Not only is Constellation Energy Corp. (CEG, Financial) a leader in the energy industry, but a committed advocate of clean and reliable nuclear power. With its impressive generating capacity, substantial market share and diverse range of sustainable products and services, the company is well-positioned to meet the ever-growing energy demands while reducing carbon emissions. Its recent progress toward producing clean and carbon-free electricity has driven strong financial performance, making it a potentially attractive investment opportunity.
The discussion will delve into the Baltimore-based company's forward-thinking approach to tackling the climate crisis, creating long-term value for its shareholders and other fundamental factors that have positioned it as a premier and transformational ESG company.
State of price return and valuation
Constellation Energy's performance over the past 12 months has been exceptional, with its return of more than 20% outperforming its peer group.
However, its forward enterprise value/revenue ratio of 1.35 is significantly lower than the sector median of 3.95, indicating the stock is undervalued. Similarly, the forward price-sales ratio of 1.03 is well below the sector median of 2.24, further supporting the stock's undervaluation.
Vital developments
Constellation Energy has invested significantly in developing and promoting clean and reliable nuclear power. Its efforts have yielded some impressive results. For instance, the company recently started production at the nation's first one-megawatt demonstration-scale nuclear-powered clean hydrogen facility. This advanced facility will demonstrate the value of producing hydrogen with carbon-free nuclear energy to help address the climate crisis.
Furthermore, during the winter storm emergency in December, Constellation's nuclear fleet outperformed fossil fuel plants in the nation's largest grid. This performance led to calls for a renewed focus on reliability measures. However, the winter storm also highlighted the risks of not investing in domestic fuel sources for the nuclear industry. As a result, President and CEO Joe Dominguez urged Congress to authorize and fully fund legislation providing up to $3.5 billion for investments in domestic fuel sources for the nuclear energy industry to address this issue. This investment will mitigate the risks of global disruptions in the supply chain of enriched uranium converted into fuel for nuclear power plants.
In addition to these efforts, Constellation is making significant investments in two Illinois nuclear plants to increase clean energy output. These projects will result in additional carbon-free electricity with the capacity to power the equivalent of 100,000 homes constantly over the course of a year. Constellation is also introducing a new PJM tracking system that will help customers in the nation's largest grid purchase carbon-free energy every hour of every day.
Source: Fourth-quarter 2022 earnings.
Overall, Constellation is well-positioned for the long term thanks to its investment-grade balance sheet, which is a competitive advantage. The company's 2023 guidance range calls for adjusted Ebitda of $2.9 billion to $3.3 billion, driven by higher realized energy prices, continued strong customer business performance, incremental costs to invest in the business and 14 refueling outages for the year versus 11 in 2022.
By taking significant steps to achieve this goal, Constellation Energy is proving to be committed to promoting reliable and clean nuclear energy.
Favorable fundamentals
Constellation Energy is a top carbon-free energy provider in the U.S., with the lowest carbon emissions and carbon intensity generation. It has an impressive total generating capacity of 32,355 megawatts and has avoided 127 million metric tons of carbon through its nuclear fleet. It serves 2 million customers in 48 states and Washington D.C., with substantial market shares in the commercial and industrial solar, retail electricity and natural gas spaces.
With the ability to extend its fleet to 80 years, the company is poised to provide 24/7 carbon-free power through 2050 and beyond.
Furthermore, Constellation Energy aims to create new value from its existing fleet through repowering, co-location and other opportunities. It is also focusing on sustainability-based products and services for its customers to meet their clean energy, efficiency, storage and electrification needs. It produces clean hydrogen using its carbon-free fleet and engages with the technology and innovation ecosystem through partnerships with national labs, universities, startups and research institutions.
The company is investing in a carbon-free future that comfortably exceeds its double-digit return threshold and has significantly reduced its emissions. Constellation Energy also benefits from favorable state and federal policies, including the Inflation Reduction Act and the Production Tax Credit. Its nuclear fleet plays a unique role in the fight against the climate crisis and has the lowest life-cycle emissions of any technology.
A look at the company's performance and value growth will provide a clear picture of how the fundamentals will work for it.
Performance and value growth
Constellation Energy is a premier, transformational ESG company committed to creating long-term value for its shareholders, customers and society. During its recent fourth-quarter earnings call, the company provided an update on its progress toward its commitments, including producing 180 terawatt hours of carbon-free clean electricity in 2022, ranking as the number one retail energy supplier, investing in hydrogen and extending the lives of its assets. These decisions support the company's future performance and value growth by creating enduring businesses that tackle the climate crisis and protect its balance sheet.
Additionally, the company's commitment to clean energy has led to strong financial performance, with adjusted Ebitda of $2.66 billion in 2022. The company has also identified approximately $5 billion of unallocated capital for strategic priorities, including mergers and acquisitions and additional organic growth while returning capital to shareholders if opportunities do not materialize. This capital allocation plan creates value for its business, customers and owners.
Further, one of the company's most critical decisions was to invest $900 million in building a commercial-scale greenfield hydrogen production facility in the Midwest with an initial capacity of 250 megawatts. This investment demonstrates the company's commitment to satisfying the growing demand for clean hydrogen. Approximately 90% of the hydrogen produced is expected to be sold through offtake agreements with customers who will be co-located at the facility, which is expected to be in commercial operation by 2026.
Source: Investor Presentation
Finally, given the turmoil caused by the war in Ukraine, the company has secured nuclear fuel through 2028 and begun implementing a plan to upgrade plants to achieve more output with no incremental operating and maintenance. Constellation has also allocated approximately $800 million from 2023 to 2029 to extend the lives of its nuclear assets, take advantage of upgrade opportunities and replace turbines at the Byron and Braidwood plants, demonstrating its commitment to preserving and enhancing its world-class fleet.
The company plans to invest approximately $350 million for around 315 megawatts of wind repowering and refurbishing. The investment will increase its wind power generation capacity and provide clean, reliable and resilient energy to its customers, expanding its earnings capabilities.
In conclusion, Constellation Energy's long-term growth will benefit from its leadership position in carbon-free energy in the U.S. In addition, the company's strong commitment to promoting reliable and clean nuclear energy resulted in its recent investments in developing and promoting nuclear power, producing hydrogen and increasing energy output. These factors position the company well for long-term growth.
Thus, Constellation Energy's undervaluation, impressive financial performance and strong capital allocation plan make it a potentially attractive investment opportunity for value investors looking for a company committed to creating long-term value while tackling the climate crisis.
