Tuesday, January 26, 2010

CEG: Credit Crisis Survivor on the Rebound

Constellation Energy - a company with $21B in sales and $7B market cap. Credit crisis survivor. This company was caught in a debt trap with the bankruptcy of Lehman at height of the credit crisis. CEG made it through as an independent company, but have they solved the problem?

With the completion of the $4.5B sale of 50% of their nuclear energy business to EDF, the company is now on solid footing. This raised $2B in cash to the balance sheet. The company also moved ahead with debt reduction starting with a $1B payoff of debt due in 2012.

But is the company still exposed to another cash shortfall? There are two areas of concern 1) derivatives and 2) debt.

Derivative exposure is still at $1B. Worst case scenario, they use their new cash balance to handle any problems. (CEG 3Q 2009 10-Q)

What about their debt schedule (including BGE)?

Not bad.

Although current earnings are neglible due to deleveraging, this is a temporary circumstance. Overall, earnings should return to $200m per quarter over the next year due to the rebound in energy prices and the economy. This is modest compared to the previous track record which recorded close to $700m+ in earnings per year throughout the last decade.

Bottom Line: CEG looks like it has eliminated it's debt problem has tremondous earnings upside to drive value for investors.

The author is long CEG.