Annual Reports

 
Quarterly Reports

  • 10-Q (Nov 7, 2011)
  • 10-Q (Aug 8, 2011)
  • 10-Q (May 9, 2011)
  • 10-Q (Nov 5, 2010)
  • 10-Q (Aug 6, 2010)
  • 10-Q (May 7, 2010)

 
8-K

 
Other

Constellation Energy Group 10-Q 2010

Use these links to rapidly review the document
TABLE OF CONTENTS

Table of Contents




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 June 30, 2010

Commission
File Number
  Exact name of registrant as specified in its charter   IRS Employer
Identification No.
1-12869   CONSTELLATION ENERGY GROUP, INC.   52-1964611

100 CONSTELLATION WAY,                BALTIMORE, MARYLAND                21202
                                         (Address of principal executive offices)                        (Zip Code)

410-470-2800
(Registrant's telephone number, including area code)

1-1910

 

BALTIMORE GAS AND ELECTRIC COMPANY

 

52-0280210

2 CENTER PLAZA, 110 WEST FAYETTE STREET,                BALTIMORE, MARYLAND                21202
                                                         (Address of principal executive offices)                                              (Zip Code)

410-234-5000
(Registrant's telephone number, including area code)

MARYLAND
(State of Incorporation of both registrants)

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 ý        No o

        Indicate by check mark whether Constellation Energy Group, Inc. has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý        No o

        Indicate by check mark whether Baltimore Gas and Electric Company has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o        No o

        Indicate by check mark whether Constellation Energy Group, Inc. is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
(Check one):

Large accelerated filer ý   Accelerated filer o   Non-accelerated filer o
(Do not check if a smaller
reporting company)
  Smaller reporting company o

        Indicate by check mark whether Baltimore Gas and Electric Company is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
(Check one):

Large accelerated filer o   Accelerated filer o   Non-accelerated filer ý
(Do not check if a smaller
reporting company)
  Smaller reporting company o

        Indicate by check mark whether Constellation Energy Group, Inc. is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o        No ý

        Indicate by check mark whether Baltimore Gas and Electric Company is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o        No ý

Common Stock, without par value 201,961,349 shares outstanding
of Constellation Energy Group, Inc. on July 30, 2010.

        Baltimore Gas and Electric Company meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this form in the reduced disclosure format.




Table of Contents


TABLE OF CONTENTS

 
  Page

Part I—Financial Information

  2
 

Item 1—Financial Statements

  2
           

Constellation Energy Group, Inc. and Subsidiaries

   
           

Consolidated Statements of Income (Loss)

  2
           

Consolidated Statements of Comprehensive Income

  2
           

Consolidated Balance Sheets

  3
           

Consolidated Statements of Cash Flows

  5
           

Baltimore Gas and Electric Company and Subsidiaries

   
           

Consolidated Statements of Income

  6
           

Consolidated Balance Sheets

  7
           

Consolidated Statements of Cash Flows

  9
           

Notes to Consolidated Financial Statements

  10
 

Item 2—Management's Discussion and Analysis of Financial Condition and Results of Operations

  39
           

Introduction and Overview

  39
           

Business Environment

  39
           

Events of 2010

  41
           

Results of Operations

  42
           

Financial Condition

  58
           

Capital Resources

  61
 

Item 3—Quantitative and Qualitative Disclosures About Market Risk

  67
 

Items 4 and 4(T)—Controls and Procedures

  67

Part II—Other Information

  68
 

Item 1—Legal Proceedings

  68
 

Item 2—Issuer Purchases of Equity Securities

  68
 

Item 5—Other Information

  69
 

Item 6—Exhibits

  70
 

Signature

  71

1


Table of Contents

PART 1—FINANCIAL INFORMATION

Item 1—Financial Statements

CONSOLIDATED STATEMENTS OF INCOME (LOSS) (UNAUDITED)

Constellation Energy Group, Inc. and Subsidiaries

 
  Three Months Ended June 30,
  Six Months Ended June 30,
 
 
  2010
  2009
  2010
  2009
 

 

 
 
  (In millions, except per share amounts)
 

Revenues

                         
 

Nonregulated revenues

  $ 2,559.2   $ 3,097.3   $ 5,077.4   $ 6,209.6  
 

Regulated electric revenues

    651.1     655.7     1,402.4     1,462.5  
 

Regulated gas revenues

    99.6     111.1     416.7     495.4  
   
 

Total revenues

    3,309.9     3,864.1     6,896.5     8,167.5  

Expenses

                         
 

Fuel and purchased energy expenses

    2,267.7     2,631.6     4,629.8     5,904.8  
 

Fuel and purchased energy expenses from affiliate

    222.1         420.6      
 

Operating expenses

    413.7     561.2     810.1     1,142.9  
 

Merger termination and strategic alternatives costs

        4.0         46.3  
 

Impairment losses and other costs

        67.2         95.8  
 

Workforce reduction costs

        0.4         11.2  
 

Depreciation, depletion, and amortization

    125.3     148.9     256.7     297.5  
 

Accretion of asset retirement obligations

    0.4     18.2     0.9     36.1  
 

Taxes other than income taxes

    65.6     72.4     132.4     150.3  
   
 

Total expenses

    3,094.8     3,503.9     6,250.5     7,684.9  

Equity Investment Losses

    (33.5 )       (54.2 )    

Net Gain (Loss) on Divestitures

    0.3     (129.6 )   5.2     (464.1 )
   

Income from Operations

    181.9     230.6     597.0     18.5  

Other Expenses

    (8.9 )   (15.0 )   (31.2 )   (71.3 )

Fixed Charges

                         
 

Interest expense

    60.4     106.1     181.9     221.2  
 

Interest capitalized and allowance for borrowed funds used during construction

    (8.7 )   (21.6 )   (24.3 )   (43.2 )
   
 

Total fixed charges

    51.7     84.5     157.6     178.0  
   

Income (Loss) from Continuing Operations Before Income Taxes

    121.3     131.1     408.2     (230.8 )

Income Tax Expense (Benefit)

    37.5     102.8     133.1     (139.4 )
   

Net Income (Loss)

    83.8     28.3     275.1     (91.4 )

Less: Net Income Attributable to Noncontrolling Interests and BGE Preference Stock Dividends

    11.2     20.2     11.0     24.0  
   

Net Income (Loss) Attributable to Common Stock

  $ 72.6   $ 8.1   $ 264.1   $ (115.4 )
   

Average Shares of Common Stock Outstanding—Basic

    200.8     199.2     200.6     198.9  

Average Shares of Common Stock Outstanding—Diluted

    202.6     200.0     202.2     198.9  
   

Earnings (Loss) Per Common Share—Basic

  $ 0.36   $ 0.04   $ 1.32   $ (0.58 )
   

Earnings (Loss) Per Common Share—Diluted

  $ 0.36   $ 0.04   $ 1.31   $ (0.58 )
   

Dividends Declared Per Common Share

  $ 0.24   $ 0.24   $ 0.48   $ 0.48  
   

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

Constellation Energy Group, Inc. and Subsidiaries

 
  Three Months Ended June 30,
  Six Months Ended June 30,
 
 
  2010
  2009
  2010
  2009
 

 

 
 
  (In millions)
 

Net Income (Loss)

  $ 83.8   $ 28.3   $ 275.1   $ (91.4 )
 

Other comprehensive income (OCI)

                         
   

Hedging instruments:

                         
     

Reclassification of net loss on hedging instruments from OCI to net income (loss), net of taxes

    179.4     410.5     287.9     867.7  
     

Net unrealized gain (loss) on hedging instruments, net of taxes

    70.9     (57.3 )   (162.0 )   (396.5 )
   

Available-for-sale securities:

                         
     

Reclassification of net (gain) loss on sales of securities from OCI to net (loss) income, net of taxes

        (0.2 )   (0.1 )   29.5  
     

Net unrealized gain on securities, net of taxes

        45.6     0.2     18.9  
   

Defined benefit obligations:

                         
     

Amortization of net actuarial loss, prior service cost, and transition obligation included in net periodic benefit cost, net of taxes

    4.9     14.2     10.8     22.1  
   

Net unrealized (loss) gain on foreign currency, net of taxes

    (10.7 )   2.5     (9.0 )   4.5  
   

Other comprehensive (loss) income—equity investment in CENG, net of taxes

    (22.1 )       (12.2 )    
   

Other comprehensive (loss) income—other equity method investees, net of taxes

    (0.3 )   (2.4 )   (0.5 )   3.3  
   
 

Comprehensive income

    305.9     441.2     390.2     458.1  
   

Less: Comprehensive income attributable to noncontrolling interests, net of taxes

    11.2     20.2     11.0     24.0  
   

Comprehensive Income Attributable to Common Stock

  $ 294.7   $ 421.0   $ 379.2   $ 434.1  
   

See Notes to Consolidated Financial Statements.
Certain prior-period amounts have been reclassified to conform with the current period's presentation.

2


Table of Contents

CONSOLIDATED BALANCE SHEETS

Constellation Energy Group, Inc. and Subsidiaries

 
  June 30,
2010*
  December 31,
2009
 

 

 
 
  (In millions)
 

Assets

             
 

Current Assets

             
   

Cash and cash equivalents

  $ 1,603.2   $ 3,440.0  
   

Accounts receivable (net of allowance for uncollectibles of $71.4 and $80.4, respectively)

    1,933.1     1,778.2  
   

Accounts receivable—consolidated variable interest entities (net of allowance for uncollectibles of $87.5 and $80.2, respectively)

    239.2     359.4  
   

Fuel stocks

    356.6     314.9  
   

Materials and supplies

    101.7     93.3  
   

Derivative assets

    558.2     639.1  
   

Unamortized energy contract assets (includes $382.0 and $371.3, respectively, related to CENG)

    447.7     436.5  
   

Restricted cash

    2.0     2.7  
   

Restricted cash—consolidated variable interest entities

    73.9     24.3  
   

Deferred income taxes

    88.0     127.9  
   

Other

    166.1     244.4  
   
   

Total current assets

    5,569.7     7,460.7  
   

Investments and Other Noncurrent Assets

             
   

Investment in CENG

    5,164.8     5,222.9  
   

Other investments

    399.7     424.3  
   

Regulatory assets (net)

    386.7     414.4  
   

Goodwill

    25.5     25.5  
   

Derivative assets

    550.2     633.9  
   

Unamortized energy contract assets (includes $210.4 and $400.9, respectively, related to CENG)

    372.1     604.7  
   

Other

    254.4     304.2  
   
   

Total investments and other noncurrent assets

    7,153.4     7,629.9  
   

Property, Plant and Equipment

             
   

Property, plant and equipment

    13,193.7     12,534.5  
   

Accumulated depreciation

    (4,207.4 )   (4,080.7 )
   
   

Net property, plant and equipment

    8,986.3     8,453.8  
   
 

Total Assets

 
$

21,709.4
 
$

23,544.4
 
   

* Unaudited
See Notes to Consolidated Financial Statements.
Certain prior-period amounts have been reclassified to conform with the current period's presentation.

3


Table of Contents

CONSOLIDATED BALANCE SHEETS

Constellation Energy Group, Inc. and Subsidiaries

 
  June 30,
2010*
  December 31,
2009
 

 

 
 
  (In millions)
 

Liabilities and Equity

             
 

Current Liabilities

             
   

Short-term borrowings

  $ 29.0   $ 46.0  
   

Current portion of long-term debt

        0.4  
   

Current portion of long-term debt—consolidated variable interest entities

    58.1     56.5  
   

Accounts payable

    987.6     916.3  
   

Accounts payable—consolidated variable interest entities

    152.7     234.2  
   

Derivative liabilities

    621.6     632.6  
   

Unamortized energy contract liabilities

    249.9     390.1  
   

Accrued taxes

    55.3     877.3  
   

Accrued expenses

    275.2     409.8  
   

Other

    388.8     477.5  
   
   

Total current liabilities

    2,818.2     4,040.7  
   
 

Deferred Credits and Other Noncurrent Liabilities

             
   

Deferred income taxes

    3,185.1     3,205.5  
   

Asset retirement obligations

    30.4     29.3  
   

Derivative liabilities

    633.0     674.1  
   

Unamortized energy contract liabilities

    472.5     653.7  
   

Defined benefit obligations

    734.9     743.9  
   

Deferred investment tax credits

    29.8     32.0  
   

Other

    345.8     388.8  
   
   

Total deferred credits and other noncurrent liabilities

    5,431.5     5,727.3  
   
 

Long-term Debt, Net of Current Portion

   
3,765.4
   
4,359.6
 
 

Long-term Debt, Net of Current Portion—consolidated variable interest entities

    424.7     454.4  
 

Equity

             
   

Common shareholders' equity:

             
     

Common stock

    3,284.8     3,229.6  
     

Retained earnings

    6,614.5     6,461.0  
     

Accumulated other comprehensive loss

    (878.4 )   (993.5 )
   
   

Total common shareholders' equity

    9,020.9     8,697.1  
   

BGE preference stock not subject to mandatory redemption

    190.0     190.0  
   

Noncontrolling interests

    58.7     75.3  
   
   

Total equity

    9,269.6     8,962.4  
   
 

Commitments, Guarantees, and Contingencies (see Notes)

             
 

Total Liabilities and Equity

 
$

21,709.4
 
$

23,544.4
 
   

* Unaudited
See Notes to Consolidated Financial Statements.
Certain prior-period amounts have been reclassified to conform with the current period's presentation.

4


Table of Contents

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Constellation Energy Group, Inc. and Subsidiaries

Six Months Ended June 30,
  2010
  2009
 

 

 
 
  (In millions)
 

Cash Flows From Operating Activities

             
 

Net income (loss)

  $ 275.1   $ (91.4 )
 

Adjustments to reconcile to net cash (used in) provided by operating activities

             
   

Depreciation, depletion, and amortization

    256.7     297.5  
   

Amortization of nuclear fuel

        67.0  
   

Amortization of energy contracts and derivatives designated as hedges

    70.6     (86.7 )
   

All other amortization

    14.6     74.9  
   

Accretion of asset retirement obligations

    0.9     36.1  
   

Deferred income taxes

    (47.9 )   (121.6 )
   

Investment tax credit adjustments

    (2.2 )   (3.0 )
   

Deferred fuel costs

    39.0     32.4  
   

Defined benefit obligation expense

    33.7     64.7  
   

Defined benefit obligation payments

    (39.0 )   (328.6 )
   

Workforce reduction costs

        11.2  
   

Impairment losses and other costs

        95.8  
   

Impairment losses on nuclear decommissioning trust assets

        62.4  
   

Merger termination and strategic alternatives costs

        37.2  
   

(Gain) loss on divestitures

    (5.2 )   464.1  
   

Equity in earnings of affiliates less than dividends received

    69.7     18.5  
   

Derivative contracts classified as financing activities

    79.8     785.3  
   

Changes in:

             
     

Accounts receivable, excluding margin

    21.1     599.2  
     

Derivative assets and liabilities, excluding collateral

    227.3     185.2  
     

Net collateral and margin

    (73.4 )   1,094.9  
     

Materials, supplies, and fuel stocks

    (44.2 )   323.4  
     

Other current assets

    49.8     237.0  
     

Accounts payable

    (29.9 )   (786.1 )
     

Accrued taxes and other current liabilities

    (1,063.9 )   (156.0 )
   

Other

    (39.2 )   51.0  
   
 

Net cash (used in) provided by operating activities

    (206.6 )   2,964.4  
   

Cash Flows From Investing Activities

             
 

Investments in property, plant and equipment

    (425.0 )   (809.1 )
 

Asset and business acquisitions, net of cash acquired

    (372.9 )    
 

Investments in nuclear decommissioning trust fund securities

        (233.4 )
 

Proceeds from nuclear decommissioning trust fund securities

        214.7  
 

Proceeds from sales of investments and other assets

    21.2     80.9  
 

Proceeds from investment tax credits and grants related to renewable energy investments

    21.5      
 

Contract and portfolio acquisitions

    (29.0 )   (2,153.7 )
 

(Increase) decrease in restricted funds

    (30.0 )   1,004.4  
 

Other

    (0.7 )   (1.8 )
   
 

Net cash used in investing activities

    (814.9 )   (1,898.0 )
   

Cash Flows From Financing Activities

             
 

Net repayment of short-term borrowings

    (17.0 )   (515.8 )
 

Proceeds from issuance of common stock

    8.8     13.6  
 

Proceeds from issuance of long-term debt

        109.0  
 

Repayment of long-term debt

    (629.0 )   (1,180.3 )
 

Debt issuance costs

    (0.7 )   (62.8 )
 

Common stock dividends paid

    (92.6 )   (133.7 )
 

BGE preference stock dividends paid

    (6.6 )   (6.6 )
 

Proceeds from contract and portfolio acquisitions

    2.3     2,243.1  
 

Derivative contracts classified as financing activities

    (79.8 )   (785.3 )
 

Other

    (0.7 )   11.8  
   
 

Net cash used in financing activities

    (815.3 )   (307.0 )
   

Net (Decrease) Increase in Cash and Cash Equivalents

    (1,836.8 )   759.4  

Cash and Cash Equivalents at Beginning of Period

    3,440.0     202.2  
   

Cash and Cash Equivalents at End of Period

  $ 1,603.2   $ 961.6  
   

See Notes to Consolidated Financial Statements.

5


Table of Contents

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Baltimore Gas and Electric Company and Subsidiaries

 
  Three Months Ended
June 30,

  Six Months Ended
June 30,

 
 
  2010
  2009
  2010
  2009
 

 

 
 
  (In millions)
 

Revenues

                         
 

Electric revenues

  $ 651.1   $ 655.7   $ 1,402.4   $ 1,462.5  
 

Gas revenues

    100.4     111.7     418.4     498.6  
   
 

Total revenues

    751.5     767.4     1,820.8     1,961.1  

Expenses

                         
 

Operating expenses

                         
   

Electricity purchased for resale

    286.8     260.0     636.4     580.9  
   

Electricity purchased for resale from affiliate

    114.6     142.5     238.6     346.8  
   

Gas purchased for resale

    42.1     51.6     236.6     309.7  
   

Operations and maintenance

    118.6     121.3     239.1     226.4  
   

Operations and maintenance from affiliate

    27.9     27.6     56.4     49.5  
 

Depreciation and amortization

    60.6     65.7     128.3     132.6  
 

Taxes other than income taxes

    45.0     44.4     92.6     92.2  
   
 

Total expenses

    695.6     713.1     1,628.0     1,738.1  
   

Income from Operations

    55.9     54.3     192.8     223.0  

Other Income

    5.5     7.2     12.0     14.7  

Fixed Charges

                         
 

Interest expense

    33.9     36.0     68.3     72.7  
 

Allowance for borrowed funds used during construction

    (1.5 )   (1.1 )   (2.8 )   (2.1 )
   
 

Total fixed charges

    32.4     34.9     65.5     70.6  
   

Income Before Income Taxes

    29.0     26.6     139.3     167.1  

Income Taxes

    12.0     10.6     57.9     66.1  
   

Net Income

    17.0     16.0     81.4     101.0  

Preference Stock Dividends

    3.3     3.3     6.6     6.6  
   

Net Income Attributable to Common Stock

  $ 13.7   $ 12.7   $ 74.8   $ 94.4  
   

See Notes to Consolidated Financial Statements.
Certain prior-period amounts have been reclassified to conform with the current period's presentation.

6


Table of Contents

CONSOLIDATED BALANCE SHEETS

Baltimore Gas and Electric Company and Subsidiaries

 
  June 30,
2010*
  December 31,
2009
 

 

 
 
  (In millions)
 

Assets

             
 

Current Assets

             
   

Cash and cash equivalents

  $ 260.2   $ 13.6  
   

Accounts receivable (net of allowance for uncollectibles of $33.3 and $46.2, respectively)

    319.3     311.7  
   

Accounts receivable, unbilled (net of allowance for uncollectibles of $1.0 and $1.0, respectively)

    227.3     252.7  
   

Investment in cash pool, affiliated company

        314.7  
   

Accounts receivable, affiliated companies

    2.5     15.4  
   

Fuel stocks

    51.1     73.8  
   

Materials and supplies

    31.7     31.9  
   

Prepaid taxes other than income taxes

    0.2     49.5  
   

Regulatory assets (net)

    55.2     72.5  
   

Restricted cash—consolidated variable interest entity

    23.5     24.3  
   

Deferred income taxes

        11.2  
   

Other

    10.1     11.3  
   
   

Total current assets

    981.1     1,182.6  
   
 

Investments and Other Assets

             
   

Regulatory assets (net)

    386.7     414.4  
   

Receivable, affiliated company

    322.5     326.2  
   

Other

    58.1     98.2  
   
   

Total investments and other assets

    767.3     838.8  
   
 

Utility Plant

             
   

Plant in service

             
     

Electric

    4,882.2     4,772.4  
     

Gas

    1,278.3     1,260.6  
     

Common

    499.2     499.0  
   
     

Total plant in service

    6,659.7     6,532.0  
   

Accumulated depreciation

    (2,382.4 )   (2,318.2 )
   
   

Net plant in service

    4,277.3     4,213.8  
   

Construction work in progress

    249.0     215.5  
   

Plant held for future use

    6.6     2.4  
   
   

Net utility plant

    4,532.9     4,431.7  
   
 

Total Assets

 
$

6,281.3
 
$

6,453.1
 
   

* Unaudited
See Notes to Consolidated Financial Statements.

7


Table of Contents

CONSOLIDATED BALANCE SHEETS

Baltimore Gas and Electric Company and Subsidiaries

 
  June 30,
2010*
  December 31,
2009
 

 

 
 
  (In millions)
 

Liabilities and Equity

             
 

Current Liabilities

             
   

Short-term borrowings

  $   $ 46.0  
   

Current portion of long-term debt—consolidated variable interest entity

    58.1     56.5  
   

Accounts payable

    157.6     166.0  
   

Accounts payable, affiliated companies

    73.8     98.3  
   

Customer deposits

    78.5     76.0  
   

Deferred income taxes

    29.4      
   

Accrued taxes

    37.0     80.2  
   

Residential customer rate credit

        112.4  
   

Accrued expenses and other

    87.8     96.1  
   
   

Total current liabilities

    522.2     731.5  
   
 

Deferred Credits and Other Liabilities

             
   

Deferred income taxes

    1,107.2     1,087.6  
   

Payable, affiliated company

    243.3     243.4  
   

Deferred investment tax credits

    9.0     9.5  
   

Liability for uncertain tax positions

    67.7     73.3  
   

Other

    16.5     20.0  
   
   

Total deferred credits and other liabilities

    1,443.7     1,433.8  
   
 

Long-term Debt

             
   

Rate stabilization bonds—consolidated variable interest entity

    482.8     510.9  
   

Other long-term debt

    1,431.5     1,431.5  
   

6.20% deferrable interest subordinated debentures due October 15, 2043 to wholly owned BGE Capital Trust II relating to trust preferred securities

    257.7     257.7  
   

Unamortized discount and premium

    (2.1 )   (2.2 )
   

Current portion of long-term debt—consolidated variable interest entity

    (58.1 )   (56.5 )
   
   

Total long-term debt

    2,111.8     2,141.4  
   
 

Equity

             
   

Common shareholder's equity

    2,013.6     1,938.8  
   

Preference stock not subject to mandatory redemption

    190.0     190.0  
   

Noncontrolling interest

        17.6  
   
   

Total equity

    2,203.6     2,146.4  
   
 

Commitments, Guarantees, and Contingencies (see Notes)

             
 

Total Liabilities and Equity

 
$

6,281.3
 
$

6,453.1
 
   

* Unaudited
See Notes to Consolidated Financial Statements.

8


Table of Contents

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Baltimore Gas and Electric Company and Subsidiaries

Six Months Ended June 30,
  2010
  2009
 

 

 
 
  (In millions)
 

Cash Flows From Operating Activities

             
 

Net income

  $ 81.4   $ 101.0  
 

Adjustments to reconcile to net cash provided by operating activities

             
   

Depreciation and amortization

    128.3     132.6  
   

Other amortization

    1.6     3.7  
   

Deferred income taxes

    55.2     46.7  
   

Investment tax credit adjustments

    (0.5 )   (0.5 )
   

Deferred fuel costs

    39.0     32.4  
   

Defined benefit plan expenses

    17.4     17.5  
   

Allowance for equity funds used during construction

    (5.2 )   (4.2 )
   

Changes in:

             
     

Accounts receivable

    16.0     82.8  
     

Accounts receivable, affiliated companies

    12.9     2.2  
     

Materials, supplies, and fuel stocks

    22.9     87.8  
     

Other current assets

    49.9     57.9  
     

Accounts payable

    (7.8 )   (111.6 )
     

Accounts payable, affiliated companies

    (24.5 )   (38.3 )
     

Other current liabilities

    (119.8 )   10.6  
     

Long-term receivables and payables, affiliated companies

    (13.9 )   (171.8 )
     

Other

    (71.7 )   (3.1 )
   
 

Net cash provided by operating activities

    181.2     245.7  
   

Cash Flows From Investing Activities

             
 

Utility construction expenditures (excluding equity portion of allowance for funds used during construction)

    (190.3 )   (166.7 )
 

Change in cash pool at parent

    314.7     (5.2 )
 

Proceeds from sales of investments and other assets

    20.9      
 

Decrease in restricted funds

    0.8     0.7  
   
 

Net cash provided by (used in) investing activities

    146.1     (171.2 )
   

Cash Flows From Financing Activities

             
 

Repayment of long-term debt

    (28.1 )   (51.6 )
 

Net repayment of short-term borrowings

    (46.0 )   (30.1 )
 

Debt issuance costs

        (0.3 )
 

Contribution from noncontrolling interest

        8.0  
 

Preference stock dividends paid

    (6.6 )   (6.6 )
   
 

Net cash used in financing activities

    (80.7 )   (80.6 )
   

Net Increase (Decrease) in Cash and Cash Equivalents

    246.6     (6.1 )

Cash and Cash Equivalents at Beginning of Period

    13.6     10.7  
   

Cash and Cash Equivalents at End of Period

  $ 260.2   $ 4.6  
   

See Notes to Consolidated Financial Statements.

9


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Basis of Presentation

This Quarterly Report on Form 10-Q is a combined report of Constellation Energy Group, Inc. (Constellation Energy) and Baltimore Gas and Electric Company (BGE). References in this report to "we" and "our" are to Constellation Energy and its subsidiaries, collectively. References in this report to the "regulated business(es)" are to BGE.

        Various factors can have a significant impact on our results for interim periods. This means that the results for this quarter are not necessarily indicative of future quarters or full year results given the seasonality of our business.

        Our interim financial statements on the previous pages reflect all adjustments that management believes are necessary for the fair statement of the results of operations for the interim periods presented. These adjustments are of a normal recurring nature.

Reclassifications

In accordance with the presentation requirements for consolidated variable interest entities (VIEs), which we adopted on January 1, 2010, we have separately presented the following material assets and liabilities of these VIEs on our, and/or BGE's, Consolidated Balance Sheets:

    "Accounts receivable—consolidated variable interest entities,"
    "Restricted cash—consolidated variable interest entities,"
    "Current portion of long-term debt—consolidated variable interest entities,"
    "Accounts payable—consolidated variable interest entities," and
    "Long-term Debt, Net of Current Portion—consolidated variable interest entities."

        We discuss our adoption of the reporting requirements for consolidated variable interest entities below in the Variable Interest Entities section.

        We have also reclassified certain prior-period amounts:

    We have separately presented "Other comprehensive income—other equity method investees, net of taxes" that was previously reported within "Reclassification of net loss on hedging instruments from OCI to net income (loss), net of taxes" and "Net unrealized gain (loss) on hedging instruments, net of taxes" on our Consolidated Statements of Comprehensive Income (Loss).
    We have separately presented "Electricity purchased for resale from affiliate" that was previously reported within "Electricity purchased for resale" on BGE's Consolidated Statements of Income.
    We have separately presented "Operations and maintenance from affiliate" that was previously reported within "Operations and maintenance" on BGE's Consolidated Statements of Income.
    We have separately presented "Accounts Payable" that was previously reported within "Accounts Payable and Accrued Liabilities" on our Consolidated Balance Sheets.

Variable Interest Entities

Effective January 1, 2010, we adopted new accounting, presentation, and disclosure requirements related to VIEs. As a result of our assessment and implementation of the new requirements, our accounting and disclosures related to VIEs were impacted as follows:

    We have presented separately on our Consolidated Balance Sheets, to the extent material, the assets of our consolidated VIEs that can only be used to settle specific obligations of the consolidated VIE, and the liabilities of our consolidated VIEs for which creditors do not have recourse to our general credit.
    The new requirements emphasize a qualitative assessment of whether the equity holders of the entity have the power to direct matters that most significantly impact the entity. We have evaluated all existing entities under the new VIE accounting requirements, both those previously considered VIEs and those considered potential VIEs. Our accounting for and disclosure about VIEs did not change materially as a result of these assessments.

        We consolidate three VIEs for which we are the primary beneficiary, and we have significant interests in six VIEs for which we do not have controlling financial interests and, accordingly, are not the primary beneficiary.

Consolidated Variable Interest Entities

In 2007, BGE formed RSB BondCo LLC (BondCo), a special purpose bankruptcy-remote limited liability company, to acquire and hold rate stabilization property and to issue and service bonds secured by the rate stabilization property. In June 2007, BondCo purchased rate stabilization property from BGE, including the right to assess, collect, and receive non-bypassable rate stabilization charges payable by all residential electric customers of BGE. These charges are being assessed in order to recover previously incurred power purchase costs that BGE deferred pursuant to Maryland Senate Bill 1.

        BGE determined that BondCo is a VIE for which it is the primary beneficiary. As a result, BGE, and we, consolidated BondCo.

        The BondCo assets are restricted and can only be used to settle the obligations of BondCo. Further, BGE is required to remit all payments it receives from customers

10


Table of Contents

for rate stabilization charges to BondCo. During the quarter and six months ended June 30, 2010, BGE remitted $18.2 million and $42.0 million, respectively, to BondCo.

        BGE did not provide any additional financial support to BondCo during the quarter and six months ended June 30, 2010. Further, BGE does not have any contractual commitments or obligations to provide additional financial support to BondCo unless additional rate stabilization bonds are issued. The BondCo creditors do not have any recourse to the general credit of BGE in the event the rate stabilization charges are not sufficient to cover the bond principal and interest payments of BondCo.

        During 2009, our retail gas operation formed two new entities and combined them with our existing retail gas operation into a retail gas entity group for the purpose of entering into a collateralized gas supply agreement with a third party gas supplier. While we own 100% of these entities, we determined that the retail gas entity group is a VIE because there is not sufficient equity to fund the group's activities without the additional credit support we provide in the form of a letter of credit and a parental guarantee. We are the primary beneficiary of the retail gas entity group; accordingly, we consolidate the retail gas entity group as a VIE, including the existing retail gas customer supply operation, which we formerly consolidated as a voting interest entity.

        The gas supply arrangement is collateralized as follows:

    The assets of the retail gas entity group must be used to settle obligations under the third party gas supply agreement before it can make any distributions to us,
    The third party gas supplier has a collateral interest in all of the assets and equity of the retail gas entity group, and
    As of June 30, 2010, we provided a $100 million parental guarantee and a $37 million letter of credit to the third party gas supplier in support of the retail gas entity group.

        Other than credit support provided by the parental guarantee and the letter of credit, we do not have any contractual or other obligations to provide additional financial support to the retail gas entity group. The retail gas entity group creditors do not have any recourse to our general credit. Finally, we did not provide any financial support to the retail gas entity group during the quarter and six months ended June 30, 2010, other than the parental guarantee and the letter of credit.

        We also consolidate a retail power supply VIE for which we became the primary beneficiary in 2008 as a result of a modification to its contractual arrangements that changed the allocation of the economic risks and rewards of the VIE among the variable interest holders. The consolidation of this VIE did not have a material impact on our financial results or financial condition.

        The carrying amounts and classification of the above three consolidated VIEs' assets and liabilities included in our consolidated financial statements at June 30, 2010 are as follows:

 
  (In millions)
 
   

Current assets

  $ 475.8  

Noncurrent assets

    74.1  
   

Total Assets

  $ 549.9  
   

Current liabilities

  $ 299.5  

Noncurrent liabilities

    434.1  
   

Total Liabilities

  $ 733.6  
   

        All of the assets in the table above are restricted for settlement of the VIE obligations and all of the liabilities in the table above can only be settled using VIE resources.

Unconsolidated Variable Interest Entities

As of June 30, 2010, we had significant interests in six VIEs for which we were not the primary beneficiary. Other than the obligations listed in the table below, we have not provided any material financial or other support to these entities during the quarter and six months ended June 30, 2010 and we do not intend to provide any additional financial or other support to these entities in the future.

        The nature of these entities and our involvement with them are described in the following table:

VIE Category
  Nature of
Entity
Financing

  Nature of
Constellation
Energy
Involvement

  Obligations or
Requirement
to Provide
Financial
Support

  Date of
Involvement

 

Power contract monetization entities (2 entities)

  Combination of debt and equity financing   Power sale agreements, loans, and guarantees   $30.5 million in letters of credit   March 2005

Power projects and fuel supply entities (4 entities)

 

Combination of debt and equity financing

 

Equity investments and guarantees

 

$5.0 million debt guarantee and working capital funding

 

Prior to 2003

        For purposes of aggregating the various VIEs for disclosure, we evaluated the risk and reward characteristics for, and the significance of, each VIE. We discuss the nature of our involvement with the power contract monetization VIEs in detail in Note 4 of our 2009 Annual Report on Form 10-K.

        We concluded that power over the most economically significant activities of two of the power project VIEs is shared equally among the equity holders. Accordingly,

11


Table of Contents

neither of the equity holders consolidate these VIEs. The equity holders own 50% interests in these VIEs and all of the significant decisions require the mutual consent of the equity holders.

        The following is summary information available as of June 30, 2010 about these entities:

 
  Power
Contract
Monetization
VIEs

  All
Other
VIEs

  Total
 
   
 
  (In millions)
 

Total assets

  $ 498.5   $ 315.6   $ 814.1  

Total liabilities

    388.2     111.0     499.2  

Our ownership interest

        53.2     53.2  

Other ownership interests

    110.3     151.4     261.7  

Our maximum exposure to loss

    30.5     59.4     89.9  

Carrying amount and location of variable interest on balance sheet:

                   
 

-Other investments

        54.4     54.4  

        Our maximum exposure to loss is the loss that we would incur in the unlikely event that our interests in all of these entities were to become worthless and we were required to fund the full amount of all obligations associated with these entities. Our maximum exposure to loss as of June 30, 2010 consists of the following:

    the carrying amount of our investment totaling $54.4 million, and
    debt and payment guarantees totaling $35.5 million.

        We assess the risk of a loss equal to our maximum exposure to be remote and, accordingly have not recognized a liability associated with any portion of the maximum exposure to loss. In addition, there are no agreements with, or commitments by, third parties that would affect the fair value or risk of our variable interests in these VIEs.

Earnings Per Share

Basic earnings per common share (EPS) is computed by dividing net income (loss) attributable to common stock by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution of common stock equivalent shares that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.

        Our dilutive common stock equivalent shares consist of stock options and other stock-based compensation awards. The following table presents stock options that were not dilutive and were excluded from the computation of diluted EPS in each period, as well as the dilutive common stock equivalent shares:

 
  Quarter
Ended
June 30,

  Six Months
Ended
June 30,

 
 
  2010
  2009
  2010
  2009
 
   
 
  (In millions)
 

Non-dilutive stock options

    4.4     5.0     4.4     5.3  

Dilutive common stock equivalent shares

    1.8     0.8     1.6     0.5  
   

As a result of the Company incurring a loss for the six months ended June 30, 2009, dilutive common stock equivalent shares were not included in calculating diluted EPS for that reporting period.

Acquisitions

Criterion Wind Project

In April 2010, we completed the acquisition of the Criterion wind project in Garrett County, Maryland. This 70 MW wind energy project will be developed, constructed, and owned by our Generation business and is expected to have a completed cost of approximately $140 million. We expect to place this facility in commercial operation during the first quarter of 2011.

Texas Combined Cycle Generation Facilities

In May 2010, we acquired the 550 MW Colorado Bend Energy Center and the 550 MW Quail Run Energy Center natural gas combined cycle generation facilities in Texas. We include these facilities as part of our Generation business and have included their results of operations in our consolidated financial statements since the date of acquisition.

        We acquired 100% ownership of these facilities for $372.9 million, all of which was paid in cash at closing.

        We recorded the major classes of assets acquired and liabilities assumed as follows:

At May 17, 2010  

Current assets

  $ 8.6  

Property, plant and equipment

    367.4  
   

Total assets acquired

    376.0  
   

Current liabilities

    (3.1 )
   

Net assets acquired

  $ 372.9  
   

12


Table of Contents

        The preliminary net assets acquired are based on estimates and the purchase price is subject to adjustment, which could impact the amounts recognized for net assets acquired.

        The pro-forma impact of this acquisition would not have been material to our results of operations for the quarter and six months ended June 30, 2010 and 2009.

Divestiture

BGE

In January 2010, BGE completed the sale of its interest in a nonregulated subsidiary that owns a district chilled water facility to a third party. BGE received net cash proceeds of $20.9 million. No gain or loss was recorded on this transaction in 2010. BGE has no further involvement in the activities of this entity.

Mammoth Lakes Geothermal Generating Facility

In August 2010, we completed the sale of our 50% equity interest in the Mammoth Lakes geothermal generating facility in California. We received net cash proceeds of approximately $72 million. In the third quarter of 2010, our Generation business will record an approximately $38 million pre-tax gain on this transaction. We will have no further involvement in the activities of this generating facility.

Investment in Constellation Energy Nuclear Group, LLC (CENG)

On November 6, 2009, we completed the sale of a 49.99% membership interest in CENG, our nuclear generation and operation business, to EDF Group and affiliates (EDF). As a result of this transaction, we retained a 50.01% economic interest in CENG, but we and EDF have equal voting rights over the activities of CENG. Accordingly, we deconsolidated CENG and began to record our investment in CENG under the equity method of accounting. For the quarter and six months ended June 30, 2010, our equity investment losses were as follows:

 
  Quarter Ended
June 30,
2010

  Six Months Ended
June 30,
2010

 
   
 
  (In millions)
 

CENG

  $ 40.2   $ 63.6  

Amortization of basis difference in CENG

    (61.5 )   (104.2 )
   

Total equity investment losses—CENG1

  $ (21.3 ) $ (40.6 )
   

1 For the quarter and six months ended June 30, 2010, total equity investment losses in CENG includes $0.5 million and $1.6 million, respectively, of expense related to the portion of cost of certain share-based awards that we fund on behalf of EDF.

        The basis difference is the difference between the fair value of our investment in CENG at closing and our share of the underlying equity in CENG, because the underlying assets of CENG were retained at their carrying value. See Note 2 to our 2009 Annual Report on Form 10-K for a more detailed discussion.

        Summarized income statement information for CENG for the quarter and six months ended June 30, 2010 is as follows:

 
  Quarter Ended
June 30,
2010

  Six Months Ended
June 30,
2010

 
   
 
  (In millions)
 

Revenues

  $ 376.1   $ 737.0  

Fuel and purchased energy expenses

    53.4     111.8  

Income from operations

    73.2     110.8  

Net income

    81.3     130.4  

13


Table of Contents

Information by Operating Segment

In connection with the strategic initiatives that were undertaken in 2008 and 2009, we re-aligned our reporting structure, beginning January 1, 2010, to reflect our current view of managing the business. As a result, as of January 1, 2010, we changed our reportable segments and have recast prior period information to conform with the current presentation.

        Our reportable operating segments are Generation, NewEnergy (referred to as Customer Supply in our 2009 Annual Report on Form 10-K), Regulated Electric, and Regulated Gas:

    Our Generation business includes:
    a power generation and development operation that owns, operates and maintains fossil and renewable generating facilities, a fuel processing facility, qualifying facilities, and power projects in the United States and Canada,
    an operation that manages certain contractually owned physical assets, including generating facilities,
    an interest in a nuclear generation joint venture (CENG) that owns, operates, and maintains five nuclear generating units, and
    an interest in a joint venture (UniStar Nuclear Energy, LLC (UNE)) to develop, own, and operate new nuclear projects in the United States.
    Our NewEnergy business includes:
    full requirements load-serving sales of energy and capacity to utilities, cooperatives, and commercial, industrial, and governmental customers,
    sales of retail energy products and services to residential, commercial, industrial, and governmental customers,
    structured transactions and risk management services for various customers (including hedging of output from generating facilities and fuel costs) and trading in energy and energy-related commodities to facilitate portfolio management,
    risk management services for our Generation business,
    design, construction, and operation of renewable energy, heating, cooling, and cogeneration facilities for commercial, industrial, and governmental customers throughout North America, including energy performance contracting and energy efficiency engineering services,
    upstream (exploration and production) natural gas activities, and
    sales of home improvements, servicing of electric and gas appliances, and heating, air conditioning, plumbing, electrical, and indoor air quality systems, and providing electricity and natural gas to residential customers in central Maryland.
    Our regulated electric business purchases, transmits, distributes, and sells electricity in Central Maryland.
    Our regulated gas business purchases, transports, and sells natural gas in Central Maryland.

        Our Generation, NewEnergy, Regulated Electric, and Regulated Gas reportable segments are strategic businesses based principally upon regulations, products, and services that require different technologies and marketing strategies. We evaluate the performance of these segments based on net income. We account for intersegment revenues using market prices. A summary of information by operating segment is shown in the table below.

14


Table of Contents

 
  Reportable Segments    
   
   
 
 
  Holding
Company
and Other

   
   
 
 
  Generation
  NewEnergy
  Regulated
Electric

  Regulated
Gas

  Eliminations
  Consolidated
 
   
 
  (In millions)
 

Quarter ended June 30,

                                           

2010

                                           

Unaffiliated revenues

  $ 283.0   $ 2,276.1   $ 651.1   $ 99.6   $ 0.1   $   $ 3,309.9  

Intersegment revenues

    267.3     114.7         0.8         (382.8 )    
   

Total revenues

    550.3     2,390.8     651.1     100.4     0.1     (382.8 )   3,309.9  

Net income (loss)

    15.3     50.8     20.9     (3.9 )   0.7         83.8  

Net income (loss) attributable to common stock

    15.3     42.9     18.4     (4.7 )   0.7         72.6  

2009

                                           

Unaffiliated revenues

  $ 168.3   $ 2,926.0   $ 655.7   $ 111.1   $ 3.0   $   $ 3,864.1  

Intersegment revenues

    514.2     52.1         0.6         (566.9 )    
   

Total revenues

    682.5     2,978.1     655.7     111.7     3.0     (566.9 )   3,864.1  

Net income (loss)

    62.1     (46.1 )   22.1     (6.2 )   (3.6 )       28.3  

Net income (loss) attributable to common stock

    62.1     (62.9 )   19.5     (6.9 )   (3.7 )       8.1  

Six months ended June 30,

                                           

2010

                                           

Unaffiliated revenues

  $ 574.2   $ 4,503.1   $ 1,402.4   $ 416.7   $ 0.1   $   $ 6,896.5  

Intersegment revenues

    556.0     238.6         1.7         (796.3 )    
   

Total revenues

    1,130.2     4,741.7     1,402.4     418.4     0.1     (796.3 )   6,896.5  

Net income (loss)

    42.4     154.9     48.1     33.3     (3.6 )       275.1  

Net income (loss) attributable to common stock

    42.4     150.5     43.0     31.8     (3.6 )       264.1  

2009

                                           

Unaffiliated revenues

  $ 350.1   $ 5,854.0   $ 1,462.5   $ 495.4   $ 5.5   $   $ 8,167.5  

Intersegment revenues

    1,117.9     138.9         3.2         (1,260.0 )    
   

Total revenues

    1,468.0     5,992.9     1,462.5     498.6     5.5     (1,260.0 )   8,167.5  

Net income (loss)

    103.6     (292.4 )   67.5     33.4     (3.5 )       (91.4 )

Net income (loss) attributable to common stock

    103.6     (309.7 )   62.4     31.9     (3.6 )       (115.4 )

Certain prior-period amounts have been restated to conform with the current period's reportable segment presentation.

Our Generation business operating results for the quarter and six months ended June 30, 2010 include the following after-tax charges:

    deferred income tax expense relating to federal subsidies for providing post-employment prescription drug benefits of zero and $0.8 million, respectively, as a result of healthcare reform legislation enacted in March 2010,
    amortization of basis difference in investment in CENG of $37.0 million and $62.7 million, respectively,
    impact of power purchase agreement with CENG of $29.1 million and $54.8 million, respectively, (amount represents the amortization of our "unamortized energy contract asset" less our 50.01% equity in CENG's amortization of its "unamortized energy contract liability"),
    loss on early retirement of 2012 Notes of zero and $30.9 million, respectively, and
    amortization of credit facility amendment fees in connection with the EDF transaction of $1.9 million and $3.8 million, respectively.

Our NewEnergy business operating results for the quarter and six months ended June 30, 2010 include the following after-tax charges:

    deferred income tax expense relating to federal subsidies for providing post-employment prescription drug benefits of zero and $0.1 million, respectively, as a result of healthcare reform legislation enacted in March 2010, and
    amortization of credit facility amendment fees in connection with the EDF transaction of $1.0 million and $2.0 million, respectively.

Our Regulated Electric business operating results for the six months ended June 30, 2010 include an after-tax charge for the deferred income tax expense relating to federal subsidies for providing post-employment prescription drug benefits of $3.1 million as a result of healthcare reform legislation enacted in March 2010.

Our Holding Company and Other businesses operating results for the six months ended June 30, 2010 include an after-tax charge for the deferred income tax expense relating to federal subsidies for providing post-employment prescription drug benefits of $4.8 million as a result of healthcare reform legislation enacted in March 2010.

Total assets declined approximately $1.8 billion during 2010 due primarily to a decrease in cash and cash equivalents as a result of income taxes paid on the transaction with EDF and the retirement of debt.

15


Table of Contents

Pension and Postretirement Benefits

We show the components of net periodic pension benefit cost in the following table:

 
  Quarter Ended
June 30,

  Six Months Ended
June 30,

 
 
  2010
  2009
  2010
  2009
 
   
 
  (In millions)
 

Components of net periodic pension benefit cost

                         

Service cost

  $ 9.1   $ 14.4   $ 18.6   $ 29.6  

Interest cost

    19.7     31.1     41.4     58.3  

Expected return on plan assets

    (23.2 )   (38.9 )   (49.9 )   (68.5 )

Recognized net actuarial loss

    8.7     11.1     16.8     21.7  

Amortization of prior service cost

    0.9     2.5     1.9     5.8  

Amount capitalized as construction cost

    (2.9 )   (2.8 )   (4.8 )   (5.4 )
   

Net periodic pension benefit cost1

  $ 12.3   $ 17.4   $ 24.0   $ 41.5  
   

1 BGE's portion of our net periodic pension benefit cost, excluding amounts capitalized, was $8.5 million for the quarter ended June 30, 2010 and $7.2 million for the quarter ended June 30, 2009. BGE's portion of our net periodic pension benefit cost, excluding amounts capitalized, was $14.8 million for the six months ended June 30, 2010 and $14.4 million for the six months ended June 30, 2009. Net periodic pension benefit costs exclude settlement charges of $1.5 million in the quarter and six months ended June 30, 2010 and $7.7 million in the quarter and six months ended June 30, 2009.

        We show the components of net periodic postretirement benefit cost in the following table:

 
  Quarter Ended
June 30,

  Six Months Ended
June 30,

 
 
  2010
  2009
  2010
  2009
 
   
 
  (In millions)
 

Components of net periodic postretirement benefit cost

                         

Service cost

  $ 0.6   $ 2.0   $ 1.3   $ 3.6  

Interest cost

    5.0     6.3     9.7     12.1  

Amortization of transition obligation

    0.6     0.6     1.1     1.1  

Recognized net actuarial (gain) loss

    (0.1 )   0.4     0.2     1.1  

Amortization of prior service cost

    (0.7 )   (1.0 )   (1.4 )   (1.8 )

Amount capitalized as construction cost

    (1.6 )   (1.8 )   (2.9 )   (3.3 )
   

Net periodic postretirement benefit cost1

  $ 3.8   $ 6.5   $ 8.0   $ 12.8  
   

1 BGE's portion of our net periodic postretirement benefit cost, excluding amounts capitalized, was $4.6 million for the quarter ended June 30, 2010 and $5.2 million for the quarter ended June 30, 2009. BGE's portion of our net periodic postretirement benefit costs, excluding amounts capitalized, was $9.4 million for the six months ended June 30, 2010 and $9.8 million for the six months ended June 30, 2009.

        Our non-qualified pension plans and our postretirement benefit programs are not funded; however, we have trust assets securing certain executive pension benefits. We estimate that we will incur approximately $9.8 million in pension benefit payments for our non-qualified pension plans and approximately $28.0 million for retiree health and life insurance costs in 2010. We contributed $12.2 million to our qualified pension plans in April 2010 and an additional $12.2 million in July 2010.

Healthcare Reform Legislation

During March 2010, the Patient Protection and Affordable Care Act and the Healthcare and Education Reconciliation Act of 2010 were signed into law. These laws eliminate the tax exempt status of drug subsidies provided to companies under Medicare Part D after December 31, 2012. As a result of this new legislation, we recorded a noncash charge to reflect additional deferred income tax expense of $8.8 million in the six months ended June 30, 2010.

Financing Activities

Credit Facilities and Short-term Borrowings

Our short-term borrowings may include bank loans, commercial paper, and bank lines of credit. Short-term borrowings mature within one year from the date of issuance. We pay commitment fees to banks for providing us lines of credit. When we borrow under the lines of credit, we pay market interest rates. We enter into these facilities to ensure adequate liquidity to support our operations.

Constellation Energy

Our liquidity requirements are funded with credit facilities and cash. We fund our short-term working capital needs with existing cash and with our credit facilities, which support direct cash borrowings and the issuance of commercial paper, if available. We also use our credit facilities to support the issuance of letters of credit, primarily for our NewEnergy business.

16


Table of Contents

        Constellation Energy had bank lines of credit under committed credit facilities totaling $4.0 billion at June 30, 2010 for short-term financial needs as follows:

Type of
Credit Facility

  Amount
(In billions)

  Expiration Date
  Capacity Type
 

Syndicated Revolver

  $ 2.32   July 2012   Letters of credit and cash

Commodity-linked

    0.50   August 2014   Letter of credit

Bilateral

    0.55   September 2014   Letters of credit

Bilateral

    0.25   December 2014   Letters of credit and cash

Bilateral

    0.25   June 2014   Letters of credit and cash

Bilateral

    0.15   September 2013   Letters of credit
             
 

Total

  $ 4.02        
             

        At June 30, 2010, we had approximately $1.3 billion in letters of credit issued including $0.3 billion in letters of credit issued under the commodity-linked credit facility discussed below and no commercial paper outstanding or direct borrowings under these facilities.

        The commodity-linked credit facility allows for the issuance of letters of credit up to a maximum capacity of $0.5 billion. This commodity-linked facility is designed to help manage our contingent collateral requirements associated with the hedging of our NewEnergy business because its capacity increases as natural gas price levels decrease compared to a reference price that is adjusted periodically.

        At June 30, 2010, Constellation Energy had approximately $29 million of short-term notes outstanding with a weighted average effective interest rate of 6.4%.

BGE

BGE has a $600.0 million revolving credit facility expiring in 2011. BGE can borrow directly from the banks, use the facility to allow commercial paper to be issued, if available, or issue letters of credit. At June 30, 2010, BGE had no commercial paper or direct borrowings outstanding. There were immaterial letters of credit outstanding at June 30, 2010.

Debt

Constellation Energy

As part of our voluntary commitment to reduce our debt by $1 billion with funds received from the EDF transaction, we retired the following debt during the six months ended June 30, 2010, completing this commitment.

7.00% Notes due April 1, 2012

In February 2010, we retired an aggregate principal amount of $486.5 million of our 7.00% Notes due April 1, 2012 pursuant to a cash tender offer, at a premium of approximately 11%. We recorded a loss on this transaction of $50.1 million within "Interest expense" on our Consolidated Statements of Income (Loss).

Tax-Exempt Notes

In March 2010, we repurchased our outstanding $47 million and $65 million variable rate tax-exempt notes. Since these notes are variable rate instruments, there was no gain or loss recorded upon repurchase.

Net Available Liquidity

The following table provides a summary of our, and BGE's, net available liquidity at June 30, 2010.

At June 30, 2010
  Constellation
Energy

  BGE
 
   
 
  (In billions)
 

Credit facilities1

  $ 3.5   $ 0.6  

Less: Letters of credit issued1

    (1.0 )    

Less: Cash drawn on credit facilities

         
   

Undrawn facilities

    2.5     0.6  

Less: Commercial paper outstanding

         
   

Net available facilities

    2.5     0.6  

Add: Cash and cash equivalents

    1.3     0.3  
   

Cash and facility liquidity

    3.8     0.9  

Add: EDF put arrangement

    1.4      
   

Net available liquidity

  $ 5.2   $ 0.9  
   

1 Excludes $0.5 billion commodity-linked credit facility due to its contingent nature and $0.3 billion in letters of credit issued against it.

Other Sources of Liquidity

We have an asset put arrangement with EDF that provides us with an option at any time through December 31, 2010 to sell certain non-nuclear generation assets, at pre-agreed prices, to EDF for aggregate proceeds of no more than $2 billion pre-tax, or approximately $1.4 billion after-tax. The amount of after-tax proceeds will be impacted by the assets actually sold and the related tax impacts at that time.

        Exercise of the put arrangement is conditioned upon the receipt of regulatory approvals and third party consents, the absence of any material liens on such assets, and the absence of a material adverse effect, as defined in the Investment Agreement. During the quarter ended June 30, 2010, we received the final expected regulatory approval for one of the assets, which increased the net after-tax liquidity available through the put arrangement to approximately $1.4 billion.

17


Table of Contents

Credit Facility Compliance and Covenants

Certain credit facilities of Constellation Energy contain a provision requiring Constellation Energy to maintain a ratio of debt to capitalization equal to or less than 65%. At June 30, 2010, the debt to capitalization ratio as defined in the credit agreements was 29%.

        Under our $2.32 billion credit facility, we granted a lien on certain of our generating facilities and pledged our ownership interests in our nuclear business to the lenders upon the completion of the transaction with EDF.

        The credit agreement of BGE contains a provision requiring BGE to maintain a ratio of debt to capitalization equal to or less than 65%. At June 30, 2010, the debt to capitalization ratio for BGE as defined in this credit agreement was 43%.

        Decreases in Constellation Energy's or BGE's credit ratings would not trigger an early payment on any of our, or BGE's, credit facilities. However, the impact of a credit ratings downgrade on our financial ratios associated with our credit facility covenants would depend on our financial condition at the time of such a downgrade and on the source of funds used to satisfy the incremental collateral obligation resulting from a credit ratings downgrade. For example, if we were to use existing cash balances or exercise the put option with EDF to fund the cash portion of any additional collateral obligations resulting from a credit ratings downgrade, we would not expect a material impact on our financial ratios. However, if we were to issue long-term debt or use our credit facilities to fund any additional collateral obligations, our financial ratios could be materially affected. Failure by Constellation Energy, or BGE, to comply with these covenants could result in the acceleration of the maturity of the borrowings outstanding and preclude us from issuing letters of credit under these facilities.

        The credit facilities of Constellation Energy and BGE contain a material adverse change representation but draws on the facilities are not conditioned upon Constellation Energy and BGE making this representation at the time of the draw. However, to the extent a material adverse change has occurred and prevents Constellation Energy or BGE from making other representations that are required at the time of the draw, the draw would be prohibited.

Income Taxes

We compute the income tax expense (benefit) for each quarter based on the estimated annual effective tax rate for the year. The effective tax rate was 30.9% and 32.6% for the quarter and six months ended June 30, 2010, respectively, compared to 78.3% and 60.4% for the same periods of 2009. The lower effective tax rate for the quarter ended June 30, 2010 reflects the impact of favorable adjustments (primarily related to reductions of uncertain tax positions and higher deductions for qualified production activities). The lower effective tax rate for the six months ended June 30, 2010 reflects the absence in 2010 of the impact of unfavorable nondeductible adjustments in 2009 (primarily related to nondeductible dividends on Series B preferred stock and the write-off of unamortized debt discount on senior notes) in relation to the lower estimated 2009 taxable income (primarily attributable to losses on the divestiture of a majority of our international commodities and our Houston-based gas trading operations).

        The BGE effective tax rate was 41.4% and 41.6% for the quarter and six months ended June 30, 2010, respectively, compared to 39.8% and 39.6% for the same periods of 2009. The higher effective tax rate for 2010 is primarily due to the impact of the healthcare reform legislation enacted in the first quarter of 2010, which eliminates the tax exempt status of prescription drug subsidies received under Medicare Part D.

Unrecognized Tax Benefits

The following table summarizes the change in unrecognized tax benefits during 2010 and our total unrecognized tax benefits at June 30, 2010:

At June 30, 2010
   
 
   
 
  (In millions)
 

Total unrecognized tax benefits, January 1, 2010

  $ 312.5  

Increases in tax positions related to the current year

    6.7  

Increases in tax positions related to prior years

    11.1  

Reductions in tax positions related to prior years

    (42.3 )

Reductions in tax positions as a result of a lapse of the applicable statute of limitations

    (0.6 )
   

Total unrecognized tax benefits, June 30, 20101

  $ 287.4  
   

1 BGE's portion of our total unrecognized tax benefits at June 30, 2010 was $100.1 million.

        Increases in tax positions related to the current year and prior years are primarily due to unrecognized tax benefits for repair and depreciation deductions measured at amounts consistent with prior IRS examination results and state income tax accruals.

        Reductions in tax positions related to prior years are primarily due to the resolution of the tax treatment of distributions received from our shipping joint venture, merger termination fees, the timing of losses from international coal hedges, and offsetting tax depreciation associated with potential disallowance of repair deductions.

        Total unrecognized tax benefits as of June 30, 2010 of $287.4 million include outstanding claims of approximately

18


Table of Contents

$62.5 million, including $51.6 million in state tax credits, for which no tax benefit was recorded on our Consolidated Balance Sheet because refunds were not received and the claims do not meet the "more-likely-than-not" threshold.

        If the total amount of unrecognized tax benefits of $287.4 million were ultimately realized, our income tax expense would decrease by approximately $170 million. However, the $170 million includes state tax refund claims of $51.6 million that have been disallowed by tax authorities and are subject to appeals.

        Interest and penalties recorded in our Consolidated Statements of Income (Loss) as tax expense (benefit) relating to liabilities for unrecognized tax benefits were as follows:

 
  Quarter Ended
June 30,

  Six Months Ended
June 30,

 
 
  2010
  2009
  2010
  2009
 
   
 
  (In millions)
 

Interest and penalties recorded as tax expense (benefit)

  $ (10.7 ) $ 1.5   $ (7.3 ) $ 0.7  
   

BGE's portion of interest and penalties was immaterial for both periods presented.

        Accrued interest and penalties recognized in our Consolidated Balance Sheets were $15.8 million, of which BGE's portion was $2.3 million, at June 30, 2010, and $23.1 million, of which BGE's portion was $1.6 million, at December 31, 2009.

Taxes Other Than Income Taxes

Taxes other than income taxes primarily include property and gross receipts taxes along with franchise taxes and other non-income taxes, surcharges, and fees.

        BGE and our NewEnergy business collect certain taxes from customers such as sales and gross receipts taxes, along with other taxes, surcharges, and fees that are levied by state or local governments on the sale or distribution of gas and electricity. Some of these taxes are imposed on the customer and others are imposed on BGE and our NewEnergy business. Where these taxes, such as sales taxes, are imposed on the customer, we account for these taxes on a net basis with no impact to our Consolidated Statements of Income (Loss). However, where these taxes, such as gross receipts taxes or other surcharges or fees, are imposed on BGE or our NewEnergy business, we account for these taxes on a gross basis. Accordingly, we recognize revenues for these taxes collected from customers along with an offsetting tax expense, which are both included in our, and BGE's, Consolidated Statements of Income (Loss). The taxes, surcharges, or fees that are included in revenues were as follows:

 
  Quarter Ended
June 30,

  Six Months Ended
June 30,

 
 
  2010
  2009
  2010
  2009
 
   
 
  (In millions)
 

Constellation Energy (including BGE)

  $ 30.5   $ 23.8   $ 61.5   $ 54.5  

BGE

    19.3     18.5     41.2     40.1  
   

Guarantees

Our guarantees do not represent incremental Constellation Energy obligations; rather they primarily represent parental guarantees of subsidiary obligations. The following table summarizes the maximum exposure by guarantor based on the stated limit of our outstanding guarantees:

At June 30, 2010
  Stated Limit
 
   
 
  (In billions)
 

Constellation Energy guarantees

  $ 9.4  

BGE guarantees

    0.3  
   

Total guarantees

  $ 9.7  
   

        At June 30, 2010, Constellation Energy had a total of $9.7 billion in guarantees outstanding related to loans, credit facilities, and contractual performance of certain of its subsidiaries as described below.

    Constellation Energy guaranteed a face amount of $9.4 billion as follows:
    $8.6 billion on behalf of our Generation and NewEnergy businesses to allow them the flexibility needed to conduct business with counterparties without having to post other forms of collateral. Our estimated net exposure for obligations under commercial transactions covered by these guarantees was approximately $2 billion at June 30, 2010, which represents the total amount the parent company could be required to fund based on June 30, 2010 market prices. For those guarantees related to our derivative liabilities, the fair value of the obligation is recorded in our Consolidated Balance Sheets.
    $0.6 billion primarily on behalf of CENG's nuclear generating facilities for nuclear insurance and credit support to ensure these plants have funds to meet expenses and obligations to safely operate and maintain the plants. We recorded the fair value of $12.3 million for these guarantees on our Consolidated Balance Sheets.
    $0.2 billion to its other nonregulated businesses.

19


Table of Contents

    BGE guaranteed the Trust Preferred Securities of $250.0 million of BGE Capital Trust II.

Commitments and Contingencies

We have made substantial commitments in connection with our Generation, NewEnergy, regulated electric and gas, and other nonregulated businesses. These commitments relate to:

    purchase of electric generating capacity and energy,
    procurement and delivery of fuels,
    the capacity and transmission and transportation rights for the physical delivery of energy to meet our obligations to our customers, and
    long-term service agreements, capital for construction programs, and other.

        Our Generation and NewEnergy businesses enter into various long-term contracts for the procurement and delivery of fuels to supply our generating plant requirements. In most cases, our contracts contain provisions for price escalations, minimum purchase levels, and other financial commitments. These contracts expire in various years between 2010 and 2018. In addition, our NewEnergy business enters into long-term contracts for the capacity and transmission rights for the delivery of energy to meet our physical obligations to our customers. These contracts expire in various years between 2010 and 2030.

        Our Generation and NewEnergy businesses also have committed to long-term service agreements and other purchase commitments for our plants.

        Our regulated electric business enters into various long-term contracts for the procurement of electricity. These contracts expire between 2010 and 2012 and represent BGE's estimated requirements to serve residential and small commercial customers as follows:

Contract Duration
  Percentage of
Estimated
Requirements

 
   

From July 1, 2010 to May 2011

    100 %

From June 2011 to September 2011

    75  

From October 2011 to May 2012

    50  

From June 2012 to September 2012

    25  
   

        The cost of power under these contracts is recoverable under the Provider of Last Resort agreement reached with the Maryland Public Service Commission (PSC).

        Our regulated gas business enters into various long-term contracts for the procurement, transportation, and storage of gas. Our regulated gas business has gas procurement contracts that expire between 2010 and 2011, and transportation and storage contracts that expire between 2010 and 2027. The cost of gas under these contracts is recoverable under BGE's gas cost adjustment clause discussed in Note 1 of our 2009 Annual Report on Form 10-K.

        We have also committed to long-term service agreements and other obligations related to our information technology systems.

        At June 30, 2010, the total amount of commitments was $6.3 billion. These commitments are primarily related to our Generation and NewEnergy businesses.

Long-Term Power Sales Contracts

We enter into long-term power sales contracts in connection with our load-serving activities. We also enter into long-term power sales contracts associated with certain of our power plants. Our load-serving power sales contracts extend for terms through 2019 and provide for the sale of energy to electricity distribution utilities and certain retail customers. Our power sales contracts associated with power plants we own extend for terms into 2016 and provide for the sale of all or a portion of the actual output of certain of our power plants. Substantially all long-term contracts were executed at pricing that approximated market rates, including profit margin, at the time of execution.

Contingencies

Litigation

In the normal course of business, we are involved in various legal proceedings. We discuss the significant matters below.

Merger with MidAmerican

Beginning September 18, 2008, seven shareholders of Constellation Energy filed lawsuits in the Circuit Court for Baltimore City, Maryland challenging the then-pending merger with MidAmerican. Four similar suits were filed by other shareholders of Constellation Energy in the United States District Court for the District of Maryland.

        The lawsuits claim that the merger consideration was inadequate and did not maximize value for shareholders, that the sales process leading up to the merger was flawed, and that unreasonable deal protection devices were agreed to in order to ward off competing bids. The federal lawsuits also assert that the conversion of preferred stock issued to MidAmerican into debt is not permitted under Maryland law.

20


Table of Contents

        The termination of the MidAmerican merger renders moot the claims attempting to enjoin the merger with MidAmerican. One of the federal merger cases was voluntarily dismissed on December 31, 2008, and the other federal merger cases were dismissed as moot on May 27, 2009. Plaintiffs' counsel in six of the seven state merger cases have filed dismissals without prejudice of their MidAmerican merger claims. On April 16, 2010, the seventh merger case was dismissed without prejudice by the Court, thereby concluding these cases.

Securities Class Action

Three federal securities class action lawsuits have been filed in the United States District Courts for the Southern District of New York and the District of Maryland between September 2008 and November 2008. The cases were filed on behalf of a proposed class of persons who acquired publicly traded securities, including the Series A Junior Subordinated Debentures (Debentures), of Constellation Energy between January 30, 2008 and September 16, 2008, and who acquired Debentures in an offering completed in June 2008. The securities class actions generally allege that Constellation Energy, a number of its present or former officers or directors, and the underwriters violated the securities laws by issuing a false and misleading registration statement and prospectus in connection with Constellation Energy's June 27, 2008 offering of Debentures. The securities class actions also allege that Constellation Energy issued false or misleading statements or was aware of material undisclosed information which contradicted public statements including in connection with its announcements of financial results for 2007, the fourth quarter of 2007, the first quarter of 2008 and the second quarter of 2008 and the filing of its first quarter 2008 Form 10-Q. The securities class actions seek, among other things, certification of the cases as class actions, compensatory damages, reasonable costs and expenses, including counsel fees, and rescission damages.

        The Southern District of New York granted the defendants' motion to transfer the two securities class actions filed there to the District of Maryland, and the actions have since been transferred for coordination with the securities class action filed there. On June 18, 2009, the court appointed a lead plaintiff, who filed a consolidated amended complaint on September 17, 2009. On November 17, 2009, the defendants moved to dismiss the consolidated amended complaint in its entirety. We are unable at this time to determine the ultimate outcome of the securities class actions or their possible effect on our, or BGE's financial results.

ERISA Actions

In the fall of 2008, multiple class action lawsuits were filed in the United States District Courts for the District of Maryland and the Southern District of New York against Constellation Energy; Mayo A. Shattuck III, Constellation Energy's Chairman of the Board, President and Chief Executive Officer; and others in their roles as fiduciaries of the Constellation Energy Employee Savings Plan. The actions, which have been consolidated into one action in Maryland (the Consolidated Action), allege that the defendants, in violation of various sections of ERISA, breached their fiduciary duties to prudently and loyally manage Constellation Energy Savings Plan's assets by designating Constellation Energy common stock as an investment, by failing to properly provide accurate information about the investment, by failing to avoid conflicts of interest, by failing to properly monitor the investment and by failing to properly monitor other fiduciaries. The plaintiffs seek to compel the defendants to reimburse the plaintiffs and the Constellation Energy Savings Plan for all losses resulting from the defendants' breaches of fiduciary duty, to impose a constructive trust on any unjust enrichment, to award actual damages with pre- and post-judgment interest, to award appropriate equitable relief including injunction and restitution and to award costs and expenses, including attorneys' fees. On October 2, 2009, the defendants moved to dismiss the consolidated complaint in its entirety. We are unable at this time to determine the ultimate outcome of the Consolidated Action or its possible effects on our, or BGE's, financial results.

Mercury

Since September 2002, BGE, Constellation Energy, and several other defendants have been involved in numerous actions filed in the Circuit Court for Baltimore City, Maryland alleging mercury poisoning from several sources, including coal plants formerly owned by BGE. The plants are now owned by a subsidiary of Constellation Energy. In addition to BGE and Constellation Energy, approximately 11 other defendants, consisting of pharmaceutical companies, manufacturers of vaccines, and manufacturers of Thimerosal have been sued. Approximately 70 cases, involving claims related to approximately 132 children, have been filed to date, with each claimant seeking $20 million in compensatory damages, plus punitive damages, from us.

        The claims against BGE and Constellation Energy have been dismissed in all of the cases either with prejudice based on rulings by the Court or without prejudice based on voluntary dismissals by the plaintiffs' counsel. Plaintiffs may attempt to pursue appeals of the rulings in favor of BGE and Constellation Energy once the cases are finally concluded as to all defendants. We believe that we have

21


Table of Contents

meritorious defenses and intend to defend the actions vigorously. However, we cannot predict the timing, or outcome, of these cases, or their possible effect on our, or BGE's, financial results.

Asbestos

Since 1993, BGE and certain Constellation Energy subsidiaries have been involved in several actions concerning asbestos. The actions are based upon the theory of "premises liability," alleging that BGE and Constellation Energy knew of and exposed individuals to an asbestos hazard. In addition to BGE and Constellation Energy, numerous other parties are defendants in these cases.

        Approximately 488 individuals who were never employees of BGE or Constellation Energy have pending claims each seeking several million dollars in compensatory and punitive damages. Cross-claims and third party claims brought by other defendants may also be filed against BGE and Constellation Energy in these actions. To date, most asbestos claims which have been resolved have been dismissed or resolved without any payment and a small minority have been resolved for amounts that were not material to our financial results.

        BGE and Constellation Energy do not know the specific facts necessary to estimate their potential liability for these claims. The specific facts we do not know include:

    the identity of the facilities at which the plaintiffs allegedly worked as contractors,
    the names of the plaintiffs' employers,
    the dates on which and the places where the exposure allegedly occurred, and
    the facts and circumstances relating to the alleged exposure.

        Until the relevant facts are determined, we are unable to estimate what our, or BGE's, liability might be. Although insurance and hold harmless agreements from contractors who employed the plaintiffs may cover a portion of any awards in the actions, the potential effect on our, or BGE's, financial results could be material.

Environmental Matters

Solid and Hazardous Waste

In 1999, the EPA proposed to add the 68th Street Dump in Baltimore, Maryland to the Superfund National Priorities List, which is its list of sites targeted for clean-up and enforcement, and sent a general notice letter to BGE and 19 other parties identifying them as potentially liable parties at the site. In March 2004, we and other potentially responsible parties formed the 68th Street Coalition and entered into consent order negotiations with the EPA to investigate clean-up options for the site under the Superfund Alternative Sites Program. In May 2006, a settlement among the EPA and 19 of the potentially responsible parties, including BGE, with respect to investigation of the site became effective. The settlement requires the potentially responsible parties, over the course of several years, to identify contamination at the site and recommend clean-up options. BGE is indemnified by a wholly owned subsidiary of Constellation Energy for most of the costs related to this settlement and clean-up of the site. The clean-up costs will not be known until the investigation is closer to completion, which is expected by late 2010. The completed investigation will provide a range of remediation alternatives to the EPA, and the EPA is expected to select one of the alternatives by the end of the third quarter of 2011. In addition, the allocation of the costs among the potentially responsible parties is not yet known. The clean-up costs we incur could have a material effect on our financial results.

Air Quality

In May 2007, a subsidiary of Constellation Energy entered into a consent decree with the Maryland Department of the Environment to resolve alleged violations of air quality opacity standards at three fossil fuel plants in Maryland. The consent decree requires the subsidiary to pay a $100,000 penalty, provide $100,000 to a supplemental environmental project, and install technology to control emissions from those plants. Our obligations under this consent decree were completed in May 2010.

        In January 2009, the EPA issued a notice of violation (NOV) to a subsidiary of Constellation Energy, as well as the other owners and the operator of the Keystone coal-fired power plant in Shelocta, Pennsylvania. We hold an approximately 21% interest in the Keystone plant. The NOV alleges that the plant performed various capital projects beginning in 1984 without complying with the new source review permitting requirements of the Clean Air Act. The EPA also contends that the alleged failure to comply with those requirements are continuing violations under the plant's air permits. The EPA could seek civil penalties under the Clean Air Act for the alleged violations.

        The owners and operator of the Keystone plant are investigating the allegations and have entered into discussions with the EPA. We believe there are meritorious defenses to the allegations contained in the NOV. However, we cannot predict the outcome of this proceeding and it is not possible to determine our actual liability, if any, at this time.

Water Quality

In October 2007, a subsidiary of Constellation Energy entered into a consent decree with the Maryland Department of the Environment relating to groundwater

22


Table of Contents

contamination at a third party facility that was licensed to accept fly ash, a byproduct generated by our coal-fired plants. The consent decree requires the payment of a $1.0 million penalty, remediation of groundwater contamination resulting from the ash placement operations at the site, replacement of drinking water supplies in the vicinity of the site, and monitoring of groundwater conditions. We recorded a liability in our Consolidated Balance Sheets of approximately $10.6 million, which includes the $1 million penalty and our estimate of probable costs to remediate contamination, replace drinking water supplies, monitor groundwater conditions, and otherwise comply with the consent decree. We have paid approximately $5.9 million of these costs as of June 30, 2010, resulting in a remaining liability at June 30, 2010 of $4.7 million. We estimate that it is reasonably possible that we could incur additional costs of up to approximately $10 million more than the liability that we accrued.

Insurance

We discuss our non-nuclear insurance programs in Note 12 of our 2009 Annual Report on Form 10-K.

Derivative Instruments

Nature of Our Business and Associated Risks

Our business activities primarily include our Generation, NewEnergy, regulated electric and gas businesses. Our Generation and NewEnergy businesses include:

    the generation of electricity from our owned and contractually-controlled physical assets,
    the sale of power, gas, and other energy commodities to wholesale and retail customers, and
    risk management services and energy trading activities.

        Our regulated electric and gas businesses engage in electricity and gas transmission and distribution activities in Central Maryland at prices set by the Maryland PSC that are generally designed to recover our costs, including purchased fuel and energy. Substantially all of our risk management activities involving derivatives occur outside our regulated businesses.

        In carrying out our business activities, we purchase and sell power, fuel, and other energy-related commodities in competitive markets. These activities expose us to significant risks, including market risk from price volatility for energy commodities and the credit risks of counterparties with which we enter into contracts. The sources of these risks include, but are not limited to, the following:

    the risks of unfavorable changes in power prices in the wholesale forward and spot markets in which we sell a portion of the power from our power generation facilities and purchase power to meet our load-serving requirements,
    the risk of unfavorable fuel price changes for the purchase of a portion of the fuel for our generation facilities under short-term contracts or on the spot market. Fuel prices can be volatile, and the price that can be obtained for power produced from such fuel may not change at the same rate as fuel costs.
    the risk that one or more counterparties may fail to perform under their obligations to make payments or deliver fuel or power,
    interest rate risk associated with variable-rate debt and the fair value of fixed-rate debt used to finance our operations; and
    foreign currency exchange rate risk associated with international investments and purchases of equipment and commodities in currencies other than U.S. dollars.

Objectives and Strategies for Using Derivatives

Risk Management Activities

To lower our exposure to the risk of unfavorable fluctuations in commodity prices, interest rates, and foreign currency rates, we routinely enter into derivative contracts, such as fixed-price forward physical purchase and sales contracts, futures, financial swaps, and option contracts traded in the over-the-counter markets or on exchanges, for hedging purposes. The objectives for entering into such hedging transactions primarily include:

    fixing the price for a portion of anticipated future electricity sales from our generation operations,
    fixing the price of a portion of anticipated fuel purchases for the operation of our power plants,
    fixing the price for a portion of anticipated energy purchases to supply our load-serving customers, and
    managing our exposure to interest rate risk and foreign currency exchange risks.

Non-Risk Management Activities

In addition to the use of derivatives for risk management purposes, we also enter into derivative contracts for trading purposes primarily for:

    optimizing the margin on surplus electricity generation and load positions and surplus fuel supply and demand positions,
    price discovery and verification, and
    deploying limited risk capital in an effort to generate returns.

23


Table of Contents

Accounting for Derivative Instruments

The accounting requirements for derivatives require recognition of all qualifying derivative instruments on the balance sheet at fair value as either assets or liabilities.

Accounting Designation

We must evaluate new and existing transactions and agreements to determine whether they are derivatives, for which there are several possible accounting treatments. Mark-to-market is required as the default accounting treatment for all derivatives unless they qualify, and we specifically designate them, for one of the other accounting treatments. Derivatives designated for any of the elective accounting treatments must meet specific, restrictive criteria, both at the time of designation and on an ongoing basis. The permissible accounting treatments include:

    normal purchase normal sale (NPNS),
    cash flow hedge,
    fair value hedge, and
    mark-to-market.

        We discuss our accounting policies for derivatives and hedging activities and their impacts on our financial statements in Note 1 of our 2009 Annual Report on Form 10-K.

NPNS

We elect NPNS accounting for derivative contracts that provide for the purchase or sale of a physical commodity that will be delivered in quantities expected to be used or sold over a reasonable period in the normal course of business. Once we elect NPNS classification for a given contract, we cannot subsequently change the election and treat the contract as a derivative using mark-to-market or hedge accounting.

Cash Flow Hedging

We generally elect cash flow hedge accounting for most of the derivatives that we use to hedge market price risk for our physical energy delivery activities because hedge accounting more closely aligns the timing of earnings recognition and cash flows for the underlying business activities. Management monitors the potential impacts of commodity price changes and, where appropriate, may enter into or close out (via offsetting transactions) derivative transactions designated as cash flow hedges.

Commodity Cash Flow Hedges

We have designated fixed-price forward contracts as cash-flow hedges of forecasted sales of energy and forecasted purchases of fuel and energy for the years 2010 through 2016. We had net unrealized pre-tax losses on these cash-flow hedges recorded in "Accumulated other comprehensive loss" of $744.6 million at June 30, 2010 and $951.3 million at December 31, 2009.

        We expect to reclassify $576.7 million of net pre-tax losses on cash-flow hedges from "Accumulated other comprehensive loss" into earnings during the next twelve months based on market prices at June 30, 2010. However, the actual amount reclassified into earnings could vary from the amounts recorded at June 30, 2010, due to future changes in market prices.

        When we determine that a forecasted transaction originally hedged has become probable of not occurring, we reclassify net unrealized gains or losses associated with those hedges from "Accumulated other comprehensive loss" to earnings. We recognized in earnings the following pre-tax amounts on such contracts:

 
  Quarter Ended
June 30,

  Six Months Ended
June 30,

 
 
  2010
  2009
  2010
  2009
 
   
 
  (In millions)
 

Pre-tax gains (losses)

  $ 1.1   $ (74.6 ) $ (0.3 ) $ (241.0 )
   

Interest Rate Swaps Designated as Cash Flow Hedges

We use interest rate swaps designated as cash flow hedges to manage our interest rate exposures associated with new debt issuances and to manage our exposure to fluctuations in interest rates on variable rate debt. The effective portion of gains and losses on these interest rate cash flow hedges, net of associated deferred income tax effects, is recorded in "Accumulated other comprehensive loss" in our Consolidated Statements of Comprehensive Income. We reclassify gains and losses on the hedges from "Accumulated other comprehensive loss" into "Interest expense" in our Consolidated Statements of Income (Loss) during the periods in which the interest payments being hedged occur.

        Accumulated other comprehensive loss includes net unrealized pre-tax gains on interest rate cash-flow hedges of prior debt issuances totaling $7.3 million at June 30, 2010 and $11.3 million at December 31, 2009. We expect to reclassify $0.6 million of pre-tax net gains on these cash-flow hedges from "Accumulated other comprehensive loss" into "Interest expense" during the next twelve months. We had no hedge ineffectiveness on these swaps.

Fair Value Hedging

We elect fair value hedge accounting for a limited portion of our derivative contracts including certain interest rate swaps. The objectives for electing fair value hedging in these situations are to manage our exposure and to optimize the mix of our fixed and floating-rate debt.

24


Table of Contents

Interest Rate Swaps Designated as Fair Value Hedges

We use interest rate swaps designated as fair value hedges to optimize the mix of fixed and floating-rate debt. We record any gains or losses on swaps that qualify for fair value hedge accounting treatment, as well as changes in the fair value of the debt being hedged, in "Interest expense." We record changes in fair value of the swaps in "Derivative assets and liabilities" and changes in the fair value of the debt in "Long-term debt" in our Consolidated Balance Sheets. In addition, we record the difference between interest on hedged fixed-rate debt and floating-rate swaps in "Interest expense" in the periods that the swaps settle.

        We have interest rate swaps qualifying as fair value hedges relating to $400 million of our fixed-rate debt maturing in 2012 and 2015, and converted this notional amount of debt to floating-rate. The fair value of these hedges was an unrealized gain of $44.0 million at June 30, 2010 and $35.8 million at December 31, 2009 and was recorded as an increase in our "Derivative assets" and an increase in our "Long-term debt." We had no hedge ineffectiveness on these interest rate swaps.

Hedge Ineffectiveness

For all categories of derivative instruments designated in hedging relationships, we recorded in earnings the following pre-tax gains (losses) related to hedge ineffectiveness:

 
  Quarter Ended
June 30,

  Six Months Ended
June 30,

 
 
  2010
  2009
  2010
  2009
 
   
 
  (In millions)
 

Cash-flow hedges

  $ (37.6 ) $ 23.5   $ (24.3 ) $ 52.6  

Fair value hedges

                23.9  
   

Total

  $ (37.6 ) $ 23.5   $ (24.3 ) $ 76.5  
   

        We did not have any fair value hedges for which we have excluded a portion of the change in fair value from our effectiveness assessment.

Mark-to-Market

We generally apply mark-to-market accounting for risk management and trading activities for which changes in fair value more closely reflect the economic performance of the underlying business activity. However, we also use mark-to-market accounting for derivatives related to the following physical energy delivery activities:

    our competitive retail gas customer supply activities, which are managed using economic hedges that we have not designated as cash-flow hedges in order to match the timing of recognition of the earnings impacts of those activities to the greatest extent permissible, and
    economic hedges of activities that require accrual accounting for which the related hedge requires mark-to-market accounting.

Quantitative Information About Derivatives and Hedging Activities

Balance Sheet Tables

We present our derivative assets and liabilities in our Consolidated Balance Sheets on a net basis, including cash collateral, whenever we have a legally enforceable master netting agreement with a counterparty to a derivative contract. We use master netting agreements whenever possible to manage and substantially reduce our potential counterparty credit risk. The net presentation in our Consolidated Balance Sheets reflects our actual credit exposure after giving effect to the beneficial effects of these agreements and cash collateral, and our credit risk is reduced further by other forms of collateral.

        The following tables provide information about the types of market risks we manage using derivatives. These tables only include derivatives and do not reflect the price risks we are hedging that arise from physical assets or nonderivative accrual contracts within our Generation and NewEnergy businesses.

        As discussed more fully following the tables, we present this information by disaggregating our net derivative assets and liabilities into gross components on a contract-by-contract basis before giving effect to the risk-reducing benefits of master netting arrangements and collateral. As a result, we must present each individual contract as an "asset value" if it is in the money or a "liability value" if it is out of the money, regardless of whether the individual contracts offset market or credit risks of other contracts in full or in part. Therefore, the gross amounts in these tables do not reflect our actual economic or credit risk associated with derivatives. This gross presentation is intended only to show separately the various derivative contract types we use, such as commodities, interest rate, and foreign exchange.

        In order to identify how our derivatives impact our financial position, at the bottom of the tables we provide a reconciliation of the gross fair value components to the net fair value amounts as presented in the Fair Value Measurements note and our Consolidated Balance Sheets.

25


Table of Contents

        The gross asset and liability values in the tables below are segregated between those derivatives designated in qualifying hedge accounting relationships and those not designated in hedge accounting relationships. Derivatives not designated in hedging relationships include our NewEnergy retail gas operations, economic hedges of accrual activities, the total return swaps entered into to effect the sale of the international commodities and Houston- based gas trading operations, and risk management and trading activities which we have substantially curtailed as part of our effort to reduce risk in our business. We use the end of period accounting designation to determine the classification for each derivative position.

As of June 30, 2010
  Derivatives
Designated as Hedging
Instruments for
Accounting Purposes

  Derivatives Not
Designated As Hedging
Instruments for
Accounting Purposes

  All Derivatives
Combined

 
   
Contract type
  Asset
Values3

  Liability
Values4

  Asset
Values3

  Liability
Values4

  Asset
Values3

  Liability
Values4

 
   
 
  (In millions)
 
 

Power contracts

  $ 1,627.5   $ (2,013.0 ) $ 11,159.2   $ (11,800.9 ) $ 12,786.7   $ (13,813.9 )
 

Gas contracts

    2,095.6     (1,853.1 )   4,360.1     (4,110.8 )   6,455.7     (5,963.9 )
 

Coal contracts

    35.8     (33.5 )   348.6     (343.9 )   384.4     (377.4 )
 

Other commodity contracts1

            125.0     (79.7 )   125.0     (79.7 )
 

Interest rate contracts

    44.0         37.4     (44.8 )   81.4     (44.8 )
 

Foreign exchange contracts

            6.5     (4.5 )   6.5     (4.5 )
   

Total gross fair values

  $ 3,802.9   $ (3,899.6 ) $ 16,036.8   $ (16,384.6 ) $ 19,839.7   $ (20,284.2 )
                   
 

Netting arrangements5

                            (18,850.0 )   18,850.0  
 

Cash collateral

                            (78.6 )   179.6  
                               

Net fair values

                          $ 911.1   $ (1,254.6 )
                               

Net fair value by balance sheet line item:

                                     

Accounts receivable2

                          $ (197.3 )      

Derivative assets—current

                            558.2        

Derivative assets—noncurrent

                            550.2        

Derivative liabilities—current

                                  (621.6 )

Derivative liabilities—noncurrent

                                  (633.0 )
                               

Total Derivatives

                          $ 911.1   $ (1,254.6 )
   

1 Other commodity contracts include oil, freight, emission allowances, and weather contracts.
2 Represents the unrealized fair value of exchange traded derivatives, exclusive of cash margin posted.
3 Represents in-the-money contracts without regard to potentially offsetting out-of-the-money contracts under master netting agreements.
4 Represents out-of-the-money contracts without regard to potentially offsetting in-the-money contracts under master netting agreements.
5 Represents the effect of legally enforceable master netting agreements.

26


Table of Contents

As of December 31, 2009
  Derivatives Designated
as Hedging
Instruments for
Accounting Purposes

  Derivatives Not
Designated As Hedging
Instruments for
Accounting Purposes

  All Derivatives Combined
 
   
Contract type
  Asset
Values3

  Liability
Values4

  Asset
Values3

  Liability
Values4

  Asset
Values3

  Liability
Values4

 
   
 
  (In millions)
 
 

Power contracts

  $ 1,737.3   $ (2,292.1 ) $ 11,729.3   $ (12,414.3 ) $ 13,466.6   $ (14,706.4 )
 

Gas contracts

    1,860.6     (1,380.0 )   4,159.1     (3,857.1 )   6,019.7     (5,237.1 )
 

Coal contracts

    20.1     (40.8 )   609.5     (627.2 )   629.6     (668.0 )
 

Other commodity contracts1

    1.4     (0.8 )   83.1     (32.1 )   84.5     (32.9 )
 

Interest rate contracts

    35.8         28.5     (39.9 )   64.3     (39.9 )
 

Foreign exchange contracts

            13.2     (9.0 )   13.2     (9.0 )
   

Total gross fair values

  $ 3,655.2   $ (3,713.7 ) $ 16,622.7   $ (16,979.6 ) $ 20,277.9   $ (20,693.3 )
                   
 

Netting arrangements5

                            (19,261.0 )   19,261.0  
 

Cash collateral

                            (92.6 )   125.6  
                               

Net fair values

                          $ 924.3   $ (1,306.7 )
                               

Net fair value by balance sheet line item:

                                     

Accounts receivable2

                          $ (348.7 )      

Derivative assets—current

                            639.1        

Derivative assets—noncurrent

                            633.9        

Derivative liabilities—current

                                  (632.6 )

Derivative liabilities—noncurrent

                                  (674.1 )
                               

Total Derivatives

                          $ 924.3   $ (1,306.7 )
   

1 Other commodity contracts include oil, freight, emission allowances, and weather contracts.
2 Represents the unrealized fair value of exchange traded derivatives, exclusive of cash margin posted.
3 Represents in-the-money contracts without regard to potentially offsetting out-of-the-money contracts under master netting agreements.
4 Represents out-of-the-money contracts without regard to potentially offsetting in-the-money contracts under master netting agreements.
5 Represents the effect of legally enforceable master netting agreements.

        The magnitude of and changes in the gross derivatives components in these tables do not indicate changes in the level of derivative activities, the level of market risk, or the level of credit risk. The primary factors affecting the magnitude of the gross amounts in the tables are changes in commodity prices and the total number of contracts. If commodity prices change, the gross amounts could increase, even if the level of contracts stays the same, because separate presentation is required for contracts that are in the money from those that are out of the money. As a result, the gross amounts of even fully hedged positions could increase if prices change. Additionally, if the number of contracts increases, the gross amounts also could increase. Thus, the execution of new contracts to reduce economic risk could actually increase the gross amounts in the table because of the requirement to present the gross value of each individual contract separately.

        The primary purpose of these tables is to disaggregate the risks being managed using derivatives by contract type and accounting treatment. In order to achieve this objective, we prepare these tables by separating each individual derivative contract that is in the money from each contract that is out of the money and present such amounts on a gross basis, even for offsetting contracts that have identical quantities for the same commodity, location, and delivery period. We must also present these components excluding the substantive credit-risk reducing effects of master netting agreements and collateral. As a result, the gross "asset" and "liability" amounts for each contract type far exceed our actual economic exposure to commodity price risk and credit risk. Our actual economic exposure consists of the net derivative position combined with our nonderivative accrual contracts, such as those for load-serving, and our physical assets, such as our power plants. Our actual derivative credit risk exposure after master netting agreements and cash collateral is reflected in the net fair value amounts shown at the bottom of the tables above. Our total economic and credit exposures, including derivatives, are managed in a comprehensive risk framework that includes risk measures such as economic value at risk, stress testing, and maximum potential credit exposure.

27


Table of Contents

Gain and (Loss) Tables

The tables below summarize the gain and loss impacts of our derivative instruments segregated into the following categories:

    cash flow hedges,
    fair value hedges, and
    mark-to-market derivatives.

        The tables only include this information for derivatives and do not reflect the related gains or losses that arise from generation and generation-related assets, nonderivative accrual contracts, or NPNS contracts within our Generation and NewEnergy businesses, other than fair value hedges, for which we separately show the gain or loss on the hedged asset or liability. As a result, for mark-to-market and cash-flow hedge derivatives, these tables only reflect the impact of derivatives themselves and therefore do not necessarily include all of the income statement impacts of the transactions for which derivatives are used to manage risk. For a more complete discussion of how derivatives affect our financial performance, see our accounting policy for Revenues, Fuel and Purchased Energy Expenses, and Derivatives and Hedging Activities in Note 1 of our 2009 Annual Report on Form 10-K.

        The following tables present gains and losses on derivatives designated as cash flow hedges. As discussed more fully in our accounting policy, we record the effective portion of unrealized gains and losses on cash flow hedges in Accumulated Other Comprehensive Loss until the hedged forecasted transaction affects earnings. We record the ineffective portion of gains and losses on cash flow hedges in earnings as they occur. When the hedged forecasted transaction settles and is recorded in earnings, we reclassify the related amounts from Accumulated Other Comprehensive Loss into earnings, with the result that the combination of revenue or expense from the forecasted transaction and gain or loss from the hedge are recognized in earnings at a total amount equal to the hedged price. Accordingly, the amount of derivative gains and losses recorded in Accumulated Other Comprehensive Loss and reclassified from Accumulated Other Comprehensive Loss into earnings does not reflect the total economics of the hedged forecasted transactions. The total impact of our forecasted transactions and related hedges is reflected in our Consolidated Statements of Income (Loss).

Cash Flow Hedges
   
   
   
   
  Quarter Ended June 30,
 
   
 
  Gain (Loss)
Recorded in AOCI
   
  Gain (Loss)
Reclassified from
AOCI into
Earnings
  Ineffectiveness
Gain (Loss)
Recorded in
Earnings
 
Contract type:
  2010
  2009
  Statement of Income (Loss) Line Item
  2010
  2009
  2010
  2009
 
   
 
  (In millions)
 

Hedges of forecasted sales:

              Nonregulated revenues                          
 

Power contracts

  $ (80.8 ) $ 100.4       $ (1.0 ) $ (37.5 ) $ (20.5 ) $ 21.2  
 

Gas contracts

    1.8     7.9         16.2     (0.6 )   (2.9 )   4.5  
 

Coal contracts

                             
 

Other commodity contracts1

        (7.1 )           (0.8 )       (2.2 )

Interest rate contracts

                    (0.2 )        

Foreign exchange contracts

                             
   

Total gains (losses)

  $ (79.0 ) $ 101.2   Total included in nonregulated revenues   $ 15.2   $ (39.1 ) $ (23.4 ) $ 23.5  
   

Hedges of forecasted purchases:

              Fuel and purchased energy expense                          
 

Power contracts

  $ 163.9   $ (112.8 )     $ (331.6 ) $ (611.9 ) $ (3.4 ) $ (0.3 )
 

Gas contracts

    (2.6 )   (21.2 )       45.1     66.7     (13.1 )   1.9  
 

Coal contracts

    32.6     (40.5 )       (15.3 )   (52.0 )   2.3     (1.6 )
 

Other commodity contracts2

        (3.7 )           (2.7 )        

Foreign exchange contracts

                             
   

Total losses

  $ 193.9   $ (178.2 ) Total included in fuel and purchased energy expense   $ (301.8 ) $ (599.9 ) $ (14.2 ) $  
   

Hedges of interest rates:

              Interest expense                          
 

Interest rate contracts

                0.2     (0.1 )        
   

Total gains

  $   $   Total included in interest expense   $ 0.2   $ (0.1 ) $   $  
   

Grand total (losses) gains

  $ 114.9   $ (77.0 )     $ (286.4 ) $ (639.1 ) $ (37.6 ) $ 23.5  
   

1 Other commodity sale contracts include oil and freight contracts.
2 Other commodity purchase contracts include freight and emission allowances.

28


Table of Contents

Cash Flow Hedges
   
   
   
  Six Months Ended June 30,
 
   
 
  Gain (Loss)
Recorded in AOCI
   
  Gain (Loss)
Reclassified from
AOCI into
Earnings
  Ineffectiveness
Gain (Loss)
Recorded in
Earnings
 
Contract type:
  2010
  2009
  Statement of Income (Loss) Line Item
  2010
  2009
  2010
  2009
 
   
 
  (In millions)
 

Hedges of forecasted sales:

              Nonregulated revenues                          
 

Power contracts

  $ 121.7   $ 262.2       $ (60.2 ) $ (129.6 ) $ 1.3   $ 81.0  
 

Gas contracts

    (33.1 )   (23.9 )       36.4     (22.0 )   (4.0 )   6.5  
 

Coal contracts

        10.0             (229.9 )        
 

Other commodity contracts1

        6.6         (0.7 )   (3.6 )       (5.1 )

Interest rate contracts

        (0.3 )           (0.2 )        

Foreign exchange contracts

        0.3             (0.9 )        
   

Total gains (losses)

  $ 88.6   $ 254.9   Total included in nonregulated revenues   $ (24.5 ) $ (386.2 ) $ (2.7 ) $ 82.4  
   

Hedges of forecasted purchases:

              Fuel and purchased energy expense                          
 

Power contracts

  $ (291.6 ) $ (886.8 )     $ (534.7 ) $ (1,038.4 ) $ (12.7 ) $ (29.5 )
 

Gas contracts

    (76.2 )   154.5         123.1     92.7     (13.1 )   2.6  
 

Coal contracts

    21.8     (125.1 )       (27.8 )   (65.3 )   4.0     (2.9 )
 

Other commodity contracts2

    (0.2 )   (2.1 )       (0.3 )   23.1     0.2      

Foreign exchange contracts

        0.1             0.1          
   

Total losses

  $ (346.2 ) $ (859.4 ) Total included in fuel and purchased energy expense   $ (439.7 ) $ (987.8 ) $ (21.6 ) $ (29.8 )
   

Hedges of interest rates:

              Interest expense                          
 

Interest rate contracts

                4.1     (0.2 )        
   

Total gains

  $   $   Total included in interest expense   $ 4.1   $ (0.2 ) $   $  
   

Grand total (losses) gains

  $ (257.6 ) $ (604.5 )     $ (460.1 ) $ (1,374.2 ) $ (24.3 ) $ 52.6  
   

1 Other commodity sale contracts include oil and freight contracts.
2 Other commodity purchase contracts include freight and emission allowances.

        The following table presents gains and losses on derivatives designated as fair value hedges and, separately, the gains and losses on the hedged item. As discussed earlier, we record the unrealized gains and losses on fair value hedges as well as changes in the fair value of the hedged asset or liability in earnings as they occur. The difference between the gains and losses on derivatives designated as fair value hedges and the gains and losses on the hedged item represents the recognition of locked-in gains on terminated interest rate swaps.

Fair Value Hedges
   
  Quarter Ended June 30,
  Six Months Ended June 30,
 
   
 
   
  Amount of
Gain (Loss)
Recognized in
Income on
Derivative

  Amount of
Gain (Loss)
Recognized in
Income on
Hedged Item

  Amount of
Gain (Loss)
Recognized in
Income on
Derivative

  Amount of
Gain (Loss)
Recognized in
Income on
Hedged Item

 
 
   
     
Contract type:
  Statement of Income (Loss) Line Item
  2010
  2009
  2010
  2009
  2010
  2009
  2010
  2009
 
   
 
   
  (In millions)
 

Commodity contracts:

                                                     
 

Gas contracts

  Nonregulated revenues   $   $   $   $   $   $ 40.6   $   $ (16.7 )

Interest rate contracts

  Interest expense     4.2     (20.4 )   (4.1 )   20.4     17.4     (15.5 )   (15.2 )   15.5  
   

Total gains (losses)

      $ 4.2   $ (20.4 ) $ (4.1 ) $ 20.4   $ 17.4   $ 25.1   $ (15.2 ) $ (1.2 )
   

29


Table of Contents

        The following table presents gains and losses on mark-to-market derivatives. As discussed more fully in Note 1 to our 2009 Annual Report on Form 10-K, we record the unrealized gains and losses on mark-to-market derivatives in earnings as they occur. While we use mark-to-market accounting for risk management and trading activities because changes in fair value more closely reflect the economic performance of the activity, we also use mark-to-market accounting for certain derivatives related to portions of our physical energy delivery activities. Accordingly, the total amount of gains and losses from mark-to-market derivatives does not necessarily reflect the total economics of related transactions.

Mark-to-Market Derivatives
   
  Quarter Ended
June 30,

  Six Months Ended
June 30,

 
   
 
   
  Amount of Gain
(Loss) Recorded in
Income on Derivative

  Amount of Gain
(Loss) Recorded in
Income on Derivative

 
 
   
     
 
  Statement of Income (Loss) Line Item
 
Contract type:
  2010
  2009
  2010
  2009
 
   
 
   
  (In millions)
 

Commodity contracts:

                             
 

Power contracts

  Nonregulated revenues   $ 40.1   $ 58.4   $ (24.8 ) $ 147.0  
 

Gas contracts

  Nonregulated revenues     5.0     (116.9 )   30.7     (279.5 )
 

Coal contracts

  Nonregulated revenues     7.6     52.1     7.7     9.8  
 

Other commodity contracts1

  Nonregulated revenues     (3.8 )   4.3     1.1     0.4  
 

Coal contracts

  Fuel and purchased energy expense         (2.2 )       (107.7 )

Interest rate contracts

  Nonregulated revenues     (0.6 )   (20.1 )   (1.7 )   (20.6 )

Foreign exchange contracts

  Nonregulated revenues     (1.2 )   1.9     (2.1 )   9.7  
   

Total gains (losses)

      $ 47.1   $ (22.5 ) $ 10.9   $ (240.9 )
   

1 Other commodity contracts for the quarter ended June 30, 2009 include oil, freight, weather, and emission allowances. For the quarter ended June 30, 2010 and for the six months ended June 30, 2010 and 2009, other commodity contracts also include uranium.

        In computing the amounts of derivative gains and losses in the above tables, we include the changes in fair values of derivative contracts up to the date of maturity or settlement of each contract. This approach facilitates a comparable presentation for both financial and physical derivative contracts. In addition, for cash flow hedges we include the impact of intra-quarter transactions (i.e., those that arise and settle within the same quarter) in both gains and losses recognized in Accumulated Other Comprehensive Loss and amounts reclassified from Accumulated Other Comprehensive Loss into earnings.

Volume of Derivative Activity

The volume of our derivatives activity is directly related to the fundamental nature and scope of our business and the risks we manage. We own or control electric generating facilities, which exposes us to both power and fuel price risk; we serve electric and gas wholesale and retail customers within our NewEnergy business, which exposes us to electricity and natural gas price risk; and we provide risk management services and engage in trading activities, which can expose us to a variety of commodity price risks. We conduct our business activities throughout the United States and internationally. In order to manage the risks associated with these activities, we are required to be an active participant in the energy markets, and we routinely employ derivative instruments to conduct our business.

        Derivative instruments provide an efficient and effective way to conduct our business and to manage the associated risks. We manage our generating resources and NewEnergy business based upon established policies and limits, and we use derivatives to establish a portion of our hedges and to adjust the level of our hedges from time to time. Additionally, we engage in trading activities which enable us to execute hedging transactions in a cost-effective manner. We manage those activities based upon various risk measures, including position limits, economic value at risk (EVaR) and value at risk (VaR), and we use derivatives to establish and maintain those activities within the prescribed limits. We are also using derivatives to execute, control, and reduce the overall level of our trading positions and risk as well as to manage a portion of our interest rate risk associated with debt and our foreign currency risk from non-dollar denominated transactions. Accordingly, the use of derivative instruments is integral to the conduct of our business, and derivative instruments are an important tool

30


Table of Contents

through which we are able to manage and mitigate the risks that are inherent in our activities.

        The following tables present information designed to provide insight into the overall volume of our derivatives usage. However, the volumes presented in these tables are subject to a number of limitations and should only be used as an indication of the extent of our derivatives usage and the risks they are intended to manage.

        First, the volume information is not a complete representation of our market price risk because it only includes derivative contracts. Accordingly, these tables do not present a complete picture of our overall net economic exposure, and should not be interpreted as an indication of open or unhedged commodity positions, because the use of derivatives is only one of the means by which we engage in and manage the risks of our business. For example, these tables do not include power or fuel quantities and risks arising from our physical assets, non-derivative contracts, and forecasted transactions that we manage using derivatives; a portion of these volumes reduce those risks. They also do not include volumes of commodities under nonderivative contracts that we use to serve customers or manage our risks. Our actual net economic exposure from our generating facilities and NewEnergy activities is reduced by derivatives, and the exposure from our trading activities is managed and controlled through the risk measures discussed above. Therefore, the information in the tables below is only an indication of that portion of our business that we manage through derivatives and serves primarily to identify the extent of our derivatives activities and the types of risks that they are intended to manage.

        Additionally, the disclosure of derivative quantities potentially could reveal commercially valuable or otherwise competitively sensitive information that could limit the effectiveness and profitability of our business activities. Therefore, in the tables below, we have computed the derivative volumes for commodities by aggregating the absolute value of net positions within commodities for each year. This provides an indication of the level of derivatives activity, but it does not indicate either the direction of our position (long or short), or the overall size of our position. We believe this presentation gives an appropriate indication of the level of derivatives activity without unnecessarily revealing the size and direction of our derivatives positions.

        Finally, the volume information for commodity derivatives represents "delta equivalent" quantities, not gross notional amounts. We make use of different types of commodity derivative instruments such as forwards, futures, options, and swaps, and we believe that the delta equivalent quantity is the most relevant measure of the volume associated with these commodity derivatives. The delta-equivalent quantity represents a risk-adjusted notional quantity for each contract that takes into account the probability that an option will be exercised. Therefore, the volume information for commodity derivatives represents the delta equivalent quantity of those contracts, computed on the basis described above. For interest rate contracts and foreign currency contracts we have presented the notional amounts of such contracts in the tables below.

        The following tables present the volume of our derivative activities as of June 30, 2010 and December 31, 2009 shown by contractual settlement year.

Quantities1 Under Derivative Contracts
   
   
   
   
  As of June 30, 2010
 
   
Contract Type (Unit)
  2010
  2011
  2012
  2013
  2014
  Thereafter
  Total
 
   
 
  (In millions)
 

Power (MWh)

    24.9     19.7     8.2     2.4     4.0     1.7     60.9  

Gas (MMBTU)

    39.3     50.3     13.4     39.8     45.3     19.3     207.4  

Coal (Tons)

    2.3     4.7     1.3     0.1             8.4  

Oil (BBL)

    0.3         0.1                 0.4  

Emission Allowances (Tons)

    11.2                         11.2  

Interest Rate Contracts

  $ 264.2   $ 204.4   $ 318.7   $ 241.8   $ 60.0   $ 250.0   $ 1,339.1  

Foreign Exchange Rate Contracts

  $ 31.5   $ 64.5   $ 7.7   $ 16.7   $ 16.8   $ 15.5   $ 152.7  
   

31


Table of Contents


Quantities1 Under Derivative Contracts
   
   
   
  As of December 31, 2009
 
   
Contract Type (Unit)
  2010
  2011
  2012
  2013
  2014
  Thereafter
  Total
 
   
 
  (In millions)
 

Power (MWh)

    32.7     1.6     3.2     3.2     0.1     0.9     41.7  

Gas (MMBTU)

    37.3     37.4     22.1     21.0     22.7     21.3     161.8  

Coal (Tons)

    3.9     3.9     0.2                 8.0  

Oil (BBL)

    0.3                         0.3  

Emission Allowances (Tons)

    7.2                         7.2  

Interest Rate Contracts

  $ 972.3   $ 140.6   $ 440.5   $ 58.2   $ 255.0   $ 200.0   $ 2,066.6  

Foreign Exchange Rate Contracts

  $ 27.9   $ 72.4   $ 16.7   $ 16.7   $ 16.8   $ 15.5   $ 166.0  
   

1 Amounts in the tables are only intended to provide an indication of the level of derivatives activity and should not be interpreted as a measure of any derivative position or overall economic exposure to market risk. Quantities are expressed as "delta equivalents" on an absolute value basis by contract type by year. Additionally, quantities relate only to derivatives and do not include potentially offsetting quantities associated with physical assets and nonderivative accrual contracts.

        In addition to the commodities in the tables above, we also hold derivative instruments related to weather that are insignificant relative to the overall level of our derivative activity.

Credit-Risk Related Contingent Features

Certain of our derivative instruments contain provisions that would require additional collateral upon a credit-related event such as an adequate assurance provision or a credit rating decrease in the senior unsecured debt of Constellation Energy. The amount of collateral we could be required to post would be determined by the fair value of contracts containing such provisions that represent a net liability, after offset for the fair value of any asset contracts with the same counterparty under master netting agreements and any other collateral already posted. This collateral amount is a component of, and is not in addition to, the total collateral we could be required to post for all contracts upon a credit rating decrease.

        The following tables present information related to these derivatives at June 30, 2010 and December 31, 2009. Based on contractual provisions, we estimate that if Constellation Energy's senior unsecured debt were downgraded, our total contingent collateral obligation for derivatives in a net liability position was $0.2 billion at both June 30, 2010 and December 31, 2009, which represents the additional collateral that we could be required to post with counterparties, including both cash collateral and letters of credit, in the event of a credit downgrade to below investment grade. These amounts are associated with net derivative liabilities totaling $1.0 billion at both June 30, 2010 and December 31, 2009 after reflecting legally binding master netting agreements and collateral already posted.

        We present the gross fair value of derivatives in a net liability position that have credit-risk-related contingent features in the first column in the tables below. This gross fair value amount represents only the out-of-the-money contracts containing such features that are not fully collateralized by cash on a stand-alone basis. Thus, this amount does not reflect the offsetting fair value of in-the-money contracts under legally-binding master netting agreements with the same counterparty, as shown in the second column in the tables. These in-the-money contracts would offset the amount of any gross liability that could be required to be collateralized, and as a result, the actual potential collateral requirements would be based upon the net fair value of derivatives containing such features, not the gross amount. The amount of any possible contingent collateral for such contracts in the event of a downgrade would be further reduced to the extent that we have already posted collateral related to the net liability.

        Because the amount of any contingent collateral obligation would be based on the net fair value of all derivative contracts under each master netting agreement, we believe that the "net fair value of derivative contracts containing this feature" as shown in the tables below is the most relevant measure of derivatives in a net liability position with credit-risk-related contingent features. This amount reflects the actual net liability upon which existing collateral postings are computed and upon which any additional contingent collateral obligation would be based.

32


Table of Contents

Credit-Risk Related Contingent Feature
  As of June 30, 2010
 
   
Gross Fair Value
of Derivative
Contracts Containing
This Feature1

  Offsetting Fair Value
of In-the-Money
Contracts Under Master
Netting Agreements2

  Net Fair Value
of Derivative
Contracts Containing
This Feature3

  Amount of
Posted
Collateral4

  Contingent
Collateral
Obligation5

 
   
(In billions)
 
$ 7.7   $ (6.7 ) $ 1.0   $ 0.8   $ 0.2  
   

 

Credit-Risk Related Contingent Feature
  As of December 31, 2009
 
   
Gross Fair Value
of Derivative
Contracts Containing
This Feature1

  Offsetting Fair Value
of In-the-Money
Contracts Under Master
Netting Agreements2

  Net Fair Value
of Derivative
Contracts Containing
This Feature3

  Amount of
Posted
Collateral4

  Contingent
Collateral
Obligation5

 
   
(In billions)
 
$ 8.6   $ (7.6 ) $ 1.0   $ 0.7   $ 0.2  
   

1 Amount represents the gross fair value of out-of-the-money derivative contracts containing credit-risk-related contingent features that are not fully collateralized by posted cash collateral on an individual, contract-by-contract basis ignoring the effects of master netting agreements.
2 Amount represents the offsetting fair value of in-the-money derivative contracts under legally-enforceable master netting agreements with the same counterparty, which reduces the amount of any liability for which we potentially could be required to post collateral.
3 Amount represents the net fair value of out-of-the-money derivative contracts containing credit-risk related contingent features after considering the mitigating effects of offsetting positions under master netting arrangements and reflects the actual net liability upon which any potential contingent collateral obligations would be based.
4 Amount includes cash collateral posted of $179.6 million and letters of credit of $601.0 million at June 30, 2010 and $125.6 million and letters of credit of $585.2 million at December 31, 2009.
5 Amounts represent the additional collateral that we could be required to post with counterparties, including both cash collateral and letters of credit, in the event of a credit downgrade to below investment grade after giving consideration to offsetting derivative and non-derivative positions under master netting agreements.

Concentrations of Derivative-Related Credit Risk

We discuss our concentrations of credit risk, including derivative-related positions, in Note 1 to our 2009 Annual Report on Form 10-K. As of June 30, 2010, we had two counterparties that exceeded 10% of our total credit exposure, including derivative-related positions. We had an approximately 17% exposure related to the power purchase agreement executed in 2009 with CENG, and we had an approximately 11% exposure related to an electric cooperative customer.

33


Table of Contents

Fair Value Measurements

Recurring Measurements

Our assets and liabilities measured at fair value on a recurring basis consist of the following (BGE's assets and liabilities measured at fair value on a recurring basis are immaterial):

 
  As of
June 30, 2010

 
 
  Assets
  Liabilities
 
   
 
  (In millions)
 

Cash equivalents

  $ 1,076.7   $  

Equity securities

    38.5      

Derivative instruments:

             
 

Classified as derivative assets and liabilities:

             
   

Current

    558.2     (621.6 )
   

Noncurrent

    550.2     (633.0 )
   
   

Total classified as derivative assets and liabilities

    1,108.4     (1,254.6 )
 

Classified as accounts receivable*

    (197.3 )    
   
 

Total derivative instruments

    911.1     (1,254.6 )
   

Total recurring fair value measurements

  $ 2,026.3   $ (1,254.6 )
   

* Represents the unrealized fair value of exchange traded derivatives, exclusive of cash margin posted.

        Cash equivalents represent exchange-traded money market funds which are included in "Cash and cash equivalents" in the Consolidated Balance Sheets. Equity securities primarily represent mutual fund investments which are included in "Other assets" in the Consolidated Balance Sheets. Derivative instruments represent unrealized amounts related to all derivative positions, including futures, forwards, swaps, and options. We classify exchange-listed contracts as part of "Accounts Receivable" in our Consolidated Balance Sheets. We classify the remainder of our derivative contracts as "Derivative assets" or "Derivative liabilities" in our Consolidated Balance Sheets.

        We present all derivatives recorded at fair value net with the associated fair value cash collateral. This presentation of the net position reflects our credit exposure for our on-balance sheet positions but excludes the impact of any off-balance sheet positions and collateral. Examples of off-balance sheet positions and collateral include in-the-money accrual contracts for which the right of offset exists in the event of default and letters of credit. We discuss our letters of credit in more detail in the Financing Activities section.

34


Table of Contents

        The table below sets forth by level within the fair value hierarchy the gross components of the Company's assets and liabilities that were measured at fair value on a recurring basis as of June 30, 2010. Our net derivative assets and liabilities are disaggregated on a gross contract-by-contract basis. These gross balances are intended solely to provide information on sources of inputs to fair value and proportions of fair value involving objective versus subjective valuations and do not represent either our actual credit exposure or net economic exposure. Therefore, the objective of this table is to provide information about how each individual derivative contract is valued within the fair value hierarchy, regardless of whether a particular contract is eligible for netting against other contracts or whether it has been collateralized.

At June 30, 2010
  Level 1
  Level 2
  Level 3
  Netting and
Cash Collateral*

  Total Net
Fair Value

 
   
 
  (In millions)
 

Cash equivalents

  $ 1,076.7   $