Constellation Energy Corporation

Good day, ladies and gentlemen, and welcome to the Constellation Energy Corporation third quarter 2022 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. As a reminder, this call may be recorded. I would now like to introduce your host for today's call, Emily Duncan. Vice President, Investor Relations, you may begin.

Thank you, Amy. Good morning, everyone, and thank you for joining Constellation Energy Corporation's third quarter earnings conference call. Leading the call today are Joe Dominguez, Constellation's President and Chief Executive Officer, and Dan Eggers, Constellation's Chief Financial Officer. They are joined by other members of Constellation's senior management team who will be available to answer your questions following our prepared remarks. We issued our earnings release this morning along with the presentation, all of which can be found in the investor relations section of the Constellations website. The earnings release and other matters which we will discuss during today's call contain forward-looking statements and estimates regarding Constellation and its subsidiaries that are subject to various risks and uncertainties. Actual results could differ from our forward-looking statements based on factors and assumptions discussed in today's material and comments made during the call. Please refer to today's 8K and Constellation's other SEC filings for discussions of risk factors and other circumstances and considerations that may cause results to differ from the management's projections, forecasts, and expectations. Today's presentation also includes references to adjusted EBITDA and other non-GAAP measures. Please refer to the information contained in the appendix of our presentation and our earnings release for reconciliations between the non-GAAP measures and the nearest equivalent GAAP measures. I'll now turn it over to the CEO of Constellation, Joe Dominguez.

Thanks, Emily. Good morning, everyone. Thanks for joining our call. I especially want to thank the new owners of Constellation to the call. It's gratifying to see the continuing and expanding interest in our new company from all parts of the world. We had a strong quarter delivering adjusted EBITDA of $592 million, which is a result of the strong operations and performance across the business. Dan will go through some of the details in his remarks, and we look forward to your questions at the end. As always, I want to start with a shout out to the talented women and men who help us to run this company and who listen in to these calls. Thanks for everything you do. Plainly, the biggest news during the quarter was the passage of the Inflation Reduction Act, which recognizes the vital role that clean, carbon-free nuclear plays in meeting the country's climate objectives. We've had a little time now to absorb the transformational impact of the IRA to us, and it in our minds does four big things. First, it helps us to attract and retain talent. This business is about human capital, and it's hard to keep people when you're constantly talking about plant closures. Thankfully, we're done with that. Second, and to the same point, the IRA keeps the plants open for our communities and for America. And it's not just about the carbon benefits. It's about the local air pollution reductions. It's the jobs and economic benefits, especially in hard-hit areas of our nation. And it's about electric reliability and affordability. We've said this before, but it bears constant repeating. The most important energy commodity in the world today is a reliable zero-emission clean energy megawatt. I don't care how you make it. But producing affordable, clean energy that shows up whenever and wherever you want is the foundation of any modern energy system that deals with climate. The PTC begins to recognize the value of that scarce commodity, and we make more of it than anyone in America. Third, the IRA provides our owners consistent returns by creating downside protection through commodity cycles with inflation protections. We wanted to take a minute this morning highlighting the inflation protection mechanism of the PTC, given the concern that all businesses and investors rightfully have about inflation at this moment in time. Our thinking is that inflation will be difficult to control for many reasons, and that the Fed's stated goal of getting to 2% long-term inflation will be a significant challenge. Fortunately, the PTC automatically adjusts higher in these scenarios as you can see from the slide. In a 2% case, prices go to about $51 over the term of the PTC and $57 a megawatt hour in a 3% case. This gives us great confidence in our ability to favorably manage longer-term inflationary risks. Fourth, the IRA gives us an interesting opportunity to grow by operating our plants and to earn an enhanced PTC for incremental megawatts, to grow by investing in hydrogen, and to grow by extending the lives of our assets to 80 years. I'll talk about a couple of these more in a moment. In sum, the IRA gives our investors a very unique investment opportunity. A clean energy investment with unlimited upside to higher commodity prices downside commodity risk protection provided by the U.S. government, unique growth opportunities in hydrogen, life extensions, and upgrades, and structural inflationary risk protection. We were pleased to see that the S&P recognized that the IRA provides significant benefits as part of its reassessment of Constellation's risk profile and upgraded us to BBB while maintaining a positive outlook. A good investment credit rating is more important now than ever. If I could turn to slide six, I think this is a slide I'm pretty excited to talk about. What it depicts is the life of our existing assets. The blue is the current license life of our fleet. And as you can see, it starts to dwindle down beginning in the 2030s and phases out by 2050. You can see in some of the other colors here certain life extensions that we've already filed for or obtained in the case of a few of our plants. The green that's shown on the chart is the additional life that we will get by going to 80 years. And just to provide some context on how big that opportunity is for Constellation in America, just extending the life of Constellation's clean energy units It's not all the units in the country, just ours. Just extending ours will create as much clean power for America to fight the climate crisis as all of the renewable energy that's been built in America over the last 40 years. And it won't cost hundreds of billions of dollars to make it happen. It's there for us at a modest cost through the NRC life extension process. Last week, we announced that we will be asking the NRC to renew the licenses of Clinton and Dresden in Illinois for an additional 20 years, allowing these plants to serve America to the middle of the century and beyond. The NRC process for renewal is expected to take us about four years, and it will allow Clinton to run to 2047 and Dresden to run to about 2050. This is Clinton's initial license renewal, and with a subsequent renewal, it has the potential to operate until 2067. With continued policy support, we believe that we'll be able to renew the licenses at all of our plants, which would mean parts of our existing fleet would be providing carbon-free, always-on generation well into the 2060s at least. Once license life is extended, our clean energy nuclear plants would have an operating life that is longer than any existing renewable energy source. And in fact, longer than any new renewable energy source that would be put into service in the next decade. But this isn't just about competition with other technologies. We need every zero carbon resource. And license renewal is a hugely important part of the climate tool chest. It gives our owners a unique investment opportunity for the long run. Turning to slide seven, I want to talk a little bit about hydrogen. Like many others, we think that clean hydrogen will play an incredibly important role in mitigating climate change and reaching sectors of our energy and transportation industrial uses that can't be reached through traditional electrification. Hydrogen can be used to create sustainable aviation fuels for airplanes, reduce emissions in steel manufacturing and other industrial process, for fuel cells that provide power for long-haul trucking, and even to create fertilizers and other clean agricultural products. The opportunities are virtually limitless. And the clean hydrogen provisions of the IRA, specifically the ability to earn both a nuclear and hydrogen PTC, means that nuclear plants can become CODs in the clean hydrogen market. As you know, we will be the first to produce hydrogen from nuclear energy through our pilot project at Nine Mile Point. Last week, we also announced that we are a member of the Midwest Alliance for Clean Hydrogen, or MOT2, which will be applying for a hydrogen hub funding from the DOE. We see Constellation participating in three ways as shown on this slide. First, hydrogen by wire. Think about customers that are already using hydrogen at their industrial processes and want to use clean hydrogen. In order to get the full tax credit, they're going to need to prove that they're powering their electrolyzers with clean energy. And that will translate into contract opportunities with us to provide clean 24-7 power through our Constellation business. The second opportunity we have is to co-locate electrolyzers and make hydrogen byproducts at our sites. And the third opportunity is to power fuel cells with hydrogen, and that's what we're testing at Nine Mile along with NYSERDA and the DOE. There, you store hydrogen at times where the grid doesn't need power, and then you run that hydrogen back through a fuel cell and produce energy to the grid when it's needed. The key thing we're doing here is exploring optionality so that we could use these three strategies interchangeably. And one of the technical things that we're trying to work on is being able to move from producing energy and putting it on the grid to making hydrogen with that energy and going back and forth in a matter of 10 to 15 minutes. That way we'll always be able to support the grid when the grid needs energy. And when the grid doesn't need the excess energy, we could be making hydrogen. As we turn to slide eight, I want to talk a little bit about our operations. Our power and renewable fleet performed well with power dispatch match rate of 98.8% and a renewable capture rate of 95.7%. Our nuclear fleet ran well, but not perfect at 96.4% in its capacity factor. Our fleet will end the year with industry-leading performance, performance that is led continually for a significant period of time now. We continue to operate at a capacity factor that is about 4% better than the industry average. And to put that in context for you, on an open position at the PTC price board, a 4% higher capacity factor for our fleet translates into over $300 million of incremental revenue. Turning to slide nine in our commercial business highlights, As I mentioned at the top, our commercial business performed well during the quarter with strong volumes of electricity and gas delivered to our customers, and we closed deals that provide carbon-free solutions to our customers. We delivered 56 terawatt hours of electricity during the quarter, and we continue to see strong renewal and win rates across both our electric and gas businesses. Those win rates are reflected on the chart. We reached an agreement with the city of Chicago in collaboration with Swift Current Energy to purchase 100% clean renewable energy by 2025. As part of the agreement, the city will source its large energy uses with 300 megawatts of a new solar facility under construction in Illinois and will procure renewable energy credits for its remaining uses. This agreement will help Chicago lead the way in the fight against the climate crisis. and yet is another example of how we're helping our customers meet their sustainability goals. Finally, I want to spend a moment on used fuel. Turning to slide 10, we often talk about the fact that nuclear has many ESG attributes. It's got the lowest lifecycle carbon emissions of any technology. It produces more carbon-free power on less land than any other source because of its incredible power density. It provides unprecedented reliable and affordable energy to all communities because we think reliability is just as important to society as sustainability. It provides family-sustaining jobs in many poor communities across the country and has a strong industry safety culture. And as I mentioned, through innovation, we could use that clean energy to decarbonize other sectors with hydrogen fuels. But one of the questions we often get from investors is about spent fuel, or as we prefer to call it, used fuel. So I want to spend a few minutes talking about how fuel is safely secured and stored at our sites. First, I don't think we get appropriate credit for this, but We're the only large-scale energy-producing technology that takes full responsibility for all its waste, plans for its eventual disposal, and we pre-fund all of our plant's retirement obligations. That's not true for any other energy source, whether it's fossil fuels or renewable energy. We know where every gram of spent fuel is located and how it is packaged, tagged, and tracked. In terms of volume, nuclear energy is extremely dense and produces less waste by volume than any other type of energy. For context, all of the spent nuclear fuel produced in the United States from the dawn of the civilian nuclear era, when President Eisenhower gave his famous 1953 Atoms for Peace speech, until now, all of it could fit inside a super Walmart. By comparison, A single coal plant generates as much waste by volume in one hour as the entire U.S. nuclear power industry has produced during its entire history. Now, after our fuel is used to produce energy, it's placed in water pools to cool down. Then it's placed in these 16-foot stainless steel containers that are shown on the picture in this slide. and there the material could be safely stored for hundreds and hundreds of years. These containers are designed to withstand earthquakes, storms, and projectiles, and they're completely passive, meaning they don't need any power or any source of energy to continue to operate. There's never been any unplanned radiation released from the containers, and they emit less radiation than a frequent flyer receives in a year. The safe storage of these materials gives us time to finally resolve disposal or to reuse the fuel as many technologies now propose to do. Look, it's not a perfect solution, but there are no perfect solutions in the energy sector. And we're extremely proud of what the industry has done. And we wanted to share this perspective because we know how important it is to many of our owners. Now, with that, let me flip it over to Dan.