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.

Stimulus Watch: China keeps throwing out the dough

Apparently China is making a mild attempt to preempt a credit crisis in China...

"Premier Wen Jiabao said yesterday China will “well manage” the pace of credit growth after a record 9.59 trillion yuan of new loans were doled out in 2009, stoking concerns of asset bubbles and worsening credit quality. China’s central bank last week raised the proportion of deposits banks must set aside as reserves for the first time in 18 months."

Lending 9.59 trillion yuan is lending over 25% of GDP in one year. Let's see what they plan for next year...

"China has told some banks to limit lending and will restrict overall credit growth in the nation to 7.5 trillion yuan ($1.1 trillion) this year, banking regulator Liu Mingkang said."

This amount is still over 20% of GDP of nominal loans in one year. Wow.

In addition, the fiscal stimulus keeps rolling...

"...the 4 trillion renminbi multiyear fiscal package, which was announced last year, which is equivalent to 15% to 20% of GDP. ...It's a massive undertaking, all funded internally by the Chinese government plus some private equity participation."

I am not sure when China's fiscal stimulus effect is expected to peak. If someone has found a reference, let me know.

Overall, should you go long China? Can't say. Looks tempting. Despite the huge run up already, i will look into opportunities.

Stimulus Watch: Not more bad is good

Over the next few months, the receding stimulus will have a negative effect. But what has it done thus far?

According to the rail car stats, nothing but stabilize the situation.

But looking at a bigger picture, things have been less worse.

Understanding what this will mean in the next few quarters is "above my pay grade".

This blog will continue to look for opportunities, long or short, wherever they arise.

GMK: Value south of the border

Is there a more stable business than having the #1 torilla brand in Mexico?

Has $3B USD in sales and is a market leader in the US, Mexico and a few other countries. They saw a 1% increase in revenue this year (excluding currency issues). Operating margin for the business increased in 2009 to 6.3% from 4.6% last year. Operating profits totaled close to $100m USD for 2009. YAWNN!!!!! Are you bored yet? Let's get to the real questions.

A year ago GMK was caught in a horrible hedging position as corn prices collapsed that caused an $800M+ USD loss for 2008. The GMK was saved by banks (most likely the same banks that sold them the derivatives) and now is liable for a $660m USD note which comes due in 2014. So why invest? Value.

The current market capitalization for GMK is $1B. At the current amortization rate (and assuming they once again refinance to a yet smaller debt position again in 2014) the company should still hold at least a $1.5B market cap. The credit crisis may not be over, but viable businesses like GMK are not likely to remain exposed in the same way as pre-2008. Let's take advantage of this painfully gained wisdom and buy GMK.

The author recommends buying at $8.50.

IMAX changed the movie business

Did you see Avatar? Everyone did. But did you see Avatar on 3-D IMAX? If so, then you really saw Avatar. The game has changed. Catch the ride.

3-D and IMAX have not only changed the future of the movie business. They have changed the business model of the movie business. IMAX used to be just science documentaries at your local museum. IMAX has made deals with all but one of the major studios to collect 1/3 of the box office take for any feature shown in their theatres. To see Avatar costs $10.50 for a regular adult ticket, but $16.50 for the IMAX experience. Just Avatar alone will put them in the black for 2009.

But the 2010 line up is just as impressive...Alice in Wonderland, Shrek, How to Train Your Dragon, Toy Story 3, and Twilight:Eclipse. It will be a while before a movie like Avatar invests as much in cutting edge graphics. But, as James Cameron has noted, the platform is now there.

"The box office success of “Avatar” boosted analyst estimates for Imax Corp.’s fourth-quarter EBITDA estimate to $20.3 million from $13.7 million and earnings per share to 15 cents from five cents. [EBITDA or earnings before interest, taxes, depreciation and amortization, is a key measure of operating cash flow.] The Firm says IMAX’s share of the box office has risen to the 15%-18% range from the typical 8%-12% from just 3%-4% of the screens, showing the format is a “must-have” for multiplex operators."

International growth is also being initiated due to brand recognition and word of mouth about the IMAX experience. The game has changed worldwide, if an action movie is a must see, then it must be seen on IMAX.

The author recommends buying IMAX at $13.10.

Buy a Warren Buffett throwaway: Constellation Energy

Constellation Energy is an energy trading holding company with a large regulated utility, Baltimore Gas & Electric, as a subsidiary. In late 2008, the bankruptcy of Lehman Bros caused a massive liquidity crunch for Constellation Energy holding company. The ensuing capital crunch for their positions led them to seek Warren Buffett to provide the capital to allow the holding comapany to stay out of bankruptcy. Warren the White Knight, after staving off creditors sold his position and for his charity received break up fee of $1B from Constellation Energy.

The story was not over. With it's credit rating shot because of the trading mishap, Constellation Energy still needed to secure greater financing. Since the credit markets were closed to risky investments, the company sold half of it's assets to EDF, the French state owned electric utility for $4.5B. The story was still a nail biter because there was political pressure in France not to do the deal. For Constellation Energy, this was a quick end to their liquidity issues or possibly another capital crisis if the deal fell through. On Nov 6th, the deal completed and now CEG is on stable ground.

Reviewing their 3rd quarter statement, the Constellation Energy holding company still holds over $1B in energy trading instrument exposure.

So why touch this dog with bad management? Purely on value. Constellation Energy is a company with annual sales of $19B for 2008 (expected at $16B in 2009) with a market cap of $7B. Now that the EDF joint venture is closed, bankruptcy is absolutely off the table. The company turned profitable again in the 3rd quarter of 2009. Is it sustainable? I don't know. But even if the company breaks even, it is a steal.

Just two years ago, this stock was $60 and had a 3% yield.

I am buying CEG at market. On Jan 4th and it will be the first thing I do in the new year.

Even better than the common shares are the subordinated debt of the Baltimore Gas & Electric (BGE) subsidiary. Thus far, all the problems with CEG have come from the energy trading holding company, the regulated utility has been uneffected other than the fact that they have leaned on the subsidiary for capital during the capital crisis.

As a measure for closing the sale to EDF, CEG committed to recapitalizing BGE.

"The PSC ruled Oct. 30 that Baltimore-based Constellation (NYSE: CEG) could go forward with the EDF deal if it included a handful of concessions. They included:

...

• A $250 million investment into BGE; and,

• A restriction from drawing dividends from BGE if it would drop the utility’s cash reserves below a certain level."


Thus I am also recommending again BGE Capital Trust II (NYSE:BGE-PB). The subordinated debt has a 7.5% yield and is selling 10% below par.