ML20217G771

1997 Annual Rept for Bg&E

ML20217G771
Person / Time
Site:	Calvert Cliffs
Issue date:	12/31/1997
From:	Cruse C, Poindexter C BALTIMORE GAS & ELECTRIC CO.
To:	NRC OFFICE OF INFORMATION RESOURCES MANAGEMENT (IRM)
References
NUDOCS 9804020514
Download: ML20217G771 (63)

Text

CH ARMS II. CRUSE Baltimore Gas and Electric Company Vice President Calvert Cliffs Nuclear Power Plant Nuclear Energy 1650 Calvert Cliffs Parkway Lusby. Maryland 20657 410 495-4455 March 25,1998 U. S. Nuclear Regulatory Commission Washington, DC 20555 ATTENTION:

Document Control Desk

SUBJECT:

Calvert Cliffs Nuclear Power Plant Unit Nos.1 & 2; Docket Nos. 50-317 & 50-318 Calvert Clifts Independent Spent Fuel Storage Installation, Docket No. 72-8 1997 Annual Renort In accordance with the requirements of 10 CFR 50.71(b) and 10 CFR 72.80(b), enclosed please find a copy of the Baltimore Gas and Electric Company's 1997 Annual Report to its shareholders.

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

Very truly yours,

,/ s.

-1W' CIIC/JKK/bjd

Enclosure:

As stated cc:

Resident Inspector, NRC (Without Enclosure)

R. S. Fleishman, Esquire

11. J. Miller, NRC J. E. Silberg, Esquire R. I. McLean, DNR Director, Project Directorate 1-1, NRC J. II. Walter, PSC A. W. Dromerick, NRC 9804020514 971231 PDR ADOCK 05000317 k

R PDR g.q s^

M.

.g.

i n plain English 1997 Annual Report to Shareholders

'?

?

Cont:nts A4 the nation's okleet gas utility and one of the earliest electric utlpties, the Baltimore 2

BGE at a Glance Gas and Electric Company brings gas and '_ _1/.ery to more than 2.6 million residents in 4 Chairman's Letter Central Maryland. BGE's subsidiaries also enhance customer service and incrosse revenue to Shareholders growth., in 1997 combined revenues totaled $3.3 billion from utlpty and diverslSed :.1-IL _.

8 The rules are changing..

10,. and we'll be ready.

Financial Highlights 12 Here's what we're doing.

""E" 17 Financial Contents (in mnens. eeest per sris<e anwns; 56 Directors and Officers 60 Shareholder Information Eamings por share Earnings per share from current-year operations Utility business

$1.94

$1.96 (1.0)%

Diversified businesses 0.34 0.31 9.7%+

1 Esmings and Dividends Doolemd Total earnings per share from current-year operations

$2.28

$2.27 0.4%

por them of Conunon Stock

• Write-off of merger costs (0.25)

• Write downs of real estate investments (0.31) sa.co.

• Disallowed reptacement energy costs (0.42)

))

Total earnings per share

$1.72

$1.85 (7.0)%

~

~

~-

~

Dividends declared por share

$1.63

$1.59 2.5%

sie Average shares outstanding 147.7 147.6 0.1%

~

~~1ees 1oes"~1oor'

~

1ees 1oo4

" 888'8' (a'*88*8)

Reported 8.9%

9.5%

'(6.3)%

" 8"""8' 8"'*8 Excluding nonrecurring charges to earnings 11.7%

12.0%

(2.5)%

l Book value per share-year end

$19.44

$ 19.33 0.6%

l 1

8 listurnon Market price por :' n,;;:end

$34 /e

$26 /4 27.6%

j Average Common Equity i

in FINANCIAL DATA 1m __

Revenues Electric

$2.1S2

$ 2,209 (0.8)%

a_

Gas 522 517 1.0%

~

~

~

Diversified businesses 594 427 39.1%

" ^ ~ ~

~~~

~

~

Total revenues

$3.30s

$ 3,153 4.9%

i n_

y g g 3,

3,,,

Not income

$283

$311 (9.0)%

8 Emmings apt e=haa to common stock

$254

$272 (6.7)%

di Assets Utility business

*78

$7,143 0.5%

Diversified businesses

.L,t..,o 1.401 13.8%

and Book h per h Total assets

$8.773

$ 8,544 2.7%

I s3s g

sao UtiHty construction expenditures (excluding Allowance sas _

for Funds used During Construction)

$365

$349 4.6%

so.

BGE investment in the Constellation Holdings c: 7

$342

$396 (13.6)Wgr 61s _

sto UTILITY SYSTEM DATA Electric sales-megawatt-hours 28.1 28.4 (1.1)%

ss _

Gas system sales-dekatherms 112.4 114.3 (1.7)%

_1ee4._ toes toes toer 1e93

• Nonrecurring charges to eamings discussed in Note 12 to the Consolidated Financial Statements (pnge 51).

an, w p,,,, gp,s,,,,

Certain priorpear amounts han been reclassified to conform with the current year's presentation.

an, e,,n y,su, grear enny Vlelt our wetselte at 8'a--nesad to Eguel Oppersunity luttp://www.hge.com As an Equal Opportunity Employer, DGE does not discriminate on the basis of age, color, disability, marital status, national origin, race, rolgton, sex, sexual orientation, or veteran status.

h N# oi. recycled paper

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BGE at a Glance Product / Service Companies Activities Customers and Markets Electric generation, BGE

= Regulated, investorowned gas and electric utility,

= More than 1.1 million tran mission, and providing service in Central Maryland industrial, commercial, and residential electric distribution

= Owns and operates 10 generating plants (two nuclear customers in 2,300 units); part owner of three generating plants in square' mile service NaturIl gas supply Pennsylvania; total generating capacity exceeds territory and di;tribution 6,200 megawatts

= More than 565,0C0 a Belongs to Pennsylvania-NewJersey-Maryland industrial, commercial, Interconnection (PJM), a power pool interconnecting and residential natural-the transmission systems of eight energy companies

• Stores and delivers natural gas through two gas f"00s uar plants and nine gate stations service territory Wholecale electric Constellation

• Power

• Develops, owns, and operates power generation

= Domestic and Latin gener: tion and projects in the U.S. and Latin America; provides American wholesale di tribution operations and maintenance services to energy and retail energy facilities markets Energy marketing Constellation

• Provides wholesale power. marketing and risk-

= Wholesale Power Source management services, with Goldman Sachs Power energy customers as exclusive advisor nationwide Constellation

• Provides wholesale and retail

= Wholesale and retail Energy Source natural-gas marketing services customers in the Mid-Atlantic and Northeast

= Offices in MD, TX, PA, VA, and CT l

I Energy products Constellation Energy

= Offers energy consulting and power-quality services

= Industrial, commer-and services Projects & Services

. Develops district and private electric, gas, and cial, government, and retail customers east chilled-water systems of the Mississippi

= Offices in MD, VA, and PA BGE Home Products

• Sells, installs, and services HVAC and plumbing

= Residential and 3

& Services systems; sells and services appliances and commercial customers electronics; offers ful! range of home improvements in MD, VA, and BGE Commercial

• Provides full-service building solutions, including HVAC, Washington, D.C.

Building Systems plumbing, and building-automation systems Other businesses Constellation

= Provides income from investments in securities

= Relatively liquid investments and partnerships investment markets Constellation Real

= Develoos, owns, and operates commercial properties

= Institutional investors Estate Group and regional commercial markets l

Constellation Senior

= Develops, owns, and operates senior-living facilities,

= Elderly market on the Services with emphasis on assisted-living market East Coast 2

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y. C 1997 High!!ghts g

MAR e Generated $3.1 million in revenues through Premium Power Program sales. Received EPRI Award for Best Utility Power Quality Program fl,y!

(

in U.S.

g 312 mi o g att urs Hs) a iner ase of 2 We W N since 1992 SEN#efF de MarWiend, ~~

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/ 1 e Connected about 14,000 residential customers to gas heat; added i

d'I 2.2 million dekatherms (DTHs) of new industrial and commercial

[

fii load; exceeded industry average for industrial and commercial gas gl

&y customer satisfaction by 22%

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m, p

&W e Signed lo@ term power supply agreement with national

(.

distribution company in Guatemala; will develop generation

• J plints to fulfill agreement a Developing cogeneration plant in Curacao that will supply utility e,e f e e,*

k needs of an oil rafinery and eMctricity to the island utility e

e e

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a Developing 700 MW electric generation site near Los Angeles for merchant sales in Southern California market

- l e, 4 e Purchased and operating coal-pulverizing plant in Gary, IN, to

'e supply U.S. Steel facility g

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p 4

l e Traded nearly 9 million MWHs throughout the U.S. with more than

!l' M

60 companies in first year of operation p'

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e Signed first U.S./ Canadian energy storage deal with Hydro Quebec i V D

to swap power over two-year period k

d[d 9 Power Fleets owned, Spetolog

.. m e incrrased naturalgas sales 60%

(or Messges By Seestegemen Power "]

e invested in gasinanagement, risk-management, and accounting 2,

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systems to support large volumes of transactions typical in s astelSery GNeses j

g deregulated naturafgas market bFU j

a Security Administration, the U.S. Postal Service, and several h

j}h e Provided total energy solutions to large customers, including Social b

commercial chain accounts E{

e Received the Secretary of the Army's Energy Conservation Award 9

I{(

d for making Aberdeen Proving Ground a showcase for EPA Energy Star technology G

e e improved profits through the growth of attractive business lines h'

3 and organizational efficiencies e

1 4

e e Expanded product and service offerings to Maryland tuburbs of

]

e W shington, D.C.

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?.h e Crpitalized on strong financial markets, resulting in another strong h

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performance year V /

f

l b

e Continued reduction of real estate assets, expansion of serdce d

]h business, and investment in select, profitable new projects ftl OY t

L, i

t:

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e Current portfolio consists of 1,369 units in 26 facilities, of which h

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j 11 tre operating, five are under construction, and 10 are under P

jgj development

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3 Mj

(-

.dm O.- -.<.a,.ukS.Odau d G O.n d 3

Witn:c3 the fellowing ccti:ns wo took in 1997:

c We canceled our merger with Potomac Electric Power Company (Pepco). We did this because two of the regulatory orders approving it had imposed financial conditions that would have made it impossible for our investors to share in the benefits now or in the future.

a We increased our dividend rate. This marked 88 consecutive years of paying dividends.

We have raised our dividend 20 out of the last 22 years and have never lowered it.

O We positioned ourselves to take advantage of new opportunities in the wholesale elec-tric market by creating Constellation Power Source. Through an exclusive arrangement, this new subsidiary draws on the risk-management and trading expertise of Goldman Sachs Power, an affiliate of Goldman, Sachs & Co.

s s mp e o We filed a request to increase gas rates. This will give us an opportunity to earn a Cumulative Total Return to proper return on the new investments we've made to meet the growing demand Shareholders through 12/31/97 for service.

si 000.

a We strengthened our competitim position by further lowering our generation costs.

~

Since 1992 we have lowered those costs 23%.

$700.

$600.

Our goal is to continually incrones sharehokler value Despite a year of mixed financial results, our stock price hit an all-time high in 1997. Total shareholder retum ran well above utility industry average-nearly 35% versus industry average of 26%. We believe the increase in our stock prices not only reflects the favorable overall market conditions and interest rates, but also the investment community's confidence in our competitive advantages and eamings potential.

[

Our reported earnings were down 6.7% from last year. Sales were down due to milder 1982 iss7 m

' weather, and we took several write-downs. Without these charges, our earnings from

" 8"" 8N""t'"*"8 operations were $2.28 per share. Here are the specifics:

c During 1997 electric system sales decreased 1.2%, and gas system sales decreased BGE shareholders have enjoyed 1.7% compared to 1996. Most of the decline was due to milder weather.

Solid investment returns over a We wrote off our share of the merger costs incurred during the 27 months we were preparing to operate as Constellation Energy Corporation. This amounted to 25 cents as Emwn to H76, per share. Most of the costs were associated with information and telecommunication systems conversions necessary for operating as an integrated company.

pr viding a 16% annual return, with dividends reinvested.

O Our real estate subsidiary wrote down costs associated with Church Street Station in I'lorida when we began negotiations to sell the project. We also wrote down the Piney Orchard project in Maryland, to comply with accounting rules, based on estimated future cash flows.

5 a

Maryland prepares to give custensers choice of energy suppliers Although I was disappointed that we had to terminate the merger agreement with Fopco, it was the right thing to do at the time. In business, as in life, timing is everything.

When our merger with Pepco was announced in September 1995, it made perfect business sense. It would have further lowered our costs and increased our financial base. Yet those advantages were not worth the price the regulatory orders required. We decided to cancel the merger when we saw that the orders would not be adequately modified.

Now we are tuming our full attention to 1: :portant issues affecting our company WWng for com# Won has as we move toward customer choice. Both the Maryland Public Service Commission (PSC) and the state legislature are working to reshape the state's electric industry. The PSC's goal is to have legislation and regulations in place so been my sMe M ImW that all customers will be able to choose their electric suppliers by July 2002.

(See pages 8-10 for more information on restructuring activities.)

goal since becoming chairman We're gaining valualde experience threep our gas businees While the change to customer choice will be dramatic for everyone who produces, delivers, or uses electricity, we've already seen competition open new markets in flV8 years ago. I am enCour, the natural gas business. Our industrial customers have been able to purchase natural gas from third-party suppliers since 1983. Now commercial and residential aged by our accomplishments customers are beginning to have that choice, as well.

To enjoy the benefits of a competitive marketplace, we believe customer choice is essential. That's why we have supported the PSC's efforts to establish retail gas so far."

competition in the region. The p ocess has helped us learn more about the market and what customers war from their suppliers. It has also helped our nonregulated gas-marketing subPdiary, Constellation Energy Source, position itself to compete as the gas supg;y prena continues to open.

It is important to remember that even when custome:rs choose their suppliers, their gas is still delivered through our distribution pipes. Our long-term goal is to continue to perform among the best local gas distribution companies. Toward that end, we've reduced operating costs per gas customer for the fourth straight year. And we've maintained a customer satisfaction rating that's well above the national average.

We nave a distinct advantage in wholesale power naarketing and supply With industry restructuring, we expect the generation part of our utility business will move from a regulated environment to one driven by competition. As this evolves, we will continue to work to be a low-cost generator and reliable energy supplier in our service territory. We also will continue to explore business opportunities in nonregulated energy markets.

Already, deregulation in the electric utility industry has opened up the wholesale power supply market-where bulk electric power is sold for resale. This has spurred the increase in power marketers-companies that buy and sell energy on the ooen market. Now in a phase of exponential growth, power marketing has the potential to become the biggest commodity market in the country.

These developments present us with exciting opportunities. In last year's annual report, I announced that we had formed Constellation Power Source, our new power-marketing company. In less than a full year of operations, Constellation Power Source has est5tblished itself in the national wholesale market for electricity and associated risk 4nanagement products. In 1998 we believe we'll see a rapid rise in our market position.

6

l' We enter the powermarketing business with a distinct advantage-an exclusive advisory BGE Generation Costs relationship with Goldman Sachs Power, an affiliate of Goldman, Sachs & Co. Between their Decrease Faster Than Region's expertise and ours, we have what it takes to be successful.

Sems powam)

I That's why I am pleased to announce that we have again joind forces with Goldman Sachs.

• ~ ~ ~ ~ ~ ~ ~ ~ ~

In January 1998 we signed a letter of intent to form a company to buy power plants in the j

United States.

~

~~

Under the terms of the agreement, this company will form strategic alliances with

3. _ _

_ _ _f N_

Constellation Power Source and Constellation Operating Services-our subsidiary that

{

operates power plants in the United States. Constellation Power Source will be the exclusive 3, _ _ _

l provider of powermarketing and riskmanagement services, while Constellation Operating Services will provide the exclusive operations and maintenance services for acquired 3,

power plants.

O We're preparing to be a player in the competitive arena l

Preparing for competition has been my single most important goal since becoming chairman

" PJM Costs (*29st not evadabJe>

+

five years ago. I am encouraged by our accomplishments so far.

l We've earned our customers' confidence, maintaining residential customer satisfaction ratings that are among the best in the country. We've become one of the lowest cost, BGE Production efficient generators in the region, in the past six years, we've increased the number of Reaches Record Levels (Maons of Megawatthours) customers per employee. At the same time, we've. improved our customer service, system reliability, and powerquality performance.

For all we've accomplished, I especially want to thank our employees for their extraordinary

~

3, efforts last year. It was often difficult, given how uncertain the future seemed without resolution of the merger. But I also know the merger process has been an invaluable learning experience for all of us.

It taught us how to perform well and shift gears in an atmosphere of uncertainty and a _ _ _-

dramatic change. We will need those skills as we navigate the challenges the next few years will present, o___________.

1992 1993 1994 1995 1996 1997 I also want to thank you, our shareholders, for your continued commitment to BGE. Our goal is to maintain your confidence by taking an active role in shaping our future in the new

,w competitive world.

Since 1992 we've lowered our generating costs by 23%, while increasing our electric produc-tion by 22% to meet growing customer demand.

n i

Christian H. Poindexter Chairman of the Board and Chief Executive Officer February 12,1998 I

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l customer chelce approved O states with cenamissions recenunending customer choice in late 1997 the Maryland Public Service Commission (PSC) ordered that electric competition "I

be phased in over two years beginning July 1, 2000. Under the order, all Maryland electric O Ctete with no action customers would be able to choose their electric suppliers by July 1, 2002.

The PSC's decision also included direction on several key restructuring issues. It appears to Nntly every state in the U.S.

allow Maryland utilities an opportunity to recover their stranded and transition costs. It also is at least discussing electric recommends that the state legislature reform tax laws to crr+ ate a level playing Tield for all rxtructuring, and more than a competitors while maintaining total tax revenues.

Parallel to the PSC order, Maryland's General Assembly has created a legislative task force rxtructuring or pilot programs t

a n o

ey California, where all customers will be able to choose their powIr suppliers this year, and We're seeking a level playing field

, Penn2ylvania, which began a From the beginning, BGE has had a voice in the restructuring debate in Maryland. While we cu tomer-choice pilot program firmly believe the company and our shareholders can profit in a competitive energy supply last year. All Pennsylvania market BGE also believes restructuring is a complex process that must be done right the

, electric customers will have the first time.

ability to choose their suppliers Through our association with the Marylanders for Sensible Electricity Reform coalition, we are strongly advocating a sensible and fair restructuring that does not hurt Maryland's

1. ""#I environment, local charities, assistance to low-income citizens, or the state's economy.

This voluntary coalition includes utilities, electric cooperatives, citizens, and businesses across Maryland. Among tne coalition's goals is to ensure that the reliability of Maryland's electric system is not sacrificed. It also wants to protect the interests of Maryland utilities' shareholders, in addition to these issues, many important questions still need to be decided as the debate continues in our state.

)

10 '

We'ro in the middle of an ciectri3 rcvolution The electric industry revolution began several years ago with candid questions from large electric customers: Why are there no choices in electric suppliers? Why is there no competition among utilities? How can we reduce our energy costs?

The response to those questions has been a move to open the nation's electric industry to competition. As a result, both federal and state regulators and 'awmakers have begun exploring the issues that come with restructuring the nation's most vital service.

Meanwhile, nearly a dozen states where electric prices were highest-most notably California, Pennsylvania, Massachusetts, and New Hampshire-have already approved restructuring legislation and will begin offering customers choices of electric suppliers as soon as this year.

All of this activity is creating new challenges for the $200-billion-a-year electric industry as it moves into uncharted territory.

chang ng Restructuring presents new challenges for utilities Until now, regulated electric utilities performed three primary functions: generating electricity in power plants, transmitting it over high-voltage wires to the local distribution system, and distrib-uting it to businesses and homes in a franchised service territory. Restructuring, however, will separate those functions. In a deregulated market, competing companies can move into a utility's onceexclusive temtory and sell power to that utility's customers. The local utility, meanwhile, would continue to distribute the electricity over its local power lines.

Simple as that seems, restructuring has proven to be a complex undertaking. Because electric utilities are regulated, opening a state to electric competition requires regulatory changes that support market conditions that are fair for all competir'g companies. States are making decisions on a broad range of issues from how electricity will be taxed to who should pay for utilities' stranded costs.

What are stranded costs? They are costs a utility would recover under a regulated pricing system, but not a competitive one. Traditionally, utilities have been required to serve all customers in their franchised area while regulators have set the rates to pay for that service. To meet customers' demand for electricity, utilities have had to build generating plants and buy power, among other things. While regulators have approved these investments, they have tried to keep prices low for consumers by setting rates that deferred or spread these costs over several decades.

Under customer choice, however, electric supply rates will be set by the market, not by regulators.

That means if the market price drops below the current regulated price, the utility would not recover its investment in generation and, therefore, the costs would be " stranded."

Maryland makes a move toward competitlen Although restructuring is in et least the discussion stages in nearly all 50 states, each state has its own timetable and, in many cases, its own approach to restructuring issues.

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Wo intend to be among th3 low-cost producers that will prosper l

There's no getting around it. Price will be the first thing customers look at when they choose an electric supplier. That's why we've continued to work hard to drive down our electric-generation costs. And we've succeeded. Since 1992, we've lowered our generation costs by 23%, v/hile increasing our electric production by 22% to meet growing customer demand.

%+

We control costs For the third year in a row, BGE topped the list as the lowest cost electricity provider among the eight energy companies in our regional comparison group, the Pennsylvania-Newjersey-

. g Maryland (PJM) power pool. We've set even more aggressive goals for ourselves in 7

6 the future.

a Here's what j

BGE Reduces injury Rate Controlling costs means getting the most value from our power plants. Every year this to Record Low decade, our fossil plants have broken the previous year's record production levels. Just since (Number of nyunes per 200 employees) 1992 we've increased our total electric production from about 25 million megawatt-hours to s.s _ _ _ _ _ _ _. _ _..

just over 31 million megawatt-hours. In 1997 both our Calvert Cliffs Nuclear Power Plant and s.O _

h._._ _

jointly owned Keystone fossil plant had their best production years ever.

a.

4.s __ _ _ ___ _.

We work productive'v 88 -

Controlling costs also met.Y %. amployees work productively. We've been cross-training our 8 8 - - ----

fossil-generation employees in both operations and maintenance since 1995. A multi-skilled 2.s -

work force allows any team on any shift to do whatever it takes to keep the plant running.

to._

And that allows us to provide high-quality, low-cost energy to customers.

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Our predictive maintenance practices helped us achieve the lowest forcedoutage rate among

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the PJM companies. That means our plants keep producing when it's most profitable to do so.

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During an extended heat wave last summer, customers set a new summer record for energy 1993 1994 1995 1998 im consumption. But most people never realized it. Because all of our generating units were u su producing near 100%, we were able to meet customer demand and still have enough left

"['j8'%D"*"'

over during the day to sell more than 10,000 megawatt-hours to our power pool.

Y199rinformatson not available)

Employees' commitment to We work safely working safely has led to a 63%

While we've reduced costs and improved productivity, our employees are working more safely reduction in accidental injuries than ever. In the past five years our generation errployees have reduced occupational injuries since 1993, consistently lower by more than 60%. In a 1996 Edison Electric Institute study, BGE held the second-lowest taan the average injury rate accidental injury rate among 14 comparab!e utilities, and our performance improved even among comparable companies.

further in 1997.

12

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Some things you don't went to g **

lotm the hard way-ilke how to

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v operate a power plant. That's N

why we've invested in developing II

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this state.cf-the-art simulated

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powsr-plant control room for our Brandon Shores, H.A. Wagner, and C.P. Crano.Gould Street I\\ *E",

A enzrgy complexes. It gives our plint operators the closest thing i

! ar to reaHlfe situations without Y

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the risks.

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.s we're do ng We're helping set the model for a cc.npetitive buik-power market BGE operates its transmission system as a member of the PJM, a power pool serving the Mid-Atlantic region. %s.the electric industry evolves, power pools are changing how they do business.

"We have seen the future, and the future is PJM" In a competitive bulk-power market, there needs to be equal access to utility transmission systems. To accomplish this, we have been working with c group of PJM companies to restructure the transmission business to allow for open access.

In November 1997 the Federal Energy Regulatory Commission (FERC) accepted the group's proposal. When FERC Chairman James Hoecker presented the order, he called it the model for the entire country, stating, "We have seen the future, and the future is PJM."

l.cf: :-f: '_ systeen operators will maintain reliability in the future the bulk transmission of electricity will continua to be regulated by FERC and

. operated regionally by independent system operators (ISO). The ISO's job will be to make sure the power reaches the local distribution company, which will deliver the power to its customers. The ISO's primary objective is to maintain systein reliability by keeping supply ano demand in balance at all times.

13

We're preparing for competition by improving the reliability of our distribution syst@m Ir. a competitive world, some things won't change. Even when customers can choose their ent/gy supplier, the.Nat utility will still deliver the power to their homes and businesses.

Arn customers will still demand that their service is reliable and their energy needs are met.

We've worked hard to improve the reliability of our distribution system and our services to customers. In these efforts we have made great strides. We've done it while lowering costs and improving our employee safety record, as well.

We work to prevent outages in recent years we've redirected our focus from responding to outages to preventing them.

That has helped us work smarter, manage our field crews better, and use the latest technology. And we've gotten results. Service interruptions have dropped 40% since 1994.

We recognize our largest customers are the most at risk in a competitive world. In 1997 we increased our focus on improving reliability and power quality for industrial and commercial customers. As a result, for these customers we've reduced outages, including shortduration interruptions-or what we call momentaries-by 35% since 1995.

Our efforts recently caught the attention of two industry organizations: the Southeastern Electric Exchange (SEE) and the Electric Power Research institute (EPRI).

SEE awarded us first prize in 1997 for Excellence in Engineering for our Distribution Automation System. This sophisticated system helps us restore power remotely in minutes, greatly improving service reliability and restoration efforts.

l EPRI utility members recognized our Premium Power Program as the best utility power quality l

program in the U.S., presenting us with the coveted End-Use Leadership Award. Through this l

long-standing program, we've helped many industries and businesses-and even residences l

with PCs-prevent power disturbances that can cause everything from operational errors to l

equipment damage.

l l

Randle Cliff, in the southem end af our service area, is home to just over 1,000 BGE customers.

Two years ago the reliability of its electric service was one of the worst in our system. Today we take pride in having boosted Randle Cliff into the list of top-performing areas. Reconfiguring feeders, performing maintenance and tree trimming, and installing ~

distribution automation, among other efforts, improved reliability of our electric se'rvice by 90%

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Wa've been expanding our gas business to meet growing demand, in 1997 we continued to open new areas for gas service, including southeastem Frederick County, Maryland, a region designated for residential development. It encompasses approximately 600 existing homes and 500 acres of land zoned for residential development.

+:

i.

. rw We're already meeting the challenge of customer choice in our gas business While we're preparing for competition in the electric industry, we're already experiencing it in our gas business. Our industrial customers have had their choice of suppliers for more than a decade; our commercial customers since 1995. Now we are trying the concept with residential customers through a two-year pilot program, Gas Options. During this time as many as 25,000 customers will be able to choose their gas suppliers, while BGE continues to deliver the gas to their homes or businesses.

We want to be the provider of choice With competition, we can't expect to retain 100% of the market share. But we're doing every-thing we can to become our customers' provider of choice. And we expect to be able to succeed as more customers choose their gas suppliers. In 1996 the Maryland Public Service Commission allowed us to implement market-based rates. This means our customers pay a price based on the market value of gas. When BGE buys below that price, both customers and the company share the profits.

Market-based rates offer an added incentive to find and deliver gas at the lowest possible price. Last year, market-based rates increased our shareholders' earnings by $3.5 million and saved our gas customers the same amount.

. Ws'ro expanding gas service in our territory Is Even with competition we will continue to be the sole gas distributor to customers in our service territory. We see much potential for growth in the number of our gas customers. in

- 1997 we connected nearly 9.000 new homes to gas, improving our market share 11% over 1996. In addition we converted about 5,000 residential customers to gas heat, and added 2.2 million dekatherms of new industrial and commercial load.

We've continued to improve our customers' satisfaction with their gas service. In 1997 our industrial and commercial customer satisfaction rating was 22% above the industry average. At the same time we've reduced operating costs per customer, increased the number of customers per employee, and improved our overall safety record. In fact, last year not a single employee in our gas division missed work as a result of injury.

15

En:rgy inductry d:regulati:n la paving tho wcy for nsw busin:co cpportunitico The future of the industry is energy marketing With competition comes risk. But in a competitive marketplace, risk and opportunity go hand-in-hand. Take the recent development of power ma keting-the buying and selling of energy on the open market.

This industry didn't exist just a few years ago. 03ty in 1992 was the wholesale M

market-where bulk power is sold for resale.-opened to competition. Now in a phase h((A of exponential growth, power marketing has the potential to become the biggest commodity market in the country.

Early last year we made the aggressive move to enter the power-marketing business, launching our Constellation Power Source subsidiary. Headquartered in Baltimore, Constellation Power Source, through an exclusive advisory relationship, draws on the r

risk-management and trading expertise of Goldman Sachs Power, an affiliate of one g of the world's most prestigious investment banks, Goldman, Sachs & Co.

fikk

+%3 Other investment opportunities are opening in the electric generation business.

N54 Regulators have required some utilities to sell off their power plants. Other utilities have voluntarily opted to exit the generation business altogether.

To take advantage of these developments and expand our power-marketing business, we have again agreed to join Goldman Sachs in a new venture. In January 1998 we signed a letter of intent to form a company to buy power plants in the United States. This move will improve the market presence of two a

of our subsidiaries: Constellation Power Source will be the exclusive provider of power-marketing and risk-management services, while Constellation Operating 4

Services will provide the exclusive operations and maintenance services for A

1.

acquired facilities.

Constellation Power Sourco now We're developing foreign and domestic niche energy snarkets has nearly 60 people marketing On the international front, BGE's Constellation Power-our independent power subsidiary--

and trading power nationally has been active in Latin America. As countries privatize their electric generation and distribu-from its Baltimore headquarters.

tion systems to meet growing demand, the governments have turned to foreign investors with Cur new power-marketing energy experience. Constellation Power now has interests in 10 energy projects in seven Latin business offers wholesale American countries-Argentina, Bolivia, Brazil, Costa Rica, CuraQao, Guatemala, and Peru.

energy customers creative elm Pm e m@M h e M N hm Wuale me en and cost-effective solutions t ex anding its energy investments to 26. Among new projects, it began developing a site for a

• complex energy problems while g

helping them manage the risk of fluctuating energy prices.

when it purchased a coal-pulverizing plant in Gary, Indiana, to supply U.S. Steel's Gary plant.

Our future is in energy j

l In a competitive world the lowcost producer will prosper. So, too, will the energy marketers who will buy and sell all forms of energy. We have positioned ourselves to take advantage of both.

As we move forward, we will continue to explore opportunities that allow us to do what we do best-producing and marketing energy and the products and services supporting that business.

16

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Utility' Operating Ctatictico Compound Elecidc Operating Statistics ~

1997 1996 1995 1994 1993 Growth 5-Year 10 Year Revenues (In Millions)

Residential

$ 932.5

$ 958.7

$ 955.2

$ 931.7

$ 931.7 2.11% 4.61%

Commercial 892.6 861.3 879.4 853.0 869.8 1.16-3.88

. Industrial-211.9 207.6 208.5 205.6 199.0 0.96 1.59 System Sales 2,037.0 2,027.6 2,043.1 1,990.3 2,000.5 1.57 3.93 Interchange and Other Sales 132.7 155.9 167.0 118.0 91.5 15.59 15.14 Other 22.3 25.5 21.0

- 19.1 20.1 6.08 2.00 Total.

$2,192.0

$2,209 0

$2,231.1

%2,127.4

$2,112.1 2.20 4.32

. S1hs (In Thousands}-Mwn Residential 10,906 11,243 10,966 10,670 10,614 2.11 2.40 Commercial 12,72A 12,591 12,635 12,351 12,395 1.32 2.42 Industrial 4,575 4.596 4.591 4.433 3,763 4.55 1.25 System Sales 28,099 28.430 28,192 27,454 26,772 2.12 2.21

_ 6 224-7,580 8.149 5.684 4,149_

14.37 17.26 Interchange and Other Sales 1

Total

,_34 323 36,010 36,341 33,138 30.921 3.80 3.71 a

Customers (In Thousands)

Residential 1,001.0 995.2 988.2 978.6 968.2 0.91 1.33 Commercial 105.9 104.5 103.4 101.9 100.8 1.21 1,74 Industrial 4.5 4.3 4.1 4.0 3.8 3.44 6.05 Total 1,111.4 1,104.0 1,095.7 1,084.5 1,072.8 0.95 1.39 Average Use per Residential Customer-KwH 10,794 11,297 11,097 10,903 10,963 1.18 1.06 Average Rate per Kww (System Sales)-$

Residential 8.63 8.53 8.71 8.73 8.78 0.00 2.16 Commercial 7.02 6.84 6.96 6.91 7.02 (0.17) 1.43 Industrial 4.63 4,52 4.54 4.64 5.29 (3.42) 0.33 Ptak Load (One. Hour)-ww 5,980 5,955 5,947 6,038 5,876 1.47 1.43 C2pability at Summer Peak-ww 6,741 6,800 6,731 6,722 6,701 0.16 1.36 System Load Factor 56.9%

57.5%

57.2%

54.7%

55.2%

0.75 0.67 Gas Operating Statistics Revenues (in Millions)

Residential -Excluding Delivery Service

$321.7

$320.1

$243.3

$262.7

$265.6 5.80 2.38

-Delivery Service 0.5 Commercial-Excluding Delivery Service 113.5 125.1 109.9 121.0 121.8 0.23 0.28

-Delivery Service 12.9 7.2 3.7 2.3 3.3 29.08 14.96 Industrial -Excluding Delivery Service 11.4 17.1 16.7 20.2 22.3 (11.59)

,5.42)

-Delivery Service 17.2 14.6 16.3 9.6 12.9 3.76 (1.64)

System Sales 477.2 484.1 394.9 415.8 425.9 3.91 1.88 Off-System Sales 37.5 26.6 Other 6.9 6.6 5.6 5.4 7.3 1.20 (9.87)

Total

$521.6

$517.3

$400.5

$421.2

$433.2 5.43 2.30 t'

Stl s (In Thousands}-cTH Residential -Excluding Delivery Service 39,958 43,784 40,211 40.279 40,029 0.46 0.47

- -Delivery Service 205

- Commercial-E.;cluding Delivery Service 18,435 22,698 23,612 23,712 23,830 (4.72) '. (1.12)

-Delivery Service 12,964 8,755 6,982 6,490 7,428 12.79 9.41 Industrial -Excluding Delivery Service 2,016 2,887 4,102 4,410 5,298 (17.62) (6.71)

-Delivery Service 38 791 36.201 35,925 33.837 31,390 2.89 1.08 1

System Sales

i.:d,209 114,325 110,832 108,728 107,975 0.69 0.88

_17 611 10,204 Off-System Sales 3

Total-129,980 124,529 110,832 108.728 107,975 3.66 2.36 Customers (In Thousands)

Residential 524.5 516.5 506.8 498.2 491.2 1.50 0.85 Commercial 29.3 38.9 38.4 37.9 37.5 1.21 1.22 industrial 1.3 1.3 1.3 1.3 1.3 (1.47) 0.00 Total 5651 556.7 546.5 537.4 530.0 1.47 0.87 Average Use per Residential Customer-Therms 762 848 794 809 815 (1.02) (0.37)

Average Rate per Therm-$

Residential (Excluding Delivery Service)

.81

.73

.62

.65

.66 5.49 2.38 Commercial (Excluding Delivery Service)

.62

.55

.47

.51

.51 5.25 1.39 Industrial (Excluding Delivery Service)

.57

.59

.41

.46

.42 7.34 1.52 Peak Day Sendout (in Thousands)-oTH 765.0 709.0 706.3 761.9 657.7 4.66 1.86 l

Peak Day Capability (in Thousands}-cTH 870.0 870.0 847.0 847.0 847.0 0.54 1.76 Utillty operating statistics do not reflect the elimination ofIntercompany transactions.

l-L 18 Baltimore Gas and Electric Company and Subsidiaries

Selected Financi:1 Data Compound 1997 1996 1995 1994 1993 Growth (Dortar amountiTn mitilons, except per share amounts) 5-Year 1& Year Summrry of Operations Tot:1 Revenues

$3,307.6

$3.153.2

$2,934.8

$2,783.0

$2,741.4 5.26% 5.47%

Expenses Other Than interest and income Taxes ASS 4.0 2.483.7 2.23L1 2,147.7 2,12_5.0_

5.00 6.22 income From Operations 723.6 669.5 695.7 635.3 616.4 6.21 3.21 uther income (Expense)

_(82.8) 6.1 8.8 32.3 20 1 Income Defore Interest and Income Taxes 870.8 675.6 704.5 667.6 636.7 3.77 2.07 Net interest Expense 230.0 198.5

'197.0 190.1 188.8 3.93 7.10 income Before income Taxes

~44ES 477.'1 507.5 4U.5 44fT 3.69 0.24 Income Taxes 158.0 166.3 169.5 153.9 138.1 8.87 1.94 Net income

~2Sf.S 3168 338.0 323.6 3D5T 1.36 (0.59)

Praftrred and Preference Stock Dividends 28.7 38.5 40.6 39.9 41.8 (7.42) 0.84 Earnings Applicable to Common Stock M S4.1

$ 2f2.3

$ 297.4

$ ~ 285.7

$ 268T 2.73 (0.74)

EImings Per Share of Common Stock

$1.72

$1.85

$2.02

$1.93

$1.85 1.08 (2.91)

DMdencs Declared Per Sharc of Common Stock

$1.83

$1.59

$1.55

$1.51

$1.47 -

2.65 2.69 Ratio of Earnings to Fixed Charges 2.78 3.10 3.21 3.14 3.00 0.96 (3.97)

Ratio of Earnings to Fixed Charges and Preferred and Preference Stock Dividends Combined 2.35 2.44 2.52 2.47 2.34 2.47 (3.22)

Financial Statistics at Year End Tot 11 Assets

$8,773.4

$8.54 3

$8.277.6

$7,995.9

$7.829.6 4.01 6.26 C pit lization Long-term debt

$2,988.9

$2,758.8

$2,598.2

$2,584.9

$2,823.1 4.69

. 5.76 Preferred stock 59.2 59.2 59.2 Redeemable preference stock 90.0 134.5 242.0 279.5

. 342.5 (25.63) (7.02)

Przference stock not sutiect to mandatory redemption 210.0 210.0 210.0 150.0 150.0 13.81 6.68 Common shareholders' equity 2,870.4 2,854.7 2,811.2 2,719.0 2,620.5 2.52 5.04 Totti Capitalization

$6,159.3

$5.958.0

$5.920.6

$5,792.6

$5.995.3 2.38 4.90 Bcck Value Per Share of Common Stock

$19.44

$19.33

$19.06

$18.43

$17.94 1.97 2.74 Number of Common Shareholders (in Thousands) 73.7 77.6 -

79.8 81.5 82.3

- (1.73) (1.10)

C:rt In prior-year amounts haw been reclassified to conform with the current year's presentation.

e Baltimore Gas and Electric Company and Subsidiaries ig

Management'o Discussion and Analysia of Financial Condition and Results of Operations introduction in Management's Discussion and Analysis we explain the general The electric utility industry is undergoing rapid and substantial financial condition and the results of operations for BGE and its change. Competition in the generation part of our business is

' diversified business subsidiaries including:

increasing. The regulatory environment (federal and state) is shifting toward customer choice. These matters are discussed a what factors affect our businesses,.

briefly in the " Competition and Response to Regulatory Change" a what our eamings and costs were in 1997 and 1996.

section beginning on page 21. They are discussed in detail in O why earnings and costs changed from the year before, our Annual Reports on Form 10-K.

We continuously evaluate changes in the utility industry. Based O how all of this affects our overall financial condition, on the evaluations, we refine short and long term business a what our expenditures for capital projects were in 1995 plans. We may also enter new businesses, which may be through 1997 and what we expect them to be in 1998 opportunities to:

through 2000, and

' o where we will get cash for future capital expenditures.

a provide our core energy business customers more services, or eaa new ws2mers W our cm ensgy Mness, M f

As you read Management's Discussion and Analysis, it may be a expand our diversified stream of revenues.

helpful to refer to our Consolidated Statements of income on i

page 31, which present the results of our operations for 1997, 1996, and 1995. In Management's Discussion and Analysis, we analyze and explain the annual changes in the specific line items in the Consolidated Statements of income. Our analysis may be important to you in making decisions about your investments in BGE.

Reentts of C: "rs in this section, we discuss our 1937 and 1996 earnings and the downs in the *Real Estate Development and Senior-Uving factors affecting them. We begin with a general overview, then Facilities" section on page 27.

separately discuss eamings for the utility business and for in 1997, utility earnings from current-year operations were lower diversified businesses.

g weather (people use less electricity and gas to heat or cool their N'M*W homes in milder weather). We discuss our utility earnings in more detail in the " Utility Business" section beginning on page 21.

in 1997, diversified business earnings from current-year opera-1997 1996 1995 tions were higher mostly because the Constellation Holdings Ecrnings per share from Companies had higher earnings from power generation projects current year operti ans:

and financial investments. We discuss our diversified business UtliitY usiness

$1.94 $1.96 $1.84 eamings in more detail in the " Diversified Businesses" section b

Diversified businesses (subsidiaries)

.34

.31

.18 beginning on page 26.

Total earnings per share from current year operations 2.28 2.27 2.02 1996 Our 1996 total earnings decreased $25.1 million, or $.17 per Writeoff of merger costs (see Note 12)

(.25)

Write-downs of real estate share, from 1995. Our total earnings decreased because we Investments (see Note 12)

(.31) wrote off disallowed replacement energy costs. We discuss this Disallowed replacement in detail in the " Disallowed Replacement Energy Costs" section energy costs (see Note 12)

(.42) on page 23.

~

Total earnings per share

$1.72 $1.85 $2.02 in 1996, utility earnings from operations were higher due to three factors: we sold more electricity and gas due to colder 1997 winter weather, there was an increase in the number of Our 1997 total eamings decreased $18.2 million, or $.13 per customers, and we had lower operations and maintenance share, from 1996. Our total earnings decreased because:

expenses. We would have had even higher utility earnings from operations except we sold less electricity in the third quarter a we wrote off costs associated with the proposed merger due to milder summer weather, with Potomac Electric Power Company, and o Constellation

• Holdings, Inc. and Subsidiaries (together in 1996, diversified business eamings were higher mostly because known as the Constellation Holdings Companies) wrote the Constellation Holdings Companies had higher eamings from down their investments in two real estate projects, power generation projects and financial investments.

We discuss the writeoff of merger costs in the

• Write-Off of

' Merger Costs" section on page 25, and the real estate write-Baltimore Gas and Electric Company and Subsidiaries 20

UtlHty Business Before we go into the details of our electric and gas operations, During the cooling season, hotter weather is measured by more we believe rt is important to discuss four factors that have a cooling degree days and results in greater demand for electricity strong influence on our utility business performance: regulation, to operate cooling systems. During the heating season, colder the weather, other factors including the condition of the economy weather is measured by more heating degree days and results in in our service territory, and competition.

greater demand for electricity and gas to operate heating systems.

Regulation by the Maryland Public Service Commission We show the number of cooling and heating degree days in 1997 a

age danges in h nh M pu day Te :.r an C determines the rates we can charge our pars, aM N nwnW M &ge days in a. mal, s customers. Our rates consist of a " base rate" and a " fuel rate,"

a esen ar amage in N MMnpah The b:se rate is the rate the Maryland PSC allows us to charge our customers for the cost of providing them service, plus a 30 Year profit. We have both an electric base rate and a gas base rate.

1997 1996 Average

. Higher electric base rates apply during the summer when the Cooling degree days 7i6 786 804~

demand for electricity is the highest. Gas base rates are not affict d by seasonal changes.

Percentage change from prior year (5.1)% (25.6)%

f 5

. Th3 M ryland PSC allows us to include in base rates a Heating degree days 4,822 5,138 4,901 I

component to recover money spent on conservation programs.

Percentage change from prior year (6.2)%

11.7%

S This component is called an " energy conservation surcharge."

However, under this surcharge the Maryland PSC limits what our e

ws profit can be. If, at the end of the year, we have exceeded our tilowed profit, we lower the amount of future surcharges to our g

g g

customers to correct the amount of overage, plus interest.

a p W. % m W g

g g

in addition, we charge our electric customers separately for the those sections, we discuss how these and other factors affected fuel we use to generate electricity (nuclear fuel, coal, gas, or oil) electric and gas sales during 1997 and 1996.

End for the net cost of purchases and sales of electricity (primarily with other utilities). We charge the actual cost of these The nun,ber of customers in a given period is affected by new stims to the customer with no profit to us. We discuss this in home and apartment construction and by the number of more detail in the " Electric Fuel Rate Clause" section on page 23 businesses in our service territory.

and in Note 1.

Usage per customer refers to all other items impacting customer We also charge our gas customers separately for the natural gas sales which cannot be separately measured. These factors they consume. The price we charge for the natural gas is based include the strength of the economy in our service territory.

On a market baseo rates incentive mechanism approved by the When the economy is healthy and expanding, customers tend Maryland PSC We discuss market based rates in more detail in to consume more electricity and gas. Conversely, during an the " Gas Cost Adjustments" section on page 24 and in Note 1.

economic downtrend, our customers tend to consume less electricity and gas.

i from time to time, when necessary to cover increased costs, we

. ask the Maryland PSC for base rate increases. The Maryland Competition and Response to Regulatory Change PSC holds hearings to determine whether to grant us all or a Our electric and gas businesses are also affected by portion of the amount requested. The Maryland PSC has histori-competition. We discuss competition in each business below.

j crity allowed us to increase base rates to recover costs for r placing utility plant assets, plus a profit, beginning 6t the time i

Electric Business of relacement. Generally, rate increases improve our utility eam-Electric utilities are facing competition on various fronts, ire Decause they allow us to collect more revenue. However, including:

1 rate increases are normally granted based on historical data and those increase; may not always keep pace with increasing costs, a in the construction of generating units to meet increased j

l demand for electricity, d

Weather a in the sale of their electricity in the bulk power markets, j

Weather affects the demand for electricity and gas, especially a in competing with attemative energy suppliers, and

!.

• rmong our residential customers. Very hot summe,s and very a in the future, for electric sales to retail customers which j

dd winters increase demand. Mild weather reduces demand.

utilities now serve exclusively.

J l

We meIsure the weather's effect using " degree days." A We regularly reevaluate our strategies with two goals in mind: to I

l: ' degree day is the difference between the average daily actual improve our competitive position, and to anticipate and adapt to l

t;mperature and a baseline temperature of 65 degrees. Cooling regulatory changes. We cannot predict the ultimate effect j_

degree days result when the daily actual temperature exceeds competition or regulatory change will have on our earnings.

- the 65 degree baseline. Heating degree days result when the dilly actual temperature is less than the baseline.

g

,g

,g Regulatory Matters and Competition."

Baltimore Gas and Electric company and Subsidianes 21

i t

I c

Gas Business Bectric Cystem Sales Volumes Regulatory change in the natural gas industry is w:ll under way.

• Electric system sales" are sales to customers in our service We discuss competition in our gas business in more detail in our territory at rates set by the Maryland PSC. These sales do not Annutl Reports on Form 10-K under the heading

• Gas Regulatory include interchange sales and sales to others.

l Matt!rs and Competition.'

The percentage changes in our electric system sales volumes, by type of customer, in 1997 and 1996 compared to the respective l

Strategies prior year were:

l Wa will continue to develop strategies to keep us competitive.

1997 1996 These strategies might include one or mere of the following:

Residential (3.9)%

2.5%

o the complete or partial separation of our generation, Commercial 1.0 (0.3) transmission, and distribution functions, industrial (0.4) 0.1 l

0 purchase or sale of generation assets, l

c mIrgers or acquisitions of utility or norrutility businesses, in 1997, we sold less electricity to residential customers mostly for two reasons: lower electricity usage per customer and milder o spinoff or sale of one or more businesses.

weather. We sold more electricity to commercial customers j'

W3 cannot predict whether any transactions of the types mostly because usage per customer increased. We would have described above may actually occur, nor can we predict what their sold even more electricity to commercial customers except for l

cffect on our financial condition or competitive position might be, milder weather during the year, We sold about the same amount

[

of electricity to industrial customers as we did in 1996.

in 1996, we sold more electricity to residential customers for l

Utility Business Earnings per Share of Common Stock three reasons: colder weather in the first quarter, greater 1997 1996 1995_

electricity usage per customer, and an increase in the number Utility earnings per share from of customers. We would have sold even more electricity to l

current-year operations:

residential customers except for milder summer weather. We Electric business

$1.77

$1.75

$1.70 sold about the same amount of electricity to commercial and G:s business

_.1_7

.21

.14 industrial customers as we did in 1995.

Total utility eamings per share Weather impacts residential, more than commercial and industrial, from current-year or.erations 1.94 1.96 1.84 sales. In 1997 and 1996, other items offset the impact of weather l

Write-off of merger costs (see on commercial and industrial sales. Other items included the l

Note 12)

(.25) demand for power to fuel manufacturing equipment and office

. Disillowed replacement machinery, which vary with changes in the customers' businesses.

l

- Energy costs (see Note 12)

_(.42) l Total utility earnings _per share

$1.69

$1.54

$1.84 Sales of Electricity l

(Billions of Kilowatthours)

Our 1997 total utility earnings increased $24.0 million, or $.15 l

per shire, from 1996. Our 1996 total utility earnings decreased g

l

$44.5 million, or $.30 per share, from 1995. We discuss the l

factors affecting utility earnings below.

12 __ _ _. _ _ ___

l 10 _r

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c r

l Eltetric Operations 8.J, J _ ! __i _.) _

+

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e e

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Electric Revenues 6 M

~7 7 s;

The changes in electric revenues in 1997 and 1996 compared to the rsspective prior year were caused by:

4-d Q

y

-f

_-h 4

1997 1996 I

2 4

2l j

1 M

0.}A (In millions) 3 2

_2.

2 Electric system sales volumes

$(15.5)

$ 0.3 l

Base rates 29.2 (2.5) 1993 1994 1995 1996 1997 j.

Fuel rates

_14.3)

(12.3) m Reid Total change in electric revenues aus Commercial from electric system sales 9.4 (14.5)

Int rchange and other sales (23.2)

(11.1) nam industrial Other

_(3.2) 4.5 Totil change in electric revenues

. $(17.0)

$(21.1) 22 Bammore Gas and Electric Company and subsidiaries

j Base Rates Electric Fuel and Purchased Energy Expenses in 1997, b se rate revenues were higher than they wsre in 1996 bec:use of higher energy conservation surcharge revenues.

1997 1996 1995 During 1996, we exceeded our profit limit under the energy (in millitm/

conservation surcharge. As a result, we excluded $28.5 million Actual costs

$504.5

$539.2

$554.5 of our 1996 surcharge billings from revenue. To correct the Net recovery of costs overage, we lowered the surcharge on our customers' bills under electric fuel beginning in July 1997 and will continue to bill the lows, surcharge through June 1998.

rate clause (see Note 1) 15.2 8.2 24.3 Disallowed replacement energy in 1996, base rate revenues were about the same as they were costs (including carrying in 1995. Although we sold more electricity in 1996, our revenues charges)(see Note 12) 95.4 did not increase because the higher sales occurred during the Total electric fuel and wintir when our base rates are lower.

purchased energy expenses

$519.7

$642.8

$578.8 Fuel Mates Actual Costs

• The fuel rate is the rate the Maryland PSC allows us to charge in 1997, our actual costs of fuel to generate electricity (nuclear our customers, with no profit to us, for:

fuel, coal, gas, or oil) and electricity we bought from others were c our actual cost of fuel used to generate electricity, and lower than in 1996 mostly for two reasons: we bought less elec-O the net cost of purchases and sales of electricity (primarily tricity from other utilities because we were able to meet demand with other utilities),

using the electricity we genersted, and we were able to use a less<ostly mix of generating plants mostly because of shorter if these costs go up, the Maryland PSC permits us to increase refueling and maintenance downtime at Calvert Cliffs, the fuel rate, if these costs go down, our customers benefit from a reduction in the fuel rate. The fuel rate is impacted most by the in 1996, our actual costs were lower than in 1995 because the amount of electricity generated at our Calvert Cliffs Nuclear p

d el@i@ W mee Wt h om Mn e Power Plant (Calvert Cliffs) because the cost of nuclear fuel is lower and we sold less electricity. The price we pay for electricity cherper than coal, gas, or oil. We discuss the calculation of the g

fuel rate in Note 1.

market conditions, complex pricing formulas for PJM transactions, and contract terms.

Chinges in the fuel rate normally do not affect eamings.

How ver, if the Maryland PSC disallows recovery of any part of Electric Fuel Rate Clause the fuel costs, our eamings are reduced. We discuss this more Under the electric fuel rate clause, we defer (include as an asset thoroughly in the " Disallowed Replacement Energy Costs" section or liability in our Consolidated Balance Sheets and exclude from j

below and in Note 12.

our Consolidated Statements of Income) the difference betweer, in 1997, fuel rate revenues decreased mostly because we sold our actual costs of fuel and energy and what we collect frorr.

less electricity. In 1996, fuel rate revenues decreased due to a customers under the fuel rate in a given period. We either bill or lower fuel rate because we were able to operate plants with the refund our customers that difference in the future. We discuss lowest fuel costs. Fuel rate revenues would have been even lower the calculation of the fuel rate in Note 1.

except we sold more r ancity.

In 1997 and 1996, our actual costs of fuel and energy were lower than the fuel rate revenues we collected from our customers.

.I Intercharge and Other 5&ro

• Interchange and other sales are sales li the Pennsylvania-Dismilowed Replacement Energy Costs New Jersey-Maryland Interconnection (PJ@ energy market and to in December 1996, we settled fuel rate proceedings about others. PJM is a regional power pool with members that include extended outages that occurred at Calvert Cliffs in 1989 through.

.miny wholesale market participants, as well as BGE and seven 1991. We agreed not to bill our customers for $118 million of other utility companies. We sell energy to PJM members and electric replacement energy costs associated with these outages.

to others after we have satisfied the demand for electricity We wrote off a portion of these costs in 1990 and wrote off the in our own system.

remainder in 1996. We discuss this further in Note 12.

In 1997, we had lower interchange and other sales compared to 1996 mostly because of lower sales volumes due to reduced demand.

in 1996, we had lower interchange and other sales compared to 1995 because we generated less electricity at Calvert Cliffs. This meint that we had less electricity to sell outside of our service trritory. We generated less electricity at that plant mostly bec use the 1996 outage for regular refueling and maintenance took longer than in 1995.

Bdtimore Gas and Dectric Company and subsidiaries 23

l Gas Cporations Base Rates in 1997, base rate revenues were higher than they were in j

Gas Revenues 1996. Although we sold less gas in 1997, our base rate The changes in gas revenues in 1997 and 1996 compared to the revenues increased because of a higher energy conservation respective prior year were caused by:

surcharge in the last six months of the year.

1997 1996 (in millions) in 1996, base rate revenues were higher than in 1995 because Gas system sales volumes

$(7.3)

$ 8.2 in November 1995, the Maryland PSC allowed us to increase our Base rates 0.6 18.9 gas base rates. This increased our annual base rate revenues for 1996 by $19.3 million. That amount included $2.4 million to Gas cost adjustments

-(0.2) 62.1 recover higher depreciation expense (an accounting procedure Total change in gas revenues which spreads the cost of utility plant in service over the years m, from gas system sales (0.9) 89.2 which it is used).

Off-system sales 10.9 26.6 Other 0.3 1.0 During 1997, we applied for a $36.7 million increase in our gas tom! change in gas revenues

$ 4.3

$116.8 base rates. The Maryland PSC is currently reviewing our application, and is expected to issue an order by June 1998. Our earnings will be impacted during 1998 and 1999 by the outcome of this case.

Gas System Sales Molumes The parcentage changes in our gas system sales volumes, by Gas Cost A(ustments type of customer, in 1997 and 1996 compared to the respective We charge our gas customers for the natural gas they consume pnor year were:

using gas cost adjustment clauses set by the Maryland PSC.

1997 1996 These clauses operate similar to the electric fuel rate clause Residential (8.3)%

8.9%

described in the " Electric Fuel Rate Clause" section on page 23.

Commercial (0.2) 2.8 However, effective October 1996, the Maryland PSC approved a industrial 4.4 (2.3) modification of these clauses to provide a market based rates incentive mechanism. Under market based rates, our actual cost of In 1997, we sold less gas to residential customers mostly for two reasons: lower usage per customer and milder weather. We sold gas is compared to a market index (a measure of the market price about the same amount of gas to commercial customers as we did of gas in a given period). The difference between our actual cost in 1996. We sold more gas to industrial customers mostly because

' and the market index is shared equally between BGE (which bene-the milder weather caused fewer service interruptions and fits shareholders) and customers. We also discuss this in Note 1.

Bethlehem Steel (our largest customer) used more gas. We would Delivery service customers, including Bethlehem Steel, are have sold even more gas to industrial customers except gas usage not subject to the gas cost adjustment clauses because we by industrial customers other than Bethlehem Steel decreased.

are not selling them gas (we are,ellirig them the service of in 1996, we sold more gas to residential and commercial delivering their gas).

customers due to colder winter and early spring weather and an in 1997, gas cost revenues decreased mostly because we sold increase in the number of customers. We would have sold even less gas. In 1996, gas cost revenues increased becausa we had more gas to those customers except that gas usage per to pay more for gas and we sold more gas, customer decreased. We sold less gas to industrial customers because Bethlehem Steel used less gas. We would have sold 0#4ystem Sales even less gas to industrial customers except for increased gas Off-system gas sales, which are low 4nargin direct sales to whole-usage by other industrial customers, an increase in the number sale suppliers of natural gas outside our service territory, are not of customers, and colder winter weather.

subject to gas cost adjustments. We began sales of off-system gas during the first quarter of 1996. The Maryland PSC approved Sales of Gas an arrangement for part of the earnings from off-system sales to (Millions of Dekatherms) benefit customers (through reduced costs) and the remainder to be retained by BGE (which benefits shareholders).

50 in 1997 and 1996, off-system gas sales increased mostly 40,_.y._,_

+1 because we first began off-system sales of gas in February of g

_f._}_

1996. These increases in off-system sales did not significantly m

-g e

-4 w

m impact earnings.

r V

20 q; 4

Gas Purchased For Resale Expenses 10 -

-i M

1997 1996 1995 0- l l

.]

(In millions) 1993 1994 1995 1996 1997 Actual costs

$291.6

$295.4

$205.9 Net recovery (deferral) of sw Residential costs under gas adjustment aus Commercial clauses (see Note 1) 0.5 (11.0)

(7.8) r Ems industrial Total gas purchased for resale expenses

$292.1

$284.4

$198.1

\\.

24 Baltimore Gas and Electric cornpany and Subsidiaries

I Actual Costs Other income cod Expenses Actu11 costs include the cost of gas purchased for resale to our Write-Off of Merger Costs custorners and for sale off-system. Actual costs do not include tiu cost of gas purchased by delivery service customers, in September 1995 we signed an agreement with Potomac including Bethlehem Steel.

Electric Power Company to merge together into a new company, Constellation Energy Corporation, after all necessary regulatory l

In 1997, actual gas costs decreased from 1996 mostly because approvals were received. In December 1997, both companies l

we sold less gas. In 1996, actual gas costs increased from mutually terminated the merger agreement. Accordingly, in 1997, i

1995 due to three factors: h'gher market prices of gas, higher we wrote off $57.9 million of costs related to the merger. This silzs volumes, and the purchase of gas to resell off-system write-off reduced after-tax earnings by $37.5 million, or $.25 per (b3 ginning in the first quarter of 1996).

share. We also discuss the writeoff of these costs in Note 12.

Gas A(ustment Clauses Allowance for Funds Used During Construction (AFC)

We charge customers for the cost of gas sold through gas adjust.

We finance construction projects with borrowed funds and equity r

m3nt clauses (determined by the Maryland PSC), as discussed funds. We are allowed by the Maryland PSC to record the cost of under " Gas Cost Adjustments" earlier in this section.

these funds as part of the cost of construction projects in our i

Consolidated Balance Sheets. We do this through the AFC, which In 1997, the portion of our actual gas costs subject to these we calculete using a rate authorized by the Maryland PSC. We bill clauses was lower than the revenues we collected from our our customers for the AFC plus a retum after the utility plant is customers. In 1996, the portion of our actual gas costs subject placed in service. We also describe AFC in Note 1.

,

• to these clauses was higher than the revenues we collected from l

our customers.

In 1997, AFC was about the same as it was in 1996. In 1996, we had lower AFC compared to 1995 because we completed l

several projects and started less new construction. We also had Other Cperating Expenses lower AFC because the Maryland PSC decreased the gas AFC rate in November 1995 from 9.40% to 9.04E i

Operations and Maintenance Expenses in 1997, our operations and maintenance expenses were slightly Net Other income and Deductions low!r than Lhey were in 1996.

Net other income and deductions represent miscellaneous income in 1996, our operations and maintenance expenses decreasert and expenses which are not directly related to operations.

l

$18.5 million due to our continued efforts to control costs. This in 1997, net other income and deductions were about the same decrease would have been even greater except we had higher costs to mainta,n our nuclear plant.

as they were in 1996, in 1996, net other income and deductions i

increased $4.9 million compared to 1995 mostly because the Conste:lation Holdings Companies had lower deductions not Depreclation and Amortir.ation Expenses directly related to operations and BGE had about $2 million more S

We describe depreciation and amortization expenses in Note 1.

of other interest and finance charge income, in 1997, our depreciation and amortization expense increased

$12.7 million from 1996 mostly because we had more plant in interest Charges service (as our level of plant that is in service changes, the interest charges represent the interest we paid on outstanding debt.

cmount of our depreciation and amortization expense changes).

In 1997, we had $23.6 million higher interest charges compared in 1996, our depreciation and amortization expense increased to 1996 because we had more debt outstanding and interest

$12.8 mililon from 1995 because we had more utility plant in rates were higher, s:rvice, and we had more energy conservation program costs in 1996, we had $2.1 million lower interest charges compared to to be amortized.

1995 largely because of lower interest rates. We would have had The increase in 1996 expenses would have been even greater even lower interest charges except we had more debt outstanding.

except that in 1995 depreciation and amortization expense included Income Taxes

$14.2 million for the writeoff of costs associated with planned future generation facilrties at our Perryman site that will not be built.

In 1997 our income taxes decreased because we had lower

-* We discuss this writeoff also in Note 1. In 1996, depreciation and taxable income from both our utility operations and our amortization expense did not include any such writeoff.

diversified businesses.

In 1996 our income taxes decreased because we had lower l. T'xes Other Than income Taxes taxable income from utilrty operations. Our income taxes would in 1997, taxes other than income taxes were about the same as have been even lower except that we had higher taxable income they were in 1996.

from our diversified businesses, in 1996, taxes other than income taxes were 59.6 million higher thin in 1995 mostly due to three factors: plant additions made in 1995 increased our property taxes about $7 million, higher 1996 l.

r3 venues increased our gross receipts taxes about $2 million, and l

higher labor costs increased our payroll taxes about $1 million.

l-f l

Baltimore Gas and Electric Company and Subsidianes 25 i

1 Diversified Businesse3 Power Generttlon -

The Constallation Holdings Companirs' powsr gin: ration busi-in the 1980s, we began to diversify our business in response to ness develops, owns, and operates domestic and irtemational limit d growth in gas and electric sales. Today, we continue to power generation projects. We discuss intemational projects later div:rsify our business in response to regulatory changes in the in this section, utility industry. Some of our diversified businesses are related in 1997, eamings increased from 1996 mostly because of to our core utility business and others are not. Our diversified improved performance of various energy projects.

businesses are organized in three groups:

In 1996, earnings increased from 1995 mostly due to our share c the Constellation Holdings Companies--our power genera-of higher earnings from energy projects and a $14.6 million after.

tion, financial investments, and real estate businesses, tax gain on the sale by a Constellation partnership of a power O Constellation Energy Solutions *, Inc. and Subsidiaries-purchase agreement with Jersey Central Power & Light Company our energy marketing businesses, and at 6 kgy pmjeds had @nadngs for a a BGE Home Products & Services, Inc. and Subsidiaries-varlety of reasons-some ongoing (like improved efficiency due to our home products and commercial building systems equipment or procedure changes) and some onetime (for businesses.

example, losses incurred in 1995-to shutdown certain opera-tions at a plant-.did not occur again in 1996). These increases were offset by $16.2 million of write <ffs of investments in certain Div rsified Business Earnings Per Share of Common Stock power projects. We describe these write 4ffs further in Note 3.

1997 1996 1995 Constellation Holdings Companies

$.39

$.29

$.18 Camela Peer Pwchase 4reements The Constellation Holdings Companies have $261 million Constellation Energy Solutions

(.08)

.00 00 invested in 16 projects that sell electricity in California under BGE Home Products & Services

.03

.02

.00 power purchase agreements called " Interim Standard Offer No. 4" Total diversified business earnings per agreements. Eamings from these projects wero $37.3 million, or share from current-year operations

.34

.31

.18

$.25 per share, in 1997.

Write 4 owns of real estate investments by the Coastellation Holdings Under these agreements, the electricity rates change from fixed Companies (see Note 12)

(.31) rates to variable rates during 1996 through 2000. The projects Total diversified business which already have had rate changes have lower revenues under earnings per share

$.03

$.31

$.18 variable rates than they did under fixed rates. When the remainmg projects transition to variable rates, we expect their Our 1997 diversified business earnings decreased $42.2 million, revenues also to be lower than they are under fixed rates.

or $.28 per share, from 1996. Our 1996 diversified business However, the California projects that make the highest revenues will transition in 1999 and 2000. As a result, we do not expect earnings increased $19.3 million, or $.13 per share, from 1995.

These changes came mostly from the Constellation Holdings the Constellation Holdings Companies to have significantly lower Companies. We discuss factors affecting the eamings of our earnings before 2000 due to the transition to variable rates. We cannot predict the financial effects of the transition from fixed to diversified businesses below.

variable rates on the Constellation Holdings Companies or on BGE, but the effects could be material.

The Constellation Holdings Companies-We describe these projects and the transition process in detail Our Power Generation, Financial Investments, in Note 12.

and Real Estate Businesses The Constellation Holdings Companies:

Intemational The Constellation Holdings Companies' power generation c develop, own, and operate power generation projects, business in Latin America:

o engage in financial investments, and o develop, own, and manage real estate and senior-living a develops, acquires, owns, and operates power generation facilities.

projects, and a acquires and owns distribution systems.

Earnings per share from the Constellation Holdings Companies At December 31,1997, the Constellation Holdings Companies had w re:

1997 1996 1995 invested about $23.1 million and committed another $4.3 million Powcr generation

$.25

$.18 $.13 in power projects in Latin America. In the future, the Constellation Financial investments

.18

.14

.08 Holdings Companies' power generation business may be expanding

' Real estate development and further in both domestic and international projects, seniorliving facilities

(.01)

(.02)

(.02)

Oth:r

(.03)

(.01) 001)

Total Constellation Holdings Companies' earnings per share from current-year operations

.39

.29

.18 Write 4 owns of real estate ir'v:stments (see Note 12)

(.31)

Total Constellation Holdings Companies' earnings per share

$.08

$.29 $.18 26 Baltimore Gas and Electric Company and subsidiaries

Financial investments Constillation Energy Solutions, Inc, and Subsidiaries-Eamings from ths Consttilation Holdings Comp:nizs' portfolio of

- Our Energy Marketing Businesses financial investments include income from:

Our energy marketing businesses:

o marketable securities

• m rovide power marketing and risk management services to O financial limited partnerships, and c financial guaranty insurance companies.

wholesale customers in North America by purchasing and selling electric power, other energy commodities, and in 1997, earnings were higher than in 1996 due to better related derivatives, ctmings from trading securities, and increased gains from a provide natural gas brokering and related services for mIrkstable securities.

wholesale and retail customers, and in 1996, earnings were higher than in 1995 because of better a provide a broad range of cuctomized energy services, carnings from marketable securities and increased gains from ircluding private electric and gas distribution systems, finIncial limited partnerships.

energy consulting, power quality services, and campus and multibuilding energy systems.

. Real Estate Ex:':;n..d and Senior 4.lving Facilities in 1997, earnings from our energy marketing businesses were The Constellation Holdings Companies' real estate development lower than in 1990 mostly because of lower gas brokering business includes:

margins and increased uncollectible expense. In 1996, eamings a land under development, e office buildings, o r: tall projects, BGE Home Products & Services, Inc. and a distribution facility projects, Subsidiaries-Our Home Products and c En entertainment, dining, and retail complex in Orlando, Commercial Building Systems Businesses Florida.

o a mixed-use planned-unit development, and BGE Home Products & Services, Inc. and subsidiaries:

. c senior-living facilities.

a sells and services electric and gas appliances,

/ In 1997, earnings from real estate development and senior 4iving a engages in home improvements, and facilitlis were lower than in 1996 mostly due to:

a sells and services heating and air conditioning systems.

c a $14.1 million after-tax write 4cwn of the investment in in 1997 and 1996, earnings increased due to improved Church Street Station-an entertainn.ent, dining, and retail performance in the service and installation business, complex in Orlando, Florida-which occurred because the Constellation Holdings Companies have now decided to sell rather than keep tne project, and o a $31.9 million aftertax write-down of the investment in Piney Orchard-a mixed-use, planned-unit development-which occurred because the expected cash flow from the project was less than the Constellation Holdings Companies' investment in the project.

In 1996, earnings from real estate development and senior 4iving facitrd:s were about the same as they were in 1995.

We consider market demand, interest rates, the availability of

fin ncing;, and the strength of the economy in general when 1

making decisions about our real estate investments. We believe that until the economy shows sustained growth and there is more

)

demind for new developmern, our real estate values will not l

., improve much. If we were to soll our real estate projects in the I

currtnt market, we would have losses, although the amount of the losses is hard to predict. Depending on market conditions in l

the future, we could also have losses on any future sales.

f I

• We discribe the Constellation Holdings Companies' real estate I

business further in Note 12.

j i

1 i-I 1

i adumore ces and Electric company and subsidiaries 27 i

UgukNty aml Capital Resources Cverview

' Our business requires a great deal of capital. Our actual capital requirements for the years 1995 through 1997, along with estimated emounts for the years 1998 through 2000, are shown below.

1995 1996 1997 1998 1999 2000

1. ## "'E UtRity Businese Capital Requirements:

Construction expenditures (excluding AFC)

Electric

$223

$219

$ 238

$214

$ 222

$ 229 Gas 70 84 89 77 76 72 Common 51 46 38 34 27 24 Total construction expenditures 344 349 365 325 325 325 AFC 22 10 8

7 7

6 Nuclear fuel (uranium purchases and processing charges) 46 47 44 50 50 48 Deferred energy conservation expenditures 46 31 27 12 10 10

• Ritirement of long-term debt and redemption of preference stock 279 184 243 117 344 264 Total utility business c@ ital requirements 737 621 687 511 736 653 DiverslRed Buelness Capital Requirements:

Investment requirements 118 118 156 169 134 157 R;tirement of longterm debt 55 52 188 164 137 246 Total diversified business capital requirements 173 170 344 333 271 403 Total capital requirements

$910

$791

$1.031

$844

$1,007

$1,056 C:pital Requirements of Our Utility Business Our securities ratings at the date of this report are shown in the following table. In October,1997, Standard & Poors upgraded our Wa continuously review and change our construction program, so mortgage b(,nds from A+ to AA,

actual expenditures may vary from the estimates for the years 1998 through 2000 in the capital requirements chart.

Standard Moody's

& Poors investors DL,ff & Phelps Electric construction expenditures include improvements to g nerating plants and to our transmission and distribution Rating Group Service Credit Rating Co.

facilities. Our prujections of future electric construction Mortgage Bonds AA-A1 AA-expenditures do not include costs to build more generating units.

Unsecured Debt A

A2 A+

erence A

• a.

A

. Our utility operations provided about 78% in 1997,96% in 1996, and 100% in 1995, of the cash needed to meet our capital requirements, excluding cash needed to retire debt and redeem Capital Requirements of Our Diversified Businesses pr:fstred and preference stock, in the past, capital requirements of our diversified businesses only included the Constellation Holdings Companies because During the three years from 1998 through 2000, we expect utility they had the only significant capital requirements. From time to operations to provide 115% of the cash needed to meet our time, however, our other diversified businesses may develop capital requirements, excluding cash needed to retire debt and significant caprtal requirements. As that occurs, we will include r: deem preference stock.

the caprtal requirements of those businesses in the capital When we cannot meet utility capital requirements internally, we requirements table above. As discussed under

• Diversified sell debt and equity securities. We also sell securities when -

Business investment Requirements," capital requirements for m:rket conditions permit us to refinance existing debt or prefer-Constellation Power Source *-a subsidiary of Constellation O

ence stock at a lower cost. The amount of cash we need and Energy Solutions, Inc., and ComfortLink -a general partnership.

market conditions determine when and how much we sell. During in which BGE is a partner, are also included this year.

the three years ended December 31.1997, we sold:

Our diversified businesses expect to expand their businesses, a $619 million of long-term debt.

This may include expansion in the energy marketing, power o $60 million of preference stock, and generation, financial investments, real estate, and senior-living 3 $4 million of common stock.

facility businesses. Such expansion could mean more invest-ments in and acquisition of new projects. Our diversified busi-Security Ratings.

nesses have met their capital requirements in the past through Independent credit-rating agencies rate our fixed-income borrowing, cash from their operations, and from time to time, loans or equity contributions from BGE. Our diversified securities. The ratings indicate the agencies' assessment of businesses plan to raise the cash needed to meet capital our ability to pay interest, dividends, and principal on these securities. These ratings affect how much it will cost us when we requirements in the future through these same methods.

sell these securities. The better the rating, the lower the cost of

, th3 securities to us when we sell them.

l 28.

Baltimore Gas and Electric company and Subsidianes

Diversilled Business I;vesttr.ent tequirements Diversified Business Debt and Liquidity The investrnent requirements of our diversified businesses include:

Our diversified businesses plan to meet capital requirements by O the Constellation Holdings Companies' investments in m nan ng as n es e, W monal Msg aN f

financial limited partnerships and funding for the develop-gn es. Ms Mu&s cash kom ment and acquisition of projects, as well as loans made to n,a asse, aN eaW W W@. E Nme project entities, Products & Services may also meet capital requirements through O funding for growing Constellation Power Source's power sales of receivables. We also discuss receivable sales in Note 12.

marketing business, and if the Constellation Holdings Companies can get a reasonable l

c Comfortunk's funding for construction of district energy value for real estate, additional cash may be obtained by selling projects.

real estate projects. The Constellation Holdings Companies' ability Investment requirements for 1998 through 2000 include estimates to sell or liquidate assets will depend on market conditions, and we cannot give assurances that these sales or liquidations could of funding for existing and anticipated projects. We continuously be made. For more information, see the discussion of the real review and modify those estimates. Actual investment require-estate business and market in the "Real Estate Development and ments could vary a great deal from the estimates on page 28 Senior-Uving Facilities" section beginning on page 27.

. because they would be subject to several variables, including:

In 1997, the Constellation Holdings Companies issued $289 0 the type and number of projects selected for development, million of three and four-year notes. In addition, our diversified D the effect of market conditions on those projects, businesses have the following revolving credit agreements to O the ability to obtain financing, and provide additional cash for short-term financial needs:

0 the availability of cash from operations.

Amount of Revolving Credit Agreement Constellation Holdings Companies

$75 million ComfortLink

$50 million Constellation Energy Solutions, Inc.

and Subsidiaries

$10 million Other Matters Environmental Matters We have identified and evaluated all of our systems and applica-We are subject to increasingly stringent federal, state, and local tions that may be affected by the year 2000 issue, and have laws and regulations that work to improve or maintain the quality developed plans to ready these systems and applications for the of the environment. If certain substances were disposed of or century change. Modification and replacement projects are released at any of our properties, whether currently operating or currently under way. We plan to complete our evaluation of not, these laws and regulations require us to remove or remedy suppliers' systems and applications by mid-1998. We plan to the ef fect on the environment. This includes Environmental have our systems and applications ready for the year 2000 by Protection Agency Superfund sites. You will find details of our mid-1999. We do not expect the costs to address the year 2000 environmental matters in Note 12 and in our Annual Reports on issue to be material.

Form 10 K under item 1. Business-Environmental Matters.

These details include financial information. Some of the information is about costs that may be material.

Accounting Standards issued We will adopt the following statements that the Financial Accounting Standards Board issued in 1997 on the dates N h 2000 h indicated below:

The year 2000 issue affects virtually all companies and organiza-

. tions. Many existing computer programs and digital systems use a Statement of Financial Accounting Standards No.130,

' only two digits to identify a year in the date field. These programs Reporting Comprehenshe income, which we must adopt in our c.nd systems were designed and developed without considering financial statements for the quarter ended March 31,1998, the impact of the upcoming change in the century. If not and

. corrected, many computer applications could fail or create a Statement of Financial Accounting Standards No.131,

' erroneous results by or at the year 2000.

Disclosures About Segments of an Enterprise and Related information, which we must adopt in our financial state-l In 1997, we formed a special task force to:

ments for the year ended December 31,1998.

I O identify and evaluate our systems and applications that may We do not expect the adoption of these standards to have a j

be affected by the year 2000 issue, material impact on our financial results or financial statement j

0 modify or replace those systems and applications so they disclosures.

will work properly in the year 2000, and O communicate with our suppliers to make sure they are prepared for the year 2000.

Bmimore Gas and Electric Company and Subsidiaries 29

Ceport of Management The management of the Company is responsible for the informa-internal control procedures. Coopers & Lybrand L.L.P., indepen-tion and representations in the Company's financial statements.

dent accountants, audit the financial statements and express The Company prepares the financial statements in accordance their opinion about them. They perform their audit in accordance with generally accepted accounting principles based upon with generally accepted auditing standards, available facts and circumstances and management's best The Audit Committee of the Board of Directors, which consists of estimates and judgments of known conditions.

four outside Directors, meets periodica!!y with management, The Company maintains an accounting system and related internal auditors, and Coopers & Lybrand L.L.P. to review the rystem of internal controls designed to provide reasonable activities of each in discharging their responsibilities. The internal cssurance that the financial records are accurate and that the audit staff and Coopers & Lybrand L.L.P. have free access to the Company's assets are protected. The Company's staff of internal Audit Committee, auditors, which reports directly to the Chairman of the Board, conducts periodic reviews to maintain the effectiveness of Christian H. Poindexter David A. Brune Chairman of the Board Chief Financial Officer and Chief Executive Officer l

R: port of Independent Accountants l

l l

To the Shareholders of Baltimore Gas and Electric Company We have audited the accompanying consolidated balance sheets audit also includes assessing the accounting principles used and l

rnd statements of capitalization of Baltimore Gas and Electric significant estimates made by management, as well as evalu-l Company and Subsidiaries as of December 31,1997 and 1996, ating the overall financial statement presentation. We believe and the related consolidated statements of income, cash flows, that our audits provide a reasonable basis for our opinion.

common shareholders' equity, and income taxes for each of the in our opinion, the financial statements referred to above present three years in the period ended December 31,1997. These fairly, in all material respects, the consolidated financial position finIncial statements are the responsibility of the Company's of Baltimore Gas and Electric Company and Subsidiaries as of l

management. Our responsibility is to express an opinion on December 31,1997 and 1996, and the consolidated results of these financial statements based on our audits.

their operations and their cash flows for each of the three years We conducted our audits in accordance with generally accepted in the period ended December 31,1997 in confomiity with l

auditing standards. Those standards require that we plan and generally accepted accounting principles.

perform the audit to obtain reasonable assurance about whether I

the financial statements are free of material misstatement. An

~

cudit includes examining, on a test basis, evidence sunoorting j

l the amounts and disclosures in the financial statements. An Coopers & Lybrand L.L.P.

Baltimore, Maryland January 21,1998 l

l l

l l

30 Baltimore Gas and Electric Company and Subsidia..w j

lL ---

Consolidated Ctatementa of Income Year Ended December 31, 1997 1996 1995 (In millions, except per share amounts)

Revenues Electric

$2,191.7

$2.208.7

$2,229.8 Gis 521.6 517.3 400.5 Diversified businesses 594.3 427.2 304.5 Totti revenues 3,307.6 3,153.2 2,934.8 Expenses Other Than Interest and income Taxes Electric fuel and purchased energy 519.7 547.4 578.8 Disillowed replacement energy costs (see Note 12) 95.4 Gas purchased for resale 292.1 284.4 198.1 Operations 518.3 526.4 550.8 Miintenance 178.5 174.1 168.3 Diversified businesses-selling, general, and administrative 444.9 311.1 220.6

. Write-downs of real estate investments (see Note 12)

.70.8 Depr;ciation and amortization 342.9 330.2 317.4 j

TLxts other than income taxes 216.8 214.7 205.1

)

Totil expenses other than interest and income taxes 2,584.0 2,483.7 2,239.1 1

Income from Operations 723.6 669.5 695.7 Other income (Expense)

Writs-off of merger costs (see Note 12)

(57.9)

,, - Allowince for eqtsty funds used during construction 5.3 6.5 14.2

)-

Equity in earnings of Safe Harbor Water Power Corporation 5.0 4.6 4.5

' Net other income and (deductions) -

(5.2)

(5.0)

(9.3)

Totti other income (expense)

(52.8) 6.1 8.8 '

income Before Interest and income Taxes 670.8 675.6 704.5 i

' interest Expense Inttrzst charges 241.2 217.6 219.7 i

Capitalized interest (8.4)

(15.6)

. (15.0)

Allowance for borrowed funds used during construction (2.8)

(3.5)

(73

' Net interest expense 230.0 198.5 197.0 income Before income Taxes

-440.8 477.1 507.5 income Taxes 158.0 166.3 169.5 4

• Not income 282.8 310.8 338.0 Preferred and Preference Stock Dividends 28.7 38.5 40.6

' Eamings Applicable to Common Stock

$ 254.1

$ 272.3

$ 297.4 l

l Average Shares of Common Stock Outstanding 147.7 147.6 147.5 Emmings Per Common Share and Eemings Per Common Share-Assuming Dilution

$1.72

$1.85

$2.02 See Notes to Consolidated Financial Statements.

Baltimora Gas and Electric Company and Subsidiares 31

' Consolidated Balance Sheet 3

' At December 31, 1997 1996 (In millions)

Assets,

Current Assets Cash and cash equivalents 8 16 2.6 66.7 Accounts receivable (net of allvwance for uncollectibles of $24.1 and $18.0 respectively) 419.8 419.5 119.7 68.8 Trading securities Fuel stocks 87.8 87.1-Materials and supplies 164.2 147.7 65.2 64.7 Prepaid taxes other than income taxes Othr' 27.4 44.7 Totai current assets 1,046.5 899.2 Investments and Other Assets R:al estate projects 446.8 52C.8 Power generation projects 451.7 379.1 Financial investments 198.5 204.4 Nuclear decommissioning trust fund 145.3-116.4 113.0 84.5 Net pension asset Safe Harbor Water Power Corporation 34.4

.34.4 82.2 36.4 Senior living facilities

' Other 108.1 92.2 l

Total investments and other assets 1,558.0 1,473.2 I

UtNity Plant Plant in service Electric 8,725.6 6,514.9 Gas

$46.9 777.0 Common 554.1 523.5 Total plant ira service 8,126.6 7,815.4-Accumulated depreciation 12,843.4)

(2,617.1}

Net plant in service 5,283.2 5,198.3 Construction work in progress 215.2 221.9 Nuclear fuel (net of amortization) 127.9 132.9 Plant held for future use 25.2 25.5 Net utility plant 5,651.5 5,578.6 Deterred Charges 470.7 512.3 Regulatory assets (net)

Other' 48.7 81.0 517.4 593.3 Total deferred charges Total Assets

$8.773.4

$8.544.3 See Notes to Consolidated Financial Statements.

Cert;'n prior-year amounts have been reclassified to conform with the current year's presentation.

l

)

Danimore Gas and Electric Compar and Subsidianes 32 l

Consolidated Balance Sheeta At December 31, 1997 1996 (In millions)

Liabilities and Capitalization Current Liabilities Short-term borrowings

$ 316.1

$ 333.2 Current portions of long-term debt and preference stock 271.9 280.8 Accounts payable 203.0 172.9 Customer deposits 80.1 28.0 Accrued taxes 5.5 6.5 Accrued interest 88.4 57.4 Dividends declared 66.3 66.9 Accrued vacation costs 36.2 34.3

~ Other 44.3 37.1 Total current liabilities 1,031.8 1,017.1 Deferred Credits and Other Lv bilities Deferred income taxes 1,294.9 1,295.9 Postretirement and postemployment benefits 185.5 169.2 Decommissioning of federal uranium enrichment facilities 34.9 38.6 Other 67.0 65.5 Total deferred credits and other liabilities 1,582.3 1,569.2 Capitallration Long-term debt 2,988.9 2,758.8 Redeemable preference stock 90.0 134.5 Preference stock not subject to mandatory redemption 210.0

-210.0 Common shareholders' equity

_2 870.4 2,854.7 Total capitalization

_ 8,1 59.3 5,958.0 Comenttments, Guarantees, and Contingenciee-See Note 12 4

Total Uabilities and Capitalization

$8,773.4

$8.544.3 See Notes to Cbnsolidated Anancial Statements.

Certiin prior-year amounts haw been reclassified to conform with the current year's presentation.

Bammare Gas and Doctric Company and Subsidiaries 33

Consolidated Ctatementa of Cash Flowa

.I l

Year Ended December 31, 1997 1996 1995 j

(In millions)

Cash Flowr From Operating Activities Net income

$282.8

$310.8

$338.0 Adjustments to reconcile to net cash provided by operating activities Depreciation and amortization 396.8 383.1 379.0 Deferred income taxes 7.4 26.0 103.5 investment tax credit adjustments (7.5)

(7.6)

(8.1)

Deferred fuel costs 18.3 0.5 5.6 28.5 1.3 Deferred energy conservation revenues 95.4 Disallowed replacement energy costs Accrued pension and postemployment benefits (18.0)

(13.8)

(7.6).

Write-off of merger costs 57.9 Write downs of real estate investments 70.8 Allowance for equity funds used during construction (5.3)

(6.5)

(14.2)

Equity in er *Mgs of affiliates and joint ventures (net)

(42.5)

(48.3)

(21.3) *

~ Changes in current assets, other than sales of accounts receivable (54.7)

(88.0)

(107.4)

Changes in current liabilities, other than short-term borrowings 42.6 (4.9)

(7.3)

Other

_{22.6) 26.7 6.7 Net cash provided by operating activities 726.0 701.9 668.2 Cash Flows From Financing Activities Net istaance (maturity) of short-term borrowings (17.1) 53.9 215.6 Proceeds from issuance of Long term debt 622.0 383.2 184.4 59.3 Preference stock Common stock 3.7 0.3 Proceeds from sales of receivables 10.0 2.0 Reacquisition of long-term debt (343.3)

(158.5)

(315.1)

Redemption of preferred and preference stock (104.5)

(112.6)

(73.0)

Common stock dividends paid (239.2)

(233.1)

(227.2)

Prtferred and preference stock dividends paid (29.7)

(37.0)

(40.1)

Oth:r 2.5 (1.2)

Net cash used in financing activities (109.3)

(91.6)

(193.8)

Cash Flows From investing Activities Utility construction expenditures (including AFC)

(373.2)

(360.5)

(366.0)

Allowance for equity funds used during construction 5.3 6.5 14.2 Nuclear fuel expenditures (43.6)

(46.8)

(46.3)

- Deferred energy conservation expenditures (27.1)

(31.4)

(45.5)

Contributions to nuclear decommissioning trust fund (17.6)

(25.5)

(9.8)

Merger costs (20.9)

(28.5)

(5.1)

Purchases of marketable equity securities (23.0)

(32.7)

(18.5)

Sil:s of marketable equity securities 46.5 39.7 49.8 Other financial investments (0.4) 7.1 9.4 Rnl estate projects 24.2 (55.3)

(15.6)

• Power generation systems (44.3)

(5.3)

(34.4)

Other.

(46.7)

(34.3)

(21.8)

Net cash used in investing activities (520.8)

(567.0)

(489.6).

Not increase (Decrease) in Cash and Cash Equivalents 95.9 43.3 (15.2)

Cash and Cash Equivalents at Beginning of Year 66.7 23.4 38.6 Cash and Cash Equivalents at End of Year

$162.6

$ 66.7

$ 23.4 Other Cash Flow Information C:sh paid during the year for:

Interest (net of amounts capitalized)

$224.2

$193.6

$195.3

' income taxes

$171.2

$160.1

$ 99.6 See Notes to Consolidated Financial Statements.

Csrt:In prior-year amounts haw been reclassified to conform with the current year's presentation.

34 Baltimore Gas and Doctric Company and Subsidiaries

-Consolidated Ctatement3 of Common Shareholders' Equity Unrealized Gain (Loss)

. on Available Pension Common Stock Retained For Sale Liability Total Yerts Ended December 31,1997, f 996, and 1995 Shares Amount Earnings Securities Adjustmnnt Amount (Dollar amounts in millions, number of shares in thousands)

Balance at December 31,1994 147,527

$1,425.4

$1,312.6

$(2.5)

$(16.5)

$2,719.0

- Net income 338.0 338.0

' Dividends declared Preferred and preference stock (40.6)

(40.6).

Common stock ($1.55 per share)

(228.6)

(228.6)

, Common stock issued 0.3 0.3 Other 0.1 0.1 Net unrralized gain on securities 10.0 10.0 Deferrid taxes on net unrealized gain on securities (3.5)

(3.5)

Pension liability adjustment 25.4 25.4 Def;rr:d taxes on pension liability adjustment (8.9)

(8.91 Balance at December 31,1995 147,527 1,425.8 1,381.4 4.0 2,811.2

' Net income 310.8 310.8 Dividends declared Pr".firred and preference stock (38.5)

(38.5)

Common stock ($1.59 per share)

(234.6)

(234.6)

Common stock issued '

140 3.7 3.7

, Other 0.4 0.4 Net unrtalized gain on securities 2.6 2.6 Def rred taxes on net unrealized gair on securities (0.9)

(0.91 '

Balance at December 31,1996 147,667 1,429.9 1,419.1 5.7 2,854.7 Net income 282.8 282.8 Dividends declared P/efer:nce stock (28.7)

(28.7)

Common stock ($1.63 per share)

(240.7)

(240.7)

Other 3.1 3.1 i

Net unrralized loss on securities (1.2)

(1.2)

Def;rred taxes on net unrealized loss on securities 0.4 0.4 Balance at December 31,1997 147,667

$1,433.0

$1,432.5

$4.9

$2,870.4

- See Notes to Consolidated Financial Statements.

l.' C rt:in prior-year amounts have been reclassified to conform with the current year's presentation.

je-l Baltimors Gas and Dectric Company and Subsidianes -

35

Consolidated Ctatements of Capitalization At December 31, 1991 1996 (In millions) long-Term Detut Fir;t Refunding Mortgage Bonds of BGE '

24.9 6X% Series, due August 1,1997 Floating rate series, due April 15,1999 125.0 125.0 8.40% Series, due October 15,1999 91.1 91.1 SW% Series, due July 15,2000 125.0 125.0 8%% Series, due August 15,2001 122.3 122.4 22.7 7%% Series, due January 1,2002 7X% Series, due July 1,2002 124.5 124.5 5M% installment Series, due July 15, 2002 9.8 10.4.

6M% Series, due February 15,2003 124.8 124.8 6%% Series, due July 1,2003 124.9 124.9 SM% Series, due April 15,2004 125.0 125.0 Remarketed floating rate series, due September 1,2006 125.0 125.0

• 7M% Series, due January 15,2007 123.5 123.7 6%% Series, due March 15,2008 124.9 125.0 7M% Series, due March 1,2023 125.0 125.0 7M% Series, due April 15,2023 100.0 100.0 Total First Refunding Mortgage Bonds of BGE 1,570.8 1,619.4 Other long-term debt of BGE 50.0 Tirm bank loan due March 29,2001 Mediumterm notes, Series B 100.0 100.0 Medium-term notes, Series C 143.0 183.0 Medium-term notes, Series D 225.0 138.0 Medium-term notes, Series E 183.5 Pollution control loan, due July 1, 2011 36.0 36.0 Port facilities loan, due June 1, 2013 48.0 48.0 Adjustable rate pollution control loan, due July 1,2014 20.0 20.0 5.55% Pollution control revenue refunding loan, due July 15, 2014 47.0 47.0 Economic development loan, due December 1,2018 35.0 35.0 6.00% Pollution control revenue refunding loan, due April 1, 2024 75.0 75.0 Variable rate pollution control loan, due June 1,2027 8.8 Total other long-term debt of BGE 921.3 732.0 Long-term debt of Constellation Holdings Companies Loans under revolving credit agreement Variable rates based on LIBOR, due December 9,1999 65.0 Mortgage and construction loans and other collaterali2ed notes 8.69% mortgage note, due January 28,1998 28.4 24.9 7.90% mortgage note, due September 12, 2000 8.6 8.8 8.00% mortgage note, due July 31,2001 0.1 0.1 8.00% mortgage note, due October 30,2003 1.6 1.5 7.50% mortgage note, due October 9,2005 9.7 9.8 Variable rate mortgage notes, due through 2009 93.5 94.9 7.357% mortgage note, due March 15,2009 5.5 5.8 9.65% mortgage note, due February 1,2028 9.7 9.7.

8.00% mortgage note, due November 1,2033 1.2 l

Unsecured notes 579.1 387.2 l

Total longterm debt of Constellation Holdings Companies 737.4 607.7 l

Lort-term debt of other diversified businesses Loans under revolving credit agreement 22.0 12.0 l

Unamortized discount and premium (13.7)

(14.5)

Current portion of long-term debt (248.9)

(197.8)

Tot:1 long-term debt

$2,988.9

$2,758.8 continued on page 37 See Notes to Consolidated Financial Statements.

Certain prior-year amounts have been reclassified to conform with the current year's presentation.

36 Baltimore Gas and Electne Company and Subsidianes

l Consolidated Ctatement3 of Capitalization At December 31l 1997 1996 (In millions)

Preference Stock -

Cumulati e, $100 par value,6,500,000 shares authorized.

RIdeemable preference stock 7.50%,1986 Series,365,000 and 395,000 shares outstanding. Callable at $102.50 per share prior to October 1,2001 and at lesser amounts thereafter 36.5 39.5

' 6.75 %,1987 Series,425,000 and 440,000 shares outstanding. Callable

' tt $102.25 per share prior to April 1,2002 and at lesser amounts thereafter 42.5 44.0 7.80%,1989 Series,500,000 shares redeemed at par on July 2,1997 50.0

. 8.25%,1989 Series,100,000 shares redeemed at par on October 1,1997 10.0 8.625%,1990 Series,130,000 and 390,000 shares outstanding 13.0 39.0 7.85%,1991 Series 210,000 and 350,000 shares outstanding 21.0 35.0 i

l Current portion of redeemable preference stock

_(23.0)

(83.0)

' Total redeemable preference stock 90.0 134.5 Pref rence stock not subject to mandatory redemption 7.78%,1973 Series,200,000 shares outstanding, callable at $101 per share 20.0 20.0 l

7.125%,1993 Series,400,000 shares outstanding, not callable prior to July 1,2003 40.0 40.0 l

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 0.99%,1995 Series,600,000 shares outstanding, not callable prior to October 1,2005 60.0 60.0 Total preference stock not subject to mandatory redemption 210.0 210.0 Common Shareholders' Equity l

Common stock without par value, 175,000,000 shares authorized; 147,667,114 shares lisued and outstanding at December 31,1997 and 1996. (At December 31,1997 l

166,893 shares were reserved for the Employee Savings Plan and 3,277,656 shares were reserved for the Dividend Reinvestment and Stock Purchase Plan.)

. 1,433.0 1,429.9 Rets.ined earnings '

1,432.5 1,419.1 -

Unrzalized gain on available-for-sale securttles 4.9 5.7 TotIl common shareholders' equity 2,870.4 2,854.7 i-l Total Capitaliastion

$6,159.3

$5.958.0 l

See Notes to Consolidated Financial Statements.

l

' Certiin prior $ ear amounts haw been reclassified to conform with the currentyear's presentation, i

l I

Baltimore Gas and Doctnc Co6 many and Subsidiaries 37

' Consolidated Ctatement3 of Income Taxco.

Year Ended December 31, 1997 1996 1995 (Dollar amounts in millions)

. Income Taxes Current -

$158.1

$147.9

$ 74.1 Deferred Change in tax effeet of temporary ditferences (1.0) 21.0 116.9 Change in income taxes recoverable through future rates 8.0 4.9 (1.0)

Deferred taxes credited (charged) to shareholders' equity 0.4 (0.9)

(12A Deferred taxes charged to expense 7.4 26.0 103.5

~ Investment tax credit adjustments (7.5)

_{7.6)

(8.1) income taxes per Consolidated Statements of income

$158.0

$166.3

$169.5 Reconciliation of income Taxes Computed at Statutory Federal Rate to Totalincome Taxes income before income taxes

. $440.8

$477.1

$507.5 Statutory federal income tax rate 35%

35%

35%

income taxes computed at statutory federal rate 154.3 167.0 177.6 increases (decreases) in income taxes due to Depreciation differences not normalized on regulated activities 13.9 12.6 11.0 Allowance for equity funds used during construction (1.9)

(2.3)

(5.0)

Amortization of deferred investment tax credits (7.5)

(7.7)

(8.1)

- Tax credits flowed through to income (0.5)

(0.5)

(0.5)

Amortization of deferred tax rate differential on regulated activities (2.3)

(1.9)

(2.0)

State income taxes 8.2 4.1 1.6 Other (4.2)-

(5.0)

(5.1)

Total income taxes

$158.0

$166.3

$169.5 Effective federal income tax rate 35.8%

34.9%

33.4%

At December 31, 1997 1996 (Dollar amounts in millions)

Deferred income Taxes Deferred tax liabilities Accelerated depreciation 8 953.5

$ 920.6 Allowance for funds used during construction 206.7 209.2 Income taxes recoverable through future rates 89.8 92.6 Deferred termination and postemployment costs 41.1 45.6 Daferred fuel costs 1.5 7.9 Leveraged leases 25.2 27.6 Percentage repair allowance 38.7 38.4 Energy conservation expenditures 24.5 26.6 Other 191.5 175.6 Total deferred tax liabilities 1,572.5 1.544.1 Def rred tax assets Accrued pension and postemployment benefit costs 37.6 40.6 Deferred investment tax credits 44.3 46.9 Capitalized interest and overhead 44.5 42.5 Contributions in aid of construction 39.7 35.7 Nuclear decommissioning liability 24.3 20.0 Other 87.2 62.5 Total deferred tax assets 277.6 248.2 Deferred tax liability. net

$1.294.9

$1.295.9

- See Notes to Consolidated Financial Statements.

- Certain prioryear amounts have been reclassified to conform with the current year's nresentation.

38 Baltirnore Gas and Electne Company and Subsidiaries

- Not:3 to Consolidated Financid Ctat menta Note 1. Significant Accounting Policies Nature of Our Business However, sometimes the Maryland PSC orders an accounting Baltimore Gas and Electric Company (BGE) is the parent company treatment different from that used by nonregulated companies to End conducts our primary business-the electric and gas utility determine the rates we charge our customers. We discuss this business. That business serves Baltimore City and all or part further in Note 5.

of 10 Central Maryland counties. We also conduct various diversified businesses in subsidiary companies. We describe Utility Revenues our diversified businesses in Note 3.

We record utility revenues in our Consolidated Statements of income when we provide service to customers.

. We us3 three different accounting methods to report our Invest-Fuel and Purchased Energy Costs ments in our subsidiaries or other companies: consolidation, the We incur costs for:

equity method, and the cost method.

a the fuel we use to generate electricity.

Conse#deflon a purchases of electricity from others, and We us3 consolidation when we own a majority of the voting stock u natural gas that we resell.

' of th1 subsidiary. This means the accounts of our subsidiaries These costs are shown in our Consolidated Statements of

. ara combined with our accounts. We eliminate intercompany income as " electric fuel and purchased energy" and " gas

- balinces and transactions when we consolidate these accounts.

purchased for resale." We discuss each of these separately Our consolidated financial statements include the accounts of; below.

O BGE, O Constellation Holdings, Inc. and Subsidiaries (the Fuel 1/ sed to Generate Sectricity and Purchases of Sectricity Constellation Holdings Companies),

From others a Constellation Energy Solutions, Inc. and Subsidiaries, and Under the electric fuel rate clause set by the Maryland PSC, we

- 0 BGE Home Products & Services, Inc. and Subsidiaries.

charge our electric customers for:

a the fuel we use to generate electricity (nuclear fuel, coal, The Equity Afethod gas, or oil), and

' We usually use the equity method to report corporate joint a the net cost of purchases and sales of electricity, primarily ventures, partnerships, and affiliated companies (including power with other utilities.

ginerztlon projects) where we hold a 20% to 50% voting interest.

I Under the equity method, we report:

We charge the actual costs of these items to customers with no profit to us. To do this, we must keep track of what we spend O our interest in the entity as an investment in our and what we collect from customers under the fuel rate in a Consondated Balance Sheets, and given period. Usually these two amounts are not the same o our percentage share of the earnings from the entity in our because there is a difference between the time we spend the Consolidated Statements of Income, money and the time we collect it from our customers.

The only time we ao not use this method is if we can exercise Under the electric fuel rate clause, we defer (include as an asset i

control over the operations and policies of the company. If we or liability in our Consolidated Balance Sheets and exclude from hive control, accounting rules require us to use consolidation.

our Consolidated Statements of income) the difference between We r: port our investment in Safe Harbor Water Power our actual costs of fuel and energy and what we collect from

< Corporation under the equity method.

customers under the fuel rate in a given period. We either bill or refund our customers that difference in the future. We discuss l4 The Cast Afethod this further in Note 5.

We usually use the cost method if we hold less than a 20%

We calculate the electric fuel rate using three factors:

voting interest in on investment. Under the cost method, we report our investment at cost in our Consolidated Balance a the mix of generating plants we used over the last 24 i + Sheets. The only time we do not use this method is when we can

months, l

cxercise significant influence over the operations and policles of a the latest three-month average fuel cost for each generating the company. If we have significant influence, accounting rules unit, and

{

requir3 us to use the equity method.

e the net cost of purchases and sales of electricity, primarily with other utilities, over the last 24 months.

The MIryland Public Service Commission (Maryland PSC) regu-We may change the fuel rate only if the calculated rate is more i

than 5% above or below the rate in effect. The fuel rate is latIs our utility business. Generally, we use the same accounting affected most by the amount of electricity generated at our polici s and practices used by nonregulated companies for finan-Calvert Cliffs Nuclear Power Plant (Calvert Cliffs) because the ci;l rIporting under generally accepted accounting principles.

cost of nuclear fuel is cheaper than coal, gas, or oil.

Balumore Gas and Doctnc Company and Subsidiaries 39

We also report two other items as " electric fuel and purchased Under the mark-to-market method of accounting, we report:

energy" in our Consolidated Statements of income:

. e commodity positions and derivatives at fair value in our O amortization of nuclear fuel (described under " Utility Plant" Consolidated Balance Sheets, and later in this note). We amortize nuclear fuel based on the a changes in fair value as diversified business revenues in our energy produced over the life of the fuel. We pay quarterly Consolidated Statements of income.

fees to the Department of Energy for the future disposal of At December 31,1997, Constellation Power Source had deriva-spent nuclear fuel, and accrue these fees based on the tive assets with a fair value of about $9.4 million and derivative kilowatt-hours of electricity sold. We bill our customers for liabilities with a fair value of about $8.6 million.

nuclear fuel as described earlier in this note.

O amortization of deferred costs of decommissioning and Market Mok decontaminating the Department of Energy's uranium enrich-ment facilities. We discuss these costs further in Note 5.

We measure our exposure to market risk at any point in time by comparing our open positions to a market estimate of fair value. The Extended outages at Calvert Cliffs drive up fuel costs and may market prices we use to determine fair value are based on manage-result in fuel rate proceedings before the Maryland PSC. In these ment's best estimates, which consider various factors including:

proceedings, the Maryland PSC would consider whether any a clos. g exchange prices, a time value of money, and in portion of the extra fuel costs should be paid by BGE instead of passed on to customers. We discuss the financial impact of past e over-the-counter prices, a volatility factors.

extended outages in Note 12.

At December 31,1997, our exposure to market risk was not material.

Natural Gas Taxes We charge our gas customers for the natural gas they consume We sumrdze our income taxes in the Consolidated Statoments using " gas cost adjustment clauses" set by the Maryland PSC.

of income Taxa on page 38. As you read this section, it may be These clauses operate the same as the electric fuel rate clause helpful to refer to Wose statements.

described earlier in this note. However, effective October 1996, the Maryland PSC approved a modification of the gas cost adjust-Income Tax Expense ment clauses to provide a market based rates incentive mecha-We have two categories of inco.ne taxes in our Consolidated nism. Under market based rates our actual cost of gas is Statements of Income-current and deferred. We describe each compared to a market index (a measure of the market price of of these below.

gas in a given period). The difference between our actual cost and the market index is shared equally between BGE (which Our current income tax expense consists solely of regular tax benefits shareholders) and customers, less applicable tax credits. Our 1996 and 1995 current income tax expense amounts include altemative minimum tax credits of

$30 million in 1996 and $40 million in 1995. The attemative M MW minimum tax can be carried forward indefinitely and used as We engage in risk management activities in our gas business tax credits in years when our regular tax liabihty exceeds the and in our diversified businesses. We separately describe these alternative minimum tax liability. We do not have any remaining activitias for each business below.

alternative minimum tax credits.

Gas Business Our deferred income tax expense is equal to the changes in the in 1996, we began using basis swaps in the winter months deferred income tax liability and regulatory asset (described later (November through March) to hedge price risk associated with in this note) during the year, excluding amounts charged or natural gas purchases. Under internal guidelines, we are not credited to common shareholders' equity, permitted to try to predict market changes.

Imestment Tax Credits We defer, as unrealized gains or losses, the net amount we owe We have also deferred the investment tax credit associated with (unrealized losses) or are due (unrealized gains) under the swaps our regulated utility business in our Consolidated Balance Sheets in our Consolidated Balance Sheets. At December 31,1997, we as a regulatory liability. The regulatory liability is amortized evenly had outstanding basis swap agreements covering 15.4 million to income over the life of each property. We discuss this furthr r l

decatherms of natural gas purchases through March 1998. We in Note 5. We reduce income tax expense in our ConsolidMN had unrealized gains of $1.0 million related to the outstanding Statements of income for the investment tax credit and mer tax agreements. When amounts are paid under the agreements, we credits associated with our nonregulated diversified buunesses, l

report the payments as gas costs in our Consolidated other than leveraged : eases.

l Statements of income.

Deferred income Tax Assets and Unblittles DhorsMed Businesses We must report some of our assets and liabilities differently for Our subsidiary, Constellation Power Source, engages in power our financial statements than we do for income tax purposes.

marketing activities, which include trading electricity, other energy The tax effects of the differences in these items are reported as commodities, and related denvatives (such as forwards, options, deferred income tax assets or liabilities in our Consolidated i

and swaps). Constellation Power Source reports trading activities Balance Sheets. We measure the assets and liabilities using using the mark-to-market method of accounting, income ta( rates that are currently in effect.

I l

l 40 Baltimore Gas and Electric Company and Subsidiaries

A portion of our total deferred income tax liability relates to our Trading securities utility business, but has not been refircted in the rates we The Constellatico Holdings Companies classify some of their charg cur customers. We refer to this portion of the liability investments in marketable equity securities and financial limited as

• income taxes recoverable through future rates." We have partnerships as trading securities. We include any unrealized recorded that portion of the liability as a regulatory asset in our gains or losses on these securities in diversified bus l ness Consolidated Balaace Sheets. We discuss this further in Note 5.

revenues in our Consolidated Statements of income.

Franchise Taxes Available4or. sale securities

'V3 pn Maryland public service company franchise tax instead of We classify our investments in the nuclear decommissioning trust state incMie tax on our utility revenue from sales in Maryland.

fund as available'for-sale securities. We include any unrealized We include the franchise tax in " taxes other than income taxes" gains or losses on the trust assets as a change in the decom-in our Consolidated Statements of income, missioning reserve. We describe the nuclear decommissioning trust and the reserve under the heading " Decommissioning inventory Costs" later in this note.

We report the majority of our fuel stocks and materials and supplies at average cost-in addition, the Constellation Holdings Companies classify some 8

of their investments in marketable equity securities as available.

for sale securities. We include any unrealized gains or losses on Evaluation of Assets for impairment these securities in shareholders' equity in our Consolidated Statement of Financial Accounting Standards No.121, Balance Sheets. We also include the Constellation Holdings Accounting for the Impairment of LongDved Assets and for Long-Companies' portion of unrealized gains or \\osses on securtties Limd Assets to Be Disposed Of, applies particular requirements of equity-method (described earlier in this note) Investees in l

to some of our assets that have long lives (some examples are shareholders' equity.

utility property and equipment, and real estate). We determine if those assets are impaired by comparing their undiscounted expected future cash flows to their carrying amount in our Utility PM, Depreciatkn and Amortization, and

-q accounting records. We recognize an impairment loss if the undiscounted expected future cash flows are less than the Utility Plant cirrying amount of the asset.

IJtiltty plant is the term we use to describe our utility business property and equiprhent that is in use, being held for future use, or under construction. We summarize utility plant in our n ot 4 we su ize the real estate projects that are in our Consolidated Balance Sheets. We report our utility plant at its Consolidated Balance Sheets. The projects consist of the m@al cost wm mems.

Constellation Holdings Companies' investments in:

a material and labor, c rental and operating properties, that they are holding for a contracts costs, investment, and a construcNon overhead costs (where applicable), and -

f C properties under development, that they are holding for a an allowance for funds used during construction (described l

future development and subsequent sale, later in this note).

The Constellation Holdings Companies include the costs incurred We charge retired or otherwisedisposed-of utility plant to to acquire and develop these properties as part of the costs of accumula'ed depreciation.

the properties. GenetaHy, the Constellation Holdings Companies We own an undivided interest in the Keystone and Conemaugh i

report these properties at cost, unless the amount invested electric generating plants in Westem Pennsylvania, as well as in exceeds the fair value. In these cases, the Co.nstellation Holdings the transmission hne that transports the plants' output to the Compinles write down the projects to their fair values

• Soint owners' service territories. Our ownership interests in these l

plants are 20.99% in Keystone and 10.56% in Conemaugh.

Financial investments and Trading Securities These ownership interests represented a net investment of in Note 4, we summarize the financial investments that are in

$152 million at December 31,1997, and $153 million at our Consolidated Balance Sheets.

December 31,1996. We report these properties in the same Statement of Financial Accounting Standards No.115, Accounting accounts we use for our other utility plant (described above),

for Certain Innstments in Debt and Equity Securities, applies p rticular requirements to some of our investments in debt and Depreciation Expense

• equity securities. We report those invectments at fair value, and Generally, we compute depreciation by applying composite, we Mse specific identification to determine their cost for straight line rates (approved by the Maryland PSC) to the average computing realized gains or losses. We classify these investments investment in classes of depreciable property. We depreciate ts either trading securities or availabla-for sale securities, which vehicles based on their estimated useful lives. As a result of the we describe separately below. We report investments that are not Maryland PSC's November 1995 gas base rate order, we revised covered by Statement of Financial Accounting Standards No.115 our gas utility plant depreciation rates to reflect the results of a at their cost.

detailed depreciation study. The revised rates increased deprecia-tion expense by approximately $2.4 million annually.

Baltirnore Gas and Electric Cornpany and Subsidiaries 41

Our 1995 depreciation expense includes the write-off of expendi-Prior to November 1995, we used a pre-tax rate of 9.40% to

. tures tssociated with a second combustion turbine at our calculate AFC for all of our utility plant. Effective November 1995, P;rrymin site that will not be built. This write off reduced after-the Maryland PSC reduced the pre-tax AFC rates to 9.04% for gas 1:x carnings during 1995 by $9.7 million, or $.07 per share. The plant and 9.36% for common plant. We continue to use 9.40%

construction of the first 140 megawatt combustion turbine at for electric plant. We compound AFC annually.

P rryman was cornpleted, and the unit was placed in service, during June 1995.

Capitalked interest The Constellation Holdings Companies capitalize interest costs Amortkation Expense incurred to finance real estate developed for internal use and Amortization is an accounting process of reducing an amount in power generation development projects.

our Consohdated Balance Sheets evenly over a period of time.

When we reduce amounts in our Consolidated Balance Sheets, Long-Term Detzt we increase amortization expense in our Consolidated We defer (include as an asset or liability in our Consolidated Statzments of income. An amount is considered fully amortized Balance Sheets and exclude from our Consolidated Statements when it has been reduced to zero, of Ireome) all costs related to the issuance of long-term debt, These costs include underwriters' commissions, discounts or Dec;. 1 ' "- "c.,i; Costs premiums, and other costs such as legal, accounting and We must accumulate a reserve for the costs that we expect to regulatory fees, and printing costs. We amortize these costs incur in the future to decommission the radioactive portion of over the life of the debt.

Calvert Cliffs. We do this based on a sinking fund methodology.

When we incur gains or losses on debt that we retire prior to in 1995, the Maryland PSC authorized us to record decommis.

maturity, we amortizo those gains or losses over the rema,ning l

i I

sioning expense based on a facility-specific cost estimate so we original life of the debt.

l cin accumulate a decommissioning reserve of $521 million in 1993 dollars by the end of Calvert Cliffs' service life in 2016; Cash Flows adjusted to reflect expected inflation. We have reported the decommissioning reserve in " accumulated depreciation" in For the purpose of reporting our cash flows, we define cash our Consolidated Balance Sheets. The total reserve was equMlents as highly liquid investments that mature in three

$201,6 million at December 31,199-7, and $167.5 million months or less.

at December 31,1996.

Use of Accounting Estimates To fund the costs we expect to incur to decommission the. plant, Management makes estimates and assumptions when preparing we established an external decommissioning trust in accordance f nancial statements under generally accepteo accounting princh with Nuclear Regulatory Commission (NRC) regulations. We ples. These estimate t id assumptions affect various matters, report the assets in the trust in

• nuclear decommissioning trust including-fund" in our Consolidated Balance Sheets. The NRC requires uttih ties to provide financial assurance that they will accumulate suffi-e our reported amounts of assets and liabilities in our cient funds to pay for the cost of nuclear decommissioning based Consolidated Balance Sheets at the dates of the financial upon either a generic NRC formula or a facility-specific decommis-statements, sioning cost estimate. We use the facihtyspecific cost estimate u our disclosure of contingent assets and liabilities at the (mentioned above) for funding these costs and providing the dates of the financial statements, and required financial assurance.

e our reported amounts of revenues and expenses in our Consolidated Statements of income during the reporting Allowance for Funds Used During Construction periods.

and Capitalized interest These estimates involve judgments with respect to, among other Allowance for Funds Used During Construction (AFC) things, future economic factors that are difficult to predict and We finance construction projects with borrowed funds and equity are beyond management's control. As a result, actual amounts funds. We are allowed by the Maryland PSC to record the costs could differ from these estimates.

of these funds as part of the cost of construction projects in our Consolidated Balance Sheets. We do this through the AFC,.which hclassifications we calculate using a rate authorized by the Maryland PSC. We bill We have reclassified certain prior-year amounts for comparative our customers for the AFO plus a return after the utility plant is purposes. These reclassifications did not affect consolidated net placed in service, income for the years presented.

42 Baltimore Gas and Electric Company and Subsidiaries

l I

gte 2. Information by Business Segment We have three business segments: electric, gas, and diversified businesses (subsidiaries). Our electric business generates, purchases, and sells electricity. Our gas business purchases, transports, and sells natural gas. Our diversified businesses are involved in various activities which we describe in Note 3. We show selected financial information for each of our business segments in the following table.

j Construction Identiriable segment intersegment Total incorne from Depreciatwan/

Expenditures Assets at Revenues Revenues Revenues operations Amortization (including AFC)

December 31 (In millions) 1997-Electric

$2,191.7

$ 0.3

$2,192.0

$596.8

$286.5

$278.7

$6,204.7 Gas 521.6 521.6 63.5 39.3 94.5 896.9 Diversified businesses 594.3 10.3 604.6 63.3 17.1 1,595.2 Other identifiable assets 76.6 Intercompany eliminations J10.6) j i_0_.6)

Total

$3.307.6

$3,307.6

$723.6

$342.9

$373.2

$8,773.4 1993-Electric

$2.208.7

$ 0.3

$2,209.0

$498.0

$279.3

$262.5

$6,222.6 Gas 517.3 517.3 68.9 37.8 98.0 810.1 Diversified businesses 427.2 6.8 434.0 102.6 13.1 1.400.6 Other identifiable assets 111.0 Intercompany eliminations (7.1)

(7.1)

Total

$3.153.2

$3.153.2

$669.5

$330.2

$360.5

$8.544.3 1995-Electric

$2,229.8

$ 1.3

$2,231.1

$574.3

$276.3

$288.5

$6.193.4 Gas 400.5 400.5 48.1 29.6 77.5 748.5 Diversified businesses 304.5 6.6 311.1 73.3 11.5 1.266.1 Other identifiable assets 69.6 Intercomp6ny chminations (7.9)

(7.9)

Total

$2.934.8

$2.934.8

$695.7

$317.4

$366.0

$8.277.6 Note 3. Information About Our Subsidiaries Our diversified business subsidiaries are organized in three groups:

1997 1996 1995 0 Our power generation, financial investments, and real estate income Statements businesses, Revenues o Our energy marketing businesses, and Real estate projects

$152.7

$80.8 5108.4 o Our home products and commercial building systems Power generation systems 109.1 93.1 57.7 businesses.

Financial investments

_ _51.9 38.9 25.2 Total revenues 313.7 212.8 191.3 Our Power Generation, Financialinvestments, Expenses other than interest and Real Estate Businesses and income taxes 238.8 113.2 114.4 We refer to all of these together as the Constellation Hold.ings Companies. Constellation Holdings, Inc. Is a wholly owned locome from operations 3.9 99.6 76.9

, subsidiary of BGE and holds all of the stock of the following

.n

. n s

3 three subsidiaries.

0 Capitalized interest 8.4 14.6 13.6 o Constellation Power, Inc.-develops, owns, and operates income tax expense

_{11.8)

(26.6)

(14.4) power generation projects, Net income

$ 11.9

$42.3

$ 27.1 0 Constellation investments, Inc.-engages in financial Contribution to our earnings investments, and 0 Constellation Real Estate Group, Inc.-develops, owns, and r share,0f common stock S.08

$.29

$.18 manages real estate and senior-living facilities.

Balance Sheets We show condensed financial information for the Constellation Current assets

$ 170.4 $ 115.7 $

98.5 Noncurrent assets

_1 190.0 1,189.7 1,102.5 Holdings Companies in the following table. We have not reflected t

the elimination of intercompany balances or transactions that are Total assets

$1.360.4 $1.305.4 51.201.0 eliminated in our consolidated financial statements. We describe Current liabihties

$ 181.1 $ 134.0 $

70.4 this further in Note 1.

Noncurrent liabilities 837.0 775.2 778.5 Shareholder's equity 342.3 396.2 352.1 Total liabilities and shareholder's equity

$1.360.4 $1.305.4 $1.201.0 Britimore Gas and Electric Company and Subsidianes 43

The 1997 income statement includes aft:r-tax write downs of real o Constellation Enirgy Source, Inc.~provides natural estate projects totaling $46 million. We describe these write <fowns ges brok: ring and relat:d services for wholesale and in the "Real Estate Development and Senior-l.iving Facilities" retail customers.

section of Management's Discussion and Analysis on page 27.

a Constellation Energy Projects & Services *, Inc. and j

Subsidiaries-provides a broad range of customized The 1996 income statement includes a $14.6 million aftertax gain energy services, including private electnc and gas on the sale of a power purchase agreement that was offset by:

distribution systems, energy consulting, power quality I

D a $7.0 million aftertax write-off of an investment in two services, and campus and multhbuilding energy systems.

geothermal wholesale power generating projects that sell electricity under California power purchase agreements, Our Home Products and Commercial Building Systems o a $3.0 million after-tax write-off of development costs for a Businesses coaffired power project, and BGE Home Products & Services, Inc. and subsidiaries:

c a $6.2 million after-tax writeoff of a portion of an invest-a sells and services electric and gas appliances, ment in a solar power project.

a engages in home improvements, and a sells and services heating and air conditioning systems.

Our Energy Marketing Buelnesses Constellation Energy Solutions, Inc. is a wholly owned subsidiary of BGE and serves as the hol ding company for our three energy Other mirketing businesses:

Safe Harbor Water Power Corporation is a producer of hydroelectric power. BGE owns two-thirds of Safe Harbor's a

o Constellation Power Source, Inc.-provides power marketing total capital stock, including one-half of the voting stock, and risk management services to wholesale customers in and a two-thirds interest in its retained earnings.

North America by purchasing and selling electric power, other energy commodities, and related derivatives.

Nota 4. Real Estate Projects and Financial investments Amortized Unreahzed unrealized Fair Real Estate Projects At December 31,1997 cost Basis cains tosses value Real estate projects consist of the following investments held by the Constellation Holdings Companies:

(In millions)

Marketable Equity Securities $ 77.3

$12.0 $(0.5) $ 88.8 At December 31,

_1997 1996

. U.S. Government agency 14.9 0.2 15.1 (in millions)

State municipal bonds 65.5 2.2 67.7 Properties under development

$220.8

$286.2 Totals

$157.7

$14.4 $(0.5) $171.6 R:ntal and operating properties (nct of accumulated depreciaticn) -

225.6 237.7 Amortized unreenad unremitzad Fair Other real estate ventures 0.4 1.9 At December 31,1996 cost Basis Gains

' Losses Value Total real estateprojects

$446.8

$525.8 (in mili,bos)

Marketable Equity Securities $ 52.5 $ 8.0

$(0.1) $ 60.4 Financial Investments U.S. Government agency 18.1 0.3 18.4 Financial investments consist of the following investments held State municipal bonds 73.6 2.2 (0.1) 75.7 l'

by the Constellation Holdings Companies:

Totals

$144.2 $10.5 $(0.2) $154.5 At December 31, 1997 1996 (in millions)

Gross and net realized gains and losses on available-for-sale Insurance companies

$ 88.8

$ 78.8 securities were as follows:

l M:rketable equity securities 33.3 46.2 1997 1996 1995 Financial limited partnerships 43.6 48.1 (in millions)

Leveraged leases 30.8 33.3 Gross realized gains

$9.3

$4.3

$5.5 i

Total financial Investments

$196.5

$204.4 Gross realized losses

_(0.6)

(0.2)

(2.5)

Net realized gains

$8.7

$4.1

$3.0 investments Classi6ed as Available-for. Sale We classify our investments in the nuclear decommissioning trust The U.S. Government agency obligations and state municipal l

fund and the Constellation Holdings Companies' marketable bonds (shown above) mature on the following schedule:

f equity securities (shown above) as available-for-sale. This means At December 31,1997 Amount we do not expect to hold them to maturity and we do not i

l'8 SIIIIOU8) consider them trading securities.

Less than 1 year

$ 1.0

' We show the fair values, gross unrealized gains and losses, and 1-5 years 24.1 cmortized cost 'sa? 5 thew available-for-sale securities, 5-10 years 51.8 u

exclusive of f,3.5 million of unreilized net gains on securities of More than 10 years 5.9 cquity4nethoi lnvestees. in the fellowing tables.

Total maturities of debt securities

$82.8 l

44 Baltimore Gas and Doctric Company and Subsidiaries L.

Note 5. Cogulatory Assets (not)

As discussed in Note 1, the Maryland PSC regulates our utility Deferred Nuclear Expenditures business. Generally, we use the same accounting policies and Deferred nuclear expenditures are the net unamortized balance practices used by nonregulated companies for financial reporting of certain operations and maintenance costs at Calvert Cliffs.

Under generally accepted accounting principles. However, some-Tnese expenditures consist of:

times the Maryland PSC orders an accounting treatment different from that used by nonregulated companies to determine the rates a costs incurred from 1979 through 1982 for inspecting and we charge our customers. When this happens, we must defer repairing seismic pipe supports, certain utility expenses and income in our Consolidated Balance a expenditures incurred from 1989 through 1994 associated Sheets as regulatory assets and liabilities. We then record them with nonrecurring phases of certain nuclear operations in our Consolidated Statements of Income (using amortization) projects, and when we include them in the rates we charge our customers, a expenditures incurred during 1990 for investigating leaks in the pressurizer heater sleeves.

We have recorded these regulatory assets and liabilities in our

. Consolidated Balance Sheets in accordance with Statement of We are amortizing these costs over the remaining life of the plant

- Financial Accounting Standards No. 71, Accounting for the in accordance with the Maryland PSC's orders.

Etfects of Certain Types of Regulation. If we were required to terminate application of that statement for all of our regulated Deferred Energy Conservation Expenditures operations, we would have to record the amounts of all regula-Deferred energy conservation expenditures include two components:

e tory assets and liabilities in our Consolidated Statements of Income at that time. This means our eamings would be reduced a o erations costs (labor, materials, and indirect costs) asso-by the total net amount in the table below, net of applicable daw @ m@ me%% mm WW W W come taes.

WP M

tW M' wpm accordance with the Maryland PSC's orders, and We summarize our regulatory assets and liabilities in the a revenues we collected from customers in 1996 in excess of following table, and we discuss each of them separately below.

Our profit limit under the energy conservation surcharge.

Af December 31, 1997 1996 The Maryland PSC allows us to collect from customers money (in millions) spent on conservation programs under an

• energy conservation income taxes recoverable through future rates $256.5 $264.5 surcharge." However, under this surcharge the Maryland PSC Deferred postretirement and limits what our profit can be. If, at the end of the year, we have postemployment benefit costs 96.4 89.2 exceeded our allowed profit, we lower the amount of future Deferred nuclear expenditures 77.7 82.1 surcharges to our customers to correct the amount of overage, Deferred energy conservation expenditures 55.8 46.7 plus interest.

Deferred costs of decommissioning During 1996, we exceeded our profit limit under the energy federal uranium enrichment facilities 42.4 46.0 conservation surcharge. As a result, we deferred $28.5 million of Daferred environmental costs 38.8 47.7 our 1996 revenue from surcharge billings as a regulatory liability.

Deferred termination benefit costs 21.0 41.1 To correct the overage, we lowered the surcharge on our Deferred fuel costs 4.4 22.7 customers' bills from July 1997 to June 1998.

Def rred investment tax credits (126.6) (133.9)

Other 4.3 6.2 Delorred Costs of Decommissioning Federal Uranium Total regulatory assets (ne_t}

$470.7 $512.3 Enrichment Facilities Deferred costs of decommissioning federal uranium enrichment income Taxes Recoverable Through Future Rates facilities are the unamortized portion of our required contributions As described in Note *, income taxes recoverable through future to a fund for decommissioning and decontaminating the rates are the portion of our deferre' income tax liability that is Department of Energy's uranium enrichment facilities. We are applicable to our utility business, but has not been reflected in required, along with other domestic utilities, by the Energy Policy

, the rates we charge our customers. These income taxes repre.

Act of 1992 to make contributions to the fund. The contributions sent the tax effect of temporary differences in depreciation and are generally payable over 15 years with escalation for inflation and the allowance for equity funds used during construction, offset by are based upon the proportionate amount of uranium enriched by differences in deferred tax rates and deferred taxes on deferred the Department of Energy for each utility. We are amortizing these

, investment tax credits (discussed later in this note). We amortize costs over the contribution period as a cost of fuel. We also these amounts as the temporary differences reverse, discuss this in Note 1.

Deferred Postretirement and Postemployment Benefit Costs Deferred Environmental Costs Deferred postretirement and postemployment benefit costs are Deferred environmental costs are the estimated costs of investi-the costs we recorded under Statements of Financial Accounting gating and cleaning up contaminated sites we own. We discuss Standards No.106 (for postretirement benefits) and No.112 (for this further in Note 12. We are amortizing $21.6 mlIlion of these post:mployment benefits) in excess of the costs we included in costs (the amount we had incurred through October 1995) over a the rates we charge our customers. We will amortize these costs 10-year period in accordance with the Maryland PSC's November over a 15-year period beginning in 1998. We discuss these costs 1995 order.

further in Note 6.

Palumore Gas and Dectric Company and Subsidiaries 45

Deferred Termination Benefits At December 31, 1997 1996 DefIrred 1:rmination benefit co:ts are the net unamortizid (In millions) bilance of the cost of certain termination benefits offered to Electric deferred fuel costs employees of our regulated utility operations. We describe these Costs deferred (over recovered)

$(19.0)

$113.2 1:rmination benefits further in Note 7. We are amortizing these Disallowed replacement costs over a fiveyear period in accordance with the Maryland energy costs (see Note 12)

(118.0)

PSC's orders.

Net electric deferred (over-recovered) fuel costs (19.0)

(4.8)

Deferred Fuel Costs Gas deferred fuel costs 23.4 27.5 As described in Note 1, deferred fuel costs are the difference Total deferred fuel costs S 4.4

$ 22.7 between our actual costs of electric fuel, net purchases and sal:s of electricity, and natural gas and our fuel rate revenues Deferred Investment Tax Credits collected from customers. We reduce deferred fuel costs as we As described in Note 1, deferred investment tax credits are collect them from customers.

investment tax credits associated with our regulated utility We show our deferred fuel costs in the following table.

business. Under federal income tax regulations, we do not deduct deferred investment tax credits from rate base.

Not3 8. Pension, Postratirement, Other Postemployment, and Employee Savings Plan Benefits We offer pension, postretirement, other postemployment, and We show the components of total net pension cost in the s

employee savings plan benefits. We describe each of these following table. We do not include the cost of termination bene-fits described in Note 7 in net pension cost.

srpIrately below.

Year Ended December 31, 1997 1996 1995 Pension Benefits (10 millions)

We sponsor several defined benefit pension plans for our Service cost-benefits employees. A defined benefit plan specifies the amount of bene.

fits a plan participant is to receive using information about the earned during the period

$16.8

$16.1

$11.4 participant. Our largest plan covers nearly all BGE employees and Interest cost on projected certain employees of our subsidiaries. Our other plans, which are benefit obligation 61.3 59.9 58.4 not material in amount, provide supplemental benefits to certain Actual return on plan assets (130.0)

(57.7)

(150.5) k:y employees. Our employees do not contribute to these plans.

Net amortization and deferral 70.0 2.1 94.7 Generally, we calculate the benefits under these plans based on Total net pension cost 18.1 20.4 14.0 ag3, years of service, and pay.

Amount capitalized as construction cost (2.5)

(2.4)

_{1J Som: times we amend the plans retroactively. These retroactive plan amendments require us to recalculate benefits related to Total net pension cost participants' past service. We amortize the change in the benefit charged to expense

$15.6

$18.0

$12.6 costs from these plan amendments on a straight-line basis over th3 gverage remaining service period of active employees. We Postratirement Benefits fund the plans by contributing at least the minimum amount We sponsor defined benefit postretirement health care and life required under internal Revenue Service regulations. We calcu-insurance plans which cover nearly all BGE employees and late the amount of funding using an actuarial method called the certain employees of our subsidiaries. Generally, we calculate the projected unit credit cost method. The assets in all of the plans benefits under these plans based on age, years of service, and at December 31,1997 were mostly marketable equity and fixed pension benefit levels, We do not fund these plans.

income securities, and group annuity contracts.

Fct nearly all of the health care plans, retirees make contribu-We show the funded status of all of the plans in the following table.

tions to cover a portion of the plan costs. Contributions for At December 31, 1997 1996 employees who retire after June 30,1992 are calculated based (In millions) on age and years of service. The amount of retiree contributions increase based on expected increases in medical costs. For the Vested benefit obligation

$ 702.0 $695.6 life insurance plan, retirees do not make contributions to cover a Nonvested benefit obligation 40.0 18.0 p rtion of the plan costs.

Accumulated benefit obligation 742.0 713.6 Projected t,efits related to Effective January 1,1993, we adopted Statement of Financial increase in future compensation levels 160.0 132.7 Accounting Standards No.106, Employers' Accounting for Projected benefit obligation 902.0 846.3 Postretirement Benefits Other Than FensIons. The adoption of Plan assets at fair value (912.3) (792.5) that statement caused:

Projected benefit ooligation less p!an assets (10.3) 53.8 m a transition obligation, which we are amortizing over 20 Unrecognlied prior service cost (19.4)

(21.9) years, and Untzcognized net loss (84.2) (117.2) e an increase in annual postretirement benefit costs, which Unimortized net asset from we discuss later in this note, adoption of FASB Staten ent No. 87 0.9 0.8 Acm44 pens!on asset

$(113.0) $ (84.5)

Battimore Gas and Dectric company and Subsidiaries 46

For our diversified businesses, we expense all postretirement Other Postemployment Benefits

' benefrt cotts. For our regulated utility business, we accountsd for We provide the following postemployment benefits:

the increase in annual postretirement benefit costs under two Maryland PSC rate orders; a health and life insurance benefits to our employees and certain employees of our subsidiaries who are found to a in an April 1993 rate order, the Maryland PSC allowed us to be disabled under our Disability insurance Plan, and expense onohalf and defer, as a regulatory asset (see Note 5),

a income replacement payments for employees found to be the other half of the increase in annual postretirement benefit costs related to our utility business.

disabled before November 1995 (payments for employees found to be disabled after that date are paid by an o in a November 1995 rate order, the Maryland PSC allowed insurance company, and the cost is paid by employees),

us to expense all of the increase in annual postretirement benefit costs related to our gas business.

The liability for these benefits totaled $45.4 million as of December 31,1997 and $50.8 million as of December 31,1996.

Beginning in 1998, the Maryland PSC authorized us to:

Effective December 31,1993, we adopted Statement of D cxpense all of the increase in annual postretirement benefit Financial Accounting Standards No.112, Employers' Accounting costs related to our electric business, and for Postemployment Benefits. The portion of the liability a amortize the regulatory asset for postretirement benefit attributable to regulated activities as of December 31,1993 was costs related to our utility business over 15 years.

deferred as a regulatory asset (see Note 5), consistent with the The Maryland PSC authorized us to reflect these changes in our Maryland PSC's orders for postretirement benefits (described

• current electric base rates and will adjust our gas base rates to earlier in this note). We will amortize the regulatory asset over recover the higher costs that will be recognized in 1998, 15 years beginning in 1998. The Maryland PSC authorized us to reflect this change in our current electric base rates and will Our trsatment of the increase in annual postretirement benefit

- adjust our gas base rates to recover the higher costs that will be costs meets guidelines established by the Emerging issues Task recognized in 1998.

Force of the Financial Accounting Standards Boat for deferring postretirement benefit costs as a regulatory asset.

amM WM Wate W Wm We show the components of the accumulated postretirement postretirement, and other postemployment benefit liabilities, banefit obligation and a reconciliation of these amounts to the accrued postretirement benefit liability in the following table.

At December 31, 1997 1996_

Discount rate At December 3.1, 1997 1996 Pension and postretirement benefits 7.25%

7.5% -

Health Life Health ufe Other postemployment benefits 6.0 6.0 care Insurance Care insurance Average increase in in minions) future compensation levels -

4.0 4.0 Accumulated postretirement benefit obligation:

Expected long-term rate of Retirees

$164.5 - $47.3 $163.9 $45.5 return on assets 9.0 9.0 Active employees 87.7 20.8 82.4 19.3 We assumed the health care inflation rates to be:

Total accumulated post-retirement benefit obligation 252.2 88.1 246.3 64.8 e in 1997,6.0% for both Medicare +1igible retirees and Unrecognized transition retirees not covered by Medicare, and e in 1998,8.0% for Medicare-eligible retirees and 9.5% for obligation (132.2) (38.4) (141.1) (41.0) retirees not covered by Medicare.

Unrscognized net loss (3.8)

(7.1)

(7.4) (5.7)

Accrued postretirement

.After 1998, we assumed both rates will decrease by 0.5% annu-benefrt liability

$116.2 $22.6 $ 97.8 $18.1 ally to a rate of 5.5% in the years 2003 and 2006. A one-percent increase in the health care inflation rate from the assumed rates We show the components of net postretirement benefit cost in would increase the accumulated postretirement benefit obligation the following table, We do not include the cost of termination by approximately $40 million as of December 31,1997 and

. benefits described in Note 7 in net postretirement benefit cost, w uld increase the combined service and interest costs of the postretirement benefit cost by approximately $4 million annually.

Ybar ended December 31, 1997 1996 1995 S

P h6

1. 1. s)

. Service cost-benefits eamed We also sponsor a defined contribution savings plan that is during the period

$ 5.4

$ 5.5 $ 3.9 offered to all eligible BGE employees and certain employees of Interest cost on accumulated post our subsidiaries, in a defined contribution plan, the benefits a participant is to receive resu!t from regular contributions to retirement benefit obligation 21.8 21.9 21.2 a participant account. Under this plan, we make matching Amortization of transition obligation 11.4 11.4 11.4 s pl n o\\

Net amortization and deferral 0.1 0.2 (0.1) st Total net postretirement benefit cost 38.7

' Amount capitalized

'39.0 36.4 s $8.5 million in 1997, as construction cost (7.6)

(6.2)

(5.3) m $9.4 million in 1996, and Amount deferred (7.2)

(7.4)

(8.0) m $8.5 million in 1995.

Total net postretirement benefit cost charged to expense

$23.9

$25.4 $23.1 Bdtimore Ces and Electric Company and Subskharies 47 j

i i

J

Note 7. Termination Benefita Termination Bene 8ts Offered in 1992 Termination Benents Offered in 1993 W3 offered a Voluntary Special Early Retirement Program to We offered a second Voluntary Special Early Retirement Program cligible employees who retired from February 1,1992 through to eligible employees who retired as of February 1,1994. The April 1,1992. The termination benefits of this program cost $6.6 terrnination benefits of this program consisted mostly of million and consisted mostly of an enhanced pension benefit. We enhanced pension and postretirement benefits. As part of this era cmortizing the cost of these benefits over a five-year period program, we accomplished further emp!oyee reductions by in accordance with the Maryland PSC's April 1993 order, eliminating positions, and offering additional benefits to ernployees affected by the eliminations. We deferred

$88.3 million of the costs of this program that were attributable to regulated activities. We are amortizing these costs over a five-year period, consistent with tre Olaryland PSC's previous oroers.

Nets 3. Short-Term Borrowings Summery of Short-Term Borrowings We had unused bank lines of credit supporting our commercial Our short-term borrowings include bank loans, commercial paper paper notes of $231 million at December 31,1997 and notzs, and bank lines of credit. Short-term borrowings mature

$203 million at December 31,1996. These amounts do not within one year from the date of the financial statements. We pay include unused mvolving credit agreements of $100 million at commitment fees to banks for providing us lines of credit. When December 31,1997 and $150 million at December 31,1996 we borrow under the lines of credit, we pay market interest rates.

that are discussed in Note 9.

We summarize our short-term borrowings in the following table.

At December 31, 1997 1996 Our weighted average effective interest rates for short-term (in millions) borrowings were as follows:

8.8 BGE's bank loans BGE's commercial paper notes 316.1 324.4 year ended December 31, 1997 1996 Totrl short-term borrowings

$316.1

$333.2 Bank loans 5.00%

4.93%

Commercial Paper Notes 5.66 5.53

- Note 9. Lang-Term Debt Long-term debt' matures more than one year from the date of the a SM% installment Series, due 2002 a 6M% Series, due 2003 fintncial statements. We summarize our long-term debt in the s 8.40% Series, due 1999 m 6%% Series, due 2003 Consolidated Statements of Capitalization on page 36. As you a 5W% S ries, due 2000 m SW% Series, due 2004 rred this sectioni it may be helpful to refer to those statements, u 8%% Series, due 2001 a 7W% Series, due 2007 We discuss BGE's, the Constellation Holdings Companies', and a 7M% Series, due 2002 m 6%% Series, due 2008

- oth!r diversified businesses' long-term debt separately below.

We must pay principal on the SM% installment Series as follows:

BGE's Long Term Debt year (In millions)

BQE2 Rest Rehadhg hfortgage Bonde BGE's first refunding mortgage bonds are secured by a mortgage 1998 and 1999

$ O.7 li n on nearly all of our assets, including all utility properties and 2000 and 2001 0.9 franchises and our subsidiary capital stock. Our subsidiary 2002 6.7 capital stock pledged under the mortgage includes that of:

Holders of the Remarketed Floating Rate Series Due O Constellation Holdings, Inc.,

September 1,2006 have the option to require BGE to O Constellation Energy Solutions, Inc.,

repurchase their bonds at face value on September i of each a BGE Home Products & Services, Inc., and Y^ar BGE is required to repurchase and retire at par any bonds that are not remarketed or purchased by the remarketing agent.

O Safe Harbor Water Power Corporation.

BGE also has the option to redeem all or some of these bonds BGE is required to make an annual sinking fund payment each at face value each September 1.

August i to the mortgage trustee. The amount of the payment is equIl to 1% of the highest principal amount of bonds outstanding BGE's Other Lorg-Term Debt during the preceding 12 months. The trustee uses these funds to BGE has $100 million of revolving credit agreements with 1.overal retire bonds from any series through repurchases or calls for banks that are available through 2000. At December 31,1997, early redemption. However, the trustee cannot call the following BGE had no outstanding borrowings under these agreements.

bonds for early redemption:

These banks charge us commitment fees based on the daily average of the unborrowed amount, and we pay market interest rates on any borrowings. These agreements also serve as back.

up credit support for BGE's commercial paper notos, as described in Note 8.

48 Baltimore Gas and Electric Company and Subsidianes

We show tno weighted-average interest rates and maturity Other Diversified Businesses' Long-Term Debt dites for BGE's fixed-rate mediumterm notes outstanding at ComfortLink, a general partnership in which BGE is a partner, December 31,1997 in the following table, has a $50 million unsecured revolving credit agreement that Weighted-Average matures September 26. 2001. Under the terms of the agree-ment. ComfortLink has the option to obtain loans at various Series Interest Rate Maturity Dates rates for terms up to nine months. Comfortlink pays a facility fee B

8.43%

1998 2006 on the total amount of the commitment. At December 31,1997, C

7.15%

1998-2003 ComfortLink had $22 million outstanding under this agreement.

D 6.36%

1998-2006 E

6.70%

2006-2012 Constellation EnerEy Source has a $10 million revoMng credit agreement that matures February 1,2000. At December 31,1997, Some of the medium-term notes include a "put option." These Constellation Energy Source had no outstanding borrowings under put options allow the holders to sell their notes back to BGE on this agreement.

the put option dates at a price equal to 100% of the principal amount. The following is a summary of medium-term notes with Maturities of Long-Term Debt put options.

All of our longterm borrowings mature on the following schedule

' Series E Notes Principal Put Option Dates (includes sinking fund requirements):

g gj, (In millions)

ygg, gag 6.75% due 2012

$60.0 June 2002 and 2007 (in millions)

. 6.75%, due 2012

$25.0 June 2004 and 2007 1998

$ 93.6

$155.3 6.7M, due 2012

$25.0 June 2004 and 2007 1999 334.5 131.9 2000 253.8 244.5 Constellation Holdings Companies' Long-Term Debt 2001 198.6 185.0 kivoMng Credit Agreemerrt 2002 156.2 2.8 The Constellation Holdings Companies have a $75 million unse-Thereafter 1,455.4 39.9 cured revoMng credit agreement that matures December 9.1999, Total long-term debt which they use to provide liquidity for general corporate purposes, at December 31,1997

$2.492.1

$759.4 The Constellation Holdings Companies pay a commitment fee based on the daily average of the unborrowed portion of the commitment. At December 31,1997, the Constellation Holdings At December 31,1997, BGE had longterm loans totaling $255 Companies had no outstanding borrowings under this agreement.

million that mature after 2002 that lenders could potentially require us to repay early. Of this amount, $145 million could poten-tially be repaid in 1998, $60 million could be repaid in 2002, and gage

$50 million could be repaid thereafter. We have the ability and The Constellation Holdings Companies' mortgage and construc-intent to refinance such debt by issuing nedium-term notes or by tion loans and other collateralized notes have varying terms. The borrowing under our revolving credit agreements, if necessary, following mortgage notes require monthly principal and interest payments:

g y, c 7.90%, due in 2000 m 7.357%, due in 2009 Our weighted average interest rates for variable rate debt were:

I c 8.00%, due in 2001 m 9.65%, due in 2028 o 7.50%, due in 2005 Year ended December 31, 1997 1996 The 8.00% mortgage note due in 2003 requires interest BGE payments until maturity. The variable rate mortgage notes require Floating rate series mortgage bonds 6.11%

5.87%

periodic payment of principal and interest. The B.00% mortgage Remarketed floating rate j

note due in 2033, requires interest payments initially then series mortgage bonds 5.75 5.63 monthly principal and interest payments.

Medium-term notes, series D 5.78 Pollution control loan 3.63 3.49 Unsecured Notes Port facihties loan 3.71 3.59

• The unsecured notes mature on the following schedule:

Adjustable rate pollution control loan 3.90 3.90 Amount Economic development loan 3.69 3.57 (In millions)

Variable rate polkrtion control loan 3.73

, 7.05%, due April 22,1998

$ 25.0 7.03%, due September 9,1998 20.0 Constellation Holdings Companies 8.48%, due October 15,1998 75.0 1 ns under credit agreement 5.99 6.08 7.30%, due April 22,1999 90.0

,,ortgage and construction loans 8.73%, due October 15,1999 15.0 and other collateralized notes 8.10 8.33 7.125%, due March 13, 2000 15.0 Other Diwrsified Businesses 7.55%, due April 22,2000 35.0 Loans under credit agreement 6.04 6.13 7.50%, due May 5,2000 139.0 7.43%, due September 9, 2000 30.0 7.66%, due May 5,2001 135.0 8.00%, due December 31, 2000 0.1 Total unsecured notes at December 31,1997

$579.1 Battinue Gas and Dectric Company and subsidianes 49 i

- Note 10. Eedeemable Preference Stock -

Priority The following table summarizes the annual required redemptions For the payment of dividends and in the event of liquidation of of all redeemable preference stock.

BGE, we rank preference stock prior to common stock. We rank Year til prtference stock equally.

(In millions) 1998

$ 23.0 Sinking Fund Redemptions 1999 10.0

- Required Binkig Fund Redemptions 2000 10.0 Some of our preference stock issues have annual sinking fund

'2001 3.0 requir:ments. Under those requirements, we must redeem 2002 3.0 some of our preference stock at $100 per share annually.We Thereafter 64.0 summirize the redemptions required in the following table.

Total required redemptions

$113.0 Beginning Series Shares Year Optional Sinkig Fund Redemptions s

7.50% 1986 Series 15,000 1992 For each series, we have the option to redeem shares in addition

- 6.75 % 1987 Series 15,000 1993 to the annual sinking fund requirements. Each year, we may redeem an amount up to the required annual number of sinking 8.625% 1990 Series 130,000 1996 fund shares at $100 per share.

7.85% 1991 Series 70,000 1997 Other Redemptions We also have the option to fully redeem the 7.50% 1986 Series, and the 6.75% 1987 Series, at the prit.es shown in the Consolidated Statements of Capitalization on page 37.

Nota 11. Leases There are two types of leases-operating and capital. Capital incoming Lease Rentals f

leis 3s qualify as sales or purchases of property and are Some Constellation Holdings Companies, as landlords, lease i

report:d in the Consolidated Balance Sheets. All other leases office and retail space to others. These operating leases expire ara operating leases and are reported in the Consolidated over periods ranging from one to 20 years, and have options to L

Stattments of income. We present information about our renew. At December 31,1997, the Constellation Holdings operating leases below.-

Companies had property under operating leases with a net book value of $184.9 million.

Outgdng Lease Payments At December 31,1997, tenants owed the Constellation Holdings l

We, Es lessee, lease some facilities and equipment used in our Companies future minimum rentals under operating leases as follows:

builness. ihe lease agreements expire on various dates and h:ve various renewal options. We expense all lease payments Year t

tssoclited with our regulated utility operations.

(in millions) j 1 8 Lease expense was:

g i

o $9.5 million in 1997, 2000 17.7 0 $11.6 million in 1996, and 2001 16.2 c $12.2 million in 1995.

2002 14.6 Thereafter 63.1 At December 31,1997, we owed future minimum payments for Total future minimum lease rentals

$147.6 long-term noncancelable operating leases as follows:

War (In millions) 1998

$ 5.9

.1999 3.6 2000 3.3 2001 2.8 2002 2.3 Th:rsafter 5.6 Total future minimum lease payments

$23.5 50 Datt6more Gas and Dectric Company and Subsidiaries

Nots 12. Commitments, Guarantees, and Contingencies Commitments Termination of Proposed Merger With

We have made substantial commitments in connection with our -

Potomac Electric Power Company utility construction program for future years. In addition, we have As previously disclosed, in September 1995 we signed an agree-ent: red into three long-term contr6 cts for the purchase of electric ment with Potomac Electric Power Company to merge together generating capacity and energy. The contracts expire in 2001, into a new company, Constellation Energy Corporation, after all 2013, and 2023. We made payments under these contracts of:

necessary regulatory approvals were received. In December 1997, p $65.6 million in 1997, both companies mutually terminated the merger agreement.

' D $64.1 million in 1996, and According!y, in 1997, we wrote off $57.9 million of costs related to the merger. We have reported the writeoff as

• write off of

- 3 $68.4 million in 1995-merger costs' in our Consolidated Statements of income. This At December 31,1997, we estimate our future payments for write-off reduced after-tax earnings by $37.5 million, capacity and energy that we are obligated to buy under these contracts to be:

Environmental Matters Year Clean Air (in millions)

The Clean Air Act of 1990 contains two titles designed to reduce 1998

$ 81.4 emissions of sulfur dioxide and nitrogen oxide (NOx) from electric generadng sta@ns @ N and M L

• 1999 92.2 2000 92.8 Title IV addresses emissions of sulfur dioxide. Compliance is 2001 63.2 remired in two phases:

2002 42.1 m Phase I became effective January 1,1995. We met the Thereafter 765.3 requirements of this phase by Installing flue gas desulfurization Total estimated future payments for systems (scrubbers), switching fuels, and retiring some units, capacity and energy under long term contracts

$1.137.0 e Phase 11 must be implemented by 2000. We are currently examining what actions we should take to comply with this Some Constellation Holdings Companies have committed to phase. We expect to meet the compliance requirements contribute additional capital and to make additional loans to through some combination of installing flue gas desulfuriza-some affiliates, joint ventures, and partnerships in which they tion systems (scrubbers), switching fuels, retiring some have an interest. At December 31,1997, the total amount of units, or allowance trading.

Investment requirements committed to by the Constellation Holdings Companies was $35 million, Title I addresses emissions of NOx, but the regulations of this f;g in December,1994, BGE and BGE Home Products & Services plans for complying with this title are less certain. By 1999 the

~ entered into agreements 'with a financial institution to sell on an regulations require more NOx controls for ozone attainment at ongoing basis an undivided interest in a designated pool of our generating plants. The additional controls will result in more customer receivables. Under the agreements, BGE can sell up to expenditures, but it is difficult to estimate the level of those a total.of $40 million, and BGE Home Products & Services can expenditures since the regulatione have not been finalized, sell up to a total of $50 million. Under the terms of the agree-However, bared on existing and proposed regulations, we ments, the buyer of the receivables has limited recourse against currently estimate that the additional controls at our generating BGE and has no recourse against BGE Home Products &

plants will cost approximately $90 million.

Services. BGE and BGE Home Products & Serv;ces hav recorded a reserve for credit losses. At December 31,1997, in July 1997, the gowrnment published new National Ambient BGE had sold $35 million and BGE Home Products & Services Air Quality Standards for very fine particulates and revised had sold $47 million of receivables under these agreements.

standards for ozone attainment. These standards may require Increased controls at our fossil generating plants in the future.

Guarantees We ;annot estimate the cost of these increased controls at this BGE guarantees two-thirds of certain debt of Safe Harbor Water time because the states, including Maryland, still need to

.

• Power Corporation. The maximum amount of our guarantee is determine what reductions in pollutants will be necessary to l

$23 million. At December 31,1997, Safe Harbor Water Power meet the federal standards.

Corporation had outstanding debt of $30 million, of which

$20 million is guaranteed by BGE.

Waste Disposal The Environmental Protection Agency and several state agencies BGE also issued an $11 million guaranty for debt under the have notified us that we are considered a potentially responsible revolving credit agreement of Constellation Energy Source. At party with respect to the cleanup of certain environmentally

- December 31,1997, Constellation Energy Source had no contaminated sites owned and operated by others. We cannot outstanding borrowings under this agreement.

estimate the cleanup costs for all of these sites. We can, At December 31,1997, the Constellation Holdings upanies had however, estimate that our 15.79% share of the possible guirtnteed outstanding loans and letters of credit of cern in power cleanup costs at one of these sites, Metal Bank of America generation and real estate projects totaling $46 million. A! no, the (a metal reclaimer in Philadelphia) could be approximately Constellation Holdings Companies guarantee certain other borrow.

$7 million higher than amounts we have recorded. This Ings of various power generation and real estate projects.

estimate is based on the highest estimate of costs in the range of reasonably possible alternatives. The cleanup costs

. We assess the risk of material loss from these guaran'.ees for some of the remaining sites to be minimal.

B11timore Gas and Dectric Company and Subsidiaries.

51 l

could be significant, but we do not expect them to hive a As an operator of a commercial nuclear power plant in the United matirial cffect on our financlil position or results of operations.

States, we are required to purchase insurance to cover radiation injury claims of certain nuclear workers. On January 1,1998, a new Also, we are investigating several sites where gas was insurance policy became effective for all operators requiring m:nufactured in the past. The investigation of these sites coverage for current operations. Walving the right to make additional includes reviewing possible actions to remove coal tar. In late claims under the old policy was a condition for acceptance under December 1996, we signed a consent order with the Maryland the new policy. We describe both the old and new policies below.

Department of the Environment that requires us to implement remedial action plans for contamination at and around the Spring a BGE nuclear worker claims reported on or after Gardens site. We have submitted the required remedial action January 1,1998 are covered by a new insurance poucy plans and the Maryland Department of the Environment is in the with an annual industry aggregate limit of $200 million proceIs of reviewing them. Based on several remedial action for radiation injury claims against all operators insured options for all sites, the costs we consider to be probable to by this policy.

remedy the contamination are estimated to total $50 million in a All nuclear worker claims reported prior to January 1,1998 nominal dollars (including inflation). We have recorded these are still covered by the old insurance policies. Insureds costs as a liability on our Consolidated Balance Sheets and have under the old policies, with no current operations, are not defirr:d these costs, net of accumulated amortization and required to purchase the new policy described above, and tmounts we expect to recover from insurance companies, as a may still make claims against the old policies for the next regulatory asset. We discuss this further in Note 5. We are also 10 years. If radiation injury claims under these old policies requir:d by accounting rules to disclose additional costs we exceed the policy reserves, all policyholders could be consider to be less likely than probable costs, but still

• reason-assessed, with our share being up to $6.3 million.

tbly possible" of being incurred at these sites. Because of the r:sults of studies at these sites, it is reasonably possible that if claims under these polices exceed the coverage limits, the provi-the:e additional costs could exceed the amount we recognized by sions of the Price Anderson Act (discussed above) would anply.

gpproximately $48 million in nominal dollars ($11 million in current dollars, plus the impact of inflation at 3.1% over a period Recoverability of Electric Fuel Costs of up to 60 years).

By law, we are allowed to recover our cost of electric fuel as long as the Maryland PSC finds that, among other things, we have Nuclear insurance kept the productive capacity of our generating plants at a if there were an accident or an extended outage at either unit of reasonable level. To do this, the Maryland PSC will perform an Cilvert Cliffs, it could have a substantial adverse financial effect evaluation of each outage (other than regular maintenance i

on BGE. The primary contingencies that would result from an inci-outages) at our generating plants. The evaluation will determine dent at Calvert Cliffs could include:

if we used all reasonable and costeffective maintenance and a the physical damage to the plant, l

0 the recoverability of replacement power costs, and Effective January 1,1987, the Maryland PSC established a f

0 our liability to third parties for property damage and Generating Unit Performance Program to measure, annually,

{

bodily injury, whether we, and other utilities, have maintained the productive capacity of our generating plants at reasonable levels. To do this, We h ve insurance policies that cover these contingencies, but the program uses a system-wide generating performance target the policies have certain exclusions. Furthermore, the costs that and an individual performance target for each base load gener-I could result from a covered major accident or a covered extend ating unit. In fuel rate hearings, actual generating performance outage at either of the Calvert Cliffs units could exceed our insur-adjusted for planned outaFs wiii be compared first to the Cnce coverage limits.

system-wide target. If t*,at target is met, it should mean that the requirements of fe f and law have been met, if the system-wide i

For physical damage to Calvert Cliffs, we have $2.75 billion of i

property insurance from an industry mutual insurance company.

target is not m2, each unit's adjusted actual generating perfor-mance will be CT.gaed to its individual performance target to I

If En outage at either of the two units at Calvert Cliffs is caused by an insured physical damage loss and lasts more than 17 determine if the req;irements of Maryland law have been met i

weeks, we have insurance coverage for replacement power costs and, if not, to determine the basis for possibly imposing a up to $487.2 million per unit, provided by an industry mutual penalty on BGE. Even if we meet these targets, other parties to l

insurtnce company. This amount can be reduced by up to $94.6 fuel rate hearings may still question whether we used all reason-million per unit if an outage to both units at the plant is caused able and cost +ffective procedures to try to prevent an outage. If by a single insured physical damage loss. If accidents at any the Maryland PSC decides that we were def.icient in some way, insur d plants cause a shortfall of funds at the industry mutual, the Maryland PSC may not allow us to recover the cost of all policyholders could be assessed with our share being up to rept cement energy.

$31 million.

The two units at Calvert Cl!ffs use the cheapest fuel. As a result, in addition we, as well as others, could be charged for a portion the costs of replacement energy associated with outages at these of any third party claims associated with a nuclear incident at units can be significant. We cannot estimate the amount of Eny commercial nuclear power plant in the country. Under the replacement energy costs that could be challenged or disallowed in l

provisions of the Price Anderson Act, the limit for third party future fuel rate proceedings, but such amounts could be material.

clilms from a nuclear incident is $8.92 billion. if third party cillms exceed $200 million (the amount of primary insurance),

l our share of the total liability for third party claims could be up to

$159 million per incident. That amount would be payable at a rate of $20 million per year.

52 Baltimore Gas and Dectric Company and Subsidianes

During 1989 through 1991 we had extended outages at Calvert Holdings Companies' eamings could be affected significantly.

' Clif fs. These outag:s drove up full costs, tend r*sulted in fusi However, the California projects that make the highest revenues rate proceedings before the Maryland PSC for several years. In will transition to variable rates in 1999 and 2000. As a result, these proceedings, the Marytand PSC considered whether any we do not expect the Constellation Holdings Companies to have portion of the extra fuel costs should be charged to BGE instead significantly lower eamings due to the transition to variable rates of passed on to customers, before 2000, in December 1996, we settled the pioceedings by agreeing not The Constellation Holdings Companies are pursuing attematives to bill our customers for $118 million of electric replacement for some of these power generation projects including:

energy costs associated with these outages. All costs associated with the outages in excess of $118 million have already been a mpowering the prcjects to reduce operating costs, collected from customers through the fuel rate. In 1990, we a changing fuels to reduce operating costs, wrote off $35 million of these costs. in 1996, we wrote off the a renegotiating the power purchase agreements to improve remaining $83 million plus $5.6 million of related financing the terms, charges. The 1996 writeoffs, together, reduced after-tax a restructuring financings to improve the financing terms, and cornings by $57.6 million.

a selling its ownership interests in the projects.

" Also in 1996, we wrote off $6.8 million of fuel costs related to We cannot predict the financial effects of the switch from fixed to earli r outages that were disallowed by the Maryland PSC. This variable rates on the Constellation Holdings Companies or on write-off reduced 1996 after-tax eamings by $4.5 million.

BGE, but the effects could be material.

We have reported all of the 1996 writeoffs as " disallowed replace-ment energy costs

• In our Consolidated Statements of income.

Most of the Constellation Holdings Companies' real estate projects are in the Baltimore-Washington corridor. The area has gg %, gg.

___g The Constellation Holdings Co panies have $261 million invested had a surplus of available land and office space in recent years, "N "

E "E

in 16 projects that sell electricity in Califomla under power cah M W h cmMons. "'

e n

. purchase agreements called

• Interim Standard Offer No. 4*

agretments. Earnings from these projects were $37.3 million, The Constellation Holdings Companies' real estate portfolio has

' or $.25 per share. in 1997.

continued to incur carrying costs and depreciation over the years.

Additionally, the Constellation Holdings Companies have been Under these agreements, the projects supply electricity to utility charging interest payments to expense rather than capitalizing companies at:

them for some undeveloped land where development activities o a fixed rate for capacity and energy for the first 10 years of have stopped. These carrying costs, depreciation, and interest the agreements, and expenses have decreased earnirgs and are expected to continue o a fixed rate for capacity plus a variable rate for energy to do so.

based on the utilities

• avoided cost for the remaining term Cash flow from real estate operations has not been enough to of the agreements.

make the monthly loan payments on some of these projects.

Generally, a

• capacity rate" is paid to a power plant for its avaig Cash shortfalls have been covered by cash from Constellation tsbility to supply electricity, and an

• energy rate

• is paid for the Holdings Constellation Holdings obtained those funds from the electricity actually generated. " Avoided cost" generally is the cost cash flow from other Constellation Holdings Companies and of a utility's cheapest next-available source of generation to through additional borrowing, service the demands on its system.

We consider market demand, interest rates, the availability of.

l We use the term transttlon period to describe the timeframe financing, and the strength of the economy in general when when the 10-year periods for fixed energy rates expire for these making decisions about our real estate investments. We believe 1

16 power generation projects and they begin supplying electricity that until the economy shows sustained growth and there is more at viriable rates. The transition period for some of the projects demand for new development, our real estate values will not began in 1996 and will continue for the remaining projects improve much. If we were to sell our reaf estate projects in the through 2000. At the date of this report, six projects had already current market, we would have losses, although the amount of

, transitioned to variable rates and three other projects will transk the losses is hard to predict.

tion in 1998. The remaining seven projects will transition in 1999 Management's current real estate strategy is to hold each real or 2000, estate project until we can realize a reasonable value for it.

• The projects that have already transitioned to variable rates have Management evaluates strategies for all its businesses, including had lower revenues under variable rates than they did under fixed real estate, on an ongoing basis. We anticipate that competing rat:s. However, we have not yet experienced total lower eamings demands for our financial resources and changes in the utility from the Califomia projects because the combined revenues from industry will cause us to evaluate thoroughly all diversified bush the remaining projects, which continued to supply electricity at ness strategies on a regular basis so we use capital and other

~ fixed rates, were high enough to offset the lower revenues from resources in a manner that is most beneficial. Depending on the variablerate projects. When the remaining projects transition market conditions in the future, we could also have losses on to viriable rates, we expect the revenues from those projects to any future sales.

also be lower than they are ur. der fixed rates. It is difficult to esti-mate how much lower the revenues may be, but the Constellation Bdtirnore Gas and Elect % rM.pany and Subsidiaries 53

it may be helpful for you to understand when w3 tre required, by a a $14.1 million after-tax wnte-down of the investment in accounting rules, to write down the value of a r:al estate invest-Church Street Station-an entartainment, dining, and r: tail

' ment to market value. A writslown is required in either of two complex in Orlando, Florida--which occurred because the c ses. The first is if we change our intent about a project from Constellation Holdings Companies have now decided to sell in int:nt to hold to an intent to sell and the market value of that rather than keep the project, and project is below book value. The second is if the expected cash e a $31.9 million after-tax write <!own of the investment in flow from the project is less than the investment in the project.

Piney Orchard-a mixed-use, planned-unit development--

cou ause me exW rash h hm h In 1997, the Constellation Holdings Companies recorded the project was less than the Constellation Holdings following write-downs of their investments in two projects:

Companies investment in the project.

Note 13. Fair Value of Financial instruments We show the carrying amounts and fair values of financial instru-envestments and Other Assets ments included in our Consolidated Balance Sheets in the following Practicable to Estimate Fair Melue table, and we describe some of the items separately below.

Investments and other assets include investments in common At December 31, 1997 1996 and preferred securities, which are classified as financial invest-ments in our Consolidated Balance Sheets, and the nuclear Carrying Fair Carrying Fair Amount value Amount Value decommissioning trust fund. We base the fair value of invest-(in millions) ments and other assets on quoted market prices where twailable.

Cash and cash equivalents

$162.6 $182.6 $66.7 $66.7 Net recounts receivable 419.8 419.8 419.5 419.5 Not Practicable to Estimate Fair Value Other current assets 128.8 128.8 75.0 75.0 It was not practicable to estimate the fair value of the investments and other Constellation Holdings Companies' investments in:

assets for which it is:

a several financial partnerships that invest in nonpublic Practicable to debt and equity securities, estimate fair value 197.4 198.8 184.5 185.7 e several partnerships that own solar powered energy Not practicable to production facilities, and estimate fair value 57.5 62.2 e a company involved in developing international power Short-term borrowings 316.1 316.1 333.2 333.2 projects.

Curr:nt portions of long-term debt and preference stock 271.9 271.9 280.8 280.8 This is because the timing and amount of cash flows from these investments are difficult to predict. We report these investments Accounts payable 203.0 203.0. 172.S 172.9 at their original cost in our Consolidated Balance Sheets.

Other current liabilities 204.4 204.4 194.1 194.1 Def;rred credits and The investments in financial partnerships totaled $43.6 million at

. Other liabilities 9.6 9.6 December 31,1997 and $48.1 million at December 31,1996, Longtrm debt 2,988.9 3,069.8 2.758.8 2,767.7 representing ownership interests up to 10% The total assets of Redeemable preference all of these partnerships totaled $6 billion at December 31,1996 stcck,

90.0 93.5 134.5 141.6 (which is the latest information available).

The investments in solar powered energy production facility Other Current Assets and Other Current Liabilities partnerships totaled $10.9 million at December 31,1997 and The financial instruments included in other current assets are

$11.0 million December 31,1996, representing ownership trading securities and miscellaneous loans receivable of the interests up to 125 The total assets of all of these partnerships Conitellation Holdings Companies. The financial instruments totaled $39.8 million at December 31,1996 (which is the latest included in other current liabilities are the total current liabilities information available).

from our Consolidated Balance Sheets excluding short-term borrowings, current portions of longterm debt and preference Long-Term Debt and Preference Stock stock, accounts payable, and accrued vacation costs. The We estimate the fair value of fixed-rate long-term debt and carrying amounts of current assets and current liabilities are the redeemable preference stock using quoted market prices where surie as their fair values because these instruments have short available or by discounting remaining cash flows at current maturities.'

market rates. The carrying amount of variable-rate long-term debt approximates fair value.

Guarantees it was not practicable to determine the fair value of certain loan guarantees of BGE and the Constellation Holdings Companies. BGE guaranteed outstanding debt of $20 million at December 31,1997 and $21 million at December 31,1996.

The Constellation Holdings Companies guaranteed outstanding debt totaling $43 million at December 31,1997 and $47 million at December 31,1996. We do not anticipate that we will need to fund these guarantees.

54 Baltimore Gas and Electric Company and Subsidiaries

Not) 14. Quarterly Financl:1 Cata (Unaudited)

Our quarterly financial information has not been audited but, in management's opinion, includes all adjustments necessary for a fair presrntation. Our utility business is seasonal in nature with the peak sales periods generally occurring during the summer and winter months. Accordingly, comparisons among quarters of a year may not represent overall trends and changes in operations.

1997 Quartedy Data 1996 Quarterly Data farmngs Eamings Eamings Eamings encome Appirable Per Share income Appiscable Per Share From Net to Common of Common From Net to Common of Common Revenues Opershons Iricome Stock Stock Revenues Operations income Stoch Stock (In millions, except per-share amounts)

(In millions, except per-share amounts) l Quarter Ended:

Quarter Ended:

March 31

$ 887.7 $163.9 $ 72.1 $ 64.2 $0.43 March 31

$ 861.3 $201.3 $100.8 $ 91.1 $0.62 June 30 746.4 78.8 15.0 7.1 0.05 June 30 731.7 148.6 64.5 52.4 0.36 September 30 860.8 321.0 171.4 164.4 1.11 September 30 826.0 275.7 146.5 137.9 0.93 Dacember 31 812.7 159.9 24.3 18.4 0.12 December 31 734.2 43.9 (1.0)

(9.1) (0.06)

Year Ended:

Year Ended:

December 31 $3,307.6 $723.6 $282.8 $254.1 $1.72 December 31 $3.153.2 $669.5 $310.8 $272.3 $1.85 Our first quarter results include a $12.0 million after-tax write-Our second quarter results include a:

down, by the Constellation Holdings Comoanies, of an investment in a real estate project (see Note 12).

a $4.5 million after-tax write-off of disallowed replacement energy costs (see Note 12).

Our second quarter results include a $31.9 million after-tax write-u $14.6 million after-tax gain on the sale by a Constellation down, by the Constellation Holdings Companies, of an investment partnership of a power purchase agreement (see Note 3).

In a rsal estate project (see Note 12).

m $7.0 miilion after-tax write-off of the Constellation Holdings Our fourth quarter results include a:

Companies' investment in two geothermal wholesale power generating projects (see Note 3).

O $37.5 million after-tax write-off of merger costs (see Note 12).

m $3.0 million after-tax write off, by the Constellation Holdings D $2.1 million after-tax write-down, by the ConstcIlation Companies, of development costs for a coal-fired power

~ Holdings Companies, of an investment in a real estate project (see Note 3),

project (see Note 12).

Our third quarter results include a $6.2 million after-tax write off by the Constellation Holdings Companies of a portion of a solar power project investment (see Note 3).

Our fourth quarter results include a $57.6 million after-tax write-off of disallowed replacement energy costs (see Note 12).

The sum of the quarterly eamings per share amounts may not equal the total for the year due to the effects of rounding.

j i

e BDtimore Gas and Dectnc Company and Subsidianes 55

Boardo cf Directcra CaMimste Gas and Electric Company Christian H. Poindexter Jerome W. Geckle 59, Chairman of the Board and 68, Retired Chairman of the Board, I

g Chief Executive Officer, BGE PHH Corporation

-f" Vq:

u H. Furiong Baldwin Freeman A. Hrabowski 111 ff 47 President, University of Maryland, 66, Chairman of the Board and Chief Executive Officer, 9

g Baltimore County Mercantile Bankshares Corporation 9

1 ar 7 ce Beverly B. Byron Nancy Lampton 55, Chairman and Chief Executive Officer, ya 65, Former Congresswoman, g

g*

3 ~

American Life and Accident Insurance b

U.S. House of Representatives

" r Company of Kentucky J. Owen Cole Goorge V. McGowan 68, Director, Arst Maryland Bancorp; 70, Former Chain,ian of the Board and Chairman, Firs

• National Bank of Maryland Chief Executive Officer, BGE 4

Trust Committee

[n-3 Ii 1

George L Russell, Jr., Esq.

7"W""F]f),7 Dan A.Colussy 68, Partner, Piper & Marbury

- 66, Former Chairman of the Board and Chief Executive Officer, UNC, incorportted

)

Edward A. Crooke F' mg Michael D. Sullivan c.

!)

59, President and

^!

hj 58, Chairman of the Board, j Chief Operating Officer, BGE Golf America Stores,Inc.

A 5

.l;I

\\

t 6

o g_

2 James R. Curtiss, Esq.

E, 44, Partner, Winston & Strawn

[

l i

56 Baltimore Gas and Electric company and subsidianes

Constellation Enterprises, Inc.*

Constellation Energy Solutions, Inc.*

• Conunittees of the BSE Board Edward A. Crooke 59, Chairman of the Board; Audit Committee President and Chief Operating Officer, BGE J. Owen Cole, Chairman Beverly B. Byron Bruce M. Ambler Freeman A. Hrabowski til 58, President and Chief Executive Officer, George L. Russell, Jr.

Constellation Holdings H. Furlong Baldwin Committee on Management 66, Chairman of the Board and Chief Executive Officer, Jirome W. Geckle, Chairman Mercantile Bankshares Corporation J. Owen Cole Din A. Colussy Roger W. Gale Michael D. Sullivan 51, President, Washington International Energy Group Committee on Nuclear Power Jerome W. Geckle Din A. Colussy, Chairman 68, Retired Chairman of the Board, PHH Corporation Beverly B. Byron James R. Curtiss I

Geg % Me 70, Retired Cochairman and Chief Operating Officer, Ernst & Young Long-Range Strategy Committee George V. McGowan j

H. Furlong Baldwin. Chairman 70, Former Chairman of the Board and j

J mes R. Curtiss Chief Executive Officer, BGE Roger W. Gale J: rome W. Geckle Nincy Lampton 59, Chairman of the Board and Chief Executive Officer, BGE Michael D. Sullivan Mayo A. Shattuck lli 43, Cochairman and CXhief Executive Officer, Executive Committee BT Alex. Brown, Inc.

George V. McGowan, Chairman i

g H. Furlong Baldwin Edward A. Crool<e 52, President, Constellation Energy Solutions; President and Chief Executive Office" Freeman A. HrabowskiIll Constellation Power Source Christian H. Poindexter George L. Russell, Jr.

i

• Constellation Enterprises, Inc. was established on

' Committee on Workplace Diversity January 23,1998, as a holding company for Constellation 1

Beverly B. Byron, Chairwoman Holdings, Inc. and BGE Home Products & Services, Inc.

J mes R. Curtiss Freeman A. HrabowskiIll

• *In 1997 ConstcIlation Energy Solutions, Inc. became the N:ncy Lampton holding company for Constellation Power Source, Inc.,

Constellation Energy Source. Inc., and Constellation Energy Projects & Services, Inc.

I Batt more Gas and Electric Company and Subsktiaries 57

Officers Baltimore Gas and Electric Company Constellation Enterprises, Inc.

Christian H. Poindexter ConsteNation Helengs Companies 59, Chairman of the Board and Chief Executive Officer

. Edward A.Crooke Edward A. Crooke >

59, Chairman of the Board, Constellation Holdings 59, President and Chief Operating Officer Bruce M. Ambler Robert E. Denton.

58, President and Chief Executive Officer, 55, Senior Vice President, Generation '

Constellation Holdings Thomas F. Brady Randall M. Griffin

. 48, Vice President, Customer Service & Distribution 53, President, Constellation Real Estate Group David A. Brune Ronald F. Watson 57, Vice President, Finance & Accounting; 49, President, Constellation Health Services -

Chief Financial Officer and Secretary Steven D. Kesler Charles H. Cruse 46, President, Constellation investments 53, Vice President, Nuclear Energy John F. Walter Careerlo Doyle 63, President, Constellation Power 55, Vice President, Electric Interconnection & Transmission '

Robert E. Windham Frank O. Heint 55, President, Church Street Station 53, Vice President, Gas Sharon S. Hostetter BSE Home Products & Servlees, Inc.

53, Vice President, Marketing & Sales Edward A. Crooke Ronald W. Lowman 59, Chairman of the Board

53. Vice President, Fossil Energy '

William H. Munn Gregory C. Martin 50, President and Chief Executive Officer

'49, Vice President, General Services Linda D. Miller 47, Vice President, Management Services Constellation Energy Solutions, Inc. and Subsidiaries Stephen F. Wood Edward A. Crooke 45, Vice President 59, Chairman of the Board, Constellation Energy Solutions Richard M. Bange, Jr.

Ch E 5%

53, Controller and Assistant Secretary 52, President, Constellation Energy Solutions:

Thomas E. Ruszin, Jr.

President and Chief Executive Officer,

.43 Treasurer and Assistant Secretary Constellation Power Source Diane L Featherstone 44, President, Constellation Energy Source Stephen F. Wood 45, President, Constellation Energy Projects & Services i

l l'

i i

I 1

l l

gg Baltimore Gas and Electric Company and subsidiarHrs

Five-Year Stati;tical Cummary 1997 1996 1995 1994 1993 common stock pata Quarterly Enmhts Per Share First Quarter

$0.43

$0.62

$0.41

$0.49

$0.38 Second Quarter 0.05 0.36 0.28 0.39 0.31' Third Quarter 1.11 0.93 1.04 0.79 1.01 j

Fourth Quarter 0.12 (0.06) 0.29 0.26 0.14

{

Total

$1.72

$1.85

$2.02

$1.93

$1.85 j

i Dividende i

Dividends Declared Per Share

$1.63

$1.59

$1.55

$1.51

$1.47 f

DMdends Paid Per Share 1.62 1.58 1.54 1.50 1.46 Dividend Payout Ratio Reported 94.8%

85.9%

76.7%

78.2%

79.5%

Excluding nonrecurring I

charges to earnings 71.5%

70.0%

76.7%

78.2%

79.5%

htarket Prices Hidh

$34he

$29h

$29

$25%

$27%

Low 24%

25 22 20h 22 4 l

8 Close 34h 26h 28%

22h 25 4 8

Capital Structure Consolidated Long-Term Debt 48.0%

45.0%

42.8%

46.1%

' 47.4%

ShortTerm Debt 4.7 5.1 4.4 1.0 Preferred and Preference Stock 4.8 6.5 8.5 8.9 9.2 Common Shareholders' Equity 42.5 43.4 44.3 44.0 43.4 Winty Only Long-Term Debt 45.4%

42.5%

40.4%

43.5%

- 44.5%

1 Short-Term Debt.

5.8 6.1 5.2 1.2 Preferred and Preference Stock 5.9 7.8 10.0 10.6 10.9 Common Shareholders' Equity 42.9 43.6 44.4 44.7 44.6-The surn of the quarterly camings per share amounts may not equal the total for the year due to the effects of rounding and changes in the average number of shares outstanding throughout the year.

1 The quarterly eamings per share amounts include certain one-time adjustments as shown in Note 14 to the Consolidated Financial St:tements.

Dattimore Gas and Electric Company and subsidiaries 59

Sharehelder Information comumen steek oweense and prios seemees 1997 1996 Dividend Price Dividend Price Declared High Low Declared High Low i

Fir;t Quarter

$.40

$28

$26%

$.39

$29% $26%

Second Quarter

.41 27 24%

.40 28%

25%

Third Quarter

.41 28b 26

.40 28%

25 Fourth Quarter

.41 34b 25'b

.40 28%

25%

. Total

$1.63

$1.59 DMeead Peucy Amamal Meeting The common stock is entitled to dMdends when and as declared The annual meeting of shareholders will be held at 10 a.m.

by th3 Board of Directors. There are no limitations in any inden-on Friday, April 24,1998, at the Morris Mechanic Theatre, tura or other agreements on payment of dMdends. Holders of 1 North Charles Street (entrance on Hopkins Plaza), Battimore, prefirred stock (first) and holders of preference stock (next),

Maryland 21201.

however, are entitled to receive, when and as declared from the surplus or net profits, cumulative yearly dividends at the fixed Fenn idHC preferential rate specified for each series and no more, payable tipon wdtten request, the company will lumish, without charge, quart rly. They are also entitled to receive, when due, the applic-a copy of its Annual Report on Form 104, including financial

able preference stock redemption payments before any dMdend statements, after it is filed with the Securities and Exchange on the common stock shall be paid or set apart. Dividends have Commisolon in March 1998. Requests should be addressed b:en paid on the common stock continuously since 1910. Future to David A. Brune, Chief Financial Officer and Secretary, dMdends depend upon future earnings, the financial condition of Vloo President, Finance & Accounting, P.O. Box 1475, the company, and other factors. Quarterly dividends were Baltimore, Maryland 212031475.

dectrred on the common stock during 1997 and 1996 in the amounts shown above.

AusEters Coopers & Lybrand L.LP.

e-Steek DMdend Dates hm N Record dates are normally on the 10th of March, June' Gas and Electric Building September, and December. Quarterly dividends are Charles Center customarily mailed to each shareholder on or about the Baltimore, Maryland 21201 ist of April, July, October, and January.

Mail: P.O. Box 1475 Baltimore, Maryland 21203-1475 The company's Dividend fieinvestment and Stock Purchase Plan m

provides an opportunity for holders of the company's common Shareholders desiring assistance with lost or stolen stock

' stock to acquire additional shares of such stock in a convenient certificates or dividend checks, name changes, address changes, and economical manner. Participants in the plan may reinvest stock transfers, or other matters should call the shareholder

- cish dMdenas on all or a portion of their shares of common services representatives on our toll-free telephoce numbers.

ttock and/or make optional cash payments.

The following toll-free telephone numbers are available Stock Trading during our business hours,8 a.m. to 4:45 p.m.:

?

The company's common stock, which is traded under the Baltimore Metropolitan Area 410783-5920 L tickIr symbol BGE, is listed on the New York, Chicago, sind Within Maryland 1-800492-2861 Pacific stock exchanges, and has unlisted trading prMleges on Outside of Maryland 14002580499 the Boston, Cincinnati, and Philadelphia exchanges. As of Letters should be addressed to:

Dec:mber 31,1997, there were 73,694 common shareholders Baltimore Gas and Electric Company of record.

Shareholder Services P.O. Box 1642 ye ag,,g,,g g,gg,g,,,

Baltimore, Maryland 212031642 Harris Trust and Savings Bank Chicago, Illinois Baltimore Gas and Electric Company and Subsidiaries 60 -

J

t P.O. Box 1475 Baltimore, Maryland 21203-1475 www.bge.com 3

4

. _ _.