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Constellation spin-off underscores nuclear's role in US decarbonization effort

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The Clinton Power Station in Illinois will be part of a 22,000-MW nuclear fleet operated by the new Constellation Energy Corp. when it formally spins off from Exelon Corp.
Source: Exelon Corp.

Constellation Energy Corp.'s spin-off from Exelon Corp. arrives at a pivotal moment for nuclear power, with the new company signaling it could be on the hunt for assets and as state and federal policy begins to reflect the technology's value as a carbon-free power source.

The separation of Exelon Generation Co. LLC and retail business Constellation Energy Resources LLC from Exelon is expected to unlock the nuclear fleet's capabilities as the engine for carbon-free growth opportunities, Constellation management said during its Jan. 11 analyst day. The new company, which is expected to begin publicly trading Feb. 1 under the CEG ticker, initiated 2022 adjusted EBITDA guidance of $2.35 billion to $2.75 billion.

Wells Fargo analysts said in a report that Constellation is "poised to produce meaningful free cash flow, providing management with substantial financial flexibility to execute on ... asset acquisitions" after Joseph Dominguez, Constellation's incoming president and CEO, called the company "one of the only natural buyers" for nuclear infrastructure.

KeyBanc Capital Markets wrote on Jan. 6 that Constellation "may be the only natural buyer for [Public Service Enterprise Group Inc.'s] nuclear assets should PEG decide to divest at any point," given that the new company is already a partner in Public Service Enterprise Group's Salem and Peach Bottom plants in New Jersey and Pennsylvania, respectively.

CreditSights, meanwhile, in a Jan. 11 report named as the "most logical" acquisition targets: Dominion Energy Inc.'s roughly 2,097-MW Millstone nuclear plant in Connecticut, as well as Energy Harbor Corp.'s 1,872-MW Beaver Valley nuclear plant in Pennsylvania, and in Ohio its 908-MW Davis-Besse and 1,268-MW Perry nuclear plants.

'A clear pathway'

"Given the lead time associated with some of its growth initiatives and its 2022 commitment to debt reduction, we would not expect any material activity over the next 6-9 months," BMO Capital Markets analyst James Thalacker wrote in a Jan. 11 report, estimating the market cap for Constellation at about $14 billion.

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Constellation plans to seek a 20-year renewal of operating licenses to extend the lives of units in its 22,000-MW nuclear fleet up to 80 years. Company management also sees opportunities to utilize their existing fleet for "clean hydrogen production" and to power data centers or direct air capture facilities.

"In our view, while it may take some time for a deeper investor base to form and build comfort around the policy sensitivities unique to nuclear ownership, Constellation has laid out a clear pathway through 2023 and beyond," Guggenheim Securities LLC analyst Shahriar Pourreza wrote in a Jan. 11 research report.

"On the inorganic side, we believe management remains open to asset acquisitions ... with the team acknowledging the advantages of its economies of scale," Pourreza wrote, adding that Constellation executives said in a call with Guggenheim analysts after the investor presentation that if no attractive nuclear asset deals are available, the company will return available capital to shareholders.

Less controversial?

Kathleen Barrón, Constellation executive vice president and chief strategy officer, asserted during the Jan. 11 presentation that there has been a "sea change in perspective" on nuclear generation and its role in a decarbonizing economy from politicians "on both sides of the aisle" and climate advocates.

"It's really now unacceptable to be a serious climate advocate and be opposed to the continued operation of our country's nuclear plants," Barrón said.

Guggenheim's Pourreza noted that nuclear has "broad bipartisan support" with energy seen as one of the least controversial aspects of U.S. President Joe Biden's Build Back Better agenda.

While Sen. Joe Manchin, D-W.Va., upended Democrats' hopes for passing the nearly $2 trillion Build Back Better Act in its current form, federal tax credits for nuclear and hydrogen production as well as stand-alone storage could still pass in a separate piece of legislation.

In West Virginia, lawmakers are considering a repeal of the coal-heavy state's ban on nuclear construction.

"Federal and state policies may trend toward being more accommodating" toward nuclear energy, KeyBanc said, citing New Jersey's renewal of zero emissions certificates and Illinois legislation providing financial support for nuclear plants.

The recently signed Infrastructure Investment and Jobs Act includes a dedicated zero-emission production tax credit for qualifying facilities.

But nuclear power has weathered some recent setbacks as well, including the recent denial of a federal application by Oklo Inc. to build a fast reactor at the Idaho National Laboratory, citing unresolved safety and design issues.

And the construction of two new reactors at the Vogtle Nuclear Plant, led by Southern Co. subsidiary Georgia Power Co., continues to be plagued by delays and cost overruns.