Constellation Energy: A New Clean Electricity Pick

Constellation Energy: A New Clean Electricity Pick

Allkindza/E+ via Getty Images Europe’s energy shortages and high energy prices here have made clear the importance of affordable, reliable, as well as environmentally-friendly energy supplies. Thus, Exelon’s ( EXC ) spinoff of its Exelon Generation nuclear plants and other generating assets into the standalone and unregulated Constellation Energy Corporation (NASDAQ: CEG ) provides an opportunity to consider a “new” large, clean-energy company.

Despite its recent (January 2022) spinoff, Constellation Energy is a well-established provider of clean energy. By the numbers, the company has:

*electricity generating capacity of more than 32,400 megawatts;

*revenues of $17 billion;

*total assets of $49 billion;

*the country’s lowest-carbon fleet among large power producers;

*nearly 12,000 employees.

I reviewed parent company Exelon a year ago as it was entangled in a bribery case with former Illinois House Speaker Michael Madigan. (Madigan has been indicted on 22 counts of racketeering and bribery.) That entanglement has since resolved for Exelon.

I recommend Constellation as a speculative buy to ESG and growth-oriented investors (but not dividend investors). Because electricity demand is increasing and we have an “all of the above” need for energy, Constellation is a well-timed, well-positioned, and experienced-though-new company. US Electricity Demand and Macro

According to the EIA’s 2022 forecast , electricity growth is expected to be about 1%/year for the next three decades. The chart below shows growth rates , not predictions of absolute demand. US electricity growth (EIA) Ongoing federal and state decarbonization policy goals play directly to Constellation’s strength: its large fleet of nuclear generation plants, with high capacity factors, have been and will be key in providing non-hydrocarbon (“clean”) electricity.

The biggest US economic concern is large, growing, and ongoing inflation that will affect everything bought and sold, including energy and electricity. For example, the producer price index just registered a challenging annualized increase of 10.0%. More generally, high US federal government spending has lifted inflation across the board. The Federal Reserve is beginning a series of interest rate boosts in response, with an initial 0.25% just announced.

There are many ways to discuss total US spending vis-à-vis revenues. One illustrated below from the St. Louis Federal Reserve is rising total public debt relative to gross domestic product. debt to GDP comparison (St. Louis Federal Reserve) CEG’s 2021 Results

Although Constellation Energy was not a standalone company in 2021, its 880-page 10-K provides substantial information, about how its operations performed:

*Revenues of $19.6 billion;

*Operating loss of -$346 million, including high purchased energy costs due to winter storm Uri;

*Net loss of -$83 million;

*EBITDA of $3.81 billion.

The 2021 net loss of -$83 million compares to 2020 net income of $579 million and 2019 net income of $1.2 billion Constellation Energy Operations

Constellation serves two million residential, public sector and business customers.The map below shows the locations of Constellation electricity generating units.Light blue is nuclear;Dark blue is hydro;Purple is natural gas;Light green is wind;Orange is solar;Dark green is other renewables. CEG Generating Unit Locations (Constellation Energy 10-K) Source: Constellation 10-KAs the chart below shows, the majority of Constellation’s 36,500 megawatts of generating capacity is nuclear. (Of this, 36,500 megawatts, 89% is owned and the rest is contracted.) CEG Unit Capacity (Constellation 10-K and Starks Energy Economics) Geographically, the company’s owned 32,400 MW of generating capacity divides as:Mid-Atlantic 32%,Midwest 37%,New York 10%,ERCOT 11%,Other regions 10%.The company’s nuclear fleet is notable, and a key source of competitive advantage. Constellation Energy operates 21 of the 23 nuclear facilities in which it has an interest. For the last three years, the average capacity factor of its nuclear plants has been about 95%.Constellation’s 2021 data on sources of electric supply (rather than capacity percentages, so reflecting capacity factors) is shown below. Note the larger portion of supply coming from nuclear compared to its capacity portion in the chart above. Constellation energy sources (Constellation 10-K and Starks Energy Economics, LLC) The company supplies both electricity and natural gas. The map below shows states it serves. Constellation Energy service area (Constellation Energy 10-K) The company uses derivatives to hedge price risk. Like all providers, demand for its energy is seasonal. Competitors Constellation Energy is headquartered in Baltimore, Maryland, well outside the Chicago/Illinois orbit.While the company has the largest fleet of nuclear plants, it competes with other utilities with nuclear power that may also be selling clean electricity such as Entergy ( ETR ), Tennessee Valley Authority, Duke ( DUK ), Southern Company ( SO ), and others.Constellation also competes with NextEra Energy ( NEE ) in providing clean energy and with independent power producers like Vistra ( VST ). Strategy According to […]

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