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 March 31, 2007

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

			MARYLAND
(State of Incorporation 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 180,305,042 shares outstanding of
Constellation Energy Group, Inc. on April 30, 2007.

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		22
Business Environment		22
Events of 2007		23
Results of Operations		24
Financial Condition		35
Capital Resources		37
Item 3—Quantitative and Qualitative Disclosures About Market Risk		41
Item 4—Controls and Procedures		41
Part II—Other Information
Item 1—Legal Proceedings		42
Item 1A—Risk Factors		42
Item 2—Unregistered Sales of Equity Securities and Use of Proceeds		42
Item 5—Other Information		42
Item 6—Exhibits		44
Signature		45

PART 1—FINANCIAL INFORMATION

Item 1—Financial Statements

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Constellation Energy Group, Inc. and Subsidiaries

	Three Months Ended March 31,
	2007			2006
	*(In millions, except per share amounts)*
Revenues
Nonregulated revenues	$	4,138.2		$	3,936.9
Regulated electric revenues	514.8			504.0
Regulated gas revenues	402.5			418.3
Total revenues	5,055.5			4,859.2
Expenses
Fuel and purchased energy expenses	3,961.1			3,923.1
Operating expenses	568.7			507.7
Workforce reduction costs	—			2.2
Merger-related costs	—			1.9
Depreciation, depletion, and amortization	132.4			130.2
Accretion of asset retirement obligations	17.7			16.5
Taxes other than income taxes	73.2			73.6
Total expenses	4,753.1			4,655.2
Income from Operations	302.4			204.0
Other Income	42.4			14.8
Fixed Charges
Interest expense	80.3			77.0
Interest capitalized and allowance for borrowed funds used during construction	(3.8		)	(2.7		)
BGE preference stock dividends	3.3			3.3
Total fixed charges	79.8			77.6
Income from Continuing Operations Before Income Taxes	265.0			141.2
Income Tax Expense	67.7			39.6
Income from Continuing Operations	197.3			101.6
(Loss) income from discontinued operations, net of income taxes of $0.8 and $7.1, respectively	(1.6		)	12.3
Net Income	$	195.7		$	113.9
Earnings Applicable to Common Stock	$	195.7		$	113.9
Average Shares of Common Stock Outstanding—Basic	180.6			178.6
Average Shares of Common Stock Outstanding—Diluted	182.8			180.4
Earnings Per Common Share from Continuing Operations—Basic	$	1.09		$	0.57
(Loss) income from discontinued operations	(0.01		)	0.07
Earnings Per Common Share—Basic	$	1.08		$	0.64
Earnings Per Common Share from Continuing Operations—Diluted	$	1.08		$	0.56
(Loss) income from discontinued operations	(0.01		)	0.07
Earnings Per Common Share—Diluted	$	1.07		$	0.63
Dividends Declared Per Common Share	$	0.435		$	0.3775

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

Constellation Energy Group, Inc. and Subsidiaries

	Three Months Ended March 31,
	2007			2006
	*(In millions)*
Net Income	$	195.7		$	113.9
Other comprehensive income (loss) (OCI)
Hedging instruments:
Reclassification of net loss on hedging instruments from OCI to net income, net of taxes	399.4			81.0
Net unrealized gain (loss) on hedging instruments, net of taxes	310.3			(755.0		)
Available-for-sale securities:
Reclassification of net gain on sales of securities from OCI to net income, net of taxes	(0.9		)	(0.3		)
Net unrealized gain on securities, net of taxes	(19.5		)	11.8
Defined benefit obligations:
Amortization of net actuarial loss, prior service cost, and transition obligation included in net periodic benefit cost, net of taxes	6.3			—
Net unrealized gain on foreign currency, net of taxes	0.3			—
Comprehensive Income (Loss)	$	891.6		$	(548.6	)

See Notes to Consolidated Financial Statements.

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

CONSOLIDATED BALANCE SHEETS

Constellation Energy Group, Inc. and Subsidiaries

	*March 31,* 2007*				*December 31,* 2006
	*(In millions)*
Assets
Current Assets
Cash and cash equivalents		$	1,936.6			$	2,289.1
Accounts receivable (net of allowance for uncollectibles of $51.7 and $48.9, respectively)		3,187.4				3,248.3
Fuel stocks		369.7				599.5
Materials and supplies		204.4				200.2
Mark-to-market energy assets		1,189.3				1,294.8
Risk management assets		233.6				261.7
Unamortized energy contract assets		34.1				35.2
Deferred income taxes		172.0				674.3
Other		485.4				497.0
Total current assets		7,812.5				9,100.1
Investments and Other Assets
Nuclear decommissioning trust funds		1,257.7				1,240.1
Investments in qualifying facilities and power projects		297.3				308.6
Regulatory assets (net)		560.3				389.0
Goodwill		157.6				157.6
Mark-to-market energy assets		702.3				623.4
Risk management assets		323.8				325.7
Unamortized energy contract assets		118.2				123.6
Other		291.3				311.4
Total investments and other assets		3,708.5				3,479.4
Property, Plant and Equipment
Nonregulated property, plant and equipment		7,945.7				7,587.6
Regulated property, plant and equipment		5,816.9				5,752.9
Nuclear fuel (net of amortization)		337.6				339.9
Accumulated depreciation		(4,545.1		)		(4,458.3		)
Net property, plant and equipment		9,555.1				9,222.1
Total Assets		$	21,076.1			$	21,801.6

* Unaudited

See Notes to Consolidated Financial Statements.

CONSOLIDATED BALANCE SHEETS

Constellation Energy Group, Inc. and Subsidiaries

	March 31, 2007*				December 31, 2006
	*(In millions)*
Liabilities and Equity
Current Liabilities
Current portion of long-term debt		$	878.8			$	878.8
Accounts payable and accrued liabilities		2,089.5				2,137.2
Customer deposits and collateral		365.3				347.2
Mark-to-market energy liabilities		1,082.9				1,071.7
Risk management liabilities		484.4				1,340.0
Unamortized energy contract liabilities		336.2				378.3
Accrued expenses and other		703.8				969.5
Total current liabilities		5,940.9				7,122.7
Deferred Credits and Other Liabilities
Deferred income taxes		1,377.4				1,435.8
Asset retirement obligations		992.5				974.8
Mark-to-market energy liabilities		466.9				392.4
Risk management liabilities		667.8				707.3
Unamortized energy contract liabilities		866.1				958.0
Defined benefit obligations		813.6				928.3
Deferred investment tax credits		55.5				57.2
Other		127.2				109.0
Total deferred credits and other liabilities		5,367.0				5,562.8
Long-term Debt
Long-term debt of Constellation Energy		3,051.6				3,042.9
Long-term debt of nonregulated businesses		352.3				347.4
First refunding mortgage bonds of BGE		123.1				244.5
Other long-term debt of BGE		1,214.5				1,214.5
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		(5.6		)		(5.9		)
Current portion of long-term debt		(878.8		)		(878.8		)
Total long-term debt		4,114.8				4,222.3
Minority Interests		90.1				94.5
BGE Preference Stock Not Subject to Mandatory Redemption		190.0				190.0
Common Shareholders’ Equity
Common stock		2,707.0				2,738.6
Retained earnings		3,574.0				3,474.3
Accumulated other comprehensive loss		(907.7		)		(1,603.6		)
Total common shareholders’ equity		5,373.3				4,609.3
Commitments, Guarantees, and Contingencies (see Notes)
Total Liabilities and Equity		$	21,076.1			$	21,801.6

* Unaudited

See Notes to Consolidated Financial Statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Constellation Energy Group, Inc. and Subsidiaries

*Three Months Ended March 31,*	2007			2006
	*(In millions)*
Cash Flows From Operating Activities
Net income	$	195.7		$	113.9
Adjustments to reconcile to net cash provided by (used in) operating activities
Gain on sale of discontinued operations	—			(0.9		)
Depreciation, depletion, and amortization	126.4			144.7
Accretion of asset retirement obligations	17.7			16.5
Deferred income taxes	23.2			(48.3		)
Investment tax credit adjustments	(1.7		)	(1.7		)
Deferred fuel costs	(173.5		)	7.1
Defined benefit obligation expense	34.2			33.8
Defined benefit obligation payments	(138.2		)	(65.1		)
Equity in earnings of affiliates less than dividends received	15.8			5.0
Proceeds from derivative power sales contracts classified as financing activities under SFAS No. 149	1.5			(19.6		)
Changes in
Accounts receivable	234.6			(76.1		)
Mark-to-market energy assets and liabilities	89.6			(191.0		)
Risk management assets and liabilities	28.7			16.7
Materials, supplies, and fuel stocks	155.8			(73.8		)
Other current assets	(7.4		)	(64.0		)
Accounts payable and accrued liabilities	(62.6		)	(23.3		)
Other current liabilities	(196.8		)	(269.6		)
Other	6.0			6.5
Net cash provided by (used in) operating activities	349.0			(489.2		)
Cash Flows From Investing Activities
Investments in property, plant and equipment	(272.7		)	(184.4		)
Acquisitions, net of cash acquired	(212.0		)	(100.8		)
Investments in nuclear decommissioning trust fund securities	(140.0		)	(73.5		)
Proceeds from nuclear decommissioning trust fund securities	131.2			69.1
Other	0.8			4.0
Net cash used in investing activities	(492.7		)	(285.6		)
Cash Flows From Financing Activities
Net issuance of short-term borrowings	—			424.3
Proceeds from issuance of
Common stock	22.1			18.8
Long-term debt	10.0			—
Repayment of long-term debt	(126.5		)	(17.6		)
Common stock dividends paid	(68.5		)	(59.8		)
Reacquisition of common stock	(77.6		)	—
Proceeds from contract and portfolio acquisitions	27.0			—
Proceeds from derivative power sales contracts classified as financing activities under SFAS No. 149	(1.5		)	19.6
Other	6.2			1.3
Net cash (used in) provided by financing activities	(208.8		)	386.6
Net Decrease in Cash and Cash Equivalents	(352.5		)	(388.2		)
Cash and Cash Equivalents at Beginning of Period	2,289.1			813.0
Cash and Cash Equivalents at End of Period	$	1,936.6		$	424.8

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 March 31,
	2007			2006
	*(In millions)*
Revenues
Electric revenues	$	514.8		$	504.0
Gas revenues	407.3			420.2
Total revenues	922.1			924.2
Expenses
Operating expenses
Electricity purchased for resale	274.2			262.9
Gas purchased for resale	284.1			298.4
Operations and maintenance	123.1			120.0
Merger-related costs	—			0.6
Depreciation and amortization	58.9			57.7
Taxes other than income taxes	45.8			43.5
Total expenses	786.1			783.1
Income from Operations	136.0			141.1
Other Income	5.2			0.1
Fixed Charges
Interest expense	28.6			24.2
Allowance for borrowed funds used during construction	(0.4		)	(0.4		)
Total fixed charges	28.2			23.8
Income Before Income Taxes	113.0			117.4
Income Taxes	43.7			45.7
Net Income	69.3			71.7
Preference Stock Dividends	3.3			3.3
Earnings Applicable to Common Stock	$	66.0		$	68.4

See Notes to Consolidated Financial Statements.

CONSOLIDATED BALANCE SHEETS

Baltimore Gas and Electric Company and Subsidiaries

	March 31, 2007*				December 31, 2006
	*(In millions)*
Assets
Current Assets
Cash and cash equivalents		$	11.6			$	10.9
Accounts receivable (net of allowance for uncollectibles of $16.1 and $16.1, respectively)		428.8				344.7
Investment in cash pool, affiliated company		—				60.6
Accounts receivable, affiliated companies		2.0				2.5
Fuel stocks		22.6				110.9
Materials and supplies		44.8				40.2
Prepaid taxes other than income taxes		23.6				48.0
Regulatory assets (net)		45.2				62.5
Other		20.1				35.2
Total current assets		598.7				715.5
Investments and Other Assets
Regulatory assets (net)		560.3				389.0
Receivable, affiliated company		181.6				150.5
Other		127.4				127.5
Total investments and other assets		869.3				667.0
Utility Plant
Plant in service
Electric		4,094.8				4,060.2
Gas		1,157.5				1,148.3
Common		441.9				444.6
Total plant in service		5,694.2				5,653.1
Accumulated depreciation		(2,015.3		)		(1,994.7		)
Net plant in service		3,678.9				3,658.4
Construction work in progress		120.3				97.1
Plant held for future use		2.4				2.7
Net utility plant		3,801.6				3,758.2
Total Assets		$	5,269.6			$	5,140.7

* Unaudited

See Notes to Consolidated Financial Statements.

CONSOLIDATED BALANCE SHEETS

Baltimore Gas and Electric Company and Subsidiaries

	*March 31,* 2007*				*December 31,* 2006
	*(In millions)*
Liabilities and Equity
Current Liabilities
Current portion of long-term debt		$	258.9			$	258.3
Accounts payable and accrued liabilities		171.5				187.3
Accounts payable and accrued liabilities, affiliated companies		149.7				163.4
Borrowing from cash pool, affiliated company		151.7				—
Customer deposits		72.4				71.4
Current portion of deferred income taxes		42.0				47.4
Accrued expenses and other		115.5				98.3
Total current liabilities		961.7				826.1
Deferred Credits and Other Liabilities
Deferred income taxes		744.8				697.7
Payable, affiliated company		241.8				250.7
Deferred investment tax credits		13.1				13.5
Other		26.0				14.0
Total deferred credits and other liabilities		1,025.7				975.9
Long-term Debt
First refunding mortgage bonds of BGE		123.1				244.5
Other long-term debt of BGE		1,214.5				1,214.5
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		(2.9		)		(2.9		)
Current portion of long-term debt		(258.9		)		(258.3		)
Total long-term debt		1,358.5				1,480.5
Minority Interest		16.7				16.7
Preference Stock Not Subject to Mandatory Redemption		190.0				190.0
Common Shareholder’s Equity
Common stock		912.2				912.2
Retained earnings		804.1				738.6
Accumulated other comprehensive income		0.7				0.7
Total common shareholder’s equity		1,717.0				1,651.5
Commitments, Guarantees, and Contingencies (see Notes)
Total Liabilities and Equity		$	5,269.6			$	5,140.7

* Unaudited

See Notes to Consolidated Financial Statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Baltimore Gas and Electric Company and Subsidiaries

*Three Months Ended March 31,*	2007			2006
	*(In millions)*
Cash Flows From Operating Activities
Net income	$	69.3		$	71.7
Adjustments to reconcile to net cash (used in) provided by operating activities
Depreciation and amortization	62.0			61.1
Deferred income taxes	58.0			(10.1		)
Investment tax credit adjustments	(0.4		)	(0.4		)
Deferred fuel costs	(173.5		)	7.1
Defined benefit plan expenses	10.1			10.9
Allowance for equity funds used during construction	(0.7		)	(0.8		)
Changes in
Accounts receivable	(84.1		)	27.2
Accounts receivable, affiliated companies	0.5			1.2
Materials, supplies, and fuel stocks	83.7			56.8
Other current assets	39.6			22.0
Accounts payable and accrued liabilities	(15.8		)	(45.5		)
Accounts payable and accrued liabilities, affiliated companies	(13.7		)	(4.6		)
Other current liabilities	1.3			51.3
Long-term receivables and payables, affiliated companies	(50.0		)	(36.4		)
Other	12.2			11.9
Net cash (used in) provided by operating activities	(1.5		)	223.4
Cash Flows From Investing Activities
Utility construction expenditures (excluding equity portion of allowance for funds used during construction)	(85.4		)	(74.6		)
Change in cash pool at parent	212.3			(94.9		)
Sales of investments and other assets	—			0.5
Other	—			7.9
Net cash provided by (used in) investing activities	126.9			(161.1		)
Cash Flows From Financing Activities
Repayment of long-term debt	(121.4		)	—
Distribution to parent	—			(59.8		)
Preference stock dividends paid	(3.3		)	(3.3		)
Net cash used in financing activities	(124.7		)	(63.1		)
Net Increase (Decrease) in Cash and Cash Equivalents	0.7			(0.8		)
Cash and Cash Equivalents at Beginning of Period	10.9			15.1
Cash and Cash Equivalents at End of Period	$	11.6		$	14.3

See Notes to Consolidated Financial Statements.

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

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.

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	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 of our 2006 Annual Report on Form 10-K.

The following is summary information available as of March 31, 2007 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		$	744.7		$	354.9	$	1,099.6
Total liabilities		591.1			148.4		739.5
Our ownership interest		—			52.2		52.2
Other ownership interests		153.6			154.3		307.9
Our maximum exposure to loss		64.5			88.3		152.8

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 March 31, 2007 consists of the following:

¨ outstanding receivables, loans and letters of credit totaling $88.0 million,

¨ the carrying amount of our investment totaling $52.1 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.

Discontinued Operations

In the fourth quarter of 2006, we completed the sale of six natural gas-fired plants. During the first quarter of 2007, we recognized an after-tax loss of $1.6 million as a component of “(Loss) income from discontinued operations” due to post-closing working capital adjustments. We discuss the details of the sale in Note 2 of our 2006 Annual Report on Form 10-K.

Workforce Reduction Costs

We incurred costs related to workforce reduction efforts initiated in 2006. We discuss these costs in more detail in Note 2 of our 2006 Annual Report on Form 10-K.

The following table summarizes the status of the involuntary severance liability for Nine Mile Point and Calvert Cliffs at March 31, 2007:

	*(In millions)*
Initial severance liability balance		$	19.6
Amounts recorded as defined benefit obligations		(7.3		)
Net cash severance liability		12.3
Cash severance payments		(5.8		)
Other		—
Severance liability balance at March 31, 2007		$	6.5

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 March 31,
	2007		2006
	*(In millions)*
Non-dilutive stock options		—		2.0
Dilutive common stock equivalent shares		2.2		1.8

Accretion of Asset Retirement Obligations

We discuss our asset retirement obligations in more detail in Note 1 of our 2006 Annual Report on Form 10-K. The change in our “Asset retirement obligations” liability during 2007 was as follows:

	*(In millions)*
Liability at January 1, 2007		$	974.8
Accretion expense		17.7
Liabilities incurred		—
Liabilities settled		—
Revisions to cash flows		—
Other		—
Liability at March 31, 2007		$	992.5

In 2007, we are performing site specific studies for all three of our nuclear facilities. We expect to complete the studies and reflect the results in the third quarter of 2007.

Acquisitions

Working Interests in Gas Producing Fields

In the first quarter of 2007, we acquired working interests of 41% and 55% in two gas and oil producing properties in Oklahoma for $212.0 million in cash, subject to closing adjustments. We purchased leases, producing wells, inventory, and related equipment. We have included the results of operations from these properties in our merchant energy business segment since the date of acquisition.

Our preliminary purchase price is allocated to the net assets acquired as follows:

*At March 23, 2007*
	*(In millions)*
Property, Plant and Equipment
Inventory		$	0.2
Unproved property		7.3
Proved property		204.5
Net Assets Acquired		$	212.0

The purchase price is subject to closing adjustments, which could impact our purchase price allocation.

We believe that the pro-forma impact of the acquisition of these working interests would not have been material to our results of operations for the three months ended March 31, 2007 and 2006.

Coalbed Methane Properties

In April 2007, Constellation Energy Partners LLC (CEP) acquired 100% ownership of certain coalbed methane properties for an aggregate purchase price of approximately $115 million. The properties are located in the Cherokee Basin in Kansas and Oklahoma.

In connection with the financing of this acquisition, CEP also sold in a private placement 2,207,684 common units at $26.12 per unit and sold 90,376 newly-created Class E units at a price of $25.84 per unit to third-party investors for gross cash proceeds of approximately $60 million. In the second quarter of 2007, we expect to record a pre-tax gain of $10-$15 million related to this additional equity issuance by CEP. The remaining purchase price was funded from funds available under an existing revolving credit facility of CEP.

In anticipation of closing this acquisition and the related equity issuance, at March 31, 2007 we evaluated the probability of forecasted sales of natural gas from CEP’s properties that previously had been hedged by our merchant energy business. As a result of the anticipated

deconsolidation of CEP resulting from this equity issuance, which we discuss below, we determined that the hedged forecasted sales were probable of not occurring. Therefore, we reclassified $21.8 million pre-tax in previously deferred cash-flow hedge losses from “Accumulated other comprehensive loss” to earnings during the first quarter of 2007.

As a result of the equity issuance by CEP, our ownership percentage in CEP fell below 50 percent. Therefore, during the second quarter of 2007, we deconsolidated CEP and began accounting for our investment under Accounting Principles Board Opinion (APB) No. 18, The Equity Method of Accounting for Investments in Common Stock. We discuss the equity method of accounting in more detail in Note 1 of our 2006 Annual Report on Form 10-K.

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 and capacity to utilities, cooperatives, 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,

— upstream (exploration and production) and downstream (transportation and storage) natural gas operations,

— coal sourcing and logistics services for the variable or fixed supply needs of global customers, and

— generation operations and maintenance and new nuclear development consulting 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 governmental 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 in the table on the next page.

	Reportable Segments
	Merchant Energy Business			Regulated Electric Business			Regulated Gas Business			Other Nonregulated Businesses			Eliminations				Consolidated
	*(In millions)*
Quarter ended March 31,
2007
Unaffiliated revenues	$	4,063.5			$	514.8		$	402.5		$	74.7		$	—			$	5,055.5
Intersegment revenues	322.9				—			4.8			—			(327.7		)		—
Total revenues	4,386.4				514.8			407.3			74.7			(327.7		)		5,055.5
Loss from discontinued operations	(1.6		)		—			—			—			—				(1.6		)
Net income	120.0				32.2			33.7			9.8			—				195.7
2006
Unaffiliated revenues	$	3,876.1			$	504.0		$	418.3		$	60.8		$	—			$	4,859.2
Intersegment revenues	207.2				—			1.9			0.1			(209.2		)		—
Total revenues	4,083.3				504.0			420.2			60.9			(209.2		)		4,859.2
Income from discontinued operations	11.4				—			—			0.9			—				12.3
Net income	43.6				33.6			35.0			1.7			—				113.9

Certain prior year amounts have been reclassified to conform with the current year’s presentation. The reclassifications primarily relate to operations that have been classified as discontinued operations in the current year.

Pension and Postretirement Benefits

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

	Quarter Ended March 31,
	2007			2006
	*(In millions)*
Components of net periodic pension benefit cost
Service cost	$	12.5		$	11.7
Interest cost	24.4			20.5
Expected return on plan assets	(26.6		)	(22.3		)
Recognized net actuarial loss	8.0			8.6
Amortization of prior service cost	1.3			1.3
Amount capitalized as construction cost	(3.0		)	(2.9		)
Net periodic pension benefit cost 1	$	16.6		$	16.9

1 BGE’s portion of our net periodic pension benefit cost, excluding amounts capitalized, was $5.2 million in 2007 and $5.6 million in 2006.

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

	Quarter Ended March 31,
	2007			2006
	*(In millions)*
Components of net periodic postretirement benefit cost
Service cost	$	1.7		$	2.1
Interest cost	6.2			6.2
Amortization of transition obligation	0.5			0.5
Recognized net actuarial loss	1.4			2.0
Amortization of prior service cost	(0.8		)	(0.9		)
Amount capitalized as construction cost	(2.1		)	(2.0		)
Net periodic postretirement benefit cost 1	$	6.9		$	7.9

1 BGE’s portion of our net periodic postretirement benefit cost, excluding amounts capitalized, was $4.0 million in 2007 and $4.3 million in 2006.

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 $4 million in pension benefit payments for our non-qualified pension plans and approximately $29 million for retiree health and life insurance benefit payments during 2007. We contributed $125.0 million to our qualified pension plans in March 2007.

Financing Activities

Constellation Energy had committed bank lines of credit under facilities totaling $4.6 billion at March 31, 2007 for short-term financial needs. We discuss these facilities in more detail in Note 8 of our 2006 Annual Report on Form 10-K. These facilities can issue letters of credit up to approximately $4.1 billion. Letters of credit issued under all of our facilities totaled $1.5 billion at March 31, 2007.

In connection with the acquisition of coalbed methane properties discussed on page 12, CEP borrowed $10.0 million under an existing credit facility. At March 31, 2007, CEP had $32.0 million of borrowings outstanding under its credit facility. We discuss the credit facility in more detail in Note 9 of our 2006 Annual Report on Form 10-K.

Under our shareholder investment plans we issued $22.1 million of common stock during the quarter ended March 31, 2007. In addition, during the first quarter of 2007, we purchased $77.6 million of our common stock in the open market. These common shares are held by us in order to satisfy employee stock based compensation obligations.

Income Taxes

Total income taxes are different from the amount that would be computed by applying the statutory Federal income tax rate of 35% to book income before income taxes as follows:

	Quarter Ended March 31,
	2007			2006
	*(In millions)*
Income before income taxes (excluding BGE preference stock dividends)	$	268.3		$	144.5
Statutory federal income tax rate	35		%	35		%
Income taxes computed at statutory federal rate	93.9			50.6
(Decreases) increases in income taxes due to:
Synthetic fuel tax credits flowed through to income	(39.7		)	(34.3		)
Synthetic fuel tax credit phase-out	11.5			15.8
Synthetic fuel tax credit true-up for 2006 flowed through to income	(7.9		)	—
State income taxes, net of federal tax benefit	11.8			7.4
Other	(1.9		)	0.1
Total income taxes	$	67.7		$	39.6
Effective tax rate	25.3		%	27.4		%

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

Synthetic fuel tax credits are net of our expectation of a 29% phase-out in 2007 based on forward market prices and volatilities at March 31, 2007. In the first quarter of 2007, we also recorded $7.9 million of additional tax credits related to 2006 to reflect the impact of the final oil reference price and inflation factor published by the Internal Revenue Service (IRS) in 2007.

Based on forward market prices and volatilities as of April 27, 2007, we continue to estimate a 29% tax credit phase-out in 2007. The expected amount of synthetic fuel tax credits phased-out may change materially from period to period as a result of continued changes in oil prices.

During the quarter ended March 31, 2007, we recognized $21.6 million in our Consolidated Balance Sheets related to additional “Deferred income taxes” on unrealized gains related to our nuclear decommissioning trust securities with an offsetting increase in “Accumulated other comprehensive loss.” This adjustment represents the trust level taxes for which we had not previously provided deferred income taxes.

We discuss the adoption of the Financial Accounting Standards Board’s (FASB) Interpretation No. (FIN) 48, Accounting for Uncertainty in Income Taxes, beginning on page 20.

Commitments, Guarantees, and Contingencies

We have made substantial commitments in connection with our merchant energy, 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 merchant energy business enters 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 2007 and 2020. In addition, our merchant energy 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 2007 and 2019.

Our merchant energy business also has 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 2007 and 2009. Our regulated gas business has gas transportation and storage

contracts that expire between 2007 and 2028. As discussed in Note 1 of our 2006 Annual Report on Form 10-K, the costs under these contracts are fully recoverable by our regulated businesses.

Our other nonregulated businesses have committed to gas purchases, as well as to contribute additional capital for construction programs and joint ventures in which they have an interest.

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

At March 31, 2007, the total amount of commitments was $8,840.4 million. These commitments are primarily related to our merchant energy business.

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 2014 and provide for the sale of all or a portion of the actual output of certain of our power plants. All long-term contracts were executed at pricing that approximated market rates, including profit margin, at the time of execution.

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 based on the stated limit of our outstanding guarantees at March 31, 2007:

*At March 31, 2007*	Stated Limit
	*(In millions)*
Competitive supply guarantees		$	10,678.1
Nuclear guarantees		773.6
BGE guarantees		263.3
Other non-regulated guarantees		74.2
Power project guarantees		19.2
Total guarantees		$	11,808.4

At March 31, 2007, Constellation Energy had a total of $11,808.4 million in guarantees outstanding related to loans, credit facilities, and contractual performance of certain of its subsidiaries as described below.

¨ Constellation Energy guaranteed $10,678.1 million on behalf of our subsidiaries for competitive supply activities. These guarantees are put into place in order to allow our subsidiaries the flexibility needed to conduct business with counterparties without having to post other forms of collateral. While the face amount of these guarantees is $10,678.1 million, our calculated fair value of obligations for commercial transactions covered by these guarantees was $2,983.4 million at March 31, 2007. If the parent company was required to fund these subsidiary obligations, the total amount based on March 31, 2007 market prices would be $2,983.4 million. For those guarantees related to our mark-to-market energy or risk management liabilities, the fair value of the obligation is recorded in our Consolidated Balance Sheets.

¨ Constellation Energy guaranteed $773.6 million primarily on behalf of our 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.

¨ BGE guaranteed the Trust Preferred Securities of $250.0 million of BGE Trust II,

¨ BGE guaranteed two-thirds of certain debt of Safe Harbor Water Power Corporation, an unconsolidated investment. At March 31, 2007, Safe Harbor Water Power Corporation had outstanding debt of $20.0 million. The maximum amount of BGE’s guarantee is $13.3 million.

¨ Constellation Energy guaranteed $62.4 million on behalf of our other nonregulated businesses primarily for loans and performance bonds of which $25.0 million was recorded in our Consolidated Balance Sheets at March 31, 2007.

¨ Our other nonregulated business guaranteed $11.8 million primarily for performance bonds.

¨ Our merchant energy business guaranteed $19.2 million for loans and other performance guarantees related to certain power projects in which we have an investment.

We believe it is unlikely that we would be required to perform or incur any losses associated with guarantees of our subsidiaries’ obligations.

Contingencies

Revenue Sufficiency Guarantee Costs

During 2006, the Federal Energy Regulatory Commission (FERC) issued orders finding that the Midwest Independent System Operator (MISO) violated its tariff by incorrectly allocating revenue sufficiency guarantee (RSG) charges among market participants. As a result of FERC orders, MISO proposed a revised methodology for the allocation of RSG charges in its December 2006

compliance filing with the FERC with a proposed effective date of April 1, 2007.

In March 2007, FERC rejected the RSG allocation methodology proposed by MISO in its December 2006 compliance filing and ordered MISO to reallocate RSG costs based on its existing tariff back to the date of FERC’s original order (April 2006). Based on this FERC order, we recorded an immaterial liability in our Consolidated Balance Sheets based on our estimate of the amount of re-allocated RSGs we believe is probable. Our liability is subject to change based upon MISO’s calculation of the actual RSG adjustment. In addition, the order may be appealed, and we cannot predict the ultimate timing or outcome of any appeal.

Environmental Matters

Solid and Hazardous Waste

The Environmental Protection Agency (EPA) and several state agencies have notified us that we are considered a potentially responsible party with respect to the clean-up of certain environmentally contaminated sites. We cannot estimate the final clean-up costs for all of these sites, but the current estimated costs for, and current status of, each site is described in more detail below.

68th Street Dump

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 fully indemnified by a wholly-owned affiliate of Constellation Energy for costs related to this settlement, as well as any clean-up costs. The clean-up costs will not be known until the investigation is closer to completion. However, those costs could have a material effect on our financial results.

Spring Gardens

In December 1996, BGE signed a consent order with the Maryland Department of the Environment that requires it to implement remedial action plans for contamination at and around the Spring Gardens site, located in Baltimore, Maryland. The Spring Gardens site was once used to manufacture gas from coal and oil. Based on remedial action plans and cost modeling performed in late 2006, BGE estimates its probable clean-up costs will total $43 million. BGE has recorded these costs as a liability in its Consolidated Balance Sheets and has deferred these costs, net of accumulated amortization and amounts it recovered from insurance companies, as a regulatory asset. Based on the results of studies at this site, it is reasonably possible that additional costs could exceed the amount BGE has recognized by approximately $3 million. Through March 31, 2007, BGE has spent approximately $40 million for remediation at this site.

BGE also has investigated other small sites where gas was manufactured in the past. We do not expect the clean-up costs of the remaining smaller sites to have a material effect on our financial results.

Air Quality

In late July 2005, we received two Notices of Violation (NOVs) from the Placer County Air Pollution Control District, Placer County California (District) alleging that the Rio Bravo Rocklin facility located in Lincoln, California had violated certain District air emission regulations. We have a combined 50% ownership interest in the partnership which owns the Rio Bravo Rocklin facility. The NOVs allege a total of 38 violations between January 2003 and March 2005 of either the facility’s air permit or federal, state, and county air emission standards related to nitrogen oxide, carbon monoxide, and particulate emissions, as well as violations of certain monitoring and reporting requirements during that time period. The maximum civil penalties for the alleged violations range from $10,000 to $40,000 per violation. Management of the Rio Bravo Rocklin facility is currently discussing the allegations in the NOVs with District representatives. It is not possible to determine the actual liability, if any, of the partnership that owns the Rio Bravo Rocklin facility.

Litigation

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

City of Tacoma v. AEP, et al.,—The City of Tacoma, on June 7, 2004, in the U.S. District Court, Western District of Washington, filed a complaint against over 60 companies, including Constellation Energy Commodities Group, Inc. (CCG). The complaint alleges that the defendants engaged in manipulation of electricity markets resulting in prices for power in the western power markets that were substantially above what market prices would have been in the absence of the alleged unlawful contracts, combinations and conspiracy in violation of Section 1 of the Sherman Act. The complaint further alleges that the total amount of damages is unknown, but is estimated to exceed $175 million. On February 11, 2005, the Court granted the defendants’ motion to dismiss the action based on the Court’s lack of jurisdiction over the claims in