Management's Discussion and Analysis of Financial Condition and Results of Operations

Introduction and Overview

Constellation Energy Group, Inc. (Constellation Energy) is an energy company that conducts its business through various subsidiaries including a merchant energy business and Baltimore Gas and Electric Company (BGE). We describe our operating segments in the Notes to Consolidated Financial Statements beginning on page 16.

This Quarterly Report on Form 10-Q is a combined report of Constellation Energy and 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. We discuss our business and strategy in more detail in Item 1-Business section of our 2008 Annual Report on Form 10-K and we discuss the risks affecting our business in Item 1A. Risk Factors section of our 2008 Annual Report on Form 10-K.

Our 2008 Annual Report on Form 10-K includes a detailed discussion of various items impacting our business, our results of operations, and our financial condition. These include:

º •
º Introduction and Overview section which provides a description of our business segments, º •
º Strategy section, º •
º Business Environment section, including how recent events, regulation, weather, and other factors affect our business, and º •
º Critical Accounting Policies section.

Critical accounting policies are the accounting policies that are most important to the portrayal of our financial condition and results of operations and that require management's most difficult, subjective, or complex judgment. Our critical accounting policies include derivative accounting, evaluation of assets for impairment and other than temporary decline in value, and asset retirement obligations.

In this discussion and analysis, we explain the general financial condition and the results of operations for Constellation Energy and BGE including:

º •
º factors which affect our businesses, º •
º our earnings and costs in the periods presented, º •
º changes in earnings and costs between periods, º •
º sources of earnings, º •
º impact of these factors on our overall financial condition, º •
º expected future expenditures for capital projects, º •
º expected sources of cash for future capital expenditures, and º •
º our net available liquidity and collateral requirements.

As you read this discussion and analysis, refer to our Consolidated Statements of Income (Loss) on page 3, which present the results of our operations for the quarters ended March 31, 2009 and 2008. We analyze and explain the differences between periods in the specific line items of the Consolidated Statements of Income (Loss).

We have organized our discussion and analysis as follows:

º •
º We describe changes to our business environment during the year. º •
º We highlight significant events that occurred in 2009 that are important to understanding our results of operations and financial condition. º •
º We then review our results of operations beginning with an overview of our total company results, followed by a more detailed review of those results by operating segment. º •
º We review our financial condition, addressing our sources and uses of cash, capital resources, commitments, and liquidity. º •
º We conclude with a discussion of our exposure to various market risks.

Business Environment

Various factors affect our financial results. We discuss these various factors in the Forward Looking Statements section on page 68 and in Item 1A. Risk Factors section of our 2008 Annual Report on Form 10-K. We discuss our market risks in the Risk Management section beginning on page 62.

The volatility of the financial, credit and global energy markets impacts our liquidity and collateral requirements as well as our credit risk. We discuss our liquidity and collateral requirements in the Financial Condition section and our customer (counterparty) credit and other risks in more detail in the Risk Management section.

In this section, we discuss in more detail events which have impacted our business during 2009.

Environmental Matters

Air Quality

Capital Expenditures

As discussed in our 2008 Annual Report on Form 10-K, we expect to incur additional environmental capital expenditures to comply with air quality laws and regulations. Based on updated information from vendors, we expect our estimated environmental capital requirements for these air quality projects to be approximately $300 million in 2009, $35 million in 2010, $15 million in 2011 and $30 million from 2012-2013.

Our estimates may change further as we implement our compliance plan. As discussed in our 2008 Annual Report on Form 10-K, our estimates of capital expenditures continue to be subject to significant uncertainties.

Accounting Standards Issued and Adopted

We discuss recently issued and adopted accounting standards in the Accounting Standards Issued and Accounting Standards Adopted sections of the Notes to Consolidated Financial Statements beginning on page 38.

Events of 2009

Divestitures

In January 2009, we entered into a definitive agreement to sell a majority of our international commodities operation. We completed this transaction in March 2009. Additionally, we entered into an agreement to sell an additional international holding, which is expected to close in the second quarter of 2009.

In February 2009, we entered into a definitive agreement to sell our Houston-based gas trading operation. We transferred control of this operation in April 2009. Simultaneously, we entered into an agreement with the buyer of our Houston-based gas trading operation under which that company will provide us with the gas supply needed to support our retail gas customer supply business.

We discuss these divestitures in more detail in the Notes to Consolidated Financial Statements beginning on page 14.

Merger Termination and Strategic Alternatives Costs

During the quarter ended March 31, 2009, we incurred merger termination and strategic alternative costs related to the terminated merger with MidAmerican Energy Holdings Company (MidAmerican), the conversion of our Series A Preferred Stock, the transactions related to EDF Group and related entities (EDF), and other strategic alternatives costs. We discuss costs related to the mergers and strategic alternatives in more detail on page 11 in Notes to Consolidated Financial Statements.

Impairment losses and other costs

During the quarter ended March 31, 2009, we recorded impairment losses and other costs on certain of our investments in equity securities and other assets. We discuss these charges in more detail in the Notes to Consolidated Financial Statements on page 13.

Workforce Reduction Costs

During the quarter ended March 31, 2009, we incurred workforce reduction costs primarily related to the divestitures of a majority of our international commodities operation as well as some smaller restructurings elsewhere in our organization. We recognized a $10.8 million pre-tax charge in 2009 related to the elimination of approximately 180 positions. We expect all of these restructurings will be completed within the next 12 months. We discuss our workforce reduction costs in more detail in the Notes to Consolidated Financial Statements beginning on page 13.

Results of Operations for the Quarter Ended March 31, 2009 Compared with the Same Period of 2008

In this section, we discuss our earnings and the factors affecting them. We begin with a general overview, then separately discuss earnings for our operating segments. Significant changes in other income and expense, fixed charges, and income taxes are discussed, as necessary, in the aggregate for all segments in the Consolidated Nonoperating Income and Expenses section on page 54.

Overview

Results

                                              Quarter Ended
                                                March 31,
                                           2009             2008

                                         (In millions, after-tax)
                 Merchant energy      $       (202.7 )  $       72.7
                 Regulated electric             45.4            36.2
                 Regulated gas                  39.6            40.2
                 Other nonregulated             (2.0 )           0.3

                 Net (Loss) Income    $       (119.7 )  $      149.4

                 Net (Loss) Income
                 attributable to
                 common stock         $       (123.5 )  $      145.7

                 Other Items
                 Included in
                 Operations
                 (after-tax):
                   Non-qualifying
                   hedges             $            -    $      (34.6 )
                   International
                   commodities
                   operation and
                   gas trading
                   operation1                 (184.2 )             -
                   Impairment
                   losses and other
                   costs                       (11.1 )             -
                   Merger
                   termination and
                   strategic
                   alternatives
                   costs                       (42.3 )             -
                   Impairment of
                   nuclear
                   decommissioning
                   trust assets                (23.8 )          (3.9 )
                   Workforce
                   reduction costs              (4.2 )             -
                   Credit facility
                   amendment fees               (3.7 )             -

                 Total Other Items    $       (269.3 )  $      (38.5 )

                 Change from prior
                 year                 $       (230.8 )

1 These amounts include the loss on sale of the international commodities operation, the reclassification of losses on previously designated cash-flow hedges from Accumulated Other Comprehensive Loss because the forecasted transactions are probable of not occurring, and earnings that are no longer part of our core business. The impairment losses and other costs and workforce reduction costs line items also include amounts related to the operations we are divesting.

Quarter Ended March 31, 2009

Our total net loss attributable to common stock for the quarter ended March 31,
2009 was unfavorable compared to net income for the same period of 2008 by
$269.2 million, or $1.43 per share, primarily due to the following:

                                             2009 vs. 2008

                                             (in millions,
                                              after-tax)
                      Generation gross
                      margin                  $           7
                      Customer Supply
                      gross margin                       38
                      Global Commodities
                      gross margin                     (150 )
                      Hedge
                      ineffectiveness                    51
                      Credit loss-coal
                      supplier bankruptcy                33
                      Merchant interest
                      expense                           (28 )
                      Regulated
                      businesses                          9
                      Other nonregulated
                      businesses                         (2 )
                      Total change in
                      Other Items
                      included in
                      operations per
                      Overview-Results
                      table                            (231 )
                      All other changes                   4

                      Total Change            $        (269 )

In the following sections, we discuss our net loss by business segment in greater detail.

Merchant Energy Business

Background

Our merchant energy business is a competitive provider of energy solutions for various customers. We discuss the impact of deregulation on our merchant energy business in Item 1. Business-Competition section of our 2008 Annual Report on Form 10-K.

Our merchant energy business focuses on delivery of physical, customer-oriented products to producers and consumers, manages the risk and optimizes the value of our owned generation assets and customer supply activities, and uses our portfolio management and trading capabilities both to manage risk and to deploy risk capital.

We are continuing to assess the ongoing capital requirements of the merchant energy business, including evaluating the proper size of our Customer Supply and Global Commodities operations, and we are continuing to implement various strategic initiatives for our Global Commodities operation. We discuss our strategy in more detail in the Strategy section of our 2008 Annual Report on Form 10-K.

While we have completed the sale of a majority of our international commodities operation and our gas trading operation, the execution of our strategy in the future will be affected by continued instability in financial, credit, and commodities markets. Execution of our goals could have a

substantial effect on the nature and mix of our business activities. In particular, upon closing the transactions contemplated by our Investment Agreement with EDF, we expect that our subsidiary that owns our nuclear generation assets will be deconsolidated. In turn, this could affect our financial position, results of operations, and cash flows in material amounts, and these amounts could vary substantially from historical results. We discuss our asset and operation divestitures in more detail in the Notes to Consolidated Financial Statements beginning on page 14.

We record merchant energy revenues and expenses in our financial results in different periods depending upon which portion of our business they affect and based on the associated accounting policies. We discuss our revenue recognition policies in the Critical Accounting Policies section and in Note 1 of our 2008 Annual Report on Form 10-K.

As part of managing our total portfolio risk, we use economic value at risk. We view economic value at risk as the most comprehensive measure of our exposure to changing commodity prices. This metric measures the risk in our total portfolio, encompassing all aspects of our merchant energy business. We also use daily value at risk and stop loss limits and liquidity guidelines to restrict the level of risk in our portfolio.

Our Global Commodities operation actively transacts in energy and energy-related commodities in order to manage our portfolio of energy purchases and sales to customers through structured transactions. As part of these activities, we trade energy and energy-related commodities and deploy risk capital in the management of our portfolio in order to earn returns.

We discuss the impact of our economic value at risk and value at risk in more detail in the Mark-to-Market and Risk Management sections.

Results

                                              Quarter Ended
                                                March 31,
                                            2009         2008

                                              (In millions)
                     Revenues            $  3,279.5   $  3,947.0
                     Fuel and
                     purchased energy
                     expenses              (2,694.8 )   (3,298.9 )
                     Operating
                     expenses                (434.6 )     (429.8 )
                     Merger and
                     strategic
                     alternatives
                     costs                    (42.3 )          -
                     Impairment losses
                     and other costs          (28.6 )          -
                     Workforce
                     reduction costs          (10.8 )          -
                     Depreciation,
                     depletion, and
                     amortization             (63.6 )      (71.1 )
                     Accretion of
                     asset retirement
                     obligations              (17.9 )      (16.6 )
                     Taxes other than
                     income taxes             (29.4 )      (27.7 )
                     (Loss) gain on
                     divestitures            (334.5 )       15.0

                     Income from
                     Operations          $   (377.0 ) $    117.9

                     Net (Loss) Income   $   (202.7 ) $     72.7

                     Net (Loss) Income
                     attributable to
                     common stock        $   (203.2 ) $     72.2

                     Other Items
                     Included in
                     Operations
                     (after-tax):
                       Non-qualifying
                       hedges            $        -   $    (34.6 )
                       International
                       commodities
                       operation and
                       gas trading
                       operation1            (184.2 )          -
                       Impairment
                       losses and
                       other costs            (11.1 )          -
                       Merger
                       termination and
                       strategic
                       alternatives
                       costs                  (42.3 )          -
                       Impairment of
                       nuclear
                       decommissioning
                       trust assets           (23.8 )       (3.9 )
                       Workforce
                       reduction costs         (4.2 )          -
                       Credit facility
                       amendment fees          (3.7 )          -

                     Total Other Items   $   (269.3 ) $    (38.5 )

Above amounts include intercompany transactions eliminated in our Consolidated Financial Statements. The Information by Operating Segment section within the Notes to Consolidated Financial Statements on page 17 provides a reconciliation of operating results by segment to our Consolidated Financial Statements.

1 These amounts include the loss on sale of the international commodities operation, the reclassification of losses on previously designated cash-flow hedges from Accumulated Other Comprehensive Loss because the forecasted transactions are probable of not occurring, and earnings that are no longer part of our core business. The impairment losses and other costs and workforce reduction costs line items also include amounts related to the operations we are divesting.

Revenues and Fuel and Purchased Energy Expenses

Our merchant energy business manages the revenues we realize from the sale of energy and energy-related products to our customers and our costs of procuring fuel and energy. The difference between revenues and fuel and purchased energy expenses, including all direct expenses, represents the gross margin of our merchant energy business, and this measure is a useful tool for assessing the profitability of our merchant energy business. Accordingly, we believe it is appropriate to discuss the operating results of our merchant energy business by analyzing the changes in gross margin between periods. In managing our portfolio, we may terminate, restructure, or acquire contracts primarily to reduce risk and/or improve our liquidity. Such transactions are within the normal course of managing our portfolio and may materially impact the timing of our recognition of revenues, fuel and purchased energy expenses, and cash flows.

We discuss our merchant energy revenues, fuel and purchased energy expenses, and gross margin below.

Revenues

Our merchant energy revenues decreased $667.5 million in the first quarter of
2009 compared to 2008, primarily due to the following:

                                              2009 vs. 2008

                                              (In millions)
                      Change in Global
                      Commodities
                      mark-to-market
                      revenues due to
                      favorable changes in
                      power and gas prices   $            25
                      Decrease in contract
                      prices and volume of
                      business primarily
                      related to our
                      international coal
                      and freight
                      operation, which we
                      have divested                     (409 )
                      Increase in contract
                      prices and volume
                      related to our
                      domestic coal
                      operation                           87
                      Realization of lower
                      prices and volume of
                      business at our gas
                      trading operation
                      and absence of
                      revenue due to the
                      sales of certain of
                      our upstream gas
                      properties in 2008                 (90 )
                      Realization of lower
                      volumes on wholesale
                      and retail load at
                      our Global
                      Commodities and
                      Customer Supply
                      operations,
                      partially offset by
                      higher contract
                      prices                            (267 )
                      All other                          (14 )

                      Total decrease in
                      merchant revenues      $          (668 )

Fuel and Purchased Energy Expenses

Our merchant energy fuel and purchased energy expenses decreased $604.1 million
in the first quarter of 2009 compared to 2008, primarily due to the following:

                                              2009 vs. 2008

                                              (In millions)
                      Increase in Global
                      Commodities
                      mark-to-market
                      expenses related to
                      international coal
                      purchase contracts
                      due to decreasing
                      prices, which we
                      have divested          $           169
                      Decrease in contract
                      prices and volume of
                      business primarily
                      related to our
                      international coal
                      and freight
                      operation, which we
                      have divested                     (333 )
                      Increase in contract
                      prices and volume
                      related to our
                      domestic coal
                      operation                           80
                      Realization of lower
                      volumes at our gas
                      trading operations                 (35 )
                      Realization of lower
                      contract prices and
                      volumes on wholesale
                      and retail purchases
                      at our Global
                      Commodities and
                      Customer Supply
                      operations                        (508 )
                      All other                           23

                      Total decrease in
                      merchant energy fuel
                      and purchased energy
                      expenses               $          (604 )

Gross Margin

We analyze our merchant energy gross margin in the following categories:

º •
º Generation-our operation that owns, operates, and maintains fossil, nuclear, and renewable generating facilities and holds interests in qualifying facilities, and power projects in the United States and Canada. We present the gross margin results of this operation based on a 100% hedged assumption for the portfolio, related to both output from the facilities and the fuel used to generate electricity. The assumption is based on executing hedges at current market prices with the Global Commodities operation at the end of each fiscal year in order to ensure that the Generation operation is fully hedged. Therefore, all commodity price risk is managed by and presented in the results of our Global Commodities operation as discussed below. Changes in gross margin of our Generation operation during the period are due to changes in the level of output from the generating assets, and changes in gross margin between years are a result of changes in prices and expected output.

º •
º Customer Supply-our load-serving operation that provides energy products and services to wholesale and retail electric and natural gas customers, including distribution utilities, cooperatives, aggregators, and commercial, industrial and governmental customers. We present the gross margin results of this operation based on the gross margin value of new customer supply arrangements at the time of execution assuming an estimated level of customer usage and the impact of any changes in the underlying usage of the customers based on actual energy deliveries. Changes in estimated customer usage result from attrition (customers changing suppliers) or variable load risk (changes in actual usage when compared to expected usage). All commodity price risk is presented in and managed by our Global Commodities operation as discussed below. º •
º Global Commodities-our marketing, risk management, and trading operation that manages contractually owned physical assets, including generation facilities, natural gas properties, international coal and freight assets, provides risk management services, and trades energy and energy-related commodities. This operation provides the wholesale risk management function for our Generation and Customer Supply operations, as well as our structured products and energy investments portfolios, and includes our merchant energy business' actual hedged positions with third parties. Therefore, changes in gross margin for this operation result mostly from changes in commodity prices and positions across the various commodities and regions in which we transact.

We provide a summary of our gross margin for these three components of our merchant energy business as follows:

                                              Quarter Ended March 31,
                                               2009                 2008

                                           (Dollar amounts in millions)
                                                       % of             % of
                                                      Total            Total
. . .