Taxes 477.157 507,534 477,470 447,938 367,694 837 139 incorne Taxes 166333 169,527 153,853 138,072 103,347 14.22 1.65 Net inc<wne 310,824 338/K)7 323,617 309.866 264,347 4.17 1.25 Preferred and Preference Stak Dividends 38.536 40,578 39.922 41.839 42.247 (2.05) 3.67 Eamings Applicable to Common Stock 5 272.288 5 297.429 5 283.695 5 268.027 5 222.100 5.26 0.95 Eamingx Per Share of Common Stock 51.85 $2.02 51.93 $1.85 $ 1.63 2,07 (1.26) Dividends Declared Per Share of Ctunmon Stock 51.59 $1.55 $1.51 $1.47 $1.43 2.58 3.03 Ratio of Eamings to Iked Charges 3.10 3.21 3.14 3.00 2.65 6.43 (2.97) Ratio of Eamings to Exed Charges and Prefermi and Preference Stock Dividends Combined 2.44 2.52 2.47 234 2.08 6.N (2.68) Financial Statistics at Year End Total Assets 58.550.970 58316.663 58.037.502 $7.829.613 $7.208.660 3.68 6.44 Capitalization i long-temi debt $2,758,769 $2.598.254 $2.584,932 $2.823,144 $2.376,950 2.91 5.62 l Preferred stock 59,185 59,185 59,185 59,185 Redeemable preference stock 134,500 242,000 279.500 342,500 395,500 (19.53) 10.40 Ikference stock not subject to mandatory redemption 210.000 210JKK) 150,000 150fXX) 110,00() 13.81 6.68 Common shareholders' equity 2.857,113 2,812.682 2.717,866 2.620.511 2.534.639 5.82 5.77 Total Capitalization 55.960.382 55.922.121 55.791.483 55.995340 $5.476.274 3.12 5.63 lkmL Value Per Share of Common Stock 51935 519.07 $18.42 517.94 $17.63 2.62 3.43 Number of Common Shareholders 77.550 79,811 81,505 82,287 80.371 1.74 0.07 19 Baltimore Gas and Dettric Company and Sut)sidiaries u

Management's Discussion and Analysis of e Financial Condition and Results of Operations introduction In Management's Discussion and Analysis we explain the general obtain all regulatory approvals. These matters are discussed in financial cornfition and the resuhs of operations for BGE and its more detail in Note 12 beginning on page 48 and in a Registra-diversified business subsidiaries including: tion Statement on Form S-4 (ReF stration No. 33417W). The i a what factors affect our business, merger may impact many of flye matters discussed in Manage-ment's Discussion and Analysis meludmg cammgs, results of a what our camings arxi costs were in 1W6 arx11W5, electric operations, expenses, liquidity, and capital resources. m why those carnings and costs were different from the year The electric utility irxiustry is undergoing rapid and substantial

befwe, change. Competition is increasing. The regulatory environment a where our earnings came from, (federal and state) is shifting. These matters are discussed briefly in me nnperson and Reppmse to Regulatmy Change" section a low all of this affects our overall financial condition, on page 22 in Management s Discussion and Analysis.They are a what our experuhtures for capital projects were in 1994 discussed in detail in our Annual Repnts on Form 10-K. BGE through IW6 and what we expect them to be in IW7 continuously evaluates these changes. Based on the evaluations, through 1999, and BGE refines short and long term business plans with the primary a where cash will come frorn to pay for future capital Foal of protecting our security holders' investments and pro-expenditures, viding them with superior retums on their investment in BGE. In order to suppnt this primary goal, we also focus on other groups As you read Management's Discussion and Analysis, it may be who impact our pnmary goal. For example, we stress providing helpful to refer to our Consolidated Statements of income on page low cost, reliable power to our electric customers. As you read 31, which present the results of our operations for 1996,1995, and Management's Discussion and Analysis, many BGE initiatives 19% In Management's Discussion and Analysis, we analyze and to support our primary goal are mentioned. These include the expla,m the annual changes m the specific hne items m the Con-proposed rnerger with Potomac Electric Power Company, solidated Statements of income. Our analysis may be imputant t

& signed to position us to remain competitive as the industry you in making decisums about your investnwnts in BGE. changes, and our diversification effort. We enter new businesses You may notice some changes in this year's discussion, which we believe will support our primary goal. For example, compared to past years. This is because we volunteered to new businesses may be opputunmes to: participate in a pilot program with the Securities and Exchange a provide customers of our core energy business additional Commission to write financial documents in plain English. As a services, or result, we han re-written our entire Management's Discussion and Analysis section. Our goal is to discuss our financial condi. E attract new customers for our core energy business, or tion in language ttut is more easily understcxxi-e expand our diversified stream of revenues. BGE and Potomac Electric Power Company have agreed to We believe our newest subsidiary, Constellation Power Source, merge into a new company named Comtellation Energy Inc., will satisfy all three criteria. Its proposed power marketing Corporation. We plan to complete the merger as soon as we business is desenhed in detail in the front of this reput. l Results of Operations in this section, we discuss our 1996 and 1995 earnings and the 1996 f actors af tecting them. We begin with a Feneral overview, then Our 1996 total camings decreased $25.1 million, or 5.17 per separately discuss camings for the utility business and for share, from 1995. Our total camings decreased because we diversified businesses, reserved for disallowed replacernent energy costs. We discuss this in detail in the " Disallowed Replacement Energy Costs" Overview section on page 23. Total Earnings per Share of Common Stock In 1996, we had higher utihty earnings from current year opera-tions due to three factors: we sold more electricity and gas due 1996 1995 1994 to colder winter weather (people use more gas and electricity to f amings per share from heat their homes in colder weather), there was an increase in the current 9 ear operatums: number of customers, and we had lower operations and mainte-2 Utihty business 51.96 51.84 51.81 nance expenses. We would have had even higher utility camings Diversified twinesses (subsidiaries) .31 .I8 .12 from current year operations except ue sold less electricity in Total camings per share from the third quarter dec to rnilder summer weather. We discuss our current-year openitions 2.27 2.02 1.93 utihty camings in more detail beginning on page 22. Disallowed n placement energy cosh (see Note 12) (,42) Total cammys per share S t.M5 52.02 51.93 s w I { Baltimore Gas and Declrit Certpaq and Sutmcian f

e in 1996, we had higher camings from our daersified business From time to time, w hen necessary to cover increased costs, we 4 60hsidiaries mostly because the Constellation Companies had ask the Maryland Commission for base rate increases. Not every higher camings from power generation projects and financial request for base rate increases is granted in full. However, the investments. We discuss our diversified business earnings in Maryland Commission has historically allowed BGE to increase mort detail beginning on page 26. base rates to recover costs for replacing utility plant assets, plus a profit, beginning at the time of replacement. Generally, rate 1995 increases improve our utihty eamings because they allow us to c Ilect more revenue. Ilowever, rate increases are ncxmally Our 1995 total camings increased $13.7 million, or $.09 per granted based on histoncal data and those increases may not 6 hare, fnnn 1994. always keep pace with increasing costs. In 1995, we had higher utility camings mostly due to greater sales of electricity during an extremely hot summer and higher elec-Weather tricity and gas sales resulting fnun colder fall weather. We would Weather afTects the demand for electricity and gas, especially have had even higher utility camings except for the mild weather among our residential customers. Very hot summers and very m the first half of the year, lower net other income and deductions cold winters increase demand. Mild weather reduces demand. (miscellaneous non. operating income and expenses), and lower allowance for funds used during constmetion (an accounting pn> We measure the weather's effect using " degree days." A degree cedure used to exclude the cost of capital fnwn expense and day is the difference between the average daily actual tempera-include it as part of the cost of utility plant construction). ture and a baseline temperature of 65 degrees. Cooling degree days result w hen the daily actual temperature exceeds the 65 In 1995, we had higher camings from our diversified businesses degree baseline. Ileating degree days result when the daily mostly because the Constellation Companies had higher earn-actual temperature is less than the baseline. .m from power generation projects and financial investments. During the cooling season, hotter weather is measured by more Utility Bustriess cooling degree days and results in greater demand for electricity to operate cooling systems. During the heating season, colder, liefore we go into the details of our electric and gas operations, weather is measured by more heating degree days and results in we believe it is important to discuss four factors that have a greater demand for electricity and gas to operate heating systems. strong innuence on our utihty business perfomutnce: reFulation, the wcather, other factors includmg the condition of the economy De following chart shows the number of cooling and heating in our sersice temtory, and competition. degree days in 1996 and 1995, shows the percentage changes in the number of degree days from prior years, and shows the Regulation by the Maryland Public Ser ice Commission number of degree days in a " normal" year as represented by the The h1aryland Public Service Commission (Maryland Com-Nyear average. 30-Year mission) determines the rates we can charge our customers. Our rates consist of a " base rate" and a " fuel rate". De base rate is 1996 1995 Average the rate the Maryland Commission allows us to charFe our Cooling degree days 786 1,056 MM customers for the cost of providing them service, plus a profit. Percentage change We have txith an electric base rate and a gas base rate, liigher compared to prior year (25.6)% 11.3 % electric base rates apply during the summer when the demand lleating degree days 5,138 4.601 4,901 for electricity in the highest, Gas base rates are not afTected by Percentage change seasonal changes. compared to pnor year 11.7 % (l.5)G The Maryland Commission allows us to include in base rates a component to recover money spent on conservation Other Factors programt This component is called an "enerFy conservation Other factors, aside from weather, impact the demand for elec-surcharge."llowever, under this surcharge the hiaryland tncity and gas. Dese factors include the " number of customers" Conuni<,sion limits w hat our profit can be. If, at the end of the and usage per customer" during a given period. year, we have exceeded our allowed profit, we lower the amount of future surcharges to our customers to correct the amount of ne number of customers in a given period is affected by new overage, plus interest. home and apartment construction and by the number of busi- "I "I' In addition, we charge our clectric customers separately for the fuel (nuclear fuel, coal, gas, or oil) we use to generate electricity. Usage per customer refers to all other items impacting customer The actual cost of the fuel is passed on to the customer with no sales which cannot be separately measured. Dese factors profit. We also charge our gas customers separately for the include the strength of the economy in c.4 service terntory. natural gas they consume.De price we charge for the natural When the economy is healthy and expanding, customers tend to gas is based on a Market Based Rates incentive mechanism consume more electricity and gas. Conversely, during an approved by the Maryland Commission. We discuss Market economic downtrend, our customers tend to consume less liased Rates in more detail in the " Gas Cost Adjustments" electricity and gas. section on page 24 and in Note 1 on page 39. We use these terms later m our discussions of electric and gas operations. In those sections, we discuss how these and other factors affected electric and as sales during 1996 and 1995. F 21 Ba ec Gas and Dettoc Corgan and Setsdianes

Competitioet and Response lo Regulatory Change Electric Operations Our business is also affected by competition. Electric utilities are Electric Resenues [ "8 ""E** The changes in electric revenues in 1996 and 1995 compared to l e in the construction of generating units to meet increased the respective prior year were caused by: i demand for electricity, - 1996 1995 e in the sale of their electricity in the bulk power markets, gf,,ubiu) aml - Electric system sales volumes $ 0.4 $ 43.4 I e in the future, fi>r electric saled to retail customers which Base rates 12.5) 23.2 utilities now serve exclusively. Fuel rates (123) (13.8) l " ' ' "E# We regularly reevaluate our strategies with two goals in mind: to improve our competitive position, and to anticipate and adapt to from electric system sales (14.4) 52.8 j regulatory changes. In September 1995, we decided that a merger ange and ohr sala with Potomac Electric Power Company would help us compete ' by maintaining k)w-cost pnxluction and increasing our size. Total change in electric revenues $421.01 $1m.2 - The pending merger is more thmughly discussed in Note 12 on i page 48. Although we believe the merger willimprove our com-Electric System Sales Volumes j petitive position in the future, no one can perdict the ultimate " Electric system sales

• are sales to customers m our service effect competition or regulatory change will have on our camings terntory at rates set by the Maryland Commission. These sales or on the camings of the merged company.

do not include interchange sales and sales to others. We will continue to deveh>p strategies to keep us competitive. The percentage changes in our electric system sales volumes, by 1hesc strategies might include one or more of the following: type of customer, in 1996 and 1995 compared to the respective pnor year were: - a the complete or partial separation of our generation, transmisak>n, and distribution functions 1996 1995 l Residential 2.5% 2.8% e other m.ternal restructunng Commercial (0.3) 2.3 e mergers or acquisitions of utility or non-utility businesses Industrial 0.1 3.6 f s addition or disposition of portions of our service territories !n 1996, we sold more electricity to residential customers for e spin-off or distribution of one or more businesses three n asons: colder weather in the first quarter, greater elec-We cannot predict whether any transactions of the types tricity usage per customer, and an increase in the number of l described above may actually occur, nor can we predict what customers. We would have sold even more electricity to residen-l their effect on our financial condition or competitive position tial customers except for milder summer weather. We sold about j might be, the same amount of electncity to commeertal and industrial customers as we did in 1995. As mentioned above, weather i We discuss competition in our electric and gas businesses in impacts residential, more than commercial and industrial, sales. more detail in our Annual Reports on Form 10-K under the in 1996 other items offset the impact of weather on commercial - headings " Electric Regulatory Matters and Competition"and and industrial sales. Other items include the demand for power " Gas Regulatory Matters and Competition." to fuel manufacturing equipment and office machinery, which vary with changes in the customers' businesses. For example, if Utlkly Business Earnings per Share of Common Stock a manufacturing plant has a slow year,it will make less product 1996 1945 1994 and use less power to run its assembly lines. Ut lity camings per share from in 1995, we sold more electricity to residential and commercial a current. year operations: customers mostly because we had an increase in the number of Electric business 51.75 11.70 $1.71 customers and we had extremely hot summer weather and cold l Gas business .21 .14 .10 fall weather. We would has e sold even more electricity to those Total utility camings per share customers except we had milder weather in the first half of i from current year operations 1.% 1.84 1.81 1995 compared to 1994. We sold more electricity to industrial Disallowed replacement customers mostly because we had an increase in the number of t energy costs (see Note 12) (.42) customers and more demand for electricity from Bethlehem Total utility earnings per share 51.54 51 R4 %I.Mi Steel (our largest customer). Ikise Rates Our 1996 total utility carnings decreased $44.5 million, or in 1996, base rate revenues were about the same as they were 530 per share, fmm 1995. Our 1995 utility earnings increased in 1995. Ahhough we sold more electricity this year, our I 55.6 milhon, or 5.03 per share, fmm 19%. revenues did not increase because the higher sales occurred We discuss the factors alTecting utility earnings below. during the winter when our base rates are lower. j 22 1 l t i Baltimore Gas and Electric Comparty and Subsidiaries ~ i

a la 1915, base rate revenues were higher than in 1994 because of Electric Fuel and Purchased Energy thpenses a !\\igher energy conservation 6urcharge and aho because we did 1996 1995 1994 not hate to reduce conservation revenues as we did in 1994, 4,,,,m,m when we exceeded our allowed profit. Actual unts $539.2 $554.5 5541.2 Fnnn July 1,1993, through June 30,1994, we exceeded our Net recovery of costs uraler electric fuel profit limit under the energy conservation surcharge. To coTect rate clause (see Nine 1) N.2 24.3 1.1 the overage, we lowered the surcharge on our customers' bills fnnn December 1993 to Nosember 1994. As a result, we billed Dhanowed replacement 520.1 million less than we wouki have otherwise. We also energy costencluding exceeded the limit on our profit during 1996. Therefore, we carrying charges) See Note i2) 95.4 excluded $28.5 million of our 1996 surcharge bilhngs fawn revenue, and we will lower the surcharge on our customers' bilh Total electric fuel and beginning in July 1997 to correct the overage, purchased energy expenses $42.N $578.H %t23 Fuel Rates Actual Costs The fuel rate is u.e rate the Maryland Coinmission allows us to in 19%, our actual cost of fuel to generate electricny ' nuclear cha ye our customers for our actual cost of fuel with no profit to fuel, coal, gas, or oil) arxl electricity we tuught fnun other utilities ut if the cost of fuel goes up, the Maryland Commiwion was lower than in 1995 because the price of electricity and permits us to increase the fuel rate. If the cost of fuel goes down, capacity we hiught f rom other utihties was lower arxl we sold less our customen benefit from a reduction in the fuel rate. The fuel electricity. The price we pay for electricity and capacity we buy rate is impacted,nost by the anunint of electricity pencrated at fnnn other utihties changes based on market etwxhtions, complex the Calvert Chlfs Nutlear Power Plant because the cost of pricitig forinul.a for PJM transactions. arul avitract tenns nuclear fuel n cheaper than coal. gas, or oil. (See Note I on in 1995, our actual ant of fuel to genaate electricity and elec-page 39 for a further discussion of how the fuel rate increases ty we bought imm other uth was Ngha than in W and decreases.) m:ntly because we generated nuwe electricity and the price of Changes in the fuel rate normally do not affect earnings, electricity arxl capacity we bought fnwu other utilities was llowever,if the Marylaral Commiwion disallows reemery of higher. Our actual costs wouki have been even higher except we any part of the fuel unts, our earnings are reduced (We discuw were able to use a less-costly mix of generating plants, mostly this more thoroughly in the "Eketric Fuel and Purchased EnerFy because of shorter refuehng and maintenance downtime at our Expenses" section below and in Note 12 on page 50 ) Calvert Chrh Nuclear Power Plant. In 1996 and 1995, fuel rate revenues decreased due to a lower Elcetrie l'url Rate Clause fuel rate treause we were able to operate plants with the lowest 'lhe " electric fuel raic clause"(determined by the Mary had fuel onts to generate electricity dunng the previous 24 months Commission) requires that we defer (to inchule as an awet or Fuel rate revenues would have been even lower except ue soki liabihty on the bidance sheet and exchale from incoine arni more electricity, in 1995, the fuel rate was also lower compared expense) the difference trlween our actuid costs of fuel arxl our to 1994 because of lower fuel costs. fuel rate mvenues collected from customen through the fuel rate. We bnn twfund that dnWenwe to customers in the future. t interchange and Other Sales " Interchange and other sales" are sales of energy in the in 1996 and 1995, our actual fuel costs were lower than the fuel l Pennsyhania New Jersey Maryhux!Interconnectmn(PJM)and rate n vemies we collected from our customers. As a result, we I to others. The PJM h a reponal power pml of eight utihty reemered fuel costs w hich we hix! deferred in prior years. member companies, includmg ilGE. We sell energy to PJM members and to others af ter we have sathfied the demand for Divdlowed Replacement Energy Costs During 1989 through 1991 we experienced extended outages at electriaty in our ow n sy stem. t our Calvert Chih Nuclear Power Plant. These outages have been l In 1996, we had lower intercluuige and other sales compared to the sutyect of ongoing fuel rate priveedings before the Marylam! 1995 betause we generated Icw electricity at our Cahert Chih Commission for several years (see Note 12 on page 50). t Nuclear Power Plant.This meant that we had Icw electricity to sell out41e of our senice temtory. We generated less electricity in December FN6, we entered mto a settlement agreement with at that plant mostly because the 1996 outage fte regular refuchng the Maryland People's Counsel and the Marylaix! Commission and maintenance took hmger than in 1995. Staff. We agreed not to bill our customers for 5118 milhon of electric replacement energy costs associated with these extended in UN5, interchange amt other sales m. creased because we were outages. We set up a reserve for 535 milhon of these costs in able to operate plants u ith the lowest fuel costs to generate elec-UNO. In 1996, we increased that resene by 583 million and we tricity, had avadable capaaty, and had low er costs than other wrote off 55 6 million of related carrying charges. In a&htion, utihties. Specifically, we had gwater generation from our coal-we w rote oft 56.8 million of fuel costs that were disallowed by fired ilrandon Shores Power Plant, and our Calvert Chih

g. Mmland Commiwion in May 1996 (we dncuss these costs Nuclear Power Plant generated a record lesel of electricity f urther in Note 12 on page 50). These w rite offs and the increase dunny uni in the reserve Sigmficantly increased our total purchased fuel and energy expenses in PN6. The remairaler of the replacement energy costs associated with the extended outage has already been recovered from customers through the fuel rate.

23 Pattimore Go and flectnc Company and Sufis diaries

Gas OperaticCs EfTective Octoter 1996, the Maryland Commission approved u., Gas Rnenm modification of the gas cost adjustment clauses to provide a " Market flased Rates" incentive mechanism. In general temis, De changes in gas revenues in 1996 and 1995 compared to the under Market Based Rates our actual cost of gas is compared to rcspective pnor year were caused by: a market index (a measure of the market price of gas in a given 1996 1995 period), and half of the difference belongs to shareholders. We uelm<>ru; discuss this in more detail in Note 1 on page 39. Gas system sales volumes $ 8.2 $ 0.2 Delivery service customers, including Bethlehem Steel, are not flase rates 18.9 6.4 subject to the gas cost adjustment clauses because we are not Gas cost adjusunents 62.1 (27.4) sell ng them gas (we are selling them the service of delivering Total change in gas revenues their gas). fnxn gas system sales 89.2 (20.8) In 1996 gas cost revenues increased because we had to pay oft. system udes 26.6 more for gas and we sold mom gas. In 1995, gas cost revenues Other 1.0 0.1 decmased because we paid less for gas and we sold less gas. Total change in gas revenues $116.8 $(20.7) Off-System Sales Gas System Sales M4umes Off-system gas sales, which are direct sales to suppliers and end %e percentage changes in our gas system sales volumes, by usen of natwal gas wth mr senice tenitmy, aho am mt ] type of customer, in 1996 and 1995 compared to the respective subject to gas cost adjustments. We began sales of off-system gas prior year were, durmg the first quarter of 1996. Le Maryland Commission j 1996 1995 appmved an anangement fw pan oW eanu,ngs fran omsystem sales i benefit customers (through reduced costs) and the Residenual M.9 % (0.2)1,, Commercial 2.N 1.3 remainder to be retained by BGE (which benefits shareholders). Industrial (2.3) 47 Gas Purchased l'or Resale Espenses I in 1996, we sold more gas to residential and commercial 1996 1995 1994 custaners due to colder winter and early spring weather and an r/n men 3; increase in the number of customers. We would have sold even Actual costs $295.4 $205.9 $222.7 more gas to those customers except that gas usage per customer Net recovery (deferral) of decreased. We sold less gas to industrial customers because costs under gas adjustment Bethlehem Steel used less gas. We would have sold even less clauses (see Note 1) (11.03 (7.8) 1.9 gas to mdustrial customers except for increased gas usage by other industrial customers, an increase in the number of Total gas purchased for customers, and colder winter weather. resale expenses 52x14 $198.1 $224.6 In 1995, we sold ahnut the same amount of gas to residential Actual Costs customers as we did in 1994. We sold rnore gas to commercial Actual costs include the cost of gas purchased for resale to our customers for three reasons: an increase in the number of cus-customers and for sale off-system. These costs do not include j tomers, increased gas usage per customer, and colder weather in the cost of gas purchased by delivery senice customers, the fall of 1995. We would hve sold even more gas to com-including Bethlehem Steel. mercial customers except for mikler weather in the first half of 1995. We sold more gas to industrial customers due to greater In 1996, actual gas costs increased from 1995 dee to three gas usage per customer. factors: higher market prices of gas, higher sales volumes, and the purchase of gas to resell off-systern (beginning in the first i Base Rates quarter of 19%). In 1996, base mte revenues were higher than in 1995 because in November 1995, the Maryland Cemmission allowed us to in 1995, actual gas costs decreased compared to 1994 because of increase our gas base rates. Bis increased our annual base rate the considerably lower market price of gas. This decrease would revenues for 1996 by $19.3 million, or approximately 3.7% of hase been even greater except that we received supplier refunds total 1995 gas revenues. Dat amount included $2.4 million to in 1994 which reduced actual gas costs that year. recover higher depreciation expense (an accounting procedure Gas Adjustment Clauses w hich spreads the cost of utility plant in service oser the years We charge customers for the cost of gas sold through gas adjust-m which it is used). ment clauses (determined by the Maryland Commission), as in 1995, our base rate revenues were higher than in 1994 discussed under " Gas Cost Adjustments

• carlier in tbt,cetion.

because of the energy conservation surcharge. In 1996 and 1995, the puttion of our actual gas cosas subject to Gas Cost Adjustments these clauses was higher than the revenues we collected from j Prior to October 1996, the Maryland Commission allowed us to our customers. As a result, we defernxi the difference and recover the actual cost of the gas sold to our customers through will collect the costs from our customers in the future. Dese " gas cost adjustment clauses." Dese clauses require that we deferrals decreased our total gas purchased for resale expenses defer the ditTerence between our actual cost of gas and the gas in 1996 and 1995. revenues we collect fmm customers We bill or refund that ' N difference to customers in the future. Baltimore Gas and Eintrir Company and Sutsidiaries

01,her Operating Expenses Other income and Expenses Opemtions and Maintenance Expenses Allowancefor Funds Used During Construction (AFC) In 1996, our operations and maintenance expenses decreased AFC is an accounting procedure used to exclude the cost of $13.5 million due to our continued efhnts to contml costs.This capital from expense and include it as part of the cost of utility decrease would have been even greater except we had higher plant construction. AFC is calculated at a rate authorized by the costs to maintain our nuclear plant. In 1995, our operations and Maryland Commission. We describe AFC further in Note 1 on maintenance expenses were ahC the same as they were in 1994. page 40. Depreciation and Amorti:ation Expenses in 1996 and 1995, we had lower AFC compared to prior years We describe depreciation and amortization expenses in Note I on because we completed several projects and struted less new construction. In 1996, we also had lower AFC because the Mary-page 4tt land Cornmission decreased the gas AFC rate in November 1995 In 1996, our depreciatum and amortization expense increased from 9.40% to 9.W4.This amant we were not autimrized to $12.8 millu n fnnn 1995 for two reasons: record as much gas AFC in 1996 as we were in 1995 and 1994. O we had nwre utihty plant in service to be depreciated Net OtherIncome and Deductions (as our level of utility plant that is in service chanFes. Net other incane and deductions represent miscellaneous income the amount of our depreciation expense changes), and and expenses which are not directly related to operations. O we had more enerFy consemition program costs to be in 1996, net other income and deductu ns mcreased $4.9 million amonized' compared to 1995 mostly because the Constellation Companies The increase in these expenses would have been even greater had lower deductions not directly related to operations and BGE except that in 1995 depreciation and arruirtization expense had about $2 million more of other interest and finance charge included $14.2 million for the write-otT of certain costs of our income. Perryman site, which is covered in more detail below. In 1996, in 1995, net other income and deductions decreased $16.2 million tk preciation and amortization expense did rot include any such cunpared to 1994 because we had ah>ut $12 million less of other write-off. interest and finance charge income, and we had about $4 million In 1995, our depreciation and anortization expense increased lower income from the sale of receivables (money customers owe $21.5 million over 1994 because we had more utility plant in to us) and property. We sell receivables to a Gnancial institution service to be depn:ciatal (mostly because of some capital addi-under agreements which are discussed in Note 12 on page 48. tions to our Calvert Clif1s Nuclear Power Plant), and we had a Interest Charges higher level of energy consers ation program costs to be amor. Interest charges represent the interest we paid on outstanding debt. tized. In athlition, we completed a study of the cost to decommis-sion Calvert Cliffs (Decommission is a term used in the nuclear In 1996, we had $2.1 million lower interest charges compared to mdustry for the permanent shut 4 town of a nuclear power plant 1995 largely because of lower interest rates. We would have had which usually occurs when the plant's license expires.)The study even lower interest charges except we had more debt outstanding. resulted in a higher estimated cost of deconunissioning, which increased decommissioning expense (included in depreciation in 1995, we had $53 million higher interest charges compared and amortitation expense) by $9 million annually. to 1994 because we had more debt outstanding and short-term interest rates were higher. Our 1995 and 1994 depreciation and amortizatmn expense reflected the write-oft of expenditures associated with future Income Taxes generation facilities at our Perryman site w hich will not be built. In 1996 our income taxes decreased treause we had lower We discuss the write-off of expenditures at our Perryman site taitable income from utility operations. Our income taxes would further in Note 1 on page 40.The write-off of these costs have b - even lower except that we had higher taxable income increased our 1995 depreciation and amortization expense by from o e diversified businesses. $14.2 million and inercased our 1994 expense by $15.7 million. In 1995, our income taxes increased because we had higher 7 axes Other 7han income Taxes taxable income from both our utitity operations and our in 1996, taxes (other than income taxes) were 59.6 million diversified businesses. higler than in 1995 mostly due to three factors: plant additions made in 1995 increased our property taxes about $7 million, Environmental Matters higher 19% revenues increased our gross receipts taxes about We are subject to increasingly stringent federal, state, and kical $2 milhon, and higher labor costs increased our payroll taxes laws and regulations that work to improve or maintain the quality ahiut $1 milhon. of the environment. If certain substances were disposed of or in 1995, taxes (other than income taxes) were $5.4 million higher released at any of our properties, w hether currently operating or than in 1994 mostly due to higher propeny taxes resulting from not, these laws and regulations require us to remove or remedy the effect on the environment. This includes Environmental nore utihty plant in service. Protection A ency Superfund sites. You uill find details of our F environmental matters in Note 12 on page 49 and in our Annual Reports on Form 10-K under item 1. Business - Environmental Matters. 'these details include financial infomiation. Some of the information is about costs that may be material. 25 (1sitimore G8tt siid Electric Compq arid Set'siciar!es

Diversified Businesses pmer purchase agreement with Jersey Central Power & Light - Company back to that utiliry. Energy pmjects had higher eans In the 1980s, we began to diversify our business in response to ings hw a varW of masonsonw ongoing Me unpmW hmited growth in gas and electric sales. Today, we continue to e e ency due to cyuipment or procedure changes) and some diversify our business in response to regulatory changes in the onetinw Um exarnple, losses incurred in 1995-to shut-down utility industry. Some of our diversified businesses are related to catain opemtbns at a plant--slid not occur again in 19(X0 our core utility business and others are not. Our diversified busi-nesses include; nese increases were offset by: s Constellation llokhngs, Inc. and Subsidiaries. together a a 57.0 million after-tax write-off of Constellation's invest-know n as the Constellation Companies ment in two geothermal u holesale power generating a BGE Ilome Pnducts & Services, Inc. and Subsidiary P"dCCIS' s BGE Energy Projects & Services,Inc. and Subsidiaries a a 53.0 million after-tax write-off of development costs for a proposed coal-fired power project that will not be built, a Constellation Energy Source, Inc. (formerly named BNG, aid inc.) e a 56.2 million after-tax write-off of a portion of an invest-Diversified Business Earnings Per Share of Comrnon Stock ment in a solar power pniect, in which Constellation has a

• ""N "*"#"

1. Y" 1996 1995 1994 with the lender.

Constellation Companies $.29 5.18 5.09 in 1995, eamings increased from 1994 mostly due to our share BGE ilome Pmducts & Services .02 JX) .03 of higher earnings from energy pniects and a profit made on the DGE Energy Pndects & Services 380 JM) sale of some operating and maintenance contracts. Constellation EnerFy Source J10 JX) 30 Cahfornia Power Purchase Agreements Total divenified business '!he Constellation Companies hase 5227 million invested in carninFs per share 5.31 5.Ik 5.12 16 projects that sell electricity in Calilomia under power purchase agreements called " Interim Standard Ofter No. 4" agreements. Our 1996 diversified business carnings increased 519.3 million, or 5.13 per share, from 1995. Our 1995 divenified business Under these agreements, the projects supply electricity to utility earnings increased 58.2 million, or 5 06 per share, from 1994. compames at: Dese increases mostly renect higher camings from the u a fixed rate for capacity and energy the first 10 years of Constellation Companies. the agreements, and We discuss factors affecting the camings of each diversified a a fixed rate for capacity plus a variable rate for energy business subsidiary below, based on the utilities' asoided cost for the remaining tenn of the acreements. Constellation, %p:.ies' Operations Generally, a " capacity rate" is paid to a power plant ihr its avail-ne Constellation sompanies engage in the following: ability to supply electricity, and an " energy rate"is paid for the e devekipment, ownership, and operation of power clatncity actually generated. " Avoided cost" generally is the generation projects, cost of a utility s cheapest next-available source of generation to sen ice the demands on its system. a financial investments, and From 1996 through 2(x0 the 10-year periods for fixed energy a deselopment, ownership, and management of real estate rates expire for these 16 pmer generation projects and they and semor.living facilities. begin supplying electricity at variable rates. When this happens, Eamings per share fmm the Constellation Companies were: the revenues at these pniects are expected to be lower than they are now. It is difficult to estimate how much lower the resenues 1996 1995 1994 may be, but the Constellation Companies' earnings could be Power peneration 5.lM 5.13 5.10 affected significantly. Financial investments .I4 .08 .03 IP"N .". supply ng electncity at variable rates in Real estate desclopment and 1997 and 1998. This means the Constellation Companies could senior-hving facdities (.02 ! 002) (.03) experience lower earnings from those pniects. Ilowes er, the Other t.n D (09 (.01 ) remaining pniects, w hich will continue to supply electricity at Total Constellation Companies' fixed rates, are expected to have higher resenues in 1997 and camings per share 5.29 5.18 5.09 1998. These higher revenues may ofTset the low er resenues from i the variable-rate pniects during those ) cars. j Power Generation ne Cahlornia projects that make the highest res enues will ne Constellation Companies' power generation businew begin supplying electricity at vanable rates in 1999 and 2(U). develops, owns, and operates pm er generation facilities. M a muh, we q not eget the Constellation Companies to have signihcantly lower camings due to the switch from hxed in 1996, earnings increased from 1995 mostly due to our share to variable rates before 2(X n 26 of higher camings from energy pndects and a 514.6 million after-tax pain on the sale by a Constellation partnership of a t al'ir e r e G as ar 1 f. e:t r,c C r:r ra r y a r1 Su es, a rie s

i e, In die second quarter of IVX>, Constellation determined that its Most of these projects are in the Bahimore-Washington corridor. ' irfvestments in two of these plants are not expected to be fully The area has had a surplus of available land and oflice space recoverable. Accordingly, as mentioned earher in this section, in recent > cars, during a time of low economic growth and die C mstellation C nnpanies recorded a 57.0 million after-tax corporate downsizings. Our projects have been economica!!y write-off of the investment in these plants. hurt by these conditions. Eamings fmm real estate development arul senior-living facilities in IW6 and lW5 were essentially Constellation is pursuing alternatives for some of these power unchanged from prior years. generation pndects including: Gostellation's real estate putfolio has continued to incur carry ing a repowering the pmjects to reduce operating costs, com and deprwiation over the years. Additionally, the Constella-O changing fuels to reduce operating costs, tion Companies has e been charging interest payments to expense rather than capitalizing them for some undeveloped land wirn' o renegotiating the power purchase agreements to improve &velopment activities have stoppedMhese carry ing costs, depre-the tenns' ciation, and interest expenses have decreased eamings and are 0 restructuring financings to improve the financing terms, expected to continue to do so. and Cash flow from real estate operations has not been enough to o selling its ownership interests in the proj.ects. make the monthly loan payments on some of these projects. We cannot predict the financial elfects of the suitch from fixed Cash shortfalls have been covered by cash from Constellation to variable rates on the Constellation Companies or on 11GE, but lloldings. Constellation Holdings obtained ttose funds from the the effects could be material. cash flow from other Constellation Companies and through "" "E International I hstorically, Constellation's power generation projects have We will consider market demand, interest rates, the availability Iren in the United States. Over the last two years, however, of financing, and the strength of the economy in general when Constellation has sought projects in Latin America. As of making decisions atuut our real estate in estments. We believe December 31, IVM. Constellation had invested about that until the economy shows sustained growth and there is i 517.1 milhon and committed another 56.5 million in power more demand for new development, our real estate values will pmjects in Latin America. In the future, Constellation's power not improve much. If we were to sell our real estate projects in generation business may he expanding funher in both domestic the current market, we u ould have losses, although the amount and international pndects. of the losses is hard to predict. Management's current real estate strategy is to hold each real estate pnsect until we can realize a reasonable value for it. Management evaluates strategies for all Financial insestments its businesses, including real estate, on an onFoing basis. We Earnings inun Constellation's portfolio of financial investments anticipate that competing demands for our financial resources, include. changes in the utility industry, and the proposed merger with a income from marketable securities, Potomac Electric Power Company, will cause us to evaluate thoroughly all diversified business strategies on a regular basis o incone from financiallimited partnerships, and so we use capital and other resources in a manner that is most . F mancial uaranty insurance compames. heneficial. Depending on market conditions in the future, w e 0 income from f. in IVM, camings were higher than in IWS because of better could also have losses on any future sales. eamings fnnu marketable securities arxl increased gains from h m N WM h p m dmW Am w a gM h finarual limited partnerships. In 1W5, camings were higher accounting rules, to w ntedown the value of a real estate invest-compared to IW4 due to: mereased earnings fnun marketable "*"I '" *"N#I "#lue A w rit ow n is requirrd in either of two securities, increased gains from finar'cial hmited partnerships, and caws i nt n, d.we change our intent aluut a pn9xt fnun an higher earnings from financial uaranty insurance companics. intent to hold to an intent to sell and the market value of that F expected cash P*5"' 1(cal Estate Desclopment and Senior-l.ising Facilities flow fnnn the project is less than the investment m the pndect. Constellation's real estate development businen includes: BGE Home Products & Services' Operations O Lmd urkler development, BGE Ilome Pnslucts & Services engages in: 0 office buildings. a sales and service of electric and gas appliances, O retail pnjects, o distnbution facility pnsects, a home improvements, and 0 an entenainment, dining, and rrtail complex in Orlando, a sales and service of heating arx! air conditioning systems.

florida, in IW6, earnings increawd due to improved perfonnance in the sen ice arxl installation business. In IW5, camings decreased

. O a mned use planned-unit development, and compared to IW4 larFely due to lower income inun the sale of a senior-living facilities. nceivables during IW5. We sell receivables to a financial instito-tion under agreements uhich are discussed in Note 12 on page 48. r. 27 h h t e ff" C f f 6 41 3 rMt ( l e M C C 0 m p g D y g p d $ U [M d g n g g

t BGE Energy Projects & Services' Operations a district energy systems through Comfort Link (a partner, I 13GE Energy Projects & Services provides a brmd range of ship with the Poole and Kent Company), and customired energy services, including: e private electric and gas distribution systems, 'l e powerquality services, This subsidiary was formed in November 1995'. It had no signif cant camings in 1996 or 1995. l e customer electrical system improvements, a lighting and mechanical engineering and installation Constellation Energy Source's Operations j 6e m ces. Constellation Energy Source (formerly named BNG,Inc.) i e campus and multi-building energy systems, engages in natural gas brokering.This subsidiary had no e energy consulting and financial contracts, significant earnings in 1996 or 1995. j i i i f i i !: eldity and Capital Resources l Overview Our businew requires a great deal of capital. Our actual capital requirrments for the years 1994 through 1996, along with estimated amounts for the years 1997 through 1999, are shown below. 1 f 1 1494 1995 1996 1997 1998 1999 Utility flusiness Capital Requirements: tin millkmM j Construction expenditures (excluding AIC) Electric $345 $223 $219 $230 $216 $ 215 3 Gas 68 70 84 72 70 73 i Common 42 51 46 33 39 37 Total c:mstruction expenditures 455 344 349 335 325 325 AIC 34 22 10 7 7 7 l Nuclear fuel (uranium purchases and processing charges) 42 46 47 49 50 50 Deferred energy conservation expenditures 41 46 31 24 19 18 ( Deferred nuclear expenditures 8 ~ r Retirement of king-term debt and redemption of preference stock 203 279 184 173 117 270 Total utility business capital requirements 783 737 621 588 518 670 l Diversifialilusiness Capital Requirements: i investment rquirements 51 118 118 214 180 205 j Retirement of hing-term debt 37 55 52 108 165 186 Total diversified business capital requirements 88 173 170 322 345 391 i l Total capital requirements 5871 5910 5791 5910 5863 51.061 I 9 Capital Requirements of Our Utility Business Electric construction expenditures include: i Capital requirements for our utility business do not include costs e installation of a 5,(XX) kilowatt diesel generator u hich to complete the pending merger with Potomac Electric Power was placed in service in 1996 at our Calvert Cliffs Nuclear Company, These costs. currently estimated to be $ 150 million, Power Plant, and are discussed in more detail in Note 12 on page 48. e imprmements to other generating plants and to our We continuously review and change our construction program, transmission and distribution facilities, so actual expenditures may vary from the estimates for the years Our projections of future electric construction expenditures do 1997 through 1999 in the capital requirements chart. Addi' not include costs to build more generating units. tionally, actual capital requirements may be different than the estimates for 1997 through 1999 because adjustments which Our utility operations prosided about 96'I in 1996,100rk in may result from the pending merger with Potomac Electric 199$, and 72Tr in 1994, of the cash needed to meet our capital Power Company have mit been considered in those estimates. requirements, excluding cash needed to retire debt and redeem i preferred and preference stock. In addition, in 1994, the sale of 28 some receivables provided $70 million in cash. This is discussed in more detail in Note 12 on page 48. i Baltimore Gas and Electric Company ar.d Subsidanes

l j insestment Requirements l During the three years fann 1997 timiugh 1999, we expect l' utility operathms to pmvide 115% ci the cash needed to meet The investment requirements of our diversified businesses our capital requirements, excluding cash needed to retire debt include: and redeem preference 6tock.1his estimate does not consider a for the Constellation Ownpanies, investments in financial the pending merger with Potomx Electric Power Onnpany. limited partner, hips and funding for the development and When we canrot meet utih.ty capital requirements mtemally, we acquisithm of projects, as well as kians made to project + sell debt and equity securitics. The anmunt of cash we need and partnerships, and i t marks corahtions detennine when and imw much we self. a for BGE Energy Projects & Services, funding for ' During the three years ended December 31,1996, we sold: . constructum of district energy projects of Comfint Link - O $540 millkm of kmg-term debt

• Investment requirements for 1997 through 1999 inckde esti-i 0 $60 million of preference stock, and mates of fundu.g for existing and new projects and for our new power marketing business. We continuously review arx! nxxlify 0 $39 millirm of comnon stock.

those estimates. Actual investment requiremenu could vary a great deal from the estimates on page 28 because they would be j Security Mathsgs subject to several variables, mcluding. i Independent credit-rating agencies rate our fixed-income securi-tiet 1he ratings indicate the agencies' assessment of our ability a the type and number of pmjects selected far devekspment, to pay interest, dividends, and principal on these securities.These a the effect of market conditkms on those projects, f ratings affect how much it wdl cost us to sell these securities.The e opportunities for growth in the power marketing business, Irtter the rating,. the cheaper it is for us to nell. At the date of this report,our securities rutings were as follows: a the ability to obtain financing, and simlard Moody's a the availability of cash from operations. t & Ponrs investors Duff & Pirym I Raur.g Group Servkc Cmhi Raung Co. Debt and Liquidity Mangage llornli A+ AI AA-Our diversified businesses plan to meet capital requirements by i Unsecured Debt A A2 A+ refinancing debt as it comes due, by additional borrowing, and ' j Preference SkxL A "a2" A with cash generated by the businesses.this includes cash from i operati ms, ude of assets, and camed tax lenefits. BGE Ilome Pmducts & Services may also meet capital requirements through '. ales of receivables as discussed in Note 12 on page 48. Capital Requifements s ' of Our Diversified Businesses if Constellation can get a reasonable value for its real estate, it l -In the past, capital requirements of our diversified businesses could obtain addithmal cash by selling real estate projects. For J only included the Omstellation Companies because they had the more infonnation, see the discusskm of the real estate business only significant capital requirements. Fnwn time to time, low-and market on page 27. Constellation *s ability to sell or liquidate ever, our other diversified l'usinesses may develop significant assets will depend on market conditions, and we cannot give l capital requirements. As that occurs, we will include the capital assurances that these sales or liquidathms could be made. seguirements of dose businesses in the capital requirements in additkm, Constellathm has a $75 million revolving credit table on page 2H. As discussed tx low under Investment agreement and Comfort Link has a $50 million revolving Reqmrements, capital requirements for Gunfort I. ink are alw rd pm m pmvide addithmal cash for short-temt inchded this year. financial needs. Our umstellation Companies and oder diversified businesses .r exptt to expand their businesset 'this will include our new l power marketing businent It alw may include expansion in the energy, financial investments, real estate, and senior-living + facility businesses. Such expansion could mean more invest-i ments in and acquisition of new projects. Our Constellathm Companies arx! other diversified tmsinesses have met their capital requirements in the past thmugh lorrowing, cash fnun their operations, and from time to time. loans or equity con-tritmthms inun llGE. Our Constellathm Companies and other diversified businesses plan to raise the enh needed to meet capital requirements in the future through these same methals. i ? ? 29 I i i i i d Saltimote Gas and tiectric Company and Sut:sidiaries

i Report of Management e lhe management of the Company is resp >mible for the informa-internal control procedures. Coopers & 1 y hrand L.L.P., indepen-tion and representa!!ons in the Company's financial statements. dent accountants, audit the financial statements and express their The Company prepares the financial statements in accordance opinion about them. 'Ihey grrfonn their audit in accordance with w nh gene. ally accepted accounting principles based upm as ail-generally accepted auditing standards. ahic facts and circumstances and management's best estimates Dr Aucht Comminee of the !!oard of Directon, which consists and judgments of known cornhtions. of four outside Directors, meets periodically with Management. The Company maintaim an accounting system and related internal auditors, and Coopers & L) brand L.L.P. to review the system of intemal controls designed to provide reasonable activities of each in discharging their respinsibilities.1he assurance that the financial records are accurate and that the internal audit staff and Coopers & L) brand L.L.P. have free C<nngany's assets are protected. The Company's staff of internal access to the Audit Committee, auditon, which reports directly to the Chainnan of the lloard, corxtucts periodic review s to maintain the effectiveness of 0 L.) f g1,f 4 Christian 11. Poindexter Charles W. Shivery Chainnan of the lloard Chief Financial Of ficer and Chief Executive Officer Report of Independent Accountants To the Shancholders of Italthnore tien smd Elet tric Compmy We have audited the accompuning consohdated balance sheets also includes assessing the accoun'.ing principles used and and statenents of capitalization of Italumore Gas and Electric sigmficant estimates made by Management, as uell as evalu-C<nnpany arkt Subsidiaries as of December 31,19% aral 1995, ating the merall financial statement presentation. We beliese aix! the related consolidated statements of inctune, cash flows, that our audits prmide a reasonable basis for our opinion. onnnon shanctolden' equity arxlincome tases for each of the three )can in the perial crated December 31,19%. lhese fine-In our opuuon, de h.nc tal statenwnts refwd h> above pnvnt vial statements are the respusibihty of the Company's Manage-fairh, in au mataial respects, the consolidated f, manual position nwnt. Our resprsibihty is to express arnipinion on these financial of llahnnore Gas and Electne Company and Subsidiaries as of statements based on our authis. cemhv 31, FM and , and de consohdated resuhs of their operations and their cash flows for each of the three yean We condut1ted our audits in accordance with generally accepted in the perial ended December 31,1996 in conformity w ith auditing stanitards. lhose standards require that we plan and generally accepted accounting principles. perfonn 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 i the amounts and disclosures in the financial statements. An audit da f Coopers a I;b;and LLP. Italtimore, Maryland January 17,1997 t "130 d l3(!f rl 5 i D d i l e J. f r : C n m p a fl y and 5 s e d ia ;e $

Consolidated Statements of Income Year I:ndedikcender 31, a996 I995 l994 i (in thousands, emyt per share anumnts) Resenues Electra $2.208,744 $2,229,774 $2,126,581 Gas $17,292 400,5(M 421.249 Diversified businewes 427,211 3(M,521 235,155 Total revenues 3.153,247 2.934,799 2,782,985 l I:spenws Other Than interest and Inamw Tases Electric fuel and purchased enerFy 547,414 578,801 542,314 l Disalk>wed replacement energy costs (see Note 12) 95.369 Gas purchased for resale 284,443 198,069 ' 224,590 i O erations 526,424 550,811 552,817 f Maintenance 174,141 168,269 1(4,892 ) Diversified businesses. selling, gerrral, and administrative 311,053 220,573 167,430 Ikpreciation arxl armwtization 330,191 317,417 295,950 l Taxes other than income taxes 214,747 205,167 199,733 j Total expenses mher than interest and income taxes 2.483.782 2,239,107 2,147,726 t inctmw Imm Operations 669.465 695,692 635,259 I Other Inumw Alk>wance for equity funds used during construction 6,508 14,162 21,746 Equity in camings of Safe llartor Water Power Corporatkin 4.5% 4.559 4.349 l Net other income and (deductions) (4,974) (9,902) 6,270 Total other income 6,130 8,819 32,365 Income Hefore Interest and Innmw Tases 675,595 7(M,511 667,624 r s Interest Espene Interest charges 217,622 219,689 214.347 Capitalized interest (15/ M ) (15,050) (12.427) Allowt.nce for borrowed funds used during construction (3,520) (7,662) (11,766) Net interest expense 198.438 1 %,977 190,154 Inamie Hefore Income Taws 477.157 507,534 477,470 l incimie Taws 166.333 169,527 153,853, i Net Innmw 310.824 338,007 323,617 4 Preferred and Preference Shri Diiidends 38,536 40,578 39,922 l Earnings Applicable to Comnum Stock $ 272,28x $ 297,429 5 283.695 Asergte Fhares of Comnum Stock Outdanding 147,5v 147,527 147,100 l'ernings Per Share of Conmum Shek $1.85 $2.02 $1.93 i Stf Nidelli)(QnstkhshAfk financialStatements. i l-h 31 l 1 l Belhmore Gas and Uettdc Company and Subsidiaries. l I

Consolidated Balance Sheets AI De< cmler 3/, 1996 1995 tin tiunnaruh) Assets Current Assets Cat and ca,h equisalents $ 66,708 5 23,443 Accounts receivable (net of allowance for uncollectibles of $1H,028 and $16,390, respectively) 419,479 400,005 Tnul;ng securities 68,794 47,990 Fuelstocks M7,tr'3 59,614 Material, arxl supplies 147.729 145,9f K) liepaid taxes other than incorne taxes 64,763 60,508 Deferred inanne taxes 2,943 36,831 Other 44,709 31,487 Total current assets 902,198 805,77N Insestments and Other Assets Real estate projects 525,765 479,344 Power generation projects 379,130 358,629 Financial investments 2N,443 205,84i Nuclear decommissioning trust furxi 116,368 H5,811 N:t pension asset 84,510 f.0.077 Safe liarbr Water Power Corporation 34,363 34,327 Senior kving facilities 36,415 16,N5 Other 92,171 71,894 Total 'avestments and other assets 1,473,165 1,311, % 8 l l'tility Plant Plant m service Electric 6,514,950 6.360,624 l Gas 776,973 692,693 l Comnum 523.485 522,450 l 'Iotal plant in sen ice 7,815,408 7.575,767 Accumulated depreciation (2,613,355) (2,481,801) Net plant in senice 5,202,053 5,093,966 Construction work in progress 221.857 247,2 % Nuclear fuel (net of amortization) 132.937 130,782 Plant held for future use 25,503 25,552 Net utility plant 5,582J50 5.497.5 % ikferred Charges Regulatory aswts (net) 512,279 637,915 Other 80.97N 63,406 Total deferred charges 593,257 701,321 Total Aswts W50,970 58,316.663 See Note.s to ConwhJ,acJ Firusiu ial St.iterrrerats. l 37 l Ealtimore Gas anc Electilc Company and Sur,sicianes

Consolidated Balance Sheets At De< em/vr.iI. 1996 I995 tin alunoamhI Liabilities and Capitalization Current I.labiliti-$ Sluet-term borrowings 5 333,1MS 5 279.305 Current portions of hmg-term debt and preference stock 2*),772 146,% 9 Accounts payable 172,889 177,092 Cuvomer delwts 27,993 26.857 Accrued taes 6,473 8,244 Accrued interest $7,440 56.670 Dividends declared 66,950 67,198 Accrued vacation costs .4 351 33,403 Other 37,046 39,417 Total current liabilities 1,017.099 835.155 ) Deferred Credits and Other I, labilities Deferred income taxes 1,300,174 1,311,530 Postretirement and posternployment benefits 169.253 148,594 Decimimissioning of federal uranium enrichment facilities 38,599 43.695 Otler 65,463 55,568 Total defermi crniits and other liabilitics __l,573,489 1.559.387 Capitalisation ieog-term debt 2,758,769 2.598.254 iteferred stock 59,185 Redeemable preference stock 134.500 242,000 lYeference stock not subject to inandatory redemption 210JNN) 2]O(NK) Conmxo shareboklers* cquity 2,857,113 2.812,682 Total capitahratism 5,960J82 5,922.12i Commitments Guarantees and Contingencies - See Note 12 Total 1. labilities and Capitalisation 9L550.970 58.316.663 See Mws to Cornolulated I truaru sal 5hatenteruts 1 33 6 o Baltimore Gas and Electric Company and Subsidianes

Consolidated Statements of Cash Flows harInded un ember 31, 1996 1995 1994 4intho n vuh) Cash Flows From Operating Actisities Net inwme $310.824 $338JX)7 $323,617 Adjustments to reconcile to net cash pmvided by operating activities Depreciatum and anantitation 383,155 378,977 351,064 Deferred income taxes 263W)9 103,494 79,278 l Investnwnt tax credit adjustments (7,655) (8,088) (8.192) Deferred fuel costs 528 5,565 11,461 Deferred energy conservation revenues 28,500 1,283 18,769 Disalkswed replacement enerFy costs 95J69 Accrued pension and postemployment benefits (13,792) (7,M1 ) (41,113) Allowance for equity funds used during construction 16,508) (14,162) (21,746) Equity in camings of affihates and joint sentures (net) (48,305) (21,259) (20,225) Changes in cunent assets other than sale of accounts receivable (88,035) (107.392) (10,536) Changes in current liabilities, other than short-tenn borrowings (4,905) (7,293) (24,447) Other 26,762 6,661 (5,699) Net cash provided by operating activities 701,947 668,152 652,231 Cash flows From l'inancing Actisities Proceeds fnun issuance of Short-tenn borTuwings Own 53,880 215,605 63,700 I;og-tenn debt 383,182 184,422 207,169 Preference stock 59,329 Comnum Mock 3,729 318 33,869 Pnceeds fnwn sale of receisables 10,000 2J)00 70JX0 Reacquisition of long-tenn debt (158,551) (315,105) (240,853) Rearquisition of preferred and preference stock (112,559) (73JXO) (4,406) Common stock dividends paid (233,109) (227,192) (220.152) Preferred and preference stock dis idends paid (37,050) (40,087; (39,950) Other i1,172) 13 (437) Nei cash used in financing activities (91,650) (193,697) (131,060) Cash Flows l' rom Insesting Actisities Utihty construction experxhtunts (including AlCI (360,4851 (366,037) (488,976) Allowance for equity funds used during construction 6,508 14,162 21,746 i I Nuclear fuel expenditures 146,761) (46,330) (42J189) l Deferred nuclear experxhtures 18.393) l IMerred energy conservation expeixhtures (31,383) (45,503) (40,440) l Contnhutions to nutlear decommissioning trust fund (25,483) (9,780) (9,780) l Purchases of marketable equity securities (32,664) (l8,447) (52,099) l Sales of marketable equity secunties 39,657 49,788 40,585 Other financial imestnwnts 7,068 9.423 2,469 Real estate projects t55,344) (l5.599) 14,926 IWer gercration sy stems 15.332) (34,408) (1,116) Other 162,8131 (26,871) (3,650) Net cash used in investing actnines 1567,032) (489,602) (566,817) Net increase (Decreaselin Cash and Cash I:quisalents 43,265 (15,147) (45,M6) Cash and Cash 1:quisalents at lleginning of Year 23,443 38,590 84,236 Cash and Cash I?quisalents at End of Year 5 66,708 $ 23,443 5 38,590 Other Cash 11ow Information Cash paid during the year for: Interest (net of amounts capitahzed) $182.43I $ 195.308 $184,441 income tases $160,132 5 99.623 $ 83,143 j JA See Norn to CavooMared I nrunn ud Statemenix Certain prior 9 ear am,mnts haw twrn in lautfie d so avrform with the surrent yari prevnranam Batumcre Gas and Electric C onany ar c Mseat;nics

Consolidated Statements of Common Shareholders' Equity Unrealized Gain (less) on Available Pension Conunon Stock Retaired For Sale Liability Total rears linled th em/vr 3/, IWi, /Wi and /WJ Shares Amount Earnings Securities Adjustment Amount tin slumsan hI flalance at Decemtwr 31,1993 146,034 $1,391,4M $l.251.140 $(22,093) $2,620,511 Net irunne 323,617 323,617 Divideixh declared Preferred and preference stock (39,922) (39,922) Onnmon stock ($1.51 per sharr) (222,180) (222,180) Onnnum stock issued 1,493 33,869 33,869 Other 45 45 Nc unreali/cd loss on sceurities (5/419) (5ff)9) Ikferred taes on tiet unreali/ed loss on securities 1,963 1,963 Penso hability adjustment H,573 M,573 Ikferred tases on pension liability adjustment (3,(K)l) (3,(X)l) llalance at Decem!wr 31,1994 147,527 1,425,378 1,312,655 (3 M6) (16,521) 2,717,866 Net ironne 338,007 338,007 Dwidends det tared l Preferred and preference stock (40,578) (40,578) Gunmon sterk ($l.55 per share) (228/67) (228/i67) l Conunon stock issued 318 318 Other 109 109 l Net unreali/cd gain on securities 14,010 14.010 Ikferred t.ncs on net unrealized ain on securities (4,9(M) (4,9(M) F l Pension liability adjustment 25,417 25,417 Ikferred taxes on pension liabihty adjustment (M,896) (8,k96) llalance at December 31,1995 147,527 1,425,805 1,381,417 5,460 2,812,682 Net incorre 310,824 310,M24 [wideixts declared Preferred and preference stock (38,53M (38,53M Cornnum slotk ($1.59 per share) (234,640) (234,640) Comnum stock hsued I40 3,729 3,729 i Other 408 408 l Net unreahied gain on securities 4,071 4,071 l Ikferred tases on net unreali/ed gain on securities (l.425) (I,4251 Italarwe at Decemtwr jl,1996 147,667 $1.429.942 $1,419,005 48,106 $2 N57,113 l bff Nt#1 id (iEnMD$h$,ilCnl h'I!kJ9h 51$ blnllCHWnh, 35 l Pammert Gn anc ! rctric Compy and Sut-siciaries l

Consolidated Statements of Capitalization At Dc emberfl. 1996 1995 tin thoenm.h6 f amg-Term Debt First Refunding hknigage Ilonds of IIGE 5%% Series,due Apnl 15,19% 5 26,187 6X9 Series,due August 1,1997 24,935 24,935 Floating rate series, due Apnl 15,1999 125.(MN) 125,f00 8.40% Series, due October 15,1999 91,137 91,200 SMG Series, due July 15,2(XO 124,990 125,(XX) HX4 Series,due August 15,2(K)] 122J77 122,427 7X9 Senes,duc January 1,2(X)2 22,737 39,698 7X4 Series, due July 1,2002 124,484 124,609 SM% installment Series, due July 15. 2(02 10,440 11,045 6XG Series,due Frbruary 15,2(X13 124,822 124.882 6X% Series,due July 1,2(03 124,855 124,925 $M9 Series, due April 15,2(K4 124,995 124,995 Remarketed floatmg rate series, due September 1,2(XV, 125,00() 7M'?,. Series, due January 15,2007 123,652 123,667 6%9 Series, due March 15,2(08 124,960 124,985 7M4 Senes,due March 1,2023 124,973 124,973 7M4 Series,due April 15,2023 100JMM) KK).(KK) lotal First Refunding Mortgage Ikods of HGE 1,619,357 1,538,528 Other hog-term debt of IIGli Term bank kian due March 29,20:11 50,0 M 50,(XX) Medium-tenn notes, Series A 10,500 Medium-term notes, Series H 100JMK) 100/XX) Medium-tenn notes, Series C 183,000 200,(XX) Medium-temi notes Series D 138J100 28,(KK) 36,000 36,(XX) Pollutkm control loan, due July 1,2011 g Port facilities kian. due June 1,2013 4 48,000 48JXX) Adjustable rate pollutain control hian, due July 1,2014 20J100 20.(KK) 5.55% Pollution control resenue refundmg k>an, due July 15,2014 47JHW) 47J00 Fronomic development k>an. due December 1,2018 35JMM) 35/WX) 6.(04 Pollution control resenue refurkling kian, due April 1,2024 75,000 75fX0 Total other long-tenn debt of IlGE 732JMM) 649,5(X) I ung-tenn debt of Constellation Companies Revolving crethe agreement Wriable rates based on LillOR, due December 9,1999 65,IMW) 1,(xK) Mortgage and construction loans and other collateralized notes 8.(XVi,due July 31,2(Xll 141 i l 81XF1 due October 30,2003 1,500 l Wriable rates, due through 2t09 128,571 110,018 l 7,5(VX, due October 9,2(05 9,846 9,989 ( 7.357%, due March 15,2(09 5,763 5.896 9 659, due February 1,2028 9,746 Unsecured notes 387,160 420ft X) Total hmg-tenn debt of Constellation Companies 607.727 546,903 long-temi debt of other diversified businesses loans under revoh ing credit agreements 12J100 Unarnortired discount aral prmium (14,543) (15,708) Current pation of hmg-tenn debt (197,772) (120,969) Total hmg-tenn debt $2.758,769 52,598,254 umimurJ <m puge 37 36 See Mucua comoh,tatenuwaal statemems. Balhrnere Gas and Uectr c Company and Sctsidiaries

Consolidated Statements of Capitalization At Det emtwr 31. 1996 1995 tin riuusands) Preferred Stock Cumulative, 51(X) par value,1 JXW)JW W) shares authorized Series B,4MG,2'2,921 shares redeemed at 5110 per share on May 28,1996 5 22,292 Series C,4%,68,v28 shares redeemed at $105 per share on May 28,1996 6.893 Senes D,5.40%,3(X)JWX) shares redeemed at $101 per share on May 28,19% 30fXX) Tigal preferred stock 59.185 Preference Stock Cumulative, $100 par value,6.500JX K) shares authoriicd Redeemable preference stock 7.5(Yre,1986 Series 395JXX) and 425JX K) shares outstanding. Callable at $102.50 per slure prior to October 1,2(K)] and at lesser amcunts thereafter 39SX) 42,5(X) 6.75%,1987 Series,440/KX) and 455JX K) shares outstanding. Callable at $1(M.50 per share prior to April 1,1997 and at lesser amounts thereafter 44JMN) 45,5(X) 7.80%,1989 Series 500fWX) shares outstarxling 50JNN) 50AXX) H.25%,1989 Series, l(X)JX K) and 3(X)JX X) shares outstanding 10JM)0 30JKK) 8.625 %,1990 Scries, 390J R K) arkl 650J W M) shares outstanding 39,(MX) 65JXX) 7.85%,1991 Series,350fxx) shares outstanding 35JNio 35JXX) Current portion of rr feemable preference stock (N3JHWil (26JXX11 Total redeemable preference stock 134,5tN) 242JXX) Preference stuk not subject to mandatory redemption 7.78%,1973 Series 200,0(K) shares outstanding, callable at $101 per share 20JMN) 20JXX) 7.125%,1993 Series,4(K)JWW) shares outstandmg, not callable prior to July 1,2003 40JMM) 40,(XX) 6.979,1993 Series,5(X)JX10 shares outstanding, not callable prior to October 1,2(X)3 50JWN) 50JXK) 6.70%,1993 Series,4(X)JuX) shares outstarafing, not callable prior to January 1,2(XM 40JMM) 403XX) 6.99%,1995 Series. 6(W)JX K) shares outstanding, not callable prior to October 1, 2005 60JM)0 60JXN) l Total preference stock not subject to mandato:y redemption 210JNN) 210JXK) l Common Shareholders' Equity l Common stock without par value,175/XKijrX) shares authorized; 147,667.114 and l 147,527,114 shares issued and outstanding at December 31,1996 and 1995, resgectisely. (At December 31,1996,166,893 shann. were reserved for the Employee Savings Plan and 3,277,656. hares were resersed for the D;vidend Reimestment and Stock Purchase Plan.) 1,429,942 1,425,805 Retained earnings 1,419,065 1,381,417 l Unrealized gain (k>su on available-for. sale securities M,106 5,460 Total common shareholders' equity 2 M57.113 2.812,682 Tt,tal Capitalisation 55.960,382 55.922.121 See &tes to Gmwhdated Ihwu ial Statements. i l [ 37 Baltimere Gas arid ficctut Company and Subsidiaries

Consolidated Statements of Income Taxes e Year 1.rulediJn em/wr 3i, I996 1995 1994 Illallar amounts in fiknaarkid Income Taxes Current $147,979 5 74,121 5 82,767 Defened Change in tas effect of tempirary differences 22,516 118,300 M8,896 Chang: in income taxes recoverable through future rates 4,918 (l 006) (H,580) Ikferred taxcuredited (cluuyed) to shareholders' equity (1,4 25) (l3,800) (l.03M) Ikferred taxes charged to expense 26,009 103,494 79,278 investment tax credit adjustments 17,655) ( M,088 ) (8,192) Incmne taxes per Consolidated Statements of huime $166.333 5169.527 5153.853 Hecondliation of income Tases Computed at Statutory I'ederal Hate lo Total Income Tases hwunw before income taxes $477,157 5507,534 5477,470 Statutory federal ironne tax rate _ 35 % 35 % 35M hunne taxes computed at statutory faleral rate 167,005 177,637 167,115 Increases (decreases) in income taxes due to Depreciation differences not normalized on regulated activities 12,(49 10,953 9,791 Allowance for equity t'urkis used durinF construction (2,27M) (4,957) (7.61 l } Amortization of deferred investment tax cwdits (7.655) (H.0MN) (M.lM) ' lax credits Howed through to income (520) (521) (1,754) Amortization of deferred tas rate differential on regulated actisities (1.95H) (2,013) (1,885) Other 1930s (3.484) (3,639) Total incane tases $166,333 5169,527 5153,853 Effective federal inmne tax rate 34.9 % 33.49-32.2'7o At IJn em/wr 31, 1996 1995 Deferred Ineome Tases ilDollar amounts in thouwmid Ikferred tas liabilities Accelerated depreciation 5 920,631 5 878,470 Allowance for fuixls used during construction 209,183 210,928 Income taxes recoserable through future rates 92,584 94.305 Ikferred termination atxt pistemployment ctwts 45,624 d,591 Ikfened fuel costs 7,957 39.559 l ineraged leases 27.581 29.842 l'ercentage repair allow ance 38,354 38,295 l Energy conservation expenditures 26,622 28.12I l Other 175,5x7 151.23i Total deferred t2n liabihties 1,544.123 I.520.342 Ikferred tan assets Alternatise minimum tas 32.626 Accrued pension and postemployment benefit costs 40,570 31,707 Ikferred investment tas credits 46.889 49,512 Capitalized interest arki overik'2kl 42,509 39,439 Contnbutions in aid of constmction 35,710 34,4N Nucinu dec unmissioning habihty IN,750 16,708 Other 62,464 41,247 Total deferred tan assets 246.N92 245.M 3 Ikferred tas liabihty, net 51.297.231 51.274.699 [^ 3g See Notes to Conwlulated Iinanaal Statmwnts. B a'tirn cr e G as a r:1 [Ncu n Ccmpany ar;5 S utsid: aries

Notes to Consolidated Financial Statements Note 1. Significant Accounting Policies Nature of the flusiness $57.6 million, or 39 cents per share, in acklition, the Maryland llaitinure Gas and Electrie Company (BGE) arxl Subsidiaries Commission issued a rate onter in May 1996 distdlowing cenain (collectively, the Company) is pnmanly an electric arxl gas utihty fuel o,sts w hich were pres iously deferred by llGE. Accordingly, serving a terntory which enannpasses flaltimore City and all or BGE wrote-of f the a ferred f uel costs in 1996. The write-off of part of ten Central Maryland counties.The Company is alvi these costs reduced after-tm earnings by 54.5 million, or 3 cents engaged in diversified businesses as described further in Note 3. per share. Principles of Conwildation Prior to (ktoter 1996, the cost of gas sold was recovered through The unsolidated financial statenrnts include 0 e acomunts of gas adjustment clauses subject to approval by the Mary land ilGE and all subsidiaries in which IlGE owns directly or indi-Commission. Under these clauses, the ditTen:nce between actual rectly a majority of the voting stock. Intercompany balances and fuel costs and fuel revenues is deferred on the luhince sheet and inutsactions are eliminated in ctosolidation. Umler this p>licy, the recovered from or refunded to customers in future perials. acniuntmf Constellation iloidings, Inc. t CIll) and Sutwidianes Eflective October 1996. the Maryland Commission approsed a (collectnely. the Constellation Cornpudest BGE ikune Products nulification of these clauses to provide a Market Based Rates & Services, Inc. and Subsidiary (collectisely, llP&S), IlGE (MHR) incentive mechanism. Urxler the MilR mechanism. Errrgy Projects & Services. Inc. aml Sutwidiaries (collectively, ditlerences between a market index arxl BGE's actual cost of gas EP&S). anxl Ctwntellation Energy Source, Inc. (fonnerly named are shared equally between HGE's customers and shareholders. IlNG, Inc.) are e msolidated in the financial statements, and Safe Risk Management liarixw Water Power Corpration is reputed under the equity Beginning in 1996, llGE engages in comnnlity hedging activities nrtini. Corporate joint sentures, putnerships, and affiliated to minimize the nsk of market fluctuations associated wah the com;unies (w hich include power generation projects) in which a pxe of g s umla the My mechanhnQr objecthe oMr4ing 2(r4 to $(r4 voting interest is held are accounted fit under the n to m nage HGE s pnce nsk under the MHR mechanism. Urxler equity nrtini, unlew control is evident,in which case the entity intanal gudhms gaulane pwidons are pmhibned is c osolklated. Insestments in which 1:ss than a 2(r4 mting intenest is held are accounted for urxler dw cost method, unless BGE enters into basis swap agreements w hich help minimize significant influence is exercised over the enti'y. in w hich case the comnnlity price risk by fixing the basis or dif ferential that investment is accounted for under the equity metin!. exists between a delivery location irxlex and the ctnnmodity futures prices. Net amounts receivable or payable under the Rgulation of Utility Operations sw aps are deferred arxl recognized as a compment of gas costs ilGE's utility operations are subject to regulation by tir Mary-

• I*'n reahied. At ikcember 31,1996, there were unsettled land Public Senice Commiwion (Maryland Commission). The 5%aP agreenenh mpresenting a nodonal quanhty of 12.3 mMon accounting policies and practices used in the determinathm of decathenns of natural gas purchases through March 1997.

service rates are also generally used for financial reprting pur-pwes in accorthmcc w th generally accepted accounting principles Income Trxes for reputned irklustries. See Note 5. Dr defernxi ta habihty repesents de tax effect of tempirary MTacnce& tween de finawiaktatenxnu and tu bawwf asets Utiltty Revenues arx! li bilities. It n measunxi using prewntly enacted in rates.'lhe HGF rtuignizes utihty rnenues as sen ice is reixlered to customen. pntho of HGE's deferred tax liabihty applicable to utility olerations Fueland Purrhawl Energy Costs which has not been reflected in current service rates reprwnh 1he ont of fuel used in perrrating electricity, net of rnenues fnvu inconr taes recoverable thnogh future rates.1 hat putnn has been intetchange sales, is rec ncred thnogh a peru-based electnc fuel rtuwded as a regulatory asset on tir Consolidated ILdance Sheets. rate subject to approval by the Mary lanxi Commiwion. The difTer-Ikfenrd irune tu expense represetus the net clunge in the ence between actual fuel costs atxi tuel revenues is deferred on the deferred tax liabihty arxl regulattny asset during the year, exclusive Consolklated flalance Sheets to be recovered from or refunded to of anmnts charged or credited to etwnmon sharehokk-rs' equity. customen in future periods.1he electric fuel rate formula is lused Current in expense consists solely of regular ta less applicable upo the latest twenty.four-nwnth generation mix arx! the latest tn credit. In eenain prios years, tax expense included an alter-thire.nxxuh aserage fuel cost for eacn generating unit.1he fuel n;ng mininmm tn ( AE diat can be t'arned forward m-rate (kn run change unless de calculated rate is nxwe than 54 &hnnely as tax cn es to future > cars m which the regular tax ahn e or below tie rate then in effect. liability exceed the AMT liability. Current income ta for the During 1989 through 1991 BGE experienced extended outages years ended Ikcember 31,19% ark! 1995 reflect full utilization at its Cah ert Chffs Nuclear Power Plant. The replicement of AMT credits carTied forwant of S30 milliori arxi $40 millkn, energy costs awociated uith these outages are estimated to br respxtively. 'lhe defernxi inctor tues puvided in earlier years on $45M million. The extended outages base been the subject of the AMT liabihty were revened as tir credits were utilized. ongoing fuel rate proceedings before the Maryland Commission The investment in credit (lTC) associated with HGE,s regulated for socral years (see Note 12). utility operations has been deferred on the Consolidated Halance in ikcember 19%, BGE entered into a settlement agreement Sheets (see Note 5) and is amortized to income ratably over the with the Maryland Peoplei Counsel arxl the Maryland Com-lives of the subject propeny. ITC and <xher tax credas associated mission Staff propwing that customers will not fund a total of with nonregulated diversified businesses other than incraped M $1iN million of electric replacement energy costs associated leases are flowed through to income. with these extended outages. HGE remrded a reserve for llGE's utility rnenue from system sales.is subject to the Mary-535 milhon of these costs in 1990. In 1996, BGE increased the rnene by $N3 milton and wnne off SS.6 milhon of accrued land public senice company tranchise tag in heu of a state incorne tnSe franchie tax is indu&d m ta ewther than carrying d arges related to the deferred fuel balances. 'lhese income ta es in d e Consohdated Statements of Income. increases in the reserve reduced 1996 after-tax camings by Paltne Gas and Eintut Cwcaq aH Sastaanes

Inventory Miluation 7 cents per share. As a result of the Marylarxl Commission's Fuel stoc ks and materiak ami supphes are generally stated at August 1995 Order requiring all new generation capacity needs

• average cost.

to be competitively bid and flGE's September 1995 announce-ment that it will merge with Potomac Electric Power Company, Impairment of f1>ng-la, red Anets !!GE determined that it will not build the second combustion long-hsed assets subject to the requirements of Statement of turbine for the first combined cycle unit.Therefore, during the hnancial Accounting Starnlards No.121, Annuntingfor the third quarter of 1995, IIGE w rote off the remaining construction impairment ofIswrLived A uct3 and/or lame-lard A ucts t" mrk in pmgress costs awociated with the first combined cycle Be Di3po3rd Of, are es aluated for impainnent through a resiew unit. This write-of f reduced after-tax earnings during 1995 by of undiscounted expected future cash flows. If the sum of the 59.7 million, or 7 cents per share. De construction of the first urnhsanmted expected future cash flows is lew than the carry m.g WWegnan combustion turbine at Perryman was completed, annunt of the asset, an impairment low is recognized. and the unit w as placed in service, during June 1995. Real Blate Projects llGE owns an iuxlivided interest in the Keystone and Conemaugh Real estate projects consist of the Constellation Companies' electric Fenerating plants hicated in westem Pennsylvania, as well investments in rental and (gieratinF pmperties and pmpernes as in the transmission ime which transpins the plants' output to the urkler desehrpment. Rental and operating properties are held for joint owners' service territories. IIGE's owrership interest in these im ntrnent. Pnipenies urxkr desclopment are held for future pigs ;s,R999 ard 10.569, respectisely, and represents a net desclopment aint subsequent sale. Costs incurred m the acquisi' imestment of $153 million and 5150 million as of December 31, tion and actise development of such pmperties are capitalized-Um arul 1995, respectisely. Firuncing and accounting for these Rental and operatmg propenies and properties under develop-pgg.nieme the sum % for w holly owned utility plant. ment are stated at cost unless the amount msested exceeds the amounts expected to be recovered through operations and sales. Nuclear fuel espenditures are amonized as a comp >nent of in these cases, the projects are written down to the amount esti-actual fuel costs based on the energy pnxtueed over the life of mated to be recoverable. the fuel. Fees for the future dispnal of spent nuclear fuel are paid quarterly to the Depanment of Energy and are accrued inwstments and Other Aucts based on the kilowatt-hours of electricity soki. Nuclear fuel Imestments in debt and equity secunties subjc(1 to the requ. ire-expenses are subject to recusery through the electric fuel rate. ments of Statement of Finarial Accounting Starnlards No.115, Accounting hr Cenain Investments in Debt and Equity Secunties, Nuclear decommissioning costs are accrued by and recovered are repirted at f air 5 alue. Cenain of Constellation Companies' through a sinking furx! metinlology. In a 1995 order, the marketable equity securities and finarrial partnerships are clawi-Marylarul Commission authorized 13GE to rec rd decommis-lied as tradmg secunties Unreaheed gains and kisses on these sioning expense based on a facdity-specific cost estimate in order securities are included in diversified businesses resenues. The to accumulate a deconuniwioning resen e of $521 million in 1993 I imestments compnsing the nuclear decommissioning trust Iund dollars by the end of Cahen Chlfs' service life in 2016, adjusted l ark! certain marketable equity secunties of Cl11 are clawilied as to reflect expected inflation, to decommission the radioactise av,ulable fomde. Unreahied gaim aral losses on these secunties, portion of the plant.1he total deconuniwioning resene of I as well as Cl11% pirtion of unreahied gains and lowes on securi- $163.8 million and $136.7 milhon at December 31,1996 and ties of equity method imestees, are reconled in shareholders' 1995, respectively, is included in accumulated depreciation in the equity.1he Company utilites specific identification to detennine Comolidated flabnce Sheets. the cost of these securities in computing realized gains or hisses. In accordance with Nuclear Regulatory Commiwion (NRC) Utility 11 ant, IApreciation and Amorti:ation, and regulations, ilGE has established an external decommissioning />trommiuioning trust to w hich a ponion of accrued decommissioning costs base Utdity plant is stated at onginal cost, w hich includes material, been contributed. The NRC requires utihties to provide financial labor, and, w here apphcable, construction overhead costs arxt an awurance that they will accumulate sufficient furxh to pay for allowance for turuk used during construction. Atkhtions to unhty the cost of nuclear decomnnwioning based upon either a generic plant and replacements of units of pmperty are capitahied to utihty NRC formula or a facihty-specific decommiwioning cost esti-plant accountt Unhty plant retired or otherwisc disposed of is mate. IlGE is using the facihty-specific cost esumate for funding charged to accumulated deprecianon. Maintenance and repairs of these costs and providing the requisite tintmeial assurance. pmpeny arsi svplacements of items of pmperty detennined to be less than a unit of property are charged to maintenance c> pense. Afloyancefor I,unds Wd l>uring Comfruction and Capatali:tsiinterest Depreciation is generally computed using composite straight-The allow ance for funds used during construction (AFC) is an lirw rates applied to the aserage imestment in classes of depre-accounting procedure which capitalizes the cost of funds used to ciable property. Vehicles are depreciated based on their esti-finance utility corwtruction projects as pa't of utility plant on the mated usef ul hses. As a resuh of the Maryland Commiwioni Consolidated llalance Sheets crediting the cost as a noncash Nosember 1995 pas rate Order. IIGE revised its gas utility plant item on the Consolidated Statements of Irxwne. De cost of depreciation rates to reflect the results of a detailed depreciation borrowed and equity funds is segreFated betw een interest study. lhe res ised rates resulted in an increase in deprecianon eyicnse and other income, respectis ely. IlGE rrcosers the capi-accruals of approsimately 52.4 million annually. tahied Al:C and a retum thereon af ter the related utihty plant is Depreciation cyien e for 1995 and In94 includes the wnte-off of cenain costs at liGE's Perry man site. Initially, itGE had planned Pnor to November 20,1995, the Company accrued AFC at a to buikt two combined cycle generating units at its Perryman site pre-tas rate of 9.40% Effective Nosember 20,1995, a rate order with c,uh unit ainsisting of two combustion turbines lloweser, of the Marylark! Commission reduced the pre-tas gas-plant and due to significant changes in the emironment in w hich utihties common plant AFC rates to 9W4 and 9.36% respectisely. operate, liGE decided in 1994 exit to construct the secorwl AFC is compounded annually. cornbined cycle generaung unit and wrote oil the construction wmt in progrew costs awociated with that unit.%is wnte-ofl he C,ondauon L,ompanies capitalize interest on quahfying reduced af ter tas camings during 1994 by $11.0 million or real estate and gewer paration dmhipment pmjectt Baitmoe Gas and Uectoc Correary and Sut'smanes

Long-Term Debt amounts of resenues and expenses during the reporting period. %e dncoimt or premium und expense of issuance asociated with These estinutes involve judgments with respect to, among other long-term debt are defemxt and anxutio d m er the triginal lives of things, various future economic factors which are ddncult to de respa:tise debt issues. Gains and losses on the reacquisition of predict and are beyond the control of the Company. Therefore, debt are anux1i/cd over the remaining original lives of the issuances. actual amounts could di!Ter from these estimates. Cah Ilaws Accounting Standards issued For the purpose of reporting cash flows, highly liquid invest-The Financial Accounting Standards floard has issued Statement ments purchasal uith a maturity of three months or less are of Financial Accounting Standa tis No.125, regarding accounting considered to be cash equivalents. for transfers and senicing of Gnancial assets and extinguishments of liabilities, etTective January 1,1997. The American Institute of Use of Acmunting Stamates Certified Public Accountants has issued Statement of Position The preparation of financial statements in confonnity with gener-No. 96-1, regarding accounting for environmental remediation ally accepted accounting principles requires management to make I abilities, effective January 1,1997. Adoption of these statements estimates and assumptions that affect the reported anx> tints of k M apM m W a ed WM m h Commi assets and liabihties arkt disclosure of contingent assets and financial statements. habilities at the date of the financial statements and the reported Note 2. Segment Information Construction Identifiable Nonaffiliated Affiliated Total Income from Depreciation / Expenditures Assets at Resenues Revenues Resenues Operations Amortization (Including AFC) December 31 (in thomanda Electrie $2,208,744 $ 283 $2,209,027 $497,986 $279,345 $262,542 $6,226,291 Gas 517,292 517,292 68,848 37,790 97,943 810,084 Dnenified businesses 427,211 6,782 433,993 102,631 13,056 1,400,553 Other identifiable assets 114.042 Intercompany eliminations 17.065) (7,065) lotal ul53,247 $3.153.247 $669,465 $330,191 $360.485 $8,550,970 1995 Electrie $2,229.774 $1,337 $2,231,111 $$74,299 $276.285 $288.509 $6,195,722 Gas 400,5(4 4(X).5(4 48,1(M 29,637 77,528 748,462 Disersified businesses 3(M,521 6.609 311,130 73,289 11,495 1,266Ju9 Other identifiable assets 106,430 Intercompany eliminations (7,946 (7,946) Total $2.934.799 5- $2.934.799 $695.692 $317,417 $366.037 $8.316M3 l 1994 l Electne $2,126,581 5 840 $2,127,421 $539,739 $252,273 $412,885 $5,981.634 Gas 421.249 421,249 27,801 32,478 76,091 726,759 Dnersified businesses 235,155 8,245 243,4(X) 67.719 11,199 1,2(X),551 Other identifiable assets 128,558 Interrompany eliminatium 19.085) (9.085) Total $2.782.985 $2.782.985 $635.259 $295.950 $488.976 $8.037.502 1 Note 3. Subsidiary Information Diser4fied businesses consist of the operations of the Constel-include: power quality services, customer electrical >> stem lation Comtunies, llP&S, EP&S, and Constellation Energy imprm ements, lighting and mechanical engineering and installa-Source, Inc. (formedy named IING, Inc.). tion senices, campus and multi-building energy systems, energy consulting and financial contracts, district energy systems The Constellation Companies include (,onstellation lloldm.gs through Comfort Link (a partnership with the Poole and Kent Inc., a w holly owned subsidiary which holds all of the stock of Company ), and, beginning in late 1996, private electric and gas three other subsiduuies, Constellation Ptmer, Inc. (formerly distnbution systems. named Con tellation Energy, Inc.), Constellation lmestments, ine., and Constellation 1(cal Estate Group, Inc. These companies Constellation Energy Soun;e, Inc. (formerly named 13NG, Inc.) is a are engaged in des chipment, ownership, and operation of power wholly owned subsidiary which engages in natuml gas brokering. generation projects; financial im estments; and development, ilGE's investment in Safe liarbor Water Power Corporation, a ow nership, and management of real estate and senior-lising p ducer of hydnvlecuic power, represents two-thirds of Safe facihties, respectively. liarbor's total capital stock, m, eluding one-half af the voting flP&S is a w holly owned subsidiary w hich engages predominantly stock, and a two-thirds interest in its retained earnings. 41 l in the sales and sen ice of electrie and gas appliances, home & following is condensed f.mancial infom ation for the Con- } impnwements and sides and senice of heating and air comb, stellation Companies. The condensed financial information does j tioning systems pimanly in Central klaryland. not reflect the elimination of intercompany balances or trans- ^ IM S is a wholly owned subsidiary which provides a broad actions w hieh are eliminated in the Company's consolidated j range of customited energy senices, lhese energy senices financial statements. Balhmae Gas and flectiic Compny and Subsidiants

The 1996 operating results reflect a $14.6 million after-tax gain on proposed coal-fired pmer ptsect that will rot be built, and a $6.2. the sale by a Corvstellation partnership of a pimer purchase agree-million after-tax write-off of a pwtion of an investment in a solar

• ment with Jerv y Central hmer & lj ht Cornpany back to that ptmer project in which the Constellation Companies have a g

utthry. Thi$ Fain was ofIset by a $7.0 million after-tax write-off of minority ounership interest and which is expected to be restmetured the investnrnt in two geothermal wholesale puwer generatmg witi, the lender. pnsects, a $3.0 million after-tax write <>fTof deveksprent costs of a I996 1995 1994 Ineome Statements tin tiumsarwis, napt twr sharr armnmth Revenues Real estate pndects $ 80,793 $ 108,414 $ 106,915 Power generation systems 93,134 57,734 41J01 Financial investments 38,916 25.201 12.126 Total revenues 212,843 191,349 160,342 Expenses other than interest and income taxes 113,247 114.479 107.267 income from operations 99,5 % 76,870 53,075 Minority interest (355) (2J48) Interest expense t44,991) (46,673) (45.762) CapitalizcJ interest 14/>45 13,582 10,776 income tax benefit (expense) (26,578) (I4J55) (4305) Net income 5 42.317 5 27.076 5 13.764 Contribulkm to the Company's carnings per share of common stock 5 .29 5 .Ix 5 .09 Italance Sheets Current assets $ 115,689 $ 98,526 $ 92,814 Noncurrent assets 1,189,726 1.102.528 1.055.056 Total assets $ 1,305.415 51.201.054 $ 1,147.870 Current liabilities $ 134,025 $ 70,393 $ 70.670 Noncurrent liabilities 775,237 778,505 758.626 Shareholder's equity 396.153 352.156 318.574 Total liabihties and shareholder's equity S uos,415 51.201.054 51.147.870 Note 4. Real Estate Pfojects and FinancialInvestments RmlEstate Pmjects Amitable-For-Sale Investments Real estate pndects consist of the following investments held by 1he Constellation Companies' marketable equity secunties shown the Constellation Companies: above and ilGE's investments compising the nuclear decommis-As Ivum/vr 3/. 1996 1995 sioning trust fund are classined as available-for sale. The fair values, l gmss unreali/ed gains and kisses, and amortized cost bases for

1. In r/umnhi Properties under devekyment

$236,200 $270,678 available-for-sale securities, exclusive of $1.9 millhm of unrealized Rental and operating pnperties net gains on securities of equity-netha.1 investees, are as follows: Ort of accumulated I depreciation) 237,725 207,666 ^* "i/ed Unreahied Unrealued Fair Other real estate sentures 1,840 1.000 A' lk"*I'n 3/. /W Cost Hasis Gains I osses Wlue Total real estate pniects iT25J65 5479.344 II" '#"*d*M l Marketable equity $ 39,363 $6,918 $ (50) $ 46,231 FinancialIncestments

• '"'i'i

Financial insestments consist of the following insestments held d"'**'"' by the Constellation Companies: agency 18,167 263 18,430 State municipal At ivumler 31. 1996 1995 hmds 73.571 2,202 (125) 75.648 fin itumasM Total $131.101 $9.383 5(175) $140,309 Insurance companies $ 76,822 $ 77,792 Marketable equity securities 46,231 41,475 Ancized Unrealued Unrealued Fair Emancial limited partnerships 48,115 51,023 At tvwmivr 31. /w3 cosi nash Gains losses wiue Ineraged leases 33.275 35,551 gin,fyyuomn; Total financial investments $204.443 5205.K4 l Marketable equity securities $ 38.520 $2,998 5 (43) $ 41.475 L~ U.S. govemment U agency 14.177 141 State municipal 14,318 bonds 50.411 2.056 (74) 52393 Total 5103.108 55.195 54117) 510x. l x6 Baltimore Gas and Electric Company and Subsid: anes =

Gross and net realized gains and losses on the Constellation Continctual3faturities Pompanies' available-for-sale securities were as follows: The contractual maturities of debt securities are as follows: 1996 1995 1994 Amount t/n tluwwruh) tin thmamb) Grow realized pains $4,280 $5,470 5 1,108 Less than 1 year 5 1,000 Gmss realued losses J210) (2,446) (3,150) 1-5 years 10,065 Net realized gains (kwses) 54.070 53.024 5t2 m 21 5-10 yean 71,405 h1 ore than 10 years 6.fXX) Total contractual maturities of debt securities 5x8.470 Note 5. Regulatory Assets (net) As du.cuwed in Note 1, liGEi utility operations are subject to activities at contaminated Company-owned sites (see Note 12). In regulation by the h1aryland Commission. Except for diflerences November 1995, the Alaryland Commission issued a rate order in in the timing of Llw recognition of certain utility expenses and the C4nnpany's gas base rate pmceeding which authvired the credits, the ratemaking process utilized by the Ataryland Cond Company to amortire over a 10-year period $21.6 rnillion of these missm Fenerally is based upm the same accounting principles costs, the amotmt which had been incurred through October 1995. applied by nonregulated enti:ies. Under the h1aryland Cond Deferred energy conservation expenditures represent the net misskmi ratemaking pmcess, these utility expenses and credits unamortized balance of certain operations costs u hich are being are deferred on the Consolidated Balance Sheets as regulatory anxinized over five years m accordance with orders of the assets and liabilities and are recognized in income as the related h1aryland Commission. These expenditures consist of labor, annunts are included in senice rates and recovered from or matenals, and indirect costs associated with the conservation refunded to customers in utdity revenues.The following table programs appmved by the h1aryland Commission. sets fonh BGEi regulatory awets and liabilities: Mem d awt of dxommissioning federal uranium enrichment At thu+r $/' 1996 1995 facilities represents the unanuntized portion of BGEi required t/n r/uawm6) contributions to a fund for decommissmomg and decontaminating hicome taxes recoverable through the Department of Energy s (DOE) uranium enrichment iacihties. future naes $264,525 5269.442 h Energy Pohey Act of 1992 requires dinnestic utilities to make Ikferred pi stemployment benefit costs 89,217 81,616 such contnbutions, which are generally payable over a 15-year ikferred nuclear expenditures 82,101 86,519 period with escalation for mflation and are based upon the amount ikferred em mmmental cosh 47,657 38,37I of uranium enriched by DOE for each utility.These costs are ikfened energy conservation being anxirti/ed over the contnbution period as a cost of fuel. experklitures 46,696 73.297 Ikferred cost of decommissioning Deferred termination benefit cosh represent the net unamortized federal uranium enrichment facilities 46,015 51,1N balance of the cost of certain tennination benefits (see Note 7) Ikfenrd tennination benefit costs 41,137 60.073 applicable to BGEi regulated operations. These costs are being ikferred fuel cosh 22,734 113,026 anantiied over a five-year period in accordance with rate actions Ikferred investment tax credits (133,9701 (141,463) of the h1aryland Commission. Other 6.167 5.930 - [i79 %637.915 Deferred fuel cosh represent the difference between actual fuel MI 'Ibtal regulatory assets (net) costs and the fuel rate revenues under BGEi fuel clauses (see Note 1). Defennl fuel costs are reduced as they are collected from income taxes reemerable through future rates reprvsent princi-customers. pally the tax effect of depreciation dif ferences not normali/ed The untierrecovered costs deferred under the fuel clauses were and the allow ance for equity funds used during construction. as ibliows: off.et by unamortired deferred tax rate differentials and deferred taxes on defened ITC. Wse amounts are amortized as the As thuar 3/. 1996 1995 l related temporary differences reverse. See Note 1 for a further r/n thouwndo discuwion of income taxes. Electric deferred fuel costs Costs deferred $113,172 5130,399 Ikfened posternployment benefit costs represent the excess of Resene for disallowed replacement such costs recognized m accordance with Statements of hnanc. l exrgy costs (see Ncte 12) (I1M,0006 (35.000) ia Accounting Standards No.106 arxl No. I12 oser the arnounts Nd & & M M M e MW EVN re0ccted m utihty rates.These cosh will be amonized mer a Gas deferred fuel costs 27,562 17,627 15-year period beginning in 1998 (see Note 6). Timd deferred fuel costs 5 22,734 5113.026 Ikferred nuclear experwhtures represent the net unanortized b;d.mee of cenain operations and maintenance costs which are Deferred investment tax credits (ITC) represents ITC associated being anustired m er the remaining life of the Calvert Clith with BGE's regulated utility operations as discussed in Note 1. Nuclear Power Plant in acetwdance with orders of the h1aryland ikferred ITC are not deducted from rate base in accordance Commission. These experwhtures consist of costs incurred from with fehral income tax normalization requirements. 1979 through 1982 for inspecting and repairing seismic pipe The forry ing regul tory assets arxlliabilities are rectwded on y suppons, experwhtures incurred from 1989 through 1994 associ-BGE's Consolidated Balance Sheets m accordance with Statement ated with nonrecuning phases of certain nuclear operations of hnarnal Acetonting Standards (SFAS) No. 71. If BGE wett pnvch, and expenditures incunrd during 1990 for in estigating ruluired u erminate application of SFAS No. 71 for all ofits regu-leaks in the pressurires heater sleeves. lated operations, all such amounts defeired would be recognized m, ikfenrd em ironmental costs rqxtsent the estimated costs the Consolidated Statements of income at that time, resulung in a of investigating contamination arxl performing certain remediation charge to earnings, net of applicable inctwne taxes. l f Baltimore Gas and Electric Cornpany and Sutisidiaries

Note 6. Pension and Postemployment Benefits Pemion lienefts senice period of actne emphiyees. He Company's funding The Company sponsors several noncontnbutory defined benefit policy is to contribute at least the minimum amount required pension plans, the largest of which (the Pension Plan) cos ers under internal Resenue Senice regulations using the projected substantially all llGli employees and certain employees of unit credit cost method. Plan assets at December 31,19% llGE's sutwidiaries.1he other plans, w hich are not material in consisted primarily of marketable equity and fixed income amount, pnnide supplemental benefits to certain non-employee securities, and gniup annuity contracts. directors and key employees. Ilenefits under the plans are gener-ally based on age, ye:ars of service, and compensation levels. De f Howing tables set fonh the combm.ed funded status of the plans and the composition of total net pension cost. Net pension Prior senice cost associated with retroacthe plan amendments is cost shown below does not include the cost of termination bene-amorti/ed on a straight-kne basis oser the average remaining fits described in Note 7. At IM em/wr J1. I996 I995 tiniham m lO b ted benefit obhgation $695,634 $688,084 Nornested benefit obligation 17,974 15.668 Accumulated benefit obhgation 713,608 703,752 Projected benefits related to increase in future compensation leseh 132,673 122.539 Pnsected benefit obligation 846.281 N26.29 i Plan a sets at fair value (792.541) (744.M5) Pnsected benefit obligation lew plan assets 53,740 81.646 Unrecogni/ed prior senice cost 121390) (24,357) Unrecogni/ed net low I117,157) ( l I 8,361 ) Unamonimi net awet in un aikiption of FASil Statement No. 87 797 995 Accmed pension tawet) liability $ 184.510i 5 W).077) h or I:n&J twm/wr 31. I996 I995 I994 tin ihmoanJO Components of net pension cost Sen ice cost-benefits carned during the period $16,089 511,407 $15.015 Interest cost on pn jected benefit obhgation 59,948 '.8.433 58.723 Actual retum on plan assets t 57,671 i (l50.510) 7,932 Net amortization and deferral 2,115 94.674 W).071) Total net pension cost 20,481 14Jul 21,599 Amount tapitahted as construction cost (2,4421 (l.422) (2.578) Amount t harged to eiyiense $18.039 512.582 $19.021 The Company also spinson a defined contnbution sasings plan in April 1993, the Maryland Commiwion issued a rate order cos enng all chgible ilGli employ ees aiki cenain employet s of authorizing flGE to recogni/e in operating expenw one-half of IlGE's subsidianes Under this plan. the Company makes contribu the annual increase in PRil costs applicable to regulated opera-tiorw im behalf of panicipants. Comptny contributions to this plan tions as a result of the adoption of Statement No.106 and to totaled 59.4 milhon. 58.5 milhon, and 58.7 million in 1996,1995, defer the remainder of the annual increase in these costs for and IW4, respectisely. inclusion in llGE's nest base rme pniceeding. In accordance with the April 1993 Order, all amounts to be deferred prior to Ntretirement lienefits completion of IlGE's next base rate proceeding will be amor-The Company sponsors deh.ned benelit pwtretirement health tired oser a 15-year period beginning in 1998. care and hie msurance plans u hich coser substanually all llGE employees and cenain employ ees of its subsidiaries. llenefits In Nosember 1995, the Maryland Commission issued a rate mWr the plans are generally based on age, > cars of senice, and order in llGE's pas base rate proceedmg prosiding for full pension benefit lesch. lhe postretirement benelit (PRil) plans are recognition in operating expense of PRil and other pmt-unfunded Substantially all of the health care plans are contnb-employ ment benefits (discussed below) costs attributable to gas utory, and parucipant contnbutions for employees u ho retire after operations, and affirming its presious decision on amorti/ation June 30,1992 are based on age and yean of senice. Retiree of deferred PRil costs. This phase-in approach meets the guide-l contnbutions itxTease conunensurate with the expected increase lines established by the Emerging !wues Task Force of the i in nulical costs The pwtret rement life insurance plan h noncon-Financial Accounting Standards lloard for deferring All costs tnbutory 1he transinon obhgation resulting fn m the adoption of as a regulatory awet. Accrual-basis PRil costs apphcable to Statement of Financial Accounting Standards Na 106 effectise nonregulated operations are charged to expense. y January 1,1993 is being amonimi oser a 2ayear period. a f!E 0!e C a 5 aP d fie f.ific C ce r a n y a n d Sut sidia r,e s i

l..

The following table sets finth the components of the accumulated PRB obligation and a reconciliation of these amounts to the accrued IHB liability. Ar I)n cm/vr 31. 1996 1995 Life Life Health Care Insurance llealth Care insurance (in riuum.h) Accumulated pwtretirement berrfit obligation: Retirees $163.904 $45,485 5157,804 544,769 Acthe employees M2.373 19.269 84,724 I8,599 Total accumulated pwtretirement benefit obligation 246,277 64,754 242,528 63,368 Unrecogni/ed transition obligation t141,089) (40,960) (149.907) (43,521) Unrecogni/cd net kiss (7J68) (5,690) (12,767) (5,764) Accrued postretirement benefit liabihty 5 91.H2O $18,104 5 79.854 514.OMT ne following table sets forth the compnition of net PRB cost. Consistent with the Maryland Commission's Nosember 1995 Such cost does not include the cost of tennination benefits order, the amounts deferred will be amonized over a 15-year described in Note 7. period beginning in 1998. War emled Isweml.er 31, I996 I995 Assumptions (In sfumamh> The pension, postretirement, and other postemployment benefit Net pntretirement benefit cost: liabilities were deterrnined using the following assumptions. Sersice cant-berwfits camed durinF At twml er 31. 1996 1995 the period 5 5.559 5 3,918 Assumptions: Interest cost on accumulated post Discount rate retirement benefit obligation 21,918 21,203 Pension and postretirement benefits 7.5% 7.59 Amortiration of transition obligation 11.37N 11.378 Other pntemployment benefits 6.0 6.0 Net anuuti/ation and deferral 174 486) Average increase in Total net pwtretirement benefit cost 39,029 36,413 future ctunpensation levels 4.0 4.0 Amount capitalized as cotwtruction cant (6.224) (5,299) Expected long-term rate of Amour,t defened (7,455) (N.025) return on assets 9.0 9.0 Annunt charged to expense $25.350 $23.089 %e health care inflation ra'es for 1996 are assumed to be 9.5% Other Postemployment lienefits for Medicare-cligible retirees and 8.9% for retirees not covered ne Company prosides health and life insurance benefits t by Medicare. The health care inflation rates for 1997 are assumed employees of BGE and certain employees of its subsidiaries u ho to be 7.59 for Medicare-eligible retirees and 10.09 for retirees are determined to be disabled under BGE's Disability Insurance not covered by Medicare. After 1997, both rates are assumed to Plan. The Company also prmides pay continuation pay ments for decrease by 0.5% annually to an ultimate rate of 5.59 in the employces detennined to be disabled before November 1995. vears 2001 and 20% respectively. A one percentage point Such payments for employees determined to be disabled after increase in the heahh care inflation rate from the assumed rates l that date are paid by an insurance company, and the cost of such would increase the accumulated postretirement benefit obligation insurance is paid by employees. The liability for these benefits by approximately $41 mi" ion as of Ikcember 31,1996 and totaled 551 million and $52 million as of Ikcember 31,1996 and would increase the aggregate of the servke cost and interest cost 1995. respectively. ne pution of the liability attributable to compinents of postretirement benefit cost by approximately regulated activities as of Ikcember 31,1993 was deferred. $4 million annually. Note 7. Termination Benefits 11GE ofPred a Voluntary Special Early Retirement Pmgram February 1,1994. The one-time cost of the 1993 VSERP tthe iW2 VSERP) to eligible employees who retired during the consisted of enhanced pension and postretirement benefits. In period Febi sary 1,1992 through April 1,1992. In April 1993, addition to the 1993 VSERP, further employec reductions have the Marylano Ccminion authonfed BGE to amortire the been accomplished through the elimination of certain pwitions, 56.6 million cost of te mination benefits amciated uith the and various programs has e been offered to employees impacted 1992 VSERP, which consisted principally of an enhanced pen-by the eliminations. The $88.3 million pution of 1993 VSERP sion benefit, over a fhe-year period for ratemaking purpwes. attnbutable to regulated activities was deferred and is being 45 anm o er a egear p for ratemaking purposey, BGE otIered a second Voluntary Special Early Retirement Pro-beginning in February 1994, consistent with prenous rate gram (the 1993 VSERP) to eligible employees u ho retired as of actions of the Maryland Commission. Baltimore Gas and Electric Company and Sutisidianes

I Note 8, Short-Tefm Borrowings c Short term horrowings include bank loans, commercial paper The weighted average interest rates for short-tenn turrowings rustes and bank lines of credit. The Company pays commitment were as follows: fees in support of lines of credit. llorrowings under the lines are at the banks' prime rates, base mterest rates, or at various money k, af mI@<mn M M5 M market rates I loans 4.93 % 4.749 Short term borrowings were as follows: Commercial Paper Notes 5.53 5.92 As I)n ember 31 1996 1995 Constellation Companies Un slumwnds) Lines of Credit IlGE's bank huns 5 8,785 5 3.845 IlGE's commercial paper notes 324,400 275,300 Unused lines of credit suppxting comnwrcial paper notes at Constellation Companies' lines of credit 160 Ikcember 31,1996 and 1995 were $203 million and 5238 million. Total short-tenn borrowings 9 33,185 5279.305 respectively.1hese amounts are exclusive of $150 million of resolving credit agreenents undrawn at year-end (see Note 9). Note 9. Long Term Debt First Refunding Mortgage Bonds oflKiE Following is information regarding IIGE's Medium-term Notes Substantially all of the principal properties and franchises owned outstanding at Ikcember 31,1996: by llGE, as well as the capital stock of Constellation lloldings, ^ Inc., Safe liarbor Water Power Corporation, ilP&S, EP&S. and R Maturity Dates Constellation Energy Source, Inc. (formerly named HNG. Inc.), are subject to the lien of the mortgage under w hich IIGE's 11 8 43% 1998-2006 outstarxhng First Refunding Mortgage lionds hase been issued. C 7.099 1997-2(X)3 D 6.609 1998-2(X)6 On August I of each year, ilGE is required to pay to the nuw1 gage trustee an annual sinking futui paynent equal to 19 of the largest le>ng-7erm Debt of Constellation Companies principal anxiunt of hkutgage llonds outstanding under the mort-The Constellation Companies have a $75 million unsecured re-page during the preceding twehe numths. Such funds are to be volving credit agreenwnt u hich matures ikcember 9,1999 and is used, as pmvided in the nun 1 gage, for the purchase and retirenrnt used to provide liquidity for general corporate purposes. A commit. by the tmstee of Mortgage lionds of any series otirr than the 549 nrnt fee is paid on the daily average of tir unbonuwed portion of instalinent Series of 2(X)2. the 8.409 Series of 1999, the SM9 the commitment. At thember 31,1996, the Constellation Com-Series of 2(XX), tir 8X9 Series of 2(X)l, the 7%9 Series of 2(X)2-panies had $65 million outstanding under this agreement. the 639 Series of 2003, the 6W Series of 2003, the SM9 Series of 2(m, the 7M9 Series of 2007, arxl the 6W Series of 2(X)M. The Constellation Companies' mortgage and construction loans and other collaterali/ed notes has e varying tenns. The 81X)9 The principal amounts of the 5M4 Installment Series Mortgage nxirtgace note requires monthly principal and interest payments lionds payable each year are as follow s: through July 31,2001. The 81X)G construction loan requires no ) Par monthly principal and interest payments during construction and t/n riunnarulo is due October 30,2003.The variable rate mortgage notes require 1997 5 605 periodic payment of principal and interest with vanous maturities 1998 and 1999 690 from June 1997 through July 2009.The 7.509 nun 1 gage note 2(XX) and 2001 865 requires monthly principal and interest payments through 2002 6,725 October 9,2(X)5.1he 7.3579 mortgage note requires quanerly principal and interest pay ments through March 15,2009.The lhe Remarketed Floating Rate Series Due September 1,2(X)6 9.65% mortgage note requires monthly principal and interest First Refunding Mortgage llonds mclude a provision that allows nenb thmugh Febmary 1,2028. the borx! holders the option to tender their bonds back to HGE on an annual tusis. IlGE is required to repurchase and retire at par The unsecures! notes outstanding as of December 31,1996 any bonds tendered that are not remarketed or purchased by the mature in accordance with the following schedule: remarketing agent. In addition, ilGE has the option to call the ^"*'U"' bonds annually at par on each remarketing date. tin ilunaaruld Other I/mg-Term ikbt of flGE 8.939, due August 28,1997 5 52/XX) HGE maintains revohing credit agreements that expire at 6.659, due September 9,1997 15JXX) [ various times from 1997 through 1999. Under the tenns of the 8.239, due October 15,1997 303XX) j agreenrnts, HGE may, at its option, obtain kuns at various 7.059,due April 22,1998 25JXX) interew rates. A commitment fee is paid on the daily average of 7.069, due September 9,1998 20JKX) the unborrowed portion of the commitment. At December 31, 8.489, due Ochiber 15,1998 75JXX) i 1996, IlGE had no bonuwings under these res olving credit 7.309, due Apnl 22,1999 90fx X) _.i agreements and had available 5150 million of unused capacity 8.739, due October 15,1999 153XX) 46 under these agreements. 7.554,due April 22,2000 35JXX) 7.439, due September 9. 2(XX) 30JXX) { Urkler the terms of the bank loan u hich matures on March 29, 81K)9, due December 31,200l) IN) l 2001, the bank has a one-time option to cancel the hun on Total unsecured notes $387.lN) December 29,1997. Until that date, the interest rate on the hun j is 5.224. If the bank does not cancel the kun on December 29, i 1997, the interest rate for the remaining tenn will reset to 6.119. t Baltim0f e Gas and (lettrtC C0rrpany and $ct$1dants R

• e Jimg-Term Debt of Other Diversified Businesses Aggregate Maturities feng-term debt of other divmified businesses includes a The combined aggregate maturities and sinking fund require-550 million unsecurcJ revolving credit agreement of Comfort ments for all of the Company's long-tenn boirowings for each Link which matures September 26,2(X)l. loans may be obtained of the next five years are as follows:

at various rates for terrns up to nine numths. A facihty fee is paid Dn.m ned on the total arruiunt of the commitment. At December 31,1996, $12 million w ausutstanding under this agreement. %ar BGE Businesses an ihmnando Weighted Average Interest Ratesfor Variable Rate Debt lwy $ g9,g4g $;9y,934 The weighted average interest rates for variable rate debt were IWM 93,578 165.370 19W 247,347 186.339 lear ended December 3/, 1996 1995 2(XX) 253.658 97,803 IlGl? 2'X)] 247.183 31,897 lloating rate series trxogage twxxh 5.N7% 6.30% As of December 31,1996, BGE had $195 million of detw with Remarketed floating rate serich provisions that allow lenders the option to request BGE to repay m<cgage lxwnis 5.63 the debt at certain times prior to maturity. In the event such Pollution control hian 3.49 3.79 options are exercised, BGE intends to refinance such debt on a Port facilities loan 3.59 4.06 long-term basis through the issuance of medium term notes or Adjustable rate guillution control loan 3.90 3.75 using resolving credit agreements. Econornie devekipment loan 3.57 4.01 Constellation Companies lams under credit agreements 6.08 6.74 Mortgage and construction loans and other collateralized notes H.33 H.99 Other Dhcrsified Ilusinesses loans under credit agreements 6.13 Note 10. Redeemable Pfeference Stock The 7.809,1989 Series is subject to mandatory redemption in The combined aggregate redemption requirements at full at par on July 1,1997. The following series are subject to an December 31,1996 for all series of redeemabk preference annual mandatory redemption of the number of shares shown stock are as follows: below at par beginning in the year shown below. At BGE's g.ar option, un additional number of shares. not to exceed the same g, number as are mandatory, may be redeemed at par m an) year, commencing in the same year in w hich the mandatory redemp-1997 $ 83,(XX) tion begins. The 8.259,1989 Series. the 8.6259.1990 Series, 1998 23,(XX) and the 7.859,1991 Series listed below are not redeemable 1999 23 (XX) except through operation of a sinking fund. 2(X X) 10JXX) Beginning 2(X)1 10jXX) Series Shares Year Thereafter 68.5(X) Total aggregate redemption requirements 5217.5(X) 7.509,1986 Series 15,(XX) 1992 6.759,1987 Series 15JXX) IW3 With regard to payment of dnidends or assets available in the H.25E 19x9 Series 1(XIJXX) 1995 esent o qu non,au s of preference stock. w hether M 625%.19'M) Series 130JXX) 1996 su@ct m mandatory redemption or not, rank equally; and all 7.859,1991 Series 70fXX) 1997 preference stock ranks pnor to common stock. 47 14altimore Gas and Electric Cornpant and Subsidianes

Note 11. Leases The Company, as lessee, contracts for certain facilities and Certain of the Constellation Companies, as lessor, have entered equipment under lease agreements with various expiration dates into operating leases for omcc and retail space. Rese leases amt renewal options. Consistent with the regulatory treatment, expire over periods ranging from 1 to 19 years, with options to lease payments for utinty operations are charged to expense. renew. The net book value of property under operating leases lease expense, w hich is comprised primarily of operating was $177.3 million at December 31,1996. The future minimum leases, totaled SI1.6 million,512.2 million, and 512.7 million rentals to be received under operating leases in effect at for the years ended 1996,1995, and 1994, respectively. December 31,1996 are as follows: The future minimum lease payments at December 31,1996 for long-tenn noncancelable operating leases are as iollow s: 1 Ear Year 1In Junowds) (In slumwdT) 1997 $ 15,433 1997 $ 4,8w 1998 14,073 1998 4,095 IW9 13,146 19W 2,072 2000 12,671 2000 1,g93 2001 l l,7(M 2001 1,450 nereafter 61,735 nereafter 2,725 Total minimum rentals 5128.762 Total minimum lease payments 567.134 _. -. ~ _ _. _ Note 12. Commitments, Guafantees, and Contingencies Commitments Guarantees BGE has made substantial commitments in connection with its BGE has agreed to guarantee two-thirds of certain indebtedness construction program for 1997 and subsequent years. In addition, of Safe liarbor Water Power Corporation. The total amount of BGE has entered into three long-tenn contracts for the purchase indebtedness that can be guaranteed is 550 million. of w hich of electric generating capacity and energy. De contracts expire in $33 million represents BGE*s potential share of the guarantee. 2001,2013, and 2023. Iotal payments under these contracts were As of December 31,19%, outstanding indebtedness of Safe SM.1,568.4, and $69.4 million during 19'Xi,1995, and 1994, liarbor Water Power Corporation was $32 million, of w hich respectively. At December 31,19'X>, the estimated future $21 million is guaranteed by BGE. BGE has also agreed to payments for capacity and energy that BGE is obligated to buy guarantee up to $20 milhon of obhgations and indebteoness of under these contracts are as follows: Constellation Energy Source, Inc. (fonnerly named BNG, Inc.) As of December 31,1996, there were no outstanding obligations 3g7 ""0" ' E*"'"' anslua wuh) on the loans guaranteed n mimmal. 9 Iw8 78,075 As of December 31,1996, the total outstanding loans and letters 1999 91,93g of credit of certain power generation and real estate projects guar-2000 92,039 anteed by the Constellation Companies were $54 million. Also, the Constellation Companies have agreed to guarantee certain I 2(x)I 62,978 hereafter 805.110 otha Wnming ohanous power generation and real estate pmjects.The Company has assessed that the r:sk of material loss . Total estimated future pay ments for on the loans guaranteed and perfonnance guarantees is minimal. capacity and enerFy under long.tenu contracts 51.191.809 Pending Merger With 1%tomac Electric Power Company BGE, Potomac Electric Power Company (PEPCO), and Certain of the Constellation Companies hase committed to Constellation Energy Corporation (fonnerly named "lui contribute allitional capital and to make additional loans to Acquisition Corp.")(CEC), have entered into an Agreement and cenain affiliates. joint sentures, and partnerships in which they Plan of Merger, dated as of September 22,1995 (the Merger hase an interest. As of December 31,1996, the total amount of Agreemenu. CEC was formed to accomplish the merger and its investment requirements committed to by the Constellation outstandmg capital stock is ouned 5(V4 by BGE and 504 by Compames n 556 milhon. PEICO. The Merger Agreement prosides'for a strategic busi-In December,194, BGE and llPkS entered into agreements with new combination that uill be accomplished by merging both a financial insutution whereby BGE and IIP &S can sell on an BGE and PEPCO into CEC (the Merger). The Merger, w hich ongoing basis up to an aggrrgate of $40 million and 550 million, uas unanimously approved by the Boards of Directors of BGE respecthely, of an undivided interest in a designated pool of and PEPCO and approved by the shareholders of both com-customer receivables. Under the tenns of the agreements, BGE panies. is expected to close during 1997 after all other conditions t the consummation of the Merger, including obtaining applic-and llP&S hase limited recourse on the receivables and have i 4g recorded a n:scrve for crnht losses. At December 31,19%, BGE able regulatory approvals (described below), are met or waived. I and llP&S had sold $35 million and $47 million of receivables, in connecuon with the Merger, BGE common shareholders will l respecthely, under these agreements. receive one share of CEC common stock for each BGE share j and PEPCO common shareholders will rc cise 0.997 of a share of CEC common stock for each PEPCO share. I Battmore Gas and Electric Company and Subsidianes l

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Prelirninary estimates by the managements of PLPCO and ilGE that the Maryland Commission adopt an ahernatise regulatory ihdicate that the synergies resulting from the combination of plan and also asks that rates be examined. h1aryland Commission their utility operations could generate net cost savings of up to StafT testimony also utili/es the new test period. Ilased on the 51.3 bdhon mer a period of 10 year following the hierger. new test period h1aryland Commission StafT recomnends an 1hese estima.es indicate that about two-thirds of the sasings will immediate decrease of 563.6 million (BGE's rates reduced by come from reduced labor costs, with the remaining sasings split 554.3 million and PEPCO's by 59.3 milhon) at the time of the between nonfuel purchasing and corporate and administrath e Merger. Maryland Commission Staff's surrebuttal testinuiny programs. These savings are net of costs to achieve, presently adso recomnends that CEC be required to nuke a rate filing estinuted to be approximately $150 million, and are expected to 15 months after the Merger becomes effective. be alkicated among shareholders and cusunners. This alkication " #Md "] Columbia Pubudmu.r Cmnmiulon - Heanngs will depend upon the results of reFulatory pmceedings in the began February iH,1997. Testimony was filed by the parties m various jurisdictions in which IIGE and PEPCO operate their September 1996. The D.C. Ofhee of People's Counsel (the utility businesses (see discussion of the issues raised in regula-aduncates for residennal customers) opposes the Merger based tory proceedings regarding the alkication and other matters). The on in comention that ilGE and PEPCO have not proved that the analyses ernployed in order to develop estimates of the potential hierger is m the public interest. Tesumony of the D.C. People s savings as a result of the Merger were necessanly based upon C""" "b" amides that should the Merger be approved, an various assumpt;ons which involve judgments uith respect to, immediate rate reduction of $44.2 million he impwed at the among other things, future national and reF onal econom'c and i ome of du Mnger, fonowed by a 5-year moratonum on rate competitive conditions, inflation rates, regulatory treatment, increases. Further, testinony of D.C. People's Counsel adq>- weather condaions, financial market conditions, interest rates, ca es divestiture of all nonutility affiliate comsmies, exclusion future business decisions and other uncertainties, all of which of BGE's Cahert Chffs Nuclear Plant fnun pniduction plant _ are difficult to predict and many of which are beyond the control awyned to D C., and a 5-year $23.37 milhon per y ear economic of IIGE and PEPCO. Accordingly, whde ilGE believes that such devehipment program. GSA, a major D.C. customer, requests awumptions are reasonable for purposes of the development of diat any appms al duiuld be coupled with an impwition of retail estimates of potential sasings, there can be no assurance that competition access for ratepayers such as GSA, a 25-year amor-such assumption w di apprminute actual exgwrience or that all tiration of costs to achieve the Merger, and elimination of such sasings will be reahted. Calvert Chffs from the generating mix. In addition to these Major regulatory pmceedings, together uith an indication of the matters, D.C. People's Counsel, an intervenor, Washington Gas current status of the proccethng, which must be concluded in Light Company, and the D.C. Corpwation Counsel have ques-order to pniceed u ith the merger, are listed below. The Merger tioned the interpretation by llGE and PEPCO that a D.C. statute Agreenent provides that a c axfition to chwing is that no such know n as the Antimerger Law is inapplicable to this transaction. approvals shall impwe tenus and corxlitioia dut would lune, or Should such statute be deemed to be applicable, authorization of woulJ be reasonably hLely to luwe, a nutenal adscrse effe"t on the Merger by Congress would be required. Allegations also the business, operations, properties, assets, condition (firiancial or uere made that BGE and PEPCO should hase receised odrrwise), pnwpects, or results of operations of the new company. Congressional approsal for their owning 509 of the shell company, CEC, prior to consummation of the Merger. n Federal Encryy Regulcaor, c.ommtwon (FERC) - tlearings base been completed and we are waiting for a decision. The hear- 'Ihe reasons ihr the Merger, the terms and condaion3 contained in ings explored the nerged company's generation market power, the Merger Agreement, the regulatory approsals required prior to includmg the appropriate geographic markets, and to consider ekwing the Merger, and other matters concerning the Merger, appropriate renedies if the merged company is found to pnsess PEPCO, and CEC are discussed in more detail in the Regntration generation nurket pmer. Testinumy of I ERC statIincluded the Statement on Fonn S-4 (Registration No. 33-64799). suggestion dut a significant prtitm of generation (apprminutely b,""II""*#"'dI Nd"##3 240 L3W} megaw atts) be disested or transmission capability be The Clean Air Act of 19W)(the Act) contams two titles des.igned upgraded or both due to the perceived market pmer of the to reduce emissions of sulfur dioxide and mtrogen mide (NOx) merged company in both the wholesale and retail nurkets. l from electric generating stations. Title IV contains pnnisions for I a Martl<uul Publir &reice Conuninion (Manland Comminion) - compliance in two separate phases. Phase I of Title IV became ilearings luse been completed and w e are waiting ihr a decision. effective January 1,1995, and Phase 11 of Title IV must be Since die Reput on Fonn 10-Q fiw die third quaner 1996 w as implemented by 2(XX). BGE met the requirements of Phase I by filed. rebt ttal anil surrebuttal testimony tus been 6ted. Office of installing flue pas desulfuri/ation systems and fuel switching People's Counsel (the achocates for residential customers) recom-and through unit retirements. BGE is currently examining what nrrxled that the Maryland Conunission not approve the Merger actions will be required in order to comply with Phase 11 of the until the Appheants denonstrate that Mar)Lmd customers u di not Act. Ilowes er. BGE anticipates that compliance will ir attained be hamed by p4ential restrictions on competition due to the by some combination of fuel switching, flue gas desulfuritation, nurket power of the new company. If, htm es er, the Maryland unit retirements, or allow ance trading. Commission decides to approse the Merger, People's Counsel At dus time, pLins for complying with NOx control requirements continues to recomnend rate decreases. Due to dr use of a thfTerent test pern!, the amounts are someu hat ddTerent than under Tide I of the Act are less certain because all implementjdion reguladons bas e not yet been Gnahred by the gm ernment. It is irputed in the sectmd qturter Reput on lium 1(kQ. Based on a test gerial propwed by People's Counsel in recent testimony, CWNND*W N ** "EO""' d W" A they recommend a pnwrirrger rate reduction of approxinutely tuinal NOx contn.is for ozone attainment at BGE's generating plants and at other BGE facilities The controls will result m ackli- $108.3 mdlion t584.7 mdlion to BGE ctatoners and 523.6 million O to PEPCO customers) with Merger savings being retketed in tonal expenditures that are difGeuh to predict prior to the issuance further reduced rates of approximately 565 million (545 mahon to olyuch nyulanons Based on existing and proposed ozone n nut-taimnent nyulaumn, BGE currently estimates that the NOx BGE custuurrs and $20 millum to PEPCO custoners) omtempw C""II"I'"' NCE's generating plants will cost approximately 590 raneously w ith the d,ue of the Merger. A number of other recom-rnendatnos are also includal in People's Counsel testirnony. The million. BGE y.s currendy unable to predict the owt of comphance Mary Lmd Energy Admmistration (MEA) continues to rectEnnwnd with the additional requirer.rnts at other BGE facilities. Baltimore Gas and fitctoc Compaq and Sutsidianes

e* IlGE has been notified by the Emironmental Pnwection Agency $473.2 million per unit of insurance, pros ided by an industry and several state agencies that it is being considered a pitentially mutual insurance company, for replacement pow er costs. This responsible party (PHP) with respect to the cleanup of certain amount can be reduced by up to 594 6 milhon per unit if an emironmentally contaminated sites owned and operated by third outage to both units at Calven Clith is caused by a smgular panies. Cleanup costs for these sites cannot be estimated, except insured phy sical damage loss. If accidents at any insured plants that IlGE's 15.79% share of the p>wible cleanup costs at one of cause a shortfall of funds at the industry mutuah, BGE and all these sites. Metal llank of America, a metal reclaimer in Phila-policy holders could be assessed, with BGE's share being up to delphia, could exceed amounts recognized by up to appnai-535.1 million. nutely 57 million based on the highest estimate of costs in the range of reasonably pnuble alternatises. Although the cleanup Rec verability ofElectnc Fuel Costs cosh for cenain of the remaining sites could be sigmficant, ilGE Ily statute, actual electric fuel costs are recoverable so long as the Maryland Commission finds that IlGE demonstrates that, anmng belieses that the resolution of these matters will not have a material etfect on ih Onancial position or resuth of operations. other things, it has maintained the pmductive capacity of its generating pkmh at a reasonable lesel.The Maryland Com-Aho, llGE is coordinating investigation of sescral fonner Fas mission and Maryland *> highest appellate coun hase interpreted manufacturing plant sites, including exploration of corrective this as pennitting a subjecthe evaluation of each unplanned action optiom to remme coal tar. In late December 1996, the outage at BGE's generating plants to determine whed er or not Mary land Depanment of the Environment and ilGE signed a llGE had implemented all reasonable and cost-etTectise mainte-consent order that requires IlGli to implement remedial action nance and operating control procedures appropriate for pre-plars addressing contamination at and related to the Spring venting the outage. Effectise January 1,1987, the Maryland Gardens site. 'Ilw specific remedial actions for this site will be Commission authorized the establishment of a Generating Unit desekiped in the future. IIGE has recogni/cd estinuted environ-Perfonnance Program (GUPP) to measure, annually, utility mental costs at all fonner gas manufacturing plant sites (based compliance with maintaining the pnsluctive capacity of gener. on semedial action options) w hich are considered probable ating plants at reasonable levels by establishing a system-wide totaling 550 million in nominal dollars. These costs, net of generating perfonnance target and indisidual performance targets accumulated amortization hase been deferred as a regulatory for each base load generating unit. In fuel rate hearings, actual met bec Note 5). Accounting rules also require llGE to generating performance after adjustment for planned outages will dadose additional costs deened by !!GE to be lew likely than be compared to the system-wide target and, if met, should signify pmbable costs, but still " reasonably pnsible" of being incurred that 13GE has complied uith the requirements of Maryland law. at these sites. Ilecause of the result of recent studies at these Faifure to meet the system-wide target uill result in resiew of sites, it is reasonably pnsible that these additional costs coukt each unit's adjusted actual generating performance s ersus its exceed the amount recognized by approximately 548 million in performance target in detennining compliance with the law and nominal dollars 1511 nullion in current dollars, plus the imptct the basis for pnsibly imposing a penalty on llGE. Parties to fuel of innation at 3.19 mer a period of up to 60 years). rate hearings may still question the prudence of BGLPs actions or inactions with respect to any given generating plant outage, A,urlear Imurance which could result in the disallow ance of replacenwnt energy An accident or an extended outage at either umt of the Cahen costs by the Maryland Conuniwion. Clith Nuclear Power Plant could hase a substanual adserse effect on BGE. The primary contingencies resulting from an Since the two units at liGE's Calvert Cliffs Nuclear Power incident at the Cahen Chth plant would imohe the physical Plant utilize llGIPs lowest cost fuel. replacement energy costs d.unage to the plant, the recoserabihty of replacement pmer associated with outages at these unih can be significant. IlGE costs. aux! BGE's liabihty to third parties for property damage cannot estimate the amount of replacement energy cosh that and hshly injury, llGli maintains sarious imurance policies for could be challenged or disallowed in future fuel rate proceed-these contingencies. The cosh that could result from a major ings, but such amounts could be material. accident or an extended outage at either of the Cahert Chth unib In Wtober 1988.13GE filed its h_rst fuel rate application for a could exceed the emerage hmih. change in its electric fuel rate under GUPP. The resultant case in addition, in the esent of an incident at any commercial nuclear before the Maryland Comnussion covers llGE's operating per-pmer plant in the country, BGE could be assessed for a pinion fornunce in calendar year 1987, and BGE's filing demonstrated of any third party claims associated uith the incident. Under the that it met the sy stem-wide and indhidual nuclear plant perfor-prmisiom of the Price Anderson Act, the limit for inird party mance targets for 1987. In Nosember 1989. testimony w as filed daims from a nuclear incident is 58.92 bdlion. If third party on behalf of the Maryland People's Counsel tPeople's Counsel) claims relating to such an incident exceed 52tW) million t the alleging that sesen outages at the Cahert Chth plant in 1987 amount of pnmary insurance), BGE's share of the total liabihty were due to management imprudence and that the replacement for thini par'y claims could be up to 5159 nulhon per incident, energy cmts associated with those outages should be disallowed that woukt be payable at a rate of $20 milhon per year. by the Commiwion. Total replacement energy costs awociated with the 1987 outages were approximately 533 mi!! ion. On BGE.and other opetators of commercial nuclear pmer plants m Janutuy 23,1995, the lleanny Examiner iwued ha decision in the Umted States are required to purchase insurance to emer the 1987 fuel rate proceedmp and found that th,: Company had clanm of cenain nuclear uorkers Other non-gmernmental nwt the GUPP standard w hich establishes a presumption that commercial nuclear facihties nuy also purchase such insurance. BGE lud operated the plant at a reasmrNy productise capacity C m erage of, up to 54(W) milhon a prouded for claims against lesel. Iloweser, the Order found that ine presumption of reason-ILGE or others insured by these pibeies f or radiation injuries. If ableness would be mercome bs a showing of mismanagement certain claims were nude under these pohges, ilGE and all and that such a showing was Eade with respect to the emiron-poheyhoklers could be awessed, with BGE s share bemp up to mental qualifications outag time. The llearing Examiner had + 56 02 mdhon in any one year. nutigated the disidlowrmce of replacement energy costs due to the For phy sical damage to Cah ert Chth, BGE has 52.75 billion of fact the GUPP stan&d w as met. The llearing Examiner's Order pnyeny insurance f rom irklustry mutual insurante companies was appealed to the M-ryland Commission by both BGE and if an outage at Cahert Chih is caused by an insured physical People's Courel. The Maryland Commiwion upheld the damage low and lash nuw than 2I weeks, llGE has up to ilearing E<.aminer's findings with respect to the emironmental Balumpe Gas and Eietnic Ccmpany and Sctsidianes

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gahfication related outage time, but disagreed with certain for p>ssible disallowanee of replacement energy costs recorded i nethodologies applied by the llearing Examiner. The impact of in IVA). U refore, in December 1996, llGE increased the the Maryland Commiwion's decision on the Company's 19 X) prosision for the disallowance of such costs by 583 million. camings was approximately 54.5 milhon, the anmunt presiously Additionally,in 1996,ilGE wrote off 55.6 million of accrued estimated by the Company. People's Counsel has filed a motion carrying charges related to the deferred fuel balances. The for rehearing. remainder of the replacement energy costs awociated uith the extended e itage has already been recosered from customers in May 1989, ilGE filed its fuel rate case in which 1988 per-through the 41 rate. fonnance w as examined. IlGE met the system-wide and nuclear plant perfonnance targets in 1988. People's Counsel alleged that California ther Mirclune Agreements llGli imprudently manaFed several outages at Cahert Chffs, and The Constellation Companies base ounership interests in llGE estimates that the total replacement energy costs awociated 16 pniects that sell electricity in California under " Interim with these 1988 outages were approximately 52 million. On Standard Offer No. 4" power purchase agreements. Under these Nosember 14, IV>l, a llearing Diaminer at the Maryland agreements, the pndects supply electricity to utilities at a fixed Commission iwued a proposed Order, w hich became final on rate for capacity and energy the first 10 years of the agree-December 17,1991 and concluded that no disallowance uas ments, and a lhed rate for capacity plus a variable rate for warranted. 'Ihe llearing Examiner found that ilGE maintained energy based on the utilities' avoided cost for the remaining the pnduc.tive capacity of the Plant at a reasonable level, noting term of the agreements. Asoided cost generally is the cost of a that it pnduced a near record amount of power and exceeded utility's lowest-cost neitt-available source of generation to the GUPP standard.15ased on this acc ini, the Order concluded senice the demands on its system. there was suf0cient cause to excuse any asoidable failures to From 1996 through 2(XXI, the 10. year perkds for f.uted energy maintain pnductne capacity at higher lesch. rates expire for these projects and they will begin supply mg During 1989, IVX), and 19)l, llGE experienced extended electricity at variable rates. At current avoided cost lesch, the outages at its Cahen Chth Nuclear Power Plant. In the Spring of Constellation Companies wouki experience reduced earnings 1989, a leak was disemered around the Unit 2 pressuri/er heater or incur lowes awociated with these padects when they begin sleeses during a refueling outage. IlGE shut down Unit I as a supplying electricity at sariable rates. Eight pndects begin precautimary measure en May 6.1989, to inspect for similar supplying electricity at variable rates in 19(n and 1998. The leaks and none were found. Iloweser, Unit I was out of senice pndects that make the highest resenues will begin supplying for the remainder of 1989 and 285 days of 1990 to undergo electricity at s ariable rates in 1999 and 2(KX). As a result, ue do maintenance and moddication work to enhance the reliah hty of not expect the Constellation Companies to experience signifi-various safety systems, to repair equipment, and to perfonn cantly lower camings or h>sses on these pndects before 2tXX). required perh lie suncillance tests. Unit 2, which returned to Constellation is pursuing alternathes for these power generation senice May 4,1991, remained out of senice for the remainder pniects including reguwering the pndects to redace operating of 1989,1990, and the first pan of 1991 to repair the pressuri/cr, costs, changing fuels to reduce operating costs, renegotiating perform maintenance and modification uork, and complete the the juwer purchase agreements to impnne the terms restrue-refuchng. The replacement energy emts associated with these turing financings to impnne the financing terms, and selling its eitterxled outages for Nith units at Cahen Chth, concluding with ow nership interests in the pniects. The Company cannot esti-the return to senice of Unit 2, are estimated to be 5458 milhon. mate the financial impact of the suitch from lhted to variable rates on the Constellation Companies or on llGE, but the impact In a December 1990 Order n. sued by the Maryland Commn.sion could be material. in a llGE base rate proceedmg, the Mary land Commasion found that cenain operatiom and maintenance eitpenses incurred at Constellation Real Estate Cahert Chfis dunny the test year should not be recmered from Management will consider market demand, interest rates, the ratepayers lhe Maryland Commission found that this uork, availability of financing, and the strength of the economy in which was perfonned during the 1989-1990 Umt I outage rad general when making decisions atuut real estate in estments. ( fell within the test year, was avoidable and caused by llGE We believe until the economy shows sustained growth and there l action w hith wcre deficient. The Maryland Commiwion noted is more demand for new deselopment. real estate s alues will not in the Order that its resiew and findmps on these issues pertain impane much. If we wcre to sell our real estate pndects in the to the reasonableness of IIGE's test year operations and mainte-current market, w e would has e losses, although the amount of nance cyienses for pur;uses of setting base rates and not to the the knses is hard to predict. Management's current real estate responsibdity for replacement energy costs associated with the strategy is to hold each real estate pndect until we can realize a outages at Cahert Chih. The Maryland Conuniwion stated reasonable value for it. Management evaluates strategies for all that its decision in the base rate case will hase no res judicata its businewes, includmg real estate, on an ongoing basis. Com-(bindmg) ellect in the fuel rate proceeding examimnp the 1989-peting demands for our financial resources, changes in the utility 1991 outages.1he work characterited as avoidable significantly industry, and the proposed merger with Potomac Electric Power increased the duration of the Unit I outage. Despite the Mary-Company. are factors we will consider w hen w e evaluate all land Commiwion's statement regarding no binding effect, ilGE diversified businew strategies so we use capital and other reco;nifes that the siew s exprewed by the Maryland Com-resources effecthely. Depending on market conditions in the miwion made the full reemery of all of the replacement energy future, we could also have lowes on any future sales. costs awociated with the Unit I outage doubtful. Therefore,in December 1990, ilGE recorded a prosision of $35 million App @able aaounting mies u ouk1 require a wntedow n of.a real against the powible dnallowance of such costs. eytay unestment to market value m, either of two cases. The hrst n if we change our intent about a pndect from an intent to 51 in December 1996,11Gil entered into a settlement agreement hold to an intent to sell and the market s alue of that pndect is with Peoplei Counsel and the Maryland Commission Staff below book value. The second is if the eyiected cash flow from Pmiusing a resolutkin to these fuel rate proceedmps. IlGE agreed the padect is less than the investment in the pndect. that ratepayen will not fund a total of $118 million of electne replacement energy costs awociated with the extended outages. This repnvnts 583 nullion in addition to the 535 million resene t Baltimole Gas and Elecint Ccmpaq anc Sut'sidianes I

._. _._.. -~. _. _ -. _ _ i r I Note 13. Faif Value of Financiallastruments j ~De following table presents the canying amounts and fair values of financial instruments included in the Consolidated Balance Sheets. l Ar IM emler 31, l996 1995' l; Carrying. Fair . Carrying - Fair -l Amount Value Amount Value i (In rourumds) Cash and cash equisalents 5 66,70N $ 66,70N $ 23,443 $ 23,443. Net accounts receivable - 419,479 419,479 400,005. 400,(X15 ' Other current assets. 74,964 74,964 54 070 54,070 investments arul other aucts for which it is: FractwaMe to estimate fair value 184,487 185,679 149,M 5 150.170 f Mt practicable to estimaic fair value - 62,162 73,042 ' Short-term borrowings 333,185 333,185 279,305 279,305 i Current ;xstions of long-tenn debt and peference stuck 280,772 2No,772 ' 146,969 146,969 j Accounts payable - 172D9 - 172M9 177,072 177,092 Other cunent liabilities 194,065 194,065 l93,992 193,992 { lemg-term delt - - 2,75N,769 2,767,721 2,598,254

2,694,858 l

Redeemable peference stock 134,500 141,621 242,000 254,809 I t Financial instmnrnts included in other current assets include Th investments in financial partnerships totaled $48 millkm and l trading securities and miscellaneous loans receivable of the $50 million at December 31,1996 aal 1995, respectively, repre- - Constellation Companies. Financial instruments inclucked in senting ownership interests up to 10% The appegate assets of v uther current liabihties represent total current liabilities fmm the these partnerships totaled $6.1 billion at December 31,1995.De Consolidated Balance Sheets excluding short-term turowings, investments in solar powered encryy pnuluction facility partner-current putkms of long-term debt and preference ntock, ships totaled $11 million and $22 million at December 31,1996 i' accounts payable, and accrued vacation costs. The carrying and 1995, respectively, representing ownership interests up to amourv of current auets and cunent liabilities approximates fair 12Elhe aggregate assets of these partnerships totaled $35

value becauw of the short maturity of these instruments.

million at December 31,1995, j investnwnts and other assets include investments in conumm The fair value of fixed-rate long-term debt and redeemable -I and preferred securities, which are classified as financial invest. preference stock is estimated using quoted market prices where l ments in the Consolidated Halany Crets, and the nuclear available or by discounting remaining cash flows at the current { decomminioning trust fund.1he fair value of investments and market rate. The carrying amount of sariable-rate kmg-term debt oiler assets is based on quoted market prices where available, it appnaimates fair value, was not pn eticable to estimate the fair vahie of the Constellation - i BGE, and the Constellathm Onnpanies have kian guarantees cm Companies' investments in several financial partnerships which outstandmg trxlelwedness totaling $21 million and $47 milhon, invest in nonpublic debt and equity securities, investments in respectively, at December 31,19% and $22 million and j several partnerships which own s.,lar powered energy pruduc, ' tion facilities, and in un investment in a company involved in the $35 million, respectively, at Deccmher 31,1995 for which it developnwnt of international power pmjects because the timing is mW gaticaNe to detenmne fair value. It is at unucipated and magnitude of cash fic,ws from these investments are difficult that these kran guarantees wdl need to be funded to predict. These investments are cacried at their oiiginal cost in the Consolidated Balance Sheets. I 6 i l. 1 t 52 l f r Baltimore Gas and Ela:fric Company and Sutisidiaries 1 z o

e.- t $te 14. Quarterly Financial Data (Unaudited) The following data are unaudited but, in the opinion of Management, include all adjustments necewsry for a fair presentation. IlGE's utility businest is seawnal in nature with the peak sales periods generally occurring during the summer and winter months. Accordingly, compariusns among quarters of a year may not be indicative of overall trends and changes m operanons. 4 r Quarter Ended Year Ended l March 31 June 30 September 30 Ikcember 31 IXcember 31 - (In slumsaruh ext ept per-share tumnmts) 1996 Revenues 5861,330 $731,707 5825,960 $734,250 $3,153,247 bicome frun opemtions 201,315 148,637 275,667 43,846 669,465 l 4 Net income 100,781 64,553 146,482 (992) 310,824 Earnings applicable to common stock 91,118 52,448 137,862 (9,140) 272,288 Earnings per share of common stock 0.62 0.36 .93 f.06) 1.85 1995 Revenues $717,806 SM2,500 5848,781 $725,712 $2,934,799 Income from operations I48,222 120,920 299,744 126,806 695.692 Net income 70,854 50,889 163,335 52,929 338.007 ) 4 Eamings applicable to common stock 60,902 40,937 153,1(M 42,486 297,429 Earningycr share of common stak O.41 0.28 1.(M 0.29 2.02 i two Resuhsfor dw senwulquat<er tryect' O tlw $45 mahan aper-ta writr<ff nfdiudlowrd replat errwns energy e osu (see Nort iJ t G the $146 milhem af er. tan gein on the sale by a Gmstellarism partnenhsp of a rmwerpun twe agreement isee Note 31 O the $7.0 milhon arul $3.0 milhon after-tat n nte-ofs by the Gmstellathm Gnryumies of the !.nrstment m two geothernud wiudeude tu wer generating plants arui the development wsts of a pnqued candperd umerpnsject. trspersively Isee Note 31 t Resulnfor the thiniquarter reject the $h2 muhon aper-tm write of by the Gmstellatum Gunpanies of a poniem of a solarpowcrpnoject . imrsament (see Note 3t Results for thefounk quarter reficco the $$7.6 milli <m aper-tat writen4 ofdisallowed n placenwns enetxy wsrs (see Note iI /W3 Results far the thiniqwnter vrpect IIw $V 7 millum after-tat write <#ofceruin Perryman wxt (see Note 11 1 a i s [ 53 BalUrnere Gas and Eiectric Cornpany and Subsidiaries s

.a D i r e c t o;r s a n d.0'f f i c e r s- - Baltimore Gas and Electric Company Directors Christian H. Poindexter,58 Nancy lampton, $4 Carserlo Doyle,54 Chairman of the Board and ' Chairman and Vice President. Electric Chief Executive Officer, BGE Chief Executive Officer, Interconnection & Transmission Amnic an Life and Axident H. Furkmg Baldwin,65 Jon M. Files,61 nsu anx Company oMentudy Vice President, Chainnan of the Ikiard and Chief Executive Ollicer, George V. McGowan,69 Management Services Mercantile Bankshares Former Chairman of the Board Frank O. Heintz,52 Corporation and Chief Executive OfTicer, BGE Vice President, Gas Beserly B. Byron, M George l Russell, Jr., Esq.,67 Sharon S. Hostetter,52 lbnner Congresswoman. Panner, Piper & Marbury Vice President, U.S. Ilouse of Representatives Michael D. Sullivan,57 Marketing & Sales J. Owen Cole,67 Chairman of the lhiard' Ronald W. Lowman,52 Chairman of the Board. Golf America Stores, Inc. Vice President, Fossil Energy Blue Cmss and Blue Shield Officers of Maryland,Inc. G. Dowell Schwartz, Jr.,60 Christian II. Poindexter,58 Vice President, General Services Dan A.Colussy,65 Chairman of the Board and Chairman of the Ikiard and I' Chief Executive Officer Chief Executive Officer, Vice President, UNC, incorporated Edward A.Crooke,58 Finance & Accounting; President and Chief Financial Ollicer and Edward A.Crooke,58 Chief Operating Ofheer Secretary President and Chief Operating Otlicer. BGE George C. Creel,62 Joseph A.Tiernan,58 Executive Vice President and Vice President, Corporate AITairs James R. Cu:tiss, Esq.,43 Acting Chief Operating Officer Partner, Wmston & Strewn Stephen E Wood,44 Robert E. Denton,53 Vice President Jerome W. Geckle,67 Senior Vice President, Generation Retired Chainnan of the Board, Richard M. Bange, Jr.,52 Plill Corporation Thomas E Brady,47 Centroller and Vice President, Customer Service Awistant Secretary Freeman A.lirahowski111,46 & Distribution President, University of Thomas E. Ruszin, Jr.,42 Maryland. Baltimore County Charles II. Cruse,52 Treasurer and Assistant Secretary Vice President, Nuclear Energy John R. Collins,39 Assistant Treasurer 54 Baltimore Gas and Electric Company and Sutisidiaries

l k' i l Directors and O f fic e rs ~ .. o Constellation Holdings, Inc. l Directors Officers Edward A.Crooke,58 Jerome W. Geckle,67 Edward A.Crooke,58 Steven D. Kesler,45 i Chainnan of the Board, Retired Chairman of the Chairman of the Board, President, j Constellation lloldings; Board. Pilli Corporation Constellation lloldings Constellation j Edward W. Kay,69 Bruce M. Ambler,57 Operating Ofh.eer, BGE Retired Co-Chairman and President and Chief John E Walter,62 Bruce M. Ambler,57 Chief Operating Officer, Executive Officer, President, l 1 President and Chief Ernst & Young Constellation iloidings Constellation Power j i Executive OtEcer, . George V. McGowan,69 Randall M. Griffin, $2 Robert E. Windham,54 Constellation iloidings g. p pg

11. Furlong Baldwin,65 the lloard and Chief Constellation Real Church Street Station Chairman of the Ikiard Executive OIDeer, BGE Estate Group Christian II. Poindexter,58 James W. Jeffcoat,43 OfDeer, Mercanule llankshares Corporation and Chief Executive Constellation 11ealth Roger W. Gale,50 Officer, BGE Services President, Washington Mayo A. Shattuck 111,42 l

International Energy l g Operating Ollicer. f ""E Alex. Brown. Inc. ~ BGE Energy Prclects BGE Home Products Constellation Energy & Services, Inc. & Services, Inc. Source, Inc. l Officers. Officers Officers Edward A.Crooke,58 - Edward A.Crooke,58 Edward A.Crooke,58 Chairnum of the Ikiard Chairman of the lhiard Chairman of the Board l and President Stephen R Wood,44 William 11. Munn,49 President and Chief President and Chief Executise Officer Executive O' Deer Changes in Offhers and Directors l Effective January 1,1996, George C. Creel former Effective January 1,1997, lierbert D. Coss, Jr., retired l . Senior Vice P mident, Generation, was elected from the company with more than 40 years of service. i Executive Vice President. Mr. Creel also assumed the Frank O. Ileintz replaced him as Vice President, Gas. responsibilities of Chief Operating Officer until the completion of the merger. President and Chief Effective January 31,1997, Martin L. Grass resigned Operating Officer Edward A. Crooke was assigned from BGE's Board of Directors due to time constraints . the responsibilities of co-chair of Constellation associated with his responsibilities as Chairman and 55 Energy Corporation's 'Ihmsition Management Team, Chief Executive Officer of Rite Aid Corporation. i which guided all merger-related activities. Baltimore Gas and Electric company and Subsidiaries

1 r t 1 Five-Year Statistical Summary 1996 1995 1994 1993 1992 Common Stock Data Quarterly Earnings Per Sharc First Quarter.. $.62 $.41 $.49 $.38 $.37 Second Quarter.. .36 .28 .39 .31 .20 Third Quaner., .93 1.04 .79 1.01 .84 Fourth Quarter.. (.06) .29 .26 .14 .22 Total. $1.85 $2.02 $1.93 $1.85 $1.63 Dividends Dividends Declared Per Share.. $1.59 $1.55 $1.51 $1.47 $1.43 Dividends Paid Per Share.. 1,58 1.54 1.50 1.46 1.42 Dividend Payout Ratio Reported.. 85.9 % 76.79 78.29 79.5 % 87.7 9 Excluding dnallowed replacement energy costs. 70.0 % 76.79 78.29 79.5'k 87.79 Market Prices liigh.. $29% $ 29 $25M $27H $24X low. 25 22 20% 22X 19% Close. 26% 28M 22% 25X 23% Capital Structure Consolidated long-Term Debt. 45.0 % 42.8% 46.19 47.49 46.19 Short. Term Debt.. 5.0 4.4 1.0 0.2 Preferred and Preference Stock. 6.5 8.5 8.9 9.2 9.8 Common Shareholders' li uity. 43.5 44.3 44.0 43.4 43.9 t Utility Only 1.ong-Term Debt. 42.5 % 40.49 43.69 44.5 9 42.99 Short-Term Debt., 6.1 5.2 1.2 0.3 Preferred and Preference Stock. 7.8 10.0 10.5 10.9 11.6 Common Shareholders' Equity. 43.6 44.4 44.7 44.6 45.2 The noun of she quarterly earnings per shart announts nsay runt equal the rosalfor the prar Jur to a hanges in the ascrage nunuber of shares outAlaruhng throughout Ihr year The quarterly carnings per shart unurunIA inchtJe certain one-tune adjustinents as shoss n in Note 14 to the C.nnohdatrJ l utancial Atatronentt I i I i i !$6 i Bal!Imcre Gas a0d fledlic Company and Sutsimaries I i

i 3 Shareholder inf ormation O CGmmon Stock Dividends and Price Ranges : 1996 1995 .] Dividend Price Dividend Price Declared Illgh Low Declared High low First Quaner $ 39 $ 29% $ 26% $.38 5 25 $ 22 j Second Quaner .40 2(4 25 % .39 26 % 23 % Third Quaner .40 28 % 25 39 26% 24 % Founh Quarter .40 28 % 25 % .39 29 25 % Totat $1.59 51.55 Dividend Policy Transfer Agent and Registrar l The common stock is entitled to dividends when and as llarris Trust and Savings Bank i declared by the floard of Directors. There are no limita-Chicago, Illinois 4 tione in any indenture or other agreements on payment of i dividends. Iloklers of preferred stock (first) and holder" Form 10-K of preference surk (nex0, however, are entitled to g,,,.iuen request, th company will furnish, receive, w hen and as declared from the surplus or net without charge, a copy ofits Form 10-K annual p>6ts, cumulative yearly dividends at the Oxed report, including financial statements, after it is filed preferential rate specified for each series and no more, with the Securities ami Exchange Commission in payable quarterly. They are also entitled to receive, when Marrh 1997. Requests should he addressed to i due, the applicable preference stock redemption payments Charles W. Shisery, Chief Financial Officer und tefore any dividend on the common stock shall be paid or Secretar), Vice President-l'inance & Accounting, set apart. Dividends have been paid on the common stock P. O, lios 1475, llaltimore, Maryland 21203-1475. continuously since 1910. Future dividends depend uptm i r future earnings, the 6nancial condition of the company, Auditors and other factors. Quarterly dividends were declared on Coopers & Lybrand L.L.P. l the common stock during 1996 and 1995 in the amounts shown above. Executive Offices i Gas and Electric lluilding Common Stock Dividend Dates Charles Center Record dates are normally on the 10th of March, June, llattimore, Maryland 21201 September, and December. Quanerly dividends are Maik RO. Ilox 1475 customarily mailed to each shareholder on or about the llattinwrc, Maryland 21203-1475 Ist of April, July, October, and January. Shareholders' inquiries and Assistance Dividend Reinvestment and Stock Purchase Plan ShareholJers desiring assistance with lost or stolen stock The company's Disidend Reinvestment and Snick certificates or dividend checks, name changes, address Purchase Plan provides an opportunity for holders of the changes, stock transfers, or other matters should call the company's common stock to acquire additional shares of shareholder services representatises on our toll-free such suick in a contement and economical manner. telephone numbers. Participants in the plan may reinvest cash dividends on all or a portion of their shares of common stock and/or The following toll free telephone numbers are available make optional cash payments, during our business hours,8:00 a.m. to 4:45 p.m.: llaltimore Metropolitan Area (410)783-5920 mn Maryland WW2-2W Stock Tradin9 Outside of Maryland I-800-258-0499 l The company's common stock, which is traded under the -l ticker symbol IIGE, is listed on the New York Chicago, Letters should be addressed to: and Pacific stock exchanges, and has unlisted trading Baltimore Gas and Electric Comreny 57 privileges on the Boston, Cincinnati, and Philadelphia Shareholder Sersices exchangen. As of December 31,19%, there were RO. Ilox 1642 77.550 common sharehoklers of record. Italtimore, Maryland 21203-1642 I ] 1 l

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