ML20210U276
| ML20210U276 | |
| Person / Time | |
|---|---|
| Site: | Calvert Cliffs  |
| Issue date: | 08/13/1999 |
| From: | Cruse C BALTIMORE GAS & ELECTRIC CO. |
| To: | NRC (Affiliation Not Assigned) |
| References | |
| NUDOCS 9908200048 | |
| Download: ML20210U276 (14) | |
Text
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CH ARLES II. CRU5E Baltimore Gas and Electric Company Vice President Calven Cliffs Nuclear Power Plant Nuclear Energy 1650 Calvert Cliffs Parkway Lusby, Maryland 20657 410 495-4455 A Member ofthe Constellation Energy Group August 13,1999 U. S. Nuclear Regulatory Conimission l
Washington, DC 20555 l
ATTENTION: Director, Nuclear J eactor Regulation
SUBJECT:
Calvert Cliffs Nuclear Power Plant Unit Nos.1 & 2; Docket Nos. 50-317 & 50-318 Guarantee of Retrospective Premium in accordance with the reouirements of 10 CFR 140.21, we are attaching the guarantee of payment of deferred premiums for out Calvert Cliffs Nuclear Power Plant reactors.
l Exhibit I A copy of the 1998 Annual Report to Shareholders of Baltimore Gas and Electric Company containing certified financial statements Exhibit 11 A copy of quarterly financial statements as of June 30,1999 Exhibit til A copy of Projected Cash Flow for the twelve months ended July 31,2000 Exhibit IV Narrative statement on curtailment / deferment of capital expenditures (if any) to ensure that retrospective premiums up to $10 million per reactor year for each nuclear incident would be available for payment.
Should you have questions regarding this matter, we will be pleased to discuss them with you.
Very truly yours,
] 0l t u.]? '
ll CHC/JKK/bjd A* **
Attachments: As stated cc: Document Control Desk, NRC [
(Without Attachments)
R. S. Fleishman, Esquire 11. J. Miller, NRC -
J. E. Silberg, Esquire Resident inspector, NRC S. S. Bajwa, NRC R.1. McLean, DNR A. W. Dromerick, NRC J. II. Walter, PSC 9908200048 990813 PDR ADOCK 05000317 I PDR
EXHIBIT II QUARTERLY FINANCIAL STATEMENTS AS OF JUNE 30,1999 l
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Baltimore Gas and Electric Company Calvert Cliffs Nuclear Power Plant August 13,1999
consteHation Energy Group i I-Quarterly Financial Summary .
June 1999 P
Baltimore Gas andElectric Company BGE Home Products and Services Constellation Energy Source Constellation investments Constellation Power Constellation PowerSource Constellation Real Estate Group -
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Consolidated St;tement3 ef income (Unsudited)
Three Afonths Ended Six Afonths Ended Twelve Afonths Ended >
June 30 June 30 June 30 1999 1998 1999 1998 1999 1998 (In Aldlions. Except Per Share Amounts)
Rnenues Electric . $ 533.0 5 .5.2 51.046.0 $ 1.024.3 52.240.9 52.200.6 Gas . 79.9 J2.0 272.7 262.6 459.5 478.1 Dhcrsified businesses . 207.1 '160.4 433 6 346.8 776.3 628.4 Total Res enues 820.0 767.6 1.752.3 1,633.7 3.476.7 3.307.1 Expenws Other Than Ehed Charges And Income Tases Electric fuel and purchased energy... -- 120.0 115.6 241.2 242.1 SN.8 513.8 Gas purchased for resale.. 33.0 32.2 135.1 130.4 213.3 241.2 7 Operations-- ... 135.2 139.7 270.5 265.8 558.8 519.1 Maintenance - -.. 53.6 57.9 102.4 92.1 187.8 168.4 Diversi0ed businesses . selhng.
general and administrative.. 171.7 126.8 348.0 270.9 627.9 466.8 Nrite-dou ns of real estate investments - - - - 23.7 3.2 Depreciation and amortization 90.8 89.6 181.1 186.1 372.1 358.1 Taxes other than income taxes 51.8 49.6 112.1 106.6 224.9 216.0 Total expenses other than fixed charges and tneome taxes . 656.1 611.4 1.390.4 1.294.0 2.713.3 2.486.6 income from Operations... 163.9 156.2 361 9 339.7 763.4 820.5 Other income (Expense)
Write-off of merger costs . - - - - --
(57.9)
Other income 5.2 0.9 4.5 2.8 7.4 5.9 Total other income (expense) .. _5.2 0.9 4.5 2.8 7.4 (523 Income Before Fixed Charges and Income Taxes . 169.1 157.1 366.4 342.5 770 8 768.5 Flxed Charges interest espense 58.2 58.9 119.3 118.5 241.8 237.7 BGE preference stock dnidends . 3.4 5.8 6.9 11.6 17.1 24.4 Total fixed charges -- 61.6 64.7 126 2 130.1 258.9 262.1 Income Before income Taxes.. 107 ', 92.4 240.2 212.4 511.9 506 4 Income Taxes Current . 26.4 30.7 75 9 88.1 157.4 177.5 Deferred 15.3 6.1 17.8 (3.9) 39.1 21.7 investment tax credit adjustments (2.2) (1.8) 14.3 p (3.6) (9.5) (7.4)
Total income taxes . 19.5 35.0 89.4 80.6 187.0 191.8 Net income $~6R.0 5 57.4 5 150 8 5 131 8 5 324.9 5 314 6 P Earning Applicable to Common Stock . 5 M.o 5 57.4 5 iSan i 131.x 5 324.9 5 314 o Average Shares of Common Stock Outstanding 149.6 148.3 149.6 145.1 149.2 147.9 EARNINGS PER COMMON SilARE Electric business - . 50.37 50.33 50.67 50.63 $1.79 51.90 GIs business - - 0.01 0.15 0.12 0.21 0.17 Total utility business. .. 0.37 0.34 0.82 0.75 2.00 2.07 Energy Senices: j Power marketing and trading .. 0.08 0.01 0.13 0.01 0.17 0.01 Power projects 0.04 0.04 0.I 1 0. I 1 0.29 0.24 Other energy services - - - -
(0.01) (0.05)
Other (primarily real estate and im estments) -- (0.N) -
10.05) 0.02 (0.13) 0 12_ 1 Total earnings per share from operations 0 45 0.39 1.01 0.89 2.32 2.39 l Write-off of merger costs * . - - - - -
(0.25)
Write-dow ns of real estate investments * - - - -
(0.10) (0.01) l Write-off of energy senices investment * . - - - -
(0.04) -
i Total Earnings Per Common Share and Earnmgs per i Common Share-Assuming Dilution .. . 50.45 50.39 11.01 $0.89 52.18 52.13 i Investment in utility business at end of period . 52.372.6 $ 2.390 7 52.372 6 52.3907 52.372.6 52.390.7 I
Investment in diversified businesses at end of period., 5 631 h 5 $w 9 5 631.x 5 Sw9 5 63 l .h 5 $w 9 l l :
Results for interim periods. which can be largely influenced by weather condaions. are two necessarily endicanw of results to be e.ywcsedfor an entire year.
Certain prror period amounts have twen reclassified to conform with the current period's prnentation.
- Nonrecurrung charges to earnings.
Conseallation Energy Group and Subsidiaries c j
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Consoudated Balanc3 Sheet)(Unaudited)
June 30, ASSETS 1999 1998 Current Assets tin Afillions)
C:sh and cash equivalents - -
5 103.4 5 302.5 Accounts receivable (net of allowance for uncollectibles of $21.5 and $24.1, respectively)-- 482.1 Trading securities 388.1 Fuel stocki - 109.4 121.7 Materials and supplies --
. . . 69.I 75.3 Prepaid tases other than income taxes - 149.5 160.5 3.5 3.0 Assets from energy trading activities.
Other -- -
317.8 3513 j Total current assets - 57.0 28.7
' 1.291.8 1.431.1 investments And Other Anets ,,
Real estate projects and investments.-
! Power projects . . -- 319.2 422.4 Financial im estments-669.5 539.8 l
172.6 Nuclear decommissioning trust fund -- I87.4 Net pension asset x- 199.2 165.0
!~
Other- 96 6 114.8 262.1 217.1 Totalinvestments and other assets Utility Plant T7i9.2 1.646.5 Utility plant--
8,838.6 8.597.2 Accumulated deprecialion.-
l Net utility plant-- (3.193.5) (2.966.9)
Deferred Charges ~6 645.1 5.630 3 Regulatory assets (net) .. ...
Other .- .
519.8 560.1 58.2 53.4 Total deferred charges 578.0 613.5 Tot:1 Assets.. -.
$9334.1 5932TT UAIlLITIES AND CAPITALIZATION Current Liabilities Short-term borrowings l
$ 1093 5 72.5 Current portions of long-tenn debt and preference stock-l Accounts pa)able . 4743 631.0 317.4 200.6 Customer deposits Accrued lates - 383 32.5 l
3.0 0.6
, Accrued interest.
55.9 60.5 l Dividends declared .-
663 68.0 Accrued vacation costs 36 3 38.7 l
Liebilities from energy trading activities -
Other 150.0 333.1 35.1 26.1 Total current liabilities - . -
1,315.9 Def;rred Credits And Other Liabilities 1.463.6 Deferred income taxes -
1,314 3 1,2853 l Postretirement and postemployment benefits i' 231.9 195 3 Deferred imestment tax credits.
113.7 123.1 Decommissioning of federal uranium enrichment facilities -
30.8 34.9 Other-69.4 58.4 j Totd deferred credits and other liabilities 1,760.1 Long-Term Debt 1.69f0~
BGE first refunding mortgage bonds- 1,429.2 1,570.8 i . BGE other long-term debt. .
1,000.8 1,027.8 BG3 obligated mandatorily redeemable trust preferred securities -
250.0 250.0 Diversified businesses long . term debt 762.6 735.9 Unamortized discount and premium.
Current portion oflong-term debt (11.6) (13 3)
Totd long-term debt . (4673) (508 0)
BCE Redeemable Preference Stock
~ND 2 3.063.T 7.0 110,0 Current portion of BGE redeemable preference stock .
Total BGE redeemable preference stock (7.0) (101to) 7.0 BCE Preference Stock hot Subject To Mandatory Redemption __f0.0 i 210.0 Current portion of BGE preference stock not subject to mandatory redemption -
Tot .1 BGE preference stock tot subject to rnandatory redemption . (20.(3
... 190.0 190 0 Conunon Shareholders' Equity ;
i Common stock 1,4943 1,454.5 Retained earmngs . - 1,515.5 1,4413 Accumulated other comprehensive income.-
(5.4) 4_8_
Tot:.1 common shareholders' equity -
_ 3.ON 4 2,900 6 Totd capitahzation 6.158.1 6.160.8 -
Total LlaK2 tics And Capitalization.. . - 59.234.1
- l 59.321.4 i
f ; Certain prior-penod onwants have been nrlassifiedso confornith the currentperiod's presentation. '
l l Constellatoon Energy Group and Subsidiaries i
)
iJ Coneelldeted Statements Of Cash Flows (Uneustited)
Si.s Months Ended Twelve Months Ended June 30 June 30, ,
1999 1998 1999 1998 L lin Millions) h Cash Flows from Operating Activitics Net income- $ 150.8 $ 131.8 $ 324.9 5 314.6 Adjustments to reconcile to cash provided by operating activities Depreciation and amortin ,-- ._.: 208.4 209.0 428.7 409.8 Deferred income taxes. _ 17.8 (3.9) 39.1 21.7 investment tax credit adjustments.. (4.3) (3.6) (9.5) (7.4) ,
Deferred fuel costs. 7.1 20.4 (21.6) 11.0 i Accrued pension and postemployment benefits 28.7 10.6 59.7 (73) !
Write-off of nerger costs - - -
57.9 :
Write 40w ns of real estate investments - -
26.2 3.2 Equity in earnings of affiliates and joint ventures (net) 26.2 (11.9) (16.5) (39.0)
Changes in assets from energy tradmg activities.. (157.6) (341.9) 33.5 (3513)
Changes in liabilities from energy trading activities _ 53.8 324.5 (153.1) 333.1 Changes in other current assets. (24.4) 1(M.9 (100.4) (7.2)
Changes in other current liabilities 68.4 (18.2) 149.8 56.4 Other - (4.7) (18.3) 5.5 (41.1)
Net cash pros ided by operating activities - 370.2 403 4 766.3 754.4 Cash Flows From investing Activities Utility capital expenditures.-
l (182.3) (169.9) (412.1) (414.7)
Contributions to nuclear decommissioning trust fund - (8.8) (8.8) (17.6) (17.6)
Purchases of marketable equity secunties (12.4) (16.5) (29.2) (29.6)
Sales of marketable equity securities. 9.8 18.7 24.0 43.7 Other financialinvestments 8.5 13.6 4.9 14.1 Real estate projects and mvestments 40.7 26.9 35.3 27.7 Power projects (31 8) (82.1) (l15.9) (109.2)
Other __ (19.2) (31.2) (64.9) (51.8)
Net cash used in investinE activities (195.5) (249.3) (575.5) (537.4)
Cash Flow from Financing Activities Pmceeds from issuance of I Short-term borrowings . 1,029.3 1,476.1 1,515.4 2,877.7 l long-term debt 127.5 391.4 567.4 W
485.1 Common stock 9.6 12.6 39.1 21.6 Repayments of short-term lorrowings (920.0) (l,719.7) (1,478.6) (2,922.1)
Reacquisition oflong-term debt- (360.5) (59.1) (656.6) (300.2)
Redemption of BGE preference stock . -
(3.0) (124.9) (106 0)
Common stock dividends paid (125.5) (121.2) (250.4) (242.3)
Other _ (5.4) 8.7 (l.3) 0.5
. Net cash used in financing activities . (245.0) (14.2) (389.9) (185.7)
Net increase in Cash and Cash Equivalents... (70.3) 139.9 (199.1) 31.3 Cash and Cash Equivalents at Beginning af Year 173.7 162.6 302.5 271.2 Cash and Cash Equivalents at End of Year 5 103.4 $ 302.5 5 103.4 5 302.5 Other Cash Flow Information
- Interest paid (net of amounts capitalized).. $ 120.4 $ 114.7 $ 242.4 5 235.6 Preference stock dividends paid- $ 6.9 $ I1.6 $ 16.3 $ 25.5 Income taics paid $ 101.0 $ 89.9 $ 175.4 $ 168.5 Certain prior. period anunmts have been reclassyled to cortform with the currentperimrs presentation. -
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E Constellatoon Energy Group and Subsidiaries u h
I Utility Operating Stati; tics '
Three Months Ended Sh Months Ended Tuelve Months Ended 4 June 30, June 30, June 30, t l ELECTRIC 1999 1998 1999 1998 1999 1998
[ Revenues (In Millions)
Residential-with househe.aing. 5 84.1 5 83.4 5 203.6 5 193.6 5 402.5 5 392.9
-.- other 131.0 1313 250.7 246.6 560 3 539.7
-total 215.1 214.7 454.3 440.2 %2.8 932.6 Commercial.- 225.0 224.0 4235 414.1 922.2 897.9 Industrial - 51.6 55 3 96.5 10t).5 207.5 213.9 System Sales - 491.7 494.0 974 3 954 8 2.092.5 2.044.4 Interchange and Other Sales 34.9 25.5 59 3 57.9 1223 132.2 l
Other 6.5 5.7 12.9 I l .7 28.1 24.3 Total - 55311 5 5252 51.N6.5 51.024 4 52.2429 52.2009 Sales (In Thousands}-MWH Residential-with househeating- 989 968 2.663 2,487 5.034 4.883
-other -- 1,388 1,387 2.820 2,747 6,180 5,905
-total - 2,377 2,355 5,483 5.234 11,214 10,788 Commercial 3,198 3,178 6.468 6330 13.357 12,960 Industnal 1,091 1,195 2.194 2309 4,468 4,621 System Sales 6,666 6,728 14.145 13,873 29.039 28,36F Interchange and Other Sales. 1,441 1p63 2.659 2,798 5,315 6,159 Total H.107 7.791 16.8N 16.671 34.354 34.528 GAS Revenues tin Millions)
Residential -excluding delivery service .... 5 51.1 5 49.2 5 175.9 5 164.1 5 291.1 5 294.6
-delivery service - 1.8 0.6 6.7 1.9 9.7 2g
-total 52.9 49.8 182.6 166.0 300.8 297.0 Commercial--excluding delivery service... 12.9 11.5 49.4 44.8 80.2 87.9
---delivery service. 4.3 3.6 13.5 10.8 22.2 16.7 Industrial -<xcluding delivery service.. 1.1 0.8 4.7 3.6 9.1 8.5
-dehvery service 3.5 3.8 8.1 8.2 15.9 16.9 System Sales 74.7 69.5 2583 233.4 428.2 427.0 Off-System Sales . 5.5 10.8 15.1 25.6 30.3 44 3 Other . 2.1 1.7 38 3.6 73 6.8 Total .. 5 823 5 82.0 5 27'7.2 5 262.6 5 465.8 5 478 1_
Sales Iin Thousands >--DTII Residential ---excluding delivery service .. 5,148 5,160 21,460 l 20,911 34,143 36,726
--delivery service.- 554 227 2.403 718 3,575 924
-total 5,702 5.387 23,863 21,629 37,718 37,650 lj Commercial-excluding delivery service...
-.wielivery service 1,657 3,977 1,514 3,402 7,455 11.278 7,166 9,315 12,065 18,5 %
14,4N 15,401 Industrial --excluding delivery service... . 101 50 782 519 1,676 1,360
-delivery senice 7.369 8,527 16,192 17,180 33.810 37,2N System Sales 18.806 18,880 59.570 55,809 103,865 106,019 Off.Sptem Sales 2.263 4,710 6382 10.604 12,502 17,079 Total - 21.069 23390 65.952 66.413 116367 123.098 Utihty operating statistics do not reflect the elimination ofintercompany transactions.
Cenain prior.periodamounts have been reclassfed to conform with the current period's presentation.
l Heating / Cooling Degree Days (Calendar-Month Basis) lleating degree days-Actual 517 463 2,907 2.485 4,541 4,383
-Normal 531 534 2.987 3,011 4,759 4,822 Cooling degree days-Actual . 203 258 2N 279 839 843
-Nonnal- 230 227 233 230 840 814 I Utility Electric Generation Statistics Twelve Months EndedJune 30.
Purchased flydro Power Net of Nuclear Coal Oil & Gas Energy Sides Total l Generation by Fuel Type (%)
l 1999- 433 573 4.3 3.0 (7.9) 100.0 l
1998.. 44.8 60.1 23 3.7 (10.9) 100.0 Thousands of MWil 1999.. 13,312 17,642 1,330 922 (2,431) 30,775 1998 13,439 18,024 687 1,103 (3.256) 29,997 Average Cost of Fuel -
(Cents per Million Bru) 1999 45.52 137.53 214.4' -
101.65 l 1998. 45.96 138.88 267.51 - -
102.07 Constellation Energy Group and Subsidiaries
__ J
Supplemental Financial Statistics
- Talve Months EndedJune 30 Utility Consolidated 1999 1998 1999 1998 Capitalization' Long-term debt . 45.5% 46.9% 47.2 % 48.4 %
BGE obligated enanditorily redeemable trust preferred securities 4.79 4.6% 3.7% 3.6%
~ Short-term bo:Towings 2.1% -
1.6% 1.1%
BGE preference stock 3.7% 5.8% 2.9% 4.7%
Common equity - 44.0% 42.7 % 44.6 % 42.2 %
Return On Average Common Equity Reported - 12.5 % 11.2 % 10.9 % 10.9 %
Excludmg nonrecurring charges to earnings" 12.5 % 12.7 % 11.6 % 12.2 %
Ratio Of Earnings (SEC Metlal)
To fixed charges 3.32 3.39 3.02 3.11 To fixed charges and preference dividends combined 2.94 2.81 2.74 2.68 AFC As A % of Earnings Applicable To Common Stock 3.7% 3.5% 3.2% 3.0%
Effecthe Tax Rate .. 34.7 % 35.7 % 36.5 % 36.1 %
Certain pdor-period amounts how been reclasssfied to conform with the current period's presentation.
- Capitali:ation includes currentportions oflong-serm debt and BGEpreference stocL
" Nonrecurring charges to earnmgs include the write-ofof merger costs and ofan energy services investment, and the write-downs ofreal estate investments as shown on the Consolidated Statements ofincome.
Common Sto k Data Three Months Ended Twelve Months Ended June 30 June 30, 1999 1998 1999 1998 Common Stock DMdends-Per Share
-Declared . $0.42 $0.42 $1.68 $1.65
-Paid-- $0.42 $0.41 $1.68 $1.64 Market Value Per Share
-High $314 $32% $35% $34L
-Low $25W $30X $24'M- $25'L
- Close- . $29% $31 $29% $3tL Shares Outstanding-End of Period (In Millions) s49.6 148.3 149.6 148.3 )
Book Value per Share-End of Period $20.09 $19.55 $20.09 $19.55 l
r Inquiries concerning this summary should be directed to:
David A. Brune Kevin J. Miller Constellation Energy Group Vice President. Manager, P.O. Box 1475 ChiefFinancial Oficer, FinancialPlanning Baltimore, Maryland 21203 l and Secretary (410)234-5434 (410) 234-5511 \
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' Constellation E'nergy Group and Subsidiaries sannw
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r EXHIBIT III PROJECTED CASH FLOW FOR 12 MONTHS ENDED JULY 31, 2000 Baltimore Gas and Electric Company Calvert Cliffs Nuclear Power Plant August 13,1999 i
Exhibit III Page 1 of 2 Internal Cash Flow Projection For Calvert Cliffs Nuclear Power Plant Percentage Ownership in all Operating Calvert Cliffs Unit No. I 100.00 %
Nuclear Units Calvert Cliffs Unit No. 2 100.00 %
Maximum Total Contingent Liability (000) per Nuclear Incident $176,200 Payable at Per Year (000) $20,000 Projected Twelve Months Twelve Months Ended 6/30/99 Ended 7/31/00 Non - Cash Expenses ($000)
Depreciation and Amortization $421,914 $434,866 Deferred Income Taxes and Investment Tax Credits 7.140 (3,382)
Total $429,054 $431,484 l
Percentage of Total to Maximum Total Contingent Liability Payable Per Year 2,145.3 % 2,157.4 %
Retained Earnings ($000)
Net In:ome After Taxes $331,833 Less Allowance for Funds '
Used During Construction 10,487 Less Dividends paid 266,652 Total $ 54,694 TotalInternal Cash Flow $483,748 Percentage of Total Internal Cash Flow Maximum Total Contingent Liability Payable Per Year 2,418.7 %
Exhibit 111 Page 2 of 2 Baltimore Gas and Electric Company Underlying Assumptions for Projected Cash Flows (1) Projected cash flow does not include an estimate of retained earnings. However, internally generated funds without retained earnings are well in excess of the maximum possible retrospective premiums.
(2) Depreciation is generally computed using composite straight-line rates applied to l the average investment in classes of depreciable property. Vehicles are depreciated based on their estimated useful lives.
(3) Estimates of Federal income taxes and other tax expense are based upon existing tax laws and any known changes thereto.
(4) Accounting policies are consistent with those in effect June 30, 1999.
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EXHIBIT IV NARRATIVE STATEMENT CURTAILMENT OF CAPITAL EXPENDITURES l
Baltimore Gas and Electric Company Calvert Cliffs Nuclear Power Plant August 13,1999
I 1
Exhibit IV j Baltimore Gas and Electric Company Curtailment of Capital Expenditures I
Estimated construction expenditures including nuclear fuel and Allowance for Funds Used During Construction for the twelve months ended July 31,2000 are $433 million. To insure that retrospective premiums under the Price Anderson Act would be available during the aforementioned twelve month period without additional funds from external sources, construction curtailments would affect all construction expenditures rather than impacting a specific project.
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EXIIIBIT I i
1998 ANNUAL REPORT TO SIIAREHOLDERS l
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i Baltimore Gas and Electric Company Calvert Cliffs Nuclear Power Plant August 13,1999
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- COMMON STOCK DATA ? fM '
' semines per sNw 3 . 238
~ af Earnin per share from opersions } ,. .<. .. 2 .
- i ! i Ut business )
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- - c $ ) 11.93".. f$ % 943 .
- (0.5)%(
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($p2.20c%tx$y:?2.28A M.5)M 1 Total earnings per share from operations;.
NWrite-offofmerger costsM %
DW . .(0.25) :-
" C ** Write-downs ofreal estate inves&tnients > . e' , < ( (0.10)) :
V. l
, *' Writedofenergy services investment 2 ff 1i (0.04) . %(0.31)? %-1 -
MTotalearningsper sharrt > 9 1 $ N2.06a 1 $ t t.72. 719.8toj l Dividends dedored per ddr.1- W :.5;f j'$ 1.67? l $[i.63 C159U A,.,.g. ,h,,es "
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PReported4 %
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105%! < 18.9%; ' 18.0% :
w Excluding nonrecurringcharges to camin85 ' #' . 131.2%; . _ (11j7% 7(4.3)% '
[ Book M per ' . . ,3.nd::, '
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$ ' 19.98 ' $119,44 / . 2.89V
- Merked price perf- end? $30.875 ' ' $34.125 s ' (9.5)% s
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- FINANCIAL DATA '
O geve,we,3 ,
~
p* N Electrici ib $ 2,219 ; : $ 2,192) i1.2%b
/ Gas e 4. , .? ... 1449! J$22-- ,(13.9)%f
> Diversified businesses 0 4
<690, . ,594-. J 16.1%i
?Totai revenues' ,
, . $ 3,358 - $ 3,308 ' 51.5%
f Not income :: n- $. 3287 +
,$ 283- l15.8%
[semings -/ f"Mcomnen seock - , i$ J306.- J::: $ 1 254 .: 20.4% ;
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FDiversified businesses - 1,924 l ' ~ 1,595
' ' 20.6%1
' .. Total assetsi $ 9,195 $ 8,900. I33%)
lUtilith construction wpendleven :
. (escluding Allowance for Funds Used During Construction) $ : 329 $1' 365;
- (9.9)%
RDGE investment in deversdied buslnnsa - ~' S 515 L$ '488' 5.5%.
UTILITY SYSTEM DATA -
Electric system sales-megawatt hours 28.8 :28.1 ' 2.5%
Gas system sales-.dekatherms : 100.1 112.4 (10,9)%
VWonmwdng shepr se camings dixunedin Note 2 so the Consolidasd FinancialStatemenn on pay 5L gy b Certainprior-yner amounu haar been reclampofso senfone wish the currentyear)prruntation. l N .. . .L - , #;
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f 7 WhoWeArc 2flittertoSharehoklers 4 FinancialReview 17. ForwardlookingStatements 35 9
'f Directors and Officers-'66 ; Five-Year Statistical Summary 68 ' Shareholder Information 69 <
d hs Odr St$tegiesi C$ncentrating on Our Home-Field Advantage in Maryland 8 TargetinhWholeaale Ibwer Marketing and Generation 12 Focusing on Latin America 16
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Nobody just steps out on the court and wins. You have to have a pf 3D. You have to make tou choices. You have to be Commi tted. ina yeu have te woru at it. ana wern at it. aed work at it. @ That's what matters on the court and in the evolving energy marketplace. Today hundreds of experienced power compames are compenng for good position along with a host of niche players and newcomers. While it's early on in the ,
!E game, BGE's made some Sma rt p1ayS with a growing wholesale power business, a solid commitment to power generation, and a pro-customer choice stance at home. E In the end, BGE _L plans to be a WIHHCf. That's why we're doing everything we can to prepare. Building a strong team. Setti:ig competitive Strateg CS. And playing hard, very hard. @ Bottom line, 3 . .
i at BGE,WC TC GetCrminec to win.
Earnings and Dividends Return on Average Common Equiry Common Stock Market Price Declared per Share of Common Stock and Book Velue per Share 8 2.s e its ss 82.00 88%
$18 81.s e l f sai
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- Enterprises, lnc.,focuYon
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- Geneendom Owns and operates ^ >
- Gas Distribution: Stons and delivers -. 'I i10 Maryland-basedpowerstadons . i natural gas through twcipeak-shaving' __ ; : -
Tinduding the;Calvert Clifis Nudearj _ plants, nine gite stations, and nearly ' Constel'lation Power Source"' j I j Power Plant; shares ownership ofthne - 5,600 square miles ofgas mains in a more ^MM _. !
Mpower plants in Pennsylvania; total gener-D ; than 600-square-mile service territoryL Provides wholesale power-marketing and risd
? adng capadty exceeds 6.200 megawatts m.m.s.. .aent services, with Goldman Sachs '
- NE15ctricTransmissionand; ' 1998 Mgimghht -
Poweias its exdusive advisor Distribution: Provides electricity
- See new pmduedon records in fossil and Cthroughoutits 2,300-square-mile $ervice _ (nudcar plants _by generating 32.4 million Costenners and Markets: . .1 0 territory through its transmission and C 7megawatthours, anincreaseof14% . Wholesale energy customers m North Ameriq idistribution system;is a member of they smce1994o :
' iPJM(Pennsylvania-NewJersey.' ;
- Became firstin the U.S. to file for nudear ~ IM8lil fl8 0kh8 i
- Incmasedtradingvolumenearly12-foldto j
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i h6ryland) Interconnection, a re'gional plant relicensing to extend Calvert Cliffs ll power poolofwholesale market; Nudear Ibwer Plant's operadng license 116 million megawatt hours compared to l
"" '" #7 j' f participants and eight utilitycompanies -
- Filed transi: ion plan for introducing
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electric retail comnetition with the
- Developed New England business base by
' Maryland Public "Semce entering into long-term contracts wi Conunission(PSC) State Electric Company, Fitchburg Gas an Electric Company, and Eastern Utilities
- Gained $16million naturalgas base
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rateincrease thatindaded a 4
. provision to protect revenues from
- Formed Orion Power Holdings,Inc. with ;
. weatherfluctuations Goldman Sachs Capital Partners to pursue Purchasing exisdng power plants in North
~*Added nearly12,000newnaturalgas customersandmorethan 15,600 A'"*N'*
dectriccustomers to system ' Orion xquimo ne 105-megawatt Carr Stm I ' Power plant in Syracuse,NY
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- Rankedin thetop 17th percentile
- Entered into five-year contract to purchase
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ofcomparable utilities for safety performance all capacity, energy, and ancillary semces
.r* generated by Carr Street power plant
- Moved into new downtown Baltimore head quarters with a state-of-the-art trading floor!
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,marke ' b thew , D,VA,'and Washington, ' iAtlantic D.C. ' regioni @mMd M
ts ; _ ' '
.SgtinAmericag g W@fg,' 7 " j998Illghlights: . l 1998liighlighh: _ hy"hh 998 Nigb11ghts' h J O > - '~ . p. Added naturalgas toits existing .
g ipo'rtfolio of pmducts and services to d ,
, More than doubled naturalgas sales J in oneyear
$44$
Setpmducuonrecordofover4milhon 8
Syf takeadsantageof6ppormnities j p ni gwiththederegulationofthe
. Edanded productline to offer @8 M b full complement ofenergy and m
do wJ **' .mPoM. T (retailnaturalS. assupplymaker; , , energy-related services to mid-sized hd Reorganfzed managementteam,MM _ 4 Cancisded sde and merketingdrive sq%u@#
aligningoperanonstopursuewholesale f ~
_ commercial, industrial,and ? M J
" as a participantin Maryland's Gas - governrnentalcunomers ~ #L ;
power-markermgand merchanW NOptions pilot pmgram, attracting
- p. . .Invenedin newinformation synems 3hMb, genentionstrategiesy SpTT significant interest from residencial and Ac uiredcontmilingin}terestinf to support large transaction volumes W (Esmall<ommercialmarkets El tra Noreste. S.A., Panama's J - % 4: .IWdn two'"B$imore's Best" Awards required to serve sophisticated customers' complex energyneeds
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$5nedlongterm' power 4upply1 ' J existing stores and opening a third ~
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LETTER O I nr-n, m-m-n- ,, ;
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Our 0 . Strategies 1
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t Edwstd A?Crooke JChristian H; Poindexter
' ' Vice Chairman . '
Chairman of the Board, President o -
cand ChiefExecutive Officer
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Ld oday, and for the foreseeable future, the best description for our business is
_ "an industry in transition " Transition means change, and change is filled with uncertainty. The events of 1998 bear this out.
We're determined to win in the new energy market. As we go through this transition, we'll work to preserve the integrity of your investment, shed assets that no longer fit the emerging market, and seize opportunities for growth.
l l SH REHOLDERS In this transition year, BGE's stock performed below our A Look at the Scorecord standards and my own expectations.To be candid, our In 1998, BGE earned $305.9 million, or $2.06 per stock performed in the lowest quartile among utilities in common share, on revenues of $3.4 billion.This compares 5 our peer group. I attribute this to the following: with earnings in 1997 of $254.1 million, or carnings per j
- Flat earnings due to less energy demand caused by mild share of $1.72 on revenues of $3.3 billion. ;
weather in the fall and winter, and write-downs on Both 1998 and 1997 earnings reflect one-time charges, explained in the financial section of this report. Excluding ;
projects resulting from our decision to sell a real estate the effect of the nonrecurring charges, earnings for 1998 a investment and exit an energy services venture.
were $2.20 per share compared with $2.28 for 1997.
- Anticipated lower future revenues from 15 California Dividends declared amounted to $1.67 per common share 5 power projects with power purchase agreements. ---
in 1998 and $1.63 per common share in 1997.
Owned by our Constellation Power affdiate, these projects will have transitioned from fixed to variable =
Our Utility Business Our utility business includes our rates by the end of the year 2000.
regulated electric and gas sales, production, and delivery
- A rate reduction proposed by the Maryland Office smices. Earnings from these businesses in 1998 were about of People's Counsel to the Maryland Public Service the same as in 1997. Although we had higher electric sales, Commissmn (PSC) that could reduce BGE's we also had lower gas sales, along with higher operations, earnings potential, maintenance, and depreciation expenses.
- The regulatory and legislative process under way in During the year we added about 15,600 electric and Maryland to move to a competitive electric market. 12,000 gas customers. Total electric sales to customers Investors er uncertain about how key issues such as ncreased approximately 2.4% mostly due to customer transition cost recovery and fair tax treatment for growth, increased demand during the hot summer, and utilities will be resolved. increased usage per customer. Electric sales to residential 1 assure you that your leadership team is acutely aware customers were up almost 1.5% while sales to commercial l of how these issues affect the value ofyour stock.We are and industrial customers increased 2.9% j working hard on many fronts to resolve them and are Total gas sales to customers decreased 10.9% compared i encouraged by our progress.
with 1997, due to 1998's mild winter and fall weather and I am especially happy to report that legislation was lower usage per customer. Sales to residential customers passed and signed into Maryland law early in 1999, decreased 11.6% while sales to commercial and industrial removing a 1910 Maryland stature that prevented BGE customers decreased 10.5%
from forming a holding company. You'll find more detail BCEpouvrplantshadanotherrecord-settingyear. In on page 6, but I want you to know I was overwhelmed by 1998, our Calvert Cliffs Nuclear Power Plant (CCNPP) the strong show of suppor : from local invevors and our generated 13.3 million megawatt hours ofenergy,its employees, as well as community and busince leaders, on highest production level since it begin operation 22 years the holding company issue. I thank each ofyou for your ago. Our fossil plants also set a new production record of help. It truly made a difference. 19.1 million megawatt hours.
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1
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For the fourth year in a row, our BCE generation team Holding Company Bil/ Passes After the close of the 1998 also distinguished itself as the lowest-cost electricity provider legislative session last April, we worked to achieve an among the eight utilities that are included in the PJM understanding with Maryland's governor and legislative (Pennsylvania-New Jersey-Maryland) power pool. leaders on the importance of a holding company to BGE's In April 1998, BGE also became the first utility in the future. A 90-year-old law made our state the only one in the country to 61e with the Nuclear Regulatory Commission to nation prohibiting a utility from forming a holding company.
extend the operatinglicenses ofCCNPP's two nuclear units. ByJune, we received commitments from Maryland's Since then, several other utilities have filed or plan to file for governor, senate president, and speaker of the house that extensions in the near future.This this outdated law would be
~~ ^
process will help ensure a diverse l .[~~ changed early in the '99 session.
fuel mix for our nation's energy } hg ~ hf g I am pleased to report that state consumers, allowing our country l .L ?.L Q LJLQ 11I lawmakers voted overwhelmingly and our state to meet stringent { to allow utilities incorporated in new domestic and international ! Maryland to form holding compa-air quality standards. ! nies.'The bill was signed into law Weare on target to he Icar , , on February 3,1999.
2000(l'2K)wady. Our utility j ud -4 This puts BGEon equal footing operations are on schedule to be l se with other gas and electric utilities n completelyY2K-ready by mid u i serving Maryland customers but 8
f , , ,
1999. We've made a significant c __ __,, ,
incorporated out ofstate.This also 2 investment and have been
- 2 working with the PSC and other l
j J U gives us greater access to the capital markets and the Enancial flexibility utilities to ensure system relia- 8
! 'M MS M .' MP ? MS ;
to build our businesses.
g bility. Simply put, our customers ase ms ase sm, The final steps will be receiving j can expect the same high levelof '
- approvals from the Nuclear service reliability during and after Regulatory Commission and 7emisemdessasindKiEW3N y
_ft the millennium rollover as they 7 milli, n p.marAsun,fdumcupinme.7W j from shareholders at our annual o
experienced before it. [i ha3-50aamsseawrd-wdmuriaM7. j meeting in April.
s e ig ua ,%-. a -,.s.,,m.. . ,.m w d OurNonregulatedBusinesses Moving Ibu ard Comprehensive Earnings from our nonregulated amliates reflect solid hgislationforElectric Derrgulation In December 1997, performance. Excluding the write-downs taken in 1998 and the PSC set July 1,2000 as the date when Maryland 1997, our nonregulated business operations pmduced $41.1 customers would begin to choose their electric suppliers.
nillion in earnings (5.27 per share) in 1998 compared with State lawmakers then debated the issues surrounding dereg-
$W.5 million ($.34 per share) in 1997. ulation in the '98 session. While no bill was introduced, the Write-dawns for 1998 included investments in Church debates raised awareness of the complex and important Street Station-an entertainment complex in Florida-and issues needing resolution before deregulation begins.
an energy services venture.The nei result: Nonregulated Since that session, BG E and the other utilities serving earnings were $20.2 million in 1998 compared with Maryland have continued to work on proposed legislation.
$4.5 million in 1997. Together, the six utilities developed a series of bills for consid- 1 The major contributors to nonregulated earnings in eration by the Maryland General Assembly leadership.
1998 were Constellation Power, Inc. (CPI), our largest We have set out to achieve a broad consensus on the main operating subsidiary, and Constellation Power Source, Inc. elements, taking into consideration the views of all srcke-(CPS), our newest operating subsidiary. CPI contributed holders-customers, agulators, legislators, community
$44.3 million ($.30 per share) to earnings compared with leaders, and shareholders. Our objective is to find the fairest
$36.6 million ($.25 per share) in 1997. CPS weighed in and fastest way to open the state's energy market and resolve with a $7.5 million (5.05 per share) contribution in its first the uncertainties the transition has created.
full operating year. All along, we've sensed a commitment to doing it right the first time to ensure an e$cient and equitable market that A Brighter Osflook Ahead benefits cusmmers and producers alike. We are continuing We have been working hard to resolve several issues that held to work with Maryland's electric industry leaders and state us back in 1998 and to position your company to win in the lawmakers to pass comprehensive legislation in 1999.
competitive energy market. Here are some ofour successes:
I
f~
Focusing Afliate Businesses on Energy We have rearganized Become a Signaficant Generation andEnergy Delisrry and streamlined our subsidiary structure and focused Supplierin Latin America Constellation Power, our our activities on the business we know best-energy. independent power business, began expanding its expertise For our nonenergy-related businesses we are evaluating in generation and energy delivery beyond our borders three transitional strategies. years ago. It now has 15 projects in eight Latin American 10 ward that end, our Constellation Real Estate Group countries. We intend to build on our winning track record (CREG) transferred most ofits operating properties to and increase our involvement in the government privatiza-Corporate Office PropertiesTrust (Col'T), a publicly traded tion process now under way in this geographic region.
real estate investment trust based in "
~
Philadelphia. In exchange, CREG f~~ ,[ Taking Our Best Shots received a signiGcant stock owner-ship position in COPT, cash, and relief from associated property debt.
t r Generation. Ice hockeygreat Wayne Gretzky h.s two ,u,.s th.t s.m up h,s approach to the game. First,"I l -
l ,
skate towhere the puck is going to 5trategies j , ,
be." Second, he says, "You miss for the Transition ! , ! 100 percent ofthe shots you never
(
Our pre-eminent goal for the next h 4 take."That is exactly how BGE )
i few years is to actively manage the ! se - , , .
[ approaches the utility business.
transition to a competitive electric se l Beingdetermined to win in =
{ se _ -, the new energy world means :
market. At the annual shareholders >
I meetingin April 1998,I announced -
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taking the long view but focusing l the strategies for success going 38 f quickly. It means having the g forward.Since then, wive narrowed -
- g 7pg%"y " ! conGdence to seize upon ', ,
=
- our foms and set our sights on three I asse r : as ess well-considered risks. Most
' ~
primary strategies.We go into more f importantly,it means playing the detail on pages 8-16, but here is a Siser 19N, BGE ss isuom/imgrammes aus @ game on many levels by thinking {
briefoverview ofour game plan: l/ "naI" 6elaumo-ea:t nar dM """*"M#6# dumcitypmedera.d'"*
6e a
locally, regionally, nationally, and 7 /
pg,,,, ; globally-because the energy Pnwide Pirmier Utility Sert. ices k _ j,f _ _ , _ ._ ,_ _ _ ; market af the next century is that e to Maryland WhileManagingshe broad and expansive. l Transition to Competitirr Energy Markets Wive been In 1999, will continue to move quickly in response to serving Maryland customers for nearly two centuries, promising and proGrable opportunities. Wire building on a and we want to continue to have a strong corporate 182-year record of achievement, and we know what it takes presence here.Thmughout most of this decade wive been to win. I kiok forward to telling you ofour progress this time !
preparing our operations for competition. We've improved next year.
reliability and service, lowered costs, and increased our I want to thank our employees for their tireless commit- j pmver plant production. As the retail energy markets open ment to assuring reliable and responsive services to our in Maryland, we plan to remain the statis leader in energy customers.Their daily actions are representative of the kind delivery services. of teamwork and dedication that will make BGE a winner in the energy industry of the future. Finally, I thank you for Be a leader in Wklesale PouerMarketing and Generation sharing my conGdence in BGE's Gnancial success, in North America in less than two years, Constellation Power Source, our power marketing and trading business, has become one of the top 25 power marketers in the U.S.
L build on this success, wive realigned subsidiary l
operations to support our merchant-generation and power-marketing strategy. We have assembled the full spectrum of skills and services that will allow us to be a major player 6 in North America's emerging merchant electric industry.
Within our family of nonregulated companies. we have Christian H. Poindexter the know-how to build, buy and operate power plants, Chairman of the Board, President trade the output on the open market, and manage the risk and Chief Executive OfBcer of fluctuating energy prices. February 11,1999 l
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L J he home team always has an advantage.That's BGESteps Up to the Plate to Preparefor Customer because they know the field, they know the fans, Choice With choice, virtually every customer transac- _ they know how to win on their own turf. tion we now do is subject to change. Making sure our BGE has had that edge for more than 180 years as systems are ready and our customers are educated for the Central Maryland's hometown utility. As the biggest local changes ahead is a monumental task. Given the impact player, we've continually worked and evolved to help meet these changes have, it is a job that cannot be done in Maryland's growing energy needs, giving customers and a vacuum. shareholders their money's worth every season. BGE has stepped up to the plate. We are a significant Now, ofcourse, the rules are all changing. h won't he long player in the process, participating in the numerous hefore we're not the only game in town. Maryland PSC roundtables and technical groups. We are At BGE, we don't intend to - . ,- m. e m - . , , _ , now working through lose our hometown edge. j the many regulatory We've developed some strate- F q details necessary to draw a g w gies to help us keep that edge. [ ' 3 blueprint for how customer We plan to: [ j choice will work.
- Maintain our premier energy {- i To meet the PSC's year- .
delivery servicelevels forour b 2000 deadline, we're now j Maryland customers; f ,] upgradingourinformation
+ Build on the reliable and 'Y""'"#'*""'Y' '"PP " I gang 'PLA5: j customer choice. We're e low-cost generation legacy a
_. ngntg{c , creating a new retail suppl,er i - while helping to manage a [p .Feas on cuenung a on Our'Home-
? . '
t-MeadWhenwgy; j mf rmation system, and smooth transition to y. Field Advantage - 9 customer chm.ce; t
- delivsyin Cental .
7 we're extending the ability of - r in Maryland l;. M- :) our customer information a
~q *
+ Remain a leader in the - t .
!- .B'uW en om poen - ! rystem.Together they will competitive retail energy markets opening in
[L ,, STRATEST: h allow BGE to enroll 18H888"89f - ~ customers and suppliers in the region. : podsers - C#"#I""'" k . < . . e 4 retail electnc cho. ice, keep [ Maylandtronnem ; permier stility"
) nack of cunomer/supph. er Der Premier Energy i ioasemadmin.: . 1 Delivery Service b "*'"#" N# b ~^ a relationships, bill and collect
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j- while manags.st + revenues, as well as account Deregulan.on in the utility e _andraputmanin 4 industry means that f M8Vi sndbyamenang & wnsition u } for all energy used on our
= 4 delivery system.
I ~ customers will be able to k "9" a com/etitire 1 L . ensgypodatand d choose where they buy the.ir [ marketplace. - energv. No matter which i Investing toimprove Access e andReliabiliry Beforeand company they buy from, b _
,, , m customers will still depend after deregulation, we plan upon the utility to deliver that energy safely and reliably to to continue serving Central Maryland as a recognized their homes and businesses.That's why we're concentrating leader in energy delivery.Toward that end, we continue to on our energy delivery systems in Central Maryland. invest in our system of pipes and wires.
This year the PSC approved a $ 16 milhon natural gas distribution rate increase to help us maintain our gas system. We continue to enlarge our gas disuibution system to give even more customers the opportunity to chcxwe gas for their homes and businesses. In 1998, we added 112 miles ofgas lines and about 12,000 new customers. - a BG E is echnologically transforming our
- electric distribution substations to improve reliability and reduce costs. Our system control integration program has replaced older components with compact micro-processor-based relays, meters, and other control systems.The program is expected a to reduce costs in new substation l construction and ongoing maintenance.
l We've also continued to expand j the use ofour industry-recognized distribu-tion automation system, a sophisticated j system designed to restore customers' interrupted power in minutes. Since 1994, 10 investments in such programs and other . CONCENTRATE . I system-wide upgrades have helped reduce A /I y ON OUR: the number of unplanned outages by 38% LOW-COST LEGACYIN POWER and the duration of those outages by 20%, GENERATION . Delivering on Customer Satisfaction nee bes iewered Customer satisfaction is something BGE has regularly Y2K conversion. The good news delivered to Maryland. BGE's " excellent job" ratings with is many ofour utility systems are ses, % ,,, residential customers rank us in the top quartile among Y2K-ready. Where needed, the investor-owned utilities in the country. in recent years, team has begun repairing and we've concentrated on improving reliability and power testing. We are on target for our quality for our maior customers. Just three years ago, our systems to be Y2K-ready by June 1999. large industrial customer satisfaction score was good, but We've also been checking on the Y2K-readiness status of not good enough. So BG E account executives went to all ofour suppliers. Plus, we're working with industry work. Our resuhs this year prove our efTorts make a ditTer- groups such as the North American Electric Reliability ence. We improved by 17 percentage points. Council, Edison Electric Institute. Electric Power Research Institute, American Gas Association, and our WrePreparingforthe Dar2000andBeyond BGE partners in the PJ M power pool, to plan operations to began tackling the Year 2000 (Y2K) challenge in 1996. allow for a smooth transitian to the new century. Since then, experts throughout the company have been working to ensure our systems are ready for a smooth
Generating Winning Numbers Our Retail Energy Products Maryland customers will soon have a choice in their and $ervices Role CONCENTRATE energy suppliers, which will change how our power BCE first opend its electric and ON EMERGING plants do business. In the meantime, we're working to gas appliance stores in the 1920s. COMPETITIVE ENERGY-RELATED - provide a smooth transition so that when competition Several years ago, we transferred R.ETAIL MARKETS IN comes, our customers, shareholders, and our power plants this business to our BGE Home MARYLAND will be in a position to win. Products & Services (BGE
'E compete in the new electric generation market, our HOME) affiliate.Today, BGE "
power plants must be able to produce winning numbers- liOME has expanded its See of emerg pedeses low costs, high capacity factors, strong safety and environ- product lines to include not only **d**'***- mental records, and consistently reliable operations. all major brands of appliances, For the past several years, BG E's power plants have but electronic and entertainment been putting up the right numbers. In 1998, our combined products, plumbing and home improvement services, as fossil and nuclear energy generators posted the lowest well as heating and air conditioning systems. costs among the PJM power pool utilities for the fourth in fact,in 1998 BGE liOME was voted Baltime consecutive year. BG E plants have also increased their magazine's "Best of Baltimore" as the city's foremost appli- e production levels every yor in this decade, ance and plumbing service source. j For the fourth year in a row, our nuclear facility was well j within the top 10% for individual safety in the industry. Winner in the Gas Pilot p y ~ , 7 .y. p y ' Plus, the fossil generation group again topped its own all- 5 Program A new role for e time low record for OSHA recordable accidents, w hich also BGE liOME is as a { should place it in the top 10% ofits comparison companies, marketer and seller of 11 We've maintained a solid reliability record, too. Our natural gas.This - predictive maintenance practices helped us achieve the summer BGE HOME = lowest forced outage rate in the PJM for the fourth consec- entered Maryland's utive year.That means our plants keep producing when n 5 residential Gas Options , most profnable to do so. pilot program. A competitive success, BGE HOME attracted the most BGE's Commitment to the Environment Remains Strong customers of any participant. Since the Clean Air Act in 1970, BGE has invested hundreds of millions ofdollars in cleaner air, and we A New P4 y with C<mstellation Energy Source While continue to make significant reductions to our emissions. BGE HOME serves residential and small-commercial We are meeting or doing better than regulations require customers in Maryland. Constellation Energy Source is on our sulfur dioxide emissions 1 y burning low-sulfur coal, concentrating on mid-sized industrial and commucial generating nearly halfour electricity using emissions-free customers. This year we have repositioned this business to nuclear fuel and hydroelectric power, retiring several older provide a wide range ofenergy products and services to plants. ad installing emissions-reducing equipment, meet the complex energy needs ofsophisticated customers To comply with the 1990 Clean Air Act Amendments in the mid-Atlantic region. and reduce our nitrogen oxide emissions, we expect to spend about $126 million by 2003. We plan to continue & Game Goes On Maryland's energy picture is changing. to install new technology at our plants to further reduce Going forward, we intend to continue to be a corgurate emissions to comply with new regulations. leader in Maryland. BGE is rnanaging the game at hand and putting the plays in place to maintain our winning edge. a
l aving the home-court advantage is one thing, but BGE's trading arm made money in 1998, a rare feat for
~'
to succeed in the new wholesale power market, any newcomer, especially in a highly competitive business ) a a you've got to know how to go coast-to-coast. like this one. Competition might be opening slowly in the retail As evidenced by the volatile wholesale price swings this energy markets, but the wholesale power market opened summer that had electricity selling for as high as $7,000 in 1992. It's been on the fast track ever since. Emerging per megawatt hour, the market will continue to change. l businesses such as power marketing and merchant genera. But it will reward those companies that best understand the l tion have achieved tremendous growth and have shown no dynamics that are at work. We believe Constellation Power signs ofletting up. Source has what it takes to succeed. The facid ofcompetitors, ofcourse, has become Gaining the 7hchnologica/Ildge From the new trading c wded quickly.Two years ago, BGE entered the race, too, floor overlooking Baltimore's Inner Harbor, Constellation but we didn't come in to sit back in the pack. We came in Power Source's nearly 100 employees have a real knowing that to succeed, we'd
)
need skill, instinct and agility. * ' m a - - - '
- ' yi
{~~ We'd also need the nerve to [ t ; 3 take risks and the judgment to h . know when not to take them. [ ~h[ :
.q And most importantly, we , '!
- 3) .
knew we'd need the power [ ' _-Wholesale Power MarketingI when the marker wanted it. k [ and Generation d In the past two years we've made some pretty good moves. ; On the wholesale side, we,ve Gamt PLA5:. ,
' SftATEST:
aligned our team and *N8NN eenindemWienelMame P ' &d MI8 MMm8dN positioned ourselves to go l
- Ausmble e stang ponielio of gensohnD onets. #b"# " '" #E nationwide. And with the [
g passage of the holding i a company billin Maryland, (~ _. n . . ~ . . - -. we wdi have the ability to fmance this strategy. competitive advantage as they trade energy in North America. That's because they have access to first-rate l ConsteHetion Power Soune in the Running technology with appropriate risk management I In a strategic move to realize the benefits ofderegulation, infrastructure in place. BG E added Car.stellation Power Source to its roster of Constellation Power Source has customized for subsidiaries in 1997. With Goldman Sachs Power as its energy the same trading and risk-management system exclusive advisor, Constellation Power Source provides that Goldman Sachs uses to manage its worldwide power-marketing and risk-management services to whole- commodities business.The result is an unparalleled sale energy customers throughout North America. information resource that supplies real-time details on Pairing BGE's electric industry expertise with Goldman trade positions and associated risks. Sachs' trading and risk-management expertise has its l advantages. In less than two years, the business went from a Orion Power Denis ) standing start to one of the top 25 power marketers in the Building on its power play, Constellation Power Source country. In 1998, trading volume increased nearly 12-fold and an affiliate ofGoldman, Sachs & Co. formed Onon to 116 million megawatt hours versus 9 million in 1997. Power Holdings,Inc. 2his year to pursue buying existing , l 1 l l l
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power plants in the United States and Canada. In 1998, Orion acquired the 105-megawatt Carr Street electric N%,
' w ._ N h %E]
generating plant in upstate New York. It also announced kg g '" ~ %,g the planned acquisition of New York State utility
%%gg Niagara Mohawk's 72 hydro generating facilities *=E ?
E;s.t $,y# mNO3%w%*% s g" - -
^
totaling 661 megawatts ofcapacity.
$2 1*
d 9 , A, .- em
.* TARGET POWTJL PLANT PURCHASES _,_
i -
! Gden Peeer EsMings
- w a.No.s sus y , ,-
~ to PUNbSAS pSWSr a , pissesis s p h.. _ .
I M ,.. eQL : _" %" #y - l Our Orion investments provide ye l j benefits on several fronts. First. Orion's power plants will be operated ( l4 by our Constellation Operating Services-a move that [ k; ' 3 increases our power plant operating services business. And, I/, Constellation Power Source has the exclusive right to market d the output from Orion plants. [; ' bg C For example, Constellation Power Source entered into JL
, k a five-year contract to purchase all of the capacity, energy, .
and ancillary services generated by Orion's Carr Street Generating Station 13' Constellation Operating Services will manage that plant. Gmwing Business Base Constellation Power Source made its move this year to establish a base in New England, one of the first regions to go through the deregulation process. In 1998, Constellation Power Source entered into long-term contracts with Granite State Electric Company, Fitchburg Gas and Electric Company, and Eastern Utilities Associates.These contracts mean Constellation Power Source will provide wholesale electricity to these local utilities' customers who have not yet chosen a new electric supplier.
k TARGET Constellation Power
. MERCHANTPIANT 5pearheads Merchant t%,h ,A CONSTRUCTION. Plant Constrottion N ,s %; While Orion concentrates on
'> has more shee : , buying existing power plants to back
' 12 years ele . our trading business, Constellation doorgaos 4 s, Power,s focus is now turning to plash. develop, build and operate merchant power plants in strategic regions.
The process to build a plant is a long one-usually two years for permitting and two years for construction. But the fmal product is a large, highly
} efficient generation facility whose full capacity can be sold on the wholesale market.
Seten Mmhant Plant Site Approu als Under Mry e r Constellation Power has more than 12 years ofexperience j developing independent power plants. Its understanding of the many project factors that need to be considered o is invaluable. 3 As of this writing, Constellation Power is pursuing l % site approvals for ses eral domestic merchant plant ggN 15 development projects. They include two sites in California -
?) -
suitable for 750 megawatts ofelectricity; two sites in Texas = suitable for 1,600 megawatts: two sites in Horida suitable
, for 1,550 megawatts: and or,e in Massachusetts suitable for 700 megawatts.
What makes these sites so attractive is that they will be Lg ~ .y
~~ '
developed to provide power during the times ofhighest v J-
._.- % demand.They are also strategically located relative to V '"1 C~[ .
u4- _ ~ ~ p. .A sg major transmission systems, cooling water, and natural
..y gas supply.
f y
. .X y EN, Building on Our Strengths Between our Constellation Power Source, Constellation TARGET ENERGY :
TRADING AND RISK Power, and Constellation Operating Services businesses. MANAGEMENT we have assembled a contender in the merchant generation
.[, and power-marketing business. We have the know-how to
build, buy and operate power plants, trade the output on
- gas,se hes green . the open market, and manage the risk of fluctuating lateseeof theser energy prices.
SS power menetersle g, .l'he result? A new future for our company, our employees, and our shareholders-a future we're aggressively building on all fronts. @
u FOCUS ON'
' CONTINUING ID
. GROWOURLATINi
' AMEIUCAN POWER BUSINESS -
' Gurpumans espdsMomassess:
' 174800cussemass.
! o atin American utilities, once the domain of Generatingin Guatemala Similarly, Constellation Power governments, are being privatized in an effort to has plans to expand the generating capacity we purchased more efficiently serve the regions' growing in Guatemala. Again, the goal is to fulfill our supply demand for electricity.The governments have turned to agreements and have merchant power available to sellin foreign investors with energy experience, an invitation that the area as demand accelerates. We have already added has allowed us to expand our expertise beyond U.S. borders. 60 megawatts of new generation here and did so in record i Currently, through our Constellation Power affiliate, we time. We closed on the Guatemala acquisition in January l have interests in 15 projects in eight Latin American 1998 and by August-just seven months later-we had countries including Argentina, _ . , , _ _ , _ . , new capacity onhne. j Bolivia, Brazil, Costa Rica, El ( l Sahador, Guatemala, Panama, L' , , Good Timing We arrived 1 on the scene at a fortuitous and Peru. [ time, and our success se far Elektra Nornre-Panama t has been gratifying. Over the Most recently, we acqr'r-d the l I dmmars we have bid ! controllinginterest in uektra on six major privatizations p, Noreste, S.A., which serves the 'E I. and won four of them..The j eastern halfof Panama. It's our - compennon has been su.fT, biggest acquisition ever and the !; . often mvolving much larger SSBE Piau: i first time we have taken control o international corporations, t- 4 ., ofa distribution company.The
- Acquire gensation imd m N' I second-largest electric distribu. - and AnimHon omsts.
on Latin America- build on our winning track tion company in Panama, .g,,,,,,, r 4 record and increase our Elektra Noreste serves 170,000 i c NW ' - STRATEST: involvement in the customers.We plan to improve pnvatizanon process performance and service to Beasign nt - m the future, a e form 5elid ? . these customers and grow th,is distribution company. [' pneration and emrgy w delimsupph. erin f , Latin America. f Ia -. - .
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1 i Utility Operating Statistics Ba, o,.cos..o ei.e.,icco... ,o osss;o>o,i.s Compound 1998 1997 1996 1995 1994 Growth 5-Year 10-Year Weseste eyessnes Seedsess Revenues (InMillions) Residential $ 948.6 $ 932.5 $ 958.7 $ 955.2 $ 931.7 0.36 % 433% Commercia! 912.9 892.6 861 3 879.4 853.0 0.97 3.82 Industrial 211.5 211.9 207.6 208.5 205.6 1.23 1.77 System Sales 2,073.0 2,037.0 2,027.6 2,043.1 1,990.3 0.71 3.81 Interchange and Other Sales 120.8 132.7 155.9 167.0 118.0 5.71 10.65 Other 27.0 223 25.5 21.0 19.1 6.08 1.84 Total $2.220.8 $2,192.0 $2,209.0 $2.231.1 52,127.4 1.01 4.06 Sales (in husands).--win hidential 10,965 10,806 11,243 10,966 10,670 0.65 1.77 Commercial 1L219 12,718 12,591 12,635 12,351 130 2.20 Industrial 4.583 4,575 4,596 4,591 4,433 4.02 1.00 System Sales 28,767 28,099 28,430 28,192 27,454 1.45 1.84 Interchange and Other Sales 5,454 6,224 7,580 8,149 5,684 5.62 10.27 Total 34,221 34,323 36,010 36341 33,138 2.05 2.77 Customers (In Wusands) Residential 1,009.1 1,001.0 995.2 988.2 978.6 0.83 1.20 m Commercial 106.5 105.9 104.5 103.4 101.9 1.11 1.41
- Industrial 4.6 4.5 43 4.1 4.0 3.90 5.87
- Total 1,120.2 1,111.4 1,104.0 1,095.7 1,084.5 0.87 1.23 o Average Use per Residential Customer- nu 10,866 10,794 11,297 11,097 10,903 (0.18) 0.57 E Average Rate per nu (System Sales)-c a hidential 8.65 8.63 8.53 8.71 8.73 (0.30) 2.51 3 Commercial 6.91 7.02 6.84 6.96 6.91 (032) 1.59
; Industrial 4.62 4.63 4.52 4.54 4.64 (2.67) 0.77 e' Nk load (One-Ho.ir)-ww 6,045 5,980 5,955 5,947 6.038 0.57 1.17 CapabilityatSummerPeak ww 6,422 6,741 6,800 6,731 6,722 (0.85) 0.80 l.8 Systemlead Factor 57.4 % 56.9 % 57.5 % 57.2 % 54.7 % 0.78 0.50 m Ses Spesudes SeedsNes
$ Revenues (inMillions) hidential -Excluding Delivery Service $ 279.2 $ 321.7 $ 320.1 $ 2483 $ 262.7 1.00 2.18
-Delivery Service 4.9 0.5 - - - - -
Commercial -ExcludingDeliveryService 75.6 113.5 125.1 109.9 121.0 (9,10) (3.27)
-Delivery Service 19.4 12.9 7.2 3.7 23 42.51 21.80 Industrial -Escluding DeliveryService 8.0 11.4 17.1 16.7 20.2 (18.54) (10.29)
-O:Ise, ' Service 16.0 17.2 14.6 163 9.6 4.40 (037)
System Sales 403.1 477.2 484.1 394.9 415.8 0.77 (1.09) Off-System Sales 40.9 37.5 26.6 - - - - Other 7.2 6.9 6.6 5.6 5.4 (0.28) (1.29) Total 5 451.2 $ 521.6 $ 517.3 $ 400.5 5 421.2 0.82 1.69 Sales (in Wusands)-trtu Residential -Excluding Delivery Service 33,595 39,958 43,784 40,211 40,279 (3.44) (1.76)
-Delivery Service 1,890 205 - - - - -
Commercial -Excluding Delivery Service 11,775 18,435 22,698 23,612 23,712 (13.15) (637)
-Delivery Se:vice 16,633 12,964 8.755 6,982 6,490 17.50 12.72 Industrial -Excluding Delivery Service 1,412 2,016 2,887 4,102 4,410 (23.24) (13.21)
-Delivery Service 34,798 38,791 36,201 35,925 33.837 2.08 (0.28)
System Sales 100,103 112,369 114325 110,832 108,728 (1.50) (0.90) Off-System Sales 16,724 14,759 9,%8 - - - - Total 116,827 127.128 124.293 110.832 108,728 1.59 0.65 Customers (In Musands) Residential 532.5 524.5 516.5 506.8 498.2 1.63 1.00 Commercial 39.6 393 38.9 38.4 37.9 1.10 1.13 Industrial 13 13 13 13 1.3 - - Total 573.4 565.1 556.7 546.5 537.4 1.59 1.01 A.aage Use per ResidentialCustomer (Excluding Delivery Service)-Therms 631 762 848 794 809 (4.99) (2.74) Average Rate per Therm---$ Residential (Excluding Delivery Service) .83 .81 .73 .62 .65 4.69 4.01 Commercial (Excluding Delivery Service) .64 .62 .55 .47 .51 4.65 336 Industrial (Excluding Deli Service) .57 .57 .59 .41 .46 630 335 hk Day Sendour (in Nusa J-.rrru 658.4 765.0 709.0 70C3 761.9 0.02 (0.17) Nk DayCapability (In Nusandi)-17TH B33.0 870.0 870.0 847.0 847.0 (0.33) 0.49 Utility operating statistics do not reject the elimination ofinterrompany transactions. .
Selected Financial Data ..,,;_.o ..on.c.ec.,.,. osa.u Compound 1998 1997 1996 1995 1994 Growth (Ikuar amouna in miuions, exceptper slurr amouna) 5-Year 10. Year seammary of opereNees
. TotalRevenues _ $3.358.1 $3,307.6 $3,153.2 $2,934.8 $2,783.0 4.14 % 5.37 %
Expenses otherThan Interest and IncomeTaxes 2,617.0 2,584.0 2,483.7 2.239.1 2,147.7 4.25 5.81 Income From Operations 741.1 723.6 669.5 695.7 635.3 3.75 3.98 OtherIncome (Expense) 5.7 (52.8) 6.1 8.8 32.3 (22.43) (11.20)
' Income Before Interest and Income Taxes 746.8 670.8 675.6 704.5 667.6 3.24 3.68 Net Interest Expense 240.9 230.0 198.5 197.0 190.1 4.99 6.87 income BeforeIncomeTaxes 505.9 440.8 477.1 507.5 477.5 2.47 2.47 IncomeTaxes 178.2 158.0 166.3 169.5 153.9 5.23 6.71 Net Income - 327.7 282.8 310.8 338.0 323.6 1.13 0.77 Preferred and Preference Swck Dividends 21.8 28.7 38.5 40.6 39.9 (12.21) (2.95)
Earnings Applicable to Common Stock $ 305.9 $ 254.1 $ 272.3 $ 297.4 $ 283.7 2.68 1.11 Earnings !Yr Share ofCommon Stock and EamingsIhr Share ofCommon Stock-j s Assuming Dilution $ 2.06 5 1.72 $ 1.85 $ 2.02 $ 1.93 2.17 (1,14) ' Dividends Declared Ihr Share of E Common Stock $ 1.67 $ 1.63 $ 1.59 $ 1.55 $ 1.51 2.58 2.38 l Somenery of Messelal Comessem Total Assets $9,195.0 $8,900.0 $8.678.2 $8.419.1 $8,145.3 2.86 6.02 ;. Capitalization long-term debt $3,128.1 $2,988.9 $2,758.8 $2,598.2 $2,584.9 2.07 5.87 Preferred stock - - - 59.2 59.2 - - Redeemable preference stock - 90.0 134.5 242.0 279.5 - - Preference stock not subject to mandatory redemption 190.0 210.0 210.0 210.0 150.0 4.84 6.63 Common shareholders' equity 2.981.5 2,870.4 2,854.7 2,811.2 2,719.0 2.61 4.69 Total Capitalization $6,299.6 $6,159.3 $5,958.0 $5,920.6 $5,792.6 1.00 4.51 Noemalal Steelseles et Weer Red Ratio ofEarnings to Fixed Charges 2.94 2.78 3.10 3.21 3.14 Ratio ofEarnings to Combined Fixed Charges and Preferred and Preference Stock Dividends 2.60 2.35 2.44 2.52 2.47 BookValue Ihr Share ofCommon Stock $ 19.98 5 19.44 $ 19.33 $ 19.06 $ 18.43 Number ofCommon Shareholders (In 7housands) 69.9 73.7 77.6 79.8 81.5 Certainprior-yaramounn hate been redassifedto conform urirh the cunentparspn sentation.
Management's Discussion and Analysis of Financial Condition and Results ofOperations Introduction The electric utility industry is undergoing rapid and sub-In Management's Discussion and Analysis, we explain the stantial change. Competition in the generation part ofour general fmancial condition and the results ofoperations for business is increasing.The regulatory environment (federal BGE
- and its diversified business subsidiaries including: and state) is shifting toward customer choice.These matters are discussed briefly in the " Competition and Response to
- what factors affect our businesses, I Regulatory Change" section beginning on page 22.They
+ what our earnings and costs were m 1998 and 1997* are discussed in detail in our most recent Annual Report on
- why earnings and costs changed from the year before, Form 10-K.
+ where our earnings came from,
- how all of this affects our overall fmancial condition, in response to this change, we regularly reevaluate our
- what our expenditures for capital projects were in 1996 strategies with two goals in mind: to improve our competitive through 1998, and what we expect them to be in 1999 position, and to anticipate and adapt to regulatory change.
through 2001,and These strategies might include one or more of the following:
- where we will get cash for future capital expenditures. , the complete or partial separation ofour generation, As you read Management's Discussion and Analysis,it may transmission, and distribution functions, j
"
- purchase or sale ofgeneration assets, 1 be helpful to refer to our Consolidated Statements of Income on page 37 which present the results ofour
- mergers or acquisitions ofutility or non-utility businesses, f
- e spin-offor sale ofone or more businesses, and operations for 1998,1997, and 1996. In Management's
; Discussion and Analysis, we analyze and explain the annual
- growth ofearnings from nonregulated businesses.
g changes in the specific line items in the Consolidated We cannot predict whether any of the strategies described
. Statements ofincome. above may actually occur, or what their effect on our finan-a cial condition or competitive position might be. Please refer to the " Forward looking Statements" section on page 35.
j I Results of p em mww ~+ -- - earnings would have Operations been higher excepn [ , in this section,we dis- k ? M 1 1 .
- our real estate and cuss our earnings and [ .
F senior.living facili-the factors affecting h Totil Earnings per Share - ties business wrote them.We begm with a [ down its invest-Eencral overview, then i r ofCommon Stock
< ment in a real for th tility W -- b #'
$1.93
$1.94 " ; $1.96
**# E ## ' "
- we wrote off an l
s Utihty busmens I business and for diver-sified busmesses. g , ). S 1.31, energy services I
.3 Om - investment. l 4 operations , ;2.20 ' 2.28 2.27 ipos ; Mdg Weee Note 2 I"I998'"".li'T#*'"' i Our 1998 total carn- ! on page 51): -: (.25) - I"8'I'
- P#""""' l ings increased $51.8 were about the same
[ ' Wdte-downs dies! estate , c mpared m 1997. million, or $.34 per j investments (seeNote3 on page $2) , (.10) ; (.31) ' - share, compared to We discuss our utih,ty i pisabed - ' =- =t 1997.Our total earn- energyensE (see Note 10 onpage 63) carnings in more detail (.42) ingsincreased mostly Write.odforenergy services investment - in the " Utility Busi-l ness" section begm-because 1997 results j (seeNote 2 onpage 51) ~ _ J 04) f- .- reflect our write-offof e [
- Totaleaminaspershaie $2.05 $1.72 - $1.85 nmg on page 21.
merger costs, and our ! In 1998, diversified real estate and seniot- L - business camings from living facilities busi- operations decreased ness' write-down ofits imrstments in two real estate compared to 1997 mostly because oflower camings from our projects, as discussed in the 1997 section below. Our 1998 real estate and senior-living facilities and financial investments
l businesses. However, we had higher earnings from our power In addition, we charge our electric customers separately for pmjects and power marketing and trading businesses. We the fuel we use to generate electricity (nuclear fuel, coal, gas, discuss our diversified business camings in more detail in the or oil) and for the net cost ofpurchases an i sales ofelectric-
*Divenified Businesses" section beginningon page 26. iry (primarily with other utilities). We charge the actual cost iese tenu t t cusmma with no profa to us. If these We discuss the real estate write-down in the "Other fuel c St88 uP, the Maryland PSC permits us to increase Divenified Businesses" section on page 28 and the write-off the fuel rate. If these costs go down, our customers benefit of the energy services investment in the ,Other Energy Services secuon on page 28.
f hi i d aMd misiwd 7 ;
, Cliffs Nuclear Power Plant (Calvert Cliffs) because the cost fnuclear fuel is cheaper than coal, gas, or oil.
Our 1997 total earnings decreased $18.2 million, or 5.13 per share, compared to 1996. Our total earnings We discuss this in more detail in the " Electric Fuel Rate decreased because: Clause" section on page 24 rad in Note 1 of the Notes to Conselidated Financial Statements on page 46.
= we wrote offcosts associated with the terminated merger with Ibtomac Electric Ibwer Company, and Changes in the fuel rate normally do not affect earnings.
- our real estate and senior-living facilities business wrote However, if the Maryland PSC disallows recovery ofany down its investments in two real estate projects. part of the fuel costs, our earnings are reduced. In 1996, the
. Maryland PSC disallowed certain fuel costs as discussed in We discuss the write-offormerger costs m the . Write-Off . . .
t sau we ReplacememEnugyCosts smmnon ofMerger Costs" section on page 26, and the real estate Page 24 and in Note 10 on page 63. - write-downs in the "Other Diversified Businesses" section on page 28. We also charge our gas customers separately for the natural j a In 1997, utility earnings from operations decreased com- E** ural gas . Purchase is based on a market based from us. The rates incentive mecha-price we charge for the n pared to 1996 mosdy because we sold less electricity and gas
. nism approved by the Man land PSC. We discuss market due to milderweather.
- based rates in more detail in the " Gas Cost Adjustments" In 1997, diversified business earnings f om operations increased compared to 1996 mostly because ofhigher section on page 25 and in Note 1 on page 46. l From time to time, when necessary to cover increased costs, earnings from our power projects and financial invest- g we ask the Maryland PSC for base rate increases.The -
ments businesses. Maryland PSC holds hearings to determine whether to , grant us all or a portion of the amount requested.The Utility Business Maryland PSC historically has allowed us to increase base Before we go into the details ofou* clectric and gas opera- rates to recover increased utility plant asset costs, plus a tions, we believe it is imponant m discuss factors that have a profit, beginning at the time of replacement. Generally, rate strong influence on our utility business performance: regu- incruses improve our utility earnings because they allow us lation, the weather, other factors including the condition of to collect more revenue However, rate increases are nor-the economy in our service territory, and competition. mally granted based on historical data, and those increases may not always keep pace with increasing costs. angelessen by me meryload rebels seree Other parties may petition the Maryland PSC to lower ur base rates. We discuss this m more detail in the The Maryland PSC determines the rates we can charge our Compeuuon and Response to Regulatory Change, customers. Our rates consist ofa " base rate" and a " fuel , secu n n page22. rate."The base rate is the rate the Maryland PSC allows us to charge our customers for the cost ofproviding them ser-vice, plus a profit. We have both an electric base rate and a Weather affects the demand for electricity and gas. Very hot gas base rate. Higher electric base rates apply during the summers and very cold winters increase dema nd. Mild summer when the demand for electncay is the highest.
****h'"'d"'d***"d'W'**h*.*I# k"". *! '*l**
Gas base rates are not affected by seasonal changes. more than commercial and industnal se dkh are The Maryland PSC allows us to include in base rates a com- mostly affected by business needs for clet u icity and gas. ponent to recover money spent on conservation programs. hm eather's effect using
- degree days." A This component is called a conservation surcharge. .
degree day is the difTerence between the average daily However, under this surcharge the Maryland PSC limits actual temperature and a basehne temperature of 65 what our profit can be. If, at the end of the year, we have degrees. Cooling degree days result when the average daily exceeded our allowed profa, we defer the excess in that year actual temperature exceeds the 65 degree baselme. Heaung and we lower the amount of future surcharges to our cus-romers to correct the amount ofoverage, plus interest. dedwdehgd@d we ture isless than the baseline.
During the cooling season, hotter weather is measured by On July 1,1998, BGE and all other Maryland investor-more cooling degree days and resuhs in greater demand for owned electric utilities filed with the Maryland PSC their electricity to operate cooling systems. During the heating individual proposals for the transition from a regulated season, colder weather is measured by more heating degree electric supply system to one where generation is priced days and results in greater demand for electricity and gas to based on a competitive retail electric market, in our plan, operate heating systems. we proposed that: Effective March 1,1998, the Maryland PSC allowed us to + all customers would be able to choose other suppliers or implement a monthly adjustment to our gas business our service, revenuu to eliminate the effect of abnormal weather
- we would guarantee our service at rates frozen until July patterns. We discuss this further in the " Weather 2002. Prices would then be adjusted for inflation until Normalization"section on page 25. the transition is complete, but not beyond 2008, We show the number ofcooling and heating degree days in *"***"*'".c me a wppingc ean altematesupplierw uld t us credit would reduce their 1998 and 1997, the percentage changes in the number of BCE bill by the market value ofcapacity, energy, and degree days from the prior year, and the number of degree days in a " normal" year as represented by the 30-year
#" ****" "E*' P' ' ***** "'
+ we would attempt t reduce potentially stranded invest-average in the following table.
ments by lowering operating costs and applying all 30-year earnings in excess ofour authorized rate of return to 1998 1997 average accelerate the recovery ofgeneration assets. This would Cooling degree days 915 746 836 lower the generation asset book values toward their o Percentage change competitive market values thereby reducing any from prior year 22.7 % (5.1)% potentially stranded investment, Heatingdegree days 4,119 4,822 4,783
- market valuc ofgeneration assets would be determined h Percentage change by annual independent appraisals beginning in 2002 i from prior year (14.6)% (6.2)% and continuing through the transition period, g + when the difference between the book value and market l Other Fosters value ofgeneration assets is within 10%, the transition Other factors, aside from weather, impact the demand for period would end and a non-bypassable surcharge 22 electricity and gas.These factors include the "uumber of would be applied to customers' bills to recover the
,, customers" and " usage per customer" during a given period. remaining stranded investments over a two- to three-3 We use these terms later in our discussions ofelectric and gas year period, and operations. In those sections, we discuss how these and other + net regulatory assets and nuclear decommissioning costs factors affected electric and gas sales during 1998 and 1997. would continue to be collected from customers through the regulated transmission and distribution business.
The number ofcustomers in a given period is affected by new home and apartment construction and by the number of On December 22,1998, other parties filed their positions businesses in our service territory. in response to our proposal.The counter-proposals contain provisions which, if adopted by the Maryland PSC, could Usage per customer refers to all other items impacting negatively impact our electric business.The Maryland PSC customer sales which cannot be measu ed separately.These will hold hearings to examine our electric restructuring factors include the strength of the economy in our service transition proposal and the counter-proposals ofother territory. When the economy is healthy and expanding, parties. In the meantime, settlement negotiations are ongo-customers tend to consume more electricity and gas. ing. Absent settlement, the Maryland PSC is scheduled to Corwersely, during an economic downtrend, our I issue an order by October 1,1999. customers tend to consume less electricity and gas. I On September 3,1998, the OfTice ofItople's Counsel (OPC) ceanpetitlen med neaponse te negolatory cheese filed a petition requesting the Maryland PSC to lower our Our electric and gas businesses are also affected by competi- electric base rates. At our request, the Maryland PSC agreed tion and regulatory changes. We discuss these items for to consolidate any such review ofour electric base rates with both ofour regulated businesses below. Its review ofour electric restructuring transition proposal discussed above. We filed testimony and exhibits with d"N Electne unhues are facing competition on various fronts, the Maryland PSC supporting our position that our cur-rent electric base rates are justified. On February 5,1999, mcluding: other parties, including the OPC, filed testimonies to
+ the construction ofgenerating units to meet increased lower our base rates by as much as $131 million. As a demand for electricity, condition of the Maryland PSC's consolidation of these
+ the sale ofelectricity in bulk power markets, matters, we agreed to make our rates subject to refund
)
+ competingwith alternativeenergysuppliers,and effective July 1,1999 should the Maryland PSC issue a
+ electric sales to retail customers. rate reduction order after that date.
1 We cannot predict the ultimate effect competition or The percentage changes in our electric system sales regulatory change will have on our earnings. volumes, by type ofcustomer,in 1998 and 1997 c mpared to the respective prior year were: We discuss mmpetition in our electric business in more detail in our most recent Anmial Report on Form 10-K under the 1998 1997 heading"fjectric Regulatory Matters and Competition." Residential 1.5% (3.9)% Gas Businest """'I^l b l'0 Regulatory change in the natural gas industry is wcll Industn 1 0.2 (0A) under way. We discuss competition in our gas business in 1998, we sold more electricity to residential customers in more detailin our most recent Annual Report on mostly because: Form 10-K under the heading
- Gas Regulatory Matters
,, a the number ofcus-and Compen. .non. ,, , , , , , . . . _ . _ , . _ . , , ,_ -
g Effective November I e e- + we had hotter sum-1,1998, the [ (j j ; mer weather, and Maryland PSC [ ,LA A .
+ usage percustomer allowed us to begin F , .-
~
increased. collectinga Delivery [ , ngs FShare
' Wew uldhavesold Service Realignment h <
ofCommon Stock e even moreelectricity to arge torecover. k L_ . y,,g : 3997 : gg residentialcustomers certam msts assoca- [ ~ Electricbusiness. .$1.75 $1.77: $1.75 twe hadmilder . ated with the intro- Gasbusiness ~.18 .17 ' 21 -
.. I ~
duction of winterweatherin 1998. compennon m our p : Toint utilityenmugpper sbase , g,gg g ; ( 6ent apermaans _ , , ; 1.93 : El 94 '_ l.96 to commercialcustomers a gas business.This is 1 S Wrise-offafsnesysr case (see Nose 2 -- - b m stlybecauseusageper
- r(.25) '-
~
not expected to - on'page 51) - sigmficantly u, npact p
! Disallowed
-~
s Idaboutthesame 8 our earnings. ! onses(seeNase10onpage63)3 - -- (A2) . amount ofelectricityto lg '; i utilityearnitypersbase $1.93 = $149' $1.5T industrialcustomersas
, y3
[Jtility Business L -aw uam-~ ~ ~1, - - - a wedidin1997. ~ Urningsper In 1997, we sold less electricity to residential customers Share ofCommon Stock mostly for two reasons: lower usage per customer and Our 1998 total utility earnings increased $36.1 million, or milder weather. We sold more electricity to commercial 5.24 per share, from 1997. Our 1997 total utility earnings customers mostly because usage per customer increased. increased $24.0 million, or 5.15 per share, from 1996. We We would have sold even more electricity to commercial discuss the factors afTecting utility earnings below. customers except for milder weather during the year. We sold about the same amount ofelectricity to industrial
'"S'"** as we did in 19' 6.
Electric Operations m BaseRates The changes in electric revenues in 1998 and 1997 In 1998, base rate revenues decreased compared to 1997. compared to the respective prior year were caused by: Although we sold more electricity in 1998, our base rate revenues decreased because oflower consen'ation 1998 1997 surcharge revenues. (in mdlwm) In 1997, base rate revenues incmased compared to 1996 Electric system sales volumes $50.8 $(15.5) because ofhigher conservation surcharge revenues. During Base rates (6.6) '9.2 1996, we exceeded our profit limit under the consen ation Fuelrates (8.1) (4.3) surcharge. As a result, we excluded $28.5 million ofour 1996 Total change,m electric revenue' surcharge billings from revenue.To correct the overage, we from electric system sales 36.1 9.4 lowered the surcharge on our customers' bills over a twelve-Interchange and other sales (13.2) (23.2) month period beginningJuly 1997 through June 1998. Other 4.6 (3.2) Totalchangein electric revenues $27.5 $(17.0) ElectricSystem Sales %lumes " Electric system sales volumes" are sales to customers in our service territory at rates set by the Maryland PSC.These sales do not include interchange sales and other sales.
1 FuelRates Electric FuelRare Clause in 1998, fuel rate revenues decreased compared to 1997. Under the electric fud rate dause, we defer (indude as an Although we sold more electricity, the fuel rate was lower asset or liability in our Consolidated Balance Sheets and l mostly because we were able to use a less-costly mix of exdude from our Consolidated Statements ofIncome) the I generating plants and electricity pt.rchases. difTerence between our actual costs of fuel and energy and
*****'"#'* "m cust mers under the fuel rate in a in 1997, fuel rate revenues decreased compared to 1996
.. given period. We en. her bill or refund our customers that mostly because we sold less electncity.
dhm in fm We discuss the calculation of the Interrhangeand Other Sales fuel rate in Note 1 on page 46.
" Interchange and other sales" are sales in the PJM In 8, our aaual costs f fuel and energ were Qer (Pennsylvania-New Jersey-Maryland) Interconnection energy market and to others.The PJM is a regional power t an le ue ate mvenues we collected from our customers.
pool with members that indude many wholesale market in 1997, our actual costs of fuel and energy were lower than participants, as well as BGE and seven other utility compa- the fuel rate revenues we collected from our customers. nies. We sell energy to PJM memhers and to others after we DisallourdReplacement Energy Corts have sausfied the demand for electricity in our own system. In December 1996, we settled fuel rate proceedings about in 1998 and 1997, interchange and other sales revenues extended outages that occurred at Calvert Cliffs from 1989 decreased compared to the respective prior year mostly through 1991. We agreed not to bill our customers for because oflower sales volumes. 5118 million ofelectric replacement energy costs associated with the outages. We wmte off a portion of the costs in Electric Feel and Purcleased Energy Expenses 1990 and wrote off the remainder in 1996. We discuss this 1998 1997 1996 further in Note 10 on page 63.
* (In mil lwou) o g Actual costs $514.7 5504.5 5539.2 Cas Operations i Net recovery (deferral) 2 ofcosts under electric fue] ses Revenues h rate clause (see Note j The changes in gas revenues in 1998 and 1997 compared to on page 46) (9.0) 15.2 8.2 the respective prior year were caused by:
14 Disallowed replacement energy 199', 1998
,, costs (induding carrying g,, ,,sj,,g 8 charges)(see Note 10 on page 63) - -
95.4 Gas system sales volumes 5(10.8) $(7.3) Base rates 14.2 0.6 Totalelectric fuel and Weather normalization 10.1 - purchased energy expenses 5505.7 5519.7 5642.8 Gas cost adinstments (87.6) (0.2) ActualCo;,, Total change in gas revenues In 1998, our actual costs of fuel to generate electricity from gas system sales (74.1) (6.9) (nudear fuel, coal, gas, or oil) and electricity we bought Off-system sales 1.8 10.9 from others increased compared to 1997 mostly because we Other 0.1 0.3 settled a capacity contract with PECO Energy Company. Total change in gas revenues 5(72.2) 54.3 In 1997, our actual costs decreased compared to 1996 Cas Syrtem Sales Volumes mostly for two reasons: we bought less electricity from The percentage changes in our gas system sales volumes, others as a result ofbeing able to meer demand using the by type ofcustomer, in 1998 and 1997 compared to the electricity w e generated, and we were able to use a less-costly respective prior year were: mix ofgenerating plants mostly because we generated more electricity at Calvert Cliffs. 1998 1997 Resideniial (l1.6)% (8.3)% Commercial (9.5) (0.2) Industrial (l 1.3) 4.4
In 1998, we sold less ps to residential end commercial index (a measure of the market price ofgas in a given customers mostly for two reasons: milder weather and lower period).The difference between our actual cost and the usage per customer. We would have sold even less ps to market index is shared equally between shareholders and residential and commercial customers except the number of customers, and does not significantly impact earnings. We customers increased. We sold less gas to industrial customers also discuss this in Note 1 on page 46. mostly because usage by Bethlehem Steel (our largest Delivery service customers, induding Bethlehem Steel, are not customer) and other mdustnal customers decmased. subj.ect to the gas cost adjustment clauses because we are not in 1997, we sold less ps to residential customers mostly for selling ps to them. We charge these customers fees to recover two trasons: lower usage per customer and milder weather. the fixed costs for the t:2nsportation service we provide.These We sold about the same amount ofgas to commercial fees are essentially the same as the base rate charged for ps customers as we did in 1996. We sold more ps to indastrial sales and are induded in ps system sales volumes. customers mosdy for two reasons: milder weather caused in 1998 and 1997, ps cost adjustment revenues decreased fewer service interruptions and Bethlehem Steel used more c mpared the respective prior year mosdy because we ps. Sometimes we need to interrupt service during periods
- E**'
with the highest demand. Some industrial customers pay miuced rates in exchange for our right to interrupt their OfSystem Sales service during these periods. We would have sold even more Off-system gas sales are low-margin direct sales ofgas to ps to industrial customers except gas usage by industrial wholesale suppliers ofnatural gas outside our service customers other than Bethlehem Steel decreased territory. Off-system gas sales, which occur after we have satisfied our customers' demand, are not subject to gas cost
. adjmtments.The Maryland PSC approved an arrangement !
In 1998, base rate revenues mcreased compared to 1997, for part of the margin from oft-system sales to benefit : Although we sold less ps during 1998, our base rate nevenues mc cased mostly because the Maryland PSC authorized an e h dhedd E increase in our base rates effecuve March 1,1998.The retained by BGE (which benefits shareholders). Changes in fr-system sales do not sigmficandy impact carmngs. change in rates will increase our base rate revenues over the twelve-month period from March 1998 through February In 1998, off-system gas sales revenues increased compared a 1999 byapproximately $16 million. to 1997 mosdy because we sold more gas cff-system. s In 1997, base rate revenues increased compared to 1996. In 1997, off-system gas sales revenues increased compared f5_ Although we sold less ps in 1997, our base rate revenues to 1996 mosdy because we first began off system sales ofgas increased because of higher conservation surcharge in February 1996. revenues during the last six months of the year. WeasherNomsalaatio,s Effective March 1,1998, the Maryland PSC allowed us 1998 1997 1996 to irnplement a monthly adjustment to our gas base rate #=h> revenues to climinate the effect of abnormal weather Actual costs $212.2 5291.6 5295.4 patterns on our gas system sales volumes.This means our Net recovery (deferral) of monthly gas base rate revenues will be based on weather costs under gas adjustment that is considered " normal" for the month and, therefore, dauses (see Note 1 on page 46) (3.6) 0.5 (11.0) will not be affected by actual weather conditions. Total gas purchased for Gas CartA4justment, resale expenses $208.6 5292.1 5284.4 We charge our gas customers for the namral gas they pur- gg diase from us using gas cost adjustment clauses set by the
. Actual costs indude the cost ofps purchased for resale Maryland PSC. These clauses operate simdar to the electnc t ur cust mers and for off-system sales. Actual costs fuel rate clause described in the 'FJectric Fuel Rate Clause.
do not mclude the cost ofgas purchased by delivery section on page 24. g , However, effective October 1996, the Maryland PSC In 1998 and 1997, actual ps costs decreased compared to approved a modifican.on oftheseps clauses to provide a the respective prior year mostly because we sold less gas. market based rates incentive mechanism. Under market based rates, our actual cost ofgas is compared to a market
GasAdjustment Clauses agreement. Accordingly,in 1997, we wrote off $57.9 million We charge customers for the cost ofgas sold through gas ofcosts related to the merger.This write-offitduced after-tax adjustment clauses (determined by the Maryland PSC), camings by $37.5 million, or $.25 per share. as discussed under " Gas Cost Adjustments" carlier in this section. laterest Cherges in 1998, actua' gas costs were higher than the revenues we Interest charges represent the interest on our outstanding debt. collected from our customers. In 1998, interest charges increased $6.7 million compared In 1997, actual gas costs were lower than the revenues we to 1997 mostly because we had more debt outstanding. collected from our customers. Interest charges would have been higher except interest rates were lower than they were m 1997. Other OperatingExpenses In 1997, interest charges increased $23.6 million compared to 1996 mostly for two reasons: we had more debt
- 4. n - : end meisteemme. -- ; : ::
outstanding and interest rates were higher. In 1998, operations and maintenance expenses increased
$34.8 million compared to 1997 mostly because of: losesse Temos
*'"""" In 1998, income taxes increased $20.2 million compared to
+ higheremployeebenefitcosts, and 1997 because we had higher taxable income from both our a 56.0 million write-offorcontributions to a third pany "* 'I P"** "* "" " ' " " " * **
- for a low-level radiation waste facility that was never In 1997, income taxes decreased $8.3 million compared to
!! completed. 1996 because we had lower taxable income from both our 8 o utility operations and our diversified businesses. in 1997, operations and ma.mtenance expenses were o slightly lower than they were in 1996. y 8 DiversifedBusinesses 4 ' t med Asserttsatlee ';m - Our diversified businesses engage primarily in energ 7 We describe depreciation and amortization expenses in services. Our energy services businesses indude certain I Note 1 on page 48. subsidiaries ofConstellation* Enterprises, Inc. and the 26 In 1998, deprecianon and amonization expenses increased District Chilled Water General lbrtnership (Comforttink*), 534.2 million compared to 1997 mosdy because: 8Sencra Pannersh. .ip m which BGEis a panner.Theyare: E . in October,1998, the Maryland PSC authorized us to e Constellation Power Source Inc.-our wholesale smplement new electric depreciation rates retroactive t power marketing and trading business, January 1,1998, which mcreased depreciation expense
- Constellation Power
- Inc. and Subsidiaries-our by approximately $13.9 million, E *" P"k' "* "*
- we had more utility plant in service (as our level ofplant . ConneHanon Enugy Source,9ncrour enugy
. . products and services business, in service changes, the amount ofour deprecianon and
. BGE Home Pmducts & Services,* Inc. and amonization expense changes), and
- we reduced the amonization period fw certam com-puter software begm. rung m the first quaner of1998 SMdiaism .
hogode-i&ild%.l a systems, and residenn. l and small commercial gas retai from five years to three years. marketing business, and
- Comfonlink--ourcoolingservicesbusinessfor in 1997, depreciation and amortization expenses increased commercialcustomers in Baltimore.
$12.7 million compared to 1996 mostly because we had more plant m service.
Constellan.on Enterprises, Inc. also has two other subsidiaries: OtherIneomeandExpense, . Conste11ationinvestments*Inc.-outfinancial investments business, and Write OH of merger Costs
- Constellation Real Estate Group,* Inc.-our real estate In September 1995,we signed an agreement with Potomac and senior-living facilities business.
Electric Ibwer Company to merge together into a new company, Constellanon Energy
- Corporanon, after all We describe our diversified businesses in more detail 'n necessary regulatory approvals were received. In December our most recent Annual Report on Form 10-1, under Item 1. Bus. mess-D.iversified Businesses.
1997, both companies mutually terminated the merger
Diversifed Business Earningsper Share of be material In 1998, assets and liabilities from energy Common Stock trading activities increased because ofgreater trading Our 1998 diversified business earnings increased activity compared to 1997.
$ 15.7 million, or $.10 per share, compared to 1997. Our In March 1998, Constellation Ibwer Source and Goldman, 1997 divernfied business carnings decreased $42.2 milhon, Sachs Capital Partners 11 LP., an affiliate of Goldman, Sachs or 5.28 per share, compared to 1996. & Co., formed Orion Power Holdinp, Inc. (Orion) to We discuss factors affecting the earning of our diversified acquire dectric generating plants in the United States and businesses below. Canada. Constdlation Ibwer Source has a commitment to fund its investment in Orion as discussed further in
"" ' * " P*G' "
EnergyServices power meetiegleg e m w y~ m m m-m ,, - .m , , , , , _
,y Power Preioses med fredlag [ I In 1998, earning from
- I~. '. x* . } our power projects busi-In 1998, earnings f from our power ness increased compared
[ marketing and ( ' ' a to 1997 mostly because trading business 7
" '- IAEN -
Constellation Power increased compared h az Of Common StockI 1." ' recorded a $10.4 million to 1997 mostly I 7 , ., l after-tax gain forits
. 1998. q~1997' .:1996 because ofincreased
' ., ;.n _ share ofearnings in a N 88f**8 :
trading activities in '. - -
...9-. partnership.The part-1998 which was f Ibwerrnarketingand trading : .5.051 i$.00: . $-~[..
tership recognized a : Constellation Iower .. m JO. .25 i M8M ain an rbe ok nfin a i (.01) s 1(.05) .02 iwnership interest in a Source's first full [ "EI '" "P t 3 year ofoperations. [ Pershase from operanons
.34 . 6.20 ' J .20 l 4 power sales contract.
5
. Otherdnerafiedbusinesses In 1997, earnings a Constellation Ibwer [
=l Source uses the [ _ earnmespershesefmmoperations, 1.07) - 11 4 ..d15 , increased compared to l 1996 mostly because of mark-to-market [ ; Tots! diversified business earmny .
' .31 I improved performance E Per share fmm operations - L27 L.34 i e method ofaccount. [_ Write <lownsofsealestateinvestments ;
ingfor its trading i n. j ofvarious energy ,, activities.We discuss , (see Note 3 on pay 52) o ( 10) ' ~431) e. d projects. Also,1996 Write-offorenergy .ervices investment i - (.04) - - s earningsinduded the mark-to-market [ r Totalenmings pershare $.131 - $.03 e$31 3 $14.6 million (after-method ofaccount- l ing and Constella- tax) for Constellation ["
' " " " " *" " " ' '# Power's percentage tion Power Source's trading activities in Note 1 on page 47, share ofearnings in a prtnership.The partnership recognized : in on the sale As a result of the nature ofits trad.mg acuvines, of a peer purchase agreement.These increases were offset Constellanon Ibwer Source s revenue and earnings will by $16.2 :nillion of after-tax write-offs ofinvestments in I fluctuate. We cannot predict these fluctuations, but the certain power projects.
efrect on our revenues and earning could be material.The primary factors that cause these fluctuations are: We describe our earning in the partnerships and the write-offs funher in Note 3 on page 52. l
= the number and s.ize of new transactions, California &<r ArhaseAgreements j e the magnitude and volatility ofchanges in commodity prices and interest rates, and Constellation Power and subsidiaries and Constellation l
= the number and size ofopen commodity and derivative Investment: have $310.6 million invested in 15 projects l positions Constellation Power Source holds or sells. that sell elec :ricity in California under power purchase agree-ments called " Interim Standard Offer No. 4" agreements. In l
Constellation Ibwer Source's management uses its best esti- 1998, carning from these projects were $413 million, or mates to determine the fair value ofcommodity and derh a- $.28 per share. rive positions it holds and sells.These estimates consider various factors induding dosing exchange and over-the. Under these agreements, the electricity rates change from j I counter price quotations, time value, volatility factors, and fixed rates to variable rates beginning in 1996 and continu-credit exposure. However, it is possible that future market ing through 2000.The projects which already have had rate prices could vary from those used in recording assets and changes have lower revenues under variable rates than they , did under fixed rates. When the remaining projects transi- j liabilities from trading activities, and such variations could tion to variable rates, we expect their revenues also to be V I lower than they are under fixed rates.
Our power projects business is pursuing alternatives for estate and senior-living facilities business decreased compared some of these projectsincluding: to 1997 mosdydue to:
+ repowering the projects to reduce operating costs, + a $15.4 million after-tax write-down ofits investment
+ changing fuels to reduce operating costs, in Church Street Station-an entenainment, dining.
- renegotiating the power pu: hase agreements to and retail complex in O lando, Florida, improve the terms, + lower earnings from various real estate and senior-living
+ restructuring fmancing to improve existing terms, and facilities projects, and
+ selling its ownership interests in the projects. + a $4 million after-tax gain on the sale oftwo senior-liv ng facilit es pr jects reflected in 1997 results.
The California projects that make the highest revenues will transition in 1999 and 2000.The projects which transition In addition, in 1998, our real estate and senior-living facili-in 1999 contributed $10.7 million, or 5.07 per share to ties business exchanged cenain assets and liabilities in return 1998 earnings, while those changing over in 2000 con- for a 41.9% equity interest in Corporate Office Propenics tributed $24.0 million, or $.16 per share to 1998 carnings. Trust (COPT), a real estate investment trust. We expect earnings to ultimately decrease by similar .
. . Earn.mgs from our financial in estments business decreased amounts begm.mng m 1999 as these projects tramition.
W9 d%d We describe these projects in more detail in Note 10 on
+ better market performance for our investments in page61 1997, and InternationalPmjecu
- a 56 million after-tax gain on the sale ofstock held by a
, At December 31,1998, Constellation Power had invested financiallimited partnership reflected in 1997 results.
E about $183.4 million in 15 power projects in latin America . . o compared to $23.5 milh.on mvested in Lan.nAmen.ca m In 1997, earnings from our other diversified businesses gnm ru .:s_... . ~ .m..s m . u.m mcreased compared to 1996 mostly because of m. creased _m . _i. 2 earnings in our financialinvestments b' usiness from j + the purchase ofa 51% interest in a Panamanian electric better earnings in trading securities and increased gains distribution company for approximately 590 million in from marketable securities. Earnings would have been 1998 by an investment group in which subsidiaries of higher except we had a decrease in earnings from our real Constellation Power hold an 80% interest, and estate and senior-living facilities business mostly due to: 28 + approximately 598 million for the purchase ofexisting . electric generation facib. .ues and the construction ofan
+ a $14.1 million after-tax wnte-down ofthe investment . m Church Street Station, and o
o electric generation facih.ry m Guatemala. .
- a531.9millionafter-taxwnte-downoftheinvestmentin in the future, Constellation Power expects to expand its Piney Orchard-a mixed-use, planned-unit development.
power projects business further in both domestic and international projects. MdbW eq@shiwdmsof our real estate projects, the COPT transaction, and our
, financial investments further in Note 3 on page 52.
In 1998, earnings from our remaining energy services busi- We consider market demand, interest rates, the availability nesses int.reased compared to 1997 due to improved results of fmancing, and the strength of the economy in general from our energy products and services business. Earnings when making decisions about our real estate projects. Ifwe would have been higher except we recorded a 55.5 million were to decide to sell our real estate projects, we could have after-tax, or 5.04 per share, write-offofour investment in, write-downs. In addition, ifwe were to sell our real estate and certain ofour product inventory from, an automated projects in the current market, we would have losses which electric distribution equipment company. We recorded this could be material, aldmugh the amount of the losses is hard write-offbecause of that company's inability to raise capital to predict. Depending on market conditions, we could also and sellits products. have material losses on any future sales. In 1997, earnings from our remaining energy services busi- Management's current real estate strategy is to hold each real nesses decreased compared to 1996 mostly because oflower estate project until we can realize a reasonable value for it earnings from our energy products and services business. except for Church Street Station which we intend to sell. Management evaluates strategies for all its businesses, OtherDw.ersif.edBusm. esse' including real estate, on an ongoing basis. We anticipate that competing demands for our f.nancial resources and In 1998, earnings from our other diversified businesses changes in the utility industry will cause us to evaluate l decreased compared to 1997 mostly for two reasons: lower thoroughly all diversified business strategies on a regular I earnings fmm our real estate and senior-living facilities and basis so we use capital and other resources in a manner that financial imestments businesses. Earnings from our real is most beneficial.
FinancialCendition in 1998, cash used in financing activities increased compared 1998 1997 1996 to 1997 mosdy because of the repayment of short-term borrowings that matured, smlung fund requirements, and Cash provided by(used in): carly redemption ofhigher cost securities. Net cash used OperatingActivities $820.8 $726.0 $701.9 would have been higher except we issued more long-term InvestingActivities (625.0) (520.8) (567.0) debt and common stock in 1998 compared to 1997. FinancingActivities (184.7) (109.3) (91.6) in 1997, cash used in financing acth ities increased from in 1998 and 1997, cash provided by operations increased 1996 mosdy because of the repayment oflong-term debt compared to the respective prior year mostly because of and short-term borrowings that matured, sinking fund changes in working capital requirements. requirements, and early redemptions ofhigher cost securities. In 1998, net cash used in investing activities increased com. Net cash used would have been higher except we issued more pared to 1997 mosdy because of the additional investment I ng-term debt in 1997 compared to 1996, in international power projects. Cash used in investing would have been higher except for a $33.8 million decrease sawl4 awings in utility construction expenditures. Independent credit-rating agencies rate our fixed-income securities.The ratings indicate the agencies' assessment of In 1997, net cash used in investing activities decreased our ability to pay interest, distributions, dividends, and mostly because of the $79.5 million cash inflow from the principal on these securities.These ratings affect how much sale of real estate properties and the increase in loans it will cost us to sell these securities.The better the rating. I collected from real estate projects compared to 1996. Cash the lower the cost of the securities to us when we sell them. : used in investing activities would have been lower except for Our securities ratings at the date of this report are shown in ! e $ 12.7 million increase in utility construction expenditures, the following table. !" and $46.5 million increase for our investments in power D" "'P' projects and financial limited partnerships. [^j $[* { Total utility construction expenditures, including the Rating Group Service Rating Co. - allowance for funds used during construction, were Mortgage Bonds AA- A1 AA-Unsecured Debt A A2 A+ 2
-,1
$339.4 million in 1998 as compared to $373.2 million in 1997 and $360.5 million in 1996. Trust Originated Preferred Securities ;
~
& Preference Stock A "a2" A CapitalResources Our business requires a great deal of capital. Our actual
- regulation, legislation,andcompetition, capital requirements for the years 1996 through 1998,
- load growth, along with estimated annual amounts for the years 1999 + environmental protection standards, through 2001, are shown in the table on page 30. For the
- the type and number ofprojects selected for year ended December 31,1998, our ratio ofearnings to development, fixed charges was 2.94 and our ratio ofcarnings to com-
- the effect ofmarket conditions on those projects, bined fixed charges and preferred and preference dividend
- the cost and availability ofcapital, and requirements was 2.60.
- the availability ofcash from operations.
Investment requirements for 1999 through 2001 include Our estimates are also subject to additional factors. Please estimates of funding for existing and anticipated projects. see " Forward looking Statements" on page 35. We continuously review and modify those estimates. Actual investment requirements may vary from the estimates included in the table on page 30 because of a number of factors induding: 11
1996 1997 1998 1999 2(X)0 2001 (k miHw m) Unehy suele es cephel N' _ ^ Construction expenditures (exduding AFC) Electric $219 $ 238 $ 239 5 285 $ 269 $ 290 Gas 84 89 55 74 70 69 Common 46 38 35 25 20 18 Total construction expenditures 349 365 329 384 359 377 AFC 10 8 10 11 13 19 Nuclear fuel (uranium purchases and processing charges) 47 44 50 50 50 48 Deferred conservation expenditures 31 27 16 1 - - Retirement oflong-term debt and redemption ofpreference stock 184 243 222 341 253 195 Total utility business capital requirements 621 687 627 787 675 639 MworeNied Seelmees Cephel t j - - Investment requirements 118 156 325 423 480 500 Retirement oflong-term debt 52 188 132 200 273 363 Total diversified business capital requirements 170 344 557 623 753 863 a Total capital requirements $791 $1,031 $1,184 $1,410 $1,428 $1,502 s 2 2 Cephet segeleomenes of one Denny Besteees We discuss the NOx regulations further in Note 10 la Our estimates offuture electric construction expenditures do not indude costs to build more generating units. Electric on page 61. construction expenditures indude improvements to generat-Our utiln.y operanons provided about 108% in 1998, g 105% in 1997, and 96% in 1996 of the cash needed to eng plants and to our transmission and distribunon facihues. In"t ur C2Pi tal requirements, exduding cash needed to 30 ~'~ They also indude estimated cx>sts for replacing the steam gen. retire debt and redeem preference stock. erators and extending the operating lianses at Calven Cliffs. j The operating licenses expire in 2014 for Unit I and in 2016 We will continue to have cash requirements for: for Unit 2. We estimate these Calven Cliffs costs to be: .
. workm.g capital needs including the payments
* $34 million in 1999, ofinterest, distributions, and dividends,
. $44 million in 2000, and . capitalexpenditures,and a $58 million in 2001. . . the retirement ofdebt and redemption of preferencest ck.
We estimate that during the two-year period 2002 through 2003, we will spend an additional $ 151 million to complete During the three years from 1999 through 2001, we expect the replacement of the steam generators and extend the utility operations to provide about 115% of the cash needed operating licenses at Calvert Cli'fs. We discuss the license to meet our carital requirements, excluding cash needed to extension process further in the "Calven Cliffs License retire debt and redeem preference stock. Extension"section on page 33. . When we cannot meer our utih.ty capital requirements if we do not replace the steam generators, we estimate that internally, we sell debt and equity securities. We also sell Calven Cliffs could not operate for the full term ofits cur- securities when market conditions permit us to refmance rent operating licenses. We expect the steam generator existing debt or preference stock at a lower cost.The replacements to occur during the 2002 refueling outage for amount ofcash we need and market conditions determine Unit I and during the 2003 refueling outage for Unit 2. when and how n uch we sell. Additionally, our estimates of future electric construction Future funding for capital expenditures, the retirement of expenditures indude the costs ofcomplying with Environ- debt, redemption ofpreference stock, and payments of , mental Protection Agency (EPA) and State ofMaryland interest and dividends is expected to be provided by inter- l 65% nitrogen oxides emissions (NOx) reduction regula- nally generated funds, commercial paper issuances, avail- ! tions as follows: able capacity under credit facilities, and/or the issuance of I
* $29 million in 1999, I ng-term debt, trust securities, or equity. !
* $28 million in 2000,
* $33 million in 2001,and
+ $14 million in 2002.
At December 31,1998, we have the authority from the cash needed to meet capital requirements in the future Federal Energy Regulatory Commission to issue up to through these same methods. BGE liome Products & $700 million of short-term borrowings. In addition, we Services may also meet capital requirements through sales maintain $113 million in committed bank lines of credit ofreceivables. and we have $100 million in bank revolving credit If we can get a reasonable value for our real estate agreements to support the commercial paper pro 5 ram as discussedin Note 6 on page 57. projects, additional cash may be obtained by selling real estate projects. The ability to sell or h.quidate assets 1
. . will depend on market conditions, and we cannot give
. assurances that these sales or hqmdanons could be made.
Cert un ofour diversified businesses expect to expand their , We discuss the real estate business and market in the l busiacsses which will require addiuonal investments. These investment requirements indude funding for: "Other Diversified Businesses" section on page 28 and in the Notes to Consolidated Financial Statements
- growing our power marketing and trading business, beginning on page 45.
- the development and acquisition ofpower projects, as Our diversified businesses also have revolving credit well as loans to project entities, agreements totaling $270 million to provide additional e investments in fmancial hm,ted i partnersh.ips, and .
h.qmdity for short-term fmanc.:a l needs,m. duding the
- funding for construction ofcooling system projects.
issuance ofup to $135 million ofletters ofcredit. The investment requirements exdude BGE's commitment . In 1998, a subsidiary ofConstellan.on Enterpnses,Inc. to contribute up to $115 million in equity to Constellan. on . Ibwer Source, Inc. to fund its investment in On.on Power issued $157 milh. on of two- and three-year notes to several lioldings,Inc. msutunonalinvestors in a private placement offen.ng. .
. . In 1997, our diversified businesses issued $289 million of a"
Our diversified businesses have met their capital reqm. re-thice. and four-year notes. - ments in the past through borrowing, cash from their operations, and from time to time equity contributions We discuss our short-term borrowings in Note 6 on page 57 ", from BGE. Our diversified businesses plan to raise the ' and long-term debt in Note 7 on page 57. s 3JL Market Risk We are exposed to market risk, induding changes in interest la kreet Re k Risk ; rates, certain commodity prices, equity prices, and foreign We are exposed to changes in interest rates as a result of l currency.To manage our market risk, we may enter into financing through our issuance ofvariable-rate debt, fixed- ! various derivative instruments induding swaps, forward rate debt, and preferred and preference securities.The contracts, futures contracts, and options. Please refer to the following table provides information about our obligations " Forward looking Statements" section on page 35. We that are sensitive to interest rate changes. discuss our market risk and the related use ofderivative instiuments in this section. Priestpel _r - ^: and Intecost Rete Dokil by Centreekel Anebrity Date IWr value at 1999 2000 2001 2002 2003 Thereafter Total Dec. 31.1998 (in millum) Long-terrn debt Variable-rate debt $306.5 $ 40.9 $ 75.0 $ 0.9 $ 6.6 $ 278.3 5 708.2 5 708.2 Average interest rate 5.59 % 5.97 % 5.92 % 7.79 % 6.89 % 4.20 % 5.11 % Fixed. rate debt $228.2 $485.1 $482.8 $154.6 5286.6 $1,329.7 $2,967.0 $3,076.6 Averageinterest rate 7.85 % 7.16 % 7.08 % 7.31 % 6.51 % 6.72 % 6.95 % I%ferenceStock Fixed-rate preference stock 5 7.0 $ - $ - $ - $ - $ -
$ 7.0 $ 7.2 Average interest rate 7.85 % -% -% -% -% -% 7.85 %
Commedley Pdes Risis ! oftheirvalue. Additionally, Constellation PowerSource We are exposed to the impact of market fluctuations in the estimates variances and correlation using historical market price and transportation costs ofnatural gas, electricity, movements over the most recent rolling three-month period. and other trading commodities. Currently, our gas business . The value at nsk amount represents the potential loss m.the and energy services businesses use derivative instruments to
. . fair value ofassets and liabihues from tradmg actmues over manage changes m.their respective commoditypnces, a one-day holding period with a 99.6% confidence level.
GarAussness Using this confidence level, Constellation Power Source Our gas business may enter into gas futures, options, would expect a one-day change in fair value greater than or and swaps to hedge its price risk under our market based equal to the daily value at risk at least once per year. As of rates incentive mechanism and our off-system gas sales December 31,1998, Constellation Power Source's value at program. We discuss this funher in Note 1 on page 46. At risk was $6.0 million. December 31,1998, our exposure to commodity price risk .
. Constellan.on Power Source,s calculan.on mcludes allassets forour gas busm.ess was not matenal. .
andliabih. .ues fmm trading acu. . .vmes, mcluding energy EmergySerssrsBusinesses commodities and derivatives that do not require cash settle-With respect to our energy services businesses, Constell- rnents. We believe that this represents a more complete ation Power Source manages its commodity price risk calculation ofour value at risk from energy trading activities. inherent in its energy trading acth ities on a ponfolio basis, Due m ae relative immaturity of the competitive market subject to established trading and risk management policies. , f r cleancity and related derivatives and the seasonahry of Commodity price risk arises from the potential for changes changes m market prices, the value at nsk calculation may in the value ofenergy commodities and related derivatives I nm reaca the fuH enent ofour commodity pnce nsk due to: changes in commodity prices, volatility ofcom-exposure. Addinonally, actual changes m the value of modity prices, and fluctuations in interest rates. A number l offactors associated with the structure and operation of the Prions may differ from the value at nsk calculated using a linear appmximadon uaemm in our dculadon mahod 8 electricity market significamly influence the level and volatility ofprices for electricity and related derivative We discuss Constellation Ibwer Source's trading business in [
; products.These factorsinclude: the " Power Marketing and Trading" section on page 27 and
- in Note 1 on page 47.
- seasonal changes in the demand for electricity, J2
- hourly fluctuations in demand due to weather The commodity price risk for our remaining energy services conditions, businesses was not material.
5
- available generation resources, a transmission availability and reliability within and ageley Pdes Elsis between regions, and We are exposed to price fluctuations in equity markets
- procedures used to maintain the integrity ofthe primarily through our financial investments business and physical electricity system during extreme conditions. our nuclear decommissioning trust fund. We are required by the Nuc! car Regulatory Commission (NRC) to maintain
- These factors can affect energy commodity and derivative ,
a trust t fund the costs ofdecomm,issiomng Calven Cliffs. prices in different ways and to different degrees.These At December 31,1998, equity price risk was not material. effects may vary throughout the country and result from , We discuss our nuclear decommissionmg trust fund m regionaldifferencesin: more detail in Note 1 on page 49. We also desenbe our
- weatherconditions, financial investments in more detail in Note 3 on page 52.
- marketliquidity.
- capability and reliability of the physical electricity p e.s en cue,.swy mists system, and .
We are exposed to foreign currency risk primarily through a the nature and extent ofelectricity deregulation. our power projects business. Our power projects business has $183.4 million invested in 15 international power Constellation Ibwer Source uses various methods, including generati n and distribution projects as of December 31,1998. a value at risk model, to measure its exposure to market risk To manage our exposum m foreign cunmy risk, the from energy trading activities. Value at risk is a statistical maj rity f urc ntracts are denommated m or m, dexed to model that attempts to predict risk ofloss based on historical the U.S. dollar. At December 31,1998, foreign currency market price and volatility data. Constellation Ibwer Source nsk was not material. We discuss our international projects calculates value at risk using a variance /covariance technique in the " Power Projects" section on page 28. that models option positions using a linear approximation
Other#4tters Of these areas, digital systems have the most impact on our ability to provide electric and gas service, coevere EIIIes Meense gesenstem
. Telecommunications, major suppliers, and cenain in 1998,we filed an apph. canon for a 20-year license exten-information technology applications also impact our sion for Calven Cliffs wah the NRC to extend its license ability to provide electric and gas service.
beyond 2014 for Unir I and 2016 for Unit 2. License renewal evaluations focus on age-related issues in long-lived DerMTmjetPhases passive componenta (passive components indude buildings, Our year 2000 project is divided into two phases: the reactor vessel, piping, ventilation ducts, electric cables,
- Phase 1-initial assessment and detailed analysis, and etc.).We must demonstrate that we can ensure that these . Phasell-testing,remediation, certification,and passive components will conti nue to perform their mtended contingency planning.
functions thmugh the renewal period.The NRC will also consider the impact of the 20-year lieer.se extension on Phase I involves conducting an inventory of all systems and the environment. identifying appropriate resources. We have identified the
. following appropriate resources for each system or piece of We began tu h. cense extension process in 1998 because the equipment:
. NRC may not role on our application until 2002 or 2003. If the NRC denies er application, we must have adequate
- BGE employees familiar with each system or time to begin replacemet power source planning. We piece ofequipment,
. cannot predict the timing of, or impact, ifany, of the NRC's
- specializedcontractors,and decision on our financial results. Ifour application is denied, . specificvendors.
it could have a material effect on our financial results.
- Phase I also includes developing action plans to ensure that the key areas identified above are year 2000 ready.The :
severemoneesel anese* e action plans for each system or piece ofequipment indude: You will find details ofour environmental matters in Note 10 on page 61 and in our most recent Annual Repon e ourbudget, ; on Form 10-K under item 1. Business-Environmental
- schedules for PhaseI and11,and ;
e our remediation approach-repair, upgrade, replace Matters. These details indade financial information. Some e of the information is about environmental costs that may be orret re. = material to our financial results, in evaluating our risks and estimating our costs, we utilized J)[ empk>yees with expenise in each line ofbusiness to perform h "'**8"*** h the activities under Phase 1. We believe our empk>yees are the We have not experienced any significant year 2000 problems " most familiar with their systems or equipment and therefore to dare and we do not expect any significant problems t will provide a reliable estimate ofour risks and costs. impair our operanons as we transmon to the new century. However, due to the magnitude and complexity of the year Phase 11 includes converting and testing all ofour systems. 2000 issue, even the most conscientious efforts cannot Each system will be tested by those employees used in guarantee that every pmblem will be found and conected Phase I following formal guidelines developed by the prior toJanuary 1,2000. We are focusing on critical PMO. Each system or piece ofequipment will then be operating and business systems and expect to have certified by a tester and the PMO, following testing contingency plans in place to deal with any pmblems, guidelines developed with the help ofoutside consultants. if they should occur. Please refer to
- Forward looking We are currently evaluating whether we will have our Statements"on page 35. year 2000 testing independently certified. Phase 11 also includes identifying our major suppliers and developing M'1 8"'I""' contingency plans. We have identified our major suppliers We established a year 2000 Pmgram Management Office and are currently assessing their year 2000 readiness (PMO). Based on a work plan developed by the PMO, we through surveys. We plan to follow-up with our major have targeted the following six key areas: suppliers via interviews in early 1999.
. digital systems (devices with embed < led micropmce" ContingencyPlanning such as power instrumentation, controls, and meters). Year 2000 operational contingency planning is underway.
. telecommunicationssystems, StafTing and initial planning was completed in 1998.
- majorsuppliers, Contingency plans are expected to be completed,induding
. information technology applications (our customer, company-widetraining bySeptember 1999.Weare business, and human resources information systems)-
developing contingency plans using the contingency
. computer hardware and software infrastructure, and guidelines issued by the Nudear Energy Institute (which a contingencyplans. are endorsed by the NRC), the contingency guidelines issued by the Nonh American Electric Reliability Council (NERC), and guidance from consultants.
l
We are also addressing the impact ofelectric power grid Cosrr pmblems that may occur outside ofour own clearic system. In the following table, we show the breakdown ofour total We have staned year 2000 electric power grid impact costs between normal system replacements that will be planning through our various electric interconneaion capitalized (included in the Consolidated Balance Sheets) affiliations.The PJM interconneaion has drafted year 2000 and the msts that will be expemed (included in our operational preparedness plans and restoration scenarios and Consolidated Statements ofInmme) through operations will continue to develop these plans during the first halfor and maintenance (O&M) mst. We also show the breakd-u 1999 in cooperation with NERC.He NERC has staned ofnon-incremental (previously included in our information monthly assessmems of the electric utility industry to technology budget) and incremental O&M cost: communicate the n adiness of the national clearic grid for g %g year 2000.The NERC has scheduled two industry-wide cost com Total l tesu for 1999. 1996 1997 1998 1999 2000 Costs l (In malwa) Through the Electric Power Research Institute (EPRI), an industry-wide effon has been established to deal with year TotalCost $0.1 $1.7 $18.9 $19.5 $2.0 542.2 2000 problems affecting digital systems and equipment less: Capital used by the nation's electric power companies. Under this c st - - 7.3 5.7 - 13.0 elfon, panicipating utilities are working together to assess O & M cost 0.1 1.7 11.6 13.8 2.0 29.2 specific vendors' system problems and test plans.The less:n n-assessment will be shared by the industry as a whole to incremental facilitate year 2000 problem solving. O&M cost 0.1 1.7 4.6 7.0 1.0 14.4
)
n Incremental l i BGE has joined the American Gas Association (AGA) O&M cost $- 5- $ 7.0 $ 6.8 $1.0 $14.8 I o in an initiative similar to the one with EPRI to facilitate year l o 2000 problem sohing among gas utilities.The AGA has The costs incurred in 1996 and 1997 were for Phase 1. 3 initiated quanerly assessments of the gas utility industry to The costs incurred in 1998 were for Phases I and 11. g communicate the readiness ofits members for the year 2000. Costs incurred in 1999 and 2000 will be for Phases I and II. j CunrntStatus in 1998 and 1999, we had and expect to have the equh alent of approximately 110 full-time employees assigned to our The most reasonably likely worst case scenario faced by our X utility business is any interruption in prosiding electric and year 2000 project. gas service to our customers. We cannot predict the impact u of any interruption on our results of operations, but the DirmifedBusinesses impact could be material.The following table shows our O v rsified businesses have established year 2000 cask estimate as of the date of this repon of the percentage for s to address their year 2000 issues and are mmpleting completed for Phases I and 11 and our expected year 2000 their initial assessments. As the initial assessments are readiness target dates for the six key areas: completed, the businesses have developed, and will be Year 2000 developing, action plans to prepare their systems for the j readine" year 2000. Outside consultants have been retained bv several PhaseI Phase Il targ. t due ;g g'g Id/F""d" *' "/k"> assessment and detailed analysis phase, and to assist in the Digitalsystems 98 % 50 % testing, remediation, and cenification phase oftheir year June 1999 Telecommunications 2000 pmjects.The action plans developed are similar to those systems 100 % 90 % March 1999 used by our utility business, including a test cenification Major suppliers 95 % 85 % pmcess. All systems are expected to be cenified by Deamber June 1999 Information technology 1999. Our diversified businesses are evaluating whether they applications 100 % 55 % June 1999 will have their year 2000 resting independendy cenified. i Computer hardware In evaluating their risks and estimating their costs, our and software diversified businesses utilized employees with expenise in infrastructure 100 % 80 % March 1999 each line ofbusiness to perform initial assessments. We Contingencyplans - 20% September 1999 believe our diversified businesses' cmployees are the most The completion percentages listed above are reviewed by familiar with their systems or equipment and therefore will our PMO in monthly status meetings with the personnel provide a reliable estimate ofour risks and costs. responsible for each project and their supervision. Monthly progress is also monitored by senior BGE management. 4 l 1 i
r-The progress ofour divenified businesses' year 2000 businesses have two internet service providen and are projects are reviewed by their year 2000 task forces in contracting with a third provider for alternate routing to monthly status meetings with the personnel responsible for critical Internet sites necessary to perform day-to-day each project and their supervision. Monthly progress is also business functions. Both are currently assessing their monitored by senior management for each businen and year 2000 issues. periodic updates are provided to BGE senior management. For our home products and commercial building systems ContingencyPlanning business, the most reasonably likely worst case scenarios Each ofour diversified businesses will develop contingency would be any interruption in billing customers or renewing plans, which are expected to be mmpleted by December 1999. maintenance contracts.This business has substantially completed the assessment and detailed analysis phase and CunentStatm . has started the testing, remed. .iauon, and cenificanon phase
'I.he most reasonably likely worst case scenarios faced by
. ofits year 2000 project.
our energy services businesses and out other d.ivenified businesses are discussed below. However, if any of these Other Diversified Busmesses scenarios actually occurred, the impact is not expected to The most reasonably likely worst case scenarios for our be material to our consolidated fmancial results. fmancial investments business would be a breakdown in the Enercy Services systems of the brokers or safekeeping banks which it uses to trade, or the failure ofits investment managers' computer The nmst reasonably likely worst case scenarios for any one pmgrams t at set nvesunent strateg s business is ofour power projects would be: currently surveying and monitoring the year 2000 readiness e a shutdown ofthe plant's systems (most ofwhich can be ofits banks, brokers, and investment managers. . manually overridden),
. . , for our realestate and senior-h. .v ngfacih. .t es business, the
+ mability of the purchas.mg unlity to take the plant s =
most reasonably likely worst case scenario is a failure of the ! l systems that support the health, safery, and welfare ofresidents
. ohfuel.
m the senior-hving facihnes. I ersonnel at each facility are . Personnel at each plant are currently assessing their involved in assessing their panicular year 2000 issues. particular year 2000 issues and certain plants have started g, l the testing, remediation, and cenification phase of their We estimate our total year 2000 costs for our power year 2000 project. -35 i projects business to be approximately $4.2 million, of For our power marketing and trading business and our which $1.2 million is related to our year 2000 efforts for , energy products and services business, the most reasonably our Panamanian electric distribution company.The total likely worst case scenario would be encountering any estimated year 2000 costs for our remaining diversified Internet access problems with trading partners, transmission businesses are appmximately $2.8 million. service providers, independent operators, power exchanges, and various electronic bulletin boards. Each of these Asseenting Stenderds loseed and Adepted We discuss recently issued and adopted accounting standards in Nore 1 on page 49. Forward Looking Statements We make statements in this report that are considered
- availability, terms, and use ofcapital, forward looking statements within the meaning of the a nuclear and environmentalissues, Securities Exchange Act of 1934. Sometimes these state- . weather, ments will contain words such as ' believes," *cxpects," + industry restructuring and cost recovery (including the
- intends," " plans," and other similar words.These state- potential effect ofstranded investments),
ments are not guarantees ofour future performance and are + commodiry price risk, and subject to risks, imcertainties, and other imponant factors + year 2000 readiness. that could cause our actual performance or achievements to
. G,iven these uncertainties, you should not place undue i be materially different from those we proj.ect. These n.s ks, l . reliance on these forward lookm.g statements. Please see the I uncenainties, and factors mclude,but are not mue h. . d to:
other sections of this repon and our other periodic reports a general economic, business, and regulatory conditions, filed with the SEC for more information on these factors.
+ energy supply and demand, These forward looking statements represent our estimates
+ competition, and assumptions only as of the date of this repon.
- federal and state regulations,
Report of Management l The management of the Company is responsible for the The Audit Committee of the Board of Directors, which consists information and representations in the Company's financial of five outside Directors, meets periodically with management, statements. The Company prepares the financial statements in internal auditors, and Pri ewaterhouseCoopers LL.P to review accordance with generally accepted accounting principles based the activities ofeach in discharging their responsibilities. The upon available facts and circumstances and management's best internal audit staff and PricewaterhouseCoopers LLP have free estimates and judgments of known conditions. access to the Audit Committee. The Company maintains an accounting system and related system ofinternal controls designed to provide reasonable assurance that the financial records are accurate and that the Company's assets are protected.The Company's staffofinternal auditors, which reports directly to the Chairman of the Board, , f conducts periodic reviews to maintain the effectiveness of gg (j, W internal control procedures. PricewaterhouseCoopers LLP, independent accountants, audit the financial statements and Christian H. Poindexter David A. Brune express their opinion on them.They perform their audit in chairman. Nident chiefhnancialofcer accordance with generally accepted auditing standards. andchief&uume ofcer f a e A 21 Report ofIndependent Accountants To theShawholdm of Baltimow GasandEletric Company We have audited the accompanying consolidated balance sheets significant estimates made by management, as well as evaluating and statements ofcapitalization of Baltimore Gas and Electric the overall financial statement presentation. We believe that our Company and Subsidiaries as of December 31,1998 and 1997, audits provide a reasonable basis for our opinion. and the related consolidated statements ofincome, comprehensive
. In our opinion, the financial statements referred to above present income, cash flows, common shareholders. equity, and income fairly, m.all materi ! respects, the consolidated financ.ia l position taxes for each of the three years in the period ended December 31, of Baltimore Gas and Electnc Company and Subsidianes as of 1998.These financial statements are the responsibih.ty of the December 31,1998 and 1997, and the consolidated results of Company's management. Our responsibility is to express an their operations and their cash flows for each of the three years .
opinion on these financial statements based on our audits. . . m the period ended I)ecember 31,1998 m conform.ity with We conducted our audits in accordance with generally accepted generally accepted accounting principles. auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An [. e gg audit includes examining, on a test basis, evidence supporting, PricewaterhouseCoopers LLP the amounts and disclosures in the financial statements. An Baltimore, Maryland audit also includes assessing the accounting principles used and January 15,1999
Consolidated Statements ofIncome e.,,._.coso o.<,,4com,o ,o ds sid.o,;.s krEndedDeumber31, 1998 1997 1996 (In millions, exceptpershare amounts) movemees FJectric $2,219.2 $2,191.7 $2,208.7 Gas 449.4 521.6 517.3 Diversified businesses 689.5 594.3 427.2 Total revenues 3,358.1 3,307.6 3,153.2
, n -- - Other Then letorest and lessene Deses FJectric fueland purchased energy 505.7 519.7 547.4 Disallowed replacement energy costs (see Note 10) - -
95.4 Gas purchased for resale 208.6 292.1 284.4 Operations 554.1 518.3 526.4 Maintenance 177.5 178.5 174.1 Diversified businesses-selling, general, and administrative 550.9 444.9 311.1 Write-downs of real estate invest ments (see Note 3) 23.7 70.8 - Depteciation and amortization 377.1 342.9 330.2 Taxes other than income taxes 219.4 216.8 214.7 Total expenses other than interest and income taxes 2,617.0 2,584.0 2,483.7 ' losesse freen r;1 ^" - 741.1 723.6 669.5 ! Otherlosesse(suponse) ! Write-offofmerger costs (see Note 2) - (57.9) - l Allowance for equity funds used during construction 6.3 5.3 6.5 . Equiry in earnings ofSafe Harbor Water Power Corporation 5.0 5.0 4.6 Net other expense (5.6) (5.2) (5.0) ; Total other income (expense) 5.7 (52.8) 6.1 y lesease sofere laterest med losesse Tunes 746.8 670.8 675.6 laterest Expense . Interest charges 247.9 241.2 217.6 Capi. iizedinterest (3.6) (8.4) (15.6) Allowance for borrowed funds used during cor.struction (3.4) (2.8) (3.5) Net interest expense 240.9 230.0 198.5 Imeense Before losesse Temos 505.9 440.8 477.1 losesseTemos 178.2 158.0 166.3 flot lesense 327.7 282.8 310.8 Preferred and Preferomec Stesh Davidends 21.8 28.7 38.5 Beralogs Appliemble to Cease ee Steak $ 305.9 $ 254.1 $ 272.3 Average Sleeres of Ceasemen Steak Ostetending 148.5 147.7 147.6 sornings per Ceassmos Shere end Beratings per Cosessen h "
; Dilotion 52.06 51.72 $1.85 Consolidated Statements ofComprehensive Income s Boltimore Gas and Electric Company and Subsidiaries WrEndedDecember31, 1998 1997 1996 (in millions)
Blot losesse $ 327.7 $ 282.8 $ 310.8 Other comprehensive gain /(loss), net of taxes 1.2 (0.8) 1.7
"._ losesse $ 328.9 $ 282.0 $ 312.5 SeeNotes to ConsolidatedFinancialStatements.
Certainprior-paramounts haw been reclassifedto conform with ahe currentparspresentation.
r Consolidated Balance Sheets .... _.o... m c.,.,. es .. . As Durmber31. 1998 1997 (In milliom) Assets cervene Assets Cash and cash equivalents $ 173.7 $ 162.6 Accounts receivable (net ofallowance for uncollectibles of$20.3 and $24.1 respectively) 401.8 419.8 Tradingsecurities 119.7 119.7 Fuel stocks 85.4 87.6
, Materials and supplies 145.1 164.2 Prepaid taxes other than income taxes 68.8 65.2 Assets from energy trading activities 160.2 9.4 Other 21.4 27.4 Total current assets 1,176.1 1,055.9 Inveseeneses med Osber Assets Real estate projects and investments 353.9 446.8 a Power projects 656.8 451.7 s Financialinvestments 198.0 196.5
- Nucleardecommissioning trust fund 181.4 145.3 g Net pension asset 108.0 113.0 n Safe HarborWaterIbwer Corporation 34.4 34A 5 Senior-living facilities 93.5 62.2 j* Otha 115.4 98.7 Totalinvestments and other assets 1,741.4 1,548.6 We818ey Plane U Plant in service Electric 6,890.3 6,725.6 Gas 921.3 846.9 Common 552.8 554.1 Totalplant in service 8,364.4 8,126.6 Accumulated depreciation (3,087.5) (2,843.4)
Net plant in service 5,276.9 5,283.2 Construction workin progress 223.0 215.2 Nuclear fuel (ner ofamonization) 132.5 127.9 Plant held for future use 24.3 25.2 Net utility plant 5,656.7 5,651.5 Deferred charges Regulatory assets (net) 565.7 597.3 Other 55.1 46.7 Total deferred charges 620.8 644.0 Total Assets 59,195.0 $8.900.0 SuNotes to ConsolidatedFinancialStatemenn. Certainprior-yaramounn han hun uclampedto confonn with the cunrntyearipesentation. i
Consolidated Balance Sheets -_ao....o~,u ,.,. ose.;o;.,;.. AtDecember31, 1998 1997 (in millions) Liabilitinand Capitalization corrent uebeneses Short-term borrowings $ -
$ 316.1 Current portions oflong-term debt and preference stock 541.7 271.9 Accounts payable 249.6 203.0 Customer deposits 35.5 30.1 Accrued tnes 6.5 5.5 {
Accrued intes est 58.6 58.4 . Dividends declared 66.1 66.3 l Accrued vacation costs 34.7 36.2 Liabilities from energy trading activities 126.2 8.6 Other 45.3 44.3 Totalcurrentliabilities 1,164.2 1,040.4 , I Deferred cemetes med other usedneses Deferredincome taxes 1,309.1 1,294.9 il Postretirement and postemployment benefits 217.0 185.5 Deferredinvestment tax credits 118.0 126.6 5 30.8 34.9 e Decommissioning of federal uranium enrichment facilities Other 56.3 58.4 Total deferred credits and other liabilities 1,731.2 1,700.3 g I- ; i Iong-term debt 3,128.1 2,988.9 l Redeemable preference stock 90.0 l Preference stock not subject to mandatory redemption 190.0 210.0 Common shareholders'equiry 2,981.5 2,870.4 Totalcapitalization 6,299.6 6,159.3
*- "^ *
^.eseressees,med i ^" y ?:: poete le Total Liabilities and Capitalization $9,195.0 $8,900.0 SeeNotes to ConsolidatedFinancialStatemenn.
Certainprior-yearamounn hats been reclauifedto conform with the cunentyearspresentation.
Consolidated Statements of Cash Flows m_.c,....om<,ec.,.,.mosa... . WarEndedDecember31, 1998 1997 1996 (In millions) Cash plews Frees operetleg AstMeles Net income 5 327.7 5 282.8 5 310.8 Adjustments to reconcile to net cash provided by operating activities Depreciation and amortization 429.4 3%.8 383.1 Deferred income taxes 17.5 7.4 26.0 Investment tax credit adjustments (8.8) (7.5) (7.6) Deferred fuelcosts (8.3) 18.3 0.5 Deferred conservation revenues - - 28.5 Disallowed replacement energy costs - - 95.4 Accrued pension and postemployment benefits 41.6 (18.0) (13.8) Write-offofmerger costs - 57.9 - Writeslowns of real estate investments 23.7 70.8 - Allowance for equity funds used during construction (6.3) (5.3) (6.5) Equity in earnings of affiliates and joint ventures (net) (54.5) (42.5) (48.3) Changes in assets from energy trading activities (150.8) (9.4) - Changes in liabilities from energy trading activities 117.6 8.6 - Changes in other current assets 39.2 (54.7) (88.0) n Changes in other current liabilities 56.1 42.6 (4.9)
; Other (3.3) (21.8) 26.7 o Net cash provided by operating activities 820.8 726.0 701.9 Q Cash Flows Press Investleg Astivleles 2 Utility construction expenditures (including AFC) (339.4) (373.2) (360.5)
Allowance for equity funds used during construction 6.3 5.3 6.5
- ' Nuclear fuel expenditures (50.5) (43.6) (46.8) 5 Deferred conservation expenditures (16.2) (27.1) (31.4)
Contributions to nuclear decommissioning trust fund (17.6) (17.6) (25.5) 40 Merger costs - (20.9) (28.5) , Purchases ofmarketable equity securities (33.3) (23.0) (32.7) o Sales ofmarketable equity secu-ities 32.8 46.5 39.7 Other fmancialinvestments 14.6 (0.4) 7.1 Real estate projects and investments 21.5 24.2 (55.3) Powerprojects (166.2) (44.3) (5.3) Other (77.0) (46.7) (34.3) Net cash used in investing activities (625.0) (520.8) (567.0) Cash Plows Freen Fleenslag Astivleles Proceeds from issuance of Short-term borrowings 1,962.2 2,719.0 3,970.8 long-term debt 831.3 622.0 383.2 Common stock 51.8 - 3.7 Repayment ofshort-term borrowings (2,278.3) (2,736.1) (3,916.9) Reacquisition oflong-term debt (355.2) (343.3) (158.5) Redemption ofpreference stock (127.9) (104.5) (112.6) Common stock dividends paid (246.0) (239.2) (233.1) Preferred and preference stock dividends paid (21.0) (29.7) (37.0) Otl.cr (l.6) 2.5 8.8 Net cash used in financing activities (184.7) (109.3) (91.6) Not leeresse le Casin and Cash agelvelents 11.1 95.9 43.3 Cash med Cash agelveients et sopanolog of Yeer 162.6 66.7 23.4 Cash med Cash agelvelents et med of voor $ 173.7 $ 162.6 $ 66.7 poker Cash Flew Inferanstlen Cash paid during the year for: Interest (net of amounts capitalized) 5 236.7 5 224.2 $ 193.6 Income taxes 5 164.3 $ 171.2 $ 160.1 98easesin L " ; and "-- ' ; Astm 95es in 1998, Corporate Office Properties Trust (COPT) assumed approximately $62 million of Constellation Real Estate Group's (CREG) debt and issued to CREG 7.0 million common shares and 985,000 convertible preferred shares. In exchange, COPT received 14 operating properties and two properties under development from CREG. See Notes to ConsolidatedFinancialStatemena. Certainprior-yearammna hate been reclassifedto conform with the currentyearipresentation. l
1 Consolidated Statements ofCommon Shareholderi Equity Boltimore Gcs and E;ectric Company and Subsidiaries Accumulated Other Common Stock Retained Comprehensive Etal Mars EndedDecember31.1998,1997, and 19% Shares Amount Earnings Income Amount (Dollaramounts in millions, number ofshares in thousands) saleseo se Deeensber 31,1995 147,527 $1,425.8 $1,381.4 54.0 $2,811.2 Net income 310.8 310.8 Dividends declared Preferred and prefe,ence stock (38.5) (38.5) Common stock ($1.59 per share) (234.6) (234.6) Common stocle issued 140 3.7 3.7 Other 0.4 0.4 Net unrealized gain on securities 2.6 2.6 Deferred taxes on net unrealized gain on securities (0.9) (0.9) selease se Deeensber 31,1996 147,667 1,429.9 1,419.1 5.7 2,854.7 e ll ) Net income 282.8 282.8 I a Dividends declared Preference stock (28.7) (28.7) Common stock ($1.63 per share) (240.7) (240.7) I 8 Other 3.1 3.1 Net unrealized loss on securities (1.2) (1.2) Deferred taxes on net unrealized loss on securities 0.4 0.4 g selease et seeensber 31,1997 147,667 1,433.0 1,432.5 4.9 2,870.4 Net income 327.7 327.7 Dividends declared Preference stock (21.8) (21.8) Common stock ($1.67 per share) (248.1) (248.1) Common stockissued 1,579 51.8 51.8 Other 0.3 0.3 Net unrealized gain on securities 1.8 1.8 ; Deferred taxes on net unrealized gain on securities (0.6) (0.6) j salesse se seesseber 31,1998 149,246 $1.485.1 $1,490.3 $6.1 $2,981.5 ! SeeNotes to ComolidatedFinancialStatements. Certainprier-yearamounts han ban reclassifedto conform wich the curn ntyear5 presentation. l
Consolidated Statements of Capitalization ..,,; o... <,,;.c..o......s s.; ;.,;..
. AtDecnnber31, 1998 1997 (In milliom)
Lees-Waren Sold First Refunding Mortgage Bonds ofBGE Floating rate series, due April 15,1999 $ 125.0 $ 125.0 8.40% Series, due October 15,1999 91.1 91.1 SW% Series,dueJuly 15,2000 125.0 125.0 8%% Series,due August 15,2001 122.3 122.3 7%% Series,dueJuly 1,2002 124.5 124.5 5W% Installment Series, dueJuly 15,2002 9.1 9.8 6W% Series,due February 15,2003 124.8 124.8 6%% Series,dueJuly 1,2003 124.9 124.9
. 5W% Series, due April 15,2004 125.0 125.0 Remarketed floating rate series, due September 1,2006 125.0 125.0 7W% Series,dueJanuary 15,2007 123.5 123.5 6%% Series,due March 15,2008 124.9 124.9 7W% Series,due March 1,2023 125.0 125.0 7W% Series,due April 15,2023 84.1 100.0
, Total First Refunding Mortgage Bonds of BGE 1,554.2 1,570.8 i Otherlong-term debt ofBGE o Medium-term notes, Series B 60.0 100.0 l Medium-term notes, Series C Medium-term notes, Series D -
116.0 143.0 3 215.0 225.0
.i Medium-term notes, Series E 200.0 183.5 !! . Medium-term notes, Series G 140.0 -
2 Pollution control loan, due july l. 2011
*- 36.0 36.0 Port facilities loan, dueJune 1,2013 48.0 48.0 42- Adjustable rate pollution control loan, dueJuly 1,2014 20.0 20.0 5.55% Pollution control revenue refunding loan, due July 15,2014 47.0 47.0 3 Economic development loan, due December l,2018 35.0 35.0 a
6.00% Pollution control revenue refunding loan, due April 1,2024 75.0 75.0 Wriable rate pollution control loan, due June 1,2027 8.8 8.8 Total otherlong-term debt of BGE 1,000.8 921.3 Company obligated mandatorily redeemable trust preferred securities ofsubsidiary trust holding solely 7.16% deferrable interest subordinated debentures of the Company due June 30,2038 250.0 - long-term debt ofdiversified businesses loans under revolving credit agreements 74.0 22.0 Mortgage and construction loans 8.69% mortgage note, dueJanuary 28,1998 - 28.4 7.90% mortgage note, due September 12,2000 8.3 8.6 8.00% mortgage note, due July 31,2001 0.1 0.1 8.00% mortgage note, due October 30,2003 1.8 1.6 7.50% mortgage note, due October 9,2005 - - 9.7
. %riable rate mortgage notes and construction loans, due through 2004 149.5 93.5 7.357% mangage note, due March 15,2009 5.1 5.5 9.65% mortgage note, due February 1,2028 9.6 9.7 8.00% mortgage note, due November 1,2033 - 5.8 1.2
' Unsecured notes 616.0 579.1 Totallong-term debt ofdiversified businesses 870.2 759.4 Unamortized discount and premium (12.4) (13.7)
Current portion oflong-term debt (534.7) (248.9) Totallong-term debt $3,128.1 $2,988.9 SeeNotes to ConsolidatedFinancialStatemenn. continuedonpage43 Certainprior-yaramounts have been reclassi)iedto conform with the currentparipresentation. i'
Consolidated Statements of Capitalization ..m....o... ..m....,. osme..s.. AtDecemher31, 1998 1997 (In millions) presseemse seesh Cumulative, $100 par value,6,500,000 shares authorized Redeemablepreference stock 7.50%,1986 Series,335,000 shares redeemed at $ 102.50 per share on July 17,1998;
- 30,000 shares redeemed at par on October 1,1998 $ -
$ 36.5 6.75%,1987 Series,30,000 shares redeemed at par on April 1,1998; 395,000 shares redeemed at $102.25 on July 17,1998 -
42.5 8.625%,1990 Series,130,000 shares redeemed at par on July 1,1998 - 13.0 7.85%,1991 Series,70,000 shares outstanding and 140,000 shares I redeemed at par onJuly 1,1998 7.0 21.0 ; Current portion ofredeemable preference stock (7.0) (23.0) Total redeemable preference stock - 90.0 Preference stock not subject to mandatory redemption 7.78%,1973 Series,200,000 shares redeemed at $101 per share on July 17,1998 - 20.0 7,125%,1993 Series,400,000 shares outstanding, not callable prior to July 1,2003 40.0 40.0 6.97%,1993 Series,500,000 shares outstanding, not callable prior to October 1,2003 50.0 50.0 : 6.70%,1993 Series,400,000 shares outstanding, not callable prior to January 1,2004 40.0 40.0 j 6.99%,1995 Series,600,000 shares outstanding, not callable prior to October 1,2005 60.0 60.0 m Total preference stock not subject to mandatory redemption 190.0 210.0 l Ceauses shorebelders' espuhy , Common stock without par value,175,000,000 shares authorized; 149,245,641 and a 147,667,114 shares issued and outstanding at December 31,1998 and = 1997, respectively. (At December 31,1998,166,893 shares were reserved 43 for the Employee Savings Plan and 2,372,531 shares were reserved for the - , Shan:holderInvestmen Plan.) 1,485.1 1,433.0 , , 1,490.3 1,432.5
- Retained earnings Accumulated other comprehensive income 6.1 4.9 Total common shareholders' equiry 2,981.5 2,870.4 asseI U^
$6,299.6 $6,159.3 See Notes to ConsolidatedFinandalStatemenn.
Certainprior-yearamounn have been redassifedto conform with the currentyearspursentation.
Consolidated Statements ofIncome Taxes e,_.c ..on.<,,x.,.,_os..... har EndedDecember31. I998 1997 l996 (Dollaramountsin millions) sneean Temes Current $169.5 $158.1 $147.9 Deferred Change in tax efTect of tem;wrary differences 14.2 (1.0) 22.0 Change in income taxes recoverable through future rates 3.9 8.0 4.9 Deferred taxes credited (charged) to shareholders' equity (0.6) 0.4 (0.9) Deferred taxes charged to expense 17.5 7.4 26.0 Investment tax credit adjustments (8.8) (7.5) (7.6) Income taxes per Consolidated Statements ofincome $178.2 $158.0 $166.3 mesome40lesien of Basesse twmes '- - n f se - _-
-g poderet asse se Teesi sneesie vezes Income before income taxes $505.9 $440.8 $477.1 Statutory federalincome tax rate 35% 35% 35 %
Income taxes computed at statutory federal rate 177.1 154.3 167.0 9 Increases (decreases) in income taxes due to {* Depreciation differences not normalized on regulated activities 13.6 13.9 12.6 Allowance for equity funds used during construction (2.2) (1.9) (2.3) { Amortization ofdeferred investment tax credits (8.8) (7.5) (7.7) Tax credits flowed through toincome (0.3) (0.5) (0.5)
'i , Amortization ofdeferred tax rate differential on regulated activities (2.3) (2.3) (1.9)
{ State income taxes Other 9.8 6.2 4.1 (8.7) (4.2) (5.0) 4_4 Totalincome taxes $178.2 $158.0 $166.3 g Effective federalincome tax rate 35.2 % 35.8 % 34.9 % At December 31, 1998 1997 (In millions) soferred se Temos Deferred taxliabilities Accelerated depreciation $1,009.9 5 953.5 Allowance for funds used during construction 204.5 206.7 Income taxes recoverable through future rates 88.4 89.8 Deferred termination and postemployment costs 32.3 41.1 Deferred fuel costs 4.5 1.5 Leveragedleases 22.6 25.2 Percentage repair allowance 36.8 38.7 Conservation expenditures 18.9 24.5 Energy trading activities 44.0 2.4 Other 182.6 187.7
, Totaldeferred taxliabilities 1,644.5 1,571.1 Deferred tax assets Accrued pension and postemployment benefit costs 54.3 37.6 Deferred investment tax credits 41.3 44.3 Capitalizedinterest and overhead 46.6 44.5 Contributions in aid ofconstruction 45.6 39.7 Nuclear decommissioningliability 22.8 20.8 Energy trading activities 30.9 1.4 Other 93.9 87.9 Total deferred tax assets 335.4 276.2 Deferred tax liability, net $ 1,309.1 51.294.9 SeeNotes to CensolidttedFinancialStatements.
Certainprior-yearamounts haw been recLtssifedre conform with the currentyear1pmentation.
E
" \
$. Otes te cem,eiiae<ea siemeeiei stetemeet Boltimore Gas and Electric Company and Subsidiories eee 1 Significant Accounting Policies neeeece et one moeineen T/x CostMethod Baltimore Gas and Electric Company (BG E) is the paren. We usually use the cost method ifwe hold less than a 20%
company and conducts our primary business-the elec.ric voting interest in an investment. Under the cost method, we and gas utility business.nar business serves Baltimov repon our investment at cost in our Consolidated Balance City and all or pan of 10 Central Maryland counths. We Sheets.ne only time we do not use this method is when we also conduct various diversified businesses in subsidiary can exercise significant influence over the operations and companies. We describe our operating segments in Note 2 policies of the company. Ifwe have significant influence, on page 50. accounting rules require us to use the equity method. Commessh uom pelley messeseten et weiney seelmene We use three different accounting methods to report our The Maryland Public Service Commission (Maryland PSC) investments in our subsidiaries or other companies: regulates our utility business. Generally, we use the same consolidation, the equiry method, and the cost method. accounting policies and practices used by nonregulated :: g,,3.j,,j, companies for fmancial reporting under generally accepted We use consolidation when we own a majority of the voting acc unting principles However, sometimes the Maryland - stock of the subsidiary. This means the accounts ofour PSC orders an accounnng treatment different from that ; used by nonregulated companies to determme the rates we subsidiaries are combined with our accounts. We climinate ; intercompany balances and transactions when we charge our customers. When this happens, we must defer cenain utility expenses and income in our Consolidated 3 consolidate these accounts. Our consolidated financial a statements include the accounts of: Balance Sheets as regulatory assets and liabihnes. We have rernrded these regulatory assets and liabihnes m our _
*BGE, Consolidated Balance Sheets in accordance with Statement
- Constellation Enterprises,Inc. and Subsidiaries,
+ District Chilled Water General Partnership of Financial Accounting Standards (SFAS) No. 71 j Accountingforthe ffirrs ofCertain Types ofRegulation. We (Comfon1. ink), and summarize and discuss our regulatory assets and liabilities
. BGE CapitalTrust 1 (See Note 7 on page 58). furtherin Note 4 on page 53.
TheEquiryMethod in 1997, the Financial Accounting Standards Board (FASB) We usually use the equity method to repon investments, through its Emerging IssuesTask Force (EITF) issued EITF corporate joint ventures, pannerships, and afEliated 97-4, Deregulation ofthe hicing ofElectricity-/ssues companies (including power projects) where we hold a Relatedto she Application offASB Statements No. 71 and 20% to 50% voting interest. Under the equity method. 101.The EITF concluded that a company should cease to we report: apply SFAS No. 71 when either legislation is passed or a
- ourinterest in the entityas an investment in our regulatory body issues an order that contains sufHcient Consolidated Balance Sheets beginning on page 38, and detail to determine how the transmon plan will affect
+ our percentage share of the earnings from the entity in the deregulated ponion of the business. Addm,onally, a our Consolidated Statements ofincome on page 37. ' *P*
liabihn."Y.w uld continue to recognize regulated assets and es m the Consolidated Balance Sheets to the extent The only time we do not use this method is ifwe can that the transition plan provides for their recovery. exercise control over the operations and policies of the company. Ifwe have control, accounting rules require us At December 31,1998, we met the requirements of SFAS to use consolidan.on. No. 71. We discuss our transition proposal for electnc utdity competition filed with the Maryland PSC .m the We report our investment in Safe Harbor Water Power " Competition and Response to Regulatory Change' Corporation (Safe Harbor) under the equity method. Safe section ofManagement's Discussion and Analysis Harbor is a producer ofhydroelectric power. BGE owns on page 22. two-thirds ofSafe Harbor's total capital stock, including one-halforthe voting stock, and a iwo-thirds interest in its retained earnings.
unney nevenees . We also repon two other items as " Electric fuel and pur-We record utility revenues in our Consolidated Statements chased energy" in our Consolidated Statements ofincome: ofIncome when we provide service to customers.
- amonization ofnudear fuel (described under
- Utility Plant" later in this note). We amortize nudear fuel based on the energy produced over the life of the fuel. We pay
- I"'"' *" I "
quanerly fees to the Depanment ofEnergy for the future a thefuelweuse togenerateelectricity, disposal ofspent nudear fuel, and accrue these fees based
- purchases ofclearicity from others, and on the kilowatt-hours ofelectricity sold. We bill our
. naturalgasthatweresell. customers for nudear fuel as described earlier in this n te,and These costs are shown in our Consolidated Statements
* ** "I*I n fdeferredcostsofdecomm,ss,om,ngand ii ofIncome as " Electric fuel and purchased energy" and .
dentaminantig the Department of Energys uramum
- Gas purchased for resale." We discuss each of these ennchment facihnes. We discuss these costs funher in separately below.
Note 4 on rrige 54. l Fuel Usedto Genernre Elecerscity andherchases of l . Extended outages at Calven Cliffs increase fuel costs and may result in fuel rate pr ceedings before the Maryland Under the electric fuel rate dause set by the Maryland PSC, l PSC. In these proceedings, the Mary 4and PSC would we diargeour ehtric cusmmen fon consider whether any portion of the extra fuel costs should a the fuel we use to generate electricity (nudear fuel, be paid by BGE instead ofpassed on to customers. We
, coal, gas, or oil), and discuss the fmancial impact ofpast extended outages in j ; + the net cost ofpurchases and sales ofelectricity Note 10 on page 63.
e (primarily with other utilities). l 3, I
- We charge the actual costs of these items to customers We charge our gas customers for the natural gas they purchase fj . with no profit to us. To do this, we must keep track of from us using " gas cost adjustment dauses" set by the ia what we spend and what we collect from customers under Maryland PSC nese dauses operate similarly to the electric
- the fuel rate in a given period. Usually these two amounts fuel rate clause described earlier in this note. However, are not the same because there is a difference between the effective October 1996, the Maryland PSC appmved a 46 time we spend the money and the time we collect it from modification of the gas mst adjustment clauses to pmvide a our customers. market based rates incentive mechanism. Under market based I
! Under the electric fuel rate dause, we defer (indude as an as ur aaual at ofgas is mmpand to a marka index (a measum fthe marka price ofgas us a gnren pen,oe.%e asset or liability in our Consolidated Balance Sheets and diffnence between our aaual at and the market mdex is exdude from our Consolidated Statements ofIncome) the shared equaHy between sliamholders and customers.
difference between our actual costs of fuel and energy and what we collect from customers under the fuel rate in a j given period.We either bill or refund our customers that " M *"*"' ... . We engage m nsk management acuvmes m our gas business I difference in the future. We discuss this funher in Note 4 l and in our diversified businesses. We separately desenbe
,, p,g,54, these activities for each business below.
We calculate the electric fuel rate using three factors: Gas Business a the mix ofgenerating plants we used over the last We use basis swaps in the winter months (Novembec , i- 24 months, through Match) to hedge our price risk associated with a the latest three-month average fuel cost for each natural gas purchases under our market based rates generating unit, and incentive mechanism. We also use fixed-to-floating and a the net cost ofpurchases and sales ofelectricity over floating-to-fixed swaps to hedge our price risk associated
- the last 24 months. with our off-system gas sales.The fixed portion represents 8 Specific dollar amount that we will pay or receive and the We may change the fuel rate only if the calculated rate is ,
E ating Ponion represent a fluctuaung amount based on more than 5% above or below the rate in effect.The fuel rate a published index that we will receive or pay. is affected most by the amount ofelectricity generated at our Calven Cliffs Nudear Power Plant (Calven Cliffs) because the cost ofnuclear fuel is cheaper than coal, gas, or oil.
Our gas business internal guidelines do not permit the Innstment & Crrdirs use ofswap agreements for any other purpose than to We have deferred the investment tax credit associated with hedge price risk. our regulated utility business in our Consolidated Balance We defer, as unrealized gains or losses, the net amount we Sheets. The investment tax credit is amortized evenly to are due (unrealized gains) or owe (unrealized losses) under inc me ver the life ofeach property. V e reduce income tax the swap agreements m our Consolidated Balance Sheets. expense in our Consolidated Statements ofincome for the investment tax creda.and other tax credits associated w.it h When amounts are paid under the agreements, we repon our diversified businesses, other than leveraged leases. the payments as gas costs in our Consolidated Statements ofincome. Defern dIname Tax Assers andLiabilities We must report some ofour revenues and expenses difl.er-DiwrsrfedBusinesses ently for our fmancial statements than we do for income tax Our subsidiary, Constellation Power Source, engages in purposes.The tax efTects of the ditTerences in these items are power marketing activities, which include trading electricity, reponed as deferred income tax assets or liabilities in our other energy commoditics, and related derivatives (such as Consolidated Balance Sheets. We measure the assets and futures, forwards, options, and swaps). Constellation Power liabilities using income tax rates that are currently in effect. Source uses the mark-to-market method ofaccounting for
" ' ' ' * ."E*'"""**' A portion ofour total deferred icome tax liabih.ty relates to our utility business, but has not been reflected in the rates Under the mark-to-market method ofaccounting, we report we charge our customers. We refer to this portion of the
. commodity positions and derivatives at fair value as liability as " Income taxes recoverable or payable through
. . . , , future rates. We have recorded that portion of the net
. Assets from energy tradm.gactmnes or.Liabih. .nes
. . . , , . liability as a regulatory asset in our C,onsolidated Balance -
from energy tradm.gacnymes mourConsolidated - Sheets.We discuss this further m. Note 4 on page 54.
- Balance Sheets, and *
- changes in fair value as components of" Diversified '
Frenchise Tsues e busm.ess revenues m our Consolidated Statements ofIncome. We pay Maryland publi~ervice company franchise tax ; mstead of state income tax on our utility revenue from a sales in Maryland. We include the franchise tax in " Taxes = V,e summarize our income taxes in our Consolidated other than income taxes" in our Consolidated Statements
. ofincome. -
47 Statements ofIncome Taxes on page 44. As you read this section, it may be helpful to refer to those statements. Inventory ; Iname TaxExpense We repon the majority ofour fuel sn>cks and materials and We have two categories ofincome taxes in our Consolidated supplies at average cost. Statements ofIncome-current and deferred. We describe cach of these below. neel astete Projects and leevestements Our current income tax expense consists solely ofregular in Note 3 on page 52, we summarize the real estate projects tax less applicable tax credits. Our 1996 current income tax and investments that are m our Consolidated Balance expense amount includes alternative minimum tax creda.s Sheets. The projects and investments consist of: of $30 million.The alternative minimum tax can be carried e land under development in the Baltimore-forward indefmitely and used as tax credits in years when Washington corridor, our regular tax liability exceeds the alternative minimum + an entertainment, dining, and retail complex in tax liability. We do not have any remaining alternative Orlando, Florida, minimum tax credits.
- a mixed-use planned-unit development,
+ senior-livingfacilities,and Our deferred income tax expense is equal to the changes . .
+ beg.mnmg m 1998, a 41.9% equity interest in m the net deferred income tax liabih.ty, excludm.g.
amounts charged or credited to common shareholders, Corporate Office Propern.es Trust, a real estate investment trust. equity. Our deferred income tax expense is increased or reduced for changes to the net regulatory asset (described The costs incurred to acquire and develop properties are laterin this note) during the year. included as pan of the cost of the propenies.
Evoleettee of Assets for laspelresent Utility Pleet,4_ *:^*:x, Amnertisaties, end = ' - ' * ' - - 5FAS No.121, Accountingfor theImpairment ofLong-Uwd Assets andfor Long-UndAsse.s to Be Disposed Of applles Utility Plant particular requirements to some ofour assets that have long Utility plant is the term we use to describe our utility lives. (Some examples are utility propeny and equipment business propeny and equipment that is in use, being held and real estate.) We determine if those assets are impaired for future use, or under construction. We summarize utility by comparing their undiscounted expected future cash plant in our Consolidated Balance Sheets. We repon our flows to their carrying amount in our accounting records. utility plant at its original cost, whidi indudes: We recognize an impairment loss if the undiscounted , ;g expected future cash flows are less than the carrying amount
+ ContractorCosts, of the asset.
+ construction overhead costs (where applicable), and
+ an allowance for funds used during construction (desmbed later m tius note).
In Note 3 on page 52, we summarize the financial invest-ments that are in our Consolidated Balance Sheets. We charge retired or otherwise-disposed-ofutility plant to SFAS No.115, Accountingfor Certain Investmentsin Debt
* ' ' " " 'P'" *O*"*
andEquity Semrities, applies panicular requirements to We own an undivided interest in the Keystone and some ofour investments in deb: and equiry securities. We Conemaugh electric generating plants in Western report those investments at fair value, and we use specific Pennsylvania, as well as in the transmission line that identification to determine their cost for computing transports the plants' output to the joint owners' service a realized gains or losses. We classify these ir aestments as territories. Our ownership interests in these plants are 8 eithertradingsecuritiesoravailable-fc.-sar securities, 20.99% in Keystone and 10.56% in Conemaugh.These I which we describe separately below. We report investments ownership interests represented a net investment of C that are not covered by SFAS No. I 15 at their cost. $152 million at December 31,1998 and 1997.We eport these properties in the same accounts we use for our other {c g. .,j,, unhty plant (described abon). Our divers fled businesses dassify some of the. ir. mvestments Ti in marketable equity securities and financial limited Depreciation Erpense pannerships as trading securitics. We indude any Generally, we compute depreciation by applying composite, 48-- unrealized gains or losses on these securities in straight-line rates (approved by the Maryland PSC) to the
. " Diversified business revenues"in our Consolidated average investment in dasses ofdepreciable propeny. We $ . Statements ofincome. depreciate vehides based on their estimated useful lives.
Avaitable-for-Sale Securities Amortization Erpense We classify our investments in the nuclear decommissioning Amortization is an accounting process of reducing an trust fund as available-for-sale securities. We indude any amount in our Consolidated Balance Sheets evenly over a unrealized gains or losses on the trust assets as a change in period of time. When we reduce amounts in our the decommissioning reserve. We describe the nudear Consolidated Balance Sheets, we increase amortization decommissioning trust and the reserve under the heading expense in our Consolidated Statements ofIncome. An
" Decommissioning Costs" later in this note. amount is considered fully amortized when it has been reduced to zero.
In addition, our diversified businesses dassify some of their investments in marketable equity securities as available-for- Decommissioning Coser sale securities. We indude any unrealized gains or losses on We must accumulate a reserve for the costs that we expect to these securities in " Accumulated other comprehensive incur in the future to decommission the radioactive portion income" in our Consolidated Statements ofCommon ofCalven Cliffs. We do this based on a sinking fund Shareholders' Equity on page 41 and in the Consolidated methodology.The Maryland PSC authorized us to record Statements ofCapitalization on page 43. We also indude decommissioning expense based on a f,cility-specific cost our diversified businesses' ponion ofunrealized gains or estimate so we can accumulate a decommissioning reserve of losses on securities ofequiry-method (described earlier in $521.0 million in 1993 dollars by the end of Calven Cliffs' this note) investees in our Consolidated Statements of service life in 2016, adjusted to reflect expected inflation. We Common Shareholders' Equity, have reponed the decommissioning reserve in " Accumulated depreciation" in our Consolidated Balance Sheets.The total reserve was $244.0 million at December 31,1998 and
$201.6 million at December 31,1997.
i i i
To fund the costs we expect to incur to decommission the Use of Assoweeles Eseleostes plant, we establiehed an external decommissioning trust in Management makes estimates and assumptions when accordance with Nudear Regulatory Commissie.n (NT<C) preparing financial statements under generally accepted regulations. We report the assets in the trust in 'Nudear accounting principles. These estimates and assumptions decommissioning trust fund" in our Consolidated Balance affect various matters,induding: Sheets.The NRC requires utilities to provide financial
, our reported amounts of assets and liabilities in our assurance that they wdl accumulate sufficient funcis t" Consolidated Balance Sheets at the dates of the financial pay for the cost ofnudear decommissionmg based upon statements either a generic NRC formula or a facility-specific
- our disdosure ofcontingent assets and liabilities at the decommissioning cost estimate. We use the facility-specific dates ofthe financial statements, and cost estimate for funding these costs and providing the
, our reported amounts of revenues and expenses in required fmancial assurance.
our Consolidated Statements ofIncome during the reporting periods. h feeP u ds u n d W W e u d Copieslised laterese These estimates involve judgments with respect to, among Allowancefor Funds UsedDuriug Contruction (AFC) other things, future economic factors that are diflicult to We finance construction pmiects with horrowed funds and predict and are beyond management's control. As a result, equiry funds. We are allowed by the Maryland PSC to record actual amounts could differ from these estimates. the costs of these funds as part ofie cost ofconstruction projects in ous Consolidated Balance Sheets. We do this meelessifieseless thmugh the AFC, which we calculate using a rate authorized We have redassified certain prior-year amounts for , by the Maryland PSC. We bill our customers for the AFC comparative purposes.These reclassifications did not ': plus a return after the utility plant is placed in service. affect consolidated net income for the years presented. j The AFC rates are 9.04% for gas plant,9.36% for common plam, and 9A0% for electnc plant. V e
% l We adopted SFAS No.130, Reporting Comprehensive -
compound AFC annually. Income. effectiveJanuary 1,1998. Comprehensive income a CapitalizedInterrrt indudes net income plus all changes in shareholders' equity = Our diversified businesses capitalize interest costs incurred for the period, exduding shareholder transactions (some to finance real estate developed for internal use and certain examples are stock issuances and dividend payments). Our E-power projects. comprehensive income includes net income plus the effect , ofunrealized gains or losses on available-for-sale securities. ?, Lees verse sehe We have presented comprehensive income in the We defer (indude as an asser or liability in our Consolidated Consolidated Statements ofComprehensive Income, and Balance Sheets and exclude from our Consolidated accumulated other comprehensive income in the Statements ofIncome) all costs related to the issuance Consolidated Statements ofCommon Shareholders' Equiry oflong-term debt.These costs include underwriters' and in the Consolidated Statements of Capitalization. commissions, discounts or premiums, and other costs such We adopted SFAS No.131, Disclosures about Segments as legal, accounting and regulatory fees, and printing costs. ofan Enterprise and RelatedInformation, effective We amortize these costs over the life of the debt. January 1,1998. SFAS No.131 establishes standards When we incur gains or losses on debt that we retire prior for the way that we report information about operating to maturity, we amonize those gains or losses over the segments in annual financial statements and requires remainingoriginallife ofthe debt. that we report selected information about operating seg-ments in interim financial reports. SFAS No.131 also Cash Flews catablishes standards for related disdosures about prod-For the purpose of reporting our cash flows, we define cash ucts and services, geographic areas, and major customers. equivalents as highly liquid investments that mature in The adoption of this statement did not affect results of three months or less. operations or financial position, but did affect the disdosure of segment information. See Note 2 on page 50. L
We adopted SFAS No.132, Employen'Disclosurrs about We do not expect the adoption of these statements to have a Pensions and Otherikstrrtirement Benefn. cffective material impact on our financial results. January 1,1998. SFAS No.132 establishes standards for In June 1998, the FASB issued SFAS No.133, Accountingfor the way that we report our pensicm and postretirement Deritearit<InstrumenaandB4ingActivities. SFAS No.133 benefits as well as requiring addmonal information on establishes the accounting and disdosure standards for
. changes m the benefit obligations and fair values ofplan}}