This article has been written by an expert contributor Munro Partners
Who are they?
Constellation Energy (CEG) was recently spun out of Exelon Energy in January and is an independent power producer that owns and operates the largest nuclear fleet in the US, holding more than 55% of the nation’s unregulated capacity. With plants stretching from the Midwest across to New York, Constellation provides greater than 165 Terawatt-hours (TWh) of carbon-free electricity to Americans each year, which amounts to approximately120mn metric tons of CO2 avoided annually.
Why do we like Constellation Energy?
We view nuclear as the cornerstone of the US energy transition. Without nuclear energy, it is highly unlikely that the US can meet their Paris Agreement targets to reduce carbon emissions by at least 50% by 2030 (see diagram below), with renewables only accounting for 18% of US power generation today. Nuclear energy also boasts the highest utilisation rates for carbon-free energy sources, and therefore, its ability to provide 24/7 baseload power to the grid is pivotal to ensuring energy security and reliability. This will be particularly important as the transition progresses, with variable weather conditions (wind speeds, sun shading etc.) impacting the utilisation rates of renewables.
We like Constellation for their hedged exposure to rising power prices (that are determined by natural gas prices as the marginal cost of fuel), while their operating costs remain relatively constant, resulting in strong earnings growth and cash flow generation.
More recently, the Inflation Reduction Act (IRA) has drastically improved the prospects of nuclear energy in the US, providing production tax credits (PTCs) over the next 10+ years that give operators like Constellation long-term certainty by effectively setting a ‘floor’ on the power price they receive on their carbon-free generation.
We see numerous options to the upside – from aggressive capital allocation plans to investment in pink hydrogen (where electrolysers are powered by nuclear energy to produce clean hydrogen) – allowing Constellation to also claim the generous hydrogen PTCs as they lead the decarbonisation of today’s approximately 90 million ton fossil fuel hydrogen market.
Written by Munro Partners, October 2022.
Disclaimer: The material contained in this publication has been furnished for general information purposes only as is not investment advice of any nature. The companies mentioned are for illustrative purposes only, is not a recommendation and may or may not be held by a Munro fund. There can be no guarantee that any projection, forecast or opinion in these materials will be realised. As an actively managed fund, Munro continually assesses each portfolio holding and the views expressed in this document may change at any time subsequent to the date of issue. This information has been prepared without taking account of the objectives, financial situation or needs of individuals. No representation or warranty is made concerning the accuracy of any data contained in this document.
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