Once Unwanted, Constellation Energy Is One of the Hottest Stocks
The power producer agreed to buy Calpine this past week for $16.4 billion and has become an industry darling amid surging electricity demand
Three years ago Constellation Energy CEG 25.16%increase; green up pointing triangle was spun out of the utility Exelon, hived off as an unwanted company running nuclear power plants that might close.
This past week, Constellation’s stock hit a record high, and it signed one of the power industry’s largest acquisitions.
Constellation, the country’s biggest producer of nuclear power, agreed to buy the private-equity-owned Calpine, a major generator of natural gas-fired and geothermal power for $16.4 billion, plus debt. Shares rose 25% on Friday, and it was the second-best performer in the S&P 500 that day.
It is part of a remarkable turnaround for Constellation, Calpine and other power producers, which have emerged from years of ho-hum electricity demand as the newly popular kids. Constellation’s stock has risen roughly 575% since the spinout.
The industry’s glow is due in large part to the boom in demand for electricity-hungry artificial-intelligence computing. That trend has sent the wealthy tech sector on a desperate hunt for city-sized amounts of power for new data centers.
Tech companies have preferred wind, solar or nuclear power because they avoid carbon emissions. But in practical terms, power demand is rising so quickly that companies can’t be picky. For now, sustainability commitments are taking a back seat to tech companies’ desire to rapidly build data centers, according to analysts.
The deal for Calpine, and its fleet of natural-gas plants, is a shift for Constellation, which investors have viewed as a bet on nuclear power’s future in the U.S. Constellation Chief Executive Joe Dominguez says tech companies and others are running out of carbon-free power options.
“They’re going to have to use some natural gas, and we want to be able to participate in that,” Dominguez said.
Nuclear renaissance
In 2022, Exelon was among several utilities selling competitive generation businesses. Constellation’s pitch to investors and lawmakers was that the country would increasingly need nuclear’s reliable and carbon-free generation.
While nuclear plants provide a reliable backbone to electric grids across the country, many had folded under competitive pressures from natural gas and renewables. Several states had stepped in with tax credits or other forms of support to halt closures.
Within weeks of the spinout, Russia invaded Ukraine, which sent natural-gas prices higher and prompted a rethink of global energy security, including the value of nuclear plants.
In August 2022, federal tax credits for nuclear power were approved under the Inflation Reduction Act, giving generators like Constellation a price floor to ensure that plants could stay open. Constellation has since notched improvements to its credit rating, too, which was earlier considered almost speculative.
Last September, Constellation and Microsoft signed a high-profile deal to restart the undamaged reactor at the Three Mile Island nuclear plant in Pennsylvania, the site of the nation’s biggest civilian power accident. Constellation also plans license extensions at existing plants and “upratings” to produce more nuclear power at existing reactors.
There are a limited number of such projects, though, and building new nuclear plants will be costly and time-consuming.
Small modular reactors, which developers say could be delivered faster and cheaper than conventional nuclear plants, have created a lot of excitement but aren’t yet available. Other new, clean and reliable technologies are in early stages, too.
“New nuclear is a good bit away in our estimation,” Dominguez said. “We believe gas is going to be part of the solution set for businesses for at least the next couple of decades and quite honestly probably more. We’ve understood that for a while, and so we don’t think of this as a pivot.”
Natural-gas needs
When private-equity firm Energy Capital Partners and a group of co-investors agreed to take Calpine private in 2017, Tyler Reeder, president and managing partner of ECP, said the purchase was “a little bit contrarian.”
“We would hear a frequent question around gas-fired assets, questions around obsolescence or how much longer we would need these assets,” Reeder said. “In some markets I think it was overstated that these assets wouldn’t be needed five or 10 years out. We had a very different view.”
ECP liked Calpine’s geothermal assets, including The Geysers complex with 13 plants in northern California. It has also developed large battery-storage and solar projects.
In the past year, the consensus on how much natural gas will be needed has increased sharply with electricity demand forecasts.
Discussions between Constellation and Calpine leaders had been going on for about two years, though they picked up last fall, Dominguez said.
ECP and its partners have agreed to hold Constellation shares for 18 months. Reeder said it allows them to start an exit but stay invested in the idea that a combined company can meet the wave of data-center demand. “We just believe in it. We’re not in any way running for the door here,” Reeder said.
The addition of natural gas-fired plants will expose Constellation to more commodity price risk, said Scott Wilmot, analyst at Enverus Intelligence Research.
The companies will need approvals for the deal from federal and state regulators, too.
“Given the increased political and overall attention on power demand, we would expect a protracted process and likely opposition from stakeholders, including regulated utilities,” analysts at Jefferies said.
Constellation said it could sell some assets in markets that overlap with Calpine, especially in the PJM Interconnection, the regional transmission organization and electricity market serving Washington, D.C., and all or part of 13 states.