Constellation Energy Corp

Constellation Energy's acquisition of Calpine Corp. will expand its power generation asset footprint, positioning it favorably within the energy sector. The energy sector is currently trading at a discount relative to the broader market, yet it offers higher free cash flow yields. The S&P 500 Energy Index yields 8.2%, significantly higher than the S&P 500 Index's 3.4%. This suggests that Constellation Energy is well-placed to benefit from the ongoing consolidation in the sector and the rising demand for power generation, particularly from artificial intelligence data centers.

Constellation Energy is the largest producer of carbon-free energy in the United States, operating the nation’s largest nuclear fleet alongside natural gas, geothermal, wind, solar and hydro assets. The company is central to the U.S. energy transition, providing reliable, affordable, and sustainable power critical to electrification, decarbonization, and AI-driven data center growth. The pending acquisition of Calpine will significantly expand its generation portfolio. We see Constellation well-positioned with excellent operational performance, strong cash flow generation, and significant financial flexibility, benefiting from favorable legislation and strategic acquisitions.

Constellation Energy (CEG) has significantly outperformed regulated utilities due to renewed confidence in demand expectations. The company announced a 20-year power purchase agreement with Meta at a premium to market pricing, indicating strong market positioning and demand for its services. This performance reflects the broader trend of independent power producers gaining favor over traditional utilities, suggesting a positive outlook for CEG as it capitalizes on growing electricity consumption driven by data center and AI proliferation.

Constellation Energy shares continue to benefit from positive momentum for nuclear energy from new U.S. policy support and growing investor enthusiasm for the company’s role in meeting rising clean power demand. This reflects a strong alignment with the increasing focus on clean energy solutions, positioning the company favorably in a market that is increasingly prioritizing sustainability.

Constellation Energy contributed to performance; however, this was because of profit taking for the Fund, after the stock spiked early in the quarter following its acquisition of power generator Calpine. The stock declined because of increased regulatory uncertainty making it difficult for the company to sell its zero-emission nuclear power to hyperscaler customers at premium prices.

The letter mentions that the portfolio was trimmed in Constellation Energy (CEG) along with other utility positions. This action reflects a reallocation of utility exposure to focus on higher quality utilities, but does not provide a specific argument for or against Constellation Energy itself.

We initiated a position in Constellation Energy, which operates the largest carbon-free nuclear fleet in the U.S. Data center growth is driving higher electricity demand, and nuclear is a sustainable source of power.