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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 1999
Commission Exact name of registrant as specified in IRS Employer
File Number its charter Identification No.
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1-12869 CONSTELLATION ENERGY GROUP, INC. 52-1964611
1-1910 BALTIMORE GAS AND ELECTRIC COMPANY 52-0280210
MARYLAND
(States of incorporation)
250 W. PRATT STREET, BALTIMORE, MARYLAND 21201
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(Address of principal executive offices) (Zip Code)
410-234-5000
(Registrants' telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Name of each exchange
Title of each class on which registered
------------------- -----------------------------
New York Stock Exchange, Inc.
Constellation Energy Group, Inc. Common } Chicago Stock Exchange, Inc.
Stock--Without Par Value Pacific Stock Exchange, Inc.
7.16% Trust Originated Preferred Securities
($25 liquidation amount per preferred secu-
rity) issued by BGE Capital Trust I, fully } New York Stock Exchange, Inc.
and unconditionally guaranteed, based on
several obligations, by Baltimore Gas and
Electric Company
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Not Applicable
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) have been subject to such filing
requirements for the past 90 days. Yes X No .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrants' knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Aggregate market value of Constellation Energy Group, Inc. Common Stock,
without par value, held by non-affiliates as of February 29, 2000 was
approximately $4,439,562,000 based upon New York Stock Exchange composite
transaction closing price.
CONSTELLATION ENERGY GROUP, INC. COMMON STOCK, WITHOUT PAR VALUE 149,602,816
SHARES OUTSTANDING ON FEBRUARY 29, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Part of Form 10-K Document Incorporated by Reference
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III Certain sections of the Proxy Statement for Constellation
Energy Group, Inc. for the Annual Meeting of Shareholders to
be held on April 28, 2000.
Baltimore Gas and Electric Company meets the conditions set forth in General
Instruction I(1)(a) and (b) of Form 10-K and is therefore filing this Form in
the reduced disclosure format.
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TABLE OF CONTENTS
Page
----
Forward Looking Statements................................. 1
PART I
Item 1 -- Business
Overview................................................... 1
Electric Business.......................................... 4
Electric Operating Statistics.............................. 10
Gas Business............................................... 11
Gas Operating Statistics................................... 13
Franchises................................................. 14
Diversified Businesses..................................... 14
Consolidated Capital Requirements.......................... 17
Environmental Matters...................................... 17
Employees.................................................. 21
Item 2 -- Properties
Electric................................................... 21
Gas........................................................ 22
General.................................................... 22
Item 3 -- Legal Proceedings
Asbestos................................................... 22
Restructuring Order........................................ 23
Item 4 -- Submission of Matters to a Vote of Security Holders........ 24
Executive Officers of the Registrant (Instruction 3 to Item
401(b) of Regulation S-K).................................. 24
PART II
Item 5 -- Market for Registrant's Common Equity and Related Shareholder
Matters Stock Trading...................................... 25
Dividend Policy............................................ 25
Common Stock Dividends and Price Ranges.................... 25
Item 6 -- Selected Financial Data.................................... 26
Item 7 -- Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 28
Item 7A-- Quantitative and Qualitative Disclosures About Market
Risk....................................................... 47
Item 8 -- Financial Statements and Supplementary Data................ 48
Item 9 -- Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................... 86
PART III
Item 10 -- Directors and Executive Officers of the Registrant......... 86
Item 11 -- Executive Compensation..................................... 86
Item 12 -- Security Ownership of Certain Beneficial Owners and
Management................................................. 86
Item 13 -- Certain Relationships and Related Transactions............. 86
PART IV
Item 14 -- Exhibits, Financial Statement Schedules and Reports on
Form 8-K.................................................... 87
Signatures............................................................. 91
Forward Looking Statements
We make statements in this report that are considered forward looking
statements within the meaning of the Securities Exchange Act of 1934. Sometimes
these statements will contain words such as "believes," "expects," "intends,"
"plans," and other similar words. These statements are not guarantees of our
future performance and are subject to risks, uncertainties, and other important
factors that could cause our actual performance or achievements to be
materially different from those we project. These risks, uncertainties, and
factors include, but are not limited to:
. general economic, business, and regulatory conditions,
. energy supply and demand,
. competition,
. federal and state regulations,
. availability, terms, and use of capital,
. nuclear and environmental issues,
. weather,
. implications of the Restructuring Order by the Maryland PSC,
. commodity price risk,
. operating our currently regulated generation assets in a deregulated market
beginning July 1, 2000 without the benefit of a fuel rate adjustment clause,
. loss of revenues due to customers choosing alternative suppliers,
. higher volatility of earnings and cash flows,
. increased financial requirements of our nonregulated subsidiaries,
. inability to recover all costs associated with providing electric retail
customers service during the electric rate freeze period, and
. implications from the transfer of BGE's generation assets to nonregulated
subsidiaries of Constellation Energy.
Given these uncertainties, you should not place undue reliance on these forward
looking statements. Please see the other sections of this report and our other
periodic reports filed with the Securities and Exchange Commission for more
information on these factors. These forward looking statements represent our
estimates and assumptions only as of the date of this report.
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PART I
Item 1. Business
Overview
On April 30, 1999, Constellation Energy(R) Group, Inc. (Constellation Energy)
became the holding company for Baltimore Gas and Electric Company (BGE(R)) and
Constellation(R) Enterprises, Inc. Constellation Enterprises was previously
owned by BGE. Constellation Energy was incorporated in Maryland on September
25, 1995.
References in this report to "we" and "our" are to Constellation Energy and its
subsidiaries, collectively. References in this report to the "utility business"
are to BGE.
Constellation Energy's subsidiaries primarily include BGE and a group of energy
services businesses focused mostly on power marketing and merchant generation
in North America.
BGE is an electric and gas public utility company with a service territory that
covers the City of Baltimore and all or part of ten counties in Central
Maryland. BGE was incorporated in Maryland in 1906.
BGE's electric service territory includes an area of approximately 2,300 square
miles with an estimated population of 2.7 million. BGE's gas service territory
includes an area of more than 600 square miles with an estimated population of
2.0 million. There are no municipal or cooperative wholesale customers within
BGE's service territory.
The electric utility industry is undergoing rapid and substantial change. On
April 8, 1999, Maryland enacted legislation authorizing customer choice and
competition among electric suppliers. On November 10, 1999, the Maryland Public
Service Commission (Maryland PSC) issued Order No. 75757 (Restructuring Order)
approving a Stipulation and Settlement Agreement between BGE and a majority of
the active parties involved in the electric restructuring proceeding that
resolves the major issues surrounding electric restructuring. Our electric
business will change significantly beginning July 1, 2000 as we enter into
retail customer choice for electric generation and our generation assets are
transferred from BGE to nonregulated subsidiaries of Constellation Energy.
Please refer to the Electric Regulatory Matters and Competition section for
more information.
1
As discussed throughout this report, the two units at the Calvert Cliffs
Nuclear Power Plant (Calvert Cliffs) are our principal generating facilities
and use the cheapest fuel in our system. An extended outage of either of these
units could have a substantial adverse effect on our business and financial
results.
We describe our utility business further in five other sections of this report
- -- Electric Business, Electric Operating Statistics, Gas Business, Gas
Operating Statistics, and Franchises.
Our energy services businesses are:
. Constellation Power Source,(TM) Inc. -- wholesale power marketing,
. Constellation Power,(TM) Inc. and Subsidiaries -- power projects,
. Constellation Energy Source,(TM) Inc. -- energy products and services,
. Constellation Nuclear Group,(TM) LLC -- nuclear generation and consulting
services,
. BGE Home Products & Services,(TM) Inc. and Subsidiaries -- home products,
commercial building systems, and residential and small commercial gas retail
marketing, and
. District Chilled Water General Partnership (ComfortLink(R)) -- a general
partnership, in which BGE is a partner, that provides cooling services for
commercial customers in Baltimore.
Our other businesses are:
. Constellation Investments,(TM) Inc. -- financial investments, and
. Constellation Real Estate Group,(TM) Inc. -- real estate and senior-living
facilities.
We describe our diversified businesses further in the Diversified Businesses
section.
Strategy
The change toward customer choice will significantly impact our business going
forward. In response to this change, we regularly evaluate our strategies with
two goals in mind: to improve our competitive position, and to anticipate and
adapt to regulatory change. We are realigning our organization combining all of
our domestic merchant energy businesses. We will continue to invest in the
growth of these businesses with the objective of providing new sources of
earnings. In addition, we might consider one or more of the following
strategies:
. the complete or partial separation of our transmission and distribution
functions,
. the construction, purchase or sale of generation assets,
. mergers or acquisitions of utility or non-utility businesses,
. spin-off or sale of one or more businesses, and
. growth of earnings from other nonregulated businesses.
We cannot predict whether any of the strategies described above may actually
occur, or what their effect on our financial results or competitive position
might be. However, with the shift toward customer choice, competition, and the
growth of our nonregulated subsidiaries, various factors will affect our
financial results in the future. These factors include, but are not limited to,
operating our currently regulated generation assets in a deregulated market
beginning July 1, 2000 without the benefit of a fuel rate adjustment clause,
the loss of revenues due to customers choosing alternate suppliers, higher
volatility of earnings and cash flows, and increased financial requirements of
our nonregulated subsidiaries. Please refer to the Forward Looking Statements
section for additional factors.
In addition, our Board of Directors has a Long-Range Strategy Committee to
oversee the development of our long-range strategic goals, and to consider
strategic initiatives presented by management. We also have a Corporate
Strategy and Development Group, led by a Vice President, that is responsible
for evaluating strategic objectives and developing strategy implementation.
We discuss competition in our electric and gas businesses in more detail in the
Electric Regulatory Matters and Competition and Gas Regulatory Matters and
Competition sections.
2
Revenues and Net Income by Operating Segment
The percentages of revenues and net income attributable to our electric, gas,
and diversified businesses are shown in the tables below. We present
information about our operating segments, including certain nonrecurring items,
in Note 2 to Consolidated Financial Statements. We are realigning our
organization combining all of our domestic merchant energy businesses. We have
not determined the impact of this reorganization on our operating segments, but
such change will impact our operating segments in the future.
Revenues*
-----------------------------------
Electric Gas Diversified
-------- --- ---------------------
Energy Services Other
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1999 60% 12% 25% 3%
1998 66 13 16 5
1997 66 16 12 6
1996 70 16 10 4
1995 76 14 6 4
Net income*/(1)/
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Electric Gas Diversified
-------- --- ---------------------
Energy Services Other
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1999 81%/(1)/ 10% 15% (6)%
1998 85 9 13 (7)
1997 88 10 10 (8)
1996 74 11 10 5
1995 85 7 6 2
*Reflects the elimination of intercompany transactions.
/(1)/ Excludes an extraordinary charge of $66.3 million related to electric
restructuring as discussed in Note 4 to Consolidated Financial Statements.
The differences in percentages of revenues and net income for our electric and
gas businesses are due to two factors:
. our level of investment in each business, and
. our fuel costs in each business.
Our electric and gas revenues reflect amounts collected for fuel and other
operating expenses plus a return on our investment. Our investment for
ratemaking purposes in the electric business is $4.7 billion and our investment
for ratemaking purposes in the gas business is approximately $719 million. As a
result, our electric revenues include a much higher return component than our
gas revenues.
Also, as shown in our Consolidated Statements of Income in Item 8. Financial
Statements and Supplementary Data, our electric fuel costs ("Electric fuel and
purchased energy") were 22% of electric revenues in 1999, and our purchased gas
costs ("Gas purchased for resale") were 48% of gas revenues in 1999. This means
our cost of fuel in relation to our revenues is lower in the electric business
than in the gas business.
Currently and until July 1, 2000, we charge the actual cost of the fuel we use
to generate electricity and the net cost of purchases and sales of electricity
to customers with no profit to us. We discuss the elimination of the electric
fuel rate clause on July 1, 2000 further in the Electric Regulatory Matters and
Competition section. The price we charge for natural gas is based on a market
based rates incentive mechanism approved by the Maryland PSC. The difference
between our actual cost and the price we charge under market based rates does
not significantly impact earnings. We discuss market based rates further in the
Gas Regulatory Matters and Competition section.
Our electric and gas revenues come from many customers -- residential,
commercial, and industrial. In 1999, our largest electric customer provided
2.0% of our total electric revenues. In 1999, our largest gas customer provided
1.4% of our total gas revenues.
As shown in the tables above, the percentages for revenues and net income
differ for our diversified businesses due primarily to nonrecurring items
included in operations that are discussed in Note 2 to Consolidated Financial
Statements.
3
Electric Business
We get most of our revenues and net income from our electric utility business.
Our electric business will change significantly beginning July 1, 2000 as we
enter into retail customer choice for electric generation. No earlier than July
1, 2000, and after all regulatory approvals are received, BGE will transfer all
of its generation assets to nonregulated subsidiaries of Constellation Energy.
The impact of this transfer on BGE's financial results will be material. BGE's
transmission and distribution business will continue to be regulated by the
Maryland PSC. We describe this business and these changes in the sections
below.
Electric Regulatory Matters and Competition
On April 8, 1999, Maryland enacted the Electric Customer Choice and Competition
Act of 1999 (the "Act") and accompanying tax legislation that will
significantly restructure Maryland's electric utility industry and modify the
industry's tax structure. In the Restructuring Order discussed below, the
Maryland PSC addressed the major provisions of the Act. The accompanying tax
legislation is discussed in detail in Note 4 to Consolidated Financial
Statements.
On November 10, 1999, the Maryland PSC issued a Restructuring Order that
resolves the major issues surrounding electric restructuring, accelerates the
timetable for customer choice, and addresses the major provisions of the Act.
The Restructuring Order also resolves the electric restructuring proceeding
(transition costs, customer price protections, and unbundled rates for electric
services) and a petition filed in September 1998 by the Office of People's
Counsel (OPC) to lower our electric base rates. The major provisions of the
Restructuring Order are discussed in Item 7. Management's Discussion and
Analysis--Electric Restructuring and Note 4 to Consolidated Financial
Statements.
In early December, the Mid-Atlantic Power Supply Association (MAPSA), Trigen-
Baltimore Energy Corporation, and Sweetheart Cup Company, Inc. filed appeals of
the Restructuring Order. MAPSA also filed a motion seeking to delay the
implementation of the Restructuring Order pending a decision on the merits by
the court. While we believe that the appeals are without merit, no assurances
can be given as to the timing or outcome of these cases, and whether the
outcome will have a material adverse effect on our and BGE's financial results.
We discuss these appeals further in Item 3. Legal Proceedings.
Electric utilities are facing competition on various fronts, including:
. construction of generating units to meet increased demand for electricity,
. sale of electricity in bulk power markets,
. competing with alternative energy suppliers, and
. electric sales to retail customers.
As a result of the deregulation of BGE's electric generation, no earlier than
July 1, 2000, and upon receipt of all regulatory approvals, we expect that BGE
will transfer, at book value, its nuclear generating assets and its nuclear
decommissioning trust fund to a subsidiary of Constellation Nuclear Group, LLC.
In addition, we expect that BGE will transfer, at book value, its fossil
generating assets and its partial ownership interest in two coal plants and a
hydroelectric plant located in Pennsylvania to a nonregulated subsidiary of
Constellation Energy. In total, these generating assets represent about 6,240
megawatts of generation capacity with a total projected net book value at June
30, 2000 of approximately $2.4 billion. We estimate that the electric
generation portion of our business currently represents about one-half of BGE's
operating income.
We expect BGE to transfer approximately $278 million of tax exempt debt to our
nonregulated subsidiaries related to the transferred assets and that BGE will
receive approximately $1.1 billion in unsecured promissory notes. Repayments of
the notes by our nonregulated subsidiaries will be used exclusively to service
certain long-term debt of BGE. BGE will also transfer equity associated with
the generation assets to nonregulated subsidiaries of Constellation Energy.
Under the Restructuring Order, BGE will provide standard offer service to
customers at fixed rates over various time periods during the transition period
for those customers that do not choose an alternate supplier once customer
choice begins July 1, 2000. In addition, the electric fuel rate will be
discontinued effective July 1, 2000. Nonregulated subsidiaries of Constellation
Energy will provide BGE with the energy and capacity required to meet
4
its standard offer service obligations for the first three years of the
transition period. Standard offer service will be competitively bid thereafter.
Nonregulated subsidiaries of Constellation Energy will obtain the energy and
capacity to supply BGE's standard offer service obligations from Calvert Cliffs
and BGE's former fossil plants, supplemented with energy purchased from the
wholesale energy market as necessary. Our earnings will be exposed to the risks
of the competitive wholesale electricity market to the extent that our
nonregulated subsidiaries have to purchase energy and/or capacity or generate
energy to meet obligations to supply power to BGE at market prices or costs,
respectively, which may approach or exceed BGE's standard offer service rates.
We will also be affected by operational risk, that is, the risk that a
generating plant is not available to produce energy when the energy is
required.
Until July 1, 2000, we will continue to recover our cost of fuel and purchased
energy through the electric fuel rate as long as the Maryland PSC finds that,
among other things, we have kept the productive capacity of our generating
plants at a reasonable level. To do this, the Maryland PSC will evaluate the
performance of our generating plants, and will determine if we used all
reasonable and cost-effective maintenance and operating control procedures
under the Generating Unit Performance Program. We discuss the Generating Unit
Performance Program further in Note 10 to Consolidated Financial Statements.
We have been able to recover all of our costs of fuel and purchased energy from
1992 through 1996. Under the Restructuring Order, BGE's electric fuel rate is
frozen at its current level until July 1, 2000, at which time the fuel rate
clause will be discontinued. We will continue to defer the difference between
our actual costs of fuel and energy and what we collect from customers under
the fuel rate through June 30, 2000. Any accumulated difference between our
actual costs of fuel and energy and the amounts collected from customers under
the electric fuel rate clause will be collected from our customers over a
period to be determined by the Maryland PSC.
After July 1, 2000, any energy purchased to meet BGE's load commitments will
become a cost of doing business in the newly competitive marketplace.
Therefore, if BGE provides standard offer service at fixed rates to its
customers that do not select an alternative provider as required under the
terms of the Restructuring Order, and the load demand exceeds our capacity to
supply energy due to a plant outage, we would be required to purchase
additional power in the wholesale energy market. If the price of obtaining
energy in the wholesale market exceeds the fixed standard offer service price,
our earnings would be adversely affected. Imbalances in demand and supply can
occur not only because of plant outages, but also because of transmission
constraints or due to extreme temperatures (hot or cold) causing demand to
exceed available supply.
We cannot estimate the impact of the increased financial risks associated with
this transition. However, these financial risks could have a material impact on
our, and BGE's, financial results.
Nuclear Operations
The two units at Calvert Cliffs use the cheapest fuel. As a result, the costs
of replacement energy associated with outages at these units can be
significant. If any unplanned outage were to occur during the summer or winter
when demand was at a high level, the replacement power costs could have a
material adverse impact on our financial results.
Generation
Megawatt- Capacity
Hours (MWH) Factor
----------- --------
1999....................................................... 13,309,306 91%
1998....................................................... 13,326,633 91
1997....................................................... 13,133,441 90
1996....................................................... 12,069,937 82
1995....................................................... 12,940,496 88
In 1998, we filed an application with the NRC for 20-year license renewals for
both units at Calvert Cliffs. The current operating licenses expire in 2014 for
Unit 1 and in 2016 for Unit 2. This is discussed further in Item 7.
Management's Discussion and Analysis -- Current Issues.
5
Electric Load Management, Energy and Capacity Purchases
We have implemented various programs for use when system operating conditions
require a reduction in load. We refer to these programs as active load
management programs. These programs include:
. customer-owned generation and curtailable service for large commercial and
industrial customers,
. air conditioning control which is available to residential and commercial
customers, and
. residential water heater control.
We have generally activated these programs on peak summer days. The potential
reduction in the summer 2000 peak load from active load management is
approximately 440 megawatts (MW).
We have an agreement with Pennsylvania Power & Light Company (PP&L) to purchase
electricity and capacity (availability to supply electricity) from June 1, 1990
through May 31, 2001. This agreement, which has been accepted by the FERC, is
designed to help maintain adequate reserve margins and provide flexibility in
meeting capacity obligations. The PP&L agreement:
. entitles us to 5.94% of the electricity output, and net capacity (currently
130 MW), of PP&L's nuclear Susquehanna Steam Electric Station from October
1, 1991 to May 31, 2001, and
. enables us to treat a portion of PP&L's capacity as our capacity for
purposes of satisfying our installed capacity requirements as a member of
the PJM (Pennsylvania-New Jersey-Maryland) Interconnection energy market.
The PJM is the operator of a regional transmission organization (RTO) as
well as a regional power pool with members that include many wholesale
market participants, as well as BGE and six other utility companies.
We are not acquiring an ownership interest in any of PP&L's generating units.
PP&L will continue to control, manage, operate, and maintain that station and
all other PP&L-owned generating facilities.
Our firm capacity purchases at December 31, 1999 represented:
. 150 MW of rated capacity of Bethlehem Steel Corporation's Sparrows Point
complex,
. 57 MW of rated capacity of the Baltimore Refuse Energy Systems Company, and
. 130 MW of Susquehanna capacity from PP&L.
On or about July 1, 2000, BGE will transfer certain purchase power contracts to
our nonregulated subsidiaries.
Our generation and transmission facilities are connected to those of
neighboring utility systems to form the PJM. Under the PJM agreement, we use
the interconnected facilities for substantial energy interchange and capacity
transactions as well as emergency assistance. In addition, sometimes we enter
into short-term capacity transactions to meet PJM obligations.
On December 20, 1999, the Federal Energy Regulatory Commission (FERC) issued
Order 2000, amending its regulations under the Federal Power Act to advance the
formation of RTOs. The regulations require that each public utility that owns,
operates, or controls facilities for the transmission of electric energy in
interstate commerce make certain filings with respect to forming and
participating in an RTO. FERC also identified the minimum characteristics and
functions that a transmission entity must satisfy in order to be considered an
RTO.
According to the Order, a public utility that is a member of an existing
transmission entity that has been approved by FERC as in conformance with the
Independent System Operator (ISO) principles set forth in the FERC Order No.
888 (such as BGE, through its membership in the PJM) must make a filing no
later than January 15, 2001. That filing must explain the extent to which the
transmission entity in which it participates meets the minimum characteristics
and functions of an RTO, and either propose to modify the existing institution
to the extent necessary to become an RTO, or explain the efforts, obstacles and
plans with respect to conforming to these characteristics and functions.
As a member of the PJM, an existing ISO, BGE does not expect to be
significantly impacted by the Order. However, the full impact has not yet been
determined.
6
Fuel for Electric Generation
Our electric generation by type of fuel and the cost of each fuel in the five-
year period 1995-1999 is shown below. No earlier than July 1, 2000, the
electric generation fuel contracts as discussed below will be included with the
generation assets transferred to nonregulated subsidiaries of Constellation
Energy.
Average Cost of Fuel Consumed
Generation by Fuel Type ((cent) per million BTU)
---------------------------- ----------------------------------
1999 1998 1997 1996 1995 1999 1998 1997 1996 1995
---- ---- ---- ---- ---- ------ ------ ------ ------ ------
Nuclear(a)....... 43% 44% 44% 40% 43% 45.07 45.45 46.51 47.29 47.22
Coal............. 57 58 59 58 57 140.09 137.17 140.52 143.80 148.64
Oil.............. 4 3 1 1 1 226.95 243.18 283.61 313.33 267.59
Hydro & Gas...... 3 4 3 4 3 -- -- -- -- --
--- --- --- --- ---
107 109 107 103 104
Net Interchange
Sales........... (7) (9) (7) (3) (4)
--- --- --- --- ---
100% 100% 100% 100% 100%
=== === === === ===
(a) Nuclear fuel costs include disposal costs associated with long-term off-
site spent fuel storage and shipping, which is currently set by law at one mill
per kilowatt-hour of nuclear generation (approximately 10 cents per million
Btu), and contributions to a fund for decommissioning and decontaminating the
Department of Energy's uranium enrichment facilities. We discuss this further
below.
Nuclear
The supply of fuel for nuclear generating stations includes the:
. purchase of uranium concentrates,
. conversion to uranium hexafluoride,
. enrichment of uranium hexafluoride, and
. fabrication of nuclear fuel assemblies.
Information is shown below about fuel requirements for Calvert Cliffs Units 1
and 2:
Uranium
We have, either in inventory or
Concentrates:
under contract, sufficient quantities of uranium to meet 70% to 80%
of our requirements through 2004.
Conversion:
We have contractual commitments providing for the conversion of
uranium concentrates into uranium hexafluoride which will meet
approximately 75% of our requirements through 2004.
Enrichment:
We have a contract with the U.S. Enrichment Corporation that
provides approximately 75% of our enrichment requirements, which
will decline to approximately 50% by 2004.
Fuel We have contracted for the fabrication of fuel assemblies for
reloads required through 2013.
Assembly
Fabrication:
Any remaining nuclear fuel requirements will be purchased on the spot market.
The nuclear fuel market is very competitive and we do not anticipate any
problem in meeting our requirements beyond these periods. We discuss our
expenditures for nuclear fuel in Item 7. Management's Discussion and Analysis
- -- Capital Resources.
Storage of Spent Nuclear Fuel -- Federal Facilities: Under the Nuclear Waste
Policy Act of 1982 (the 1982 Act), we contracted with the United States
Department of Energy (DOE) to place spent fuel discharged from Calvert Cliffs
into a federal repository. Such facilities do not currently exist, and,
consequently, must be developed and licensed. We cannot predict when such
facilities will be available. However, the 1982 Act required the DOE to accept
spent fuel starting in 1998. We cannot predict what the ultimate cost to
dispose of the spent fuel will be. However, the 1982 Act assesses a one mill
per kilowatt-hour fee on nuclear electricity generated and sold. We estimate
this fee to be approximately $13 million for Calvert Cliffs each year based on
expected operating levels. Fees are deposited into the Nuclear Waste Fund.
In December 1996, the DOE notified us and other nuclear utilities that it would
not be able to meet the 1998 deadline for accepting spent fuel. We participated
in litigation, along with 36 other utilities, against the DOE. The litigation,
titled Northern States Power, et al. v. DOE, was filed January 31, 1997 in the
United States Court of
7
Appeals for the D.C. Circuit. That court has original jurisdiction under the
1982 Act. The utilities asked the court to allow them to pay fees that formerly
went directly to the DOE for deposit into the Nuclear Waste Fund, into escrow
instead. Among other remedies, the utilities also asked the court to force the
DOE to submit a program with milestones illustrating how it would meet the
deadline for accepting spent nuclear fuel, and a monthly report to allow the
utilities to monitor the DOE's progress.
On November 14, 1997, the court ordered the DOE to comply with its
unconditional obligation under the 1982 Act to dispose of spent fuel. The court
did not grant the utilities the remedies sought, stating that adequate
contractual and statutory remedies already existed. The DOE and several
utilities filed separate motions for reconsideration with the court, which were
denied. The DOE's request for review to the U.S. Supreme Court was also denied.
We are currently evaluating our contractual options in light of the court's
decision. We cannot currently estimate the total amount of the costs we will
incur as a result of the DOE's failure to meet the 1998 deadline.
Storage of Spent Nuclear Fuel -- BGE Facility: We have a license from the NRC
to operate an on-site independent spent fuel storage facility. We have storage
capacity at Calvert Cliffs that will accommodate spent fuel from operations
through the year 2006. In addition, we can expand our temporary storage
capacity to meet future requirements until federal storage is available.
Costs for Decommissioning Uranium Enrichment Facilities: The Energy Policy Act
of 1992 (the 1992 Act) contains provisions requiring domestic nuclear utilities
to contribute to a fund for decommissioning and decontaminating the DOE's
uranium enrichment facilities. These contributions are generally payable over a
fifteen-year period with escalation for inflation and are based upon the amount
of uranium enriched by the DOE for each utility through 1992. The 1992 Act
provides that these costs are recoverable through utility service rates.
Information about the cost of decommissioning is discussed in Note 1 to
Consolidated Financial Statements -- Fuel And Purchased Energy Costs.
Restructuring Order Impacts: When BGE transfers its nuclear generation assets
to a nonregulated subsidiary of Constellation Energy, that subsidiary will also
become liable for the decommissioning costs of Calvert Cliffs and costs
associated with the on-site independent spent fuel storage facilities. BGE will
transfer the trust fund established to decommission Calvert Cliffs and the spent
fuel storage facilities, as well as future amounts collected from customers for
decommissioning under the Restructuring Order, to the nonregulated subsidiary.
In addition, the responsibility for quarterly fees to the DOE for the future
disposal of spent nuclear fuel and the liability for decommissioning uranium
enrichment facilities will also be transferred to a nonregulated subsidiary of
Constellation Energy. The cost for decommissioning uranium enrichment facilities
will be recovered through BGE's service rates.
Coal
We get most of our coal under supply contracts with mining operators, and we
get the rest through spot purchases. We believe that we will be able to renew
supply contracts as they expire or enter into similar contracts with other coal
suppliers. Our coal-burning facilities have the following requirements:
Annual Coal
Requirement
(tons)
-----------
Brandon Shores (a)
Units 1 and 2 (combined)........................................... 3,500,000
Crane (b)
Units 1 and 2 (combined)........................................... 800,000
Wagner (c)
Units 2 and 3 (combined)........................................... 1,000,000
Special Coal Restrictions:
(a) Sulfur content less than 0.8%
(b) Low ash melting temperature
(c) Sulfur content no more than 1%
Coal deliveries to our coal burning facilities are made by rail and barge. The
coal we use is produced from mines located in central and northern Appalachia.
We have a 20.99% undivided interest in the Keystone coal-fired generating plant
and a 10.56% undivided interest in the Conemaugh coal-fired generating plant.
Both of these plants are located in Pennsylvania. The majority of the annual
coal requirements for the Keystone plant are under contract from Rochester and
Pittsburgh Coal Company. The remainder of the Keystone plant and all of the
Conemaugh plant annual coal requirements are purchased from local suppliers on
the open market.
8
Oil
Under normal burn practices, our requirements for residual fuel oil amount to
approximately 1,500,000 to 2,000,000 barrels of low-sulfur oil per year.
Deliveries of residual fuel oil are made directly into our barges from the
suppliers' Baltimore Harbor marine terminal for distribution to the various
generating plant locations. We have contacts with various suppliers to purchase
oil at spot prices to meet our requirements.
Gas
We purchase firm natural gas transportation entitlements, as necessary, to
provide ignition and banking at certain power plants. We purchase gas for
electric generation, as needed using interruptible transportation arrangements.
Some of our gas-fired units can use residual fuel oil instead of gas.
9
Electric Operating Statistics
Year Ended December 31,
--------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
Electric Output (In Thousands) --
MWH:
Generated........................ 32,684 32,372 31,289 30,107 30,548
Purchased (A).................... 3,232 3,496 4,737 7,560 7,403
-------- -------- -------- -------- --------
Subtotal........................ 35,916 35,868 36,026 37,667 37,951
Less Interchange and Other Sales.. 4,785 5,454 6,224 7,580 8,149
-------- -------- -------- -------- --------
Total Output.................... 31,131 30,414 29,802 30,087 29,802
======== ======== ======== ======== ========
Power Generated and Purchased at
Times of Peak Load (MW) (one
hour):
Generated by Company............. 5,366 5,565 5,472 4,789 5,162
Net Purchased (A)................ 1,017 480 508 1,166 785
-------- -------- -------- -------- --------
Peak Load (B)..................... 6,383 6,045 5,980 5,955 5,947
======== ======== ======== ======== ========
Annual System Load Factor (%)..... 55.7 57.4 56.9 57.5 57.2
Revenues (In Millions)
Residential...................... $ 975.2 $ 948.6 $ 932.5 $ 958.7 $ 955.2
Commercial....................... 939.3 912.9 892.6 861.3 879.4
Industrial....................... 204.3 211.5 211.9 207.6 208.5
-------- -------- -------- -------- --------
System Sales..................... 2,118.8 2,073.0 2,037.0 2,027.6 2,043.1
Interchange and Other Sales...... 112.1 120.8 132.7 155.9 167.0
Other............................ 29.1 27.0 22.3 25.5 21.0
-------- -------- -------- -------- --------
Total........................... $2,260.0 $2,220.8 $2,192.0 $2,209.0 $2,231.1
======== ======== ======== ======== ========
Sales (In Thousands) -- MWH:
Residential...................... 11,349 10,965 10,806 11,243 10,966
Commercial....................... 13,565 13,219 12,718 12,591 12,635
Industrial....................... 4,350 4,583 4,575 4,596 4,591
-------- -------- -------- -------- --------
System Sales..................... 29,264 28,767 28,099 28,430 28,192
Interchange and Other Sales...... 4,785 5,454 6,224 7,580 8,149
-------- -------- -------- -------- --------
Total........................... 34,049 34,221 34,323 36,010 36,341
======== ======== ======== ======== ========
Customers (In Thousands)
Residential...................... 1,021.4 1,009.1 1,001.0 995.2 988.2
Commercial....................... 107.7 106.5 105.9 104.5 103.4
Industrial....................... 4.7 4.6 4.5 4.3 4.1
-------- -------- -------- -------- --------
Total........................... 1,133.8 1,120.2 1,111.4 1,104.0 1,095.7
======== ======== ======== ======== ========
Average Cost of Fuel Consumed
(cents per million BTU).......... 107.27 104.05 105.76 108.05 104.78
======== ======== ======== ======== ========
We achieved an all-time peak load of 6,383 megawatts on July 6, 1999.
(A) Includes purchases from Safe Harbor Water Power Corporation, a
hydroelectric company, of which we own two-thirds of the capital stock.
(B) We discuss active load management programs that may be activated at times
of peak load in Electric Load Management, Energy, and Capacity Purchases.
10
Gas Business
We describe our gas utility business in the sections below.
Gas Regulatory Matters and Competition
Currently, no regulation exists for the wholesale price of natural gas as a
commodity, and the regulation of interstate transmission at the federal level
has been reduced. All BGE industrial and commercial gas customers and,
effective November 1, 1999, all BGE residential customers have the option to
purchase gas from other suppliers. However, the delivery of gas continues to be
regulated by the Maryland PSC.
We buy all gas that we resell directly from various suppliers (rather than
pipeline companies) and arrange separately for transportation and storage.
Alternatively, we can transport gas for our customers. We also participate in
the interstate markets, by releasing pipeline capacity or bundling pipeline
capacity with gas for off-system sales.
We provide all of our customers with the option for delivery service across our
distribution system so that they may make direct purchase and transportation
arrangements with suppliers and pipelines. In addition to the delivery service,
we also provide these customers with meter readings, billing, emergency
response, regular maintenance, and balancing.
Approximately 55% of the gas on our distribution system is for customers using
delivery service. We charge all our delivery service customers fees to recover
the fixed costs for the transportation service we provide. These fees are the
same as the base rate charged for gas sales.
Delivery service customers may choose to purchase gas from several different
suppliers, including two of our diversified businesses. The basis of
competition for delivery service customers is primarily commodity price.
As part of our response to the increase in competition in the natural gas
business, earnings from off-system gas sales and capacity release revenues are
shared between shareholders and customers. Off-system gas sales are low-margin
direct sales of gas to wholesale suppliers of natural gas outside our service
territory. We make these sales as part of a program to balance our supply of,
and cost of, natural gas. In addition, we have a market based rates incentive
mechanism for gas we sell on our system. Under market based rates, our actual
cost of gas is compared to a market index (a measure of the market price of gas
in a given period). The difference between our actual cost and the market index
is shared equally between shareholders and customers.
On November 17, 1999, we applied for a $36.3 million annual increase in our gas
base rates. The Maryland PSC is currently reviewing our application, and is
expected to issue an order by June 2000.
Gas Operations
We distribute natural gas purchased directly from many producers and marketers.
We have transportation and storage agreements as shown below. These agreements
are on file with the FERC. The gas is transported to our city gates, under
various transportation agreements, by:
. Columbia Gas Transmission Corporation,
. CNG Transmission Corporation, and
. Transcontinental Gas Pipe Line Corporation.
To transport gas from the pipelines that supply gas to the pipelines that are
connected to our city gates as mentioned above, we also have transportation
capacity under contract with:
. Texas Eastern Transmission Corporation,
. Texas Gas,
. Columbia Gulf Transmission Company, and
. ANR Pipeline Company.
We have storage service agreements with:
. Columbia Gas Transmission Corporation,
. CNG Transmission Corporation, and
. ANR Pipeline Company.
11
Our current pipeline firm transportation entitlements to serve our firm loads
are 280,553 DTH per day during the winter period and 255,533 DTH per day during
the summer period. We use the firm transportation capacity to move gas from the
Gulf of Mexico, Louisiana, south central regions of Texas, and Canada to our
city gates. We can arrange short-term contracts or exchange agreements with
other gas companies in the event of short-term emergencies.
We have three market area storage contracts to manage weather sensitive gas
demand during the winter period. Our current maximum storage entitlements are
235,080 DTH per day. To supplement our gas supply at times of heavy winter
demands and to be available in temporary emergencies affecting gas supply, we
have:
. a liquefied natural gas facility for the liquefaction and storage of natural
gas with a total storage capacity of 1,000,000 DTH and a planned daily
capacity of 287,988 DTH, and
. a propane air facility with a mined cavern with a total storage capacity
equivalent to 500,000 DTH and a planned daily capacity of 85,000 DTH.
We have under contract sufficient volumes of propane for the operation of the
propane air facility and are capable of liquefying sufficient volumes of
natural gas during the summer months for operation of our liquefied natural gas
facility during winter emergencies.
12
Gas Operating Statistics
Year Ended December 31,
---------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
Gas Output (In Thousands)-- DTH:
Purchased............................. 49,082 47,972 62,988 70,260 70,391
LNG Withdrawn from Storage............ 463 268 484 904 815
Produced.............................. 486 46 541 784 528
------- ------- ------- ------- -------
Total Output........................ 50,031 48,286 64,013 71,948 71,734
Delivery service gas (A)............... 59,494 55,608 52,629 45,964 43,854
Off-system sales (B)................... 15,543 16,724 14,759 9,968 --
------- ------- ------- ------- -------
Total............................... 125,068 120,618 131,401 127,880 115,588
======= ======= ======= ======= =======
Peak Day Sendout (DTH)................. 727,800 658,359 765,011 708,966 706,287
======= ======= ======= ======= =======
Capability on Peak Day (DTH)........... 836,600 833,000 870,000 870,000 847,000
Revenues (In Millions)
Residential
Excluding Delivery Service........... $ 298.1 $ 279.2 $ 321.7 $ 320.1 $ 248.3
Delivery Service..................... 11.5 4.9 0.5 -- --
Commercial
Excluding Delivery Service........... 79.3 75.6 113.5 125.1 109.9
Delivery Service..................... 24.4 19.4 12.9 7.2 3.7
Industrial
Excluding Delivery Service........... 8.2 8.0 11.4 17.1 16.7
Delivery Service..................... 16.1 16.0 17.2 14.6 16.3
------- ------- ------- ------- -------
System sales.......................... 437.6 403.1 477.2 484.1 394.9
Off-system sales...................... 42.9 40.9 37.5 26.6 --
Other................................. 7.7 7.2 6.9 6.6 5.6
------- ------- ------- ------- -------
Total............................... $ 488.2 $ 451.2 $ 521.6 $ 517.3 $ 400.5
======= ======= ======= ======= =======
Sales (In Thousands) -- DTH:
Residential
Excluding Delivery Service........... 34,272 33,595 39,958 43,784 40,211
Delivery Service..................... 4,468 1,890 205 -- --
Commercial
Excluding Delivery Service........... 11,733 11,775 18,435 22,698 23,612
Delivery Service..................... 20,288 16,633 12,964 8,755 6,982
Industrial
Excluding Delivery Service........... 1,367 1,412 2,016 2,887 4,102
Delivery Service..................... 33,118 34,798 38,791 36,201 35,925
------- ------- ------- ------- -------
System sales.......................... 105,246 100,103 112,369 114,325 110,832
Off-system sales...................... 15,543 16,724 14,759 9,968 --
------- ------- ------- ------- -------
Total............................... 120,789 116,827 127,128 124,293 110,832
======= ======= ======= ======= =======
Customers (In Thousands)
Residential........................... 543.5 532.5 524.5 516.5 506.8
Commercial............................ 39.9 39.6 39.3 38.9 38.4
Industrial............................ 1.3 1.3 1.3 1.3 1.3
------- ------- ------- ------- -------
Total............................... 584.7 573.4 565.1 556.7 546.5
======= ======= ======= ======= =======
For the periods presented, we achieved an all-time peak day sendout of 765,011
DTH on January 18, 1997. Subsequently, on January 17, 2000, we achieved a new
all-time peak day sendout of 795,700 DTH.
(A) Delivery service gas is gas purchased by customers directly from suppliers
for which we receive a fee for transportation through our system.
(B) Off-system sales are low-margin sales to wholesale suppliers of natural gas
outside our service territory (beginning first quarter 1996).
We discuss these programs further in the Gas Regulatory Matters and Competition
section.
13
Franchises
We have nonexclusive electric and gas franchises to use streets and other
highways that are adequate and sufficient to permit us to engage in our present
business. All such franchises, other than the gas franchises in Manchester,
Hampstead, Perryville, Sykesville, Havre de Grace, Mt. Airy, and Montgomery and
Frederick Counties, are unlimited as to time. The gas franchises for these
jurisdictions expire at various times from 2015 to 2087, except for Havre de
Grace which has the right, exercisable at twenty-year intervals from 1907, to
purchase all of our gas properties in that municipality. Conditions of the
franchises are satisfactory.
- --------------------------------------------------------------------------------
Diversified Businesses
Our diversified businesses engage primarily in energy services that focus
mostly on power marketing and merchant generation in North America. We also
have other diversified businesses that engage in financial investments and
develop, own, and manage real estate and senior-living facilities. Our
diversified businesses are presented below. We present operating segment
information in Note 2 to Consolidated Financial Statements.
In anticipation of the deregulation of Maryland's electric industry on July 1,
2000, we are realigning our organization. We are combining the existing power
marketing functions of Constellation Power Source with domestic plant
operations, development, and generation functions of Constellation Power and no
earlier than July 1, 2000, certain portions of BGE's business. Together these
functions will form an integrated domestic merchant energy organization that
will strategically develop, own, and operate power plants, market power, and
manage risk in the wholesale energy market.
Energy Services
Our energy services businesses experience substantial competition from
utilities and their affiliates, independent power producers and other power
marketers. Competition is based on the price of the commodities, services
delivered, and the quality and reliability of services provided.
Power Marketing
Constellation Power Source, Inc. (CPS), formed in 1997, provides power
marketing and risk management services to wholesale customers in North America
through the purchase and sale of electric power, other energy commodities and
related derivative contracts. CPS has an exclusive agreement with a subsidiary
of Goldman, Sachs and Co. to serve as an advisory for power marketing and
related risk management services. CPS purchases electric power by several
methods, including:
. from regional power pools, or
. through bilateral agreements with third parties.
Upon the transfer of BGE's fossil and nuclear plants to nonregulated
subsidiaries of Constellation Energy, which is expected to occur no earlier
than July 1, 2000, CPS will also manage the output of those plants (combined
capacity of approximately 6,200 megawatts) including sales of power to BGE that
will allow BGE to meet its standard offer service obligations under the
Maryland PSC's Restructuring Order.
CPS sells the electric power it purchases to customers such as utilities,
cooperatives and other resellers, structuring the transactions to meet each
customer's diverse needs.
CPS supplies standard offer electric supply service to several distribution
utilities in New England and is currently focusing efforts in high-energy
growth areas such as Texas and the mid-west. CPS sold 69,787,986 megawatt hours
of electric power in 1999 and 27,608,080 megawatt hours in 1998, its first full
year of operation.
CPS engages in trading activities in order to manage its portfolio of energy
purchases and sales to customers through structured transactions. These
activities involve the use of a variety of instruments, including:
. forward contracts (which commit it to purchase or sell energy commodities in
the future),
. swap agreements (which require payments to or from counterparties based upon
the differential between two prices for a predetermined contractual
(notional) quantity),
. options contracts (which convey the right to buy or sell a commodity,
financial instrument or index at a predetermined price), and
. futures contracts (which are exchange traded standardized commitments to
purchase or sell a commodity or financial instrument, or make a cash
settlement, at a specified price and future date).
14
Active portfolio management allows CPS to manage and hedge its fixed price
purchase and sale commitments; provide fixed-price commitments to customers and
suppliers; reduce exposure to the volatility of cash market prices; and hedge
fuel requirements at third-party power generation facilities.
CPS' trading activities expose it to market and credit risk. CPS monitors and
controls its risk exposure through separate but complementary financial,
operational, and credit reporting systems. Our Board of Directors establishes
parameters for the risks that CPS undertakes, which management monitors. In
addition, CPS maintains a segregation of duties, with credit review and risk
monitoring functions performed by groups that are independent from revenue
producing groups.
CPS is exposed to the risk that fluctuating market prices may adversely affect
its, or our, financial results. For additional information on market risk, see
Item 7. Management's Discussion And Analysis--Market Risk.
CPS' credit risk is the loss that may result from a counterparty's non-
performance. CPS uses credit policies to control its credit risk, including
utilizing an established credit approval process, monitoring counterparty
limits, employing credit mitigation measures such as margin, collateral or
prepayment arrangements, and using master netting agreements. However, due to
the possibility of extreme short term volatility in the prices of electricity
commodities and derivatives, the market value of contractual positions with
individual counterparties could exceed established credit limits or collateral
provided by those counterparties. If such a counterparty were then to fail to
perform its obligations under its contract (for example fail to deliver the
electricity CPS had contracted for), CPS could sustain a loss that could have a
material impact on its, or our, financial results.
CPS is affected by weather conditions in the different regions of North
America. Typically, demand for electricity, and its price, is higher in the
summer and the winter, when weather is more extreme. However, not all regions
of North America typically experience extreme weather conditions at the same
time. CPS uses forward contracts, swap agreements, options contracts, and
futures contracts to monitor its risk on a regional basis and to manage its
exposure to changing weather conditions and the underlying impact on customer
usage and power availability regionally.
In March 1998, we formed Orion Power Holdings, Inc. (Orion) with Goldman, Sachs
Capital Partners II L.P., an affiliate of Goldman, Sachs & Co., to acquire
electric generating plants in the United States and Canada. Our energy services
businesses own a minority interest in Orion. To date, our energy services
businesses have funded $104 million in equity and have a commitment to
contribute an additional $121 million to Orion. Orion has entered into
strategic relationships with Constellation Power Source and Constellation
Operating Services, Inc., a subsidiary of Constellation Power, Inc.
Constellation Power Source has the exclusive right to provide power marketing
and risk management services to Orion. Currently, Constellation Operating
Services has the exclusive right to provide operating and maintenance services
to Orion's plants.
Power Projects
Constellation Power, Inc. and Subsidiaries primarily develop, own, and operate
domestic and international power projects and manage power projects owned by
Constellation Investments, Inc. Our power projects business has operated in the
nonregulated power markets since 1985.
Domestic Projects
Our power projects business holds up to a 50% ownership interest in 28 domestic
energy projects in operation or under construction that account for $531.3
million of assets. These projects consist of electric generation, fuel
processing, or fuel handling and are either qualifying facilities under the
Public Utility Regulatory Policies Act of 1978 or otherwise exempt from the
Public Utility Holding Company Act of 1935. Projects totaling approximately
$55.7 million of assets are located in the East and $475.6 million of assets
are located in the West. The electric generation projects, with a combined
capacity of 731.5 megawatts, are either biomass, coal, geothermal,
hydroelectric, solar, waste coal or municipal solid waste. Some are also
cogeneration plants. Each plant sells its output to its local utility.
Our power projects business has 17 power project sites under active
development. Construction of 800 megawatts of peaking capacity in the Mid-
Atlantic/Mid-West region is planned by the summer of 2001 and an additional
4,300 megawatts of peaking and combined cycle production facilities are
15
scheduled for completion in 2002 and beyond throughout the United States. All
of these plants will be gas fired, with some having duel fuel capability. They
are expected to sell their output under tolling arrangements or in the market
to third parties.
Our power projects business also invests in international power projects. These
are discussed later in this section.
California Power Purchase Agreements
Our Domestic-West power projects include $301.8 million invested in 14 projects
that sell electricity in California under power purchase agreements called
"Interim Standard Offer No. 4" agreements.
Under these agreements, the electricity rates change from fixed rates to
variable rates beginning in 1996 and continuing through 2000. The projects that
already have had rate changes have lower revenues under variable rates than
they did under fixed rates. When the remaining projects transition to variable
rates, we expect their revenues also to be lower than they are under fixed
rates. We discuss these projects further in Note 10 to Consolidated Financial
Statements.
Our power projects business continues to pursue alternatives for some of these
projects including:
. repowering the projects to reduce operating costs,
. changing fuels to reduce operating costs,
. renegotiating the power purchase agreements to improve the terms,
. restructuring financing to improve existing terms, and
. selling its ownership interests in the projects.
Constellation Operating Services, Inc.
Constellation Power, Inc., through its subsidiary, Constellation Operating
Services, Inc., provides operation and maintenance services, including testing
and start up, to owners of electric generating plants, including plants owned
by our power projects business and Orion Power Holdings, Inc.
International Projects
Constellation Power's business in Latin America:
. develops, acquires, owns, and operates power generation projects, and
. acquires and owns distribution systems.
At December 31, 1999, Constellation Power had invested about $254.1 million in
10 power projects in Latin America. These investments include:
. the purchase of a 51% interest in a Panamanian electric distribution company
for approximately $90 million in 1998 by an investment group in which
subsidiaries of Constellation Power hold an 80% interest, and
. approximately $98 million for the purchase of existing electric generation
facilities and the construction of an electric generation facility in
Guatemala.
In December 1999, we decided to exit the international portion of our power
projects business as part of our strategy to improve our competitive position.
We expect to complete our exit strategy by the end of 2000. We discuss this
further in Item 7. Management's Discussion And Analysis--Power Projects
section.
Energy Products and Services
Constellation Energy Source, Inc. offers energy products and services designed
primarily to provide solutions to the energy needs of mid-sized commercial and
industrial customers. These energy products and services include:
. wholesale gas marketing services,
. a full range of heating, ventilation, air conditioning, and energy services,
. energy consulting and power-quality services,
. services to enhance the reliability of individual electric supply systems,
and
. customized financing alternatives.
Constellation Nuclear Group
Constellation Nuclear Group, LLC offers nuclear consulting services to nuclear
power plant owners and operators. Upon transfer by BGE no earlier than July 1,
2000, it will also own Calvert Cliffs.
Home Products, Commercial Building Systems, and Gas Retail Marketing
BGE Home Products & Services, Inc. and Subsidiaries offer services to
residential and small commercial customers. These services include:
. the sale and service of electric and gas appliances,
. home improvements,
. the sale and service of heating, air conditioning, plumbing, electrical, and
indoor air quality systems, and
. natural gas retail marketing.
16
ComfortLink
ComfortLink provides cooling services using a central chilled water
distribution system to commercial customers in Baltimore.
Other Diversified Businesses
Financial Investments
Constellation Investments, Inc. engages in financial investments, including:
. marketable securities, and
. financial limited partnerships.
Real Estate and Senior-Living Facilities
Constellation Real Estate Group, Inc. develops, owns, and manages real estate
and senior-living facilities, including:
. land under development in the Baltimore-Washington corridor,
. a mixed-use planned-unit development,
. senior-living facilities, and
. an equity interest in Corporate Office Properties Trust (COPT), a real
estate investment trust.
We describe the real estate business and the COPT transaction further in Item
7. Management's Discussion and Analysis and Note 3 to Consolidated Financial
Statements.
We consider market demand, interest rates, the availability of financing, and
the strength of the economy in general when making decisions about our real
estate projects. If we were to decide to sell our real estate projects, we
could have write-downs. In addition, if we were to sell our real estate
projects in the current market, we would have losses which could be material,
although the amount of the losses is hard to predict. Depending on market
conditions, we could also have material losses on any future sales.
- --------------------------------------------------------------------------------
Consolidated Capital Requirements
Our business requires a great deal of capital. Our total capital requirements
for 1999 were $1,245 million. Of this amount, $778 million was used in our
utility operations and $467 million was used in our diversified businesses. We
estimate our total capital requirements for the years 2000 through 2002 to be:
. $1,920 million in 2000,
. $2,117 million in 2001, and
. $1,356 million in 2002.
We continuously review and change our capital expenditure programs, so actual
expenditures may vary from the estimates for the years 2000 through 2002.
We discuss our capital requirements further in Item 7. Management's Discussion
and Analysis-- Capital Resources.
- --------------------------------------------------------------------------------
Environmental Matters
We are subject to regulation by various federal, state, and local authorities
with regard to:
. air quality,
. water quality,
. waste disposal, and
. other environmental matters.
Some of the regulations require substantial expenditures for additions to our
utility plant and the use of more expensive low-sulfur fuels. We cannot
precisely estimate the total effect on our facilities and operations of current
and future environmental regulations and standards. However, our capital
expenditures (excluding allowance for funds used during construction) were
approximately $85 million during the five-year period 1995-1999 to comply with
existing environmental standards and regulations, and we estimate that the
future capital expenditures (excluding allowance for funds used during
construction) necessary to comply with environmental standards and regulations
will be approximately:
. $66 million in 2000,
. $53 million in 2001, and
. $ 4 million in 2002.
Clean Air
The Federal Clean Air Act (the Act) regulates health and welfare standards for
concentrations of air
17
pollutants. Under the Act, the State of Maryland must set limits on all major
sources of these pollutants in the State so that the standards are not
exceeded. We have certain limits on our generating units that put us in
compliance with existing air quality regulations, as follows:
. All of our generating units, except Crane Units 1 and 2, are limited to
burning fuel (coal or oil) with a sulfur content of 1% or below.
. The Crane Units 1 and 2 are limited to 3.5 pounds of sulfur dioxide per
million Btu, which is equivalent to a coal sulfur content of approximately
2.4%.
. All units are limited to releasing particulate matter at or below 0.02
grains per standard cubic foot of exhaust gas for oil fired units and 0.03
grains per standard cubic foot for coal-fired units.
. Brandon Shores, a newer plant, is subject to more stringent standards for
sulfur dioxides (1.2 pounds per million Btu), and nitrogen oxides (0.7
pounds per million Btu).
The Clean Air Act of 1990 contains two titles designed to reduce emissions of
sulfur dioxides and nitrogen oxides (NOx) from electric generating stations --
Title IV and Title I.
Title IV addresses emissions of sulfur dioxides. Compliance is required in two
separate phases:
. Phase I became effective January 1, 1995. We met the requirements of this
phase by installing flue gas desulfurization systems, switching fuels, and
retiring some units.
. Phase II became effective January 1, 2000. We met the compliance
requirements through a combination of switching fuels and allowance trading.
Title I addresses emissions of NOx. The Maryland Department of the Environment
(MDE) has issued regulations, effective October 18, 1999, which require up to
65% NOx emissions reductions by May 1, 2000. We have entered into a settlement
agreement with the MDE since we cannot meet this deadline. Under the terms of
the settlement agreement, BGE will install emissions reduction equipment at two
sites by May 2002. In the meantime, we are taking steps to control NOx
emissions at our generating plants.
The Environmental Protection Agency (EPA) issued a final rule in September 1998
that requires up to 85% NOx emissions reduction by 22 states including Maryland
and Pennsylvania. Maryland will meet the requirements of the rule by 2003.
Based on the MDE and EPA regulations, we currently estimate that the additional
controls needed at our generating plants to meet the 65% NOx emission reduction
requirements will cost approximately $135 million. Through December 31, 1999,
we have spent approximately $51 million to meet the MDE's 65% reduction
requirements. We estimate the additional cost for the EPA's 85% reduction
requirements to be approximately $35 million by 2003.
In July 1997, the EPA published new National Ambient Air Quality Standards for
very fine particulates and revised standards for ozone attainment. In 1999,
these new standards were successfully challenged in court. The EPA is expected
to appeal the 1999 court rulings to the Supreme Court. While these standards
may require increased controls at our fossil generating plants in the future,
implementation will be delayed for several years. We cannot estimate the cost
of these increased controls at this time because the states, including Maryland
and Pennsylvania, still need to determine what reductions in pollutants will be
necessary to meet the federal standards.
Water
The MDE regulates the discharge of waste materials into the waters of the State
of Maryland under the National Pollutant Discharge Elimination System permit
program. This program was established as part of the Federal Clean Water Act.
At the present time, we have the required permits under the program for all of
our steam electric generating plants.
The MDE water quality regulations require us to, among other things, define
procedures to determine compliance with State water quality standards. These
procedures require extensive studies involving sampling and monitoring of the
waters around affected generating plants. The State of Maryland may require
changes in plant operations. We continually perform studies to determine
whether any changes will be necessary to comply with these regulations.
Waste Disposal
The EPA has regulations for implementing the portions of the Resource
Conservation and Recovery
18
Act that deal with the management of hazardous wastes. These regulations, and
the Hazardous and Solid Waste Amendments of 1984, identify certain spent
materials as hazardous wastes and establish standards and permit requirements
for those who generate, transport, store, or dispose of such wastes. The State
of Maryland has adopted regulations governing the management of hazardous
wastes that are similar to the EPA regulations. We have procedures in place to
comply with all applicable EPA and State of Maryland regulations governing the
management of hazardous wastes. Some high volume utility wastes, such as coal
fly ash and bottom ash, are exempt from these regulations. We mostly use our
coal fly ash and bottom ash as structural fill material in a manner approved by
the State of Maryland. Beginning in 1999, we provided some of our coal fly ash
to a processing facility that is designed to recycle it into a new material
that can be sold to the construction industry. We sell the remainder of the
coal ash to the construction industry for a number of other approved uses.
The Federal Comprehensive Environmental Response, Compensation and Liability
Act (Superfund statute) establishes liability for the cleanup of hazardous
wastes that contaminate the soil, water, or air. Those who generated,
transported, or deposited the waste at the contaminated site are each jointly
and severally liable for the cost of the cleanup, as are the current property
owner and the owner when the contamination occurred. Many states have
implemented laws similar to the Superfund statute.
The EPA and several state agencies have notified us that we are considered a
potentially responsible party with respect to the cleanup of certain
environmentally contaminated sites owned and operated by others. We cannot
estimate the cleanup costs for all of these sites.
In the early 1970s, we shipped an unknown number of scrapped transformers to
Metal Bank of America, a metal reclaimer in Philadelphia. Metal Bank's scrap
and storage yard has been found to be contaminated with oil containing high
levels of PCBs (hazardous chemicals frequently used as a fire-resistant coolant
in electrical equipment). On December 7, 1987, the EPA notified us and nine
other utilities that we are considered potentially responsible parties (PRPs)
with respect to the cleanup of the site. We, along with the other PRPs,
submitted a remedial investigation and feasibility study (RI/FS) to the EPA on
October 14, 1994, and the EPA issued its Record of Decision (ROD) on December
31, 1997. On June 26, 1998, the EPA ordered us, the other utility PRPs, and the
owner/ operator to implement the requirements of the ROD. The utility PRPs are
currently conducting the remedial design. Based on the ROD, our share of the
reasonably possible cleanup costs, estimated to be approximately 15.43%, could
be as much as $4.9 million higher than amounts we have recorded as a liability
on our Consolidated Balance Sheets.
On October 16, 1989, the EPA filed a complaint in the U.S. District Court for
the District of Maryland under the Superfund statute against us and seven other
defendants to recover past and future expenditures associated with the cleanup
of a site located at Kane and Lombard Streets in Baltimore. The State of
Maryland filed a similar complaint in the same case and court on February 12,
1990. The complaints alleged that we arranged for our coal fly ash to be
deposited on the site. The Court dismissed these complaints in November 1995.
The MDE began additional investigation on the remainder of the site for the
EPA, but never completed the investigation. We, along with three other
defendants, agreed to complete the RI/FS of groundwater contamination around
the site in a July 1993 consent order. The remedial action, if any, for the
remainder of the site will not be selected until these investigations are
concluded. Therefore, we cannot estimate the total amount, or our share of the
site cleanup costs.
From 1985 until 1989, we shipped waste oil and other materials to the
Industrial Solvents and Chemical Company in York County, Pennsylvania for
disposal. The Pennsylvania Department of Environmental Protection (PADEP)
subsequently investigated this site and found it to be heavily contaminated by
hazardous wastes. The PADEP notified us on August 15, 1990, that approximately
1,000 other entities and we are PRPs with respect to the cost of all remedial
activities to be conducted at the site. The PRPs have performed waste
characterization, removed and disposed of all tanks and drums of waste,
completed a RI/FS at the site, and installed public water lines. In 1998, PADEP
notified BGE and other PRPs of the final remedy and requested the installation
of additional public water lines. In 1999, the PRPs installed the water
19
lines and once PADEP approves the final report, we will have no further
obligations under the consent orders at the site.
In December 1995, the EPA notified us that we are one of approximately 650
parties that may have incurred liability under the Superfund statute for
shipments of hazardous wastes to a site in Denver, Colorado known as the RAMP
Industries site. We, through our disposal vendor, shipped a small amount of low
level radioactive waste to the site between 1989 and 1992. The site, which was
found to have been operated improperly, was closed in 1994. That same year, the
EPA began cleaning up the site by removing drums of radioactive and hazardous
mixed wastes. BGE accepted a settlement offer from EPA in August 1999, whereby
BGE will pay an immaterial amount to resolve its liability at this site. The
consent order will be finalized in 2000.
In September 1996, we received an information request from the EPA about the
Drumco Drum Dump Site, located in the Curtis Bay area of Maryland. This site
was the subject of an emergency drum removal action in 1991, due to a concern
about hazardous substances leaking from drums and posing a threat to human
health and the environment. According to EPA documents, approximately $2
million dollars were spent on the drum removal action. To our knowledge, no
long-term remediation is planned for this site. In addition, we understand that
the EPA has sent information requests to approximately 17 other parties. Our
records indicate that we sold empty drums to Drumco, Inc. from approximately
1983-1990. Although our potential liability cannot be estimated, we do not
expect such liability to be material based on our records showing that we sold
only empty storage drums to Drumco, Inc.
On July 12, 1999, the EPA notified us, along with nineteen other entities, that
we may be a potentially responsible party at the 68th Street Dump/Industrial
Enterprises Site, also known as the Robb Tyler Dump located in Baltimore,
Maryland. The EPA indicated that it is proceeding with plans to conduct a
remedial investigation and feasibility study. This site was proposed for
listing as a federal Superfund site in January 1999, but the listing has not
been finalized. Although our potential liability cannot be estimated, we do not
expect such liability to be material based on our records showing that we did
not send waste to the site.
In the early part of the century, predecessor gas companies (which were later
merged into BGE) manufactured coal gas for residential and industrial use. The
residue from this manufacturing process was coal tar, previously thought to be
harmless but now found to contain a number of chemicals designated by the EPA
as hazardous substances. We are coordinating an investigation of some of these
former manufacturing sites, and determining what, if any, remedial action may
be required by MDE.
In late December 1996, we signed a consent order with the MDE that requires us
to implement remedial action plans for contamination at and around the Spring
Gardens site, located in Baltimore, Maryland. We submitted the required
remedial action plans and they have been approved by the MDE. Based on the
remedial action plans, the costs we consider to be probable to remedy the
contamination are estimated to total $47 million in nominal dollars (including
inflation). We have recorded these costs as a liability on our Consolidated
Balance Sheets and have deferred these costs, net of accumulated amortization
and amounts we recovered from insurance companies, as a regulatory asset. We
discuss this further in Note 5 to Consolidated Financial Statements. Through
December 31, 1999, we have spent approximately $34 million for remediation at
this site.
We are also required by accounting rules to disclose additional costs we
consider to be less likely than probable, but still "reasonably possible" of
being incurred at these sites. Because of the results of studies at these
sites, it is reasonably possible that these additional costs could exceed the
amount we recognized by approximately $14 million in nominal dollars ($7
million in current dollars, plus the impact of inflation at 3.1% over a period
of up to 36 years).
20
Employees
As of December 31, 1999, we employed about 9,000 people.
Item 2. Properties
We describe our electric and gas business properties separately below. We lease
several properties in our service area which are used for Constellation
Energy's headquarters, various offices, and services. We own our principal
plants and other important units that are located in Maryland including BGE's
principal headquarters building in downtown Baltimore. None of the properties
used in connection with the operation of our diversified businesses are
considered material to Constellation Energy.
Electric
Our principal electric properties are discussed below:
Generation (MWH)
Installed ---------------------
Generating Plant Location Capacity (MW) Primary Fuel 1999 1998
- ---------------- -------- ---------------------- ------------ ---------- ----------
(at December 31, 1999)
----------------------
Steam
Calvert Cliffs Calvert County, MD 1,685 Nuclear 13,309,306 13,326,633
Brandon Shores Anne Arundel County, MD 1,300 Coal 9,116,356 8,259,725
Herbert A. Wagner Anne Arundel County, MD 1,006 Coal/Oil/Gas 3,529,019 4,108,074
Charles P. Crane Baltimore County, MD 385 Coal 2,314,076 1,995,318
Gould Street Baltimore City, MD 104 Oil 112,327 137,560
Riverside Baltimore County, MD 78 Oil/Gas 42,039 46,322
Jointly Owned -- Steam
Keystone Armstrong and Indiana
Counties, PA 359(A) Coal 2,755,946 2,800,921
Conemaugh Indiana County, PA 181(A) Coal 1,335,411 1,387,837
Combustion Turbine
Perryman Harford County, MD 350 Oil/Gas 92,464 234,990
Notch Cliff Baltimore County, MD 128 Gas 28,954 29,644
Westport Baltimore City, MD 121 Gas 16,460 20,814
Riverside Baltimore County, MD 173 Oil/Gas 19,639 11,989
Philadelphia Road Baltimore City, MD 64 Oil 8,026 8,021
Charles P. Crane Baltimore County, MD 14 Oil 1,919 2,247
Herbert A. Wagner Anne Arundel County, MD 14 Oil 1,713 1,665
----- ---------- ----------
Totals 5,962 32,683,655 32,371,760
===== ========== ==========
- --------
(A) These totals reflect BGE's proportionate interest and entitlement to
capacity from Keystone and Conemaugh, which include 2 megawatts of diesel
capacity for Keystone and 1 megawatt of diesel capacity for Conemaugh. We
share the ownership of the properties for the Keystone and Conemaugh plants
in Pennsylvania. There are minor liens and easements on the Keystone and
Conemaugh properties, but these encumbrances do not materially interfere
with our use of the properties.
We also own two-thirds of the outstanding capital stock of Safe Harbor Water
Power Corporation, and are currently entitled to 277 megawatts of the rated
capacity of the Safe Harbor Hydroelectric Project. Safe Harbor is operated
under a Federal Energy Regulatory Commission license which expires in 2030.
21
Gas
We own the following propane air and liquefied natural gas facilities:
. a liquefied natural gas facility for the liquefication and storage of
natural gas with a total storage capacity of 1,000,000 DTH and a planned
daily capacity of 287,988 DTH, and
. a propane air facility with a mined cavern with a total storage capacity of
500,000 DTH and a planned daily capacity of 85,000 DTH.
We also have rights-of-way to maintain 26-inch natural gas mains across certain
Baltimore City owned property (principally parks) which expire in 2004. These
rights-of-way can be renewed during their last year for an additional period of
25 years based on a fair revaluation.
General
We have electric transmission and electric and gas distribution lines located:
. in public streets and highways pursuant to franchises, and
. on permanent rights-of-way secured for the most part by grants from owners
of the property and for a relatively small part by condemnation. Conditions
of the grants are satisfactory.
All of BGE's property, including the generation assets that will be transferred
as part of deregulation, is subject to the lien of BGE's mortgage securing its
mortgage bonds.
- --------------------------------------------------------------------------------
Item 3. Legal Proceedings
Asbestos
Since 1993, we have been involved in several actions concerning asbestos. The
actions are based upon the theory of "premises liability," alleging that we
knew of and exposed individuals to an asbestos hazard. The actions relate to
two types of claims.
The first type is direct claims by individuals exposed to asbestos. We
described these claims in a Report on Form 8-K filed August 20, 1993. We are
involved in these claims with approximately 70 other defendants. Approximately
530 individuals that were never employees of BGE each claim $6 million in
damages ($2 million compensatory and $4 million punitive). These claims were
filed in the Circuit Court for Baltimore City, Maryland in the summer of 1993.
We do not know the specific facts necessary to estimate our potential liability
for these claims. The specific facts we do not know include:
. the identity of our facilities at which the plaintiffs allegedly worked as
contractors,
. the names of the plaintiff's employers, and
. the date on which the exposure allegedly occurred.
To date, 23 of these cases were settled for amounts that were not significant.
The second type is claims by one manufacturer -- Pittsburgh Corning Corp. --
against us and approximately eight others, as third-party defendants. These
claims relate to approximately 1,500 individual plaintiffs and were filed in
the Circuit Court for Baltimore City, Maryland in the fall of 1993. To date,
about 140 cases have been resolved, all without any payment by BGE. We do not
know the specific facts necessary to estimate our potential liability for these
claims. The specific facts we do not know include:
. the identity of our facilities containing asbestos manufactured by the
manufacturer,
. the relationship (if any) of each of the individual plaintiffs to us,
. the settlement amounts for any individual plaintiffs who are shown to have
had a relationship to us, and
. the dates on which/places at which the exposure allegedly occurred.
Until the relevant facts for both types of claims are determined, we are unable
to estimate what our liability, if any, might be. Although insurance and hold
harmless agreements from contractors who employed the plaintiffs may cover a
portion of any awards in the actions, our potential liability could be
material.
22
Restructuring Order
Three separate appeals of the Restructuring Order issued by the Maryland PSC
have been filed. Two appeals, one by Trigen--Baltimore Energy Corporation and
the other by Sweetheart Cup Company were filed on December 9, 1999 in the
Circuit Court for Baltimore City. The third appeal was filed by the Mid-
Atlantic Power Supply Association (MAPSA) on December 10, 1999 in the Circuit
Court for Prince Georges County. MAPSA's appeal has been transferred to the
Circuit Court for Baltimore City.
Each appeal asks for a review of the Restructuring Order. MAPSA also seeks to
delay the implementation of the Restructuring Order until a decision on the
merits of the appeals by the court.
We believe that the appeals are without merit. However, if a delay in
implementation is granted or the appeals are successful, it could have a
material adverse effect on our and BGE's financial results.
See Item 1. Business -- Electric Regulatory Matters and Competition, Nuclear
Operations, Fuel for Electric Generation, Gas Regulatory Matters and
Competition, Environmental Matters, and Item 7. Management's Discussion and
Analysis and Note 10 to Consolidated Financial Statements for other information
about our legal or regulatory proceedings.
23
Item 4. Submission of Matters to Vote of Security Holders
Not applicable.
Executive Officers of the Registrant
BGE meets the conditions set forth in General Instruction I(1)(a) and (b) of
Form 10-K for a reduced disclosure format. Accordingly, the executive officers
of BGE are not presented below.
Executive Officers of Constellation Energy Group at the date of this report
are:
Other BGE Offices or
Positions
Name Age Present Office Held During Past Five Years
---- --- -------------- ---------------------------
Christian H. Poindexter 61 Chairman of the Board, President Chairman of the Board,
and Chief Executive Officer (A) President, and Chief
(Since formation of Executive Officer
Constellation Energy Group as
the holding company on April 30,
1999; since March 1, 1998 for
BGE)
Thomas F. Brady 50 Vice President Corporate Strategy Vice President, Corporate
and Development (Since April 30, Strategy and Development,
1999) Vice President, Retail
Services Vice President,
Customer Service and
Distribution
David A. Brune 59 Vice President Finance and General Counsel
Accounting, Chief Financial
Officer and Secretary (Since
formation of Constellation
Energy Group as the holding
company on April 30, 1999; since
February 25, 1997 for BGE)
Robert S. Fleishman 46 Vice President Corporate Affairs General Counsel
and General Counsel (Since Associate General Counsel--
formation of Constellation Regulatory
Energy Group as the holding
company on April 30, 1999; since
May 1, 1998 for BGE)
Linda D. Miller 49 Vice President Human Resources Vice President, Management
(Since formation of Services Manager, Employee
Constellation Energy Group as Services
the holding company on April 30,
1999; since May 1, 1998 for BGE)
- --------
(A) Chief Executive Officer, Director, and member of the Executive Committee.
Officers of Constellation Energy Group are elected by, and hold office at the
will of, the Board of Directors and do not serve a "term of office" as such.
There is no arrangement or understanding between any director or officer and
any other person pursuant to which the director or officer was selected.
24
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
Stock Trading
Constellation Energy's common stock is traded under the ticker symbol CEG. It
is listed on the New York, Chicago, and Pacific stock exchanges. It has
unlisted trading privileges on the Boston, Cincinnati, and Philadelphia
exchanges.
As of February 29, 2000, there were 65,226 common shareholders of record.
Dividend Policy
Constellation Energy pays dividends on its common stock after its Board of
Directors declares them. There is no limitation on Constellation Energy paying
common stock dividends.
BGE pays dividends on its common stock after its Board of Directors declares
them. There is no limitation on BGE paying common stock dividends unless:
. BGE elects to defer interest payments on the 7.16% Deferrable Interest
Subordinated Debentures due June 30, 2038, and any deferred interest remains
unpaid; or
. all dividends (and any redemption payments) due on BGE's preference stock
have not been paid.
Dividends have been paid on the common stock continuously since 1910. Future
dividends depend upon future earnings, our financial condition, and other
factors. Quarterly dividends were declared on the common stock during 1999 and
1998 in the amounts set forth below. Dividends paid prior to April 30, 1999
were on BGE common stock. As a result of the share exchange Constellation
Energy is the successor of BGE.
Common Stock Dividends and Price Ranges
1999 1998
--------------------- -----------------------
Price* Price*
------------ --------------
Dividend Dividend
Declared High Low Declared High Low
-------- ---- ---- -------- ---- ----
First Quarter............ $ .42 $31 1/8 $24 11/16 $ .41 $34 1/8 $29 3/4
Second Quarter........... .42 31 3/8 25 1/8 .42 32 15/16 29 1/4
Third Quarter............ .42 30 7/8 27 3/16 .42 33 5/8 29 5/16
Fourth Quarter........... .42 31 1/2 27 1/2 .42 35 1/4 30 1/8
----- -----
Total................... $1.68 $1.67
===== =====
- --------
* Based on New York Stock Exchange Composite Transactions as reported in THE
WALL STREET JOURNAL.
25
Item 6. Selected Financial Data
Constellation Energy Group, Inc. and Subsidiaries
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
(Dollar amounts in millions, except per share amounts)
Summary of Operations
Total Revenues $3,786.2 $3,358.1 $3,307.6 $3,153.2 $2,934.8
Operating Expenses 3,026.3 2,617.0 2,584.0 2,483.7 2,239.1
- --------------------------------------------------------------------------------------------------------------
Income From Operations 759.9 741.1 723.6 669.5 695.7
Other Income (Expense) 7.9 5.7 (52.8) 6.1 8.8
- --------------------------------------------------------------------------------------------------------------
Income Before Fixed Charges
and Income Taxes 767.8 746.8 670.8 675.6 704.5
Fixed Charges 255.0 262.7 258.7 237.0 237.6
- --------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 512.8 484.1 412.1 438.6 466.9
Income Taxes 186.4 178.2 158.0 166.3 169.5
- --------------------------------------------------------------------------------------------------------------
Income Before Extraordinary Item 326.4 305.9 254.1 272.3 297.4
Extraordinary Loss, Net of Income Taxes (66.3) - - - -
- --------------------------------------------------------------------------------------------------------------
Net Income $ 260.1 $ 305.9 $ 254.1 $ 272.3 $ 297.4
==============================================================================================================
Earnings Per Share of Common Stock
and Earnings Per Share of Common
Stock-- Assuming Dilution Before
Extraordinary Item $ 2.18 $ 2.06 $ 1.72 $ 1.85 $ 2.02
Extraordinary Loss, Net of Income Taxes (.44) - - - -
- --------------------------------------------------------------------------------------------------------------
Earnings Per Share of Common Stock and
Earnings Per Share of Common Stock--
Assuming Dilution $ 1.74 $ 2.06 $ 1.72 $ 1.85 $ 2.02
==============================================================================================================
Dividends Declared Per Share
of Common Stock $ 1.68 $ 1.67 $ 1.63 $ 1.59 $ 1.55
==============================================================================================================
Summary of Financial Condition
Total Assets $9,683.8 $9,275.0 $8,900.0 $8,678.2 $8,419.1
==============================================================================================================
Capitalization
Long-term debt $2,575.4 $3,128.1 $2,988.9 $2,758.8 $2,598.2
Preferred stock - - - - 59.2
Redeemable preference stock - - 90.0 134.5 242.0
Preference stock not subject to
mandatory redemption 190.0 190.0 210.0 210.0 210.0
Common shareholders' equity 2,993.0 2,981.5 2,870.4 2,854.7 2,811.2
- --------------------------------------------------------------------------------------------------------------
Total Capitalization $5,758.4 $6,299.6 $6,159.3 $5,958.0 $5,920.6
==============================================================================================================
Financial Statistics at Year End
Ratio of Earnings to Fixed Charges 2.87 2.60 2.35 2.44 2.52
Book Value Per Share of Common Stock $ 20.01 $ 19.98 $ 19.44 $ 19.33 $ 19.06
Number of Common Shareholders (In Thousands) 66.1 69.9 73.7 77.6 79.8
Certain prior-year amounts have been reclassified to conform with the current
year's presentation.
26
Baltimore Gas and Electric Company and Subsidiaries
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
(Dollar amounts in millions, except per share amounts)
Summary of Operations
Total Revenues $3,028.3 $3,358.1 $3,307.6 $3,153.2 $2,934.8
Operating Expenses 2,324.0 2,617.0 2,584.0 2,483.7 2,239.1
- --------------------------------------------------------------------------------------------------------------
Income From Operations 704.3 741.1 723.6 669.5 695.7
Other Income (Expense) 8.4 5.7 (52.8) 6.1 8.8
- --------------------------------------------------------------------------------------------------------------
Income Before Fixed Charges
and Income Taxes 712.7 746.8 670.8 675.6 704.5
Fixed Charges 205.9 240.9 230.0 198.5 197.0
- --------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 506.8 505.9 440.8 477.1 507.5
Income Taxes 178.4 178.2 158.0 166.3 169.5
- --------------------------------------------------------------------------------------------------------------
Income Before Extraordinary Item 328.4 327.7 282.8 310.8 338.0
Extraordinary Loss, Net of Income Taxes (66.3) - - - -
- --------------------------------------------------------------------------------------------------------------
Net Income 262.1 327.7 282.8 310.8 338.0
Preferred and Preference Stock Dividends 13.5 21.8 28.7 38.5 40.6
- --------------------------------------------------------------------------------------------------------------
Earnings Applicable to Common Stock $ 248.6 $ 305.9 $ 254.1 $ 272.3 $ 297.4
==============================================================================================================
Summary of Financial Condition
Total Assets $7,272.6 $9,275.0 $8,900.0 $8,678.2 $8,419.1
==============================================================================================================
Capitalization
Long-term debt $2,206.0 $3,128.1 $2,988.9 $2,758.8 $2,598.2
Preferred stock - - - - 59.2
Redeemable preference stock - - 90.0 134.5 242.0
Preference stock not subject to
mandatory redemption 190.0 190.0 210.0 210.0 210.0
Common shareholder's equity 2,355.4 2,981.5 2,870.4 2,854.7 2,811.2
- --------------------------------------------------------------------------------------------------------------
Total Capitalization $4,751.4 $6,299.6 $6,159.3 $5,958.0 $5,920.6
==============================================================================================================
Financial Statistics at Year End
Ratio of Earnings to Fixed Charges 3.45 2.94 2.78 3.10 3.21
Ratio of Earnings to Combined Fixed Charges and
Preferred and Preference Stock Dividends 3.14 2.60 2.35 2.44 2.52
Certain prior-year amounts have been reclassified to conform with the current
year's presentation.
27
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction
On April 30, 1999, Constellation Energy(R) Group, Inc. (Constellation Energy)
became the holding company for Baltimore Gas and Electric Company (BGE(R)) and
Constellation(R) Enterprises, Inc. Constellation Enterprises was previously
owned by BGE.
Constellation Energy's subsidiaries primarily include BGE and a group of energy
services businesses focused mostly on power marketing and merchant generation in
North America.
BGE is an electric and gas public utility company with a service territory that
covers the City of Baltimore and all or part of ten counties in Central
Maryland.
Our energy services businesses are:
. Constellation Power Source,(TM) Inc.--wholesale power marketing,
. Constellation Power,(TM) Inc. and Subsidiaries--power projects,
. Constellation Energy Source,(TM) Inc.--energy products and services,
. Constellation Nuclear Group,(TM) LLC--nuclear generation and
consulting services,
. BGE Home Products & Services,(TM) Inc. and Subsidiaries--home
products, commercial building systems, and residential and small
commercial gas retail marketing, and
. District Chilled Water General Partnership (ComfortLink(R)) --a
general partnership, in which BGE is a partner, that provides cooling
services for commercial customers in Baltimore.
Our other businesses are:
. Constellation Investments,(TM) Inc.--financial investments, and
. Constellation Real Estate Group,(TM) Inc.--real estate and
senior-living facilities.
This report is a combined report of Constellation Energy and BGE. The
consolidated financial statements of Constellation Energy include the accounts
of Constellation Energy, BGE and its subsidiaries, Constellation Enterprises,
Inc. and its subsidiaries, and Constellation Nuclear Group, LLC and its
subsidiaries. The consolidated financial statements of BGE include the accounts
of BGE, ComfortLink, and BGE Capital Trust I. As Constellation Enterprises and
its subsidiaries were subsidiaries of BGE prior to April 30, 1999, they are
included in the consolidated financial statements of BGE through that date.
References in this report to "we" and "our" are to Constellation Energy and its
subsidiaries, collectively. References in this report to the "utility business"
are to BGE.
In this discussion and analysis, we explain the general financial condition and
the results of operations for Constellation Energy and BGE including:
. what factors affect our business,
. what our earnings and costs were in 1999 and 1998,
. why earnings and costs changed from the year before,
. where our earnings came from,
. how all of this affects our overall financial condition,
. what our expenditures for capital projects were in 1997 through 1999,
and what we expect them to be in 2000 through 2002, and
. where we expect to get cash for future capital expenditures.
As you read this discussion and analysis, refer to our Consolidated Statements
of Income, which present the results of our operations for 1999, 1998, and 1997.
We analyze and explain the differences between periods by operating segment. Our
analysis is important in making decisions about your investments in
Constellation Energy and/or BGE.
Also, this discussion and analysis is based on the operation of the electric
generation portion of our utility business under current rate regulation. The
electric utility industry is undergoing rapid and substantial change. On April
8, 1999, Maryland enacted legislation authorizing customer choice and
competition among electric suppliers. On November 10, 1999, the Maryland Public
Service Commission (Maryland PSC) issued Order No. 75757 (Restructuring Order)
approving a Stipulation and Settlement Agreement between BGE and a majority of
the active parties involved in the electric restructuring proceeding that
resolves the major issues surrounding electric restructuring. See the "Electric
Restructuring" section and Note 4 for a detailed discussion of the Restructuring
Order.
Our electric business will change significantly beginning July 1, 2000 as we
enter into retail customer choice for electric generation and our generation
assets are transferred to nonregulated subsidiaries of Constellation Energy.
Accordingly, the results of operations and financial condition described in this
discussion and analysis are not necessarily indicative of future performance.
28
Strategy
The change toward customer choice will significantly impact our business going
forward. In response to this change, we regularly evaluate our strategies with
two goals in mind: to improve our competitive position, and to anticipate and
adapt to regulatory change. We are realigning our organization combining all of
our domestic merchant energy businesses. We will continue to invest in the
growth of these businesses, with the objective of providing new sources of
earnings. In addition, we might consider one or more of the following
strategies:
. the complete or partial separation of our transmission and
distribution functions,
. the construction, purchase or sale of generation assets,
. mergers or acquisitions of utility or non-utility businesses,
. spin-off or sale of one or more businesses, and
. growth of earnings from other nonregulated businesses.
We cannot predict whether any of the strategies described above may actually
occur, or what their effect on our financial results or competitive position
might be. However, with the shift toward customer choice, competition, and the
growth of our nonregulated subsidiaries, various factors will affect our
financial results in the future. These factors include, but are not limited to,
operating our currently regulated generation assets in a deregulated market
beginning July 1, 2000 without the benefit of a fuel rate adjustment clause, the
loss of revenues due to customers choosing alternate suppliers, higher
volatility of earnings and cash flows, and increased financial requirements of
our nonregulated subsidiaries. Please refer to the "Forward Looking Statements"
section for additional factors.
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Current Issues
Competition--Electric
Electric utilities are facing competition on various fronts, including:
. construction of generating