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constellation energy 2003 Annual Report 

 

 
 
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Published:  December 03, 2009
 
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Slide 1: 2003 Annual Report The Way Energy Works
Slide 2: The Way Energy Works 1 Start with a vision. We’re working to be the firstchoice provider for customers seeking energy solutions. 4 Get (and keep) the best of the best. We have a high-performance team. 5 Get better. Period. Ours is a culture of ongoing improvement. 6 7 8 9 Sweat the small stuff. The physical nitty gritty of energy. Maintain discipline. We’re cautious consumers of capital. Keep it simple. Customers view us as their one-stop energy shop. Be accountable. We answer to our customers and shareholders. 10 Make a difference. Our goal is to provide a superior long-term return to shareholders. 11 Be responsible. It’s the way we live our lives. 12 Answer the important questions. Mayo A. Shattuck III discusses our vision and issues important to our future. 14 Board of Directors 16 Executive Team 18 Understanding Our Form 10-K A guide to – and highlights of – our detailed financial and business information. 24 Glossary 25 Form 10-K Financial Highlights In millions except per share amounts 2003 2002 % Change Common Stock Data Reported (GAAP) earnings per share Cumulative effects of changes in accounting principles Special items * Earnings per share excluding cumulative effects of changes in accounting principles and special items ** Dividends declared per share Average shares outstanding – assuming dilution Market price per share – year end $ 1.66 $ (1.19) $ 0.09 $ $ 2.76 1.04 166.7 $ 39.16 $ $ $ $ 3.20 – 0.68 ) 2.52 0.96 164.2 $ 27.82 9.5% 8.3% 40.8% Financial Data Total revenues GAAP net income Cumulative effects of changes in accounting principles Special items (after-tax)* Net income excluding cumulative effects of changes in accounting principles and special items** Total assets Total debt Total common equity Capital expenditures $ 9,703 $ 277 $ (198) $ 14 $ 461 $15,801 $ 5,392 $ 4,141 $ 761 $ 4,727 $ 526 – $ 112 $ 414 $14,943 $ 5,051 $ 3,862 $ 923 Certain prior year amounts have been reclassified to conform with current year’s presentation. * Includes workforce reduction costs, impairment losses and other costs, and net gain on sale of investments and other assets. ** Represents a measure that is not determined in accordance with generally accepted accounting principles (GAAP) and should not be considered as an alternative to the comparable amount under GAAP. However, we believe that the impact of special items obscures trends in our results and that it is useful to consider our results excluding such items. 2001 Earnings: For 2001, our GAAP earnings per share were $0.57. Excluding cumulative effect of change in accounting principle of $0.05 and special items* of $(1.89), our earnings per share were $2.41. We’re Constellation Energy (constellation.com), a Fortune 500 company based in Baltimore and the nation's leading competitive supplier of electricity to large commercial and industrial customers. We are one of the largest wholesale power sellers in the country. We also manage fuels and energy services on behalf of energy-intensive industries and utilities. We own and operate a diversified fleet of power plants throughout the United States. We deliver electricity and natural gas through Baltimore Gas and Electric Company (BGE), our regulated utility in Central Maryland. In 2003, the combined revenues of our integrated energy company totaled $9.7 billion.
Slide 3: The Way Energy Works ... at Constellation Energy Our vision is to be the first-choice provider for customers seeking energy solutions in the complex and changing energy marketplace. We’re ... – – – – – A Fortune 500 competitive energy company based in Baltimore. The nation’s leading supplier of competitive electricity to large commercial and industrial customers. One of the nation’s largest wholesale power sellers. A major generator of electricity with a diversified fleet of power plants strategically located throughout the United States. A regulated distributor – our Baltimore Gas and Electric utility – of electricity and natural gas in Central Maryland. In 2003, we ... – Provided a 45 percent total return to shareholders, assuming reinvestment of dividends. Earned $2.76 per share excluding the cumulative effect of changes in accounting principles and special items, a 9.5 percent increase from 2002. Had revenues of $9.7 billion. In 2004, we’re working to ... – Continue creating shareholder value that will produce superior total returns. Continue achieving 10 percent growth in earnings per share. Implement productivity initiatives to help improve our earnings in 2005 and beyond. – – – Our foundational values – integrity, teamwork, social and environmental responsibility, and customer focus – guide our actions. Our performance values – speed, accountability, passion for excellence, and creation of value – measure our results. – Constellation Energy Constellation Power Source Our Customers Premier wholesale customers who are intensive energy users – primarily distribution utilities, electric co-operatives, municipalities, and power marketers. How We Help Them Provides reliable wholesale energy at predictable prices. Sells energy, capacity, risk management, and related products under short- and long-term contracts. Manages fuel and power logistics, and other energy services. Competitive Supply Constellation NewEnergy Constellation NewEnergy – Gas Division More than 8,000 large commercial and industrial customers – many with multiple locations – in nearly three dozen states and three Canadian provinces. 53 of the Fortune 100 companies – including Ford Motor Company, Hyatt Hotels, Kimberly-Clark, and Staples. Provides specialized energy products and services that help customers effectively manage and control energy costs and usage based on their unique business requirements. Meets energy needs with: – Electricity and natural gas supply. – Risk management. – Load and usage management. – Procurement and cost management services. Constellation Generation Generation Constellation Power Source sells all of the output from our generating plants to premier wholesale customers– primarily distribution utilities, electric co-operatives, municipalities, power marketers, and major independent system operators. Generates reliable electricity under long-term contracts and spot market opportunities. Dispatches power to independent system operators as required to ensure reliability of the grid. Owns and operates more than 12,000 megawatts of generating capacity diversified by fuel, technology, and strategic geographic location. Baltimore Gas and Electric Energy Delivery 1.2 million electric and 600,000 natural gas residential, commercial, and industrial customers. Delivers electricity and natural gas to homes and businesses. Maintains and operates 250 substations, nearly 23,000 miles of distribution lines and 1,300 miles of transmission lines. Maintains and operates two peak-shaving plants, nine gate stations, and more than 6,000 miles of gas main. Enables customers to choose energy suppliers, and arranges supply for customers who have not chosen an alternate supplier. Fellon-McCord & Associates Energy Consulting/Services Large commercial and industrial customers – including Toyota, Hanson PLC, Wabash Alloys, and Church & Dwight Co., Inc. Government and large commercial and industrial customers. Provides energy consulting and management services. Meets all natural gas and electricity supply, transmission, and distribution needs. Provides customized solutions – utility infrastructure outsourcing (electricity, chilled water, heating), mechanical-electrical upgrades, utility data mining, and performance contracting – to increase energy efficiency, reliability, and cost effectiveness. Provides energy-focused, essential products and services – heating and cooling systems, plumbing and electrical systems, home improvements, and appliance service. Constellation Energy Source BGE HOME Residential and small commercial customers.
Slide 4: Serving Customers Throughout North America s States and provinces where we serve retail customers. s States where we serve retail customers and have generation plants. s States where we have generation plants. In addition, we serve wholesale customers throughout the United States and Canada. Our Markets Competitive wholesale markets throughout North America – we handle a significant volume of the wholesale electric load for the Mid-Atlantic states, the Northeast, and Texas. Strategic, competitive markets across North America. – Served 16,000 megawatts of peak load in the U.S. 2003 Highlights – Created $171 million worth of future gross margin – wholesale energy market. – Contracted to sell energy products and services that $132 million to be realized in 2004-2006. – Broadened our coal specifications and enhanced our coal generated $186 million in current gross margin. supply chain to include more suppliers from more locations – saving between $10 million and $20 million in fuel costs annually through 2007. – Significantly increased our natural gas capabilities with the acquisitions of Blackhawk Energy Services and Kaztex Energy Management, as well as with the acquisitions of retail gas contracts from other energy companies. – Expanded our natural gas operations in California, Illinois, Indiana, Michigan and Wisconsin. – Increased natural gas sales by nearly 30 percent, bringing – Continued to grow market share to 16 percent of the competitive switched electricity market. – Acquired nearly 1,000 megawatts of customer contracts from other companies. – Added over 3,000 megawatts of new electric business, bringing total peak load served to over 8,000 megawatts. – Achieved a customer renewal rate of more than 80 percent. – Opened new offices in Dallas, Detroit, Calgary and Toronto. total load to more than 195 billion cubic feet of natural gas. Competitive wholesale markets across North America. – Generated more than 50 million megawatt hours of – Reached an agreement to acquire the 495-megawatt electricity from our 107 generating units, a 15 percent increase over 2002. – Set a new world record for a two-piece steam generator Ginna Nuclear Power Plant in New York. – Started operations 60 days ahead of schedule at our new replacement outage by completing the replacement at our Calvert Cliffs Nuclear Power Plant in 66 days. High Desert generating facility in California – which was also named POWER magazine Plant of the Year. – Received the National Safety Council Award at our Calvert Cliffs Nuclear Power Plant. Central Maryland – a 2,300-squaremile electric service territory, and an 800-square-mile natural gas service territory. – Continued strong, stable earnings contribution to – Received Maryland Public Service Commission approval Constellation Energy’s overall results. – Received the Emergency Response Award from the Edison of Standard Offer Service bidding procedures for 2004. – Added 20,000 new customers. – Increased delivered electricity and natural gas volumes Electric Institute recognizing our effective and efficient restoration of power to customers whose service had been knocked out by the devastation of Hurricane Isabel. by 1.3 percent. Energy markets across North America. – Grew our customer portfolios in natural gas supply and – Increased the number of customer facilities we serve by transportation and electricity to $2 billion each – up from $1.5 billion each in 2002. – Completed construction – seven months ahead of nearly 40 percent over 2002. Energy markets across North America. schedule – of the $48.2 million Nashville District Energy System facility. – Began a long-term operations agreement with the city of Nashville to operate the District Energy System facility. Maryland. – Successfully executed its repositioning strategy – moving the face of the company from the storefront to the service force. – Built a state-of-the-art training center in Baltimore County to support technical trades personnel.
Slide 5: At Constellation Energy, we know the way energy works. We have a plan, and we follow it – step by step. Mayo A. Shattuck lll Chairman, President and Chief Executive Officer
Slide 6: EARNINGS PER SHARE (In dollars) 2.41 2.52 2.76 TOTAL REVENUES (In billions of dollars) 9.7* Our earnings – excluding cumulative effects of changes in accounting principles and special items – increased 9.5% in 2003. Note: Earnings as reported – our GAAP earnings – were: $0.57 in 2001, $3.20 in 2002, $1.66 in 2003. See the Financial Highlights table on the inside front cover for more details. 3.9 4.7 We’ve grown to a company with revenues of almost $10 billion in 2003. * Includes approximately $1.4 billion effect of a change in accounting principle. 01 02 03 01 02 03 We have a sustainable business model that allows us to be successful in competitive energy markets. We’re one of the very few companies in our industry that has a strong growth story – growing 10 percent in a 3 percent industry. We are a stable, flexible, competitive company delivering results and creating value for our customers and shareholders. step (1) Start with a vision. Our vision is clear. We’re working to be the first-choice provider for customers seeking energy solutions in the complex and changing energy marketplace. Our strategy starts and ends with our customers. Meeting their needs guides all that we do. We’re prospering and growing We’ve transformed our company, building a business with almost $10 billion in revenues. We serve customers in nearly three dozen states and three Canadian provinces. Our large commercial and industrial customers include 53 of the Fortune 100 companies. The markets rewarded our growth and performance during 2003. Our stock price appreciated nearly 41 percent. Including our $1.04 per share dividend, our total return to shareholders – assuming the dividend was reinvested – was 45 percent. In January 2004, we increased our dividend 10 percent to an annual rate of $1.14 per share. In 2003, our earnings – excluding cumulative effects of changes in accounting principles and special items – increased 9.5 percent to $2.76 per share, up from $2.52 earnings per share in 2002. We’re doing it right In advance of other companies, we saw the importance of transparency and built an infrastructure to provide the right metrics and accurately project our results. We have met or exceeded our earnings guidance in every quarter since then. That’s nine consecutive quarters as of year end 2003. We also expanded our risk and financial controls to ensure we are taking and managing risk in a manner in line with the interests of our shareholders. In disciplined fashion, over the last three years, we’ve found opportunities from among the fallen and restructuring energy companies. We held out for the right assets at the right prices – NewEnergy, Fellon-McCord/Alliance Energy Services, Blackhawk Energy Services, Kaztex Energy Management, the Nine Mile Point Nuclear Station, the Ginna Nuclear Power Plant, and several portfolios of customer contracts. Our strong financial and operating results tell the story. Our growing sales force, increasing brand recognition, product excellence, credit strength, and leading management have us well positioned to continue prospering and growing. We’re reaching for the future Our performance in 2003 is a strong affirmation that we have the right business model. We have the right pieces – a leading competitive supply business, a low-cost generation fleet, and a reliable customer-focused regulated utility. To those pieces, we add intellectual capital, technology, market understanding, and disciplined risk management. Reliable energy is critical to our economy and our quality of life. Two events during 2003 provided an unwelcome experience of life without energy. In August, the largest blackout in history hit eight Midwest and Northeast states and Canada. Major cities – including New York, Toronto, Cleveland and Detroit – were left without power. More than 50 million people were affected, some for days. While this cascading blackout did not affect our transmission system or utility operations, 2
Slide 7: CREATING SHAREHOLDER VALUE – 2003 STOCK PRICE APPRECIATION 50% 40% Constellation Energy Dow Jones Electric Utility Index S&P 500 40.8% Beating the averages. Our stock price appreciated 40.8% in 2003, significantly better than the Dow Jones Electric Utility Index and the S&P 500. An investment of $100 in Constellation Energy common stock on December 31, 2002 was worth – with dividends reinvested – $145.21 on December 31, 2003. 30% 20% 26.4% 19.7% 10% 0 -10% 12/31/02 3/31/03 6/30/03 9/30/03 12/31/03 it did impact our Nine Mile Point Nuclear Station in New York. We brought the plant safely off line and then back on line as soon as conditions allowed. In September, Hurricane Isabel hit the Mid-Atlantic states, causing $200 million in damage. It disrupted service to 3.1 million customers – including 790,000 customers of BGE, our regulated utility in Central Maryland. Our planning and preparation paid off, and we were able to restore service to all of our BGE customers in eight days. For our efforts, we received the Edison Electric Institute Emergency Response Award. While hurricanes cannot be avoided, this blackout could have been. Its causes and effects are symptomatic of the challenges within our fragmented industry. Imagine the inefficiencies and complexities if every major city or state had its own particular airline and air traffic control system ... its own unique computer technology and operating system ... its own independently operated postal service. All with little or no common standards, or incentive to work together. That describes the fragmentation of today’s energy industry. It’s clear that well-functioning competitive energy markets need standards. They must have a solid structure, clear rules, a number of competing suppliers, and an open and reliable transmission system. Customers do not benefit fully from markets in which individual companies discriminately control when and how much energy they can receive ... and at what price they can receive it. At a time when customers would benefit from wellfunctioning competitive markets, some companies in our industry are grabbing for the past. They’ve retreated from competitive markets, attempting to restructure back into the old regulated utility model. We – on the other hand – are reaching for the future. Our progressive strategy is distinct from many companies in our industry. It creates a business designed to succeed in the reality of today’s competitive markets. The future is competitive markets and leading to innovations, efficiencies and growth. Competition is in the best interests of energy customers, and it’s good for our economy. Customers need and want convenience, reliability and efficiency – all at the best value. In regulated markets where customers have only one supplier with no ability to choose, the level of convenience, reliability, efficiency and value is limited by the capability, willingness and motivation of their one supplier. In competitive markets where customers can choose suppliers, the level of convenience, reliability, efficiency and value continuously improves with the technologies and skills of companies competing to be the best at meeting customers’ energy needs. By letting fair competitive markets work, our industry will create the potential for developing new ways to deal with environmental challenges and reliability issues, while also sending appropriate market signals that will ensure we have the right amount of generating capacity. Regulated markets provide no incentives to be innovative. Competitive markets do. The way energy works We’re redefining America’s energy industry, and we’re excited about it. Customers, investors, financial analysts and even other energy companies have taken note. I am energized, my team is committed, and our employees are focused on the opportunity at hand. We know the way energy works. We also know the opportunity competitive markets present to create value for our customers, our economy, our quality of life, and for our shareholders. And we’ll work tirelessly to realize that value. Sincerely, We believe competitive markets will continue to evolve and grow, eventually dominating the energy landscape Mayo A. Shattuck III Chairman, President and Chief Executive Officer March 15, 2004 3
Slide 8: step (2) Get (and keep) the best of the best. IT’S A FUNDAMENTAL TRUTH OF BUSINESS – GROWTH ATTRACTS STRONG PEOPLE. Our growth has helped us attract and assemble a high-performance team with the skills, experience and determination needed to succeed in the competitive energy marketplace. It is a team with a wealth of energy expertise, competitive business experience, and know-how in developing and implementing best practices. We have been putting the right people in the right places to successfully run and grow our business. By adding key senior leaders and managers with the best talent outside our industry to the unsurpassed energy expertise already within our company, we’ve become a diverse and strong team focused on creating shareholder value. The fruits of our teamwork can be seen everywhere – from Wall Street’s positive response to our proposed Ginna Nuclear Power Plant acquisition ... to the remarkable growth of our competitive supply business ... to the phenomenal effort to restore power to BGE customers following Hurricane Isabel. Our people – the entire Constellation Energy workforce – drive our future. Our employees win when our company wins. And our shareholders win with the value we create. Our 8,650 employees collectively form a high-performance team that has the skills, experience and competitiveness to make us a leading North American energy company and create value for our shareholders. Meet just a few of our team members ... Beth Perlman Transforms the way we work by building a new information technology platform that reduces our 35 desktop configurations to five, consolidates our financial systems, and implements a new human resources system. Phil O’Connor Spearheaded an effort that helped define and make competitive market rules in Illinois effective through the end of 2006, eliminating uncertainties customers had in switching energy suppliers. Jeannette Mills Leads her team in streamlining BGE’s new-service request and installation process, providing a positive first experience to the 20,000 new customers our distribution utility gains annually. Roger Cockroft Guides our Six Sigma program using his unique expertise gained from consulting with and helping some of the world’s largest companies get better at what they do. Kurt Duerod Started and leads a real-time operations team that monitors our North American energy contracts and fills our customers’ power needs 24/7. Dale Linaweaver Drives an effort to maximize the value of our generating plants by creating a franchise of best practices that can be used by our entire generating fleet and applied to any acquisitions we may make. Tom Restuccio Brought our Nine Mile Point Nuclear Station safely off line and then safely back on line during the uncertainty and disruption caused by the blackout in the Northeast last summer. 4
Slide 9: WE’RE NEVER DONE. Success in competitive markets requires constant improvement. Ours is a culture of ongoing improvement, and our efforts to increase productivity are deep and widespread. Over the last two years, we’ve significantly improved our cost structure. This year, we’re investing in initiatives that will make us even more efficient – including rebuilding our information technology infrastructure and revising and streamlining our policies, practices and processes. At our generating plants, our initiatives work toward reducing the duration of outages and increasing the reliability, availability, and capacity of our plants. In 2003, our high-performance teamwork and meticulous planning enabled us to replace a steam generator at our Calvert Cliffs plant in 66 days. That set a new world record for steam generator replacements, while minimizing the plant’s down time. Incorporating lessons learned and striving to implement best practices has long been a part of the way we do business. And programs like Six Sigma – a rigorous, managed process that puts the power to make changes in our employees’ hands – is helping us do even more. Our goal is best in class, top quartile in all measures. And that means always improving what we do. step (3) Get better. Period. Jeanne Blondia Uses her experience in large, competitive corporations to help further strengthen our balance sheet and its position as one of the strongest in our industry. Burt Jackson Enhanced BGE’s reliability and customer satisfaction by implementing significant productivity improvements in our gas main maintenance work. Dave Sikora Applies more than 20 years’ experience at BGE to help this subsidiary become an industry leader in Six Sigma productivity improvements. Deirdre Lord Heads a team whose energy, sales, operations, marketing and regulatory expertise makes it a leader for electricity supply to commercial and industrial customers in New York and New Jersey. Dave Boward Manages High Desert, our new environmentally friendly power plant in California that began operations nearly 60 days ahead of schedule and was named POWER magazine’s 2003 Power Plant of the Year. Randall Hartman Championed – along with a national group of professionals – an accounting standards change that provides a clearer picture of energy delivery contracts. Shameek Konar Puts nearly 10 years of U.S. energy markets experience to work in pricing and acquiring natural gas for our power plants, and expanding our hydrocarbons business. 5
Slide 10: generation marketing transmission A wholesale knowledge of energy Fluctuations in weather, power plant production, transmission congestion and other factors create a dynamic, always-changing wholesale energy market. Stuart Johnson and our competitive wholesale energy team stay on top of the market 24/7, making sure customers’ energy needs are met. That helps make us one of the leading suppliers of competitive wholesale energy in North America. step (4) Sweat the small stuff. OURS IS A PHYSICAL BUSINESS. We generate and buy energy. We handle the logistics of supplying and delivering it to customers. And we manage the risk associated with the pricing and reliability. We deliver energy products and services to real customers, and we employ real assets – including the more than 12,000 megawatts of our national fleet of generating plants – on a recurring and repeatable basis. In short, we sweat the details to get energy to our customers. We get it to them when they need it and where they need it, and at prices that help them manage their energy costs. In complex deregulated markets, serving customers reliably and adding value requires deep understanding of the variability, consumption and nuances of thousands of nodes in delivery and generation networks. That is the physical nitty gritty of energy. And that is what makes us an important partner with our customers – utilities, integrated utilities, municipalities, cooperatives, and large commercial and industrial businesses. 6
Slide 11: step (5) Maintain discipline. STRICT CONTROLS AND DISCIPLINE GUIDE OUR OPERATIONS AND GROWTH STRATEGY. We’re cautious consumers of capital. And transparency is a priority with our strong management practices. We’ve acquired and built a risk management expertise that we feel is the best in our industry. It enables us to provide customers with the predictable pricing they want and need. Our disciplined approach to acquisitions means that we will be an active bidder and acquirer only when and where we find the right price with the right fit. Over the last three years, we’ve strategically invested in acquisitions, all of which are now contributing significantly to our growth and our bottom line. We’re patient for the right opportunity. For example, we evaluated more than 70 generation projects over the last two years before announcing in November 2003 our plans to acquire the Ginna Nuclear Power Plant located north of Rochester, New York. distribution 7
Slide 12: step (6) Keep it simple. OUR CUSTOMERS’ ENERGY NEEDS ARE COMPLEX. Our job is to make it simple for them. We’re relentless and rigorous in our approach to meeting our customers’ total energy needs. We analyze their requirements, supply their energy, help them manage consumption, and offer various options to control price volatility. Customers in deregulated areas throughout North America view us as their one-stop, national energy shop. With electricity and natural gas capabilities, we serve customers in nearly three dozen states and three Canadian provinces. In these areas, we provide competitive energy and value-added services to more than 8,000 large commercial and industrial customers. We bring regional expertise to all deregulated energy markets. Plus we have a physical presence that allows us to assist with changing local and regulatory conditions, as well as to provide customized products and pricing, and superior customer service. Our mission is to have customers in competitive energy markets choose us first and always. And they have been. One-stop shopping We’re making complex energy markets simple for Gregg Bowler, vice president and chief financial officer at Wabash Alloys, the world’s largest producer of recycled aluminum casting alloys. We provide Wabash with a onestop shop for natural gas supply, and energy consulting and management expertise. Knowing the market In Chicago and Cincinnati, we’re helping nearly a dozen major Hyatt hotels meet their energy needs efficiently. Brian Burke, director of energy for Hyatt Hotels Corporation, chose us because of our regional expertise in newly deregulated markets. 8
Slide 13: Customizing solutions Ryan Lowery, senior purchasing agent for Church & Dwight Co., Inc., producer of Arm & Hammer® baking soda, turns to us for customized solutions to meet the energy needs of each of the company’s nine plants. Taking the hassle out We’ve taken the hassle out of buying energy for Bob Valair, Staples’ director of energy and environmental management. We provide power for Staples locations in Massachusetts and Michigan – all under one contract. Doing it all By supplying the town’s full energy requirements, we help Dick Joyce, director of the Wellesley Municipal Light Plant, provide Wellesley’s 27,000 residents with reliable and efficient electric power at fair and competitive rates. step (7) WE ANSWER TO OUR CUSTOMERS. We provide them with tailored energy products – electricity, natural gas, energy services, and pricing options that limit volatility – to meet their specific needs. All at the best value. Our customers count on our financial strength. Backed by a strong balance sheet, cash flow, and credit ratings, we have the dependability and reliability that they want and need. We also answer to our shareholders. Our leadership in financial disclosure and integrity – our strong internal Be accountable. financial controls and corporate compliance program, along with the independence of our Board of Directors and auditors – provides a clear look at what we do and how we’re doing at it. We’re a model business within America’s energy industry. We’re also a leading advocate for competitive markets and a national energy policy that supports good market design – a level playing field for all participants, effective and sensible environmental outcomes, and disciplined business practices. 9
Slide 14: CREATING VALUE FOR OUR SHAREHOLDERS DRIVES ALL THAT WE DO. We have an unflinching commitment to winning in competitive markets and an absolute obsession with executing our strategy successfully. We’re a dynamic, growing energy company that’s doing things right. In 2003, our stock price appreciated nearly 41 percent. Combined with our $1.04 dividend per share – assuming it was reinvested – our total return to shareholders was 45 percent. While we can’t expect those levels of return every year, our goal is to provide a superior long-term return. We are a financially strong company. Our balance sheet is one of the best in our industry. We’re a solid investment. We’re aiming to achieve 10 percent annual earnings growth and pay dividends in line with our earnings. step (8) Make a difference. 10
Slide 15: IT’S THE WAY WE LIVE OUR LIVES THAT SHAPES OUR CULTURE AND DEFINES OUR REPUTATION. For generations we have carried out a commitment to community partnership – working to build and support the communities we serve. Through thoughtful social investments, we strive to enhance the quality of life for the communities surrounding our operations. We also work to earn their trust by putting our environmental policy into practice every day. For example, over the last three years, we’ve reduced our power plant emission rates by an average of 30 percent while generating nearly 30 percent more electricity. In 2003, our total contributions to community and environmental groups were $4.3 million. We were the largest philanthropic corporate giver in Central Maryland, and the largest contributor to the United Way in Maryland and Oswego, New York. In addition to these contributions, we sponsored the Constellation Energy Classic – a professional golf tournament on the Champions Tour – which contributed $300,000 to the Kennedy Krieger Institute, Living Classrooms Foundation, and The Chesapeake Bay Foundation. An environmental friend Our new, state-of-the-art High Desert plant in Southern California received POWER magazine’s Power Plant of the Year award for being 2003’s most innovative, efficient and environmentally sound power project. Building community We contributed $1 million to the restoration of Baltimore’s majestic Hippodrome theater. The reopening of this 90-yearold, 2,300-seat theater has been a catalyst for rejuvenating the city’s west side. We rest only when the lights are on Before Hurricane Isabel knocked out power for 790,000 BGE customers, we were ready. Then, working around-the-clock, and averaging 15,000 hours per day of restoration work, we replaced more than 400 poles, 300 transformers, 33,000 fuses, and 100 miles of wire. We restored service to all our customers in eight days. Our efforts earned us the Edison Electric Institute Emergency Response Award, and letters of thanks from people like eight-year-old Rebecca Oh. She wrote: Dear BGE ... I hope you have a lot of rest when you are done. Thank you for working overtime to get my power back on. You’re welcome, Rebecca. That’s our job. step (9) Be responsible. 11
Slide 16: Our business model is designed for today’s energy marketplace. We believe competitive markets will grow and eventually dominate the landscape. We have found that our customers want the advantages that come from being able to purchase a tailored energy product. They also want a one-stop provider that will supply the energy they need, when they need it, and with pricing certainty. Our business model makes us that one-stop provider. And we believe there are none better than we are. Mayo A. Shattuck III Chairman, President and Chief Executive Officer step (10) Answer the important questions. Why was 2003 such a great year for Constellation Energy? What will our company look like in five years? It was a transforming year for us. While some companies in our industry continued to retreat to the old utility model of the past, we continued to operate and build a company for the future. We aligned our physical assets with wholesale and commercial and industrial customers in competitive markets. We continued to grow, both organically and through acquisitions. Most important, we did an excellent job executing our customer-centric strategy. No one is better than we are at meeting the complex physical energy needs of customers in competitive markets. Our results – and our continuing growth – make that clear. We’re succeeding because we’re doing it right – combining physical assets and financial strength with strong risk management controls and market expertise. What does it mean to be the leading energy company we talk about in our vision? We expect that we will be the leading energy provider in competitive markets – serving load to wholesale customers, selling and supplying energy to commercial and industrial customers throughout North America, and managing hydrocarbons, including coal, gas, and other fuels. In addition, through BGE we will maintain a growing, customer-service oriented regulated utility business. In what markets will we be a competitor? We plan to be an active participant in all deregulated energy markets. We expect to enter regions as they deregulate and open up to competition. Our strategy has been to gain a footprint – a generating plant, or energy services capabilities, or a portfolio of energy contracts or customers. We then take advantage of our regional and competitive expertise to grow our business. Why is continuing deregulation throughout the United States important to our business model? It means being a leading supplier of competitive energy in North America, providing the best products and service to customers. The performance of our generating facilities must rank among the top 10 percent in our industry. The reliability of our transmission and distribution operations must be a given. Our unsurpassed risk management skills must keep their leading edge. We must focus on meeting our customers’ needs all along the energy value chain, from our efficient management of energy logistics to the intermediary role that we play between generators and distributors of power. We are building our company to be a leading North American competitive energy company. Over the short term, we are not relying on either federal deregulation or an ever-increasing number of state-level deregulations to achieve our growth objectives. There is plenty of growth available in markets that have deregulated and are open to competition. Over the long term, we believe deregulation will continue and increase. As that happens, there will be winners and losers among energy companies. We intend to be a winner. 12
Slide 17: Why are we making an effort to build the Constellation Energy brand? We are a customer-centric business operating in competitive markets. Our branding efforts will help articulate why we are different and how we create value for customers. Although energy itself is a commodity, the service we provide is not. There are various options for pricing, risk tolerance, physical delivery, billing, and management. Customers want confidence in their energy supplier’s skill set, product depth, creditworthiness, and dependability. What’s your view on industry consolidation? Our leading market share in competitive retail electricity markets where we participate has grown to 16 percent, and we have plans in place to drive it to 21 percent by 2007. Over the last two years, we have made significant progress in improving our cost profile, and our efforts over the next few years should produce significant additional results. How do we build value for our shareholders? The regional structure of our industry is inefficient. Consolidation generally improves service levels and reduces costs. That’s what happened with consolidation in the telecommunications, retail, pharmaceutical distribution, air travel, and other industries. While our industry has its own specific issues – a myriad of federal and regional issues and concerns – I believe consolidation would lead to improved service, lower costs, increased innovation, and other benefits to our customers. What is our acquisition policy? We build value for our shareholders by growing our business and meeting our earnings targets. We believe that strong earnings growth should drive long-term stock appreciation and a premium stock price-to-earnings ratio. In 2003, our stock price appreciated almost 41 percent. Adding the dividend – assuming it was reinvested – total return to shareholders was 45 percent. While that’s an exceptional year, we have a long-term focus. I believe that if we continue to execute our strategy and meet our goals, we’ll also continue to produce superior long-term total returns and create greater value for our shareholders. What is our dividend policy? We only make an acquisition when it is a strategic and financial fit – the right asset in the right location at the right price. We’re cautious consumers of capital and disciplined in our deployment of funds. That approach has paid off with the acquisitions we’ve made over the last three years – NewEnergy, Fellon-McCord/Alliance Energy Services, Nine Mile Point Nuclear Station, and various portfolios of customer contracts. We’ve been very successful at integrating them into our business and achieving exceptional returns. We applied the same approach to our 2003 acquisitions – Blackhawk Energy Services and Kaztex Energy – and to our agreement to purchase the Ginna Nuclear Power Plant. And we expect good results from those investments. How do you grow 10 percent in a 3 percent industry? We strive to make the most effective use of our earnings by paying dividends, reinvesting in our business, and reducing debt. Our focus is on maximizing shareholder value and total shareholder return. We plan to raise our dividend in line with our earnings growth as long as it continues to make good business sense. In January 2004, we increased the dividend by 10 percent to an annual rate of $1.14 per share. This is the third consecutive year we’ve increased the dividend. How will you spend most of your time during 2004? We grow 10 percent by increasing our share in competitive energy markets, continuously making productivity improvements, and being disciplined in our deployment of capital. In 2003, we created a chief administrative officer position to oversee more of the day-to-day operations of our business. That frees my time to focus more on future strategic issues. We are one of the nation’s leading competitive energy companies, and we have experience and perspectives that can be helpful in various discussions about our industry. I’m going to be working to ensure that we have an appropriate presence among thought-leaders and other participants in any efforts concerning the future of our energy industry and markets. 13
Slide 18: Board of Directors Our Board of Directors has the responsibility to oversee and direct management activities to enhance the long-term value of our company for our shareholders and other constituents. We have 12 independent directors, one director who is an employee, and one director who is a retired employee. Our Audit, Compensation, and Nominating and Corporate Governance committees are made up entirely of our independent directors. Yves C. de Balmann Co-Chairman Bregal Investments Age 57 Director since 2003 James T. Brady Managing Director, Mid-Atlantic Ballantrae International, Ltd. Age 63 Director since 1999 Frank P. Bramble, Sr. Vice Chairman MBNA Corporation Age 55 Director since 2002 James R. Curtiss, Esq. Partner Winston & Strawn Age 50 Director since 1994* Douglas L. Becker Chairman and Chief Executive Officer Sylvan Learning Systems, Inc. Age 38 Director since 1998* Mayo A. Shattuck lll Chairman, President and Chief Executive Officer Constellation Energy Age 49 Director since 1999 Edward A. Crooke Retired Vice Chairman Constellation Energy Age 65 Director since 1988* 14
Slide 19: Corporate Governance During 2003, we focused on implementing industry-leading corporate governance principles, including the adoption of new Corporate Governance Guidelines, the creation of a Corporate Compliance Program, the updating of the charters of each of the committees of the Board of Directors, and the implementation of Principles of Business Integrity that apply throughout our entire organization. In addition, our Board has named Michael D. Sullivan, one of our independent directors, to serve as its Lead Director. Committees of the Board Executive Committee Mayo A. Shattuck lll, Chairman Frank P. Bramble, Sr. Edward A. Crooke Edward J. Kelly lll Robert J. Lawless Audit Committee James T. Brady, Chairman Yves C. de Balmann Freeman A. Hrabowski lll Nancy Lampton Compensation Committee Robert J. Lawless, Chairman Douglas L. Becker Frank P. Bramble, Sr. Edward J. Kelly lll Lynn M. Martin Michael D. Sullivan Committee on Nuclear Power James R. Curtiss, Chairman Edward A. Crooke Roger W. Gale Nominating and Corporate Governance Committee Michael D. Sullivan, Chairman and Lead Director Douglas L. Becker Frank P. Bramble, Sr. Edward J. Kelly lll Robert J. Lawless Lynn M. Martin * Formerly a BGE Director, was elected to the Constellation Energy Board of Directors in April 1999 at the formation of the holding company. Roger W. Gale Partner GF Energy, LLC Age 57 Director since 1999 Edward J. Kelly lll Chairman, President and Chief Executive Officer Mercantile Bankshares Corporation Age 50 Director since 2002 Robert J. Lawless Chairman, President and Chief Executive Officer McCormick & Company, Inc. Age 57 Director since 2002 Michael D. Sullivan Chairman Life Source, Inc. Age 64 Director since 1992 * Dr. Freeman A. Hrabowski lll President University of Maryland Baltimore County Age 53 Director since 1994* Nancy Lampton Chairman and Chief Executive Officer American Life and Accident Insurance Company of Kentucky Age 61 Director since 1994* Lynn M. Martin Advisor Deloitte & Touche LLP Age 64 Director since 2003 15
Slide 20: Paul J. Allen Senior Vice President, Corporate Affairs, Constellation Energy 52, joined Constellation in 2001. Prior to this he was SVP and Group HeadOgilvy Public Relations, managing its energy and environment practice. Previously he served as senior staff member at the Natural Resources Defense Council; Press Secretary for U.S. Senator Christopher Dodd (D-CT); and National Public Radio’s Editor of “Morning Edition” and then Foreign News Editor. Thomas F. Brady Executive Vice President, Corporate Strategy & Retail Competitive Supply, Constellation Energy 54, joined BGE in 1969. In addition to corporate strategy (since 1999), serves as Board Chairman and managing executive for Constellation’s recently acquired NewEnergy companies, BGE Home, Constellation Energy Source and Constellation’s portfolio of nonregulated ventures. Prior to 1999 he held various positions at BGE, including Chief Accounting Officer and VP, Customer Service & Distribution. Thomas V. Brooks Executive Vice President, Constellation Energy and President, Constellation Power Source 41, joined Constellation in 2001 as VP, Business Development & Strategy, and was elected to his current position in 2001. Prior to this, he was VP, Goldman Sachs, working with Constellation to develop its power marketing business; previously served as director, Enron Capital & Trade Resources, joining them when they bought AERX, Inc., a company he helped found that specialized in emissions credit trading. Executive Team Constellation Energy’s executive team is diverse in experience, background, and point of view. Those who are steeped in the knowledge and experience of Constellation Energy work side by side with those who have been recruited for their expertise gained around the world. Together they combine the right mix of energy industry tradition and competitive business savvy necessary for today’s changing energy landscape. Paul J. Allen Senior Vice President, Corporate Affairs Thomas F. Brady Executive Vice President, Corporate Strategy & Retail Competitive Supply Thomas V. Brooks Executive Vice President, Constellation Energy and President, Constellation Power Source Kathleen A. Chagnon Senior Vice President, General Counsel, Corporate Secretary & Chief Compliance Officer John R. Collins Senior Vice President & Chief Risk Officer Frank O. Heintz Executive Vice President, Constellation Energy and President & Chief Executive Officer, Baltimore Gas and Electric Company 16
Slide 21: Kathleen A. Chagnon Senior Vice President, General Counsel, Corporate Secretary & Chief Compliance Officer, Constellation Energy 44, joined Constellation in 2002. Before this she was VP and Corporate Group General Counsel for The St. Paul Companies, Inc. She was also Assistant VP and Associate Group Counsel of USF&G Corporation until its acquisition by The St. Paul Companies in 1998. She held associate positions in two international law firms, Hogan & Hartson and O’Melveny & Myers. Frank O. Heintz Executive Vice President, Constellation Energy and President & Chief Executive Officer, Baltimore Gas and Electric Company 60, joined BGE in 1996 as VP, assuming leadership of its Gas Division in 1997; elected Executive VP, BGE Utility Operations in 1998, and became BGE President in 2000. Prior to this he served 13 years as Chairman, Maryland Public Service Commission. Previous jobs include Executive Director, Maryland Employment Security Administration; Special Assistant to Maryland Lieutenant Governor Blair Lee III, and state legislator. Mark P. Huston Vice President, Corporate Strategy & Development, Constellation Energy 41, joined BGE in 1986; in 1993 was General Supervisor in the Gas Construction Division, and in 1996 was promoted to Director of Gas Business Development. In 1997 he was named Project ManagerCorporate Restructuring Project; in 1999 was named Manager, Corporate Strategy & Development, and in 2002 was elected to his current position. Mayo A. Shattuck III Chairman, President & Chief Executive Officer, Constellation Energy 49, appointed President and CEO of Constellation November 2001 and elected Chairman of the Board in July 2002. Prior to Constellation, he was with Deutsche Bank and served as Chairman of the Board of Deutsche Banc Alex. Brown and, during his tenure, served as Global Head of Investment Banking and Global Head of Private Banking. Previously, he was Vice Chairman of Bankers Trust and President of Alex. Brown & Sons. Marc L. Ugol Senior Vice President, Human Resources, Constellation Energy 45, joined Constellation in 2002. Prior to this he was SVP of Human Resources at Tellabs, Inc., a global telecom equipment manufacturer. Previously, he held human resource management positions at Platinum Technology, Inc., and System Software Associates, Inc., and spent 14 years with Amoco Corp. in a variety of HR leadership roles. John R. Collins Senior Vice President & Chief Risk Officer, Constellation Energy 46, joined BGE in 1988; named Assistant Treasurer and Director of Financial Management in 1995; joined Constellation Power Source at its formation in 1997, serving as its senior financial officer; became Managing Director-Finance and Treasurer, Constellation Power Source Holdings in 2000 and was elected to his current position in 2001. E. Follin Smith Executive Vice President, Chief Financial Officer & Chief Administrative Officer, Constellation Energy 44, joined Constellation in 2001. Prior to this she was SVP and CFO of Armstrong Holdings, Inc. She spent 13 years with General Motors (GM), starting in the New York Treasurer’s Office; other positions included Treasurer-GM of Canada Limited; VP of Finance for GMAC; Assistant Treasurer for GM; and CFO for GM’s Delphi Chassis Systems division. Michael J. Wallace Executive Vice President, Constellation Energy and President, Constellation Generation Group 56, joined Constellation in 2002. Prior to this he was co-founder and Managing Director, Barrington Energy Partners, LLC, an energy industry strategic consulting firm. Previously he held several executive positions at Unicom/ComEd of Illinois. He was also ComEd’s Chief Nuclear Officer, responsible for the operation of the company’s 12 nuclear generating units at six power plant sites. Mark P. Huston Vice President, Corporate Strategy & Development Mayo A. Shattuck III Chairman, President & Chief Executive Officer E. Follin Smith Executive Vice President, Chief Financial Officer & Chief Administrative Officer Marc L. Ugol Senior Vice President, Human Resources Michael J. Wallace Executive Vice President, Constellation Energy and President, Constellation Generation Group 17
Slide 22: Understanding Our Form 10-K One of our priorities at Constellation Energy is to provide you with clear, easy-to-read and easy-to-understand information about our company. We want you to know what we do, how we do it, and how we’re doing at it. So we’re working to make our Form 10-K – our annual report required to be filed with the Securities and Exchange Commission – more welcoming and less complex. This special section is intended to be a guide, describing some of what you can find in our Form 10-K, and where you can find it. Our complete Form 10-K follows this special section. Breaking Down Our Form 10-K The information contained in the Form 10-K is broken down into Parts, which are further broken down into Items. Our Form 10-K has four Parts: Part I Part II Part III In-depth descriptions of our businesses. Our financial performance, the information in which investors are usually most interested. Directs readers to our proxy statement for details on our Board of Directors and executive officers and their compensation, and information about our independent auditors and the fees we have paid them. Part IV A listing of exhibits, and certain executive and Board of Directors’ signatures. Over the next few pages, we provide summaries of some of the major topics included in Parts I and II, and where you can find them. We’re doing that for Parts I and II because they contain the most detailed information about our business. 18
Slide 23: Part I: Our Businesses Part I of our Form 10-K provides details about our businesses: – Our merchant energy business. – Our regulated utility – Baltimore Gas and Electric Company. – Our other nonregulated businesses. Also included is information about environmental matters, employees, properties, and executive officers. Here’s Where You Look in Part l Page 1-2 Item Business Section Overview Highlights of What You’ll Find – Company description and brief background. We have a merchant energy business and a regulated utility. – Operating segment details. Our reportable operating segments are merchant energy, regulated electric, and regulated gas. 3-9 Merchant Energy Business – Business description. We combine electric generating assets with the marketing and risk management of energy. – Discussion of fuel sources we use to generate electricity. We have a diversified portfolio of fuel sources that we use to generate electricity. – Discussion of our competition. Companies – of various sizes and levels of experience and financial and human resources . – Merchant energy operating statistics for the last five years. Our revenues and megawatt hours generated. 9-13 Baltimore Gas and Electric Company – Business description broken down between electric and gas. Our electric service territory covers 2,300 square miles, and our gas service territory covers 800 square miles. – Electric and gas operating statistics for the last five years. Revenues by customer type, sales to our customers, and the number of our customers. 13 Other Nonregulated Businesses – Descriptions of our other nonregulated energy businesses. Primarily heating and cooling system services we provide to residential, commercial, industrial and municipal customers. – Discussion of the environmental matters affecting the company. We are subject to regulations concerning air quality, water quality, and disposal of hazardous substances. – Number of employees. We had approximately 8,650 employees at year end 2003. – Generating plant location, ownership and size details. We own more than 12,000 megawatts of generating capacity located strategically throughout the United States. – Offices and facilities we own and lease. Our corporate offices are in Baltimore, and we have plants and marketing offices throughout North America. 13-16 Environmental Matters 16 Employees 17-19 Properties 19-20 Executive Officers of the Registrant – Executive officers’ names, ages, current positions and recent experience. Our corporate officers have a diverse mix of energy, financial and other experience in competitive and regulated markets. Note: This special section is intended to be a guide, describing some of what you can find in our Form 10-K, and where you can find it. Our complete Form 10-K follows this special section. 19
Slide 24: Part II: Our Financial Performance Part II contains management’s discussion of our results of operations and financial condition. It compares 2003 results to 2002, and 2002 results to 2001. The sections in Part II include: – Introductory Items – the basics. – Management’s Discussion and Analysis – the context. – Financial Statements – the numbers. – Notes to the Financial Statements – the details. Introductory Items The basics. Here’s information about our common stock, prices and dividends, and historical financial data. Here’s Where You Look in Part II Page 21 Item Market for Registrant’s Common Equity and Related Shareholder Matters Selected Financial Data Section Highlights of What You’ll Find – Dividend information and quarterly dividend and stock prices for the last two years. The price of our common stock – at the end of each of the four quarters in 2003 – ranged from $25.17 to $39.61. We declared a dividend of $1.04 per share in 2003, and increased our annual dividend rate to $1.14 per share in January 2004. 22-23 – Summary of operations and financial conditions of Constellation Energy and Baltimore Gas and Electric, and financial statistics for the last five years. Our results show the success of the strategy we’ve implemented. Management’s Discussion and Analysis The context. Our management discusses in detail the financial results and condition of our company ... and the way we manage our business. Here’s Where You Look in Part II Page 24 Item Management’s Discussion and Analysis of Financial Condition and Results of Operations Section Introduction and Overview – Overview of our company. We’re an energy company that conducts business mainly through our merchant energy business and our regulated utility. Highlights of What You’ll Find 24-25 Strategy – Discussion of our overall strategy. We are pursuing a balanced strategy to distribute energy through our North American competitive supply activities and our regulated utility in Maryland. – Discussion of the business environment in which we operate – in general and in Maryland and other states – and how regulation, the weather, and other factors affect our business. Energy markets continued to be volatile in 2003, and competition continues to evolve in Maryland and other states that have deregulated. – Description of our accounting policies that are most complex and subjective in showing our financial condition and results. These include revenue recognition/mark-to-market, evaluation of assets for impairment, and asset retirement obligations. – Discussion of the significant events in 2003 that affected our company. These include workforce reduction costs, impairment losses, selling non-core assets, Hurricane Isabel, startup of our High Desert plant, our acquisitions, synthetic fuels tax credits, our standard-setting outage at Calvert Cliffs, and our dividend increase. 25-28 Business Environment 29-31 Critical Accounting Policies 32-33 Significant Events of 2003 Note: This special section is intended to be a guide, describing some of what you can find in our Form 10-K, and where you can find it. Our complete Form 10-K follows this special section. 20
Slide 25: Here’s Where You Look in Part II Page 34-48 Item Section Results of Operations Highlights of What You’ll Find The detailed discussion of our earnings: – Our overall net income. Changes in accounting principles reduced our net income by $198.4 million in 2003, while gains from selling non-core assets increased our net income by $166.7 million in 2002 – including the effect of these and other special items, our overall net income for 2003 was $277.3 million, a decrease of $248.3 million from 2002. – Our net income for our merchant energy business. Changes in accounting principles reduced our merchant energy business net income by $198.4 million in 2003, resulting in a $132.6 million decrease from 2002. – Our net income for our regulated electric and gas businesses. Our regulated electric business net income for 2003 was $107.5 million, an increase of $8.2 million from 2002; and our regulated gas business net income for 2003 was $43.0 million, an increase of $11.9 million from 2002. – Our net income from our other nonregulated businesses. Net income from our other nonregulated businesses during 2003 was $12.2 million, compared with $148.0 million in 2002 – mainly the result of $169.1 million in gains on non-core assets we sold in 2002. 49-51 Financial Condition – Cash flow details. Cash provided by our operations was $1.1 billion in 2003, a $60 million increase from 2002. – Security ratings for Constellation Energy and Baltimore Gas and Electric. All our security ratings are solid investment grade, with stable outlooks. 51-54 Capital Resources – Capital requirements for the last three years and an estimate for 2004 and 2005. We’re estimating that we’ll need $760 million in capital for 2004 and $650 million to $750 million in 2005 to fund construction and improvements to our existing facilities and plants, and to comply with various environmental regulations. – How we expect to fund our capital requirements. Funding for the expansion of our merchant energy business is expected from internally generated funds and other available sources. We expect to fund acquisitions with a mixture of debt and equity, with our overall goal of maintaining a strong investment grade credit profile. – Committed amounts over the next five years and beyond. We describe our contractual and contingent obligations. 54-58 Market Risk – Discussion of our market risks and how we manage them. Our risk factors include interest rates, commodity prices, competition, operational reliability of generating plants, creditworthiness of our counterparties, and equity prices. Our Financial Statements The numbers. We provide separate financial statements for Constellation Energy and Baltimore Gas and Electric. This section also includes our management and auditors reports on our financial information. Here’s Where You Look in Part II Page 59 Item Financial Statements and Supplementary Data Section Report of Management – Management’s report on how the financial statements are prepared – signed by Chairman of the Board, President and Chief Executive Officer Mayo A. Shattuck III and by Executive Vice President, Chief Financial Officer and Chief Administrative Officer E. Follin Smith. Our management accepts responsibility for the information and representations in our financial statements. – External audit report of PricewaterhouseCoopers LLP. Our independent auditors state their opinion that our consolidated financial statements present fairly, in all material respects, the financial condition of our company. Highlights of What You’ll Find 59 Report of Independent Auditors Note: This special section is intended to be a guide, describing some of what you can find in our Form 10-K, and where you can find it. Our complete Form 10-K follows this special section. 21
Slide 26: Our Financial Statements (continued) Here’s Where You Look in Part II Page 60 Item Section Consolidated Statements of Income – Revenue, expenses, income and earnings for the last three years. Taking out the effect of a $166.7 million net after-tax gain on sales of investments and other assets in 2002, and the $198.4 million after-tax charge for the cumulative effects of changes in accounting principles, our earnings – excluding these and other special items – grew nearly 10 percent in 2003. – Assets, and total liabilities and equity for the last two years. Our total assets were $15.8 billion at December 31, 2003. – Cash flows from operating, investing and financing activities for the last three years. Our net cash provided by operating activities increased from $573.3 million in 2001 to $1.02 billion in 2002 to $1.08 billion in 2003 . – Changes in common stock, retained earnings, and other comprehensive income for the last three years. We declared $172.8 million in dividends during 2003, and our retained earnings were $2.1 billion at year end. Highlights of What You’ll Find 61-62 Consolidated Balance Sheets Consolidated Statements of Cash Flows Consolidated Statements of Common Shareholders’ Equity and Comprehensive Income Consolidated Statements of Capitalization 63 64 65-66 – Long-term debt, preference stock and common shareholders’ equity details for the last two years. At December 31, 2003, our total capitalization was $9.5 billion – $5.0 billion in long-term debt, $113.4 million in minority interests, $190.0 million in preference stock, and $4.1 billion in common shareholders’ equity. – Consolidated Statements of Income, Consolidated Statements of Comprehensive Income, Consolidated Balance Sheets, and Consolidated Statements of Cash Flows. We include financial statements for BGE because it has publicly traded debt and is a separate registrant required to file with the SEC. 67-70 Baltimore Gas and Electric Financial Statements Notes to Our Financial Statements The details. We explain the processes, events, actions, projects, issues and specifics that produce the amounts reflected in our financial statements. Here’s Where You Look in Part II Page 71-82 Item Notes to Consolidated Financial Statements Highlights of What You’ll Find Section Note 1 Significant Accounting Policies Note 2 Workforce Reduction, Impairment Losses, Contract Termination, and Other Events Note 3 Information by Operating Segment – Accounting methods that we use, and how they’re applied throughout our businesses. – Accounting standards issued. – Workforce reduction, impairment losses and other events – pre-tax and after-tax amounts for the last three years. 83-87 87-88 – Revenue, expense, net income and other financial information for our reportable operating segments and other nonregulated businesses for the last three years. Note: This special section is intended to be a guide, describing some of what you can find in our Form 10-K, and where you can find it. Our complete Form 10-K follows this special section. 22
Slide 27: Here’s Where You Look in Part II Page 89-90 Item Section Note 4 Investments Note 5 Intangible Assets Note 6 Regulatory Assets (net) Note 7 Pension, Postretirement, Other Postemployment, and Employee Savings Plan Benefits Note 8 Short-Term Borrowings Note 9 Long-Term Debt and Preference Stock Note 10 Taxes Note 11 Leases Note 12 Commitments, Guarantees, and Contingencies Highlights of What You’ll Find – Real estate, power project, and financial investments for the last two years. 91 – Goodwill and intangible assets subject to amortization. 92-93 – Regulatory assets for the last two years. 93-97 – Pension and postretirement benefits – obligation, asset, funded status, and assumption details about our employee benefit plans for the last two years. – Employee savings plan information and company-matching contributions. 98 – Short-term bank loans, commercial paper outstanding, and available bank lines of credit for Constellation Energy, Baltimore Gas and Electric, and our nonregulated businesses. 98-100 – Long-term debt and preference stock details for Constellation Energy, Baltimore Gas and Electric, and our nonregulated businesses. 101-102 – Income tax details for the last three years, and information about synthetic fuels tax credits. 102 – Lease payment details for the last three years, for the next five years, and for beyond 2008. 103-109 – Commitments for the next five years and beyond 2008. – Financial guarantees we’ve made for our businesses. – Environmental issues. – Legal proceedings involving our company. – Nuclear fuel storage status and nuclear insurance coverage. – Issues concerning our California power purchase agreements. 110-111 Note 13 Hedging Activities and Fair Value of Financial Instruments Note 14 Stock-Based Compensation Note 15 Acquisitions Note 16 Related Party Transactions – BGE Note 17 Quarterly Financial Data – Actions to manage interest rate exposure and commodity prices, and results of those actions. – Information on the fair value of our financial instruments. 111-113 – Stock options and stock awards for the last three years. 113-115 – Information about Blackhawk Energy Services, Kaztex Energy Management, High Desert Power Project, Alliance/Fellon-McCord, and NewEnergy. – Relationships and interactions among our subsidiaries. 116 117-118 – Quarterly revenue, income, and earnings for Constellation Energy and Baltimore Gas and Electric over the last two years. Note: This special section is intended to be a guide, describing some of what you can find in our Form 10-K, and where you can find it. Our complete Form 10-K follows this special section. 23
Slide 28: Glossary aggregator – a company or agent that combines the energy needs of multiple customers and then buys or provides the energy and services needed. British thermal unit (Btu) – the basic unit used to measure natural gas; the amount of natural gas needed to raise the temperature of one pound of water by one degree Fahrenheit. competitive supply business – our growth engine; the portion of our business that provides energy and value-added services to wholesale and retail customers located in competitive markets. dekatherm – a measurement of natural gas; ten therms or one million Btu. deregulation – in the energy industry, the process by which regulated markets become competitive markets, giving customers the opportunity to choose their supplier. distribution – the delivery of energy to retail customers, including homes, businesses, office buildings and industrial facilities. Emerging Issues Task Force (EITF) – a group of financial professionals that advises the Financial Accounting Standards Board (FASB) about standards for reporting new transactions that may be unique and complex. Federal Energy Regulatory Commission (FERC) – the U.S. agency that regulates interstate energy activities. Financial Accounting Standards Board (FASB) – an independent, private sector organization that is recognized by the Securities and Exchange Commission and relied upon to establish and improve standards of financial accounting and reporting. full requirements service – a product offering that handles all of a customer’s energy needs through a combined service that can include generating or buying energy, managing load and power purchase agreements, scheduling delivery, managing risk, settling accounts, and other related services. generating capacity – the amount of electricity that can be produced by a specified generating plant or utility. generation – the process of transforming other forms of energy – coal, natural gas, uranium, oil, wind, water, and sun – into electricity. hydrocarbons – fuels – including oil, natural gas and coal – used to produce energy. independent system operator – a federally regulated organization that manages regional transmission lines to deliver electricity. load serving – the process of providing wholesale customers with the energy they need to serve their retail customers. megawatt – one million watts of electricity; enough electricity to light 10,000 100-watt light bulbs. megawatt hour – one million watts of electricity consumed over one hour; enough electricity to keep 10,000 100-watt light bulbs lit for one hour. merchant energy business – our nonregulated business that combines generation from our power plants and energy we purchase with marketing and other services to provide energy solutions to meet the needs of customers throughout North America. nonregulated business – the portion of our business that operates in competitive, or deregulated, markets. nuclear decommissioning trust fund – a federally mandated fund set up to ensure that nuclear power plant owners put aside enough money to pay for cleaning up and dismantling the plants at the end of their useful lives. Nuclear Regulatory Commission – the U.S. agency that regulates commercial nuclear power plants and the civilian use of nuclear materials. open access – the mandate allowing companies fair use of other companies’ transmission and distribution power lines at cost-based fees. origination – the initiation of wholesale energy purchases and sales that may include value-added services along with the energy. physical delivery activity – the completion of an energy sale by the actual delivery of the energy to a customer. regional transmission organization (RTO) – a group of companies with responsibility for the planning and use of power transmission lines in a geographic region. regulated business – the portion of our business whose primary operations and prices are set and controlled by the rules and activities of a governmental agency. retail market – the market in which energy is sold directly to the customers who use it. Standard Offer Service – in Maryland, the obligation of a utility – such as Baltimore Gas and Electric – to supply electricity as the provider of last resort (POLR) for those customers who have not chosen an alternate supplier. transmission – the sending of electricity at high voltage, usually on lines running along high towers, from generating plants to substations, where it is then reduced to a lower voltage that is delivered to homes, businesses, office buildings and industrial facilities. value at risk (VaR) – a statistical measure that helps evaluate risk by showing how much the value of mark-to-market assets or liabilities may change under various circumstances. watt – the basic unit used to measure electricity; for example, a 100-watt light bulb requires more electricity and provides brighter light than a 60-watt light bulb. wholesale market – the market in which energy is sold in large blocks to other utilities, distribution companies, electric co-operatives, municipalities, and power marketers, who then sell or distribute the energy to others. 24
Slide 29: Shareholder Information Common Stock Dividends and Price Ranges Price* 2003 Dividend Declared First Quarter Second Quarter Third Quarter Fourth Quarter Total $0.26 0.26 0.26 0.26 $1.04 High $30.23 34.92 37.65 39.61 Low $25.17 27.50 31.75 35.03 2002 Dividend Declared First Quarter Second Quarter Third Quarter Fourth Quarter Total $0.24 0.24 0.24 0.24 $0.96 High $31.18 32.38 29.85 29.02 Price* Low $26.16 27.65 21.51 19.30 * Based on NYSE composite transactions Dividend Policy Constellation Energy pays dividends on its common stock after its Board of Directors declares them. There are no contractual limitations on Constellation Energy paying common stock dividends. Dividends have been paid continuously on our common stock since 1910. Future dividends depend upon future earnings, our financial condition, and other factors. Dividend Increase In January 2004, we announced an increase in our quarterly dividend from 26 cents to 28.5 cents per share on our common stock payable April 1, 2004, to holders of record on March 10, 2004. This is equivalent to an annual rate of $1.14 per share. Common Stock Dividend Dates Record dates are normally on the 10th of March, June, September, and December. Quarterly dividends are customarily mailed to each shareholder on or about the 1st of April, July, October, and January. Stock Trading Constellation Energy common stock, which is traded under the ticker symbol CEG, is listed on the New York, Chicago, and Pacific stock exchanges, and has unlisted trading privileges on the Boston, Cincinnati, and Philadelphia exchanges. Form 10-K The company has furnished a copy of its Form 10-K as a part of this annual report. In addition, our Form 10-K and other SEC filings can be found on our Web site, constellation.com. Upon written request the company will furnish, without charge, additional copies of its Form 10-K. Requests should be sent to Constellation Energy, Shareholder Services, Ellen Trippe, 750 East Pratt Street, Baltimore, MD 21202. Auditor PricewaterhouseCoopers LLP Forward Looking Disclaimer We make statements in this Annual Report that are considered forward looking within the meaning of the Securities Exchange Act of 1934. These statements are not guarantees of our future results and are subject to risks, uncertainties, and other important factors that could cause our actual results to differ, including those set forth in our Form 10-K under the “Forward Looking Statements” section. Shareholder Investment Plan Constellation Energy’s Shareholder Investment Plan provides common shareholders an easy and economical way to acquire additional shares of common stock. The plan allows shareholders to reinvest all or part of their common stock dividends, purchase additional shares of common stock, deposit the common stock they hold into the plan, and request a transfer or sale of shares held in their accounts. Stock Transfer Agent and Registrar American Stock Transfer & Trust Company Shareholder Services 59 Maiden Lane New York, NY 10038 800-258-0499 www.amstock.com Shareholder Assistance and Inquiries If you need assistance with lost or stolen stock certificates or dividend checks, name changes, address changes, stock transfers, the Shareholder Investment Plan, or other matters, please contact our stock transfer agent by mail, telephone, or online. The contact information is listed above in the Stock Transfer Agent and Registrar section. New Shareholder Account Numbers Your shareholder account number has changed to a new format that gives you easy telephone and online access to your account. The new format uses your old shareholder account number and simply adds a 9 and 0s to the front to make it a 10-digit number. You can determine what your new shareholder account number will be by following these steps: 1. Find your old shareholder account number on one of your dividend check stubs or investment plan statements. 2. Add a 9 and then add enough 0s to the front of your old shareholder account number to make it a 10-digit number. For example, if your old account number is 1234, your new account number is 9000001234. © Constellation Energy Group 2004

   
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