Ours has been an industry in transition for
nearly a decade. Much of the upheaval experienced in the past year may be an inevitable
and necessary step in the evolution from a regulated to a competitive market. This
transformation has caused volatility and uncertainty around many factors that affect our
company’s profitability. While we wholeheartedly endorse the industry’s
migration to a freely competitive market, we are focused on maintaining our strength and
flexibility, both strategically and financially, and managing risk vigilantly while
positioning our company for the future. Thus, that is the theme of this annual report.
Financial
Highlights
Our 2001 earnings from operations were $2.60 per share compared
to $2.43 per share in 2000. In the fourth quarter, however, we reported a series of
special costs that together equal approximately $533 million, or a total earnings per
share impact of $2.08. We also recorded a cumulative effect of an accounting principle
change in the first quarter that increased earnings per share by $.05. This resulted in
reported earnings for the calendar year of $.57 per share.The special
costs recognized in the fourth quarter (see pages 22–23 in the Financial section) are
the result of rigorous analysis coupled with an aggressive strategy to monetize our
non-core assets, improve our balance sheet, and rationalize our cost structure. With these
actions, we want to assure you that we are clearly focused on our core business of energy.
Dividend Policy
Changes
Going forward, we are committed and determined to improve our
results. Achieving a competitive total return on your investment is our goal.
Since deciding not to separate into two companies, we recognized that we needed to change
our dividend policy that became effective last year in April. |
Constellation Energy Group owns a balanced
portfolio of businesses -- regulated and nonregulated -- that should provide dependable
earnings growth and strong cash flow with a moderate level of risk.
|
On January 30, we announced that we would increase our annual dividend from $.48
to $.96 per share beginning with the next quarterly payment date of April 1, 2002. The
dividend is a meaningful contributor to our goal of providing superior return to our
shareholders.
Focus on the Fundamentals
One of the most important strategic decisions we made last year
was deciding not to separate our merchant from our retail energy services business. This
significant choice was partly driven by the capital markets, which had shifted
dramatically and no longer awarded a cost-of-capital advantage to merchant generation
companies. We also recognized that in times of economic uncertainty, it’s wise to
build from a base of scale and stability and that there is strength in a portfolio of
businesses that balances earnings growth and cash flow.
The collapse of Enron and the steady decline in the value of all merchant energy
companies have demonstrated that our courageous decision not to separate was, in fact, the
right decision.
Since canceling separation, we have moved quickly to realign the management team
and streamline our organization. We have established three operating units and put the
right people with the right skills in charge to manage them.
In addition, we have created a new staff role of Chief Risk Officer, who is
focused on defining and managing all key risks across the company. It was particularly
gratifying that our prudent business practices allowed us to avoid any material
Enron-related losses. This new position strengthens our ability to continue to manage risk
responsibly.
The strategic and organizational decisions of 2001 provide real clarity to our
direction. We are focused on being a leader in the wholesale merchant energy business and
providing premier utility and energy-related services in Maryland and the surrounding
region.
In pursuing these strategies, we are guided by the core values that are
fundamental to the successful operation of Constellation Energy Group. This is a company
that has a 186-year history of dealing fairly with its customers, of maintaining the
highest level of integrity, and of living up to its responsibility to its shareholders,
communities, and employees.
A Solid Platform for Growth
A Strong Base of Generation Assets
We believe that the strongest energy businesses have physical assets to complement their
merchant capabilities. Our strength in generation, including our expanding influence in
the nuclear world, is a true core competency. In 2001, we started the year by winning the
Edison Award, our industry’s most prestigious honor, for our pioneering work in
nuclear license renewal. We ended the year with the purchase of Nine Mile Point Nuclear
Station. In the summer, we brought on line 1,100 megawatts of new gas-fired generation. We
also have under construction an additional 2,900 megawatts in key parts of the country.
As of year-end 2001, our Generation Group owned and
operated about 9,200 megawatts of power. With 2,900 megawatts under construction, it will
have more than 12,000 megawatts by the end of 2003 when all the plants will be completed.
Leveraging Our Assets
Our power marketing, long-term power contract origination, and risk management business
leverages off of the strength of our generation assets and is a vital part of our
company’s success. Since its inception five years ago, this operation has generated
strong earnings growth for Constellation. Much of this growth has been driven by serving
electric distribution companies that have elected to outsource their wholesale supply.
Constellation is now a key player in the Northeast, the Mid-Atlantic, and Texas—three
regions that have meaningfully deregulated their retail energy markets. We plan to
continue to grow our load-serving market positions in these regions. We built the risk
management and long-term power contract origination business with the help of our advisor,
Goldman Sachs. One of the strategic decisions made in 2001 was the termination of the
power business services agreement with Goldman. This allows us to benefit from 100% of the
profits and provides us with strategic and operating control of this business, which is
critically linked to our fleet of generation assets.
Reliable Delivery and Returns
Our regulated utility, Baltimore Gas and Electric Company (BGE), balances our portfolio of
energy businesses. BGE holds a solid franchise in an economically healthy region that has
successfully deregulated the electric and gas supply. As an energy-delivery company, BGE
provides very predictable earnings and generates high cash flow with a low risk profile.
BGE’s 186-year heritage of serving Central Maryland is unique in our industry.
Today, BGE delivers energy to more than 1.1 million
electric and 600,000 gas customers. As always, its primary focus is on reliability,
safety, and achieving operational excellence.
Toward that end, the utility embraced a new
initiative in 2001 to comprehensively review and re-engineer key business processes. Now
implementing the more than 200 recommendations that came out of the process, BGE has
created the blueprint for substantially improving business processes, functions, and
activities while providing customers with more efficient, effective, and hassle-free
service.
A Company With Staying Power
The California situation combined with Enron’s collapse and
a slower pace of deregulation indicate that a lot is changing in our world. Yet,
Constellation Energy is operating from a position of strength with a very solid balance
sheet. We have taken a series of decisive actions, all of which are discussed in more
detail in the Financial section of this report. We believe these actions will prove
critical to ensuring the strength of the company’s balance sheet in the future.
While we have a lot of work ahead, our success is ultimately in our own hands.
With employees focused on crisp execution of our strategy, we indeed are in control of our
own destiny. This is a long-term business, and Constellation Energy Group has proven that
the same strength and flexibility that have sustained this company for more than 186 years
will help us withstand virtually any challenge the future may bring.
That’s cause for credit and applause for the many dedicated employees who
helped us weather a turbulent 2001.
Before closing, we want to thank and bid farewell to five long-term board
members who announced their retirement as of December 31, 2001: H. Furlong Baldwin, J.
Owen Cole, Dan A. Colussy, Jerome W. Geckle, and George L. Russell, Jr.
All five combined have given 80 years of service to this company and provided
impeccable leadership and guidance through the deregulation of Maryland’s gas and
electric industry and the formation of our merchant energy business.
Sincerely,
Mayo A. Shattuck III
President & Chief Executive Officer |
Christian H. Poindexter
Chairman of the Board |
March 25, 2002 |
