Constellation Energy: Well Below Its Intrinsic Value

A few days ago we talked about Constellation Energy (CEG) and the EDF (EDFEY.PK) deal. I made a bunch of points about how I value the company, based mostly on assumptions I had made surrounding the EDF offer. What I missed was EDF's analysis of what CEG was worth. I have included it below in this table:

CEG's Valuation according to EDF
Asset	Value (billions USD)
Non-Nuclear Generating Assets (6,595MW x implied $862/kw)	$5.7
50% of Nuclear Generating Assets	$4.3
Baltimore Gas and Electric (7x 2009E EBITDA of $593mm)	$4.2
Global Commodities and Customer Supply	$0.3
Unistar JV	$0.3
Corporate Overhead	-$0.1
Total Firm Value before net debt and transaction adjustments	$14.7
Net Debt	-$6.9
Mid Amerian Transaction and termination fees	-$0.6
EDFI sale proceeds (nuclear, net of tax)	$3.2
Total net debt and transaction adjustments	-$4.3
Implied total Equity Value	$10.4
Implied value per CEG common stock ($/share, assuming 199.9mm shares)	$52.00

So that's why EDF assumes their deal is worth $52/share to common shareholders. Of course cash is king, so right now CEG is trading for less than half of that. Importantly the market probably disagrees on a bunch of things like BG&E's value, Global Commodities, Unistar, and the Non-Nuclear generating assets... or seemingly everything. The main problem, though, is in the valuation of the non-nuclear generating assets. What I, and seemingly everyone else, has missed is the prescribed value put on CEG's non-nuclear generating assets in the EDF bid. That table is below:

Assets	Price ($ millions)	Implied $/kw	MW
Handsome Lake	$141	$525	250
Brandon Shores	$1,658	$1,290	1300
Perryman	$162	$455	355
ACE Cogeneration	$57	$1,769	31
Panther Creek / Colver Power	$71	$967	70
Sunnyside Cogeneration	$23	$892	51
Keystone	$466	$1,328	359
Conemaugh	$290	$1,601	181
Herbert A. Wagner 1 & 4	$103	$210	490
Herbert A. Wagner 2 & 3	$562	$1,231	457
C.P. Crane	$334	$868	398
Total	$3,867	$1,019.40	3,942

I've added some of my own information (MW, and the totals). There seems to be some discrepancy between the CEG website and EDF's data, which is relatively minor, except in the case of Sunnyside Cogeneration. That's not really material though to the overall point, which is that EDF will not be buying ALL of the plants listed for $2 billion, merely some of them. Importantly they are willing to pay the prices listed above for those particular assets. So CEG could elect to sell Brandon Shores, for example, and receive $1.658 billion for it. This puts a definitive market price on all of these assets, lending credence to EDF's theory that the valuation is materially higher than the market is currently indicating.

The one thing that kind of bothers me about the whole deal is why it is structured this way. It seems there is significant tax leakage (which the company says they are working to minimize) inside the company, which is effectively lost money to shareholders. If the deal had instead been structured as a tender offer, where EDF put something out there to buy 50% of CEG (minus the 8.7% they already own), it would seem like both parties would be better off. EDF would receive half of everything nuclear, BG&E, non-nuclear) and could have paid something like $45/share (about 84 million times, for a total of $3.78 billion). Any extra funds that they set aside for this transaction (the $2 billion put, the $700 million they would save at $45/share) could have gone towards CEG's liquidity (in the form of a credit line). This would have meant no asset sales, and therefore no tax effects inside the company, and all tax effects would then be pushed to the shareholders that sell at $45/share.

That would seemingly have been better for both EDF and CEG shareholders (remember cash is king), the only real concern for EDF would be if no one tendered at $45/share. This particular deal (where EDF buys half of just the nuclear assets) ensures that EDF gets the assets they want, even if they are paying a higher price for it than they otherwise could have.

I have a long position in CEG, so I may be biased, but I do find it funny the way the market works. CEG, and their story, is like a microcosm for the whole market. Credit concerns lead to bankruptcy concerns, someone comes in and sees the value of the company (Mid American), a second bid comes in (EDF), there is some initial euphoria around the second bid ($30ish share price), and finally investors don't want to risk any money so they sell when a cash offer is off the table. Sounds a lot like any financial company that was taken out in the past few months (minus the second bidder thing, that was only Wachovia). Where the market always seems to fall apart is if there is any work to be done to value the company.

It wasn't a terrible amount of work for me to put this together; in fact, almost all of the work was already done for me. While it doesn't necessarily lead me to the conclusion that CEG is worth $52/share, it does make me believe that it's worth at least $30/share with the potential for some upside. It doesn't really matter what market we are in, people don't do much in the way of homework. But in a bull market the exuberance over having two bidders would have led to a $52+ share price. In this bear market we end up at half that.

Disclosure: Long CEG

Comments

[Phantom Gre...:]

The last time you discussed CEG you mentioned management, as did the comments. So, has anything changed? If not, why are you still betting on the buffoons that nearly destroyed the company?

What about investing in a company that has management that knows what they are doing? Surely those managers are out there; some may even be running utilities.

Clowns that nearly destroy a company don't deserve another chance.

2008 Dec 27 02:56 PM

[Diegojames:]

WHAT COMPANY IS THAT? I AM LOOKING .
DIEGOJAMES
PORTER RANCH , CALIFORNIA

Jan 11 12:38 PM

[Diegojames:]

GREAT ARTICLE ON CEG. I RECENTLY BOUGHT HE BECAUSE OBAMA GOES TO HAWAII AND WILL GIVE THIS UTILITY A BOOST...ALSO A NEW GUY IS OVER THERE WHO PUTS SOLAR PANELS ON COMMERCIAL BUILDING ROOFS.
IMAGINE THAT.....
BUT CEG IS worth a look....if t he FRENCH BUY it that is good becuse thFCey are not CHICKEN with NUCLEAR POWER used to power their TGV -trains of great speed-which are very nice and beat a AIRPLANE ride in a crowded ANGRY airplane without a parachute and everyone under investigation.
SOLD WELLS FARGO ,XLB ....BOUGHT MORE CVS on the drop...AMERICA NEEDS PRESCRIPTIONS....and I supply them.

Jan 11 12:49 PM

[sjcg:]

Does your intrinsic value calculation remain the same now CEG released Q4 earning and more detailed analysis of merger costs? Still above $30/share?

Now it's really under valued if that's the case...

EDF's purchase alone (using liquidation analysis) should appear to be more than the current mkt cap.

What to you think?

Feb 19 01:45 AM