Text

Annual Rept 1986
	ML20237H908
Person / Time
Site:	Calvert Cliffs
Issue date:	12/31/1986
From:	Mcgowan G, Trueschler B; BALTIMORE GAS & ELECTRIC CO.
To:	;
Shared Package
ML20237H898	List: ML20237H895; ML20237H908; ML20237H912; ML20237H919; ML20237H923; ML20237H926;
References
	NUDOCS 8708170410
	Download: ML20237H908 (57)
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L OUR SdRVICE TERRITORY B.<ldmore Gas and Electric Company i l 1 . cE'Nty ?W 3' l-UtYgaP' {- it c2u"nIy* I-i (,gN ~_- ~,,y k-washin ton. w o.c. / w..,,. V E w. E"'u"n'[y [ CHARACTERISTICS OF THE BUSINESS Baltimore Gas and Electric Company Baltimore Gas and Electric Company is an investor-power. In addition, the Company is a member of the - owned utility engaged primarily in the business of Pennsylvania - New Jersey - Maryland Interconnection producing and selling electricity and purchasing and which affords access to pooled capacity on favorable selling natural gas. The Company. which was the first gas terms. Electric generation by fuel type for 1986 was utility and one of the first electric utilities ir the United 56% nuclear,45% coal,3% oil 4% hydro, and (8)% net ( States, has 8,800 employees serving an area which interchange. + The Company obtains substantially all of includes Baltimore City and all or part of nine Central the natural gas it sells through purchases from pipeline Maryland counties. The area served with electricity suppliers and natural gas producers. To supplement this approximates 2,300 square miles with 2,395.000 supply of natural gas, the Company maintains facilities at residents, while the area served with gas includes three plants in Central Maryland for the production and 600 square miles with a population of 1,845.000. storage of liquefied natural gas. substitute natural gas. O To service this area, the Company operat(s ten and propane. t in addition to its regulated utility electric generating plants in Central Maryland, including business, the Company sells electric and gas appliances. the Calvert Cliffs Nuclear Power Plant which has con- + Constellation Holdings. Inc., a wholly owned sub-sistently ranked as one of the top performing nuclear sidiary, directs the Company's expanding diversification plants in the country. The Company also maintains efforts. This corporation holds the stock of three other shared ownership of generating facilities in Pennsylvania, companies engaged in such diversified activities as consisting of two mine-mouth plants and Safe Harbor financial investments. real estate development and alter-i Water Power Corporation, a producer of hydroelectric native energy projects. L -

- HIGHLIGHTS-4 BALTIMORE GAS AND ELECTRIC COMPANY. Percent 1986 1985-Change Earnings Per Share of Common Stock Utility Operations $2.83 $2.66 6.4 % - Constellation Companies .32 .14 128.6 % Total $3.15 $2.80 12.5 % Dividends Declared Per Share of Common Stock $1.775 $1.675 .60% Avetage Shares of Common Stock Outstanding 76.627,000 78.627 000 Operating Revenues Electric $ 1.388,251.000 $1,301.463.000 6.7% Cas ' 445.769.000 453.309.000 (1.7)% l Total $ 1,834,020,000 $1,754.772.000 4.5% Net income S 274,619,000 $ 247.300,000 11.0%. Earnings Applicable to Common Stock $ 247,743.000 $ 219.930,000 12.6 % Electric Sales-megawatt-hours 21,236,000 19.699,000 7.8% Gas Sales-dekatherms 97,376.000 96.881,000 0.5 % l Total Assets $4,370,500,000. $4,183,408.000 4.5% Net Utility Plant $3,567,6'/6.000 $3_.453.186.000 3.3% Construction Expenditures $ 254,142.000 $ 225.771,000 12.6 % CONSTELLATION COMPANIES Permnt 1986 1985 Change Revenues 6 24,876,000 $ 13.545,000 83.7% Net income $ 24,825,000 $ 11.252.000 ~ 120.6% Total Assets $409,888,000 $206.195.000 98.8% BCGE's investment $192.147,000 $107,322.000 79.0% Dividends Paid on the Common Stock Continuously Since 1910- Always Earned-Never Reduced 4 l --mm_.--____.__ .A.-____am_ _ _ _ _ _ _ - _. _ -. _ _ _ -. a-a. m _a d

l Ba timore Gas anc Eectric Company + Annua Report 1986 1 i i l l l l \\ I CONTENTS The Chairman's Letter to Our Shareholders 2 + The Presider.t's Report on Operations 4 Financial Review 6 + The Constellation Companies 8 + Ouality People in a Quality Company 10 Financial Contents 25 + Shareholder information 49 + Constellation Subsidiaries 50 Officers 51 + Board of Directors 52 i 1 )

The Chairman's \\s iNeTeeN eiGsTwsix was e very good veer for Beitimore Gas and Electric and for our Central Maryland service Letter to Our territory. Unemployment in the state remained well below Shareholders the nati n I vm ge with nrength in the commadal and governmental sectors offsetting losses in heavy industry. The good economy and favorable weather combined to produce higher elec-tric sales in a ' customer classes. These factors. combined with a major increase in earnings from our Constellation sub-sidiaries. brought 1986's total Company earnings to a record high of $3.15 per share. an increase of 12.5% over 1985 earn- ~ ings. The Board of Directors voted to increase quarterly com-mon stock dividends to 45 cents per share effective with the July 1.1986 dividend. This represents a lO-cents-pei share anriual increase to the new yearly rate of $1.80 per share. E + BGGE customers continued to beneut in 1986 as well. Our E unit cost for both electricity and natural gas were less than in the previous year, and we fully expect rates t, drop further 4 ~ ' s. in 1987. The immediate savings to our electre customers 8 resulted from a new one-year record for electricity generated t. by our Calvert Cliffs Nuclear Power Plant complemented by new high achievement levels from our base load coal-fired o' units. Natural gas costs continued to reflect savings from our successful purchasing policies in both the traditional and spot gas markets. We now believe that natural gas prices have fallen to a level where it is prudent to freeze them for our -i customers by acquiring gas reserves for future use. and we p' k;j g have begun a gas reserve acquisition program to seek out C such opportunities. + Our customers will experience a sub-2 g]% Jf-I stantial decrease in the price of natural gas in 1987. The Columbia Gas Transmission Corporation, our primary pipeline l W ?' supplier. has filed with the Federal Energy Regulatory Com-J l j. f L R. L .l mission for lower rates. As Foon as the new rates are approved. we will immediately begin passing on the expected $30 million annual savings to customers. + Fuel cost reductions produce dramatic savings. especially in the short run. but they in no way mitigate the need for the long-term economies that result from greater productivity. Therefore, we diligently maintained our pur-suit of efficiency in all expense area 3. We focused on budgetary practices that encourage productivity in our operating forces and welcomed again a capital market environment which permitted us to further lower our average cost of capital. + Last year we reported that, although utility operations would continue to be at the core of BG6E activities we would need to look elsewhere for sufficient earnings growth to meet the expectations of our share-holders. We have conducted that search under the auspices of our Constellation subsidiaries, and I am pleased to report to you now that the Constellation companies have been both active and successful. Through new seed capital and the reinvestment of Con-stellation earnings. we have been able to increase the amount 2

of equity invested in non-utility activities to $192 million. This invested equity is presently supporting Constellation's assets of $410 million, which produced $25 million, equivalent to 32 cents per share, of our total Company earnings. We are satisfied with this progress and are optimistic about future endeavos. + At the present time, the Conste!!ation subsidiaries are concentrating their efforts in three areas: financial investments, project financings and real estate. Major activities include: investment la the newly-formed Capital Guaranty Corporation, as well as in three small "We have alwaJt 5 power stations in California; the development of Piney Orchard in Maryland: and the construction of The Exchange at Church Street 50Hgbf f0 e,Hpr0y the Station in downtown Orlando. Florida. The Constellation com-Dest at f5GSE* IbeJte panies section on the following pages will outline these and other projects for you in more detail. + The Tax Reform Act of 1986 is hdPe hr0Ifght MS now law. If it is permitted to play out as intended, ths new law will yggtgg gggcggg jg ggg result in significant savings for our customers. It was for this reasc>n that we supported the tax reform movement and were willing to pg5f,OHd We heffgyd accept reasonable reductions in capital recovery provisions to Ih00 WIll IINO NS make the lower tax rates possible. Unfortunately, however, certain members of the new Congress are now suggesting that federal dHe#HdlPHedSHTe deficits necessitate the delay or elimination of the tax rate reduc-IN kb8 LUbNI8.,, p tions. The extraordinary effort needed to achieve tax reform should not be nullified without comparable efforts to control the deficits by reducing expenditures. + Recently there has been increasing attention given to the likelihood of mergers and acquisi-tions in the utility industry. We have followed this topic carefully and are confident that we are in a position to act in the best interest of the Company and its shareholders. Change is inevitable, and we must be prepared to deal with it. Our past achievements have derived from our commitment to planning and flexibility along with quality and service. We believe these attributes will continue to serve us well in the future, but the root of success is the dedicated effort of good people. We have always sought to employ the best at BGSE: they have brought us much success in the past, and we believe they will bring us an equal measure in the future. M l l Bernard C. Trueschler Chairman of the Board February 12, 1987 3

The President's r, HiS PAST vEAR. i986. was an important one for the Baltimore Gas and Electric Company. We were able to Report on achieve much that we had planned and much that we Opelations had hoped for. Continued growth in our service area and revo,abic weather boosted eiect,,c seics by 7.8s with ei, custome, categories contributing to the increase. This growth combined with warmer-than-normal temperatures, produced a new summer one-hour peak demand of 4.618 MW. just slightly less than we had 7 ' g.c forecasted. Since this new peak was compatible with our fore-Qi casted peak. we remain confident that our construction pro-l gram is proceeding at a proper pace. The 190 MW addition h ,,, l. ~ to the capacity of the Safe Harbor Water Power Corporation z 7( . f was completed in 1986 when the final two units of the five-c ) unit expansion project went into service. The 49 MW up-grading of Unit No. 3 at our H. A. Wagner Power Plant is ~ nearly finished, and the 640 MW Brandon Shores Unit No. 2 4 ' remains targeted for a spring 1992 commercial service date. 1 + The Calvert Cliffs Nuclear Power Plant generated 12.8 million 1 MWH of electricity in 1986. equal to 56% of all the electricity used by our customers throughout the year. This record breaking amount of generation was 10% more than produced 1-X ~ f' by Calvert Cliffs in any previcus calendar year. This perform-x ance is especially gratifying since it was achieved during a i'. year when Unit No. I was undergoing its required ten-year in-service inspection in addition to the normal refueling and maintenance requirements. During the in-service inspection. [/.. all essential plant components were examined. and all of the fuel bundles were rereved to allow inspection of the reactor l vessel. Despite the complexity involved. we were able to com-r i plete the ten-year inspection, routine maintenance and refuel-F. l ing in well under the average industry time for such outages. .1 _ Calvert Cliffs Unit No 2 begins a similar ten-year inspection, refueling and maintenance outage in March of this year. This outage will also be significant because it will initiate a cost saving 24-month refueling cycle for this Unit. Calvert Cliffs will have the first pressurized water reactor in the United States to adopt a 24-month cycle. + This change. as with all others at Calvert Cliffs is being undertaken only after exhaustive studies to assure that our highest safety standards will not be breached. We assured Marylanders in the early days of the Calvert Cliffs project that nuclear generation could be safe. clean and economical. We have kept that promise forimore than ten years. and we intend to do whatever is necessary to ensure that we keep it for many decades to come. To that end. BGGE has volunteered to host the first United States nuclear plant evaluation by the international Atomic Energy Agency. The inspection. which will be conducted by the Agency's Operational Safety Review Team, may take place in 1987. We have always advocated the sharing of ideas and experiences as one of the industry s most important ways to enhance sa'ety. In volunteering for this inspection, we hope that other utilities here and abroad will follow our lead so that we may all learn from each other's experiences. + The performance of our fossil generating units was equally notable in 1986. Our base load coal-fired units. 4

i Brandon Shores Unit No. I and H. A. Wagner Unit No. 3. set all-time individual highs. Our system equivalent availability reached its j highest level since 1978. We were able to complement the produc-l tivity of our plants with purchases of coal on the spot market that resulted in significant fuel cost savings for our customers last year. Brandon Shores continued to demonstrate its pivotal role in our system. In addition to setting an equivalent availability record, the plant produced a record burn of approximately 1.4 million tons of coal and a record 3.5 million MWH of net generation. This level of "We assured efficiency allowed Brandon Shores to account for approximately 47% of the energy generated by our fossil department plants last Marylanders in the year. Clearly, our fossil plants benefited as n.uch as our nuclear gggglgg)gggfpgg facility from the mcreased attention accorded them unde our reorganized Fossil and Nuclear Divisions. + Total gas sales for the CalPert Cli[f5 project year remained essentially unchanged from 1985. Weatter-induced N NNI NINONOIO~ sales increases to residential customers were offset by lower sales to certain industrial customers with the ability to take advantage fign con [d be safe, i of the dramatic slump in oil prices. To respond, we are focusing on (leaH and c(OHolHICal. 2 an aggressive Gas Acquisition Program to make natural gas more attractive to our industrial users and to our residential and com-We have kept that mercial customers. Production from ary reserves acquired will be used to supplement gas from our pipeline tariff suppliers and both pr01Hise...,, i long-term and spot-direct purchases. Our goal is to assemble a natural gas " portfolio" of proven reserves and long-term contracts to provide flexibility while assuring our customers competitively priced gas. + 1986 was a year of achievement for cost contain-i ment efforts as well. I am pleased to report we were able to meet six of the seven performance goals we had set for 1986: electric and gas prices billed to our customers actually declined: we decreased employees on roli by 175. or 2%; and we surpassed targets in terms of reducing motor vehide accidents and time lost due to w ark-related accidents and sickness. All of our employees contributed to these achievements. and under our employee incentive program, their performance earned them an award of Company stock equivalent to 1%% of their base pay. + As we i begin 1987, we have set even stricter targets, and we are confident j that innovative ways will be developed to meet them. We will con-l tinue to streamline, upgrade and fine-tune our operations because j we intend to repeat and improve upon the successes of 1986. We j know we can count on the creativity. loyalty and dedication of our people. They are at the heart of our achievements. With their help and your support. we look forward to an exciting future. 1 1 / ,/, - W w i George V. McGowan President February 12, 1987 5 j

Financial earnings-Continues Growin Review Earnings per share of common stock increased to $3.15 in 1986 from $2.80 in i985, an increase of 12.5%. The increase in 1986 earnings is attributable to both higher utility earnings and greater income from Constellation Holdings. Inc., the Company's diversified subsidiary. Utility and Constellation per-share earnings i were as folicvs: 1986 1985 Utilin Operations $2.83 $2.66 Constellation Holdings. Inc. .32 .14 Total $3.15 $2.80 I 1976 M Utility earnings increased in 1986 primarily as a result of a 7.8% 1977 N increase in kilowatt-hour sales of electricity. This increase resulted 1978 m from favorable weather during both the heating and cooling '878 N seasons and from continued growth in the number of electric ,'gy customers. The increase in Constellation Holdings' 1986 earnings w s the result of additional financialinvestments undertaken 1982 m ig33 dun,ng the current year. Dividend increased 1985 m 1986 The quarterly dividend rate on the Company's common stock was i l l increased to 45 cents from 42H cents per share effective with the o s 50 s1.00 s1.50 $2 00 s2.50 sa co $3 50 July 1,1986 payment. The new rate is equivalent to an annual rate Dividends Dedared M Earnings of $1.80 per share which is 10 cents higher than the previous annual rate. This marked the eleventh consecutive year the Earnings and Dividends Declared dividend rate has been increased. BGGE has paid a dividend on Per share of common stock its common stock in each year since 1910-a dividend that has always been earned and never reduced. Common Stock Performance j in August 1986, the Company's common stock traded at an all-time high price of 39%. The stock closed the year at 33%, an increase of 36% over the 1985 closing price. 1981. 1982 m Construction Expenditures 1983 m Construction expenditures amounted to $254 million in 1986, 1984 including $30 million in Allowance for Funds Used During Con-1985 M struction (AFC). Electric projects accounted for $230 million of that 1986 p total and $24 million was spent on gas projects. An additional I $87N $59 million was spent on nuclear fuel. Construction expenditures 1 o sloo s200 s300 5400 for 1987 are currently estimated to be $262 million, including $32 million of AFC. Nuclear fuel expenditures are expected to be Mconstruaion m Arc $50 million. Approximately 90% of the funds required for the Construction Expenditures 1986 expenditures for construction and nudear fuel were provided mons or Donam by the internal generation of cash related to utility operations. 1 6

i Financings j The Company has continued to minimize the cost of capital I while maintaining a strong financial position. The Company 1986 Financing Transactions was able to take advantage of the favorable interest rate. Amount I environment that existed in 1986 by retiring $69 million of mono I higher cost securities through redemption or market pur-NEW lssUEs ) chases and by replacing $25 million of outstanding bank debt 9%% nrst Refunding Mortgage Bonds $10(t0 with long-term bonds. An additional $59 million of securities )), C""'"[ Q'[j'j'"c' n$ N 7 r ns. were retired upon maturity, through operation of various sink-common stock issued under the ing funds, and by installment payment requirements. During Dividend Reinvestment and 1986, $l63 million in new securities were also issued, Details stock Purchase Plan. .7 S'63 3 of the Company's 1986 financing transactions are shown in .{ the accompanying table. R EDEMPTION s'RETIREM ENTs/R EPU RCH AsEs l MX Rdorm 16%% First Refunding Mortgage Bonds. $ 35,5 14%% First Refunding Mortgage Bonds. 15.3 The Tax Reform Act of 1986 significantly changes the federal su nrst gefunding Mortgage Bonds income taxation of corporations and should result in lower anstanment seriesi. is prices for our customers. Its provisions include an overall 2>4% nrst Refunding Mortgage Bonds. 24.3 reduction in corporate income tax rates, the elimination of $""l"$n"N'Il[r ' [3 g c the investment tax credit, changes in depreciation rates and Revolving Credit Agreement Loan 25.0 lives, and various other provisions which will affect the Com-8.7ss cumulative Preference stock. 30.0 8'373 ' '" *"' ** "'" S' * ' pany. The Act is generally prospective in nature with most of m ai sn2s its provisions being phased in under various transition rules. beginning on January 1,1987. Although the Company will i be paying fmure taxes at a lower rate, the loss of capital incentives will adversely affect cash flow. The effects of tax reform - 4.62 ) on the Company's operations are discussed more fully on page 30 5.23 .I under the heading "Thxes." . 5 43 1 mm568 Public Servke Commission Proceedings ms 85 The Public Service Commission of Maryland, at the request of ms.86 j Maryland oeople's Counsel, has undertaken an investigation into m s.03 the reasonableness of the Company's rates. This investigation was m e.14 """"""""614 requested in view of the changes in the cost of capital subsequent 6.19 to May 1984, when the present authorized rate of return was E64 established. The investigation will also consider the effects on the 6 86 Company of the Thx Reform Act of 1986 together with changes 96 in rate base, sales and expenses. Both evidentiary and public 7.23 hearings have been held or are in progress. The Commission's - 73 decision is not expected before the second quarter of 1987. m 7.53 M 7.60 i M 8.26 l 8.26 M 8.40 M 8.63 M 8.97 i M9.28 l 11.44 . 12.73 1 Average Rate Per Kilowatthour of Electricity l ICents per Kilowatthoud I ) Amone the Largest U.s. Cities with investor-owned Utilities l All Customer Categories i 12 Months Ending November 1986 ) 7 j

The m se veAn 1986 was one of extremeiy repia growth for the C. constellation Constellation family of companies. Constellation Holdings contributed s2s million of after-tax earnings, which is COrnpanieS 32 cents per share or 10E to the corporate total. We believe we are well on our way to our 1995 goal to have approximately one-third of total BGGE profits coming from the Constellation companies. + Constellation's near-term strategy is to concentrate O^.: :. on three major areas-financial investments, project financings and real estate. There are numerous opportunities in the marketplace in each of these areas, all of which will enable us to capitalize on corporate strengths. In the longer term, we expect to expand operations principally by joint ventures and acquisitions. FinancialInvestments In order to keep our assets fully deployed while we are searching for attractive longer term investments, we embarked on a program designed to provide a high level of current income while pre-serving our capital base and retaining moderate liquidity of our assets. At year end, we had invested $273 million of assets in investment securities, leveraged leases and limited partnerships. + Constellation Investments has purchased 25.2% of the stock of the newly-formed Capital Guaranty Corporation. This company will act exclusively as a monoline insurer in the business of writing guaranties for timely payments of principal and interest on finan- .nc 22 M w chiem3r sutun mod +""""" cial obligations of mid-sized regional governmental, corporate and educational issuers who, with their obligations insured, will be able rt iI tl .nd arc um wedchirs wd us fuci fer the rlant. to get the pricing of a AAA credit rating in the marketplace. Comicllatian owns R% vi titi> b %G ndlien you cr riant u hich sells cicchicity under lona- """b"Y tcnn,c,diaa to the Paolu Gas and acarif Our interests in project financings are mainly in the alternative l compana conuruatic(s rartners in u is energy. wastc'to-energy and wastewater treatment plants. We rrord arc sesdiane, "Hhas: cms inwr-have invested approximately $18 million in three Public Utility roravd and um Par ou uendma correlation. Regulatory Policy Act-qualified small power stations in California, two of which burn wood waste _ y, 4 mg m,. 7, w.y.q.q while one utilizes passive solar ~- gd, technology. Our first project was the 22 MW wood-burning Chinese Station power plant. s l + We are actively exploring the S' possibilities of expanding our s activities to include project "^ development, management and long-term operation and mainte-nance of these types of plants. 'f Several other power plant projects are under consideration, and we believe that this area is one of key, strategic importance for Constellation Holdings as a whole. 8

. Real Estate. Constellation's activity in the real estate market has been steadily ' . growing. We finished 1986 with $19 million invested in 17 different - real estate projects, representing over $235 million in total con-struction costs. Our growth has been primarily through joint venture arrangements. In April 1986, we announced our relation- . ship with The KMS Group, Inc. of Columbia, Maryland. A new . company, 20% of which is owned by Constellation Properties, was formed to provide the development, marketing and property management services. + Currently included are two shopping centers in Maryland and one in Delaware. We also have three office building projects in Maryland and an industrialloffice park in Anne Arundel County,- Maryland. By far, the largest project is Piney Orchard near Crofton, Maryland. This 1,500-acre mixed-use project willinclude over 5,000 residential units and a 350-acre industrial area. In Baltimore, Constellation Properties will own 60% i of a 100,000 square-foot mixed-use retail and office center located j .within the Inner Harbor at Fells Point. Our joint venture partner is Historical Developen of Pennsylvania. + Another project, Church j Street Station, is a high-quality entertainment center in downtown Orlando, Florida, which attracted two million visitors last year. It consists of live entertainment, restaurants and specialty retail shops designed to appeal to visitors of all ages. Constellation The Enhanac al Church Street Station will. Properties has entered into a joint venture relationship with James bc.ct in a ficing vidorian museum-like Rouse's Enterprise Development Company of Columbia, Maryland, atmosrhere micled aticr the elegant bustling and Rosie O'Grady's of Orlando, Inc., Orlando. Florida, to con-retail centers of thc late 19th ond carfu 20th struct an $18 million festival marketplace as part of tiie expansion wnturies. Authentic vidorian architedural of the Church Street Station. arnians will be utili;ed throughout the Euhange to blend in with the cristing Church Street Station facilities. Completion of the Euhange is ewected to be in late fall of l987.

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I I s OUALITY is a difficult term to define. Most people "C <r 03nrang has corned a wcH-know what it is instinctively-it's " good l' it's "the Jactred irrutahon W hnuncial real thing," It's "rightl' The international theater """i""5 /* over 5 0 Ucdrs Wr*c community saw quality of that kind in Baltimore when ["][{ 'g"j"]' they chose the city as the first American host for the u never vcco strenacr uran n is Theatre of Nations Festival, previously held in Paris, edam and irs fnase wetc 6cen Amsterdam, Caracas and other major world cities. Joina unngs rialm + Quality is a word we apply to a satisfying experience, _.nti: Nano c. Tauescat t a such as watching a performance of the Gyor Ballet of thsunan d :he Bmrd Hungary, several of whose members are pictured on the ^n"*d E"mie" facing page during a festival rehearsal. It is the way we $77"" *"""" l describe a satisfying product or service, one that has been crafted or performed by people who have a deep sense of pride and confidence in their work. That kind of quality doesn't just happen. People make it happen, l I people who are committed to "doing things rightl' We have 8,800 of them at BGSE, from our Chairman to our newest employee. + Our management style is geared to bring out their very best. As we see it, the ingredients that make up quality management are as fundamental as foresight and decisiveness; they include: the recruit-l ment, training and development of the right people: the encouragement of top-flight performance at every level: planning: teamwork: the fostering of individual motiva-tion: and the idea that we as a Company must put something extra back into the community. These elements form our corporate philosophy. To help you undestand how they work together to make the Com-pany the organization it is, we've asked several of our people to share their thoughts with you. In the following j pages you'll meet six individuals who speak for all of us l at Baltimore Gas and Electric. l l l 1 l I 11

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O USTOMER SERVICE is a demanding, rapidly changing "You can't f001 the d field. State-of-the-art gas electric and electronic home cudonrers Therj C appliances require sophisticated technicians to diagnose and repair malfunctions. At one time, all BGSE appliance NHOW WheH UOH kHOW repair people were trained to work on everything from washing ggg[ g)pg>yg ggjpg*" machines to furnaces. Today, the Appliance Service Section of Customer Se:vice is split into three categories: Heating and ^ Refrigeration: Laundry; and Kitchen. As Hap Plowman will tell .. g g" g L3 you, the reason is simple: "I don't think anybody can know it all." 3

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d( g{ fl (= the winter, often six or seven days a week. The Company works equally hard to develop courses and materials to insure that Y )(3 / people have the training to perform under those conditions. W Creating and conducting innovative training programs, in fact, is ~N [d# 4 f h, i !V an ongoing priority in all areas of the Company. + Hap has seen the quality of training in Customer Service improve dramatically g,. + ^ ir e over the past 20 years. Formal course work now begins where it / once ended-with basic gas training. After new people complete the initial program, they go on to one of the three categories and Harlan A mar" Plowman is a Customcr begin classroom training in that field at our school in Timonium. scn. ice srccialist in the customer service only after the classroom work is concluded do they start riding Dcrartment. He hs been with the Company with a trained technician for on-the-job experience. And even after over 31 years. starung as a mctcr reader before they have been on the job for years, the schoolroom remains a moving nnt to commercialscince while familiar locale. Hap notes: "Every time the Company begins selling there. he studica rlambing at night m a a new appliance, we go back to school and are trained on that company-sponsored school and obtaincd his new unit so we'll be prepared to repair it in a customer's house." aas tarcr's license in riccaration for arelying + Not all of the training is technical. Even people who genuinely la Customer scrrice. wherc he has worked lor care about people some'imes need help developing good inter-nearlu 20 years By his own definition, Hap is personal skills. The Company offers a course called "It's Our " *"" "?" "#5 "*"' h' d" Pleasure" taught by the Dale Carnegie School, its specific goal is ""f, ' j iijrc ' ^ g r ir to help employees deliver cheerful and effective service. + At BGSE. we start with the best and train them to be even better. - n / s I Y cN oNer EcN( rhm L Ulowman s me,c than lutn!v pears of !raming k_ and nycrrence in apphamc renar, t e x a _ _c_,_ 2 Power Plant spend > some Gmc alone in the ds,d N '; * ~ Centrol Room Smudator. goina over an

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upcomma lesson. Located on-site. the % ip', a ~ s-a, i> an nma ame senn o rcsnma n \\ or ihe vlanc, waroi ron and a piaus a vaal "ae roe m,,_,, am, orc,,aa, j the mana tramina programs provided by the Company nudcar trainina is one of the most ~ crIntal Ior thi5 trasen, the Company has inVcSicd over 52 ) millien in trainina proarams at Calvert Chin since 1%u ^ w< 13

1 l J "I can't possibly sit INCE UNIT No. I came on line in 1975, the Calvert Cliffs bdCk Gnd say I did a Nuclear Plant has been consistently cited as one of the top among the nation s 108 licensed nuclear un,ts, in i good job !f fliis plant terms of both operations and safety. During its lifetime. the doesn't work well*" p nt has generated over half our customers' electricity and saved them over $4 billion in energy costs. The meaning of Calvert Cliffs' performance records is far more than statistical-it results in dollars and cents going directly into the pockets of our customers P and. indirectly, into those of our investors. It is also a deep source 7: d of pride to our employees whose work is mirrored in those records. 7 NE N + Jim Lemons. Manager Nuclear Operations at Calvert Cliffs, l ) u O k believes that his own performance must be measured by the per- '? b, [" n Q-formance of the plant. Jim sees his job fundamentally as creating an environment where creative thinking can flourish: "I try to Y\\T' \\[% encourage people to come up with good ideas. When we have a \\ g [( )\\ - problem, I bring a group of our people together*th come up with ^ l \\ l ways we can change our hardware, procedures and training to l JJ 'u solve that problem. Then i make sure that we follow through on their recommendations." + in Jim's view. there is no secret to wn a Lom, < n N h." n achieving quality performance; it's a matter of doing things right Nu..ca! Orcs.dw D< nun,on N du i w thy [jfst time. "That means thinking about what you're going to do e rmic.Anownavo"nu on'" + so you can do it correctly instead of taking short cuts or trying to r i na.hanonsaw acu nn u"" get by with something. I try to be very careful that I personally run,una and naanna saicm.d uc" live up to that standard l + Jim Lemons' ultimate performance aar a u cu m sJacona a,u m +% goals for Calvert Cliffs are the same as those for every operational vi an ina ma na a aamd nwdr., rwaa tw vi, nac, m a em,, activity in the Company: safety. reliability and productivity. For u mco mu m w u m m a w u ~a, prr.:tical purposes, those broad terms are broken down into quan-un enra g a,. umumma nn s our tifiable objectives-in the case of Calvert Cliffs: "We set goals for on tw Na,o nam, einm wn availability, for accident prevention and for several other factors. ,co m s m m m acemann a. Then we incorporate these goals into a formal Nuclear Program u na w ::to won scn Plan and develop strategies to achieve them." + Running Calvert Cliffs is a satisfying experience for the people who work there. They know that Calvert Cliffs is one of the best plants in the country and they are proud to be part of it. Jim Lemons sums up the prevailing attitude most succinctly: "We just get a kick out of running a great nuclear plant." > > lier Leonom wd, Hie tene da a: Cdan Gh> N ucl car % cr Vla> l dw vig lyt iali: ~ ,4 wlach,a e:dase for Und M ihc catasc al,o Q { nuladt J the on: U Fac,

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!k to BGSE employees about their co-workers. "Afler wor [tlng all (W HEN YOU ta you hear over and over again that people tend to think g(b[gg'g[gggg'gggg[gygg of their departments as fa.mly. Throughout the Company, there is a sense of mutual support and shared objectives li[te seeing a BGGE as well as a clear understanding that each person-and each frH([2kHlldr0MHd department-depends on the others to do their jobs well. ) Management emphasizes loyalty and interdependence. In many ((!E COTHer. If really instances, it is precisely our reliance on teamwork that makes it lHG[265 90H feel 00d 9 possible for us to do dangerous jobs safely and quickly. + As a Splicing Crew Leader, Pete Peterson recognizes that he could not f0[lHOW90H't/c90f do his job alone: "You need a helper at the top of the manhole while you are in it in case there are unforeseeable hazards-N p (OlHing.,, especially when you are energizing and de-energizing cables. mm. Without teamwork, someone could be fatally injured." + Even FC N. when the job is not life-threatening, teamwork is vital. When Pete's f c7 M crew is involved in a big job, they are likely to be working with ' ~ AM u other departments. Pete recalls the cooperation required to 7 change one Baltimore City neighborhood's 4,000-volt system to y'g% '- ap a 13.000-volt system. The underground crews and the overhead M crews had to blend together. "If we didn't have team players there, f the job would have bogged down. We all have to work together to 1 n achieve the one most important thing: service to the customer." W K, O Pete is also a member of another team, a Quality Circle. This [Mi/,j program operates throughout the Company, bringing together FN7/ groups of co-workers to focus on ways to do their jobs more pro-ductively. Pete's Circle, " Reel People" has been in operation since d' ~ 1983 and has generated over $100,000 in ongoing annual savings wmln,w "Pnc" rbisons a SrIni"# crne for the Company. 9 Throughout BGSE, employees are encouraged Leada hnot af Spring Cadens A mcmber to think of themselves oHhe Ucork conuondan Derartment bl.s \\ l &L A ', / as one part of a . i9i i talnucahrnialtu inaHnvlidna wried t m v4 / d"d the 6dlvr d hn'"'""O w"5 Pe!c has whole. Pete Peterson . t t ,. W /' / sees the process as ,4' b* "i"' uk conranu L'r n (a an nonna i iD4 $ ' I "5 " C"Nf SP " *"'"fC ""d PM"f * "" h a continuum: "The $.. " ' S 4 !,! s. """" d' C"* P"" P '""" i"" U"'"U " "d Company makes you 4 i e - i ) /,/." aware that you need someone looking i. y y .,/ ,, 8,6 ocw leader posinon r p J/ s over your shoulder f I for a situation you ( / - II can't see. You get / H' / ' " /h) //.# that attitude from 3 ' [ e Pctc Pcterson on a is suc near the new U nion the people training you because they got 'N Tr"d B"dd*h" d"" "' ' '" B dd""'"4 / it from the people i \\ a;shng hna"dal < nrm who trained them.

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i r N A CORPORATE sense, planning is more than simply think-TFebeell9IVella10t ing ahead-it is the detailed process of positioning the g[ggppggg (g p[gg A Company to take the maximum advantage of the mternal and external circumstances that affect it. This means GHd pHTSHe G Very evaluating all the pertinent information, setting the goals and developing the policies that will shape our future. By planning in g g7gggjpg gg7ggg0)g ] this way, we can change when we need to or adapt successfully to at the Federal those factors we cannot change. + Our formal strategic planning process includes nine planning groups representing the integral {'Hergy g gH{a Ory elements of the Company, a Management Committee and a Future COHIHilSSIOH (O giPe issues Committee. In practical terms. planning is a major activity in every department at BG6E. For some like the Legal Department. OH!pdHy GS charting strategies to meet Company goals is one of their key gggch ((gylhlll[y functions. Lynne sees her group as part of a tean' that involves the Gas Supply Department. the Economic Research Department GSPOSSible.,, and the Marketing and Energy Services Department. + For Lynne. T' developing strategies involves a number of different activities: "It means monitoring changes in federal and state regulatory policies t ,w p and relaying that information, or giving the Gas Supply Depart-4 ment advice on what kinds of contracts we ought to have with gas ? (w suppliers. or advising them how to meet the criteria that our state g Q commission applies in looking at whether or not we have been g prudent in our gas purchases." + Lynne sees the other depart-d 6 ments in the Company who look to her for advice as clients as ,f_ tw~

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well as fellow members of a planning team: "My role is to help f^ h.. Y them do their jobs in a way that will avoid problems with the state J -iU commission while maximizing our ability to buy low-cost gas and obtain the pipeline capacity to transport the gas." in her view. they are all working toward the same goals: to keep our gas ' [,, [, [ " M [.,{ f, ((, Q, system strong. to retain our industrial customers and to insure that ,,, 1 s m. y,, y,s. g we keep our residential gas costs as low as possible. 4 Perhaps .m g , a a a. u.. m c.,,s most satisfying to Lynne as a planner is the fact that she is in a , s g,o ,z m.., ,o ,m position to implement her strategies before the state and federal l i-my, mm,,, agencies and the courts. "It is very gratifying to be part of a Com- % n ": as>mu,wm a pany that has a reputation for being innovative in its approach to e!< 4 2 weu! 'o, i the rapidly changing regulatory environment l' , 'r r. t m" 'JN'+F Mw pu, o m. o.n c g ~ h' &* g, [ N ,Jt

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" Motivation ha5 to 7 G6E EMPLOYEES are the kind of people who want to ggggg gggg g,j[gjg I work. Flo Giles believes that BGSE attracts the best because it demands the best: "The Company doesn,t j,ust be(auSe ibl5 Joh accept anybody. You really have to have something going depultfly Na5 Stress. for you to get into this Company and stay here." + Customer r 1 Relations Representatives are a special breed even among BCGE's You have to like self-motivated work force. For Flo and her co-workers, the contact people to underSland with customers is an adventure: "With each call the customer gives you something about himself. I had one customer who actually tbat Irate Cu5loinerS thenked me beceuse e storm ceve her femiiv 1he chence to sit down together for a candlelight dinner." + Along with the are not t_alking to you perSonall,, w m"q" y. j n

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Ile Goes rausc< Octmn <am aanna a rav highly gratifying career. Flo Giles enjoys being able to help many uns en the cmfomci 5cnia Daard different people in many different ways: "You play mom. You play dad. You play the priest. You play listener. You play all types of
when the thander and bahrnow haec rancJ roles on the telephone service board." + The opportunities for BG61. reerIc are udl on the roh weruna t" advancement at BGSE both within and beyond the department icuorc scnu na ett Jurny a storm u 8 not are particularly appealing to ambitious. talented people like N [ft n.I,I r fir""

FI Ciles. We provide educational and career counseling to help cutancs a takes more than moncy to vv employees find the positions best suited to their talents. and if recnic Joins uns i + ucar auct uca, I akes further education is required or desired, we will pay all or part vousuaIand mentallona% css.md mon el of the tuition. The Company-wide lob posting system allows aII a rcisonal m"mnt"E"No the rdca that employees to advance within their own departments or to seek ths is a joHhat muu bc donc promotions elsewhere at BGGE. + in Flo's view the opportunities are there but. "you have to be self-motivated first. When the chance comes. you have to be ready, too." 20

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"I SiOp to help people. O LAY STEVENS is a fortunate young man, and he knows it. I'PC GlWayS nel ea d m'als knows what he wants from life-a sense of k U quality. That may come from the satisfaction of helping Olnels wne,l thel; to in,1eii e mee,ive tren,fermer e,1he pieesere of eernieg l0ON like lhel,f Gl'e ill dollars for charity by running a race. + Clay brings that attitude to all his activities. from running-not walking-the March of Dimes need. That's sonle-waik-a-Thon every year to competing in Company-and state-lTIllig y0H SNOHld do sponsored safe driving championships for truck drivers. When Clay learned of BG6E's support of the March of Dimes, he wanted to dff (he (fine." participate: "I feel lucky to be as healthy as I am, and I figure that if I can do it. I'll go ot.t.and help those who are less fortunate." Q Clay crossed the firush line first in 1985 and 1986, earning his ki department's licro of the Month Award both times Last year, with J d the help of sponsors and contributors from his own department, 2 Clay's first-place run raised over $500 and won him an invitation 3 pgrg".' to the March of Dimes awards luncheon. + Clay has been driving for nearly as long as he has been able to run-he was operating e k $ h% farm tractors at the age of six-ro he seemed an ideal candidate

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[ TN' to enter the Company's safe di.ving competition last year. Truck j %v "roadeos" test a driver's skills in writtt.n. oral and practical exams. l r;( ,q Clay won the Company championship and went on to take second N place in the straight truck class in the Maryland State Motor Truck ( <4. Association Roadeo-no mean achievement for a first-time com-f \\g/ p\\ petitor. Since then. Clay has participated in other roadeos because g he enjoys them and because they make him a safer driver on the j streets every day. + Clay Stevens was attracted to BG6E because C la Nann n u hd dina u uh thc Recru he saw a future with a company whose attitude matched his own: "I love this area. I umt of nu: organsm m o>c Den 4unen a 1 ene o u hm ronr n ero,rd* p, y. was taught when satomoo 1,voc n.maonecm uum maa I came here that the wck.h ur u m um eu ds nas Oc a public is the number r ) one thing. There mausan ua,ctnncnouodusnuinan wchu a tann g,ut ual a es+ nmc hu mo aren't a whole lot aaanm.u, a,J w mcvvo:nwcom-3 of companies like v.muurna"nes h a the w vIIV.Hmd that." + As a cor- % a gu m cJici nca.I to ;o o c"" poration. BG6E con-tributes time, exper-tise. materials and dollars to meet a e multitude of needs i o uay Nonn Dai nnurr comJ in the metropolitan a warment oc w h e im - area. We do it for the iccaonna urn same reasons that our people give to

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the causes of their ,cenne 89 Mi um mmmunna riendmd choice: this is our eccHe o,a nrn:nc e mn : sen a nua' c.,v u n rumman M: mi vanaim f home. Maryland has n,me,'y nge arcinecoiety.n.ctuaand offered us its very i >nc,a nonunna, m na Mondanmenanc best. from its people j f chous Preaum a rmat don"o d euro a to its recreational I n.pmc 2adna.vWma hetww" um rank my opportunities to its rimac sn temna u onga ruumm cultural life. We, like errenan:o e agnaa asennnaa nn a, Clay Stevens. are for-N, tunate to be able to 4 ' give back something of ourselves. 22

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~. - - l g, i' E HOPE you've enjoyed meeting Hap Plowman. "otalitu is a way of approaching the Jim Lemons. Pete Peterson, Lynne Church, world. rather than an end rroduct Flo Giles, and Clay Stevens. They and their itscII. It a product or senice is good. s d IS '"'F9 d"S' 'h' P' P *h" codorkers at BGGE are ultimately what a quality com-6 created it not only kncw what to do, pany is all about. F.ive of the s.ix have been with us for but wcrc striting to do their very best." virtually their entire working lives-that is typical of _ctogcgy gccow3y BCSE people. All of them consider BCSE not just a job, president but a career. They've made a commitment to quality for Quakty Assurance Workshop-l themselves, for us and, most important, for you. septernber 1986 I < A mother and her children stop for a snack by the fountain in Mt. Vernon square during the Fh>wer Mart in May. This ennual nte of \\ spring in downtown Baltimore draws families and business people to the cobblestone square l to admire the profusion of flowers and enjoy a lemon stick. a Baltimore tradition. Keeping Baltimore a tily u here events like the Flower Mart can happcn is what community involvement is allabout. i h

l i l 1 l i l l l FINANCIAL CONTENTS Operating Statistics 26 + Selected Financial Data 27 Management's Discussion and Analysis 28 + Report of Management 32 Auditors' Report 32 + Statements of income 33 + Statements of Retained Earnings 33 Balance Sheets 34 + Statements of Changes in Financial Position 36 Statements of Taxes 37 +- Statements of Capitalization 38 Consolidated Condensed Financial Statements-Constellation Holdings, Inc. 40 Notes to Financial Statements 4i + Shareholder information 49 + Constellation Subsidiaries 50 Officers 51 + Board of Directors and Committees 52 25

OPERATING STATISTICS Baltimore Gas and Electric Company 1986 1985 '1984 1983 1982 (Dollar Amounts in Thousands) ELECTRIC OPERATING STATISTICS Revenues Residential $ 575,774 $ 528,676 $ 491,069 $ 452,772 413,139 Small Commercial. 279,874 265,338 261,815 242,790 230.628 Large Commercial and Industrial 523,815 497,683 446.394 390,751 386,237 Other 8,788 9,766 8,867 6,997 5.602 Total $ I,388,251 $ 1.301.463 $ l.208.145 $ 1,093,310 $ 1.035,606 Sales-MWH Residential. 7,797,858 7,083,564 6.897,025 6,644.403 6.101,831 Small Commercial. 3,349,871 3,157,806 3.263,555 3,166,055 3.012,927 Large Commercial and Industrial. 10,087,894 9.457,355 9.074.069 8.452,975 8.177.421 Total 21,235.623 19,698,725 19,234,649 18,263.433 17,292.179 Customers Residential. 853,976 831.423 811,771' 793.899 780.119 Small Commercial. 85,623 82.737 80,089 78.921 77,I44 brge Commercial and Industrial 2.715 2.518 2.317 1,760 1,876 Total 942.314 916.678 894,177 874,580 859.139 Average use per Residential Customer-KWH. 9.255 8,613 8.591 8,440 7.872 Peak Load (one-hour)-MW. 4.618 4,365 4,230 4.079 3,924 Capability at Summer Peak-MW 5.656 5,586 5.498 5.019 5,015 GAS OPERATING STATISTICS Revenues l Residential. S 258.975 2'M,',99 293,158 $ 263.693 233,700 l Small Commercial. 39,659 42,147 49,081 44,121 39,561 I Large Commercial and Industrial 141,781 148.305 205.035 233.010 262.636 Other 5,354 6.358 6.055 4,471 3.541 Total $ 445,769 $ 453,309 553.329 $ 545,295 539.038 Sales-DTH Residential, 38,629,757 36,381,366 39.906.189 37,258.732 39.853.493 Small Commercial. 5.960,010 6,255,159 6.837,512 6.258.274 6,667.439 Large Commercial and Industrial - 52.786,120 y.244,959 54.727.002 44,195,654 53.855.102 Total 97.375,887 96.881.484 101,470.703 87.712,660 100.376.034 Customers Residential.. 482.394 481,188 480,613 479,147 478,213 Small Commercial. 30,820 29,449 29.831 29,846 29.928 1.arge Commercial and Industrial 5,005 5.806 5.052 4.977 4,865 Total 518.279 516,443 515.496 513.970 513.006 Average use per Residential Customer-DTH 80.2 75.7 83.2 77.8 83.4 O Peak Day Sendout-DTH. 624,700 677,300 607.200 648.300 690.800 Peak Day Capability-DTH 748,000 827.000 827,000 827,000 827,000 ( Certain prior year amounts have been reclassified to conform with current year presentation. 26 I

SELECTED FINANC!AL DATA l Balumore Gas and Clutric Company 1986 1985-1984 1983 1982

SUMMARY

OF OPERATIONS ' (Dollar Amounts in Thousands. Except Per Share Amounts) Operating Revenues ) Electric $1,388.251 $1,301,463 $1.208.143 $1,093,310 $1.035.606 Cas. 445.769 453.309 553.329 545.295 539.438 Total operating revenues. 1,834,020 1.754.772 !.761,474 1,638.605 1.575.044 Operating Expense:; Purchased fuel and energy 598,700 570.453 630,269 654.386 676,723 Operations and maintenance 487,985 455,150 441,579 390.153 368,389 [ Depreciation 127,274 124.961 113.643 97,090 92.730 l Income taxes Current. 147,059 70.597 106,545 28,137 44,742 Deferred 5,050. 69.322 29,328 66,773 22,616 l Investment tax credit adjustments. 1,853 16.653 12,816 21,554 28,122 Other taxes. 131.536 123,394 116.526 108.309 103.018 l Total operating expenses 1.499,457 1,430,530 1.450,706 1.366.402' I,336.340 l Operating income 334,563 324.242 .310.768 272,203 238,704 l income From Steam Operations. Net 933 1,264 Other income Allowance for other funds used during construction. 16,871 14,597 23,364 32,443 24.282 Equity in net income of unconsolidated subsidiaries. 30,590 13.917 6.338 1,740 1.117 Net other income and deductions. (910) 1,225 77 (1.132) 1,107 Total other income 46.551 29.739 29.779 33.0 " 26.506 Income Before Interest Charges. 381.114 353,981 340,547 306.lb / 266,474 Net interest Charges interest charges 120,077 !!8.431 115.441 115.688 111.028 Allowance for borrowed funds used during construction (13.582) Il 1.750) I18.809) 125,954) I19.359) Net interest charges 106.495 106,681 96.632 89.734 91.669 Net income 274,619 247,300 243.915 216.453 174.805 Preferred and Preference Stock Dividends 26,876 27.370 27.580 27.580 ' 27.869 Earnings Applicable to Common Stock 247,743 219.930 216.335 188,873 146,936 Common Stock Divideads 139.567 131,692 121.114 111.423 101.507 Earnings Reinvested in the Business $ 108.176 S 88.238 S 95.221 5 77,450 $ 45.429 Average Shares of Common Stock Outstanding (Thousands) 78.627 78,622 78.123 76.UI 72.180 Earnings Per Share of Common Stock. $3.15 $2.80 S2.77 $2.48 52.04 Dividends Declared Per Share of Common Stock $1,775 S1.675 $1.55 $1.46 $1.40 Ratio of Earnings to Fixed Charges 4.19 4.14 4.23' 3.81 3.40 Ratio of Earnings to Fixed Charges and Preferred and Preference Stock Dividends Combined 3.20 3.08 3.10 2.81 2.46 FINANCIAL STATISTICS AT YEAR END Total Assets $4,370,500 $4.183,408 $4.010.796 $3,809.785 $3,566,839 Capitalization: Common stockholders' equity. $1,629,867 $1,521.960 $1,434,141 $1,316.053 $1,204,008 Preferred stock. 59,185 59.185 59.185 59.185 59.185-Preference stock not subject to mandatory j redemption 110.000 175.000 175.000 175,000 175,000 Redeemable preference stock. 50,000 80.000 90.000 100.000 100.000 - Long-term debt. 1,471,905 1.437.611 1,386.506 1,344.714 1.272,843 Totai capitalization. $3.320,957 S3.273.756 $3,144,832 $2.994.952 $2.811,036 Book Value Per Share of Common Stock. $20.73 - $19.36 $18.24 S17.04 $16.12 Common Stockholders. 76,972 79.474 81.601 85,372 87.026 Common stock data have been restated to reflect the two-for-one stock split in August 1985 and certain other prior year amounts have been restated to conform with the current year presentation. 27~

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERKflONS Ballinwre Gas and Eledrk Company (All Note references hereunder are references to the Notes to Financial Statementsa RESULTS OF OPERATIONS EARNINGS ELECTRIC OPERATING REVENUES AND SALES (MWH) Earnings per share of common stock increased to $3.15 in Electric operatirq evenues increased by 6.7% in 1986 and 1986 from $2.80 in 1985 and $2.77 in 1984. The increase in 7.7% in 1985. rnese increases were attributable to the 1986 compared to 1985 was attributable to growth in utility following facurs: earnings prompted by higher electric sales and greater in-p,d"Qy,,, come from the Company's diversified subsidiary operations. The increase in earnings in 1985 from 1984 was the result of 1986 1985 higher earnings from diversified subsidiary activities, com-Sales. $64.7 30.0 plemented by slightly lower income from utility operations. Earnings from the diversified activities of Constellation Base Rate Adjustments. 22.6 Fuel Rate Adjustments. 22.1 40.7 Holdings. Inc. (CHI) during 1986 were 32C per share com-pared with 14C in 1985 and SC in 1984 (see Consolidated Net increases. $86.8 $93.3 Condensed Financial Statements-CHIJ. The increase in earnings from utility operations in 1986 Electric sales increased by 7.8% in 1986 and 2.4% in 1985. compared with 1985 was due to the combined effects on The changes by class of customer from the prior year were electric sales of favorable weather and continued growth as follows: 1966 1985 in the number of electric customers especially those with Residential 10.1% 2.7 % residential heating. Small Commercial... 6.1 (3.2) The slight decline in Xility earnings during 1985 was the Large Commercial and industrial 6.7 4.2 - result of the effects of milder weather during the heating season on electric and gas sales. Utility earnings in 1985 The increase in sales in 1986 was attributable to favorable did reflect a portion of a $76.2 million base rate increase weather, especially during the summer cooling season. and authorized by the Public Service Commission of Maryland la a 15.4% increase in the number of residential heating June 1984 which provided for the rate recognition of the customers. Additionally, commercial and industrial sales in-service operating expenses and capital carrying costs of reflected increased business activity in the local economy. Unit No. I of the Brandon Shores Power Plant. The increase in 1985 electric sales was the result of Earnings were reduced by 3C and increased by 8C per customer growth and favorable economic conditions in the share in 1986 and 1985. respectively, as a result or certain Company's service territory. Commercial and industrial sales changes in accounting estimates and other adjustments as in 1985 reflected a realignment of certain customers from generally described in Notes I and 9. the small commercial class to the large commercial and industrial class effective during the fourth quarter of 1984. Future electric sales volumes will coatinue to be affected m H econondc situation and level of business 1976MARiBulEl r ~ W M activity in the Company,s service territory. as well as by 1977 MYM weather conditions, additional heating installations, the 1978 6 installation of cogeneration facilities, and the conservation 1979 m efforts of our custorr.ers. 1980 m 1981 m CAS OPERATING REVENUES AND SALES (UfH) 1982 m Gas operating revenues decreased by 1.7% and 18.1% in 1986 and 1985, respectively. The changes were attributable to the following factors: 1984 increase (Decrease) From Prior Year 1985 6 00 (In Millionsi l I l l I I I I I I I I Sales. $ 3.6 $ (9.5) 0 2 4 6 8 10 12 14 16 18 20 22 Base Rate Adjustments. 6.9 ?.- Residential Gas Cost Adjustments. (11.1) (97.4) Sales of Electricity M small commercial Net Decrease. $ (7.5) $(100.0) ( (Billions of Kilowatthours) Large Commercial g and Industrial 0 1 1 l l l 28

Baltimre Gas and Ekctric Compaq l Changes in operating revenues attributable to sales Future gas sales will continue to be affected by the price i volumes and gas cost adjustments are affected by the and availability of gas and alternate fuels, weather condi- { delivery service rider to the gas tariff and by the Company's tions, conservation efforts by customers, general economic 1 continued efforts to reduce the cost of purchased gas sold conditions, and the regulatory dimate in the natural gas j to customers. Under the delivery service rider. customers. Industry. If gas prices generally were to rise in relation to j principally industrial gas users with alternate fuel capability, alternate fuels in the future conversions from gas by are able to contract directly with gas producers and pipe-industrial customers would be anticipated. The delivery lines to purchase and transport gas for their use free of service rider should enable gas to compete favorably with long-term contract provisions, The Company then transports oil as a primary fuel source and moderate conversions from such gas through its service territory to the customers and gas so long as open-access transportation is available to receives a delivery service fee equivalent to the margin on move the gas from producers. gas it sells to similar customers. Gas sales increased by 0.5% during 1986 and decreased 1977 * " " T y.,{..... 1976 by 4.5% in 1985. The changes by class of customer from the prior year were as follows: 1986 1985 1978 MM ' Residential. 6.2% (8.81% 1979LA' Small Commerdal (4.7) (8.5) 1980 MM - Large Commerdal and Industrial. (2.7) (0.9) $ggj qyo7 The increase in sales to residential customers during 1982 FE TE 1986 was due to colder weather during the winter heatir'g 1983 WM. season. The dedine in sales to large commercial and i984 W ED % Industrial customers in 1986 mainly reflected the effect of 3933 m y certain large manufacturers ceasing their operations in the 198SIEEElll NE Company's service territory approximately 1% of total gas sales), and some temporary changeovers to alternate fuels. l l I I l l l I I l l l 0 10 20 30 40 50 60 70 80 90 100 110 Sales to small commercial customers reflected realignments to other schedules based on usage analysis. ll3l38 Residential The sales decline in 1985 was due to the effects of milder weather conditions during the winter heating %,0f, Gas g atherms) E ta g Co erc al season and reduced business activity at Bethlehem Steel. and industrial the Company's largest custorner. In order to maintain gas prices at a competitive level. the PURCHASED FUEL AND ENERGY EXPENSE Company continues to secure gas from several sources. In Purchased fuel and energy expense increased 5.0% in 1986 1985, the Federal Energy Regulatory Commission (FERC) due mainly to the collection of a portion of previously issued regulations designed to make transportation of gas deferred costs through the Company's electric fuel rate I through interstate pipelines available to all gas customers. clause. the write-off of disallowed deferred fuel costs (see This volantary open-access transportation rule permits the Note 9). and a 7.5% increase in overall electric output. Company and its customers to purchase gas directly from Lower fuel and natural gas prices along with greater nudear gas producers. The Company's principal gas supplier, and coal generation moderated the effect of these increases. Columbia Gas Transmission Corporation, has been granted The 9.5% decrease in purchased fuel and energy expense in approval by the FERC to transport gas under the new 1985 was primarily due to the deferral of net under-open-access rules. Although many other interstate pipe-recovered fuel costs. lines have not received final authorization to operate under Prices for oil and coal consumed for electric generation the open-access provisions, they continue to transport were lower in both 1986 and 1985 as compared to the prior customer-owned gas under temporary provisions author-year. Natural gas prices were lower during 1986 and 1985 l ized by the FERC. due to the Company's securing of contracts directly with In April 1986. the Company initiated its own gas pool several gas producers and suppliers and by negotiating j program to supplement the transportation of customers' lower prices with its prir:cipal gas supplier. supplies for shortfalls that occur when the Company's prin-Electric output increased in 1986 and 1985. Gas output cipal gas supplier is restricted due to capacity limitations declined in both years. partially as a result of increased on its system. These measures, together with the contino-sales under the delivery service rider. Gas sales under the l ing impact of the delivery service rider and the Company's delivery service rider do not involve the purchase and I somewhat limited ability to change rates to stay com-output of gas by the Company and are not reflected in I petitive with fuel cil, have enabled the Company to ietain purchased fuel and energy expense, j most of the industrial market which may have otherwise Nuclear generation is the Company's most economical converted from gas to alternate fuels. source of energy and has a significant effect on electric pur-chased fuel and energy costs. Refueling operations occur i approximately every eighteen months at each of the Com-j pany's two nuclear generating units and result in significant I increases in fuel costs during the associated outages. One I 29

IVtimore Gm and Electrk Capany unit was refueled in 1986 while both units underwent refuel-The Company has accumulated deferred taxes on certain ing outages in 1985. The resultant increase in nuclear genera-timing differences based on the current 46% tax rate. As a tion in 1986 contributed to lower electric fuel costs as com-result of the scheduled tax rate reductions, future taxes will pared with 1985. The Company intends to file a reload license be paid at a lower rate. The Act generally provides that in submittal with the Nudear Regulatory Commission to extend order to continue the use of accelerated depreciation for tax the period between each unit's refueling outages to twenty-purposes. a public utility must reverse the excess dcferred four months. If approved, this change should reduce purchased taxes over the lives of the related assets. fuel and energy expense and the related revenue collected in future years. the repeal of the investment tax credit will from customers as refueling outages could be timed such that have the effect of reducing the level of previously earned only one generating unit would be affected in a given year. credits amortized to income. Under the transition rules of the Act. the Company will continue to receive investment tax OPERATIONS AND MAINTENANCE E 'PENSES credits on Brandon Shores Unit No. 2, provided it is placed The increase in operations and mainte:ance expenses in both in service before April 1.1992. 1986 and 1985 reflected higheriabor costs as a result of wage As a result of the Act. the Company's ability to generate increases. tempered by reductions in the number of employees. cash internally will be reduced. This is due primarily to the The 1986 increase also reflected higher costs associated with loss of the investment tax credit and certain other provisions insurance and routine maintenance at various fossil power diminishing the Company's ability to defer the payment of plants The 1985 increase included costs associated with re-income taxes until later years (see Internal Generation of fueling and maintenance activities at both nuclear generating Cash section). units and the moderating effects of lower pension accruals (see Note 1). In addition. the 1985 increase reflected the SUBSIDIARIES' EARNINGS additional expenses associated with the commercial operation The ir. creases in Equity in Net income of Unconsolidated of Brandon Shores Unit No. I begnning in May 1984. Subsidiaries in 1986 and 1985 reflect the higher earnings of Constellation Holdings. Inc. (CHI) resulting from additional DEPRECIATION EXPENSE financial investments undertaken during those pars. Capital Depreciation expense increased in both 1986 and 1985 as a contributions to CHI by the Company have been deployed result of higher levels of depreciable plant in service. Addi-primarily as investments in preferred and common stocks. tionally, the 1985 increase reflects the impact of placing the professionally managed equity portfolios, leverageu lease Brandon Shores Unit No. I in commercial operation in May transactions, alternative energy systems, and real estate (see 1984. The increases in both years were moderated by the Consolidated Condensed Financial Statements-CHI). effects of the reduction in the depreciation rate applicable to the Calvert Chffs Nuclear Power Plant beginning in OTHER September 1985 isce Note 1). The Allowance for Funds Used During Construction (AFC) increased in 1986 due to continued construction of various TAXES electric projects The decrease in AFC in 1985 resulted from income tax expense decreased in 1986 and increased in Unit No. I of the Brandon Shores Power Plant being placed 1985. Although pre-tax income increased in both years, the in commercial service in May 1984. In its June l984 rate 1986 increase was attributable to higher levels of equity in order, the Public Service Commission of Maryland author-net income of unconsolidated subsidiaries. for which no ized higher service rates to provide rate recognition of the additional income taxes are provided. carrying costs and operating expenses for Brandon Shores Other taxes increased in both years due to higher prop-Unit No. I. erty. capital stock. and payroll taxes. Interest charges increased in both 1986 and 1985 due to On C,ctober 22.1986, the President signed into law the sales of additional securities. the effects of which were Tax Reform Act of 1986 Ithe Act). This law significantly moderated by lower interest rates in both years and by changes the federa; income taxation of corporations. Its pro-the early retirement of certain high cost debt in 1986. visions include an overall reduction in corporate income tax rates, the elimination of the investment tax credit, changes in depreciation rates and lives, and various ot er provisions LIQUIDITY AND CAPITAL RESOURCES h which will affect the Company. The Act is generally prospec-tive in nature with most of its provisions being phased in OVERVIEW under urious transition rules, beginning on January 1.1987. The Company's capital requirements are attributable prin-The ma}or exception is the repeal of the investment tax cipally to its construction program and its expenditures for credit. which is generally effective retroactive to January 1. nuclear fuel. Other capital requirements involve funds for 1986. Since the Company defers and amortizes such credits the maturity or retirement of outstanding debt and the to income over the lives of the related assets (see Note 1). redemption of preference stock. the repeal had an immaterial effect on net income in 1986. The resources ar ible to meet these needs consist of in-In 1987 the Company's tax expense should decreast as a ternally ge atec ads and funds from external financing. result of the Act's reduction of the maximum corporate tax The Comp-i anticstes that future capital requirements. as rate from 46% to 40% in 1988 and beyond. this rate will be shown below, will be met primarily through the internal further reduced to 34% in that the Cornpany generally generation of cash, supplemented by a mixture of debt and normalizes differences between book and tax treatment for equity offerings. The timing and mixture of future debt and accounting purposes. rnany of the Act's other provisions will equity financing will be dictated by general economic and not affect total tax expense (see Note 1). financial market conditions, and the needs of the Company. 30

Bahimore Gas and Electric Company CAplTAL REQUIREMENT Un Millions) Actual capital requirements for 1984 through 1986, along with Port Facilities Loan (1983) $ 2 estimated amounts for 1987 through 1989, are set forth below' Revolving Credit Agreement loans 125 Retirements and Floating Rate Notes 200 Redemptions Pollution Control Loan. 36 Construction. Nuclear of Debt and Port Facilities Loan (1985) 48 Expenditures AFC Fuel Preference Stock Total Adjustable Rate Pollution Control Loan. 17 un Millions) First Refunding Mortgage Bonds 100 1984. $202 $42 $42 $105 $39i 3 $528 i35.. 200 26 32 U 212 470 1986. 224 30 59 153 466 During the same three-year period, the Company issued 1987. 230 32 50 127 439 $24 million of common stock through the Dividend Reinvest- '1988. 240 36 55 65 396 ment and Stock Purchase Plan (see Note 3). l 1989. 260 44 55 - 52 411 In 1986, the Company redeemed $30 million of prefer-The Company's construction program is subject ca con-ence stock in addition to those shares redeemed pursuant tinuous review and modification. Actual construction and to a mandatory redemption requirement (see Note 3). The nuclear fuel expenditures may vary from the estimates set Company has also tendered payment to repurchase, effec-forth above because of a number of factors such as inflation, tive January 1.1987 $80 mi!! ion of preference stock subject economic conditions. regulation, legislation, load growth, to mandatory redemption (see Note 4). Subsequent to year environmental protection standards, and the cost and end the Company called for redemption all outstanding avahability of capital. The only major project in the Com-shares ($35 million) of the 9.35% 1974 Series Cumulative l pcny's construction program is Brandor Shores Unit No. 2. Preference Stock (see Note 3). whR h is scheduled for completion in 1992. In September 1986, the Company issued $50 million or l 1% clear fuel expenditures include uranium purchases and 500.000 shares of redeemable preference stock and in processing charges. In addition, in June 1985 the Company January 1987 the Company issued an additional $50 million made a one-time payment of approximately $72 million to or 500.000 shares of redeemable preference stock (see l the Department of Energy for the disposal of spent nuclear Note 4). fuel which existed at April 7.1983. In December 1986 the Company filed with the Securities and Exchange Commission (SEC) a shelf registration for two INVESTMENT IN SUBSIDIARIES million additional shares of preference stock. No preferred Since 1981 the Company has made $192 million in capital stock was issued during the three-year period. The Company contributions to Constellation Holdings. inc. (CHI). a sub-also has on file with the SEC a shelf registration for $200 sidiary which is the holding company for the Company's million of additional debt securities. The amount and timing diversified activities Isee Consolidated Condensed Financial of sales of thew debt and equity securities will depend pri-Statements-CHI and Notes I and 2). marily upon market conditions and the needs of the Company. Commercial paper notes are issued by the Company to INTERNAL GENERATION OF CASH satisfy interim financing requirements. The Company main-The internal generation of cash related to utility activities tains credit facilities with various banks in order to provide consists essentially of net income adjusted for non-cash additional liquidity. items, less dividends and capital contributions to the Com-pany's subsidiaries. During the period 1984 through 1986. CAPITAL STRUCTURE substantially all of the funds required for the Company's The Company's objective is to maintain a capital structure construction and nuclear fuel expenditures were provided that preserves an appropriate balance between the amount - from the internal generation of cash. The Company antici-of debt and equity. The Company's capital structure as of pates that approximately 75% of the funds required for December 31 is presented below: 1986 1985 1984 these purposes during 1987 through 1989 will be provided from internal sources, after reflecting the Impact of the Tax Common Equity. 47.3% 45.7% 45.3 % Reform Act and assuming responsible rate actions by the Preferred and Preference Stock Public Service Commission of Maryland. not Subject to Mandatory Redemption 5.9 7.0 7.4 EXTERNAL FINANCINGC Redeemable Preference Stock 3.8 2.7 3.1 During the three years ended 1986, the Company incurred Long-Term Debt 43.0 44.6 44.2 $528 million of long-term debt and retired $421 million Total. 100 % 100 % 100 % I through refinancing, redemptions and sinking fund opera-tions, resulting in net new long-term debt of $107 million. The investment in Constellation Hold:ngs, Inc. is financed The $528 million of long-term debt incurred during the exclusively through retained earnmgs and represented period 1984 through 1986 consisted of the following items: 5.6% in 1986. 3.2% in 1985, and 2.2% in 1984 of the Com-pany's capital structure. EFFECIS OF CHANGING PRICES For information about the impact of inflation on the Com-pany, see Note 14. 31 J

I REPORT OF MANAGEMENT Baltimore Gas and Electric Company i Management is responsible for the information and Coopers & Lybrand, independent certified publ!c representations contained in the Company's financial accountants, are engaged to examine the financial state-l statements. The financial statements are prepared in ments and express their opinion thereon. Their examination accordance with generally accepted accounting principles is made in accordance with generally accepted auditing I based upon currently available facts Ond circumstances and standards which include a review of internal controb. Management's best estimates and judgements of known - The Audit Committee of the Board of Directors, which conditions. consists of three outside Directors. meets periodically with j The Company maintains an accounting system and related Management. Internal auditors, and Coopers & Lybrand to system of internal controls which are designed to provide review the activities of each in discharging their responsi-reasonable assurance that the financial records are accurate bilities. The internal audit staff and Coopers & Lybrand have { and that the Company's assets are protected. The Com-free access to the Audit Committee. pany's staff of internal auditors, which reports directly to the Chairman of the Board, conducts periodic reviews to maintain the effectiveness of Internal control procedures. AUDITORS' REPORT Baltimore Gas and Electric Company To the Stockholders of Baltimore Gas and Electric Company We have examined the balance sheets and statements of In our opinion, the financial statements referred to above capitalization of Baltimore Gas and Electric Company at present fairly the financial position of Baltimore Gas and December 31,1986 and 1985 and the related statements of Electric Company at December 31,1986 and 1985 and the income. retained earnings, changes in financial position and results of its operations and changes in its financial position taxes for each of the three years in the period ended for each of the three years in the period ended December 31. December 31,1986. Our examinations were made in 1986 in conformity with generally accepted accounting accordance with generally accepted auditing standards and. principles applied on a consistent basis. accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances < h Coopers & Lybrand Baltimore. Maryland January 16.1987 4 32

STATEMENTS OF INCOME-Baltimore Gas and Electric Company im Year Ended December 31, 1986 1985 1984 (in Thousands. Except Per Share Amounts} OPERATING REVENUES Electric. $1.388.251 $1.301,463 ~ $1.208.145 {- Gas. 445,769 453.309 553.329 _ Total operating revenues, 1,834,020 1,754.772 1.701.474 OPERATING EXPENSES I Purchased fuel and energy 598.700 570.453 630,269 Operations. 367,979 338.573 325,668 Maintenance 120.006 116.577 115.911 Depreciation 127,274 124.961 113.643 Income taxes 153,% 2 156.572 148,689 l Other taxes 131.536 123,394 I16.526. Total operating expenses. 1,499.457 l.430.570 ' 1,450,706 OPERATING INCOME. 334,563 324.242 310,768 OTHER INCOME Allowance for other funds used during construction. 16,871 14.597 23,364 Equity in net income of unconsolidated subsidiaries 30,590 13.917 6.338 Net other income and deductions (910) 1.225 77' Total other income. 46.55I 29.739 29.779 INCOME BEFORE INTEREST CHARGES. 381,114 353.981 340.547 NET INTEREST CHARGES Interest charges.. 120.077 118.431 115.441 Allowance for borrowed fund:; used during construction. (13.582) (11.750) (18.809) Net interest charges. 106.495 106.681 96.632 NET INCOME 274,619 247,300 243.915 PREFERRED AND PREFERENCE STOCK DIVIDENDS 26,876 ~ 27.370 27.580 EARNINGS APPLICABLE TO COMMON STOCK. $ 247.743 $ 219.930 $ 216.335 AVERAGE SHARES OF COMMON STOCK OUTSTANDING 78,627 78.622 78.123 EARNINGS PER SHARE OF COMMON STOCK. $3.15 $2.80 $2.77 STATEMENTS OF RETAINED EARNINGS Year Ended December 31, 1986 1985 1984 lin Thousands) BALANCE AT BEGINNING OF YEAR $712,280 $624.042 $528,821 ADD: Net income 274.619 247,300 243.915 986,899 87l.342 772.736-DEDUCT: Dividends declared Preferred stock. 2.899 2.899 2,899 Preference stock. 23.977 24,471 24,681 Common stock (at annual amounts per share of $1.55. $1.675 and $1.77 5 in 1984,1985. and 19$6. respectively) 139,567 131.692 121,114 166,443 159,062 148.694 Premiums paid on retiremcat of preference stock. 300 BALANCE AT END OF YEAR $820,156 $712.280 $624,042 The accompanying nues are an integral part of the financial statements. 33

BALANCE SHEETS Baltimore Gas and Electric Company At December 31, 1986 1985 Un Thousands) ASSETS UTILITY Pl>NT Plant in service Electric. $3,574,122 $3,441.027 Cas 407.002 393,771 Common 207,320 180.195 Total plant in service, 4,188.444 4,014,993 Accumulated provision for depreciation. (1,197,378) (1.095 237) Net plant in service. 2,991,066 2.919,756 Plant held for future use. 13.756 13,708 Construction work in progress 399,202 350.892 Nuclear fuel (aet of amortization of $467,004.000 and $402.482.000) 163.652 168.830 Net utility plant. 3,567,676 3.453.186 OTHER PROPERTY AND INVESTMENTS Investment in subsidiaries 225,867 127,277 Other 3,374 3.196 Total other property and investments 229.241 130.473 CURRENT ASSETS Cash and cash equivalents 63.619 4,507 i Special deposits and working funds. 4,332 3,398 l Accounts receivabic Customers (net of allowance for uncollectibles of $8.293.000 and $7.848.000) 199,193 205.604 Other. 3.844 1.960 Fuel stocks 5'/,760 67,084 Matesials and supplies 94,037 90.638 Prepayments 65,031 63.454 Other 904 13.339 Total current assets 488,720 449.984 DEFERRED CHARCES Deferred fuel costs. 37,406 107,587 Deferred nuclear fuel disposal costs. 3.677 7,367 Other Total deferred charges. 43,780 34.811 84,863 149.765 TOTAL ASSETS $4,370,500 $4.183,408 The accompanying notes are an integral part of the financial statements 34

BALANCE SHEETS Baltimore Gas antl Electric Companq - At December 31, 1986 1985 (In Thousands) CAPITALIZATION AND LIABILITIES ~l CAPITA.LIZATION I Common stockholders' equity $1,629,867 $1,521.960 Preferred stock.,,,, 59,185 59,185 Preference stock not subject to mandatory redemption 110,000 175.000.. ) Redeemable preference stock 50,000 80,000 .j Long-term debt 1,471,905-1.437.6 l 1 Total capitalization 3,320,957 3.273.756 l!. CURRENT LIABILITIES Short-term borrowings, 120,000 86,975-I i Current portion of long-term debt and preference stock. 126,942 56.473 Accounts payable. 128,120 124.991 Taxes accrued, 35,483 '18,443 Interest accrued 36,573 36,351 Dividends declared. 42,206. 40,l00 Vacation costs accrued. 22,103 21,804 Other 25,378 17,797 Total current liabilities. 536,807 402.934 i l i l DEFERRED CREDITS Deferred investment tax credits. 201,6 % 201,677 Deferred income taxes. 300,989 295.037 Other 10,051 10,004 Total deferred credits. 512,736 506.718 COMMITMENTS AND CONTINGENCIES-see Note il TOTAL CAPITALIZATION AND LIABILITIES. $4,370.500 $4,183.408 The accompanying notes are an integral part of the financial statements. I i l f I l l i l k d 1 35 a

1 STATEMENTS OF CHANGES IN FINANCIAL POSITION ^ Bahimore Gas ud Electric Company Year Ended December 31, 1986 1985 l984 (in Thousandsl OPERATING ACTIVITIES Ret income. $274,619 $247,300 $243.915 - l Noncash items included in income: Depreciation and amortization. 195,050 180.467 174,262 l Investment tax credit. 19 14.208 10,217 j l Deferred Income taxes. 5,952 72,621 38.172 l Allowance for other funds used during ccostruction, (16,871) (14.597) (23.364) Equity in net income of unconsolidated subsidiaries (30,590) (13,917) (6,338) Amortization of losses from the reacquisition of debt. I,126 668 -623 Other. 3,%2 3,070 2.668 Changes in working capital components: (33,7(,7) 'j Materials, supplies and fuel stocks. 5,925 4,141 Accounts receivable. 4,527 (26.770) (6.059) Prepayments (1,577) 4.E23 (9,786) l Other current assets 12.435 (6.488) (1.352) Federal income taxes payable. 15,608 671 (6.918) One time fee for nuclear fuel disposal costs (71,829) Other current liabilities 14,771 3,408 - 2.844 Deferred fuel costs. 70,181 (47.681) 28.956 Other cash operating sources and (uses) (4.189) 1,552 (245) Net cash flow from operating activities. 550,948 351.647 413,888 FINANCING ACTIVITIES Common stock dividends (139,567) (131,692) (121.114)' Preferred and preference stock dividends (26,876) (27.370) (27.580) Proceeds from issuance of: Long-term debt 111,365 285,055 126.695 l Common stock. 31 (419) 22,867- -) l Preference stock 50,000 t Short-term debt, net 33.025 5.775 16,310 Redemption of preference stock. (40,300) (10.000) Reacquisition of long-term debt (112,953) (202,460) (105.185) Loss from reacquisition of long-term debt (2.395) (927) (3,554) Net cash used by financing activities. (127,670) (82.038) (91,561) INVESTING ACTIVITIES Construction expenditures (254,142) (225,771) (244.072) Allowance for other funds usrd during construction. 16,871 14,597 23,364 l Nuclear fuel expenditures. (59,343) (32,291) (42.383) j Investment in subsidiaries. (68,000) (24,657) (60.015) 1 Other 1,382'

.120 941 Net cash used by investing activities.

(363,232) (267.002) (322,165) ) Net increase in cash $ 60.046 $ 2.607 162 Prtor year amounts have been restated to conform with the current year presentation. The accompanying notes are an integral part of the financial statements. l I l l l l l l 36 ) l

STATEMENTS OF TAXES ' Baltimore Gas and Electric Company Year Ended December 31,' 1986 1985 1984 (In Thousands) INCOME TAX EXPENSE Charged to operating expenses. Current $147,059 $ ' 70,597 $106.545 I Deferred, consisting of the following tax effects of timing differences I Accelerated _ depreciation. 44,755 50.684 31,f 67 Deferred fuel costs.. (30,584) 22,054 (13.058) Nuclear fuel disposal costs. (1,419) (1,419) (1,343) Nuclear decommissioning costs.. (1,507) (1,259) (705) Percentage repair allowance 3,353 2,126. 17,181' J . Connection fees. (4,879) (1,246). (4.830) Other. (4,669) - (1,618) 916 Total deferred taxes. 5,050 69,322 29,328 l Investment tax credits ' Current tax credits Eligibile property.. 13,258 26,313 20,661 Employee stock ownership plan. 1,834 1,766 2,599 Amortization of tax credits. (13,239) (11,426) (10.444) Net investment tax credits. 1,853 16,653 ~ 12,816 Total charged to operating expenses 153,962 156,572 148,689 Charged to other income Current (663) (2,091) ' . (9.193) Deferred. 902 3.299 8.844 Investment tax credits, net Eligible property 10 (679). l Employee stock ownership plan 41 12. 40 Total charged to other income 290 '541 (309) TOTAL INCOME TAX EXPENSE. $154,252 $157,113 $148,380 RECONCILIATION OF TUTAL INCOME TAX EXPENSE AND TAX COMPUTED AT STATUTORY RATE Tax computed at 46% statutory federal income tax rate. - $197,281 $186.030 $180,456 ) Increases (decreases) in tax Depreciation differences not normalized 5,218 4.673 3,151 Allowance for funds used during construction (14,009) (12,120) (19.399) Amortization of deferred tax credits. (13,239) (l I,996) (10,444) Equity in net income of unconsolidated subsidiaries. (14,071) 16,402)- (2,915) Loss on retirement of property (3,211) Net other items. (3,717) (3,072) (2,469) [- Total income tax expense, $154,252 $157,113 $148,380 l Effective federal income tax rate. 36.0 % 38.8% 37.8 % OTHER TAXES Property. $ 29,755 $ 29.059 $ 28,294 Capital stock. 39,804 35.589 30,861 ] Maryland gross receipts. 36,455 34,878 35,000 Maryland electric environmental surcharge. 2,562 2,623 2.714 Social security 24,056 22,845 21,886 Miscellaneous. 3.952 3,491 3,504 136,584 128,485 122.259 Amounts included above charged to accounts other than taxes (5.048) (5,091) (5,733) TOTAL OTHER TAX EXPENSE. $131,536 . $123,394 $ 1 16,',20 The accompanying notes are an integral part of the. financial statements. 37

i - STATEMENTS'OF CAPITALIZATION i Baltimore Cas and Elutric Company i I At December 31, ) 1986 1985 1 On Thousands) ) COMMON STOCKHOLDERS' EOUlTY Common stock-without par value-100.000.000 shares authorized: 78.640.475 and 78.621.798 shares issued and outstanding at December 31.1986 and 1985. respectively. (At December 31.1986.1,017.188 shares were reserved for the Employee Stock Ownership Plan, and 5.588.189 shares were reserved for the Dividend Reinvestment j and Stock Purchase Pland S 809,554 $ 809.523 { Premium on preferred stock. 157 157 Retained earnings. 820.156 712,280 0 Total common stockholders' equity. I.629.867 1,521.960 PREFERRED STOCK f Cumulative. $100 par value. 1.000.000 shares authorized Series B. 4H%,222,921 shares outstanding, callable at $110 per share 22,292 22.292 j Series C. 4%. 68.928 shares outstanding, callable at $105 per share 6,893 6.893 1 Series D. 5.40% 300.000 shares outstanding. callable at $101 per share 30.000 30.000 Total preferred stock. 59,185 59.185 PREFERENCE STOCK j Cumulative $100 par value. 6.000.000 shares authorized i Preference stock not subject to mandatory redemption l ) 8.75%.1970 Series. 300.000 shares outstanding in 1985. 30.000 7.88 %, 1971 Series. 500.000 shares outstanding. callable at $101 per share 50.000 50.000 7.75% 1972 Series. 400.000 shares outstanding callable at $103 per share prior l to October I,1987 and at $101 per share thereafter 40,000 40.000 7.78 %, 1973 Series. 200.000 shares outstanding, callable at $!03 per share prior to December 1.1988 and at $101 per share thereafter 20.000 20.000 9.35 %. 1974 Series. 350.000 shares outstanding, called at $104 per share, to be effective April 1.1987 35,000 35.000 l _ Less preference stock called for redemption-see Note 3 (35.000) l Total preference stock not subject to mandatory redemption l10.000 175.000 { Redeemable preference stock j l 8.375%.1979 Series. 300.000 and 400.000 shares, respectively, outstanding 30.000 40.000 l 12 %. 1981 Series A. 340.000 shares outstanding 34.000 34.000 12 %. 1981 Series B, 160.000 shares outstanding 16.000 16.000 7.50% 1986 Series. 500.000 shares outstanding in 1986, callable at $107.50 per share prior to October 1.1991 and at lesser amounts thereafter. 50.000 i Less current portion of redeemable preference stock-see Note 4 (80.000) (10.000) { Total redeemable preference stock. 50,000 80.000 The accompanying notes are an integral part of the financial statements. t 1 q 1 l t i 1 1 38 ]

' STATEMENTS OF CAPITALIZATION Baltimore Gas and Electric Company At December 31, 1986 1985 (in Thousands) LONG-TERM DEBT First refunding mortgage bonds $ 24,302 j Series X 2%%, due January 15,1986, Series Z 3%, due July 15,1989 36,754 36,754 ] 3 %% Series, due December 1,1990. 29,682 29,682 j 16%% Series, due October 1,1991 35.524 4 4%% Series, due July 15.1992, 25,000 25,000 F 14%% Series, due July 15,1992 39,268-54,543 4% Series, due March 1,1993.. 24,095 24,095' 4%% Series, due July 15,1994 29,989 29,989 54% Series, due April 15,1996. 26,680 26,680 6%% Series. due August 1.1997 24,% 7 24,967 5%% installment Series, due August 15,1998 62,140 64,050 7% Series, due December 15,1998 28,705 28,705 8%% Series, due September 15,1999, 22,198' 22,198 8%% Series, due September 15,2000. 1I,431 11,433 7%% Series, due April 15.2001 60,000 60,000 7%% Series, due September I,2001 60,000 60,000 l 7%% Series, due January 1,2002 50.000 50,000 7%% Series. due July 1,2002 50,000 50,000 5%% Installment Series, due July 15,2002 12,500 12,500 - 7%% Series, due September 15,2002 50.000 50,000. l 8%% Series. due February I. 2004 74,986 74,986 6.80% Series, due September 15.2004. 20,000 20.000 9%% Series, due August 1,2005 15,638 15,638 8%% Series. due September 15,2006, 7:3.000 75,000 8%% Series, due September 15,2007 75,000 75,000 l 9%% Series, due July 1,2008. 62,560 62,560 6.90% Installment Series, due September 15,2009 55,000 55,000 9%% Series, due March 1,2016. 100,000 Total first refunding mortgage bonds 1,121,593 1,098,606 Debentures 4%% sinidng fund debentures, due June 15.1986. 10,400 4%% sinking fund debentures, due August 1,1990 16,805 17.345 Total debentures. 16,805 27.745 Otner long-term debt (unsecured) ) Loans under revolving credit agreements. 50.000 75,000 1 Floating rate notes, due July 1,1995 100,000 100,000 l ) Floating rate notes, due October 15,1995 Series 11 100,000. 100,000 Pollution control loan, due July 1, 2011 36,000 36,000 ) Port faclittles loan, due June I,2013 48,000 48,000 Adjustable rate pollution control loan, due July 1. 2014. 17.368 4.741 Total other long-term debt 351,368 363.741 Unamortized discount and premium (5,919) (6.008) ) l Less current portion of long-term debt (11,942) (46,473) ~ P Total long-term debt 1,471,905 1.437,611 'IUI'AL CAPITALIZATION $3,320,957 $3,273,756 The accompanying notes are an integral part of the nnancial statements. l 39

1 CONSOLIDATED CONDENSED FINANCIAL STATEMENTS-CONSTELLATION HOLDINGS, INC. Unconsolidated Diversified Subsidiary of Baltimore Gas and Electris Company ' l CONSOLIDATED CONDENSED STATEMENTS OF INCOME Year Ended December 31. 1986 1985 1984 Un Thousands, Except Per Share Arnounts) ) Revenues. $24,876 $13.545 $6,057 Operating expenses 5,912-2.651 1,775 Operating income. '18,964 10.894 4.282 4 Interest expense. 6,376 3.502 2,022 ( l Net income before income taxes '12,588 7.392 2,260 i income tax expense (benefit) (12.237) (3,860) - (1.570) : Net income. $24,825 $11.252 $3.830 Contribution to BG6E's earnings per share of common stock. $.32 $.14 - '$.05 i I i l CONSOLIDATED CONDENSED BALANCE SHEETS i At December 31. At December 31. ] 1986 1985 1986 1985 On Thousands) LIABILITIES AND STOCKHOLDEITS 1 ASSETS EQUITY CURRENT ASSETS CURRENT LIABILITIES Cash and cash equivalents $ 10,095 $ I1,996 Short-term debt $ 10,289 $ 8.350 J Other current assets. 10,654 6,209 Other current liabilities. 2 724 2.753 l l Total current assets 20,749 18.205 Total current liabilities 13.013 11,103 d 1 l NONCURRENT ASSETS NONCURRENT LIABILITIES Investment securities, net. 189,282 108.413 Long-term debt. 135,578 56,230-l Investment in alternative energy Deferred income taxes. 40,949 - 26.326 j systems 17,601 Other noncurrent liabilities. 28,273 5.214 investment in leveraged leases. 43,232 53.741 Total noncurrent liabilities 'O 87.770 investment in limited partnerships. 40,941 10.197 1 l Investment in insurance company 27,645 ' j Real estate, gas plant, property and STOCKHOLDER'S EQUITY equipment (net of $1,617,000 and Common stock (no par value, 100.000 i $1,039,000 of depreciation in 1986 shares authorized,10,000 shares j and 1985, respectively). 59,763 ' 15,375 issued and outstanding). 152,403 92.403 Other noncurrent assets. 10.675 264 Retained earnings. 39,744 14.919 '( Total noncurrent assets 389,139 187.990 Valuation allowance-investment securities (72) Total stockholder's equity 192.075 107.322 TUIAL LIABILITIES TOTAL ASSETS. $409.888 $206.195 AND STOCKHOLDER'S EQUITY. $409.888 $206.195 The atxwe financial information is presented in support of the Company's investment in Constellation Holdings. Inc. which is accounted for under the equity method. f see Note 2 to Finandal statements i 1 40-

NOTES..TO FINANCIAL STATEMENTS Baltimore Gas and Eledric Company NOTE I. SIGNIFICANT ACCOUNTING POLICIES SYSTEM OF ACCOUNTS The Company's policy is to fund pension costs accrued based The Company's accounting records are maintalned in accord-on the aggregate cost method. Based on the latest available ance with the Uniform System of Accounts prescribed by the actuarial report as of January 1.1986 there were no unfunded Federal Energy Regulatory Commission and adopted by the vested liabilities A comparison of accumulated plan benefits Public Service Commission of Maryland (Maryland Commissions. and plan net assets is presented below: At January 1, REVENUES 1986 1985 Revenues are generally recognized at the time customers' inn ihousands, meters are read on a monthly cycle basis. Actuarial mesent value of accumul ted plan benefits FUEL AND PURCHASED GAS COSTS Vested., $245.234 $225.300 The Company may recover, subject to the approval of the MarP Nonvested 22.783 25.446 land Commission the cost of fuel used in generating electricity $268.017 $250.746 and the cost of gas sold through zero-based electric fuel rate and purchased gas adjustment clauses (see Note 11). To the Net assets available extent revenues from customers under the clauses exceed or for benefits $374.844 $330.306 are less than actual fuel costs, the Company records deferred fuel expenses which are accumulated and refunded to of in addition to providing pension benefits, the Company pro - recovered from customers in future periodt vides certain health care and life insurance benefits for active' As implemented by the Maryland Commission, the electric and retired employees The Company generally recognizes the fuel rate formula is based upon the latest eighteen-month cost of providing these benefits as they are paid. The cost of generation mix and the latest three-month average fuel cost for - the benefits and the number of active and retired employees each generating unit. The fuel rate does not change unless the covered by these benefit plans were as follows: calculated rate is more than 5% above or below the rate then in effect. 1986 1985 The purchased gas adjustment rate is based generally upon IDoHar Amounts in Thousands the latest twelve-month volumes of gas and the current prices Cost $28.626 $23.697 charged by the Company's gas suppliers. Any deferred under-Active employees 8.833 9.008 or over-recoveries of purchased gas costs for the twelve months Retired employees 2.773 2.618 j ended November 30 each year we charged or credited to cus-tomers over the ensuing calendar year. INCOME TAXES The under-recovered costs deferred under the fuel clauses The Company and its wholly owned subsidiaries file a con-were as follows: solidated federal income tax return. Income taxes are allocated At December 31, to the individual companies based upon their respective taxable 1986 1985 incomes and tax credits. On Thousands Certain revenue and expense items are recorded for financial Electric $31.931 $ 97,252 reporting purposes in a year different from the year in which Gas. 5.475 10.335 they are recogn! zed for income tax purpc,ses Deferred income Total. $37.406 $107.587 taxes are provided on certain timing difYrences. primarily those attributable to accelerated depreciation on post-1975 property - additions, deferred fuel costs. spent nuclear fuel disposal costs. PENSION AND OTHER POSTRETIREMENT BENEFITS nuclear decommissioning costs the percentage repair allowance. The Company maintains a noncontributory defined benefit and connection fees. Deferred income taxes are not provided pension plan covering its regular employees The total pension on certain other timing differences, primarily those pertaining cost for 1986,1985, and 1984 was $6.004.000. $7.013.000, and to accelerated depreciation on pre-1976 property additions. $14.295.000, respectively, of which $4.980.000. $5.760.000, and The cumulative net amount of such timing differences for which $11.515.000, respectively, was charged to expense. The remam-deferred income taxes have not been provided approximated ders were charged to construction. During 1985. changes were $279 milhon and $284 million as of December 31.1986 and made in certain actuarial assumptions, principally an increase in 1985. respectively. I the assumed investment rate of return from 9% to the current investment tax credits, other than credits resulting from con-rate of 9%E These changes resulted in lower pension expense, tributions to the Employee Stock Ownership Plan, are deferred which increased 1985 earnings by $3.803.000, equivalent to and allocated to income ratably over the lives of the subject 5C per common share. property. Tax credits related to the Employee Stock Ownership, Plan do not affect net income as they are contributed to the Plan. 41

Baltimore Gas and Electric Company 4 UTILfTY PLANT AND DEPRECIATION ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION Utility plant in service is stated at original cost, which includes The allowance for funds used during construction (AFCl is an material, labor, construction overhead costs, and where accounting procedure whereby the cost of borrowed and other { applicable, an allowance for funds used during construction. funds used to finance construction projects is capitalized as part Construction work in progress, plant held for future use and of utility plant on the balance sheet and is credited as a non-i nuclear fuel are stated at cost. cash item on the income statement. The cost of borrowed and Additions to utility plant and replacements of units of prop-other funds is segregated between net interest charges and I erty are capitalized to utility plant accounts. The original cost of other income, respectively. The Company may recover, suSject plant retired is removed from utility plant. and such cost. plus to the approval of the Maryland Commission. the capitalized removal cost less salvage, is charged to the accumulated provi-AFC and a return thereon after the related utility plant is placed slon for depreciation. Maintenance and repairs of property and in service and included in depreciable assets and rate base. J replacements of items of property determined to be less than a AFC is not taxable income and the depreciation of capitalized ( unit of property are charged to maintenance expense. AFC is not a tax deductible expense. j Depreciation is generally computed using composite straight-As prescribed by a rate order of the Maryland Commission, j line rates, applied to the average investment in classes of an AFC rate of 9.08%. compounded annually, has been applied j depreciable property. Prior to June 1984, the composite depreci-to all major electric projects during the three-year period ended i ation rate for nudear electric properties included a provision for December 31.1986. the decommissioning of the properties at the end of their useful lives Beginning in June 1984. nuclcar decommissioning costs INVESTMENT IN SUBSIDIARIES are being recovered separately based upon an internal sinking The investment in subsidiaries is accounted for and reported fund method designed to accumulate a decommissioning re-under the equity method. serve of $333.407.000. Effective September 1.1985, the Com-pany revised the annual depreciation rate for its Calvert Cliffs INVEN'1 DRY VALUATION Nuclear Power Plant from 3.4% to 2.8%. which increased 1985 Fuel stocks and materials and supplies are generally stated at i earnings. net of related tax effects, by $1.425.000, or 2c per com-average cost. j mon share. This revision is the result of the Nuclear Regulatory Commission's extending the facility operating licenses for DEFERRED NUCLEAR MAINTENANCE EXPENDITURES Calvert Cliffs consistent with the Company's earlier application. The Company has incurred a total of $10.653.000 in maintenance The amendments to the operating licenses change the expira-expenditures for inspecting and repairing seismic pipe supports tion date for Unit l's license from July 7. 2009 to July 31, 2014 to meet Nuclear Regulatory Commission requirements at the and for Unit 2's license from July 7. 2009 to August 13. 2016. Calvert Cliffs Nuclear Power Plant. Such costs are deferred and The composite depreciation rates by class of depreciable pro-amortized over the remaining life of the plant. The balances perty for the years 1984 through 1986 were as follows: deferred as of December 31.1986 and 1985 were $7.568.000 and $7.833.000. respectively. These balances are included in Prior to Effecuve EHecdve Other Deferred Charges. i lune 1.1984 lune L 1984 sept.1.1985 Electric: LONG-TERM DEBT Nuclear. 3.31%ia) 3.40% 2.80 % The discount, premium, or expense of issuance associated with i l Brandon Shores 2.75%(b) 2.75 % long-term debt is deferred and amortized over the lives of the l Other 3.26 % 3.26% 3.26% respective debt issues. Gains and losses on the reacquisition of ) Gas. 2.74 % 3.12 % 3.12 % debt are amortized over the remaining originallives of the issues. l Common (c) 3.39 % 4.02 % 4.02 % lal Exclusive of decornmissioning factor. (b# Rate effective on May 15.1984. { Ic) Except for vehides, which are generally depreciated on a usage bash 1 1 t NOTE 2. INVESTMENT IN SUBSIDIARIES Investments in subsidiary companies were as follows: subsidiaries. Constellation investments. Inc, Constellation j At December 31. Pr perties. Inc. and Cor4stellation Biogas. Inc These companies 1986 1985 ce engaged in diversified activities consisting of financialinvest-( un rhousands, runts, land development, and obtaining gas from non-traditional j Constellation Holdings. Inc. $ 192,147 $107.322 T ei es Safe Harbor Water Power Corporation, a Safe Harbor Water Power producer of hydroelectric power. represents two-thirds of Safe Corporation - 33.720 19.955 Harbor's total capital stock. including one-half of the voting stock. I $225.867 $127.277 and a two-thirds interest in the subsidiary's retained earnings. i The capital stocks of Constellation Holdings and Safe Harbor j As of December 31.1986. Constellation Holdings. Inc. a are subject to a lien under the mortgage under which the 1 wholly owned subsidiary. holds all of the stock of three other Company's Mortgage Bonds are issued. i I J 42

. Baltimore Gas and Elatric Con.panit The Consolidated Condensed Financial Statements of Con-stellation Holdings, Inc. are presented on page 40. The following is condensed financialinformation for Safe harbor Water Power Corporation: At December 31, 1986 1985 1984 1986 1985 l On Thousandy Hn Thousands) RESULTS OF OPERATIONS FINANCIAL CONDITION Operatir g revenues. $35.010 $19.178 $12.062 Current assets. $ 5,756 $ 3.610 Operatirg expenses. 19.965 12.834 10.022 Noncurrent assets. 133.568 128.605 Income from utility Total Assets $l39,324 $132.215 operations 15.045 6.344 2,040 Current liabilities. $ 3.048 $ ' 3,916 Net other income 185 1.431 2.368 Noncurrent liabilities., 85.696 98,367 Net interest expense. 6.582 3.777 646 Stockholders' equity. 50,580 29.932 ) Net income. $ 8.648 $ 3.998 $ 3.762 Total Liabilities and l BGGE's equity in earnings. $ 5,765 $ 2.665 $ 2.508 ' Stockholders' Equity. $139,324 $132.215 'l l NOTE 3. CHANGES IN COMMON STOCK AND PREFERENCE STOCK NOT SUBJECT TO MANDATORY REDEMPTION Cumulative Common Stock Preference Stock Shares Amount Shares Amount IDollar Amounts in Thousands). Balance at December 31.1983...... 77,214,626 $787,075 1,750.000 $175.000 Common Stock issued under Dividend Reinvestment and Stock Purchase Plan .l.407.172 22.867 Balance at December 31,1984. 78.621.798 809.942 1,750.000-175,000 Costs associated with stock split (419) Balance at December 31,1985. 78.621,798 809.523 1,750.000 175.000 Redemption of 8.75% Cumulative Preference Stock. 1970 Series.. (300.000) (30.000) Common Stock issued under Dividend Reinvestment and Stock Purchase Plan 18.677 650 Costs associated with issuance of 7.50% Redeemable Preference Stock,1986 Series (see Note 4). (619) i Less preference stock called for redemption. (350.000) (35.000) j Balance at December 31.1986. 78.640.475 $809.554 1.100.000 $110.000 j A two-forene stock split was effected by the distribution of one in January 1987 the Company called for redemption all additional share for each share of stock already issued to stock-outstanding shares of the 9.35% 1974 Series Cumulative holders of record on August 22,1985. All per share amounts Preference Stock at $104 per share plus accrued dividends. and numbers of common shares presented in this report have to be effective April I.1987. been restated to give retroactive effect to the stock split. NOTE 4. REDEEMABLE PREFERENCE STOCK in September 1986, the Company issued 500.000 shares of shares of any part of the dividends received deduction. As a 7.50% Cumulative Preference Stock 1986 Series ($100 par result of the reduction in the dividends received deduction ] l value). This series is subject to an annual sinking fund of 15,000 pursuant to the Tax Reform Act of 1986, the Company elected shares at par value, beginning in 1992. At the Company's to repurchase all of such shares. Certain owners of such shares option, in any year. commencing in 1992, an additional number dispute the right of the Company to repurchase the shares and of shares. not to exceed 15,000 shares, may be redeemed for have informed the Company that they will contest the repurchase. the sinking fund at $100 per share. In January 1987, the Company issued 500.000 shares of The Company tendered payment to repurchase, effective 6.75% Cumulative Preference Stock 1987 Series ($100 par lanuary 1.1987, all outstanding shares under the 8.375% 1979 valuel. This series is subject to the same annual sink 5g fund Series and the 12 % 1981 Series A and B issues at par value provisions as the 7.50% 1986 Series, except that these provi. ] plus accrued dividends plus the indemnity payment described sions commence in 1993 for this series. I below. The Purchase Agreements under which the shares were With regard to payment of dividends or assets available in the issued contain provisions perraitting the Company to repunhase event of liquidation, Preferred Stock ranks prior to Preterence such shares if the Company makes a good faith determination Stock: all issues of Preference Stock. whether subject to man-there is a substantial risk that it would be required to make an datory redemption or not, rank equally; and all Preferred and i indemnity payment as a result of the loss to the owners of such Preference Stock rank prior to Common Stock. 43

Baltimore Gas and Electric Company NOTE 5. LONCrTERM DEBT Mortgage Lien Debenture Sinking Fund Payments Substantially all of the principal properties and franchises owned The Company is also required to make an ar.nual sinking fund by the Company are subject to a lien under the mortgage under payment (in cash and/or Sinking Fund Debenturest to the Trustee which the Company's First Refunding Mortgage Bonds are issued. under the 4%% Sinking Fund Debenture indenture. The payment. Mortgage Bond Sinking Fund Payments to be made on or before July 31 of each year through 1989 On August I of each year. the Company is required to pay to requires an annual payment of $600.000 in cash, in principal the Mortgage Trustee an annual sinking fund payment equal to amount of the debentures, or in a combination thereof. In any 1% of the largest amount of Mortgage Bonds outstanding under year, at the Company's election, a.n additional sinking fund pay-the mortgage during the preceding twelve months. Such funds ment of up to $600.000 (noncumulative may be made under the are to be used. as provided in the mortgage, for the purchase indenture. and retirement by the Trustee of Mortgage Bonds of any series other tonrTerm Debt other than the Installment Series Mortgage Bonds of 1998. The Company has a revolving credit agreement which provides 2002. and 2009. and the 6.80% Series Mortgage Bonds of for borrowings of up to $50 million. This agreement expires in 2004. Purchases may be made by the Trustee in the open December 1988. Under the terms of the agreement, the Com-market and/or through responses to invitations for scaled pany, at its option may obtain loans at various interest rates The tender offers il purchases are possible at or below the appli-Company pays a commitment fee on the daily average of the cable redemption price, or directly through the redemption unborrowed portion of the commitments, At December 31.1986 provisions to which the Mortgage Bonds are subject if pur-the Company had borrowed all of the $50 million available under chases at a more favorable price are not possible The Com-the revolving credit agreement. pany may purchase outstanding Mortgage Bonds from time to in December 1984. Anne Arundel County. Maryland Issued time and may submit its sealed proposal for the sale of such $22 million of its Adjustable Rate Pollution Con *rol Revenue Mortgage Bonds to the Trustee for the sinking fund. Bonds (Baltimore Gas and Electric Company Project) 1984 Series The Installment Series Mortgage Bonds. due August 15,1998 due July 1. 2014. The net proceeds of the issue were deposited are payable as to principal on the fifteenth day of August in the with a Trustee to be loaned to the Company as nmded to finance years and the amounts as follows: the Company's acquisition and construction of cenain air pollution Prindpal Amount control facilities at the Herbert A. %bgner Power Plant Unit No. 3. Years Each Year At December 31.1986, the Company had borrowed $17.4 million. m musas in July 1985, the Company issued $100 million of Floating Rate Notes Due 1995. Interest rates on the Notes are deter-1987 through 1990 $ 2.000 9 thr h mined quarterly based on the 91-day Treasury Eill auction rate l9 (expressed on a bond-equivalent basis) plus 1.1E The interest d 19g 1998 33'000 rate m y v y m8 to M per annm in November 1985 the Company issued $100 million of M a ng a e N tes Due 1995 Series ll. Interest rates on the The installment Series Mortgage Bonds due July 15. 2002 are payable as to principal on the fifteenth day of July in the years Notes are determmed quarterly based on the 41 day Treasury and the amounts as follows: B!ll auction rate (expressed on a bond-equivalent basist plus 1.125 The interest rate may vary from 7.9% to 11.9% per Principal Amount annum. Years Each Year in December 1985. Baltimore County. Maryland issued M Thw d $36 million of Pollution Control Revenue Bonds (Baltimore Gas 1993 $ 420 and Electric Company Project) Series 1985 due July 1,2011. The 1994 430 proceeds of the sale were loaned to the Company and subse-1995 through 1997 605 quently made available to the Trustee to be used to redeem 1998 and 1999 690 Baltimore County's Pollution Control Revenue Notes (Baltimore 2000 and 2001 865 Gas and Electric Company Project) Commercial Paper Series. 2002 6.725 The proceeds of the Notes were used to finance the Company's pollution control facilities constructed in connection with the The Installment Series Mortgage Bonds due September 15. conversion to coal of two existing steam electric generator units 2009 are payable as to principal on the fifteenth day of at the Company's Charles P Crane Power Plant. September in the years and the amounts as follows: Also in December 1985. Anne Arundel County. Maryland ssued $48 milli n f Port Facilities Revenue Bonds IBaltimore Principal Amount Years Each Year Gas and Electric Company Project) Series 1985 due lune 1. 2013. The proceeds of the sale were leaned to the Company 1 on wusa* and subsequently made available to the Trustee to be u,ed to 20rJ5 through 2008 $ 3.250 redeem Anne Arundel County's Port iacilities Revenue Notes 2W9 42.000 (Baltimore Gas and Electric Company Project) Commercial Paper Series. The proceeds of the Notes were originally used to inance the Company's acquisition c,f certain coal handling port facilities at the Brandon Shores Power Plant. ] 44 i

f Baltimore Gas aml Electric Company i The weighted average interest rates for Other Long-Term Debt Aggregate Maturities ' during 1986 and 1985 were as follows: The combined aggregate amounts of maturities and sinking I 1986 1985 fund requirements for all long-term borrowings for each of the Loans under Revolving Credit Agreements. 7.26 % 8.64 % next five years are as follows: 1 Floating Rate Notes, due July 1,1995. 8.09-8.36 Year Requirements ~ Floating Rate Notes, due October 15.1995 (in Thousands) Series li 8.10 8.57 1987 $12,000 Pollution Control Loan due July 1,2011 4.78 6.60 1988 6E000 Port Facilities Loan, due June 1. 2013.... 4.93 6.37 Adjustable Rate Pollution Control loan, due 1989 52.000 July 1. 20l4 4.88 5.50 1990 4 9 NOTE 6.' LEASES The Company contracts for certain facilities and equipment At December 31,1986, the approximate minimum future under lease agreements with various expiration dates and lease payments are as follows: renewal options. Year Payment Requirements : The Company has no material leases with inception dates sub-Itn Thousands) sequent to 1982 which meet the capitalization criteria set forth in Statement of Financial Accounting Standards (SFAS) No.13, 1987 $7.409 " Accounting for Leases." that are required to be capitalized in 1988 6.404 accordance with SFAS No. 71, " Accounting for the Effects of 1989 5.921 Certain 'lypes of Regulation?' If leases entered into prior to 1983 1990 5.662 had been classified in accordance with SFAS No.13. the Com-1991 4.310 pany would have recorded assets and obligations of $3.996.000 Thereafter 7.559 at December 31.1986 and $6.047.000 at December 31.1985. The capitalization of leases would have no impact on the Com. Tha aggregate lease expense in 1986,1985, and 1984 was pany's net income. $13,238.000. $12.678.000, and $11.600.000, respectively. NOTE 7. SHORT TERM BORROWINGS AND LINES OF CREDIT The Company maintains bank lines of credit to provide backup not restricted as to withdrawal. Borrowings under the lines are financing capacity for commercial paper notes issued to satisfy at the banks' prime or base interest rates or at various money Interim financing requirements and to permit short-term borrow-market rates. Information concerning short-term borrowings and ing flexibility. In support of such lines, the Company pays com-lines of credit is set forth below: mitment fees and maintains compensating balances which are '] i .l 1986 1985 1984 (Dollar Amounts in Thousands) j At December 31 Short-term borrowings outstanding s Commercial paper notes. . $120.000 $ 86.975 $ 81.200 Weighted average interest rate. 6.61 % 7.80 % 9.15% i Unused lines of credit $150.200 $150.200 $163.200 Compensating balances. 790 790 $ 1,725 During the Year Ended December 31 Maxirnum short-term borrowings. $167,275 $189.500 $146.325 Average daily short term borrowings (al. $ 51,634 $ 82.708 _ $ 78.205 i Weighted average interest rate (b). 7.13 % 8.21% 10.53 % tal The sum of dollar days of outstanding borrowint;s divided by actual days in the period. tt4 ActucJ accrued interest during the period divided by average daily borrowings .l 4 i 45

7 1 l Baltimore Gas and Electric Company l NOTE 8. SPENT NUCLEAR FUEL DISPOSAL COSTS i l Pursuant to a contract with the Department of Energy (DOE) classified as deferred charges and are being amortized as for the disposal of spent nuclear fuel under the provisions of recovered through base rates. the Naclear Mste Policy Act of 1982, the Company, in June The contract with the DOE also provides for the disposal of 1985, paid the DOE $71.829.000 for the disposal of spent spent nudear fuel generated after April 7,1983 at a fee of one nuclear fuel which existed at April 7.1983. As of December 31. mill per kilowatthour of nudear generation. This fee, which is 1986 and 1985, the Company had collected $68.152.000, and payable quarterly. is a component of fuel cost subject to $64.462.000 of that amount. respectively, through base rates, recovery through the electric fuel rate. The remaining balances of $3.677.000, and $7.367.000 are NOTE 9. DISALLOWED DEFERRED FUEL COSTS in January 1986 the Maryland Court of Appeals upheld a costs to Purchased Fuel and Energy Expense in 1984. The after-1982 decision of the Public Service Commission of Maryland tax effect of this write-off was a reduction in earnings of 4C per (Maryland Commission) denying recovery of $5.7 million of common share. replacement energy costs incurred by the Company during two in December 1986, the Maryland Commission issued a ded-unplanned maintenance outages at the Calvert Cliffs Nudear sion denying recovery of replacement energy costs because an l Power Plant. The Maryland Commission denied the recovery of employee error caused the extension of a 1985 planned outage l the replacement energy costs because it held that the Company at the Calvert Cliffs Nuclear Power Plant. The Company charged l failed to demonstrate that its maintenance control procedures $3.9 million of previously deferred fuel costs to Purchased Fuel were. In all respects, reasonable and appropriate for preventing and Energy Expense in 1986. The after-tax effect of this write-the outages (see Note ll). The Company. as a result of a lower off was a reduction in earnings of 3c per common share. The court decision, charged $5.7 million of previously deferred fuel Company has appealed the Commission's decision. NOTE 10. IOINTLY OWNED ELECTRIC UTILITY PLANT The Company owns an undivided interest in the Keystone and The following data repre<:ent the Company's share of the Conemaugh mine-mouth electric generating plants located in jointly owned properties as of December 31. 1986: western Pennsylvania. as well as in the transmission line which Transmission transports the plants' output to the joint ownert service terri-Keystone conemaugh (Jne tories. Financing and accounting for these properties are the (Dollar Amounts ni Thousands) same as for wholly owned utility plant. The Company's share of the direct expenses of the joint property is mduded in the cor-ownership Interest 20.99 % 10.56 % 7.00 % responding operating expenses in the income statements. Utility Plant in Service $63.180 $33.322 $1486 uWP%h6 Depreciation $17,904 $l 1,643 $ 523 Construction Work in Progress $ l.996 $ 2.935 l NOTE II COMMITMENTS AND CONTINGENCIES l Commitments and Guarantees The Company has made substantial commitments in connection for property damage and bodily injury. the physical damage to with its construction program for 1987 and subsequent years, the plant and the cost of replacement power. The Company has agreed to guarantee 20.99% of borrowings The Price-Anderson Act (Act) currently limits the liability to the of up to $27.9 million by Keystone Coal Mining Corporation the public of an owner of a riudear pcwer plant for property damage major coal supplier for the Keystone Plant (see Note 10). of and bodily injury to third parties to $700 million for a single As of December 31.1986, the total outstanding loans were nudear incident. as defined in the Act. The Company is pro- $17.9 rnillion. of which $3.8 million was guaranteed by the tected against this potential liability by a combination of com-Company. Additionally the Company has agreed to guarantee mercial insurance (currently $160 million through the nudear two-thirds of up to $125 million of indebtedness incurred by insurance pools) and Secondary Financial Protection currently Safe Harbor Water Power Corporation (see Note 2) in connec-amounting to a maximum of $540 million. Under regulations tion with the expansion of its hydroelectric generating facihties. Issued pursuant to the Act, the $540 million of Secondary Finary As of December 31.1986. the outstanding debt totaled $70.5 cial Protection for public liability resulting from a nuclear incident j million, of which $47 million represents the Company's two-would be provided through an after-loss assessment of each thirds share. The Company's assessment is that there is minimal nudear-powered utility in the country at a rate of up to $5 million risk of default on the loans it has guaranteed. per reactor, with a $10 million per reactor limit in any one Nudear Confinaendes calendar year for multiple incidents. The Company's contingent The two units'at the Company's Calvert Cliffs Nudear Power Plant li bility in the event of a nudear inddent at any licensed nudear are its principal generating facilities and produce the lowest cost power pl nt in the country is an amount up to $10 million per power available to the Company. An incident at this plant could nudear incident ($5 million for each reactor at Calvert Cliffs). f have a substantial adverse effect upon the Company The with a maximum contingent liability of $20 million per year in 1 primary contingencies resulting from an incident at the Calurt the event of more than one nudear incident in a particular year. j Cliffs Plant would involve the Company's liability to third pa-ties i i 46 l

I t Baltimore Gas and Electric Company ~... The Company's insurance for physical damage to its nuclear assessment of each member. The contingent liability to the power plant is structured to provide a level of Priraary Company for these after-loss assessments currently is $10.2 Insurance and a level of Excess Insurance. The Primary million in any one policy year. Insurance, provided through nuclear insurance pools, covers up The Company does not consider the amounts of insurance I to $500 million of physical damage. including contamination, to discussed above to be adequate to cover the costs that could I the plant. The Excess insurance currently provides coverage for result from a major incideni or an extended outage at either of i an additional S730 million for a total of $1.23 billion) of physical the Calvert Cliffs units: howaer, the insurance described above i damage to the plant, including contamination. Any damage to is the only insurance currently available to cover such public j the plant in excess of $1.23 billion would be the financial liability. property damage and replacement energy costs. The responsibility of the Company. The Excess insurance protection Company would seek to have any unrecovered costs included in is provided through a combination of nuclear insurance pools its service rates, but the Company cannot assure that the Public and an industry-owned mutual insurance company. The maior Service Commission of Maryland iMaryland Commission) would portion of any claim paid through the Excess insurance allow such recovery. l coverage for damage to any nuclear power plant operated by a Recoverability of Electric Fuel Costs member of the industry-owned mutual insurance company By statute. actal electric fuel costs are recoverable so long as would be funded through insurance company reserves and an the Maryland Commiss;on finds that the Company demonstrates I r4er-loss assessment of each member. The contingent liability that. among other things. It has maintained the productive to the Company for such after-loss assessments currently is $9.1 capacity of its generating plants at a reasonable level. The million in any one policy year. Maryland Commission and Maryland's highest appella'c Court in the event of an outage at Calvert Cliffs. the Company would have interpreted this as permitting a subjective evaluation of obtain replacement power from other sources. Due to the rela" each unplanned outage at the Comruny's generating plants to tively low cost of the power generated at the Company's determine whether or not the Comi,any had implemented all nudear plant, replacement power would be more expensive. In reasonable and cost effective maintenance and operating con-the event that there is an outage caused by physical damage to trol procedures appropriate for preventing the outage. The the nudear plant which is insured as discussed above, other Company is involved in fuel rate proceedings several times a insurance provided through an industry-owned mutual insurance year. Issues concerning individual plant outages are usually company would provide coverage for a portion of the replace-raised in those proceedings. The Company cannot estimate the ment power costs if the outage lasts more than 26 weeks. amount of replacement energy costs that could be denied in Currently this insurance provides for a maximum weekly those proceedings, but such amounts could be material. indemnity per unit of the lesser of $3.5 million, or 90% of the Company's calculated replacement power cost for that unit. This Proposed Income Tax Adjustments maximum weekly indemnity will be available for up to a in 1986 the Company was notified by the Internal Revenue 52-week period. after which the maximum weekly indemnity is Service of certain proposed adjustments relating to their l reduced by 50% for the ensuing 52-week period. For one examination of the Company's Federal income tax returns for insured occurrence causing both Calvert Cliffs units to be the years 1983 and 1984. The proposed adjustments would shut down beyond 26 weeks. the weekly indemnity payments change the timing of when deductible amounts would affect tax-would then begin for each unit at a rate of 80% of the fore-able income. The maximum potential impact on net income if going. This replacement power insurance would fund a claim these adjustments were to remain as proposed would be an paid to any member of the industry-owned mutualinsurance estimated $11 million in pre-tax interest charge 5. The Company j company through insurance company reserves and an after-loss intends to protest these proposed adjustments. 1 NOTE 12. SEGMENT INFORMATION 1986 1985 1984 ELECTRIC Un Thousandsl Operating Revenues $ 1,388.251 $1,30L463 $1,208.145 i Operating income before Income Taxes. 445,698 432,540 408.965 l Operating Income. 305.011 291.849 277,529 ) Depreciation. I13.365 I i 1.365 101.026 l Construction Expenditures 230,513 204.180 222.970 { identifiable Assets at December 31 3,371,785 3.264,559 3.195.295 GAS Operating Revenues, S 445.769 $ 453,309 $ 553.329 Operating income before Income Taxes. 42,827 48.274 50.492 Operating income. 29.552 32.393 33,239 Depreciation - 13.909 13.596 12.617 Construction Expenditures. 23.629 21,590 20.739 Identifiable Assots at December 31 345,145 343.556 342.430 TOTAL Operating Revenues $ 1,834.020 $1.754.772 $1.761,474 Operating Income before income Taxes. 488.525 480.814 459.457 Operating income. 334.563 324.242 310.768 Depreciation. 127,274 124.961 113.643 Construction Expenditures (including steam). 254,142 225,771 244,072 Identifiable Assets at December 31 3.716,930 3.608,115 3.537,725 Other Assets. 653.570 575.293 473.071 Total Assets. 4,370.500 4.183.408 4,010.796 47

Baltimore Gas and Electric Compam). NOTE 13. QUAirrERLY FINANCIAL DATA (UNAUDITED) The following data are unaudited but, in the opinion of Manage-peak sales periods generally occurring during the surnmer and ment, include all adjustments necessary for a fair statement of winter months. Accordingly, comparisons among quarters of a i such amounts. year may not be indicative of overall trends and changes in The business of the Company is seasonal in nature with the operations. Operating

Earningr, income Applicable Earnings Per Operating Plus Net to Common.

Share of. Quarter Ended Revenues AFC' income Stock Commun Stock fin Thousands. Except Per Share Amounts) M1rch 31, 1986...................... $ 532,968 $ 98.092 $ 71,973 'S 65,287 $.83 J une 30. 1986........................ 395,001 77,245 52,102 45,416 .58 l September 30,1986.................. 488,018 125,605 102,551 95,866 1.22 '1 December 31,1986................... 4'8,033 64,074' 47,993 41,I74 .52 $ 1.834,020 $365,016 $274,619 $247,743 $3.15 March 31,1985 $ 507,981 $ 90.094 $ '64,789 $ 57.894 $.74 June 30,1985. 384.843 72.743 46,811-39.916 .51 i September 30,1985 462,157 114.174 - 88.836 81,941 1.04 December 31,1985. 399.801 73.578 46.864 40.179 .51 $ l,754.772 $350,589 $247,300 $219,930 $2.80

The Mowance for Funds Used During Construction (for Borrowed Funds and other Fundsl is added to operating income in determining operating income for ratemaking purposes NOTE 14. EFTECTS OF CHANGING PRICES (UNAUDITED)

The effect of changing prices upon the Company generally may be approximated as follows in terms of the average 1986 Consumer Price Index: 1986 1985 1984 (Dollar Amounts in Thousands. Except Per Share Amounts) Operating Revenues I Historical. $1,834,020 $l,754.772 $1.761,474 l In Average 1986 Dollars $1.834,020 $1.788.339 $1,859,428 l Net income Historical. $ 274,619 $ 247.300 $ 243.915 l In Average 1986 Dollars $ 274,619 $ 252.059 $ 257,479 Cash Dividends Dedared Per Common Share i Historical. $ 1.775 $ l.675 $ 1.55 in Average 1986 Dollars $ 1.775 $ 1,71 $ l.64 Market Price Per Common Share at Year-End Historical. $33.88 $25.00 $20.32 7 In Average 1986 Dollars.. $33.60 $25.48 $21.45 4 Average Consumer Price index. 328.4* 322.2 311.1 ]

Estimated i

Under the ratinnaking prescribed by the Pub!Ic Service Com-historical dollars invested. Any excess of the current cost of mission of Maryland (Maryland Commissions, the Company is plant over historical cost is not presently recoverable in rates. generally limited to the recovery of historlul cost of plant in The Maryland Commission has previously allowed the Company i service and r.uclear fuel in revenues as depreciation and to recognize the current cost of repladng utility plant and amortization. During periods of inflation. such amounts will be nuclear fuel in its service rates when replacement of fadlities 1 recovered in dollars having less purchasing power than the occurred. a 1 l 1 ) l f 48

l 1 SHAREHOLDER INFORMATION. Baltimore Gas and Elertric Company COMMON STOCK DIVIDENDS AND PRICE RANGES 3986 '1985 i Dividend Price Dividend Price Declared High Low Declared High Low First Quarter $.425 $28% $23 . $. 40 $20% - $19% Second Quarter. .45 33% 25% .425 '23% 20% Third Quarter. .45 39% 29% .425. 23% 20 Fourth Quarter. .45 36% 32% .425 25% 20%; Total $ 1.775 - $1.675 r DIVIDEND POLICY ANNUAL MEETING The Common Stock is entitled to dividends when and as The annual meeting of shareholders will be held at - declared by the Board of Directors. There are no limita-10:00 a.m. on April 10, 1987, in the Hunt Valley Ballroom tions in any indenture or other agreements on payment of of Marriott's Hunt Valley inn,245 Shawan Road (I-83 dividends: however, holders of Preferred Stock ifirst) and at Shawan Road). Hunt Valley. Maryland. holders of Preference Stock (next) are entitled to receive, when and as declared, from the surplus or net profits. FORM 10-K~ cumulative yearly dividends at the fixed preferential rate Upon written request, the Company will furnish, without.. specified for each series and no more, payable quarterly, char 6e, a copy of its Form 10-K annual report, including and to receive when due the applicable preference stock financial statements, after it is filed with the Securities redemption payments, before any dividend on the Com-and Exchange Commission in March 1987. Requests mon Stock shall be paid or set apart. should be addressed to Charles W. Shivery. Treasurer, Dividends have been paid on the Common Stock con-P.O. Box 1475, Baltimore, Maryland 21203. tinuously since 1910. Future dividends depend upon future earnings, the financial condition of the Company, and other AUDITORS factors. Quarterly dividends were declared on the Common Coopers & Lybrand Stock during 1986 and 1985 in the amounts set forth above. EXECUTIVE OFFICES Gas and Electric Building j DIVIDEND REINVESTMENT AND STOCK Charles Center - t, PURCHASE PLAN Baltimore, Maryland 21201 The Company's Dividend Reinvestment and Stock Purchase - Mall: P.O. Box 1475 l Plan provJdes an opportunity for holders of the Company's Baltimore, Maryland 21203 Common Stock to acquire additional shares of Common Stock in a convenient and economical manner. Participants SHAREHOLDERS

INQUIRIES i

in the Plan may reinvest cash dividends on all or a portion The following toll-free telephone numbers are available l of their shares of Common Stock and/or make optional during our business hours. 8:00 a.m. to 4:45 p.m. cash payments not exceeding $6.000 per quarter. Baltimore Metropolitan Area 234-5703 = 234-6W 'l STOCK TRADING The Company's Common Stock. which is traded under the Within Maryland. 1-800 492-2861 l ticker symbol BCE is listed on the New York. Midwest, and Outside of Maryland 1-800-225-2432 4 Pacific stock exchanges and has unlisted trading privileges d l Written communication should be addressed to: _l on the Boston, Cincinnati, and Philadelphia exchanges. As of Decernber 31.1986, there were 76.972 Common Baltimore Gas and Electric Company ~

q q

Investor Services Stockholders of record. P.O. Box 147 5 Baltimore. Maryland 21203 TRAh!SFER AGENT AND REGISTRAR Maryland National Bank. Baltimore j i 4 49' l

E q CONSTELLATION SUBSIDIARIES Baltimore Gas and Flecinc Coupany {] u : l .i I) Constellation Holdings, Inc. 1101 St. Paul at Chase. Suite 302 - Chris H. Poindexter, President Baltimore, Mar-land 21202-2619 y 301-234-6784 l l Constellation investments, Inc. !!01 St. Paul at Chase.' Suite 302 l Henry A, lurand, President Baltimore, Maryland 21202 2619-' l ) l 301-234-5936 i l Constellation Properties, Inc. 7609 Energy Parkway ) G. Wendel Heineman, President P.O. Box 19628 ~ l Baltimore Maryland 212264)628 l 301-255-2030 Constellation Biogas, Inc, 1101 St. Paul at Chase, Suite 302 - .j

j. Thomas Wellener, President Baltimore, Maryland 21202-2619.

301 234-5198 -) Constellation Holdings, the parent company of Constellation investments. Constellation Properties ' i and Constellation Biogas, is a wholly owned subsidiary of Baltimore Gas and Electric Company. a O i Constellation Hosilngs Constellation Properties This company provides direction and leadership to all As the oldest of the subsidiaries, this member of the l< Constellat!on subsidiaries. Constellation Holdings group participates in industrial, commercial and coord1 nates the planning and financing of the diver-residential real estate projects. Constellation Proper-sification program in addition to searching for new ties currently has joint venture relationships with a opportunities for investment or acquisition. Corporate number of regional and national development involvement in unregulated power and wastewater companies. l projects will be managed by the holding company. Constellation investments Constellation Blogas l The main objective of this group member is the The smallest of the companies. Constellation Biogas management of our assets in various se.urities and owns and operates a methane gas production plant - l-Investment partnerships in order to keep Constella-which produces pipeline quality gas as a by-product i tion assets fully deployed and available for attractive of sewage sludge digestion. This process enables the j long-term investments. . company to convert waste materials to a useful pro-duct which can be marketed to major industrial j companies. 8 l 50: L--__-_----_.

l l \\ OFFICERS B:himore Gas and Electric Compangt l Bernard C. Trueschler Edward A. Crooke Henry H. Miller Chairman of the Board Vice President. Finance Vice President, Distribution and Chief Executive Officer and Accounting, and Secretary George V. McGowan Jon M. Files loseph A. Tiernan President and Chite Operating Vice President, Management Vice President, Nuclear Officer and Staff Services Energy Raymond C. Bryant John W. Gore, Jr. Charles W. Shivery Vice President, Consumer Vice President, Electric Treasurer and Assistant Services Interconnection and Operations Secretary Herbert D. Coss, Jr. Arthur E. Lundvall, Jr. Thomas E Brady l Vice President, General Vice President, Fossil Energy Assistant Secretary and Assistant l Senices Treasurer B j CHANGES IN OFFICERS On October I,1986, Herbert D. Coss, Jr., formerly Manager, Information Systems. became Vice President, General Services. He succeeded Norman J. Bowmaker, who retired on that date after 36 years of active service ) with BG6E. ) At the October Board meeting. Michael J. Chesser was l l elected Vice President, Consumer Services effective f l April I,1987. Mr. Chesser, who was Manager, Southern Distribution, will succeed Raymond C. Bryant who will I ret!re on that date. l l l l l l 1 51

- BOARD OF DIRECTORS Baltimore Gas and Electric Company Bernard C. Trueschler Jerome W. Geckle ' George G. Radcliffe l ^ Chairman of the Board Chairman of the Board Chairman of the Board and Chief Executive Officer and Chief Executive Officer, and Chief Executive Officer. of the Company. Baltimore PHH Group, Inc., The Baltimore Life insurance Baltimore (Vehicle. Aircraft Company. Baltimore (Insurancel and Personnel Services) George V. McGowan Charles S. Sanford, Jr. President and Chief Operating Will rd Hackerman Deputy Chairman. Bankers Officer of the Company, Baltimore President. The Whiting %rner Trust New York Corporation, ? Contracting Company. New York (Bank Holding

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1. Owen Cole and Construction Management) l Chairman of the Board, First i

Maryland Bancorp, Baltimore Dr. John B. Slaughter Paul G. Miller Chancellor, Univeriity (Bank Holding Company; ? Chairman of the Board of Maryland at College Leslie B. Disharoon and Chief Executive Officer. Park, College Park, MD ' '"'" Baltimore (Computer (Education) Chairman of the Board "'" ""0' and President. Monumental Corporation, Baltimore Harry K. Wells (Insurance) Chairman of the Board, l McCormick & Company. inc., Baltimore (Food Processing, i Sister Kathleen Feeley, 65'##' #'I 'l SS.N.D. l President, College of Notre .l Dame of Maryland, Baltimore (Education) COMMITTEES OF THE BOARD Audit Committee Executive Committee Committee on Nuclear Power Mr. Radchffe Chairman Mr. Trueschler Chairman Mr. Wells, Chairman Mr. Cole Mr. Disharoon Sister Feeley Mr. Miller Sister Feeley Mr. Hackerman Mr. McConn Mr. McGowan Committee on Management Mr. Radcliffe Dr. Slaughter Mr. Ceckle, Chairman Mr. Wells Mr. Cole Mr. Disharoon 4 i I, 52

I BOARD OF DIRECTORS fUltinwre Gas and Elutric Comt>any j, q \\ ,U '"fy - ~ ~ %. Dr. Slaughter. Mr. Radcliffe. Ic(t to right: d!- ,g .,M Mr. Cole. Mr. Disharoon. (

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