To The Moon

Constellation Energy Corp (CEG) is the largest nuclear plant owner in the US. CEG has 32GW in generation capacity, which includes 22GW in nuclear capacity (>85% of CEG’s generation) and 11GW in capacity across natural gas, oil, hydro, solar and wind. CEG’s key customers include Fortune 500 companies, with its service areas near major data centre (DC) and manufacturing hubs, such as (i) Midcontinent Independent System Operator (MISO) (i.e., largest regional transmission organisation in US including states such as Indiana, Mississippi, Missouri, Michigan), (ii) Electric Reliability Council of Texas (ERCOT), (iii) Pennsylvania-New Jersey-Maryland (PJM) (e.g, Kentucky, North Carolina) and (iv) the mid-Atlantic region. CEG is active in M&A e.g., 44% stake acquisition in 2.6GW South Texas nuclear project in Oct 2023.

Investment Overview

Beneficiary to burgeoning DC electricity demand, with elevated power prices a positive tailwind. Nuclear is a reliable source of clean energy with robust capacity factor of >90% (versus solar/wind at 20-30%), and hence is a favourable source of energy for power-intensive industries such as data centers. CEG is strategically located near major DC and manufacturing hubs such as PJM and is a key beneficiary to rising DC/commercial power demand, testament by its recent win with Microsoft in Oct 2023. We anticipate continued positive momentum in DC power demand, with PJM utilities citing >50GW of data center load growth and investments upward of USD10bn, which can help to drive CEG’s future earnings outlook. Further, US forward power prices continue to trade at elevated levels (especially in PJM West) amid tight power supply in unregulated markets, another positive tailwind to CEG’s earnings.

Long-term earnings visibility at >10% CAGR on the back of IRA’s tax credits; Repeal risk minimal on nuclear’s bipartisan support. IRA’s expanded nuclear incentives effective between 2024 – 2032 will provide up to USD15/MWh in nuclear production tax credits (PTC) when revenues are between USD25.00/MWh to USD43.75/MWh, essentially setting a nuclear-power price floor of USD43.75/MWh while allowing producers to benefit from earnings upside when market power prices exceed those levels. Thanks to the nuclear PTCs, CEG see strong earnings visibility with a guided >10% EPS CAGR until 2028. Amid ongoing concerns surrounding the US Presidential election, we see limited risks relating to the repeal of nuclear PTCs, given that nuclear power has bipartisan support from both Democrats and Republicans. Constructive government policies will continue to serve as structural tailwinds for CEG, with the US Senate recently passing a bill to accelerate the deployment of nuclear energy capacity in June 2024.

Upgraded 2024 guidance, with room for upside. CEG’s 2Q24 results was a clean beat on strong Commercial & Industrial (C&I) performance and widened power margins, with management upgrading its 2024 EPS guidance by +5%. Further earnings growth levers include (i) elevated power prices above PTC floor, (ii) above-historical average power margins/volatility and (iii) positive momentum in power off-take contracts, especially from hyperscalers/DCs. Other positive catalysts include (i) continued M&A, albeit there remains a limited number of potential nuclear targets and (ii) share buyback programme.

Extreme weather conditions could impact power prices, while slowdown in data center/hyperscaler contracts could cap earnings growth. Policy risks include uncertainties around the hydrogen production-tax-credit rule and potential repeal of the IRA. Separately, inflationary pressures relating to CEG’s fuel expenses (>50% of CEG’s total operating expenses) i.e., uranium fuel, could depress power margins/earnings.

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