Constellation Energy Corporation (CEG) — Q3 2022 Transcript

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, 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 Constellation’s 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 8-K 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 for joining 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 into these calls. Thanks for everything you do. 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 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 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 protection. We wanted to take a minute this morning to highlight 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 could 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. 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, 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 can turn to Slide 6, 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 shown on the chart is the additional life that we will get by going to 80 years. To provide some context on how big that opportunity is for Constellation in America, just extending the life of Constellation's clean energy units— not all the units in the country, just 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 units 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 renewals 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 7, 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 could be used to create sustainable aviation fuels for airplanes, reduce emissions, and employ manufacturing and other industrial processes, 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 cost-effective players 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 MachH2, which will be applying for hydrogen hub funding from the DOE. We see Constellation participating in three ways as shown on this slide. First, hydrogen by wire. They are thinking about customers that are already using hydrogen in 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 when the grid doesn't need power, and then you run that hydrogen back through a fuel cell and produce energy to the grid when needed. The key thing we're doing here is exploring optionality, so that we can use these three strategies interchangeably. 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. This way, we'll always be able to support the grid when it needs energy and when it doesn't need the excess energy, we can be making hydrogen. As we turn to Slide 8, I want to talk a little bit about our operations. Our power and renewable fleet performed well with a power dispatch match rate of 98.8% and a renewable capture rate of 95.7%. Our nuclear fleet ran well, but not perfectly at 96.4% in its capacity factor. Our fleet will end the year with industry-leading performance. Performance that has 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. To put that in context for you, on an open position at the PTC price port, a 4% higher capacity factor for our fleet translates into over $300 million of incremental revenue. Turning to Slide 9 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 is yet 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 has 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 core communities across the country and has a strong industry safety culture. 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 and securely 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 pre-funds all of our plant's retiring 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 where it cools down. Then it's placed in these 16-foot stainless steel containers that are shown in the picture on this slide, and there, the material can 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 release 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. 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.

Thank you, Joe, and good morning everyone. Starting with Slide 11, we earned $562 million in adjusted EBITDA in the third quarter, which was in-line with our expectations. The commercial business continued to produce strong results, benefiting in the quarter from favorable customer load serving obligations, effective portfolio management, and successful load options. This favorability more than absorbed the drag from the shaping issues we discussed last quarter, as well as higher bad debt expense with our residential customers. On the generation front, we ran into higher unplanned outages during the quarter, which Joe pointed to. Anytime we are running the plants, whether planned or unplanned, is an opportunity loss, particularly at these prices. And with the run-up this summer in spot power prices, replacement power costs were much higher than they've been in recent years, which impacted our results even with overall output not down all that much. For context, every day a unit was out this summer cost between $1.5 million and $2 million a day in replacement power, compared to only $0.5 million to $1 million a day in prior years. Turning to Slide 12, let me start with the commodity market. Spot natural gas prices remained volatile, but somewhat higher during the third quarter, driven by a record hot summer and associated demand, higher competing fuel prices with international demand, and below-average inventory. Spot power prices have followed the increase in gas prices, while energy demand also reflected the warmer-than-normal weather and post-COVID load recovery seen especially in Texas. ERCOT saw its warmest July on record, PGM and MISO each set records for their single warmest day, and NYISO had its second warmest day on record. Turning to forward prices. During the third quarter, we saw increases largely on the same factors driving spot markets, elevated natural gas prices, higher coal and emissions prices, having anticipated supply impacts of announced coal retirements. We continue to see backwardation in the 2024 and 2025 curves compared to 2023, although the steepness in backwardation has started to ease. Since the end of the quarter, forward prices for natural gas and power have remained volatile, and this is likely to continue given an underlying tight gas market both domestically and globally. Uncertainty over winter weather here and in Europe and a potential return in the Freeport LNG facility during the fourth quarter are also factors to consider. Moving to the gross margin table, 2022 total gross margin increased $50 million from the prior quarter as a result of the strong performance of our commercial team. Open gross margin is up $50 million as a result of higher power prices in the Midwest and Mid-Atlantic, offset by the mark-to-market of hedges since we are effectively fully hedged this year. During the quarter, we executed $100 million of new business between power and non-power. In 2023, total gross margin increased by $100 million to $8.25 billion. Open gross margin is up $1.8 billion, largely offset by the mark-to-market of hedges, and $150 million of power and non-power new business was executed during the quarter. We continue to sell at higher prices than in previous quarters and are now 92% to 95% hedged across the portfolio in 2023. When we look forward, we're excited about the structural price support the PTC will provide our generation fleet for nine years starting in 2024 through 2032. That said, recent prices have generally been well above the PTC-driven support levels, and we have plans to continue selling power to capture prices in excess of the PTC values and to support our customer business. Turning to Slide 13. We are reaffirming our adjusted EBITDA guidance midpoint of $2.55 billion and narrowing our range to $2.45 billion to $2.65 billion. We're happy with our operational performance this year and are confident in the decisions we are making for the long-term health of our company, some of which brought us more toward the midpoint of our original guidance range. From an operations perspective, the commercial business is performing better than anticipated with the cost of serving load coming in lower than expected, plus some optimization opportunities around our fleet and load given the market volatility. Our generation business continues to be an industry leader when we look at utilization rates expected to be over 94% for the year, with costs still well below the industry. We did have some operating outages of both nuclear and power that had higher replacement costs than we had experienced in a long time. As I said, we've also made some strategic decisions around our business this year that have impacted current year earnings, but are the right decisions for our business going forward. First, we've been talking with all of you this year about the organic growth opportunities ahead of us, including our work on hydrogen. As we see our finish to pursue these growth outlets, many of us further benefit from the IRA as Joe discussed. We have made the strategic decision to take on more growth-related O&M to advance these efforts. Second, as I talked about last quarter, we continue to find signed fixed-price multi-year contracts for our customers in the face of an extremely backwardated curve. We have longstanding relationships with our customers, and signing multi-year deals provides them with the budget certainty and visibility that they need to run their businesses. These contracts are weighing on our second-half results and will likely carry into the first half of next year, but have compelling economics for us over the full life of the contracts. Being a good partner to our customers is important to us, our commercial business, and positioning for a number of our future growth opportunities. Third, as we said before, we are not immune to the pressures of a tight labor market and wage inflation. Coming out of the separation and reversal of plant retirements last fall, our vacancy rates were elevated and we've made significant progress in restaffing. We have reduced our vacancy rate from approximately 9% in February to 5% today. We also ensured that we have the best talent to run our plants, sell to our customers, and support our businesses. Accordingly, we took a look at our compensation packages and realized that we were lagging in some areas and have made adjustments to ensure we provide competitive pay. Finally, as you all know, many of you have benefited from our stock prices performing very well this year. As part of the separation, we wanted to have an ownership culture and reinstated equity as part of our long-term compensation for our key managers through executives. While we would like to replicate this stock performance every year, this year is well above what was anticipated in our financial planning, and it's driving additional costs, particularly in 2022. We are happy with our results this year and remain focused on driving long-term value for the company and our owners. Finally, turning to the financing and liquidity update on Slide 14. Our balance sheet remains extremely strong and our risk profile has undeniably improved as a result of the IRA. As Joe mentioned earlier this month, S&P upgraded our credit rating from BBB- to BBB while maintaining a positive outlook, a significant credit-positive story for us. Along with the ratings action, S&P revised its business risk from satisfactory to strong, reflecting their view of material improvement following the passage of the IRA. We want to thank our colleagues at S&P for their thoughtful review of our business. The upgraded S&P is also further evidence and acknowledgment of the stability of our cash flows and competitive advantages we have going forward. We are now two notches above investment grade from both S&P and annuities. We are maintaining our credit metrics that are well above our downgrade thresholds and remain committed to a strong balance sheet. Although we are also encouraged by S&P’s openness to us taking advantage of our strong balance sheet to fund M&A opportunities as they come up over time. Beyond the validation of our metrics, business model, and outlook, the ratings and parity between the agencies have some immediate benefits, including more favorable collateral requirements and credit terms with counterparties that have lowered our posting by several hundred million dollars since the quarter ended, as well as lower rates on long-term debt in commercial paper. Our liquidity position remains strong with more than $2 billion in unused capacity as of September 30. As I close out, I'd like to remind everyone of the financial strength that sets us apart from others in the market. Our strength allows us to pursue organic and inorganic growth opportunities to grow the business while returning value to our shareholders. It also provides us with more opportunities to transact in volatile markets where margins expand as risk is more appropriately reflected in pricing, and we're better positioned to service our customers, all while meeting any additional collateral costs without the need for additional liquidity.

Thanks, Dan. The company is strong. It's built for the long haul and it's an essential company for America. As valuable as the IRA was to the company and to the nation, the thing I'm really proud of is extending the life and beginning really to extend the life of what we did with Clinton and the announcement on Dresden. These are just the most important assets for America at this point in time. Financially, we're executing well and our balance sheet is in great shape. Our investment-grade credit rating is extremely valuable. So, I'll close with the value proposition. We're a unique company that can't be replicated and our assets, as I said, are critical to meeting our climate goals. The IRA has de-risked the business providing excellent inflation protection and an exciting platform for growth. We own nearly 25% of the U.S. nuclear fleet producing the most carbon-free energy in the country, nearly twice as much carbon-free energy as the next generator. These plants can run for 80 years, a useful life that's longer than any other carbon-free generation that exists today and in the case of renewables that will be built over the next decade. We provide power to nearly 23% of all competitive C&I customers in the U.S., including three-fourths of the Fortune 100. This puts us in the best position to meet the growing demand for customer-driven carbon-free energy and sustainability products. We're the best operator of nuclear power plants in the country, and that delivers enormous value. We generate strong free cash flow through our best-in-class operations, our retail and wholesale platforms, and our focus on costs. Finally, we intend to deliver value to you, our shareholders through our capital allocation strategy. We told you that we would provide you with an update this year and we're working on that, but as many of you know, there are some meaningful potential inorganic growth opportunities that align with our strategy and we need to see how these things play out before we can provide an update. But as a reminder, our capital allocation strategy starts with maintaining strong investment-grade credit ratings, which provide us a competitive advantage. We provide an $180 million annual dividend growing at 10%. We believe there are opportunities to grow our business organically and inorganically and we will see growth opportunities that exceed a double-digit unlevered return threshold and will deliver long-term value to our customers. And when we don't have those opportunities or don't have those opportunities in a particular timeframe, we will return capital to our owners through a special dividend or share buybacks. With that said, I'll open it up for questions and I apologize for the noise on our end; there was a little glitch with the mic.

Hey, good morning, guys.

Good morning, Shar.

Joe, maybe we can start with an update just on the market for the nuclear assets now that IRA has kind of been digested. A couple of processes are going on. What have you been seeing in the market? And is M&A just more or less likely at this point based on recent dialogues you've had? And then do you have a firmer date in mind on when we could see a capital allocation update if inorganic opportunities don't meet your threshold at least in the near term?

Yes, sure. Let me answer that last part first. I think these inorganic opportunities will play themselves out by the time we speak again on our fourth quarter call. So, my view is, we'll know whether this stuff is going to be actionable for us by that point in time. But we are looking at some opportunities right now. I think the fact that the IRA got resolved gives us some sense, and gives everybody some sort of uniform sense around the floor price for these assets. And that's very good. It doesn't resolve every valuation question, and each asset is very different. I spoke frequently about the importance of the size of the particular near asset and why we like dual units a lot better than single-site units. So, those variables are going to exist as we look at any particular asset going forward. I think I could state that obviously, there was a talent process to look at the sale. Its asset was a very complicated situation because it wasn't just a nuclear sale, but it involved some fossil sales. Any involvement we would have in that would require us to marry up with another buyer that would take the fossil assets. Talent announced recently that they didn't have any conforming bids that would buy all of the assets. As other things come on the market, we'll take a look at them. We’ve talked to all of you about that and we're going to take a look at everyone. We're going to be very disciplined. We think the business will consolidate, but we don't have a timeframe that we're necessarily looking at. Just owners' willingness to transact that's going to drive it. I don't know, Shar, it's going to – this all of the floodgates will certainly start to settle a little bit of the valuation, but in the short-term, as we're looking, I think those will resolve by the time we're having the fourth quarter call, and then we will be able to return to a discussion of what capital return to shareholders should look like.

Okay, perfect. That's what I wanted to level set. So, if something inorganic doesn't transpire, it takes some time, you're not married to having to disclose capital allocation before year-end, so we can maybe expect it around the February call when you report year-end results?

Yes, I think, look, I think on the last quarter earnings call, I indicated that we would like to provide that information to our owners by the end of this year. We are aiming for that, but things happen that we don't control and opportunities develop, and we're going to explore those.

Okay, perfect. And then lastly, I don't know, this shouldn't be a surprise, but obviously, you guys like everyone else are seeing labor and material inflation. We're getting a lot of questions on it this morning. Have you seen – Joe, have you seen any moderation more recently at a higher level? How should we, sort of think, should we be thinking about maybe the potential pressures in 2023 and beyond as it relates to your initial guide you guys rolled out with the Analyst Day earlier this year, which was just shy of $4.5 billion per year?

Yes. Look, Shar, I don't think we're seeing anything unusual in this business. What is unusual about our business is the protection that we're afforded through the IRA. We wanted to spend some time at the top of this call because I don't think folks necessarily focus on the price escalator that's built into the IRA in the event we're in an inflationary environment. But let me give it to Dan to maybe – Dan, maybe you could unpack that a little.

Yes, thanks, Joe. Thanks, Shar. It's a good question. I think Joe hit it on the point that we are having the inflationary protection of the IRA. If you think about this year, the inflationary environment has really been good to us from power prices moving higher to levels we haven't seen in a long time, which is clearly helping the business. When I look at the cost of human indulgence for a second, I'll break down our costs a little more for you from an overall O&M budget perspective. First off, a little bit under half of our O&M spend is associated with labor. So, we’ve got half labor, half supplier, and contract work. Of that O&M bill for labor, about 25% to 30% is going to be for our workforce, it’s going to be the represented population. Our longest labor contract goes until 2027. We have pretty good visibility on labor inflation rates on that piece of our labor bill, around the 2.5% range. On the non-union side, I think that we saw some of that this year with the hiring and recalibrating some of our pay levels. We are seeing upward wage inflation just as you're seeing everywhere else in the economy, kind of top to bottom. So, that's something to keep an eye on. Our focus is making sure we pay our people fairly and well. And so, we're managing that, but that’s something I think this is kind of the reality of the world in which we operate right now. If I go to the contracting and supplier side of the equation, and really this is predominantly nuclear and power-related spend when we get to this side of our dollars. About half of that spend is kind of with 20 major partners, so large partners to the company of big providers. We generally sign multi-year contracts with them, with inflation caps or bands around them. That's helped to manage some of that inflation in the Q3 percent range. Obviously, there's some sensitivities as we go through renewals and there are some causes for things like commodity escalation and things like that. It hasn't been a huge drag so far, but something we're keeping an eye on, and on the other half of the suppliers. Right, these are going to be a wider range of suppliers, with smaller, shorter contracts and things like that. So far, we've managed that inflation pretty well and certainly well below what we've seen in the market, but it's something we'll keep an eye on. Given our size and how we buy, we get benefits from both buying. We also buy in inventory, so we spaced out some of those costs as they roll through, particularly when we think about nuclear inventories or things like that, which will help us manage our costs. A couple of things that I called out in my script today, that you think about for kind of next year, the growth spending that we had this year, I think you should expect us to continue to make some investments in growth. This is an important opportunity for us, and putting money to work there to help fuel that opportunity is important. On the stock compensation, which was a fairly notable amount of money this year, the tails on that are pretty small to be honest. Most of that gets timed this year just on how the true-ups work. So, there's a little bit there, but in the scheme of what our O&M spend is, it's tiny. So, that's probably how I would think about O&M as you look at your model, and our plan will be to refresh all these numbers for all of you on the fourth-quarter earnings call in our normal course.

Perfect. Thank you guys. Very helpful disclosures. Thanks. Bye.

Thanks, Shar.

Yes. Hi. Good morning. Thanks. So, just on the – Joe, one of the growth avenues you mentioned is uprates of nuclear. Could you talk to what the uprate potential might be in the fleet and any timing on that?

Yes, Steve, first of all, good morning. As we dug into the IRA, one of the things that we're seeing is that the way we interpret the IRA, I think everyone interprets the bill, is that for incremental carbon-free megawatts, you basically get a double PTC for those incremental megawatts. Bryan Hanson and our Chief Nuclear Officer, Dave Rhoades have kicked off a process to look at different upgrades that might be available to us. We've looked at these for a number of years, so we're not starting from scratch. We'll be looking at the economics of those upgrades over the fourth quarter. I think we're being in a position where we'll start to be able to provide an update on the fourth-quarter call. I think it's fair to say it could be hundreds of megawatts, but we need to look at the economics to see if they make sense. What's good about them is that when you increase the output of the machine, you're not adding people. So, there are upgrades without incremental O&M associated with running the machines. In some cases, it involves adopting technologies that actually allow us to become even more efficient from an O&M perspective. So, we need to get costs from vendors and we need to study the implementation costs. But that's something I think that'll be available to us now, and we'll be able to talk on the fourth-quarter call. I don't think I'd give you more color than that right now.

Okay. And the double PTC would essentially be kind of one for being like a new carbon-free megawatt and then another for being nuclear PTC, essentially?

Yes. Let me turn it over to Kathleen Barron who's here with me, who could explain how it works.

Hi, Steve. Yes, Joe’s talking about the tech-neutral credit that is for any carbon-free resource that goes into service at the end of 2024. You would no longer be eligible for those incremental megawatts for the existing reserve PTC. You would transition into that new carbon-free tech-neutral credit that's roughly double the value.

Okay.

What are pipeline credits?

That's right.

Yes. Okay. Thank you. And then just going back to the prior question on O&M, I know you don't want to really define all that at the moment, but just with respect to the part that's related to growth initiatives, can you give us a sense of how much you're willing to size that? And to the degree that you start moving forward, projects, would it get capitalized into those? So, it's kind of temporary. Just how to think about how big the...

Yes, Steve. You know, I don't want to put it too fine a point on us. We're still trying to understand of these opportunities. I don't want to give you an exact number, but it's going to be less than 1% right now of our O&M is going toward that kind of spend just for context. So, that's probably how I think about it. I don't think I'm seeing it getting any number above that, if that's helpful. As we look forward and as we go from this work to moving forward on projects, you're right, we will start to capitalize them once we have a sizable project with a plan and a business commitment to move forward. I think we'll probably have some level of O&M spend is not going to capitalize on growth for maybe several years to come or longer because there's always going to be work on trying to develop the next project even as one gets underway. One hydrogen project could go and it'd be the work on the next one or the other behind the scenes. Cycle, have some sustaining growth O&M there, but as we move to commercialize any project that would be capitalized.

And Steve, it's kind of everything. It's the hydrogen stuff. We started from a position earlier in the year where frankly we just needed to learn a lot before we get into this track. The hub work, the work investigating upgrades and other growth opportunities. All that stuff as a starting company essentially that hasn't done a lot of those investments over the last few years required us to bring in some talent, some consultants and other experts to get smarter about that. And that's at a cost this year. It's smart. It's good investments. It's what we need to be doing.

Okay. Great. Thank you very much.

Hi. Thank you. Good morning. Just to kind of fold together this stream of questions. Could you give expectations on all-in how much you expect O&M to change year-over-year into 2023?

Paul, as I said, I think we'll give that update on the fourth-quarter earnings call when we kind of give a comprehensive view of all the pieces put together, including the roll forward on our gross margin outlook. So, it's probably a little bit early. I think it's kind of fair when you think about some of the things enumerated on a prior question, with Shar that we are seeing some pressures where we do our best to mitigate them as we can. But I guess, it's fair to understand that there are some challenges out there in this inflationary environment.

Okay. Understood. And then secondly, could you just elaborate a little bit on how the change in interest rates influences the plan for capital allocation and more specifically the right level of leverage prospectively. Just kind of how you think about that, whether it's on a floor from a PTC level of EBITDA or the higher market levels as well?

Yes, I think we're comfortable with the balance sheet as it is right now. I think the flexibility that affords us is attractive. We saw the support of the agencies, which we're happy about. We also look at the balance sheet as a tool we can use and we look at some of these potential larger investment opportunities. The idea of using the balance sheet to support them is going to be available to us. So, we're good with where the leverage is right now and the ability to flex it when opportunities come up. When I think about the return on capital as we make new growth investments or a threshold we look at for M&A or anything else, we talked about a double-digit unlevered return at the Analyst Day. That is still our North Star as we’re evaluating opportunities and projects internally, and I don't see that changing at this point in time. So, that's pretty well where we are.

Okay, great. Thanks a lot.

Thanks, Paul.

Good morning, David. Good morning. Thanks so much for taking my question. Good morning. On hydrogen, I was wondering, what's the current state of commercial discussions with partners or suppliers? Wondering if any of the different business opportunities the by wire or co-locating projects might be farther ahead than others at this stage?

Look, we're in kind of NDA space with a lot of folks here. So, I would say that there have been very extensive conversations on all fronts, in both the colocation, as well as providing energy to customers who want to reduce hydrogen at their own site. What we're hopeful is that by the first quarter, we'll be in a position where we're going to be able to start to announce some commercial deals and commercial activity. The hub proposal is going to take a little bit longer. Kathleen, if you want to share a little bit of your thoughts on the timeline for that work, but that also has some commercial contracts that will be a significant part of that work. So, in a sense that stuff has to be done before the DOE could fund that.

That's exactly right, Joe. It is a deployment hub. The announcement that went out last week about the MachH2 coalition in Illinois and the breadth of that demonstrates how many commercial parties are involved to create a bid to the DOE that demonstrates all the different potential production cases and use cases and the midstream connection. As part of that announcement, we have a number of different hydrogen producers, transportation companies, greenfield producers, national labs, NGOs, and a number of governors and senators expressing support for the alliance as announced, the next step will be to get the bid together for the DOE, which is due in April. Later in 2023, we'll find out where DOE is going to direct that $8 billion of government matching dollars to get the production into development and ultimately into production later in this decade. But as Joe said, we have had some really great conversations across the hydrogen value chain, just to pull together that just for that alliance to be pulled together, which is making folks in the Midwest super excited about potential there for building out the clean hydrogen economy.

Okay, great. Thanks so much for the color there. I was just wondering in the quarter on the unplanned outages that you saw, wondering if there were any common underlying causes there or any need that you might feel for additional spending related to the issues like maintenance CapEx or anything that might be lingering beyond last quarter?

Yes, nothing unusual and nothing that we think is going to affect future operations or projects. We had some one-off issues, probably the longest outage we had a vendor-provided part that didn't perform up to expectations and missed the specifications for that part, which created an issue for us. The reality is these sorts of things happen every year, but every year, we're not talking, even in the Exelon days about outages. At these very high prices, you lose 10 days or a little bit more at Nine Mile, which is one of the outages that occurred during the quarter and it becomes a significant drag. It adds up quite quickly. So, let me flip it over to Bryan Hanson to see if there's anything else he wants to share here.

No, I think you covered it, Joe. There's nothing extraordinary about any of the issues we had. We'll provide some more vendor oversight to make sure the quality of parts that we get meet our standards. Again, we have very high expectations of how we operate these plants. And so when a piece of equipment isn't performing right, we'll take the plant down and make repairs and restart it. I'm just still pleased that we're wrapping up our refuel outage season here in the next couple of weeks with the four outstanding refuel outages this fall, and we're on track. Like Dan said, better than a 94% capacity factor for year-end, which will be industry-leading as always.

Okay, understood. Thanks so much. I appreciate it.

Hey, good morning team. Thanks for giving me time here. Just, hey, Dan, just wanted to check-in on the Analyst Day, you have this free cash flow, unidentified free cash flow guidance of $1.8 billion to $2.2 billion. The gross margin is tracking higher since then, but then you have some O&M as you articulated towards some growth projects. So, how should we think about where we are tracking in that range if you could just update us there?

Yes, we're not refreshing that specifically here, I would say, on the year as the EBITDA is tracking inline. Our CapEx is tracked online and I think our performance this year is certainly consistent with our expectations that we have underlined that page in the Analyst Day. As I think about next year, we're always going to go through a budgeting process, but the price outlook and market conditions have improved for next year. Obviously, we can't have a cost discussion while what's going on today, but I think we feel good about the numbers we shared with you in the spring.

Awesome. Thanks. And then just maybe a finer point. On the Q4 call, what should we be expecting? Should we be expecting guidance for 2023 looks like, but could we expect a longer-dated EBITDA guidance? Some of the investors have talked about perhaps providing a floor. So, in addition to the capital allocation update, how should we think about, sort of pro forma EBITDA guidance ranges?

Yes, I think we'll give you the 2023 guidance for sure. We'll give you some gross margin disclosures and head disclosures certainly through 2024. There's a little bit of complexity, as you're well aware, without clarification from the treasury on how gross receipts are going to be calculated. That does have a varying effect on EBITDA and free cash flow and how they're going to look. I think we want to get through that process and have a little more clarity there before we probably extend beyond the 2023, 2024 look. That could also complicate a little bit how we talk about it, a base EBITDA number, but it's something we’re trying to get our arms around because we know that you guys would like to see it, but we also want to make sure we have a well-reasoned number that's supported.

Understood. Thanks so much guys. I appreciate it.

Well, thanks everybody for joining us today. And like I said at the outset, to many of our new owners for their interest and involvement in the company. It was a terrific quarter. We knew, look, we knew walking into those calls folks were looking for us to probably increase guidance. We've talked a little bit about the inflationary pressure, but that's a piece of it, but there are growth costs that we had this year as we investigate opportunities. There are stock compensation issues because our employees are enjoying the upside that many of you have enjoyed already, and we've had a fairly significant shaping situation with our contracts— contracts that we like very, very much and happy to have been able to do that business. And then we had a few extra days of unplanned outages. Other than that, the business has been performing just to all of our expectations and we're very excited about the future. So, look forward to entertaining you again on the fourth-quarter call and until then be safe. Take care of yourselves and we'll end the call.