Constellation Energy Group (CEG)

Unrecognized Tax Benefits

The following table summarizes the change in unrecognized tax benefits during 2009 and our total unrecognized tax benefits at March 31, 2009:

1 BGE's portion of our total unrecognized tax benefits at March 31, 2009 was $4.0 million.

        Increases in current year and reductions in prior year tax positions 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.

        If the total amount of unrecognized tax benefits of $186.0 million were ultimately realized, our income tax expense would decrease by approximately $159 million. However, the $159 million includes state tax refund claims of approximately $48 million that have been disallowed by tax authorities and we believe that there is a remote likelihood of ultimately realizing any benefit from these refund claim amounts. These state refund claims may be resolved by December 31, 2009. For this reason, we believe it is reasonably possible that reductions to our total unrecognized tax benefits in the range of $40 to $50 million may occur by March 31, 2010, although these reductions are not expected to materially impact income tax expense.

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

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

        Accrued interest and penalties recognized in our Consolidated Balance Sheets were $9.6 million, of which BGE's portion was $0.8 million at March 31, 2009, and $10.3 million, of which BGE's portion was $0.7 million at December 31, 2008.

Unrecognized Tax Benefits

We adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, on January 1, 2007 (FIN 48). FIN 48 requires us to recognize in our financial statements the effects of uncertain tax positions if these positions meet a "more-likely-than-not" threshold. For those uncertain tax positions that we have recognized in our financial statements, we establish liabilities to reflect the portion of those positions we cannot conclude are "more-likely-than-not" to be realized upon ultimate settlement. These are referred to as liabilities for unrecognized tax benefits under FIN 48. We recognize interest and penalties related to unrecognized tax benefits in "Income tax expense" in our Consolidated Statements of Income (Loss).

        The following table summarizes our total unrecognized tax benefits at January 1, 2007, the date of adoption of FIN 48:

The adoption of FIN 48 did not have a material impact on BGE's financial results.

        Other unrecognized tax benefits relate to outstanding federal and state refund claims for which no tax benefit was previously provided in our financial statements because the claims do not meet the "more-likely-than-not" threshold. Included in this amount is $52.0 million of refund claims that have been disallowed by the applicable tax authorities for which we assess the probability of tax benefit recognition to be remote.

        We discuss our unrecognized tax benefits in more detail in Note 10.

Unrecognized Tax Benefits

We adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, on
January 1, 2007 (FIN 48). FIN 48 requires us to recognize in our financial statements the effects of uncertain tax positions if these positions meet a
"more-likely-than-not" threshold. For those uncertain tax positions that we have recognized in our financial statements, we establish liabilities to reflect the
portion of those positions we cannot conclude are "more-likely-than-not" to be realized upon ultimate settlement. These are referred to as liabilities for
unrecognized tax benefits under FIN 48. We recognize interest and penalties related to unrecognized tax benefits in "Income tax expense" in our Consolidated Statements of Income (Loss).

        The
following table summarizes our total unrecognized tax benefits at January 1, 2007, the date of adoption of FIN 48:

The adoption of FIN 48 did not have a material impact on BGE's financial results.

        Other
unrecognized tax benefits relate to outstanding federal and state refund claims for which no tax benefit was previously provided in our financial statements because the claims do
not meet the "more-likely-than-not" threshold. Included in this amount is $52.0 million of refund claims that have been disallowed by the applicable tax
authorities for which we assess the probability of tax benefit recognition to be remote.

        We
discuss our unrecognized tax benefits in more detail in Note 10.

Unrecognized Tax Benefits

The following table summarizes the change in unrecognized tax benefits during 2008 and 2007 and our total unrecognized tax benefits at December 31, 2008 and 2007:

(1)

BGE's portion of our total unrecognized tax benefits at December 31, 2008 and 2007 was $4.8 million and $17.8 million, respectively.

        Increases in current year tax positions in 2008 are primarily due to unrecognized tax benefits of $93.6 million related to certain MidAmerican merger termination payments and related transaction fees that were expensed for financial accounting purposes and are expected to be deducted on our 2008 federal and state income tax returns. Other increases in current year tax positions include unrecognized tax benefits for repair and depreciation deductions measured at amounts consistent with prior IRS examination results and state income tax accruals.

        In April 2008, we received a closing agreement from the State of Hawaii regarding audit examinations for the tax years 2001-2003. Additionally, in June 2008, we received notice that the United States Congressional Joint Committee on Taxation had approved the results of the IRS examination of our federal consolidated income tax returns for the 2002-2004 tax years. We reduced our liability for unrecognized tax benefits by $21.5 million to reflect the results of these audits. The impact of the audit settlements on income tax expense was immaterial.

        Total unrecognized tax benefits as of December 31, 2008 of $189.7 million include outstanding state refund claims of approximately $48.3 million for which no tax benefit was recorded on our Consolidated Balance Sheets 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 $189.7 million were ultimately realized, our income tax expense would decrease by approximately $159 million. However, the $159 million includes state tax refund claims of approximately $48 million discussed above that have been disallowed by tax authorities and we believe that there is a remote likelihood of ultimately realizing any benefit from these refund claim amounts. These state refund claims may be resolved by December 31, 2009. For this reason, we believe it is reasonably possible that reductions to our total unrecognized tax benefits in the range of $40 to $50 million may occur by December 31, 2009, although these reductions are not expected to materially impact income tax expense.

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

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

        Accrued interest and penalties recognized in our Consolidated Balance Sheets were $10.3 million, of which BGE's portion was $0.7 million at December 31, 2008, and $16.8 million, of which BGE's portion was $5.3 million, at December 31, 2007.

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11 Leases

There are two types of leases—operating and capital. Capital leases qualify as sales or purchases of property and are reported in our Consolidated Balance Sheets. Our capital leases are not material in amount. All other leases are operating leases and are reported in our Consolidated Statements of Income (Loss). We expense all lease payments associated with our regulated business. Lease expense and future minimum payments for long-term, noncancelable, operating leases are not material to BGE's financial results. We present information about our operating leases below.

Unrecognized Tax Benefits

The following table summarizes the change in unrecognized tax benefits during 2008 and 2007 and our total unrecognized tax benefits
at December 31, 2008 and 2007:

(1)

BGE's portion of our total unrecognized tax benefits at December 31, 2008 and 2007 was $4.8 million and $17.8 million,
respectively.

        Increases
in current year tax positions in 2008 are primarily due to unrecognized tax benefits of $93.6 million related to certain MidAmerican merger termination payments and
related transaction fees that were expensed for financial accounting purposes and are expected to be deducted on our 2008 federal and state income tax returns. Other increases in current year tax
positions include unrecognized tax benefits for repair and depreciation deductions measured at amounts consistent with prior IRS examination results and state income tax accruals.

        In
April 2008, we received a closing agreement from the State of Hawaii regarding audit examinations for the tax years 2001-2003. Additionally, in June 2008, we received
notice that the United States Congressional Joint Committee on Taxation had approved the results of the IRS examination of our federal consolidated income tax returns for the 2002-2004 tax
years. We reduced our liability for unrecognized tax benefits by $21.5 million to reflect the results of these audits. The impact of the audit settlements on income tax expense was immaterial.

        Total
unrecognized tax benefits as of December 31, 2008 of $189.7 million include outstanding state refund claims of approximately $48.3 million for which no tax
benefit was recorded on our Consolidated Balance Sheets 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 $189.7 million were ultimately realized, our income tax expense would decrease by approximately $159 million. However,
the $159 million includes state tax refund claims of approximately $48 million discussed above that have been disallowed by tax authorities and we believe that there is a remote
likelihood of ultimately realizing any benefit from these refund claim amounts. These state refund claims may be resolved by December 31, 2009. For this reason, we believe it is reasonably
possible that reductions to our total unrecognized tax benefits in the range of $40 to $50 million may occur by December 31, 2009, although these reductions are not expected to
materially impact income tax expense.

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

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

        Accrued interest and penalties recognized in our Consolidated Balance Sheets were $10.3 million, of which BGE's portion was $0.7 million at
December 31, 2008, and $16.8 million, of which BGE's portion was $5.3 million, at December 31, 2007.

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11 Leases

There are two types of leases—operating and capital. Capital leases qualify as sales or purchases of property and are reported in our Consolidated
Balance Sheets. Our capital leases are not material in amount. All other leases are operating leases and are reported in our Consolidated Statements of Income (Loss). We expense all lease payments
associated with our regulated business. Lease expense and future minimum payments for long-term, noncancelable, operating leases are not material to BGE's financial results. We present
information about our operating leases below.

Unrecognized Tax Benefits

The following table summarizes the change in unrecognized tax benefits during 2008 and our total unrecognized tax benefits at September 30, 2008:

1 BGE's portion of our total unrecognized tax benefits at September 30, 2008 was $4.7 million.

        Increases in current year tax positions and reductions in prior year tax positions 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.

        In April 2008, we received a closing agreement from the State of Hawaii regarding audit examinations for the tax years 2001-2003. Additionally, in June 2008, we received notice that the United States Congressional Joint Committee on Taxation had approved the results of the IRS examination of our federal consolidated income tax returns for the 2002-2004 tax years. We reduced our liability for unrecognized tax benefits by $21.5 million to reflect the results of these audits. Substantially all of this reduction has been reclassified to current tax liabilities on our Consolidated Balance Sheets to reflect payments due to the tax authorities in connection with the audit results. The impact of the audit settlements on income tax expense was immaterial.

        Total unrecognized tax benefits as of September 30, 2008 of $94.8 million include outstanding state refund claims of approximately $49 million for which no tax benefit was recorded on our Consolidated Balance Sheets 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 $94.8 million were ultimately realized, our income tax expense would decrease by approximately $65 million. However, the $65 million includes state tax refund claims of approximately $49 million discussed above that have been disallowed by tax authorities and we believe that there

24

is a remote likelihood of ultimately realizing any benefit from these refund claim amounts. These refund claims and other unrecognized state tax benefits of $2.7 million currently being reviewed by state tax authorities may be resolved by September 30, 2009. For this reason, we believe it is reasonably possible that reductions to our total unrecognized tax benefits in the range of $40 to $50 million may occur by September 30, 2009, but would not materially impact income tax expense.

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

        Accrued interest and penalties recognized in our Consolidated Balance Sheets were $12.7 million at September 30, 2008 and $16.8 million at December 31, 2007.

Unrecognized Tax Benefits

The following table summarizes the change in unrecognized tax benefits during 2008 and our total unrecognized tax benefits at June 30, 2008:

1 BGE's portion of our total unrecognized tax benefits at June 30, 2008 was $4.2 million.

        Increases in current year tax positions and reductions in prior year tax positions 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.

        In April 2008, we received a closing agreement from the State of Hawaii regarding audit examinations for the tax years 2001-2003. Additionally, in June 2008, we received notice that the United States Congressional Joint Committee on Taxation had approved the results of the IRS examination of our federal consolidated income tax returns for the 2002-2004 tax years. We reduced our liability for unrecognized tax benefits at June 30, 2008 by $21.5 million to reflect the results of these audits. Substantially all of this reduction has been reclassified to current tax liabilities on our Consolidated Balance Sheets to reflect payments due to the tax authorities in connection with the audit results. The impact of the audit settlements on income tax expense was immaterial.

        Total unrecognized tax benefits as of June 30, 2008 of $95.6 million include outstanding state refund claims of approximately $49 million for which no tax benefit was recorded on our Consolidated Balance Sheets 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 $95.6 million were ultimately realized, our income tax expense would decrease by approximately $65 million. However, the $65 million includes state tax refund claims of approximately $49 million discussed above that have been disallowed by tax authorities and we believe that there is a remote likelihood of ultimately realizing any benefit from these refund claim amounts. These refund claims and other unrecognized state tax benefits of $2.7 million currently being reviewed by state tax authorities may be resolved by June 30, 2009. For this reason, we believe it is reasonably possible that reductions to our total unrecognized tax benefits in the range of $40 to $50 million may occur by June 30, 2009, but would not materially impact income tax expense.

17

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

        Accrued interest and penalties recognized in our Consolidated Balance Sheets were $12.5 million at June 30, 2008 and $16.8 million at December 31, 2007.

Unrecognized Tax Benefits

The following table summarizes the change in unrecognized tax benefits during 2008 and our total unrecognized tax benefits at March 31, 2008:

1 BGE's portion of our total unrecognized tax benefits at March 31, 2008 was $12.2 million.

        Increases in current year tax positions and reductions in prior year tax positions are primarily due to unrecognized tax benefits for repair and depreciation deductions measured at amounts consistent with proposed IRS adjustments for prior years. There was no significant change in tax expense as a result of 2008 activity.

        Interest and penalties recorded in our Consolidated Statements of Income as tax expense relating to liabilities for unrecognized tax benefits were $1.0 million for the quarter ended March 31, 2008. As a result, accrued interest and penalties recognized in our Consolidated Balance Sheets increased from $16.8 million at January 1, 2008 to $17.8 million at March 31, 2008.

        If the total amount of unrecognized tax benefits of $113.0 million, recorded in "Other Liabilities" on our Consolidated Balance Sheets, as of March 31, 2008, were ultimately realized, our income tax expense would decrease by approximately $70 million. Of this amount, approximately $52 million is for tax refund claims that have been disallowed by tax authorities. We believe that there is a remote likelihood of ultimately realizing any benefit from these refund claim amounts.

        In 2007 and 2008, the IRS proposed certain adjustments to our 2002-2004 deductions for repairs and casualty losses. We do not anticipate the adjustments, if any, would result in a material impact to our financial results. However, we anticipate that it is reasonably possible that we will make an additional payment in the range of $15 to $20 million by March 31, 2009, which will reduce our liabilities for unrecognized tax benefits.

Unrecognized Tax Benefits

The following table summarizes our total unrecognized tax benefits at January 1, 2007, the date of adoption of FIN 48:

The adoption of FIN 48 did not have a material impact on BGE's financial results.

        Other unrecognized tax benefits relate to outstanding federal and state refund claims for which no tax benefit was previously provided in our financial statements because the claims do not meet the "more-likely-than-not" threshold. Included in this amount is $52.0 million of refund claims that have been disallowed by the applicable tax authorities for which we assess the probability of tax benefit recognition to be remote. We discuss the adoption of FIN 48 in more detail in Note 1.

        The following table summarizes the change in unrecognized tax benefits during 2007 and our total unrecognized tax benefits at December 31, 2007:

(1)

BGE's portion of our total unrecognized tax benefits at December 31, 2007 was $17.8 million.

        Increases in current and prior year tax positions and reductions in prior year tax positions are primarily due to unrecognized tax benefits for repair deductions measured at amounts consistent with proposed IRS adjustments for prior years. There was no significant change in tax expense as a result of 2007 activity.

        Interest and penalties recorded in our Consolidated Statements of Income as tax expense relating to liabilities for unrecognized tax benefits were $4.7 million for the year ended December 31, 2007. As a result, accrued interest and penalties recognized in our Consolidated Balance Sheets increased from $12.1 million at January 1, 2007 to $16.8 million at December 31, 2007.

        If the total amount of unrecognized tax benefits of $114.5 million as of December 31, 2007 were ultimately realized, our income tax expense would decrease by approximately $71 million. The $71 million includes the $52 million of disallowed refund claims discussed above.

        In 2007, the IRS proposed certain adjustments to our 2002-2004 deductions for repairs and casualty losses. We do not anticipate the adjustments, if any, would result in a material impact on our financial results. However, we anticipate that it is reasonably possible that we will make an additional payment in the range of $20 to $25 million by December 31, 2008, which will reduce our liabilities for unrecognized tax benefits.

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Unrecognized Tax Benefits

The following table summarizes our total unrecognized tax benefits at January 1, 2007, the date of adoption of FIN 48:

The adoption of FIN 48 did not have a material impact on BGE's financial results.

        Other
unrecognized tax benefits relate to outstanding federal and state refund claims for which no tax benefit was previously provided in our financial statements because
the claims do not meet the "more-likely-than-not" threshold. Included in this amount is $52.0 million of refund claims that have been disallowed by the
applicable tax authorities for which we assess the probability of tax benefit recognition to
be remote. We discuss the adoption of FIN 48 in more detail in Note 1.

        The
following table summarizes the change in unrecognized tax benefits during 2007 and our total unrecognized tax benefits at December 31, 2007:

(1)

BGE's portion of our total unrecognized tax benefits at December 31, 2007 was $17.8 million.

        Increases
in current and prior year tax positions and reductions in prior year tax positions are primarily due to unrecognized tax benefits for repair deductions measured
at amounts consistent with proposed IRS adjustments for prior years. There was no significant change in tax expense as a result of 2007 activity.

        Interest
and penalties recorded in our Consolidated Statements of Income as tax expense relating to liabilities for unrecognized tax benefits were $4.7 million for the year ended
December 31, 2007. As a result, accrued interest and penalties recognized in our Consolidated Balance Sheets increased from $12.1 million at January 1, 2007 to
$16.8 million at December 31, 2007.

        If
the total amount of unrecognized tax benefits of $114.5 million as of December 31, 2007 were ultimately realized, our income tax expense would decrease by approximately
$71 million. The $71 million includes the $52 million of disallowed refund claims discussed above.

        In
2007, the IRS proposed certain adjustments to our 2002-2004 deductions for repairs and casualty losses. We do not anticipate the adjustments, if any, would result in a
material impact on our financial results. However, we anticipate that it is reasonably possible that we will make an additional payment in the range of $20 to $25 million by December 31,
2008, which will reduce our liabilities for unrecognized tax benefits.

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