Form S-4
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As filed with the Securities and Exchange Commission on June 23, 2006

Registration No. 333-            

 


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM S-4

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 


Constellation Energy Group, Inc.

(Exact name of registrant as specified in its charter)

 

Maryland   4911   52-1964611
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)

750 E. Pratt Street

Baltimore, Maryland 21202

(410) 783-2800

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

E. Follin Smith

Executive Vice President, Chief Financial Officer and Chief Administrative Officer

750 E. Pratt Street

Baltimore, Maryland 21202

(410) 783-2800

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 


Copies To:

 

Irving B. Yoskowitz, Esq.   George P. Stamas, Esq.   Edward F. Tancer, Esq.   Philip A. Gelston, Esq.
Constellation Energy Group, Inc.   Mark D. Director, Esq.   FPL Group, Inc.   Sarkis Jebejian, Esq.
750 E. Pratt Street   Thomas W. Christopher, Esq.   700 Universe Boulevard   Cravath, Swaine & Moore LLP
Baltimore, Maryland 21202   Kirkland & Ellis LLP   Juno Beach, Florida 33408   Worldwide Plaza
(410) 783-2800   655 Fifteenth Street, N.W.   (561) 694-4000   825 Eighth Avenue
  Washington, D.C. 20005     New York, New York 10019
  (202) 879-5000     (212) 474-1000

Approximate date of commencement of proposed sale of the securities to the public: As soon as practicable after this registration statement becomes effective and upon completion of the merger described herein.

If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box.  ¨

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨              

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨              

CALCULATION OF REGISTRATION FEE

 

 
Title of each class of
securities to be registered
   Amount
to be
Registered(1)
   Proposed
Maximum
Aggregate
Offering Price(2)
   Amount of
Registration
Fee(3)

Constellation Energy Group, Inc. Common Stock—without par value

   404,244,659    $15,066,791,930    $1,612,147
 
(1) The maximum number of shares of Constellation Energy Group, Inc. issuable upon consummation of the share exchange of one share of Constellation common stock for each outstanding share of common stock of FPL Group, Inc. and based on 404,244,659 shares of common stock of FPL Group, Inc. estimated by FPL Group, Inc. to be outstanding immediately prior to the closing of the merger.
(2) Estimated solely for purposes of calculating the registration fee and computed pursuant to Rules 457(f) and (o) promulgated under the Securities Act, based on $37.27, the average of the high and the low prices of common stock of Constellation Energy Group, Inc. as reported on the New York Stock Exchange on June 22, 2006 ($53.82) adjusted to take into account the proposed stock split of the shares of common stock of Constellation Energy Group, Inc. to be effective immediately prior to the merger, and multiplied by the maximum number of shares of common stock of Constellation Energy Group, Inc. to be issued pursuant to the merger.
(3) Calculated in accordance with Section 6(b) of the Securities Act and Rule 457(f)(1) promulgated thereunder.

 


The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the registration statement shall become effective on such date as the Commission, pursuant to said Section 8(a), may determine.

 



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The information in this preliminary joint proxy statement/prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary joint proxy statement/prospectus is not an offer to sell and is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

Preliminary Copy—Subject to Completion, dated June 23, 2006

 

LOGO   LOGO

Dear Constellation stockholders and FPL Group shareholders:

On behalf of the boards of directors and management teams of both Constellation Energy Group, Inc., which we refer to as Constellation, and FPL Group, Inc., which we refer to as FPL Group, we are pleased to deliver our joint proxy statement/prospectus for the merger of our two companies. Upon completion of the merger and the related Constellation stock split to be undertaken in connection with the completion of the merger, Constellation stockholders prior to the merger will own approximately 40% of the combined company’s outstanding shares of common stock and the FPL Group shareholders prior to the merger will own approximately 60% of the combined company’s outstanding shares of common stock. We will use the term “combined company” to refer to Constellation as it will exist after completion of the merger.

We believe the merger will create a strong combined company that will deliver important benefits to our stockholders and customers and the communities we serve.

We are asking Constellation stockholders to approve (1) the issuance of shares of Constellation common stock to the former FPL Group shareholders in the merger and (2) an amendment and restatement of the Constellation charter to, among other things, increase the number of authorized shares of Constellation common stock (to facilitate both the stock split and the issuance of shares in the merger). The Constellation board of directors recommends that Constellation stockholders vote FOR the proposals related to the merger.

We are asking the FPL Group shareholders to approve the merger agreement. The FPL Group board of directors recommends that FPL Group shareholders vote FOR the proposal related to the merger.

The places, dates and times of the annual meetings are as follows:

 

For FPL Group shareholders:   For Constellation stockholders:
[·]   [·]

Before voting, you should carefully review all the information contained in the attached joint proxy statement/prospectus. For a discussion of risk factors which you should consider in evaluating the merger, see “ RISK FACTORS” beginning on page 23.

Your vote is very important. Whether or not you expect to attend the applicable annual meeting, the details of which are described on the following pages, please complete, date, sign and promptly return the accompanying proxy card in the enclosed envelope or submit your voting instructions by telephone or through the Internet if that option is available to you.

We enthusiastically support the merger of our two companies and join with our boards of directors in recommending that you vote FOR the proposals related to the merger.

Sincerely,

 

   

LEWIS HAY, III

Chairman, President and Chief Executive Officer

FPL Group, Inc.

   

MAYO A. SHATTUCK III

Chairman, President and Chief Executive Officer

Constellation Energy Group, Inc.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the merger described in this joint proxy statement/prospectus or the securities to be issued pursuant to the merger under this joint proxy statement/prospectus or determined if this joint proxy statement/prospectus is accurate or adequate. Any representation to the contrary is a criminal offense.

This joint proxy statement/prospectus is dated [·], 2006, and is first being mailed to stockholders on or about [·], 2006.


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LOGO

750 E. Pratt Street

Baltimore, Maryland 21202

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

OF CONSTELLATION ENERGY GROUP, INC.

NOTICE IS HEREBY GIVEN that Constellation Energy Group, Inc. (“Constellation”) will hold the annual meeting of its stockholders at [·] on [·], 2006, at [·], local time. The purpose of this annual meeting is to consider and vote on the following matters:

 

  1. A proposal to approve the issuance of shares of Constellation common stock to FPL Group shareholders (which we refer to herein as the share issuance proposal) as contemplated by the Agreement and Plan of Merger, dated as of December 18, 2005, among Constellation, CF Merger Corporation (which is a wholly owned subsidiary of Constellation) and FPL Group (which we refer to as the merger agreement). A copy of the merger agreement is attached as Annex A to the accompanying joint proxy statement/prospectus.

 

  2. A proposal to approve, effective as of the completion of the merger, the amended and restated charter of Constellation substantially in the form attached as Annex F to the accompanying joint proxy statement/prospectus, which we refer to as the charter amendment proposal, such approval to include, among other things, the following individual proposals:

 

    to add 700 Universe Boulevard, Juno Beach, Florida 33408 as the address of Constellation’s additional principal office;

 

    to provide that the minimum size of the Constellation board of directors shall be increased from no less than three members to consist of no less than seven members;

 

    to provide that, as of the closing date of the merger and until at least the second anniversary of the closing date of the merger, any vacancy on the Constellation board of directors that results from any cause other than an increase in the number of directors will be filled pursuant to Section 11(c)(i) of Article III of the by-laws of Constellation in effect at the closing date of the merger;

 

    to increase the number of authorized shares of common stock to 1.2 billion;

 

    to increase the number of authorized shares of preferred stock to 125 million;

 

    to provide that each share of common stock shall have one vote, and, except as otherwise provided in respect of any class of stock hereafter classified or reclassified, the exclusive voting power for all purposes shall be vested in the holders of the common stock;

 

    to provide that shares of common stock shall not have cumulative voting rights;

 

    to provide that dividends may be paid ratably on the common stock at such time and in such amounts as the Constellation board of directors may deem advisable;

 

    to provide that in the event of any liquidation, dissolution or winding up of Constellation, whether voluntary or involuntary, the holders of the common stock shall be entitled, together with the holders of any other class of stock hereafter classified or reclassified not having a preference on distributions in the liquidation, dissolution or winding up of Constellation, to share ratably in the net assets of Constellation remaining, after payment or provision for payment of the debts and other liabilities of Constellation and the amount to which the holders of any class of stock hereafter classified or reclassified having a preference on distributions in the liquidation, dissolution or winding up of Constellation shall be entitled; and

 

   

to provide that the Constellation board of directors may classify and reclassify any unissued shares of Constellation stock (whether or not such shares have been previously classified or reclassified) by setting or changing in any one or more respects, from time to time before issuance of such


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shares, the class and series designations of shares of capital stock or setting or changing the preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications or terms or conditions of redemption of such shares.

 

  3. The election of Class I directors to the Constellation board of directors to serve three year terms to expire in 2009.

 

  4. A proposal to ratify the appointment of PricewaterhouseCoopers LLP as Constellation’s independent registered public accounting firm for the year 2006.

 

  5. A stockholder proposal.

 

  6. Any such other matters as may properly come before the annual meeting and any adjournment or postponement of the annual meeting.

The record date for stockholders entitled to notice of, and to vote at, the annual meeting and any adjournment or postponement thereof is [·], 2006. As of the record date, there were [·] shares of Constellation common stock outstanding. Each share of Constellation common stock is entitled to one vote on each matter properly brought before the meeting. If you wish to vote your shares at the meeting, the inspector of elections will be available to record your vote at the meeting site beginning at [·], local time, on the date of the meeting. Voting is expected to close at the commencement of the meeting.

Your board of directors recommends that you vote FOR the charter amendment proposal, the share issuance proposal, each of the board of directors’ nominees as Class I directors and the other proposals that are described in detail in the accompanying joint proxy statement/prospectus, other than the stockholder proposal discussed therein. Your board of directors makes no voting recommendation with respect to the stockholder proposal. Your attention is directed to the accompanying joint proxy statement/prospectus for a discussion of the merger and the merger agreement.

Your vote is important. You are cordially invited to attend the meeting, but whether or not you expect to attend in person, you are urged to mark, date and sign the enclosed proxy card and return it in the enclosed prepaid envelope or follow the alternative proxy submission procedures described on the proxy card and in the accompanying joint proxy statement/prospectus so that your shares can be voted. If you attend, you may withdraw your proxy and vote in person.

By Order of the Board of Directors,

Charles A. Berardesco

Corporate Secretary

Baltimore, Maryland

[·], 2006

 

YOUR VOTE IS VERY IMPORTANT

PLEASE PROMPTLY MARK, DATE, SIGN AND RETURN YOUR PROXY CARD OR FOLLOW THE TELEPHONE OR INTERNET PROXY SUBMISSION PROCEDURES DESCRIBED ON THE PROXY CARD SO THAT YOUR SHARES MAY BE VOTED IN ACCORDANCE WITH YOUR WISHES AND SO THAT THE PRESENCE OF A QUORUM MAY BE ASSURED. YOUR PROMPT ACTION WILL AID CONSTELLATION IN REDUCING THE EXPENSE OF PROXY SOLICITATION.


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LOGO

P.O. Box 14000

700 Universe Boulevard

Juno Beach, Florida 33408-0420

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

[·], 2006

The annual meeting of shareholders of FPL Group, Inc. will be held at [·] on [·], 2006, beginning at [·], to consider and vote on the following matters:

 

    A proposal to approve the Agreement and Plan of Merger, dated as of December 18, 2005, among Constellation Energy Group, Inc., CF Merger Corporation (which is a wholly owned subsidiary of Constellation) and FPL Group. A copy of the merger agreement is included as Annex A to the accompanying joint proxy statement/prospectus.

 

    Election of FPL Group’s directors.

 

    Ratification of the appointment of Deloitte & Touche LLP as FPL Group’s independent registered public accounting firm for the year 2006.

 

    Such other matters as may properly come before the annual meeting and any adjournment or postponement of the annual meeting.

The record date for shareholders entitled to notice of, and to vote at, the annual meeting and any adjournment or postponement thereof is [·], 2006.

Your board of directors recommends that you vote FOR the FPL Group proposals that are described in detail in the accompanying joint proxy statement/prospectus. Your attention is directed to the accompanying joint proxy statement/prospectus for a discussion of the merger and the merger agreement, as well as the other matters that will be considered at the meeting.

Admittance to the meeting will be limited to shareholders. Shareholders who plan to attend are requested to so indicate by marking the appropriate space on the enclosed proxy card or following the telephonic or Internet instructions. You will need a form of personal identification to attend the annual meeting. Shareholders whose shares are held in street name (the name of a broker, trust, bank or other nominee) should bring with them a legal proxy or a recent brokerage statement or letter from the street name holder confirming their beneficial ownership of shares. For the safety of attendees, all boxes, handbags and briefcases are subject to inspection.

Please mark, date, sign and return the enclosed proxy card promptly so that your shares can be voted, regardless of whether you expect to attend the meeting. Alternatively, you may submit your proxy by telephone or electronically by following the instructions on your proxy card. If you attend, you may withdraw your proxy and vote in person.

By Order of the Board of Directors,

Alissa E. Ballot

Vice President & Corporate Secretary

Juno Beach, Florida

[·], 2006


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YOUR VOTE IS VERY IMPORTANT

PLEASE PROMPTLY MARK, DATE, SIGN AND RETURN YOUR PROXY CARD OR FOLLOW THE TELEPHONE OR INTERNET PROXY SUBMISSION PROCEDURES DESCRIBED ON THE PROXY CARD SO THAT YOUR SHARES MAY BE VOTED IN ACCORDANCE WITH YOUR WISHES AND SO THAT THE PRESENCE OF A QUORUM MAY BE ASSURED. YOUR PROMPT ACTION WILL AID FPL GROUP IN REDUCING THE EXPENSE OF PROXY SOLICITATION.


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REFERENCES TO ADDITIONAL INFORMATION

This joint proxy statement/prospectus incorporates important business and financial information about Constellation and FPL Group from other documents that are not included in or delivered with this joint proxy statement/prospectus. This information is available to you without charge upon your written or oral request. You can obtain those documents incorporated by reference into this joint proxy statement/prospectus by requesting them in writing or by telephone from the appropriate company at the following addresses and telephone numbers:

 

Constellation Energy Group, Inc.

Investor Relations

750 E. Pratt Street

Baltimore, Maryland 21202

(410) 783-3647

 

FPL Group, Inc.

Shareholder Services

700 Universe Blvd.
Juno Beach, Florida 33408-0420

(800) 222-4511

If you would like to request documents, please do so by [·], 2006 in order to receive them before your annual meeting.

You should rely on the information contained or incorporated by reference into this joint proxy statement/prospectus to vote at your annual meeting. No person is authorized to give any information or to make any representation not contained or incorporated by reference into this joint proxy statement/prospectus and, if given or made, that information or representation should not be relied upon as having been authorized.

See the discussion below under “Where You Can Find More Information” beginning on page 235.

SUBMITTING PROXIES BY MAIL, TELEPHONE OR INTERNET

If you are a Constellation stockholder of record, you may submit your proxy:

 

    by mail, by signing and dating each proxy card you receive, indicating your voting preference on each proposal and returning each proxy card in the prepaid envelope which accompanied that proxy card;

 

    by telephone, by calling the toll-free number 1-800-PROXIES (1-800-776-9437) in the United States, Canada or Puerto Rico on a touch-tone phone and following the recorded instructions; or

 

    through the Internet, by going to the following website: www.voteproxy.com, entering the information requested on your computer screen and following the simple instructions.

If you are a FPL Group shareholder of record, you may submit your proxy:

 

    by mail, by signing and dating each proxy card you receive, indicating your voting preference on each proposal and returning each proxy card in the prepaid envelope which accompanied that proxy card;

 

    by telephone, by calling the toll-free number 1-866-695-6074 in the United States or Canada on a touch-tone phone and following the recorded instructions; or

 

    through the Internet, by going to the following website: www.computershare.com/us/proxy/fpl, entering the information requested on your computer screen and following the simple instructions.

If you are a beneficial owner (but not the holder of record) of shares of Constellation common stock or FPL Group common stock, please refer to your proxy card or the information forwarded by your bank, broker or other holder of record to see which proxy submission options are available to you.

 


Except as specifically noted, stock or stock-related numbers in this joint proxy statement/prospectus related to any period prior to the completion of the merger have not been adjusted to show the effect of the proposed stock split of shares of Constellation common stock discussed herein.

 


This joint proxy statement/prospectus does not constitute an offer to sell, or a solicitation of an offer to purchase, any securities, or the solicitation of a proxy, by any person in any jurisdiction in which such an offer or solicitation is not authorized or in which the person making the offer or solicitation is not qualified to do so or to any person to whom it is unlawful to make such an offer or solicitation.

 

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TABLE OF CONTENTS

 

     Page

CHAPTER ONE THE INTRODUCTION

   1

QUESTIONS AND ANSWERS ABOUT THE ANNUAL MEETINGS

   1

SUMMARY OF THE PROPOSED MERGER

   7

RISK FACTORS

   23

Risks Relating to the Merger

   23

Risks Relating to the Businesses of Constellation, FPL Group and the Combined Company

   27

NOTE REGARDING FORWARD-LOOKING STATEMENTS

   37

CHAPTER TWO INFORMATION ABOUT THE ANNUAL MEETINGS AND VOTING

   39

Matters Relating to the Meetings

   39

Required Votes for the Constellation and FPL Group Proposals

   43

Proxies

   44

How to Submit a Proxy

   45

Other Business; Adjournments

   47

Constellation Stockholder Account Maintenance

   48

FPL Group Shareholder Account Maintenance

   48

Shares Beneficially Owned by Constellation Directors and Officers

   48

Shares Beneficially Owned by FPL Group Directors and Officers

   48

CHAPTER THREE THE PROPOSED MERGER

   49

The Companies

   49

General

   49

Constellation Merger Proposals

   50

FPL Group Merger Proposal

   50

Background of the Merger

   50

Constellation’s Reasons for the Merger; Recommendation of the Constellation Board of Directors

   58

Opinions of Constellation’s Financial Advisors

   63

FPL Group’s Reasons for the Merger; Recommendation of the FPL Group Board of Directors

   81

Opinions of FPL Group’s Financial Advisors

   86

Accounting Treatment

   105

Material United States Federal Income Tax Consequences of the Merger

   105

Regulatory Matters Relating to the Merger

   108

Appraisal Rights

   113

Federal Securities Laws Consequences; Stock Transfer Restriction Agreements

   113

Stock Exchange Listing; Delisting and Deregistration of FPL Group Common Stock

   114

Business Relationships between FPL Group and Constellation

   114

ADDITIONAL INTERESTS OF FPL GROUP’S AND CONSTELLATION’S DIRECTORS AND EXECUTIVE OFFICERS IN THE MERGER

   115

Positions with the Combined Company

   115

Additional Interests of FPL Group’s Directors and Executive Officers in the Merger

   115

Additional Interests of Constellation’s Directors and Executive Officers in the Merger

   122

THE MERGER AGREEMENT

   133

General

   133

Closing Matters

   133

Consideration to be Received Pursuant to the Merger; Stock Split

   134

Exchange of Certificates Pursuant to the Merger

   134

Listing of Constellation Stock

   135

 

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     Page

Covenants

   135

Representations and Warranties

   140

Conditions

   142

Termination of Merger Agreement

   143

Amendments, Extensions and Waivers

   145

POST-MERGER GOVERNANCE AND MANAGEMENT

   146

Amended and Restated Constellation Charter and By-laws

   146

Corporate Offices

   147

Board of Directors of Constellation

   147

Nomination of Director Candidates; Removal of Directors

   148

Other Board of Directors Matters

   148

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

   151

CHAPTER FOUR OTHER MATTERS TO BE CONSIDERED AT THE ANNUAL MEETINGS

   165

CONSTELLATION PROPOSAL 3: ELECTION OF DIRECTORS

   165

Vote Required; Recommendation of the Constellation Board of Directors

   165

Board Structure

   165

Determination of Independence

   167

Meetings and Committees of the Constellation Board of Directors

   168

Nominations for Director

   169

Stockholder Communications

   170

Directors’ Compensation

   170

Certain Relationships and Transactions

   171

Report of the Audit Committee

   171

Stock Ownership

   172

Executive Compensation

   173

Common Stock Performance Graphs

   182

Report of Compensation Committee on Executive Compensation

   183

CONSTELLATION PROPOSAL 4: RATIFICATION OF PRICEWATERHOUSECOOPERS LLP AS CONSTELLATION’S INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR 2006

   187

Vote Required; Recommendation of the Constellation Board of Directors

   187

General

   187

Fees

   187

Policy for Approval of Audit and Permitted Non-Audit Services

   187

CONSTELLATION PROPOSAL 5: STOCKHOLDER PROPOSAL

   188

Vote Required; Recommendation of the Constellation Board of Directors

   188

General

   188

FPL GROUP PROPOSAL 2: ELECTION OF DIRECTORS

   190

Vote Required; Recommendation of the FPL Group Board of Directors

   190

Nominees

   190

Performance Graph

   192

Common Stock Ownership of Certain Beneficial Owners and FPL Group Management

   193

Section 16(a) Beneficial Ownership Reporting Compliance

   195

Corporate Governance Principles & Guidelines/Code of Ethics

   195

Director Independence

   195

Director Meetings and Attendance

   196

Executive Sessions of Non-Management Directors

   196

Committees

   196

Consideration of Director Nominees

   199

 

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     Page

Communications with the FPL Group Board of Directors

   200

Director Compensation

   200

FPL Group Audit Committee Report

   201

Compensation Committee Report

   203

Executive Compensation

   207

Employment Agreements

   212

FPL GROUP PROPOSAL 3: RATIFICATION OF APPOINTMENT OF DELOITTE & TOUCHE AS FPL GROUP’S INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR 2006

   214

Vote Required; Recommendation of the FPL Group Board of Directors

   214

General

   214

Fees Paid to Deloitte & Touche LLP

   215

Policy on Audit Committee Pre-Approval of Audit and Non-Audit Services of Independent Registered Public Accounting Firm

   215

DATE FOR SUBMISSION OF SHAREHOLDER PROPOSALS

   217

Constellation

   217

FPL Group

   217

HOUSEHOLDING

   218

CHAPTER FIVE CERTAIN LEGAL INFORMATION

   219

COMPARISON OF STOCKHOLDERS’ RIGHTS

   219

DESCRIPTION OF CONSTELLATION CAPITAL STOCK

   233

Authorized Capital Stock

   233

Constellation Common Stock

   233

Constellation Preferred Stock

   233

Transfer Agent and Registrar

   234

LEGAL MATTERS

   234

EXPERTS

   234

WHERE YOU CAN FIND MORE INFORMATION

   235

 

Annex A

   Agreement and Plan of Merger

Annex B

   Opinion of Morgan Stanley & Co. Incorporated

Annex C

   Opinion of Goldman, Sachs & Co.

Annex D

   Opinion of Merrill Lynch Pierce, Fenner & Smith Incorporated

Annex E

   Opinion of Lehman Brothers Inc.

Annex F

   Form of Amended and Restated Constellation Charter

Annex G

   Form of Amended and Restated Constellation By-laws

Annex H

   Constellation Energy Group, Inc. Audit Committee Charter

Annex I

   FPL Group, Inc. Audit Committee Charter

 

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CHAPTER ONE

THE INTRODUCTION

QUESTIONS AND ANSWERS ABOUT THE ANNUAL MEETINGS

 

Q: Why am I receiving this document?

 

A: We are delivering this joint proxy statement/prospectus to you because you are either a Constellation stockholder, a FPL Group shareholder, or both. This document is serving as both a joint proxy statement of Constellation and FPL Group and a prospectus of Constellation. It is a joint proxy statement because it is being used by our boards of directors to solicit proxies from our stockholders. It is a prospectus because Constellation is offering shares of its common stock in exchange for shares of FPL Group common stock in connection with the proposed merger of the two companies (which we refer to herein as the merger).

 

Q: What do I need to do now?

 

A: After you carefully read this joint proxy statement/prospectus, complete, sign and mail your proxy card in the enclosed return envelope, or submit your proxy by telephone or through the Internet, as soon as possible, so that your shares may be represented at your meeting. In order to assure that your vote is recorded, please submit your proxy as instructed on your proxy card even if you currently plan to attend your meeting in person.

 

Q: Why have Constellation and FPL Group decided to merge?

 

A: Constellation and FPL Group believe that the combination will provide substantial strategic and financial benefits to their stockholders and customers and the communities they serve, including:

 

    diversification of business and increased scale;

 

    financial strength and flexibility;

 

    expanded capacity to generate electricity;

 

    stronger competitive energy business platform;

 

    enhanced nuclear expertise;

 

    increased breadth of fuel mix and renewable portfolio, which will include the largest wind generation portfolio in the country;

 

    improved and strengthened regulated businesses, with a broader platform for greater reliability and enhanced customer service; and

 

    combined expertise and synergies.

Additional information on the reasons for the merger is located beginning on page 58 for Constellation and on page 81 for FPL Group.

 

Q: When do you expect the merger to be completed?

 

A:

We hope to complete the merger as soon as reasonably practicable. We are working to complete the merger by the end of 2006. In light of recently adopted energy legislation in Maryland and uncertainties surrounding its implementation, including the application of new, comprehensive approval requirements applicable to the merger and the reconstitution of the Maryland Public Service Commission (which must review and approve the merger), we cannot predict when regulatory review in Maryland will be completed, whether approval will be received or the potential terms and conditions of any approval that is received. In addition, other factors outside of our control could require us to complete the merger at a later time or not to

 

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complete it at all. For a discussion of the conditions to the completion of the merger and of the risks associated with obtaining regulatory approvals in connection with the merger, see “The Proposed Merger—The Merger Agreement—Conditions” beginning on page 142 and “Risks Factors — The merger is subject to receipt of consent or approval from governmental entities that could delay or prevent the completion of the merger or impose conditions that could have a material adverse effect on the combined company or that could cause abandonment of the merger” beginning on page 25.

 

Q: If I am a Constellation stockholder, what will I receive as a result of the stock split and merger?

 

A: In connection with the completion of the merger, Constellation will effect a stock split of the shares of Constellation common stock outstanding immediately prior to the completion of the merger (which we refer to herein as the stock split). As a result of the stock split, Constellation stockholders will receive 1.444 shares of common stock of the combined company for every share of Constellation common stock they owned immediately prior to the stock split and the merger. We will not issue fractional shares but will pay cash in lieu of fractional shares resulting from the stock split.

 

Q: If I am a FPL Group shareholder, what will I receive as a result of the merger?

 

A: FPL Group shareholders will receive one share of common stock of the combined company (after the effectiveness of the stock split) in exchange for each share of FPL Group common stock they owned immediately prior to the merger.

 

Q: Should I send in my stock certificates now?

 

A: Constellation Stockholder:

No.   After the stock split is completed, Constellation will send holders of Constellation common stock prior to the effectiveness of the stock split the additional shares of Constellation common stock received as a result of the stock split (and/or cash in lieu of fractional shares resulting from the stock split).

 

A: FPL Group Shareholder:

No.   After the merger is completed, Constellation will send FPL Group shareholders written instructions for exchanging their FPL Group stock certificates for certificates representing Constellation common stock.

 

Q: On what am I being asked to vote?

 

A: Constellation Stockholder:

You are being asked to consider and vote on the following matters:

 

  1. A proposal to approve the issuance of shares of Constellation common stock to FPL Group shareholders (which we refer to herein as the share issuance proposal) as contemplated by the Agreement and Plan of Merger, dated as of December 18, 2005, among Constellation, CF Merger Corporation (which is a wholly owned subsidiary of Constellation) and FPL Group (which we refer to herein as the merger agreement). A copy of the merger agreement is attached as Annex A to this joint proxy statement/prospectus.

 

  2. A proposal to approve, effective as of the completion of the merger, the amended and restated charter of Constellation substantially in the form attached as Annex F to this joint proxy statement/prospectus, which we refer to as the charter amendment proposal, such approval to include, among other things, several individual proposals set forth in this joint proxy statement/prospectus under the section “The Proposed Merger—Post-Merger Corporate Governance and Management—Amended and Restated Constellation Charter and By-laws” beginning on page 146.

 

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  3. The election of Class I directors to the Constellation board of directors to serve three year terms to expire in 2009.

 

  4. A proposal to ratify the appointment of PricewaterhouseCoopers LLP as Constellation’s independent registered public accounting firm for the year 2006.

 

  5. A stockholder proposal.

 

  6. Any such other matters as may properly come before the annual meeting and any adjournment or postponement of the annual meeting.

 

A: FPL Group Shareholder:

You are being asked to consider and vote on the following matters:

 

  1. A proposal to approve the merger agreement.

 

  2. Election of FPL Group’s directors.

 

  3. Ratification of the appointment of Deloitte & Touche LLP as FPL Group’s independent registered public accounting firm for the year 2006.

 

  4. Such other matters as may properly come before the annual meeting and any adjournment or postponement of the annual meeting.

 

Q: What is the purpose of the amendment and restatement of the Constellation charter?

 

A: Constellation is proposing to amend and restate its charter to effect various terms of the merger as described in this joint proxy statement/prospectus. Constellation does not intend to amend and restate the Constellation charter unless the merger will be completed (even if the Constellation stockholders have approved the charter amendment proposal).

 

Q: Are there risks I, as a Constellation stockholder or FPL Group shareholder, should consider in deciding how to vote on the proposals related to the merger?

 

A: Yes, in evaluating the proposals related to the merger, you should carefully read this joint proxy statement/prospectus, including the factors discussed in the section titled “Risk Factors” beginning on page 23. You are urged to read this joint proxy statement/prospectus in its entirety prior to voting or submitting a proxy.

 

Q: Why is my vote important?

 

A: If you do not return your proxy card or submit your proxy by telephone or through the Internet or vote in person at your annual meeting, it will be more difficult for Constellation and FPL Group to obtain the necessary quorum to hold their respective annual meetings. For both the Constellation annual meeting and the FPL Group annual meeting, the presence, in person or by proxy, of holders of a majority of the issued and outstanding shares entitled to vote at the meeting constitutes a quorum for the transaction of business. If a quorum is not present at either Constellation’s annual meeting or FPL Group’s annual meeting, the stockholders of that company will not be able to take action on any of the proposals at that meeting. In addition, for the Constellation charter amendment proposal and the FPL Group proposal to approve the merger agreement, if you do not vote, it will have the same effect as a vote AGAINST the proposal, as described below. In addition, for the Constellation share issuance proposal, if you do not vote, it will be less likely that the minimum vote required for a vote on the proposal to be effective will be obtained. Therefore, if you do not vote, it will be more difficult for Constellation and FPL Group to obtain the stockholder approvals necessary for the completion of the merger, and it will be less likely that the merger will be completed.

 

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Q: May I vote in person?

 

A: Yes.   If you are a stockholder of record as of [·], 2006 for Constellation or [·], 2006 for FPL Group, you may attend your annual meeting and vote your shares in person instead of returning your signed proxy card or submitting your proxy by telephone or through the Internet. However, because you can revoke a previously granted proxy by attending your annual meeting and voting your shares in person, we urge you to return your proxy card or submit your proxy by telephone or through the Internet even if you intend to attend your annual meeting.

 

Q: If I am a record holder of my shares, what happens if I don’t submit a proxy (whether by returning my proxy card or submitting my proxy by telephone or through the Internet) or attend my annual meeting to vote in person?

 

A: Constellation Stockholder:

If you do not return your proxy card or submit your proxy by telephone or through the Internet or vote in person at your annual meeting, your vote will not be counted and it will be less likely that a quorum to conduct business at your annual meeting will be obtained. In addition, if you are a Constellation stockholder, not returning your proxy card and not voting in person at the annual meeting will have the same effect as a vote AGAINST the approval of the Constellation charter amendment proposal because the approval of the proposal by a majority of the outstanding shares of Constellation common stock entitled to vote on the proposal is required to approve the charter amendment proposal. In addition, for the Constellation share issuance proposal, if you do not vote, it will be less likely that the minimum vote required for a vote on the proposal to be effective will be obtained.

 

A: FPL Group Shareholder:

If you do not return your proxy card or submit your proxy by telephone or through the Internet or vote in person at your annual meeting, your vote will not be counted and it will be less likely that a quorum to conduct business at your annual meeting will be obtained. In addition, if you are a FPL Group shareholder, not returning your proxy card and not voting in person at the annual meeting will have the same effect as a vote AGAINST the approval of the proposal to approve the merger agreement because the approval of the proposal by a majority of the outstanding shares of FPL Group common stock entitled to vote on the proposal is required to approve the merger agreement.

 

Q: If my shares are held in “street name” by my broker, will my broker vote my shares for me even if I don’t give my broker voting instructions?

 

A: Your broker will vote your shares if you provide instructions on how to vote. In addition, brokerage firms have the authority under the rules of the New York Stock Exchange, which we refer to herein as the NYSE, to vote their clients’ unvoted shares on certain routine matters. However, the proposals related to the merger and the Constellation stockholder proposal are not routine matters under the NYSE rules, and your broker does not have discretionary authority to vote on those proposals. Therefore, if your shares are held in “street name” by your broker and you do not provide your broker with instructions on how to vote your “street name” shares, if you are a Constellation stockholder, your broker will not be permitted to vote on the charter amendment proposal, the share issuance proposal or the Constellation stockholder proposal or, if you are a FPL Group shareholder, your broker will not be permitted to vote on the approval of the merger agreement.

You should therefore be sure to provide your broker with instructions on how to vote your shares. Please check the voting form used by your broker to see if it offers telephone or Internet submission of proxies.

Under the NYSE rules, brokers do have authority to vote their clients’ unvoted shares on certain routine matters, including those related to the election of directors and the ratification of appointment of an independent registered public accounting firm. If you do not provide voting instructions, your broker may choose to vote for you or leave your shares unvoted on such routine matters.

 

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Q: What does it mean if I receive more than one set of materials?

 

A: This means you own shares of Constellation common stock or FPL Group common stock that are registered under different names or in different forms, or you own shares in both companies. For example, you may own some shares directly as a stockholder of record and other shares through a broker or you may own shares through more than one broker. In these situations and others, you will receive multiple sets of proxy materials. It is necessary for you to vote, sign and return all of the proxy cards, or follow the instructions for any alternative voting procedure on each of the proxy cards you receive, in order to vote all of the shares you own. Each proxy card you receive will be accompanied by its own prepaid return envelope; if you submit your proxy by mail, make sure you return each proxy card in the return envelope which accompanied that proxy card.

 

Q. How do I vote my FPL Group 401(k) shares?

 

A. If you participate in any of FPL Group, Inc.’s Employee Retirement Savings Plans (which we refer to herein as the FPL Group Retirement Savings Plans), you may give voting instructions to Fidelity Management Trust Company, as trustee of the FPL Group Retirement Savings Plans, by completing and returning the Retirement Savings Plans proxy card accompanying this joint proxy statement/prospectus. Your instructions will tell the trustee how to vote the number of shares of FPL Group common stock reflecting your proportionate interest in the FPL Group Stock Fund and the FPL Group Leveraged ESOP Fund. Your instructions will also determine the vote on a proportionate number of the Leveraged ESOP shares which are held in the FPL Group Retirement Savings Plans but not yet allocated to participants. If you do not give the trustee of the FPL Group Retirement Savings Plans voting instructions, the number of shares reflecting your proportionate interest will not be voted, but your proportionate share of the unallocated Leveraged ESOP shares will be voted by the trustee in the same proportions as it votes unallocated shares for which instructions are received. The trustee will vote your shares in accordance with your duly executed proxy card received by [·], 2006.

You may also revoke previously given voting instructions by [·], 2006, by filing with the trustee of the FPL Group Retirement Savings Plans either a written notice of revocation or a properly completed and signed Retirement Savings Plans proxy card bearing a later date. Your voting instructions will be kept confidential by the trustee.

 

Q. How do I vote my Constellation 401(k) shares?

 

A. If you participate in either the Constellation Energy Group, Inc. Employee Savings Plan or the Represented Employee Savings Plan for Nine Mile Point (which we refer to herein as the Constellation Savings Plans), you may give voting instructions to T. Rowe Price, as trustee of the Constellation Savings Plans, by completing and returning the proxy card accompanying this joint proxy statement/prospectus. Your instructions will tell the trustee of the Constellation Savings Plans how to vote the number of shares of Constellation common stock held in your account. If you do not give the trustee of the Constellation Savings Plans voting instructions, your shares will be voted by the trustee of the Constellation Savings Plans in the same proportions as it votes shares for which instructions are received. The trustee will vote your shares in accordance with your duly executed proxy card received by [·], 2006.

You may also revoke previously given voting instructions by [·], 2006, by filing with the trustee of the Constellation Savings Plans either a written notice of revocation or a properly completed and signed proxy card bearing a later date. Your voting instructions will be kept confidential by the trustee.

 

Q: Can I revoke my proxy and change my vote?

 

A: Yes.   You have the right to revoke your proxy at any time prior to the time your shares are voted at your annual meeting. If you are a stockholder of record, your proxy can be revoked in several ways:

 

    by timely delivery of a written revocation to your company’s corporate secretary,

 

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    by submitting another valid proxy bearing a later date, or

 

    by attending your annual meeting and voting your shares in person.

You may also revoke your proxy and submit a new proxy by telephone or through the Internet.

However, if your shares are held in the name of your bank, broker, custodian or other recordholder, you must check with your bank, broker, custodian or other recordholder to determine how to revoke your proxy.

 

Q: When and where is my annual meeting?

 

A: Constellation Stockholder:

The Constellation annual meeting will take place at [·] on [·], 2006 at [·], local time.

 

A: FPL Group Shareholder:

The FPL Group annual meeting will take place at [·] on [·], 2006 at [·], local time.

 

Q. Who can attend the FPL Group annual meeting?

 

A. Subject to space availability, all FPL Group shareholders as of the record date, or their duly appointed proxies, may attend the FPL Group annual meeting. Since seating is limited, admission to the meeting will be on a first-come, first-served basis. Registration will begin at [·]:00 a.m., local time, and seating will begin at [·]:00 a.m., local time. If you attend, please note that you may be asked to present valid picture identification, such as a driver’s license or passport.

You will need proof of ownership to enter the meeting.

If your shares are registered or held in the name of your broker or bank or other nominee, your shares are held in “street name.” Please note that if you hold your shares in “street name,” you will need to bring proof of your ownership of FPL Group common stock as of the record date, such as a copy of a bank or brokerage statement, and check in at the registration desk at the meeting.

 

Q: Will my annual meeting be webcast?

 

A: Constellation Stockholder:

Yes.   The Constellation annual meeting will be webcast (audio only) on [·], 2006. If you do not attend the meeting, you are invited to visit www.constellation.com at [·], Eastern Time, on that day to access the webcast of the meeting. You will not be able to vote your shares via the webcast. A replay of the webcast also will be available on Constellation’s website through [·], 2006.

 

A: FPL Group Shareholder:

Yes.   The FPL Group annual meeting will be webcast (audio only) on [·], 2006. If you do not attend the meeting, you are invited to visit www.fplgroup.com at [·], Eastern Time, on that day to access the webcast of the meeting. You will not be able to vote your shares via the webcast. A replay of the webcast also will be available on FPL Group’s website through [·], 2006.

 

Q: Who can answer any questions I may have about the annual meetings or the merger?

 

A: Constellation stockholders may call [·] at 1-800-[·]-[·].

FPL Group shareholders may call [·] at 1-800-[·]-[·].

 

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SUMMARY OF THE PROPOSED MERGER

This summary highlights selected information from this joint proxy statement/prospectus with respect to the proposed merger and may not contain all of the information that is important to you. To understand the merger fully and for a more complete description of the legal terms of the merger agreement, you should carefully read this entire joint proxy statement/prospectus and the documents to which we refer you. A copy of the merger agreement is attached as Annex A to this joint proxy statement/prospectus and is incorporated by reference into this joint proxy statement/prospectus. See “Where You Can Find More Information” beginning on page 235. We have included references to other portions of this joint proxy statement/prospectus to direct you to a more complete description of the topics presented in this summary, which you should review carefully in their entirety.

The Companies (see page 49)

Constellation Energy Group, Inc.

750 E. Pratt Street

Baltimore, Maryland 21202

(410) 783-2800

Constellation Energy Group, Inc. (which we refer to herein as Constellation) is an energy company that operates in three business segments—merchant energy, regulated electric and regulated gas. Constellation’s primary businesses include a merchant energy business and Baltimore Gas and Electric Company (which we refer to herein as BGE), an electric and gas public utility, which is regulated by the Public Service Commission of the State of Maryland (which we refer to herein as the MPSC) and the Federal Energy Regulatory Commission (which we refer to herein as FERC). Constellation’s merchant energy business is subject to regulation by FERC and the Nuclear Regulatory Commission (which we refer to herein as the NRC). In addition to the merchant energy business, Constellation also operates in various other nonregulated businesses. Constellation was incorporated in Maryland in 1995, and in 1999, Constellation became the holding company for BGE and its subsidiaries. BGE was incorporated in Maryland in 1906.

Shares of Constellation common stock are traded on the New York Stock Exchange under the symbol “CEG.”

FPL Group, Inc.

700 Universe Boulevard

Juno Beach, Florida 33408

(561) 694-4000

FPL Group, Inc. (which we refer to herein as FPL Group) was incorporated in Florida in 1984. Its principal subsidiary, Florida Power & Light Company (which we refer to herein as Florida Power & Light) is a rate-regulated utility engaged in the generation, transmission, distribution and sale of electric energy. Florida Power & Light is subject to regulation by FERC, the Florida Public Service Commission (which we refer to herein as the FPSC) and the NRC. FPL Group Capital Inc (which we refer to herein as FPL Capital), a wholly owned subsidiary of FPL Group, holds the capital stock and provides funding for FPL Group’s operating subsidiaries other than Florida Power & Light. The business activities of these other operating subsidiaries primarily consist of the competitive energy supply business of FPL Energy, LLC and its subsidiaries (which we refer to herein as FPL Energy), which is subject to regulation by FERC and the NRC.

Shares of FPL Group common stock are traded on the New York Stock Exchange under the symbol “FPL.”

 

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The Merger (see page 49)

Upon completion of the merger, FPL Group will become a wholly owned subsidiary of Constellation. Under the terms of the merger, a wholly owned subsidiary of Constellation formed for the purpose of the merger will merge with and into FPL Group. As a result, FPL Group will survive the merger and will become a wholly owned subsidiary of Constellation upon completion of the merger.

The merger will be completed only after the satisfaction or waiver of the conditions to the completion of the merger discussed below.

The merger agreement is attached as Annex A to this joint proxy statement/prospectus. We encourage you to read the merger agreement carefully and fully, as it is the legal document that governs the merger.

Constellation Stock Split (see page 134)

In connection with the completion of the merger, Constellation will effect a stock split of the shares of Constellation common stock outstanding immediately prior to the completion of the merger. As a result of the stock split, Constellation stockholders will receive 1.444 shares of Constellation common stock for each share of Constellation common stock they held immediately prior to the merger. Constellation will not issue fractional shares resulting from the stock split. Accordingly, the total number of shares of Constellation common stock that each Constellation stockholder will receive pursuant to the stock split will be rounded down to the nearest whole number. Each Constellation stockholder also will receive a cash payment for the remaining fraction of a share of Constellation common stock that he, she or it would otherwise receive, if any, based on the market value of Constellation common stock at the close of business on the last trading day before the closing date of the merger. Constellation does not intend to effect the stock split unless the merger will be completed.

Example: If you currently own 100 shares of Constellation common stock, you will be entitled to receive 144 shares of Constellation common stock and a cash payment for the market value of 0.40 shares at the close of business on the last trading day before the closing date of the merger.

As a result of the merger, Constellation stockholders will continue to hold their shares of Constellation common stock, as adjusted by the stock split.

FPL Group Shareholder Merger Consideration (see page 134)

In the merger, after giving effect to the stock split, FPL Group shareholders will receive one share of Constellation common stock for each share of FPL Group common stock that they held immediately prior to the merger. Upon completion of the merger and stock split, Constellation stockholders prior to the merger will own approximately 40% of the combined company’s outstanding shares of common stock and the FPL Group shareholders prior to the merger will own approximately 60% of the combined company’s outstanding shares of common stock.

Material U.S. Federal Income Tax Consequences of the Merger (see page 105)

As a condition to the completion of the merger, each of Kirkland & Ellis LLP, legal counsel to Constellation, and Cravath, Swaine & Moore LLP, legal counsel to FPL Group, must have delivered its opinion, each dated as of the effective time of the merger, that the merger will qualify as a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code and that each of Constellation, FPL Group and CF Merger Corporation (the wholly owned merger subsidiary of Constellation) will be a party to the reorganization within the meaning of Section 368(b) of the Internal Revenue Code. These opinions will be based, in part, on customary factual assumptions and written factual representations. A holder of FPL Group common stock will not recognize any gain or loss for federal income tax purposes upon the exchange of the holder’s shares of FPL

 

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Group common stock for shares of Constellation common stock pursuant to the merger. The automatic conversion of each share of Constellation common stock into 1.444 shares of Constellation common stock in the stock split will not be a taxable event to the holders of the Constellation common stock, except with respect to cash received in the stock split in lieu of a fractional share of Constellation common stock.

The federal income tax consequences described above may not apply to you depending on the facts of your situation. You should consult your own tax advisor.

Amended and Restated Constellation Charter (see page 146)

Constellation is proposing to amend and restate its charter to effect various terms of the merger as described in this joint proxy statement/prospectus. The complete text of the amended and restated charter of Constellation substantially in the form to become effective upon completion of the merger transaction is attached as Annex F to this joint proxy statement/prospectus.

Under the merger agreement, completion of the merger is subject to the satisfaction (or, if legally permitted, waiver) of specified closing conditions. Approval by the Constellation stockholders of the amended and restated Constellation charter is one of those conditions. Constellation and FPL Group may not waive the requirement for Constellation stockholders to approve the charter amendment to increase the number of authorized shares of Constellation common stock.

Constellation does not intend to amend and restate the Constellation charter unless the merger will be completed (even if the Constellation stockholders have approved the charter amendment proposal).

Post-Merger Governance and Management (see page 146)

Certain matters relating to post-merger governance and management of the combined company are set forth in the merger agreement, including the following:

 

    the combined company will maintain dual headquarters in Juno Beach, Florida and Baltimore, Maryland;

 

    Lewis Hay, III, currently Chairman, President and Chief Executive Officer of FPL Group, will become the chief executive officer of the combined company, and Mayo A. Shattuck III, currently Chairman, President and Chief Executive Officer of Constellation, will become chairman of the combined company; and

 

    the board of directors of the combined company will be composed of nine persons who served as directors of FPL Group prior to completion of the merger and six persons who served as directors of Constellation prior to completion of the merger.

Required Stockholder Approvals (see page 43)

For Constellation Stockholders:

Approval of the proposal to amend and restate the Constellation charter requires the affirmative vote of holders of a majority of the outstanding shares of Constellation common stock entitled to vote thereon on each amendment contemplated by the amended and restated Constellation charter. Approval of the proposal to issue shares of Constellation common stock as contemplated by the merger agreement requires the affirmative vote of a majority of votes cast on the proposal, provided that the total vote cast on the proposal represents over 50% of all shares of Constellation common stock entitled to vote on the proposal. Approval by the Constellation stockholders of each individual amendment contemplated by the amended and restated Constellation charter and approval of the share issuance proposal are conditions to the completion of the merger under the merger agreement.

 

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On [·], 2006, which is the record date for determining those Constellation stockholders who are entitled to vote at the Constellation annual meeting, directors and executive officers of Constellation and their affiliates beneficially owned [·] shares of Constellation common stock, representing approximately [·]% of the shares of Constellation common stock outstanding on the record date. Although none of the members of the board of directors of Constellation or its executive officers have executed voting agreements, based solely on discussions with its board of directors and executive officers, to Constellation’s knowledge, directors and executive officers of Constellation and their affiliates intend to vote their common stock in favor of the share issuance proposal and the charter amendment proposal.

For FPL Group Shareholders:

Approval of the proposal to approve the merger agreement requires the affirmative vote of holders of a majority of the outstanding shares of FPL Group common stock entitled to vote thereon. Approval of the proposal to approve the merger agreement is a condition to the completion of the merger.

On [·], 2006, which is the record date for determining those FPL Group shareholders who are entitled to vote at the FPL Group annual meeting, directors and executive officers of FPL Group and their affiliates beneficially owned [·] shares of FPL Group common stock, or approximately [·]% of the outstanding shares of FPL Group common stock entitled to vote at the annual meeting. Although none of the members of the FPL Group board of directors or its executive officers have executed voting agreements, based solely on discussions with its board of directors and executive officers, to FPL Group’s knowledge, directors and executive officers of FPL Group and their affiliates intend to vote their common stock in favor of the approval of the merger agreement.

Recommendations to Constellation Stockholders and FPL Group Shareholders (see pages 58 and 81)

To Constellation Stockholders:

The Constellation board of directors has approved the merger agreement, determined that the merger agreement and the transactions contemplated thereby, including the merger, the issuance of shares of Constellation common stock as contemplated by the merger agreement and the amendment and restatement of the Constellation charter, are advisable, fair to, and in the best interests of Constellation and Constellation stockholders, and recommends that Constellation stockholders vote FOR the share issuance proposal and the charter amendment proposal.

To FPL Group Shareholders:

The FPL Group board of directors has approved the merger agreement, determined that the merger agreement and the transactions contemplated thereby, including the merger, are fair to and in the best interests of FPL Group and FPL Group shareholders, and recommends that FPL Group shareholders vote FOR the proposal to approve the merger agreement.

Opinions of Constellation’s Financial Advisors (see page 63)

Each of Morgan Stanley & Co. Incorporated (which we refer to herein as Morgan Stanley) and Goldman, Sachs & Co. (which we refer to herein as Goldman Sachs) rendered its oral opinion to the Constellation board of directors (subsequently confirmed in writing as of December 18, 2005) that, as of that date and based upon and subject to the assumptions, qualifications and limitations discussed in such opinion, assuming the prior effectiveness of the stock split, the exchange ratio of one share of Constellation common stock for each share of FPL Group common stock pursuant to the merger agreement was fair, from a financial point of view, to the Constellation stockholders. The full text of the opinions of Morgan Stanley and Goldman Sachs, each dated

 

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December 18, 2005, which discuss, among other things, the assumptions made, procedures followed, matters considered and qualifications and limitations of the review undertaken in connection with each opinion, are attached to this joint proxy statement/prospectus as Annex B and Annex C, respectively. Constellation stockholders are urged to read these opinions carefully in their entirety.

Each of the Morgan Stanley opinion and the Goldman Sachs opinion is addressed to the Constellation board of directors and is directed only to the fairness to the Constellation stockholders, from a financial point of view, of the exchange ratio in the proposed merger. Neither the Morgan Stanley opinion nor the Goldman Sachs opinion constitutes a recommendation to any Constellation stockholder as to how any such stockholder should vote with respect to the merger proposals or any other matter. The opinions also do not address the prices at which shares of Constellation common stock will trade following the completion of the merger or at any other time.

Opinions of FPL Group’s Financial Advisors (see page 86)

On December 16, 2005, Merrill Lynch Pierce, Fenner & Smith Incorporated (which we refer to herein as Merrill Lynch) rendered its oral opinion to the FPL Group board of directors (subsequently confirmed in writing on December 18, 2005), that, as of that date, and based upon and subject to the assumptions made, matters considered and qualifications and limitations set forth in the written opinion, the exchange ratio of 1.000 share of Constellation common stock for each share of FPL Group common stock provided for in the merger, subject to the prior effectiveness of the stock split whereby each outstanding share of Constellation common stock will be automatically converted into, assuming the effectiveness of the merger, 1.444 shares of Constellation common stock, was fair, from a financial point of view, to the holders of FPL Group common stock. The full text of the written opinion of Merrill Lynch, which sets forth the assumptions made, matters considered and qualifications and limitations on the review undertaken by Merrill Lynch, is attached as Annex D to this joint proxy statement/prospectus. You are urged to read the Merrill Lynch opinion carefully in its entirety.

On December 16, 2005, Lehman Brothers Inc. (which we refer to herein as Lehman Brothers) rendered its oral opinion to the FPL Group board of directors (subsequently confirmed in writing on December 18, 2005) that, as of such date, and based upon and subject to certain matters stated in such written opinion, from a financial point of view, the exchange ratio, assuming the prior effectiveness of the stock split, to be offered to the shareholders of FPL Group in the merger is fair to the shareholders of FPL Group. The full text of the written opinion of Lehman Brothers, which sets forth the assumptions made, procedures followed, factors considered and limitations upon the review undertaken by Lehman Brothers in rendering its opinion is attached as Annex E to this joint proxy statement/prospectus. You are urged to read the Lehman Brothers opinion carefully in its entirety.

Each of the Merrill Lynch opinion and the Lehman Brothers opinion is addressed to the FPL Group board of directors. Neither the Merrill Lynch opinion nor the Lehman Brothers opinion constitutes a recommendation to any FPL Group shareholder as to how any such shareholder should vote with respect to the proposed merger or any other matter. The opinions also do not address the prices at which shares of Constellation common stock will trade following the completion of the merger or at any other time.

Risk Factors (see page 23)

There are a number of risks related to the merger, including the following:

 

    Constellation and FPL Group may be unable to obtain the regulatory approvals required to complete the merger or, in order to obtain these approvals, the combined company may be required to comply with material restrictions or conditions, including requirements that would impose significant additional costs on the business;

 

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    if the merger is not completed, the trading price of Constellation common stock or FPL Group common stock may decline to the extent that the market prices reflect a market assumption that the merger will be completed;

 

    because recently adopted energy legislation in Maryland is still in the process of being implemented, Constellation and FPL Group do not know the impact such legislation will have on the business of Constellation, both as a stand-alone company and, if the merger is completed, as part of the combined company;

 

    the value of shares of Constellation common stock will fluctuate before and after the merger;

 

    Constellation and FPL Group may be unable to successfully integrate the operations of their respective businesses;

 

    Constellation may incur significant transaction, merger-related and restructuring costs in connection with the merger; and

 

    the goodwill that will be recorded in connection with the merger may become impaired, which could adversely affect the combined company’s financial results.

Furthermore, there are a number of risks relating to the businesses of Constellation, FPL Group and the combined company, including the following:

 

    the business of the combined company will be subject to risks currently affecting the businesses of Constellation and FPL Group, such as being subject to complex laws and regulations and to changes in laws and regulations, including recent energy legislation in Maryland and other state and federal initiatives regarding rate caps, rate adjustments, deferral of cost recovery, restructuring of the energy industry and environmental compliance;

 

    Constellation and FPL Group operate in the deregulated segments of the electric power industry created by restructuring initiatives at both state and federal levels, and if competitive restructuring of the electric power industry is reversed, discontinued, restricted or delayed, the combined company’s business prospects and financial condition could be materially adversely impaired;

 

    significant risks resulting from the operation of power generation facilities, including nuclear facilities, could adversely affect the results of operation and financial condition of the combined company;

 

    the combined company’s competitive energy business will have contractual obligations to certain customers to provide full requirements service, which make it difficult to predict and plan for load requirements and may result in increased operating costs to the business;

 

    the combined company’s generation business may incur substantial costs and liabilities due to its ownership and operation of nuclear generating facilities;

 

    the combined company’s competitive energy business may incur substantial costs and liabilities and be exposed to volatility as a result of its participation in the wholesale energy markets;

 

    Constellation and FPL Group often rely on single suppliers and at times on single customers at their respective facilities, exposing Constellation and FPL Group to significant financial risks if any such supplier or customer should fail to perform its obligations; and

 

    war, acts and threats of terrorism and catastrophic events may adversely affect the combined company’s results of operations in unpredictable ways.

For a more complete discussion of these and other risk factors please see “Risk Factors” beginning on page 23 and the documents filed by each of Constellation and FPL Group with the Securities and Exchange Commission (which we refer to herein as the SEC) which are incorporated by reference into this joint proxy statement/prospectus.

 

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Conditions to the Completion of the Merger (see page 142)

The completion of the merger depends upon the satisfaction or waiver of a number of conditions, including the following:

 

    the approval of the merger agreement by the FPL Group shareholders, and the approval by the Constellation stockholders of the issuance of shares of Constellation common stock as contemplated by the merger agreement and the amendment of the Constellation charter;

 

    the absence of any law, judgment, injunction or other order by a governmental entity prohibiting completion of the merger and the absence of any proceeding by any governmental entity seeking such an order;

 

    the approval for listing by the NYSE of the Constellation common stock to be issued pursuant to the merger, subject to official notice of issuance; and

 

    the Constellation stock split having become effective.

In addition, individually, our respective obligations to effect the merger are subject to the satisfaction or, to the extent legally permissible, the waiver of the following additional conditions:

 

    the representations and warranties of the other party with respect to capital stock contained in the merger agreement being true and correct in all material respects;

 

    the representations and warranties of the other party being true and correct except where the failure of such representations and warranties to be so true and correct (without giving effect to any limitation as to materiality or material adverse effect) does not have, and would not reasonably be expected to have, individually or in the aggregate, a material adverse effect on the other party, and would not reasonably be expected to materially decrease the long-term value of the other party;

 

    the other party having performed in all material respects all obligations required to be performed and complied with by it under the merger agreement;

 

    the receipt of an opinion of the party’s counsel which provides that the merger will qualify as a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code;

 

    the receipt of the required statutory approvals (discussed below) without such approvals imposing terms or conditions that, individually or in the aggregate, would reasonably be expected to (i) have a material adverse effect on either party or the combined company and (ii) materially decrease the long-term value of either party or the combined company;

 

    since December 31, 2004 there has been no change, event or development that, individually or in the aggregate, has or would reasonably be expected to have a material adverse effect on the other party and would reasonably be expected to materially decrease the long-term value of the other party and its subsidiaries taken as a whole; and

 

    the receipt by each party of a certificate from an executive officer of the other party with respect to satisfaction of certain of the closing conditions.

Regulatory Matters (see page 108)

The approval of, among others, the following U.S. federal, state and local regulatory authorities must be obtained before the merger can be completed:

 

    FERC;

 

    the NRC; and

 

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    the regulatory agencies in several of the states in which Constellation and/or FPL Group operate electric and/or gas businesses.

In addition, under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, the merger cannot be completed until we have made required notifications and provided certain information and materials to the Federal Trade Commission (which we refer to herein as the FTC) and the Antitrust Division of the United States Department of Justice and until specified waiting period requirements have expired. Constellation and FPL Group received early termination of the statutory waiting period on March 24, 2006.

As of the date of this joint proxy statement/prospectus, each of Constellation and FPL Group was in the process of seeking such approvals as are required by applicable law or regulations.

Termination of the Merger Agreement (see page 143)

Constellation and FPL Group may mutually agree to terminate the merger agreement and abandon the merger at any time prior to completion of the merger, whether before or after the FPL Group shareholders have approved the merger agreement or the Constellation stockholders have approved the share issuance proposal or the charter amendment proposal.

In addition, either party could decide, without the consent of the other, to terminate the merger agreement in a number of situations (subject to certain limitations and exceptions), including:

 

    if the merger is not completed by December 31, 2006 (which date is automatically extended to June 30, 2007 if the conditions to closing relating to statutory and regulatory approvals of the merger have not been fulfilled but all other conditions to closing are fulfilled or are capable of being fulfilled);

 

    if a court or other governmental entity issues an order, decree or ruling or takes any other action permanently prohibiting the completion of the merger and the order, decree or ruling or other action has become final and nonappealable;

 

    if the required approval of the Constellation stockholders or FPL Group shareholders is not obtained at the respective stockholder meetings;

 

    if any condition to the obligation of such party to complete the merger becomes incapable of being satisfied;

 

    if the board of directors of the other party withdraws or adversely modifies its recommendation to its stockholders in favor of the proposals related to the merger; or

 

    if the other party breaches its representations, warranties, covenants or other agreements contained in the merger agreement, which breach is not cured within 75 days and would result in a failure of either the closing conditions relating to the breach of representations and warranties or the performance of obligations, each as described above.

Termination Fees (see page 144)

Generally, if following receipt by a party of a competing takeover proposal, the merger agreement is terminated because such party’s board of directors has withdrawn or adversely modified its recommendation to its stockholders in favor of the proposals related to the merger, the merger agreement is terminated because the merger has not been completed by the applicable termination date or such party’s stockholders have failed to approve the proposals related to the merger, then, subject to certain limitations, such party will be required to reimburse the other party for its out-of-pocket expenses and, if such party enters into a competing transaction within a specified period of time, it will be required to pay the other party a termination fee. The termination fee

 

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payable by FPL Group to Constellation would be $650 million (reduced by the amount of any expense reimbursement), and the termination fee payable by Constellation to FPL Group would be $425 million (reduced by the amount of any expense reimbursement).

In addition, in circumstances where either party has withdrawn or adversely modified its recommendation to its stockholders in favor of the proposals related to the merger after receipt of a competing takeover proposal and such party’s stockholders fail to approve the proposals related to the merger at a stockholder meeting, such party shall be required to promptly pay a fee of $100 million to the other party, such amount to be credited against the total termination fee of $425 million or $650 million to be paid by Constellation or FPL Group, respectively, if such termination fee becomes payable.

Payment of Dividends Until and After Completion of the Merger

The merger agreement permits each of Constellation and FPL Group to continue to pay regular dividends to its respective stockholders in accordance with past practices (with permitted increases in accordance with the terms of the merger agreement). Constellation and FPL Group expect to continue their respective stated dividend policies until completion of the merger. On May 19, 2006, Constellation declared a second quarter 2006 dividend payable on July 3, 2006 equal to $0.3775 per share. On May 26, 2006, FPL Group declared a second quarter 2006 dividend payable on June 15, 2006 equal to $0.375 per share.

Constellation and FPL Group have agreed to coordinate dividend declarations and the related record dates and payment dates so that their stockholders will not receive two dividends, or fail to receive one dividend, for any single calendar quarter. Accordingly, prior to completion of the merger, we may coordinate and amend our record dates and payment dates in order to effect this policy.

Subject to applicable law and fiduciary duties, we expect that the combined company will pay a per share quarterly dividend consistent with the quarterly dividend paid by FPL Group. After adjusting for the stock split, this is a higher per share dividend amount than Constellation has paid historically. (If Constellation’s second quarter 2006 dividend were adjusted for the stock split, the per share dividend amount would be $0.2614.) As a result, we expect that Constellation stockholders will receive an increase in their quarterly dividends following completion of the merger. If the combined company were to pay the same per share quarterly dividend as FPL Group’s second quarter 2006 dividend ($0.375 per share), Constellation stockholders prior to the merger would experience more than a 43% increase in their quarterly dividends from the combined company, as compared to Constellation’s second quarter 2006 dividend, after adjusting for the stock split.

Example: If you owned 1,000 shares of Constellation common stock prior to the merger, you would have received a second quarter dividend of $0.3775 per share, or $377.50 in total. After the stock split and the merger, you will own 1,444 shares of common stock of the combined company. If the combined company declares and pays a quarterly dividend of $0.375 per share after the merger, which equals FPL Group’s second quarter 2006 dividend, your total quarterly dividend on your 1,444 shares of the combined company common stock would be $541.50, or an increase of approximately 43% over what you would have otherwise received for the second quarter.

Comparison of the Rights of Constellation Stockholders and FPL Group Shareholders (see page 219)

The rights of Constellation stockholders are governed by Maryland law, and the rights of FPL Group shareholders are governed by Florida law. Moreover, there are differences in the rights of Constellation stockholders and FPL Group shareholders as a result of the provisions of the charter or certificate of incorporation and by-laws of each company and FPL Group’s shareholders rights plan.

 

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Constellation Common Stock NYSE Listing (see page 114)

The shares of Constellation common stock to be issued pursuant to the merger will be listed on the New York Stock Exchange under the symbol “CEG.”

Treatment of FPL Group Stock Options and Other Equity-Based Awards (see page 119)

Upon completion of the merger, all outstanding stock options to purchase FPL Group common stock, all shares of FPL Group restricted stock and all outstanding FPL Group other equity-based awards will be converted into awards that relate to shares of Constellation common stock and will vest on, and otherwise be subject to, the same terms and conditions as the corresponding FPL Group award. The number of shares of Constellation common stock underlying the new Constellation stock option will equal the number of shares of FPL Group common stock for which the corresponding FPL Group stock option was exercisable. The per share exercise price of each new Constellation stock option will equal the exercise price of the corresponding FPL Group stock option. Each share of FPL Group restricted stock will be converted into one share of Constellation restricted stock, and each FPL Group other equity-based award will be converted into one Constellation other equity-based award.

Treatment of Constellation Stock Options and Other Equity-Based Awards (see page 125)

Upon completion of the merger, all outstanding Constellation stock options to purchase Constellation common stock will be adjusted for the stock split, and all outstanding Constellation stock options that were issued prior to the end of 2005 will become fully vested. The vested Constellation stock options will either be cashed out on the completion of the merger or will be exercisable in accordance with their terms. Pursuant to the terms of Constellation’s equity incentive plans, certain of the Constellation restricted stock and Constellation restricted stock units will vest upon completion of the merger and will be cashed out within 30 days. Constellation restricted stock and restricted stock units that do not become vested pursuant to the terms of Constellation’s equity incentive plans will continue to vest in accordance with their terms after the completion of the merger. Constellation performance units will vest on a pro-rata basis on the completion of the merger, as set forth in the applicable Constellation equity incentive plan under which they were issued. Vested performance units will be cashed out within 30 days of the completion of the merger and unvested performance units will terminate.

No Appraisal Rights (see page 113)

Neither the holders of FPL Group common stock nor the holders of Constellation common stock will have any right to an appraisal of the value of their shares in connection with the merger.

Accounting Treatment for the Merger (see page 105)

The merger will be accounted for as a reverse acquisition under the purchase method of accounting in accordance with the accounting principles generally accepted in the United States of America, which means that FPL Group will be treated as the accounting acquiror and Constellation will be treated as the “acquired” company for financial reporting purposes, and the assets and liabilities of Constellation will be recorded, as of the completion of the merger, at their respective fair values and added to those of FPL Group.

Additional Interests of FPL Group’s and Constellation’s Executive Officers and Directors in the Merger (see page 115)

When FPL Group shareholders and Constellation stockholders consider their board of directors’ recommendation that they vote in favor of the proposals related to the merger, FPL Group shareholders and

 

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Constellation stockholders should be aware that FPL Group’s and Constellation’s executive officers and directors may have interests in the merger that may be different from, or in addition to, the interests of FPL Group shareholders or Constellation stockholders. Those interests include, among other things, the accelerated vesting of equity-based awards, specified severance benefits payable under certain circumstances, the appointment of directors and officers to the Constellation board of directors and management team, and in the case of Constellation, the payment of cash for certain equity-based and other awards.

As a result, the directors and officers of FPL Group and Constellation may be more likely to recommend the approval of the merger proposals than if they did not have these interests.

Each of the FPL Group board of directors and the Constellation board of directors was aware of these interests and considered them, among other matters, in approving the merger agreement and the merger. FPL Group shareholders and Constellation stockholders should consider these and other interests of FPL Group’s and Constellation’s directors and executive officers that are described in this joint proxy statement/prospectus.

Recent Closing Prices of Constellation Common Stock and FPL Group Common Stock

The following table includes the closing prices per share of Constellation common stock and FPL Group common stock as reported on the NYSE Composite Transaction Tape on:

 

    December 13, 2005, the last full trading day prior to press reports of rumors that Constellation and FPL Group were considering entering into a merger transaction;

 

    December 16, 2005, the last full trading day prior to the public announcement of the execution of the merger agreement; and

 

    [·], 2006, the most recent practicable date prior to the mailing of this joint proxy statement/prospectus to the Constellation stockholders and the FPL Group shareholders.

 

     Constellation
Common
Stock
   FPL Group
Common
Stock

December 13, 2005

   $ 56.27    $ 42.87

December 16, 2005

   $ 61.62    $ 42.95

[·], 2006

   $ [·]    $ [·]

 

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Selected Historical Financial Information

We are providing the following selected historical financial information to assist you in your analysis of the financial aspects of the merger. The information is only a summary and should be read in conjunction with each company’s historical consolidated financial statements and related notes contained in each company’s annual and quarterly reports, which have been incorporated by reference into this joint proxy statement/prospectus, as well as other information that has been filed with the SEC by Constellation and FPL Group. See “Where You Can Find More Information” beginning on page 235 for information on where you can obtain copies of this information. The historical results included below and elsewhere in this joint proxy statement/prospectus are not indicative of the future performance of Constellation, FPL Group or the combined company.

Constellation Selected Historical Financial Information

 

     Three months ended    As of and for the year ended December 31,  
    

March 31,

2006

  

March 31,

2005

   2005     2004     2003     2002(a)    2001(b)  
     (in millions, except per share data)  
     (unaudited)       

Summary of Operations

                 

Operating Revenues

   $ 4,897    $ 3,572    $ 17,132     $ 12,286     $ 9,454     $ 4,772    $ 3,683  

Income from Continuing Operations and Before Cumulative Effects of Changes in Accounting Principles

   $ 113    $ 119    $ 607     $ 567     $ 456     $ 516    $ 119  

Income (Loss) from Discontinued Operations, Net of Income Taxes

  

 

 

1

     2      23       (27 )     19       10      (37 )

Cumulative Effects of Changes in Accounting Principles, Net of Income Taxes

     —        —        (7 )     —         (198 )     —        9  
                                                     

Net Income

   $ 114    $ 121    $ 623     $ 540     $ 277     $ 526    $ 91  
                                                     

Earnings Per Common Share from Continuing Operations and Before Cumulative Effects of Changes in Accounting Principles—Assuming Dilution

   $ 0.63    $ 0.67    $ 3.38     $ 3.28     $ 2.74     $ 3.14    $ 0.75  

Income (Loss) from Discontinued Operations

     —        0.01      0.13       (0.16 )     0.11       0.06      (0.23 )

Cumulative Effects of Changes in Accounting Principles

     —        —        (0.04 )     —         (1.19 )     —        0.05  
                                                     

Earnings Per Common Share—Assuming Dilution

   $ 0.63    $ 0.68    $ 3.47     $ 3.12     $ 1.66     $ 3.20    $ 0.57  
                                                     

Dividends Declared Per Common Share

   $ 0.38    $ 0.34    $ 1.34     $ 1.14     $ 1.04     $ 0.96    $ 0.48  
                                                     

Summary of Financial Condition

                 

Total Assets

   $ 19,730    $ 18,638    $ 21,474     $ 17,347     $ 15,593     $ 14,943    $ 14,698  

Long-Term Debt, Excluding Current Maturities

   $ 4,227    $ 4,804    $ 4,369     $ 4,813     $ 5,039     $ 4,614    $ 2,713  

Common Shareholders’ Equity

   $ 4,324    $ 5,028    $ 4,915     $ 4,727     $ 4,141     $ 3,862    $ 3,844  

(a) Total revenues for the year ended December 31, 2002 include $256 million of gains recognized on the sale of Constellation’s outstanding shares of Orion Power Holdings, Inc.
(b) Net income for the year ended December 31, 2001 includes workforce reduction costs of $64 million after-tax, contract termination related costs of $140 million after-tax and impairment losses and other costs of $131 million after-tax.

 

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FPL Group Selected Historical Financial Information

 

     Three months
ended March 31,
    As of and for the year ended December 31  
     2006     2005     2005     2004     2003     2002     2001  
     (in millions, except per share data)  
     (Unaudited)        

Summary of Operations

              

Operating Revenues

   $ 3,584     $ 2,437     $ 11,846     $ 10,522     $ 9,630     $ 8,173     $ 8,217  

Income Before Cumulative Effects of Changes in Accounting Principles

   $ 248 (a)   $ 137 (b)   $ 885 (b)   $ 887 (b)   $ 893 (b)   $ 695 (c)   $ 781 (a)

Cumulative Effects of Changes in Accounting Principles, Net of Income Taxes

     —         —         —         —         (3 )(d)     (222 )(e)     —    
                                                        

Net Income

   $ 248 (a)   $ 137 (b)   $ 885 (b)   $ 887 (b)   $ 890 (f)   $ 473 (g)   $ 781 (a)
                                                        

Earnings Per Common Share—Assuming Dilution:

              

Earnings Per Common Share Before Cumulative Effects of Changes in Accounting Principles

   $ 0.63 (a)   $ 0.36 (b)   $ 2.29 (b)   $ 2.45 (b)   $ 2.51 (b)   $ 2.01 (c)   $ 2.31 (a)

Cumulative Effects of Changes in Accounting Principles

     —         —         —         —         (0.01 )(d)     (0.64 )(e)     —    
                                                        

Earnings Per Common Share—Assuming Dilution

   $ 0.63 (a)   $ 0.36 (b)   $ 2.29 (b)   $ 2.45 (b)   $ 2.50 (f)   $ 1.37 (g)   $ 2.31 (a)
                                                        

Dividends Declared Per Common Share

   $ 0.375     $ 0.355     $ 1.42     $ 1.30     $ 1.20     $ 1.16     $ 1.12  
                                                        

Summary of Financial Condition

              

Total Assets(d)(e)

   $ 32,836     $ 29,343     $ 33,004     $ 28,333     $ 26,935     $ 23,185     $ 20,713  

Long-Term Debt, Excluding Current Maturities(d)

   $ 7,828     $ 8,501     $ 8,039     $ 8,027     $ 8,723     $ 5,790     $ 4,858  

Obligations Under Capital Lease, Excluding Current Maturities(d)

   $ —       $ —       $ —       $ —       $ —       $ 140     $ 133  

(a) Includes merger-related expenses and net unrealized mark-to-market gains associated with non-qualifying hedges.
(b) Includes net unrealized mark-to-market gains or losses associated with non-qualifying hedges.
(c) Includes impairment and restructuring charges, charges related to certain wind projects and leveraged leases, a favorable settlement of litigation with the IRS and net unrealized mark-to-market gains associated with non-qualifying hedges.
(d) Reflects the adoption of FASB Interpretation No. 46, Consolidation of Variable Interest Entities, in July 2003.
(e) Reflects the adoption of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, in January 2002.
(f) Includes the cumulative effect of an accounting change and net unrealized mark-to-market gains associated with non-qualifying hedges.
(g) Includes the cumulative effect of an accounting change, impairment and restructuring charges, charges related to certain wind projects and leveraged leases, a favorable settlement of litigation with the IRS and net unrealized mark-to-market gains associated with non-qualifying hedges.

 

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Selected Unaudited Pro Forma Condensed Combined Financial Information

The merger will be accounted for as a reverse acquisition under the purchase method of accounting in accordance with the accounting principles generally accepted in the United States of America, which means that FPL Group will be treated as the accounting acquiror and Constellation will be treated as the “acquired” company for financial reporting purposes and that the assets and liabilities of Constellation will be recorded, as of the completion of the merger, at their respective fair values and added to those of FPL Group. For a more detailed description of purchase accounting, see “The Proposed Merger—Accounting Treatment” beginning on page 105.

Constellation and FPL Group have presented below selected unaudited pro forma condensed combined financial information that reflects the purchase method of accounting and is intended to provide you with a better picture of what their businesses might have looked like had they actually been combined at the beginning of the earliest period presented. The unaudited pro forma condensed combined financial information has been prepared assuming that one share of Constellation common stock had been issued in exchange for each outstanding share of FPL Group common stock pursuant to the merger and 1.444 shares of Constellation common stock had been issued for each outstanding share of Constellation common stock pursuant to the stock split prior to the merger. The unaudited pro forma condensed combined financial information may have been different had the companies actually been combined at the beginning of the earliest period presented. The selected unaudited pro forma condensed combined financial information does not reflect the effect of asset dispositions, if any, or cost savings that may result from the merger. You should not rely on the selected unaudited pro forma condensed combined financial information as being indicative of the historical results that would have occurred had the companies been combined or the future results that may be achieved after the completion of the merger. The following selected unaudited pro forma condensed combined financial information has been derived from, and should be read in conjunction with, the Unaudited Pro Forma Condensed Combined Financial Statements and related notes included in the section “Unaudited Pro Forma Condensed Combined Financial Statements” beginning on page 151.

 

 

    

Three Months Ended

March 31, 2006

  

Year Ended

December 31,
2005

     (in millions, except per share data)

Income Statement Data

     

Operating revenues

   $ 8,474    $ 29,046

Income from operations

     677      2,707

Income from continuing operations

     355      1,610

Earnings per share from continuing operations:

     

Basic

   $ 0.55    $ 2.53

Diluted

     0.54      2.49

Weighted average number of shares and share equivalents:

     

Basic

     647      637

Diluted

     653      646
    

As of

March 31, 2006

    
     (in millions)     

Balance Sheet Data

     

Cash and cash equivalents

   $ 573   

Total assets

     62,292   

Long-term debt

     12,179   

Total liabilities

     42,570   

Common shareholders’ equity

     19,722   

 

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Historical and Unaudited Pro Forma Per Share Information

The following table includes selected historical per share information of Constellation and FPL Group and unaudited pro forma condensed combined per share information after giving effect to the merger between Constellation and FPL Group, under the purchase method of accounting, assuming that one share of Constellation common stock had been issued in exchange for each outstanding share of FPL Group common stock pursuant to the merger and 1.444 shares of Constellation common stock had been issued for each outstanding share of Constellation common stock pursuant to the stock split prior to the merger. You should read this information in conjunction with the selected historical financial information included elsewhere in this joint proxy statement/prospectus and the historical financial statements of Constellation and FPL Group and related notes that are incorporated in this joint proxy statement/prospectus by reference. The unaudited Constellation pro forma condensed combined consolidated per share information is derived from, and should be read in conjunction with, the Unaudited Pro Forma Condensed Combined Financial Statements and related notes in the section “Unaudited Pro Forma Condensed Combined Financial Statements” beginning on page 151. The historical per share information is derived from audited financial statements as of and for the year ended December 31, 2005 and unaudited financial statements for the three months ended March 31, 2006. The unaudited pro forma Constellation per share equivalents are calculated by multiplying the unaudited Constellation pro forma combined per share amounts by 1.444. The pro forma combined outstanding shares are based on the number of shares of Constellation common stock outstanding at March 31, 2006 and December 31, 2005 multiplied by 1.444 and the number of shares of FPL Group common stock outstanding at March 31, 2006 and December 31, 2005.

The unaudited pro forma condensed combined per share information does not purport to represent what the actual results of operations of Constellation and FPL Group would have been had the companies been combined during the period presented or to project Constellation’s and FPL Group’s results of operations that may be achieved after the completion of the merger.

 

     Three Months
Ended March 31, 2006
  

Year Ended

December 31,
2005

Unaudited Pro Forma Combined Company

     

Per common share data:

     

Income from continuing operations:

     

Basic

   $ 0.55    $ 2.53

Diluted

   $ 0.54    $ 2.49

Cash dividends declared(1)

   $ 0.375    $ 1.42

Shareholders’ equity per share

   $ 30.25   

Constellation—Historical

     

Per common share data:

     

Income from continuing operations:

     

Basic

   $ 0.63    $ 3.42

Diluted

   $ 0.63    $ 3.38

Cash dividends declared

   $ 0.3775    $ 1.34

Shareholders’ equity per share

   $ 24.18    $ 27.57

FPL Group—Historical

     

Per common share data:

     

Income from continuing operations:

     

Basic

   $ 0.64    $ 2.33

Diluted

   $ 0.63    $ 2.29

Cash dividends declared

   $ 0.375    $ 1.42

Shareholders’ equity per share

   $ 22.69    $ 22.11

Unaudited Pro Forma Constellation Equivalents Combined

     

Per common share data:

     

Income from continuing operations:

     

Basic

   $ 0.79    $ 3.65

Diluted

   $ 0.78    $ 3.60

Cash dividends declared

   $ 0.54    $ 2.05

Shareholders’ equity per share

   $ 43.68   

 

(1) We expect Constellation will continue the dividend policy of FPL Group in effect at the time of completion of the merger. Accordingly, the pro forma cash dividends declared per share of common stock are equal to the dividend declared by FPL Group in the first quarter of 2006 and during the year ended December 31, 2005.

 

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Comparative Per Share Market Price and Dividend Information

Constellation common stock and FPL Group common stock are each listed on the NYSE. Constellation’s and FPL Group’s ticker symbols are “CEG” and “FPL,” respectively. The following table shows, for the calendar quarters indicated, based on published financial sources: (1) the high and low sale prices of shares of Constellation common stock and FPL Group common stock as reported on the NYSE Composite Transaction Tape and (2) the cash dividends paid or to be paid per share of Constellation common stock and FPL Group common stock. The FPL Group share information for 2004 has been adjusted to reflect the effect of the two-for-one stock split of the FPL Group common stock effective March 15, 2005.

 

    
Constellation Common Stock
   FPL Group Common Stock
     High    Low    Dividends    High    Low    Dividends

2004

                 

First Quarter

   $ 41.47    $ 38.52    $ 0.285    $ 34.41    $ 31.67    $ 0.31

Second Quarter

   $ 41.35    $ 35.89    $ 0.285    $ 33.63    $ 30.10    $ 0.31

Third Quarter

   $ 41.18    $ 36.76    $ 0.285    $ 34.93    $ 31.21    $ 0.34

Fourth Quarter

   $ 44.90    $ 39.90    $ 0.285    $ 38.05    $ 33.67    $ 0.34

2005

                 

First Quarter

   $ 53.55    $ 43.01    $ 0.335    $ 41.38    $ 35.90    $ 0.355

Second Quarter

   $ 57.91    $ 50.36    $ 0.335    $ 42.72    $ 39.16    $ 0.355

Third Quarter

   $ 62.09    $ 56.50    $ 0.335    $ 48.11    $ 40.30    $ 0.355

Fourth Quarter

   $ 62.60    $ 50.40    $ 0.335    $ 48.05    $ 40.75    $ 0.355

2006

                 

First Quarter

   $ 60.55    $ 54.01    $ 0.3775    $ 43.42    $ 38.85    $ 0.375

Second Quarter (through June 22, 2006)

   $ 55.68    $ 50.72    $ 0.3775    $ 41.97    $ 37.81    $ 0.375

Subject to applicable law and fiduciary duties, we expect that the combined company will pay a per share quarterly dividend consistent with the quarterly dividend paid by FPL Group. After adjusting for the stock split, this is a higher per share dividend amount than Constellation has paid historically. (If Constellation’s second quarter 2006 dividend were adjusted for the stock split, the per share dividend amount would be $0.2614.) As a result, we expect that Constellation stockholders will receive an increase in their quarterly dividends following completion of the merger. If the combined company were to pay the same per share quarterly dividend as FPL Group’s second quarter 2006 dividend ($0.375 per share), Constellation stockholders prior to the merger would experience more than a 43% increase in their quarterly dividends from the combined company, as compared to Constellation’s second quarter 2006 dividend, after adjusting for the stock split.

 

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RISK FACTORS

Constellation stockholders and FPL Group shareholders should carefully consider the following factors, in addition to those factors discussed elsewhere herein and in the documents that we have filed with the Securities and Exchange Commission and which we have incorporated by reference into this joint proxy statement/prospectus and the other information in this joint proxy statement/prospectus, before voting at their respective annual meetings.

Risks Relating to the Merger

The merger may not be completed, which could adversely affect Constellation’s and/or FPL Group’s business operations and stock prices.

To complete the merger, Constellation stockholders must approve the issuance of shares of Constellation common stock as contemplated by the merger agreement and the amended and restated Constellation charter, and FPL Group shareholders must approve the merger agreement. In addition, each of Constellation and FPL Group must also obtain certain other approvals and consents from various federal and state governmental and regulatory authorities.

Constellation and FPL Group have not yet obtained all regulatory clearances, consents and approvals required to complete the merger. Governmental or regulatory agencies could still seek to block or challenge the merger or could impose restrictions they deem necessary or desirable in the public interest as a condition to approving the merger. If these approvals are not received, or they are not received on terms that satisfy the conditions set forth in the merger agreement, then neither Constellation nor FPL Group will be obligated to complete the merger.

The recent adoption of energy legislation in Maryland creates additional uncertainty about the timing of required regulatory approval in Maryland, as well as the potential terms and conditions of such approval, if it is received. In addition, one or more parties may challenge the constitutionality of one or more provisions of the new legislation. The outcome of any challenges and the additional uncertainty that could result cannot be predicted. This legislation and its impact on the merger approval process are discussed in the section “The Proposed Merger—Regulatory Matters Relating to the Merger” beginning on page 108.

In addition, the merger agreement contains customary other closing conditions, which are described in the section “The Proposed Merger—The Merger Agreement—Conditions” beginning on page 142, which may not be satisfied or waived. If Constellation and FPL Group are unable to complete the merger, Constellation and FPL Group would be subject to a number of risks, including the following:

 

    Constellation and FPL Group would not realize the benefits of the proposed merger, including any synergies from combining the two companies;

 

    the trading price of Constellation common stock and/or FPL Group common stock may decline to the extent that the current market prices reflect a market assumption that the merger will be completed; and

 

    Constellation and FPL Group would continue to be exposed to the general competitive pressures and risks discussed elsewhere in this joint proxy statement/prospectus and in their respective Annual Reports on Form 10-K for the year ended December 31, 2005 and other SEC filings, which are incorporated by reference into this joint proxy statement/prospectus, which pressures and risks may be increased if the merger is not completed.

The occurrence of any of these events individually or in combination could have a material adverse effect on the results of operations or the trading price of Constellation common stock or FPL Group common stock.

Constellation and FPL Group will be subject to business uncertainties and contractual restrictions while the merger is pending that could adversely affect their businesses.

Uncertainty about the effect of the merger on employees and customers may have an adverse effect on Constellation and FPL Group, regardless of whether the merger is eventually completed, and, consequently, on

 

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the combined company. Although Constellation and FPL Group have taken steps designed to reduce any adverse effects, these uncertainties may impair Constellation’s or FPL Group’s ability to attract, retain and motivate key personnel until the merger is completed, or the merger agreement is terminated, and for a period of time thereafter, and could cause customers, suppliers and others that deal with Constellation or FPL Group to seek to change existing business relationships with Constellation or FPL Group.

Employee retention and recruitment may be particularly challenging during the pendency of the merger, as employees and prospective employees may experience uncertainty about their future roles with the combined company. The departure of existing key employees or the failure of potential key employees to accept employment with either of the companies, despite Constellation’s and FPL Group’s retention and recruiting efforts, could have a material adverse impact on FPL Group’s or Constellation’s business, financial condition and operating results, regardless of whether the merger is eventually completed.

The pursuit of the merger and the preparation for the integration of Constellation and FPL Group may place a significant burden on management and internal resources. The diversion of management attention away from day-to-day business concerns and any difficulties encountered in the transition and integration process could have a material adverse impact on FPL Group’s or Constellation’s business, financial condition and operating results, regardless of whether the merger is eventually completed. In general, the integration activities are expected to affect primarily the companies’ competitive businesses and not their regulated utilities.

In addition, the merger agreement restricts each of Constellation and FPL Group, without the other party’s consent, from making certain acquisitions and taking other specified actions until the merger occurs or the merger agreement terminates. These restrictions may prevent Constellation and FPL Group from pursuing otherwise attractive business opportunities and making other changes to their businesses prior to completion of the merger or termination of the merger agreement. Please see the section titled “The Proposed Merger—The Merger Agreement—Covenants” beginning on page 135 for a description of the restrictive covenants applicable to Constellation and FPL Group.

The value of shares of Constellation common stock to be received by Constellation stockholders as a result of the stock split and by FPL Group shareholders in the merger will fluctuate.

Immediately prior to the completion of the merger, each outstanding share of Constellation common stock will be split into 1.444 shares of Constellation common stock (with cash paid in lieu of fractional shares resulting from the stock split). Upon completion of the merger, each outstanding share of FPL Group common stock will be converted into the right to receive one share of Constellation common stock. Both the number of shares of Constellation common stock to be received by Constellation stockholders in the stock split and the number of shares of Constellation common stock issued pursuant to the merger for each share of FPL Group common stock is fixed, and neither number will be adjusted in the event of any change in the market prices of Constellation common stock or FPL Group common stock prior to the effective time of the stock split and the completion of the merger.

The market prices of Constellation common stock and FPL Group common stock immediately prior to the effective time of the stock split and the completion of the merger may vary significantly from their market prices at the date of this joint proxy statement/prospectus and at the date of the annual meetings of the stockholders of Constellation and the shareholders of FPL Group. See “The Introduction—Summary of the Proposed Merger—Comparative Per Share Market Price and Dividend Information” beginning on page 22 for more detailed share price information. These variations may be the result of various factors, including:

 

    changes in the business, operations or prospects of Constellation and/or FPL Group;

 

    speculation regarding the likelihood that the merger will be completed and the timing of the completion;

 

    general market and economic conditions; and

 

    litigation and/or regulatory developments.

 

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The stock split and the merger may not be completed until a significant period of time has passed after the Constellation and FPL Group annual meetings. At the time of their respective annual meetings, Constellation stockholders and FPL Group shareholders will not know the exact value of the Constellation common stock that will be received as a result of the stock split or issued in connection with the merger.

Stockholders of Constellation and shareholders of FPL Group are urged to obtain current market quotations for Constellation common stock and FPL Group common stock.

The merger is subject to receipt of consent or approval from governmental entities that could delay or prevent the completion of the merger or impose conditions that could have a material adverse effect on the combined company or that could cause abandonment of the merger.

Completion of the merger is conditioned upon the receipt of consents, orders, approvals or clearances, as required, from the public utility commissions or similar entities in several of the states in which Constellation and/or FPL Group operate electric and/or gas businesses, as well as from FERC and the NRC. Although certain approvals have already been obtained (including approvals of the Federal Communications Commission (which we refer to herein as the FCC) and early termination under the Hart-Scott-Rodino Antitrust Improvements Act of 1976), the remaining required approvals, including from the MPSC, may not be obtained and the required conditions to closing may not be satisfied. Among other things, governmental entities could condition their approval of the merger upon Constellation and/or FPL Group entering into agreements to restrict the operations of the combined businesses in accordance with specified business conduct rules, to divest generation facilities or to take other actions. In addition, governmental entities could impose significant additional costs on the business of the combined company, including requiring that merger savings be used to reduce rates charged to utility customers. The terms of any such conditions that may be imposed, if any, are not known by Constellation or FPL Group as of the date of this joint proxy statement/prospectus.

Recently adopted energy legislation in Maryland requires the appointment of a new group of commissioners at the MPSC and directs the MPSC to complete a prompt and comprehensive review of the merger pursuant to new standards. These changes have created additional uncertainty about the MPSC approval process and may result in substantial delay in the timing of required MPSC approval of the merger or the imposition of terms and conditions that are unfavorable to the combined company, such as a requirement to forego an amount of expected merger savings. A substantial delay in obtaining satisfactory approvals or the imposition of unfavorable terms or conditions in connection with such approvals could have a material adverse effect on the business, financial condition or results of operations of Constellation, FPL Group or the combined company, could result in Constellation or FPL Group litigating with one or more governmental entities and/or may cause the abandonment of the merger by Constellation or FPL Group.

The annual meetings at which the Constellation stockholders and the FPL Group shareholders will vote on the merger proposals are expected to take place before all such approvals have been obtained and, in certain cases where they have not been obtained, before the terms of any conditions to obtain such approvals that may be imposed are known. As a result, if stockholder approval of the merger proposals is obtained at such meetings, Constellation and FPL Group may make decisions after the annual meetings to waive a condition or approve certain actions required to obtain necessary approvals without seeking further stockholder approval.

See “The Proposed Merger—Regulatory Matters Relating to the Merger” beginning on page 108 for a description of the regulatory approvals necessary in connection with the merger, as well as of recent energy legislation adopted in Maryland.

The anticipated benefits of combining Constellation and FPL Group may not be realized.

Constellation and FPL Group entered into the merger agreement with the expectation that the merger would result in various benefits, including, among other things, synergies, cost savings and operating efficiencies.

 

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Although we expect to achieve the anticipated benefits of the merger, including the synergies, achieving them is subject to a number of uncertainties, including:

 

    whether state authorities, FERC, the NRC or any other regulatory authorities whose approval is required to complete the merger impose conditions on the merger or require the combined company to share a portion of the expected synergies of the merger with customers, any of which may have an adverse effect on the combined company;

 

    the ability of the two companies to combine certain of their operations or take advantage of expected growth opportunities; and

 

    general competitive factors in the market place.

No assurance can be given that these benefits will be achieved or, if achieved, the timing of their achievement. Failure to achieve these anticipated benefits could result in increased costs and decreases in the amount of expected revenues of the combined company.

The integration of Constellation and FPL Group following the merger will present significant challenges that may result in a decline in the anticipated potential benefits of the merger.

The merger involves the integration of two companies that previously operated independently. The difficulties of combining the companies’ operations include:

 

    integrating the best practices of two companies, including generation and utility operations and staff functions;

 

    combining the competitive energy businesses and the energy marketing and trading businesses;

 

    the necessity of coordinating geographically separated organizations, systems and facilities;

 

    integrating personnel with diverse business backgrounds and organizational cultures;

 

    reducing the costs associated with each company’s operations; and

 

    preserving important relationships of both Constellation and FPL Group and resolving potential conflicts that may arise.

The process of integrating operations could cause an interruption of, or loss of momentum in, the activities of one or more of the combined company’s businesses and the possible loss of key personnel. The diversion of management’s attention and any delays or difficulties encountered in connection with the merger and the integration of the two companies’ operations could have an adverse effect on the business, results of operations, financial condition or prospects of the combined company after the merger.

Constellation and FPL Group expect the merger to generate potential pre-tax cost synergies of $200 million to $250 million for the combined company on an annualized basis by the end of 2009 (assuming completion of the merger on December 31, 2006 and excluding costs of integration). A substantial majority of these synergies are expected to come from the competitive energy businesses. These savings may not be realized within the time periods contemplated, or at all.

Each of Constellation and FPL Group will incur significant transaction, merger-related and restructuring costs in connection with the merger.

Constellation and FPL Group expect to incur costs associated with combining the operations of the two companies, as well as transaction fees and other costs related to the merger. The combined company also will

 

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incur restructuring and integration costs in connection with the merger. Constellation and FPL Group are in the early stages of assessing the magnitude of these costs and, therefore, are not able to provide estimates of these costs. The costs related to restructuring will be included as a liability or as an expense in the purchase price allocation, depending on the nature of the restructuring activity. Although Constellation and FPL Group expect that the elimination of duplicative costs, as well as the realization of other efficiencies related to the integration of the businesses, may offset incremental transaction, merger-related and restructuring costs over time, any net benefit may not be achieved in the near term, or at all.

The combined company will record goodwill that could become impaired and adversely affect the combined company’s operating results.

Under the merger agreement, upon the completion of the merger, FPL Group will become a wholly owned subsidiary of Constellation. However, under generally accepted accounting principles in the United States of America (which we refer to herein as GAAP), FPL Group will be treated as the acquiror for accounting purposes and the merger will be accounted for under the purchase method of accounting as a purchase by FPL Group of Constellation. Under the purchase method of accounting, the total implied purchase price deemed paid by FPL Group in the merger will be allocated to Constellation’s tangible assets and liabilities and identifiable intangible assets, if any are identified, based on their fair values as of the date of completion of the merger. The excess of the deemed purchase price over those fair values will be recorded as goodwill. We expect that the merger will result in the creation of goodwill based upon the application of purchase accounting. To the extent the value of goodwill or intangibles becomes impaired, the combined company may be required to incur material charges relating to such impairment. Such a potential impairment charge could have a material impact on the combined company’s operating results.

Members of the management and boards of directors of Constellation and FPL Group have interests in the merger that are different from, or in addition to, those of other stockholders and that could have influenced their decision to support or approve the merger.

In considering whether to approve the merger transaction, Constellation stockholders and FPL Group shareholders should recognize that some of the members of management and the boards of directors of Constellation and FPL Group have interests in the merger that differ from, or are in addition to, their interests as stockholders of Constellation and shareholders of FPL Group. These interests are described in “The Proposed Merger—Additional Interests of FPL Group’s and Constellation’s Directors and Executive Officers in the Merger” beginning on page 115.

Risks Relating to the Businesses of Constellation, FPL Group and the Combined Company

The business of the combined company will be subject to risks currently affecting the businesses of Constellation and FPL Group.

After the completion of the merger, the business of the combined company, as well as the price of Constellation common stock, will be subject to numerous risks currently affecting the businesses of Constellation and FPL Group. For a discussion of Constellation’s business and FPL Group’s business, together with certain factors to consider in connection with such businesses, see Constellation’s Annual Report on Form 10-K for the year ended December 31, 2005 and FPL Group’s Annual Report on Form 10-K for the year ended December 31, 2005 and the other filings with the SEC by Constellation and FPL Group that are incorporated by reference into this joint proxy statement/prospectus.

Constellation’s and FPL Group’s businesses are, and the combined company’s business will be, subject to extensive regulation that will affect operations and costs.

Constellation and FPL Group are, and the combined company will be, subject to regulation under environmental laws, the Federal Power Act, the Atomic Energy Act of 1954 and the Energy Policy Act of 2005

 

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and certain sections of Maryland, Florida and other state statutes relating to public utilities and the operation of electric or natural gas facilities. Changing governmental policies and regulatory actions can have a significant impact on Constellation and FPL Group. This includes, particularly, the policies and actions of FERC, the NRC, the MPSC, the FPSC and the utility commissions of other states in which Constellation and FPL Group and their respective subsidiaries have operations.

State and federal regulations can impact, among other things, allowed rates of return, industry and rate structure, operation of nuclear power facilities, operation and construction of plant facilities, operation and construction of transmission facilities, acquisition, disposal, depreciation and amortization of assets and facilities, transactions between subsidiaries and affiliates, recovery of fuel and purchased power costs, recovery of storm-related repair costs, decommissioning costs, return on common equity and equity ratio limits, payment of dividends and present or prospective wholesale and retail competition (including but not limited to retail choice and transmission costs).

Certain regulatory commissions also have the authority to disallow recovery of any and all costs that they consider excessive or imprudently incurred. In addition, Constellation’s subsidiary, BGE, and FPL Group’s subsidiary, Florida Power & Light, hold franchise agreements with local municipalities and counties and must renegotiate those agreements as they expire.

All of these factors may have a negative impact on the business and results of operations of Constellation and FPL Group.

Florida Power & Light’s base rates for electric service are subject to regulation by the FPSC, and BGE’s distribution rates are subject to regulation by the MPSC, and such rates are effective until new rates are approved. In addition, limited categories of costs are recovered through adjustment charges that are periodically reset to reflect current and projected costs. Inability to recover material costs not included in rates or adjustment clauses, including increases in uncollectible customer accounts that may result from higher gas or electric costs, could have an adverse effect on cash flow and financial position of the combined company. Recently adopted energy legislation in Maryland mandates rate stabilization that requires BGE to defer the recovery of a portion of its purchased power costs and to phase in the recovery of these costs over a period of years. This arrangement takes effect on July 1, 2006. It will require BGE to finance the deferred portion of its purchased power costs until it has been recovered from customers. BGE also is required to credit residential electric rates by approximately $39 million per year for 10 years, beginning on January 1, 2007. Because this energy legislation is still in the process of being implemented, Constellation and FPL Group do not know the impact such legislation will have on the business of Constellation, both as a stand-alone entity and, if the merger is completed, as part of the combined company. For a further discussion of this legislation and its impact on BGE and on the merger, see “The Proposed Merger—Regulatory Matters Relating to the Merger” beginning on page 108.

As a result, the regulatory process may restrict Constellation’s or FPL Group’s ability to grow earnings in certain parts of their businesses, can cause delays in or affect business planning and transactions, can increase the combined company’s costs and does not provide any assurance as to achievement of earnings levels.

Constellation and FPL Group operate in a changing market environment influenced by various legislative and regulatory initiatives regarding deregulation, regulation or restructuring of the energy industry, including deregulation of the production and sale of electricity. Constellation, FPL Group and each of their respective subsidiaries will need to adapt to these changes, which could restrict their ability to grow the competitive businesses. In addition, Constellation, FPL Group and the combined company may face increasing competitive pressure in their competitive businesses.

The operation of power generation facilities, including nuclear facilities, involves significant risks that could adversely affect the results of operation and financial condition of the combined company.

The operation of power generation facilities involves many risks, including start up risks, breakdown or failure of equipment, transmission lines, substations or pipelines, use of new technology, availability of water,

 

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the dependence on a specific fuel source, including the transportation of fuel, the impact of unusual or adverse weather conditions (including natural disasters such as hurricanes) or environmental compliance, as well as the risk of performance below expected or contracted levels of output or efficiency. This could result in lost revenues and/or increased expenses. Insurance, warranties or performance guarantees may not cover any or all of the lost revenues or increased expenses, including the cost of replacement power. For risks relating to nuclear generating facilities, see “—The combined company’s generation business may incur substantial costs and liabilities due to its ownership and operation of nuclear generating facilities.” beginning on page 30.

Breakdown or failure of a Constellation or FPL Group operating facility may prevent the facility from performing under applicable power sales agreements which, in certain situations, could result in termination of the agreement or incurring a liability for liquidated damages.

The construction of, and capital improvements to, power generation facilities involve substantial risks. Should construction or capital improvement efforts be unsuccessful, the results of operations and financial condition of the combined company could be negatively affected.

Constellation’s and FPL Group’s ability to successfully and timely complete their power generation facilities currently under construction, those projects yet to begin construction or capital improvements to existing facilities is contingent upon many variables and subject to substantial risks. Should any such efforts be unsuccessful, the combined company could be subject to additional costs, termination payments under committed contracts and/or the write-off of its investment in the project or improvement.

The use of derivative contracts by Constellation and FPL Group in the normal course of business could result in financial losses that negatively impact the results of operations of the combined company.

Constellation and FPL Group use derivative instruments, such as swaps, options, futures and forwards, to manage their commodity and financial market risks and to engage in trading activities. The combined company could recognize financial losses as a result of volatility in the market values of these contracts or if a counterparty fails to perform.

In the absence of actively quoted market prices and pricing information from external sources, the valuation of these derivative instruments involves management’s judgment or use of estimates. As a result, changes in the underlying assumptions or use of alternative valuation methods could affect the reported fair value of these contracts. In addition, FPL Group’s use of such instruments for its utility business could be subject to prudency challenges and, if found imprudent, cost recovery could be disallowed by the FPSC. In addition, the combined company may not cover the entire exposure of its assets or positions to market price volatility and the coverage will vary over time. Fluctuating commodity prices may negatively impact the combined company’s financial results and financial position to the extent it has unhedged positions.

The combined company’s competitive energy business will have contractual obligations to certain customers to provide full requirements service, which make it difficult to predict and plan for load requirements and may result in increased operating costs to the business.

The combined companies’ competitive energy business will have contractual obligations to certain customers to supply service to these customers to satisfy all or a portion of such customers’ energy requirements. The uncertainty regarding the amount of load that the combined company’s competitive energy business must be prepared to supply may increase the operating cost of the combined company’s competitive energy business. A significant under- or over-estimation of load requirements could result in the combined company’s competitive energy business not having enough, or having too much, power to cover its load obligations, in which case it would be required to buy or sell power from or to third parties at prevailing market prices. Those prices may not be favorable and thus could increase its operating costs.

 

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Any divestiture of generation assets or capacity in order to obtain the required regulatory approvals to complete the merger increases the likelihood of the combined company’s generation business not having enough power to cover its load obligations.

BGE will be required to defer recovery of a portion of its costs incurred in satisfying its provider of last resort (POLR) obligations, which may adversely affect the combined company’s financial results and liquidity.

Under the electric restructuring Maryland enacted in 1999 and various settlements approved by the MPSC in 2003 and 2005, BGE is obligated to serve as the POLR for all retail customers in its service territories for various periods ending between 2007 and 2010. POLR obligations are the obligations of energy delivery businesses to provide electricity to customers that do not choose a competitive supplier and, by their nature, are difficult to quantify.

As the POLR supplier, BGE is required to secure load requirements through a wholesale bidding process sufficient to serve those customers in its service territory in the event that customers do not choose alternate suppliers or if a third party supplier is unable to satisfy its obligations. The settlements provide that BGE be able to recover all of its supply and certain other actual costs of providing POLR service. However, in June 2006, the Maryland legislature adopted energy legislation requiring BGE to defer recovery of some of its costs of providing residential POLR service in light of the anticipated increase in POLR prices that otherwise would have taken place upon the expiration of the residential rate freeze in June 2006. The legislation’s rate stabilization provisions cap rate increases at 15% from July 1, 2006 to May 31, 2007. Thereafter, rates will be permitted to increase to market by no later than January 1, 2008 on terms and conditions to be determined by the MPSC, in order to provide for a smooth transition to market rates without adversely affecting the creditworthiness of BGE. BGE is allowed to recover deferred costs from its customers over a period not to exceed 10 years, with the terms and conditions of cost recovery to be determined by the MPSC, in accordance with the terms of the Maryland legislation. The final terms and conditions of the rate stabilization and cost recovery plans could have a material adverse impact on the financial results and condition of Constellation and, if the merger is completed, on the combined company. The new Maryland legislation is discussed in the section of this joint proxy statement/prospectus entitled “The Proposed Merger—Regulatory Matters Relating to the Merger” beginning on page 108.

The combined company’s generation business may incur substantial costs and liabilities due to its ownership and operation of nuclear generating facilities.

Following completion of the merger, it is expected that, prior to giving effect to any divestitures required by governmental authorities to complete the merger, approximately 18% of the combined company’s owned generation capacity will be nuclear and the combined company will own approximately 8.8% of the nuclear generation capacity in the United States. Accordingly, the combined company will have greater exposure to risks that adversely affect the nuclear generation industry compared to other companies in the utility industry.

The ownership and operation of nuclear generating facilities involve risks, including:

 

    mechanical or structural problems;

 

    inadequacy or lapses in maintenance protocols;

 

    impairment of reactor operation and safety systems due to human or mechanical error;

 

    costs of storage, handling and disposal of nuclear materials, including the availability or unavailability of a permanent repository for spent nuclear fuel;

 

    regulatory actions, including shut down of units because of public safety concerns, whether at the plants of the combined company or other nuclear operators;

 

    limitations on the amounts and types of insurance coverage commercially available;

 

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    uncertainties regarding both technological and financial aspects of decommissioning nuclear generating facilities; and

 

    environmental risks, including risks associated with changes in environmental legal requirements.

In the event of a nuclear accident at one of the combined company’s nuclear plants, the cost of property damage and other expenses incurred may exceed the combined company’s insurance coverage available from both private sources and an industry retrospective payment plan. In addition, in the event of an accident at one of the combined company’s or another participating insured party’s nuclear plants, the combined company could be assessed retrospective insurance premiums. Uninsured losses or the payment of retrospective insurance premiums could each have a material adverse effect on the combined company’s financial condition and results of operations.

The combined company’s competitive energy business may incur substantial costs and liabilities and be exposed to price volatility as a result of its participation in the wholesale energy markets.

Constellation and FPL Group buy and sell electricity in both the wholesale bilateral markets and spot markets, which expose the companies to the risks of rising and falling prices in those markets, and their cash flows may vary accordingly. At any given time, the wholesale spot market price of electricity for each hour is generally determined by the cost of supplying the next unit of electricity to the market during that hour. This is highly dependent on the regional generation market. In many cases, the next unit of electricity supplied would be supplied from generating stations fueled by fossil fuels, primarily coal, natural gas and oil. Consequently, the open market wholesale price of electricity may reflect the cost of coal, natural gas or oil plus the cost to convert the fuel to electricity and an appropriate return on capital. Therefore, changes in the supply and cost of coal, natural gas and oil may impact the open market wholesale price of electricity.

A portion of Constellation’s and FPL Group’s power generation facilities operate wholly or partially without long-term power purchase agreements. As a result, power from these facilities is sold on the spot market or on a short-term contractual basis, which if not fully hedged may affect the volatility of Constellation’s or FPL Group’s financial results. In addition, Constellation’s and FPL Group’s businesses depend upon transmission facilities owned and operated by others; if transmission is disrupted or capacity is inadequate or unavailable, Constellation’s and FPL Group’s ability to sell and deliver wholesale power may be limited.

Currently, Constellation’s and FPL Group’s power generation facilities purchase a portion of their fuel through short-term contracts or on the spot market. Fuel prices may also be volatile, and the price that can be obtained for power sales may not change at the same rate as changes in fuel costs. Also, Constellation’s and FPL Group’s competitive energy businesses expose them to other risks, including credit risk and other risks relating to counterparties’ failure to perform, and to the risk of commodity price fluctuations. Fuel price increases and defaults by suppliers and other counterparties may adversely affect results of operations.

Volatility in market prices for fuel and electricity may result from among other things:

 

    weather conditions;

 

    seasonality;

 

    electricity usage;

 

    illiquid markets;

 

    transmission or transportation constraints or inefficiencies;

 

    availability of competitively priced alternative energy sources;

 

    demand for energy commodities;

 

    available supplies of natural gas, crude oil and refined products, and coal;

 

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    generating unit performance;

 

    natural disasters, wars, embargoes and other catastrophic events;

 

    federal and state energy and environmental regulation, legislation and policies; and

 

    geopolitical concerns affecting global supply of oil and natural gas.

In addition to risks discussed above, risks specifically affecting the combined company’s success in competitive wholesale markets include the ability to efficiently operate generating assets, the successful and timely completion of project restructuring activities, maintenance of the qualifying facility status of certain projects, transmission and transportation availability, competition from new sources of generation and the level of generation capacity. The combined company’s inability or failure to effectively hedge its assets or positions against changes in commodity prices, interest rates, counterparty credit risk or other risk measures could significantly impair its future financial results.

Constellation and FPL Group often rely on single suppliers and at times on single customers, exposing Constellation and FPL Group to significant financial risks if either should fail to perform its obligations.

Constellation and FPL Group often rely on a single supplier for the provision of fuel, water and other services required for operation of a facility, and at times they rely on a single customer or a few customers to purchase all or a significant portion of a facility’s output, in some cases under long-term agreements that provide the support for any project debt used to finance the facility. The failure of any one supplier or customer to fulfill its contractual obligations could negatively impact the combined company’s financial results. Consequently, the combined company’s financial performance depends on the continued performance by suppliers and customers of their obligations under these long-term agreements.

Constellation and FPL Group operate in the competitive segments of the electric and natural gas industries created by restructuring initiatives at both state and federal levels. If competitive restructuring of the electric power or natural gas industry is reversed, discontinued, restricted or delayed, Constellation and FPL Group’s business prospects and financial condition could be materially adversely affected.

The regulatory environment applicable to the electric and natural gas industries has undergone substantial changes as a result of restructuring initiatives at both the state and federal levels. These initiatives have had a significant impact on the nature of the electric and natural gas industries and the manner in which their participants conduct their businesses. Constellation and FPL Group have targeted the competitive segments of the electric and natural gas industries created by these initiatives.

Due to recent events in the energy markets, energy companies have been under increased scrutiny by state legislatures, regulatory bodies, capital markets and credit rating agencies. This increased scrutiny could lead to substantial changes in laws and regulations affecting Constellation and FPL Group, including modifications to the auction processes in competitive markets and new accounting standards that could change the way we are required to record revenues, expenses, assets and liabilities. These changes are ongoing. Constellation and FPL Group cannot predict the future development of deregulation or reregulation in these markets or the ultimate effect that this changing regulatory environment will have on the combined company’s business.

Existing regulations may be revised or reinterpreted, new laws and regulations may be adopted or become applicable to Constellation or FPL Group or their facilities and future changes in laws and regulations may have a detrimental effect on their businesses. This includes regulations adopted to implement the recently enacted Maryland energy legislation.

Certain restructured markets have experienced supply problems and/or price volatility. These conditions have been the subject of a significant amount of publicity, much of which has been critical of the restructuring initiatives. The recent adoption in Maryland of energy legislation was a response to these market conditions. The

 

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legislation, among other things, introduces a temporary cap on rate increases and requires a reconstituted MPSC to evaluate the status of Maryland’s deregulated electricity market, including the implications of requiring or allowing utilities to construct or acquire generating facilities and to re-evaluate the allowance for stranded costs under the Maryland Electric Customer Choice and Competition Act of 1999.

In other markets, including California, proposals have been made by governmental agencies and/or other interested parties to re-regulate areas of these markets which have previously been deregulated. Additional proposals to re-regulate may be made and legislative or other attention to the electric and natural gas restructuring process may delay or reverse the deregulation process.

If competitive restructuring of the electric and natural gas markets is reversed, discontinued, restricted or delayed, or if recently enacted Maryland energy legislation is implemented in a manner adverse to Constellation, Constellation’s and FPL Group’s business prospects and financial condition could be negatively impacted.

The combined company’s results may be harmed if transportation and transmission availability is limited or unreliable.

The combined company will depend on transportation and transmission facilities owned and operated by utilities and other energy companies to deliver the electricity, coal and natural gas it sells to the wholesale and retail markets, as well as the coal and natural gas it purchases to supply some of its electric generation facilities. FERC requires wholesale electric transmission services to be offered on an open access, non-discriminatory basis. However, sufficient transmission services are not always available. If transportation or transmission is disrupted, or transportation or transmission capacity is inadequate, the combined company’s ability to sell and deliver products may be hindered. Such disruptions could also hinder the ability of the combined company to provide electricity or natural gas to its retail electric and gas customers and may materially adversely affect its business.

The combined company’s financial results may fluctuate on a seasonal and quarterly basis or as a result of severe weather.

Weather conditions affect Constellation’s and FPL Group’s businesses. The combined company’s overall operating results may fluctuate substantially on a seasonal basis. The pattern of this fluctuation may change depending on the nature and location of any facilities the combined company acquires and the terms of any contract to which it becomes a party.

Weather conditions directly influence the demand for electricity and natural gas and affect the price of energy commodities. Weather also can affect the production of electricity at wind and hydro-powered facilities. Generally, demand for electricity peaks in winter and summer and demand for gas peaks in winter. Typically, when winters are warmer than expected and summers are cooler than expected, demand for energy is lower, resulting in less electric and gas consumption than forecasted.

Depending on prevailing market prices for electricity and gas, these and other unexpected conditions may reduce the combined company’s revenues and results of operations. Results of operations will be substantially dependent on weather conditions and may make period-to-period comparisons less relevant. Any substantial fluctuations in operating results for fiscal quarters or on a year-to-year basis may cause the combined company’s stock price to be volatile.

Severe weather can affect the combined company’s results of operation. Severe weather can be destructive, causing outages and/or property damage. This could require the combined company to incur additional costs. Catastrophic weather, such as hurricanes, could impact the combined company’s or its customers’ operating facilities, communication systems and technology. Unfavorable weather conditions may have a material adverse effect on the combined company’s financial condition and results of operations.

 

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A downgrade in the combined company’s credit ratings could negatively affect its ability to access capital and/or operate its wholesale and retail competitive supply businesses.

Constellation, FPL Group and their respective subsidiaries rely on access to capital markets as a source of liquidity for capital requirements not satisfied by operating cash flows. If any of their, or the combined company’s, credit ratings were to be downgraded, especially below investment grade, its ability to raise capital on favorable terms, including the commercial paper markets, could be hindered, and their and the combined company’s borrowing costs would increase. Additionally, the business prospects of their wholesale and retail competitive supply businesses, which in many cases rely (or will rely) on the creditworthiness of Constellation or FPL Group, or that of the combined company, would be negatively impacted. Some of the factors that affect credit ratings are cash flows, liquidity and the amount of debt as a component of total capitalization.

In addition, the ability and timing of the regulated utility businesses of Constellation and FPL Group to recover their costs of providing service could have a material adverse effect on the credit ratings of the utilities and of the combined company.

Reduced liquidity in the markets in which Constellation and FPL Group operate could impair the combined company’s ability to appropriately manage the risks of its operations.

Over the past several years, several competitive energy businesses have ended or significantly reduced their competitive energy activities as a result of several factors, including government investigations, changes in market design and deteriorating credit quality. As a result, several regional energy markets experienced a significant decline in liquidity. While there have been recent improvements in liquidity, future reductions in liquidity may restrict the combined company’s ability to manage its risks and could affect its operating results and financial position.

The combined company’s ability to successfully identify, complete and integrate acquisitions is subject to significant risks, including the effect of increased competition resulting from the consolidation of the power industry.

The combined company is likely to encounter significant competition for acquisition opportunities that may become available as a result of the consolidation of the power industry. In addition, the combined company may be unable to identify attractive acquisition opportunities at favorable prices and to successfully and timely complete and integrate them.

Market performance will affect the combined company’s decommissioning trust funds and benefit plan asset values.

The performance of the capital markets will affect the value of the assets that are held in trust to satisfy the combined company’s future obligations under its pension and post-retirement benefit plans and to decommission nuclear generating plants. A decline in the market value of those assets, as was experienced from 2000 to 2002, may increase the combined company’s funding requirements for these obligations.

War and threats of terrorism and catastrophic events that could result from terrorism may impact the combined company’s results of operations in unpredictable ways.

Constellation and FPL Group do not fully know the impact that any future terrorist attacks may have on the energy industry in general and on the combined company in particular. In addition, any retaliatory military strikes or sustained military campaigns may affect the combined company’s operations in unpredictable ways, such as changes in insurance markets and disruptions of fuel supplies and markets, particularly oil. The possibility alone that infrastructure facilities, such as electric generation, electric and gas transmission and distribution facilities, would be direct targets of, or indirect casualties of, an act of terrorism may affect the combined company’s operations. Such activity may have an adverse effect on the United States economy in

 

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general. A lower level of economic activity might result in a decline in energy consumption, which may adversely affect the combined company’s revenues or restrict its future growth. Instability in the financial markets as a result of terrorism or war may affect the combined company’s stock price and its ability to raise capital.

The combined company may incur substantial costs to fulfill its obligations related to environmental matters.

Subsidiaries of Constellation and FPL Group are subject to extensive federal, state and local environmental statutes, rules and regulations relating to air quality, water quality, waste management, wildlife protection, the management of natural resources and the protection of human health and safety. These could, among other things, require additional pollution control equipment, limit the use of certain fuels, restrict the output of certain facilities, or otherwise increase costs. Significant capital expenditures, operating and other costs are associated with compliance with environmental requirements. These expenditures and costs could become even more significant in the future as a result of regulatory changes.

For example, the Environmental Protection Agency (which we refer to herein as the EPA) recently adopted the Clean Air Interstate Rule (which we refer to herein as CAIR), which requires further reductions of sulfur dioxide and nitrogen oxide emissions from fossil fuel-fired plants located in 28 eastern states, including states where many of Constellation’s and FPL Group’s plants are located. The EPA also recently issued the Clean Air Mercury Rule (which we refer to herein as CAMR), which will regulate mercury emissions from coal-fired power plants.

In addition, the State of Maryland passed the Healthy Air Act in April 2006. This law will require generating facilities within the state to reduce emissions of sulfur dioxide, nitrogen dioxide, and mercury by greater amounts and more quickly than the CAIR and CAMR standards. The Healthy Air Act also requires Maryland to join the Northeast’s Regional Greenhouse Gas Initiative, which may result in rules regarding emission reductions in carbon dioxide and other greenhouse gases from generating facilities. CAIR and CAMR are still in the process of being implemented by the affected states, and the additional Maryland requirements are subject to further agency rulemaking. As a result, Constellation and FPL Group do not yet know the impact the CAIR, the CAMR or the Healthy Air Act will have on their financial results.

The EPA also issued a rule under the Clean Water Act that will require certain Constellation and FPL Group plants to implement “best technology available” to minimize adverse effects to fish and shellfish from cooling water intake structures at those plants. The capital expenditures and compliance costs related to new air emissions standards and the Clean Water Act requirements could be material to the combined company’s financial results.

Subsidiaries of Constellation and FPL Group are subject to liability under environmental laws for the costs of remediating environmental contamination. Remediation activities include the cleanup of current facilities, former properties, including former manufactured gas plants, and offsite waste disposal facilities. The remediation costs may negatively impact the combined company’s financial results. Also, subsidiaries of Constellation and FPL Group are currently involved in proceedings relating to sites where hazardous substances have been released and may be subject to additional proceedings in the future.

Subsidiaries of Constellation and FPL Group are subject to legal proceedings by individuals alleging injury from exposure to hazardous substances. Depending upon the outcome of these proceedings, the liabilities incurred could be material to the combined company’s financial results. Additional proceedings could be filed against Constellation and FPL Group in the future.

The combined company’s ability to obtain insurance and the terms of any available insurance coverage could be affected by national, state or local events and company-specific events.

The combined company’s ability to obtain insurance, and the cost of and coverage provided by such insurance, could be affected by national, state or local events as well as company-specific events. For example,

 

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due to the high cost and limited coverage available from third-party insurers, FPL Group historically has not obtained, and the combined company may not be able to obtain, insurance coverage on its transmission and distribution property against catastrophic events, such as hurricanes. Storm and property insurance reserve funds may not cover all storm costs incurred by the combined company upon the occurrence of catastrophic events, and such uninsured costs may have a material adverse effect on the combined company’s financial condition.

Constellation and FPL Group are involved in numerous legal proceedings, the outcome of which are uncertain, and resolution adverse to either company could negatively affect their cash flows, financial conditions or results of operations.

Constellation and FPL Group are subject to numerous legal proceedings, many of which are discussed in Constellation’s and FPL Group’s periodic reports filed with the SEC, which are incorporated by reference into this joint proxy statement/prospectus. Litigation is subject to many uncertainties, and we cannot predict the outcome of individual matters with certainty. It is possible that the final resolution of some of the matters in which Constellation or FPL Group are involved could require them to make expenditures in excess of established reserves, over an extended period of time and in a range of amounts that could have a material negative effect on their financial condition, cash flows and results of operations.

Customer growth in service areas may affect results of operations.

Constellation’s and FPL Group’s results of operations are affected by the growth in customer accounts in Florida Power & Light’s and BGE’s service areas, respectively. Customer growth can be affected by population growth as well as economic factors, including job and income growth, housing starts and new home prices. Customer growth will directly influence the demand for electricity and the need for additional power generation and power delivery facilities of the combined company.

The combined company is subject to employee workforce factors that could affect its businesses and financial condition.

The combined company is subject to employee workforce factors, including loss or retirement of key executives and other employees, availability of qualified personnel, collective bargaining agreements with union employees and work stoppage that could affect the businesses and financial condition of the combined company.

 

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NOTE REGARDING FORWARD-LOOKING STATEMENTS

We have made forward-looking statements in this joint proxy statement/prospectus, and in documents that are incorporated by reference into this joint proxy statement/prospectus, that are subject to risks and uncertainties. These statements are based on the current beliefs and assumptions of each company’s management. Generally, forward-looking statements include information concerning possible or assumed future actions, events or results of operations of Constellation, FPL Group or the combined company. Forward-looking statements include the information in this joint proxy statement/prospectus regarding:

 

    management forecasts;

 

    regulatory matters;

 

    financial projections and estimates;

 

    efficiencies/cost avoidance;

 

    cost savings;

 

    income and margins;

 

    earnings per share;

 

    growth;

 

    economies of scale;

 

    combined operations;

 

    the economy;

 

    future economic performance;

 

    conditions to, and the timetable for, completing the merger;

 

    future acquisitions and dispositions;

 

    litigation;

 

    potential and contingent liabilities;

 

    management’s plans;

 

    business portfolios;

 

    taxes; and

 

    merger and integration-related expenses.

These statements may be preceded by, followed by or otherwise include the words “may,” “will,” “should,” “could,” “would,” “potential,” “possible,” “believes,” “expects,” “anticipates,” “intends,” “plans,” “estimates,” “hopes” or similar expressions. We claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 for all forward-looking statements.

Forward-looking statements are not guarantees of performance. You should understand that the following important factors, in addition to those discussed in “Risk Factors” beginning on page 23 and elsewhere in this joint proxy statement/prospectus, and in the documents which are incorporated by reference into this joint proxy statement/prospectus, could affect the future results of Constellation and FPL Group, and of the combined company after the completion of the merger, and could cause those results or other outcomes to differ materially from those expressed or implied in our forward-looking statements:

 

    the ability of Constellation and FPL Group to satisfy all conditions precedent to the completion of the merger (including the receipt of stockholder and various regulatory approvals);

 

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    future legislation or regulatory actions (including to implement the recently adopted energy legislation in Maryland) that could further limit revenues or cost recoveries or impose additional costs or otherwise adversely affect Constellation, FPL Group or the combined company;

 

    the ability of Constellation and FPL Group to integrate their operations successfully;

 

    the timing of the integration of Constellation and FPL Group necessary to achieve enhanced earnings or realize cost savings;

 

    the retention of existing, and continued attraction of additional, customers and employees;

 

    an unsolicited offer of another company to acquire assets or capital stock of Constellation or FPL Group that could interfere with the merger;

 

    unexpected costs or unexpected liabilities related to the merger, or the effects of purchase accounting that may be different from Constellation’s and FPL Group’s expectations;

 

    the effects of uncertainty surrounding the merger that may cause the businesses of Constellation and FPL Group to suffer as a result thereof;

 

    other economic, business and competitive factors and volatility of energy and commodities markets;

 

    the costs and other effects of legal proceedings, as well as changes in applicable tax laws, rates or policies, rates of inflation, securities laws and corporate governance requirements;

 

    changes in accounting policies, practices or their interpretations; and

 

    the factors described in each of Constellation’s and FPL Group’s reports filed with the SEC.

Because forward-looking statements are subject to assumptions and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. Stockholders are cautioned not to place undue reliance on such statements, which speak only as of the date of this joint proxy statement/prospectus or the date of any document incorporated by reference.

All written and oral forward-looking statements concerning the merger or other matters addressed in this joint proxy statement/prospectus or incorporated by reference into this joint proxy statement/prospectus and attributable to Constellation or FPL Group or any person acting on either company’s behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Except to the extent required by applicable law or regulation, neither Constellation nor FPL Group undertakes any obligation to release any revisions or updates to such forward-looking statements to reflect events or circumstances after the date of this joint proxy statement/prospectus or to reflect the occurrence of unanticipated events.

 

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CHAPTER TWO

INFORMATION ABOUT THE ANNUAL MEETINGS AND VOTING

The Constellation board of directors is using this joint proxy statement/prospectus to solicit proxies from the holders of Constellation common stock for use at the annual meeting of the Constellation stockholders. The FPL Group board of directors is using this joint proxy statement/prospectus to solicit proxies from the holders of FPL Group common stock for use at the annual meeting of the FPL Group shareholders.

Matters Relating to the Meetings

 

    

Constellation Meeting

  

FPL Group Meeting

Time and Place:   

[·], 2006 at [·] local time, at [·].

  

[·], 2006 at [·] local time, at [·].

Purpose of Meeting is to Vote on the Following Items:   

To consider and vote on the following:

 

1.      A proposal to approve the issuance of shares of Constellation common stock to FPL Group shareholders as contemplated by the Agreement and Plan of Merger, dated as of December 18, 2005, among Constellation, CF Merger Corporation (which is a wholly owned subsidiary of Constellation) and FPL Group, which we refer to as the share issuance proposal. A copy of the merger agreement is attached as Annex A to this joint proxy statement/prospectus.

 

2.      A proposal to approve, effective as of the completion of the merger, the amended and restated charter of Constellation substantially in the form attached as Annex F to this joint proxy statement/prospectus, which we refer to as the charter amendment proposal, such approval to include, among other things, the following individual proposals:

 

•     to add 700 Universe Boulevard, Juno Beach, Florida 33408 as the address of Constellation’s additional principal office;

 

•     to provide that the minimum size of the Constellation board of directors shall be increased from no less than three members to consist of no less than seven members;

  

To consider and vote on the following:

 

1.      A proposal to approve the Agreement and Plan of Merger, dated as of December 18, 2005, among Constellation Energy Group, Inc., CF Merger Corporation (which is a wholly owned subsidiary of Constellation) and FPL Group. A copy of the merger agreement is included as Annex A to this joint proxy statement/prospectus.

 

2.      Election of the following persons to the FPL Group board of directors: Sherry S. Barrat, Robert M. Beall, II, J. Hyatt Brown, James L. Camaren, J. Brian Ferguson, Lewis Hay, III, Rudy E. Schupp, Michael H. Thaman, Hansel E. Tookes II and Paul R. Tregurtha.

 

3.      The ratification of the appointment of Deloitte & Touche LLP as FPL Group’s independent registered public accounting firm for the year 2006.

 

4.      Such other matters as may properly come before the annual meeting and any adjournment or postponement of the annual meeting.

 

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Constellation Meeting

  

FPL Group Meeting

  

•     to provide that, as of the closing date of the merger and until at least the second anniversary of the closing date of the merger, any vacancy on the Constellation board of directors that results from any cause other than an increase in the number of directors will be filled pursuant to Section 11(c)(i) of Article III of the by-laws of Constellation in effect at the closing date of the merger;

 

•     to increase the number of authorized shares of common stock to 1.2 billion;

 

•     to increase the number of authorized shares of preferred stock to 125 million;

 

•     to provide that each share of common stock shall have one vote, and, except as otherwise provided in respect of any class of stock hereafter classified or reclassified, the exclusive voting power for all purposes shall be vested in the holders of the common stock;

 

•     to provide that shares of common stock shall not have cumulative voting rights;

 

•     to provide that dividends may be paid ratably on the common stock at such time and in such amounts as the Constellation board of directors may deem advisable;

 

•     to provide that in the event of any liquidation, dissolution or winding up of Constellation, whether voluntary or involuntary, the holders of the common stock shall be entitled, together with the holders of any other class of stock hereafter classified or reclassified not having a preference on

  

 

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Constellation Meeting

  

FPL Group Meeting

  

distributions in the liquidation, dissolution or winding up of Constellation, to share ratably in the net assets of Constellation remaining, after payment or provision for payment of the debts and other liabilities of Constellation and the amount to which the holders of any class of stock hereafter classified or reclassified having a preference on distributions in the liquidation, dissolution or winding up of Constellation shall be entitled; and

 

•     to provide that the Constellation board of directors may classify and reclassify any unissued shares of Constellation stock (whether or not such shares have been previously classified or reclassified) by setting or changing in any one or more respects, from time to time before issuance of such shares, the class and series designations of shares of capital stock or setting or changing the preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications or terms or conditions of redemption of such shares.

 

Constellation stockholders may vote on each of the individual amendments contemplated by the amended and restated Constellation charter separately (corresponding with each of the bullet points above) or on all of the amendments collectively.

 

3.      The election of Class I directors to the Constellation board of directors to serve three year terms to expire in 2009. (The Constellation board of directors has nominated Douglas L. Becker, Edward A. Crooke, Mayo A. Shattuck III and Michael D. Sullivan as directors.)

  

 

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Constellation Meeting

  

FPL Group Meeting

  

4.      A proposal to ratify the appointment of PricewaterhouseCoopers LLP as Constellation’s independent registered public accounting firm for the year 2006.

 

5.      A stockholder proposal.

 

6.      Any such other matters as may properly come before the annual meeting and any adjournment or postponement of the annual meeting.

  
Record Date:    The record date for holders of shares entitled to vote is [·], 2006.    The record date for holders of shares entitled to vote is [·], 2006.
Outstanding Shares:    As of [·], 2006, the record date for the Constellation meeting, there were [·] shares of Constellation common stock outstanding.    As of [·], 2006, the record date for the FPL Group meeting, there were [·] shares of FPL Group common stock, par value $.01 per share, outstanding.
Shares Entitled to Vote:   

Shares of Constellation common stock outstanding as of the close of business on the record date are entitled to be voted at the annual meeting.

 

Each outstanding share of Constellation common stock is entitled to one vote.

  

Shares of FPL Group common stock outstanding as of the close of business on the record date are entitled to be voted at the annual meeting.

 

Each outstanding share of FPL Group common stock is entitled to one vote.

Quorum Requirement; “Broker Non-Votes”:   

A quorum of stockholders is necessary to hold a valid meeting. The presence in person or by proxy at the meeting of holders of a majority of the issued and outstanding shares of Constellation common stock is a quorum.

 

For purposes of establishing a quorum, abstentions in person, proxies received but marked as abstentions as to any or all matters to be voted on, and proxies received with broker non-votes on some but not all matters, count as present.

 

A “broker non-vote” occurs when a broker does not vote on a particular proposal because the broker does not have discretionary voting power for that proposal and has not received instructions from the beneficial owner. “Broker non-votes” will not be counted as having been voted on the proposal.*

  

A quorum of shareholders is necessary to hold a valid meeting. The presence in person or by proxy at the meeting of holders of a majority of the issued and outstanding shares of FPL Group common stock is a quorum.

 

For purposes of establishing a quorum, abstentions in person, proxies received but marked as abstentions as to any or all matters to be voted on, and proxies received with broker non-votes on some but not all matters, count as present.

 

A “broker non-vote” occurs when a broker does not vote on a particular proposal because the broker does not have discretionary voting power for that proposal and has not received instructions from the beneficial owner.*


* Under the NYSE rules, if your broker holds your shares in its name, your broker may not vote your shares on, in the case of Constellation, the share issuance proposal, the charter amendment proposal or the stockholder proposal, absent instructions from you. In the case of FPL Group, if your broker holds your shares in its name, your broker may not vote your shares on the proposal to approve the merger agreement, absent instructions from you. Without your voting instructions on those proposals, a “broker non-vote” will occur.

 

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Required Votes for the Constellation and FPL Group Proposals

 

Company

  

Vote Necessary

Constellation:   

Proposal 1 (Share Issuance Proposal)

 

Approval of the proposal to issue shares of Constellation common stock as contemplated by the merger agreement requires the affirmative vote of a majority of votes cast on the proposal, provided that the total vote cast on the proposal represents over 50% of all shares of Constellation common stock entitled to vote on the proposal. Abstentions and “broker non-votes” have no effect on this proposal, except that they will not constitute votes cast for purposes of obtaining the required minimum vote.

 

Proposal 2 (Charter Amendment Proposal)

 

Approval of the proposal to amend and restate the Constellation charter requires the affirmative vote of holders of at least a majority of the outstanding shares of Constellation common stock entitled to vote thereon on each amendment contemplated by the amended and restated Constellation charter. Abstentions and “broker non-votes” have the same effect as a vote AGAINST this proposal.

 

Proposal 3 (Election of Directors)

 

Directors are elected by a plurality of the votes cast, assuming a quorum is present. Abstentions and “broker non-votes” have no effect on this proposal, except they will be counted as having been present for purposes of determining the presence of a quorum.

 

Proposal 4 (Proposal to Ratify Independent Registered Public Accounting Firm)

 

Approval of the proposal to ratify PricewaterhouseCoopers LLP as Constellation’s independent registered public accounting firm for the year 2006 requires the affirmative vote of a majority of the votes cast by holders of shares of Constellation common stock present in person or by proxy at the meeting and entitled to vote, assuming a quorum is present. Abstentions and “broker non-votes” have no effect on this proposal, except they will be counted as having been present for purposes of determining the presence of a quorum.

 

Proposal 5 (Stockholder Proposal)

 

Approval of the stockholder proposal requires the affirmative vote of a majority of the votes cast by holders of shares of Constellation common stock present in person or by proxy and entitled to vote at the meeting, assuming a quorum is present. Abstentions and “broker non-votes” have no effect on this proposal, except they will be counted as having been present for purposes of determining the presence of a quorum.

  

Adjournments; Postponements

 

Approval of a proposal by the Constellation board of directors to adjourn or postpone the meeting requires the affirmative vote of a majority of the votes cast by holders of shares of Constellation common stock present in person or by proxy at the meeting, whether or not a quorum is present.

 

 

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Company

  

Vote Necessary

  

Other Matters Properly Before the Meetings

 

val of the any other matters that may properly come before the meeting requires the affirmative vote of a majority of the votes cast by holders of shares of Constellation common stock present in person or by proxy at the meeting and entitled to vote (unless a greater vote is required for the matter pursuant to Constellation’s charter or by-laws or applicable law), assuming a quorum is present.

FPL Group:   

The Florida Business Corporation Act (which we refer to herein as the FBCA) provides that directors are elected by a plurality of the votes cast and that all other matters are approved if the votes cast in favor of the action exceed the votes cast against the action (unless the matter is one for which the FBCA or the articles of incorporation require a greater vote). Therefore, under the FBCA, abstentions and broker non-votes have no legal effect on whether a matter is approved. However, the FPL Group bylaws, which were adopted prior to the current FBCA and remain in effect, provide that any matter, including the election of directors, is to be approved by the affirmative vote of a majority of the total number of shares represented at the meeting and entitled to vote on such matter (unless the matter is one for which the FBCA or some other law or regulation expressly requires or permits the FPL Group board of directors to require a greater vote, or the FPL Group articles of incorporation or bylaws require a greater or different vote).

 

Under the FBCA, the affirmative vote of a majority of the shares of FPL Group common stock outstanding and entitled to be cast is required to approve the merger agreement.

 

As to any other matter voted on by shareholders at the annual meeting, including the election of directors, the affirmative vote of a majority of the total number of shares represented at the meeting and entitled to vote is required. Abstentions and, with respect to the election of directors, votes to withhold, have the same effect as a vote against a matter. Broker non-votes received by FPL Group count as present for purposes of establishing a quorum and have the same effect as a vote AGAINST the proposal to approve the merger agreement. Because brokers have discretionary voting power for the other proposals scheduled to be voted on, including the election of directors, there can be no broker non-votes on such proposals. If other matters are properly brought before the annual meeting as to which brokers do not have discretionary voting power, broker non-votes will have no legal effect with respect to such matters.

Proxies

Submitting Your Proxy. If you are a stockholder of record, you may vote in person by ballot at your annual meeting or by submitting a proxy. We recommend you submit your proxy even if you plan to attend your annual meeting. If you attend the annual meeting, you may vote by ballot, which cancels any proxy previously submitted.

Instructions are included on your proxy card. If you properly give your proxy and submit it in time, the individuals named as your proxy will vote your shares as you have directed. You may vote FOR or AGAINST the proposals (or, in the case of the election of directors, FOR or WITHHOLD the nominees) or abstain from voting.

 

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How to Submit a Proxy

 

    

Constellation

  

FPL Group

By Mail:   

If you are a stockholder of record and choose to submit your proxy by mail, please mark each proxy card you receive, date and sign it, and return it in the prepaid envelope which accompanied that proxy card.

 

If you are a beneficial owner, please refer to your proxy card or the information provided to you by your bank, broker, custodian or recordholder.

  

If you are a shareholder of record and choose to submit your proxy by mail, please mark each proxy card you receive, date and sign it, and return it in the prepaid envelope which accompanied that proxy card.

 

If you are a beneficial owner, please refer to your proxy card or the information provided to you by your bank, broker, custodian or recordholder.

By Telephone or Internet:   

If you are a stockholder of record, you can submit your proxy by telephone by calling the toll-free telephone number on your proxy card or through the Internet by going to the following website: www.voteproxy.com. Please have your proxy card available when you call or go online. Telephone voting and Internet voting are each available 24 hours a day and seven days per week and will be accessible until [·] p.m., Eastern time, on [·], 2006. You will be prompted to enter the number printed on your proxy card and to follow the instructions to submit your proxy. Our telephone and Internet voting procedures are designed to authenticate stockholders by using individual control numbers.

 

If you are a beneficial owner, please refer to your proxy card or the information provided by your bank, broker, custodian or recordholder for information on telephone or Internet voting. If you submit your proxy by telephone or through the Internet, please do not mail your proxy card. If you are located outside the United States, Canada and Puerto Rico, see your proxy card or other materials for additional instructions. If you hold shares through a broker or other custodian, please check the voting form used by that firm to see if it offers telephone or Internet proxy submissions.

  

If you are a shareholder of record, you can submit your proxy by telephone by calling the toll-free telephone number on your proxy card or through the Internet by going to the following website: www.computershare.com/us/proxy/fpl. Please have your proxy card available when you call or go online. Telephone and Internet voting is available 24 hours a day and seven days per week and will be accessible until 1 a.m, Central time, on [·], 2006. You will be prompted to enter the number printed on your proxy card and to follow the instructions to submit your proxy. Our telephone and Internet voting procedures are designed to authenticate shareholders by using individual control numbers.

 

If you are a beneficial owner, please refer to your proxy card or the information provided by your bank, broker, custodian or recordholder for information on telephone or Internet voting. If you submit your proxy by telephone or through the Internet, please do not mail your proxy card. If you are located outside the United States and Canada, see your proxy card or other materials for additional instructions. If you hold shares through a broker or other custodian, please check the voting form used by that firm to see if it offers telephone or Internet proxy submissions.

 

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If you sign and date your proxy but do not make specific choices, your proxy will follow the respective board of director recommendations and vote your shares:

 

Constellation

  

FPL Group

FOR” the proposal to issue shares of Constellation common stock as contemplated by the merger agreement    FOR” the approval of the merger agreement
FOR” the proposal to approve all of the amendments contemplated by the amended and restated charter   
FOR” the election of each of the Constellation board of directors’ nominees as Class I directors to the Constellation board of directors (the Constellation board of directors has nominated Douglas L. Becker, Edward A. Crooke, Mayo A. Shattuck III and Michael D. Sullivan)    FOR” the elections as FPL Group directors of the nominees named in this joint proxy statement/prospectus
FOR” the proposal to ratify the appointment of PricewaterhouseCoopers LLP as Constellation’s independent registered public accounting firm for the year 2006    FOR” the ratification of the appointment of Deloitte & Touche LLP as FPL Group’s independent registered public accounting firm for the year 2006
ABSTAIN” on the stockholder proposal   
In accordance with the best judgment of the persons acting under the proxy concerning other matters that are properly brought before the meeting and at any adjournment or postponement thereof.    In accordance with the best judgment of the persons acting under the proxy concerning other matters that are properly brought before the meeting and at any adjournment or postponement thereof.

 


Revoking Your Proxy. You may revoke your proxy at any time prior to the time your shares are voted. If you are a stockholder of record, your proxy can be revoked in several ways:

 

    by timely delivery of a written revocation to your company’s corporate secretary;

 

For Constellation:

  For FPL Group:

Constellation Energy Group, Inc.

  FPL Group, Inc.

Corporate Secretary

  Corporate Secretary

750 East Pratt Street, 18th Floor

  P.O. Box 14000

Baltimore, Maryland 21202

  700 Universe Boulevard
  Juno Beach, Florida 33408-1420

 

    by submitting another valid proxy bearing a later date; or

 

    by attending your annual meeting and voting your shares in person. Attendance at your annual meeting will not by itself revoke a previously granted proxy.

If your shares are held in the name of your bank, broker, custodian or other recordholder, you must contact the holder of record in order to revoke your proxy.

Voting in Person. If you are a stockholder of record and you wish to vote in person at the Constellation or FPL Group annual meeting, you will be given a ballot at the meeting. However, if your shares are held in the

 

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name of your bank, broker, custodian or other recordholder, you must obtain a legal proxy, executed in your favor, from the holder of record and present it to the inspectors of election with your ballot to be able to vote at your annual meeting.

Proxy Solicitation. Constellation and FPL Group are soliciting proxies for their respective meetings and will each pay its own costs of soliciting proxies.

In addition to this mailing, proxies may be solicited by directors, officers or employees of Constellation and FPL Group in person or by telephone or electronic transmission. None of the directors, officers or employees will be directly compensated for such services. Constellation has retained Georgeson Shareholder Communications, Inc. to assist in the distribution and solicitation of proxies for its meeting. Constellation will pay Georgeson Shareholder Communications, Inc. an aggregate fee of approximately $[·] (excluding fees for additional shareholder services), plus reasonable expenses, for these services. FPL Group has retained Georgeson Shareholder Communications, Inc. to assist in the distribution and solicitation of proxies for its meeting. FPL Group will pay Georgeson Shareholder Communications, Inc. an aggregate fee of approximately $50,000, plus reasonable expenses, for these services.

Constellation and FPL Group also reimburse brokers and other nominees for their expenses in sending these soliciting materials to you and getting your voting instructions.

Do not send in any stock certificates with your proxy cards. The exchange agent will mail transmittal forms with instructions for the surrender of stock certificates for FPL Group common stock to former FPL Group shareholders as soon as practicable after the completion of the merger.

Electronic Access to Proxy Statement

This joint proxy statement/prospectus may be viewed online at www.fplgroup.com and www.constellation.com.

If you are a FPL Group shareholder of record, you can elect to receive future annual reports and proxy statements electronically by going to the web site www.computershare.com/us/sc/fpl and following the instructions there, or by following the instructions provided if you vote by Internet. If you choose this option your choice will remain in effect until cancelled. If you should choose to cancel the electronic delivery option and resume mail delivery of these documents, return to the web site www.computershare.com/us/sc/fpl and make the appropriate selection or notify FPL Group’s transfer agent, Computershare Investor Services, LLC at 2 North LaSalle Street, Chicago, Illinois 60602 by mail. If you hold your shares of FPL Group common stock through a bank, broker or another holder of record, refer to the information provided by that entity for instructions on how to elect the electronic delivery option.

Other Business; Adjournments

We are not currently aware of any other business to be acted upon at either meeting. If, however, other matters are properly brought before either meeting, or any adjourned meeting, your proxies include discretionary authority on the part of the individuals appointed to vote your shares or act on those matters according to their best judgment, including to adjourn the meeting, unless you have expressly elected to withhold discretionary authority on your proxy card.

Adjournments may be made for the purpose of, among other things, soliciting additional proxies. Any adjournment may be made from time to time by approval of the holders of shares representing a majority of the votes present in person or by proxy at the meeting, whether or not a quorum exists, without further notice other than by an announcement made at the meeting. Neither Constellation nor FPL Group currently intends to seek an adjournment of its meeting.

 

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Constellation Stockholder Account Maintenance

Constellation’s transfer agent is American Stock Transfer & Trust Company. All communications concerning accounts of Constellation stockholders of record, including address changes, name changes, inquiries as to requirements to transfer shares of common stock and similar issues, can be handled by calling American Stock Transfer & Trust Company at (800) 258-0499. For other information about Constellation, stockholders can visit Constellation’s web site at www.constellation.com.

FPL Group Shareholder Account Maintenance

FPL Group’s transfer agent is Computershare Investor Services, LLC. All communications concerning accounts of FPL Group shareholders of record, including address changes, name changes, inquiries as to requirements to transfer shares of common stock and similar issues, can be handled by calling FPL Group Shareholder Services at (800) 222-4511, or by calling Computershare Investor Services, LLC at (888) 218-4392. For other information about FPL Group, shareholders can visit FPL Group’s web site at www.fplgroup.com.

Shares Beneficially Owned by Constellation Directors and Officers

Constellation directors and executive officers beneficially owned [·] shares of Constellation common stock on [·], 2006, the record date for the Constellation annual meeting. These shares represent in total approximately [·]% of the total voting power of Constellation’s voting securities outstanding and entitled to vote as of the record date for the Constellation annual meeting. Constellation currently expects that Constellation’s directors and executive officers will vote their shares in favor of the share issuance proposal and the charter amendment proposal, although none of them has entered into any agreements obligating them to do so. See “Other Matters to be Considered at the Annual Meetings—Constellation Proposal 3: Election of Directors—Stock Ownership” beginning on page 172.

Shares Beneficially Owned by FPL Group Directors and Officers

FPL Group directors and executive officers beneficially owned [·] shares of FPL Group common stock on [·], 2006, the record date for the FPL Group annual meeting. These shares represent in total approximately [·]% of the total voting power of FPL Group’s voting securities outstanding and entitled to vote as of the record date for the FPL Group annual meeting. FPL Group currently expects that FPL Group’s directors and executive officers will vote their shares in favor of the proposal to approve the merger agreement, although none of them has entered into any agreements obligating them to do so. See “Other Matters to be Considered at the Annual Meetings—FPL Group Proposal 2: Election of Directors—Common Stock Ownership of Certain Beneficial Owners and FPL Group Management” beginning on page 193.

 

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CHAPTER THREE

THE PROPOSED MERGER

The Companies

Constellation Energy Group, Inc.

CF Merger Corporation

750 E. Pratt Street

Baltimore, Maryland 21202

(410) 783-2800

Constellation Energy Group, Inc. is an energy company that operates in three business segments—merchant energy, regulated electric and regulated gas. Constellation’s primary businesses include a merchant energy business and BGE, an electric and gas public utility, which is regulated by the MPSC and FERC. Constellation’s merchant energy business is subject to regulation by FERC and the NRC. In addition to the merchant energy business, Constellation also operates in various other nonregulated businesses.

Constellation was incorporated in Maryland in 1995, and in 1999, Constellation became the holding company for BGE and its subsidiaries. BGE was incorporated in Maryland in 1906. At December 31, 2005, Constellation and its subsidiaries employed approximately 9,850 people.

Shares of Constellation common stock are traded on the NYSE under the symbol “CEG”.

For additional information about Constellation and its business, see “References to Additional Information” beginning on page i and “Where You Can Find More Information” beginning on page 235.

CF Merger Corporation is a Florida corporation and a wholly owned subsidiary of Constellation. CF Merger Corporation was organized solely for the purpose of entering into the merger agreement with FPL Group and completing the merger. It has not conducted any business operations.

FPL Group, Inc.

700 Universe Boulevard

Juno Beach, Florida 33408

(561) 694-4000

FPL Group was incorporated in 1984 under the laws of Florida. FPL Group’s principal subsidiary, Florida Power & Light, is a rate-regulated utility engaged in the generation, transmission, distribution and sale of electric energy. Florida Power & Light is subject to regulation by the FPSC, FERC and the NRC. FPL Capital, a wholly owned subsidiary of FPL Group, holds the capital stock and provides funding for FPL Group’s operating subsidiaries other than Florida Power & Light. The business activities of these operating subsidiaries primarily consist of FPL Energy’s competitive energy supply business, which is subject to regulation by FERC and the NRC. At December 31, 2005, FPL Group and its subsidiaries employed approximately 12,400 people.

Shares of FPL Group common stock are traded on the NYSE under the symbol “FPL”.

For additional information about FPL Group and its business, see “References to Additional Information” beginning on page i and “Where You Can Find More Information” beginning on page 235.

General

In the merger, FPL Group will merge with a wholly owned subsidiary of Constellation. Immediately prior to the merger, Constellation will effect a stock split whereby each outstanding share of Constellation common stock

 

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will be converted into 1.444 shares of Constellation common stock. Then, upon completion of the merger, each outstanding share of FPL Group common stock will be converted into the right to receive one share of Constellation common stock. The merger and the related stock split will result in FPL Group becoming a wholly owned subsidiary of Constellation. Upon completion of the merger and the stock split, the Constellation stockholders prior to the merger will own approximately 40% of the combined company’s outstanding shares of common stock and the FPL Group shareholders prior to the merger will own approximately 60% of the combined company’s outstanding shares of common stock.

The Constellation board of directors is using this joint proxy statement/prospectus to solicit proxies from the holders of Constellation common stock for use at the Constellation annual meeting at which the proposals related to the merger will be considered and voted on. This joint proxy statement/prospectus is also being used by Constellation as a prospectus related to the offering of shares of its common stock in exchange for shares of FPL Group common stock in connection with the merger. The FPL Group board of directors also is using this joint proxy statement/prospectus to solicit proxies from the holders of FPL Group common stock for use at the FPL Group annual meeting at which the proposal related to the merger will be considered and voted on.

Constellation Merger Proposals

At the Constellation annual meeting, among other matters, holders of Constellation common stock will be asked to consider and vote on the approval of the issuance of shares of Constellation common stock as contemplated by the merger agreement and the amended and restated charter of Constellation.

THE MERGER WILL NOT BE COMPLETED UNLESS, AMONG OTHER THINGS, THE CONSTELLATION STOCKHOLDERS APPROVE (1) THE SHARE ISSUANCE PROPOSAL AND (2) THE CHARTER AMENDMENT PROPOSAL. UNDER THE MERGER AGREEMENT, COMPLETION OF THE MERGER IS SUBJECT TO THE SATISFACTION (OR, IF LEGALLY PERMITTED, WAIVER) OF SPECIFIED CLOSING CONDITIONS. APPROVAL BY THE CONSTELLATION STOCKHOLDERS OF THE AMENDED AND RESTATED CONSTELLATION CHARTER IS ONE OF THOSE CONDITIONS. CONSTELLATION AND FPL GROUP MAY NOT WAIVE THE REQUIREMENT FOR CONSTELLATION STOCKHOLDERS TO APPROVE THE CHARTER AMENDMENT TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF CONSTELLATION COMMON STOCK.

FPL Group Merger Proposal

At the FPL Group annual meeting, among other matters, holders of FPL Group common stock will be asked to consider and vote on the approval of the merger agreement.

THE MERGER WILL NOT BE COMPLETED UNLESS, AMONG OTHER THINGS, THE FPL GROUP SHAREHOLDERS APPROVE THE MERGER AGREEMENT.

Background of the Merger

The senior management teams and boards of directors of each of Constellation and FPL Group actively monitor and assess developments in the energy industry and are generally aware of the business activities of other major energy companies, including each other. Executives from each of Constellation and FPL Group periodically interact with each other at industry gatherings and as part of various energy industry organizations. In addition, Messrs. Shattuck and Hay have served as directors of Capital One Financial Corporation since October 2003, and they also have served as directors of the Institute of Nuclear Power Operations. As a result of these roles, they see and speak with each other several times each year.

Over the past several years, senior management and the boards of directors of each of Constellation and FPL Group have regularly reviewed strategic opportunities in the energy industry in response to developments within

 

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their respective businesses, industry trends, competitive conditions and changes in legislation and regulation. These reviews have included periodic assessments of potential business combinations with other energy companies. This included Constellation’s review in early 2002 of an unsolicited offer from another integrated energy company to acquire Constellation at an approximately 20% premium to Constellation’s then trading price of approximately $28.75. Constellation determined that, in light of what it believed was the low valuation attributed to Constellation at that time, the negative effect such an acquisition would have on its employees and the State of Maryland in terms of potential job losses, and the business plan which was being developed by a new management team led by Mr. Shattuck as the new chief executive officer, it was in the best long-term interests of Constellation to remain independent and seek to implement the business plan. During the next several years, Constellation implemented its business plan, including the growth of its competitive wholesale energy business, the acquisition and growth of its retail power and gas businesses and the acquisition of the Nine Mile Point and R.E. Ginna Nuclear power plants.

In May 2005, Messrs. Shattuck and Hay had a number of general discussions by telephone about recent developments in the energy industry. Among other things, they discussed recent energy industry transactions and the prospects for the adoption of comprehensive federal energy legislation, including the potential impact that the repeal of the Public Utility Holding Company Act might have on the industry. During these conversations, they also discussed strategic trends and opportunities within their respective companies and in the energy industry generally. In addition, they discussed briefly, and generally, the possibility of a strategic transaction between FPL Group and Constellation. Although no specific potential terms or proposals were discussed, they agreed to meet in June to discuss this possibility further.

On June 15, 2005, Messrs. Shattuck and Hay met in New York City. They discussed primarily high-level issues relating to the companies’ businesses and a potential business combination, including strategic, management and governance matters. They also discussed the status of FPL Group’s pending rate case in Florida. No agreements were reached, but both expressed interest in continuing these discussions.

On July 12, 2005, Messrs. Shattuck and Hay met in Baltimore. Mr. Hay provided Mr. Shattuck with a summary outline of possible key terms for a potential stock-for-stock merger reflecting what Mr. Hay described as a “modest premium” for Constellation stockholders. Their discussion focused primarily on the potential strategic benefits of a combination of the two companies’ businesses and various governance issues that would be raised by a merger.

On July 22, 2005, during a regularly scheduled Constellation board of directors meeting held by telephonic conference call, Mr. Shattuck (in executive session) briefed the members of the Constellation board of directors about his discussions to date with Mr. Hay. Specific terms of a potential transaction were not discussed, and no action of the board of directors was requested. Mr. Shattuck indicated his expectation that he would have further discussions with Mr. Hay and that the senior management team would begin to evaluate FPL Group more closely as a potential merger partner based on publicly available information.

On July 29, 2005, a regularly scheduled FPL Group board of directors meeting was held. At such meeting, Mr. Hay summarized for the directors his discussions to date with Mr. Shattuck regarding a potential merger and indicated that FPL Group’s management would continue to evaluate Constellation’s businesses and the potential strategic benefits of a combination of the two companies.

On August 18, 2005, Messrs. Shattuck and Hay met in Juno Beach and continued to discuss strategic and business considerations of a possible merger, as well as to review the potential terms and timetable for such a transaction.

 

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During September and October, senior management of Constellation and FPL Group had numerous discussions regarding a potential merger in addition to those described below.

On September 1, 2005, Messrs. Shattuck and Hay spoke by telephone. They discussed the terms of FPL Group’s recent settlement of its rate case in Florida. They generally agreed that if they were to pursue a transaction, the combined company would commit to maintain dual headquarters in Baltimore and Juno Beach. They also agreed that, subject to confirmatory due diligence by FPL Group, the combined company would use the Constellation name. In addition, they discussed potential pricing for the merger that would provide Constellation stockholders with a premium consistent with comparable market transactions in the energy industry. They also agreed that the companies should enter into a mutual confidentiality agreement and begin to exchange business information. Over the next several days, Messrs. Irving B. Yoskowitz, Executive Vice President and General Counsel of Constellation, and Edward F. Tancer, Vice President and General Counsel of FPL Group, negotiated a confidentiality agreement that both companies signed on September 6, 2005.

On September 21, 2005, senior executives of FPL Group and Constellation met in Baltimore to exchange initial presentations on their companies’ respective businesses.

On September 26, 2005 and October 5, 2005, Messrs. Shattuck and Hay continued their discussions by phone of a possible merger, including with respect to a possible management team for the combined company as well as economic, governance and other key terms. They also discussed the possibility of Mr. Hay attending a Constellation board of directors meeting.

During September, October and November, senior management of each of Constellation and FPL Group met regularly with their respective outside legal, financial and other outside professional advisors to discuss the structure of a potential merger, regulatory considerations and approvals, potential synergies and other matters that would arise in the course of a potential merger between the two companies.

On October 1, 2005, FPL Group engaged Merrill Lynch to act as its financial advisor in connection with a possible merger with Constellation.

Throughout the month of October, the companies exchanged and discussed high-level information about their businesses, including with respect to financial, operational, accounting and compensation and benefits matters.

On October 14, 2005, at a regularly scheduled meeting of the FPL Group board of directors, management updated the board of directors on the status of its preliminary discussions with Constellation and made a presentation regarding Constellation’s businesses and the potential merger. After engaging in discussion, the FPL Group board of directors indicated that management should continue the discussions with Constellation. Mr. Hay telephoned Mr. Shattuck on October 19, 2005 to update him on the outcome of the FPL Group board of directors meeting and to discuss a possible timetable for due diligence and the negotiation of definitive agreements.

On October 21, 2005, at an executive session of a regularly scheduled meeting of the Constellation board of directors, the senior management of Constellation provided the directors with a high-level overview of a possible merger and FPL Group’s business, financial condition and management based upon publicly available information and information provided by FPL Group over the past several weeks. The board of directors discussed with management the strategic rationale for a possible merger with FPL Group, the matters that Messrs. Shattuck and Hay had been discussing and a possible timetable for due diligence and the negotiation of definitive agreements. The Constellation board of directors instructed management to proceed with comprehensive due diligence and continue its discussions of a potential merger with FPL Group. The board of directors emphasized the significance of ensuring that a combined company would continue to have a meaningful presence in, and substantial financial and employment commitments to, Baltimore and the State of Maryland.

 

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On October 25, 2005, Mr. Shattuck telephoned Mr. Hay to discuss with him the results of the Constellation board of directors meeting. At the conclusion of the call, it was agreed that both companies would proceed with more intensive due diligence over the next few weeks and would ask their outside legal counsel to begin preparing transaction documents.

On October 27, 2005, Constellation engaged Morgan Stanley as its financial advisor with respect to a possible merger with FPL Group.

On October 31, 2005, certain senior executives of Constellation and FPL Group (other than Messrs. Shattuck and Hay) held a telephone conference call with representatives of Morgan Stanley and Merrill Lynch regarding possible financial terms of a potential merger and additional financial and operational due diligence matters.

During November, Kirkland & Ellis LLP, outside legal counsel for Constellation, and Cravath, Swaine & Moore, LLP, outside legal counsel for FPL Group, had several discussions, including with respect to legal documentation, the possible timing of negotiations of a merger agreement and due diligence matters.

On November 3, 2005, certain senior executives of Constellation and FPL Group (other than Messrs. Shattuck and Hay) met in Baltimore to review financial results for the two companies and other financial and accounting matters.

On November 4, 2005, the Compensation Committee of the Constellation board of directors met to discuss proposed amendments to existing change in control severance agreements with Constellation’s executive officers, which originally had been presented to the Committee at its October 20, 2005 meeting for review and consideration. Representatives of Constellation’s legal and human resources staffs, the Committee’s outside compensation consultant, Hewitt Associates LLC, and the Committee’s outside legal counsel for compensation matters, Sullivan & Cromwell LLP, attended portions of this meeting. At the meeting, the Committee approved the proposed amendments and directed management to prepare amended and restated change in control severance agreements to reflect these amendments. For a discussion of these amended and restated agreements, see “—Additional Interests of Constellation’s Directors and Executive Officers in the Merger—Change in Control Severance Agreements” beginning on page 122.

On November 4, 2005, Messrs. Hay and Shattuck met in Baltimore to further discuss the potential merger. They reviewed a revised summary outline and discussed transaction structure, pricing, management and governance issues, executive compensation matters and a proposed schedule for further due diligence and the negotiation of a definitive agreement. During the conversation, they discussed that the transaction would be a stock-for-stock deal involving a fixed exchange ratio and that Constellation stockholders would receive a premium consistent with comparable market transactions. Mr. Hay indicated that the merger must in any event be accretive to FPL Group. In addition, they agreed that each of Messrs. Hay and Shattuck would maintain offices in Baltimore and Juno Beach and discussed the size of the combined company board of directors and various other governance matters. They also discussed their respective management roles in a combined business, generally agreeing that Mr. Hay would be the chief executive officer and Mr. Shattuck would serve as an executive chairman. In addition, they agreed that Mr. Shattuck initially would have management responsibility for the competitive energy business. They also discussed additional senior executive personnel matters and various other compensation matters.

On or about November 7, 2005, the companies established an electronic data room to be used for legal, financial and operational due diligence, and both companies posted extensive and detailed information about their businesses in that data room throughout November and December. During this period, representatives of the companies, along with their outside legal, financial and accounting advisors, exchanged requests for information and responses to those requests, exchanged information supplementally and reviewed and discussed all such information.

 

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On November 9, 2005, certain senior executives of Constellation and FPL Group (other than Messrs. Shattuck and Hay) met in Florida to review and discuss FPL Group’s businesses. The FPL Group management team delivered a presentation on the company’s wind and other businesses, and there was a general discussion of FPL Group’s business plans, as well as legislative and regulatory matters in Florida. The next day, Ms. Follin Smith, Executive Vice President, Chief Financial Officer and Chief Administrative Officer of Constellation, met with Mr. Hay.

On November 17, 2005, certain senior executives of Constellation and FPL Group (other than Messrs. Shattuck and Hay) met in Washington, DC to review and discuss business, financial, operational, tax, personnel, compensation and risk management issues regarding Constellation. A significant portion of the discussion involved a presentation by Constellation executives of Constellation’s competitive energy business and its risk management and energy trading policies and practices. The executives also discussed litigation matters relating to both Constellation and FPL Group.

On November 21, 2005, Cravath sent to Kirkland & Ellis a first draft of a proposed merger agreement.

On November 30, 2005, Messrs. Thomas F. Brady, Executive Vice President, Corporate Strategy and Retail Competitive Supply of Constellation, and James L. Robo, Vice President, Corporate Development and Strategy of FPL Group and President of FPL Energy, met with representatives of Morgan Stanley and Merrill Lynch in New York City to discuss potential economic terms. Based on the discussion, the parties decided that negotiations would continue with the understanding that the premium to be received by Constellation stockholders would be between 13-17%. Later that day, Messrs. Shattuck and Hay spoke by telephone to discuss, among other matters, the overall status of due diligence and negotiations, including various items in the draft merger agreement. They also discussed certain senior executive personnel and compensation matters, various governance matters, the status of pending environmental legislation in Maryland and the two companies’ recently released third quarter financial results.

On December 2, 2005, at a regularly scheduled meeting of the Constellation board of directors, the senior management team updated the directors on due diligence, the status of discussions regarding terms of a potential merger with FPL Group and the key open due diligence items remaining to be addressed by each company. Representatives of Kirkland & Ellis reviewed the board of directors’ fiduciary obligations in the context of a potential merger transaction, discussed the potential key terms of a merger agreement and outlined for the board of directors the various regulatory approvals that would be required and the likely timing for securing such approvals. Representatives of Morgan Stanley discussed with the board of directors various preliminary valuation matters regarding a potential transaction based on discussions completed to date.

At the conclusion of the meeting, the Constellation board of directors went into executive session (with Mr. Shattuck remaining in attendance). Mr. Hay and four of FPL Group’s directors joined that session, at the invitation of the Constellation board of directors. They discussed strategic considerations and a range of governance and management matters that would be raised by a merger.

On December 3, 2005, Messrs. Hay and Shattuck discussed by telephone their and their company’s respective directors’ impressions of the December 2, 2005 meetings, as well as other matters.

On December 6, 2005, Kirkland & Ellis sent to Cravath proposed revisions to the draft merger agreement. The proposed revisions did not address economic or governance matters. Representatives of the two law firms discussed the proposed revisions by telephone on December 7, 2005. Later that day, Cravath distributed a proposed exhibit to the merger agreement (which became Exhibit C to the final agreement) addressing certain

 

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governance matters for the combined companies, including the management roles to be played by each of Messrs. Shattuck and Hay, the proposed composition of the combined company’s board of directors and the standing board of directors committees, the combined company’s dual headquarters and the primary locations for specific corporate and operating business functions and various other governance matters.

On December 6, 2005, at a special meeting of the FPL Group board of directors, the senior management team of FPL Group updated the board of directors on the possible merger with Constellation. Mr. Hay described the status of discussions and other members of senior management made a presentation regarding certain business and financial matters relating to FPL Group, Constellation and the potential merger as well as an update regarding due diligence. In addition, Merrill Lynch made a financial presentation regarding the potential merger. The board of directors indicated that management should complete due diligence and continue discussions with Constellation. The board of directors also approved the hiring of Lehman Brothers as its own advisor to provide an additional fairness opinion with respect to the potential merger if it was eventually presented to the board of directors for approval.

Representatives of Constellation and FPL Group (other than Messrs. Shattuck and Hay), together with their respective outside legal counsel and financial advisors, met in New York City on December 8 and 9, 2005 to review and negotiate the terms of the draft merger agreement (other than pricing) and of the governance matters in proposed Exhibit C. Substantial attention was devoted to the terms of the no solicitation covenants, termination fees and other provisions relating to a competing takeover proposal, as well as the conditions to closing, integration matters and the terms of the covenants that governed the operation of the two businesses between signing and closing. Following the resolution of a number of issues, it was agreed that the companies and their outside advisors would meet again in Baltimore along with Messrs. Shattuck and Hay on December 11, 2005 to seek to resolve the remaining open substantive issues.

On December 9, 2005, Messrs. Shattuck and Hay had numerous telephone conversations and discussed various open issues, including the issues being negotiated at the meetings in New York City on the same day. They also discussed various governance and compensation matters. In addition, Mr. Hay told Mr. Shattuck that it would be desirable for Mr. Shattuck to continue to remain employed by the combined company for a period of time following the closing of the merger, and they discussed various possible terms of such employment.

On December 9, 2005, the Constellation board of directors engaged Goldman Sachs to undertake a study to enable it to render its opinion as to the fairness of the exchange ratio contemplated by the potential merger agreement to the board of directors if the merger agreement was eventually presented to the board of directors for approval.

On December 11, 2005, senior executives of Constellation and FPL Group and their respective outside legal counsel and financial advisors continued the negotiation of the merger agreement in Baltimore. The negotiations focused on the remaining open merger agreement issues other than price. The parties resolved various open issues involving the interim operating covenants, conditions to closing, no solicitation covenants, termination fees and other provisions relating to a competing takeover proposal, including that the termination fee for each company would equal approximately 4% of its market capitalization. They also agreed on various governance matters.

Throughout the week of December 12, 2005, the companies’ respective outside legal counsel exchanged and discussed several revised drafts of the merger agreement and Exhibit C. During that week, each company also distributed to the other initial drafts of its disclosure letter. The proposed forms of the amended and restated Constellation charter and by-laws also were prepared and negotiated and it was agreed that the Constellation board of directors would be declassified upon the completion of the merger.

On December 14, 2005, news reports were published regarding rumored negotiations between Constellation and FPL Group regarding a potential merger. The companies declined to comment on the rumors or the news reports.

 

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From December 13 through 15, 2005, Messrs. Shattuck and Hay discussed economic terms in a series of telephone calls. Their respective financial advisors participated in several of these calls. The focus of the discussion was on a proposed ratio for Constellation’s pre-merger stock split. Over the course of these discussions, the parties narrowed the range between their positions. In a subsequent discussion between the financial advisors on December 15, 2005, Merrill Lynch stated that FPL Group’s management was prepared to recommend a ratio of 1.44 to 1. Constellation’s financial advisors stated that Constellation’s management continued to believe that the companies should agree upon a higher ratio.

On December 14 and 15, 2005, Constellation’s Compensation Committee met with Mr. Shattuck, other members of the company’s legal and human resources staffs, the Committee’s outside compensation consultant and the Committee’s outside counsel to discuss Mr. Shattuck’s post-merger employment as the chairman of the combined company, as well as certain other severance, retention and other compensation matters. The Committee concluded that it was critical that Mr. Shattuck remain with the combined company for a period of time after a merger and as a result requested that he enter into an employment agreement pursuant to which Mr. Shattuck would continue with the combined company following the merger.

On December 15, 2005, at a regularly scheduled meeting, in addition to approving various matters relating to 2006 director and executive officer compensation, FPL Group’s Compensation Committee met to discuss severance and retention matters relating to the merger. Mr. Hay, members of the company’s human resources staff and representatives of the Committee’s outside compensation consultant, the Committee’s outside legal counsel for compensation matters and Cravath attended portions of this meeting. At the meeting, the Committee approved amendments to the executive severance retention agreements with FPL Group’s executives, an amendment to the employment agreement between FPL Group and Mr. Hay and the establishment of a retention program to assist in retaining employees of FPL Group through and after the merger.

On December 16, 2005, before the Constellation board of directors was scheduled to meet to discuss the proposed transaction and during a break in the meeting of the FPL Group board of directors (and prior to the beginning of the discussion of the proposed merger), Messrs. Shattuck and Hay and their financial advisors again discussed financial terms and Messrs. Shattuck and Hay agreed to recommend a pre-merger stock split ratio of 1.444-to-1 to their respective boards of directors. Representatives of Kirkland & Ellis and Cravath also negotiated and agreed to final changes to the provisions of the merger agreement that set forth the circumstances under which termination fees would become payable.

On December 16, 2005, the Constellation board of directors held a special meeting to consider the proposed merger. At the meeting, senior management updated the directors on the results of additional due diligence activities and merger agreement negotiations since the December 2, 2005 meeting. The board of directors discussed with management the business, operational and financial aspects of the proposed merger. Representatives of Kirkland & Ellis again reviewed with the board of directors their fiduciary obligations in the context of considering a proposed merger. They also reviewed with the board of directors in detail the terms of the then-current draft of the proposed merger agreement. They reported that all of the material terms had been negotiated and agreed. They also discussed with the board of directors the current drafts of the disclosure letters and the post-merger governance principles in Exhibit C. Representatives of Morgan Stanley and Goldman Sachs separately reviewed with the directors their financial analyses of the proposed merger. Each of them indicated that, based upon these analyses, they were each prepared to render an opinion to the Constellation board of directors that, based upon and subject to the assumptions, qualifications and limitations described by them and to be set forth in their written opinions, and assuming the prior effectiveness of the stock split, the exchange ratio of one share of Constellation common stock for each share of FPL Group common stock pursuant to the merger agreement was fair, from a financial point of view, to the Constellation stockholders. See “—Opinions of Constellation’s Financial Advisors” beginning on page 63.

Following these presentations, the Constellation board of directors meeting was recessed, and Constellation’s Compensation Committee met to discuss the proposed employment agreement with Mr. Shattuck, and certain additional matters. The Committee reviewed and discussed with its outside compensation consultant and its outside counsel for compensation matters information that had been prepared by management

 

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summarizing the level of compensation and other benefits that Mr. Shattuck would receive under existing plans and agreements in the event of a merger between the company and FPL Group, which would constitute a change in control under Constellation’s plans and Constellation’s executive severance and retention agreements. The Committee reviewed a detailed employment agreement term sheet that had been revised and negotiated with Mr. Shattuck. The terms were consistent with those discussed by the Committee the prior day and members of the Committee reported on their discussions with Mr. Shattuck about the proposed terms. The Committee then approved the term sheet and authorized the Committee’s chairman and one of its other members to work with the Committee’s outside counsel to review a definitive agreement and for the Committee’s chairman to acknowledge such agreement, on behalf of the Committee, when it was finalized.

Following the completion of the Compensation Committee meeting, the board of directors reconvened in executive session (with only the non-executive directors present) to discuss the matters and information that the Compensation Committee reviewed and its decision regarding the terms of an employment agreement with Mr. Shattuck, as well as to continue its discussion of the proposed merger. Thereafter, Mr. Shattuck rejoined the other directors, and the board of directors continued to discuss the proposed merger. At the conclusion of the discussion, by unanimous vote of all of the directors present, the board of directors approved the merger agreement (subject to final negotiation to be completed by the company’s senior executives, in their discretion) and the merger, as well as the issuance of shares of Constellation common stock in connection with the merger and the proposed amendments to the Constellation charter and recommended that such matters be submitted for approval to the Constellation stockholders, as required.

On December 16, 2005, a regularly scheduled meeting of the FPL Group board of directors was held. At this meeting, members of FPL Group management made presentations to the FPL Group board of directors regarding, among other matters, an overview of the proposed merger and its key terms, the assignment of key management roles at a combined company, the principal reasons for the proposed merger and a due diligence and financial review of Constellation’s businesses and the proposed merger. Representatives of Merrill Lynch and Lehman Brothers made separate financial presentations regarding the proposed merger and indicated that they would be prepared to separately deliver to the FPL Group board of directors their respective opinions as to the fairness of the exchange ratio. See “—Opinions of FPL Group’s Financial Advisors” beginning on page 86. Representatives of Cravath reviewed for the FPL Group board of directors the fiduciary duties of the directors in connection with the consideration of the proposed merger. Representatives of Cravath also informed the board of directors that the material terms of the merger agreement had been fully negotiated and made a presentation of the terms and conditions of the draft merger agreement and other legal documents, focusing on the structure of the proposed transaction, the conditions to closing, post closing governance and related matters, the no solicitation covenants, the termination fees and other provisions relating to a competing takeover proposal. Representatives of Cravath also made a presentation regarding various compensation matters. The members of the FPL Group board of directors considered and discussed the various presentations made at the meeting. At this point, all the participants other than the members of the board of directors left the meeting and the meeting continued. Thereafter, Mr. Hay left the meeting and the non-executive directors met in executive session. Mr. Hay subsequently rejoined the other directors, and the FPL Group board of directors unanimously approved the proposed merger and the merger agreement (subject to final negotiation of the terms and conditions) and authorized FPL Group’s management to conclude negotiations and execute the merger agreement on the terms described to the FPL Group board of directors.

Following completion of the FPL Group board of directors meeting, Mr. Hay telephoned Mr. Shattuck, and they advised each other that their respective boards of directors had approved the proposed merger. They agreed to work out all final changes over the following two days with the objective of signing the definitive documents in time for a public announcement at 6:00 a.m. on Monday, December 19, 2005. Each of them advised their respective boards of directors, management teams and outside advisors of this.

On December 17 and 18, 2005, the companies and their outside legal counsel agreed upon all final revisions to all of the definitive documents. None of the revisions altered material terms of the merger agreement. During

 

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this time, the companies also negotiated various final changes to the permissible levels of acquisitions, dispositions, capital expenditures, share issuances and employee severance and retention payments that would be permitted during the period from the execution of the merger agreement until the closing of the merger. In addition, there were several conference calls among Mr. Shattuck, members of Constellation’s Compensation Committee, representatives of Constellation’s outside legal counsel for compensation matters (Cleary Gottlieb Steen & Hamilton LLP), the Committee’s outside counsel for compensation matters, representatives of Kirkland & Ellis, and inside counsel of Constellation to discuss and finalize Mr. Shattuck’s employment agreement. In addition, inside counsel of Constellation and representatives of Cleary Gottlieb and Kirkland & Ellis had several telephone conversations with inside counsel of FPL and representatives of Cravath to discuss and finalize Mr. Shattuck’s employment agreement. Revised drafts of the employment agreement were distributed to and reviewed by all parties and additional comments were received and reflected.

On the evening of December 18, 2005, the companies’ outside legal counsel agreed to final changes to the disclosure letters, and the chairman and one other member of Constellation’s Compensation Committee, after conferring with its outside counsel and reviewing a proposed final draft of Mr. Shattuck’s employment agreement, approved and acknowledged the final form of that agreement. Thereafter, the companies executed the merger agreement and approved a joint press release for issuance the next morning to announce the execution of the merger agreement.

Constellation’s Reasons for the Merger; Recommendation of the Constellation Board of Directors

The Constellation board of directors has approved the merger agreement, has determined that the merger agreement and the transactions contemplated thereby, including the merger, the issuance of shares of Constellation common stock as contemplated by the merger agreement and the amendment and restatement of the Constellation charter, are advisable, fair to and in the best interests of Constellation and Constellation stockholders and recommends that Constellation stockholders vote FOR the proposal to approve the issuance of shares of Constellation common stock as contemplated by the merger agreement and the proposal to approve the amended and restated charter of Constellation.

In reaching its decision to recommend that the Constellation stockholders approve the issuance of shares of Constellation common stock as contemplated by the merger agreement and approve the amended and restated charter of Constellation, the Constellation board of directors consulted with Constellation management, as well as Morgan Stanley, Constellation’s financial advisor in connection with the merger, Goldman Sachs, an investment bank engaged to undertake a study to enable it to render its opinion to the Constellation board of directors with respect to the fairness from a financial point of view of the exchange ratio of one share of Constellation common stock for each share of FPL Group common stock, assuming the prior effectiveness of the stock split, and Kirkland & Ellis LLP, Constellation’s outside counsel, and considered various material factors described below. The following discussion of the information and factors considered by the Constellation board of directors is not intended to be exhaustive, but includes all material factors considered by the Constellation board of directors. In view of the wide variety of factors considered by the Constellation board of directors in connection with its evaluation of the merger, the Constellation board of directors did not consider it practical to, nor did it attempt to, quantify, rank or otherwise assign relative weights to the specific factors that it considered in reaching its decision. In considering the factors described below, individual members of the Constellation board of directors may have given different weight to different factors. The Constellation board of directors considered this information as a whole and overall considered the information and factors to be favorable to, and in support of, its determinations and recommendations. Among the material information and factors considered by the Constellation board of directors were the following:

Strategic Considerations. The Constellation board of directors considered a number of factors pertaining to the strategic rationale for the merger, including the following:

 

   

Improving the Balance of the Business. The combined company will have greater balance between regulated and unregulated businesses. Constellation expects that following the merger approximately half of the combined company’s earnings will come from its two utilities and approximately half will

 

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come from its competitive energy and other non-utility businesses. The larger and more stable financial profile of the combined company should result in enhanced opportunities for growth, improved gross margins and greater operational and financing flexibility.

 

    Expanding and Enhancing the Competitive Energy Business. The merger will create one of the leading competitive energy businesses by combining Constellation’s wholesale and retail competitive power supply business and generation portfolio with FPL Group’s leading and rapidly growing nuclear and renewable deregulated energy platform of nearly 12,500 megawatts of capacity. The transaction will increase the size of the generation assets of Constellation’s competitive energy business from approximately 12,000 megawatts to approximately 24,000 megawatts and create a more diverse portfolio of owned generation and purchased power across an increased portion of North America. The merger also will allow Constellation to apply the sophisticated hedging, portfolio management and risk management tools it has developed in its competitive energy business to a broader supply and customer base in the combined company’s competitive energy business.

 

    Increasing the Diversity of the Business. The merger will allow Constellation to increase the diversification of its energy delivery and generation portfolio and its customer base. In the energy delivery business, the combined company will have two utility-based franchises with service areas encompassing more than 5.5 million people. These service areas also are located in dramatically different climates, which will diversify the impact of weather on the results of the utility operations. In addition, the combined company is expected to have approximately 45,000 megawatts of generation capacity in multiple states, with a fuel mix consisting of nuclear, coal, gas, oil, wind and other renewables. After the completion of the merger, Constellation will have the largest wind generation portfolio in the country. This generation portfolio diversification should create a more balanced portfolio in terms of geography, fuel mix, dispatch and load-servicing capacity.

 

    Increasing the Strength of the Balance Sheet. The combined company will be one of the largest energy companies in North America and will rank first in terms of overall United States generation capacity and in wind generation in particular and third in nuclear generation capacity and will be the number one wholesale competitive supplier and retail competitive supplier in the United States, in each case in terms of megawatts. After the completion of the merger, Constellation will have approximately $57 billion in assets and substantial cash flow from operations. The combination of Constellation and FPL Group will create what Constellation believes to be the strongest balance sheet in the industry, which will expand opportunities for productive, new capital deployments and support the growth of the competitive energy business.

 

    Increasing the Capability and Opportunities for Growth. The merger will combine two fast-growing energy companies: Constellation, with its fast-growing competitive energy business, and FPL Group, with its fast-growing utility and unregulated renewable generation platforms. The expanded geographic footprint, increased generation assets and customer base and strong balance sheet of the combined company will provide Constellation with greater capability and opportunities to expand its business. The merger not only provides an opportunity for the combined company to capitalize on operating improvements and to share best practices, but also creates opportunities to expand the renewable and nuclear energy businesses.

 

    Complementary Assets and Areas of Expertise. The merger will combine companies with complementary assets and areas of expertise: Constellation’s expertise in competitive energy supply and, more specifically, in the areas of hedging, portfolio management and risk management, and FPL Group’s deregulated generation capacity in certain markets (such as New England and Texas) where Constellation has a leading share of the competitive supply market but limited capacity and FPL Group’s expertise in wind energy and in managing a large, geographically dispersed transmission and energy delivery system. The combined company is expected to be able to draw upon the intellectual capital, technical expertise and experience of a deeper and more diverse workforce.

 

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    Improving the Regulated Businesses. The merger will allow Constellation to improve and strengthen the regulated businesses of both companies. These improvements will result from the strong balance sheet of the merged company, modest potential cost savings through leveraging utility expertise across a broader platform and improving reliability through enhanced best practices. Florida Power & Light is the largest energy supplier in Florida, one of the fastest growing energy markets in North America.

 

    Expanding and Improving Nuclear Operations. The combined company will have expanded nuclear operations which should enable the combined company to realize increased savings and efficiencies. The Constellation board of directors believes that the combined company’s nuclear operations will provide a strong platform to pursue continued nuclear consolidation and to potentially develop new nuclear plants.

Impact of the Merger on Customers, Employees and Suppliers. The Constellation board of directors evaluated the expected impact of the merger on Constellation’s customers, employees and suppliers and the benefits that would be derived from the merger by enhancing operations and strengthening reliability and by providing more opportunities for employees in a larger, more competitive company.

Impact of the Merger on Communities. The Constellation board of directors evaluated the expected impact of the merger on the communities served by Constellation and the benefits that would likely result to these communities from the greater strength of the merged company as compared to Constellation on a stand-alone basis and the likely improvements in the overall reliability and quality of service. The Constellation board of directors also considered that Constellation would maintain a headquarters in Baltimore, Maryland, that the merged company would continue to have substantial operations in Maryland and that the merged company would continue to be a significant benefactor of charities in the greater Baltimore and Maryland region.

Share Prices. The Constellation board of directors took note of the historic stock prices of Constellation and FPL Group and that the combination of the Constellation stock split and the exchange ratio in the merger reflected a 14.8% premium over the 20-day average closing price of Constellation common stock as of December 13, 2005, the last trading day prior to the first public reports of a possible transaction between Constellation and FPL Group.

Financial Considerations. The Constellation board of directors considered the expected financial impact of the merger on Constellation, including that the merger is expected to be accretive to stockholders of both companies after the first year, excluding transaction costs and the effects of purchase accounting, and that the accretive nature of the transaction would result in increased earnings per share of the combined company. The Constellation board of directors also considered the historic financial condition, operating results and businesses of Constellation and FPL Group, including information with respect to their respective earnings histories. The Constellation board of directors also considered that the merger was expected to result in an increased dividend for holders of Constellation common stock.

Opinions of Financial Advisors. The Constellation board of directors considered the financial analyses and presentations of each of Morgan Stanley and Goldman Sachs, as presented to the Constellation board of directors on December 16, 2005 (and subsequently confirmed in writing as of December 18, 2005) that as of that date and subject to and based upon the assumptions, qualifications and limitations discussed in each opinion, the exchange ratio pursuant to the merger agreement, assuming the prior effectiveness of the stock split, was fair, from a financial point of view, to the holders of Constellation common stock. See “—Opinions of Constellation’s Financial Advisors” beginning on page 58.

Strategic Alternatives. The Constellation board of directors considered the trends and competitive developments in the industry and the range of strategic alternatives available to Constellation, including the possibility of business combinations with other participants in the industry or continuing to operate as a stand-alone entity.

 

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Recommendation of Management. The Constellation board of directors took into account management’s recommendation in favor of the merger.

Terms of the Merger Agreement. The Constellation board of directors reviewed and considered the terms of the merger agreement, including the fixed nature of the exchange ratio, the restrictions on each party’s operations between the signing of the merger agreement and the closing of the transaction, the representations and warranties of each party, the conditions to each party’s obligation to complete the merger, the rights of each party to consider and engage in negotiations regarding potentially superior proposals, the rights of each party to withdraw or otherwise change its recommendation to its stockholders in favor of the proposals related to the merger agreement, the rights of each party to terminate the merger agreement and the obligations of each party to pay a termination fee or reimburse the other party for expenses. See “The Merger Agreement” beginning on page 133 for a detailed discussion of the terms and conditions of the merger agreement.

Due Diligence. The Constellation board of directors considered the scope of the due diligence investigation of FPL Group conducted by Constellation management and Constellation’s outside advisors and evaluated the results thereof.

Synergies. The Constellation board of directors considered that, although no assurance can be given that any particular level of cost savings and other synergies will be achieved, Constellation and FPL Group management had identified estimated synergies of approximately $200 million to $250 million that could be realized by the third full year of operations following completion of the merger. A substantial majority of these synergies are expected to come from the competitive energy business. Constellation management estimated that approximately one-third of these synergies would be realized in each of the three years following completion of the merger, prior to the payment of out-of-pocket expenses, taxes and transaction costs. The Constellation board of directors took note of the fact that the synergy numbers were estimates, that they may change and that achieving the synergies is subject to a number of uncertainties. See “The Introduction—Risk Factors—Risks Relating to the Merger” beginning on page 23.

Likelihood of Completion of the Merger. The Constellation board of directors considered the likelihood that the merger will be completed on a timely basis, including the likelihood that the merger will receive all necessary regulatory approvals without unacceptable conditions. The Constellation board of directors took note of the closing condition in the merger agreement that neither Constellation nor FPL Group is required to complete the merger if any governmental authority were to impose terms or conditions in connection with the required statutory approvals that would reasonably be expected to have a material adverse effect and materially decrease the long-term value of either party (or the merged company). The Constellation board of directors further considered the potential length of the regulatory approval process and that the merger agreement provides that, subject to certain exceptions, it may not be terminated until December 31, 2006, which may be extended to June 30, 2007 under specified circumstances.

Post-Merger Corporate Governance. The Constellation board of directors considered the corporate governance provisions of the merger agreement and the amended and restated charter and amended and restated by-laws of Constellation to be adopted upon completion of the merger, including that, upon completion of the merger, the Constellation board of directors will be comprised of six persons who served as Constellation directors prior to the merger and nine persons who served as FPL Group directors prior to the merger, that Mr. Mayo A. Shattuck III will serve as Chairman of the Board of Directors of the combined company and Mr. Lewis Hay, III, the current Chairman, President and Chief Executive Officer of FPL Group, will serve as the Chief Executive Officer of the combined company. The Constellation board of directors also considered the terms of Mr. Shattuck’s employment agreement. See “—Post-Merger Governance and Management” beginning on page 146 for further information.

The Constellation board of directors also considered potential risks associated with the merger, including the following:

 

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FPL Group Business Risks. The Constellation board of directors considered certain risks associated with FPL Group’s business and operations, including the impact of hurricanes on FPL Group’s regulated utility business and on the regulatory and legislative environment in Florida, limits on the ability of Florida Power & Light to obtain insurance coverage for storm damage and FPL Group’s various contingent liabilities. It was noted that storm restoration costs incurred by FPL Group’s regulated utility business would not affect the distribution rates charged by Constellation’s regulated utility business.

Termination Fee; Alternative Proposals. The Constellation board of directors considered the risk that, although Constellation has the right under certain limited circumstances to consider and participate in negotiations with respect to proposals for alternative transactions, the provisions of the merger agreement relating to the potential payment of a termination fee of $425 million may have the effect of discouraging such proposals. In addition, the Constellation board of directors considered that, under specified circumstances related to the presence of an alternative proposal, Constellation would be required to pay FPL Group a fee of $100 million or reimburse FPL Group for its out-of-pocket expenses, although in no event would the aggregate amount payable by Constellation to FPL Group exceed $425 million, which payment obligations also could have the effect of discouraging alternative proposals. The merger agreement also includes other customary restrictions on the ability of Constellation to solicit offers for alternative proposals or engage in discussions regarding such proposals, subject to exceptions, which could have the effect of discouraging such proposals from being made or pursued. The Constellation board of directors understood that these provisions may have the effect of discouraging alternative proposals and may make it less likely that the transactions related to such proposals would be negotiated or pursued, even if potentially more favorable to the stockholders of Constellation than the merger. See “—The Merger Agreement—Termination of Merger Agreement—Termination Fees/Reimbursement of Expenses Payable by Constellation” beginning on page 144 for further information regarding such fees and expenses.

Employee Matters. The Constellation board of directors considered the impact that business uncertainty pending completion of the merger could have on the ability to attract, retain and motivate key personnel until the merger is completed. The Constellation board of directors also considered the terms of Constellation’s various employee benefit plans and agreements that would entitle executive officers and employees to receive payments and other benefits upon completion of the merger and took account of the costs of such plans and agreements and the potential impact they might have on retention of executives and key employees following the merger.

Additional Interests of Executive Officers and Directors. The Constellation board of directors considered that certain executive officers and directors of Constellation may have interests with respect to the merger in addition to their interests as stockholders of Constellation. See “—Additional Interests of FPL Group’s and Constellation’s Directors and Executive Officers in the Merger” beginning on page 115 for further information.

Fixed Exchange Ratio. The Constellation board of directors considered that neither the ratio for the stock split nor the one-for-one exchange ratio that FPL Group shareholders will receive pursuant to the merger will adjust to compensate for changes in the price of Constellation common stock or FPL Group common stock prior to the closing of the merger.

Restrictions on Interim Operations. The Constellation board of directors considered the provisions of the merger agreement placing restrictions on Constellation’s operations during the period between the signing of the merger agreement and the completion of the merger.

Diversion of Management. The Constellation board of directors considered the possible diversion of management’s time and attention from Constellation’s ongoing business due the substantial time and effort necessary to complete the merger and plan for and implement the integration of the operations of Constellation and FPL Group.

The Constellation board of directors believed that, overall, the potential benefits of the merger to Constellation and its stockholders outweighed the risks.

 

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The Constellation board of directors realized that there can be no assurance about future results, including results considered or expected as described in the factors listed above, such as assumptions regarding potential synergies. It should be noted that this explanation of the Constellation board of directors’ reasoning and all other information presented in this section are forward-looking in nature and, therefore, should be read in light of the factors discussed under the heading “Note Regarding Forward-Looking Statements” beginning on page 37.

Opinions of Constellation’s Financial Advisors

Each of Morgan Stanley and Goldman Sachs rendered its oral opinion to the Constellation board of directors (subsequently confirmed in writing as of December 18, 2005) that as of such date and based upon and subject to the assumptions, qualifications and limitations discussed in its written opinion, assuming the prior effectiveness of the stock split, the exchange ratio pursuant to the merger agreement was fair, from a financial point of view, to holders of Constellation common stock.

The full text of the opinions of Morgan Stanley and Goldman Sachs, each dated December 18, 2005, which discuss, among other things, the assumptions made, procedures followed, matters considered, and qualifications and limitations of the reviews undertaken by each of Morgan Stanley and Goldman Sachs in rendering their respective opinions, are attached as Annex B and Annex C, respectively, to this joint proxy statement/prospectus and are incorporated into this joint proxy statement/prospectus by reference. The summary of each of the Morgan Stanley and Goldman Sachs fairness opinions provided in this joint proxy statement/prospectus is qualified in its entirety by reference to the full text of each of the opinions. Constellation stockholders are urged to read these opinions carefully and in their entirety. Each of the Morgan Stanley and Goldman Sachs opinions is addressed to the Constellation board of directors and is directed only to the fairness, from a financial point of view, assuming the prior effectiveness of the stock split, of the exchange ratio pursuant to the merger agreement. Neither the Morgan Stanley nor Goldman Sachs opinion constitutes a recommendation to any Constellation stockholder as to how any such stockholder should vote with respect to the proposed merger or any other matter. The opinions also do not address the prices at which shares of Constellation common stock will trade following the completion of the merger or at any other time.

Opinion of Morgan Stanley & Co. Incorporated

In connection with rendering its opinion, Morgan Stanley, among other things:

 

  i) reviewed certain publicly-available financial statements and other business and financial information of Constellation and FPL Group, respectively;

 

  ii) reviewed certain internal financial statements and other financial and operating data concerning Constellation and FPL Group, prepared by the managements of Constellation and FPL Group, respectively;

 

  iii) reviewed certain financial projections prepared by the management of Constellation and FPL Group;

 

  iv) discussed the past and current operations and financial condition and the prospects of Constellation and FPL Group with senior executives of Constellation and FPL Group, respectively;

 

  v) reviewed the pro forma impact of the merger on various Constellation financial metrics;

 

  vi) reviewed information relating to certain strategic, financial and operational benefits anticipated from the merger prepared by the managements of Constellation and FPL Group with senior executives of Constellation and FPL Group, respectively;

 

  vii) discussed the strategic rationale for the merger with senior executives of Constellation and FPL Group;

 

  viii) reviewed the reported prices and trading activity for the Constellation common stock and the FPL Group common stock;

 

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  ix) compared the financial performance of Constellation and FPL Group and the prices and trading activity of the Constellation common stock and the FPL Group common stock with that of certain other comparable publicly-traded companies and their securities;

 

  x) reviewed the financial terms, to the extent publicly available, of certain comparable acquisition transactions;

 

  xi) participated in discussions and negotiations among representatives of Constellation and FPL Group and their financial and legal advisors;

 

  xii) reviewed the merger agreement and certain related documents; and

 

  xiii) considered such other factors and performed such other analyses as it deemed appropriate.

In arriving at its opinion, Morgan Stanley assumed and relied upon without independent verification the accuracy and completeness of the information supplied or otherwise made available to it by Constellation and FPL Group for the purposes of its opinion. With respect to the financial projections, including information relating to certain strategic, financial and operational benefits anticipated from the merger, Morgan Stanley assumed that they were reasonably prepared on bases reflecting the best currently available estimates and judgments of the future financial performance of Constellation and FPL Group. Morgan Stanley also relied on the assessments of senior management of Constellation and FPL Group of the strategic rationale for the merger. Morgan Stanley assumed that the stock split would occur on the terms set forth in the merger agreement, including, among other things, the timing thereof. In addition, Morgan Stanley assumed that the merger and the other transactions contemplated in the merger agreement would be completed in accordance with the terms set forth in the merger agreement, including, among other things, that the merger would be treated as a tax-free reorganization, pursuant to the Internal Revenue Code of 1986, as amended. Morgan Stanley assumed that, in connection with the receipt of all necessary regulatory approvals for the proposed merger, no restrictions would be imposed that would have a material adverse effect on the contemplated benefits expected to be derived in the proposed merger. Morgan Stanley did not make any independent valuation or appraisal of the assets or liabilities of Constellation or of FPL Group, nor was Morgan Stanley furnished with any such appraisals. Morgan Stanley is not a legal, regulatory or tax expert and relied upon the assessments of Constellation, after receiving advice from its other advisors, with respect to such issues. Morgan Stanley’s opinion was necessarily based on financial, economic, market and other conditions as in effect on, and the information made available to Morgan Stanley as of, December 18, 2005.

In arriving at its opinion, Morgan Stanley was not authorized to solicit, and did not solicit, interest from any party with respect to an acquisition or business combination involving Constellation or any of its assets.

The following is a summary of the material financial analyses performed by Morgan Stanley in connection with the delivery of its oral opinion on December 16, 2005, which was subsequently confirmed in writing on December 18, 2005. Although each analysis was provided to the Constellation board of directors, in connection with arriving at its opinion, Morgan Stanley considered all of its analysis as a whole and did not attribute any particular weight to any analysis described below. Some of these summaries include information in tabular format. In order to understand fully the financial analyses used by Morgan Stanley, the tables must be read together with the text of each summary. The tables alone do not constitute a complete description of the analyses.

For purposes of its analysis, Morgan Stanley noted that the stock split would occur immediately prior to the effectiveness of the merger, and as a result the effective exchange ratio for Constellation stockholders would be 1.444 shares of Constellation common stock for each share of existing Constellation common stock.

Historical Trading and Exchange Ratio Analysis. Morgan Stanley reviewed ranges of closing prices of Constellation common stock and FPL Group common stock for various periods ending on December 13, 2005.

Morgan Stanley noted that for the 52-week period ending December 13, 2005, the range of closing prices per share for Constellation common stock was $42.45 to $62.60. Morgan Stanley also noted that for the 52-week

 

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period ending December 13, 2005, which was the last trading day prior to reports appearing in the press regarding a potential merger, the range of closing prices per share for FPL Group common stock was $35.90 to $48.11. Morgan Stanley also observed the following:

 

Period Ending December 13, 2005

   Average
Constellation
Price
Per Share
   Average FPL Group
Price
Per Share
   Historical
Trading Ratio
 

20 Trading Days Prior

   $ 53.44    $ 42.39    1.26 x

3 Months Prior

   $ 55.42    $ 43.63    1.27 x

6 Months Prior

   $ 56.74    $ 43.16    1.31 x

12 Months Prior

   $ 53.50    $ 41.33    1.29 x

3 Years Prior

   $ 41.83    $ 35.14    1.19 x

Morgan Stanley noted that the effective exchange ratio was 1.444x, resulting in an implied consideration to Constellation of $61.90 per share, based on a closing price of FPL Group common stock of $42.87 as of December 13, 2005.

Comparable Public Companies Analysis. Morgan Stanley reviewed and compared certain publicly available and internal Constellation and FPL Group financial information, ratios and publicly available market multiples relating to Constellation and FPL Group to corresponding financial data for publicly-traded utility companies that shared characteristics with Constellation and FPL Group to derive an implied valuation range for each company.

The companies included in the Constellation comparable companies analysis were:

 

    Entergy Corporation

 

    Exelon Corporation

 

    PPL Corporation

 

    Sempra Energy

 

    TXU Corporation

The companies included in the FPL Group comparable companies analysis were:

 

    Dominion Resources, Inc.

 

    Entergy Corporation

 

    Exelon Corporation

 

    Progress Energy, Inc.

Morgan Stanley then reviewed both publicly available and internal Constellation financial information to compare financial information and multiples of market value of the companies included in the Constellation comparable companies analysis to the following Constellation metrics based on publicly available and internal financial information:

 

    stock price to 2006 estimated EPS;

 

    stock price to 2007 estimated EPS; and

 

    Aggregate Value (defined as equity value plus estimated non-convertible debt, minority interest, capital lease obligations and preferred stock less cash and cash equivalents as of September 30, 2005) to the estimated 2006 EBITDA.

 

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The following table reflects the results of this analysis, as compared to the multiples for Constellation based on average statistics of earnings and EBITDA estimates for these companies obtained from I/B/E/S, a data service that monitors and publishes a compilation of earnings estimates produced by selected research analysts on companies of interest to investors:

 

     Price to EPS     Aggregate
Value to
EBITDA
 
     2006E     2007E     2006E  

Representative range derived from

      

Constellation comparables

   12.5x – 15.0 x   10.5x – 13.0 x   7.0x – 8.0 x

Constellation multiples

   14.6 x   11.6 x   7.3 x

Applying a representative range of multiples derived from the comparable public companies analysis, Morgan Stanley calculated a range of implied equity values per share of Constellation based on Constellation’s projected financial results with respect to the following Constellation metrics:

 

    stock price to 2006 estimated earnings per share (which we refer to herein as EPS);

 

    stock price to 2007 estimated EPS; and

 

    Aggregate Value to the estimated 2006 EBITDA.

Based on this analysis, Morgan Stanley derived a range of implied equity values per share of Constellation common stock of $44.51 to $64.63. Morgan Stanley noted that the effective exchange ratio was 1.444x, resulting in an implied consideration to Constellation of $61.90 per share, based on a closing price of FPL Group common stock of $42.87 as of December 13, 2005.

Morgan Stanley then reviewed publicly available financial information to compare financial information and multiples of market value of the companies included in the FPL Group comparable companies analysis to FPL Group’s publicly available and internal financial information:

 

    stock price to 2006 estimated EPS;

 

    stock price to 2007 estimated EPS; and

 

    Aggregate Value to the estimated 2006 EBITDA.

The following table reflects the results of the analysis, as compared to the multiples for FPL Group based on representative ranges of median I/B/E/S earnings and EBITDA forecasts:

 

     Price to EPS     Aggregate
Value to
EBITDA
 
     2006E     2007E     2006E  

Representative range derived from

      

FPL Group comparables

   14.0x – 16.0 x   12.0x – 14.0 x   7.5x – 8.5 x

FPL Group multiples

   15.3 x   13.5 x   8.0 x

Applying a range of multiples derived from the comparable public companies analysis, Morgan Stanley calculated a range of implied equity values per share of FPL Group based on average statistics of earnings and EBITDA estimates obtained from I/B/E/S with respect to FPL Group’s:

 

    stock price to 2006 estimated EPS;

 

    stock price to 2007 estimated EPS; and

 

    Aggregate Value to the estimated 2006 EBITDA.

 

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Based on this analysis, Morgan Stanley derived a range of implied equity values per share of FPL Group common stock of $36.72 to $45.00. Morgan Stanley noted that the closing price of FPL Group common stock on December 13, 2005 was $42.87.

No company utilized in the comparable public companies analysis is identical to Constellation or FPL Group. Accordingly, an analysis of the results of the foregoing necessarily involves complex considerations and judgments concerning differences in financial and operating characteristics of Constellation and FPL Group and other factors that could affect the public trading value of the companies to which they are being compared. In evaluating the comparable companies, Morgan Stanley made judgments and assumptions with regard to industry performance, general business, economic, market and financial conditions and other matters, many of which are beyond the control of Constellation or FPL Group, such as the impact of competition on Constellation or FPL Group and the industry generally, industry growth and the absence of any adverse material change in the financial conditions and prospects of Constellation or FPL Group or the industry or in the financial markets in general. Mathematical analysis, such as determining the mean, median or average, is not in itself a meaningful method of using comparable company data.

Discounted Cash Flow Analyses. Morgan Stanley also performed a discounted cash flow analysis based on consolidated financial projections provided by the management of Constellation for the period from January 1, 2006 through December 31, 2008 and FPL Group for the period from January 1, 2006 through December 31, 2008. Unlevered free cash flows were calculated as net income available to common stockholders plus the aggregate of depreciation and amortization, deferred taxes, and other noncash expenses and after-tax net interest expense less the sum of capital expenditures and investment in noncash working capital.

For the Constellation discounted cash flow analysis, Morgan Stanley calculated a range of terminal values at the end of the projection period by applying a multiple to Constellation’s projected 2008 EBITDA provided by Constellation’s management and to publicly available Morgan Stanley equity research projected 2008 EBITDA. The Aggregate Value to EBITDA multiple range used in each case was 6.5x to 7.5x. The free cash flows and range of terminal values were then discounted to present values using a range of discount rates which were chosen by Morgan Stanley based upon analysis of market discount rates applicable to comparable companies. The weighted average cost of capital range used in each case was 6.5% to 7.5%. From this analysis, Morgan Stanley calculated a range of equity values per share of Constellation common stock as of December 13, 2005 of $45.06 to $66.79. Morgan Stanley noted that the effective exchange ratio was 1.444x, resulting in an implied consideration to Constellation of $61.90 per share, based on a closing price of FPL Group common stock of $42.87 as of December 13, 2005.

For the FPL Group discounted cash flow analysis, Morgan Stanley calculated a range of terminal values at the end of the projection period by applying a multiple to FPL Group’s projected 2008 EBITDA. The Aggregate Value to EBITDA multiple range used was 7.0x to 8.0x. The free cash flows and range of terminal values were then discounted to present values using a range of discount rates which were chosen by Morgan Stanley based upon analysis of market discount rates applicable to comparable companies. The weighted average cost of capital range used was 6.0% to 7.0%. From this analysis, Morgan Stanley calculated a range of equity value per share of FPL Group common stock as of December 13, 2005 of $36.30 to $46.41. Morgan Stanley noted that the closing price of FPL Group common stock on December 13, 2005 was $42.87.

Sum-of-Parts Comparable Public Companies Analysis. Using Constellation management estimates, Morgan Stanley compared certain publicly available financial measures of selected comparable companies to those of the relevant businesses within Constellation. Morgan Stanley selected these comparable companies based upon its views as to the comparability of the financial and operating characteristics of these companies to the relevant Constellation businesses. Morgan Stanley calculated reference value ranges for the Constellation businesses by applying various multiples derived from these comparable companies to selected financial measures of the relevant Constellation businesses based on information provided by Constellation’s management. With respect to Constellation’s synthetic fuel assets, Morgan Stanley conducted a separate

 

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discounted cash flow analysis covering the entire period during which Constellation’s synthetic fuel assets were projected to provide cash flow; therefore, a comparable public companies multiple based approach was not used for this business. Based on this analysis, Morgan Stanley calculated per share values for Constellation common stock ranging from $48.60 to $57.18. Morgan Stanley noted that the effective exchange ratio was 1.444x, resulting in an implied consideration to Constellation of $61.90 per share based on a closing price of FPL Group common stock of $42.87 as of December 13, 2005.

Analysis of Selected Precedent Transactions. Using publicly available information, Morgan Stanley considered the following 6 announced or completed transactions:

 

    PacifiCorp Holdings, Inc. / MidAmerican Energy Holdings Company, announced May 24, 2005

 

    Cinergy Corp. / Duke Energy Corporation, announced May 9, 2005

 

    Public Service Enterprise Group Incorporated (“PSEG”) / Exelon Corporation, announced December 20, 2004

 

    UniSource Energy Corporation / Kohlberg Kravis Roberts & Co., announced November 24, 2003

 

    Portland General Electric Company / Texas Pacific Group & Oregon Electric Utility Company, LLC, announced November 18, 2003

 

    Connectiv / Potomac Electric Power Company (“PEPCO”), announced February 12, 2001

Morgan Stanley considered certain financial and market statistics of the selected precedent transactions, including stock price to earnings multiples, Aggregate Value to EBITDA multiples and premium to unaffected market prices. Based on an assessment of stock price to earnings multiples of the selected precedent transactions, Morgan Stanley applied a multiple to Constellation’s 2005 estimated earnings ranging from 15.0x – 17.0x and a multiple to Constellation’s 2006 estimated earnings ranging from 14.0x – 16.0x. Based on the analysis of stock price to earnings multiples of the selected precedent transactions, Morgan Stanley calculated per share values for Constellation ranging from $48.96 to $62.90. Based on an assessment of Aggregate Value to EBITDA multiples of the selected precedent transactions, Morgan Stanley applied a multiple to Constellation’s 2005E EBITDA ranging from 8.5x – 10.0x. Based on the analysis of Aggregate Value to EBITDA multiples of the selected precedent transactions, Morgan Stanley calculated per share values for Constellation ranging from $57.40 to $71.26. Based on an assessment of premium to unaffected market prices, Morgan Stanley applied a premium to Constellation’s December 13, 2005 market price ranging from 13% to 19% and a premium to Constellation’s average market price for the 20 days ending December 13, 2005 ranging from 13% to 19%. Based on the analysis of premium to unaffected prices, Morgan Stanley calculated per share values for Constellation ranging from $60.39 to $66.96. Morgan Stanley noted that the effective exchange ratio was 1.444x, resulting in an implied consideration to Constellation of $61.90 per share based on a closing price of FPL Group common stock of $42.87 as of December 13, 2005.

No transaction utilized as a comparison in the analysis of selected precedent transactions is identical to the merger in business mix, timing and size. Accordingly, an analysis of the results of the foregoing necessarily involves complex considerations and judgments concerning differences in financial and operating characteristics of Constellation and other factors that would affect the value of the companies to which it is being compared. In evaluating the precedent transactions, Morgan Stanley made judgments and assumptions with regard to industry performance, global business, economic, market and financial conditions and other matters, many of which are beyond the control of Constellation, such as the impact of competition on Constellation and the industry generally, industry growth and the absence of any adverse material change in the financial conditions and prospects of Constellation or the industry or the financial markets in general. Mathematical analysis (such as determining the mean or median) is not, in itself, a meaningful method of using precedent transactions data.

Pro Forma Transaction Analysis. Using financial projections provided by Constellation’s and FPL Group’s managements, Morgan Stanley reviewed the pro forma impact of the merger on Constellation’s and FPL Group’s

 

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estimated EPS for the years 2006-2008. For purposes of this analysis, Morgan Stanley assumed the transaction closed on January 1, 2006.

Using each company’s forward-looking financial information as the basis of comparison, the pro forma impact on Reported Earnings Per Share (defined as earnings per share taking into account all projected merger-related adjustments, including certain purchase accounting adjustments and Constellation’s estimates of expected synergies) was found to be accretive to earnings from 2006 to 2008 to Constellation and accretive to earnings from 2006 to 2008 to FPL Group.

Using each company’s forward-looking financial information as the basis of comparison, the pro forma impact on Recurring Earnings Per Share (defined as earnings per share taking into account all projected merger- related adjustments (including Constellation’s estimates of expected synergies) except for certain purchase accounting adjustments) was found to be accretive to earnings from 2006 to 2008 to Constellation and accretive to earnings from 2006 to 2008 to FPL Group.

Contribution Analysis. Morgan Stanley reviewed the pro forma effect of the merger and computed the implied equity contribution of Constellation and FPL Group for the years ended December 31, 2006 and December 31, 2007. Such financial results included EBITDA, EBIT and net income provided by the management of FPL and Constellation. The computation showed, among other things, that Constellation’s implied equity contribution based on 2006 and 2007 projected EBITDA was 38% and 42%, respectively; Constellation’s implied equity contribution based on 2006 and 2007 projected EBIT was 40% and 45%, respectively; and Constellation’s implied equity contribution based on 2006 and 2007 net income was 39% and 41%, respectively. Morgan Stanley noted that the effective exchange ratio was 1.444x, which would result in a proforma ownership of the combined company for holders of Constellation common stock equal to approximately 40%.

In connection with the review of the transaction with the Constellation board of directors, Morgan Stanley performed a variety of financial and comparable analyses for purposes of rendering its opinion. The preparation of a fairness opinion is a complex process and is not susceptible to partial analysis or summary description. In arriving at its opinion, Morgan Stanley considered the results of all of its analyses as a whole and did not attribute any particular weight to any analysis or factor considered. Furthermore, Morgan Stanley believes that the summary provided and the analyses described above must be considered as a whole and that selecting any portion of the analyses, without considering all of them, would create an incomplete view of the process underlying Morgan Stanley’s analyses and opinion. As a result, the ranges of valuations resulting from any particular analysis or combination of analyses described above should not be taken to be the view of Morgan Stanley with respect to the actual value of Constellation common stock or FPL Group common stock.

In performing its analyses, Morgan Stanley made numerous assumptions with respect to industry performance, general business and economic conditions and other matters, many of which are beyond the control of Constellation or FPL Group. Any estimates contained in Morgan Stanley’s analyses are not necessarily indicative of future results or actual values, which may be significantly more or less favorable than those suggested by the estimates. The analyses performed were performed solely as part of Morgan Stanley’s analysis of the fairness from a financial point of view of the exchange ratio pursuant to the merger agreement and assuming the prior effectiveness of the stock split, and were conducted in connection with the delivery of Morgan Stanley’s opinion dated December 18, 2005 to the Constellation board of directors. The analyses do not purport to be appraisals or to reflect the prices at which Constellation common stock or FPL Group common stock might actually trade. The stock split applicable to each share of Constellation common stock and the exchange ratio under the merger agreement and other terms of the merger agreement were determined through arm’s length negotiations between Constellation and FPL Group and approved by the Constellation board of directors. The opinion of Morgan Stanley was one of a number of factors taken into consideration by the Constellation board of directors in making its decision to approve the merger agreement and the transactions contemplated by the merger agreement. Consequently, Morgan Stanley’s analyses described above should not be viewed as determinative of the opinion of the Constellation board of directors with respect to the value of Constellation or FPL Group. See “—Constellation’s Reasons for the Merger; Recommendation of the Constellation Board of Directors” beginning on page 58.

 

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Morgan Stanley, as part of its investment banking businesses, is continually engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, competitive biddings, secondary distributions of listed and unlisted securities, private placements and valuations for estate, corporate and other purposes. Constellation selected Morgan Stanley as its financial advisor based upon the firm’s qualifications, experience and expertise and because it is an internationally recognized investment banking firm with substantial experience in transactions similar to the merger. In the ordinary course of its trading and brokerage activities, Morgan Stanley and its affiliates may at any time hold long or short positions, trade or otherwise effect transactions, for their own accounts or for the accounts of customers, in the equity or debt securities or senior loans of Constellation or FPL Group or any currency or commodity related to Constellation or FPL Group. Pursuant to the terms of its engagement, Constellation has agreed to pay Morgan Stanley a fee of $22,000,000 payable according to the following schedule: (a) 25% of the fee payable upon the execution of the merger agreement, (b) 25% of the fee payable upon approval of the merger proposals by the Constellation stockholders, and (c) the remainder of the fee payable upon the completion of the merger. Constellation has also agreed to reimburse Morgan Stanley for its fees and expenses incurred in performing its services. In addition, Constellation has agreed to indemnify Morgan Stanley and its affiliates, their respective directors, officers, agents and employees and each person, if any, controlling Morgan Stanley or any of its affiliates against certain liabilities and expenses, including certain liabilities under the federal securities laws, related to or arising out of Morgan Stanley’s engagement and any related transactions. In the past, Morgan Stanley and its affiliates have provided financial advisory and financing services for Constellation and FPL Group and have received fees for the rendering of these services. In addition, Morgan Stanley is a participant in various revolving credit facilities of Constellation and FPL Group. Morgan Stanley also may or may in the future seek to provide financial advice or financing services to Constellation and FPL Group and may receive fees for such services.

Opinion of Goldman, Sachs & Co.

In connection with rendering the opinion described above and performing its related financial analyses, Goldman Sachs reviewed, among other things:

 

    the merger agreement;

 

    annual reports to stockholders and Annual Reports on Form 10-K of Constellation and FPL Group for the five fiscal years ended December 31, 2004;

 

    certain interim reports to stockholders and Quarterly Reports on Form 10-Q of Constellation and FPL Group;

 

    certain other communications from Constellation and FPL Group to their respective stockholders;

 

    certain internal financial analyses and forecasts for FPL Group prepared by the management of FPL Group; and

 

    certain internal financial analyses and forecasts for Constellation and for FPL Group delivered by the management of Constellation, which are collectively referred to as the Forecasts, including certain cost savings and operating synergies projected by the managements of Constellation and FPL Group to result from the merger.

Goldman Sachs also held discussions with members of the senior management of Constellation and FPL Group regarding their assessment of the strategic rationale for, and the potential benefits of, the merger and the past and current business operations, financial condition and future prospects of their respective companies. In addition, Goldman Sachs reviewed the reported price and trading activity for the Constellation common stock and the FPL Group common stock, compared certain financial and stock market information for Constellation and FPL Group with similar information for certain other companies the securities of which are publicly traded, reviewed the financial terms of certain recent business combinations in the utilities industry specifically and in other industries generally and performed such other studies and analyses, and considered such other factors, as it considered appropriate.

 

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Goldman Sachs relied upon the accuracy and completeness of all of the financial, accounting, legal, tax and other information discussed with or reviewed by it and assumed such accuracy and completeness for purposes of rendering the opinion described above. In that regard, Goldman Sachs assumed with the consent of Constellation that the Forecasts were reasonably prepared on a basis reflecting the best currently available estimates and judgments of Constellation and FPL Group, as the case may be. In addition, Goldman Sachs did not make an independent evaluation or appraisal of the assets and liabilities (including any contingent, derivative or off-balance-sheet assets and liabilities) of Constellation or FPL Group or any of their respective subsidiaries and Goldman Sachs was not furnished with any such evaluation or appraisal. Goldman Sachs also assumed that all governmental, regulatory or other consents and approvals necessary for the completion of the merger will be obtained without any adverse effect on Constellation or FPL Group or on the expected benefits of the merger in any way meaningful to Goldman Sachs’ analysis.

The following is a summary of the material financial analyses presented by Goldman Sachs to the Constellation board of directors in connection with rendering the opinion described above. The following summary, however, does not purport to be a complete description of the financial analyses performed by Goldman Sachs. The order of analyses described does not represent the relative importance or weight given to those analyses by Goldman Sachs. Some of the summaries of the financial analyses include information presented in tabular format. The tables must be read together with the full text of each summary and are alone not a complete description of Goldman Sachs’ financial analyses. The following quantitative information, to the extent that it is based on market data, is based on market data as it existed on or before December 13, 2005 (the last trading day prior to published press reports regarding the potential merger), except for the closing share price data referred to in the first bullet of the Transaction Premium Analysis below, which is as of December 15, 2005, and is not necessarily indicative of current market conditions.

While the merger agreement provides that each share of FPL Group common stock will be converted into the right to receive one share of Constellation common stock, subject to the prior effectiveness of a 1.444-for-1 split of the Constellation common stock, for purpose of its analyses, Goldman Sachs considered the exchange ratio, after giving effect to the stock split, to be the economic equivalent of an implied exchange ratio of 1.444 shares of FPL Group common stock for each share of Constellation common stock.

Transaction Premium Analysis

Goldman Sachs calculated the premium implied by the implied exchange ratio over the market price per share of Constellation common stock at certain times. Goldman Sachs compared implied Constellation share prices, which were based upon (i) an implied exchange ratio of 1.444 shares of FPL Group common stock for each share of Constellation common stock and (ii) the trading price per share of FPL Group common stock at or for the periods referred to, with the following trading prices for Constellation common stock:

 

    the closing price of $61.09 on December 15, 2005;

 

    the closing price of $56.27 on December 13, 2005;

 

    the average price of $53.53 for the 20 trading days ending December 13, 2005;

 

    the average price of $53.33 for the calendar month ending December 13, 2005;

 

    the average price of $55.39 for the three calendar months ending December 13, 2005;

 

    the 52-week high of $62.14 through December 13, 2005; and

 

    the 52-week low of $43.08 through December 13, 2005.

 

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The results of Goldman Sachs’ calculations are reflected below:

 

Period:

   Implied Premium
Based on 1.444
Exchange Ratio and
then current FPL
Group Stock Price:
 

As of December 15, 2005

   1 %

As of December 13, 2005

   10 %

20-day average

   15 %

1-month average

   15 %

3-month average

   14 %

52-week high

   11 %

52-week low

   21 %

Historical Exchange Ratio Analysis

Goldman Sachs calculated the implied exchange ratios of Constellation common stock to FPL Group common stock based on the average closing share prices of Constellation common stock and FPL Group common stock for the three-month, six-month, one-year, three-year and five-year periods ended December 13, 2005. Goldman Sachs also calculated the implied exchange ratios of Constellation common stock to FPL Group common stock based on the average closing share prices of Constellation common stock and FPL Group common stock as of several dates within the last thirty trading days ended December 13, 2005. The following table reflects the results of this analysis:

 

Period:

   Implied Exchange Ratio:  

1 Day Prior to December 13, 2005

   1.31 x

5 Days Prior to December 13, 2005

   1.26 x

10 Days Prior to December 13, 2005

   1.25 x

15 Days Prior to December 13, 2005

   1.24 x

20 Days Prior to December 13, 2005

   1.26 x

25 Days Prior to December 13, 2005

   1.27 x

30 Days Prior to December 13, 2005

   1.28 x

3 Month Average

   1.27 x

6 Month Average

   1.32 x

1 Year Average

   1.29 x

3 Year Average

   1.18 x

5 Year Average

   1.15 x

Contribution Analysis

Goldman Sachs analyzed the implied relative contributions, expressed as a percentage, of Constellation and FPL Group to the gross margin, earnings before interest, taxes, depreciation and amortization, or EBITDA, earnings before interest and taxes, or EBIT, and net income of the combined company for calendar years 2005 through 2008. Goldman Sachs also analyzed the implied relative contributions, expressed as a percentage, to the equity value of the combined company. Specifically, Goldman Sachs applied enterprise value multiples to forecasts prepared by the management of Constellation of gross margin, EBITDA and EBIT for each of Constellation and FPL Group for the calendar years 2005 through 2008 to calculate enterprise values for each of Constellation and FPL Group. Goldman Sachs then subtracted each party’s net debt and minority interest to arrive at an implied equity value and calculated the percentage that each party’s equity value represented of the combined equity value. Goldman Sachs performed this analysis using weighted average multiples, based upon each party’s enterprise value relative to the other’s, as well as using only FPL Group’s enterprise value multiples. In each case, these analyses were based on forecasts of the future results of Constellation and FPL Group

 

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delivered by the management of Constellation. In determining the potential contribution of each company, Goldman Sachs did not take into account any operating, financial or accounting impacts resulting from the merger, any cost savings or other benefits projected by Constellation and FPL Group to be realized from the merger or any other pro forma impacts of the merger. The results of this analysis are as follows:

 

     % Contribution:     Implied % of Combined
Equity Value-Weighted
Average Multiples:
    Implied % of Combined
Equity Value-FPL
Group Multiples:
 
     FPL
Group
    Constellation     FPL
Group
    Constellation     FPL
Group
    Constellation  

Gross Margin Estimates

            

2005

   61.6 %   38.4 %   57.1 %   42.9 %   57.4 %   42.6 %

2006

   62.7 %   37.3 %   58.8 %   41.2 %   59.0 %   41.0 %

2007

   62.2 %   37.8 %   58.0 %   42.0 %   58.3 %   41.7 %

2008

   61.4 %   38.6 %   56.8 %   43.2 %   57.1 %   42.9 %

EBITDA Estimates

            

2005

   61.0 %   39.0 %   56.1 %   43.9 %   56.5 %   43.5 %

2006

   61.3 %   38.7 %   56.6 %   43.4 %   56.9 %   43.1 %

2007

   59.9 %   40.1 %   54.4 %   45.6 %   55.0 %   45.0 %

2008

   58.7 %   41.3 %   52.5 %   47.5 %   53.4 %   46.6 %

EBIT Estimates

            

2005

   58.3 %   41.7 %   52.0 %   48.0 %   52.9 %   47.1 %

2006

   62.1 %   37.9 %   57.8 %   42.2 %   58.1 %   41.9 %

2007

   59.4 %   40.6 %   53.6 %   46.4 %   54.4 %   45.6 %

2008

   57.3 %   42.7 %   50.3 %   49.7 %   51.5 %   48.5 %

Net Income Estimates

            

2005

   58.5 %   41.5 %   58.5 %   41.5 %   58.5 %   41.5 %

2006

   61.1 %   38.9 %   61.1 %   38.9 %   61.1 %   38.9 %

2007

   58.6 %   41.4 %   58.6 %   41.4 %   58.6 %   41.4 %

2008

   60.2 %   39.8 %   60.2 %   39.8 %   60.2 %   39.8 %

Based upon an implied exchange ratio of 1.444 shares of FPL Group common stock for each share of Constellation common stock, Goldman Sachs calculated that Constellation stockholders prior to the merger would own approximately 40.4% of the common stock of the combined company and that FPL Group shareholders prior to the merger would own approximately 59.6% of the common stock of the combined company.

Selected Companies Analysis

Goldman Sachs reviewed selected publicly available financial information, ratios and multiples for Constellation and FPL Group and compared that data to corresponding data for the following selected publicly traded companies in the utilities industry:

 

    Ameren Corporation

 

    American Electric Power Company, Inc.

 

    Dominion Resources, Inc.

 

    Duke Energy Corporation (pro forma for merger with Cinergy Corp. announced May 9, 2005)

 

    Edison International, Inc.

 

    Entergy Corporation

 

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    Exelon Corporation (not pro forma for merger with PSEG announced December 20, 2004 due to pending regulatory approvals)

 

    FirstEnergy Corporation

 

    PG&E Corporation

 

    PPL Corporation

 

    Progress Energy, Inc.

 

    Public Service Enterprise Group Incorporated (“PSEG”)

 

    Sempra Energy

 

    The Southern Company, Inc.

 

    TXU Corporation

 

    Xcel Energy, Inc.

Although none of the selected companies is directly comparable to Constellation and FPL Group, the companies included were chosen because they are publicly traded companies with operations that, for purposes of analysis, may be considered similar to certain operations of Constellation and FPL Group.

The enterprise value for each of Constellation, FPL Group and the selected companies utilized by Goldman Sachs was calculated by adding the net debt and minority interest of each company to its equity market capitalization. The equity market capitalization for each of Constellation, FPL Group and the selected companies was calculated by multiplying each company’s closing stock price as of December 13, 2005 by the number of that company’s fully diluted shares outstanding. Each company’s total debt includes short-term debt, long-term debt and preferred stock, pro forma for any issuances or repurchases. Historical financial results utilized by Goldman Sachs for purposes of this analysis were based upon information contained in the applicable company’s latest publicly available financial statements. Estimates of future results for the selected companies used by Goldman Sachs in this analysis were based on median estimates provided by Institutional Brokers Estimate System, referred to as IBES (a data service that compiles estimates issued by securities research analysts), and calendarized for those companies whose fiscal years do not end in December. Estimates of future results for Constellation and FPL Group used by Goldman Sachs in this analysis were based on forecasts delivered by the management of Constellation. Goldman Sachs’ analysis of the selected companies compared the following to the results for Constellation and FPL Group:

 

    the December 13, 2005 closing stock price as a percentage of the 52-week closing high stock price;

 

    the enterprise value as a multiple of EBITDA for the last twelve months, or LTM, and EBITDA for each of calendar years 2006 and 2007;

 

    the enterprise value as a multiple of LTM EBIT and EBIT for each of calendar years 2006 and 2007;

 

    the December 13, 2005 closing stock price as a multiple of earnings per share, or EPS (referred to as P/E ratio), for each of calendar years 2006 and 2007;

 

    5-year EPS compounded annual growth rate, or CAGR;

 

    equity market capitalization as a multiple of book value, defined as stockholders’ equity;

 

    total debt as a percentage of capitalization, which is defined as total debt plus minority interest and stockholders’ equity;

 

    P/E ratio as a multiple of 5-year EPS CAGR; and

 

    dividend yield.

 

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The following table compares the relevant multiples and percentages referred to above calculated for the selected companies, Constellation and FPL Group:

 

     Selected Companies           FPL
Group
    Constellation  
     High     Mean     Median     Low      

December 13, 2005 Stock Price as % of 52-Week Closing High

   98 %   93 %   93 %   89 %   90 %   91 %

Enterprise Value/EBITDA Multiples

            

LTM

   11.0 x   8.4 x   8.2 x   5.4 x   9.3 x   8.5 x

2006

   10.6 x   8.0 x   7.9 x   5.4 x   8.4 x   7.5 x

2007

   9.8 x   7.5 x   7.3 x   5.2 x   7.9 x   6.8 x

Enterprise Value/EBIT Multiples

            

LTM

   15.2 x   13.0 x   13.3 x   7.3 x   16.8 x   12.8 x

2006

   15.8 x   11.7 x   11.5 x   8.3 x   14.5 x   11.3 x

2007

   15.2 x   11.0 x   10.7 x   8.6 x   13.2 x   9.7 x

Stock price/2006 earnings

   17.8 x   14.5 x   14.6 x   9.6 x   15.1 x   14.3 x

Stock price/2007 earnings

   15.5 x   13.3 x   13.4 x   9.5 x   13.2 x   11.6 x

5-Year EPS CAGR

   11.3 %   5.2 %   5.0 %   3.0 %   5.1 %   12.0 %

Market Cap/book value

   3.7 x   2.1 x   1.9 x   1.4 x   1.9 x   1.8 x

Debt/Cap

   94.1 %   59.0 %   57.3 %   46.1 %   54.7 %   45.3 %

2006 PE/5-Year EPS CAGR

   5.2 x   3.2 x   3.0 x   0.9 x   3.0 x   1.2 x

Dividend Yield

   5.3 %   3.6 %   3.4 %   1.5 %   3.3 %   2.4 %

Selected Transactions Analysis

Goldman Sachs analyzed certain publicly available information relating to selected transactions involving companies in the utilities industry announced between February 2000 and May 2005. These transactions (listed by acquiror/target and month and year of announcement) included:

 

    MidAmerican Energy Holdings Company / PacifiCorp Holdings, Inc. (May 2005)

 

    Duke Energy Corporation / Cinergy Corp. (May 2005)

 

    Exelon Corporation / PSEG (December 2004)

 

    PNM Resources, Inc. / TNP Enterprises, Inc. (July 2004)

 

    Ameren Corporation / Illinois Power Company (February 2004)

 

    Saguaro Utility Group L.P. (KKR) / UniSource Energy Corporation (November 2003)

 

    Texas Pacific Group & Oregon Electric Utility Company, LLC / Enron Corp. & Portland General Electric Company (November 2003)

 

    Exelon Corporation / Illinois Power Company (September 2003)

 

    Southern Nevada Water Authority / Nevada Power Company (August 2002)

 

    Ameren Corporation / Cilcorp Inc. (AES Corporation) (April 2002)

 

    Northwest Natural Gas Company / Portland General Electric Company (October 2001)

 

    E.ON AG / PowerGen plc (April 2001)

 

    Energy East Corporation / RGS Energy Group, Inc. (February 2001)

 

    Potomac Electric Power Company / Conectiv (February 2001)

 

    National Grid Group plc / Niagara Mohawk Holdings, Inc. (September 2000)

 

    FirstEnergy Corp. / GPU, Inc. (August 2000)

 

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    The AES Corporation / IPALCO Enterprises, Inc. (July 2000)

 

    PowerGen plc / LG&E Energy Corp. (February 2000)

For each of the selected transactions, Goldman Sachs derived the equity and levered value of the target company implied by the transaction, based upon publicly available information. Levered value is defined as the equity value of the target company plus the target’s net debt plus the minority interest of the target company. Equity value is defined as fully diluted shares outstanding multiplied by the implied offer price for each share of the target company’s common stock. Goldman Sachs then calculated each target’s equity or levered value, as the case may be, as a multiple of forward EPS, LTM EBITDA, book value and net value of property, plant and equipment, or PP&E (to the extent that information was publicly available), and set forth the high, low, mean and median forward EPS, LTM EBITDA, book value and net PP&E multiples calculated for the relevant selected transactions. Data regarding forward EPS, LTM EBITDA, book value and net PP&E were based on publicly available information.

The following table shows the results of this analysis:

 

     High     Low     Mean     Median  

Equity Value as a multiple of Forward EPS

   15.0 x   11.4 x   13.8 x   14.4 x

Levered Value as a multiple of LTM EBITDA

   12.2 x   6.6 x   8.7 x   8.5 x

Levered Value as a multiple of Book Value

   3.2 x   0.9 x   1.7 x   1.6 x

Levered Value as a multiple of Net PP&E

   2.2 x   0.8 x   1.6 x   1.6 x

Goldman Sachs also calculated the premium of each target’s per share consideration to the undisturbed stock price, which was defined as the 30 day prior average stock price, and to the 52-week high stock price of the target’s stock (to the extent that information was publicly available), and set forth the high, low, mean and median undisturbed stock price and 52-week high stock price premia calculated for the relevant selected transactions. The following table shows the results of this analysis:

 

     High     Low     Mean     Median  

Per Share Merger Consideration Premium to:

        

Undisturbed Share Price

   32.3 %   10.2 %   20.6 %   17.9 %

52-Week High

   17.4 %   1.4 %   8.2 %   8.0 %

Implied Transaction Multiples Analysis

Goldman Sachs reviewed selected multiples for Constellation, assuming completion of the merger, and compared that data to corresponding data for selected transactions and public companies. Goldman Sachs compared the implied equity value as a multiple of earnings for calendar years 2005 through 2007, the implied equity value as a multiple of book value as of September 30, 2005 and the implied transaction value as a multiple of LTM EBITDA and EBITDA for calendar years 2005 through 2007 to corresponding mean and median multiples for selected transactions and public companies that were used in the Selected Transactions Analysis and Selected Companies Analysis described above.

The implied equity value of Constellation was derived by calculating the product of (i) the implied exchange ratio of 1.444 shares of FPL Group common stock for each share of Constellation common stock, (ii) the $42.87 closing trading price per share of FPL Group common stock as of December 13, 2005 and (iii) the number of diluted shares of Constellation common stock as of year end 2005 based on the estimates of Constellation’s management. The implied transaction value was calculated by adding net debt of Constellation to the implied equity value. The earnings and book value figures were based on the estimates of the management of Constellation and EBITDA was calculated as EBIT plus depreciation and amortization based on forecasts

 

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prepared by Constellation’s management. The following table compares the relevant multiples referred to above calculated for the selected transactions, selected public companies and Constellation:

 

     Selected Transactions     Selected Public
Companies
    Constellation  
     Median     Mean     Median     Mean    

Equity Value / Estimated Earnings

          

2005

   NA     NA     16.2 x   16.2 x   17.6 x

2006(1)

   14.4 x   13.8 x   14.6 x   14.5 x   15.7 x

2007

   NA     NA     13.4 x   13.3 x   12.5 x

Equity Value / Book Value as of 9/30/2005(2)

   1.6 x   1.7 x   1.9 x   2.1 x   2.0 x

Transaction Value / Estimated EBITDA

          

LTM(3)

   8.5 x   8.7 x   8.2 x   8.4 x   9.1 x

2005

   NA     NA     8.5 x   8.7 x   8.5 x

2006

   NA     NA     7.9 x   8.0 x   7.9 x

2007

   NA     NA     7.3 x   7.5 x   6.9 x

(1) The Selected Transactions figures reflect the median and mean multiples for each target’s equity value as a multiple of one year forward EPS as of the completion of the relevant transaction, as set forth in the Selected Transactions Analysis above.
(2) The Selected Transactions figures reflect the median and mean multiples for each target’s levered value as a multiple of LTM EBITDA as of the completion of the relevant transaction, as set forth in the Selected Transactions Analysis above.
(3) The Selected Transactions figures reflect the median and mean multiples for each target’s levered value as a multiple of Book Value as of the completion of the relevant transaction, as set forth in the Selected Transactions Analysis above.

Merger of Equals Analysis

Goldman Sachs analyzed the premia paid in the context of all-stock transactions between two companies in which the resulting ownership of the combined company by stockholders of either of the combining companies was not less than 40% nor greater than 60% of the combined company, or mergers of equals. For calendar years 2001 through 2005, Goldman Sachs then calculated the median premium paid relative to the share price of the target company four weeks prior to the announcement of the transaction. The premia used by Goldman Sachs in this analysis were based on information provided by SDC Platinum, a financial transactions database, and reflected information available as of December 5, 2005. The following table shows the results of this analysis for mergers of equals in the United States:

 

Calendar Year:

   Median Premium Relative to
Share Price 4 Weeks Prior to
Announcement:
 

2001

   11.1 %

2002

   (8.1 )%

2003

   0.1 %

2004

   9.2 %

2005

   7.5 %

 

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The following table shows the results of this analysis for mergers of equals globally:

 

Calendar Year:

   Median Premium Relative to
Share Price 4 Weeks Prior to
Announcement:
 

2001

   11.2 %

2002

   (8.1 )%

2003

   1.0 %

2004

   10.1 %

2005

   5.0 %

Stand-Alone Discounted Cash Flow Analyses

Constellation Discounted Cash Flow Analysis

Goldman Sachs performed illustrative discounted cash flow analyses to determine indications of illustrative implied equity values for Constellation and illustrative implied equity values per share of Constellation common stock based on Constellation management’s forecasts. Goldman Sachs also performed an illustrative discounted cash flow analysis to determine indications of illustrative implied terminal value multiples for Constellation based upon projected 2008 EBITDA as provided by Constellation’s management. In performing the illustrative discounted cash flow analysis, Goldman Sachs applied discount rates ranging from 6.5% to 8.5% to the projected cash flows of Constellation for calendar years 2006 through 2008. Goldman Sachs also applied perpetuity growth rates ranging from 3.00% to 4.00%. For purposes of the equity value per share analysis, Goldman Sachs utilized outstanding share information as of year end 2005 for Constellation as provided by the management of Constellation.

Based on the foregoing, Goldman Sachs derived illustrative implied equity values for Constellation ranging from $6,836 million to $19,984 million, illustrative implied equity values per share ranging from $37.83 to $110.59 per share with respect to Constellation common stock and implied terminal value multiples for 2008 EBITDA ranging from 4.7x to 10.4x. Applying the mid-point discount rate of 7.5% and the mid-point perpetuity growth rate of 3.50%, Goldman Sachs derived an illustrative implied equity value for Constellation of $10,945 million, an illustrative implied equity value per share of $60.57 with respect to Constellation common stock and an implied terminal value multiple for 2008 EBITDA of 6.4x.

FPL Group Discounted Cash Flow Analysis

Goldman Sachs performed illustrative discounted cash flow analyses to determine indications of illustrative implied equity values for FPL Group and illustrative implied equity values per share of FPL Group common stock based on forecasts delivered by the management of Constellation. Goldman Sachs also performed an illustrative discounted cash flow analysis to determine indications of implied terminal value multiples for FPL Group based upon projected 2008 EBITDA as provided by Constellation’s management. In performing the illustrative discounted cash flow analysis, Goldman Sachs applied discount rates ranging from 5.25% to 7.25% to the projected cash flows of FPL Group for calendar years 2006 through 2008. Goldman Sachs also applied perpetuity growth rates ranging from 2.50% to 3.50%. For purposes of the equity value per share analysis, Goldman Sachs utilized outstanding share information as of year end 2005 for FPL Group as provided by the management of Constellation.

Based on the foregoing, Goldman Sachs derived illustrative implied equity values for FPL Group ranging from $8,611 million to $40,523 million, illustrative implied equity values per share ranging from $22.38 to $105.33 per share with respect to FPL Group common stock and implied terminal value multiples for 2008 EBITDA ranging from 5.5x to 15.1x. Applying the mid-point discount rate of 6.25% and the mid-point perpetuity growth rate of 3.00%, Goldman Sachs derived an illustrative implied equity value for FPL Group of $17,204 million, an illustrative implied equity value per share of $44.72 with respect to FPL Group common stock and an implied terminal value multiple for 2008 EBITDA of 8.1x.

 

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Combined Company Discounted Cash Flow Analysis

Goldman Sachs performed illustrative discounted cash flow analyses to determine indications of illustrative implied equity values for Constellation’s implied 40% share of the combined company and illustrative implied equity values per share of the common stock of the combined company utilizing forecasts prepared by the management of Constellation and assuming the completion of the merger. In performing the illustrative discounted cash flow analysis with respect to the combined company based on forecasts prepared by the management of Constellation, Goldman Sachs applied discount rates ranging from 5.75% to 7.75% to the projected cash flows of the combined company for calendar years 2006 through 2008. Goldman Sachs also applied perpetuity growth rates ranging from 2.75% to 3.75%. For purposes of this analysis, Goldman Sachs utilized outstanding share information as of year end 2005 for the combined company as provided by Constellation’s management and assumed synergies projected by Constellation’s management to result from the merger.

Based on the foregoing, Goldman Sachs derived illustrative implied equity values for Constellation’s implied 40% share of the combined company ranging from $6,822 million to $25,326 million and illustrative implied equity values ranging from $37.76 to $140.16 per share of the common stock of the combined company. Applying the mid-point discount rate of 6.75% and the mid-point perpetuity growth rate of 3.25%, Goldman Sachs derived an illustrative implied equity value for Constellation’s implied 40% share of the combined company of $12,139 million and an illustrative implied equity value of $67.18 per share of the common stock of the combined company.

Analysis of Present Value of Hypothetical Future Stock Prices

Constellation Common Stock

Goldman Sachs calculated illustrative implied present values of the future trading prices and dividends per share of Constellation common stock based on hypothetical future share prices for Constellation common stock derived using Constellation management’s estimates of Constellation’s quarterly dividend for calendar years 2006, 2007 and 2008 and of Constellation’s EPS for calendar year 2008. For purposes of this analysis, Goldman Sachs calculated the hypothetical future share prices for Constellation common stock by multiplying the estimates of calendar year 2008 EPS for Constellation by hypothetical P/E ratios ranging from 12.0x to 15.0x and a 12% growth rate. Using discount rates ranging from 9.0% to 11.0%, Goldman Sachs derived illustrative implied present values for a share of Constellation common stock, together with the implied present value of Constellation’s future quarterly dividends, ranging from $59.55 to $73.41 using a 9% discount rate, $58.00 to $71.48 using a 10% discount rate and $56.50 to $69.62 using an 11% discount rate.

Pro Forma Constellation Common Stock Adjusted for the Exchange Ratio

Goldman Sachs calculated illustrative implied present values of the future trading prices and dividends per share of Constellation common stock, after giving effect to the merger, based on hypothetical future share prices for the common stock of the combined company derived using Constellation management’s estimates of quarterly dividend for calendar years 2006, 2007 and 2008 and of the combined company’s EPS for calendar year 2008. For purposes of this analysis, Goldman Sachs calculated the hypothetical future share prices for the common stock of the combined company by multiplying the estimates of calendar years 2008 EPS for the combined company by hypothetical P/E ratios ranging from 13.0x to 16.0x and a 12% growth rate. Using discount rates ranging from 8.0% to 10.0%, Goldman Sachs derived illustrative implied present values for a share of the common stock of the combined company, together with the implied present value of the combined company’s future quarterly dividends, ranging from $70.26 to $85.04 using a 8% discount rate, $68.43 to $82.81 using a 9% discount rate and $66.67 to $80.66 using a 10% discount rate.

Pro Forma EPS and Dividend Accretion/Dilution Analyses

Goldman Sachs performed an illustrative pro forma EPS analysis of the financial impact of the merger on Constellation and FPL Group, using estimates for Constellation, estimates for FPL Group and synergies

 

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projected to result from the merger, delivered by the management of Constellation. In preparing these analyses, Goldman Sachs assumed that the implied per share merger consideration to be paid by FPL Group to holders of Constellation common stock will consist of FPL Group common stock based on the exchange ratio contemplated by the merger agreement.

Based on the foregoing analysis, Goldman Sachs calculated that the merger would be :

 

    dilutive to FPL Group’s EPS in 2006 and accretive to FPL Group’s EPS in 2007 and 2008;

 

    accretive to Constellation’s EPS in 2006 and 2008 and dilutive to Constellation’s EPS in 2007; and

 

    significantly accretive to Constellation’s dividend in 2006, 2007 and 2008.

Based on the foregoing analysis and taking into account certain purchase accounting adjustments, which were provided to Goldman Sachs by the management of Constellation, Goldman Sachs calculated that the merger would be:

 

    significantly accretive to FPL Group’s EPS in 2006, 2007 and 2008;

 

    significantly accretive to Constellation’s EPS in 2006, 2007 and 2008; and

 

    significantly accretive to Constellation’s dividend in 2006, 2007 and 2008.

The preparation of a fairness opinion is a complex process and is not necessarily susceptible to partial analysis or summary description. Selecting portions of the analyses or of the summary set forth above, without considering the analyses as a whole, could create an incomplete view of the processes underlying Goldman Sachs’ opinion. In arriving at its fairness determination, Goldman Sachs considered the results of all of its analyses and did not attribute any particular weight to any factor or analysis considered by it. Rather, Goldman Sachs made its determination as to fairness on the basis of its experience and professional judgment after considering the results of all of its analyses. No company or transaction used in the above analyses as a comparison is directly comparable to Constellation or FPL Group or the contemplated merger.

Goldman Sachs prepared these analyses for purposes of Goldman Sachs’ providing its opinion to the Constellation board of directors that the exchange ratio, assuming the prior effectiveness of the stock split, pursuant to the merger agreement was fair from a financial point of view to the holders of the Constellation common stock. Goldman Sachs’ opinion does not address the underlying business decision of Constellation to engage in the transaction nor did Goldman Sachs expressing any opinion as to the prices at which Constellation common stock or FPL Group common stock will trade at any time. These analyses do not purport to be appraisals nor do they necessarily reflect the prices at which businesses or securities may be sold. Analyses based upon forecasts of future results are not necessarily indicative of actual future results, which may be significantly more or less favorable than suggested by these analyses. Because these analyses are inherently subject to uncertainty, being based upon numerous factors or events beyond the control of the parties or their respective advisors, none of Constellation, FPL Group, Goldman Sachs or any other person assumes responsibility if future results are materially different from those forecasted.

The exchange ratio contemplated by the merger agreement was determined through arms’-length negotiations between Constellation and FPL Group and was approved by the Constellation board of directors. Goldman Sachs did not recommend any specific exchange ratio to Constellation or its board of directors or that any exchange ratio constituted the only appropriate exchange ratio for the merger. Goldman Sachs was engaged solely for the purpose of undertaking a study to enable it to render its opinion to the Constellation board of directors as to the fairness from a financial point of view to the holders of the Constellation common stock of the exchange ratio contemplated by the merger agreement, assuming the effectiveness of the stock split, pursuant to the merger agreement and did not participate in the negotiations leading to the proposed merger.

As described above, Goldman Sachs’ opinion to the Constellation board of directors was one of many factors taken into consideration by the Constellation board of directors in making its decision to approve the

 

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merger agreement. The foregoing summary does not purport to be a complete description of the analyses performed by Goldman Sachs in connection with its fairness opinion and is qualified in its entirety by reference to the written opinion of Goldman Sachs attached as Annex C to this joint proxy statement/prospectus.

Goldman Sachs and its affiliates, as part of their investment banking business, are continually engaged in performing financial analyses with respect to businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, competitive biddings, secondary distributions of listed and unlisted securities, private placements and other transactions as well as for estate, corporate and other purposes. Goldman Sachs has provided certain investment banking and other services to Constellation from time to time, including having extended an unfunded loan commitment (aggregate principal amount $155,000,000) to Constellation in November 2005. Goldman Sachs also may provide investment banking services to Constellation and FPL Group in the future. In connection with the above-described investment banking and other services, Goldman Sachs has received, and may receive, compensation.

In addition to the foregoing, Goldman Sachs Power LLC, an affiliate of Goldman Sachs (which we refer to herein as Goldman Sachs Power), is party to an Amended and Restated Software Development and License Agreement, dated as of October 25, 2001 (which we refer to herein as the Amended License Agreement), with Constellation Energy Commodities Group, Inc., a subsidiary of Constellation formerly known as Constellation Power Source, Inc. (which we refer to herein as CCG). The Amended License Agreement was entered into in connection and contemporaneously with the termination of certain business arrangements between Goldman Sachs Power and certain of its affiliates, on the one hand, and Constellation and CCG, on the other hand. Goldman Sachs Power has advised CCG that the Amended License Agreement would remain in effect between the parties following the completion of the merger.

Furthermore, Indiantown Cogeneration, L.P. and Cedar Bay Generating Company, Limited Partnership, entities that are indirectly owned by Cogentrix Energy, Inc., an indirect wholly owned subsidiary of The Goldman Sachs Group, Inc., the parent company of Goldman Sachs, are currently plaintiffs in two lawsuits pending against affiliates of FPL Group relating to contract disputes. The captions of the cases are Indiantown Cogeneration, L.P. v. Florida Power & Light Company (pending in the U.S. District Court for the Middle District of Florida) and Cedar Bay Generating Company, Limited Partnership v. Florida Power & Light Company (pending in the Fourth Judicial Circuit Court, Duval County Florida).

Goldman Sachs is a full service securities firm engaged, either directly or through its affiliates, in securities trading, investment management, financial planning and benefits counseling, risk management, hedging, financing and brokerage activities for both companies and individuals. In the ordinary course of these activities, Goldman Sachs and its affiliates may provide such services to Constellation, FPL Group and their respective affiliates, may actively trade the debt and equity securities (or related derivative securities) of Constellation and FPL Group for their own account and for the accounts of their customers and may at any time hold long and short positions of such securities.

The Constellation board of directors engaged Goldman Sachs because it is an internationally recognized investment banking firm that has substantial experience in transactions similar to the merger. Pursuant to a letter agreement, dated December 9, 2005, Constellation agreed to pay Goldman Sachs a fee of $5,000,000 for its services, which was payable upon Goldman Sachs’ delivery of its opinion. In addition, Constellation has agreed to reimburse Goldman Sachs for its expenses, including attorneys’ fees and disbursements, and to indemnify Goldman Sachs and related persons against various liabilities, including liabilities under the federal securities laws.

FPL Group’s Reasons for the Merger; Recommendation of the FPL Group Board of Directors

The FPL Group board of directors has approved the merger agreement, has determined that the merger agreement and the transactions contemplated thereby, including the merger, are fair to and in the

 

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best interests of FPL Group and FPL Group shareholders, and recommends that FPL Group shareholders vote FOR the proposal to approve the merger agreement.

In evaluating the merger, the FPL Group board of directors consulted with management, as well as Merrill Lynch, FPL Group’s financial advisor in connection with the merger, Lehman Brothers, which was engaged to render a fairness opinion to the FPL Group board of directors with respect to the merger, Cravath, Swaine & Moore LLP, FPL Group’s outside transaction counsel, and Skadden, Arps, Slate, Meagher & Flom LLP, FPL Group’s outside federal regulatory counsel, and considered a number of factors, including those described below. The following discussion of the information and factors considered by the FPL Group board of directors is not intended to be exhaustive. In view of the wide variety of factors considered by the FPL Group board of directors in connection with its evaluation of the merger, the FPL Group board of directors did not consider it practical to, nor did it attempt to, quantify, rank, or otherwise assign relative weights to the specific factors it considered in reaching its decision. In addition, individual members of the FPL Group board of directors may have given different weight to different factors. The FPL Group board of directors considered this information and these factors as a whole and overall considered the relevant information and factors to be favorable to, and in support of, its determinations and recommendations. Among the information and factors considered by the FPL Group board of directors were the following:

Strategic Considerations. The FPL Group board of directors considered a number of factors pertaining to the strategic rationale for the merger, including the following:

 

    Expanded Scale, Skill, Scope and Diversification. The combined company will have a leading platform in the competitive energy sector, a more diversified utility business and multiple tangible growth opportunities. The combined company is expected to be the nation’s largest competitive energy supplier and have the second-largest electric utility portfolio in the United States and the largest generation portfolio in the United States, with more than 45,000 megawatts of generation. FPL Group believes that the combined company will have one of the biggest and fastest-growing utility businesses in the United States as well as a competitive energy business with greater diversity in its customer mix in terms of size, geography and contract length. FPL Group further believes that the combined company will have a solid base of stable growing earnings and cash flow built on one of the strongest balance sheets in the industry.

 

    Leading Competitive Energy Business. FPL Group believes that the merger will create a premier competitive energy company in the United States which will benefit from increased fuel and market diversity and the combination of FPL Group’s and Constellation’s complementary assets and skill bases. FPL Group further believes that the combined company will lower its costs and better serve customers by matching FPL Group’s generation assets with Constellation’s leading competitive supply portfolio. FPL Group expects the combined company to be the market leader in both competitive retail and key wholesale markets, including New England and the Pennsylvania New Jersey Maryland Interconnection LLC region (which we refer to herein as PJM). The combined company will be the second largest independent power producer in the United States, based on total megawatts of generating assets currently in operation in deregulated markets, with assets in key regions, including the Northeast, California, PJM and the Texas markets. FPL Group believes that the combined company will have significant opportunities for generation margin expansion resulting from lower-priced hedges and contracts rolling off and being replaced with new contracts at market prices. FPL Group further believes that a more balanced combined merchant power business will be better positioned to take advantage of future opportunities in the electric wholesale market.

 

    Stronger Utility Business Platform. The merger is expected to create the second-largest electric utility portfolio in the United States, and the combined company will have greater diversification of regulatory regimes. In addition, FPL Group believes that, by sharing expertise, the merger will result in a better opportunity for both utilities to better serve customers and assist each other in the event of natural disasters.

 

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    Enhanced Nuclear Expertise. The combined company will have expanded nuclear operations with potential for increased savings and efficiencies. FPL Group believes that the combined company’s nuclear operations will bring an increased depth of resources and talent and provide a strong platform to pursue continued nuclear consolidation and to potentially develop a new nuclear program.

 

    Anticipated Financial Strength and Flexibility. FPL Group believes that the combined company will have the strongest balance sheet in the industry, which will expand opportunities for productive new capital deployments. In addition, the diversification of the energy supply and generation portfolios of the combined company are expected to result in improved earnings and a more stable cash flow.

 

    Compatible Business Model. FPL Group believes that FPL Group and Constellation have largely compatible business models, including both companies’ utility businesses, large nuclear fleets and competitive wholesale and retail supply businesses.

 

    More Diverse and Balanced Fuel Mix. The combined company will have a more balanced fuel mix and a broader geographic coverage, which will improve load-serving capabilities. The combined company, which will have the largest wind generation portfolio in the United States as well as significantly improved coal and nuclear expertise, is expected to be able to reduce fuel risk exposure and increase purchasing power.

 

    Combined Expertise. FPL Group believes that the merger will combine complementary areas of expertise: FPL Group’s expertise in operations and wind energy and Constellation’s risk management, commodity and retail expertise. The combined company is expected to be able to draw upon the intellectual capital, technical expertise and experience of a deeper, more diverse workforce.

 

    Impact on Florida Power & Light’s Customers. The FPL Group board of directors considered the impact of the merger on Florida Power & Light’s customers. Specifically, the FPL Group board of directors believes that the merger should benefit Florida Power & Light’s customers through a broader range of coal and nuclear expertise and modest, direct cost savings.

Cost Savings and Synergies. The FPL Group board of directors considered that, although no assurances can be given that any particular level of cost savings and other synergies will be achieved, FPL Group management had identified estimated revenue and cost synergies of approximately $200 to $250 million annually before integration-related costs by the end of the third year of the combination. A substantial majority of these synergies are expected to come from competitive energy businesses. These cost savings are expected to result from consolidation of competitive energy business unit operations, improved procurement strategies and consolidation of information systems and corporate overhead/support activities. The FPL Group board of directors noted that expected cost savings and synergies are estimates, that they may change and that achieving the expected cost savings and synergies is subject to a number of risks and uncertainties. See “The Introduction—Risk Factors—Risks Relating to the Merger—The anticipated benefits of combining Constellation and FPL Group may not be realized” beginning on page 25.

Share Price; Tax-Free Exchange. The FPL Group board of directors considered the historical stock prices of FPL Group and Constellation, including that the exchange ratio for the Constellation stockholders (giving effect to the stock split) represented a premium of approximately 14.8% based on the exchange ratio calculated using the average of the 20-day closing prices of Constellation and FPL Group common stock for the period ending December 13, 2005, the last trading day prior to the first public reports of a possible transaction between FPL Group and Constellation. The FPL Group board of directors also considered that the merger is designed to be tax-free to the holders of FPL Group common stock.

Financial Considerations. The FPL Group board of directors considered the expected earnings, cash flow, balance sheet and dividend impact of the merger, the expected market reaction to the merger and the financial prospects of FPL Group and Constellation. The FPL Group board of directors also considered the historical financial condition and operating results of FPL Group and Constellation, as well as historical stock market information. The FPL Group board of directors believes that the merger will be accretive to FPL Group

 

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shareholders in the first full year of combined operations, excluding transaction and integration costs related to the merger. The FPL Group board of directors expects that the combined company’s dividend will be the same as that of FPL Group immediately prior to the completion of the merger.

Impact of the Merger on Communities. The FPL Group board of directors evaluated the expected impact of the merger on the communities in which FPL Group and Constellation are located and which they serve. In particular, the FPL Group board of directors believes that the merger will benefit the municipalities served by the combined company by creating a Fortune 100 company able to provide more reliable service with a shared commitment to clean energy and other environmental concerns. In addition, the companies expect to maintain their substantial presence in the cities and communities they serve, including continuing significant charitable contributions.

Opinions of Financial Advisors. The FPL Group board of directors considered the financial analyses and presentation of Merrill Lynch presented to the FPL Group board of directors at its meeting on December 16, 2005 and also considered the oral opinion of Merrill Lynch to the FPL Group board of directors, subsequently confirmed in writing on December 18, 2005, that, as of that date, and subject to and based upon the various assumptions, limitations and qualifications set forth in such written opinion, the exchange ratio in the merger was fair from a financial point of view to the holders of FPL Group common stock. See “—Opinions of FPL Group’s Financial Advisors—Opinion of Merrill Lynch Pierce, Fenner & Smith Incorporated” beginning on page 87. The FPL Group board of directors also considered the financial analyses and presentation of Lehman Brothers in connection with the merger, presented to the FPL Group board of directors at its meeting on December 16, 2005 and also considered the oral opinion of Lehman Brothers to the FPL Group board of directors subsequently confirmed in writing on December 18, 2005, that, as of that date and subject to and based upon the various assumptions, limitations and qualifications set forth in such written opinion, from a financial point of view, the exchange ratio in the merger, assuming the prior effectiveness of the stock split, to be offered to holders of FPL Group common stock was fair to the holders of FPL Group common stock. See “—Opinions of FPL Group’s Financial Advisors—Opinion of Lehman Brothers Inc.” beginning on page 97.

Recommendation of Management. The FPL Group board of directors considered management’s recommendation in support of the merger.

Terms of the Merger Agreement. The FPL Group board of directors reviewed the terms of the merger agreement, including the representations and warranties, obligations and rights of the parties under the merger agreement, the conditions to each party’s obligation to complete the merger, the rights of each party to consider and engage in negotiations regarding potentially superior proposals, the rights of each party to withdraw or otherwise change its recommendation to its shareholders in favor of the proposals related to the merger agreement, the instances in which each party is permitted to terminate the merger agreement and the related termination fees payable by each party in the event of termination of the merger agreement under specified circumstances. See “—The Merger Agreement” beginning on page 133 for a detailed discussion of the terms and conditions of the merger agreement. The FPL Group board of directors also considered the course of negotiations of the merger agreement.

Due Diligence. The FPL Group board of directors considered the scope of the due diligence investigation conducted by management and FPL Group’s outside advisors and evaluated the results thereof.

Corporate Governance. The FPL Group board of directors considered the corporate governance provisions of the merger agreement to be adopted by Constellation upon completion of the merger, including that Lewis Hay, III will be the Chief Executive Officer of the combined company, and that the board of directors of the combined company will be composed of nine persons who served as directors of FPL Group prior to the completion of the merger and six persons who served as directors of Constellation prior to the completion of the merger.

Strategic Alternatives. The FPL Group board of directors considered the trends and developments in the industry and the range of strategic alternatives available to FPL Group, including the possibility of business combinations with other participants in the industry or continuing to operate as a stand-alone entity.

 

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Likelihood of Completion of the Merger. The FPL Group board of directors considered the likelihood that the merger will be completed on a timely basis, including the likelihood that the merger will receive all necessary regulatory approvals without unacceptable conditions.

The FPL Group board of directors also considered the potential risks of the merger, including the following:

Fixed Exchange Ratio. The FPL Group board of directors considered that the fixed exchange ratio will not adjust downwards to compensate for declines in the price of Constellation common stock prior to the closing of the merger and that the terms of the merger agreement do not include termination rights triggered expressly by a decrease in value of Constellation due to a decline in the market price of the Constellation common stock. The FPL Group board of directors determined that this structure was appropriate and the risk acceptable in view of: the FPL Group board of directors’ focus on the relative intrinsic values and financial performance of FPL Group and Constellation and the percentage of the combined company to be owned by holders of FPL Group common stock prior to the merger; and the inclusion in the merger agreement of conditions to the obligations of FPL Group to effect the merger such as the absence of a material adverse change in Constellation’s business.

Constellation Business Risks. The FPL Group board of directors considered certain risks inherent in Constellation’s business and operations, including risks associated with Constellation’s competitive supply business operations (including its nuclear operations), risks relating to Constellation’s proprietary trading, the regulatory environment in Maryland and its impacts on BGE and Constellation’s environmental and other contingent liabilities. Based on reports of management and outside advisors regarding the due diligence process, the FPL Group board of directors believes that these risks are manageable as part of the ongoing business of the combined company.

Severance and Retention Arrangements. The FPL Group board of directors considered the severance and retention arrangements covering executives and employees of Constellation and related costs and the impact of such arrangements on the retention of key management of Constellation.

Regulatory Approvals. The FPL Group board of directors considered the regulatory approvals required to complete the merger and the risk that governmental authorities and third parties might seek to impose unfavorable terms or conditions as part of granting the required approvals or that such approvals may not be obtained at all. The FPL Group board of directors further considered the potential length of the regulatory approval process and the period of time FPL Group may be subject to the merger agreement.

Diversion of Management. The FPL Group board of directors considered the possible diversion of management resulting from the substantial time and effort necessary to complete the merger and integrate the operations of FPL Group and Constellation following completion of the merger.

Impact on Credit Rating and Risk Profile. The FPL Group board of directors considered the possibility that the merger could result in potential impacts to the credit rating for the combined company and certain of its subsidiaries and the implications of such impacts.

Restrictions on Interim Operations. The FPL Group board of directors considered the provisions of the merger agreement placing restrictions on FPL Group’s operations during the period prior to completion of the merger.

Increased Regulation. The FPL Group board of directors considered the additional regulation, including the regulatory oversight that would result from the addition of public utility operations in Maryland, to which the combined company will be subject. The FPL Group board of directors also considered the potential impact of new federal environmental regulations and proposed state environmental regulation on the future operations of the combined company.

Termination Fee; Alternative Proposals. The FPL Group board of directors considered the risk that, although FPL Group has the right under certain limited circumstances to consider and participate in negotiations

 

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with respect to alternative acquisition proposals, the provisions of the merger agreement relating to the potential payment of a termination fee of $650 million may have the effect of discouraging such proposals. In addition, the FPL Group board of directors considered that, under specified circumstances, FPL Group would be required to pay to Constellation a fee of $100 million or reimburse Constellation for its out-of-pocket expenses, although in no event would the aggregate amount payable by FPL Group to Constellation exceed $650 million, which payment obligations also could have the effect of discouraging alternative proposals. The merger agreement also includes other customary restrictions on the ability of FPL Group to solicit offers for alternative proposals or engage in discussions regarding such proposals, subject to exceptions, which could have the effect of discouraging such proposals from being made or pursued. The FPL Group board of directors understood that these provisions may have the effect of discouraging alternative proposals and may make it less likely that the transactions related to such proposals would be negotiated or pursued, even if potentially more favorable to the shareholders of FPL Group than the merger. See “—The Merger Agreement—Termination of Merger Agreement—Termination Fees/Reimbursement of Expenses Payable by FPL Group” beginning on page 144 for further information.

Integration. The FPL Group board of directors evaluated the challenges inherent in the merging of two business enterprises of the size and scope of FPL Group and Constellation, including the possibility of not achieving the anticipated cost-savings and synergies and other benefits sought to be obtained from the merger.

Personnel. The FPL Group board of directors considered the adverse impact that business uncertainty pending completion of the merger could have on the ability to attract, retain and motivate key personnel until the merger is completed. The FPL Group board of directors also considered other adverse impacts that the merger could have on the retention of key employees.

Interests of Executive Officers and Directors. The FPL Group board of directors considered that certain executive officers and directors of FPL Group may have interests with respect to the merger in addition to their interests as shareholders of FPL Group, including that Mr. Hay was expected to be Chief Executive Officer of the combined company and that other FPL Group executive officers were also expected to have positions with the combined company. See “— Additional Interests of FPL Group’s and Constellation’s Directors and Executive Officers in the Merger” beginning on page 115 for further information.

The FPL Group board of directors believed that, overall, the potential benefits of the merger to FPL Group and the FPL Group shareholders outweighed the risks.

The FPL Group board of directors realized that there can be no assurance about future results, including results considered or expected as described in the factors listed above. It should be noted that this explanation of the FPL Group board of directors’ reasoning and all other information presented in this section are forward-looking in nature and, therefore, should be read in light of the factors discussed under the heading “Note Regarding Forward-Looking Statements” beginning on page 37.

Opinions of FPL Group’s Financial Advisors

On October 1, 2005, FPL Group engaged Merrill Lynch to act as its lead financial advisor in connection with the proposed merger. On December 16, 2005, Merrill Lynch delivered its oral opinion to the FPL Group board of directors, subsequently confirmed in its written opinion dated December 18, 2005, that, as of that date, and based upon and subject to the assumptions made, matters considered and qualifications and limitations set forth in the written opinion, the exchange ratio of 1.000 share of Constellation common stock for each share of FPL Group common stock provided for in the merger, subject to the prior effectiveness of the stock split whereby each outstanding share of Constellation common stock will be automatically converted into 1.444 shares of Constellation common stock, was fair, from a financial point of view, to the holders of FPL Group common stock.

 

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The full text of the written opinion of Merrill Lynch, which sets forth the assumptions made, matters considered and qualifications and limitations on the review undertaken by Merrill Lynch, is attached as Annex D to this joint proxy statement/prospectus and is incorporated into this joint proxy statement/prospectus by reference. The following summary of Merrill Lynch’s opinion is qualified in its entirety by reference to the full text of the opinion. Shareholders of FPL Group are urged to read and should read the entire opinion carefully. Merrill Lynch’s opinion was delivered to the FPL Group board of directors for its benefit and use and is directed only to the fairness, from a financial point of view, of the exchange ratio to the holders of FPL Group common stock and does not address the fairness to, or any other consideration of, the holders of any other class of securities, creditors or other constituencies of FPL Group, including the merits of the underlying decision by FPL Group to engage in the merger. Merrill Lynch’s opinion does not constitute a recommendation to any FPL Group shareholder as to how such shareholder should vote with respect to the proposed merger or any matter related thereto. Merrill Lynch has consented to the inclusion in this joint proxy statement/prospectus of its written opinion and of the summary of that opinion set forth below.

In December 2005, FPL Group engaged Lehman Brothers to act as advisor to its board of directors to render to the FPL Group board of directors an opinion with respect to the merger. On December 16, 2005, Lehman Brothers rendered its preliminary oral opinion which was subsequently confirmed in writing on December 18, 2005 to the FPL Group board of directors that as of such date and, based upon and subject to certain matters stated in such opinion, from a financial point of view, the exchange ratio, assuming the prior effectiveness of the stock split, to be offered to the shareholders of FPL Group in the merger is fair to the shareholders of FPL Group.

The full text of Lehman Brothers’ written opinion, dated as of December 18, 2005 is attached as Annex E to this joint proxy statement/prospectus. You are urged to read Lehman Brothers’ opinion carefully in its entirety for a description of the assumptions made, procedures followed, factors considered and limitations upon the review undertaken by Lehman Brothers in rendering its opinion. A summary of Lehman Brothers’ opinion and the methodology that Lehman Brothers used to render its opinion is included below. This summary is qualified in its entirety by reference to the full text of the opinion. Lehman Brothers’ opinion was provided for the use and benefit of the FPL Group board of directors in connection with its consideration of the merger. Lehman Brothers’ opinion is not intended to be and does not constitute a recommendation to any shareholder of FPL Group as to how such shareholder should vote in connection with the merger. Lehman Brothers was not requested to opine as to, and Lehman Brothers’ opinion does not in any manner address, FPL Group’s underlying business decision to proceed with or effect the merger. Lehman Brothers has consented to the inclusion in this joint proxy statement/prospectus of its written opinion and of the summary of that opinion set forth below.

Opinion of Merrill Lynch Pierce, Fenner & Smith Incorporated

In preparing its opinion to the FPL Group board of directors, Merrill Lynch performed various financial and comparative analyses, including those described below. The summary set forth below does not purport to be a complete description of the analyses underlying Merrill Lynch’s opinion or the presentation made by Merrill Lynch to the FPL Group board of directors. The preparation of a fairness opinion is a complex analytic process involving various determinations as to the most appropriate and relevant methods of financial analysis and the application of those methods to the particular circumstances and, therefore, a fairness opinion is not readily susceptible to partial analysis or summary description. In arriving at its opinion, Merrill Lynch did not attribute any particular weight to any analysis or factor considered by it, but rather made its determination as to fairness on the basis of its experience and professional judgment after considering the results of all of its analyses. Accordingly, Merrill Lynch believes that its analyses must be considered as a whole and that selecting portions of its analyses and factors, or focusing on information presented in tabular format, without considering all of the analyses and factors or the narrative description of the analyses, would create a misleading or incomplete view of the process underlying its opinion.

 

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In performing its analyses, Merrill Lynch made numerous assumptions with respect to industry performance, general business, economic, market and financial conditions and other matters, many of which are beyond the control of Merrill Lynch. Any estimates contained in the analyses performed by Merrill Lynch are not necessarily indicative of actual values or future results, which may be significantly more or less favorable than those suggested by such analyses. Additionally, estimates of the value of businesses or securities do not purport to be appraisals or to reflect the prices at which such businesses or securities might actually be sold. Accordingly, these analyses and estimates are inherently subject to substantial uncertainty. In addition, as described above, the opinion of Merrill Lynch was one of several factors taken into consideration by the FPL Group board of directors in making its determination to approve the merger agreement. Consequently, Merrill Lynch’s analyses should not be viewed as determinative of the decision of the FPL Group board of directors with respect to the fairness from a financial point of view of the exchange ratio provided for in the merger agreement.

In arriving at its opinion, Merrill Lynch, among other things:

 

    reviewed certain publicly available business and financial information relating to Constellation and FPL Group that Merrill Lynch deemed to be relevant;

 

    reviewed certain information, including financial forecasts, relating to the business, earnings, cash flow, assets, liabilities and prospects of Constellation and FPL Group, as well as the amount and timing of the cost savings and related expenses and synergies expected to result from the merger, which is referred to as the expected synergies, furnished to Merrill Lynch by Constellation and FPL Group, respectively;

 

    conducted discussions with members of senior management and representatives of Constellation and FPL Group concerning the matters described in the first two bullets above, as well as their respective businesses and prospects before and after giving effect to the merger and the expected synergies;

 

    reviewed the market prices and valuation multiples for Constellation common stock and FPL Group common stock and compared them with those of certain publicly traded companies that Merrill Lynch deemed to be relevant;

 

    reviewed the results of operations of Constellation and FPL Group and compared them with those of certain publicly traded companies that Merrill Lynch deemed to be relevant;

 

    compared the proposed financial terms of the merger with the financial terms of certain other transactions that Merrill Lynch deemed to be relevant;

 

    participated in certain discussions and negotiations among representatives of Constellation and FPL Group and their financial and legal advisors;

 

    reviewed the potential pro forma impact of the merger;

 

    reviewed the merger agreement dated December 18, 2005; and

 

    reviewed such other financial studies and analyses and took into account such other matters as Merrill Lynch deemed necessary, including its assessment of general economic, market and monetary conditions.

In preparing its opinion, Merrill Lynch assumed and relied on the accuracy and completeness of all information supplied or otherwise made available to it, discussed with or reviewed by or for it, or that was publicly available. Merrill Lynch did not assume any responsibility for independently verifying such information and did not undertake any independent evaluation or appraisal of any of the assets or liabilities of Constellation or FPL Group and it was not furnished with any such evaluation or appraisal, nor did it evaluate the solvency or fair value of Constellation or FPL Group under any state or federal laws relating to bankruptcy, insolvency or similar matters. In addition, Merrill Lynch did not assume any obligation to conduct any physical inspection of the properties or facilities of Constellation or FPL Group. With respect to the financial forecast information relating to Constellation and FPL Group and the expected synergies prepared by the management of FPL Group and furnished to or discussed with Merrill Lynch by Constellation or FPL Group, Merrill Lynch assumed, with

 

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the consent of the FPL Group board of directors, that they had been reasonably prepared and reflected the best currently available estimates and judgments of the management of Constellation or FPL Group as to the expected future financial performance of Constellation or FPL Group, as the case may be, and the expected synergies. Merrill Lynch expressed no opinion as to such financial forecast information, the expected synergies or the assumptions on which they are based. Merrill Lynch further assumed that the merger will qualify as a tax-free reorganization for U.S. federal income tax purposes and that the final form of the merger agreement would be substantially similar to the last draft reviewed by it.

Merrill Lynch’s opinion is necessarily based upon market, economic and other conditions as they existed and could be evaluated on, and on the information made available to Merrill Lynch as of, December 18, 2005. Merrill Lynch further assumed that in the course of obtaining the necessary regulatory or other consents or approvals (contractual or otherwise) for the merger, no restrictions, including any divestiture requirements or amendments or modifications, would be imposed that would have a material adverse effect on the contemplated benefits of the merger. Merrill Lynch did not express any opinion as to the prices at which Constellation common stock or FPL Group common stock would trade following the announcement of the merger or the price at which Constellation common stock would trade following the completion of the merger.

Merrill Lynch’s Financial Analyses

The following is a summary of the material financial analyses that Merrill Lynch performed in connection with its opinion to the FPL Group board of directors. The financial analyses summarized below include information presented in tabular format. In order to understand fully the financial analyses performed by Merrill Lynch, the tables must be read together with the text of the summary. The tables alone do not constitute a complete description of the financial analyses, and if viewed in isolation could create a misleading or incomplete view of the financial analyses performed by Merrill Lynch. To the extent the following quantitative information reflects market data, except as otherwise indicated, Merrill Lynch based this information on market data as they existed prior to December 18, 2005. This information, therefore, does not necessarily reflect current or future market conditions.

Analysis of Constellation

Historical Trading Performance

Merrill Lynch reviewed historical trading prices for Constellation common stock. The review indicated that for the 52-week period beginning on December 14, 2004 and ending on December 13, 2005, Constellation common stock traded as low as $43.08 per share and as high as $62.14 per share, compared to the closing price per share of Constellation common stock on December 13, 2005, one day prior to media reports of a potential merger, of $56.27; and the implied offer value per Constellation share of $61.90 implied from the exchange ratio of 1.000 provided for in the merger agreement, the split ratio of 1.444 for the Constellation stock split and the closing price of FPL Group common stock on December 13, 2005.

Research Analysts’ Price Targets

Merrill Lynch reviewed the most recent research analysts’ per share target prices for Constellation common stock, which ranged from $57.00 to $75.00 compared with the implied offer value per Constellation share of $61.90.

Analysis of Selected Comparable Publicly Traded Companies

Based on financial projections provided by Constellation’s management and provided by FPL Group’s management, Merrill Lynch compared financial and operating information and ratios for Constellation with the corresponding financial and operating information and ratios for a selected group of publicly traded companies in the energy industry, including FPL Group, that Merrill Lynch deemed to be reasonably comparable to Constellation. The publicly traded companies selected as the primary comparable companies to Constellation

 

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included Edison International, Exelon Corp. (pro forma for the merger with Public Service Enterprise Group, Inc. or “PSEG” announced on December 20, 2004), FPL Group, PPL Corp., Sempra Energy and TXU Corp.

The financial and operating information and ratios reviewed by Merrill Lynch included, among other things, the ratio of price per share to estimated earnings per share, commonly referred to as EPS, for calendar year 2006, and the ratio of total enterprise value (calculated as equity market value, plus (i) total debt excluding securitization debt where applicable, (ii) preferred stock and (iii) minority interests, less cash and cash equivalents) to estimated earnings before interest, taxes, depreciation and amortization, commonly referred to as EBITDA (adjusted to eliminate cash flows dedicated to servicing securitization debt, where applicable), for calendar year 2006. All multiples were based on closing stock prices on December 13, 2005. Estimated financial data for the selected comparable companies were based on First Call estimates and publicly available research analysts’ estimates.

Based on these analyses, Merrill Lynch derived a range of implied values for Constellation common stock from $43.62 to $62.86 per share using multiples of price per share to estimated EPS for calendar year 2006, and from $52.40 to $69.88 per share using multiples of total enterprise value to estimated EBITDA for calendar year 2006. Merrill Lynch noted that, if the portion of the approximate after-tax net present value of expected synergies to be received by FPL Group shareholders (based upon pro forma ownership of Constellation common stock by FPL Group shareholders) were added to the comparable publicly traded companies valuations of Constellation common stock, the high end of the range of implied valuations for Constellation common stock using multiples of price per share to estimated EPS for calendar year 2006 would be increased from $62.86 per share to approximately $68.80 per share, and the high end of the range of implied valuations for Constellation common stock using multiples of total enterprise value to estimated EBITDA for calendar year 2006 would be increased from $69.88 per share to approximately $75.82 per share.

Merrill Lynch performed a discounted cash flow analysis to approximate the after-tax net present value of expected synergies. Assuming a discount rate ranging from 6.5% to 7.5% and a range of terminal values derived by applying EBITDA multiples to expected synergies for the third year after the merger closes, the analysis indicated an average total approximate net present value of expected synergies of $1.801 billion after taking into account an average present value of costs to achieve synergies of $381 million. Assuming FPL Group shareholders prior to the merger own approximately 60% of the pro forma company, FPL Group shareholders would receive approximately $1.081 billion of the approximate after-tax net present value of expected synergies on a proportionate basis, or $5.94 per share of Constellation common stock.

These ranges of implied value per share of Constellation common stock were based in each case on approximately 181.8 million fully-diluted shares outstanding, after deducting approximately $3.955 billion of net debt (as of September 30, 2005). Each implied per share value of Constellation common stock derived from Merrill Lynch’s comparable company analyses was compared to the per share value for Constellation implied in the merger of $61.90 and the closing price of Constellation common stock on December 13, 2005 of $56.27 per share.

Sum-of-the-Parts Selected Comparables Analyses

Merrill Lynch analyzed four segments of Constellation’s business: utility, merchant energy, other non-regulated, and synfuel tax credits. Based on financial projections provided by Constellation’s management and provided by FPL Group’s management, Merrill Lynch compared financial and operating information and ratios for the utility segment with the corresponding financial and operating information and ratios for a selected group of publicly traded companies with operations deemed to be reasonably comparable to Constellation’s utility segment, including CenterPoint Energy, Inc., Consolidated Edison Inc., Energy East Corp., Northeast Utilities, NSTAR, Pepco Holdings Inc. and PG&E Corp.

Merrill Lynch analyzed the merchant energy segment by dividing it into three sub-segments: mid-Atlantic region generation plants, Power Purchase Agreement-based generation plants and qualifying facilities;

 

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wholesale/trading; and retail. With respect to the first sub-segment, Merrill Lynch analyzed the purchase price and implied transaction multiples paid in transactions involving energy generating assets based on the type of fuel such assets used to generate energy. Merrill Lynch reviewed transactions involving facilities that used nuclear, coal, oil, gas and hydro power to generate energy, and analyzed the transaction value of such transactions as a multiple of kilowatt of net installed capacity. Merrill Lynch validated the results of its kilowatt of net installed capacity multiple analyses for the Mid-Atlantic region generation plants, Power Purchase Agreement-based generation plants and qualifying facilities included in the merchant energy segment by also performing an analysis of implied multiples of 2007 EBITDA for these plants and facilities. The publicly traded companies selected as primary comparable companies to the Constellation merchant energy segment included Mirant Corp., NRG Energy Inc. and Reliant Energy Inc. With respect to the wholesale/trading sub-segment, Merrill Lynch compared financial information and ratios with the corresponding financial information and ratios for a selected range of companies engaged in the business of trading and exchanging financial and commodity products. With respect to the retail sub-segment, Merrill Lynch analyzed, among other things, the purchase prices and implied transaction multiples paid in comparable transactions involving target companies in the retail energy business.

With respect to the other non-regulated segment, Merrill Lynch compared financial and operating information and ratios with the corresponding financial and operating information and ratios for energy-related industrial service companies and also analyzed, among other things, the purchase prices and implied transaction multiples paid in comparable transactions involving target companies in the retail energy and home services businesses. Finally, with respect to the synfuel tax credits, Merrill Lynch performed discounted cash flow analyses for the period from January 1, 2006 through December 31, 2007, inclusive, using discount rates ranging from 6.5% to 7.5% and no terminal value (because those credits were expected to expire after two years). Merrill Lynch derived a range of selected multiples for these four segments as follows:

 

Segment

  

Metric/Methodology

  

Multiple

Utility:

  

2006E Earnings

   13.0x – 16.0x
  

2006E EBITDA

   7.0x – 8.0x

Merchant Energy:

     

Mid-Atlantic, PPAs, QFs

  

$/KW of Net Installed Capacity

   $150 – $1,500

Wholesale/Trading

  

2006E EBITDA

   5.0x – 6.0x

Retail

  

2006E EBITDA

   5.0x – 6.0x

Other Non-regulated:

  

2006E EBITDA

   5.0x – 7.0x

Synfuel Tax Credits:

  

2 year DCF

   6.5% – 7.5%

Combined, Merrill Lynch’s analyses for each of the four segments indicated a range of implied values per share of Constellation common stock from $50.60 to $67.23. Merrill Lynch noted that, if the portion of the approximate after-tax net present value of expected synergies to be received by FPL Group shareholders (based upon pro forma ownership of Constellation common stock by FPL Group shareholders) were added to the sum-of-the parts selected comparables valuations for Constellation common stock, the high end of the range of implied valuations for Constellation common stock would be increased from $67.23 per share to approximately $73.17 per share.

These ranges of implied value per share of Constellation common stock were based in each case on approximately 181.8 million fully-diluted shares outstanding, after deducting approximately $3.955 billion of net debt (as of September 30, 2005), and approximately $2.065 billion of undervalued contracts. Each implied per share value of Constellation common stock derived from Merrill Lynch’s sum-of-the-parts selected comparables analyses was compared to the per share value for Constellation implied in the merger of $61.90 and the closing price of Constellation common stock on December 13, 2005 of $56.27 per share.

 

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Sum-of-the-Parts Discounted Cash Flow Analyses

Based on financial projections provided by Constellation’s management and provided by FPL Group’s management, Merrill Lynch estimated the present value of the unlevered free cash flows that each of Constellation’s business segments were expected to produce over a three year period. Ranges of terminal values were derived by applying a range of EBITDA multiples to fiscal year 2008 estimated EBITDA for each Constellation business segment except with respect to Constellation’s synfuel tax credits, for which no terminal value was used because these credits were expected to expire after two years. The free cash flows and terminal values were then discounted to present value using a range of discount rates for each Constellation business segment as follows:

 

Segment

   Time Period    Discount Rate      Exit Multiple  

Utility:

   3 Years    6.0% – 7.0 %    7.0x – 8.0 x

Merchant Energy:

   3 Years    9.0% – 11.0 %    7.0x – 8.0 x

Other Non-regulated:

   3 Years    6.5% – 7.5 %    5.0x – 7.0 x

Synfuel Tax Credits:

   2 Years    6.5% – 7.5 %    NA  

Combined, Merrill Lynch’s discounted cash flow analyses of each of Constellation’s business segments indicated a range of implied values per share of Constellation common stock from $52.54 to $74.71. Merrill Lynch noted that, if the portion of the approximate after-tax net present value of expected synergies to be received by FPL Group shareholders (based upon pro forma ownership of Constellation common stock by FPL Group shareholders) were added to the sum-of-the-parts discounted cash flow valuations of Constellation common stock, the high end of the range of implied valuations for Constellation common stock would be increased from $74.71 per share to approximately $80.65 per share.

These ranges of implied value per share of Constellation common stock were based in each case on approximately 181.8 million fully-diluted shares outstanding, after deducting approximately $3.947 billion of estimated net debt (as of December 31, 2005). Each implied per share value of Constellation common stock derived from Merrill Lynch’s sum-of-the-parts discounted cash flow analyses was compared to the per share value for Constellation implied in the merger of $61.90 and the closing price of Constellation common stock on December 13, 2005 of $56.27 per share.

Analysis of FPL Group

Historical Trading Performance

Merrill Lynch reviewed historical trading prices for FPL Group common stock. The review indicated that for the 52-week period beginning on December 14, 2004 and ending on December 13, 2005, FPL Group common stock traded as low as $36.03 per share and as high as $47.84 per share, compared to the closing price per share of FPL Group common stock on December 13, 2005, one day prior to media reports of a proposed merger, of $42.87.

Research Analyst Price Targets

Merrill Lynch reviewed the most recent research analysts’ per share target prices for FPL Group common stock, which ranged from $42.00 to $54.00 compared with the closing price per share of FPL Group common stock on December 13, 2005 of $42.87.

Analysis of Selected Comparable Publicly Traded Companies

Merrill Lynch compared financial and operating information and ratios for FPL Group with the corresponding financial and operating information and ratios for a selected group of publicly traded companies in the energy industry, including Constellation, that Merrill Lynch deemed to be reasonably comparable to FPL Group. The publicly traded companies selected as the primary comparable companies to FPL Group included Allegheny Energy Inc., Constellation, Dominion Resources Inc., Duke Energy Corp. (pro forma for the merger

 

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with Cinergy Corp. announced on May 9, 2005), Edison International, Entergy Corp., Exelon Corp. (pro forma for the merger with PSEG), NiSource Inc., PPL Corp., Sempra Energy and TXU Corp.

The financial and operating information and ratios reviewed by Merrill Lynch included, among other things, the ratio of price per share to estimated EPS for calendar year 2006, and the ratio of total enterprise value (calculated as equity market value, plus (i) total debt excluding securitization debt where applicable, (ii) preferred stock and (iii) minority interests, less cash and cash equivalents) to estimated EBITDA (adjusted to eliminate cash flows dedicated to servicing securitization debt, where applicable), for calendar year 2006. All multiples were based on closing stock prices on December 13, 2005. Estimated financial data for the selected comparable companies were based on First Call estimates and publicly available research analysts’ estimates.

Based on this analysis, Merrill Lynch derived a range of implied values of FPL Group common stock from $37.09 to $45.65 per share using multiples of price per share to estimated EPS for calendar year 2006, and from $37.85 to $45.81 per share using the multiple of total enterprise value to estimated EBITDA for calendar year 2006.

These ranges of implied value per share of FPL Group common stock were based in each case on approximately 394.9 million fully-diluted shares outstanding, after deducting approximately $9.732 billion of net debt (as of September 30, 2005). Each implied per share value of FPL Group common stock derived from Merrill Lynch’s comparable company analysis was compared to the closing price of FPL Group common stock on December 13, 2005 of $42.87 per share.

Sum-of-the-Parts Selected Comparables Analysis

Merrill Lynch analyzed five segments of FPL Group’s business: utility, merchant energy, FiberNet, other subsidiaries and other investments. Merrill Lynch compared financial and operating information and ratios for the utility segment with the corresponding financial and operating information and ratios for a selected group of publicly traded companies with operations deemed to be reasonably comparable to FPL Group’s utility segment including CenterPoint Energy, Inc., Consolidated Edison Inc., Energy East Corp., Northeast Utilities, NSTAR, Pepco Holdings Inc., PG&E Corp., Progress Energy Inc. and Scana Corp.

Merrill Lynch analyzed the merchant energy segment by analyzing the purchase price and implied transaction multiples paid in transactions involving energy generating assets based on the type of fuel such assets used to generate energy. Merrill Lynch reviewed transactions involving facilities that used nuclear, coal, oil, natural gas, hydro, wind, solar, uranium, waste coal, pet coke and waste-to-energy power to generate energy, and analyzed the transaction values of such transactions as a multiple of kilowatt of net installed capacity. Merrill Lynch validated the results of its dollars per kilowatt of net installed capacity multiple analysis for the merchant energy segment by also performing an analysis of implied multiples of 2006 EBITDA from FPL Group’s merchant energy generation plants. The publicly traded companies selected as primary comparable companies to the FPL Group merchant energy segment included Mirant Corp., NRG Energy Inc. and Reliant Energy Inc.

With respect to FiberNet, Merrill Lynch analyzed, among other things, the purchase prices and implied transaction multiples paid in selected comparable transactions involving target companies in the telecommunications industry.

With respect to FPL Group’s other subsidiaries segment, Merrill Lynch performed an analysis of, among other things, the purchase price and implied transaction multiples paid in comparable transactions involving target companies in the retail energy and energy services businesses. Finally, with respect to FPL Group’s other investments Merrill Lynch applied a 25% discount to such investments’ book value.

 

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Merrill Lynch derived a range of selected multiples for these five segments as follows:

 

Segment

  

Metric/Methodology

  

Multiple

Utility:

  

2006 Earnings

  

14.0x – 16.0x

  

2006 EBITDA

  

7.0x – 9.0x

Merchant Energy:

  

$/KW of Net Installed Capacity

  

$150 – $1,650

FiberNet:

  

2006 EBITDA

  

5.0x – 7.0x

Other Subsidiaries:

  

2006 EBITDA

  

5.0x – 7.0x

Other Investments:

  

Discount to Book Value

  

(25.0%)

Combined, Merrill Lynch’s analyses with respect to these five segments indicated a range of implied values per share of FPL Group common stock from $39.96 to $50.63.

This range of implied value per share of FPL Group common stock was based on approximately 394.9 million fully-diluted shares outstanding, after deducting approximately $8.630 billion of net debt (as of September 30, 2005). Each implied per share value of FPL Group common stock derived from Merrill Lynch’s sum-of-the-parts selected comparables analysis was compared to the closing price of FPL Group common stock on December 13, 2005 of $42.87 per share.

Sum-of-the-Parts Discounted Cash Flow Analysis

Merrill Lynch estimated the present value of the unlevered free cash flows that each of FPL Group’s business segments were expected to produce over a three year period. Ranges of terminal values were derived by applying a range of EBITDA multiples to fiscal year 2008 estimated EBITDA for each FPL Group business segment except with respect to FPL Group’s other investments, for which Merrill Lynch applied a 25% discount to such investments’ book value. The free cash flows and terminal values were then discounted to present value using a range of discount rates for each of FPL Group’s business segments as follows:

 

Segment

   Time Period    Discount Rate     Exit Multiple  

Utility:

   3 Years    6.0% – 7.0 %   7.0x – 9.0 x

Merchant Energy:

   3 Years    9.0% – 11.0 %   8.0x – 9.0 x

FiberNet:

   3 Years    12.0% – 16.0 %   5.0x – 7.0 x

Other Subsidiaries:

   3 Years    9.0% – 10.0 %   5.0x – 7.0 x

Combined, Merrill Lynch’s analyses of these four segments indicated a range of implied values per share of FPL Group common stock from $34.10 to $49.43.

These ranges of implied value per share of FPL Group common stock were based in each case on approximately 394.9 million fully-diluted shares outstanding, after deducting approximately $9.803 billion of estimated net debt (as of December 31, 2005). Each implied per share value of FPL Group common stock derived from Merrill Lynch’s sum-of-the-parts discounted cash flow analysis was compared to the closing price of FPL Group common stock on December 13, 2005 of $42.87 per share.

Exchange Ratio Analysis

Merrill Lynch reviewed the per share daily closing prices of Constellation common stock and FPL Group common stock for the period beginning on December 15, 2003 and ending on December 13, 2005, and calculated the historical implied exchange ratios by dividing the daily closing prices of Constellation common stock by those of FPL Group common stock. This analysis showed the split ratio pursuant to the Constellation stock

 

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split of 1.444, given the exchange ratio pursuant to the merger of 1.000, compared to an implied stock split exchange ratio based on December 13, 2005 closing market prices for Constellation and FPL Group of 1.313, and compared to implied historical average exchange ratios for periods ending December 13, 2005 as follows:

 

Period Ending December 13, 2005

   Implied Average Stock
Split Ratio
 

20 Days:

   1.261 x

Three Months:

   1.269 x

Six Months:

   1.315 x

One Year:

   1.293 x

Two Years:

   1.246 x

Implied Exchange Ratio Analysis

Merrill Lynch reviewed the ranges of implied values per share of Constellation and FPL Group common stock derived from each of the analyses summarized above and calculated the maximum range of exchange ratios implied from such analyses. Minimum exchange ratios were calculated for each analysis by dividing the lowest estimated implied value per share of Constellation common stock by the highest estimated implied value per share of FPL Group common stock derived from each analysis. Maximum exchange ratios were calculated for each analysis by dividing the highest estimated implied value per share of Constellation common stock by the lowest estimated implied value per share of FPL Group common stock derived from each analysis. This analysis showed an implied range for the split ratio pursuant to the Constellation stock split as follows:

 

Analyses

   Implied Stock
Split Ratio
 

Historical Trading Performance:

   0.901x – 1.725 x

Research Analyst’s Price Targets:

   1.056x – 1.786 x

Analysis of Selected Comparable Publicly Traded Companies (EPS):

   0.956x – 1.695 x

Analysis of Selected Comparable Publicly Traded Companies (EBITDA):

   1.144x – 1.846 x

Sum-of-the-Parts Selected Comparables:

   1.000x – 1.682 x

Sum-of-the-Parts Discounted Cash Flow:

   1.063x – 2.191 x

Pro Forma Merger Analysis

Based on financial projections provided by Constellation’s management and provided by FPL Group’s management, Merrill Lynch analyzed the pro forma impact of the proposed merger on FPL Group’s EPS for the fiscal years ending December 31, 2007 and 2008. For purposes of this analysis, Merrill Lynch used the expected synergies provided by the management of FPL Group.

Merrill Lynch’s analysis indicated that, including the expected synergies, the proposed merger would be approximately $0.00 to $0.17 accretive to FPL Group’s EPS for fiscal year ending December 31, 2007 and would be approximately $0.00 to $0.20 accretive to FPL Group’s EPS for fiscal year ending December 31, 2008.

Other Factors

In the course of preparing its opinion, Merrill Lynch also reviewed and considered other information and data, including the following:

 

    trading characteristics of Constellation and FPL Group; and

 

    historical market prices for Constellation common stock and FPL Group common stock.

 

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Miscellaneous

Pursuant to the terms of Merrill Lynch’s engagement, FPL Group has agreed to pay Merrill Lynch a fee of $22,000,000 payable according to the following schedule: (a) 25% of the fee payable upon public announcement of the merger agreement, (b) 25% of the fee payable upon approval of the merger by the FPL Group shareholders, and (c) the remainder of the fee payable upon the closing of the merger. FPL Group also has agreed to reimburse Merrill Lynch for reasonable expenses incurred by Merrill Lynch in performing its services and to indemnify Merrill Lynch and related persons and entities against liabilities, including liabilities under the U.S. federal securities laws, arising out of Merrill Lynch’s engagement.

Merrill Lynch has, in the past, provided financial advisory and financing services to FPL Group and Constellation and/or their affiliates and may continue to do so. Merrill Lynch has received, and may receive, fees for the rendering of such services. In March 2004, Merrill Lynch acted as lead underwriter with respect to a $300 million offering of Trust Originated Preferred Securitiessm by FPL Capital, a wholly owned subsidiary of FPL Group. In November 2005, Merrill Lynch acted as a lead remarketing agent on a $506 million FPL Capital Series B Debenture remarketing. In addition, in the ordinary course of its business, Merrill Lynch may actively trade Constellation common stock and other securities of Constellation, as well as FPL Group common stock and other securities of FPL Group, for its own account and for the accounts of customers and, accordingly, may at any time hold a long or short position in such securities.

As described above, Merrill Lynch utilized comparable publicly traded company analysis and comparable transactions analysis to establish a fair trading value of Constellation common stock and FPL Group common stock vis-à-vis the publicly traded companies in the energy, telecommunications and other industries that Merrill Lynch deemed to be reasonably comparable to Constellation and FPL Group, respectively. Although similar, none of the selected comparable companies or companies involved in the selected comparable transactions is identical to Constellation or FPL Group. Accordingly, Merrill Lynch believes a complete analysis of the foregoing comparable company analysis and comparable transaction analysis calculations cannot be limited to a quantitative review of the results. Rather, they involve complex considerations and qualitative judgments concerning differences in financial and operating characteristics of the selected comparable companies and companies involved in the selected comparable transactions as well as other factors that could affect the public trading dynamics of the selected comparable companies as well as Constellation and FPL Group.

In conducting its analyses and arriving at its opinions, Merrill Lynch utilized a variety of generally accepted valuation methods. The analyses were prepared solely for the purpose of enabling Merrill Lynch to provide its opinion to the FPL Group board of directors as to the fairness, from a financial point of view, of the exchange ratio to the holders of FPL Group common stock and do not purport to be appraisals or necessarily reflect the prices at which businesses or securities actually may be sold, which are inherently subject to uncertainty. In connection with its analyses, Merrill Lynch made, and was provided by the management of FPL Group and Constellation with, numerous assumptions with respect to industry performance, general business and economic conditions and other matters, many of which are beyond the control of Merrill Lynch, FPL Group or Constellation. Analyses based on estimates or forecasts of future results are not necessarily indicative of actual past or future values or results, which may be significantly more or less favorable than suggested by such analyses. Because such analyses are inherently subject to uncertainty, being based upon numerous factors or events beyond the control of FPL Group, Constellation or their respective advisors, neither FPL Group nor Merrill Lynch nor any other person assumes responsibility if future results or actual values are materially different from these forecasts or assumptions.

FPL Group retained Merrill Lynch based upon Merrill Lynch’s experience and expertise. Merrill Lynch is an internationally recognized investment banking and advisory firm. Merrill Lynch, as part of its investment banking business, is regularly engaged in the valuation of businesses and securities in connection with mergers and acquisitions, negotiated underwritings, competitive biddings, secondary distributions of listed and unlisted securities, private placements and valuations for corporate and other purposes.

The terms of the merger were determined through negotiations between Constellation and FPL Group and were approved by the FPL Group board of directors. Although Merrill Lynch provided advice to FPL Group

 

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during the course of these negotiations, the decision to enter into the merger was solely that of the FPL Group board of directors. As described above, the opinion and presentation of Merrill Lynch to the FPL Group board of directors were only one of a number of factors taken into consideration by the FPL Group board of directors in making its determination to approve and adopt the merger agreement and the transactions contemplated by the merger agreement, including the merger. Merrill Lynch’s opinion was provided to the FPL Group board of directors to assist it in connection with its consideration of the merger and does not constitute a recommendation to any stockholder as to how to vote or take any other action with respect to the merger. Merrill Lynch’s opinion does not in any manner address the prices at which shares of FPL Group common stock will trade after the announcement of the merger or at which shares of Constellation common stock will trade after the announcement or completion of the merger.

Opinion of Lehman Brothers Inc.

In connection with rendering its opinion, Lehman Brothers performed certain financial, comparative and other analyses described below. Lehman Brothers also relied on these analyses in preparing the presentation made to the FPL Group board of directors. In arriving at its opinion, Lehman Brothers did not ascribe a specific range of value to FPL Group or Constellation but rather made its determination as to the fairness, from a financial point of view, to the shareholders of FPL Group of the exchange ratio, assuming the prior effectiveness of the stock split, to be offered to the shareholders of FPL Group in the merger on the basis of financial and comparative analyses. The preparation of a fairness opinion involves various determinations as to the most appropriate and relevant methods of financial and comparative analysis and the application of those methods to the particular circumstances, and therefore, such an opinion is not readily susceptible to summary description. In arriving at its opinion, Lehman Brothers did not attribute any particular weight to any analysis or factor considered by it but rather made qualitative judgments as to the significance and relevance of each analysis and factor. Accordingly, Lehman Brothers believes that its analyses must be considered as a whole and that considering any portion of such analyses and factors, without considering all analyses and factors as a whole, could create a misleading or incomplete view of the process underlying its opinion. In its analyses, Lehman Brothers made numerous assumptions with respect to industry performance, general business and economic conditions and other matters, many of which are beyond the control of FPL Group and Constellation. None of FPL Group, Constellation, Lehman Brothers or any other person assumes any responsibility if future results are materially different from those discussed. Any estimates contained in Lehman Brothers’ analyses were not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than those suggested by its analyses. In addition, analyses relating to the value of the businesses do not purport to be appraisals or to reflect the prices at which businesses actually may be sold.

Based on the terms of the merger agreement, the agreed upon stock split ratio is fixed at 1.444x, and the actual exchange ratio to be offered to FPL Group shareholders is fixed at 1.000x. Lehman Brothers discussed the 1.444x stock split ratio with the FPL Group board of directors and used this stock split ratio as the basis for its opinion as to the fairness of the exchange ratio and its oral presentation to the FPL Group board of directors.

In arriving at its opinion, Lehman Brothers reviewed and analyzed, among other things:

 

    the merger agreement and the specific terms of the merger;

 

    publicly available information concerning FPL Group and Constellation that Lehman Brothers believed to be relevant to its analysis, including each of their respective Annual Reports on Form 10-K for the fiscal year ended December 31, 2004, Quarterly Reports on Form 10-Q for the quarterly period ended September 30, 2005 and other relevant filings with the SEC;

 

    financial and operating information with respect to the business, operations and prospects of FPL Group furnished to Lehman Brothers by FPL Group, including financial projections of FPL Group and extensions of such financial projections, in each case, prepared by FPL Group’s management;

 

    financial and operating information with respect to the business, operations and prospects of Constellation furnished to Lehman Brothers by FPL Group, including financial projections of Constellation prepared by the managements of Constellation and FPL Group;

 

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    trading histories of FPL Group common stock and of Constellation common stock from December 13, 2003 through December 13, 2005 and a comparison of each of their trading histories with each other and with those of other companies that Lehman Brothers deemed relevant;

 

    a comparison of the historical financial results and present financial condition of FPL Group and Constellation with each other and with those of other companies that Lehman Brothers deemed relevant;

 

    a comparison of the financial terms of the merger with the financial terms of certain other recent transactions that Lehman Brothers deemed relevant;

 

    the relative contributions of FPL Group and Constellation to the historical and future financial performance of the combined company on a pro forma basis; and

 

    the potential pro forma impact of the merger on the future financial condition and financial performance of FPL Group, including the cost savings, operating synergies and strategic benefits expected to result from the combination of the businesses of FPL Group and Constellation as estimated by the management of FPL Group (which we refer to as the expected synergies in this section “—Opinion of Lehman Brothers Inc.”) and purchase accounting adjustments to the basis of Constellation for reporting purposes under generally accepted accounting principles in the United States as estimated by the management of FPL Group (which we refer to as the purchase accounting adjustments in this section “—Opinion of Lehman Brothers Inc.”).

In addition, Lehman Brothers had discussions with the managements of FPL Group and Constellation concerning their respective businesses, operations, assets, liabilities, financial condition and prospects and undertook such other studies, analyses and investigations as Lehman Brothers deemed appropriate.

In arriving at its opinion, Lehman Brothers assumed and relied upon the accuracy and completeness of the financial and other information used by Lehman Brothers without assuming any responsibility for independent verification of such information and further relied upon the assurances of the managements of FPL Group and Constellation that they were not aware of any facts or circumstances that would make such information inaccurate or misleading. With respect to the financial projections of FPL Group and Constellation, upon advice of FPL Group, Lehman Brothers assumed that such projections were reasonably prepared on a basis reflecting the best currently available estimates and judgments of the managements of FPL Group and Constellation as to the future financial performance of FPL Group and Constellation, respectively, and that FPL Group and Constellation would perform substantially in accordance with such projections. Lehman Brothers assumed, upon the advice of FPL Group, that the positions in the trading book of the Constellation Energy Commodities Group were accurately reflected in the financial statements of Constellation and the financial impact of such positions as reflected in the financial projections of Constellation would be realized substantially in accordance with such estimates and relied upon such financial statements and projections in performing its analysis. Lehman Brothers also assumed, upon the advice of FPL Group, that the amount and timing of the expected synergies were reasonable and the expected synergies would be realized and purchase accounting adjustments recorded, in each case substantially in accordance with such estimates, and Lehman Brothers relied on the expected synergies and purchase accounting adjustments in performing its analysis. In arriving at its opinion, Lehman Brothers did not conduct a physical inspection of the properties and facilities of FPL Group or Constellation and did not make or obtain any evaluations or appraisals of the assets or liabilities of FPL Group or Constellation. Lehman Brothers further assumed, upon advice of FPL Group, that all material governmental, regulatory or other consents or approvals necessary for the completion of the merger would be obtained within the constraints contemplated by the merger agreement. Lehman Brothers’ opinion necessarily was based upon market, economic and other conditions as they existed on, and could be evaluated as of, the date of Lehman Brothers’ opinion.

In addition, Lehman Brothers expressed no opinion as to the prices at which shares of FPL Group common stock or Constellation common stock would trade at any time following the announcement of the merger or Constellation common stock would trade at any time following the completion of the merger.

The following is a summary of the material financial analyses used by Lehman Brothers in connection with providing its opinion to the FPL Group board of directors. The financial analyses summarized below include

 

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information presented in tabular format. In order to fully understand the financial analyses used by Lehman Brothers, the tables must be read together with the text of each summary.

Comparable Companies Analysis

In order to assess how the public market values shares of comparable publicly traded companies, Lehman Brothers reviewed and compared specific financial multiples relating to FPL Group and Constellation to corresponding financial ratios for comparable publicly traded utility companies. Lehman Brothers selected these companies based upon its views as to the comparability of the financial and operating characteristics of these companies to FPL Group and Constellation.

The companies included in the comparable companies analysis for FPL Group were:

 

    Edison International, Inc.

 

    Entergy Corporation

 

    PPL Corporation

 

    Ameren Corporation

 

    The Southern Company

The companies included in the comparable companies analysis for Constellation were:

 

    Dominion Resources, Inc.

 

    Entergy Corporation

 

    Exelon Corporation

 

    PPL Corporation

 

    Edison International, Inc.

 

    Sempra Energy

Lehman Brothers used publicly available research analysts’ estimates to compare specific financial multiples of these companies to FPL Group’s and Constellation’s:

 

    stock price to 2006 estimated earnings per share, or EPS;

 

    stock price to 2007 EPS;

 

    firm value to 2006 estimated EBITDA, where firm value means market equity value as of December 13, 2005 plus the following balance sheet items as of September 30, 2005: debt, minority interest, nonconvertible preferred stock and all out-of-money convertible securities less cash, and where EBITDA means earnings before interest, taxes, depreciation and amortization; and

 

    firm value to 2007 estimated EBITDA.

Multiples were based on closing stock prices on December 13, 2005 which was the last day of trading prior to published rumors of a pending transaction between FPL Group and Constellation. The following table reflects the results of the analysis:

 

     Firm Value to EBITDA     Stock Price to EPS  
     2006E     2007E     2006E     2007E  

Comparable Companies:

Selected Range

        

FPL Group

   7.75x – 8.25 x   7.50x – 8.00 x   14.50x – 15.50 x   13.50x – 14.50 x

Constellation

   7.50x – 8.00 x   7.25x