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.
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 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 our proxy statement for details on our board of directors and executive officers and their compensation.
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.
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.
BUSINESS
PAGes 1-2
OVERVIEW
Our Company
We have a merchant energy business and a regulated distribution utility.
Operating segments
Our reportable operating segments are merchant energy, regulated electric and regulated gas. We also have certain other nonregulated business activities.
PAGEs 3-9
Merchant Energy Business
Our business
We provide wholesale electricity and services to distribution utilities and municipalities...electricity supply and services and natural gas to large commercial and industrial customers...and we generate electricity.
Fuel source
Our electricity generated by fuel type in 2004: nuclear -52 percent, coal-32 percent, natural gas-10 percent, renewable and alternative-4 percent, and oil and dual oil-natural gas-2 percent.
Our competition
We encounter competition from companies of various sizes-having varying levels of experience and financial and human resources-and differing strategies.
Operating statistics for the last five years
Our revenues and megawatt hours generated have increased.
Pages 9-13
Baltimore Gas and Electric Company
Our business
We're an electric transmission and distribution utility and a natural gas distribution utility with a service territory that includes the City of Baltimore and parts of Central Maryland.
Electric and gas operating statistics for the last five years
Revenues by type, sales to our customers, and the number of our customers.
page 13
Other Nonregulated Businesses
Our businesses
We offer energy solutions to residential, commercial, industrial and municipal customers.
pages 13-16
Environmental Matters
We are subject to regulations concerning air quality, water quality and disposal of hazardous substances -over the last five years, our capital expenditures to comply with environmental standards and regulations were $235 million.
page 16
Employees
We had approximately 9,570 employees at year end 2004.
pages 17-19
Properties
Our offices and facilities
Our corporate offices are in Baltimore. We have plants and marketing offices throughout North America and we also lease space internationally.
Our generating plants
We own more than 12,500 megawatts of generating capacity diversified by fuel type and located strategically throughout the United States.
pages 19-20
Executive Officers of the Registrant
Our executive officers
Our executive officers have a diverse mix of energy, financial and other experience in competitive and regulated markets.
Part II: Our Financial Performance
Part II contains management's discussion and analysis of our results of operations and financial condition. It compares 2004 results to 2003, and 2003 results to 2002. 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.
Also included is information about environmental matters, employees, properties and executive officers.
Introductory Items
The Basics
Here's information about our common stock, prices and dividends, and historical financial data.
page 21
Market for Registrant's Common Equity and Related Shareholder Matters
Our dividend information
We declared a dividend of $1.14 per share in 2004 and increased our annual dividend rate to $1.34 per share in January 2005.
Our stock price
The price of our common stock-based on New York Stock Exchange Composite Transactions-ranged from $35.89 to $44.90 in 2004.
pages 22-23
Selected Financial Data
Summary of our operations and financial condition and our 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.
Management's Discussion and Analysis of Financial Condition and Results of Operations
page 24
Introduction and Overview
We summarize how we have organized our discussion and analysis.
pages 24-25
Strategy
We are pursuing a balanced strategy to distribute energy through our North American competitive supply businesses and our regulated Maryland utility.
pages 25-27
Business Environment
Energy markets continued to be highly volatile in 2004 with significant changes in natural gas and power prices, and the Federal Energy Regulatory Commission has been reviewing the structure and various aspects of the wholesale energy market.
pages 27-30
Critical Accounting Policies
The accounting policies that are most important to the portrayal of our financial condition-while also requiring difficult, subjective or complex judgment-include revenue recognition/mark-to-market accounting, evaluation of assets for impairment and asset retirement obligations.
pages 30-31
Significant Events
Significant events that have affected us include a loss from discontinued operations, the recognition of synthetic fuel tax credits associated with 2003 production, workforce reduction costs, impairment losses, selling non-core assets, our acquisition of the Ginna Nuclear Power Plant and our dividend increase.
pages 31-47
Results of Operations
Our overall net income
Our net income for 2004 was $539.7 million, an increase of $262.4 million from 2003-changes in accounting principles reduced our net income by $198.4 million in 2003, while higher earnings from our merchant energy business, regulated electric business, nuclear assets and certain economic hedges contributed to our 2004 earnings.
Our net income for our merchant energy business
Our merchant energy net income was $389.9 million in 2004, an increase of $275.3 million from 2003-reflecting our continued growth and the effect of changes in accounting principles that reduced our merchant energy business net income by $198.4 million in 2003.
Our net income for our regulated electric and gas businesses
Our regulated electric business net income for 2004 was $131.1 million, an increase of $23.6 million from 2003; and our regulated gas business net income for 2004 was $22.2 million, a decrease of $20.8 million from 2003.
Our net income from our other nonregulated businesses
We had a net loss of $3.5 million from our other nonregulated businesses in 2004, compared with net income of $12.2 million in 2003-mainly the result of a $16.4 million net gain on sales of non-core investments and other assets in 2003.
pages 48-50
Financial Condition
Cash flow
Cash provided by our operations was $1.1 billion in 2004, a $29.0 million increase from 2003.
Security ratings
All of our security ratings are solidly investment-grade, all with stable outlooks.
pages 50-53
Capital Resources
Capital requirements
We're estimating that we'll need $915 million in capital for 2005 and $950 million in 2006 to fund existing and anticipated projects.
Funding our capital requirements
We expect to use internally generated funds and other available sources for the expansion of our merchant energy businesses and for the needs of our regulated electric and gas businesses and our other nonregulated businesses. We expect to fund acquisitions with a mixture of debt and equity, with an overall goal of maintaining a strong investment-grade credit profile.
Contractual payment obligations
We detail our contractual payment obligations for 2005 and beyond.
pages 53-58
Market Risk
We are exposed to energy commodity price and volatility risk, credit risk, interest rate risk, equity price risk, foreign exchange risk and operations risk. Our risk management program uses an effective system of internal controls and is overseen by our Board of Directors and the Audit Committee of the Board.
Our Financial Statements
The Numbers
We provide separate financial statements for Constellation Energy and Baltimore Gas and Electric Company. This section also includes our management and auditors reports on our financial information and the effectiveness of our internal controls.
Financial Statements and Supplementary Data
page 59
Report of Management
Our management accepts responsibility for the information and representations in our financial statements and concludes that our internal control over financial reporting was effective as of December 31, 2004- 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.
pages 59-61
Reports of Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP states its opinion that our consolidated financial statements present fairly, in all material respects, the financial condition of our company and that we maintained, in all material respects, effective internal control over financial reporting at December 31, 2004.
page 62
Consolidated Statements of Income
Our net income for 2004 was $539.7 million.
pages 63-64
Consolidated Balance Sheets
Our total assets were $17.3 billion at December 31, 2004.
page 65
Consolidated Statements of Cash Flows
Our net cash provided by operating activities continued to increase steadily-from $1.01 billion in 2002 to $1.06 billion in 2003 to $1.09 billion in 2004.
page 66
Consolidated Statements of Common Shareholders' Equity and Comprehensive Income
We declared $196.3 million in dividends during 2004, and our retained earnings were $2.4 billion at year end.
pages 67-68
Consolidated Statements of Capitalization
At December 31, 2004, our total capitalization was $9.8 billion-$4.8 billion in long-term debt, $90.9 million in minority interests, $190.0 million in preference stock, and $4.7 billion in common shareholders' equity.
pages 69-72
Baltimore Gas and Electric Company financial statements
We include financial statements for BGE because it is a separate registrant required to file with the SEC.
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.
Notes to Consolidated Financial Statements
pages 73-84
note 1: Significant Accounting Policies
Accounting methods that we use and how they're applied throughout our businesses, along with the new accounting standards issued.
pages 84-87
Note 2: Workforce Reduction, Impairment Losses and Other Events
Our total special items in 2004 were $90.2 million pre-tax, mostly due to a $75.6 million loss from discontinued operations-and $21.9 million after-tax, including recognition of $35.9 million in synthetic fuel tax credits relating to 2003 production.
pages 88-89
Note 3: Information by Operating Segment
Our revenues, net income and other financial information, broken out by operating segment, shows the growth of our merchant energy business.
pages 90-91
Note 4: Investments
Our investments are mainly financial investments held as assets for our nuclear decommissioning trust fund, and to secure certain executive benefits. We also own investments in power plants.
page 92
Note 5: Intangible Assets
At December 31, 2004, our carrying amount of goodwill was $144.8 million, and our net amount of intangible assets was $357.4 million.
pages 93-94
Note 6: Regulatory Assets (net)
Our regulatory assets, net were $195.4 million at December 31, 2004.
pages 94-97
Note 7: Pension, Postretirement, Other Postemployment, and Employee Savings Plan Benefits
We provide details-obligations, assets, funded status, assumption details and company contributions-about our employee benefit plans.
page 98
Note 8: Credit Facilities and Short-Term Borrowings
Our short-term borrowings-debt that matures within one year from the date it's issued-may include bank loans, commercial paper and bank lines of credit.
pages 98-100
Note 9: Long-Term Debt and Preference Stock
We provide details about our long-term debt-debt that matures a year or more from the date it's issued-and about our preference stock.
pages 101-102
Note 10: Taxes
Our income taxes for 2004 were $172.2 million, which included the favorable impact of $123.2 million of synthetic fuel tax credits.
page 103
Note 11: Leases
Our lease expense was $34.1 million in 2004.
pages 103-108
Note 12: Commitments, Guarantees and Contingencies
We provide details about our commitments and financial guarantees, environmental matters, legal proceedings involving us, our nuclear insurance coverage and certain issues concerning our California power purchase agreements.
pages 109-110
Note 13: Hedging Activities and Fair Value of Financial Instruments
We explain how we manage interest rate exposure and commodity price fluctuations...and disclose the fair value of our financial instruments.
pages 110-112
Note 14: Stock-Based Compensation
In 2004, we granted stock options for 1.6 million shares at a weighted-average exercise price of $39.60.
pages 112-114
Note 15: Acquisitions
We completed our purchase of the Ginna Nuclear Power Plant...and provide details about the transaction, as well as about our other major acquisitions over the last three years.
page 115
Note 16: Related Party Transactions-BGE
Our merchant energy business provides BGE with a significant portion of the energy it needs and we provide BGE with the services of certain corporate functions.
pages 116-117
Note 17: Quarterly Financial Data
(Unaudited)We break out our financial results-and those of BGE-by quarter for the last two years.