This summary is based on the second quarter fiscal 2008 earnings call conducted by Constellation Energy Group Inc. (CEG) on July 31, 2008.
Management:
Vice Prezsident of IR and Financial Planning and Analyst: Kevin Hadlock
Chairman, President and CEO: Mayo A. Shattuck III
EVP and CFO: John R. Collins
President, Constellation Energy Resources, and EVP: Thomas V. Brooks
Co-Chief Commercial Officer of Constellation Energy Resources: George E. Persky
Key Investors Issues
- EPS were 96 cents a share compared to 64 cents a share last year.
- Net income rose to $171.5 million from $116.3 million a year ago.
- Revenue rose 4% to $5.08 billion from $4.88 billion a year ago.
Second Quarter Highlights
GAAP earnings were 95 cents per share.
- After special items, adjusted earnings were $1.82 per share.
- As expected, the company recorded a negative 59 cents special item at BGE related to the $188 million customer credit that was included in April and will be applied to customer''s bill in September. The credit also causes a reduction in BGE''s full year effective tax rate which impacts all four quarters.
- In addition to classifying the $188 million credit as a special item in the second quarter, the impact of the lower effective tax rate on normal earnings would be classified as a special item in each quarter. The company had a 19 cents loss on economic non-qualifying hedges. The loss was related primarily to gas transportation.
Compared to prior year, BGE was up 1 cent on adjusted basis due to higher electric transmission revenue and the benefit from the Maryland settlement, which was partially offset by higher storm expenses. BGE''s second quarter 2008 adjusted earnings of 9 cents per share were over the upper end of the second quarter guidance range of 4 cents to 8 cents per share.
- Compared to the second quarter of last year Merchant adjusted earnings were up $1.18 per share. On the positive side, Global Commodities was favorable $1.20 per share driven by strong new business results and an increased backlog realization, compared to a relatively weak second quarter 2007. Customer Supply was favorable 14 cents per share, primarily driven by favorable mark-to-market results in retail gas versus the second quarter of last year.
- Generation was unfavorable 19 cents per share, primarily driven by the differences in plant refilling outages at nuclear plants, as compared to the same quarter of last year. Higher costs to improve fossil peaking unit liability in response to PJM''s RPM capacity market and unplanned outages at Baltimore coal plant.
Customer Supply realized gross margin of $277 million.
- Year-over-year, on a comparable basis, gross margin is up $66 million or 30%. The difference is primarily due to increased new business at retail gas.
- The retail power retention rates, including the customers that remain on a month-to-month basis, increased to 76%, consistent with last year''s rate. Of the customers the company has retained, remained on short term contracts due to the high price energy environment that persisted through the second quarter.
- Gas price margins were $2.49 per megawatt hour, down from the $3.01 level of the second quarter 2007, primarily reflecting increased competition, especially in Texas and New England.
- Product mix was more weighted towards lower margin products, compared to the same period last year. Retail Gas retention rate remained strong at 95% and realized margins improved by 10 cents over last year, partially driven by Midwest acquisition of Cornerstone Energy.
- Customer Supply group backlog represents about 91% of the gross margin expected to be realized.
Global Commodities group total contribution margin was $486 million, including backlog of $47 million and $439 million of new business.
- Backlog realization was up $15 million versus the same period last year. New business was $386 million higher versus last year''s second quarter, driven primarily by an increase in portfolio, management and trading of $346 million. The company entered the second quarter bullish on energy commodities and certain price relationships among commodities and locations given of what was observed in the first quarter.
- The company benefited in power, gas and coal businesses from what turned out to be a rapidly rising market, even while maintaining risk levels comparable to the fist quarter. In addition, energy investments were up year-over-year driven by a $76 million gain on the sale of certain gas assets in Arkansas.
Through the end of the second quarter, $1.2 billion has been spent of $2.4 billion capital program.
- In addition to capital expenditures, BGE has $300 million of debt maturities this year, which is planned to re-finance.
- In June, the company added an additional $1.1 billion of credit facilities to support the continued growth of the business and to maintain an adequate liquidity position.
- Net available liquidity was $2.9 billion compared to 3.1 billion at the end of March.
- The company added an additional $1.1 billion in credit facilities to address increase in energy commodity prices, which resulted in the issuance of an additional $1.75 billion in letters of credit to support risk management and hedging activities.
- Adjusted cash flow from operating activities was a positive $262 million.
- Adjusting for investing activities, free cash flow was a use of $466 million primarily driven by capital expenditures. Cash flow from financing activities, which primarily reflects the debt insurances, was a positive $1 billion resulting in a change in net cash of $568 million.
- Merchant generated approximately $450 million in cash flow from operations, excluding changes in working capital. Increases in working capital were driven primarily by $400 million of additional initial margin requirements under new exchange rules.
- BGE generated $187 million of adjusted operating cash flow. While BGE''s GAAP net income was negative due to the one-time customer credit associated with the Maryland settlement, actual cash flows for the settlement will occur later this year.
- Total debt outstanding increased to $5.6 billion, reflecting the new issuances previously noted. Price changes and hedging contract expirations running through accumulated other comprehensive income, were major contributor to the increase in equity. These changes caused the net debt to total capital metric to improve by 100 basis points.
- Adjusting for third party collateral held and adjustments to equity from changes and accumulated other comprehensive income, adjusted net debt to adjusted total capital increased to 42%. All of these metrics exclude the impact of the BGE securitization debt.
