Constellation Energy Group
E. Follin Smith
Senior Vice President and
Chief Financial Officer
250 W. Pratt Street
Baltimore, MD 21201-2437
May 23, 2002
Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Comments to Proposed Rule on Acceleration of Periodic Report Filing Dates (File No. 57-08-02)
Dear Mr. Katz:
I am a Senior Vice President and the Chief Financial Officer of Constellation Energy Group, Inc. Constellation Energy's common stock is traded on the NYSE (Symbol: CEG) and its market capitalization as of May 15, 2002 was $4.8 billion. Constellation Energy is a North American energy company that conducts its business through various subsidiaries including a merchant energy business that generates and markets wholesale electricity and Baltimore Gas and Electric Company (BGE), a regulated electric and gas public transmission and distribution utility company which is subject to the jurisdiction of Maryland Public Service Commission. Our merchant energy business operates in the wholesale markets across North America and applies both accrual and mark-to-market accounting to various portions of its business.
Constellation Energy is submitting these comments in response to the proposed rulemaking noted above, which proposes to accelerate the filing of the Form 10Q from 45 to 30 days after the quarter end, and the Form 10K from 90 to 60 days after the fiscal year end. Constellation Energy agrees with the Commission's objective to make information publicly available that is clear, accurate and timely. However, we firmly believe that this proposal, as it relates to accelerating the filing of the 10Q, will not achieve the Commission's stated objectives, especially in light of the recent activity by the Commission in seeking to expand the disclosure requirements of these periodic reports and the increased complexity of GAAP that must be applied in the preparation of the financial statements and related notes.
The Commission correctly points out that many companies (including Constellation Energy) issue their earnings press releases within 30 days of their quarter end, and that by that time the review work for the quarter is done. The proposal cites this one aspect of the quarterly reporting process, and technological advances in communication and financial statement preparation, to support the view that accelerating the 10Q filing deadline should not be unduly burdensome - especially to large public companies that have substantial experience in preparing 10Q disclosure.
We disagree with this conclusion. It is only after the work is done to prepare for the quarterly earnings announcement and investor call that management can then fully focus its attention on the analysis required to prepare the more detailed disclosures required in MD&A. Recently our MD&A disclosure has been expanded to include more detailed disclosures most notably details about (1) certain trading activities that include non-exchange traded contracts accounted for at fair value, and contractual obligations and commercial commitments, as highlighted in FR-61 issued January 22, 2002, and (2) critical accounting policies highlighted in FR-60 issued December 12, 2001. Also, if the proposal to expand the disclosure requirements concerning the application of critical accounting estimates is adopted as proposed, its application to our businesses will be extremely complex and require a great deal of staff and management time each quarter to quantify and analyze. Initiatives such as these (and ones that have been discussed but not yet actually proposed), along with the complexity of GAAP especially in terms of derivatives, segment reporting, commitments and contingencies, and the proposed Asset Retirement Obligation initiative, only serve to underscore our concern with the accelerated filing deadline.
It may be helpful for the Commission to understand the process Constellation Energy goes through in preparing its 10Qs. Constellation Energy has a corporate structure similar to many other large publicly traded companies with several lines of business - it is a holding company whose activities are conducted through many different direct and indirect subsidiaries. The process of closing the books of each subsidiary of Constellation Energy begins after the end of business on the last day of each quarter. It takes approximately 10 days to close the books of all subsidiaries and to provide the resulting financial information to the accounting staff at Constellation Energy. At that point, it takes to approximately mid-month to complete the consolidated income statement, balance sheet and statement of cash flows. Over the remaining 10 to 15 days prior to the earnings conference call, our analysis of the changes from period to period for each line item is completed, which also includes working with our outside auditors, management team and audit committee members. From the time that all the results are received from the subsidiaries, in addition to the internal and external accounting work, we are also preparing, with the business unit and corporate accounting groups, the analysis needed to support the earnings press release (including confirmation of earnings estimates), investor conference call and questions and answers for the investor call. Our earnings press release and conference call usually occurs in the last 3 to 5 days of the month (for example, for the first quarter 2002 it occurred on April 26, 2002).
The very complex and time consuming work of analyzing our quarterly results to prepare the earnings press release occurs within a 10 to 15 day time frame and requires the full-time focus of the accounting, financial and legal staffs at Constellation Energy and its subsidiaries. The same staff who prepares the financial statements and the earnings press release also prepares MD&A and the notes to financial statements that are included in the 10Q. While much of the work required to prepare the earnings press release is useful in preparing the 10Q, significant work is still required in addition to the time and focus of management on analyzing results that the Commission demands for MD&A. We are also concerned about the increasing demands being placed on audit committees and their ability to complete their reviews if the filing deadline is shortened.
While technological advances have certainly made communication much easier, it is the internal analysis and review process, questioning and discussions among staff and management that is the basis for the timely, accurate and complete disclosure the Commission seeks. This process and the resulting quality of results would be severely compromised by the proposed acceleration of the 10Q filing date.
The proposal also asserts that the period of time between publicly announcing earnings and the filing of the 10Q is too lengthy and results in stale data in the 10Q. We do not agree with this view. A 10Q filing date of no more than ten business days after the announcement of earnings is not a substantial delay with regard to financial statements that cover the prior historical quarter. Additionally, the proposal's statement that filers can avail themselves of Rule 12b-25 for an extension of the 10Q filing date if accuracy is a concern defeats the main purpose of the proposal to provide for more timely disclosure. The purported focus of the proposal is the length of time between when the earnings press release and conference call occurs and when the 10Q is filed. Providing for an extension of the filing date in this fashion in essence acknowledges the concerns we have raised above regarding the ability to meet an accelerated filing date with accurate, complete information.
Finally, the Commission's electronic filing system requires all registrants to format their filings to meet the specific electronic specifications of the EDGAR system. This process takes approximately a day to complete once the text of the Form 10Q is finalized. With an accelerated filing deadline, the potential for the length of this formatting process to delay the filing increases substantially. If the Commission does decide to accelerate the 10Q filing deadline, implementation should be delayed until EDGAR is modified to accept a variety of filing formats so filing can be instantaneous with execution of the 10Q.
While we firmly believe that the filing deadline for the 10Qs should not be changed, we do not oppose the shortening of the filing date of the 10K as proposed. The additional month, after the fiscal year conference call and earnings release, should still provide adequate time to prepare the detailed disclosures required by Form 10K.
Finally on the proposal on the website postings, we routinely post all filings with the SEC on our website within 24 hours of when they are filed.
I would be happy to discuss my comments further with you. If you have any questions, please call me.
Very truly yours,
E. Follin Smith