UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended MARCH 31, 2001
Commission
File Exact name of registrant IRS Employer
Number as specified in its charter Identification No.
------ ---------------------------------------- ------------------
1-12869 CONSTELLATION ENERGY GROUP, INC. 52-1964611
1-1910 BALTIMORE GAS AND ELECTRIC COMPANY 52-0280210
MARYLAND
--------------------------
(State of Incorporation)
250 W. PRATT STREET, BALTIMORE, MARYLAND 21201
---------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
410-234-5000
------------
(Registrants' telephone number, including area code)
NOT APPLICABLE
-----------------
(Former name, former address
and former fiscal year, if changed since last report)
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
---------- ------------
Common Stock, without par value 163,745,696 shares outstanding of Constellation
Energy Group, Inc. on April 30, 2001.
TABLE OF CONTENTS
Page
----
Part I -- Financial Information
Item 1 -- Financial Statements
Constellation Energy Group, Inc. and Subsidiaries
Consolidated Statements of Income...................................................... 3
Consolidated Statements of Comprehensive Income........................................ 3
Consolidated Balance Sheets............................................................ 4
Consolidated Statements of Cash Flows.................................................. 6
Baltimore Gas and Electric Company and Subsidiaries
Consolidated Statements of Income...................................................... 7
Consolidated Balance Sheets............................................................ 8
Consolidated Statements of Cash Flows.................................................. 10
Notes to Consolidated Financial Statements............................................. 11
Item 2 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations
Introduction........................................................................... 18
Strategy............................................................................... 19
Current Issues......................................................................... 20
Results of Operations.................................................................. 24
Financial Condition.................................................................... 31
Capital Resources...................................................................... 32
Other Matters.......................................................................... 34
Item 3 -- Quantitative and Qualitative Disclosures About Market Risk............................. 34
Part II -- Other Information
Item 1 -- Legal Proceedings...................................................................... 35
Item 5 -- Other Information...................................................................... 36
Item 6 -- Exhibits and Reports on Form 8-K....................................................... 37
Signature........................................................................................ 38
2
CONSTELLATION ENERGY GROUP, INC. AND SUBSIDIARIES
PART 1 - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Statements of Income (Unaudited)
Three Months Ended March 31,
2001 2000
- -------------------------------------------------------------------------------------------------------------------
(In millions, except per share amounts)
Revenues
Nonregulated revenues $320.6 $275.1
Regulated electric revenues 492.2 524.4
Regulated gas revenues 352.3 194.5
- -------------------------------------------------------------------------------------------------------------------
Total revenues 1,165.1 994.0
Expenses
Operating expenses 769.3 615.8
Depreciation and amortization 103.6 132.5
Taxes other than income taxes 58.4 61.1
- -------------------------------------------------------------------------------------------------------------------
Total expenses 931.3 809.4
- -------------------------------------------------------------------------------------------------------------------
Income from Operations 233.8 184.6
Other Income -- 3.2
- -------------------------------------------------------------------------------------------------------------------
Income Before Fixed Charges and Income Taxes 233.8 187.8
Fixed Charges
Interest expense (net) 62.7 60.4
BGE preference stock dividends 3.3 3.3
- -------------------------------------------------------------------------------------------------------------------
Total fixed charges 66.0 63.7
- -------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 167.8 124.1
Income Taxes
Current 75.9 61.2
Deferred (9.3) (7.1)
Investment tax credit adjustments (2.1) (2.1)
- -------------------------------------------------------------------------------------------------------------------
Total income taxes 64.5 52.0
- -------------------------------------------------------------------------------------------------------------------
Income Before Cumulative Effect of Change in Accounting Principle 103.3 72.1
Cumulative Effect of Change in Accounting Principle, Net of Income Taxes of $5.6 8.5 --
- -------------------------------------------------------------------------------------------------------------------
Net Income $111.8 $ 72.1
- -------------------------------------------------------------------------------------------------------------------
Earnings Applicable to Common Stock $111.8 $ 72.1
===================================================================================================================
Average Shares of Common Stock Outstanding 151.8 149.6
Earnings Per Common Share and Earnings Per Common Share -
Assuming Dilution Before Cumulative Effect of Change in Accounting Principle $0.68 $0.48
Cumulative Effect of Change in Accounting Principle 0.06 --
- -------------------------------------------------------------------------------------------------------------------
Earnings Per Common Share and
Earnings Per Common Share - Assuming Dilution $0.74 $0.48
Dividends Declared Per Common Share $0.12 $0.42
Consolidated Statements of Comprehensive Income (Unaudited)
Three Months Ended March 31,
2001 2000
- -------------------------------------------------------------------------------------------------------------------
(In millions)
Net Income $111.8 $ 72.1
Other comprehensive (loss) income, net of taxes (14.3) 13.0
- -------------------------------------------------------------------------------------------------------------------
Comprehensive Income Before Cumulative Effect of Change in Accounting Principle 97.5 85.1
Cumulative Effect of Change in Accounting Principle, Net of Income Taxes of $22.6 (35.5) --
- -------------------------------------------------------------------------------------------------------------------
Comprehensive Income $ 62.0 $ 85.1
===================================================================================================================
See Notes to Consolidated Financial Statements.
Certain prior-period amounts have been reclassified to conform with the current
period's presentation.
3
CONSTELLATION ENERGY GROUP, INC. AND SUBSIDIARIES
PART 1 - FINANCIAL INFORMATION (CONTINUED)
Item 1 - Financial Statements
Consolidated Balance Sheets
March 31, December 31,
2001* 2000
- -------------------------------------------------------------------------------------------------------------------
(In millions)
Assets
Current Assets
Cash and cash equivalents $ 518.6 $ 182.7
Accounts receivable (net of allowance for uncollectibles
of $21.8 and $21.3 respectively) 589.0 738.5
Trading securities 192.4 189.3
Assets from energy trading activities 2,779.5 2,793.0
Fuel stocks 53.2 78.2
Materials and supplies 154.9 151.3
Prepaid taxes other than income taxes 35.0 73.5
Other 30.7 32.7
- -------------------------------------------------------------------------------------------------------------------
Total current assets 4,353.3 4,239.2
- -------------------------------------------------------------------------------------------------------------------
Investments and Other Assets
Real estate projects and investments 287.9 290.3
Investments in power projects 512.4 517.5
Financial investments 120.9 161.0
Nuclear decommissioning trust fund 234.3 228.7
Net pension asset 87.3 93.2
Investment in Orion Power Holdings, Inc. 213.6 192.0
Other 123.7 123.0
- -------------------------------------------------------------------------------------------------------------------
Total investments and other assets 1,580.1 1,605.7
- -------------------------------------------------------------------------------------------------------------------
Property, Plant and Equipment
Regulated property, plant and equipment 4,896.3 4,860.1
Nonregulated generation property, plant and equipment 5,525.5 5,279.9
Other nonregulated property, plant and equipment 182.1 173.8
Nuclear fuel (net of amortization) 117.5 128.3
Accumulated depreciation (3,858.5) (3,798.1)
- -------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 6,862.9 6,644.0
- -------------------------------------------------------------------------------------------------------------------
Deferred Charges
Regulatory assets (net) 479.8 514.9
Other 61.7 117.3
- -------------------------------------------------------------------------------------------------------------------
Total deferred charges 541.5 632.2
- -------------------------------------------------------------------------------------------------------------------
Total Assets $13,337.8 $13,121.1
===================================================================================================================
* Unaudited
See Notes to Consolidated Financial Statements.
Certain prior-period amounts have been reclassified to conform with the current
period's presentation.
4
CONSTELLATION ENERGY GROUP, INC. AND SUBSIDIARIES
PART 1 - FINANCIAL INFORMATION (CONTINUED)
Item 1 - Financial Statements
Consolidated Balance Sheets
March 31, December 31,
2001* 2000
- -------------------------------------------------------------------------------------------------------------------
(In millions)
Liabilities and Capitalization
Current Liabilities
Short-term borrowings $ 90.1 $ 243.6
Current portions of long-term debt 1,324.7 906.6
Accounts payable 445.9 695.9
Liabilities from energy trading activities 2,263.7 2,323.3
Dividends declared 21.5 66.5
Accrued taxes 93.3 38.2
Other 194.5 212.6
- -------------------------------------------------------------------------------------------------------------------
Total current liabilities 4,433.7 4,486.7
- -------------------------------------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities
Deferred income taxes 1,285.4 1,339.5
Postretirement and postemployment benefits 272.3 265.2
Deferred investment tax credits 99.3 101.4
Other 482.2 426.0
- -------------------------------------------------------------------------------------------------------------------
Total deferred credits and other liabilities 2,139.2 2,132.1
- -------------------------------------------------------------------------------------------------------------------
Long-term Debt
Long-term debt of Constellation Energy 1,200.0 1,000.0
Long-term debt of nonregulated businesses 673.7 670.0
First refunding mortgage bonds of BGE 1,174.7 1,174.7
Other long-term debt of BGE 889.6 976.6
Company obligated mandatorily redeemable trust preferred
securities of subsidiary trust holding solely 7.16% debentures
of BGE due June 30, 2038 250.0 250.0
Unamortized discount and premium (5.0) (5.4)
Current portion of long-term debt (1,324.7) (906.6)
- -------------------------------------------------------------------------------------------------------------------
Total long-term debt 2,858.3 3,159.3
- -------------------------------------------------------------------------------------------------------------------
BGE Preference Stock Not Subject to Mandatory Redemption 190.0 190.0
Common Shareholders' Equity
Common stock 2,058.5 1,538.7
Retained earnings 1,685.9 1,592.3
Accumulated other comprehensive (loss) income (27.8) 22.0
- -------------------------------------------------------------------------------------------------------------------
Total common shareholders' equity 3,716.6 3,153.0
- -------------------------------------------------------------------------------------------------------------------
Total capitalization 7,164.9 6,502.3
- -------------------------------------------------------------------------------------------------------------------
Total Liabilities and Capitalization $13,337.8 $13,121.1
==================================================================================================================
* Unaudited
See Notes to Consolidated Financial Statements.
Certain prior-period amounts have been reclassified to conform with the current
period's presentation.
5
CONSTELLATION ENERGY GROUP, INC. AND SUBSIDIARIES
PART 1 - FINANCIAL INFORMATION (CONTINUED)
Item 1 - Financial Statements
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended March 31,
2001 2000
- -------------------------------------------------------------------------------------------------------------------
(In millions)
Cash Flows From Operating Activities
Net income $111.8 $ 72.1
Adjustments to reconcile to net cash provided by operating activities
Cumulative effect of change in accounting principle (8.5) --
Depreciation and amortization 115.8 146.7
Deferred income taxes (3.7) (7.1)
Investment tax credit adjustments (2.1) (2.1)
Deferred fuel costs 13.2 1.6
Accrued pension and postemployment benefits 11.7 8.7
Equity in earnings of affiliates and joint ventures (net) (10.6) 3.1
Changes in assets from energy trading activities 13.5 (136.2)
Changes in liabilities from energy trading activities (59.6) 93.5
Changes in other current assets 176.9 99.1
Changes in other current liabilities (167.9) 28.7
Other 4.2 (10.1)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 194.7 298.0
- -------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities
Purchases of property, plant and equipment and other capital expenditures (353.9) (80.6)
Contributions to nuclear decommissioning trust fund (8.8) (4.4)
Purchases of marketable equity securities (15.1) (25.7)
Sales of marketable equity securities 44.3 17.9
Other investments 54.6 (35.2)
- -------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (278.9) (128.0)
- -------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Net maturity of short-term borrowings (153.5) (31.7)
Proceeds from issuance of
Long-term debt 401.0 --
Common stock 504.4 1.5
Reacquisition of long-term debt (284.3) (98.2)
Common stock dividends paid (63.2) (62.8)
Other 15.7 (3.3)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 420.1 (194.5)
- -------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 335.9 (24.5)
Cash and Cash Equivalents at Beginning of Period 182.7 92.7
- -------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $518.6 $ 68.2
===================================================================================================================
Other Cash Flow Information
Cash paid during the period for:
Interest (net of amounts capitalized) $ 55.4 $ 62.4
Income taxes $ 18.7 $ 8.0
See Notes to Consolidated Financial Statements.
Certain prior-period amounts have been reclassified to conform with the current
period's presentation.
6
BALTIMORE GAS AND ELECTRIC COMPANY AND SUBSIDIARIES
PART 1 - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Statements of Income (Unaudited)
Three Months Ended March 31,
2001 2000
- -------------------------------------------------------------------------------------------------------------------
(In millions)
Revenues
Electric revenues $492.3 $524.6
Gas revenues 357.6 195.1
- -------------------------------------------------------------------------------------------------------------------
Total revenues 849.9 719.7
Expenses
Operating expenses:
Electric fuel and purchased energy 265.8 119.4
Gas purchased for resale 252.9 103.0
Operations and maintenance 86.4 177.6
Depreciation and amortization 57.7 125.7
Taxes other than income taxes 46.0 60.0
- -------------------------------------------------------------------------------------------------------------------
Total expenses 708.8 585.7
- -------------------------------------------------------------------------------------------------------------------
Income from Operations 141.1 134.0
Other (Expense)/Income (2.2) 2.8
- -------------------------------------------------------------------------------------------------------------------
Income Before Fixed Charges and Income Taxes 138.9 136.8
Fixed Charges
Interest expense (net) 42.3 48.3
Allowance for borrowed funds used during construction (0.3) (1.2)
- -------------------------------------------------------------------------------------------------------------------
Total fixed charges 42.0 47.1
- -------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 96.9 89.7
Income Taxes
Current 40.8 57.8
Deferred (1.7) (20.3)
Investment tax credit adjustments (0.6) (2.0)
- -------------------------------------------------------------------------------------------------------------------
Total income taxes 38.5 35.5
- -------------------------------------------------------------------------------------------------------------------
Net Income 58.4 54.2
Preference Stock Dividends 3.3 3.3
- -------------------------------------------------------------------------------------------------------------------
Earnings Applicable to Common Stock $ 55.1 $ 50.9
===================================================================================================================
See Notes to Consolidated Financial Statements.
Certain prior-period amounts have been reclassified to conform with the current
period's presentation.
7
BALTIMORE GAS AND ELECTRIC COMPANY AND SUBSIDIARIES
PART 1 - FINANCIAL INFORMATION (CONTINUED)
Item 1 - Financial Statements
Consolidated Balance Sheets
March 31, December 31,
2001* 2000
- -------------------------------------------------------------------------------------------------------------------
(In millions)
Assets
Current Assets
Cash and cash equivalents $ 131.0 $ 21.3
Accounts receivable (net of allowance for uncollectibles
of $13.4 and $13.4 respectively) 430.0 413.0
Accounts receivable, affiliated companies 92.3 133.2
Note receivable, affiliated company -- 87.0
Fuel stocks 4.9 34.1
Materials and supplies 38.9 37.3
Prepaid taxes other than income taxes 23.4 44.9
Other 4.5 4.7
- -------------------------------------------------------------------------------------------------------------------
Total current assets 725.0 775.5
- -------------------------------------------------------------------------------------------------------------------
Other Assets
Net pension asset 98.0 100.2
Other 68.0 68.7
- -------------------------------------------------------------------------------------------------------------------
Other assets 166.0 168.9
- -------------------------------------------------------------------------------------------------------------------
Utility Plant
Plant in service
Electric 3,291.4 3,259.0
Gas 996.8 988.4
Common 525.9 532.9
- -------------------------------------------------------------------------------------------------------------------
Total plant in service 4,814.1 4,780.3
Accumulated depreciation (1,725.1) (1,700.3)
- -------------------------------------------------------------------------------------------------------------------
Net plant in service 3,089.0 3,080.0
Construction work in progress 77.7 75.3
Plant held for future use 4.5 4.5
- -------------------------------------------------------------------------------------------------------------------
Net utility plant 3,171.2 3,159.8
- -------------------------------------------------------------------------------------------------------------------
Deferred Charges
Regulatory assets (net) 479.8 514.9
Other 36.0 35.1
- -------------------------------------------------------------------------------------------------------------------
Total deferred charges 515.8 550.0
- -------------------------------------------------------------------------------------------------------------------
Total Assets $4,578.0 $4,654.2
===================================================================================================================
* Unaudited
See Notes to Consolidated Financial Statements.
8
BALTIMORE GAS AND ELECTRIC COMPANY AND SUBSIDIARIES
PART 1 - FINANCIAL INFORMATION (CONTINUED)
Item 1 - Financial Statements
Consolidated Balance Sheets
March 31, December 31,
2001* 2000
- -------------------------------------------------------------------------------------------------------------------
(In millions)
Liabilities and Capitalization
Current Liabilities
Short-term borrowings $ -- $ 32.1
Current portions of long-term debt 480.6 567.6
Accounts payable 101.2 119.3
Accounts payable, affiliated companies 85.1 103.5
Customer deposits 45.8 44.4
Accrued taxes 61.0 25.0
Accrued interest 42.7 43.4
Accrued vacation costs 21.3 20.8
Other 13.7 29.6
- -------------------------------------------------------------------------------------------------------------------
Total current liabilities 851.4 985.7
- -------------------------------------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities
Deferred income taxes 506.0 508.7
Postretirement and postemployment benefits 235.7 231.2
Deferred investment tax credits 24.4 25.0
Decommissioning of federal uranium enrichment facilities 23.7 23.7
Other 21.7 23.2
- -------------------------------------------------------------------------------------------------------------------
Total deferred credits and other liabilities 811.5 811.8
- -------------------------------------------------------------------------------------------------------------------
Long-term Debt
First refunding mortgage bonds of BGE 1,174.7 1,174.7
Other long-term debt of BGE 889.6 976.6
Company obligated mandatorily redeemable trust preferred
securities of subsidiary trust holding solely 7.16% debentures
of BGE due June 30, 2038 250.0 250.0
Long-term debt of nonregulated businesses 37.0 34.0
Unamortized discount and premium (2.9) (3.3)
Current portion of long-term debt (480.7) (567.6)
- -------------------------------------------------------------------------------------------------------------------
Total long-term debt 1,867.7 1,864.4
- -------------------------------------------------------------------------------------------------------------------
Preference Stock Not Subject to Mandatory Redemption 190.0 190.0
Common Shareholder's Equity
Common stock 465.1 465.1
Retained earnings 392.3 337.2
- -------------------------------------------------------------------------------------------------------------------
Total common shareholder's equity 857.4 802.3
- -------------------------------------------------------------------------------------------------------------------
Total capitalization 2,915.1 2,856.7
- -------------------------------------------------------------------------------------------------------------------
Total Liabilities and Capitalization $4,578.0 $4,654.2
===================================================================================================================
* Unaudited
See Notes to Consolidated Financial Statements.
9
BALTIMORE GAS AND ELECTRIC COMPANY AND SUBSIDIARIES
PART 1 - FINANCIAL INFORMATION (CONTINUED)
Item 1 - Financial Statements
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended March 31,
2001 2000
- -------------------------------------------------------------------------------------------------------------------
(In millions)
Cash Flows From Operating Activities
Net income $ 58.4 $ 54.2
Adjustments to reconcile to net cash provided by operating activities
Depreciation and amortization 58.3 137.9
Deferred income taxes (1.7) (20.3)
Investment tax credit adjustments (0.6) (2.0)
Deferred fuel costs 13.2 1.6
Accrued pension and postemployment benefits 7.5 8.6
Allowance for equity funds used during construction (0.7) (0.7)
Equity in earnings of affiliates and joint ventures (net) 0.2 --
Changes in other current assets (51.7) 87.4
Changes in other current liabilities 109.7 (4.4)
Other 12.6 (6.7)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 205.2 255.6
- -------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities
Utility construction expenditures (excluding AFC) (58.9) (79.1)
Nuclear fuel expenditures -- (0.7)
Deferred conservation expenditures (0.1) (0.1)
Contributions to nuclear decommissioning trust fund -- (4.4)
Other (4.1) (1.7)
- -------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (63.1) (86.0)
- -------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Net maturity of short-term borrowings (32.1) (40.4)
Proceeds from issuance of long-term debt 3.0 --
Reacquisition of long-term debt -- (67.9)
Preference stock dividends paid (3.3) (3.3)
Distributions to Constellation Energy -- (62.8)
Other -- 1.3
- -------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (32.4) (173.1)
- -------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 109.7 (3.5)
Cash and Cash Equivalents at Beginning of Period 21.3 23.5
- -------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $131.0 $ 20.0
===================================================================================================================
Other Cash Flow Information
Cash paid during the period for:
Interest (net of amounts capitalized) $ 42.1 $ 52.6
Income taxes $ 13.3 $ 6.5
See Notes to Consolidated Financial Statements.
Certain prior-period amounts have been reclassified to conform with the current
period's presentation.
10
Notes to Consolidated Financial Statements
- ------------------------------------------
Weather conditions can have a great impact on our results for interim periods.
This means that results for interim periods do not necessarily represent results
to be expected for the year.
Our interim financial statements on the previous pages reflect all adjustments
that Management believes are necessary for the fair presentation of the
financial position and results of operations for the interim periods presented.
These adjustments are of a normal recurring nature.
Holding Company Formation
- -------------------------
On April 30, 1999, Constellation Energy(R) Group, Inc. (Constellation Energy)
became the holding company for Baltimore Gas and Electric Company (BGE(R)) and
its subsidiaries. BGE's outstanding common stock automatically became shares of
common stock of Constellation Energy. BGE's debt securities, obligated
mandatorily redeemable trust preferred securities, and preference stock remain
securities of BGE, or its subsidiaries.
Basis of Presentation
- ---------------------
This Quarterly Report on Form 10-Q 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, LLC and its
subsidiaries. The consolidated financial statements of BGE include the accounts
of BGE, District Chilled Water General Partnership (ComfortLink), and BGE
Capital Trust I.
References in this report to "we" and "our" are to Constellation Energy and its
subsidiaries, collectively. Reference in this report to the "utility business"
is to BGE.
Deregulation of Electric Generation
- -----------------------------------
On April 8, 1999, Maryland enacted legislation authorizing customer choice and
competition among electric suppliers. In addition, on November 10, 1999, the
Maryland Public Service Commission (Maryland PSC) issued a Restructuring Order
that resolved the major issues surrounding electric restructuring. Effective
July 1, 2000, the state of Maryland implemented customer choice for electric
suppliers. We discuss the implications of customer choice and the Restructuring
Order further in Management's Discussion and Analysis beginning on page 20.
Please also refer to the Legal Proceedings section on page 35 for a discussion
regarding an appeal of the Restructuring Order.
- --------------------------------------------------------------------------------
Information by Operating Segment
- --------------------------------
Our reportable operating segments are - Domestic Merchant Energy, Regulated
Electric, and Regulated Gas:
o Our nonregulated domestic merchant energy business:
- provides power marketing and risk management services,
- develops, owns, and operates domestic power projects, and
- provides nuclear consulting services.
o Our regulated electric business purchases, distributes and sells
electricity, and
o Our regulated gas business purchases, transports, and sells natural gas.
Effective July 1, 2000, the financial results of the electric generation portion
of our business are included in the domestic merchant energy business segment.
Prior to that date, the financial results of electric generation are included in
our regulated electric business.
Our remaining nonregulated businesses:
o develop, own, and operate international power projects in Latin America,
o provide energy products and services,
o sell and service electric and gas appliances, and heating and air
conditioning systems, engage in home improvements, and sell natural gas
through mass marketing efforts,
o provide cooling services,
o engage in financial investments, and
o develop, own and manage real estate and senior-living facilities.
These reportable segments are strategic businesses based principally upon
regulations, products, and services that require different technology and
marketing strategies. We evaluate the performance of these segments based on net
income. We account for intersegment revenues using market prices.
11
Domestic Unallocated
Merchant Regulated Regulated Other Corporate
Energy Electric Gas Nonregulated Items and
Business Business Business Businesses Eliminations Consolidated
- --------------------------- -------------- -------------- --------------- ------------- -------------- ------------
For the three months ended March 31, (In millions)
2001
- ----
Unaffiliated revenues $ 105.1 $ 492.2 $ 352.2 $ 215.6 $ -- $ 1,165.1
Intersegment revenues 231.6 0.1 5.4 22.6 (259.7) --
- ---------------------------- ------------- -------------- --------------- ------------- ------------ --------------
Total revenues 336.7 492.3 357.6 238.2 (259.7) 1,165.1
Cumulative effect of change
in accounting principle -- -- -- 8.5 -- 8.5
Net income 42.4 27.7 28.7 13.0 -- 111.8
2000
- ----
Unaffiliated revenues $ 69.3 $ 524.4 $ 194.5 $ 205.8 $ -- $ 994.0
Intersegment revenues -- 0.2 0.6 6.7 (7.5) --
- ---------------------------- ------------- -------------- --------------- ------------- ------------ --------------
Total revenues 69.3 524.6 195.1 212.5 (7.5) 994.0
Net income (a) 18.2 30.8 20.3 2.8 -- 72.1
At March 31, 2001
- -----------------
Segment assets $ 7,586.8 $ 3,456.8 $ 1,071.2 $ 1,408.7 $ (185.7) $ 13,337.8
At December 31, 2000
- --------------------
Segment assets $ 7,297.8 $ 3,392.3 $ 1,089.9 $ 1,491.5 $ (150.4) $ 13,121.1
(a) Our regulated electric business recorded an expense of $2.5 million related
to employees that elected to participate in a Targeted Voluntary Special
Early Retirement Program.
Certain prior-period amounts have been reclassified to conform with the current
period's presentation.
- --------------------------------------------------------------------------------
Financing Activity
- ------------------
Constellation Energy
- --------------------
As discussed on page 11, effective April 30, 1999, BGE's outstanding common
stock automatically became shares of common stock of Constellation Energy.
During the period from January 1, 2001 through the date of this report, we
issued a total of 13.2 million shares of common stock, without par value for net
proceeds of $504.4 million. We issued 12.0 million shares through a secondary
offering and the remaining 1.2 million shares were issued under our Continuous
Offering Program for Stock and the Shareholder Investment Plan.
Constellation Energy issued and redeemed prior to their maturity the following
notes during the period from January 1, 2001 through the date of this report:
Date Net
Issued/ Proceeds/
Principal Redeemed Payments
- ------------------------------ -------- --------- --------
(In millions)
Issued:
- -------
Floating Rate Notes due 2002 $400.0 1/01 $399.7
Floating Rate Notes due 2002 235.0 4/01 234.7
Redeemed:
- ---------
Floating Rate Reset Notes $200.0 1/01 $200.0
due 2002
In June 2000, Constellation Energy arranged two revolving credit agreements
totaling $565.0 million to support our commercial paper program and for other
working capital purposes. Of this amount, $376.5 million is for short-term
financial needs and $188.5 million, which expires in three years, is for short
and long-term financial needs, including letters of credit. As of the date of
this report, letters of credit totaling $174.0 million were issued under this
facility. Also, letters of
12
credit totaling $245.5 million were issued under other credit facilities.
Constellation Energy has issued guarantees in an amount up to $1,146.2 million
related to credit facilities and contractual performance of certain of its
nonregulated subsidiaries. However, the actual subsidiary liabilities related to
these guarantees totaled $572.6 million at March 31, 2001.
In connection with the initiative to separate our domestic merchant energy
business from our retail services business, Constellation Energy expects to
redeem all of its outstanding debt at or prior to the separation (approximately
$1.4 billion currently). The redemption will occur through a combination of open
market purchases, tender offers, and redemption calls. We plan to arrange an
interim facility to finance working capital requirements and to repurchase the
$1.4 billion of debt. Prior to or upon separation, the new merchant energy
company will assume this facility. We discuss the separation of our business in
the Strategy section of Management's Discussion and Analysis on page 19.
BGE and Nonregulated Businesses
- -------------------------------
BGE issued and redeemed prior to their maturity the following notes during the
period from January 1, 2001 through the date of this report:
Date Net
Issued/ Proceeds/
Principal Redeemed Payments
- ------------------------------ -------- --------- --------
(In millions)
Issued:
- -------
Floating Rate Notes due 2002 $200.0 5/01 $200.0
Redeemed:
- ---------
Floating Rate Reset Notes $200.0 5/01 $200.0
due 2001
In conjunction with the July 1, 2000 transfer of generation assets, BGE is
contingently liable for $278.0 million of the tax exempt debt assigned to
nonregulated affiliates of Constellation Energy as discussed further in the
Current Issues -Electric Competition section of Management's Discussion and
Analysis on page 20. The actual liability at the date of this report is $277.4
million. In the future, BGE may purchase some of its long-term debt or
preference stock in the market. This will depend on market conditions and BGE's
capital structure.
Please refer to the Funding for Capital Requirements section of Management's
Discussion and Analysis on page 33 for additional information about the debt of
BGE and our nonregulated businesses.
Commitments
- -----------
Our domestic merchant energy business has committed to contribute additional
capital and to make additional loans to some affiliates, joint ventures, and
partnerships in which they have an interest. At March 31, 2001, the total amount
of investment requirements committed to by our domestic merchant energy business
was $181.4 million.
Environmental Matters
- ----------------------
Clean Air
- ---------
The Clean Air Act includes two titles designed to reduce emissions of sulfur
dioxide and nitrogen oxide (NOx) from electric generating plants - Title IV and
Title I.
Title IV addresses emissions of sulfur dioxides. For our older plants, we meet
the requirements of Title IV through a combination of switching fuels and
allowance trading. For newer plants, we meet the requirements of Title IV
primarily through facility design, and operational and pollution controls.
Title I addresses emissions of NOx. The Environmental Protection Agency (EPA)
issued a final rule in 1998 that required up to 85% NOx emissions reduction by
22 states (including Maryland and Pennsylvania). Maryland and Pennsylvania have
issued regulations pursuant to EPA's rule. At our Brandon Shores and Wagner
facilities in Maryland, we are installing emission reduction equipment by May
2002 in order to meet Maryland's deadline. Certain generating plants in
Pennsylvania also will install emissions reduction equipment by 2003 to meet the
Pennsylvania deadline.
We currently estimate that the controls needed at our generating plants to meet
the NOx emission reduction requirements will cost approximately $240 million.
Through March 31, 2001, we have spent approximately $130 million to meet these
reduction requirements. Future expenditures for NOx reduction will be paid by
our domestic merchant energy business.
13
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 appealed the
1999 court rulings to the Supreme Court. In February 2001, the Supreme Court
upheld EPA's authority to issue the standards. However, the Supreme Court sent
the case back to the lower court and EPA for further proceedings on
implementation issues related to the revised ozone standard. The lower court
will also address remaining challenges to the fine particulate standard. While
these standards may require increased controls at our fossil generating plants
in the future, implementation, if required, would be delayed for several years.
We cannot estimate the cost of these increased controls at this time because the
states, including Maryland, Pennsylvania, and California, still need to
determine what reductions in pollutants will be necessary to meet the EPA
standards.
In December 2000, the EPA issued a determination that coal-fired power plant
mercury emissions will be controlled. Final regulations are expected to be
issued in 2004 with controls required by 2007.The costs of these controls cannot
be estimated at this time since the level of control or systems to implement
them have not yet been established.
We received letters from the EPA requesting us to provide certain information
under Section 114 of the Clean Air Act regarding some of our electric generating
plants in Maryland and Pennsylvania. This information is to determine compliance
with the Clean Air Act and state implementation plan requirements, including
potential application of federal New Source Performance Standards. In general,
such standards can require the installation of additional air pollution control
equipment upon the major modification of an existing plant. We have provided the
EPA the requested information. We believe our generating plants have been
operated in accordance with the Clean Air Act and the rules implementing this
act. However, we cannot estimate the impact of this inquiry on our generating
plants, and our financial results, at this time.
Waste Disposal
- --------------
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.
We can, however, estimate that our current 15.47% share of the reasonably
possible cleanup costs at one of these sites, Metal Bank of America, a metal
reclaimer in Philadelphia, could be as much as $2.3 million higher than amounts
we have recorded as a liability on our Consolidated Balance Sheets. This
estimate is based on a Record of Decision issued by the EPA.
In December 1995, the EPA notified us that we were 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 and in
March 2001, a judge approved the consent order regarding this site. In April,
BGE paid an immaterial amount for the settlement of this action.
Also, we are coordinating investigation of several sites where gas was
manufactured in the past. The investigation of these sites includes reviewing
possible actions to remove coal tar. 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 were 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. 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. 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. We discuss
this further in Note 5 of our 2000 Annual Report on Form 10-K. Through March 31,
2001, we have spent approximately $36 million for remediation at this site.
We do not expect the cleanup costs of the remaining sites to have a material
effect on our financial results.
Other potential environmental liabilities and pending environmental actions are
described further in our 2000 Annual Report on Form 10-K in Item 1. Business -
Environmental Matters.
14
Nuclear Insurance
- -----------------
If there were an accident or an extended outage at either unit of the Calvert
Cliffs Nuclear Power Plant (Calvert Cliffs), it could have a substantial adverse
financial effect on us. The primary contingencies that would result from an
incident at Calvert Cliffs could include:
o physical damage to the plant,
o recoverability of replacement power costs, and
o our liability to third parties for property damage and bodily injury.
We have insurance policies that cover these contingencies, but the policies have
certain industry standard exclusions. Furthermore, the costs that could result
from a covered major accident or a covered extended outage at either of the
Calvert Cliffs units could exceed our insurance coverage limits.
Insurance for Calvert Cliffs and Third Party Claims
- ---------------------------------------------------
For physical damage to Calvert Cliffs, we have $2.75 billion of property
insurance from an industry mutual insurance company. If an outage at either of
the two units at Calvert Cliffs is caused by an insured physical damage loss and
lasts more than 12 weeks, we have insurance coverage for replacement power costs
up to $490.0 million per unit, provided by an industry mutual insurance company.
This amount can be reduced by up to $98.0 million per unit if an outage at both
units of the plant is caused by a single insured physical damage loss. If
accidents at any insured plants cause a shortfall of funds at the industry
mutual insurance company, all policyholders could be assessed, with our share
being up to $15.4 million.
In addition we, as well as others, could be charged for a portion of any third
party claims associated with a nuclear incident at any commercial nuclear power
plant in the country. At the date of this report, the limit for third party
claims from a nuclear incident is $9.54 billion under the provisions of the
Price Anderson Act. If third party claims exceed $200 million (the amount of
primary insurance), our share of the total liability for third party claims
could be up to $176.2 million per incident. That amount would be payable at a
rate of $20 million per year.
Insurance for Worker Radiation Claims
- -------------------------------------
As an operator of a commercial nuclear power plant in the United States, we are
required to purchase insurance to cover radiation injury claims of certain
nuclear workers. On January 1, 1998, a new insurance policy became effective for
all operators requiring coverage for current operations. Waiving the right to
make additional claims under the old policy was a condition for acceptance under
the new policy. We describe both the old and new policies below.
o Nuclear worker claims reported on or after January 1, 1998 are covered by a
new insurance policy with an annual industry aggregate limit of $200
million for radiation injury claims against all those insured by this
policy.
o All nuclear worker claims reported prior to January 1, 1998 are still
covered by the old insurance policies. Insureds under the old policies,
with no current operations, are not required to purchase the new policy
described above, and may still make claims against the old policies for the
next seven years. If radiation injury claims under these old policies
exceed the policy reserves, all policyholders could be assessed, with our
share being up to $6.3 million.
If claims under these policies exceed the coverage limits, the provisions of the
Price Anderson Act (discussed in this section) would apply.
Recoverability of Electric Fuel Costs
- -------------------------------------
Under the terms of the Restructuring Order, BGE's electric fuel rate clause was
discontinued effective July 1, 2000. In September 2000, the Maryland PSC
approved the collection of the $54.6 million accumulated difference between our
actual costs of fuel and energy and the amounts collected from customers that
were deferred (included as an asset or liability on the Consolidated Balance
Sheets and excluded from the Consolidated Statements of Income) under the
electric fuel rate clause through June 30, 2000. We are collecting this
accumulated difference from customers over the twelve-month period beginning
October 2000.
California Power Purchase Agreements
- ------------------------------------
Our domestic generation operation has $302.0 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 changed from fixed to variable
rates beginning in 1996. In 2000, the last four projects transitioned to
variable rates. Recently, the prices received under these agreements were higher
than prior periods due to increases in the variable-rate pricing terms. However,
due to the uncertainties in California, the recent increases in prices may not
be indicative of future prices. We discuss the developments in California in the
Current Issues--Electric Competition section on page 21.
We also describe these projects and the transition process in Note 3 and Note 10
of our 2000 Annual Report on Form 10-K.
15
Related Party Transactions - BGE
- --------------------------------
Income Statement
- ----------------
Under the Restructuring Order, BGE is providing standard offer service to
customers at fixed rates over various time periods during the transition period
from July 1, 2000 to June 30, 2006, for those customers that do not choose an
alternate supplier. Constellation Power Source is under contract to provide BGE
with the energy and capacity required to meet its standard offer service
obligations for the first three years of the transition period. The cost of
BGE's purchased energy from nonregulated affiliates of Constellation Energy to
meet its standard offer service obligation was $251.3 million for the quarter
ended March 31, 2001.
In addition, Constellation Energy charges BGE for certain corporate functions.
Certain costs are directly charged to BGE. We allocate other corporate function
costs based on a total percentage of expected use by BGE. Management believes
this method of allocation is reasonable and approximates the cost BGE would have
incurred as an unaffiliated entity. These costs were $3.7 million for the
quarter ended March 31, 2001 compared to $1.3 million for the same period in
2000.
Balance Sheet
- -------------
As a result of the deregulation of electric generation, BGE transferred its
generation assets to nonregulated affiliates of Constellation Energy effective
July 1, 2000. In conjunction with this transfer, Constellation Power Source
Generation, Inc. issued approximately $366.0 million in unsecured promissory
notes to BGE. All of these notes have been repaid by Constellation Power Source
Generation, Inc. The proceeds were used to service current maturities of certain
BGE long-term debt.
Amounts related to corporate functions performed at the Constellation Energy
holding company, BGE's purchases to meet its standard offer service obligation,
and BGE's charges to Constellation Energy and its nonregulated affiliates for
certain services it provides them result in intercompany balances on BGE's
Consolidated Balance Sheets. Management believes its allocation methods are
reasonable and approximate the costs that would be charged to unaffiliated
entities.
Accounting Standard Adopted
- ---------------------------
On January 1, 2001, we adopted Statement of Financial Accounting Standards
(SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, as
amended by SFAS No. 138, Accounting for Certain Derivative Instruments and
Certain Hedging Activities. These statements require that we recognize all
derivatives on the balance sheet at fair value. Changes in the value of
derivatives that are not hedges must be recorded in earnings.
We use derivatives in connection with our power marketing and risk management
activities and to hedge the risk of variations in future cash flows from
forecasted purchases and sales of electricity and gas in our electric generation
operations as more fully described below. Under SFAS No. 133, changes in the
value of derivatives designated as hedges that are effective in offsetting the
variability in cash flows of forecasted transactions are recognized in other
comprehensive income until the forecasted transactions occur. The ineffective
portion of changes in fair value of derivatives used as cash-flow hedges is
immediately recognized in earnings.
In accordance with the transition provisions of SFAS No. 133, we recorded the
following at January 1, 2001:
o an $8.5 million after-tax cumulative effect adjustment that increased
earnings, and
o a $35.5 million after-tax cumulative effect adjustment that reduced other
comprehensive income.
The cumulative effect adjustment recorded in earnings represents the fair value
as of January 1, 2001 of a warrant for 705,900 shares of common stock of Orion
Power Holdings, Inc. (Orion). The warrant has an exercise price of $10 per share
and expires on April 24, 2010. The warrant was received in conjunction with our
investment in Orion. We can exercise the warrant for an equivalent number of
shares of Orion's common stock with the payment of the full exercise price. We
also can exercise the warrant without payment and be entitled to a number of
shares of Orion's common stock equivalent to the difference between the
aggregate current market price less the aggregate exercise price, divided by the
current market price of one share of common stock.
The cumulative effect adjustment recorded in other comprehensive income
represents certain forward sales of electricity that we designated as cash flow
hedges of forecasted transactions primarily through our domestic merchant energy
business. We discuss our risk management for derivatives and hedging activities
below.
Risk Management for Derivatives and Hedging Activities
- ------------------------------------------------------
Our domestic merchant energy business is exposed to market risk from the power
marketing operation of Constellation Power Source and from our electric
generation operations. Constellation Power Source manages the commodity price
risk inherent in its power marketing activities on a portfolio basis, subject to
established trading and risk management policies. Constellation Power Source
uses a variety of derivative and non-derivative instruments, including:
16
o forward contracts, which commit us to purchase or sell energy commodities
in the future;
o futures contracts, which are exchange-traded standardized commitments to
purchase or sell a commodity or financial instrument, or to make a cash
settlement, at a specific price and future date;
o swap agreements, which require payments to or from counterparties based
upon the differential between two prices for a predetermined contractual
(notional) amount; and
o option contracts, which convey the right to buy or sell a commodity,
financial instrument, or index at a predetermined price.
Our domestic merchant energy business conducts electric generation operations
primarily through Constellation Power Source Generation, Calvert Cliffs, and
Constellation Power. Presently, the majority of the generating capacity
controlled by our domestic merchant energy business is used to provide standard
offer service to BGE. However, beginning in July 2002, we expect approximately
1,000 megawatts of industrial customer load will leave BGE's standard offer
service. The remainder of our domestic merchant energy business' standard offer
service arrangement with BGE terminates on June 30, 2003. Additionally, we plan
to expand our generation operations. As a result, our domestic merchant energy
business has a substantial and increasing amount of generating capacity that is
subject to future changes in wholesale electricity prices and has fuel
requirements that are subject to future changes in coal, natural gas, and oil
prices.
Constellation Power Source manages the commodity price risk of our electric
generation operations as part of its overall portfolio. In order to manage this
risk, we may enter into fixed-price derivative or non-derivative contracts to
hedge the variability in future cash flows from forecasted sales of electricity
and purchases of fuel. Our objectives for entering into such hedges include
fixing the price for a portion of anticipated future electricity sales at a
level that provides an acceptable return on our electric generation operations
and fixing the price of a portion of anticipated fuel purchases for the
operation of our power plants. The portion of forecasted transactions hedged may
vary based upon management's assessment of market, weather, operational, and
other factors.
As of March 31, 2001, our domestic merchant energy business had designated
certain fixed-price forward electricity sale contracts as a cash-flow hedge of
forecasted sales of electricity for the years 2003 through 2010. At March 31,
2001, we recorded mark-to-market losses of $56.9 million on derivatives
designated as cash-flow hedges in "Accumulated Other Comprehensive Income" and
in "Other Deferred Credits and Other Liabilities" in our Consolidated Balance
Sheets. We do not expect to reclassify any of this amount into earnings during
the next twelve months. For the quarter ended March 31, 2001, there was no hedge
ineffectiveness recognized in earnings. We discuss our market risk in Item 7.
Management's Discussion and Analysis - Market Risk of our 2000 Annual Report on
Form 10-K.
Currently, the Financial Accounting Standards Board's Derivatives Implementation
Group continues to develop interpretative guidance and has not resolved certain
issues related to our business that could ultimately impact the application of
SFAS No. 133.
17
Item 2. Management's Discussion
- -------------------------------
Management's Discussion and Analysis of Financial Condition and Results of
- --------------------------------------------------------------------------------
Operations
- ----------
Introduction
- ------------
Constellation Energy Group, Inc. (Constellation Energy) is a diversified North
American energy company. Constellation Energy conducts its business through
various subsidiaries that primarily include a domestic merchant energy business
and Baltimore Gas and Electric Company (BGE). Our domestic merchant energy
business is focused mostly on power marketing and merchant generation in North
America. BGE is an electric and gas public utility distribution company with a
service territory that covers the City of Baltimore and all or part of ten
counties in Central Maryland. We describe our operating segments in the Notes to
Consolidated Financial Statements on page 11.
References in this report to "we" and "our" are to Constellation Energy and its
subsidiaries, collectively. Reference in this report to the "utility business"
is to BGE.
This Quarterly Report on Form 10-Q 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, LLC and its
subsidiaries. The consolidated financial statements of BGE include the accounts
of BGE, District Chilled Water General Partnership (ComfortLink), and BGE
Capital Trust I.
Effective July 1, 2000, electric generation was deregulated in Maryland. Also,
on July 1, 2000, BGE transferred all of its generation assets and related
liabilities at book value to our domestic merchant energy business. We discuss
the deregulation of electric generation in the Current Issues section on page
20.
As a result of these changes, our domestic merchant energy business includes the
:
o wholesale power marketing and risk management activities of Constellation
Power Source, Inc.,
o domestic power projects of Constellation Investments, Inc. and
Constellation Power, Inc. and subsidiaries,
o fossil and hydroelectric generating assets of Constellation Power Source
Generation, Inc.,
o nuclear generating assets of Calvert Cliffs Nuclear Power Plant, Inc., and
o nuclear consulting services of Constellation Nuclear Services, Inc.
Also, effective July 1, 2000, the financial results of the electric generation
portion of our business are included in the domestic merchant energy business.
Prior to that date, the financial results of electric generation were included
in BGE's regulated electric business.
BGE remains a regulated electric and gas public utility company with a service
territory in the City of Baltimore and all or part of ten counties in Central
Maryland.
Our other nonregulated businesses include the:
o Latin American power projects and investments of Constellation Power, and
subsidiaries,
o energy products and services of Constellation Energy Source, Inc.,
o home products, commercial building systems, and residential and commercial
electric and gas retail marketing of BGE Home Products & Services, Inc. and
subsidiaries,
o ComfortLink general partnership, in which BGE is a partner, that provides
cooling services for commercial customers in Baltimore,
o financial investments of Constellation Investments, and
o real estate and senior-living facilities of Constellation Real Estate
Group, Inc.
As discussed further in the Strategy section on page 19, on October 23, 2000, we
announced initiatives to separate our domestic merchant energy business from our
remaining businesses. These remaining businesses include BGE and the other
nonregulated businesses described above.
In this discussion and analysis, we explain the general financial condition and
the results of operations for Constellation Energy and BGE including:
o what factors affect our businesses,
o what our earnings and costs were in the periods presented,
o why earnings and costs changed between periods,
o where our earnings came from,
o how all of this affects our overall financial condition,
o what we expect our expenditures for capital projects to be in the future,
and
o where we expect to get cash for future capital expenditures.
As you read this discussion and analysis, refer to our Consolidated Statements
of Income on page 3, which present the results of our operations for the
quarters ended March 31, 2001 and 2000. We analyze and explain the differences
between periods in the specific line items of the Consolidated Statements of
18
Income. 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 rate regulation through June
30, 2000. Our regulated electric business changed as we transferred our electric
generation assets and related liabilities to our domestic merchant energy
business and we entered into retail customer choice for electric generation
effective July 1, 2000. In addition, we announced our intention to separate our
domestic merchant energy business from our remaining businesses. Accordingly,
the results of operations and financial condition described in this discussion
and analysis are not necessarily indicative of future performance.
- --------------------------------------------------------------------------------
Strategy
- --------
Customer choice and regulatory change significantly impact our business. In
response, we regularly evaluate our strategies with two goals in mind: to
improve our competitive position, and to anticipate and adapt to regulatory
change. Prior to July 1, 2000, the majority of our earnings were from BGE. Going
forward, prior to separating into two companies, we expect to derive almost
two-thirds of our earnings from our domestic merchant energy business.
While BGE continues to be regulated and to deliver electricity and natural gas
through its core distribution business, our primary growth strategies center on
the nonregulated domestic merchant energy business.
On October 23, 2000, we announced three initiatives to advance our growth
strategies. The first initiative is that we entered into an agreement (the
"Agreement") with an affiliate of The Goldman Sachs Group, Inc. ("Goldman
Sachs"). Under the terms of the Agreement, Goldman Sachs will acquire up to a
17.5% equity interest in our domestic merchant energy business, which will be
consolidated under a single holding company ("Holdco"). Goldman Sachs will also
acquire a ten-year warrant for up to 13% of Holdco's common stock (subject to
certain adjustments). The warrant is exercisable six months after Holdco's
common stock becomes publicly available. The amount of common stock which
Goldman Sachs may receive upon exercise will be equal to the excess of the
market price of Holdco's common stock at the time of exercise over the exercise
price of $60 per share for all the stock subject to the warrant, divided by the
market price. Holdco may at its option pay Goldman Sachs such excess in cash.
Goldman Sachs is acquiring its interest and the warrant in exchange for $250
million in cash (subject to adjustment in certain instances) and certain assets
related to our power marketing operation. At closing, Goldman Sachs' existing
services agreement with our power marketing operation will terminate.
The second initiative is a plan to separate our domestic merchant energy
business from our remaining businesses as discussed in the introduction. The
separation will create two stand-alone, publicly traded energy companies. One
will be a merchant energy business engaged in wholesale power marketing and
generation under the name "Constellation Energy Group" after the separation. The
other will be a regional retail energy delivery and energy services company, BGE
Corp., which will include BGE, our other nonregulated businesses, and our
investment in Orion Power Holdings, Inc. ("Orion").
As a result of the separation, shareholders will continue to own all of
Constellation Energy's current businesses through their ownership of the stock
of the new Constellation Energy Group and of BGE Corp.
The third initiative is a change in our common stock dividend policy effective
April 2001. In a move closely aligned with our separation plan, effective April
2001, our annual dividend was set at $.48 per share. After the separation, BGE
Corp. expects to pay initial annual dividends of $.48 per share. Constellation
Energy Group, as a growing merchant energy company, initially expects to
reinvest its earnings in order to fund its growth plans and not to pay a
dividend.
The closing of the transaction with Goldman Sachs and the separation are subject
to customary closing conditions and contingent upon obtaining regulatory
approvals and a Private Letter Ruling from the Internal Revenue Service
regarding certain tax matters. We expect to complete the transaction and
separation by mid to late 2001. At the date of this report, we have received
approval from the Federal Energy Regulatory Commission (FERC).
Currently, our domestic merchant energy business controls over 9,000 megawatts
of generation. In December 2000, we announced that a subsidiary of Constellation
Nuclear will purchase 1,550 megawatts of the 1,757 megawatts total generating
capacity of the Nine Mile Point nuclear power plant located in Scriba, New York.
The total purchase price, including fuel, is $815 million. We discuss the
planned acquisition of the Nine Mile Point power plant in more detail in Note 10
of our 2000 Annual Report on Form 10-K.
We also are constructing generating facilities representing 1,100 megawatts of
natural gas-fired peaking capacity in the Mid-Atlantic and Mid-West regions,
which are expected to be operational by the summer of 2001. An additional 6,700
megawatts of natural gas-fired peaking and combined cycle production facilities
in various regions of North America are
19
scheduled for completion in 2002 and beyond. By 2005, our domestic merchant
energy business expects to control approximately 30,000 megawatts through the
construction or purchase of additional nuclear and non-nuclear generation assets
and through contractual arrangements.
We decided to exit the Latin American portion of our operation as a result of
our concentration on domestic merchant energy. Currently, we are actively
seeking a buyer for the Latin American portion of our business and are working
toward completing our exit strategy in 2001.
We also might consider one or more of the following strategies:
o the complete or partial separation of our transmission and distribution
functions,
o mergers or acquisitions of utility or non-utility businesses, and
o sale of generation assets or one or more businesses.
- --------------------------------------------------------------------------------
Current Issues
- --------------
With the shift toward customer choice, competition, and the growth of our
domestic merchant energy business, various factors will affect our financial
results in the future. These factors include, but are not limited to, operating
our generation assets in a deregulated market without the benefit of a fuel rate
adjustment clause, the timing and implications of deregulation in other regions
where our domestic merchant energy business will operate, the loss of revenues
due to customers choosing alternative suppliers, higher volatility of earnings
and cash flows, and increased financial requirements of our domestic merchant
energy business. Please refer to the Forward Looking Statements section on page
36 for additional factors.
In this section, we discuss in more detail several issues that affect our
businesses.
Electric Competition
- --------------------
We are facing electric competition on various fronts, including:
o the construction of generating units to meet increased demand for
electricity,
o the sale of electricity in wholesale power markets,
o competing with alternative energy suppliers, and
o electric sales to retail customers.
Maryland
- --------
On April 8, 1999, Maryland enacted the Electric Customer Choice and Competition
Act of 1999 (the "Act") and accompanying tax legislation that has significantly
restructured Maryland's electric utility industry and modified 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 of our 2000 Annual Report on Form 10-K.
On November 10, 1999, the Maryland PSC issued a Restructuring Order that
resolved the major issues surrounding electric restructuring, accelerated the
timetable for customer choice, and addressed the major provisions of the Act.
The Restructuring Order also resolved 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 Note 4 of our 2000 Annual Report on Form
10-K.
As a result of the deregulation of electric generation, the following occurred
effective July 1, 2000:
o All customers can choose their electric energy supplier. BGE will provide a
standard offer service for customers that do not select an alternative
supplier. In either case, BGE will continue to deliver electricity to all
customers in areas traditionally served by BGE.
o BGE reduced residential base rates by approximately 6.5%, on average, about
$54 million a year. These rates will not change before July 2006.
o BGE transferred, at book value, its nuclear generating assets, its nuclear
decommissioning trust fund, and related liabilities to Calvert Cliffs
Nuclear Power Plant, Inc. In addition, BGE transferred, at book value, its
fossil generating assets and related liabilities and its partial ownership
interest in two coal plants and a hydroelectric plant located in
Pennsylvania to Constellation Power Source Generation. In total, these
generating assets represent about 6,240 megawatts of generation capacity
with a total net book value at June 30, 2000 of approximately $2.4 billion.
o BGE assigned approximately $47 million to Calvert Cliffs Nuclear Power
Plant, Inc. and $231 million to Constellation Power Source Generation of
tax-exempt debt related to the transferred assets. Also, Constellation
Power Source Generation issued approximately $366 million in unsecured
promissory notes to BGE. All of these notes have been repaid by
Constellation Power Source Generation. The proceeds were used to service
the current maturities of certain BGE long-term debt.
o BGE transferred equity associated with the generating assets to Calvert
Cliffs Nuclear Power Plant, Inc. and Constellation Power Source Generation.
20
o The fossil fuel and nuclear fuel inventories, materials and supplies, and
certain purchased power contracts of BGE were also assumed by these
subsidiaries.
Effective July 1, 2000, BGE provides 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. In addition, the electric
fuel rate was discontinued effective July 1, 2000. Constellation Power Source
provides BGE with the energy and capacity required to meet its standard offer
service obligations for the first three years of the transition period. The
energy and capacity for the remaining years in the transition period will be
competitively bid.
Constellation Power Source obtains the energy and capacity to supply BGE's
standard offer service obligations from affiliates that own Calvert Cliffs
Nuclear Power Plant (Calvert Cliffs) and BGE's former fossil plants,
supplemented with energy and capacity purchased from the wholesale market as
necessary.
Other States
- ------------
Our domestic merchant energy business is focused on expanding its business
through marketing energy products to wholesale customers and acquiring control
of additional generating facilities. This business will focus on states with
strong growth in energy demand and that provide opportunities through ongoing
deregulation and the creation of competitive markets. Delays in, or the ultimate
form of, deregulation of electric generation in various states may affect our
domestic merchant energy business strategy.
Our domestic merchant energy business has $302.0 million invested in power
projects that sell 142 megawatts of electricity in California under power
purchase agreements as discussed in the California Power Purchase Agreements
section in the Notes to Consolidated Financial Statements on page 15. The
counterparties to the agreements are two California investor-owned utilities,
Southern California Edison Company (SCE) and Pacific Gas and Electric Company
(PGE). Due to various factors, including shortage of generation and the high
cost of natural gas, these utilities' financial condition has been severely
impacted because they are paying more for power than they are allowed to recover
from their customers under the deregulation plan in California. As a result,
these utilities did not maintain current payments for the power they purchased
to meet their customers' energy needs and the credit ratings of these utilities
were downgraded below investment grade. Further, on April 6, 2001, PGE filed for
protection under Chapter 11 of the United States Bankruptcy Code.
Due to the deteriorating financial condition of these utilities, our California
projects did not receive full payment for electricity delivered to these
utilities for the period November 1, 2000 through April 6, 2001. During April,
our projects that sell power to SCE began receiving current payments for power
delivered beginning April 1, 2001, and our projects that sell power to PGE began
receiving current payments for power delivered beginning April 7, 2001. Through
April 6, 2001, our portion of the amount due from these utilities was
approximately $50 million. While we expect to be paid the amount owed to us, we
cannot predict when payment will occur or if full payment will be received. We
have taken reserves in amounts we believe to be reasonable under the current
circumstances.
However, if the ultimate resolution of the events in California prevents
collection of unpaid balances under power purchase agreements by some or all of
our projects it could have a material impact on our financial results.
Additionally, if the events in California result in a modification or
termination of these agreements that reduces future cash flows, we would have to
evaluate whether our investments in the power projects that are parties to the
agreements are impaired. An impairment of these investments could have a
material impact on our financial results. Our domestic merchant energy business
does not have any other direct agreements with these utilities. However, we may
be impacted if one or more of our other counterparties are significantly
affected by the events in California, or by the operation of the California
Power Exchange and the California Independent System Operator.
Gas 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 gas customers have the option to purchase gas from
other suppliers.
Regulation by the Maryland PSC
- ------------------------------
In addition to electric restructuring which was discussed earlier, regulation by
the Maryland PSC influences BGE's businesses.
Under traditional rate regulation that continues after July 1, 2000 for BGE's
electric transmission and distribution, and gas businesses, the Maryland PSC
determines the rates we can charge our customers. Prior to July 1, 2000, BGE's
regulated electric rates consisted primarily of a "base rate" and a "fuel rate."
Effective July 1, 2000, BGE discontinued its electric fuel rate and unbundled
its rates to show separate components for delivery service, competitive
transition charges, standard offer services (generation), transmission,
universal service, and taxes. The rates for BGE's regulated gas business
continue to consist of a "base rate" and a "fuel rate."
21
Base Rate
- ---------
The base rate is the rate the Maryland PSC allows BGE to charge its customers
for the cost of providing them service, plus a profit. BGE has both an electric
base rate and a gas base rate. Higher electric base rates apply during the
summer when the demand for electricity is higher. Gas base rates are not
affected by seasonal changes.
BGE may ask the Maryland PSC to increase base rates from time to time. The
Maryland PSC historically has allowed BGE to increase base rates to recover
increased utility plant asset costs, plus a profit, beginning at the time of
replacement. Generally, rate increases improve our utility earnings because they
allow us to collect more revenue. However, rate increases are normally granted
based on historical data and those increases may not always keep pace with
increasing costs. Other parties may petition the Maryland PSC to decrease base
rates.
On November 17, 1999, BGE filed an application with the Maryland PSC to increase
its gas base rates. The Maryland PSC authorized a $6.4 million annual increase
in our gas base rates effective June 22, 2000.
As a result of the Restructuring Order, BGE's residential electric base rates
are frozen until 2006. Electric delivery service rates are frozen for a
four-year period for commercial and industrial customers. The generation and
transmission components of rates are frozen for different time periods depending
on the service options selected by those customers.
Fuel Rate
- ---------
Through June 30, 2000, we charged our electric customers separately for the fuel
we used to generate electricity (nuclear fuel, coal, gas, or oil) and for the
net cost of purchases and sales of electricity. We charged the actual cost of
these items to the customer with no profit to us. If these fuel costs went up,
the Maryland PSC permitted us to increase the fuel rate.
Under the Restructuring Order, BGE's electric fuel rate was frozen until July 1,
2000, at which time the fuel rate clause was discontinued. We deferred the
difference between our actual costs of fuel and energy and what we collected
from customers under the fuel rate through June 30, 2000.
In September 2000, the Maryland PSC approved the collection of the $54.6 million
accumulated difference between our actual costs of fuel and energy and the
amounts collected from customers that were deferred under the electric fuel rate
clause through June 30, 2000.
We are collecting this accumulated difference from customers over the
twelve-month period beginning October 2000. Effective July 1, 2000, earnings are
affected by the changes in the cost of fuel and energy.
We charge our gas customers separately for the natural gas they purchase from
us. The price we charge for the natural gas is based on a market based rates
incentive mechanism approved by the Maryland PSC. We discuss market based rates
in more detail in the Gas Cost Adjustments section on page 29 and in Note 1 of
our 2000 Annual Report on Form 10-K.
FERC Regulation--Regional Transmission Organizations
- ----------------------------------------------------
In December 1999, FERC issued Order 2000, amending its regulations under the
Federal Power Act to advance the formation of Regional Transmission
Organizations (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 a RTO. FERC also identified the minimum characteristics and
functions that a transmission entity must satisfy in order to be considered a
RTO.
According to Order 2000, 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 PJM (Pennsylvania-New
Jersey-Maryland) Interconnection, was required to make a filing no later than
January 15, 2001. PJM and the joint transmission owners, including BGE, made the
filing on October 11, 2000. That filing explained the extent to which PJM met
the minimum characteristics and functions of a RTO and explained its plans to
conform to these characteristics and functions.
As a member of PJM, an existing ISO, BGE does not expect to be materially
impacted by Order 2000. However, we are appealing two requirements of Order 2000
whereby:
o we would have to go through PJM to make a filing with FERC to change our
transmission rates, and
o we would have to transfer operational control of our transmission
facilities to PJM.
The U.S. Supreme Court agreed to hear an appeal by others of FERC Order 888. We
cannot predict the outcome of this appeal or the impact on BGE at this time.
22
Weather
- -------
Domestic Merchant Energy Business
- ---------------------------------
Weather conditions in the different regions of North America influence the
financial results of our domestic merchant energy business. Typically, demand
for electricity and its price are higher in the summer and the winter, when
weather is more extreme. However, all regions of North America typically do not
experience extreme weather conditions at the same time. Since the majority of
our generating plants currently are located in PJM, our financial results are
affected, to a greater extent, by weather conditions in this area. However, by
2005, we expect to control approximately 30,000 megawatts of generation
throughout various regions of North America.
Current weather conditions also can affect the forward market price of energy
commodity and derivative contracts used by our power marketing operation that
are accounted for on a mark-to-market basis. To the extent that our power
marketing operation purchases and sells such contracts, our financial results
could be influenced by the impact that weather conditions have on the market
price of such contracts.
BGE
- ---
Weather affects the demand for electricity and gas for our regulated businesses.
Very hot summers and very cold winters increase demand. Mild weather reduces
demand. Residential sales for our regulated businesses are impacted more by
weather than commercial and industrial sales, which are mostly affected by
business needs for electricity and gas.
However, the Maryland PSC allows us to record a monthly adjustment to our
regulated gas business revenues to eliminate the effect of abnormal weather
patterns. We discuss this further in the Weather Normalization section on page
29.
We measure the weather's effect using "degree days." A degree day is the
difference between the average daily actual temperature and a baseline
temperature of 65 degrees. Cooling degree days result when the average daily
actual temperature exceeds the 65 degree baseline. Heating degree days result
when the average daily actual temperature is less than the baseline.
During the cooling season, hotter weather is measured by more cooling degree
days and results in greater demand for electricity to operate cooling systems.
During the heating season, colder weather is measured by more heating degree
days and results in greater demand for electricity and gas to operate heating
systems.
We show the number of heating degree days in the quarter ended March 31, 2001and
2000, and the percentage change in the number of degree days between these
periods in the following table:
Quarter Ended
March 31
2001 2000
- --------------------------------------------------
Heating degree days 2,446 2,305
Percent change from prior period 6.1%
Other Factors
- -------------
Other factors, aside from weather, impact the demand for electricity and gas in
our regulated businesses. These factors include the "number of customers" and
"usage per customer" during a given period. We use these terms later in our
discussions of regulated electric and gas operations. In those sections, we
discuss how these and other factors affected electric and gas sales during the
periods presented.
The number of customers in a given period is affected by new home and apartment
construction and by the number of businesses in our service territory. Under the
Restructuring Order, BGE's electric customers can become delivery service
customers only and can purchase their electricity from other sources. We will
collect a delivery service charge to recover the fixed costs for the service we
provide. The remaining electric customers will receive standard offer service
from BGE at the fixed rates provided by the Restructuring Order. Usage per
customer refers to all other items impacting customer sales that cannot be
measured separately. These factors include the strength of the economy in our
service territory. When the economy is healthy and expanding, customers tend to
consume more electricity and gas. Conversely, during an economic downtrend, our
customers tend to consume less electricity and gas.
23
Results of Operations for the Quarter Ended March 31, 2001 Compared with the
- ----------------------------------------------------------------------------
Same Period of 2000
- -------------------
In this section, we discuss our earnings and the factors affecting them. We
begin with a general overview, then separately discuss earnings for our
operating segments. Changes in fixed charges, income taxes, and other income are
discussed in the aggregate for all segments in the Consolidated Nonoperating
Income and Expenses section on page 30.
Overview
- --------
Total Earnings Per Share of Common Stock
- ----------------------------------------
Quarter Ended
March 31
2001* 2000
- -----------------------------------------------------
Earnings before nonrecurring
charges included in operations:
Domestic merchant energy $.28 $ .13
Regulated electric .18 .22
Regulated gas .19 .14
Other nonregulated .03 .01
- -----------------------------------------------------
Total earnings per share
before nonrecurring charges
included in operations: .68 .50
Nonrecurring charges
included in operations:
TVSERP -- (.02)
- -----------------------------------------------------
Earnings per share before
cumulative effect of change
in accounting principle .68 .48
Cumulative effect of change
in accounting principle,
net of income taxes .06 --
- -----------------------------------------------------
Total earnings per share $.74 $ .48
=====================================================
*Earnings for the periods presented reflect a significant shift from the
regulated electric business to the domestic merchant energy business as a result
of the transfer of BGE's electric generation assets to nonregulated subsidiaries
on July 1, 2000 in accordance with the Restructuring Order. We discuss the
Restructuring Order in more detail in Current Issues - Electric Competition
section on page 20.
Quarter Ended March 31, 2001
- ----------------------------
Our total earnings for the quarter ended March 31, 2001 increased $39.7 million,
or $.26 per share, compared to the same period of 2000. Our total earnings
increased mostly because of three items:
o Earnings before nonrecurring charges increased compared to the same period
of 2000 mostly because we recorded $37.5 million pre-tax, or approximately
$.15 per share, of amortization expense for the reduction of our generating
plants associated with the Restructuring Order in the first quarter of 2000
that had a negative impact in that quarter.
o We recorded an $8.5 million after-tax, or $.06 per share, gain for the
cumulative effect of adopting Statement of Financial Accounting Standard
(SFAS) No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended, in the first quarter of 2001. We discuss the
adoption of SFAS No. 133 in the Notes to Consolidated Financial Statements
on page 16.
o We recorded a nonrecurring expense of $2.5 million, after-tax, for BGE
employees that elected to participate in a Targeted Voluntary Special Early
Retirement Program (TVSERP) in the first quarter of 2000 that had a
negative impact in that year.
Earnings per share contributions from all our business segments will be impacted
by additional dilution resulting from the issuance of 13.2 million shares of
common stock between January 1, 2001 and the date of our report.
In the following sections, we discuss our earnings by business segment in
greater detail.
Domestic Merchant Energy Business
- ---------------------------------
Our domestic merchant energy business engages primarily in power marketing and
domestic power generation. We describe these businesses in more detail in our
2000 Annual Report on Form 10-K in Item 1. Business -- Domestic Merchant Energy
Business.
As discussed in the Current Issues -- Electric Competition section on page 20,
our domestic merchant energy business was significantly impacted by the July 1,
2000 implementation of customer choice in Maryland. At that time, BGE's
generating assets became part of our nonregulated domestic merchant energy
business, and Constellation Power Source began selling to BGE the energy and
capacity required to meet its standard offer service obligations for the first
three years of the transition period.
24
Constellation Power Source obtains the energy and capacity to supply BGE's
standard offer service obligations from affiliates that own Calvert Cliffs and
BGE's former fossil plants, supplemented with energy and capacity purchased from
the wholesale energy market as necessary. Constellation Power Source also
manages our wholesale market price risk.
In addition, effective July 1, 2000, domestic merchant energy business revenues
include 90% of the competitive transition charges BGE collects from its
customers (CTC revenues) and the portion of BGE's revenues providing for nuclear
decommissioning costs.
Our earnings are exposed to various market risks as discussed in our 2000 Annual
Report on Form 10-K in Item 7. Management Discussion and Analysis -- Market
Risk. For example, our earnings are exposed to the risks of the competitive
wholesale electricity market to the extent that our domestic merchant energy
business has to purchase energy and/or capacity to meet obligations to supply
power or meet other energy-related contractual arrangements at prices which may
approach or exceed the applicable fixed sales price obligations. If the price of
obtaining energy in the wholesale market exceeds the fixed sales price, our
earnings would be adversely affected. We are also affected by operational risk,
that is, the risk that a generating plant will not be available to produce
energy when the energy is required. Imbalances in demand and supply can occur
not only because of plant outages, but also because of transmission constraints,
or extreme temperatures (hot or cold) causing demand to exceed available supply.
We cannot estimate the impact of the increased financial risks associated with
the competitive wholesale electricity market. However, these financial risks
could have a material impact on our financial results.
Earnings
- --------
Quarter Ended
March 31
2001 2000
- --------------------------------------------------
(In millions, except per share amounts)
Revenues $336.7 $ 69.3
Operating expenses 218.2 36.3
Depreciation and amortization 39.6 1.5
Taxes other than income taxes 11.2 --
- --------------------------------------------------
Income from operations $67.7 $31.5
==================================================
Net income $42.4 $18.2
==================================================
Earnings per share $.28 $.13
==================================================
Above amounts include intercompany transactions eliminated in our Consolidated
Financial Statements. The Information by Operating Segment section within the
Notes to Consolidated Financial Statements on page 12 provides a reconciliation
of operating results by segment to our Consolidated Financial Statements.
Revenues
- --------
During the quarter ended March 31, 2001, domestic merchant energy revenues
increased $267.4 million compared to the same period of 2000 mostly because of:
o a $251.3 million increase related to providing BGE the energy and capacity
required to meet its standard offer service obligation effective July 1,
2000,
o a $50.7 million increase related to CTC and decommissioning revenues
included in the domestic merchant energy business effective July 1, 2000,
and
o higher revenues from our domestic generation operations.
These increases were partially offset by lower revenues from our power marketing
operation.
We discuss the revenues for our power marketing and domestic generation
operations in the sections below.
Power Marketing
- ---------------
Power marketing revenues decreased compared to the same period of 2000 mostly
because of the effect of unfavorable market price changes on open trading
positions and lower revenues from new structured transactions.
Constellation Power Source uses the mark-to-market method of accounting. We
discuss the mark-to-market method of accounting and Constellation Power Source's
activities in more detail in Note 1 of our 2000 Annual Report on Form 10-K. As a
result of the nature of its operations and the use of mark-to-market accounting,
Constellation Power Source's revenues and earnings will fluctuate. We cannot
predict these fluctuations, but the effect on our revenues and earnings could be
material. The primary factors that cause these fluctuations are:
o the number and size of new transactions,
o the magnitude and volatility of changes in commodity prices and interest
rates, and
o the number and size of open commodity and derivative positions
Constellation Power Source holds or sells.
Constellation Power Source's management uses its best estimates to determine the
fair value of commodity and derivative positions it holds and sells. These
estimates consider various factors including closing exchange and
over-the-counter price quotations, time value, volatility factors, and credit
exposure. However, it is possible that future market prices could vary from
those used in recording assets and liabilities from power marketing and trading
activities, and such variations could be material.
25
Domestic Generation
- -------------------
Our domestic generation revenues increased compared to same period of 2000
mostly because we recorded a $9.5 million gain on the sale of a project under
development located in the PJM region.
California Power Purchase Agreements
- ------------------------------------
Our domestic generation operation has $302.0 million invested in 14 projects
that sell electricity in California to SCE and PGE under power purchase
agreements called "Interim Standard Offer No. 4" agreements.
Under these agreements, the electricity rates changed from fixed rates to
variable rates beginning in 1996. In 2000, the last four projects transitioned
to variable rates. Revenues from these projects were about the same compared to
the same period of 2000. While energy rates were higher compared to the same
period of 2000, this was offset by reserves established for our exposure in
California. We discuss the developments in California in the Current
Issues--Electric Competition section on page 21.
We also describe these projects and the transition process in the Notes to
Consolidated Financial Statements and Note 10 of our 2000 Annual Report on Form
10-K.
Operating Expenses
- ------------------
During the quarter ended March 31, 2001, domestic merchant energy operating
expenses increased $181.9 million compared to the same period of 2000 mostly
because of an increase of $103.4 million in fuel costs and $92.0 million in
operations and maintenance costs. These costs were associated with the
generation plants that were transferred from BGE effective July 1, 2000. This
was partially offset by lower operating expenses by our power marketing
operation mostly related to the decline in revenues.
Depreciation and Amortization Expense
- -------------------------------------
During the quarter ended March 31, 2001, domestic merchant energy depreciation
and amortization expense increased $38.1 million compared to the same period of
2000 mostly because of $37.5 million of expenses associated with the generation
plants that were transferred from BGE effective July 1, 2000.
Taxes Other than Income Taxes
- -----------------------------
During the quarter ended March 31, 2001, domestic merchant energy taxes other
than income taxes increased $11.2 million compared to the same period of 2000
because of $11.2 million of taxes other than income taxes associated with the
generation plants that were transferred from BGE effective July 1, 2000.
Regulated Electric Business
- ---------------------------
As previously discussed, our regulated electric business was significantly
impacted by the July 1, 2000 implementation of customer choice. These changes
include BGE's generating assets and related liabilities becoming part of our
nonregulated domestic merchant energy business on that date.
Earnings
- --------
Quarter Ended
March 31
2001 2000
- -----------------------------------------------------
(In millions, except per share amounts)
Electric revenues $492.3 $524.6
Electric fuel and purchased 265.8 119.4
energy
Operations and maintenance 61.8 154.1
Depreciation and amortization 43.4 112.6
Taxes other than income taxes 35.9 46.1
- -----------------------------------------------------
Income from operations $85.4 $ 92.4
=====================================================
Net income $27.7 $ 30.8
=====================================================
Total earnings per share before
nonrecurring charges included
in operations: $.18 $.22
TVSERP -- (.02)
- -----------------------------------------------------
Earnings per share $.18 $.20
=====================================================
Above amounts include intercompany transactions eliminated in our Consolidated
Financial Statements. The Information by Operating Segment section within the
Notes to Consolidated Financial Statements on page12 provides a reconciliation
of operating results by segment to our Consolidated Financial Statements.
Electric Revenues
- -----------------
The changes in electric revenues in 2001 compared to 2000 were caused by:
Quarter Ended
March 31
2001 vs. 2000
- ---------------------------------------------------
(In millions)
Electric system sales volumes $ 9.0
Rates (35.9)
Fuel rate surcharge 14.8
- ---------------------------------------------------
Total change in electric revenues
from electric system sales (12.1)
Interchange and other sales (22.9)
Other 2.7
- ---------------------------------------------------
Total change in electric revenues $(32.3)
===================================================
26
Electric System Sales Volumes
- -----------------------------
"Electric system sales volumes" are sales to customers in our service territory
at rates set by the Maryland PSC. These sales do not include interchange sales
and sales to others.
The percentage changes in our electric system sales volumes, by type of
customer, in 2001 compared to 2000 were:
Quarter Ended
March 31
2001 vs. 2000
- ---------------------------------------------------
Residential 6.2%
Commercial 2.7
Industrial (0.4)
During the quarter ended March 31, 2001, we sold more electricity to residential
customers compared to the same period of 2000 due to higher usage per customer,
an increased number of customers, and colder winter weather. We sold more
electricity to commercial customers mostly due to higher usage per customer and
an increased number of customers. We sold about the same amount of electricity
to industrial customers.
Rates
- -----
Prior to July 1, 2000, our rates primarily consisted of an electric base rate
and an electric fuel rate. Effective July 1, 2000, BGE discontinued its electric
fuel rate and unbundled its rates to show separate components for delivery
service, transition charges, standard offer services (generation), transmission,
universal service, and taxes. BGE's rates also were frozen in total except for
the implementation of a residential base rate reduction totaling approximately
$54 million annually. In addition, 90% of the CTC revenues BGE collects and the
portion of its revenues providing for decommissioning costs, are included in
revenues of the domestic merchant energy business effective July 1, 2000.
During the quarter ended March 31, 2001, rate revenues decreased compared to the
same period of 2000 mostly because of the $6.0 million decrease caused by the
6.5% annual residential rate reduction, and the $50.7 million transfer of
revenues to the domestic merchant energy business discussed above. These
decreases were partially offset by the net impact of the rate restructuring
discussed above.
Fuel Rate Surcharge
- -------------------
In September 2000, the Maryland PSC approved the collection of the $54.6 million
accumulated difference between our actual costs of fuel and energy and the
amounts collected from customers that were deferred under the electric fuel rate
clause through June 30, 2000. We discuss this further in the Electric Fuel Rate
Clause section below.
Interchange and Other Sales
- ---------------------------
"Interchange and other sales" are sales in the PJM energy market and to others.
PJM is an ISO that also operates a regional power pool with members that include
many wholesale market participants, as well as BGE, and other utility companies.
Prior to the implementation of customer choice, BGE sold energy to PJM members
and to others after it had satisfied the demand for electricity in its own
system.
Effective July 1, 2000, BGE no longer engages in interchange sales and these
activities are included in our domestic merchant energy business which resulted
in a decrease in interchange and other sales for the quarter ended March 31,
2001 compared to the same period of 2000.
Electric Fuel and Purchased Energy Expenses
- -------------------------------------------
Quarter Ended
March 31
2001 2000
- ----------------------------------------------------
(In millions)
Actual costs $251.3 $122.6
Net recovery (deferral) of costs
under electric fuel rate clause 14.5 (3.2)
- ----------------------------------------------------
Total electric fuel and
purchased energy expenses $265.8 $119.4
====================================================
Actual Costs
- ------------
During the quarter March 31, 2001, our actual costs of fuel and purchased energy
were higher compared to the same period of 2000 mostly because of the
deregulation of electric generation. As discussed in the Current
Issues--Electric Competition section on page 20, effective July 1, 2000, BGE
transferred its generating assets to, and began purchasing substantially all of
the energy and capacity required to provide electricity to standard offer
service customers from, the domestic merchant energy business.
In 2001, the cost of energy BGE purchased from our domestic merchant energy
business was $251.3 million. The higher amount paid for purchased energy is
offset by the absence of $103.4 million in fuel costs, and lower operations and
maintenance, depreciation, taxes, and other costs at BGE as a result of no
longer owning and operating the transferred electric generation plants.
Prior to July 1, 2000, BGE's purchased fuel and energy costs only included
actual costs of fuel to generate electricity (nuclear fuel, coal, gas, or oil)
and electricity we bought from others.
Electric Fuel Rate Clause
- -------------------------
Prior to July 1, 2000, we deferred (included as an asset or liability on the
Consolidated Balance Sheets and excluded from the Consolidated Statements of
Income) the difference between our actual costs of fuel and energy and what we
collected from customers under the fuel rate in a given period. Effective July
1, 2000, the fuel rate clause was discontinued under the terms of the
27
Restructuring Order. In September 2000, the Maryland PSC approved the collection
of the $54.6 million accumulated difference between our actual costs of fuel and
energy and the amounts collected from customers that were deferred under the
electric fuel rate clause through June 30, 2000. We are collecting this
accumulated difference from customers over the twelve-month period beginning
October 2000.
Electric Operations and Maintenance Expenses
- --------------------------------------------
During the quarter ended March 31, 2001, regulated electric operations and
maintenance expenses decreased $92.3 million compared to 2000 mostly because
effective July 1, 2000, $92.0 million of costs were no longer incurred by this
business segment. These costs were associated with the electric generation
assets that were transferred to the domestic merchant energy business. In
addition, BGE recognized $4.2 million of expense for employees that elected to
participate in a Targeted Voluntary Special Early Retirement Program in 2000
that had a negative impact in that year.
Electric Depreciation and Amortization Expense
- ----------------------------------------------
During the quarter ended March 31, 2001, regulated electric depreciation and
amortization expense decreased $69.2 million compared to 2000 mostly because of:
o the absence of $37.5 million of amortization expense recorded in the first
quarter of 2000 associated with the $150 million reduction of our
generating plants provided for in the Restructuring Order, and
o $37.5 million of expenses associated with the transfer of the generation
assets to the domestic merchant energy business effective July 1, 2000.
These decreases were offset partially by more electric plant in service (as our
level of plant in service changes, the amount of depreciation and amortization
expense changes) and higher amortization associated with regulatory assets.
Electric Taxes Other Than Income Taxes
- --------------------------------------
During the quarter ended March 31, 2001, regulated electric taxes other than
income taxes decreased $10.2 million compared to the same period of 2000. This
was mostly due to the absence of $11.2 million of taxes other than income taxes
associated with the generation assets that were transferred to the domestic
merchant energy business effective July 1, 2000.
Regulated Gas Business
- ----------------------
Earnings
- --------
Quarter Ended
March 31
2001 2000
- ----------------------------------------------------
(In millions, except per share amounts)
Gas revenues $357.6 $195.1
Gas purchased for resale 252.9 103.0
Operations and maintenance 24.6 23.5
Depreciation and amortization 14.3 13.1
Taxes other than income taxes 10.1 13.9
- ----------------------------------------------------
Income from operations $55.7 $41.6
====================================================
Net income $28.7 $20.3
====================================================
Earnings per share $.19 $.14
====================================================
Above amounts include intercompany transactions eliminated in our Consolidated
Financial Statements. The Information by Operating Segment section within the
Notes to Consolidated Financial Statements on page12 provides a reconciliation
of operating results by segment to our Consolidated Financial Statements.
Earnings from the regulated gas business increased during the quarter ended
March 31, 2001 compared to 2000 mostly due to timing differences in this
segment's operations that are expected to reverse themselves by the end of 2001.
All BGE customers have the option to purchase gas from other suppliers. To date,
customer choice has not had a material effect on our, and BGE's, financial
results.
Gas Revenues
- ------------
The changes in gas revenues in 2001 compared to 2000 were caused by:
Quarter Ended
March 31
2001 vs. 2000
- ---------------------------------------------------
(In millions)
Gas system sales volumes $ 16.5
Base rates 1.5
Weather normalization (7.4)
Gas cost adjustments 105.1
- ---------------------------------------------------
Total change in gas revenues
from gas system sales 115.7
Off-system sales 46.1
Other 0.7
- ---------------------------------------------------
Total change in gas revenues $162.5
===================================================
28
Gas System Sales Volumes
- ------------------------
The percentage changes in our gas system sales volumes, by type of customer, in
2001 compared to 2000 were:
Quarter Ended
March 31
2001 vs. 2000
- --------------------------------------------------
Residential 11.9%
Commercial 1.1
Industrial (24.8)
During the quarter ended March 31, 2001, we sold more gas to residential
customers compared to the same period of 2000 mostly due to colder winter
weather, higher usage per customer, and an increased number of customers. We
sold about the same amount of gas to commercial customers. The colder winter
weather was offset by lower usage per customer. We sold less gas to industrial
customers mostly because of lower usage per customer (including Bethlehem Steel)
due to their switching to lower cost alternative fuel sources.
Base Rates
- ----------
During the quarter ended March 31, 2001, base rate revenues increased slightly
compared to the same period of 2000 mostly because the Maryland PSC authorized a
$6.4 million annual increase in our base rates effective June 22, 2000.
Weather Normalization
- ---------------------
The Maryland PSC allows us to record a monthly adjustment to our gas revenues to
eliminate the effect of abnormal weather patterns on our gas system sales
volumes. This means our monthly gas revenues are based on weather that is
considered "normal" for the month and, therefore, are not affected by actual
weather conditions.
Gas Cost Adjustments
- --------------------
We charge our gas customers for the natural gas they purchase from us using gas
cost adjustment clauses set by the Maryland PSC as described in Note 1 of our
2000 Annual Report on Form 10-K. However, 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. During the quarter ended
March 31, 2001, the shareholders' portion increased $3.2 million compared to the
same period of 2000.
Delivery service customers, including Bethlehem Steel, are not subject to the
gas cost adjustment clauses because we are not selling gas to them. We charge
these 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 and
are included in gas system sales volumes.
During the quarter ended March 31, 2001, gas cost adjustment revenues increased
compared to the same period of 2000 mostly because we sold more gas at a higher
price. In 2001, the revenue increase reflects the significant increase in
natural gas prices.
Off-System Sales
- ----------------
Off-system gas sales are low-margin direct sales of gas to wholesale suppliers
of natural gas outside our service territory. Off-system gas sales, which occur
after we have satisfied our customers' demand, are not subject to gas cost
adjustments. The Maryland PSC approved an arrangement for part of the margin
from off-system sales to benefit customers (through reduced costs) and the
remainder to be retained by BGE (which benefits shareholders). Changes in
off-system sales do not significantly impact earnings.
During the quarter ended March 31, 2001, revenues from off-system gas sales
increased compared to the same period of 2000 mostly because we sold more gas
off-system at a higher price. In 2001, the revenue increase reflects the
significant increase in natural gas prices.
Gas Purchased For Resale Expenses
- ---------------------------------
Actual costs include the cost of gas purchased for resale to our customers and
for off-system sales. Actual costs do not include the cost of gas purchased by
delivery service customers.
During the quarter ended March 31, 2001, our gas costs increased compared to the
same period of 2000 mostly because we bought more gas for both system and
off-system sales and all of the gas purchased was at a higher price.
Other Gas Operating Expenses
- ----------------------------
During the quarter ended March 31, 2001, other gas operating expenses were about
the same compared to the same period of 2000.
29
Other Nonregulated Businesses
- -----------------------------
Earnings
- --------
Quarter Ended
March 31
2001 2000
- --------------------------------------------------------
(In millions, except per share amounts)
Revenues $238.2 $212.5
Operating expenses 205.8 186.8
Depreciation and amortization 6.3 5.3
Taxes other than income taxes 1.2 1.1
- --------------------------------------------------------
Income from operations $ 24.9 $ 19.3
========================================================
Net income before cumulative effect
of change in accounting principle $ 4.5 $2.8
Cumulative effect of change in
accounting principle 8.5 --
- --------------------------------------------------------
Net income $13.0 $2.8
========================================================
Earnings per share before cumulative
effect of change in accounting
principle $.03 $.01
Cumulative effect of change in
accounting principle .06 --
- --------------------------------------------------------
Earnings per share $.09 $.01
========================================================
Above amounts include intercompany transactions eliminated in our Consolidated
Financial Statements. The Information by Operating Segment section within the
Notes to Consolidated Financial Statements on page 12 provides a reconciliation
of operating results by segment to our Consolidated Financial Statements.
During the quarter ended March 31, 2001, earnings from our other nonregulated
businesses increased compared to the same period of 2000 mostly because of the
earnings related to the fair value of the Orion warrant. Under SFAS No. 133, we
are required to mark-to- market the value of the Orion warrant through earnings
each reporting period. The value of the warrant may fluctuate under
mark-to-market accounting based on changes in the stock price of Orion and the
volatility of that price in future periods. We discuss the Orion warrant further
in the Accounting Standard Adopted section of the Notes to Consolidated
Financial Statements on page 16.
Most of Constellation Real Estate Group's real estate and senior-living projects
are in the Baltimore-Washington corridor. The area has had a surplus of
available land in recent years and as a result these projects have been
economically hurt.
Constellation Real Estate's projects have continued to incur carrying costs and
depreciation over the years. Additionally, this operation has been charging
interest payments to expense rather than capitalizing them for some undeveloped
land where development activities have stopped. These carrying costs,
depreciation, and interest expenses have decreased earnings and are expected to
continue to do so.
Cash flow from real estate and senior-living operations has not been enough to
make the monthly loan payments on some of these projects. Cash shortfalls have
been covered by cash obtained from the cash flows of, or additional borrowings
by, other nonregulated subsidiaries.
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 and senior-living projects. If we were to decide to sell our projects, we
could have write-downs. In addition, if we were to sell our 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.
Our current real estate and senior-living strategy is to hold each project until
we can realize a reasonable value for it. Under accounting rules, we are
required to write down the value of a project to market value in either of two
cases. The first is if we change our intent about a project from an intent to
hold to an intent to sell and the market value of that project is below book
value. The second is if the expected cash flow from the project is less than the
investment in the project.
Consolidated Nonoperating Income and Expenses
- ---------------------------------------------
Fixed Charges
- -------------
During the quarter ended March 31, 2001, total fixed charges increased $2.3
million compared to the same period of 2000 mostly because we had higher debt
outstanding.
Income Taxes
- ------------
During the quarter ended March 31, 2001, our total income taxes increased $12.5
million compared to the same period of 2000 mostly because we had higher taxable
income from our domestic merchant energy and utility businesses.
30
Financial Condition
- -------------------
Cash Flows
- ----------
Quarter Ended
March 31
2001 2000
- -----------------------------------------------------
(In millions)
Cash provided by (used in):
Operating Activities $194.7 $298.0
Investing Activities (278.9) (128.0)
Financing Activities 420.1 (194.5)
During the quarter ended March 31, 2001, we generated less cash from operations
compared to the same period in 2000 mostly because of changes in working capital
requirements.
During the quarter ended March 31, 2001, we used more cash for investing
activities compared to the same period in 2000 mostly due to an increase in
investments in new generation facilities.
During the quarter ended March 31, 2001, we had more cash from financing
activities compared to the same period of 2000 mostly because we issued more
long-term debt and common stock. This was partially offset by repayment of
long-term debt and higher net maturities of short-term borrowings.
Security Ratings
- ----------------
Independent credit-rating agencies rate Constellation Energy and BGE's
fixed-income securities. The ratings indicate the agencies' assessment of each
company's ability to pay interest, distributions, dividends, and principal on
these securities. These ratings affect how much it will cost each company to
sell these securities. The better the rating, the lower the cost of the
securities to each company when they sell them. Constellation Energy and BGE's
securities ratings at the date of this report are:
Standard Moody's
& Poors Investors Fitch
Rating Group Service IBCA
- ---------------------------------------------------------
Constellation Energy
--------------------
Unsecured Debt A- A3 A-
BGE
---
Mortgage Bonds AA- A1 A+
Unsecured Debt A A2 A
Trust Originated
Preferred Securities
and Preference Stock A- "a2" A-
Upon separation of our merchant energy business, the merchant energy business
and BGE Corp. will be rated separately. The ratings for these entities at
separation could differ from Constellation Energy's current ratings. However, we
expect the new ratings to be investment grade. We do not expect BGE's ratings to
be negatively impacted by the separation.
31
Capital Resources
- -----------------
Our business requires a great deal of capital. Our estimated annual amounts for
the years 2001 through 2003, are shown in the table below.
We will continue to have cash requirements for:
o working capital needs including the payments of interest, distributions,
and dividends,
o capital expenditures, and
o the retirement of debt and redemption of preference stock.
Capital requirements for 2001 through 2003 include estimates of funding for
existing and anticipated projects. We continuously review and modify those
estimates. Actual requirements may vary from the estimates included in the table
below because of a number of factors including:
o regulation, legislation, and competition,
o BGE load requirements,
o environmental protection standards,
o the type and number of projects selected for development,
o the effect of market conditions on those projects,
o the cost and availability of capital, and
o the availability of cash from operations.
Our estimates are also subject to additional factors. Please see the Forward
Looking Statements section on page 36.
Calendar Year Estimates
2001 2002 2003
- -----------------------------------------------------------------------------------------------------------
(In millions)
Nonregulated Capital Requirements:
- ----------------------------------
Investment requirements:
Domestic merchant energy $1,473 $720 $1,540
Other 50 79 105
- -----------------------------------------------------------------------------------------------------------
Total investment requirements 1,523 799 1,645
Retirement of long-term debt 406* 215 200
- -----------------------------------------------------------------------------------------------------------
Total nonregulated capital requirements 1,929 1,014 1,845
Utility Capital Requirements:
- -----------------------------
Construction expenditures:
Regulated electric 168 171 173
Regulated gas 53 52 52
Common 30 26 20
- -----------------------------------------------------------------------------------------------------------
Total capital expenditures 251 249 245
Retirement of long-term debt and redemption of
preference stock 394 320 286
- -----------------------------------------------------------------------------------------------------------
Total utility capital requirements 645 569 531
- -----------------------------------------------------------------------------------------------------------
Total capital requirements $2,574 $1,583 $2,376
===========================================================================================================
* Amount does not include $1.4 billion in Constellation Energy debt that we
expect to be redeemed at or prior to business separation.
32
Capital Requirements
- --------------------
Domestic Merchant Energy Business
- ---------------------------------
Our domestic merchant energy business will require additional funding for
growing its power marketing operation and developing and acquiring power
projects.
Our domestic merchant energy business investment requirements include the
planned acquisition of the Nine Mile Point nuclear power plant for $815 million,
including fuel, and the planned construction of 1,100 megawatts of peaking
capacity in the Mid-Atlantic and Mid-West regions by the summer of 2001. An
additional 6,700 megawatts of peaking and combined cycle production facilities
are scheduled for completion in 2002 and beyond in various regions of North
America. Longer range, our plans are to control approximately 30,000 megawatts
of generation capacity by 2005. For further information see the Strategy section
on page 19. Our domestic merchant energy business investment requirements also
include construction expenditures for improvements to existing generating plants
and costs for replacing the steam generators at Calvert Cliffs.
In March 2000, we received the license extension from the Nuclear Regulatory
Commission (NRC) that extends Calvert Cliffs' operating licenses to 2034 for
Unit 1 and 2036 for Unit 2. If we do not replace the steam generators, we will
not be able to operate these units through our operating license periods. We
expect the steam generator replacement to occur during the 2002 refueling outage
for Unit 1 and during the 2003 refueling outage for Unit 2. We estimate these
Calvert Cliffs' costs to be:
o $ 63 million in 2001,
o $ 91 million in 2002, and
o $ 60 million in 2003.
Additionally, our estimates of future electric generation construction
expenditures include the costs of complying with Environmental Protection Agency
(EPA), Maryland and Pennsylvania nitrogen oxides emissions (NOx) reduction
regulations as follows:
o $ 85 million in 2001,
o $ 37 million in 2002, and
o $ 7 million in 2003.
We discuss the NOx regulations and timing of expenditures in the Environmental
Matters section of the Notes to Consolidated Financial Statements on page 13.
Regulated Electric and Gas
- --------------------------
Regulated electric and gas construction expenditures primarily include new
business construction needs and improvements to existing facilities.
Funding for Capital Requirements
- --------------------------------
On October 23, 2000, we announced initiatives designed to advance our growth
strategies in the domestic merchant energy business and a change in our common
stock dividend policy effective April 2001, as discussed in the Strategy section
on page 19.
As part of these initiatives, we expect to redeem all of the outstanding debt at
Constellation Energy at or prior to the separation of our domestic merchant
energy business and remaining businesses. The redemption will occur through a
combination of open market purchases, tender offers, and redemption calls. We
plan to arrange an interim facility to finance working capital requirements and
to repurchase the $1.4 billion of debt. Prior to or upon separation, this
facility will be assigned to the new merchant energy company.
Domestic Merchant Energy Business
- ---------------------------------
Funding for the expansion of our domestic merchant energy business is expected
from internally generated funds, commercial paper, long-term debt, equity,
leases, and other financing instruments issued by Constellation Energy and its
subsidiaries. Specifically related to the Nine Mile Point acquisition, one-half
of the purchase price, or $407.5 million, is due at the closing of the
transaction and the remainder is being financed through the sellers in a note to
be repaid over five years with an interest rate of 11.0%. We expect to close the
transaction with funds from available sources at that time. Payments on the note
over the five years are expected to come from internally generated funds. Longer
term, we expect to fund our growth and operating objectives with a mixture of
debt and equity with an overall goal of maintaining an investment grade credit
profile.
When our domestic merchant energy business separates from our remaining
businesses, it initially expects to reinvest its earnings to fund its growth and
not to pay a dividend.
Constellation Energy has a commercial paper program where it can issue up to
$500 million in short-term notes to fund its nonregulated businesses. To support
its commercial paper program, Constellation Energy maintains two revolving
credit agreements totaling $565 million, of which one facility can also issue
letters of credit. In addition, Constellation Energy has access to interim lines
of credit as required from time to time to support its outstanding commercial
paper.
33
BGE
- ---
Funding for utility capital expenditures is expected from internally generated
funds, commercial paper issuances, available capacity under credit facilities,
the issuance of long-term debt, trust securities, or preference stock, and/or
from time to time equity contributions from Constellation Energy.
At March 31, 2001, FERC authorized BGE to issue up to $700 million of short-term
borrowings, including commercial paper. In addition, BGE maintains $193 million
in annual committed bank lines of credit and has $25 million in bank revolving
credit agreements to support the commercial paper program. In addition, BGE has
access to interim lines of credit as required from time to time to support its
outstanding commercial paper.
During the three years from 2001 through 2003, we expect our regulated utility
business to provide at least 130% of the cash needed to meet the capital
requirements for its operations, excluding cash needed to retire debt.
Other Nonregulated Businesses
- -----------------------------
BGE Home Products & Services may meet capital requirements through sales of
receivables. ComfortLink has a revolving credit agreement totaling $50 million
to provide liquidity for short-term financial needs.
If we can get a reasonable value for our real estate projects, senior-living
facilities, Latin American operation, and other investments, additional cash may
be obtained by selling them. Our ability to sell or liquidate assets will depend
on market conditions, and we cannot give assurances that these sales or
liquidations could be made. We discuss the real estate and senior-living
facilities operation and market conditions in the Other Nonregulated Businesses
section on page 30.
- --------------------------------------------------------------------------------
Other Matters
- -------------
Environmental Matters
- ---------------------
We are subject to federal, state, and local laws and regulations that work to
improve or maintain the quality of the environment. If certain substances were
disposed of or released at any of our properties, whether currently operating or
not, these laws and regulations require us to remove or remedy the effect on the
environment. This includes Environmental Protection Agency Superfund sites. You
will find details of our environmental matters in the Environmental Matters
section of the Notes to Consolidated Financial Statements on page 13 and in our
2000 Annual Report on Form 10-K in Item 1. Business - Environmental Matters.
These details include financial information. Some of the information is about
costs that may be material.
Accounting Standard Adopted
- ---------------------------
We discuss a recently adopted accounting standard in the Accounting Standard
Adopted section of the Notes to Consolidated Financial Statements on page 16.
- --------------------------------------------------------------------------------
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- ------------------------------------------------------------------
We discuss the following information related to our market risk:
o risk associated with the purchase and sale of energy in a deregulated
environment as discussed in the Current Issues - Electric Competition
section of Management's Discussion and Analysis on page 20,
o financing activities and an accounting standard adopted in the Notes to
Consolidated Financial Statements on pages 12 and 16, and
o activities of our power marketing business in the Domestic Merchant Energy
Business section of Management's Discussion and Analysis beginning on page
25.
34
PART II. OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings
- --------------------------
Employment Discrimination
- -------------------------
Miller, et al. v. Baltimore Gas and Electric Company, et al. - This action was
filed on September 20, 2000 in the U.S. District Court for the District of
Maryland. Besides BGE, Constellation Energy Group, Constellation Nuclear and
Calvert Cliffs Nuclear Power Plant are also named defendants. The action seeks
class certification for approximately 150 past and present employees and alleges
racial discrimination at Calvert Cliffs Nuclear Power Plant. The amount of
damages is unspecified, however the plaintiffs seek back and front pay, along
with compensatory and punitive damages. We believe this case is without merit.
However, we cannot predict the timing, or outcome, of it or its possible effect
on our, or BGE's, financial results.
Moore v. Constellation Energy Group - This action was filed on October 23, 2000
in the U.S. District Court for the District of Maryland by an employee alleging
employment discrimination. Besides Constellation Energy, BGE and Constellation
Holdings, Inc. were also named defendants. The Equal Employment Opportunity
Commission previously concluded that it was unable to establish a violation of
law. The plaintiff sought, among other things, unspecified monetary damages and
back pay. The court dismissed the case in 2001.
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 BGE's Report on Form 8-K filed August 20, 1993. We are involved
in these claims with approximately 70 other defendants. Approximately 535
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:
o the identity of our facilities at which the plaintiffs allegedly worked as
contractors,
o the names of the plaintiff's employers, and
o the date on which the exposure allegedly occurred.
To date, 29 of these cases have been resolved for amounts that were not
significant.
The second type is claims by one manufacturer -- Pittsburgh Corning Corp. (PCC)
- -- against us and approximately eight others, as third-party defendants. On
April 17, 2000, PCC declared bankruptcy and we do not expect PCC to prosecute
these claims.
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 350 cases have been resolved, all without any payments 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:
o the identity of our facilities containing asbestos manufactured by the
manufacturer,
o the relationship (if any) of each of the individual plaintiffs to us,
o the settlement amounts for any individual plaintiffs who are shown to have
had a relationship to us, and
o 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.
Restructuring Order
- -------------------
In early December 1999, the Mid-Atlantic Power Supply Association (MAPSA),
Trigen-Baltimore Energy Corporation and Sweetheart Cup Company, Inc. filed
appeals of the Restructuring Order, which were consolidated in the Baltimore
City Circuit Court. MAPSA also filed a motion to delay implementation of the
Restructuring Order, pending a decision on the merits of the appeals by the
court.
On April 21, 2000, the Circuit Court dismissed MAPSA's appeal based on a lack of
standing (the right of a party to bring a lawsuit to court) and denied its
motion for a delay of the Restructuring Order. However, MAPSA filed an appeal of
this decision. On May 24, 2000, the Circuit Court dismissed both the Trigen and
Sweetheart Cup appeals.
MAPSA subsequently filed several appeals with the Maryland Court of Special
Appeals, the Maryland Court of Appeals, and the Baltimore City Circuit Court.
The effect of the appeals was to delay the implementation of customer choice in
BGE's service territory.
However, on August 4, 2000, the delay was rescinded and BGE retroactively
adjusted its rates as if customer choice had been implemented July 1, 2000.
35
On September 29, 2000, the Baltimore City Circuit Court issued an order
upholding the Restructuring Order.
On October 27, 2000, MAPSA filed an appeal with the Maryland Court of Special
Appeals challenging the September 29, 2000 order issued by the Circuit Court. We
believe that this petition is without merit. However, we cannot predict the
timing, or outcome, of this case, which could have a material adverse effect on
our, and BGE's, financial results.
Asset Transfer Order
- --------------------
On July 6, 2000, MAPSA and Shell Energy LLC filed, in the Circuit Court for
Baltimore City, a petition for review and a delay of the Maryland PSC's order
approving the transfer of BGE's generation assets issued on June 19, 2000. The
Court denied MAPSA's request for a delay on August 4, 2000, and after a hearing
on the petition on August 23, 2000 issued an order on September 29, 2000
upholding the Maryland PSC's order on the asset transfer. On October 27, 2000,
MAPSA filed an appeal with the Maryland Court of Special Appeals challenging the
September 29, 2000 order issued by the Circuit Court. We also believe that this
petition is without merit. However, we cannot predict the timing, or outcome, of
this case, which could have a material adverse effect on our, and BGE's,
financial results.
- --------------------------------------------------------------------------------
Item 5. Other Information
- --------------------------
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:
o satisfaction of all the conditions precedent to the closing on the purchase
of the Nine Mile Point nuclear power plants, including obtaining all
regulatory approvals,
o obtaining all regulatory approvals necessary to close on the investment by
an affiliate of the Goldman Sachs Group, Inc. in our domestic merchant
energy business and complete the separation of our domestic merchant energy
business from our remaining businesses,
o satisfaction of all conditions precedent to the transaction with Goldman
Sachs,
o general economic, business, and regulatory conditions,
o the pace and nature of deregulation nationwide (including the status of the
California markets),
o competition,
o energy supply and demand,
o federal and state regulations,
o availability, terms, and use of capital,
o nuclear and environmental issues,
o weather,
o implications of the Restructuring Order issued by the Maryland PSC,
including the outcome of the appeal,
o commodity price risk,
o operating our generation assets in a deregulated market without the benefit
of a fuel rate adjustment clause,
o loss of revenue due to customers choosing alternative suppliers,
o higher volatility of earnings and cash flows,
o increased financial requirements of our nonregulated subsidiaries,
o inability to recover all costs associated with providing electric retail
customers service during the electric rate freeze period,
o implications from the transfer of BGE's generation assets and related
liabilities to nonregulated subsidiaries of Constellation Energy, including
the outcome of an appeal of the Maryland PSC's Order regarding the transfer
of generation assets, and
o force majeure events (events beyond our control), such as: acts of nature,
changes of laws, labor strikes and work stoppages, especially as they could
impact plant construction or operation.
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 SEC for more information on these factors. These
forward looking statements represent our estimates and assumptions only as of
the date of this report.
36
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
(a) Exhibit No. 12(a) Constellation Energy Group, Inc. Computation of Ratio
of Earnings to Fixed Charges.
Exhibit No. 12(b) Baltimore Gas and Electric Company Computation of
Ratio of Earnings to Fixed Charges and Computation of
Ratio of Earnings to Combined Fixed Charges and
Preferred and Preference Dividend Requirements.
(b) Reports on Form 8-K for the quarter ended March 31, 2001:
Date Filed Items Reported
------------------------------------------
March 5, 2001 Item 5. Other Events
Item 7. Financial Statements and Exhibits
37
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, each
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONSTELLATION ENERGY GROUP, INC.
--------------------------------
(Registrant)
BALTIMORE GAS AND ELECTRIC COMPANY
----------------------------------
(Registrant)
Date: May 14, 2001 /s/ D. A. Brune
------------- -----------------------------------
D. A. Brune, Vice President on behalf of each
Registrant and as Principal Financial Officer
of each Registrant
38