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Presentation for 2004 Oil & Gas Investment Symposium April 19 – 21, 2004New York City, NY.

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Presentation on theme: "Presentation for 2004 Oil & Gas Investment Symposium April 19 – 21, 2004New York City, NY."— Presentation transcript:

1 Presentation for 2004 Oil & Gas Investment Symposium April 19 – 21, 2004New York City, NY

2 Who is Constellation Energy? CE formed in 1997 as a joint venture between Goldman Sachs and Baltimore Gas & Electric (Non-regulated Assets) CE formed in 1997 as a joint venture between Goldman Sachs and Baltimore Gas & Electric (Non-regulated Assets) Unique combination of physical market experience from Baltimore Gas & Electric utility and systems and risk management expertise of Goldman Sachs Unique combination of physical market experience from Baltimore Gas & Electric utility and systems and risk management expertise of Goldman Sachs CE is a leading provider of energy risk management products with a national (US) trading and generation portfolio CE is a leading provider of energy risk management products with a national (US) trading and generation portfolio Wholesale energy marketing, trading, development and risk management Wholesale energy marketing, trading, development and risk management 12,510 MW total controlled capacity 12,510 MW total controlled capacity Gas business currently moving approximately to 2BCF/Day Gas business currently moving approximately to 2BCF/Day

3 Constellation Family of Companies CONSTELLATION ENERGY GROUP, INC. (NYSE: CEG) Constellation Generation Group (CGG) Wholesale power generation 9,200 MW in operation – 40 plants in 11 states 2,900 MW under construction – 4 plants in 4 states July 1, 2000: BGE generation assets were transferred to the non-regulated entity Wholesale energy marketing, trading, development and risk management 12,510 MW total controlled capacity Manage a growing gas business currently, moving 490Bcf/year — National fleet fuel — Retail supply — Wholesale supply Transmission and distribution services in Central Maryland 1.1 million electric customers – 6,000 MW of load 0.6 million gas customers –Peak daily gas delivery at 795,700 dth –105 Bcf in annual throughtput Constellation Energy (CE) Baltimore Gas & Electric (BGE) Retail BGE Home — Full service physical and financial energy services — C&I focus — Mid-Atlantic concentration New Energy — Full service physical, financial services — C&I focus — Ohio Valley/Northeast and Canada Alliance –Full service physical and financial energy services and consulting –C&I focus –Ohio Valley 25 Bcf Annually 130 Bcf Annually 490 Bcf Annually 100 Bcf Annually

4 CE Gas Group Objectives Manage physical fuel supply for CEG Manage physical fuel supply for CEG Make a return on capital/credit deployed Make a return on capital/credit deployed Diversify risk profile (credit risk vs. reserve risk) Diversify risk profile (credit risk vs. reserve risk) Leverage existing gas capabilities Leverage existing gas capabilities Trading, contracts, systemsTrading, contracts, systems Pipeline and storage contractsPipeline and storage contracts Access to capital marketsAccess to capital markets Develop upstream capital businesses Develop upstream capital businesses Senior debt (VPP)Senior debt (VPP) Mezzanine financingMezzanine financing Equity investmentsEquity investments

5 Energy Capital "One Stop Shop" Senior Debt/ VPP Senior Debt/ VPP Mezzanine/ Sub Debt Mezzanine/ Sub Debt Equity (Project/Corporate) Equity (Project/Corporate) Advantages: Advantages: Saves Time -Saves Time - Prevents dealing with multiple counterparties when accessing various capital products Prevents dealing with multiple counterparties when accessing various capital products Increases Flexibility -Increases Flexibility - Eliminates inter-creditor issues Eliminates inter-creditor issues Allows for easier structuring/customization of financings for specific transactions Allows for easier structuring/customization of financings for specific transactions

6 Volumetric Production Payment (VPP) Transaction Description Buyer purchases a limited term overriding royalty interest Buyer purchases a limited term overriding royalty interest Size and term of transaction depend on production profile Size and term of transaction depend on production profile Production is delivered free of all costs (operator pays LOE, royalties, G&A, etc.) Production is delivered free of all costs (operator pays LOE, royalties, G&A, etc.) No preference given to gas or oil No preference given to gas or oil Proved Developed Non-Producing (60%) and Proved Undeveloped Reserves (20%) credited on a risk-adjusted basis Proved Developed Non-Producing (60%) and Proved Undeveloped Reserves (20%) credited on a risk-adjusted basis Some property qualifications apply Some property qualifications apply Cash advanced in exchange for hydrocarbon volumes to be delivered over time

7 VPP - Valuation Example 6,000 5,000 4,000 3,000 2,000 1,000 0 0123456789101112 Annual Production (Bbtue) Risk-Adjusted Net Production 10% Cushion Risk-Adjusted Reserve Coverage (Tail) Constellation Production Payment Unadjusted Net Production Year Portfolio of Properties “Cost Gas/Oil”

8 VPP - Structure Benefits Producer Producer Receives cash up-front to implement various strategies (monetize, refinance existing capital structure, acquire)Receives cash up-front to implement various strategies (monetize, refinance existing capital structure, acquire) Retains operational control of propertiesRetains operational control of properties Hedge out interest rate and commodity price risk (with no margin call)Hedge out interest rate and commodity price risk (with no margin call) Transfer reserve risk (no borrowing base re-determinations)Transfer reserve risk (no borrowing base re-determinations) Satisfies obligation to CE in hydrocarbons instead of cashSatisfies obligation to CE in hydrocarbons instead of cash Retains reserve upsideRetains reserve upside ORRI terminates and properties revert to producer after all production payment volumes have been deliveredORRI terminates and properties revert to producer after all production payment volumes have been delivered Constellation Energy Constellation Energy Gains access to long-term supply of hydrocarbonsGains access to long-term supply of hydrocarbons

9 VPP - Advantages Over Traditional Financing Higher cash advance rate than traditional senior financing Higher cash advance rate than traditional senior financing Non-recourse Non-recourse Fixed funding cost Fixed funding cost Lower blended cost of capital than traditional choice of debt plus equity or mezzanine financing Lower blended cost of capital than traditional choice of debt plus equity or mezzanine financing No downside price risk No downside price risk Defined volume obligation Defined volume obligation

10 VPP - Important Notes Deficiencies and make-ups are adjusted for: Deficiencies and make-ups are adjusted for: Time value of moneyTime value of money Location differentialsLocation differentials Price seasonalityPrice seasonality Up to 90% takesUp to 90% takes Structure based on net revenue interest; royalty owners are assumed to be non-participating Structure based on net revenue interest; royalty owners are assumed to be non-participating Producer is responsible for all severance and ad valorem taxes Producer is responsible for all severance and ad valorem taxes Operating and other costs are the responsibility of the producer Operating and other costs are the responsibility of the producer Structuring fee is payable by the producer at closing Structuring fee is payable by the producer at closing Legal and third-party engineering fees are paid by the producer Legal and third-party engineering fees are paid by the producer

11 Mezzanine Financing Provided as bridge financing and for low risk developmental projects Provided as bridge financing and for low risk developmental projects Provided along-side VPP structure to add additional capital for continuing project development (with VPP take-out upon successful results) Provided along-side VPP structure to add additional capital for continuing project development (with VPP take-out upon successful results) Lower blended cost of capital than traditional choice of debt plus mezzanine financingLower blended cost of capital than traditional choice of debt plus mezzanine financing Avoids inter-creditor issuesAvoids inter-creditor issues Risk adjustment factors of mezzanine funding more aggressive than those of VPP (~80-100% of PDNP and 50-60% of PUD’s) Risk adjustment factors of mezzanine funding more aggressive than those of VPP (~80-100% of PDNP and 50-60% of PUD’s) Engineering case typically greater than p10 (probabilistic case) Engineering case typically greater than p10 (probabilistic case) “Equity Participation” – in the form of override or corporate equity; Equity Principles apply including: “Equity Participation” – in the form of override or corporate equity; Equity Principles apply including: Quality management teamQuality management team Good track recordGood track record Quality PUD’s, probables, and possiblesQuality PUD’s, probables, and possibles

12 90/10 rule → Focus portfolio on small number of “qualified or known” clients with whom CEG wants to transact on a consistent basis Quality Management Teams → “Best in Class” benchmark Good Track Records → History of generating appropriate returns for risk assumed Solid Business Plans → Focused, niche players Market Factors → Investment will reflect market cycle Manage Aggressively → Know early if business plan is not being realized and take action Unsecured/Equity Transaction Size → Minimum $3 MM, maximum $25+ MM per transaction Skin in the Game → Material personal investment in the venture Exit/Liquidity → Strategy is not to “grow & hold” but “build & sell” Risk Compensation → Get compensated for risk and ongoing management Majority Investment → Maximizes investment protection Equity Capital Principles

13 Capital Products and Funding Matrix VPP / Sr. DebtMezzanineEquity Transaction Capital Threshold $20-500+mm$5-50+mm $5-25+mm Portfolio Allocation65%15%20% Investment Types VPP's, Prepays, Sr. Debt Bridge Debt, Sub Debt, Development Drilling Project, Corporate, Exploration (Diversified or Program) IRR (unlevered)8-12%12-18%25-35%+ Collateral Coverage1.3-1.70.85-1.250-0.6 Turnover (years)0-0.3 to sydicate.25-3 1-5 Funding In-House Funds, Commercial Banks/Insurance Funding Vehicles In-House Funds, Commercial Banks, Institutional Funds

14 Contact Information Houston Office: 500 Dallas St. St. 3010 Houston, TX 77002 Gas Group: Houston: Craig Fox(713) 344-2888craig.fox@constellation.com Ken Davis(713) 344-2884ken.davis@constellation.com Claire Harvey(713) 344-2878claire.harvey@constellation.com Brett Mudford(713) 344-2890brett.mudford@constellation.com Terry McBride(713) 344-2892theresa.mcbride@constellation.com John Thompson(713) 344-2889john.thompson@constellation.com Baltimore: Matt Arnold(410) 468-3707matt.arnold@constellation.com Mo Bawa(410) 468-3574mo.bawa@constellation.com Jennifer McNiece(410) 468-3564jennifer.mcniece@constellation.com Ozzie Pagan(410) 468-3641ozzie.pagan@constellation.com Dan Reck (410) 468-3571daniel.reck@constellation.com Baltimore Office: 111 Market Place St. 500 Baltimore, MD 21202


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