Constellation Energy Three Mile Island

In 1979, in the small city of Harrisburg Pennsylvania, a disaster began with the roar of steam

 A farmer, who lived across the river from the Three Mile Island (TMI) nuclear power plant, saw and heard the roaring blast of steam from the Number 2 plant.

It seemed unusual, but hardly earth shattering. It was the only outward sign of the worst kind of nuclear disaster. The event happened due to a combination of equipment failure and human error. It led to the loss of coolant and a partial meltdown of the core.

According to the Washington Post’s timeline of events:

On Wednesday, March 28, hours after the core had collapsed into rubble, Lt. Gov. William W. Scranton appeared at a news briefing to say that Metropolitan Edison, the plant’s owner, had assured the state that “everything is under control.”

By afternoon, Scranton had altered his statement. The situation, he said, was “more complex than the company first led us to believe.”

By Friday, the stage had been set for full-scale panic. Officials were still issuing reassuring statements about the status of the reactor, but schools had been closed. Residents were being urged to stay indoors, and farmers were being warned to keep their animals under cover and on stored feed.

The event hurt Harrisburg’s economy, population declined due to the fear of radiation, and it gave nuclear power a black eye. It created massive distrust in the industry that simmered for decades. And then when the Fukushima Daiichi disaster happened in 2011, it completely derailed nuclear power.

However, nuclear energy holds the key to clean power. Technological advances made reactors that are smaller, safer, and cheaper. But the true driver of nuclear renaissance is big tech.

The desire for artificial intelligence, at the cost of staggering energy consumption, has cash-rich giant technology companies investing in new nuclear power…even at the site of the U.S.’ worst nuclear disasters.

Though the stigma of Three Mile Island remained for many years, times are changing. And with the help of one of the world’s largest technological companies, the stigma may be completely lifted.

Public opinion has completely changed, as you can see in the graph here:

For example, Google is a major champion and financier of nuclear power. It signed an agreement with the private company Kairos Power to design and build small modular reactors (SMRs) for powering AI Data centers. Kairos will build 6-7 SMRs that will produce 500 megawatts. The reactors will come online from 2030 to 2036.

Tech giant Amazon also made a big bet on nuclear power. In March 2024, Amazon Web Services acquired a nuclear-powered data center from Talen Energy for $650 million. The company signed a deal with giant power producer Dominion Energy to develop SMRs near its existing data centers. And Amazon is working with X-Energy to develop an SMR project in Washington state.

Technology titan Microsoft is the company that invested in what’s being touted as the “Three Mile Island Resurrection”. The company will pay $1.6 billion to restart a mothballed nuclear reactor and bring it back into production by 2028.

That’s the single biggest event in U.S. nuclear history since the Manhattan project.

This is important on many levels. First, you have technology companies investing billions of dollars in energy utilities. That’s unusual. But it gives these utilities access to capital that they didn’t have in the past. And they can make big investments that will create excellent long-term financial results for investors.

That’s what we see today with the TMI renewal program. And we want to invest today, to be there for the benefits down the road.

Rather than invest in Microsoft, we want to invest in its partner: Constellation Energy (Nasdaq: CEG).

The Company that’s Resurrecting Three Mile Island

Constellation Energy is an $84.7 billion power company. They are the biggest nuclear power plant operator in the U.S. They currently generate 180 million megawatt hours of “carbon-free” electricity. The company claims that power will attract premium prices.

However, it’s not just higher prices that will drive this investment. It’s the supply/demand imbalance, as we look forward. The math (once again) suggests that energy prices will climb as demand outpaces supply:

The company demonstrated its commitment to its shareholders by increasing its dividend by 150% in its first two years. It has a 10% annual growth target now, which means as it grows its revenues it shares it with shareholders.

The company also buys back its shares. And while that practice received some bad press in the past, it’s valuable to shareholders. Share buy backs are the opposite of dilution. When a company needs more money, it can sell a tranche of shares. But because the company has a fixed size, the shares they sell come from shareholders.

Think of a company like a pie. Each slice is a share. To issue more shares, the company must shave a little bit off all the existing slices. That reduces the value of the existing shares. Share buybacks, on the other hand, do the opposite. The company buys back shares and effectively tacks that little bit onto all the remaining shares – making the slices bigger again.

Constellation bought back $1 billion in shares in 2023 and $1 billion in 2024. That’s equal to about 2.3%, in addition to the dividend. That’s a great way to treat shareholders.

As with many utilities, Constellation is not efficient at converting revenue to gross profit. However, its gross profit margin grew massively from 8.8% in 2022 to 19.1% so far in 2024.

That’s fantastic and it shows in the EBITDA growth as well. In 2022, the company earned $1.6 billion on $24.4 billion in sales. In the last 12 months, earnings increased to $5.5 billion on less revenue ($23.5 billion).

That means the company became more efficient…and that’s a great sign.

Action to Take: Buy Constellation Energy (Nasdaq: CEG) up to $295 per share and use a 25% trailing stop.

We know many of you look at that share price and balk at buying. But remember the share price is a function of how we slice the pie.

Constellation currently has 312 million shares outstanding. If it had 3.12 billion shares out, then the share price would be $28. If we increase the number of shares by 10x, then we divide the share price by 10.

The share price does not change the value of the company. It just changes the size of the slice of the pie.

The large share price will not impact its ability to grow. And we believe it has the potential to grow substantially, thanks to its agreement with Microsoft and the future of nuclear energy in the U.S.

Our risks to the company stem from the actual growth in the nuclear industry and its ability to remain a leader. However, its current agreement with Microsoft demonstrates its ability to make big deals. And it shows a commitment to work with the companies fostering the new demand for electricity.

We believe the future is bright for Constellation Energy.

For the Good,

The Mangrove Investor Team