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Support for nuclear energy's revitalization continues to firm up. Just last week, the U.S. Department of Energy announced a $4.2 billion loan intended to facilitate investments in electric utility Vistra's (NYSE: VST) nuclear power production infrastructure. Then, the very next day, Google parent Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) made a 20-year commitment to purchase 890 megawatts' worth of nuclear-generated electricity from utility company Constellation Energy (NASDAQ: CEG), allowing Constellation to comfortably plan a $4.3 billion investment in its own nuclear energy output capacity.
Both developments are, first and foremost, meant to meet the rapidly growing power needs of artificial intelligence (AI) data centers. But both investments in expanding these utility outfits' nuclear power capabilities will also eventually benefit customers beyond data center owners/operators. The two different agreements also illustrate that there's more than one way to fund this renewal of the nuclear energy business.
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One of these plans is better for shareholders of one of these outfits than the other, though.
The stated purpose of the DOE's prospective $4.2 billion loan to Vistra is "to finance nuclear uprates and modernization across Vistra's nuclear fleet in Pennsylvania and Ohio." Specifically, this funding "will preserve nearly 4 gigawatts (GW) of reliable baseload power -- enough to power more than 3 million homes -- and add 433 megawatts (MW) of new nuclear capacity, helping meet growing electricity demand" in this geographical market, in part by extending the initially licensed lifespan of some of these facilities by an additional 20 years.
Although the Department of Energy's press release didn't explicitly say it, much of this future nuclear energy is already earmarked for Facebook parent Meta Platforms (NASDAQ: META), which inked a 20-year power purchase agreement with Vistra in January of this year, largely to support its existing and future AI data centers.
Like any loan, however, this one would show up on Vistra's balance sheet as debt that must be repaid and serviced in the meantime. This amount of additional debt wouldn't be insignificant, either. Vistra's total long-term debt currently stands at $17.7 billion, versus annualized revenue of nearly $20 billion.
Still, debt is nothing particularly unusual for utility companies, and in this case, the underlying investment it supports would almost certainly pay for itself, and then some. The World Nuclear Association believes the stage is set for a tripling of the amount of nuclear energy the planet currently produces by 2050.
Just bear in mind that the DOE's loan depends on Vistra first meeting certain technical and financial requirements.
Alphabet isn't making a loan to Constellation, to be clear. Meeting Google's future needs will require only $4.3 billion in new investment from Constellation, which currently has only about $1 billion in cash and near-cash liquidity on its books.
This required capital may come easier than most investors might expect, however. As part of January's $26.6 billion acquisition of Calpine, Constellation opted to divest some of Calpine's assets that might overlap with existing operations or run afoul of regulatory requirements. Although most of these properties and facilities are already under contract, they're still technically sitting on Constellation's balance sheet as "assets held for sale." Their total value? A little over $5.7 billion. For perspective on that amount, Constellation is on pace to do nearly $40 billion worth of business this year.
That being said, it would be amiss not to remind investors that Amazon (NASDAQ: AMZN) made a 20-year power purchase agreement of its own with Constellation Energy just at the end of last month. While not quite as large as the recently inked deal with Google, this agreement certainly allows Constellation to commit capital more confidently to the expansion and extension of its current fleet of nuclear power facilities.
Which of these two arrangements favors two shareholders of each company the most?
In this instance, the recent dealmaking from Constellation is more advantageous than Vistra's, albeit not just for the reason you might think.
Yes, any additional debt taken on by a company crimps shareholder value. This time is no exception. Just don't read too much into it. Most utility companies' expansion is driven by debt. There's nothing especially unusual about the underlying premise of Vistra's tentative agreement with the DOE. The bigger concern here is the proverbial hoops that Vistra will need to jump through just to qualify for the loan in the first place.
Constellation Energy, meanwhile, has the capital it needs already lined up. It's just a matter of completing the sale of certain Calpine assets. Although things being this easy is an exception to the norm, it clearly works in favor of CEG shareholders right now.
Just don't mistake this favor -- or Vistra's future debt load -- as reasons to buy a stake in Constellation rather than Vistra. Neither stock offers a particularly impressive dividend yield at this time, yet both are currently priced well below analysts' consensus price targets, with each ticker being rated a strong buy by the analyst community. You could do pretty well with either one of them, as both are poised to serve the fast-growing artificial intelligence data center industry.
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James Brumley has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet, Amazon, Constellation Energy, Meta Platforms, and Vistra. The Motley Fool has a disclosure policy.
Constellation's $4.3 Billion Google-Backed Upgrades vs. Vistra's $4.2 Billion Government Loan: Which Nuclear Plan Is Better for Shareholders? was originally published by The Motley Fool
