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Exploring Constellation Energy: Innovative Financing and Risk Management in Oil and Gas

This presentation, held at the 2004 Oil & Gas Investment Symposium, delves into Constellation Energy (CE), established in 1997 through a joint venture between Goldman Sachs and Baltimore Gas & Electric. CE is a leader in energy risk management, maintaining a diverse national trading and generation portfolio. The session covers CE's operational capacity, including its wholesale energy marketing, trading, and development, as well as its strategies for accessing capital markets and innovative financing solutions such as Volumetric Production Payments (VPPs).

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Exploring Constellation Energy: Innovative Financing and Risk Management in Oil and Gas

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  1. Presentation for 2004 Oil & Gas Investment SymposiumApril 19 – 21, 2004 New 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) • 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 CONSTELLATION ENERGY GROUP, INC. (NYSE: CEG) Constellation Generation Group (CGG) 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 • 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 • 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 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 0 Unadjusted Net Production Risk-Adjusted Net Production 10% Cushion Annual Production (Bbtue) “Cost Gas/Oil” Risk-Adjusted Reserve Coverage (Tail) Constellation Production Payment 0 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

  13. Capital Products and Funding Matrix

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

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