Constellation Energy Group's New Math

Constellation Energy (CEG) reported its Q2 earnings on 7/30 in an 8-K statement that is provided below. They reported adjusted quarterly earnings of $1.08/share, which is 40% lower than its 2008 adjusted Q2 earnings of $1.82/share. Under normal circumstances, a 40% profit reduction would be cause for alarm, but in light of the prior year, it bolsters the company's claims that they are on the road to recovery.

Unless, of course, you insist on using accounting. If you're incapable of "outside the box" thinking and require the use of GAAP, then CEG's Q2 earnings were $0.04/share and constituted a 95% reduction in year-over-year profit.

On page 4 of the 8-K, Shattuck and the Enronettes justify this distorting earnings by 27 times ($1.08 vs $0.04) as follows:
We present adjusted EPS because we believe that it is appropriate for investors to consider results excluding these items in addition to our results in accordance with GAAP. We believe such a measure provides a picture of our results that is more comparable among periods, since it excludes the impact of items such as impairment losses, workforce reduction costs or gains and losses on the sale of assets, which may recur occasionally, but tend to be irregular as to timing, thereby distorting comparisons between periods. However, investors should note that this non-GAAP measure involves judgment by management (in particular, judgment as to what is classified as a special item to be excluded from adjusted earnings). This non-GAAP measure is also used to evaluate management’s performance and for compensation purposes.
(Emphasis is mine.)
In other words, the non-GAAP earnings omit non-recurring charges in order to provide a picture of "normal" operations. In Constellation's case, the exception is the rule and a quarter without extraordinary charges would be an anomaly. Clearly, these figures are used being used to justify senior management's looting of the treasury and to deceive unwary investors. .

On the other hand, perhaps I'm being narrow-minded with respect to Constellation's accounting practices. Since I have a current $128 Constellation electric bill in front of me, I can't think of a better opportunity to practice some of Shattuck's "outside the box" methodology. Thus, I see no reason not to submit $4.74, which is a 27 time reduction that represents, in the judgement of Shortbus management, a truer picture of my power consumption.

No positions in CEG.


1 comment:

  1. Exception seems the rule w/ most publicly traded companies. People's fixation w/ earnings of any kind seems misplaced, given their 'construct' nature to begin with.