Constellation Energy Corporation is hosting a second quarter earnings conference call, which is being led by Joe Dominguez, the President and Chief Executive Officer, and Dan Eggers, the Chief Financial Officer. The earnings release and other materials can be found on the company's website. The call includes forward-looking statements and non-GAAP measures, and the risk factors and other considerations that could cause actual results to differ from management's projections are discussed in the 8-K and other SEC filings.

Joe Dominguez, the CEO of Constellation, thanked the employees for delivering a great second quarter, which has led to an increase in the 2023 adjusted EBITDA guidance range by $400 million. He also mentioned that the strong performance is not limited to 2023, as there is an increase in the 2024 gross margin update by $150 million. The strong balance sheet gives Constellation a competitive advantage in providing customers with certainty and visibility on energy costs and sustainability solutions, leading to margin expansion and better value for them.

Constellation had a successful operational quarter, and since their last earnings call they have announced the acquisition of 44% of the South Texas Project Nuclear Station, a deal with Microsoft to provide them with an hourly time match clean energy product, an agreement with NYSERDA to share the value of the PTC with New York customers, and a record-breaking test of blending hydrogen with natural gas at their Hillabee generating station to reduce emissions.

Constellation and its customers are leading the fight against the climate crisis, as evidenced by their second sustainability report. They have invested in clean hydrogen blending and carbon capture technologies, resulting in a successful launch of the company with a stake valued at over $450 million. During the quarter, their nuclear plants had a capacity factor of 92.4% and their power assets had a dispatch match of 99.1%, both of which exceeded their plan.

This paragraph discusses the success of the company's Texas fleet in meeting the challenge of extreme heat, the success of the commercial business in optimizing positions, and a landmark agreement with Microsoft to produce time-match clean energy. The agreement enables Microsoft facilities to operate on nearly 100% clean power every hour and allows customers to claim they are reducing emissions even when buying credits from different regions or times.

This paragraph explains how the current approach to emissions reduction has led to interconnection problems and how nuclear energy in combination with renewable energy can provide a solution that cannot be matched by renewables alone. It also discusses the landmark agreement between Constellation and Microsoft which shows that time matching works and that nuclear energy can lead to better environmental outcomes. It argues that the federal government should prioritize nuclear energy and support it with policy.

Joe complimented the Microsoft team for their vision, and Dan Eggers discussed the company's financial outlook for the year. He reported that the business earned $1.031 billion in adjusted EBITDA in the second quarter, and that prices on generation output were higher than the previous year. Dan also mentioned that the team was able to capture value from higher margins, successful load auction wins, and portfolio optimization due to market volatility. The company also recognized $218 million of EBITDA from the Illinois ZEC program for the 2023-2024 planning year.

The Illinois ZEC program has a cost cap which has been reached in each planning year and thus, ZECs have been produced but not compensated for. In the 2023-2024 planning year, the cost cap will not be reached and some of the uncompensated ZECs from prior years will be recovered. This has caused the gross margin forecast for 2023 and 2024 to increase by $350 million. Slide 19 in the appendix provides more details on the mechanics of the Illinois ZEC program.

Exelon's gross margin forecast has increased by $150 million since the beginning of the year and their EBITDA guidance outlook has been raised by $400 million to a midpoint of $3.5 billion. This upward revision reflects the increase in gross margin as well as an increase to their O&M due to increased compensation for employees. Exelon will include the STP acquisition in their fourth quarter disclosures once the transaction has closed.

This paragraph outlines the company's strong balance sheet, which has allowed them to participate in volatile markets and resulted in a positive outlook from Moody's. They plan to issue debt later this year to fund a transaction and have completed half of the $1 billion buyback program authorized by their Board. They have an additional $1.2 billion of unallocated capital to create additional shareholder value. The company remains focused on creating value for their shareholders and is the best operator of nuclear plants and the largest producer of carbon-free electricity in the US.

Constellation is a commercial business that serves nearly 25% of the C&I market in the US and is helping customers like Microsoft meet their sustainability goals. The Inflation Reduction Act provides unique opportunities for Constellation and its investors, such as the ability to use nuclear energy to produce hydrogen, and the long-term commitment of nuclear energy as part of the national security of the US. Constellation is able to use the PTC floor to generate strong free cash flow which can be used to fund organic growth, M&A, dividends, and stock buybacks. Constellation's nuclear fleet and customer-facing business provide opportunities to grow and create value for shareholders.

Dan Eggers and Joe Dominguez answered a question from Steve Fleishman of Wolfe Research about the credit metrics slide, which is updated once a year with the full plan for numbers. Joe Dominguez then explained that the margin expansion is due to the volatility in the market, and Jim McHugh, the Head of the Commercial Group, was invited to chime in.

Joe and James are discussing the volatility of the energy market, which is due to the changing composition of the generation fleet. They explain that it takes a special kind of company with a special balance sheet to cover this volatility. They also note that sustainability solutions allow them to enter into longer deals with customers, and that customers tend to be retained for at least five years. They conclude that this trend is durable and that margins will continue to fluctuate over time.

Joe Dominguez discusses the continued volatility of markets, optimization activity, and the macro trend of sustainability products. He emphasizes the importance of the balance sheet and the competitiveness it provides. He then explains the thought process of prioritizing between producing green hydrogen from nuclear or 24/7 contracts.

The product sold to Microsoft is the same one that can enable hydrogen production at a customer location. This product can be sold to Microsoft for sustainability reasons, or to enable hydrogen production for customers who don't want to produce hydrogen on-site. The language of the statute is clear that existing nuclear plants are allowed to earn a tax credit for producing hydrogen, and there was never an agreement on additionality when the bill was passed. Therefore, any regulatory requirement of additionality would likely be defeated in court.

Joe Dominguez is having productive conversations with the administration to address nuclear energy from a regulatory standpoint. This would allow existing nuclear plants to be used to make hydrogen and be relicensed as new plants. The goal is to create time-matched and geographically-matched electricity with contracts and electrolytes. The EPA regulations require natural gas to be blended with hydrogen, and this can only be achieved by allowing existing resources to make hydrogen. Dominguez is confident that the discussions will be successful, and if not, they will use the Board's to achieve the line.

Joe Dominguez and James McHugh discussed the outperformance of the wholesale margin for the year and quarter. They attribute this success to strong performance on the wholesale load contracts with utility companies, municipals, and co-ops, as well as through optimization activities in volatile markets.

Joe Dominguez and David Dardis discuss the potential redeployment of the $1.75 billion in the event of a legal roadblock and the transition to a Performance-Based Compensation (PTC) structure with the New York State. Dominguez states that if there is any extra capital in their plan, it will be used for double-digit growth opportunities and if there are no inorganic growth opportunities, the value will be returned to the owners, possibly through a share buyback. Dardis is best to answer any questions regarding the mechanics of the transition.

New York was the first state to recognize the value of nuclear energy, and negotiated a provision in the PTC to ignore ZEC payments for calculating the PTC. Joe Dominguez and Kathleen Barron have been encouraging Congress to allocate funding to improve domestic enrichment and conversion services in the U.S., and a vote was taken in the Senate in July to include the Nuclear Fuel Security Act into the NDAA to fund the military.

The nuclear fuel cost for the company will remain below $6 per megawatt hour through 2028, and their deliveries are on track. Additionally, Congress and federal policymakers have provided support for the nuclear industry through the passage of a bill which includes $3.5 billion in funding for the DOE, an extension of Price-Anderson by 20 years, streamlining of NRC review of new reactors, and additional funding for domestic sources of fuel.

Joe Dominguez and Dan Eggers answered questions about the cash tax rate for 2024 and beyond, with Dan Eggers noting that there could be an opportunity for cash tax savings in the future depending on factors such as CapEx, depreciation, and the timing of cash taxes owed by Exelon. They were also asked about the Microsoft deal, which was described as very interesting.

The call concluded with Joe Dominguez thanking everyone for joining and James McHugh confirming that the nuclear energy for Microsoft is sourced from Constellation nuclear plants. Paul Zimbardo then thanked the team and the call was ended.

This summary was generated with AI and may contain some inaccuracies.