On Friday, Jefferies analysts maintained their Hold rating on Constellation Energy (NASDAQ:CEG) shares, with a price target of $234.00.
The firm's analysis highlighted the recent government contract secured by Constellation Energy, which is expected to add approximately $55 million in EBITDA and $44 million in free cash flow (FCF) annually, due to the benefits of nuclear uprates. The contract, valued at around $84 per megawatt-hour (MWh) for a duration of 10 years, is composed of 75% existing and 25% new energy supplies. This suggests an estimated price of approximately $75/MWh for existing energy supplies, according to Jefferies' evaluation.
The contract in question involves the U.S. General Services Administration (GSA) and Constellation Energy, where two power agreements were announced: a ten-year deal worth $840 million for over one million megawatt hours annually, and a $172 million performance contract aimed at energy savings across five GSA facilities. These agreements will provide power to 80 facilities across Illinois, Maryland, New Jersey, Pennsylvania, Ohio, and Washington D.C. The deals were finalized following a competitive procurement process by the GSA in July.
Jefferies broke down the economics of the virtual power purchase agreement, noting the fixed price of approximately $84/MWh. This price factors in a 46MW nuclear uprate allocated to the contract, part of a larger 160MW uprate for Byron and Braidwood plants, which Constellation was already planning at an estimated cost of $200 million. The uprates are expected to come online between 2026 and 2029, falling within the ten-year contract period that begins in April 2025.
The GSA press release detailed that the new capacity from the uprates would generate 2.4 million MWh over the contract's ten-year lifespan. With this in mind, the agreement implies that around 75% of the energy purchases will be sourced from existing units, while the remaining 25% will come from the new uprates.
Despite the positive outlook on the deal's virtual price, Jefferies advises caution against overestimating its impact, considering it represents a small fraction of Constellation's annual output of 180-185 terawatt-hours. The firm views the $75-$85/MWh price range for a virtual power purchase agreement as robust, yet emphasizes the need for larger data center deals and pricing to fully assess the company's performance.
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