constellation energy 2006 Annual Report

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constellation energy 2006 Annual Report

  1. 1. 2006 ANNUAL REPORT ENERGY M environment affordability reliability energy policy experience risk management customer service wledge growth strategy responsibility global markets diversificat new nuclear safety financial strength wise investments productiv innovation tion earnings growth supply dependability efficiency demand balance custom value competitive advantage community involvement
  2. 2. FINANCIAL HIGHLIGHTS ATTERS 2006 In millions, except per share amounts 2005 % Change dependabil financial strength COMMON STOCK DATA cost management safety $ 5.16 Reported (GAAP) earnings per share $ 3.47 tion weather $ 1.04 Income from discontinued operations $ 0.53 financial ity $ - Cumulative effects of changes in accounting principles $ (0.04) $ 0.51 Special items* $ 0.09 ized solutions growth Earnings per share from continuing operations and before cumulative effects of changes in accounting principles $ 3.61 and special items (adjusted earnings per share)** $ 2.89 24.9% $ 1.51 Dividends declared per share $ 1.34 12.7% 181.4 Average shares outstanding– assuming dilution 179.7 $ 68.87 Market price per share –year-end $ 57.60 19.6% FINANCIAL DATA $19,285 Total revenues $16,968 $ 936 GAAP net income $ 623 $ 188 Income from discontinued operations $ 94 $ - Cumulative effects of changes in accounting principles $ (7) $ 93 Special items (after-tax)* $ 17 Net income from continuing operations before cumulative $ 655 effects of changes in accounting principles and special items** $ 519 $21,802 Total assets $21,474 $ 5,101 Total debt $ 4,861 $ 4,609 Total common equity $ 4,916 $ 1,149 Capital expenditures $ 1,032 Certain prior year amounts have been reclassified to conform to current year’s presentation. *Includes gain on sale of gas-fired plants, mark-to-market gains from certain economic, non-qualifying hedges, earnings from our synthetic fuel processing facilities, workforce reduction costs, and merger-related costs. **Represents a measure that is not determined in accordance with generally accepted accounting principles (GAAP). However, we believe the impact of discontinued operations, accounting changes, and special items obscures trends in our results and that it is useful to consider our results excluding these items. 2004 Earnings: Our GAAP earnings per share were $3.12. Excluding special items of $0.69, our earnings per share were $2.43.
  3. 3. ENERGY DOES MATTER Our goal is to be the premier energy company in North America. We generate, transmit, and deliver energy, help customers manage energy costs and usage, buy and manage fuels for other power generators, and excel at serving customers all along the energy value chain. dependability competitive advantage balance global markets energy policy efficien environment customer service financial strength earnings growth erience diversification responsibility safety reliability productivity innovation risk management dive affordability environment demand financial strength value customized solu wise investments nity involvement Our focus is energy. We provide innovative solutions and extensive industry knowledge to give our customers a competitive advantage. We execute our business plan with precision to deliver value for our shareholders, and we implement the right strategies to drive our future success. We care about what matters to our customers, our share- holders, our employees, and the communities where we do business. What matters most to us is what matters most to you. CONTENTS Letter to Shareholders 2 Competitive Energy Advantages 4 Delivering Value 6 Our Future Success 8 Caring About What Matters Most 10 Constellation Energy at a Glance 12 Board of Directors 14 Executive Team 16 Understanding Our Form 10-K 18 Glossary 24 Form 10-K 1
  4. 4. PERFORMANCE MATTERS $3.61 $19.3 $17.0 $2.89 $2.43 $12.1 ’04 ’05 ’06 ’04 ’05 ’06 ADJUSTED EARNINGS PER SHARE REVENUES (In billions of dollars) Our adjusted earnings per share grew to a record Continuing our record performance, total revenues increased $3.61, up 25 percent from 2005. to $19.3 billion in 2006. Our growing scale, extensive industry knowledge, and disciplined risk management approach give us Note: See Financial Highlights, including the GAAP reconciliation, a strong competitive edge. on the inside front cover for more details. Also, certain prior year amounts have been reclassified to conform to current year’s presentation. $1.74 $170-180 2008E $1.51 $157-162 TARGET $1.34 2007E $1.14 $97 2006 REALIZED $50 2005 ’04 ’05 ’06 ’07 DIVIDEND GROWTH PRODUCTIVITY GAINS (Annual amount per share) (In millions of dollars) Our commitment to shareholders has included increasing Since announcing our long-term productivity initiatives dividends approximately in line with our earnings growth. in 2003, we’ve achieved $97 million in pre-tax savings, and Since 2004, our annual dividend payments have increased we expect to deliver up to $83 million in additional permanent by more than 52 percent. productivity gains over the next two years.
  5. 5. PERFORMANCE MATTERS $130 n CONSTELLATION ENERGY n S&P 500 $123.21 n S&P 500 ELECTRIC UTILITIES INDEX $122.69 $120 $115.79 $110 $100 $90 12/31/05 Q1 ’06 Q2 ’06 Q3 ’06 Q4 ’06 1-YEAR TOTAL RETURN TO SHAREHOLDERS An investment of $100 in Constellation Energy common stock on December 31, 2005, was worth–with dividends reinvested–$122.69 on December 31, 2006. Our 23 percent total return to shareholders was in line with the total return of the S&P 500 Electric Utilities Index and was better than the S&P 500. $299.56 $300 n CONSTELLATION ENERGY n S&P 500 n S&P 500 ELECTRIC UTILITIES INDEX $250 $200 $193.06 $150 $135.02 $100 $50 ’01 ’02 ’03 ’04 ’05 ’06 5-YEAR TOTAL RETURN TO SHAREHOLDERS An investment of $100 in Constellation Energy common stock on December 31, 2001, was worth–with dividends reinvested–$299.56 on December 31, 2006. That’s significantly better than the S&P 500 Electric Utilities Index and the S&P 500.
  6. 6. dependability competitive advantage bal markets energy policy efficiency productivity customer service ce diversification responsibility safety reliability innovation earnings growth diversifica risk management affordability environment demand financial strength value customized solutions wise investments volvement Mayo A. Shattuck III Chairman, President & CEO DEAR FELLOW SHAREHOLDERS: 2006 was an extraordinary year for our company on many fronts, and sheet, and the remainder of the proceeds provides funds for us to invest we delivered exceptional results. We generated $19.3 billion in revenues in more strategically aligned opportunities. and grew adjusted earnings by 25 percent to a record $3.61 per share. The strong execution of our business strategy translated into superior RETURNING TO REGULATORY STABILITY IN MARYLAND returns for our investors. Including stock price appreciation and divi- Volatile power and gas prices, the end of a six-year freeze on residential dends, we achieved total shareholder return of nearly 23 percent in 2006, electric rates, and election-year politics made 2006 a challenging and following a 35 percent return in 2005. difficult year for our regulated transmission and distribution utility, These results continue our long track record of success. Our current Baltimore Gas and Electric Company (BGE), and its customers. management team has met or exceeded our earnings targets and the guidance My expectation is that 2007 will see a return to a more stable regula- we gave Wall Street for more than five years. And since November 2001– tory climate in Maryland. There is widespread support for Maryland’s suc- the expansion of our competitive strategy–our shares have appreciated cessful market structure, and the Maryland Public Service Commission 208 percent, three times greater than the S&P 500 Electric Utilities Index already has initiated proceedings designed to identify and implement and six times greater than the S&P 500. improvements in the wholesale energy auction process. The improve- Our success also has allowed us to grow dividends approximately ments should help reduce the likelihood of sudden and severe price in line with our earnings growth. In January 2007, we announced a spikes for residential customers. quarterly dividend increase of 15 percent–from 37.75 cents per share to We remain committed to doing everything we can to help customers 43.5 cents per share–equivalent to a new annual dividend of $1.74. manage rising power prices. An important focus is introducing new options for our customers to better manage their usage and lower their bills. The options include new demand response and advanced metering EXECUTING ON ALL FRONTS Our continued success is due in large part to our integrated, yet diversi- programs, which BGE will launch to test groups later this year. We fied, business model. Each business excels in its market and contributes believe these types of energy management and conservation programs to our overall performance. will become a way of life for BGE and its customers. Constellation Energy Commodities Group, our competitive energy wholesale business, is a global leader in energy portfolio management, the DEFINING A STRONG INDEPENDENT COURSE largest power marketer in the country, and the fifth largest gas marketer. Last year at this time, it was our expectation that our proposed merger We continue to grow our power business profitably, and we’re making with FPL Group would have closed by now. However, last October, given significant gains in natural gas and coal markets in the United States the considerable regulatory and political uncertainty in Maryland, we and abroad. In addition, the successful initial public offering (IPO) of reached a mutual and amicable agreement to terminate it. Constellation Energy Partners LLC last November was an important The reaction from investors was favorable. Reaffirming our independ- milestone and will help us realize more value from our expanding port- ent course and promising future, our stock reached a new all-time high folio of natural gas properties. in 2006. This tells us three things: investors understand fully why we On the retail side, both Constellation NewEnergy and Constellation entered–and why we exited–the proposed merger; they have full confi- NewEnergy-Gas performed very well. We’ve steadily grown sales volumes dence in our strengths and capabilities as a stand-alone company; and they and margins, and our high renewal rates for power and gas provide stabil- believe we’re returning to a period of greater stability in energy markets. ity in our customer base. More importantly, the future growth picture for The proposed merger would have enabled us to meet an important these businesses is strong. strategic goal and rapidly grow the scale of our company. However, it fell Constellation Energy Generation Group also had a busy and victim to events beyond the control of either company. productive year. We increased generating capacity by 17 percent at our I look back on our outstanding performance during this challenging R.E. Ginna Nuclear Power Plant, and we completed a refueling outage period with great pride. Despite the distractions, we continued to live up at our Nine Mile Point Nuclear Station in record time. to the commitment of meeting and exceeding our financial promises Our generation team also completed the successful sale of six of to investors. our gas-fired merchant plants for $1.6 billion. Market conditions were advantageous, and the attractive price we received provided us with a sig- THINKING STRATEGICALLY ABOUT THE FUTURE nificant return on our investments in the plants. We’ve used a portion of I strongly believe that competitive markets are the future of the energy the proceeds to pay down debt and strengthen our already strong balance industry. They’re good for customers, for the economy, and for companies 2
  7. 7. reliability environment affordability growth strategy risk management fina customer service responsibility global markets financial strength diversi new nuclear safety productiv demand experience wise investments innovation tion earnings growth dependability supply efficiency balance customize value competitive advantage energy policy like ours that value efficiency and being the best at meeting customers’ We’ll achieve this growth by continuing to do what we do best. needs. Competitive markets provide incentive for companies to continu- We’ll deploy capital wisely and identify and execute on opportunities that ously work toward better and more efficient ways to meet our nation’s can drive long-term growth. We’ll leverage the scale and capabilities of energy needs. That incentive drives our success. our competitive platform by further integrating our merchant organiza- Energy markets that are open to competition are working. tion. And we’ll continue to identify and empower the best and brightest Competition has done what it is supposed to do–it has improved effi- minds in our industry. ciency and lowered costs. Power plants are operating more efficiently in In 2007, a major element of our growth story is investment. We’re competitive markets, and wholesale power price increases are consistently spending more to earn more. In the years ahead, we’ll invest more in lower than increases in fuel prices–a clear sign there is downward pres- BGE, more in our gas portfolio, and considerably more to upgrade our sure on costs in the marketplace. Maryland plants to meet the requirements of the state’s healthy air act. It’s a trend that I believe will only grow. As a leading advocate and Our generation fleet is among the cleanest in the industry, and we’re the No. 1 provider of electricity in competitive markets, we’ll continue fully committed to maintaining and broadening the scope of our envi- to speak out in Washington, D.C., and in states that have opened their ronmental efforts. Over the next three years, we’re planning to invest markets to competition or are dealing with deregulation issues. approximately $1.1 billion to produce cleaner energy. We’ll also continue Other important energy matters–the cost of energy, the global to invest in the option for new nuclear power through UniStar Nuclear, events that control supply and demand, the need for more clean energy, our joint enterprise with AREVA. and the growing strain on the existing energy infrastructure–are becom- ing the topic of frank discussions in households and statehouses across THE BEST IN THE BUSINESS North America. More than ever before, people are becoming aware of One of our best stories in 2006 was our people. During our United the importance of energy to everything around them–and are thinking Way pledge drive, our employees responded by doing even more to help strategically about energy solutions. the communities we serve. We boosted our pledge total by 20 percent Most of us can agree on the elements of our nation’s energy future: and raised close to $5 million–making us the No. 1 contributor in greater conservation and energy management programs; a commitment Central Maryland and a leading contributor in other markets where we to reducing greenhouse gases and making greater use of renewable do business. energy; and a more constructive partnership between energy suppliers, This speaks to the type of employees we have at Constellation customers, regulators, and lawmakers. Energy. We’re committed to delivering value to our shareholders–and For the second consecutive year, the Dow Jones Sustainability North we’re committed to every community we serve. America Index has included Constellation Energy on its list of companies I feel very confident about our future. We’re the established leader that operate in a socially responsible and sustainable way. Customers turn in the competitive energy sector and a respected nuclear fleet operator. to our energy supply companies for renewable energy options. We’re also BGE continues to be a top-performing utility. Our emerging businesses an industry leader in providing emission-free nuclear power, and we’ve in the United States and abroad are performing well. We just completed established effective waste recycling and pollution prevention programs. our fifth consecutive year of record growth. And the forecast for 2007 As a leader in corporate responsibility, we believe a solution must be devel- and beyond is promising. oped to slow, then stop, and eventually reverse greenhouse gas emissions. Constellation Energy has distinguished itself as a remarkable com- The pathway to a greener, more cost-effective energy future is com- pany with a very bright future. Thank you for being part of it. petition and a vibrant energy marketplace. A retreat to the old way of doing things would be a disastrous setback. As a nation and as an industry, we need to get this right. We simply cannot afford to move backward. CONTINUING TO DO WHAT WE DO BEST Our business model has proven sustainable, and our management team has demonstrated the ability to execute successfully in a wide range of Mayo A. Shattuck III market conditions. We believe there is more to come. We expect to deliver Chairman, President, and CEO compound annual earnings growth of 22 percent to 26 percent from 2005 to 2008. March 26, 2007 3
  8. 8. demand ed solutions natural gas green energy industry knowledge cost power energy customer service reliability financial strength management value expertise innovation competitive advantage scale competition deregulation “Our energy programs are integral to our business performance. Every dollar we spend for energy requires 10 times that in revenue.” LINDA SHAW–Mission Center Manager, Raytheon Integrated Defense Systems headquarters, with DAVID CHAMBERLAIN–Raytheon Principal Energy Engineer In 2006, Raytheon’s CEO issued a challenge to the company’s 80,000 employees–lower energy usage by 10 percent. Linda Shaw and David Chamberlain were part of a team effort that helped the Integrated Defense Systems business reduce its consumption by more than 12 percent. The company-wide program saved enough energy to power 8,000 homes for one year and resulted in $9 million in budget savings. 4
  9. 9. competition customized solutions industry knowledge reliability cost innovation power deregulation natural gas energy competitive advantage financial str customer service risk management green energy demand expertise scale value ENERGY MATTERS PROVIDING CUSTOMERS WITH COMPETITIVE ENERGY ADVANTAGES Customers seek the competitive advantage that results from effectively managing energy and energy-related risk. Our superior capabilities–broad scale, extensive industry knowledge, exceptional customer service, and disciplined risk management–help customers gain that advantage. PROVIDING INNOVATIVE ENERGY SOLUTIONS SERVING THE WORLD’S LEADING COMPANIES Managing energy costs and usage, and the associated risks, is chal- Our customers include more than two-thirds of the FORTUNE 100, lenging. Done well, it can provide a company with a significant as well as many of the world’s most respected brands, including competitive advantage. Our innovative solutions and superior risk Harley-Davidson, Kimberly-Clark, Lowe’s, Raytheon, and others. management help customers effectively manage their unique energy Since 2001, we’ve provided Raytheon with energy and energy- needs so they can focus on what matters most to them–running their related services at its facilities in Maryland and Massachusetts. Energy businesses successfully. is central to its core business–developing some of the most advanced We serve as an intermediary between suppliers and consumers defense technologies in the world. Using those technologies is the of energy. We help producers manage the risk associated with selling DDG 1000 (pictured left), the country’s newest naval destroyer. their output, and we help businesses manage the price risk associ- Raytheon’s Integrated Defense Systems business is designing the ated with buying it. Our pricing is competitive, and our specialized electronic and combat systems for this revolutionary warship, which energy-management products, services, and resources help customers is scheduled to be delivered to the U.S. Navy in 2012. achieve cost-effective solutions. By going beyond excellent customer care, we become a true We’ve built North America’s leading retail and wholesale com- extension of our customers’ energy procurement functions. According petitive energy businesses by being the best at what we do. Our to a recent independent study, 94 percent of our commercial and broad scale, extensive industry knowledge, superior customer service, industrial customers said they were happy they chose us and would and disciplined risk management make us the provider of choice for choose us again, and 93 percent said they would recommend us to intensive energy users. others. That tells us we’re doing it right. 5
  10. 10. discipline bottom line market share reliability worth results dividends “We’ve successfully executed on our plan for five straight years. This is what good management teams do. They deliver what they say they will.” E. FOLLIN SMITH–Executive Vice President, Chief Financial Officer, and Chief Administrative Officer
  11. 11. ENERGY MATTERS financial strength earnings growth discipline revenues wise investments results value creation productivi market share revenues earnings shareholder return strategy dividends KEVIN HADLOCK Vice President, Investor Relations DELIVERING VALUE FOR OUR SHAREHOLDERS We’ve achieved a five-year record of success by executing our growth plan and making smart business decisions. Our total return to shareholders has outpaced other comparable investments, and we continue to take the right steps to support our future growth. EXECUTING OUR PLAN AS PROMISED MANAGING OUR BUSINESS WITH DISCIPLINE We’re proud of the value we create for our shareholders. In 2006, our We’re taking the right steps to support our future growth. The profit- adjusted earnings per share were a record $3.61–a 25 percent increase able sale of our gas-fired generation plants has enabled us to further over 2005. Including stock price appreciation and dividends, our strengthen our already strong balance sheet. We used a portion of the total shareholder return for 2006 was nearly 23 percent. proceeds to repay approximately $700 million of debt that matured A $100 investment made in our company on December 31, 2001, in early 2007. The remaining proceeds give us available capital to with dividends reinvested, was worth $299.56 on December 31, 2006. redeploy in smart investments in competitive supply, power genera- Over the same time, a $100 investment in the S&P 500 was worth tion, and transmission and distribution. $135.02, and a $100 investment in the S&P 500 Electric Utilities We also continue to focus on implementing productivity initiatives Index was worth $193.06. that result in permanent savings. Since we began our productivity push We’ve achieved this success by remaining sharply focused on in 2003, we’ve achieved pre-tax cost savings that add $97 million delivering results and consistently executing our business plan. We’ve annually to our bottom line. The productivity gains resulted from gained market share, increased productivity, made wise investments, streamlining our processes and increasing the output of our generat- and improved return on invested capital. ing plants. During 2006, we optimized our nuclear workforce and Our successful track record makes us optimistic about our increased our generating capacity by 17 percent at our R.E. Ginna future–we believe our compound annual earnings growth will range Nuclear Power Plant, laying the groundwork to achieve our 2007 from 22 percent to 26 percent from 2005 to 2008. productivity target. 7
  12. 12. ENERGY MATTERS DRIVING OUR FUTURE SUCCESS WITH THE RIGHT STRATEGIES Success takes careful planning, precise execution, and a thorough understanding of energy markets. We’re implementing the right strategies today to ensure our continued success tomorrow. customer relationsh commodity markets nergy usage conservation fuel diversificati efficiency stream gas renewable ener Pictured left to right: Nine Mile Point Nuclear Station, Pinedale Anticline gas producing property, and Soda Lake Geothermal Power Plant LEVERAGING WHAT WE’VE BUILT POWERING THE FUTURE Over the last five years, we’ve built one of the industry’s top-performing Through UniStar Nuclear–our joint enterprise with AREVA–we’re wholesale and retail energy supply, risk management, and generation at the forefront of next-generation nuclear power. UniStar provides a businesses. We did it by honing our core capabilities, focusing on strong business framework for the development and deployment of advanced, customer relationships, and improving productivity. standardized nuclear power plants. With the cost benefits and proven Now we’re realigning these successful businesses to further inte- safe performance that come from having a standardized design, this grate our merchant organization, enabling us to better leverage our approach can help meet our nation’s growing demand for electricity scale, expertise, and technology. This realignment provides us with with emission-free power. opportunities to improve our operating efficiency and drive long- We’re also exploring innovative ways to expand our use of green term growth, and we’re going after both. energy options to meet our customers’ growing demands for clean We’re also applying our experience and industry knowledge to power. More than 60 percent of our generating output is comprised grow our natural gas business. In 2006, we completed a successful of sources that produce zero emissions, including hydro, geothermal, IPO of Constellation Energy Partners LLC, a company focused on nuclear, and solar. Over the next few years, we’ll be looking at adding the acquisition, development, and exploitation of oil and natural gas wind and other renewable sources to our portfolio. properties. The proceeds from the IPO provide us with capital to At BGE, we’re implementing demand response and advanced invest in natural gas production when we see attractive opportunities metering technology pilot programs that could eventually provide our that fit with our strategy. 1.2 million electric and 640,000 natural gas customers with information Leveraging our scale to invest in high-quality generation assets to better manage when and how they use energy. This is an important and managing them to achieve optimal returns are things we’ve done step in encouraging energy conservation, helping customers deal with well and will continue to do. rising power costs, and improving our service to customers. 8
  13. 13. “As we invest in new strategies, our decision-making process is guided by the same highly developed risk management techniques that have become a core competency of our business. An intense focus on risk management runs through our company. We think it sets us apart.” TOM BROOKS–Executive Vice President ips wholesale risk management new nuclear productivity scale on competitive energy markets expertise retail new technologies gy energy usage growth
  14. 14. energy assistance clean water preservation giving back conservation emission control recycling renewable energy n prevention safety reliable servic volunteering staying warm At the 2006 Constellation Energy Classic, children of our employees sold snowballs to raise more than $1,200 for Special Olympics Maryland. ENERGY MATTERS WE CARE ABOUT WHAT MATTERS MOST We succeed in business by first having a goal and then a strategy and plan to get us there. We’ve received recognition as a leader in corporate responsibility by bringing the same focus and discipline to our charitable giving and community support. ENABLING CHANGE FOR THE BETTER IMPROVING THE QUALITY OF LIFE FOR ALL In 2006, we donated nearly $12 million to organizations working to Our efforts center on enhancing the quality of life for all. Our sup- improve the quality of life in our communities. But our goal is to do port for the environment includes substantial investment in the lat- more than contribute financially. Our strategy is to drive meaningful, est environmental equipment at our plants and ongoing support for long-term change for the better. leading ecological preservation and restoration organizations. We make it a priority to give of ourselves. Our leaders serve on We support economic-development related organizations, and charitable and educational boards and foundations. Our employees we’re the title sponsor for the Constellation Energy Classic. In addi- volunteer through our company-wide Power of Caring program, and tion to raising $2.2 million for Maryland-based non-profits, this also serve as coaches, mentors, and leaders for more than 300 non- PGA TOUR Champions Tour golf tournament has generated a sig- profit organizations. We constantly measure the progress and effec- nificant economic impact for Maryland. tiveness of our community programs and support. As a community While our community involvement touches the lives of people leader–and as a leader in business–we must constantly innovate and from many walks of life, a significant focus is helping disadvantaged drive for results. youth realize their potential and achieve their dreams. We accomplish To achieve maximum results, we concentrate on four key seg- this through our support of the Living Classrooms Foundation, Big ments related to the energy business and the needs of the communi- Brothers Big Sisters, and other well respected organizations. ties we serve. These include education, the environment, economic We know that the rising cost of energy creates a serious strain for development, and energy assistance for those less fortunate. many families we serve and have committed $26 million to provide Each month, through our sponsorship of the b4students Foundation, the neediest with financial support and energy conservation pro- a group of high school students from the Baltimore City Public grams. The BGE Crisis Assistance Fund makes grants available to the School system visits our headquarters as part of a long-term mentor- Fuel Fund of Maryland, the Salvation Army, and other non-profit ing program with our employees. We’re very proud of our ongoing organizations. Our goal is to help meet immediate energy assistance sponsorship of this effort because it illustrates the philosophy behind needs and promote self-reliance. our support of innovative education programs, which also includes Our company has a 190-year tradition of substantial community the CollegeBound Foundation, Fund for Educational Excellence, support, and it’s a responsibility we take very seriously. We’re proud Junior Achievement, Maryland Mentoring Partnership, and Teach of the generosity shown by our nearly 9,700 employees. As a com- for America. Our efforts encourage students to graduate from high pany and as individuals, we’re determined to do what’s right and to school and college to prepare for their future. keep our collective focus on what matters most. 10
  15. 15. contributions giving bac learning and development keeping the lights on healthy environment clean air preserva quality of life reliable services staying warm accountability conservation es community outreach pollution prevention renewable energy “We provide employees with a safe and rewarding work environment that offers a healthy work-life balance along with opportunities to learn and grow. Employees are our most valued asset–in our business and in our communities.” JOANNE ASHTON–Human Resources Director, at home with her family–daughter Octavia, son Otis, and husband Otis 11
  16. 16. CONSTELLATION ENERGY GLANCE AT A We’re North America’s largest competitive provider of power to wholesale, commercial, industrial, and governmental customers, one of the top five gas marketers, and a leading supplier of coal to customers around the world. Our customers include more than two-thirds of the FORTUNE 100 companies, as well as some of the world’s largest producers and consumers of power, natural gas, oil, and coal. We own a diverse fleet of power plants, and we deliver electricity and natural gas to customers in Central Maryland through our regulated utility, Baltimore Gas and Electric. OUR VISION OUR FOUNDATIONAL VALUES OUR PERFORMANCE VALUES To be the first-choice provider for customers seeking These values guide our actions: These values measure our results: energy solutions in the complex and changing Integrity Speed energy marketplace. Teamwork Accountability Social & Environmental Responsibility Passion for Excellence Customer Focus Creation of Value Corporate Social Responsibility OUR YEAR’S ACCOMPLISHMENTS • Named one of America’s Most Admired Energy Companies by • Received the American Red Cross LifeBoard Recruitment Committee FORTUNE magazine of the Year Award for the most successful blood drive program in • Ranked No. 37 on the BusinessWeek 50 Top Performers list Central Maryland • Moved up to No. 125 on the FORTUNE 500 list • Received a 2006 EPA C2P2 Environmental Achievement Award for reducing • Advanced to No. 370 on the FORTUNE Global 500 list greenhouse gas emissions through the beneficial use of coal ash from our • Ranked as a Platts Top 250 Global Energy Company, earning a Baltimore plants position as the No. 2 independent power producer worldwide • Earned a 2006 Tree Line USA designation from the National Arbor Day • Named to the Dow Jones Sustainability North America Index Foundation for BGE’s efforts to protect and enhance America’s urban forests for the second consecutive year • Received a 2006 People Loving and Nurturing Trees (PLANT) Award from • Ranked the largest corporate philanthropist in Baltimore by the Maryland Department of Natural Resources for BGE’s tree planting and Baltimore Business Journal tree care efforts • Inducted into the EPA WasteWi$e Program Hall of Fame for • Named to Training Magazine’s Top 125 list for our outstanding Learning & our waste prevention and recycling efforts Organizational Development program Coal, Gas & Oil - 35% Renewable & Alternative - 4% Nuclear - 61% OPERATING A STRATEGIC GENERATION FLEET (Excludes gas-fired plants sold in 2006) Our generating facilities are strategically located and use a variety of fuels. More than 60 percent of our generating output is from sources that produce zero emissions. 12
  17. 17. OUR BROAD SCALE n COMMERCIAL & INDUSTRIAL SERVICE AREAS n Served with Electricity H n Served with Natural Gas w QQ s n s n Served with Electricity & Natural Gas t w u t u tH ll s J GENERATION ASSETS u l Q u l l w Geothermal J Baltimore Plants (Coal & Others) u u Y H Hydro s Biomass Q Nuclear l Coal nn Y Solar u Fuel Processing n t Waste Coal Gas n n UPSTREAM GAS n v n n Portfolio Properties v Constellation Energy Partners LLC OUR BUSINESSES OUR FOCUS OUR CUSTOMERS CONSTELLATION ENERGY Serving as an intermediary managing price and supply risk Energy producers and intensive energy users worldwide COMMODITIES GROUP between producers and consumers of electricity, coal, natural A wholesale marketing, risk management, and portfolio gas, and oil...helping producers manage the risk associated management and trading operation with selling their output and helping consumers manage the price risk associated with buying it...managing the output and fuels for our generation fleet and selling that power CONSTELLATION NEWENERGY Meeting our customers’ energy and risk management needs More than 14,000 commercial, industrial, and public A retail electricity supply business providing energy through innovative products and outstanding service... sector organizations, including over two-thirds of the products and services becoming an extension of our customers’ energy procure- FORTUNE 100 companies ment functions...helping customers effectively manage energy costs and usage CONSTELLATION NEWENERGY–GAS DIVISION Offering customers unparalleled service and expertise by More than 6,000 commercial, industrial, municipal, and A natural gas supply and transportation-related providing reliable and economical supplies of natural gas local gas distribution and power generation facilities in services operation competitive markets throughout North America CONSTELLATION ENERGY GENERATION GROUP Owning and operating–safely, efficiently, and reliably– Wholesale customers in competitive energy markets across A power generation operation a diversified fleet of fossil, nuclear, and renewable energy North America generating facilities...pursuing new nuclear energy through UniStar Nuclear, our joint enterprise with AREVA BALTIMORE GAS AND ELECTRIC Safely and reliably delivering electricity and natural gas to More than 1.2 million electric and 640,000 natural A regulated utility delivering power and natural gas our customers...becoming a recognized industry leader... gas residential, commercial, and industrial customers improving the reliability of our distribution system, reduc- in Baltimore and in all, or part of, 10 counties in ing interruptions, and improving our response to outages Central Maryland FELLON-MCCORD & ASSOCIATES Offering clients energy consulting and management Serving large commercial, industrial, municipal, and A leading provider of energy consulting and expertise in the physical, financial, regulatory, and legislative institutional energy users, as well as producers, generators, management services aspects of energy markets aggregators, third party marketers, utilities, storage owners, and operators CONSTELLATION ENERGY PROJECTS Providing customized solutions–including central energy Commercial, industrial, and governmental facilities through- & SERVICES GROUP plants, on-site power generation, mechanical-electrical out North America, including Heinz Field in Pittsburgh A full-service energy company upgrades, and renewable energy products–to increase energy and municipal and commercial facilities in downtown efficiency, reliability, and cost effectiveness Nashville, Tennessee BGE HOME Providing customer-centric, energy-focused solutions for Residential and small commercial customers in Maryland A competitive provider of energy-related products heating, air conditioning, plumbing, electrical, and indoor and services air quality needs, as well as window replacements and the sale of natural gas to the residential market 13
  18. 18. BOARD DIRECTORS OF MAYO A. SHATTUCK III YVES C. DE BALMANN DOUGLAS L. BECKER Chairman, President, and CEO Co-Chairman Chairman and CEO Constellation Energy Bregal Investments LP Laureate Education, Inc. Director since 1999 Director since 2003 Director since 1998 Age 52 Age 60 Age 41 JAMES T. BRADY EDWARD A. CROOKE JAMES R. CURTISS, ESQ. Managing Director, Mid-Atlantic Retired Vice Chairman Partner Ballantrae International, Ltd. Constellation Energy Winston & Strawn LLP Director since 1999 Director since 1988 Director since 1994 Age 66 Age 68 Age 53 CORPORATE GOVERNANCE We are an industry leader in corporate governance. We conduct our business honestly, with respect for our professional obligations, and with regard for legal and regulatory requirements. The independence of our Board of Directors is important to us –10 of our 11 directors are independent according to New York Stock Exchange listing standards. Michael D. Sullivan, one of our independent directors, serves as lead director. Copies of the charters of each of the committees of the Board of Directors, as well as copies of our Corporate Governance Guidelines, Principles of Business Integrity, Corporate Compliance Program, Insider Trading Policy, and Policy and Procedures with Respect to Related Person Transactions are available on our Web site at www.constellation.com. INTERESTS ALIGNED WITH SHAREHOLDERS We maintain share ownership guidelines to further align the interests of our directors with the interests of our shareholders. The guidelines require directors to acquire and maintain holdings of Constellation Energy stock equal to at least five times the annual cash retainer. 14
  19. 19. BOARD DIRECTORS OF DR. FREEMAN A. HRABOWSKI III NANCY LAMPTON ROBERT J. LAWLESS President Chairman and CEO Chairman and CEO University of Maryland, Baltimore County American Life and Accident Insurance McCormick & Company, Inc. Director since 1994 Company of Kentucky and Hardscuffle, Inc. Director since 2002 Age 56 Director since 1994 Age 60 Age 64 LYNN M. MARTIN MICHAEL D. SULLIVAN President Chairman The Martin Hall Group LLC Life Source, Inc. and Director since 2003 ADVANCARE HealthCare, LLC Age 67 Director since 1992 Age 67 COMMITTEES OF THE BOARD Executive Committee Compensation Committee Nominating and Corporate Governance Committee Mayo A. Shattuck III, Chairman Robert J. Lawless, Chairman Michael D. Sullivan, Chairman Edward A. Crooke Douglas L. Becker Douglas L. Becker Robert J. Lawless Dr. Freeman A. Hrabowski III Dr. Freeman A. Hrabowski III Lynn M. Martin Robert J. Lawless Audit Committee Michael D. Sullivan Lynn M. Martin James T. Brady, Chairman Committee on Nuclear Power Yves C. de Balmann Edward A. Crooke James R. Curtiss, Chairman Edward A. Crooke All committee members are audit committee financial experts as defined by SEC rules. Nancy Lampton Lynn M. Martin 15
  20. 20. EXECUTIVE TEAM MAYO A. SHATTUCK III THOMAS F. BRADY THOMAS V. BROOKS Chairman, President, and CEO Executive Vice President Executive Vice President Mayo, 52, is the Chairman, President, and Chief Executive Officer Tom, 57, is responsible for Constellation NewEnergy and the retail Tom, 44, heads the merchant organization. He is responsible of Constellation Energy. Prior to joining Constellation Energy, he businesses, as well as corporate strategy, mergers and acquisitions, for our retail and wholesale competitive energy companies and was Chairman of the Board at Deutsche Banc Alex. Brown. He also corporate communications, branding, and government affairs. He non-nuclear power generation, as well as for the strategy and served as Global Head of Investment Banking and Global Head of is also Chairman of Baltimore Gas and Electric. Tom has served execution of merchant acquisitions and divestitures and the devel- Private Banking at Deutsche Bank, Vice Chairman at Bankers Trust, as Chief Accounting Officer at Baltimore Gas and Electric, as well as opment of non-nuclear assets. Previously, Tom was President and and President at Alex. Brown & Sons. in a variety of executive and management positions. CEO of Constellation Energy Commodities Group. Prior to joining Constellation Energy, he worked in the Fixed Income and Com- modities Division at Goldman, Sachs & Co. E. FOLLIN SMITH MICHAEL J. WALLACE IRVING B. YOSKOWITZ Executive Vice President, Chief Financial Officer, Executive Vice President Executive Vice President and General Counsel and Chief Administrative Officer President and CEO, Constellation Energy Generation Group Irv, 61, is responsible for corporate governance and compliance, Follin, 47, is responsible for finance, information technology, human Mike, 59, is responsible for our nuclear power generation business. mergers and acquisitions, litigation, and business unit legal services. resources, legal, audit, risk management, investor relations, and Prior to joining Constellation Energy, he was Co-Founder and Prior to joining Constellation Energy, he served as Senior Partner business performance improvement. Prior to joining Constellation Managing Director of Barrington Energy Partners, LLC. Mike also of Global Technology Partners, LLC, Senior Counsel at Crowell & Energy, Follin was Senior Vice President and Chief Financial Officer was Chief Nuclear Officer and served in various executive positions Moring, LLC, and Senior Consultant at Charles River Associates. of Armstrong Holdings, Inc. She also has served in various financial at Unicom/ComEd. Irv also was Executive Vice President and General Counsel at United executive positions at General Motors Corp. Technologies Corp. and held a variety of positions at IBM. PROVEN LEADERSHIP Our mission is to be the nation’s leading energy manager and competitive supplier, generating and delivering power and natural gas safely and reliably to our customers, while acting in the interests of our communities, employees, shareholders, and the environment. Our executive team provides the proven leadership, strategic vision, skilled market analysis, and agile decision-making that help us achieve that mission. INTERESTS ALIGNED WITH SHAREHOLDERS We maintain ownership guidelines to further align the interests of our executives with the interests of our shareholders. The guidelines require our executives to acquire and maintain holdings of Constellation Energy stock ranging from three times base salary for senior vice presidents to seven times base salary for our CEO. 16
  21. 21. EXECUTIVE TEAM PAUL J. ALLEN JOHN R. COLLINS FELIX J. DAWSON Senior Vice President, Corporate Affairs Senior Vice President and Chief Risk Officer Senior Vice President Paul, 55, is responsible for external affairs, government and John, 49, is responsible for assessing and managing risk. He also serves Co-President and Co-Chief Executive Officer, regulatory relations, and environmental policy. Prior to joining on the Board of Managers of Constellation Energy Partners LLC. Constellation Energy Commodities Group Constellation Energy, Paul was Senior Vice President and Group Previously, he was Managing Director of Finance and Treasurer of Felix, 39, is responsible for wholesale energy, commodity services, Head at Ogilvy Public Relations. He also was a senior staff mem- Constellation Power Source Holdings and Constellation Energy and risk management for electricity, coal, natural gas, and related ber at the Natural Resources Defense Council, Press Secretary for Commodities Group. He also has served in various leadership posi- commodities. He also serves as President and CEO of Constellation Senator Christopher Dodd (D-Conn.), and Foreign News Editor tions at Constellation Energy Commodities Group and Baltimore Energy Partners LLC. Previously, he was Co-Chief Commercial and Editor of Morning Edition at National Public Radio. Gas and Electric. Prior to joining Baltimore Gas and Electric, Officer, Constellation Energy Commodities Group and served in he held various financial management positions at Bell Atlantic various leadership positions in origination and portfolio management. Corporation and Perdue Farms, Inc. He also has held a variety of positions at Goldman, Sachs & Co. KENNETH W. DEFONTES, JR. BETH S. PERLMAN GEORGE E. PERSKY Senior Vice President Senior Vice President and Chief Information Officer Senior Vice President President and CEO, Baltimore Gas and Electric Beth, 46, is responsible for information technology initiatives that Co-President and Co-Chief Executive Officer, Ken, 56, is responsible for our regulated electric and natural gas support business transformation and enable growth. Prior to joining Constellation Energy Commodities Group distribution utility in Central Maryland. Previously, Ken was Vice Constellation Energy, she was Vice President of Wholesale Trading George, 37, is responsible for wholesale energy, commodity services, President, Electric Transmission and Distribution, and also has Technology and served in various other technology and operations and risk management for electricity, coal, natural gas, and related served in various executive and management positions at Baltimore management positions at Enron. She also held various financial commodities. Previously, he was Co-Chief Commercial Officer, Gas and Electric. and technology management positions at Lehman Brothers, Inc., Constellation Energy Commodities Group and served in various Kidder, Peabody & Co., and JPMorgan. leadership positions in origination and portfolio management. He also has held a variety of positions at Goldman, Sachs & Co. MARC L. UGOL Senior Vice President, Human Resources Marc, 48, is responsible for staffing, organization effectiveness, labor relations, compensation, and benefits. Prior to joining Constellation Energy, he was Senior Vice President of Human Resources at Tellabs, Inc. He also served in human resources management posi- tions at Platinum Technology, Inc., System Software Associates, Inc., and Amoco Corporation. 17
  22. 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. This special section is intended to be a guide, describing and summarizing some of the information contained in our Form 10-K and providing page numbers where more details can be found. Our complete Form 10-K follows this special section. BREAKING DOWN OUR FORM 10-K Our Form 10-K has four parts: PART I In-depth descriptions of our businesses PART II Our financial performance, the information in which investors are usually most interested PART III Directs readers to other filings made with the Securities and Exchange Commission for details about our Board of Directors, executive compensation, auditor fees, stock ownership information, and other matters PART IV A listing of financial statement schedules and exhibits Over the next several pages, we provide descriptions and summaries of some of the major topics included in Parts I and II. 18

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