Edgar Filing: CONSTELLATION ENERGY GROUP INC

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 September 30, 2006

Commission File Number	Exact name of registrant as specified in its charter	IRS Employer Identification No.
1-12869	CONSTELLATION ENERGY GROUP, INC.	52-1964611
1-1910	BALTIMORE GAS AND ELECTRIC COMPANY	52-0280210

		MARYLAND
(State of Incorporation of both registrants)

750 E. PRATT STREET, BALTIMORE, MARYLAND		21202
(Address of principal executive offices)		(Zip Code)

		410-783-2800
(Registrants’ telephone number, including area code)

		NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) have been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether Constellation Energy Group, Inc. is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.

(Check one):

Large accelerated filer x Accelerated filer o Non-accelerated filer o

Indicate by check mark whether Baltimore Gas and Electric Company is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.

(Check one):

Large accelerated filer o Accelerated filer o Non-accelerated filer x

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 x

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 x

Common Stock, without par value 180,007,617 shares outstanding of

Constellation Energy Group, Inc. on October 31, 2006.

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

		Page
Part I—Financial Information
Item 1—Financial Statements
Constellation Energy Group, Inc. and Subsidiaries
Consolidated Statements of Income		3
Consolidated Statements of Comprehensive Income		3
Consolidated Balance Sheets		4
Consolidated Statements of Cash Flows		6
Baltimore Gas and Electric Company and Subsidiaries
Consolidated Statements of Income		7
Consolidated Balance Sheets		8
Consolidated Statements of Cash Flows		10
Notes to Consolidated Financial Statements		11
Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations
Introduction and Overview		25
Business Environment		25
Events of 2006		28
Results of Operations		30
Financial Condition		45
Capital Resources		48
Item 3—Quantitative and Qualitative Disclosures About Market Risk		52
Item 4—Controls and Procedures		52
Part II—Other Information		53
Item 1—Legal Proceedings		53
Item 1A—Risk Factors		53
Item 2—Unregistered Sales of Equity Securities and Use of Proceeds		53
Item 5—Other Information		54
Item 6—Exhibits		55
Signature		56

PART I—FINANCIAL INFORMATION

Item 1—Financial Statements

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Constellation Energy Group, Inc. and Subsidiaries

	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006			2005
	*(In millions, except per share amounts)*
Revenues
Nonregulated revenues	$	4,672.1		$	4,183.4		$	12,428.7		$	9,771.0
Regulated electric revenues	649.9			626.8			1,652.6			1,583.4
Regulated gas revenues	111.7			112.2			671.8			618.5
Total revenues	5,433.7			4,922.4			14,753.1			11,972.9
Expenses
Fuel and purchased energy expenses	4,096.5			3,953.2			11,416.4			9,218.0
Operating expenses	519.5			415.4			1,622.5			1,339.3
Workforce reduction costs	21.7			3.9			23.9			3.9
Merger-related costs	3.4			—			12.4			—
Depreciation, depletion, and amortization	140.7			143.3			413.8			407.4
Accretion of asset retirement obligations	17.1			15.8			50.3			46.2
Taxes other than income taxes	74.9			73.8			222.7			209.4
Total expenses	4,873.8			4,605.4			13,762.0			11,224.2
Income from Operations	559.9			317.0			991.1			748.7
Other Income	8.7			16.1			36.5			43.0
Fixed Charges
Interest expense	83.1			75.7			239.3			230.2
Interest capitalized and allowance for borrowed funds used during construction	(3.5		)	(2.1		)	(10.1		)	(7.6		)
BGE preference stock dividends	3.3			3.3			9.9			9.9
Total fixed charges	82.9			76.9			239.1			232.5
Income from Continuing Operations Before Income Taxes	485.7			256.2			788.5			559.2
Income Tax Expense	161.3			72.1			257.9			138.7
Income from Continuing Operations	324.4			184.1			530.6			420.5
Income from discontinued operations, net of income taxes of $4.1, $0.5 and $12.0, respectively	—			1.4			0.9			7.4
Net Income	$	324.4		$	185.5		$	531.5		$	427.9
Earnings Applicable to Common Stock	$	324.4		$	185.5		$	531.5		$	427.9
Average Shares of Common Stock Outstanding—Basic	179.7			178.1			179.1			177.5
Average Shares of Common Stock Outstanding—Diluted	181.6			180.5			180.9			179.6
Earnings Per Common Share from Continuing Operations—Basic	$	1.81		$	1.03		$	2.96		$	2.37
Income from discontinued operations	—			0.01			0.01			0.04
Earnings Per Common Share—Basic	$	1.81		$	1.04		$	2.97		$	2.41
Earnings Per Common Share from Continuing Operations—Diluted	$	1.79		$	1.02		$	2.93		$	2.34
Income from discontinued operations	—			0.01			0.01			0.04
Earnings Per Common Share—Diluted	$	1.79		$	1.03		$	2.94		$	2.38
Dividends Declared Per Common Share	$	0.3775		$	0.335		$	1.1325		$	1.005

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

Constellation Energy Group, Inc. and Subsidiaries

	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006			2005
	*(In millions)*
Net Income	$	324.4		$	185.5		$	531.5		$	427.9
Other comprehensive income (OCI)
Reclassification of net loss (gain) on sales of securities from OCI to net income, net of taxes	—			1.6			(0.3		)	1.5
Reclassification of net loss (gain) on hedging instruments from OCI to net income, net of taxes	193.0			(318.7		)	407.1			(416.9		)
Net unrealized (loss) gain on hedging instruments, net of taxes	(369.7		)	820.8			(1,418.7		)	906.9
Net unrealized gain on securities, net of taxes	16.7			6.7			20.0			15.3
Net unrealized (loss) gain on foreign currency, net of taxes	(0.3		)	0.7			0.8			1.1
Comprehensive Income (Loss)	$	164.1		$	696.6		$	(459.6	)	$	935.8

See Notes to Consolidated Financial Statements.

CONSOLIDATED BALANCE SHEETS

Constellation Energy Group, Inc. and Subsidiaries

	*September 30,*				*December 31,*
	2006*				2005
	*(In millions)*
Assets
Current Assets
Cash and cash equivalents		$	320.7			$	813.0
Accounts receivable (net of allowance for uncollectibles of $53.2 and $47.4, respectively)		2,959.5				2,727.9
Fuel stocks		605.7				489.5
Materials and supplies		204.2				197.0
Mark-to-market energy assets		889.3				1,339.2
Risk management assets		231.2				1,244.3
Unamortized energy contract assets		40.9				55.6
Deferred income taxes		472.0				—
Other		531.3				555.3
Total current assets		6,254.8				7,421.8
Investments and Other Assets
Nuclear decommissioning trust funds		1,170.4				1,110.7
Investments in qualifying facilities and power projects		312.5				306.2
Regulatory assets (net)		283.4				154.3
Goodwill		157.1				147.1
Mark-to-market energy assets		814.1				1,089.3
Risk management assets		360.3				626.0
Unamortized energy contract assets		120.5				141.2
Other		340.7				410.6
Total investments and other assets		3,559.0				3,985.4
Property, Plant and Equipment
Nonregulated property, plant and equipment		8,928.3				8,580.8
Regulated property, plant and equipment		5,673.5				5,520.5
Nuclear fuel (net of amortization)		362.8				302.0
Accumulated depreciation		(4,579.1		)		(4,336.6		)
Net property, plant and equipment		10,385.5				10,066.7
Total Assets		$	20,199.3			$	21,473.9

* Unaudited

See Notes to Consolidated Financial Statements.

CONSOLIDATED BALANCE SHEETS

Constellation Energy Group, Inc. and Subsidiaries

	*September 30,*				*December 31,*
	2006*				2005
	*(In millions)*
Liabilities and Equity
Current Liabilities
Short-term borrowings		$	185.0			$	0.7
Current portion of long-term debt		1,186.1				491.3
Accounts payable and accrued liabilities		1,719.9				1,667.9
Customer deposits and collateral		419.8				458.9
Mark-to-market energy liabilities		822.9				1,348.7
Risk management liabilities		1,120.7				483.5
Unamortized energy contract liabilities		412.7				489.5
Deferred income taxes		—				151.4
Accrued expenses and other		738.4				780.4
Total current liabilities		6,605.5				5,872.3
Deferred Credits and Other Liabilities
Deferred income taxes		1,268.7				1,180.8
Asset retirement obligations		956.2				908.0
Mark-to-market energy liabilities		467.8				912.3
Risk management liabilities		840.6				1,035.5
Unamortized energy contract liabilities		1,022.3				1,118.7
Net pension liability		421.8				401.4
Postretirement and postemployment benefits		395.3				382.6
Deferred investment tax credits		58.9				64.1
Other		104.8				101.0
Total deferred credits and other liabilities		5,536.4				6,104.4
Long-term Debt
Long-term debt of Constellation Energy		3,051.5				3,049.1
Long-term debt of nonregulated businesses		329.0				357.5
First refunding mortgage bonds of BGE		244.5				342.8
Other long-term debt of BGE		824.5				861.5
6.20% deferrable interest subordinated debentures due October 15, 2043 to BGE wholly owned BGE Capital Trust II relating to trust preferred securities		257.7				257.7
Unamortized discount and premium		(5.2		)		(8.0		)
Current portion of long-term debt		(1,186.1		)		(491.3		)
Total long-term debt		3,515.9				4,369.3
Minority Interests		21.9				22.4
BGE Preference Stock Not Subject to Mandatory Redemption		190.0				190.0
Common Shareholders’ Equity
Common stock		2,698.8				2,620.8
Retained earnings		3,137.4				2,810.2
Accumulated other comprehensive loss		(1,506.6		)		(515.5		)
Total common shareholders’ equity		4,329.6				4,915.5
Commitments, Guarantees, and Contingencies (see Notes)
Total Liabilities and Equity		$	20,199.3			$	21,473.9

* Unaudited

See Notes to Consolidated Financial Statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Constellation Energy Group, Inc. and Subsidiaries

*Nine Months Ended September 30,*	2006			2005
	*(In millions)*
Cash Flows From Operating Activities
Net income	$	531.5		$	427.9
Adjustments to reconcile to net cash provided by operating activities
(Gain) loss on sales of discontinued operations	(0.9		)	2.4
Depreciation, depletion, and amortization	417.1			494.9
Accretion of asset retirement obligations	50.3			46.2
Deferred income taxes	73.8			7.5
Investment tax credit adjustments	(5.2		)	(5.4		)
Deferred fuel costs	(164.7		)	12.1
Pension and postemployment benefits	35.5			4.0
Workforce reduction costs	23.9			3.9
Merger-related costs	12.4			—
Equity in earnings of affiliates less than dividends received	12.9			28.3
Proceeds from derivative power sales contracts classified as financing activities under SFAS No. 149	(38.9		)	(47.4		)
Changes in
Accounts receivable	(367.7		)	(719.8		)
Mark-to-market energy assets and liabilities	(241.5		)	(98.6		)
Risk management assets and liabilities	(2.0		)	(51.5		)
Materials, supplies, and fuel stocks	(267.9		)	(126.0		)
Other current assets	53.9			(186.1		)
Accounts payable and accrued liabilities	30.9			646.2
Other current liabilities	32.9			665.9
Other	(23.2		)	(5.2		)
Net cash provided by operating activities	163.1			1,099.3
Cash Flows From Investing Activities
Investments in property, plant and equipment	(668.0		)	(476.9		)
Acquisitions, net of cash acquired	(133.5		)	(238.1		)
Investments in nuclear decommissioning trust fund securities	(275.0		)	(258.7		)
Proceeds from nuclear decommissioning trust fund securities	266.2			245.5
Sales of investments and other assets	43.5			1.9
Contract and portfolio acquisitions	(2.3		)	(23.7		)
Proceeds from sale of discontinued operations	—			217.6
Issuances of loans receivable	(65.4		)	(82.8		)
Other investments	33.8			(28.5		)
Net cash used in investing activities	(800.7		)	(643.7		)
Cash Flows From Financing Activities
Net issuance of short-term borrowings	184.3			10.0
Proceeds from issuance of
Common stock	56.2			66.5
Long-term debt	122.0			—
Repayment of long-term debt	(285.8		)	(338.4		)
Common stock dividends paid	(195.7		)	(169.1		)
Proceeds from contract and portfolio acquisitions contracts	221.3			403.3
Proceeds from derivative power sales contracts classified as financing activities under SFAS No. 149	38.9			47.4
Other	4.1			(41.8		)
Net cash provided by (used in) financing activities	145.3			(22.1		)
Net (Decrease) Increase in Cash and Cash Equivalents	(492.3		)	433.5
Cash and Cash Equivalents at Beginning of Period	813.0			706.3
Cash and Cash Equivalents at End of Period	$	320.7		$	1,139.8	*

*Includes $4.8 million related to “Assets held for sale” at September 30, 2005

See Notes to Consolidated Financial Statements.

Certain prior-period amounts have been reclassified to conform with the current period’s presentation.

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Baltimore Gas and Electric Company and Subsidiaries

	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006			2005
	*(In millions)*
Revenues
Electric revenues	$	649.9		$	626.8		$	1,652.6		$	1,583.4
Gas revenues	114.6			115.9			678.4			626.9
Total revenues	764.5			742.7			2,331.0			2,210.3
Expenses
Operating expenses
Electricity purchased for resale	391.1			362.5			933.8			849.0
Gas purchased for resale	66.4			72.1			448.6			422.5
Operations and maintenance	123.9			112.7			364.2			332.5
Merger-related costs	0.8			—			3.3			—
Depreciation and amortization	57.2			58.6			172.1			176.6
Taxes other than income taxes	42.1			41.9			126.4			126.7
Total expenses	681.5			647.8			2,048.4			1,907.3
Income from Operations	83.0			94.9			282.6			303.0
Other Income	3.9			1.2			4.9			4.7
Fixed Charges
Interest expense	24.8			23.9			73.3			71.4
Allowance for borrowed funds used during construction	(0.5		)	(0.6		)	(1.4		)	(1.6		)
Total fixed charges	24.3			23.3			71.9			69.8
Income Before Income Taxes	62.6			72.8			215.6			237.9
Income Taxes	23.7			27.1			83.3			91.0
Net Income	38.9			45.7			132.3			146.9
Preference Stock Dividends	3.3			3.3			9.9			9.9
Earnings Applicable to Common Stock	$	35.6		$	42.4		$	122.4		$	137.0

See Notes to Consolidated Financial Statements.

CONSOLIDATED BALANCE SHEETS

Baltimore Gas and Electric Company and Subsidiaries

	*September 30,*				*December 31,*
	2006*				2005
	*(In millions)*
Assets
Current Assets
Cash and cash equivalents		$	14.9			$	15.1
Accounts receivable (net of allowance for uncollectibles of $15.4 and $13.0, respectively)		310.7				480.5
Accounts receivable, affiliated companies		30.9				1.8
Fuel stocks		115.0				102.7
Materials and supplies		42.2				40.1
Prepaid taxes other than income taxes		28.0				45.7
Other		36.1				6.5
Total current assets		577.8				692.4
Investments and Other Assets
Regulatory assets (net)		283.4				154.3
Receivable, affiliated company		160.0				154.7
Other		121.5				144.0
Total investments and other assets		564.9				453.0
Utility Plant
Plant in service
Electric		4,000.8				3,891.1
Gas		1,136.0				1,116.7
Common		434.0				416.0
Total plant in service		5,570.8				5,423.8
Accumulated depreciation		(1,972.5		)		(1,923.8		)
Net plant in service		3,598.3				3,500.0
Construction work in progress		99.8				93.9
Plant held for future use		2.9				2.8
Net utility plant		3,701.0				3,596.7
Total Assets		$	4,843.7			$	4,742.1

* Unaudited

See Notes to Consolidated Financial Statements.

CONSOLIDATED BALANCE SHEETS

Baltimore Gas and Electric Company and Subsidiaries

	*September 30,*				*December 31,*
	2006*				2005
	*(In millions)*
Liabilities and Equity
Current Liabilities
Current portion of long-term debt		$	565.9			$	469.6
Accounts payable and accrued liabilities		164.8				169.7
Accounts payable and accrued liabilities, affiliated companies		134.1				152.8
Borrowing from cash pool, affiliated company		147.3				3.2
Customer deposits		70.4				65.1
Accrued taxes		19.2				35.5
Accrued expenses and other		86.0				79.6
Total current liabilities		1,187.7				975.5
Deferred Credits and Other Liabilities
Deferred income taxes		669.0				608.9
Postretirement and postemployment benefits		278.1				277.7
Deferred investment tax credits		13.9				15.1
Other		17.7				19.0
Total deferred credits and other liabilities		978.7				920.7
Long-term Debt
First refunding mortgage bonds of BGE		244.5				342.8
Other long-term debt of BGE		824.5				861.5
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
Long-term debt of nonregulated business		25.0				25.0
Unamortized discount and premium		(1.8		)		(2.3		)
Current portion of long-term debt		(565.9		)		(469.6		)
Total long-term debt		784.0				1,015.1
Minority Interest		18.2				18.3
Preference Stock Not Subject to Mandatory Redemption		190.0				190.0
Common Shareholder’s Equity
Common stock		912.2				912.2
Retained earnings		772.2				709.6
Accumulated other comprehensive income		0.7				0.7
Total common shareholder’s equity		1,685.1				1,622.5
Commitments, Guarantees, and Contingencies (see Notes)
Total Liabilities and Equity		$	4,843.7			$	4,742.1

* Unaudited

See Notes to Consolidated Financial Statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Baltimore Gas and Electric Company and Subsidiaries

*Nine Months Ended September 30,*	2006			2005
	*(In millions)*
Cash Flows From Operating Activities
Net income	$	132.3		$	146.9
Adjustments to reconcile to net cash provided by operating activities
Depreciation and amortization	180.1			187.5
Deferred income taxes	59.0			(6.4		)
Investment tax credit adjustments	(1.2		)	(1.3		)
Deferred fuel costs	(164.7		)	12.1
Pension and postemployment benefits	(2.5		)	(5.2		)
Merger-related costs	3.3			—
Allowance for equity funds used during construction	(2.6		)	(2.8		)
Changes in
Accounts receivable	169.8			22.1
Receivables, affiliated companies	(29.1		)	(33.0		)
Materials, supplies, and fuel stocks	(14.4		)	(22.9		)
Other current assets	(11.7		)	(20.9		)
Accounts payable and accrued liabilities	(8.3		)	(3.0		)
Accounts payable and accrued liabilities, affiliated companies	(18.7		)	(20.1		)
Other current liabilities	(3.7		)	9.5
Other	(12.0		)	(23.1		)
Net cash provided by operating activities	275.6			239.4
Cash Flows From Investing Activities
Utility construction expenditures (excluding equity portion of allowance for funds used during construction)	(225.2		)	(199.2		)
Change in cash pool at parent	144.1			10.8
Other	10.3			(14.5		)
Net cash used in investing activities	(70.8		)	(202.9		)
Cash Flows From Financing Activities
Distribution to parent	(59.8		)	—
Repayment of long-term debt	(135.3		)	(23.5		)
Preference stock dividends paid	(9.9		)	(9.9		)
Net cash used in financing activities	(205.0		)	(33.4		)
Net (Decrease) Increase in Cash and Cash Equivalents	(0.2		)	3.1
Cash and Cash Equivalents at Beginning of Period	15.1			8.2
Cash and Cash Equivalents at End of Period	$	14.9		$	11.3

See Notes to Consolidated Financial Statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

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.

Subsequent Events

Termination of Merger Agreement with
FPL Group, Inc.

On October 24, 2006, Constellation Energy and FPL Group, Inc. (FPL Group) agreed to terminate the Agreement and Plan of Merger the parties had entered into on December 18, 2005.

Gas-Fired Plants

In October 2006, we announced an agreement to sell the following natural gas-fired plants owned by our merchant energy business for $1.635 billion:

Facility	Capacity (MW)	Unit Type	Location
High Desert	830	Combined Cycle	California
Rio Nogales	800	Combined Cycle	Texas
Holland	665	Combined Cycle	Illinois
University Park	300	Peaking	Illinois
Big Sandy	300	Peaking	West Virginia
Wolf Hills	250	Peaking	Virginia

We expect the transaction to close by the end of 2006 or the first quarter of 2007. We estimate that we will recognize a pre-tax gain of approximately $250 million and we expect to receive approximately $1.5 billion in cash after tax payments on the gain. We expect to apply the proceeds from the sale to reduce debt and invest in our business or repurchase equity.

In October 2006, we designated these plants as held for sale and we reclassified the assets associated with these gas-fired plants to “Assets held for sale” and the liabilities to “Liabilities associated with assets held for sale” in our Consolidated Balance Sheets, we ceased recording depreciation expense, and discontinued hedge accounting for these facilities. The assets and liabilities associated with these gas-fired plants will be removed from our Consolidated Balance Sheets at closing.

Variable Interest Entities

We have a significant interest in the following variable interest entities (VIE) for which we are not the primary beneficiary:

VIE	Nature of Involvement	Date of Involvement
Power projects and fuel supply entities	Equity investment and guarantees	Prior to 2003
Power contract monetization entities	Power sale agreements, loans, and guarantees	March 2005
Oil and gas fields	Equity investment	May 2006
Retail power supply	Power sale agreement	September 2006

We discuss the nature of our involvement with the power contract monetization VIEs in detail in Note 4 to our 2005 Annual Report on Form 10-K.

The following is summary information available as of September 30, 2006 about the VIEs in which we have a significant interest, but are not the primary beneficiary:

	Power Contract Monetization VIEs			All Other VIEs		Total
	*(In millions)*
Total assets		$	833.6	$	396.3	$	1,229.9
Total liabilities		652.3		167.6		819.9
Our ownership interest		—		54.5		54.5
Other ownership interests		181.3		174.2		355.5
Our maximum exposure to loss		68.9		102.7		171.6

The maximum exposure to loss represents 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 guarantees associated with these entities. Our maximum exposure to loss as of September 30, 2006 consists of the following:

¨ outstanding receivables, loans, and letters of credit totaling $104.5 million,

¨ the carrying amount of our investment totaling $54.4 million, and

¨ debt and performance guarantees totaling $12.7 million.

We assess the risk of a loss equal to our maximum exposure to be remote.

Merger-Related Costs

We incurred costs during the quarter ended September 30, 2006 related to the proposed merger with FPL Group. The merger was terminated on October 24, 2006. These costs totaled $3.4 million pre-tax for the quarter ended September 30, 2006 and $12.4 million pre-tax for the nine months ended September 30, 2006. Through September 30, 2006, we have recognized a cumulative total of $29.4 million pre-tax of merger costs. Currently, we estimate our total pre-tax merger-related costs will be approximately $35 million.

Workforce Reduction Costs

In March 2006, we approved a restructuring of the workforce at our Ginna nuclear facility. In connection with this restructuring, 32 employees were terminated. During the quarter ended March 31, 2006, we recognized costs of $2.2 million pre-tax related to recording a liability for severance and other benefits under our existing benefit programs.

The following table summarizes the status of the involuntary severance liability for Ginna at September 30, 2006:

	*(In millions)*
Initial severance liability balance		$	2.2
Amounts recorded as pension and postretirement liabilities		(0.3		)
Net cash severance liability		1.9
Cash severance payments		(1.0		)
Other		—
Severance liability balance for Ginna at September 30, 2006		$	0.9

In July 2006, we announced a planned restructuring of the workforce at our Nine Mile Point nuclear facility. We recognized costs during the quarter ended September 30, 2006 of $15.1 million pre-tax related to the elimination of 126 positions associated with this restructuring. We also initiated a restructuring of the workforce at our Calvert Cliffs nuclear facility during the third quarter of 2006 and we recognized costs of $3.1 million pre-tax related to the elimination of 32 positions associated with this restructuring.

In addition, as a result of the Nine Mile Point restructuring, we incurred a pre-tax settlement charge of $3.5 million in accordance with Statement of Financial Accounting Standards (SFAS) No. 88, Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits. We discuss the settlement charges that we recorded during 2006 in the Pension and Postretirement Benefits section on page 16.

Discontinued Operations

In the fourth quarter of 2005, we completed the sale of Constellation Power International Investments, Ltd. We recognized an after-tax gain of $0.9 million for the nine months ended September 30, 2006 due to the resolution of an outstanding contingency related to the sale. We discuss the details of the outstanding contingency in Note 2 of our 2005 Annual Report on Form 10-K.

Earnings Per Share

Basic earnings per common share (EPS) is computed by dividing earnings applicable 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
September 30,

Nine Months Ended
September 30,

2006

2005

2006

2005

(In millions)

Non-dilutive
stock options

2.0

—

2.0

—

Dilutive common stock equivalent shares

1.9

2.4

1.8

2.1

Stock-Based Compensation

Under our long-term incentive plans, we granted stock options, performance-based units, performance and service-based restricted stock, and equity to officers, key employees, and members of the Board of Directors.

We adopted the provisions of SFAS No. 123 Revised (SFAS No. 123R), Share-Based Payment, on October 1, 2005, as described in more detail in Note 1 of our 2005 Annual Report on Form 10-K. Under SFAS No. 123R, we

recognize compensation cost ratably or in tranches (depending if the award has cliff or graded vesting) over the period during which an employee is required to provide service in exchange for the award, which is typically a one to five-year period. We use a forfeiture assumption to estimate the number of awards that are expected to vest during the service period, and we ultimately true-up the estimated expense to the actual expense associated with vested awards. We estimate the fair value of stock option awards on the date of grant using the Black-Scholes option-pricing model, and we re-measure the fair value of liability awards each reporting period.

The following table illustrates the pro-forma effect on net income and earnings per share for all outstanding stock options and stock awards during the quarter and nine months ended September 30, 2005, when the fair value provisions of SFAS No. 123R were not in effect. We do not capitalize any portion of our stock-based compensation.

	Quarter Ended September 30, 2005				Nine Months Ended September 30, 2005
	*(In millions, except per share amounts)*
Net income, as reported		$	185.5			$	427.9
Add: Stock-based compensation expense determined under intrinsic value method and included in reported net income, net of related tax effects		7.8				17.8
Deduct: Stock-based compensation expense determined under fair value based method for all awards, net of related tax effects		(10.1		)		(24.5		)
Pro-forma net income		$	183.2			$	421.2
Earnings per share:
Basic—as reported		$	1.04			$	2.41
Basic—pro forma		$	1.03			$	2.37
Diluted—as reported		$	1.03			$	2.38
Diluted—pro forma		$	1.01			$	2.34

Accretion of Asset Retirement Obligations

SFAS No. 143, Accounting for Asset Retirement Obligations, provides the accounting requirements for recognizing an estimated liability for legal obligations associated with the retirement of tangible long-lived assets. Financial Accounting Standards Board (FASB) Interpretation (FIN) 47, Accounting for Conditional Asset Retirement Obligations—an interpretation of FASB Statement No. 143, clarifies that obligations that are conditional upon a future event are subject to the provisions of SFAS No. 143.

We measure asset retirement obligations at fair value when incurred and capitalize a corresponding amount as part of the book value of the related long-lived assets. The increase in the capitalized cost is included in determining depreciation expense over the estimated useful life of these assets. Since the fair value of the asset retirement obligations is determined using a present value approach, accretion of the liability due to the passage of time is recognized each period to “Accretion of asset retirement obligations” in our Consolidated Statements of Income until the settlement of the liability. We record a gain or loss when the liability is settled after retirement.

The change in our “Asset retirement obligations” liability during 2006 was as follows:

	*(In millions)*
Liability at January 1, 2006		$	908.0
Accretion expense		50.3
Liabilities incurred		0.4
Liabilities settled		(0.1		)
Revisions to expected future cash flows		(2.4		)
Other		—
Liability at September 30, 2006		$	956.2

Acquisitions

Gas Properties

In the first quarter of 2006, we acquired working interests in gas and oil producing properties for approximately $100 million in cash. We purchased leases, producing wells, and related equipment. We have included the results of operations in our merchant energy business segment since the date of acquisition.

Cogenex

In April 2005, we acquired Cogenex Corporation from Alliant Energy Corporation. We include Cogenex with our other nonregulated businesses and have included their results in our consolidated financial statements since the date of acquisition. Cogenex is a North American energy services firm providing consulting and technology solutions to industrial, institutional, and governmental customers. We acquired 100% ownership of Cogenex for $34.9 million. We acquired cash of $14.4 million as part of the purchase.

Our final purchase price allocation for the net assets acquired is as follows:

*At April 1, 2005*
	*(In millions)*
Cash		$	14.4
Other Current Assets		12.4
Total Current Assets		26.8
Net Property, Plant and Equipment		—
Other Assets		34.9
Total Assets Acquired		61.7
Current Liabilities		(8.0		)
Deferred Credits and Other Liabilities		(18.8		)
Net Assets Acquired		$	34.9

We believe that the pro-forma impact of the Cogenex acquisition would not have been material to our results of operations in 2005.

Information by Operating Segment

Our reportable operating segments are—Merchant Energy, Regulated Electric, and Regulated Gas:

¨ Our merchant energy business is nonregulated and includes:

— full requirements load-serving sales of energy, capacity, and ancillary services to utilities and commercial, industrial, and governmental customers,

— structured transactions and risk management services for various customers (including hedging of output from generating facilities and fuel costs),

— deployment of risk capital through portfolio management and trading activities,

— gas retail energy products and services to commercial, industrial, and governmental customers,

— fossil, nuclear, and interests in hydroelectric generating facilities and qualifying facilities, fuel processing facilities, and power projects in the United States,

— products and services to upstream (exploration and production) and downstream (transportation and storage) wholesale natural gas customers,

— coal sourcing services for the variable or fixed supply needs of North American and international power generators, and

— generation operations and maintenance services.¨ 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 remaining nonregulated businesses:

¨ design, construct, and operate heating, cooling, and cogeneration facilities for commercial, industrial, and municipal customers throughout North America, and

¨ provide home improvements, service electric and gas appliances, service heating, air conditioning, plumbing, electrical, and indoor air quality systems, and provide natural gas marketing to residential customers in Central Maryland.

In addition, we own several investments that we do not consider to be core operations. These include financial investments and real estate projects.

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

Reportable Segments

Merchant
Energy
Business

Regulated
Electric
Business

Regulated
Gas
Business

Other
Nonregulated
Businesses

Eliminations

Consolidated

(In millions)

For the three months ended September 30,

2006

Unaffiliated revenues

4,626.6

649.9

111.7

45.5

—

5,433.7

Intersegment revenues

422.4

—

2.9

—

(425.3

)

—

Total revenues

5,049.0

649.9

114.6

45.5

(425.3

)

5,433.7

Net income (loss)

284.8

42.8

(7.3

)

4.1

—