Presentation for

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Presentation for
2004 Oil Gas Investment SymposiumApril 19
21, 2004 New York City, NY
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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

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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
• CI focus
• Mid-Atlantic concentration
• New Energy
• Full service physical, financial services
• CI focus
• Ohio Valley/Northeast and Canada
• Alliance
• Full service physical and financial energy
  services and consulting
• CI focus
• Ohio Valley

• 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

490 Bcf Annually
25 Bcf Annually
130 Bcf Annually
100 Bcf Annually
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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

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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

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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, GA, 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

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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
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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

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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

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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

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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 PUDs)
• 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 PUDs, probables, and possibles

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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
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Capital Products and Funding Matrix
  VPP / Sr. Debt Mezzanine Equity
Transaction Capital Threshold  20-500mm 5-50mm  5-25mm 
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 1.3-1.7 0.85-1.25 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 In-House Funds, Commercial Banks, Institutional Funds
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Contact Information
Houston Office 500 Dallas St. St. 3010 Houston,
TX 77002 Gas Group Houston Craig Fox (713)
344-2888 craig.fox_at_constellation.com Ken
Davis [phone] ken.davis_at_constellation.com
Claire Harvey [phone] claire.harvey_at_const
ellation.com Brett Mudford (713)
344-2890 brett.mudford_at_constellation.com Terry
McBride [phone] theresa.mcbride_at_constellat
ion.com John Thompson [phone] john.thompso
n_at_constellation.com Baltimore Matt Arnold (410)
468-3707 matt.arnold_at_constellation.com Mo
Bawa [phone] mo.bawa_at_constellation.com Je
nnifer McNiece [phone] jennifer.mcniece_at_co
nstellation.com Ozzie Pagan (410)
468-3641 ozzie.pagan_at_constellation.com Dan Reck
[phone] daniel.reck_at_constellation.com
Baltimore Office 111 Market Place St.
500 Baltimore, MD 21202