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Presentation for 2004 Oil & Gas Investment Symposium April 19 – 21, 2004 New York City, NY 44 1.

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Presentation on theme: "Presentation for 2004 Oil & Gas Investment Symposium April 19 – 21, 2004 New York City, NY 44 1."— Presentation transcript:

1 Presentation for 2004 Oil & Gas Investment Symposium April 19 – 21, 2004 New York City, NY 44 1

2 Who is Constellation Energy?
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 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 12,510 MW total controlled capacity Gas business currently moving approximately to 2BCF/Day

3 Constellation Family of Companies
ENERGY GROUP, INC. (NYSE: CEG) Constellation Generation Group (CGG) Constellation Energy (CE) Baltimore Gas & Electric (BGE) Retail 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 BGE Home Full service physical and financial energy services C&I focus Mid-Atlantic concentration New Energy Full service physical, financial services Ohio Valley/Northeast and Canada Alliance Full service physical and financial energy services and consulting Ohio Valley Service Agreement Value Statement: - Volatility of net income for utilities will increase. J. Aron can proactively manage risk and add value. Current wholesale activity accounts for at least 20% of revenue at Cinergy and an even larger fraction of net income. - Deregulation puts these wholesale dollars at risk due to competition. - J. Aron will enable the utility to take the most aggressive, financially sound wholesale position to capture profits from taking positions, mispricing, and arbitrage opportunities. J. Aron can build a commodity trading desk better, faster and cheaper than anyone else. - Both physical and financial skill sets are critical to success. Implications: The fundamental value proposition of the service agreement proposal is that utilities and trading firms each have skills and assets that are critical to success in the emerging power markets, and the correct paradigm is that of outsourcing: it is cheaper and better to buy than to build. The transmission arbitrage, buy vs. make, and fat margin opportunities will be lost if an aggressive service agreement is not involved. Upside: Taking prudent risk, managing current risk and aggressively expanding wholesale business will lead to an increase in profits of $XXX MM by It is too costly and risky for a utility to develop financial expertise and for a bank to acquire physical expertise/assets on their own. The additional time and mistakes of in-house development will lead to forgone profits in the beginning of commoditization, where the margins are the fattest. The risks of Barrings and Orange County should be off-loaded to a bank. Downside of Inaction: Without taking aggressive steps, small competitors with nothing to lose will eat up utility’s profits through open access (Mega NOPR). Utility will continue to have bulk trading in real time market, which is the riskiest. 490 Bcf Annually 25 Bcf Annually 130 Bcf Annually 100 Bcf Annually

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

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

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

7 VPP - Valuation Example
Portfolio of Properties 6,000 5,000 4,000 3,000 2,000 1,000 Unadjusted Net Production Risk-Adjusted Net Production 10% Cushion Annual Production (Bbtue) “Cost Gas/Oil” Risk-Adjusted Reserve Coverage (Tail) Constellation Production Payment 1 2 3 4 5 6 7 8 9 10 11 12 Year

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

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

10 VPP - Important Notes Deficiencies and make-ups are adjusted for:
Time value of money Location differentials Price seasonality Up to 90% takes Structure based on net revenue interest; royalty owners are assumed to be non-participating Producer is responsible for all severance and ad valorem taxes Operating and other costs are the responsibility of the producer Structuring fee is payable by the producer at closing 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 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 financing Avoids 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) Engineering case typically greater than p10 (probabilistic case) “Equity Participation” – in the form of override or corporate equity; Equity Principles apply including: Quality management team Good track record Quality PUD’s, probables, and possibles

12 Equity Capital Principles
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

13 Capital Products and Funding Matrix
VPP / Sr. Debt Mezzanine Equity Transaction Capital Threshold  $ mm $5-50+mm  $5-25+mm  Portfolio Allocation 65% 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 Coverage 0-0.6 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) Ken Davis (713) Claire Harvey (713) Brett Mudford (713) Terry McBride (713) John Thompson (713) Baltimore: Matt Arnold (410) Mo Bawa (410) Jennifer McNiece (410) Ozzie Pagan (410) Dan Reck (410) Baltimore Office: 111 Market Place St. 500 Baltimore, MD 21202 Service Agreement Value Statement: - Volatility of net income for utilities will increase. J. Aron can proactively manage risk and add value. Current wholesale activity accounts for at least 20% of revenue at Cinergy and an even larger fraction of net income. - Deregulation puts these wholesale dollars at risk due to competition. - J. Aron will enable the utility to take the most aggressive, financially sound wholesale position to capture profits from taking positions, mispricing, and arbitrage opportunities. J. Aron can build a commodity trading desk better, faster and cheaper than anyone else. - Both physical and financial skill sets are critical to success. Implications: The fundamental value proposition of the service agreement proposal is that utilities and trading firms each have skills and assets that are critical to success in the emerging power markets, and the correct paradigm is that of outsourcing: it is cheaper and better to buy than to build. The transmission arbitrage, buy vs. make, and fat margin opportunities will be lost if an aggressive service agreement is not involved. Upside: Taking prudent risk, managing current risk and aggressively expanding wholesale business will lead to an increase in profits of $XXX MM by It is too costly and risky for a utility to develop financial expertise and for a bank to acquire physical expertise/assets on their own. The additional time and mistakes of in-house development will lead to forgone profits in the beginning of commoditization, where the margins are the fattest. The risks of Barrings and Orange County should be off-loaded to a bank. Downside of Inaction: Without taking aggressive steps, small competitors with nothing to lose will eat up utility’s profits through open access (Mega NOPR). Utility will continue to have bulk trading in real time market, which is the riskiest.


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